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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 September 30, 2004
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[ ] 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
Number of shares outstanding of common stock, as of November 1, 2004:
Common Stock, $1.00 par value 3,429,990
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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
September 30, 2004 and December 31, 2003..................................................................1
Consolidated Statements of Income for the three and nine months
ended September 30, 2004 and 2003.........................................................................2
Consolidated Statements of Comprehensive Income for the three and nine months
ended September 30, 2004 and 2003.........................................................................3
Consolidated Statements of Cash Flows for the nine months
ended September 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..........................................................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk...............................................20
Item 4. Controls and Procedures..................................................................................20
PART II - OTHER INFORMATION
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Item 1. Legal Proceedings........................................................................................20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..............................................20
Item 3. Defaults Upon Senior Securities..........................................................................20
Item 4. Submission of Matters to a Vote of Security Holders......................................................20
Item 5. Other Information........................................................................................20
Item 6. Exhibits and Reports on Form 8-K.........................................................................21
Signatures...............................................................................................22
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
NSD Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
As of September 30, 2004 and December 31, 2003 (unaudited)
(Dollar amounts in thousands)
September 30, December 31,
2004 2003
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Assets
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Cash and due from banks $12,034 $14,117
Interest-earning deposits in banks 598 623
Federal funds sold - 9,500
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Cash and cash equivalents 12,632 24,240
Securities available-for-sale 163,018 151,141
Loans receivable, net of allowance for loan losses of $5,935 and
$6,882 313,936 305,626
Federal Home Loan Bank stock, at cost 4,937 4,961
Bank-owned life insurance 8,763 8,537
Accrued interest and dividends receivable 2,556 2,580
Premises and equipment, net 4,162 3,326
Prepaid expenses and other assets 7,313 6,209
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Total assets $517,317 $506,620
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Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits:
Noninterest-bearing deposits $75,952 $75,724
Interest-bearing deposits 310,699 290,315
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Total deposits 386,651 366,039
Borrowed funds 84,250 94,000
Accrued interest payable 4,900 4,870
Accrued expenses and other liabilities 2,606 2,824
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Total liabilities 478,407 467,733
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Stockholders' Equity:
Common stock, $1.00 par value, 10,000,000 shares authorized;
3,758,282 and 3,529,516 shares issued 3,758 3,530
Additional paid-in-capital 30,563 26,117
Treasury stock, at cost, 344,964 and 331,701 shares (6,919) (6,626)
Retained earnings 10,261 13,077
Accumulated other comprehensive income 1,247 2,789
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Total stockholders' equity 38,910 38,887
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Total liabilities and stockholders' equity $517,317 $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 nine months ended September 30, 2004 and 2003 (unaudited)
(Dollar amounts in thousands, except share data)
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
2004 2003 2004 2003
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Interest and dividend income:
Loans receivable, including fees $4,599 $5,128 $13,893 $16,050
Securities:
Taxable 1,416 1,328 4,297 4,079
Exempt from Federal income tax 325 251 866 724
Federal Home Loan Bank stock 16 25 51 94
Deposits with banks and federal funds sold 14 41 98 119
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Total interest income 6,370 6,773 19,205 21,066
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Interest expense:
Deposits 1,333 1,645 3,851 5,436
Borrowed funds 1,134 1,373 3,835 4,076
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Total interest expense 2,467 3,018 7,686 9,512
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Net interest income 3,903 3,755 11,519 11,554
Provision for loan losses 145 240 335 3,210
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Net interest income after provision for loan
losses 3,758 3,515 11,184 8,344
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Noninterest income:
Fees and service charges 491 479 1,368 1,328
Gain on sale of securities available-for-sale,
net 1,790 156 1,954 364
Earnings on bank-owned life insurance 66 101 226 297
Other 370 370 891 1,127
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Total noninterest income 2,717 1,106 4,439 3,116
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Noninterest expense:
Compensation and employee benefits 1,645 1,721 4,907 4,530
Premises and equipment, net 479 494 1,508 1,615
Data processing 233 261 706 651
Other 2,459 902 4,057 2,450
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Total noninterest expense 4,816 3,378 11,178 9,246
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Net income before provision for income taxes 1,659 1,243 4,445 2,214
Provision for income taxes 549 296 1,326 358
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Net income $1,110 $947 $3,119 $1,856
=========== =========== =========== ===========
Net income per share:
Basic $0.33 $0.28 $0.92 $0.55
Diluted $0.32 $0.28 $0.91 $0.54
Common stock cash dividends: $0.22 $0.21 $0.65 $0.62
Average common shares outstanding:
Basic 3,407,443 3,352,190 3,383,962 3,355,813
Diluted 3,434,100 3,415,738 3,422,790 3,423,733
See accompanying notes to unaudited consolidated financial statements.
2
NSD Bancorp, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income
For the three and nine months ended September 30, 2004 and 2003 (unaudited)
(Dollar amounts in thousands)
Three months ended Nine months ended
September 30, September 30,
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2004 2003 2004 2003
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Net income $1,110 $947 $3,119 $1,856
Other comprehensive income (loss):
Unrealized holding gains (losses) on
available-for-sale securities 4,269 (3,049) (382) (295)
Less reclassification adjustment for
gains realized in income 1,790 156 1,954 364
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Net unrealized gains (losses) 2,479 (3,205) (2,336) (659)
Tax effect 843 (1,090) (794) (224)
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Other comprehensive income (loss) 1,636 (2,115) (1,542) (435)
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Comprehensive income (loss) $2,746 $(1,168) $1,577 $1,421
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See accompanying notes to unaudited consolidated financial statements.
3
NSD Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the nine months ended September 30, 2004 and 2003 (unaudited)
(Dollar amounts in thousands)
Nine months ended
September 30,
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2004 2003
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Operating activities:
Net income $3,119 $1,856
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization for premises and equipment 456 485
Provision for loan losses 335 3,210
Amortization of premiums and accretion of discounts, net 284 361
Gain on sale of securities available-for-sale, net (1,954) (364)
Proceeds from sale of loans held-for-sale - 963
Earnings on bank-owned life insurance (226) (297)
Changes in:
Accrued interest receivable 24 163
Prepaid expenses and other assets (1,104) 87
Accrued interest payable 30 (452)
Accrued expenses and other liabilities (218) (925)
Other (733) 371
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Net cash from operating activities 13 5,458
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Investing activities:
Loan originations and payments, net (8,645) 13,217
Purchases of securities available-for-sale (51,959) (94,329)
Redemptions of Federal Home Loan Bank stock 24 -
Repayments, maturities and calls of securities available-for-
sale 21,226 58,701
Proceeds from sale of securities available-for-sale 19,715 13,408
Purchases of premises and equipment (1,292) (288)
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Net cash from investing activities (20,931) (9,291)
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Financing activities:
Net change in deposits 20,612 647
Proceeds from borrowed funds 20,750 -
Repayments of borrowed funds (30,500) -
Cash dividends paid on common stock (2,202) (2,076)
Payments to acquire treasury stock (293) (915)
Proceeds from exercise of common stock options 948 628
Cash dividends paid in lieu of fractional common shares (5) (6)
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Net cash from financing activities 9,310 (1,722)
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Change in cash and cash equivalents (11,608) (5,555)
Cash and cash equivalents at beginning of period 24,240 33,626
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Cash and cash equivalents at end of period $12,632 $28,071
============== ==============
Supplemental information:
Interest paid $7,656 $9,964
Income taxes paid 1,186 1,342
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 eleven 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. Merger Related Information
On October 15, 2004, the Corporation announced the signing of a
definitive agreement to merge with F.N.B. Corporation (NYSE:FNB),
headquartered in Hermitage, PA. The merger, subject to certain
conditions, including approvals of the Corporation's shareholders and
bank regulatory authorities, is expected to be consummated during the
first quarter of 2005.
The merger is valued at approximately $135.8 million dollars in a stock
exchange with a fixed exchange ratio of 1.8 F.N.B. Corporation shares
for each share of the Corporation. The merger is expected to qualify
as a tax free reorganization for federal income tax purposes. This
purchase price is equivalent to $39.01 per share for the Corporation's
shareholders, based on F.N.B. Corporation's closing price on October
14, 2004 of $21.67. F.N.B. Corporation expects the combination to be
accretive to its earnings per share and to its regulatory capital
ratios in 2005.
5
3. 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.
4. 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 nine months ended September 30:
For the Three Months Ended For the Nine Months Ended
September 30, September 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 $1,110 $947 $3,119 $1,856
Weighted average shares outstanding 3,407,443 3,352,190 3,383,962 3,355,813
Earnings per share $0.33 $0.28 $0.92 $0.55
============ ============= ========== ==============
Diluted earnings per share:
Net income $1,110 $947 $3,119 $1,856
Weighted average shares outstanding 3,407,443 3,352,190 3,383,962 3,355,813
Dilutive effect of employee stock options 26,657 63,548 38,828 67,920
------------ ------------- ---------- --------------
Total diluted weighted average shares
outstanding 3,434,100 3,415,738 3,422,790 3,423,733
Earnings per share $0.32 $0.28 $0.91 $0.54
============ ============= ========== ==============
Average outstanding options to purchase shares of common stock of 60,205,
at prices from $24.72 to $25.18, for the three months ended September
30, 2004 and 56,404 shares, at prices from $25.96 to $26.43, for the
three months ended September 30, 2003 were not included in the
computation of diluted earnings per share for the three months ended
September 30, 2004 and September 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 $25.18, for the nine months ended September
30, 2004 and 33,518 shares, at prices from $25.96 to $26.45, for the
nine months ended September 30, 2003 were not included in the
computation of diluted earnings per share for the nine months ended
September 30, 2004 and September 30, 2003 because, to do so, would
have been anti-dilutive.
6
5. Securities
The following table summarizes the Corporation's securities
available-for-sale:
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(Dollar amounts in thousands) Amortized Unrealized Unrealized Fair
cost gains losses value
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September 30, 2004
U.S. Government agencies $70,660 $242 $(157) $70,745
Mortgage-backed securities 42,945 213 (255) 42,903
Municipal securities 31,095 527 (38) 31,584
Corporate securities 14,605 640 (80) 15,165
U.S. Treasury securities 1,586 54 - 1,640
Equity securities 238 743 - 981
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$161,129 $2,419 $(530) $163,018
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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
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$146,914 $4,802 $(575) $151,141
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6. Loans receivable
The following table summarizes the Corporation's loans receivable:
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(Dollar amounts in thousands) September 30, 2004 December 31, 2003
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Dollar Dollar
Amount % Amount %
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Residential mortgage loans $32,149 10.0% $24,436 7.8%
Nonresidential mortgage loans 75,407 23.5% 89,575 28.6%
Commercial, financial and agricultural loans 39,685 12.4% 31,450 10.0%
Consumer loans to individuals 152,404 47.5% 142,686 45.5%
Lines of credit 7,958 2.5% 8,362 2.7%
Lease financing 5,817 1.8% 8,548 2.7%
Nonperforming loans 7,294 2.3% 8,415 2.7%
---------- -------- --------- ---------
320,714 100.0% 313,472 100.0%
======== =========
Unearned income and deferred fees, net (843) (964)
---------- ---------
Total loans, net of unearned income and deferred
fees 319,871 312,508
Less: Allowance for loan losses 5,935 6,882
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Loans receivable, net $313,936 $305,626
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7
7. Deposits
The following table summarizes the Corporation's deposits:
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(Dollar amounts in thousands) September 30, 2004 December 31, 2003
-------------------------- --------------------------
Amount % Amount %
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Noninterest-bearing deposits $75,952 19.6% $75,724 20.7%
Interest-bearing demand deposits 152,326 39.4% 160,878 44.0%
Time deposits 158,373 41.0% 129,437 35.3%
----------- ------------ ---------- -------------
Total deposits $386,651 100.0% $366,039 100.0%
=========== ============ ========== =============
8. Borrowed funds
The Corporation has borrowed funds at September 30, 2004 totaling $84.3
million comprised of $75.0 million in long-term Federal Home Loan Bank
(FHLB) Convertible Select Advances and $9.3 million in overnight FHLB
advances. At December 31, 2003 long-term FHLB advances totaled $94.0
million.
9. Stock-based compensation
The Corporation maintains three 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 vested
during the periods presented herein.
10. Recent Accounting Pronouncements
In March 2004, the Financial Accounting Standards Board (FASB) reached
consensus on the guidance provided by Emerging Issues Task Force Issue
03-1 (EITF 03-1), The Meaning of Other-Than-Temporary Impairment and
its Application to Certain Investments. The guidance is applicable to
debt and equity securities that are within the scope of FASB Statement
of Financial Accounting Standard (SFAS) No. 115, Accounting for
Certain Investments In Debt and Equity Securities and certain other
investments. EITF 03-1 specifies that an impairment would be
considered other-than-temporary unless (a) the investor has the
ability and intent to hold an investment for a reasonable period of
time sufficient for the recovery of the fair value up to (or beyond)
the cost of the investment and (b) evidence indicating the cost of the
investment is recoverable within a reasonable period of time outweighs
evidence to the contrary. EITF 03-1 cost method investment and
disclosure provisions were effective for reporting periods ending
after June 15, 2004. The measurement and recognition provisions
relating to debt and equity securities have been delayed until the
FASB issues additional guidance.
8
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 nine month periods ended
September 30, 2004, and should be read in conjunction with the accompanying
consolidated financial statements and notes presented on pages 1 through 8.
FORWARD LOOKING STATEMENTS
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 Shareholders.
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 Shareholders.
9
CHANGES IN FINANCIAL CONDITION
General. The Corporation's total assets increased $10.7 million or 2.1% to
$517.3 million at September 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 $8.3 million and $11.9 million, respectively. Partially
offsetting these increases was a decrease in cash and cash equivalents of $11.6
million. The increase in total assets reflects a corresponding increase in total
liabilities of $10.7 million. The net increase was primarily the result of an
increase in deposits of $20.6 million, partially offset by a decrease in
borrowed funds of $9.8 million.
Cash and cash equivalents. Cash and cash equivalents decreased $11.6
million or 47.9% to $12.6 million at September 30, 2004 from $24.2 million at
December 31, 2003. The net decrease between September 30, 2004 and December 31,
2003 was primarily the result of utilizing cash to fund investment security
purchases, loan originations and aid in the funding of the early payoff of
certain Federal Home Loan Bank (FHLB) Convertible Select advances during the
third quarter of 2004.
Securities. The Corporation's securities portfolio increased $11.9 million
or 7.9% to $163.0 million at September 30, 2004 from $151.1 million at December
31, 2003. This net increase included security purchases totaling $52.0 million,
partially offset by sales, maturities, calls and repayments totaling $40.9
million. Security purchases were comprised of U.S. Government agencies,
mortgage-backed, tax-free municipal and other securities of $32.0 million, $9.1
million $9.9 million and $1.0 million, respectively. Security sales, maturities,
calls and repayments were comprised of U.S. Government agencies, mortgage-backed
securities, tax-free municipal and other securities of $10.1 million, $19.1
million, $1.7 million and $10.0 million, respectively. Proceeds from the sale of
securities were primarily used to aid in the funding of the early payoff of FHLB
advances. The net increase in securities was primarily due to the necessity of
reinvesting cash obtained through deposit growth and loan repayments throughout
2004.
Loans receivable. Net loans receivable increased $8.3 million or 2.7% to
$313.9 million at September 30, 2004 from $305.6 million at December 31, 2003.
Residential mortgage, commercial and consumer loans increased $7.7 million, $8.2
million and $9.7 million, respectively, while nonresidential mortgage, lines of
credit, lease financing and nonperforming loans decreased $14.2 million,
$404,000, $2.7 million and $1.1 million, respectively. Residential mortgage
loans increased primarily as a result of management's increased emphasis on
residential lending during 2004 coupled with additional products offered during
the current year to support this emphasis. Consumer loans, particularly
automobile loans, increased as customer demand rose related to attractive
interest rates offered on these products during 2004. Nonresidential mortgages
decreased related to repayments during the competitive loan pricing market
during 2004.
Nonperforming assets. Nonperforming assets include nonaccrual loans,
repossessed assets and real estate acquired through foreclosure. Nonperforming
assets decreased $800,000 to $7.8 million or 1.52% of total assets at September
30, 2004, from $8.6 million or 1.70% of total assets at December 31, 2003.
Nonperforming loans, respossessed assets and real estate acquired through
foreclosure totaled $7.3 million, $99,000 and $445,000, respectively, at
September 30, 2004 and $8.4 million, $116,000 and $89,000, respectively, at
December 31, 2003.
Deposits. Total deposits increased $20.6 million or 5.6% to $386.7 million
at September 30, 2004 from $366.0 million at December 31, 2003. This increase
was comprised of an increase in time deposits of $28.9 million, partially offset
by a decrease in other interest bearing demand deposits of $8.6 million. Time
deposits increased related to marketing efforts emphasizing special term and
rate time deposits, specifically short-term certificates of deposit, in response
to consumer demand in the lower rate environment. Other interest bearing demand
deposits, specifically savings deposits, decreased as consumers reallocated
their deposits into higher-yielding deposit instruments such as time deposits.
Also, slightly impacting the decrease in interest bearing deposits was the
closure of a branch office during the third quarter of 2004.
10
Borrowed Funds. During the third quarter of 2004, the Corporation executed
the early payoff of $24.0 million in FHLB long-term advances. Cash and the sale
of investment securities were used to fund the transaction. A prepayment penalty
was assessed by the FHLB related to the early repayment; however, gains related
to the sale of investment securities offset this expense. Also contributing to
the decrease, $5.0 million in long-term FHLB advances matured during the second
quarter of 2004. Partially offsetting these decreases, the Corporation added
$10.0 million of FHLB long-term advances related to an investment transaction.
As of September 30, 2004, the weighted average rate of long-term FHLB advances
is 5.75% and contractual maturities are as follows: $5.0 million in 2009, $60.0
million in 2010 and $10.0 million in 2014.
Stockholders' equity. Stockholders' equity remained unchanged totaling
$38.9 million at September 30, 2004 and December 31, 2003. Accumulated other
comprehensive income decreased $1.5 million during the first nine months of
2004. Partially offsetting this decrease, net income totaled $3.1 million, of
which $2.2 million was paid to stockholders in the form of a cash dividend.
RESULTS OF OPERATIONS
Comparison of Results for the Three Months Ended September 30, 2004 and 2003
General. The Corporation reported net income of $1.1 million and $947,000
for the three months ended September 30, 2004 and 2003, respectively. The
$163,000 or 17.2% increase in net income for the three months ended September
30, 2004, as compared to the three months ended September 30, 2003, was
attributable to an increase in net interest income and noninterest income of
$148,000 and $1.6 million, respectively, and a decrease in the provision for
loan losses of $95,000. Partially offsetting these favorable variances were
increases in noninterest expense and the provision for income taxes of $1.4
million and $253,000, respectively.
11
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 $167,000 and $129,000, respectively.
- ------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) Three months ended September 30,
2004 2003
------------------------------- ------------------------------
Average Yield / Average Yield /
Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------
Interest-earning assets:
- ------------------------
Loans receivable $315,766 $4,599 5.79% $319,793 $5,128 6.36%
---------- ---------- --------- ---------- ---------- --------
Securities, taxable 133,685 1,416 4.21% 120,312 1,328 4.38%
Securities, exempt from Federal tax 31,082 492 6.30% 23,700 380 6.37%
---------- ---------- --------- ---------- ---------- --------
164,767 1,908 4.61% 144,012 1,708 4.71%
---------- ---------- --------- ---------- ---------- --------
Interest-earning cash equivalents 4,843 14 1.15% 17,021 41 0.96%
Federal Home Loan Bank stock 4,937 16 1.29% 5,046 25 1.97%
---------- ---------- --------- ---------- ---------- --------
9,780 30 1.22% 22,067 66 1.19%
---------- ---------- --------- ---------- ---------- --------
Total interest-earning assets 490,313 6,537 5.30% 485,872 6,902 5.64%
Cash and due from banks 11,354 13,064
Other noninterest-earning assets 17,321 14,281
---------- ----------
Total assets $518,988 $513,217
========== ==========
Interest-bearing liabilities:
- -----------------------------
Interest-bearing demand deposits $159,151 $269 0.67% $164,901 $378 0.91%
Time deposits 157,682 1,064 2.68% 135,735 1,267 3.70%
---------- ---------- --------- ---------- ---------- --------
316,833 1,333 1.67% 300,636 1,645 2.17%
---------- ---------- --------- ---------- ---------- --------
Borrowed funds 80,208 1,134 5.62% 94,000 1,373 5.79%
---------- ---------- --------- ---------- ---------- --------
80,208 1,134 5.62% 94,000 1,373 5.79%
---------- ---------- --------- ---------- ---------- --------
Total interest-bearing liabilities 397,041 2,467 2.47% 394,636 3,018 3.03%
Noninterest-bearing demand deposits 76,457 - - 70,129 - -
---------- ---------- --------- ---------- ---------- --------
Total financial liabilities/cost of
funds 473,498 2,467 2.07% 464,765 3,018 2.58%
Other noninterest-bearing
liabilities 7,941 9,614
---------- ----------
Total liabilities 481,439 474,379
Stockholders' equity 37,549 38,838
---------- ----------
Total liabilities and stockholders'
equity $518,988 $513,217
========== ---------- ========== ----------
Net interest income $4,070 $3,884
========== ==========
Interest rate spread (difference
between 2.83% 2.61%
========= ========
weighted average rate on interest-
earning
assets and interest-bearing
liabilities)
Net interest margin (net interest 3.30% 3.17%
========= ========
income as a percentage of average
interest-earning assets)
12
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 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.
- ---------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) For the Three Months Ended September 30,
2004 versus 2003
Increase (decrease) due to
---------------------------------------
Volume Rate Total
- ---------------------------------------------------------------------------------------------------
Interest income:
Loans $(64) $(465) $(529)
Securities 241 (41) 200
Deposits with banks and Federal funds sold (34) 7 (27)
Federal Home Loan Bank stock (1) (8) (9)
-------- --------- ----------
Total interest-earning assets 142 (507) (365)
-------- --------- ----------
Interest expense:
Deposits 85 (397) (312)
Borrowed funds (196) (43) (239)
-------- --------- ----------
Total interest-bearing liabilities (111) (440) (551)
-------- --------- ----------
Net interest income $253 $(67) $186
======== ========= ==========
Net interest income. Net interest income on a tax equivalent basis
increased $186,000 or 4.8% to $4.1 million for the three months ended September
30, 2004, compared to $3.9 million for the same period in the prior year. This
net increase can be attributed to a decrease in interest expense of $551,000,
partially offset by a decrease in interest income of $365,000.
Interest income. Interest income on a tax equivalent basis decreased
$365,000 or 5.3% to $6.5 million for the three months ended September 30, 2004,
compared to $6.9 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 $529,000 and $36,000, respectively,
partially offset by an increase in interest earned on securities of $200,000.
Interest earned on loans receivable decreased $529,000 or 10.3% to $4.6
million for the three months ended September 30, 2004, compared to $5.1 million
for the same period in the previous year. Interest income on loans decreased
$465,000 related to a 57 basis point reduction in the average interest rate
earned on loans. Further impacting interest earned on loans was a decrease in
average loans of $4.0 million or 1.3%, accounting for $64,000 of the decrease in
interest income. The decrease in interest income related to yield can partially
be attributed to a change in the mix of the lending portfolio from higher
yielding commercial loans to that of consumer loans. Also, the yield on loans
decreased as the interest rates on new loans are lower than interest rates of
loans that have paid off in this generally lower interest rate environment.
Tax equivalent interest earned on securities increased $200,000 or 11.7% to
$1.9 million for the three months ended September 30, 2004, compared to $1.7
million for the same period in the previous year. The securities portfolio
gained $241,000 in interest income related to an increase in average securities
outstanding of $20.8 million or 14.4%. Partially offsetting this favorable
increase in average balance was a decrease in the average interest rate earned
on securities of 10 basis points resulting in a decrease of $41,000 of interest
income. Average securities increased as funds from loan repayments and customer
deposits were deployed in marketable securities during late 2003 and 2004.
13
Interest earned on other interest-earning assets decreased $36,000 or 54.5%
to $30,000 for the three months ended September 30, 2004, compared to $66,000
for the same period in the previous year. This decrease was primarily the result
of a decrease in the average balance outstanding of $12.3 million or 55.7%. The
decrease in average balance is primarily related to deploying these funds into
higher yielding assets as well as to aid in the funding of the early payoff of
debt during 2004.
Interest expense. Interest expense decreased $551,000 or 18.3% to $2.5
million for the three months ended September 30, 2004, compared to $3.0 million
for the same period in the previous year. The net decrease in interest expense
can be attributed to decreases in interest incurred on deposits of $312,000 and
interest expense related to borrowed funds of $239,000.
Interest-bearing demand deposit expense decreased $312,000 or 19.0% to $1.3
million for the three months ended September 30, 2004, compared to $1.6 million
for the same period in the previous year. This decrease in interest expense can
be attributed to a 50 basis point decline in the cost of interest-bearing demand
deposits resulting in a reduction in expense due to rate of $397,000. Partially
offsetting the favorable rate variance was an increase in average
interest-bearing demand deposits of $16.2 million or 5.4% resulting in
additional interest expense of $85,000. The overall decrease in interest expense
on interest-bearing deposits, similar to that of interest income, was primarily
due to the lower interest rate environment.
Interest expense related to borrowed funds decreased $239,000 or 17.4% to
$1.1 million for the three months ended September 30, 2004, compared to $1.4
million for the same period in the previous year. The decrease in interest
expense is primarily the result of the early payoff of $24.0 million of FHLB
advances during the third quarter of 2004. The partial elimination of debt will
reduce the Corporation's interest expense on borrowed funds by approximately
$300,000 per quarter.
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 $95,000 decrease in the
Corporation's provision for loans losses between the three-month periods ended
September 30, 2004 and 2003 can be attributed to the continued workout of larger
problem credits as well as a change in composition of the loan portfolio.
Noninterest income. Noninterest income increased $1.6 million to $2.7
million during the three months ended September 30, 2004, compared to $1.1
million during the same period in the prior year. The net increase can be
attributed to an increase in gain on sale of securities available for sale of
$1.7 million primarily related to the sale of equity and bond securities to
facilitate the funding of and offset the prepayment penalty related to the early
debt payoff. Partially offsetting this increase, earnings on bank-owned life
insurance decreased $35,000 related to a decrease in yield on the policies
during 2004 associated with the decline in market interest rates.
14
Noninterest expense. Noninterest expense increased $1.4 million to $4.8
million during the three months ended September 30, 2004, compared to $3.4
million during the same period in the prior year. The increase in noninterest
expense can primarily be attributed to a $1.5 million prepayment penalty
recorded in other noninterest expense associated with the early payoff of debt
aforementioned. Compensation and benefits expense decreased $76,000 or 4.4%
primarily related to nonrecurring officer severance payments during the third
quarter of 2003, partially offset by normal salary and benefit increases in
2004.
Provision for income taxes. The provision for income taxes increased
$253,000 or 85.5% to $549,000 for the three months ended September 30, 2004,
compared to $296,000 for the same period in the prior year. This change was
primarily related to the increase in pre-tax income.
Comparison of Results for the Nine Months Ended September 30, 2004 and 2003
General. The Corporation reported net income of $3.1 million and $1.9
million for the nine months ended September 30, 2004 and 2003, respectively. The
$1.2 million or 68.1% increase in net income for the nine months ended September
30, 2004, as compared to the nine months ended September 30, 2003, was
attributable to a decrease in provision for loan losses of $2.8 million and an
increase in noninterest income of $1.3 million. Partially offsetting these
favorable variances were unfavorable variances related to net interest income,
noninterest expense and provision for income taxes of $35,000, $1.9 million and
$968,000, respectively.
15
Average Balance Sheet and Yield/Rate Analysis. Tax-equivalent adjustments
to net interest income for 2004 and 2003 were $446,000 and $373,000,
respectively.
(Dollar amounts in thousands) Nine months ended September 30,
2004 2003
------------------------------ ------------------------------
Average Yield / Average Yield /
Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------------
Interest-earning assets:
- ------------------------
Loans receivable $310,551 $13,893 5.98% $324,704 $16,050 6.61%
---------- ---------- -------- ---------- ---------- --------
Securities, taxable 134,007 4,297 4.28% 114,206 4,079 4.78%
Securities, exempt from Federal tax 27,741 1,312 6.32% 22,695 1,097 6.46%
---------- ---------- -------- ---------- ---------- --------
161,748 5,609 4.63% 136,901 5,176 5.05%
---------- ---------- -------- ---------- ---------- --------
Interest-earning cash equivalents 11,175 98 1.17% 15,251 119 1.04%
Federal Home Loan Bank stock 4,956 51 1.37% 5,055 94 2.49%
---------- ---------- -------- ---------- ---------- --------
16,131 149 1.23% 20,306 213 1.40%
---------- ---------- -------- ---------- ---------- --------
Total interest-earning assets 488,430 19,651 5.37% 481,911 21,439 5.95%
Cash and due from banks 14,108 13,908
Other noninterest-earning assets 15,514 15,626
---------- ----------
Total assets $518,052 $511,445
========== ==========
Interest-bearing liabilities:
- -----------------------------
Interest-bearing demand deposits $161,370 $853 0.71% $160,357 $1,246 1.04%
Time deposits 147,147 2,998 2.72% 139,072 4,190 4.03%
---------- ---------- -------- ---------- ---------- --------
308,517 3,851 1.67% 299,429 5,436 2.43%
---------- ---------- -------- ---------- ---------- --------
Borrowed funds 88,847 3,835 5.77% 94,000 4,076 5.80%
---------- ---------- -------- ---------- ---------- --------
88,847 3,835 5.77% 94,000 4,076 5.80%
---------- ---------- -------- ---------- ---------- --------
Total interest-bearing liabilities 397,364 7,686 2.58% 393,429 9,512 3.23%
Noninterest-bearing demand deposits 74,676 - - 68,832 - -
---------- ---------- -------- ---------- ---------- --------
Total financial liabilities/cost of
funds 472,040 7,686 2.17% 462,261 9,512 2.75%
Other noninterest-bearing
liabilities 7,623 10,305
---------- ----------
Total liabilities 479,663 472,566
Stockholders' equity 38,389 38,879
---------- ----------
Total liabilities and stockholders'
equity $518,052 $511,445
========== ---------- ========== ----------
Net interest income $11,965 $11,927
========== ==========
Interest rate spread (difference
between 2.79% 2.72%
======== ========
weighted average rate on interest-
earning
assets and interest-bearing
liabilities)
Net interest margin (net interest 3.27% 3.31%
======== ========
income as a percentage of average
interest-earning assets)
16
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.
- ----------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) For the Nine Months Ended September 30,
2004 versus 2003
Increase (decrease) due to
--------------------------------------
Volume Rate Total
- ----------------------------------------------------------------------------------------------------
Interest income:
Loans $(679) $(1,478) $(2,157)
Securities 886 (453) 433
Deposits with banks and Federal funds sold (34) 13 (21)
Federal Home Loan Bank stock (2) (41) (43)
-------- --------- ---------
Total interest-earning assets 171 (1,959) (1,788)
-------- --------- ---------
Interest expense:
Deposits 160 (1,745) (1,585)
Borrowed funds (223) (18) (241)
-------- --------- ---------
Total interest-bearing liabilities (63) (1,763) (1,826)
-------- --------- ---------
Net interest income $234 $(196) $38
======== ========= =========
Net interest income. Net interest income on a tax equivalent basis
increased $38,000 to $12.0 million for the nine months ended September 30, 2004,
compared to $11.9 million for the same period in the prior year. This net
decrease can be attributed to a decrease in interest income of $1.8 million
partially offset by a decrease in interest expense of $1.8 million.
Interest income. Interest income on a tax equivalent basis decreased $1.8
million or 8.3% to $19.7 million for the nine months ended September 30, 2004,
compared to $21.4 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 $2.2 million and $64,000,
respectively, partially offset by an increase in interest earned on securities
of $433,000.
Interest earned on loans receivable decreased $2.2 million or 13.4% to
$13.9 million for the nine months ended September 30, 2004, compared to $16.1
million for the same period in the previous year. Interest income on loans
decreased $1.5 million related to a 63 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 $14.2 million or 4.4%, accounting for
$679,000 of the decrease in interest income. The decrease in interest income
related to yield can partially be attributed to a change in the mix of the
lending portfolio from higher yielding commercial loans to that of consumer
loans as well as the continued downward re-pricing of loans in the lower
interest rate environment during late 2003 and early 2004.
Tax equivalent interest earned on securities increased $433,000 or 8.4% to
$5.6 million for the nine months ended September 30, 2004, compared to $5.2
million for the same period in the previous year. The securities portfolio
gained $886,000 in interest income related to an increase in average securities
outstanding of $24.8 million or 18.2%. Partially offsetting this favorable
increase in average balance was a decrease in the average interest rate earned
on securities of 42 basis points resulting in $453,000 of interest income lost.
Average securities increased as funds from loan repayments and customer deposits
were deployed in marketable securities during late 2003 and 2004.
17
Interest earned on other interest-earning assets decreased $64,000 or 30.0%
to $149,000 for the nine months ended September 30, 2004, compared to $213,000
for the same period in the previous year. This decrease was the result of a
decrease in the average balance outstanding of $4.2 million or 20.6% resulting
in $36,000 of interest income lost, partially offset by a decrease in the
average interest rate earned on such assets of 17 basis points accounting for
$28,000 of the decrease in interest earned. The decrease in balance is primarily
the result of deploying such funds into higher yielding assets and aiding the
funding of the debt payoff aforementioned.
Interest expense. Interest expense decreased $1.8 million or 19.2% to $7.7
million for the nine months ended September 30, 2004, compared to $9.5 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 $1.6 million
as well as a decrease in interest paid on borrowed funds of $241,000.
Interest-bearing deposit expense, which includes demand and time deposits,
decreased $1.6 million or 29.2% to $3.9 million for the nine months ended
September 30, 2004, compared to $5.4 million for the same period in the previous
year. This decrease in interest expense can be attributed to a 76 basis point
decline in the cost of interest-bearing deposits resulting in a reduction in
expense due to rate of $1.7 million. Partially offsetting the favorable rate
variance was an increase in average interest-bearing deposits of $9.1 million or
3.0% resulting in additional interest expense of $160,000. The decrease in
interest expense, similar to that of interest income, was primarily due to the
lower interest rate environment during late 2003 and 2004.
Interest expense related to borrowed funds decreased $241,000 or 5.9% to
$3.8 million for the nine months ended September 30, 2004, compared to $4.1
million for the same period in the previous year. This decrease in interest
expense is primarily the result of the early payoff of $24.0 million in FHLB
advances during the third quarter of 2004 as well as a maturity of $5.0 million
during the second quarter of 2004, partially offset by an addition of $10.0
million related to an investment transaction.
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 $375,000 between the nine-month periods ended September
30, 2004 and 2003, primarily due to the workout of problem credits as well as a
change in the loan portfolio mix. The allowance for loan losses to total loans
was 1.9% and 2.2% at September 30, 2004 and December 31, 2003, respectively.
Noninterest income. Noninterest income increased $1.3 million or 42.5% to
$4.4 million during the nine months ended September 30, 2004, compared to $3.1
million during the same period in the prior year. This increase can be
attributed to an increase in gain on sale of securities of $1.7 million related
to the sale of securities to aid in the funding of and offset the prepayment
penalty incurred related to the aforementioned early debt payoff. Partially
offsetting these increases, earnings on bank-owned life insurance decreased
$71,000 related to a decrease in yield and a decrease in title company income of
$77,000 related to decreased residential mortgage closing activity.
Noninterest expense. Noninterest expense increased $1.9 million or 20.9% to
$11.2 million during the nine months ended September 30, 2004, compared to $9.2
million during the same period in the prior year. The increase in noninterest
expense is primarily related to a $1.5 million prepayment penalty associated
with the early payoff of debt. Compensation and employee benefits expense
increased $377,000 or 8.32% as a result of both normal salary and benefit
increases as well as the addition of key management personnel during 2004.
Partially offsetting these increases were nonrecurring officer severance
payments made during the third quarter of 2003.
Provision for income taxes. The provision for income taxes increased
$968,000 to $1.3 million for the nine months ended September 30, 2004, compared
to $358,000 for the same period in the prior year. This increase was primarily
related to the increase in pre-tax income.
18
LIQUIDITY
The Corporation's primary sources of funds generally are derived from
deposits obtained through the offices of the Bank, borrowings from the FHLB, and
amortization and prepayments of outstanding loans and maturing securities.
During the nine months ended September 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 $16.4 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 $506,000.
At September 30, 2004, time deposits amounted to $158.4 million or 41.0% of
the Corporation's total consolidated deposits, including approximately $106.2
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 September 30, 2004, the Corporation's
borrowing capacity with the FHLB, net of funds borrowed, was $38.7 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 $23,000 or 1.0% to $38.9 million at
September 30, 2004. Accumulated other comprehensive income decreased $1.5
million. Net income contributed $3.1 million to stockholders' equity during the
first nine months of 2004, partially offset by cash dividends paid totaling $2.2
million.
The Corporation has maintained a strong capital position with a capital to
assets ratio of 7.5% at September 30, 2004. While continuing to sustain this
capital position, the Corporation paid cash dividends totaling $0.65 per share
during the first nine months 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 September 30,
2004, the Corporation and the Bank were in compliance with all regulatory
capital requirements.
19
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 September 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. Unregistered Sales of Equity Securities and Use of Proceeds
- --------------------------------------------------------------------
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.
20
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits:
Exhibit 2.1 Agreement and Plan of Merger between F.N.B.
Corporation and NSD Bancorp, Inc. dated as of October
14, 2004, filed as Exhibit 2.1 to NSD Bancorp Inc.'s
From 8-K filed October 18, 2004, is incorporated
herein by reference.
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 breference.
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 10.5 Change of Control Agreement of Andrew W. Hasley dated
June 30, 2003 filed as Exhibit 99.1 to NSD Bancorp
Inc.'s Form 8-K filed May 20, 2004, is incorporated
herein by reference.
Exhibit 10.6 Change of Control Agreement of William C. Marsh dated
October 8, 2003 filed as Exhibit 99.2 to NSD Bancorp
Inc.'s Form 8-K filed May 20, 2004, is incorporated
herein by reference.
Exhibit 11.1 Statements re: computation of earnings per share.
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.
21
(b) Reports on Form 8-K:
Reports on Form 8-K filed or furnished during the three month period
ended September 30, 2004:
A report on Form 8-K dated August 25, 2004 to report a cash dividend.
A report of Form 8-K dated July 28, 2004 to report earnings for the
quarter ended June 30, 2004.
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: November 12, 2004 By: /s/ Andrew W. Hasley
-----------------------------------------------
Andrew W. Hasley
President and
Chief Operating Officer
(Principal Executive Officer)
Date: November 12, 2004 By: /s/ William C. Marsh
-----------------------------------------------
William C. Marsh
Senior Vice President,
Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
22