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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 June 30, 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
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NSD Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-1616814
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
5004 McKnight Road, Pittsburgh, Pennsylvania, 15237
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(Address of principal executive offices)
(412) 231-6900
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(Registrant's telephone number, including area code)
N/A
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(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 August 1, 2004:
Common Stock, $1.00 par value 3,397,204
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(Class) (Outstanding)
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NSD Bancorp, Inc.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of
June 30, 2004 and December 31, 2003.......................................................................1
Consolidated Statements of Income for the three and six months
ended June 30, 2004 and 2003..............................................................................2
Consolidated Statements of Comprehensive Income for the three and six months
ended June 30, 2004 and 2003..............................................................................3
Consolidated Statements of Cash Flows for the six months
ended June 30, 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...............................................19
Item 4. Controls and Procedures..................................................................................19
PART II - OTHER INFORMATION
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Item 1. Legal Proceedings........................................................................................19
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.........................19
Item 3. Defaults Upon Senior Securities..........................................................................19
Item 4. Submission of Matters to a Vote of Security Holders......................................................19
Item 5. Other Information........................................................................................20
Item 6. Exhibits and Reports on Form 8-K.........................................................................20
Signatures...............................................................................................21
PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
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NSD Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
As of June 30, 2004 and December 31, 2003 (unaudited)
(Dollar amounts in thousands)
June 30, December 31,
2004 2003
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Assets
------
Cash and due from banks $14,599 $14,117
Interest-earning deposits in banks 1,539 623
Federal funds sold 6,200 9,500
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Cash and cash equivalents 22,338 24,240
Securities available-for-sale 174,708 151,141
Loans receivable, net of allowance for loan losses of $6,767 and
$6,882 306,942 305,626
Federal Home Loan Bank stock, at cost 4,937 4,961
Bank-owned life insurance 8,697 8,537
Accrued interest and dividends receivable 2,710 2,580
Premises and equipment, net 3,607 3,326
Prepaid expenses and other assets 8,387 6,209
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Total assets $532,326 $506,620
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Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits:
Noninterest-bearing deposits $75,481 $75,724
Interest-bearing deposits 318,651 290,315
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Total deposits 394,132 366,039
Borrowed funds 94,000 94,000
Accrued interest payable 4,587 4,870
Accrued expenses and other liabilities 2,919 2,824
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Total liabilities 495,638 467,733
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Stockholders' Equity:
Common stock, $1 par value, 10,000,000 shares authorized;
3,741,665 and 3,529,516 shares issued 3,742 3,530
Additional paid-in-capital 30,351 26,117
Treasury stock, at cost, 344,964 and 331,701 shares (6,919) (6,626)
Retained earnings 9,903 13,077
Accumulated other comprehensive income (loss) (389) 2,789
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Total stockholders' equity 36,688 38,887
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Total liabilities and stockholders' equity $532,326 $506,620
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See accompanying notes to unaudited consolidated financial statements.
1
NSD Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
For the three and six months ended June 30, 2004 and 2003 (unaudited)
(Dollar amounts in thousands, except share data)
Three months ended Six months ended
June 30, June 30,
----------------------- ------------------------
2004 2003 2004 2003
----------- ----------- ----------- ------------
Interest and dividend income:
Loans receivable, including fees $4,577 $5,304 $9,295 $10,998
Securities:
Taxable 1,461 1,440 2,882 2,752
Exempt from Federal income tax 304 244 541 473
Federal Home Loan Bank stock 17 28 34 69
Deposits with banks and federal funds sold 47 22 83 77
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Total interest income 6,406 7,038 12,835 14,369
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Interest expense:
Deposits 1,288 1,821 2,518 3,791
Borrowed funds 1,342 1,359 2,701 2,703
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Total interest expense 2,630 3,180 5,219 6,494
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Net interest income 3,776 3,858 7,616 7,875
Provision for loan losses 60 2,715 190 2,970
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Net interest income after provision for loan
losses 3,716 1,143 7,426 4,905
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Noninterest income:
Fees and service charges 445 479 877 849
Gain on sale of securities available-for-sale,
net 90 120 165 209
Earnings on bank-owned life insurance 67 94 160 196
Other 288 374 520 757
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Total noninterest income 890 1,067 1,722 2,011
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Noninterest expense:
Compensation and employee benefits 1,612 1,403 3,262 2,858
Premises and equipment, net 523 542 1,029 1,039
Data processing 231 177 473 390
Other 897 935 1,597 1,657
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Total noninterest expense 3,263 3,057 6,361 5,944
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Net income (loss) before provision for income
taxes 1,343 (847) 2,787 972
Provision for (benefit from) income taxes 364 (418) 778 62
----------- ----------- ----------- ------------
Net income (loss) $979 $(429) $2,009 $910
=========== =========== =========== ============
Net income (loss) per share:
Basic $0.29 ($0.12) $0.60 $0.27
Diluted $0.29 ($0.12) $0.59 $0.27
Common dividends declared and paid per share: $0.22 $0.22 $0.22 $0.22
Average common shares outstanding:
Basic 3,384,500 3,359,067 3,372,222 3,357,624
Diluted 3,415,493 3,432,151 3,413,819 3,427,730
See accompanying notes to unaudited consolidated fianncial statements.
2
NSD Bancorp, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income
For the three and six months ended June 30, 2004 and 2003 (unaudited)
(Dollar amounts in thousands)
Three months ended Six months ended
June 30, June 30,
----------------------- -----------------------
2004 2003 2004 2003
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Net income (loss) $979 $(429) $2,009 $910
Other comprehensive income (loss):
Unrealized holding gains (losses) on
available-for-sale securities (6,300) 2,540 (4,650) 2,755
Less reclassification adjustment for
gains realized in income 90 120 165 209
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Net unrealized gains (losses) (6,390) 2,420 (4,815) 2,546
Tax effect (2,173) 823 (1,637) 866
Other comprehensive income (loss) (4,217) 1,597 (3,178) 1,680
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Comprehensive income (loss) $(3,238) $1,168 $(1,169) $2,590
=========== =========== =========== ===========
See accompanying notes to unaudited consolidated financial statements.
3
NSD Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the six months ended June 30, 2004 and 2003 (unaudited)
(Dollar amounts in thousands)
Six months ended
June 30,
-------------------------------
2004 2003
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Operating activities:
Net income $2,009 $910
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization for premises and equipment 320 330
Provision for loan losses 190 2,970
Amortization of premiums and accretion of discounts, net 200 159
Gain on sale of securities available-for-sale, net (165) (209)
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 (160) (196)
Changes in:
Accrued interest receivable (130) (76)
Prepaid expenses and other assets (2,178) 753
Accrued interest payable (283) (247)
Accrued expenses and other liabilities 95 (772)
Other 1,579 (749)
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Net cash from operating activities 1,477 2,873
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Investing activities:
Loan originations and payments, net (1,506) 8,717
Purchases of securities available-for-sale (50,959) (63,519)
Redemptions of Federal Home Loan Bank stock 24 -
Repayment, maturities and calls of securities available-for-sale 17,287 41,152
Proceeds from sale of securities available for sale 5,314 13,240
Purchases of premises and equipment (601) (270)
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Net cash from investing activities (30,441) (680)
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Financing activities:
Net change in deposits 28,093 4,861
Proceeds from Federal Home Loan Bank borrowings 5,000 -
Maturities of Federal Home Loan Bank borrowings (5,000) -
Cash dividends paid on common stock (1,451) (1,373)
Payments to acquire treasury stock (293) (557)
Proceeds from exercise of common stock options 718 346
Cash dividends paid in lieu of fractional common shares (5) (6)
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Net cash from financing activities 27,062 3,271
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Change in cash and cash equivalents (1,902) 5,464
Cash and cash equivalents at beginning of period 24,240 33,626
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Cash and cash equivalents at end of period $22,338 $39,090
============== ==============
Supplemental information:
Interest paid $5,502 $6,741
Income taxes paid 986 972
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 was made in lieu of fractional shares.
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 and six months ended June 30:
5
For the Three Months Ended For the Six Months Ended
June 30, June 30,
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(Dollar amounts in thousands, except share
data) 2004 2003 2004 2003
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Basic earnings per share:
Net income (loss) $979 ($429) $2,009 $910
Weighted average shares outstanding 3,384,500 3,359,067 3,372,222 3,357,624
Earnings per share $0.29 ($0.13) $0.60 $0.27
============ ============== ========== ================
Diluted earnings per share:
Net income (loss) $979 ($429) $2,009 $910
Weighted average shares outstanding 3,384,500 3,359,067 3,372,222 3,357,624
Dilutive effect of employee stock options 30,993 73,084 41,597 70,106
------------ -------------- ---------- ----------------
Total diluted weighted average shares
outstanding 3,415,493 3,432,151 3,413,819 3,427,730
Earnings per share $0.29 ($0.12) $0.59 $0.27
============ ============== ========== ================
Average outstanding options to purchase shares of common stock of 60,205,
at prices from $24.72 to $25.17, for the three months ended June 30,
2004 and 40,318 shares, at prices from $24.72 to $25.13, for the three
months ended June 30, 2003 were not included in the computation of
diluted earnings per share for the three months ended June 30, 2004
and June 30, 2003 because, to do so, would have been anti-dilutive.
Average outstanding options to purchase shares of common stock of 60,205,
at prices from $24.72 to $25.17, for the six months ended June 30,
2004 and 27,816 shares, at prices from $24.79 to $25.09, for the six
months ended June 30, 2003 were not included in the computation of
diluted earnings per share for the six months ended June 30, 2004 and
June 30, 2003 because, to do so, would have been anti-dilutive.
4. Securities
The following table summarizes the Corporation's securities
available-for-sale:
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(In thousands) Amortized Unrealized Unrealized Fair
cost gains losses value
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June 30, 2004
U.S. Government agencies $74,622 $15 $(1,389) $73,248
Mortgage-backed securities 47,170 187 (1,479) 45,878
Municipal securities 31,105 191 (776) 30,520
Corporate securities 20,338 592 (130) 20,800
U.S. Treasury securities 1,593 30 - 1,623
Equity securities 468 2,171 - 2,639
----------- ----------- ----------- -----------
$175,296 $3,186 $(3,774) $174,708
=========== =========== =========== ===========
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) June 30, 2004 December 31, 2003
------------------- -------------------
Dollar Dollar
Amount % Amount %
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Residential mortgage loans $28,090 8.9% $24,436 7.8%
Nonresidential mortgage loans 77,885 24.7% 89,575 28.6%
Commercial, financial and agricultural loans 38,202 12.1% 31,450 10.0%
Consumer loans to individuals 147,342 46.8% 142,686 45.5%
Lines of credit 7,897 2.5% 8,362 2.7%
Lease financing 7,104 2.3% 8,548 2.7%
Nonperforming loans 8,227 2.6% 8,415 2.7%
---------- -------- --------- ---------
314,747 100.0% 313,472 100.0%
======== =========
Unearned income and deferred fees, net (1,038) (964)
---------- ---------
Total loans, net of unearned income and deferred
fees 313,709 312,508
Less: Allowance for loan losses 6,767 6,882
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Net loans receivable $306,942 $305,626
========== =========
6. Deposits
The following table summarizes the Corporation's deposits:
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(Dollar amounts in thousands) June 30, 2004 December 31, 2003
-------------------------- --------------------------
Amount % Amount %
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Noninterest-bearing deposits $75,481 19.2% $75,724 20.7%
Interest-bearing demand deposits 163,555 41.4% 160,878 44.0%
Time deposits 155,096 39.4% 129,437 35.3%
----------- ------------ ---------- -------------
$394,132 100.0% $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 June 30, 2004
and December 31, 2003. These advances have a weighted average interest
rate of 5.65% and 5.72%, respectively. Contractual maturities of these
advances are as follows: $4.0 million in 2008, $10.0 million in 2009
and $80.0 million in 2010 and thereafter. Throughout the first half of
2004, maturities totaled $5.0 million.
The Corporation added $5.0 million during the second quarter of 2004 and
is committed to borrow an additional $5.0 million during the third
quarter of 2004 from the Federal Home Loan Bank in connection with a
specific investment strategy. The additional $10 million in advances
have a term of ten years and a rate of 3.95% and 3.98%, respectively.
These advances are ten-year / two-year Convertible Select Advances,
fixed at the stated rate for two years then floating thereafter should
the three-month Libor rate exceed 8.0%. Further discussion of and
disclosures associated with the Corporation's borrowed funds can be
found in the 2003 Annual Report to Stockholders.
7
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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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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 and six month periods ended
June 30, 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.
8
CHANGES IN FINANCIAL CONDITION
General. The Corporation's total assets increased $25.7 million or 5.1% to
$532.3 million at June 30, 2004 from $506.6 million at December 31, 2003. This
net increase was comprised of an increase in loans receivable and investment
securities of $1.3 million and $23.6 million, respectively. Partially offsetting
these increases was a decrease in cash and cash equivalents of $1.9 million. The
increase in total assets reflects a corresponding increase in total liabilities
of $27.9 million or 6.0% and a decrease in stockholders' equity of $2.2 million
or 5.7%, respectively. The net increase was primarily the result of an increase
in deposits of $28.1 million, partially offset by a decrease in accumulated
other comprehensive income (loss) totaling $3.2 million.
Cash and cash equivalents. Cash and cash equivalents decreased $1.9 million
or 7.9% to $22.3 million at June 30, 2004 from $24.2 million at December 31,
2003. The net decrease between June 30, 2004 and December 31, 2003 was primarily
the result of the utilization of cash to fund purchases of investment securities
and the origination of loans.
Securities. The Corporation's securities portfolio increased $23.6 million
or 15.6% to $174.7 million at June 30, 2004 from $151.1 million at December 31,
2003. This net increase included security purchases totaling $51.0 million,
partially offset by repayments, maturities and calls totaling $17.3 million.
Security purchases were comprised of U.S. Government agency, mortgage-backed and
tax-free municipal securities of $32.0 million, $9.1 million and $9.9 million,
respectively. Security maturities and calls were comprised of U.S. Government
agency, tax-free municipal, mortgage-backed and other securities of $6.3
million, $1.7 million, $68,000 and $250,000, respectively. The increase in
securities was primarily due to the necessity of reinvesting cash obtained
through deposit growth and loan repayments throughout the first half of 2004.
Loans receivable. Net loans receivable increased $1.3 million to $306.9
million at June 30, 2004 from $305.6 million at December 31, 2003. Residential
mortgage, commercial and consumer loans increased $3.7 million, $6.8 million and
$4.7 million, respectively, while nonresidential mortgages decreased $11.7
million. During the second quarter of 2004, loan originations began to outpace
prepayments as the Corporation's residential and home equity mortgage lending
efforts improved.
Nonperforming assets. Nonperforming assets include nonaccrual loans,
repossessed assets and real estate acquired through foreclosure. Nonperforming
assets decreased slightly by $112,000 to $8.5 million or 1.60% of total assets
at June 30, 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 $28.1 million or 7.7% to $394.1 million
at June 30, 2004 from $366.0 million at December 31, 2003. This increase was
comprised of an increase in time deposits and other interest bearing demand
deposits of $25.7 million and $2.7 million, respectively, as the Bank increased
its focus on generating deposits via strategically offered specials. Also
contributing to the increase were deposits made by a local school district and
the City of Pittsburgh in the form of interest bearing deposits. Noninterest
bearing deposits remained relatively unchanged.
Stockholders' equity. Stockholders' equity decreased $2.2 million or 5.7%
to $36.7 million at June 30, 2004 from $38.9 million at December 31, 2003. The
net decrease was principally the result of a decrease in accumulated other
comprehensive income (loss) of $3.2 million. Partially offsetting this decrease,
net income totaled $2.0 million, of which $1.5 million was paid to stockholders
in the form of a cash dividend.
9
RESULTS OF OPERATIONS
Comparison of Results for the Three-Month Periods Ended June 30, 2004 and 2003
General. The Corporation reported net income of $979,000 and a net loss of
$429,000 for the three months ended June 30, 2004 and 2003, respectively. The
$1.4 million increase in net income for the three months ended June 30, 2004, as
compared to the three months ended June 30, 2003, was attributable to a decrease
in provision for loan losses of $2.7 million. Partially offsetting this
favorable variance were unfavorable variances related to net interest income,
noninterest income, noninterest expense and provision for income taxes of
$82,000, $177,000, $206,000 and $782,000, respectively.
The second quarter 2003 net loss was primarily the result of $2.5 million
in additional loan loss provision recorded as the result of the deterioration of
a large commercial loan relationship in the prior year. The financial
deterioration of this large commercial loan customer resulted in placing the
credit relationship on nonperforming status and the provision for loan losses
charge.
10
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 $157,000 and $126,000, respectively.
- ------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) Three months ended June 30,
2004 2003
------------------------------- ------------------------------
Average Yield / Average Yield /
Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------
Interest-earning assets:
- ------------------------
Loans receivable $300,616 $4,577 6.12% $321,283 $5,304 6.62%
---------- ---------- --------- ---------- ---------- --------
Securities, taxable 142,098 1,461 4.14% 115,270 1,440 5.01%
Securities, exempt from Federal tax 30,063 461 6.16% 23,083 370 6.42%
---------- ---------- --------- ---------- ---------- --------
172,161 1,922 4.49% 138,353 1,810 5.25%
---------- ---------- --------- ---------- ---------- --------
Interest-earning cash equivalents 15,931 47 1.19% 7,233 22 1.22%
Federal Home Loan Bank stock 4,937 17 1.38% 5,053 28 2.22%
---------- ---------- --------- ---------- ---------- --------
20,868 64 1.23% 12,286 50 1.63%
---------- ---------- --------- ---------- ---------- --------
Total interest-earning assets 493,645 6,563 5.35% 471,922 7,164 6.09%
Cash and due from banks 13,921 19,063
Other noninterest-earning assets 22,767 19,076
---------- ----------
Total assets $530,333 $510,061
========== ==========
Interest-bearing liabilities:
- -----------------------------
Interest-bearing demand deposits $164,043 $279 0.68% $160,032 $180 0.45%
Time deposits 153,368 1,009 2.65% 137,973 1,641 4.77%
---------- ---------- --------- ---------- ---------- --------
317,411 1,288 1.63% 298,005 1,821 2.45%
---------- ---------- --------- ---------- ---------- --------
Borrowed funds 92,333 1,342 5.85% 94,000 1,359 5.80%
---------- ---------- --------- ---------- ---------- --------
92,333 1,342 5.85% 94,000 1,359 5.80%
---------- ---------- --------- ---------- ---------- --------
Total interest-bearing liabilities 409,744 2,630 2.58% 392,005 3,180 3.25%
Noninterest-bearing demand deposits 75,700 - - 71,259 - -
---------- ---------- --------- ---------- ---------- --------
Total financial liabilities/cost of
funds 485,444 2,630 2.18% 463,264 3,180 2.75%
Other noninterest-bearing
liabilities 7,433 8,782
---------- ----------
Total liabilities 492,877 472,046
Stockholders' equity 37,456 38,015
---------- ----------
Total liabilities and stockholders'
equity $530,333 $510,061
========== ---------- ========== ----------
Net interest income $3,933 $3,984
========== ==========
Interest rate spread (difference
between 2.77% 2.84%
========= ========
weighted average rate on interest-
earning
assets and interest-bearing
liabilities)
Net interest margin (net interest
income as a percentage of average
interest-earning assets) 3.20% 3.39%
========= ========
11
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) For the Three Months Ended June 30,
2004 versus 2003
Increase (decrease) due to
-------------------------------------
Volume Rate Total
- ---------------------------------------------------------------------------------------------------
Interest income:
Loans $(329) $(398) $(727)
Securities 402 (290) 112
Deposits with banks and Federal funds sold 26 (1) 25
Federal Home Loan Bank stock (1) (10) (11)
-------- --------- --------
Total interest-earning assets 98 (699) (601)
-------- --------- --------
Interest expense:
Deposits 112 (645) (533)
Borrowed funds (24) 7 (17)
-------- --------- --------
Total interest-bearing liabilities 88 (638) (550)
-------- --------- --------
Net interest income $10 $(61) $(51)
======== ========= ========
Net interest income. Net interest income on a tax equivalent basis
decreased $51,000 or 1.3% to $3.9 million for the three months ended June 30,
2004, compared to $4.0 million for the same period in the prior year. This net
decrease can be attributed to a decrease in interest income of $601,000
partially offset by a decrease in interest expense of $550,000.
Interest income. Interest income on a tax equivalent basis decreased
$601,000 or 8.4% to $6.6 million for the three months ended June 30, 2004,
compared to $7.2 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
of $727,000, partially offset by an increase in interest earned on securities
and other interest-earning assets of $112,000 and $14,000, respectively.
Interest earned on loans receivable decreased $727,000 or 13.7% to $4.6
million for the three months ended June 30, 2004, compared to $5.3 million for
the same period in the previous year. The loan portfolio lost $398,000 in
interest income related to a 50 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 $20.7 million or 6.4%, accounting for $329,000
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 as
a result of lower new loan demand and higher repayments during the second half
of 2003 and 2004.
Tax equivalent interest earned on securities increased $112,000 or 6.2% to
$1.9 million for the three months ended June 30, 2004, compared to $1.8 million
for the same period in the previous year. The securities portfolio gained
$336,000 in interest income related to an increase in average securities
outstanding of $33.8 million or 24.4%. Partially offsetting this favorable
increase in average balance was a decrease in the average interest rate earned
on securities of 57 basis points resulting in $224,000 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.
12
Interest earned on other interest-earning assets increased $14,000 or 28.0%
to $64,000 for the three months ended June 30, 2004, compared to $50,000 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 40 basis points, partially
offset by an increase in the average balance outstanding of $8.6 million or
69.9% as a result of cash received from deposits and loan repayments not yet
deployed into higher yielding assets.
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 in the current interest rate environment,
as well as the lower pricing of new loans and securities added during 2004
compared to 2003.
Interest expense. Interest expense decreased $550,000 or 17.3% to $2.6
million for the three months ended June 30, 2004, compared to $3.2 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 $533,000,
partially offset by an increase in interest expense related to borrowed funds of
$17,000.
Interest-bearing deposit expense decreased $533,000 or 29.3% to $1.3
million for the three months ended June 30, 2004, compared to $1.8 million for
the same period in the previous year. This decrease in interest expense can be
attributed to an 82 basis point decline in the cost of interest-bearing deposits
resulting in a reduction in expense due to rate of $645,000. Partially
offsetting the favorable rate variance was an increase in average
interest-bearing deposits of $19.4 million or 6.5%.
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 $2.7 million decrease
in the Corporation's provision for loans losses between the three-month periods
ended June 30, 2004 and 2003 can be attributed to an additional loan loss
provision charge of $2.5 million during the second quarter of 2003 related to
the deterioration of a large commercial loan relationship. Excluding this
charge, the Corporation's provision for loan losses decreased $155,000 between
the three month periods ended June 30, 2004 and 2003, primarily due to the
overall adequacy of the Corporation's allowance for loan losses at June 30,
2004.
Noninterest income. Noninterest income decreased $177,000 or 16.6% to
$890,000 during the three months ended June 30, 2004, compared to $1.1 million
during the same period in the prior year. The net decrease can be attributed to
decreases in correspondent premium mortgage fee income, title company revenue,
gain on sale of investment securities and earnings on bank-owned life insurance
of $90,000, $49,000, $30,000 and $27,000, respectively.
Correspondent premium mortgage fee income and title company revenue
decreased as a direct result of the decrease in mortgage loans originated for
sale as the Corporation directed its focus on retaining rather than selling
loans in this lending category. The decrease in earnings on bank-owned life
insurance was primarily associated with a decrease in the yield on the policies
related to the general decline of interest rates.
13
Noninterest expense. Noninterest expense increased $206,000 or 6.7% to $3.3
million during the three months ended June 30, 2004, compared to $3.1 million
during the same period in the prior year. The increase in noninterest expense
can primarily be attributed to increases in compensation and benefits expense,
data processing expense and professional fees of $209,000, $54,000 and $18,000,
respectively, partially offset by a decrease in title company expenses of
$60,000.
The increase in compensation and benefits expense can be attributed to
normal salary and wage increases, incentive management plans put into place at
the beginning of 2004 and the addition of several senior management members
added during 2004 to further solidify the management team and to aid in the
accomplishment of specific initiatives set forth to position the Corporation for
continued growth and success. Also contributing to the increase in compensation
and benefits expense was an increase in employee related benefits such as
healthcare costs. Partially offsetting these increases was a decrease in the
overall headcount of the Corporation.
Data processing fees increased as a direct result of an increase in
activity related to items processed. Professional fees expense increased due to
increased problem credit workout costs associated with the increase of
nonperforming loans during the second quarter of 2003 and regulatory compliance
initiatives. Title company expenses decreased as activity associated with
mortgage loans held for sale decreased.
Provision for income taxes. The provision for income taxes increased
$782,000 to $364,000 for the three months ended June 30, 2004, compared to a
benefit from income taxes of $418,000 for the same period in the prior year.
This change was directly related to the change in pre-tax income (loss).
Comparison of Results for the Six-Month Periods Ended June 30, 2004 and 2003
General. The Corporation reported net income of $2.0 million and $910,000
for the six months ended June 30, 2004 and 2003, respectively. The $1.1 million
increase in net income for the six months ended June 30, 2004, as compared to
the six months ended June 30, 2003, was attributable to a decrease in provision
for loan losses of $2.8 million. Partially offsetting this favorable variance
were unfavorable variances related to net interest income, noninterest income,
noninterest expense and provision for income taxes of $259,000, $289,000,
$417,000 and $716,000, respectively.
14
Average Balance Sheet and Yield/Rate Analysis. Tax-equivalent adjustments
to net interest income for 2004 and 2003 were $279,000 and $244,000,
respectively.
- -----------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) Six months ended June 30,
2004 2003
------------------------------ ------------------------------
Average Yield / Average Yield /
Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------
Interest-earning assets:
- ------------------------
Loans receivable 300,763 9,295 6.21% 322,288 10,998 6.88%
---------- ---------- -------- ---------- ---------- --------
Securities, taxable 134,167 2,882 4.32% 111,849 2,752 4.96%
Securities, exempt from Federal tax 26,071 820 6.32% 22,500 717 6.42%
---------- ---------- -------- ---------- ---------- --------
160,238 3,702 4.65% 134,349 3,469 5.21%
---------- ---------- -------- ---------- ---------- --------
Interest-earning cash equivalents 15,967 83 1.05% 12,550 77 1.24%
Federal Home Loan Bank stock 4,965 34 1.38% 5,060 69 2.75%
---------- ---------- -------- ---------- ---------- --------
20,932 117 1.12% 17,610 146 1.67%
---------- ---------- -------- ---------- ---------- --------
Total interest-earning assets 481,933 13,114 5.47% 474,247 14,613 6.21%
Cash and due from banks 13,859 18,826
Other noninterest-earning assets 21,427 20,069
---------- ---------- -------- ---------- ---------- --------
Total assets $517,219 $13,114 5.10% $513,142 $14,613 5.74%
========== ========== ======== ========== ========== ========
Interest-bearing liabilities:
- -----------------------------
Interest-bearing demand deposits $162,479 $585 0.72% $158,406 $868 1.11%
Time deposits 141,880 1,933 2.74% 140,205 2,923 4.20%
---------- ---------- -------- ---------- ---------- --------
304,359 2,518 1.66% 298,611 3,791 2.56%
---------- ---------- -------- ---------- ---------- --------
Borrowed funds 93,167 2,701 5.83% 94,000 2,703 5.80%
Other - - 0.00% - - 0.00%
---------- ---------- -------- ---------- ---------- --------
93,167 2,701 5.83% 94,000 2,703 5.80%
---------- ---------- -------- ---------- ---------- --------
Total interest-bearing liabilities 397,526 5,219 2.64% 392,611 6,494 3.34%
Noninterest-bearing demand deposits 73,421 - - 71,922 - -
---------- ---------- -------- ---------- ---------- --------
Total financial liabilities/cost of
funds 470,947 5,219 2.23% 464,533 6,494 2.82%
Other noninterest-bearing
liabilities 7,463 9,868
---------- ---------- -------- ---------- ---------- --------
Total liabilities 478,410 5,219 2.19% 474,401 6,494 2.76%
Stockholders' equity 38,809 - - 38,741 - -
---------- ---------- -------- ---------- ---------- --------
Total liabilities and stockholders'
equity $517,219 $5,219 2.03% $513,142 $6,494 2.55%
========== ========== ======== ========== ========== ========
Net interest income $7,895 $8,119
========== ==========
Interest rate spread (difference
between
weighted average rate on interest-
earning
assets and interest-bearing
liabilities) 2.83% 2.88%
======== ========
Net interest margin (net interest
income as a percentage of average
interest-earning assets) 3.29% 3.45%
======== ========
15
Analysis of Changes in Net Interest Income. The following table analyzes
the changes in interest income and interest expense on a fully tax equivalent
basis.
(In thousands) For the Six Months Ended June 30,
2004 versus 2003
Increase (decrease) due to
-------------------------------------
Volume Rate Total
- ---------------------------------------------------------------------------------------------------
Interest income:
Loans $(706) $(997) $(1,703)
Securities 623 (390) 233
Deposits with banks and Federal funds sold 19 (13) 6
Federal Home Loan Bank stock (1) (34) (35)
-------- --------- --------
Total interest-earning assets (65) (1,434) (1,499)
-------- --------- --------
Interest expense:
Deposits 72 (1,345) (1,273)
Borrowed funds (24) 22 (2)
-------- --------- --------
Total interest-bearing liabilities 48 (1,323) (1,275)
-------- --------- --------
Net interest income $(113) $(111) $(224)
======== ========= ========
Net interest income. Net interest income on a tax equivalent basis
decreased $224,000 or 2.8% to $7.9 million for the six months ended June 30,
2004, compared to $8.1 million for the same period in the prior year. This net
decrease can be attributed to a decrease in interest income of $1.5 million
partially offset by a decrease in interest expense of $1.3 million.
Interest income. Interest income on a tax equivalent basis decreased $1.5
million or 10.3% to $13.1 million for the six months ended June 30, 2004,
compared to $14.6 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 $1.7 million and $29,000,
respectively, partially offset by an increase in interest earned on securities
of $233,000.
Interest earned on loans receivable decreased $1.7 million or 15.5% to $9.3
million for the six months ended June 30, 2004, compared to $11.0 million for
the same period in the previous year. The loan portfolio lost $997,000 in
interest income related to a 67 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 $21.5 million or 6.7%, accounting for $706,000
of the decrease in interest income. The decrease in the yield on loans is
reflective of the general low interest rate environment prevalent throughout the
end of 2003 and the first half of 2004.
Tax equivalent interest earned on securities increased $233,000 or 6.7% to
$3.7 million for the six months ended June 30, 2004, compared to $3.5 million
for the same period in the previous year. The securities portfolio gained
$493,000 in interest income related to an increase in average securities
outstanding of $25.9 million or 19.3%. Partially offsetting this favorable
increase in average balance was a decrease in the average interest rate earned
on securities of 37 basis points resulting in $260,000 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.
16
Interest earned on other interest-earning assets decreased $29,000 or 19.9%
to $117,000 for the six months ended June 30, 2004, compared to $146,000 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 55 basis points, partially
offset by an increase in the average balance outstanding of $3.3 million or
18.9%.
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. Also contributing to
the decline in interest income was the necessity of redeploying funds from loan
repayments in lower yielding marketable securities.
Interest expense. Interest expense decreased $1.3 million or 19.6% to $5.2
million for the six months ended June 30, 2004, compared to $6.5 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 $1.3 million.
Interest-bearing deposit expense, which includes demand and time deposits,
decreased $1.3 million or 33.6% to $2.5 million for the six months ended June
30, 2004, compared to $3.8 million for the same period in the previous year.
This decrease in interest expense can be attributed to a 90 basis point decline
in the cost of interest-bearing deposits resulting in a reduction in expense due
to rate of $1.3 million. Partially offsetting the favorable rate variance was an
increase in average interest-bearing deposits of $5.7 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. During the second quarter of 2003, $2.5 million
of additional loan loss provision was recorded as the result of the
deterioration of a large commercial loan relationship. The financial
deterioration of this large commercial loan customer resulted in placing the
credit relationship on nonperforming status and the provision for loan loss
charge. Aside from the aforementioned charge, the Corporation's provision for
loan losses decreased $280,000 between the six-month periods ended June 30, 2004
and 2003, primarily due to the overall adequacy of the Corporation's allowance
for loan losses at June 30, 2004 and lower than anticipated loan production
during the first half of 2004. The allowance for loan losses to total loans was
2.2% at June 30, 2004 and December 31, 2003.
Noninterest income. Noninterest income decreased $289,000 or 14.4% to $1.7
million during the six months ended June 30, 2004, compared to $2.0 million
during the same period in the prior year. This decrease can be attributed to
decreases in correspondent mortgage fees, title company revenue, gain on sale of
investment securities and earnings on bank-owned life insurance of $149,000,
$75,000, $44,000 and $36,000, partially offset by an increase in customer
service fees of $28,000.
Correspondent premium mortgage fee income and title company revenue
decreased due to the decrease in loan originations associated with mortgage
loans held for sale. Bank owned life insurance earnings decreased as a result of
a decrease in the yield associated with the policies. Customer service fee
income increased primarily from an increase in overdraft fee income.
Noninterest expense. Noninterest expense increased $417,000 or 7.0% to $6.4
million during the six months ended June 30, 2004, compared to $5.9 million
during the same period in the prior year. The increase in noninterest expense
can be attributed to increases in compensation and benefits and professional
fees of $404,000 and 74,000, respectively. Partially offsetting these increases
was an insurance claim settlement received in 2004 totaling $118,000 related to
a fraud associated with a home equity line of credit from 2003.
17
Compensation and benefits expense increased $404,000 or 14.1% to $3.3
million during the six months ended June 30, 2004 compared to $2.9 million for
the same period in the prior year. This increase can be attributed to normal
salary and wage increases, the addition of incentive management plans and
additional senior management personnel added during 2004. Professional fees
increased as a result of increased problem credit workout costs and regulatory
compliance initiatives.
Provision for income taxes. The provision for income taxes increased
$716,000 to $778,000 for the six months ended June 30, 2004, compared to $62,000
for the same period in the prior year. This change was directly related to the
change in pre-tax income.
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 six months ended June 30, 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 $20.0 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 $859,000.
At June 30, 2004, time deposits amounted to $155.1 million or 39.4% of the
Corporation's total consolidated deposits, including approximately $99.1
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 June 30, 2004, the Corporation's
borrowing capacity with the FHLB, net of funds borrowed, was $30.9 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 decreased $2.2 million or 5.7% to $36.7 million
at June 30, 2004 from $38.9 million at December 31, 2003. Accumulated other
comprehensive income (loss) decreased $3.2 million. Net income contributed $2.0
million to stockholders' equity during the first half of 2004, partially offset
by dividends paid totaling $1.5 million for the first six months of 2004.
The Corporation has maintained a strong capital position with a capital to
assets ratio of 6.9% at June 30, 2004. While continuing to sustain this capital
position, the Corporation declared a quarterly cash divided of $0.22 per share
during both the first and second quarters 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 June 30, 2004,
the Corporation and the Bank were in compliance with all regulatory capital
requirements.
18
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 June 30, 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.
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
- ------------------------------------------------------------
(a) The annual meeting of stockholders of the Corporation was held April
27, 2004. Of 3,200,590 common shares eligible to vote, 2,874,221 or
89.8% were voted in person or by proxy.
(b) The following First Class directors were elected for a two-year term
expiring in 2006:
Name Shares For Shares Withheld
---- ---------- ---------------
Nicholas C. Geanopulos 2,823,896 50,325
Gus P. Georgiadis 2,808,803 65,418
Andrew W. Hasley 2,814,659 59,562
Charles S. Lenzner 2,824,777 49,444
Kenneth L. Rall 2,826,078 48,143
In addition to the above listed individuals, the following persons
continue to serve as directors: William R. Baierl, John C. Brown,
Jr., Grant A. Colton, Jr., Lawrence R. Gaus, David J. Malone and
Arthur J. Rooney, II.
19
(c) The recommendation of the Board of Directors to approve and adopt the
NSD Bancorp, Inc. 2004 Omnibus Stock Incentive Plan, as described in
the proxy statement for the annual meeting, was approved with
1,591,264 shares in favor, 149,561 shares against and 27,396 shares
abstained.
(d) The recommendation of the Board of Directors to ratify the appointment
of S.R. Snodgrass, A.C. as the Corporation's independent auditors, as
described in the proxy statement for the annual meeting, was approved
with 2,857,433 shares in favor, 15,526 shares against and 1,262 shares
abstained.
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.
Exhibit 11.1 Statements re: computation of ratios. The information
for this Exhibit is incorporated by reference to
pages 5-6 of this Form 10-Q.
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.
20
(b) Reports on Form 8-K:
Reports on Form 8-K filed during the three month period ended June 30,
2004:
A Report on Form 8-K was filed on April 21, 2004 to announce earnings
for the quarter ended March 31, 2004.
A report on Form 8-K was filed on April 28, 2004 to declare a stock
dividend.
A report on Form 8-K was filed on May 20, 2004 documenting change of
control agreements with Andrew W. Hasley and William C. Marsh.
A report on Form 8-K was filed on May 26, 2004 to declare a cash
dividend.
A report on Form 8-K was filed on June 2, 2004 announcing the hiring of
a new Senior Vice President and Chief Lending Officer.
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: August 10, 2004 By: /s/ Andrew W. Hasley
----------------------------------------------
Andrew W. Hasley
President and
Chief Operating Officer
(Principal Executive Officer)
Date: August 10, 2004 By: /s/ William C. Marsh
----------------------------------------------
William C. Marsh
Senior Vice President,
Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
21