- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number: 0-22124
NSD Bancorp, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1616814
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization) (IRS Employer
Identification No.)
5004 McKnight Road, Pittsburgh, Pennsylvania, 15237
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(412) 231-6900
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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. X Yes No
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of May 1, 2004:
Common Stock, $1.00 par value 3,204,075
----------------------------- ---------
(Class) (Outstanding)
- --------------------------------------------------------------------------------
NSD Bancorp, Inc.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of
March 31, 2004 and December 31, 2003......................................................................1
Consolidated Statements of Income for the three months
ended March 31, 2004 and 2003.............................................................................2
Consolidated Statements of Comprehensive Income for the three months
ended March 31, 2004 and 2003.............................................................................3
Consolidated Statements of Cash Flows for the three months
ended March 31, 2004 and 2003.............................................................................4
Notes to Consolidated Financial Statements................................................................5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations..........................................................8
Item 3. Qualitative and Quantitative Disclosures about Market Risk...............................................14
Item 4. Controls and Procedures..................................................................................14
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings........................................................................................15
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.........................15
Item 3. Defaults Upon Senior Securities..........................................................................15
Item 4. Submission of Matters to a Vote of Security Holders......................................................15
Item 5. Other Information........................................................................................15
Item 6. Exhibits and Reports on Form 8-K.........................................................................15
Signatures...............................................................................................17
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
- -----------------------------
NSD Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
As of March 31, 2004 and December 31, 2003 (unaudited)
(Dollar amounts in thousands)
March 31, December 31,
2004 2003
------------- --------------
Assets
- -------
Cash and due from banks $11,557 $14,117
Interest-earning deposits in banks 241 623
Federal funds sold 23,300 9,500
------------- --------------
Cash and cash equivalents 35,098 24,240
Securities available-for-sale 157,533 151,141
Loans receivable, net of allowance for loan losses of $6,795 and
$6,882 298,962 305,626
Federal Home Loan Bank stock, at cost 4,989 4,961
Bank-owned life insurance 8,630 8,537
Accrued interest and dividends receivable 2,388 2,580
Premises and equipment, net 3,586 3,326
Prepaid expenses and other assets 6,082 6,209
------------- --------------
Total assets $517,268 $506,620
============= ==============
Liabilities and Stockholders' Equity
- ------------------------------------------------------------------
Liabilities:
Deposits:
Noninterest-bearing deposits $72,572 $75,724
Interest-bearing deposits 303,035 290,315
------------- --------------
Total deposits 375,607 366,039
Borrowed funds 94,000 94,000
Accrued interest payable 4,149 4,870
Accrued expenses and other liabilities 3,223 2,824
------------- --------------
Total liabilities 476,979 467,733
------------- --------------
Stockholders' Equity:
Common stock, $1 par value, 10,000,000 shares authorized;
3,532,338 and 3,529,516 shares issued 3,532 3,530
Additional paid-in-capital 26,152 26,117
Treasury stock, at cost, 331,701shares (6,626) (6,626)
Retained earnings 13,403 13,077
Accumulated other comprehensive income 3,828 2,789
------------- --------------
Total stockholders' equity 40,289 38,887
------------- --------------
Total liabilities and stockholders' equity $517,268 $506,620
============= ==============
See accompanying notes to unaudited consolidated financial statements.
1
NSB Bancorp, Inc. and Subsidiaries
Consolidated Income Statements
For the three months ended March 31, 2004 and 2003 (unaudited)
Dollar amounts in thousands, except share data
Three months ended
March 31,
-----------------------
2004 2003
----------- -----------
Interest and dividend income:
Loans receivable, including fees $4,718 $5,694
Securities:
Taxable 1,421 1,312
Exempt from Federal income tax 237 229
Federal Home Loan Bank stock 17 41
Deposits with banks and federal funds sold 36 55
----------- -----------
Total interest income 6,429 7,331
----------- -----------
Interest expense:
Deposits 1,230 1,970
Borrowed funds 1,359 1,344
----------- -----------
Total interest expense 2,589 3,314
----------- -----------
Net interest income 3,840 4,017
Provision for loan losses 130 255
----------- -----------
Net interest income after provision for loan losses 3,710 3,762
----------- -----------
Noninterest income:
Fees and service charges 432 370
Gain on sale of securities available-for-sale, net 75 89
Earnings on bank-owned life insurance 93 102
Other 232 383
----------- -----------
Total noninterest income 832 944
----------- -----------
Noninterest expense:
Compensation and employee benefits 1,651 1,455
Premises and equipment, net 506 497
Data processing 242 213
Other 692 722
----------- -----------
Total noninterest expense 3,091 2,887
----------- -----------
Net income before provision for income taxes 1,451 1,819
Provision for income taxes 420 480
----------- -----------
Net income $1,031 $1,339
=========== ===========
Net income per share:
Basic $0.32 $0.42
Diluted $0.32 $0.41
Common dividends declared and paid per share: $0.22 $0.22
Average common shares outstanding:
Basic 3,199,970 3,196,364
Diluted 3,252,171 3,260,296
See accompanying notes to unaudited consolidated financial statements.
2
NSB Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
For the three months ended March 31, 2004 and 2003 (unaudited)
Dollar amounts in thousands, except share data
Three months ended
March 31,
-----------------------
2004 2003
----------- -----------
Net income $1,031 $1,339
Other comprehensive income:
Unrealized holding gains on available-for-sale securities 1,649 214
Less reclassification adjustment for gains
realized
in income 75 89
----------- -----------
Net unrealized gains 1,574 125
Tax effect 535 43
Other comprehensive income 1,039 83
----------- -----------
Comprehensive income $2,070 $1,422
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
3
NSB Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the three months ended March 31, 2004 and 2003 (unaudited)
Dollar amounts in thousands
Three months ended
March 31,
--------------------------------
2004 2003
-------------- ---------------
Operating activities:
Net income $1,031 $1,339
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization for premises and equipment 164 165
Provision for loan losses 130 255
Amortization of premiums and accretion of discounts, net (105) 73
Gains on sale of securities available-for-sale, net (75) (89)
Gain on sale of loans, net - (62)
Proceeds from sale of loans held-for-sale - 963
Loans originated for sale - (901)
Earnings on bank-owned life insurance, net (93) (102)
Changes in:
Accrued interest receivable 192 (1)
Prepaid expenses and other assets (264) 12
Accrued interest payable (721) (143)
Accrued expenses and other liabilities 400 (31)
-------------- ---------------
Net cash from operating activities 659 1,478
-------------- ---------------
Investing activities:
Loan originations and payments, net 6,534 6,967
Purchases of securities available-for-sale (13,030) (38,766)
Purchases of Federal Home Loan Bank stock (28) (110)
Repayment, maturities and calls of securities available-for-sale 8,140 23,015
Proceeds from sale of securities available for sale 107 -
Purchases of premises and equipment (424) (169)
Proceeds from the sale of other real estate owned - 33
-------------- ---------------
Net cash from investing activities 1,299 (9,030)
-------------- ---------------
Financing activities:
Net change in deposits 9,567 6,488
Cash dividends paid on common stock (704) (670)
Payments to acquire treasury stock - (205)
Proceeds from exercise of common stock options 37 262
-------------- ---------------
Net cash from financing activities 8,900 5,875
-------------- ---------------
Change in cash and cash equivalents 10,858 (1,677)
Cash and cash equivalents at beginning of period 24,240 33,626
-------------- ---------------
Cash and cash equivalents at end of period $35,098 $31,949
============== ===============
Supplemental information:
Interest paid $3,310 $3,457
Income taxes paid 106 425
See accompanying notes to unaudited consolidated financial statements.
4
NSD Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
1. Business and Basis of Presentation
NSD Bancorp, Inc. (the Corporation) is a Pennsylvania corporation and
bank holding company that provides a wide range of retail and
commercial financial products and services to customers in western
Pennsylvania through its wholly owned subsidiary bank, NorthSide Bank
(the Bank). The Bank is an FDIC-insured, state chartered bank based in
Pittsburgh, Pennsylvania, that operates twelve branch offices serving
Pittsburgh and its northern suburbs. In addition to providing
traditional lending and depository products and related banking
services, the Bank offers investment advisory, brokerage and insurance
services. The Bank also provides title searches and other real estate
settlement services through its wholly owned subsidiary, NSB Financial
Services, LLC, a limited liability corporation, which operates as a
licensed title insurance agency. The consolidated financial statements
contained herein include the accounts of the Corporation, the Bank and
the Bank's wholly owned subsidiary, which operate as one operating
segment. All inter-company amounts have been eliminated.
The accompanying unaudited consolidated financial statements for the
interim periods include all adjustments, consisting of normal recurring
accruals, which are necessary, in the opinion of management, to fairly
reflect the Corporation's financial position and results of operations.
Additionally, these consolidated financial statements for the interim
periods have been prepared in accordance with instructions for the
Securities and Exchange Commission's Form 10-Q and therefore do not
include all information or footnotes necessary for a complete
presentation of financial condition, results of operations and cash
flows in conformity with accounting principles generally accepted in
the United States of America. For further information, refer to the
audited consolidated financial statements and footnotes thereto as of
and for the year ended December 31, 2003, as contained in the
Corporation's 2003 Annual Report to Stockholders, presented as Exhibit
13 in the Corporation's Form 10-K for the year ended December 31, 2003
filed March 30, 2004.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan
losses and deferred tax assets. The results of operations for interim
quarterly or year to date periods are not necessarily indicative of the
results that may be expected for the entire year or any other period.
Certain amounts previously reported may have been reclassified to
conform to the current year's financial statement presentation.
2. Stock Dividend
On April 28, 2004, the Corporation declared a 5% stock dividend payable
on May 17, 2004 to shareholders of record as of May 3, 2004. A cash
payment will be made in lieu of fractional shares.
5
3. Earnings Per Common Share
Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflects
additional common shares that would have been outstanding if dilutive
potential common shares had been issued, as well as any adjustment to
income that would result from the assumed issuance. Potential common
shares that may be issued by the Corporation relate solely to
outstanding stock options, and are determined using the treasury stock
method. The following table sets forth the computation of basic and
diluted earnings per share for the three months ended March 31:
(Dollar amounts in thousands, except share data) 2004 2003
- -------------------------------------------------------------------------------------------
Basic earnings per share:
Net income $1,031 $1,339
Weighted average shares outstanding 3,199,970 3,196,364
Earnings per share $0.32 $0.42
=========== ===========
Diluted earnings per share:
Net income $1,031 $1,339
Weighted average shares outstanding 3,199,970 3,196,364
Dilutive effect of employee stock options 52,201 63,932
----------- -----------
Total diluted weighted average shares outstanding 3,252,171 3,260,296
Earnings per share $0.32 $0.41
=========== ===========
Average outstanding options to purchase shares of common stock of
57,338, at prices from $25.96 to $26.43, for the three months ended
March 31, 2004 and 17,670 shares, at prices from $27.56 to $27.64, for
the three months ended March 31, 2003 were not included in the
computation of diluted earnings per share for the three months ended
March 31, 2004 and March 31, 2003 because, to do so, would have been
anti-dilutive.
4. Securities
The following table summarizes the Corporation's securities
available-for-sale:
(In thousands) Amortized Unrealized Unrealized Fair
cost gains losses value
- -----------------------------------------------------------------------------------------
March 31, 2004
U.S. Government agencies $55,585 $436 $- $56,021
Mortgage-backed securities 50,648 737 (24) 51,361
Municipal securities 21,807 702 (7) 22,502
Corporate securities 21,610 1,738 (138) 23,210
U.S. Treasury securities 1,600 96 - 1,696
Equity securities 484 2,259 - 2,743
----------- ----------- ----------- -----------
$151,734 $5,968 $(169) $157,533
=========== =========== =========== ===========
December 31, 2003
U.S. Government agencies $48,845 $150 $(116) $48,879
Mortgage-backed securities 51,353 404 (244) 51,513
Municipal securities 22,959 520 (24) 23,455
Corporate securities 21,634 1,330 (191) 22,773
U.S. Treasury securities 1,607 75 - 1,682
Equity securities 516 2,323 - 2,839
----------- ----------- ----------- -----------
$146,914 $4,802 $(575) $151,141
=========== =========== =========== ===========
6
5. Loans receivable
The following table summarizes the Corporation's loans receivable:
(Dollar amounts in thousands) March 31, 2004 December 31, 2003
------------------- -------------------
Dollar Dollar
Amount % Amount %
- -----------------------------------------------------------------------------------------
Residential mortgage loans $24,274 7.9% $24,436 7.8%
Nonresidential mortgage loans 80,594 26.3% 89,575 28.6%
Commercial, financial and agricultural loans 38,582 12.6% 31,450 10.0%
Consumer loans to individuals 139,148 45.4% 142,686 45.5%
Lines of credit 8,019 2.6% 8,362 2.7%
Lease financing 7,494 2.4% 8,548 2.7%
Nonperforming loans 8,466 2.8% 8,415 2.7%
---------- -------- --------- ---------
306,577 100.0% 313,472 100.0%
======== =========
Unearned income (820) (964)
---------- ---------
Total loans, net of unearned income and fees 305,757 312,508
Less: Allowance for loan losses 6,795 6,882
---------- ---------
Net loans receivable $298,962 $305,626
========== =========
6. Deposits
The following table summarizes the Corporation's deposits:
(Dollar amounts in thousands) March 31, 2004 December 31, 2003
-------------------------- --------------------------
Amount % Amount %
- -------------------------------------------------------------------------------------------
Noninterest-bearing deposits $72,572 19.3% $75,724 20.7%
Interest-bearing demand deposits 158,397 42.2% 160,878 44.0%
Time deposits 144,638 38.5% 129,437 35.3%
----------- ------------ ---------- -------------
$375,607 100.0% $366,039 100.0%
=========== ============ ========== =============
7. Borrowed funds
The Corporation has borrowed funds, comprised of Federal Home Loan Bank
Convertible Select Advances, totaling $94.0 million at March 31, 2004
and December 31, 2003. These advances have a weighted average interest
rate of 5.72%. Contractual maturities of these advances are as follows:
$5.0 million in 2004, $4.0 million in 2007 and $85.0 million in 2008
and thereafter. Further discussion of the Corporation's borrowed funds
can be found in the 2003 Annual Report to Stockholders.
8. Stock based compensation
The Corporation maintains two stock-based compensation plans. These
plans provide for the granting of stock options to the Corporation's
employees and directors. The Corporation follows Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees" and
related Interpretations, under which no compensation cost has been
recognized for any of the periods presented. The options have exercise
prices equal to the market value of the underlying common stock on the
dates of grant. If grants are made during a reporting period, the pro
forma effect on net income and earnings per share are disclosed via
footnote disclosure as if the Corporation had applied the fair value
recognition provisions of the Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-based Compensation," to
stock-based employee and director compensation. No grants were made
during the periods presented herein.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
This section discusses the consolidated financial condition and results of
operations of NSD Bancorp, Inc. (the Corporation) and its wholly owned
subsidiary bank, NorthSide Bank (the Bank) and the Bank's subsidiary NSB
Financial Services, LLC, as of and for the three month period ended March 31,
2004, and should be read in conjunction with the accompanying consolidated
financial statements and notes presented on pages 1 through 7.
Discussions of certain matters in this Report on Form 10-Q may constitute
forward-looking statements within the meaning of the Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended (the Exchange Act), and as such, may involve risks and
uncertainties. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies, and expectations, are
generally identifiable by the use of words or phrases such as "believe", "plan",
"expect", "intend", "anticipate", "estimate", "project", "forecast", "may
increase", "may fluctuate", "may improve" and similar expressions of future or
conditional verbs such as "will", "should", "would", and "could". These
forward-looking statements relate to, among other things, expectations of the
business environment in which the Corporation operates, projections of future
performance, potential future credit experience, perceived opportunities in the
market, and statements regarding the Corporation's mission and vision. The
Corporation's actual results, performance, and achievements may differ
materially from the results, performance, and achievements expressed or implied
in such forward-looking statements due to a wide range of factors. These factors
include, but are not limited to, changes in interest rates, general economic
conditions, the demand for the Corporation's products and services, accounting
principles or guidelines, legislative and regulatory changes, monetary and
fiscal policies of the US Government, US Treasury, and Federal Reserve, real
estate markets, competition in the financial services industry, attracting and
retaining key personnel, performance of new employees, regulatory actions,
changes in and utilization of new technologies, and other risks detailed in the
Corporation's reports filed with the Securities and Exchange Commission (SEC)
from time to time, including the Annual Report on Form 10-K for the year ended
December 31, 2003. These factors should be considered in evaluating the
forward-looking statements, and undue reliance should not be placed on such
statements. The Corporation does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
CRITICAL ACCOUNTING POLICIES
The most significant accounting policies followed by the Corporation are
presented in Note 1 of the Corporation's 2003 Annual Report to Stockholders.
These policies, along with the disclosures presented in the other financial
statement notes provide information on how significant assets and liabilities
are valued in the financial statements and how these values are determined.
Management views critical accounting policies to be those which are highly
dependent on subjective or complex judgments, estimates and assumptions and
where changes in those estimates and assumptions could have a significant impact
on the financial statements. Management has identified the allowance for loan
losses and accounting for stock options as critical accounting policies. Further
discussion of these policies can be found in the Management's Discussion and
Analysis of Financial Condition and Results of Operations section of the
Corporation's 2003 Annual Report to Stockholders.
CHANGES IN FINANCIAL CONDITION
General. The Corporation's total assets increased $10.6 million or 2.1% to
$517.3 million at March 31, 2004 from $506.6 million at December 31, 2003. This
net increase was comprised of an increase in cash and cash equivalents and
securities of $10.9 million and $6.4 million, respectively. Partially offsetting
these increases was a decrease in loans receivable of $6.7 million. The increase
in total assets reflects a corresponding increase in total liabilities and total
stockholders' equity of $9.2 million or 2.0% and $1.4 million or 3.6%,
respectively. The increase in total liabilities was primarily the result of an
increase in deposits of $9.6 million. The increase in stockholders' equity was
primarily the result of increases in retained earnings and accumulated other
comprehensive income of $327,000 and $1.0 million, respectively.
8
Cash and cash equivalents. Cash and cash equivalents increased $10.9 million or
44.8% to $35.1 million at March 31, 2004 from $24.2 million at December 31,
2003. The net increase between March 31, 2004 and December 31, 2003 was
primarily the result of the aforementioned increase in customer deposits and
loan repayments. Management intends to deploy these funds by purchasing
investment securities and originating loans during the second quarter of 2004.
Securities. The Corporation's securities portfolio increased $6.4 million or
4.2% to $157.5 million at March 31, 2004 from $151.1 million at December 31,
2003. This net increase included security purchases totaling $13.0 million,
partially offset by repayments, maturities and calls totaling $8.1 million.
Security purchases were comprised of U.S. Government agency and mortgage-backed
securities of $10.0 million and $3.0 million, respectively. Security maturities
and calls were comprised of U.S. Government agency, tax-free municipal and
mortgage-backed securities of $3.3 million, $1.1 million and $68,000,
respectively. The increase in securities was primarily due to the necessity of
reinvesting cash obtained through deposits and loan repayments.
Loans receivable. Net loans receivable decreased $6.7 million or 2.2% to $299.0
million at March 31, 2004 from $305.6 million at December 31, 2003. Mortgage and
consumer loans decreased $9.1 million and $3.9 million, respectively, while
commercial loans increased $6.1 million during the first quarter of 2004. The
decline in the loan portfolio was due to general declining market demand
resulting primarily from the low interest rate environment which caused
prepayments to outpace originations.
Nonperforming assets. Nonperforming assets include nonaccrual loans, repossessed
assets and real estate acquired through foreclosure. Nonperforming assets
increased slightly by $136,000 to $8.8 million or 1.69% of total assets at March
31, 2004, from $8.6 million or 1.70% of total assets at December 31, 2003.
Further discussion of the Corporation's nonperforming assets can be found in the
2003 Annual Report to Stockholders.
Deposits. Total deposits increased $9.6 million or 2.6% to $375.6 million at
March 31, 2004 from $366.0 million at December 31, 2003. This increase was
comprised of an increase in time deposits of $15.2 million, partially offset by
decreases in noninterest bearing and interest bearing demand deposits of $3.2
million and $2.5 million, respectively. During the first quarter of 2004, the
Bank received $7.0 million in public funds invested in time deposits from a
local school district. These deposits have a weighted average term of
approximately nine months. Also influencing deposits was the Bank's focus on
increasing time deposits through strategically offered specials.
Stockholders' equity. Stockholders' equity increased $1.4 million or 3.6% to
$40.3 million at March 31, 2004 from $38.9 million at December 31, 2003. This
increase was principally the result of an increase in accumulated other
comprehensive income of $1.0 million and an increase in retained earnings of
$327,000, comprised of net income of $1.0 million offset by cash dividends paid
to stockholders of $704,000.
RESULTS OF OPERATIONS
Comparison of Results for the Three-Month Periods Ended March 31, 2004 and 2003
General. The Corporation reported net income of $1.0 million and $1.3 million
for the three months ended March 31, 2004 and 2003, respectively. The $308,000
or 23.0% decrease in net income for the three months ended March 31, 2004, as
compared to the three months ended March 31, 2003, was attributable to decreases
in net interest income and noninterest income of $177,000 and $112,000,
respectively, and an increase in noninterest expense of $204,000. Partially
offsetting these unfavorable variances were decreases in provision for loan
losses and provision for income taxes of $125,000 and $60,000, respectively.
9
Average Balance Sheet and Yield/Rate Analysis. The following table sets forth,
for periods indicated, information concerning the total dollar amounts of
interest income from interest-earning assets and the resultant average yields,
the total dollar amounts of interest expense on interest-bearing liabilities and
the resulting average costs, net interest income, interest rate spread and the
net interest margin earned on average interest-earning assets. For purposes of
this table, average loan balances include nonaccrual loans and exclude the
allowance for loan losses, and interest income includes accretion of net
deferred loan costs. To compare the tax-exempt asset yields to taxable yields,
amounts are adjusted to pretax equivalents based on the marginal corporate
Federal tax rate of 34%. The tax-equivalent adjustments to net interest income
for 2004 and 2003 were $122,000 and $118,000, respectively.
(Dollar amounts in thousands) Three months ended March 31,
2004 2003
------------------------------- ------------------------------
Average Yield / Average Yield /
Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------
Interest-earning assets:
- ---------------------------------------
Loans receivable $310,818 $4,718 6.09% $328,276 $5,694 7.03%
---------- ---------- --------- ---------- ---------- --------
Securities, taxable 126,264 1,421 4.51% 102,529 1,312 5.19%
Securities, exempt from Federal tax 23,414 359 6.15% 21,707 347 6.48%
---------- ---------- --------- ---------- ---------- --------
149,678 1,780 4.77% 124,236 1,659 5.42%
---------- ---------- --------- ---------- ---------- --------
Interest-earning cash equivalents 17,520 36 0.82% 20,594 55 1.08%
Federal Home Loan Bank stock 4,984 17 1.37% 5,068 41 3.28%
---------- ---------- --------- ---------- ---------- --------
22,504 53 0.94% 25,662 96 1.52%
---------- ---------- --------- ---------- ---------- --------
Total interest-earning assets 483,000 6,551 5.44% 478,174 7,449 6.32%
Cash and due from banks 11,655 14,021
Other noninterest-earning assets 12,562 15,765
---------- ----------
Total assets $507,217 $507,960
========== ==========
Interest-bearing liabilities:
- ---------------------------------------
Interest-bearing demand deposits $161,774 $143 0.35% $156,549 $329 0.85%
Time deposits 132,136 1,087 3.30% 143,232 1,641 4.65%
---------- ---------- --------- ---------- ---------- --------
293,910 1,230 1.68% 299,781 1,970 2.67%
---------- ---------- --------- ---------- ---------- --------
Borrowed funds 94,000 1,359 5.80% 94,000 1,344 5.80%
---------- ---------- --------- ---------- ---------- --------
94,000 1,359 5.80% 94,000 1,344 5.80%
---------- ---------- --------- ---------- ---------- --------
Total interest-bearing liabilities 387,910 2,589 2.68% 393,781 3,314 3.41%
Noninterest-bearing demand deposits 72,230 - - 67,332 - -
---------- ---------- --------- ---------- ---------- --------
Total financial liabilities/cost of
funds 460,140 2,589 2.26% 461,113 3,314 2.91%
Other noninterest-bearing
liabilities 7,515 7,076
---------- ----------
Total liabilities 467,655 468,189
Stockholders' equity 39,562 39,771
---------- ----------
Total liabilities and stockholders'
equity $507,217 $507,960
========== ---------- ========== ----------
Net interest income $3,962 $4,135
========== ==========
Interest rate spread (difference
between 2.76% 2.91%
========= ========
weighted average rate on interest-
earning
assets and interest-bearing
liabilities)
Net interest margin (net interest 3.29% 3.51%
========= ========
income as a percentage of average
interest-earning assets)
10
Analysis of Changes in Net Interest Income. The following table analyzes the
changes in interest income and interest expense in terms of: (1) changes in
volume of interest-earning assets and interest-bearing liabilities and (2)
changes in yields and rates. The table reflects the extent to which changes in
the Corporation's interest income and interest expense are attributable to
changes in rate (change in rate multiplied by prior year volume), changes in
volume (changes in volume multiplied by prior year rate) and changes
attributable to the combined impact of volume/rate (change in rate multiplied by
change in volume). The changes attributable to the combined impact of
volume/rate are allocated on a consistent basis between the volume and rate
variances. Changes in interest income on securities reflect the changes in
interest income on a fully tax equivalent basis.
(In thousands) 2004 versus 2003
Increase (decrease) due to
-------------------------------------
Volume Rate Total
- ---------------------------------------------------------------------------------------------------
Interest income:
Loans $(292) $(684) $(976)
Securities 315 (194) 121
Deposits with banks and Federal funds sold (7) (12) (19)
Federal Home Loan Bank stock (1) (23) (24)
-------- --------- --------
Total interest-earning assets 15 (913) (898)
-------- --------- --------
Interest expense:
Deposits (38) (702) (740)
Borrowed funds - 15 15
-------- --------- --------
Total interest-bearing liabilities (38) (687) (725)
-------- --------- --------
Net interest income $53 $(226) $(173)
======== ========= ========
Net interest income. Net interest income on a tax equivalent basis decreased
$173,000 or 4.2% to $4.0 million for the three months ended March 31, 2004,
compared to $4.1 million for the same period in the prior year. This net
decrease can be attributed to a decrease in interest income of $898,000
partially offset by a decrease in interest expense of $725,000. The Corporation
continues to experience net interest income compression as a result of the
downward repricing of interest-earning assets outpacing the repricing of
interest-bearing liabilities, which have reached their effective floors.
Aside from changes in the volume and rates of interest-earning assets and
interest-bearing liabilities discussed herein, average nonperforming loans
increased $7.6 million to $8.4 million for the three months ended March 31, 2004
from $824,000 for the same period in the previous year. This increase resulted
in approximately $156,000 of interest income lost for the three-month period
ended March 31, 2004. Further discussion concerning the increase in
nonperforming loans can be found in the 2003 Annual Report to Stockholders.
Interest income. Interest income on a tax equivalent basis decreased $898,000 or
12.1% to $6.6 million for the three months ended March 31, 2004, compared to
$7.4 million for the same period in the prior year. The net decrease in interest
income can be attributed to a decrease in interest earned on loans and other
interest-earning assets of $976,000 and $43,000, respectively, partially offset
by an increase in interest earned on securities of $121,000.
Interest earned on loans receivable decreased $976,000 or 17.1% to $4.7 million
for the three months ended March 31, 2004, compared to $5.7 million for the same
period in the previous year. The loan portfolio lost $684,000 in interest income
related to a 94 basis point reduction in the average interest rate earned on
loans. Further impacting interest earned on loans was a decrease in average
loans outstanding of $17.5 million or 5.3%, accounting for $292,000 of the
decrease in interest income. The decrease in the yield on loans is reflective of
the general low interest rate environment. Loan volume declined between the two
periods as a result of lower new loan demand and higher repayments in 2004
versus 2003.
11
Tax equivalent interest earned on securities increased $121,000 or 7.3% to $1.8
million for the three months ended March 31, 2004, compared to $1.7 million for
the same period in the previous year. The securities portfolio gained $315,000
in interest income related to an increase in average securities outstanding of
$25.4 million or 20.5%. Partially offsetting this favorable increase in average
balance was a decrease in the average interest rate earned on securities of 65
basis points resulting in $194,000 of interest income lost. Average securities
increased as funds from loan repayments and customer deposits have been deployed
in marketable securities during late 2003 and 2004.
Interest earned on other interest-earning assets decreased $43,000 or 44.8% to
$53,000 for the three months ended March 31, 2004, compared to $96,000 for the
same period in the previous year. This decrease was the result of a decrease in
the average interest rate earned on such assets of 58 basis points and also a
decrease in the average balance outstanding of $3.2 million or 12.3%.
The overall decrease in interest income was primarily due to generally lower
market interest rates and the corresponding downward re-pricing of
adjustable-rate loans and securities during 2003 and 2004, as well as the lower
pricing of new loans and securities added throughout 2003 and 2004 relative to
those already in the portfolios during the first quarter of 2003.
Interest expense. Interest expense decreased $725,000 or 21.9% to 2.6 million
for the three months ended March 31, 2004, compared to $3.3 million for the same
period in the previous year. The net decrease in interest expense can be
attributed to a decrease in interest incurred on deposits of $740,000, partially
offset by an increase in interest expense related to borrowed funds of $15,000.
Interest-bearing deposit expense decreased $740,000 or 37.6% to $1.2 million for
the three months ended March 31, 2004, compared to $2.0 million for the same
period in the previous year. This decrease in interest expense can be attributed
to a 99 basis point decline in the cost of interest-bearing deposits resulting
in a reduction in expense due to rate of $702,000. Also contributing to the net
decrease was a decrease in average interest-bearing deposits of $5.9 million.
The overall decrease in interest expense, similar to that of interest income,
was primarily due to the lower interest rate environment; however, the rate on
the cost of funds did not decrease as quickly and as much as the yield on
interest-earning assets.
Provision for loan losses. The Corporation records provisions for loan losses to
bring the total allowance for loan losses to a level deemed adequate to cover
probable losses inherent in the loan portfolio. In determining the appropriate
level of allowance for loan losses, management considers historical loss
experience, the present and prospective financial condition of borrowers,
current and prospective economic conditions (particularly as they relate to
markets where the Corporation originates loans), the status of nonperforming
assets, the estimated underlying value of the collateral and other factors
related to the collectibility of the loan portfolio. The $125,000 decrease in
the Corporation's provision for loans losses between the three-month periods
ended March 31, 2004 and 2003 can be attributed to the overall adequacy of the
Corporation's allowance for loan losses at March 31, 2004. The allowance for
loan losses to total loans was 2.2% at March 31, 2004 and December 31, 2003.
Noninterest income. Noninterest income decreased $112,000 or 11.9% to $832,000
during the three months ended March 31, 2004, compared to $944,000 during the
same period in the prior year. This decrease can be attributed to a decrease in
mortgage fee income, safe deposit income and title company income of $74,000,
$35,000 and $28,000, respectively, partially offset by an increase in service
fee income of $62,000. Mortgage fee income decreased due to the declining
balance in mortgage loans as well as decreased loan originations in this lending
category. The increase in service fee income was primarily due to an increase in
customer overdraft fees.
12
Noninterest expense. Noninterest expense increased $204,000 or 7.1% to $3.1
million during the three months ended March 31, 2004, compared to $2.9 million
during the same period in the prior year. The increase in noninterest expense
can be attributed to an increase in compensation and employee benefits expense,
data processing expense and premises and equipment expense of $196,000, $29,000
and $9,000, respectively, partially offset by a decrease in other expense of
$30,000.
Compensation and employee benefits expense increased $196,000 or 13.5% to $1.7
million during the three months ended March 31, 2004, compared to $1.5 million
for the same period in the prior year. This increase can be attributed primarily
to an increase in employee benefit costs, specifically health insurance expense,
and normal and expected salary increases. Incentive compensation expense
increased $90,000 as a result of management incentive plans implemented at the
beginning of 2004. Also impacting the net increase in noninterest expense was an
increase in professional fees expense of $56,000, associated with problem credit
workout costs and regulatory compliance initiatives, as well as an increase in
marketing and advertising expense of $40,000. Included in noninterest expense,
as an offset, for the first quarter of 2004 was $118,000 received on an
insurance claim filed during 2003.
Provision for income taxes. The provision for income taxes decreased $60,000 or
12.5% to $420,000 for the three months ended March 31, 2004, compared to
$480,000 for the same period in the prior year. This decrease was directly
related to the decrease in net income before provision for income taxes.
LIQUIDITY
The Corporation's primary sources of funds generally have been deposits obtained
through the offices of the Bank, borrowings from the Federal Home Loan Bank
(FHLB), and amortization and prepayments of outstanding loans and maturing
securities. During the three months ended March 31, 2004, the Corporation used
its sources of funds primarily to purchase securities and, to a lesser extent,
fund loan commitments. As of such date, the Corporation had outstanding loan
commitments, including undisbursed loans and amounts available under credit
lines, totaling $12.4 million, and standby letters of credit, which have
collateral typically in the form of Bank deposit instruments and a term
generally under one year, totaling $764,000.
At March 31, 2004, time deposits amounted to $144.6 million or 38.5% of the
Corporation's total consolidated deposits, including approximately $82.6
million, which are scheduled to mature within the next year. Management of the
Corporation believes that it has adequate resources to fund all of its
commitments, that all of its commitments will be funded as required by related
maturity dates and that, based upon past experience and current pricing
policies, it can adjust the rates of time deposits to retain a substantial
portion of maturing liabilities.
Aside from liquidity available from customer deposits or through sales and
maturities of securities, the Corporation has alternative sources of funds such
as a line of credit and term borrowing capacity from the FHLB and, to a limited
and rare extent, the sale of loans. At March 31, 2004, the Corporation's
borrowing capacity with the FHLB, net of funds borrowed, was $33.9 million.
Management is not aware of any conditions, including any regulatory
recommendations or requirements, which would adversely impact its liquidity or
its ability to meet funding needs in the ordinary course of business.
CAPITAL RESOURCES
Total stockholders' equity increased $1.4 million or 3.6% to $40.3 million at
March 31, 2004 from $38.9 million at December 31, 2003. Net income contributed
$1.0 million to stockholders' equity during the first quarter of 2004. The net
increase in stockholders' equity was also due to an increase in accumulated
other comprehensive income and stock options exercised of $1.0 million and
$38,000, respectively.
13
The Corporation has maintained a strong capital position with a capital to
assets ratio of 7.8% at March 31, 2004. While continuing to sustain this capital
position, the Corporation declared a quarterly cash divided of $0.22 per share
during the first quarter of 2004.
Capital adequacy is the Corporation's ability to support growth while protecting
the interest of shareholders and deposits and to ensure that capital ratios are
in compliance with regulatory minimum requirements. At March 31, 2004, the
Corporation and the Bank were in compliance with all regulatory capital
requirements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
There have been no material changes in information regarding quantitative and
qualitative disclosures about market risk at March 31, 2004 from the information
presented in the 2003 Annual Report to Stockholders under the caption,
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Market Risk Management.
Item 4. 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-Q. 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.
14
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
- --------------------------
The Corporation is involved in various legal proceedings occurring in the
ordinary course of business. It is the opinion of management, after consultation
with legal counsel, that these matters will not materially effect the
Corporation's consolidated financial position or results of operations.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
- ------------------------------------------------------------------------------
None.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
Item 5. Other Information
- --------------------------
None.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits:
Exhibit 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.
Exhibit 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.
Exhibit 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.
Exhibit 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.
Exhibit 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.
Exhibit 10.4 NSD Bancorp, Inc. 2004 Omnibus Stock Incentive Plan
is incorporated by reference as Exhibit C to NSD
Bancorp, Inc.'s 2004 Proxy Statement for the Annual
Shareholders Meeting to be held April 27, 2004.
15
Exhibit 31.1 Rule 15(d)-14(a) certification of the President and
Chief Operating Officer.
Exhibit 31.2 Rule 15(d)-14(a) certification of the Senior Vice
President, Treasurer and Chief Financial Officer.
Exhibit 32.1 Principal Executive Officer Certification pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2 Principal Financial Officer Certification pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
Reports on Form 8-K filed during the three month period ended March 31,
2004:
A Report on Form 8-K was filed on February 25, 2004 to announce
earnings for the quarter and year ended December 31, 2003.
16
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.
Date: May 12 2004 By: /s/ Andrew W. Hasley
------------------------------------------------
Andrew W. Hasley
President and
Chief Operating Officer
(Principal Executive Officer)
Date: May 12 2004 By: /s/ William C. Marsh
------------------------------------------------
William C. Marsh
Senior Vice President,
Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
17