Back to GetFilings.com
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, 2003
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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES |_| NO |X|
The number of shares outstanding of the Registrant's common stock as of November
3, 2003 was:
Common Stock, $1.00 par value - 3,196,063 shares outstanding
NSD BANCORP, INC.
FORM 10Q
For the Quarter Ended September 30, 2003
INDEX
Page
Part I. Financial Information ----
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2003
and December 31, 2002 (unaudited) 3
Consolidated Statements of Income For the Three and Nine
Months Ended September 30, 2003 and 2002 (unaudited) 4
Consolidated Statements of Cash Flows For the Nine
Months Ended September 30, 2003 and 2002 (unaudited) 5
Consolidated Statements of Comprehensive Income
For the Three and Nine Months Ended September 30,
2003 and 2002 (unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 19
Item 4. Controls and Procedures 19
Part II. Other Information 20
Item 6. Exhibits and Reports on Form 8K 20
2
NSD BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, December 31,
2003 2002
--------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and Due From Banks $ 16,371,151 $ 15,025,678
Federal Funds Sold 11,700,000 18,600,000
--------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents 28,071,151 33,625,678
Investment Securities Available for Sale at Market 149,908,991 128,200,176
Loans, Net of Deferred Fees 319,341,746 334,809,161
Unearned Income (1,025,288) (1,317,283)
Allowance for Loan Losses (6,805,674) (4,212,225)
--------------------------------------------------------------------------------------------------------------------------------
Loans, Net 311,510,784 329,279,653
Premises and Equipment, Net 3,417,308 3,614,128
Accrued Interest Receivable 2,367,089 2,530,297
Other Real Estate Owned and Assets Held for Sale 201,712 268,915
Other Assets 13,457,671 12,929,425
--------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 508,934,706 $ 510,448,272
================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-Interest Bearing $ 74,019,504 $ 71,382,829
Interest Bearing 295,827,450 297,816,315
--------------------------------------------------------------------------------------------------------------------------------
Total Deposits 369,846,954 369,199,144
Advances from Federal Home Loan Bank and Other Borrowings 94,000,000 94,000,000
Accrued Interest Payable 5,953,688 6,405,531
Other Liabilities 1,260,782 2,021,341
--------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 471,061,424 471,626,016
Common Stock $1 Par Value; 10,000,000 shares authorized, 3,527,764
issued and 3,527,764 3,334,720
3,196,063 outstanding and 3,334,720 issued and 3,038,922 outstanding
Treasury Stock at cost, 331,701 and 295,798 shares (6,625,742) (5,710,410)
Capital Surplus 26,051,457 21,553,470
Accumulated Other Comprehensive Income 2,021,738 2,457,122
Retained Earnings 12,898,065 17,187,354
--------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 37,873,282 38,822,256
--------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 508,934,706 $ 510,448,272
================================================================================================================================
See notes to unaudited consolidated financial statements
3
NSD BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
For the Nine Months Ended September For the Three Months Ended September
30, 30,
------------------------------------------------------------------------------
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Loans, Including Fees $ 16,049,428 $ 18,631,364 $ 5,127,642 $ 6,340,155
Investment Securities
Taxable 4,021,353 3,741,936 1,309,062 1,111,526
Tax-Exempt 725,243 531,136 251,455 179,503
Dividends 152,443 200,086 44,188 62,879
Interest Bearing Deposits 14,610 13,230 5,931 8,646
Federal Funds Sold 102,739 90,692 34,713 50,080
- ---------------------------------------------------------------------------------------------------------------------------------
Total Interest And Dividend Income 21,065,816 23,208,444 6,772,991 7,752,789
INTEREST EXPENSE
Deposits 5,436,096 6,468,611 1,644,818 2,164,942
Federal Funds Purchased ----- 8,216 ----- -----
FHLB Advances and Other Borrowings 4,076,023 4,085,425 1,373,605 1,373,605
- ---------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 9,512,119 10,562,252 3,018,423 3,538,547
Net Interest Income 11,553,697 12,646,192 3,754,568 4,214,242
Provision for Loan Losses 3,210,000 720,000 240,000 240,000
- ---------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 8,343,697 11,926,192 3,514,568 3,974,242
OTHER INCOME
Net Investment Securities Gains 364,044 433,026 155,640 404,172
Service Fees 1,327,668 815,203 478,623 299,499
Other Operating Income 1,424,210 1,289,023 471,289 511,436
- ---------------------------------------------------------------------------------------------------------------------------------
Total Other Income 3,115,922 2,537,252 1,105,552 1,215,107
OTHER EXPENSES
Salaries and Employee Benefits 4,529,576 3,964,438 1,721,169 1,350,209
Occupancy Expense 768,665 696,366 248,848 210,708
Equipment and Supplies 1,025,623 997,882 332,813 331,412
Data Processing 651,638 625,514 261,094 224,017
FDIC Insurance 44,721 36,856 14,941 22,242
Advertising 197,985 198,640 63,953 63,797
Other Operating Expenses 2,027,182 3,694,915 734,351 2,417,368
- ---------------------------------------------------------------------------------------------------------------------------------
Total Other Expenses 9,245,390 10,214,611 3,377,169 4,619,753
Income Before Income Taxes 2,214,229 4,248,833 1,242,951 569,596
Provision for Income Taxes 358,000 1,171,436 296,000 93,236
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income $ 1,856,229 $ 3,077,397 $ 946,951 $ 476,360
=================================================================================================================================
NET INCOME PER COMMON SHARE
Net Income - Basic $0.58 $0.95 $0.30 $0.15
Net Income - Diluted $0.57 $0.94 $0.29 $0.15
Common Dividends Declared and Paid Per Share $0.44 $0.62 $0.22 $0.21
Weighted Average Shares Outstanding - Basic 3,196,012 3,224,912 3,192,562 3,216,868
Weighted Average Shares Outstanding - Diluted 3,260,698 3,279,157 3,253,084 3,284,124
See notes to unaudited consolidated financial statements
4
NSD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
For the Nine Months Ended
September 30,
2003 2002
- --------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES
Net Income $ 1,856,229 $ 3,077,397
Adjustments to Net Income:
Provision for Loan Losses 3,210,000 720,000
Net Gains on Sale of Securities Available for Sale (364,044) (433,026)
Loss on Sale of Other Assets 57,196 22,132
Gain on Loan Sales ---- (21,721)
Depreciation and Amortization 484,895 413,854
Net Premium Amortization 360,700 174,303
Decrease in Accrued Interest Receivable 163,207 248,934
(Decrease) Increase in Accrued Interest Payable (451,843) 322,350
Increase in Cash Surrender Value of Bank-Owned Life Insurance (296,842) (263,698)
Decrease in Other Assets 86,597 2,144,251
Deferred Loan Fees, Net (71,078) 405
Decrease in Other Liabilities (925,115) (553,124)
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 4,109,902 5,852,057
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sale of Investment Securities Available for Sale 13,407,620 18,312,815
Proceeds from Repayments and Maturities of Investment Securities
Available for Sale 58,701,270 28,210,267
Purchases of Investment Securities (94,328,890) (35,521,368)
Purchase of Bank-Owned Life Insurance ---- (2,985,876)
Proceeds from Sales of Other Real Estate Owned 385,683 340,184
Net Decrease (Increase) in Loans 13,216,950 (28,094,124)
Proceeds from Loan Sales 963,100 914,726
Purchases of Premises and Equipment (288,152) (1,443,938)
- --------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (7,942,419) (20,267,314)
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (Decrease) in Demand and Savings Accounts 11,526,089 (4,279,663)
(Decrease) Increase in Certificates of Deposit (10,878,280) 19,890,158
Proceeds from the Exercise of Common Stock Options 628,070 138,236
Cash Paid in Lieu of Fractional Shares (6,397) (4,411)
Treasury Stock Purchased (915,333) (789,342)
Dividends Paid (2,076,159) (1,813,307)
- --------------------------------------------------------------------------------------------------------------------
Net Cash (Used) Provided by Financing Activities (1,722,010) 13,141,671
- --------------------------------------------------------------------------------------------------------------------
Net Decrease in Cash and Cash Equivalents (5,554,527) (1,273,586)
Cash and Cash Equivalents at Beginning of Period 33,625,678 26,703,917
- --------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 28,071,151 $ 25,430,331
====================================================================================================================
For the nine months ended September 30, 2003 and 2002, the Corporation paid
interest of $9,963,962 and $10,239,901 and income taxes of $1,342,000 and
$1,911,026, respectively.
See notes to unaudited consolidated financial statements
5
NSD BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
For The Nine Months Ended For The Three Months Ended
September 30, September 30,
---------------------------------- --------------------------------
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 1,856,229 $ 3,077,397 $ 946,951 $ 476,360
Unrealized holding gains (losses) on available
for sales securities arising during period (295,629) 2,427,779 (3,049,049) 783,001
Less: reclassification adjustment for
gain realized in net income 364,044 433,026 155,640 404,172
- ----------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) (659,673) 1,994,753 (3,204,689) 378,829
- ----------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) (659,673) 1,994,753 (3,204,689) 378,829
Tax Expense (Benefit) at 34% (224,289) 678,216 (1,089,594) 128,802
- ----------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss), net (435,384) 1,316,537 (2,115,095) 250,027
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income (Loss) $ 1,420,845 $ 4,393,934 $ (1,168,144) $ 726,387
==================================================================================================================================
See notes to unaudited 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 its wholly owned subsidiary,
NorthSide Bank, a community bank operating twelve branch offices located in
Western Pennsylvania, and NorthSide Bank's wholly owned subsidiary, NSB
Financial Services, LLC, a limited liability corporation which operates as a
licensed title insurance agency providing title searches and other real estate
settlement services. Material intercompany accounts and transactions have been
eliminated.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with instructions to Form 10-Q and, therefore, do not necessarily
include all information which would be included in audited financial statements.
The information furnished reflects all normal recurring adjustments which are,
in the opinion of management, necessary for the fair statement of the results of
the period. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full year or any
future period. The unaudited consolidated financial statements should be read in
conjunction with Form 10-K for the year ended December 31, 2002.
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.
For The Nine Months Ended For The Three Months Ended
September 30, September 30,
------------------------------ ---------------------------------
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
Weighted-average Common Shares Outstanding 3,507,634 3,488,069 3,517,959 3,490,727
Average Treasury Stock Shares (311,622) (250,626) (325,397) (260,818)
- --------------------------------------------------------------------------------------------------------------------------------
Weighted-average Common Shares and Common
Stock
Equivalents Used to Calculate Basic Earnings Per Share 3,196,012 3,237,443 3,192,562 3,229,909
Additional Common Stock Equivalents (Stock Options)
Used to Calculate Diluted Earnings Per Share 64,686 54,245 60,522 67,256
- --------------------------------------------------------------------------------------------------------------------------------
Weighted-average Common Shares and Common Stock
Equivalents Used to Calculate Diluted Earnings Per Share 3,260,698 3,291,688 3,253,084 3,297,165
================================================================================================================================
Average outstanding options to purchase shares of common stock of 33,518, at
prices from $25.96 to $26.45, as of the nine months ended September 30, 2003 and
24,014 shares, at prices from $19.95 to $26.33, as of the nine months ended
September 30, 2002 were not included in the computation of diluted EPS for the
nine months ended September 30, 2003 and September 30, 2002 because, to do so,
would have been anti-dilutive.
Average outstanding options to purchase shares of common stock of 56,404, at
prices from $25.96 to $26.43, for the three months ended September 30, 2003 and
20,153 shares, at prices from $25.96 to $26.33, for the three months ended
September 30, 2002 were not included in the computation of diluted EPS for the
three months ended September 30, 2003 and September 30, 2002 because, to do so,
would have been anti-dilutive.
Basic and diluted earnings per share calculations include the retroactive effect
of a 5% stock declared on April 22, 2003 and a 5% stock dividend declared April
23, 2002.
3. Recent Accounting Pronouncements:
On December 31, 2002, the Financial Accounting Standards Board (FASB) issued FAS
No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure,
which amends FAS No. 123, Accounting for Stock-Based Compensation. FAS No. 148
amends the disclosure requirements of FAS No. 123 to require more prominent and
more frequent disclosures in financial statements about the effects of
stock-based compensation. Under the provisions of FAS No. 123, companies that
adopted the preferable, fair value based method were required to apply that
method prospectively for new stock option awards. This contributed to a
"ramp-up" effect on stock-based compensation expense in the first few years
following adoption, which caused concern for companies and investors because of
the lack of consistency in reported results. To address that concern, FAS No.
148 provides two additional methods of transition that reflect an entity's full
complement of stock-based compensation expense immediately upon adoption,
thereby eliminating the ramp-up effect. FAS No. 148 also improves the clarity
and prominence of disclosures about the pro forma
7
effects of using the fair value based method of accounting for stock-based
compensation for all companies--regardless of the accounting method used--by
requiring that the data be presented more prominently and in a more
user-friendly format in the footnotes to the financial statements. In addition,
the statement improves the timeliness of those disclosures by requiring that
this information be included in interim as well as annual financial statements.
The transition guidance and annual disclosure provisions of FAS No. 148 are
effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. For the nine months ended
September 30, 2003 and 2002, the Corporation had no stock based compensation.
In April 2003, the FASB issued FAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under FAS
No. 133. The amendments set forth in FAS No. 149 improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly. In particular, this statement clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
as discussed in FAS No. 133. In addition, it clarifies when a derivative
contains a financing component that warrants special reporting in the statement
of cash flows. FAS No. 149 amends certain other existing pronouncements. Those
changes will result in more consistent reporting of contracts that are
derivatives in their entirety or that contain embedded derivatives that warrant
separate accounting. This statement is effective for contracts entered into or
modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. The guidance should be applied
prospectively. The provisions of this statement that relate to FAS No. 133
Implementation Issues that have been effective for fiscal quarters that began
prior to June 15, 2003, should continue to be applied in accordance with their
respective effective dates. In addition, certain provisions relating to forward
purchases or sales of when-issued securities or other securities that do not yet
exist, should be applied to existing contracts as well as new contracts entered
into after June 30, 2003. The adoption of this statement did not have a material
effect on the Corporation's financial position or results of operations.
In May 2003, the FASB issued FAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Such instruments may have
been previously classified as equity. This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of this statement did not have a material effect on the
Corporation's financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. This interpretation elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. This interpretation
clarifies that a guarantor is required to disclose (a) the nature of the
guarantee, including the approximate term of the guarantee, how the guarantee
arose, and the events or circumstances that would require the guarantor to
perform under the guarantee; (b) the maximum potential amount of future payments
under the guarantee; (c) the carrying amount of the liability, if any, for the
guarantor's obligations under the guarantee; and (d) the nature and extent of
any recourse provisions or available collateral that would enable the guarantor
to recover the amounts paid under the guarantee. This interpretation also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the obligations it has undertaken in issuing the
guarantee, including its ongoing obligation to stand ready to perform over the
term of the guarantee in the event that the specified triggering events or
conditions occur. The objective of the initial measurement of that liability is
the fair value of the guarantee at its inception. The initial recognition and
initial measurement provisions of this interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure requirements in
this interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The adoption of this interpretation did
not have a material effect on the Corporation's financial position or results of
operations.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, in an effort to expand upon and strengthen existing
accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
The objective of this interpretation is not to restrict the use of variable
interest entities but to improve financial reporting by companies involved with
variable interest entities. Until now, one company generally has included
another entity in its consolidated financial statements only if it controlled
the entity through voting interests. This interpretation changes that by
requiring a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. The consolidation requirements of this interpretation apply
immediately to variable interest entities created after January 31, 2003. The
consolidation requirements apply to older entities in the first fiscal year or
interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The adoption of
this interpretation has not and is not expected to have a material effect on the
Corporation's financial position or results of operations. In October 2003, the
FASB decided to defer the implementation date for Interpretation No. 46 to the
fourth quarter from the third quarter. This deferral only applies to variable
interest entities that existed prior to February 1, 2003.
8
4. Reclassifications:
For comparative purposes, reclassifications have been made to certain amounts
previously reported in the unaudited Consolidated Financial Statements.
9
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, 2003 compared to the three and nine months ended
September 30, 2002.
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 nine months ended September 30, 2003 was $1,856,229, a
decrease of $1,221,168 from $3,077,397 for the nine months ended September 30,
2002. The decline in earnings was primarily due to an additional $2,460,000 loan
loss provision, made during the second quarter of 2003, related to one large
commercial loan relationship. Also contributing to the decrease in earnings was
a decrease in net interest income of $1,092,495 and an increase in salaries and
employee benefits of $565,138. Offsetting these decreases in net income, was an
increase in other income of $578,670 and a $1,667,733 decrease in other
operating expenses for the nine months ended September 30, 2003 compared to the
same period in 2002. The Corporation's annualized return on average assets (ROA)
for the first nine months of 2003 was 0.49% compared to 0.85% for the same
period in 2002. This decrease reflects primarily the impact of the additional
$2,460,000 loan loss provision, offset by compression of the net interest
margin. Annualized return on average equity (ROE) was 6.38% for the first nine
months of 2003 compared to 11.36% for the same period in 2002. This decrease
also reflects the impact of the additional $2,460,000 loan loss provision and,
to a lesser degree, a decline in net interest margin during the first six months
of 2003.
Net income for the third quarter of 2003 was $946,951, an increase of $470,591,
from $476,360 for the third quarter of 2002. The increase in earnings was
primarily due to a charge-off of $1,793,205 in excess of specific loss reserves,
during the third quarter of 2002, resulting from an external fraud. Offsetting
the increase to net income were decreases in net interest income and other
income of $459,674 and $109,555, respectively and increases of $370,960 and
$38,140 in salaries and employee benefits and occupancy expense, respectively
for the three months ended September 30, 2003 compared to the same period in
2002. ROA and ROE for the third quarter of 2003 was 0.73% and 9.67%,
respectively, compared to 0.39% and 5.23% for the same period in 2002.
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 calculated
using the statutory income tax rate of 34%.
Total tax-equivalent interest income decreased $2,061,471 during the nine months
ended September 30, 2003 as compared to the same period in 2002 as the result of
a decline in the yield on average earning assets to 5.95% for the nine months
ended September 30, 2003 compared to 6.93% for the nine months ended September
30, 2002 offset by a $28,317,527 increase in average earning assets.
Contributing to the decrease in tax-equivalent interest income was a decline in
the yield on total loans to 6.61% for the first nine months of 2003 from 7.43%
for the same period in 2002 along with a decrease in average loans outstanding
of $11,017,039. The yield on federal funds sold decreased to 1.04% from 1.67%
while average federal funds sold outstanding increased $5,968,132 during first
nine months of 2003. The yield on investment securities available for sale
decreased from 5.80% for the first nine months of 2002 to 4.97% for the first
nine months of 2003 offset by an increase in average investment securities
available for sale of $32,517,176.
Total interest expense decreased $1,050,132 during the nine months ended
September 30, 2003 compared to the same period in 2002 as the result of a
decrease in the cost of interest bearing liabilities to 3.23% at September 30,
2003 from 3.78% at September 30, 2002 offset by a $20,136,868 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 2.43% for the first nine months of 2003 from 3.11% for the same
period in 2002 offset by an increase in average interest bearing deposits of
$21,336,318.
Total tax-equivalent interest income decreased $947,119 to $6,905,422 during the
third quarter of 2003 as compared to the same period in 2002. This decrease is
the result of a decline in the yield on total earning assets from 6.79% for the
third quarter of 2002 to 5.64% for the third quarter of 2003 offset by growth in
average earning assets of $26,935,497. Contributing to the decrease in
tax-equivalent interest income was a decline in the yield on average loans to
6.37% during 2003's third quarter compared to 7.25% for the same period in 2002
along with a decrease in average loans of $27,512,362. Also contributing to this
decrease was a decline in the
10
yield on average investment securities outstanding during the quarter to 4.62%
from 5.89% for the third quarter of 2002 offset by an increase in average
investment securities outstanding of $51,610,862.
Interest expense decreased $520,123 during the third quarter of 2003 compared to
the third quarter of 2002 due to a decline in the average total cost of funds
from 3.71% for the third quarter of 2002 to 3.03% for the third quarter of 2003
offset by a $16,285,436 increase in average interest bearing liabilities. The
cost of total average interest bearing deposits declined to 2.17% in the third
quarter of 2003 from 3.02% for the same period in 2002 while the average
interest bearing deposits increased $16,265,556. The increase in average
interest bearing deposits consisted of $9,983,885, $4,199,457 and $2,082,244
increases in average money market and interest checking, average certificates of
deposits and average savings, respectively.
The Corporation's year-to-date net interest margin decreased from 3.82% as of
September 30, 2002 to 3.31% as of September 30, 2003, 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 2003 third quarter net interest
margin of 3.17% reflects a decline from 3.73% for the same period in 2002. This
decline was the result of a decline 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 $3,210,000 and $240,000 provision for loan losses for
the nine and three month periods ended September 30, 2003, compared with a
$720,000 and $240,000 provision for the same periods in 2002. On June 30, 2003,
the Bank, in response to the financial deterioration of one large commercial
customer, placed three related loans secured by two properties and business
assets located in Washington County, Pennsylvania, in non-performing status. As
a result, the Bank increased the reserve for loan losses by an additional
$2,460,000 to provide for potential future losses associated with this loan
relationship. The unpaid principal balance of these loans was approximately $5.3
million at September 30, 2003. The Bank has initiated legal proceedings to
secure its lien priority on the properties and the business assets. Management
believes that potential losses associated with these loans are adequately
provided for based on information available as of the report date. However,
future developments may require additional provisions. The Corporation's Board
of Directors and Management are taking appropriate action to address the
situation and to reduce the possibility of a similar occurrence in the future.
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.
Including the significant commercial loan relationship, noted above, the
provision for loan losses for the nine months ended September 30, 2003, compared
to the first nine months of 2002 provision was affected by the following
factors:
o An increase in non-accrual loans from $889,842 at December 31, 2002 to
$7,031,421 at September 30, 2003, offset by a decrease in loans 90
days past due and still accruing interest from $1,171,436 at December
31, 2002 to $856,438 at September 30, 2003. The result of these
changes was a $5,759,376 increase in total non-performing assets and
loans 90 days past due and nonaccrual loans. Of this increase,
$5,357,496 is attributable to the three loans corresponding to the one
commercial loan relationship which was placed on non-accrual status at
June 30, 2003. The ratio of reserve for loan losses to non-performing
assets and past due loans decreased to 84.13%, at September 30, 2003,
from 180.77% at December 31, 2002. For further discussion, please
refer to the Non-performing Assets section of this report.
o The Corporation's recent loan performance can be closely correlated to
industry statistics, which indicate a trend toward rising loan
delinquencies and bankruptcy filings throughout the industry as a
whole.
o Local and national economies impacting business growth and employment
projections.
o Excluding the $2,460,000 additional provision for loan losses, net
loan loss experience continued to be quite favorable in relation to
average loans outstanding, which further supported the use of existing
individual loan portfolio loss factor assignments in calculating
required pool reserve allocations.
o 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.
Other Income
Other income increased $578,670 to $3,115,922 for the nine months ended
September 30, 2003 from $2,537,252 for the nine months ended September 30, 2002.
Net gains on sales of investment securities available for sale during the first
nine months of 2003 decreased $68,982 to $364,044 from $433,026 for the same
period in 2002. Service fees increased to $1,327,668 for the first nine months
of 2003, from $815,203 for the same period in 2002 principally due to an
increase of $463,417 in NSF charges as a result of the implementation of
NorthSide Bank's (the "Bank") courtesy overdraft program. The increase in
service fees is also related to an increase in checking account fees of $52,180.
Other operating income increased to $1,424,210 for the nine months ended
September
11
30, 2003, from $1,289,023 for the same period in 2002. Contributing to this
improvement was $107,972 and $38,639 in additional income generated from title
insurance premiums and electronic funds transfer fees. Increases in mortgage
related correspondent banking fees, mortgage application fees, and mortgage
processing fees contributed $83,338, $27,222 and $26,410, respectively, in
additional income compared to the first nine months of 2002. Offsetting these
increases was a $149,205 decrease in Cashflow Maximizer service fees as the
Corporation began eliminating this program during 2002.
Other income decreased $109,555 to $1,105,552 for the three months ended
September 30, 2003 from $1,215,107 for the three months ended September 30,
2002. Sales of investment securities available for sale during the third quarter
of 2003 resulted in net gains of $155,640 compared to net gains of $404,172 for
the same period in 2002. Service fees increased to $478,623 for the third
quarter of 2003, from $299,499 for the same period in 2002 as the result of a
$163,098 increase in NSF charges as a result of the implementation of the Bank's
courtesy overdraft program. Other operating income decreased to $471,289 for the
three months ended September 30, 2003 compared to $511,436 for the three months
ended September 30, 2002. Contributing to this decline was a $58,229 decrease in
mortgage related correspondent banking fees and a decrease of $33,411 in
Cashflow Maximizer service fees as the Corporation began eliminating this
program during 2002. Offsetting these decreases was a decrease of $5,556 in net
losses recognized on the sale of other assets and a $2,959 increase in
investment services commissions.
Other Expenses
Total other expenses for the first nine months of 2003 decreased $969,221 to
$9,245,390 from $10,214,611 for the same period in 2002. Salaries and employee
benefits increased $565,138 reflecting normal salary and benefit increases,
additional incentive compensation accruals, nonrecurring officer severance and
increased life insurance costs to the Corporation. Also contributing to this
increase were additional costs incurred to staff the Bank's new Fox Chapel
branch office, opened during the third quarter of 2002. Occupancy expense
increased $72,299 compared to the same period in 2002 principally due to a
$31,127 increase in rent primarily related to the new Fox Chapel branch opened
in the third quarter of 2002. Also contributing to the increase in occupancy
expense were $30,768 and $7,298 increases in building maintenance and utilities,
respectively. Equipment and supplies expense increased $27,741 due primarily to
a $25,612 increase in maintenance contracts due to new contracts on technology
upgrades. Also corresponding to these upgrades was a $71,041 increase in
depreciation expenses. Offsetting these increases in equipment and supplies was
a decrease in office expense of $36,732 due to a timing difference in supplies
ordering compared to the prior year. The $26,124 increase in data processing was
due to an increase in charges incurred for third party data processing. The
overall decrease in other operating expenses of $1,667,733 can be attributed in
large part to a $2,162,062 decrease in Cashflow Maximizer expense as the result
of a $1,793,205 charge-off in excess of specific loss reserves, resulting from
an external fraud, and a $211,000 additional reserve for Cashflow Maximizer
losses recognized during the second quarter of 2002. Offsetting the decrease in
other operating expenses was a $147,857 increase in financial services
principally due to costs related to the Bank's courtesy overdraft program. Legal
expenses increased $103,180 and title insurance premium expense increased
$84,876 for the period. Pennsylvania Shares tax increased $24,008 corresponding
to overall bank growth.
Total other expenses for the third quarter of 2003 decreased $1,242,584 to
$3,377,169 from $4,619,753 for the same period in 2002. Salaries and employee
benefits increased $370,960 reflecting normal salary and benefit increases,
additional incentive compensation accruals, nonrecurring officer severance and
increased medical insurance costs to the Corporation. Also contributing to this
increase were additional costs incurred to staff the Bank's new Fox Chapel
branch office, opened during the third quarter of 2002. Occupancy expense
increased $38,140 due to a $12,748 increase in building maintenance expense and
a $15,345 increase in insurance. Equipment and supplies expense increased $1,401
as increases in depreciation and equipment maintenance contracts of $15,223 and
$6,014, respectively were offset by a $19,061 reduction in stationary and
supplies. The $37,077 increase in data processing was primarily due to an
increase in charges incurred for third party data processing. The overall
decrease in other operating expenses of $1,683,017 can be attributed in large
part to a $1,830,174 decrease in Cashflow Maximizer expense as the result of a
$1,793,205 charge-off in excess of specific loss reserves, resulting from an
apparent external fraud recognized during the third quarter of 2002 and
disclosed in our Form 10-Q for September 30, 2002 as filed on November 15, 2002.
Offsetting this decrease were increases in legal expenses and financial services
of $65,000 and $85,765, respectively.
Income Taxes
The Corporation recorded an income tax provision of $358,000 for the nine months
ended September 30, 2003 compared to $1,171,436 for the nine months ended
September 30, 2002. The decrease in tax provision was primarily the result of
lower pre-tax earnings and also by the impact of an increase in the proportion
of tax-exempt investment securities and other tax-exempt earning assets to
taxable earning assets. The effective tax rates for the first nine months of
2003 and 2002 were 16.2% and 27.6%, 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 nine months of 2003 compared to the
same period in 2002.
The Corporation recorded an income tax provision of $296,000 for the three
months ended September 30, 2003 compared to $93,236 for the three months ended
September 30, 2002. This increase in tax expense was the result of higher
pre-tax earnings offset by the impact of an increase in the proportion of
tax-exempt investment securities and other tax-exempt assets to taxable earning
assets. The effective tax rates for third quarter of 2003 and 2002 were 23.8%
and 16.4%, respectively. The increase in effective tax rate is due to an
increase in higher pre-tax earnings offset by the income earned on higher
average outstanding tax-exempt earning.
12
Financial Condition
The Corporation's total assets decreased $1,513,566 from $510,448,272 at
December 31, 2002 to $508,934,706 at September 30, 2003. Securities available
for sale increased $21,708,815 from $128,200,176 at December 31, 2002 to
$149,908,991 at September 30, 2003. Net loans decreased from $329,279,653 at
December 31, 2002 to $311,510,784 at September 30, 2003.
Investment Securities
Contributing to the investment securities available for sale increase during the
first nine months of 2003 were increases in U.S. Government agencies,
mortgage-backed securities, obligations of state and political subdivisions and
marketable equity securities of $21,413,785, $1,244,066, $1,685,507 and
$395,368, respectively, while U.S. Treasuries, and corporate bonds decreased by
$29,535 and $3,000,376, respectively due to normal purchasing activity net of
any sales, calls, maturities and changes in unrealized gains classes. The fair
value of marketable equity securities increased $395,368 during the first nine
months of 2003, which was almost entirely due to the improvement in the
valuation of bank stocks held within 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:
September 30, 2003
- -----------------------------------------------------------------------------------------------------------------------------
Gross Unrealized
Amortized Holding
-------------------------------------
Cost Gains Losses Market Value
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Securities $ 1,613,622 $ 81,843 ------ $ 1,695,465
U.S. Government Agencies 38,721,839 159,108 $ 243,362 38,637,585
Mortgage-backed Securities 56,316,251 401,575 539,537 56,178,289
Obligations of State and Political Subdivisions 22,970,532 425,229 41,270 23,354,491
Other Bonds 21,657,621 1,172,836 518,104 22,312,353
Marketable Equity Securities 5,565,938 2,167,053 2,183 7,730,808
- -----------------------------------------------------------------------------------------------------------------------------
Total Investment Securities Available for Sale $ 146,845,803 $ 4,407,644 $ 1,344,456 $ 149,908,991
=============================================================================================================================
December 31, 2002
- -----------------------------------------------------------------------------------------------------------------------------
Gross Unrealized
Amortized Holding
-------------------------------------
Cost Gains Losses Market Value
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Securities $ 1,633,478 $ 91,522 ------ $ 1,725,000
U.S. Government Agencies 16,963,956 259,844 ------ 17,223,800
Mortgage-backed Securities 54,077,641 923,950 $ 67,368 54,934,223
Obligations of State and Political Subdivisions 21,274,317 417,421 22,754 21,668,984
Other Bonds 25,025,818 932,552 645,641 25,312,729
Marketable Equity Securities 5,502,038 1,839,362 5,960 7,335,440
- -----------------------------------------------------------------------------------------------------------------------------
Total Investment Securities Available for Sale $ 124,477,248 $ 4,464,651 $ 741,723 $ 128,200,176
=============================================================================================================================
13
Loans
Loans, net of deferred fees, decreased to $319,341,746 at September 30, 2003
from $334,809,161 at December 31, 2002. Nonresidential mortgages declined
$2,126,328 principally due to three large loans transferred to non-performing
status. A $3,426,462 decline in commercial, financial and agricultural loans was
due to lower origination activity and a very aggressive loan pricing market
which resulted in the refinancing of certain larger relationships with other
institutions. Lease financing declined by $1,814,810 as a result of lower new
business activity combined with the repayment of leases resulting from a shift
in market demand toward more traditional commercial financing. A slight increase
of $772,182 in consumer loans outstanding resulted from limited growth due to
lower production levels in the Bank's indirect automobile business. The
Corporation began establishing correspondent relationships, during the second
quarter of 2002 with other mortgage businesses to sell residential mortgages at
the time of funding. Consequently, residential mortgages declined by $15,498,724
corresponding to the payoffs of several large borrowing customers and a change
in business practice away from inventorying mortgage production. Lines of credit
and non-accrual loans increased by $414,069 and $6,141,579, respectively. Refer
to the "Non-Performing Assets" section for further discussion of this increase
in non-accrual.
September 30, December 31, Increase
2003 2002 (Decrease)
- ----------------------------------------------------------------------------------------------------------------------------------
Consumer Loans to Individuals $ 148,606,223 $ 147,834,041 $ 772,182
Mortgage:
Nonresidential 87,165,547 89,291,875 (2,126,328)
Residential 26,169,080 41,667,804 (15,498,724)
Commercial, Financial and Agricultural 33,560,506 36,986,968 (3,426,462)
Lines of Credit 8,094,280 7,680,211 414,069
Lease Financing 9,035,680 10,850,490 (1,814,810)
Non-Accrual Loans 7,031,421 889,842 6,141,579
- ----------------------------------------------------------------------------------------------------------------------------------
Total Loans 319,662,737 335,201,231 (15,538,494)
Deferred Fees (320,991) (392,070) 71,079
- ----------------------------------------------------------------------------------------------------------------------------------
Loans, Net of Deferred Fees $ 319,341,746 $ 334,809,161 $ (15,467,415)
==================================================================================================================================
The Corporation collectively reviews leases and consumer loans under $50,000 and
residential real estate and commercial loans under $250,000 for impairment. 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, 2003, the Corporation had $6,267,411 in loans which were
considered impaired with a corresponding loan loss reserve of $2,694,759 in
accordance with FAS No. 114. These loans are associated with one large
commercial customer relationship which is discussed within the "Non-Performing
Assets" section of this report. There were no loans considered impaired that
have been partially written down through charge-offs. The average recorded
investment in impaired loans was $2,700,000 during the first nine months of
2003. There was no average recorded investment in impaired loans for the nine
months ended September 30, 2002. The Corporation did not recognize any interest
on impaired loans during the first nine months of 2003 or during the first nine
months of 2002.
Non-Performing Assets
Non-performing assets and loans 90 days past due and still accruing increased to
$8,089,570 at September 30, 2003 from $2,330,194 at December 31, 2002 due to an
increase of $6,074,374 in total non-performing assets, offset by a $314,998
reduction in loans 90 days past due and still accruing interest.
On June 30, 2003, the Bank, in response to the financial deterioration of one
large commercial customer, placed three related loans secured by two properties
and business assets located in Washington County, Pennsylvania, on non-accrual
status and classified them as non-performing loans. The total of these three
loans is $5,357,496 as of September 30, 2003. As a result, the Bank increased
the reserve for loan losses by an additional $2,460,000 to provide for potential
future losses associated with this loan relationship. The Bank has initiated
legal proceedings to secure its lien priority on the properties and the business
assets. Management believes that potential losses associated with these loans
are adequately provided for based on information available as of this report
date. However, future developments may require additional provisions. The
Corporation's Board of Directors and management are taking appropriate action to
address the situation and to reduce the possibility of a similar occurrence in
the future.
14
The current quality of the loan portfolio can be demonstrated by the following
table, which details total non-performing loans and past due loans:
September 30, December 31,
2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
Non-accrual Loans $ 7,031,421 $ 889,842
Other Real Estate Owned 133,844 82,818
Other Assets Held for Sale 67,867 186,098
- --------------------------------------------------------------------------------------------------------------------------------
Total Non-Performing Assets 7,233,132 1,158,758
Loans 90 Days Past Due and Still Accruing Interest 856,438 1,171,436
- --------------------------------------------------------------------------------------------------------------------------------
Total Non-Performing Assets and Past Due Loans $ 8,089,570 $ 2,330,194
================================================================================================================================
Reserve for Loan Losses
The Corporation's loan loss reserve at September 30, 2003 was $6,805,675 or
2.14% of total loans compared to $4,212,225 or 1.26% of total loans at December
31, 2002. Management believes that the loan loss allowance is appropriate based
upon estimated losses.
The Corporation's net charge-off by loan type in the reserve for loan losses
were as follows:
For the Nine Months Ended
September 30,
- -------------------------------------------------------------------------------------------------------------------------
2003 2002
- -------------------------------------------------------------------------------------------------------------------------
Reserve for Loan Losses at Beginning of Year $ 4,212,225 $ 4,139,476
Charge-offs:
Commercial, Financial, and Agricultural Loans 32,523 384,011
Real Estate Mortgage Loans 26,597 -------
Installment Loans 300,101 240,267
Lease Financing 224,535 134,816
- -------------------------------------------------------------------------------------------------------------------------
Total Charge-offs 583,756 759,094
Recoveries:
Commercial, Financial, and Agricultural Loans ------- 9,500
Real Estate Mortgage Loans 800 1,000
Installment Loans 25,628 28,759
Lease Financing ------- 3,000
- -------------------------------------------------------------------------------------------------------------------------
Total Recoveries 26,428 42,259
- -------------------------------------------------------------------------------------------------------------------------
Net Charge-offs 557,328 716,835
Transfer to Reserve for Unfunded Loan Commitments 59,222 -------
Provisions for Loan Losses 3,210,000 720,000
- -------------------------------------------------------------------------------------------------------------------------
Reserve for Loan Losses at End of Period $ 6,805,675 $ 4,142,641
=========================================================================================================================
The Corporation's policies provide for the maintaining of a loan loss reserves
adequate to absorb estimated potential unidentified and/or identified loan
losses inherent in the loan portfolio. The allowance is increased by the
provision for loan losses, which is charged against operating results, and is
decreased by the amount of net charge-offs. Management considers historical data
concerning actual losses and loans classified by specific loan credit evaluation
in determining the adequacy of the reserve for loan losses. Also considered in
this process are loan delinquency trends, economic conditions and uncertainties
in estimating losses, all of which may be susceptible to significant change.
This evaluation is inherently subjective as it requires material estimates
concerning future losses for each type of loan in the portfolio.
The Corporation follows a loan review program to evaluate the credit risk in its
loan portfolio. 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
non-accrual status. As of September 30, 2003, substandard loans totaled
$1,231,156 and doubtful loans totaled $6,884,051. All substandard and doubtful
loans were designated as delinquent or non-accrual as of September 30, 2003.
15
In addition to its classified account list and delinquency list of loans, the
Corporation maintains a separate "watch list," which further aids the
Corporation in monitoring its loan portfolio. Watch list loans show warning
elements where the present status portrays one or more deficiencies requiring
attention in the short run, or pertinent ratios of the loan account have
weakened to a point that more frequent monitoring is warranted. These loans do
not have all the characteristics of a classified loan (substandard or doubtful)
but do show weakened elements as compared with those of a satisfactory credit.
The Corporation reviews these loans while assessing the adequacy of the reserve
for loan losses and may determine that sufficient risk is present to warrant
provision of a specific reserve based on the facts and circumstances concerning
individual loan relationships.
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 FAS No. 114, Accounting by
Creditors for Impairment of a Loan, and FAS 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 pool reserves for all loans not considered by the
specific reserve method. Pool 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 pool reserves for substandard, doubtful and loss credits are
based upon management's judgment of inherent risks associated within these loan
classifications. Pool 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 pool reserves for all loan types by applying a
factor, based on corresponding historical charge-off percentages, to homogeneous
pools of loans.
These pool 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 pool reserves and the allowance for loan losses is adjusted accordingly.
The Corporation maintains loan loss reserves taking into consideration the
following factors:
o Trends in volume and terms of loans,
o Seasoning of the loan portfolio,
o Delinquency and non-accrual trends,
o Recent loss experience in particular segments of the portfolio,
o Credit quality trends (including current and expected trends in
non-performing loans under existing conditions),
o Specific industry conditions within portfolio segments,
o General local and national economic and business conditions affecting
key loan portfolios,
o Duration of the current business cycle,
o Changes in lending and collection practices,
o Management's experience, and
o 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.
The Corporation made no changes during the nine months ended September 30, 2003
in estimation methods or assumptions that affected the methodology for assessing
the appropriateness of the reserves for loan losses
Loan loss reserves increased $2,593,449 from $4,212,225 at December 30, 2002, to
$6,805,674 at September 30, 2003. On June 30, 2003, the Bank, in response to the
financial deterioration of one large commercial customer, placed three related
loans secured by two properties and business assets located in Washington
County, Pennsylvania, in non-performing status as doubtful loans. As a result,
the Bank increased the reserve for loan losses by an additional $2,460,000 to
provide for potential future losses associated with this loan relationship. The
unpaid principal balance of these loans was $5,357,496 at September 30, 2003.
The Bank has initiated legal proceedings to secure its lien priority on the
properties and the business assets. Management believes that potential losses
associated with these loans are adequately provided for based on information
available as of the report date. However, future developments may require
additional provisions. The Corporation's Board of Directors and management are
taking appropriate action to address the situation and to reduce the possibility
of a similar occurrence in the future.
Current local and national economic conditions are expected to remain unchanged
throughout the course of the 2003 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 continually 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 specific and inherent loss
16
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 from estimated amounts. Consequently, estimation risk is present and is
provided for in assessing the appropriateness of the unallocated reserve for
loan losses. Management also remains concerned about the potential adverse
effects of changes in the current economic and interest rate environment on
those borrowers who have a more leveraged financial profile. In addition,
concern also exists as to the effects of projected slowing trends, by certain
external parties, on automobile manufacturers and the impact on consumer demand
and consumption.
Liabilities
Total liabilities were $471,061,424 at September 30, 2003, a decrease of
$564,592 from December 31, 2002. The decrease was the result of decreases in
accrued interest payable and other liabilities of $451,843 and $760,559,
respectively. These decreases were offset by an increase in total deposits of
$647,810.
Deposits
Total deposits increased $647,810 from $369,199,144 at December 31, 2002 to
$369,846,954 at September 30, 2003. Contributing to the overall increase were
increases in non-interest bearing demand deposits, interest bearing demand
deposits, savings deposits and money market accounts of $2,636,675, $1,043,266,
$1,520,030 and $6,326,118, respectively, offset by decreases in time deposits
over $100,000 and other time deposits, and of $1,201,390 and $9,676,890,
respectively.
The composition of deposits is shown in the following table:
September 30, December 31, Increase
2003 2002 (Decrease)
- ----------------------------------------------------------------------------------------------------------------------------
Non-interest Bearing Demand $ 74,019,504 $ 71,382,829 $ 2,636,675
Interest Bearing Demand 32,054,111 31,010,845 1,043,266
Savings 70,705,067 69,185,037 1,520,030
Money Market Account 58,510,492 52,184,374 6,326,118
Time Deposits equal to or more than $100,000 29,538,418 30,739,808 (1,201,390)
Time Deposits less than $100,000 105,019,362 114,696,251 (9,676,889)
- ----------------------------------------------------------------------------------------------------------------------------
Total Deposits $ 369,846,954 $ 369,199,144 $ 647,810
============================================================================================================================
Total Borrowed Funds
At September 30, 2003, the Corporation had total borrowed funds of $94,000,000,
$5,000,000 of which 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 decreased $948,974 from $38,822,256 at
December 31, 2002 to $37,873,282 at September 30, 2003. This decrease was the
result of purchases of treasury stock and the payment of cash dividends to
shareholders along with a decrease in accumulated other comprehensive income,
which is comprised entirely of unrealized holding gains/losses on investment
securities classified as available for sale. These decreases were offset by a
increase in capital surplus primarily due to the exercise of stock options along
with payment of a stock dividend to shareholders and an increase.
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, 2003 was 9.61% compared to 9.47% at
December 31, 2002. The Corporation's total risk-based capital ratio at September
30, 2002 was 11.13% compared to 10.78% at December 31, 2002. Regulatory minimum
requirements for Tier I and total risk-based capital ratios are 4.00% and 8.00%,
respectively.
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 $4,109,902 during the first nine
months of 2003, compared to net cash provided of $5,852,057 during the first
nine months of 2002. The primary source of operating cash flows for 2003 was net
income adjusted for the
17
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 $7,942,419 during the first nine months of
2003, compared to net cash used of $20,267,314 during the first nine months of
2002. 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 used cash of $1,722,010 during the first nine months of
2003, compared to net cash provided of $13,141,671 for the first nine months of
2002. 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.
18
Item 3.
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.
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 September 30, 2003. Therefore, such
analysis is regarded as a fair presentation of the Corporation's market risk as
of September 30, 2003.
Item 4.
Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The Corporation maintains
controls and procedures designed to ensure that information required to be
disclosed in the reports that the Corporation files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission. Based upon their evaluation of those controls and
procedures performed within 90 days of the filing date of this report, the Chief
Executive and Chief Financial Officers of the Corporation concluded that the
Corporation's disclosure controls and procedures were adequate, except for the
internal control components of risk assessment and monitoring with respect to
the timely reporting and resolution of commercial loan documentation exceptions
and independent, internal analysis of the current financial condition concerning
significant borrowing relationships.
(b) Changes in internal controls. The Corporation has not made significant
changes in its internal controls or in other factors that could significantly
affect these controls subsequent to the date of the evaluation of the controls
by the Chief Executive and Chief Financial Officers, except as noted herein. On
July 22, 2003, management created the position of Credit Administration Officer
who will monitor credit risk issues independent of loan production related
functions and report material findings to senior management. In addition,
management is developing a more effective system of controls to insure the
timely reporting and resolution of policy and procedural exceptions related to
commercial loan documentation. Management believes these actions, when complete,
will be adequate to assess and identify ongoing risks within the commercial loan
portfolio and will help insure appropriate accountability and disclosure
concerning all related issues.
19
Part II - Other Information
Item 1 Legal Proceedings
From time to time we are involved in various litigation
matters arising out of the conduct of our business.
Previously pending matters that are material to us were
reported in our quarterly report on Form 10-Q for the
quarter ended June 30, 2003 filed on August 14, 2003. There
were no material developments in the litigation matters
previously disclosed.
Items 2-5 Not applicable pursuant to the instructions to Part II
Item 6 Exhibits and Reports on Forms 8-K.
(a) Exhibits
10.1 Agreement and Mutual Release dated August 29, 2003,
between NSD Bancorp, Inc. and Lloyd G. Gibson.
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.
31.1 Section 302 of the Sarbanes-Oxley Act of 2002
Disclosure Certification of Principal Executive Officer
31.2 Section 302 of the Sarbanes-Oxley Act of 2002
Disclosure Certification of Principal Financial Officer
32.1 Section 906 of the Sarbanes-Oxley Act of 2002
Disclosure Certification of Principal Executive Officer
32.2 Section 906 of the Sarbanes-Oxley Act of 2002
Disclosure Certification of Principal Financial Officer
(b) Reports on Form 8-K
Reports on Form 8-K filed during the third quarter of 2003:
July 29, 2003 - NSD Bancorp, Inc. issued a news announcing
its second quarter results.
August 26, 2003 - NSD Bancorp, Inc. issued a news release
announcing third quarter cash dividend.
September 2, 2003 - NSD Bancorp, Inc. issued a news release
announcing resignations.
September 29, 2003 - NSD Bancorp, Inc. issued a news release
announcing the appointment of Andrew W. Hasley as President
and COO of the Company and President and COO of NorthSide
Bank.
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, 2003 /S/ Andrew W. Hasley
-----------------------------------------------------
Andrew W. Hasley, President and Chief Operating
Officer
Dated: November 14, 2003 /S/ William C. Marsh
-----------------------------------------------------
William C. Marsh, Senior Vice President and Chief
Financial Officer
21