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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(X) Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee Required) for the fiscal year ended December 31, 2003.
OR
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required) for the transition period from
to
------------------------ -----------------------
Commission File No. 0-22124
NSD Bancorp, Inc.
(Exact name of Registrant as specified in its charter)
Commonwealth of Pennsylvania 25-1616814
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5004 McKnight Road, Pittsburgh, Pennsylvania 15237
(Address of principal executive offices) (Zip Code)
(412) 231-6900
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------------ -----------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 Par Value
-----------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K X .
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES NO X
----- -----
The aggregate market value of Common Stock, $1.00 par value, held by
non-affiliates as of June 30, 2003, was $66,726,000.
The number of shares outstanding of the Registrant's Common Stock as of March
16, 2004 was 3,199,636.
Documents Incorporated By Reference:
Portions of the Registrant's Annual Report to shareholders for the year ended
December 31, 2003 are incorporated by reference into Parts I, II and IV.
Portions of the Registrant's Proxy Statement for the Annual Shareholders'
Meeting to be held on April 27, 2004, are incorporated by reference into Part
III.
Number of Pages in this Filing 20
----
NSD BANCORP, INC.
Form 10-K
For the Fiscal Year Ended December 31, 2003
INDEX
Page
Part I ----
Item 1. Description of Business 2
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholders Matters
and Issuer Purchases of Equity Securities 12
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 12
Item 7a. Quantitative and Qualitative Disclosure About Market Risk 12
Item 8. Financial Statements and Supplementary Data 12
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 12
Item 9a. Controls and Procedures 13
Part III
Item 10. Directors and Executive Officers of the Registrant 14
Item 11. Executive Compensation 14
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 14
Item 13. Certain Relationships and Related Transactions 14
Item 14. Principal Accountant Fees and Services 14
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 15
Signatures 16
Part I
Item 1. Description of Business
- ------- -----------------------
General
NSD Bancorp, Inc. (the "Corporation") is a registered bank holding company
organized under the Pennsylvania Business Corporation Law and is registered
under the Bank Holding Company Act of 1956, as amended. The Corporation became a
holding company upon acquiring all of the outstanding shares of NorthSide Bank
through an exchange of stock on August 2, 1993. At December 31, 2003, the
Corporation had total assets, deposits and shareholders' equity of $506.6
million, $366.0 million and $38.9 million, respectively. Full-time equivalent
employees of the Corporation were 151 at December 31, 2003.
The Corporation derives substantially all of its income from banking and
bank-related services provided by its wholly-owned subsidiary, NorthSide Bank
(the "Bank"), a state chartered bank with twelve branch locations at December
31, 2003, and the Bank's wholly-owned subsidiary, NSB Financial Services, LLC.
NSB Financial Services 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. The Corporation is subject to
periodic examination and regulation by the Federal Reserve Bank. As a state
chartered bank, the Bank is subject to periodic examination and regulation by
the Pennsylvania Department of Banking and the FDIC. The Bank is a full-service
bank offering retail banking services, such as demand, savings and time
deposits, money market accounts, secured and unsecured loans, mortgage loans,
safe deposit boxes, holiday club accounts, wire transfers, money orders and
traveler's checks. Services to commercial customers are also offered, including
real estate mortgage loans, lines of credit, inventory and accounts receivable
financing and equipment leasing. The Bank operates thirteen automatic teller
machines to provide 24 hour banking services to its customers. The Bank's
deposits are derived from more than 50,000 individual and commercial accounts.
There is no single depositor or group of related depositors, the loss of whom
would have a materially adverse effect on the business of the Bank. The Bank's
loans are not concentrated within a single industry or group of related
industries to any material extent.
The Bank's primary market area includes the northern portion of Allegheny County
and southern Butler County where it competes with many other banks. The Bank
also competes with regional bank and trust companies, credit unions, savings and
loan associations, consumer finance companies, insurance companies and direct
lending agencies of the government throughout its service area. Banks compete
for all types of deposit and loan accounts, with banks and trust companies
having the additional power to compete for trust accounts. Savings and loan
associations offer savings and time deposit services as well as installment and
mortgage loans.
Credit unions also compete with the Bank for savings and time deposit accounts
and for installment loan accounts. Consumer finance companies provide personal
installment loan services in direct competition with the Bank.
The Bank's business is not seasonal in nature, nor does it depend on any single
customer or a few customers, the loss of any one or more of which would be a
materially adverse effect on its business. A further description of the
Corporation's business and discussion of operations is set forth on page 5 in
the Corporation's 2003 Annual Report to shareholders included in this Form 10-K
as Exhibit 13 which description is incorporated herein by reference.
The Corporation's website address is www.nsdbancorp.com. The Corporation makes
available free of charge its annual report to shareholders on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports as soon as reasonably practicable after it electronically files
such reports with the Securities and Exchange Commission.
Lending Activities
General. The principal lending activities of the Bank are the origination of
residential mortgage, commercial mortgage, commercial business and consumer
loans. Generally, loans are originated in the Bank's primary market area.
One-to-Four Family Mortgage Loans. The Bank offers first mortgage loans secured
by one-to-four family residences located in the Bank's primary market area.
Typically such residences are single-family owner occupied units. The Bank is an
approved, qualified lender for the Federal Home Loan Mortgage Corporation
(FHLMC). As a result, the Bank may sell loans to and service loans for the FHLMC
in market conditions and circumstances where this is advantageous in managing
interest rate risk.
Home Equity Loans. The Bank originates home equity loans secured by
single-family residences. These loans may be either a single advance fixed-rate
loan with a term of up to 15 years, or a variable rate revolving line of credit.
These loans are made only on owner-occupied single-family residences.
Commercial and Commercial Real Estate Loans. Commercial lending constitutes a
significant portion of the Bank's lending activities comprising a combined total
of 41.4% of the total loan portfolio at December 31, 2003. Commercial real
estate loans generally consist of loans granted for commercial purposes secured
by commercial or other nonresidential real estate. Commercial loans consist of
secured and unsecured loans for such items as capital assets, inventory,
operations, and other commercial purposes.
Consumer Loans. Consumer loans generally consist of fixed-rate term loans for
automobile purchases, home improvements not secured by real estate, capital, and
other personal expenditures. In addition, the Bank funds education loans, under
various government guaranteed student loan programs, that are serviced for the
Bank by a third party. The Bank also offers unsecured revolving personal lines
of credit and overdraft protection.
Loans to One Borrower. Banks are generally subject to limits, set by regulation,
on the amount of credit that they can extend to one borrower. Under current law,
loans to one borrower are limited to an amount equal to 15% of unimpaired
capital and surplus on an unsecured basis, and an additional amount equal to 10%
of unimpaired capital and surplus if the loan is secured by readily marketable
collateral. At December 31, 2003, the Bank's loans-to-one borrower limit based
upon 15% of unimpaired capital was $5.8 million. At December 31, 2003, the
Bank's largest aggregation of loans to one borrower was approximately $5.8
million of loans secured by real estate. At December 31, 2003, all of these
loans were performing in accordance with their terms.
The following table sets forth the composition and percentage of the
Corporation's loans receivable in dollar amounts and in percentages of the
portfolio as of December 31:
Dollar
amounts in
thousands) 2003 2002 2001 2000 1999
---------------- ---------------- ---------------- ---------------- ----------------
Dollar Dollar Dollar Dollar Dollar
Amount % Amount % Amount % Amount % Amount %
- ---------------------------------------------------------------------------------------------------
Residential
mortgage
loans $24,436 7.8% $41,668 12.4% $58,586 18.1% $61,008 19.9% $47,824 17.7%
Nonresidential
mortgage
loans 89,624 28.6% 89,292 26.6% 73,703 22.8% 71,523 23.4% 47,730 17.7%
Commercial,
financial and
agricultural
loans 31,730 10.1% 36,987 11.0% 31,573 9.8% 26,400 8.6% 45,668 16.9%
Consumer loans
to
individuals 142,686 45.4% 147,834 44.2% 135,107 41.7% 123,077 40.2% 108,847 40.4%
Lines of
credit 8,362 2.7% 7,680 2.3% 6,029 1.9% 4,845 1.6% 4,923 1.8%
Lease
financing 8,548 2.7% 10,850 3.2% 13,420 4.1% 17,198 5.6% 13,400 5.0%
Loans held for
sale - 0.0% - 0.0% 4,620 1.4% 1,326 0.4% 631 0.2%
Nonperforming
loans 8,415 2.7% 890 0.3% 635 0.2% 521 0.2% 778 0.3%
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
313,801 100.0% 335,201 100.0% 323,673 100.0% 305,898 100.0% 269,801 100.0%
====== ====== ====== ====== ======
Deferred fees
and unearned
income (1,293) (1,709) (2,215) (3,073) (2,310)
--------- --------- --------- --------- ---------
Total loans
receivable 312,508 333,492 321,458 302,825 267,491
Less:
Allowance for
loan losses 6,882 4,212 4,139 3,365 3,088
--------- --------- --------- --------- ---------
Net loans
receivable $305,626 $329,280 $317,319 $299,460 $264,403
========= ========= ========= ========= =========
The following table sets forth the scheduled contractual principal repayments or
interest repricing of loans, excluding nonperforming loans, in the Corporation's
portfolio as of December 31, 2003. Demand loans having no stated schedule of
repayment and no stated maturity are reported as due within one year.
- ------------------------------------------------------------------------------------------------------------------------
Due in one Due from one to Due from five Due after
(In thousands) year or less five years to ten years ten years Total
- ------------------------------------------------------------------------------------------------------------------------
Residential mortgage $163 $434 $1,730 $22,109 $24,436
Nonresidential mortgage 7,602 14,810 14,879 52,333 89,624
Commercial, financial and agricultural 14,263 14,364 2,318 785 31,730
Consumer loans to individuals (net of unearned income) 2,670 100,702 19,957 19,028 142,357
Lines of credit 8,362 - - - 8,362
Lease financing (net of unearned income) 436 6,777 371 - 7,584
------------- --------------- ------------- ----------- ---------
$33,496 $137,087 $39,255 $94,255 $304,093
============= =============== ============= =========== =========
- ------------------------------------------------------------------------------------------------------------------------
The following table sets forth the dollar amount of the Corporation's fixed- and
adjustable-rate loans as of December 31, 2003:
- ----------------------------------------------------------------------
(In thousands) Fixed Adjustable
rates rates
- ----------------------------------------------------------------------
Residential mortgage loans $24,083 $353
Nonresidential mortgage loans 68,188 21,436
Commercial, financial and agricultural loans 8,401 23,329
Consumer loans to individuals 142,357 -
Lines of credit - 8,362
Lease financing 7,584 -
--------- -----------
$250,613 $53,480
========= ===========
- ----------------------------------------------------------------------
Contractual maturities of loans do not reflect the actual term of the
Corporation's loan portfolio. The average life of mortgage loans is
substantially less than their contractual terms because of loan prepayments and
enforcement of due-on-sale clauses, which give the Corporation the right to
declare a loan immediately payable in the event, among other things, that the
borrower sells the real property subject to the mortgage. Scheduled principal
amortization also reduces the average life of the loan portfolio. The average
life of mortgage loans tends to increase when current market mortgage rates
substantially exceed rates on existing mortgages and conversely, decrease when
rates on existing mortgages substantially exceed current market interest rates.
Delinquencies and Classified Assets
Delinquent Loans, Repossessed Assets and Real Estate Acquired Through
Foreclosure (REO). Typically, a loan is considered past due and a late charge is
assessed when the borrower has not made a payment within fifteen days from the
payment due date. When a borrower fails to make a required payment on a loan,
the Corporation attempts to cure the deficiency by contacting the borrower. The
initial contact with the borrower is made shortly after the seventeenth day
following the due date for which a payment was not received. In most cases,
delinquencies are cured promptly.
If the delinquency exceeds 60 days, the Corporation works with the borrower to
set up a satisfactory repayment schedule. Typically loans are considered
nonaccruing upon reaching 90 days delinquency, although the Corporation may be
receiving partial payments of interest and partial repayments of principal on
such loans. When a loan is placed in nonaccrual status, previously accrued but
unpaid interest is deducted from interest income. The Corporation institutes
foreclosure action on secured loans only if all other remedies have been
exhausted. If an action to foreclose is instituted and the loan is not
reinstated or paid in full, the property is sold at a judicial or trustee's sale
at which the Corporation may be the buyer.
Repossessed assets primarily include automobile and equipment collateral
acquired as a result of loan default. After repossession, the repossessed asset
is carried at the lower of carrying amount or fair value less cost to sell. The
Corporation generally attempts to sell its repossessed assets within thirty
days.
Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are initially recorded at fair value at the date of foreclosure
establishing a new cost basis. After foreclosure, management periodically
performs valuations and the real estate is carried at the lower of carrying
amount or fair value less cost to sell. Revenue and expenses from operations and
changes in the valuation allowance are included in loss on foreclosed real
estate. The Corporation generally attempts to sell its REO properties as soon as
practical upon receipt of clear title. The original lender typically handles
disposition of those REO properties resulting from loans purchased in the
secondary market.
As of December 31, 2003, the Corporation's nonperforming assets, which include
non-accrual loans, repossessed assets and REO, amounted to $8.6 million or 1.7%
of the Corporation's total assets.
Classified Assets. Regulations applicable to insured institutions require the
classification of problem assets as "substandard," "doubtful," or "loss"
depending upon the existence of certain characteristics as discussed below. A
category designated "special mention" must also be maintained for assets
currently not requiring the above classifications but having potential weakness
or risk characteristics that could result in future problems. An asset is
classified as substandard if not adequately protected by the current net worth
and paying capacity of the obligor or of the collateral pledged, if any. A
substandard asset is characterized by the distinct possibility that the
Corporation will sustain some loss if the deficiencies are not corrected. Assets
classified as doubtful have all the weaknesses inherent in those classified as
substandard. In addition, these weaknesses make collection or liquidation in
full, on the basis of currently existing facts, conditions and values, highly
questionable and improbable. Assets classified as loss are considered
uncollectible and of such little value that their continuance as assets is not
warranted.
The Corporation's classification of assets policy requires the establishment of
valuation allowances for loan losses in an amount deemed prudent by management.
Valuation allowances represent loss allowances that have been established to
recognize the inherent risk associated with lending activities. When the
Corporation classifies a problem asset as a loss, the asset is charged off
immediately.
The Corporation regularly reviews the problem loans and other assets in its
portfolio to determine whether any require classification in accordance with the
Corporation's policy and applicable regulations. As of December 31, 2003, the
Corporation's classified and criticized assets amounted to $13.7 million with
$6.3 million classified as substandard, $5.9 million classified as doubtful,
$109,000 classified as loss and $1.4 million identified as special mention.
The following table sets forth information regarding the Corporation's
nonperforming assets as of December 31:
- ----------------------------------------------------------------------
(Dollar amounts in thousands) 2003 2002 2001 2000 1999
- ----------------------------------------------------------------------
Nonperforming loans $8,415 $890 $635 $521 $778
Other real estate owned 89 83 76 208 132
Repossesed assets 116 186 212 133 130
------- ------- ------- ------- -------
Total nonperforming assets 8,620 1,159 923 862 1,040
Loans 90 days past due and
still accruing 1,200 1,171 1,151 420 600
------- ------- ------- ------- -------
-
Total nonperforming assets
and past due loans $9,820 $2,330 $2,074 $1,282 $1,640
======= ======= ======= ======= =======
- ----------------------------------------------------------------------
Allowance for Loan Losses. Management establishes reserves for estimated losses
on loans based upon its evaluation of the pertinent factors underlying the types
and quality of loans; historical loss experience based on volume and types of
loans; trend in portfolio volume and composition; level and trend on
non-performing assets; detailed analysis of individual loans for which full
collectibility may not be assured; determination of the existence and realizable
value of the collateral and guarantees securing such loans; and the current
economic conditions affecting the collectibility of loans in the portfolio. The
Corporation analyzes its loan portfolio and REO properties each month for
valuation purposes and to determine the adequacy of its allowance for losses.
Based upon the factors discussed above, management believes that the
Corporation's allowance for losses as of December 31, 2003 of $6.9 million is
adequate to cover probable losses inherent in the portfolio.
The following table sets forth an analysis of the allowance for losses on loans
receivable for the years ended December 31:
- ----------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 2003 2002 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Balance at beginning of period $4,212 $4,140 $3,365 $3,088 $2,757
Provision for loan losses 3,465 960 1,200 825 840
Charge-offs:
Commercial, financial and agricultural loans (32) (445) (40) (105) (78)
Real estate mortgage loans (26) - - (24) (40)
Installment Loans (511) (320) (410) (359) (386)
Lease Financing (269) (137) (50) (103) (50)
---------- --------- --------- ---------- ---------
(838) (902) (500) (591) (554)
Recoveries:
Commercial, financial and agricultural loans - 44 13 - -
Real estate mortgage loans 1 1 1 - 1
Installment Loans 42 45 59 42 42
Lease Financing - 3 2 1 2
---------- --------- --------- ---------- ---------
43 93 75 43 45
Transfer to reserve for unfunded loan commitments - (79) - - -
---------- --------- --------- ---------- ---------
Balance at end of period $6,882 $4,212 $4,140 $3,365 $3,088
========== ========= ========= ========== =========
Ratio of net charge-offs to average loans outstanding 0.25% 0.25% 0.14% 0.19% 0.30%
========== ========= ========= ========== =========
Ratio of allowance to total loans at end of period 2.20% 1.26% 1.29% 1.11% 1.15%
========== ========= ========= ========== =========
The following table sets forth an analysis of the allowance for losses on loans
receivable by loan category for the years ended December 31:
- -----------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 2003 2002 2001 2000 1999
-------------- -------------- -------------- -------------- --------------
Dollar Dollar Dollar Dollar Dollar
Amount % Amount % Amount % Amount % Amount %
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Balance at end of period applicable to:
Consumer loans $1,253 18.2% $1,307 31.0% $1,204 29.1% $1,099 32.7% $965 31.3%
Commercial loans 5,629 81.8% 2,905 69.0% 2,935 70.9% 2,266 67.3% 2,123 68.8%
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Balance at end of period $6,882 100.0% $4,212 100.0% $4,139 100.0% $3,365 100.0% $3,088 100.0%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
- -----------------------------------------------------------------------------------------------------------------------
The following table sets forth an analysis of the changes in the allowance for
loan losses for the years ended December 31:
- --------------------------------------------------------------------------------
(In thousands) 2003 2002 2001
- --------------------------------------------------------------------------------
Balance at the beginning of the year $4,212 $4,140 $3,365
Provision for loan losses 3,465 960 1,200
Loans charged-off (838) (902) (500)
Recoveries 43 93 75
Transfer to reserve for unfunded loan commitments - (79) -
--------- --------- ---------
Balance at the end of the year $6,882 $4,212 $4,140
========= ========= =========
- --------------------------------------------------------------------------------
Investment Portfolio
General. The Corporation maintains an investment portfolio of securities such as
mortgage-backed securities, U.S. Government agencies, municipal and corporate
securities, U.S. Treasury securities and equity securities.
Investment decisions are made within policy guidelines established by the Board
of Directors. This policy is aimed at maintaining a diversified investment
portfolio, which complements the overall asset/liability and liquidity
objectives of the Bank, while limiting the related credit risk to an acceptable
level.
The following table sets forth certain information regarding the amortized cost,
fair value, weighted average yields and contractual maturities of the
Corporation's securities as of December 31, 2003:
- ----------------------------------------------------------------------------------------------------------------------
(In thousands) Due in 1 Due from 1 Due from 5 Due after No scheduled
year or less to 5 years to 10 years 10 years maturity Total
- ----------------------------------------------------------------------------------------------------------------------
U.S. Government agencies $- $10,076 $31,868 $6,902 $- $48,846
Mortgage-backed securities - - 89 51,264 - 51,353
Municipal securities - 29 11,726 11,203 - 22,958
Corporate securities 250 2,077 12,386 6,921 - 21,634
U.S. Treasury Securities - 1,607 - - - 1,607
Equity securities - - - - 516 516
------------ ------------ ------------ ------------ --------- -----------
$250 $13,789 $56,069 $76,290 $516 $146,914
============ ============ ============ ============ ========= ===========
Estimated fair value $257 $14,046 $57,314 $76,685 $2,839 $151,141
============ ============ ============ ============ ========= ===========
Weighted average yield (1) 7.50% 3.70% 4.83% 4.73% 1.46% 4.66%
============ ============ ============ ============ ========= ===========
(1) Weighted average yield is on a taxable equivalent basis and is calculated
based upon amortized cost.
For additional information regarding the Corporation's investment portfolio see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Notes to Consolidated Financial Statements" in the Annual
Report to shareholders incorporated herein by reference.
Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
The Corporation has various financial obligations, including contractual
obligations and commitments, that may require future cash payments.
Contractual Obligations. The following table presents, as of December 31, 2003,
significant fixed and determinable contractual obligations to third parties by
payment date. Further discussion of the nature of each obligation is included in
the referenced note to the consolidated financial statements.
- --------------------------------------------------------------------------------------------------------------------
(In thousands) Note Due in 1 Due from 1 Due from 3 Due after
Reference year or less to 3 years to 5 years 5 years Total
- --------------------------------------------------------------------------------------------------------------------
Deposits without a stated maturity 8 $236,602 $- $- $- $236,602
Certificates of deposit 8 70,872 41,989 14,471 2,105 129,437
Borrowed funds 9 5,000 - 4,000 85,000 94,000
Operating leases 6 446 533 188 96 1,263
Long-term contracts 6 435 870 870 - 2,175
The Corporation's operating lease obligations represent short and long-term
lease and rental payments for facilities. Long-term contracts represent
obligations under agreements to purchase goods or services that are enforceable
and legally binding on the Corporation and that specify all significant terms,
including: fixed or minimum quantities to be purchased; fixed, minimum or
variable price provisions; and the approximate timing of the transaction. The
long-term contracts amounts presented above are related to the Corporation's
commitment with a third-party information systems service provider.
Commitments. Commitments to make loans are generally made for periods of 30 days
or less. Commitments to extend credit generally renew annually. Standby letters
of credit generally have expiration dates within one year. Further discussion of
these commitments is included in Note 14 to the consolidated financial
statements.
Sources of Funds
General. Deposits are the primary source of the Bank's funds for lending and
investing activities. Secondary sources of funds are derived from loan
repayments and investment maturities. Loan repayments can be considered a
relatively stable funding source, while deposit activity is greatly influenced
by interest rates and general market conditions. The Bank also has access to
funds through credit facilities available from the FHLB. For a description of
the Bank's sources of funds see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Annual Report to
shareholders incorporated herein by reference.
Deposits. The Bank offers a wide variety of retail deposit account products to
both consumer and commercial deposit customers, including time deposits,
non-interest bearing and interest bearing demand deposit accounts, savings
deposits, and money market accounts.
Deposit products are promoted in periodic newspaper advertisements, along with
notices provided in customer account statements. The Bank's market strategy is
based on its reputation as a community bank that provides quality products and
personal customer service.
The Bank pays interest rates on its interest bearing deposit products that are
competitive with rates offered by other financial institutions in its market
area. Management reviews interest rates on deposits weekly and considers a
number of factors, including (1) the Bank's internal cost of funds; (2) rates
offered by competing financial institutions; (3) investing and lending
opportunities; and (4) the Bank's liquidity position.
Borrowed Funds. The Bank has the capacity to borrow both short-term and
long-term funds through the FHLB. For additional information regarding the
Corporation's deposit base and borrowed funds see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Notes to
Consolidated Financial Statements" in the Annual Report to shareholders
incorporated herein by reference.
Subsidiary Activity
The Corporation has one wholly owned subsidiary, the Bank, a state-chartered
bank with twelve branches. The Bank has one wholly owned subsidiary, NSB
Financial Services, LLC, a limited liability corporation which operates as a
licensed title insurance agency.
Competition
The Bank competes for loans, deposits, and customers with other commercial
banks, savings and loan associations, securities and brokerage companies,
mortgage companies, insurance companies, finance companies, money market funds,
credit unions, and other nonbank financial service providers.
Risk Factors
The following discusses certain factors that may affect the Corporation's
financial condition and results of operations and should be considered in
evaluating the Corporation.
Ability Of The Corporation To Execute Its Business Strategy. The financial
performance and profitability of the Corporation will depend, in large part, on
its ability to favorably execute its business strategy. This execution entails
risks in, among other areas, technology implementation, market segmentation,
brand identification, banking operations, and capital and human resource
investments. Accordingly, there can be no assurance that the Corporation will be
successful in its business strategy.
Economic Conditions And Geographic Concentration. The Corporation's operations
are located in western Pennsylvania and are concentrated in Allegheny and Butler
Counties, Pennsylvania. Although management has diversified the Corporation's
loan portfolio into other Pennsylvania counties, and to a very limited extent
into other states, the vast majority of the Corporation's credits remain
concentrated in the two primary counties. As a result of this geographic
concentration, the Corporation's results depend largely upon economic and real
estate market conditions in these areas. Deterioration in economic or real
estate market conditions in the Corporation's primary market areas could have a
material adverse impact on the quality of the Corporation's loan portfolio, the
demand for its products and services, and its financial condition and results of
operations.
Interest Rates. By nature, all financial institutions are impacted by changing
interest rates, due to the impact of such upon:
-- the demand for new loans
-- prepayment speeds experienced on various asset classes, particularly
residential mortgage loans
-- credit profiles of existing borrowers
-- rates received on loans and securities
-- rates paid on deposits and borrowings.
As presented previously, the Corporation is financially exposed to parallel
shifts in general market interest rates, changes in the relative pricing of the
term structure of general market interest rates, and relative credit spreads.
Therefore, significant fluctuations in interest rates may present an adverse
effect upon the Corporation's financial condition and results of operations.
Government Regulation And Monetary Policy. The financial services industry is
subject to extensive federal and state supervision and regulation. Significant
new laws, changes in existing laws, or repeals of present laws could cause the
Corporation's financial results to materially differ from past results. Further,
federal monetary policy, particularly as implemented through the Federal Reserve
System, significantly affects credit conditions for the Corporation, and a
material change in these conditions could present an adverse impact on the
Corporation's financial condition and results of operations.
Competition. The financial services business in the Corporation's market areas
is highly competitive, and is becoming more so due to technological advances
(particularly Internet based financial services delivery), changes in the
regulatory environment, and the consolidation that has occurred among financial
services providers. Many of the Corporation's competitors are much larger in
terms of total assets and market capitalization, enjoy greater liquidity in
their equity securities, have greater access to capital and funding, and offer a
broader array of financial products and services. In light of this environment,
there can be no assurance that the Corporation will be able to compete
effectively. The results of the Corporation may materially differ in future
periods depending upon the nature or level of competition.
Credit Quality. A significant source of risk arises from the possibility that
losses will be sustained because borrowers, guarantors, and related parties may
fail to perform in accordance with the terms of their loans. The Corporation has
adopted underwriting and credit monitoring procedures and credit policies,
including the establishment and review of the allowance for loan losses, that
management believes are appropriate to control this risk by assessing the
likelihood of non-performance, tracking loan performance, and diversifying the
credit portfolio. Such policies and procedures may not, however, prevent
unexpected losses that could have a material adverse effect on the Corporation's
financial condition or results of operations. Unexpected losses may arise from a
wide variety of specific or systemic factors, many of which are beyond the
Corporation's ability to predict, influence, or control.
Market Risk. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the Annual Report to shareholders incorporated
herein by reference.
Liquidity Risk. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the Annual Report to shareholders incorporated
herein by reference.
Other Risks. From time to time, the Corporation details other risks with respect
to its business and financial results in its filings with the SEC.
Item 2. Properties
- ------- ----------
The Corporation's principal office is located at 5004 McKnight Road, Pittsburgh,
Pennsylvania. The Bank's main office is located at 100 Federal Street,
Pittsburgh, Pennsylvania. Including the main office, the Bank has a total of
twelve branch offices located as listed below. The Bank owns the four-story
building located on Federal Street. The Bank also owns its Cranberry Township,
Ross Township, Pine Creek and West View branch offices, although it leases the
land on which the Pine Creek Shopping Center branch office is located. The
Bank's Hampton Township, McCandless Township, Allegheny Professional Building,
Duncan Manor, Pittsburgh Cultural District, Franklin Park and Fox Chapel branch
offices and the Pine Creek Shopping Center land are operated under leases that
contain various renewal option periods extending through May, 2012. All
properties are in good condition and are adequate for the Corporation's and the
Bank's purposes.
The following is a list of the banking offices and the addresses of each office:
Location Name and Address
-----------------------------
Pittsburgh-North Side Ross Park
100 Federal Street 5004 McKnight Road
Pittsburgh, PA 15212 Pittsburgh, PA 15237
Allegheny Professional Building Pine Creek - Pine Creek Shopping Center
490 East North Avenue 9805 McKnight Road
Pittsburgh, PA 15212 McCandless, PA 15237
West View Duncan Manor - Duncan Plaza
728 Center Avenue 1701 Duncn Avenue
West View, PA 15229 Allison Park, PA 15101
McCandless Township Pittsburgh Cultural District
Perry Highway and Ingomar Road 701 Liberty Avenue
McCandless, PA 15237 Pittsburgh, PA 15222
Cranberry Township Franklin Park
Route 19N at St. Francis Way 2000 Crporate Drive at Brandt School Road
Cranberry, PA 16066 Wexford, PA 15090
Hampton Township Fox Chapel
Shoppers Plaza at Route 8 1112 Freeport Road
Hampton, PA 15101 Pittsburgh, PA 15238
Item 3. Legal Proceedings
- ------- ------------------
The Corporation is subject to a number of asserted and unasserted potential
legal claims encountered in the normal course of business. In the opinion of
management, there is no present basis to conclude that the resolution of these
claims will have a material adverse effect on the Corporation's consolidated
financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ----------------------------------------------------
No matter was submitted by the Corporation to its shareholders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------- -----------------------------------------------------------------------
and Issuer Purchases of Equity Securities
- -----------------------------------------
Incorporated by reference is the information presented on page 52 and Note 10 of
the 2003 Annual Report to shareholders.
Item 6. Selected Financial Data
- ------- ------------------------
Incorporated by reference is the information presented on page 4 of the 2003
Annual Report to shareholders.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations
- --------------
Incorporated by reference is the information presented on pages 5 to 23 of the
2003 Annual Report to shareholders.
Item 7a. Quantitative and Qualitative Disclosure About Market Risk
- ------- ----------------------------------------------------------
Incorporated by reference is the information presented on pages 16 to 18 of the
2003 Annual Report to shareholders.
Disclosure of the Corporation's significant accounting policies is included in
Note 1 to the consolidated financial statements on pages 29 to 33 of the 2003
Annual Report to shareholders. Some of these policies are particularly sensitive
requiring significant judgments, estimates and assumptions to be made by
management. Additional information is contained in Management's Discussion and
Analysis for critical accounting policies, including the allowance for loan
losses, which is located on page 30, and the accounting for stock options, which
is located on pages 32 to 33, of the 2003 Annual Report to shareholders.
Item 8. Financial Statements and Supplementary Data
- ------- --------------------------------------------
Incorporated by reference is the information presented on pages 5 to 28 of the
2003 Annual Report to shareholders.
Item 9. Changes in and Disagreements With Accountants on Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosure
- ---------------------
Incorporated by reference is the information presented under the caption "Change
in Accountants" of the Proxy Statement for the Annual Shareholders Meeting to be
held April 27, 2004.
Item 9a. Controls and Procedures
- ------- -------------------------
The Corporation's management evaluated, with the participation of the
Corporation's President and Chief Operating Officer and Chief Financial Officer,
the effectiveness of the Corporation's disclosure controls and procedures, as of
the end of the period covered by this form 10-K. Based on that evaluation, the
Chief Operating Officer and Chief Financial Officer concluded that the
Corporation's disclosure controls and procedures, as defined in rules 13(a) -
15(e) and 15(d) - 15(e) under the Securities Exchange Act of 1934, are effective
to ensure that information required to be disclosed by the Corporation in the
reports that it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms.
There were no changes in the Corporation's internal control over financial
reporting that occurred during the Corporation's last fiscal quarter that have
materially affected, or are reasonably likely to affect, the Corporation's
internal control over financial reporting.
In connection with the audit of the Corporation's financial statements for the
year ended December 31, 2002, the Corporation's auditors identified two
reportable conditions under standards established by the American Institute of
Certified Public Accountants (AICPA). These conditions related to deficiencies
associated with the timeliness of preparation and inadequacy of review
associated with certain cash account reconciliations and with the lack of
current customer financial information associated with certain commercial loan
relationships. Further, the reportable condition associated with the timeliness
and inadequacy of the cash account reconciliations was considered a material
weakness under standards established by the AICPA.
Corrective action was taken by the Board of Directors and management during 2003
to address these reportable conditions and the material weakness. During the
2003, the Corporation established policies and standards whereby cash
reconciliations are performed on a monthly basis and appropriate supervisory
review procedures have been set forth. In addition, the Corporation has
established a framework to ensure that all general ledger accounts are
reconciled and reviewed on a monthly basis. During 2003, the Corporation
established a recurring loan documentation review program to ensure the adequacy
of information maintained in commercial loan files and has instituted a number
of initiatives to enhance controls associated with the commercial lending
function.
These reportable conditions and the material weakness identified in the prior
year were corrected and resolved by the end of the third quarter of 2003, and
management believes that these matters have been appropriately addressed to
ensure proper control over financial reporting.
Part III
Item 10. Directors and Executive Officers of the Registrant
- ------- ----------------------------------------------------
Incorporated by reference is the information presented under the captions
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" of the Proxy Statement for the Annual Shareholders Meeting to be
held April 27, 2004.
Item 11. Executive Compensation
- ------- ------------------------
Incorporated by reference is the information presented under the caption
"Compensation and Plan Information" of the Proxy Statement for the Annual
Shareholders Meeting to be held on April 27, 2004.
The equity compensation plan table is incorporated by reference under the
caption "Compensation and Plan Information" of the Proxy Statement for the
Annual Shareholders Meeting to be held on April 27, 2004.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
- ------- -------------------------------------------------------------------
Related Stockholder Matters
- ----------------------------
Incorporated by reference is the information presented under the caption "Share
Ownership" of the Proxy Statement for the Annual Shareholders Meeting to be held
on April 27, 2004.
Item 13. Certain Relationships and Related Transactions
- ------- ------------------------------------------------
Incorporated by reference is the information presented under the caption
"Compensation and Plan Information - Transactions with Directors and Executive
Officers" of the Proxy Statement for the Annual Shareholders Meeting to be held
on April 27, 2004.
Item 14. Principal Accountant Fees and Services
- ------- ----------------------------------------
Incorporated by reference is the information presented under the caption "Report
of the Audit Committee" of the Proxy Statement for the Annual Shareholders
Meeting to be held on April 27, 2004.
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- ------- -----------------------------------------------------------------
Consolidated Financial Statements Filed:
The consolidated financial statements and report of the Registrant's independent
auditor thereon are incorporated by reference to the pages indicated in the said
Annual Report to shareholders.
Consolidated Financial Statements:
NSD Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets, page 24
Consolidated Statements of Income, page 25
Consolidated Statements of Comprehensive Income, page 26
Consolidated Statements of Changes in Shareholders' Equity, page 27
Consolidated Statements of Cash Flows, page 28
Notes to Consolidated Financial Statements, pages 29-50
Independent Auditor's Report, page 51
Consolidated Financial Statement Schedules:
Schedules normally required on Form 10-K are omitted since the required
information is either not applicable, not deemed material or is shown in the
respective consolidated financial statements or in the notes thereto.
Exhibits
3.1 Articles of Incorporation of NSD Bancorp, Inc. filed as Exhibit 3a to
NSD Bancorp, Inc.'s Form S-4 filed March 9, 1993 (Registration No.
33-59242), is incorporated herein by reference.
3.2 Bylaws of NSD Bancorp, Inc. filed as Exhibit 3b to NSD Bancorp, Inc.'s
Form S-4 filed March 9, 1993 (Registration No. 33-59242), is
incorporated herein by reference.
10.1 Agreement and Mutual Release dated August 29, 2003, between NSD
Bancorp, Inc., NorthSide Bank and Lloyd G. Gibson filed as Exhibit
10.1 to NSD Bancorp Inc.'s Form 10-Q filed November 14, 2003, 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 NSD Bancorp, Inc. 2004 Omnibus Stock Incentive Plan is incorporated by
reference as Exhibit C to NSD Bancorp, Inc.'s Proxy Statement for the
Annual Shareholders Meeting to be held April 27, 2004.
11 Statement re: Computation of Earnings Per Share (incorporated by
reference on page 32 of the 2003 Annual Report to Shareholders,
attached as Exhibit 13, hereto.)
13 2003 Annual Report to Shareholders.
14 Code of Ethics.
16 Deloitte and Touche, LLP, letter concerning "Changes in Accountants
Item 9(d) of Reg 14A" filed as Exhibit 16 to NSD Bancorp Inc.'s Form
10-K filed March 28, 2003, is incorporated herein by reference.
21 Subsidiaries of the Registrant filed as Exhibit 21 to NSD Bancorp
Inc.'s Form 10-K filed March 28, 2003, is incorporated herein by
reference.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors is presented
within.
31.1 Rule 15d-14(a) certification of the President and Chief Operating
Officer.
31.2 Rule 15d-14(a) certification of the Chief Financial Officer.
32.1 Section 1350 certification of the President and Chief Operating
Officer.
32.2 Section 1350 certification of the Chief Financial Officer.
Reports on Form 8-K
Reports on Form 8-K filed during the fourth quarter of 2003.
October 14, 2003 - NSD Bancorp, Inc. issued a news release announcing the
appointment of William C. Marsh as Senior Vice President and Chief
Financial Officer of the Corporation and NorthSide Bank.
October 30, 2003 - NSD Bancorp, Inc. issued a news release announcing its
third quarter results and fourth quarter dividend.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NSD BANCORP, INC.
----------------
(Registrant)
Dated: March 29, 2004 By /S/ Andrew W. Hasley
---------------------------------------
Andrew W. Hasley
President and Chief
Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 29, 2004:
/S/ Lawrence R. Gaus Lawrence R. Gaus, Chairman of the Board, Director
- --------------------------
/S/ Andrew W. Hasley Andrew W. Hasley, President and Chief Operating Officer
- -------------------------- (Principal Executive Officer)
/S/ William C. Marsh William C. Marsh, Treasurer
- -------------------------- (Principal Financial and Accounting Officer)
/S/ William R. Baierl William R. Baierl, Director
- --------------------------
/S/ John C. Brown Jr. John C. Brown, Jr., Director
- --------------------------
/S/ Grant A. Colton Jr. Grant A. Colton, Jr., Director
- --------------------------
/S/ Nicholas C. Geanopulos Nicholas C. Geanopulos, Director
- --------------------------
/S/ Gus P. Georgiadis Gus P. Georgiadis, Director
- --------------------------
/S/ Gerald B. Hindy Gerald B. Hindy, Vice Chairman
- --------------------------
/S/ Charles S. Lenzner Charles S. Lenzner, Director
- --------------------------
/S/ David J. Malone David J. Malone, Director
- --------------------------
/S/ Kenneth L. Rall Kenneth L. Rall, Director
- --------------------------
/S/ Arthur J. Rooney II Arthur J. Rooney, II, Director
- --------------------------