1
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the period ended June 30, 1997
or
[ ] Transition Report Pursuant to Section
13 or 15(d) of the Securities Exchange Act
of 1934 For the transition period from
to
---- ----
Commission file number 0-20255
I.R.S. Employer Identification Number 34-1692031
Mahoning National Bancorp, Inc.
(an Ohio Corporation)
23 Federal Plaza
Youngstown, Ohio 44501-0479
Telephone: (330) 742-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date: 6,300,000 shares of the
Company's Common Stock (No par value) were outstanding as of July 31, 1997.
2
MAHONING NATIONAL BANCORP, INC.
INDEX
Page Number
-----------
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements Consolidated
Balance Sheet (unaudited) June 30, 1997 and
December 31, 1996 3
Consolidated Statements of Income-
Three and Six Months Ended June 30, 1997
and 1996 (unaudited) 4
Condensed Consolidated Statement of Cash Flows -
Six Months Ended June 30, 1997 and 1996
(unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2 - Management Discussion and Analysis
of Operations and Liquidity and Capital Resources 7-16
Item 3 - Summary of Average Balances and Interest Rates 17
PART II - OTHER INFORMATION 18-19
Exhibit 10 - Material Contracts 20-120
Exhibit Number 27 - Financial Data Schedule
SIGNATURES 121
3
PART I
FINANCIAL INFORMATION
MAHONING NATIONAL BANCORP INC.
CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)
(Amounts in thousands)
JUNE 30, DECEMBER 31,
ASSETS 1997 1996
--------- ------------
Cash and due from banks $ 30,786 $ 29,257
Federal funds sold -- 19,500
Investment securities available for sale - at fair value 162,314 143,600
Investment securities held to maturity - at cost
(Market value $71,918 at June 30, 1997
and $85,646 at December 31, 1996) 72,018 85,732
Loans 490,535 477,795
Less allowance for possible loan losses 7,919 8,112
--------- ---------
Net loans 482,616 469,683
Bank premises and equipment 8,701 8,981
Other assets 15,319 12,807
--------- ---------
Total assets $ 771,754 $ 769,560
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $ 73,875 $ 70,706
Interest bearing
Savings 275,294 282,929
Time 201,903 197,363
--------- ---------
Total deposits 551,072 550,998
Federal funds purchased and securities
sold under agreement to repurchase 115,859 122,467
Short term borrowings 15,000 10,235
Long term borrowings 3,614 4,065
Other liabilities 5,078 4,700
--------- ---------
Total liabilities 690,623 692,465
--------- ---------
STOCKHOLDERS' EQUITY
Common stock (No par value, $1 stated value)
Authorized 15,000,000 shares, Issued
and Outstanding - 6,300,000 shares 6,300 6,300
Additional paid-in capital 44,100 44,100
Retained earnings 30,995 26,627
Unrealized (loss) gain on investment securities
available for sale, net of deferred taxes (264) 68
--------- ---------
Total stockholders' equity 81,131 77,095
--------- ---------
Total liabilities and
stockholders' equity $ 771,754 $ 769,560
========= =========
See Notes to Consolidated Financial Statements
4
MAHONING NATIONAL BANCORP INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE FOR THE THREE FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
(Amounts in thousands, except per share data) JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- -----------
INTEREST INCOME
Interest and fees on loans $10,946 $10,501 $21,595 $20,952
Interest on investment securities
Taxable 3,215 3,153 6,333 6,191
Nontaxable 265 216 508 403
Interest on federal funds sold 128 66 306 166
------- ------- ------- -------
14,554 13,936 28,742 27,712
INTEREST EXPENSE
Interest on deposits 4,234 4,555 8,454 9,171
Interest on federal funds purchased and
securities sold under agreement to repurchase 1,570 985 3,059 1,927
Interest on short term borrowings 128 69 226 145
Interest on long term borrowings 51 62 105 104
------- ------- ------- -------
5,983 5,671 11,844 11,347
------- ------- ------- -------
Net interest income 8,571 8,265 16,898 16,365
PROVISION FOR LOAN LOSSES 725 550 1,525 1,075
------- ------- ------- -------
Net interest income after
provision for loan losses 7,846 7,715 15,373 15,290
OTHER OPERATING REVENUE
Trust department income 787 664 1,497 1,266
Service charges on deposit accounts 1,019 874 2,014 1,698
Other service charges 204 188 395 345
Other revenue 75 64 144 144
Gain on sale of investment securities
available for sale -- -- 178 --
------- ------- ------- -------
2,085 1,790 4,228 3,453
------- ------- ------- -------
OTHER OPERATING EXPENSE
Salaries and employee benefits 2,741 2,664 5,445 5,320
Expenses of premises and fixed assets 704 813 1,506 1,622
Other expense 1,666 1,647 3,185 3,285
------- ------- ------- -------
5,111 5,124 10,136 10,227
------- ------- ------- -------
Income before income taxes 4,820 4,381 9,465 8,516
INCOME TAX EXPENSE 1,568 1,423 3,080 2,766
------- ------- ------- -------
NET INCOME $ 3,252 $ 2,958 $ 6,385 $ 5,750
======= ======= ======= =======
EARNINGS PER COMMON SHARE $ 0.51 $ 0.47 $ 1.01 $ 0.91
DIVIDENDS PER SHARE $ 0.16 $ 0.135 $ 0.32 $ 0.27
See Notes to Consolidated Financial Statements
5
MAHONING NATIONAL BANCORP INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS SIX MONTHS
ENDED ENDED
(Amounts in thousands) JUNE 30, 1997 JUNE 30, 1996
(UNAUDITED) (UNAUDITED)
-----------------------------
Cash flows from operating activities $ 6,926 $ 8,325
Cash flows from investing activities
Proceeds from maturities of investment securities available for sale 10,172 11,609
Proceeds from maturities of investment securities held to maturity 13,735 22,710
Sale of investment securities available for sale 20,075 --
Purchase of investment securities available for sale (49,286) (16,660)
Purchase of investment securities held to maturity -- (35,468)
Net increase in loans (15,095) (18,179)
Net decrease in federal funds sold 19,500 2,800
Capital expenditures (262) (306)
-------- --------
Net cash (used in) provided by investing activities (1,161) (33,494)
Cash flows from financing activities
Net increase (decrease) in deposits 74 (6,157)
Net (decrease) increase in federal funds purchased and
securities sold under agreement to repurchase (6,608) 22,542
Net increase in short term borrowings 4,765 7,622
Proceeds from long term borrowings -- 3,500
Payments on long term borrowings (451) (298)
Dividends paid (2,016) (1,701)
-------- --------
Net cash (used in) provided by financing activities (4,236) 25,508
Net increase in cash and cash equivalents 1,529 339
Cash and cash equivalents at beginning of year 29,257 30,731
-------- --------
Cash and cash equivalents at end of six months $ 30,786 $ 31,070
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the first six months for:
Interest $ 11,735 $ 11,262
======== ========
Income Taxes $ 2,874 $ 2,320
======== ========
Non-cash transactions:
Transfer from loans to other real estate owned $ 107 $ 34
======== ========
See Notes to Consolidated Financial Statements
6
MAHONING NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The financial information presented is prepared in accordance with
generally accepted accounting principles and general policies within the
financial service industry. The financial information included herein has been
prepared by management without audit by independent certified public accountants
who do not express an opinion thereon. All significant intercompany balances and
transactions have been eliminated and the information furnished includes all
adjustments consisting of normal recurring accrual adjustments which are in the
opinion of management, necessary for a fair presentation of results for the
interim period. The results of the interim financial information presented are
not necessarily indicative of the results of operations for the full calendar
year ending December 31, 1997.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Earnings Review
Net income for the first six months of 1997 amounted to $6.385 million
or $1.01 per share. This represents an increase of 11% over net income earned
during the same period in 1996 ($5.750 million or $0.91 per share). Mahoning
National Bancorp, Inc.'s, (the Company) net income for the current quarter
increased 10% to $3.252 million or $.51 per share from $2.958 million or $0.47
per share for the same quarter in 1996.
The primary component of earnings is net interest income. Net interest income
for the first six months of 1997 was $16.898 million compared with $16.365
million or a 3% increase from the comparable period in 1996. Net interest income
for the current quarter increased 4% over the comparable period of 1996 ($8.571
million from $8.265 million).
Interest and fees on loans increased $643 thousand in the first six months of
1997 compared to the first six months of 1996. This increase was the result of a
$16.117 million increase in average loan balances for the first six months of
1997 compared to 1996; $487.698 million compared to $471.581 million. The
increase in average loan balances in the first six months of 1997 accounted for
nearly all of the additional interest and fee income on loans. Interest expense
increased $497 thousand in the first six months of 1997 compared to the same
period in 1996. This increase can be attributed to an increase in the volume of
securities sold under agreements to repurchase as 1997 average balances
increased $42.071 million over average balances in the same period of 1996. This
increase in funding offset the $14.236 million decrease in average savings
deposits in the first six months of 1997 compared to the same period in 1996.
The average balance of time deposits for the first six months of 1997 decreased
$10.766 million from the average balances for the same period of 1996. The cost
of these funds also decreased from 5.46% for the first six months of 1996 to
5.30% for the first six months of 1997, a 16 basis point decrease. While time
deposit costs for 1997 are currently lower than 1996 costs, they should increase
in the second half of the year as maturing certificates are repricing at higher
rates and the local time deposit market remains extremely competitive. It is the
Company's intent to offer competitive rates on those time deposit maturities
that the Asset Liability Committee (ALCO) determines appropriate. The ALCO will
base their decisions on the Company's balance sheet structure, interest rate
forecasts and alternative funding costs.
For a detailed analysis of the Company's net interest margin, on a tax
equivalent basis, refer to the Summary of Average Balances and Interest Rates;
Item 3 of this report on page 17.
In late March of 1997 the Federal Reserve Bank increased the discount rate and
the Company increased its prime lending rate by 25 basis points. With this
increase a significant portion of the Company's loan portfolio was repriced
upward immediately,
8
while rates on interest bearing deposits and borrowings continued to increase
more deliberately, with existing certificates of deposit repricing at slightly
higher rates than previously experienced.
The impact of this pricing change had minimal impact on year to date and second
quarter earnings. The change in the mix of the loan portfolio, which had
declines in consumer loans that were off-set with increases in lower yielding
residential mortgage loans, kept the portfolio yield at 8.97% for both the first
and second quarters of 1997. Strategic funding and pricing decisions on the
Company's deposits and other borrowings have resulted in a steady 3.85% cost on
interest bearing liabilities for the first six months of 1997. The net interest
margin for the first six months of 1997 was 4.75%, a four (4) basis point
decrease from the 4.79% net interest margin for the first six months of 1996.
With the current uncertainty on which direction the Federal Reserve will move
rates over the next twelve months, the Company analyzed the effect of a presumed
100 and 200 basis point increase and decrease in interest rates through its
simulation analysis. While the results of the simulation indicated no
significant impact on net interest income over the next twelve months, they did
indicate the Company to be negatively impacted by rising interest rates and
positively impacted by falling interest rates due to the liability sensitive
nature of the balance sheet.
Other operating revenue for the first six months of 1997, exclusive of security
transactions, was $4.050 million or a 17% increase over the first six months of
1996 total of $3.453 million. Other operating revenue for the current quarter,
exclusive of security transactions, was $2.085 million compared to $1.790
million for the same quarter of 1996, a 16% increase. Other operating revenue,
exclusive of security transactions, as a percentage of average assets was 1.06%
for the first six months of 1997 compared to .94% for the same period in 1996.
The largest component of other operating revenue in the first six months of 1997
was service charges on deposit accounts which increased $316 thousand or 19%
over the first six months of 1996. Service charges on deposit accounts for the
current quarter increased by $145 thousand or 17% over the same period in 1996,
$1.019 million from $874 thousand. The Company annually reviews all of its
fee-based products and services for marketability and profitability. Adjustments
to fees for the Company's products and services and the strengthening of
controls for the collections of such fees are the reasons for the significant
increase.
Mahoning National Bank's Trust Department generated $1.497 million in other
revenue in the first six months of 1997, an increase of $231 thousand or 18%
over the $1.266 million earned in the same period of 1996. The Trust Department
generated $787 thousand of operating income in the second quarter of 1997, an
18% increase over the $664 thousand earned in the comparable quarter of 1996.
This increase can be attributed to two factors; an influx of new trust accounts
and market value based fees which increased due to the significant increase in
account market values due to rises in the stock market over the past year. At
June 30, 1997, Trust department assets totaled $433.596 million with a market
9
value of $628.924 million compared to $549.959 million with a market value of
$727.144 million at June 30, 1996. This decrease was the result of a corporate
customer consolidating employee benefit and custody trust accounts with a
financial institution outside of our market area in the second quarter of 1997.
As a result of the loss of this account relationship Trust department revenue
for 1997 should approximate the $2.837 million earned in 1996.
In February of 1997 the Company realized a $178 thousand gain when $20.075
million of US Government securities were sold from the available for sale
portfolio. There were no security sales in the second quarter of 1997. There
were no security sales in the first six months of 1996.
Provision for loan losses for the first six months of 1997 amounted to $1.525
million compared to $1.075 million for the comparable period in 1996. The
provision for the current quarter was $725 thousand compared to $550 thousand
for the same quarter of 1996. This increase is discussed in more detail under
the Provision For Loan Losses heading later in this discussion.
Other operating expense for the first six months decreased $91 thousand or less
than 1% from the comparable period in 1996 to $10.136 million from $10.227
million. For the current quarter other operating expense totaled $5.111 million
compared to $5.124 million in the same quarter of 1996. As a percentage of
average assets, other operating expense was 2.65% for the first six months of
1997 compared to 2.77% in the same time period of 1996.
On September 30, 1996, the "Deposit Insurance Fund Act of 1996" was enacted.
This Act requires Federal Deposit Insurance Corporation (FDIC) insured banks to
pay a 1.29 basis point assessment ($.0129 per $100 of deposits) for Bank
Insurance Fund deposits in 1997, 1998 and 1999. As a result of this assessment,
FDIC premium expense for the first six months of 1997 totaled $36 thousand
compared to $1 thousand for the same period in 1996.
Salaries and employee benefits expense for the first six months of 1997
increased $125 thousand or 2% and $77 thousand or 3% for the most recent quarter
when compared to 1996. Salary expense alone increased $80 thousand or 2% for the
first six months of 1997 and $30 thousand for the current quarter when compared
to the same periods in 1996. This increase can be attributed to annual merit
salary adjustments which took effect January 1, 1997 and increases in various
employee incentive programs. Health care expenses for the first six months of
1997 were $387 thousand compared to $328 thousand for the same period in 1996,
an increase of $59 thousand or 18%. This increase was due in part to increased
health care claims over the past 12 months. The Company's renewal rates for the
1997 - 1998 plan year increased between 5 - 10%, which should increase health
care costs over the remainder of 1997 and into 1998. This increase should not
have a material impact on future earnings.
10
Expenses of premises and fixed assets for the first six months of 1997 totaled
$1.506 million, a 7% decrease ($116 thousand) from the same period in 1996.
Current quarter expense totaled $704 thousand, a 13% decrease from the same
quarter in 1996. This decrease in mainly attributable to the termination of
various equipment leases early in the second quarter of 1997 and reduced
building maintenance costs.
Other expenses, exclusive of the FDIC insurance assessment, decreased $135
thousand in the first six months of 1997, to $3.149 million from $3.284 million
for the same period of 1996, a 4% decrease. For the second quarter of 1997 other
expense, exclusive of the FDIC insurance assessment, totaled $1.647 million, the
same as the second quarter of 1996. The decrease from 1996 was the result of
reduced state franchise taxes, insurance and bond premiums and professional
expenses. Overhead expenses for the remainder of 1997 are expected to
approximate those incurred in the first six months of the year.
Income Taxes
Income tax expense for the first six months of 1997 amounted to $3.080 million
compared to $2.766 million for the same period in 1996. Income tax expense for
1997 is being accrued at an effective rate of approximately 32.5%, which
compares to an effective tax rate of 32.3% for all of 1996.
The Statement of Condition includes approximately $2.861 million and $2.681
million of net deferred tax assets at June 30, 1997 and December 31, 1996
respectively. It is management's belief that the Company has adequate taxable
income to realize the deferred tax asset and accordingly no valuation reserve
has been established.
The following annualized ratios reflect the earnings performance for the first
six months of 1997 compared to the same time period of 1996:
For the six For the six
months ended months ended
June 30, 1997 June 30, 1996
------------- -------------
Return on Average Assets 1.67% 1.56%
Return on Average Equity 16.30% 16.11%
Return on Earnings Assets
- -Taxable Equivalent 8.01 8.05
Interest Cost 3.26 3.26
Net Interest Margin 4.75 4.79
Statements of Condition
As of June 30, 1997, total assets of the Company amounted to $771.754 million,
an increase from December 31, 1996 total assets of $769.560 million. Average
assets for the
11
first six month of 1997 amounted to $772.242 million compared to $740.262
million for the same period of 1996, a 4% increase. Through the first six months
of 1997 total loans increased $12.740 million or 3% from year end while the
investment portfolio increased $5.000 million or 2% in that same period. The
growth in loans and the investment portfolio was primarily funded through a
$19.500 million reduction in federal funds sold and earnings retention. While
short term borrowings and federal funds purchased increased $4.765 million and
$11.200 million respectively in the first six months of 1997, securities sold
under agreements to repurchase declined $17.808 million from $122.467 million on
December 31, 1996 to $104.659 million at June 30, 1997. The significant decline
in securities sold under agreements to repurchase resulted from the loss of
approximately $11.2 million in overnight repurchase agreements (corporate
"sweep" checking accounts) due to a corporate sweep customer consolidating their
funds with a financial institution outside of our market area.
Investment Portfolio
The deposits and other borrowings of the Company, in excess of required reserves
and operating funds of the Company, are invested in loans, investment securities
and federal funds sold. The objective of the investment portfolio is to combine
liquidity, earnings and safety of the investment in a prudent manner so as to
protect the depositor, fulfill responsibility to borrowers and offer a favorable
return to the stockholders.
At June 30, 1997 the investment portfolio totaled $234.332 million (net of a
$407 thousand unrealized loss on available for sale securities) which was an
increase of $5.000 million from December 31, 1996.
At June 30, 1997 the Company has classified investment securities with amortized
cost and fair market value of $162.721 and $162.314 million respectively, or 69%
of the portfolio as available for sale, with the remainder of the portfolio
classified as held to maturity. The adoption of SFAS 115 has resulted in a
decrease in the carrying amount of investment securities of $407 thousand with a
decrease in stockholders' equity of $264 thousand net of deferred income taxes.
Those securities classified as available for sale will afford the Company's
Asset/Liability Committee the necessary flexibility to manage the portfolio to
meet liquidity needs that may arise.
In the first quarter of 1997, $20.075 million of U.S. Government Securities that
were coming due in 1997 were sold from the available for sale portfolio and were
reinvested in longer term U.S. Treasury securities. There were no security sales
in the second quarter of 1997, or the first six months of 1996. No securities
were transferred between categories in the first six months of 1997.
Loans
Total loans outstanding increased by $12.740 million or 3% from $477.795 million
on December 31, 1996, to $490.535 million on June 30, 1997. This growth, coupled
with no
12
change in deposits resulted in a loan to deposit ratio of 89.01% at June 30,
1997, compared to 86.71% at December 31, 1996.
The increase in the loan portfolio in the first six months of 1997 is the result
of continued loan demand and good results from business development efforts. The
areas of largest growth in the first six months of 1997 were nonresidential
mortgages, commercial loans and residential mortgages.
Nonresidential mortgages increased $9.713 million or 10% from $95.081 million to
$104.794 million and commercial loans increased $4.858 million or 6% from
$87.117 million to $91.975 million in the first six months of 1997. The momentum
established the past several years with a strong sales culture in the corporate
and branch business development areas continue to result in new relationships.
The continued strength of the local economy and good environment for
construction also contributed to the strong growth. Modest commercial loan
growth is projected for the remainder of 1997.
Residential mortgages increased $3.835 million or 2% from $156.574 million to
$160.409 million in the first six months of 1997. The demand for purchase money
mortgage loans lessened in the second quarter as did refinancings. Strong demand
for equity loan products continues to result in increased loan balances in those
products.
Consumer loans decreased $3.996 million or 3% in the first six months of 1997
after decreasing $10.496 million or 8% in 1996. Consumer loan balances are
primarily dependent on the level of indirect automobile financing purchased by
the Bank. Substantial growth of the past years was not sustained in 1996 and the
first six months of 1997 due to a slower market, greater competition among local
lenders and the Company's close monitoring of underwriting criteria due to
increased charge-offs and delinquency trends. Competition from leasing by
captive automobile finance companies (i.e. GMAC, Ford Motor Credit) will impact
future growth and necessitate a commitment to providing the dealer network with
a very high level of service. Given the rapid amortization of the automobile
loan portfolio, which has a short average maturity, and a projected slow down in
our national economy, consumer loan totals are expected to continue to decline
throughout 1997.
13
As of June 30, 1997, non-performing loans, defined as those loans which are on
non-accrual or are 90 days or more past due and still accruing, totaled $3.601
million compared to $4.629 million at December 31, 1996. Listed below is a
schedule of the Company's non-performing assets:
(Amounts in thousands) June 30, 1997 December 31, 1996
- ------------------------- ------------- -----------------
Non accrual loans $2,560 $3,698
Accruing loans 90 days
or more past due 1,041 931
------ ------
Non performing loans 3,601 4,629
Restructured loans in
compliance with modified
terms 271 411
Other real estate owned 286 269
------ ------
Total problem assets $4,158 $5,309
====== ======
Total problem assets to
total assets 0.54% 0.69%
The following ratios will provide additional information on the status of the
loan portfolio:
As of As of
June 30, 1997 December 31, 1996
------------- -----------------
Loan to deposit ratio 89.01% 86.71%
Non performing loans to
total loans .73 .97
Non performing loans to
allowance for loan losses 45.47 57.06
Allowance for loan losses
to total loans 1.61 1.70
Shown below is a summary of the allowance for loan losses:
For the six For the six
months ended months ended
(Amounts in thousands) June 30, 1997 June 30, 1996
- ------------------------- ------------- -------------
Balance at beginning of period $8,112 $7,156
Provision charged to operating
expense 1,525 1,075
Recoveries of loans charged off 295 272
Losses charged to allowance (2,013) (1,128)
------ ------
Balance at end of period $7,919 $7,375
====== ======
Net charge-offs to average
loans .35% .18%
14
Information required under Statement of Financial Accounting Standards No. 114
"Accounting by Creditors for Impairment of a Loan" and No. 118 "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosure" is as
follows for the six months ended June 30:
1997 1996
---- ----
Principal amount of impaired loans $ 934 $ 495
Allowance allocated to impaired loans 450 125
------ ------
Portion for which no allowance is allocated $ 484 $ 370
====== ======
Average investment in impaired loans for
the six months ended June 30: $1,071 $ 538
====== ======
Total cash collected on impaired loans during the first six months of 1997 and
1996 was $556 thousand and $136 thousand respectively; $547 thousand was
credited to the principal balance outstanding and $9 thousand was credited to
interest in the first six months of 1997 while the entire $136 thousand was
credited to the principal balance outstanding in the first six months of 1996.
Interest that would have been accrued on impaired loans in the first six months
of 1997 and 1996 was $47 thousand and $28 thousand respectively. Interest income
of $9 thousand and $0 was recognized during the first six months of 1997 and
1996, respectively.
Provision For Loan Losses:
The policies of the Company provide for loan loss reserves to adequately protect
the Company against potential unidentified and/or identified loan losses
consistent with sound and prudent banking practice.
In determining the monthly provision for loan losses and the adequacy of the
loan loss reserve, management reviews the current and forecasted economic
conditions and portfolio trends. The primary focus is placed on current problem
loans, delinquencies and anticipated charge-offs. As of June 30, 1997, all loans
classified for regulatory purposes do not represent or result from trends or
uncertainties which management reasonably expects will materially impact future
operating results, liquidity, or capital resources.
The provision for loan losses charged to expense during the first six months of
1997 was $1.525 million, an increase of $450 thousand from the 1996 first six
month provision. This increase was the result of the growth in the loan
portfolio and increases in consumer loan and commercial loan charge-offs.
Net charge-offs on consumer loans and credit card related plans totaled $915
thousand for the first six months of 1997 compared to $824 thousand for the same
period in 1996. The Company's experience in 1996 and the first six months of
1997 followed national trends of deteriorating credit quality in consumer loans
and credit card and related plans brought on
15
by the high level of consumer debt and record personal bankruptcy filings. In
mid-1996 the Company implemented stricter underwriting guidelines and completed
an analysis of the collection department to strengthen collection efforts. The
result of these actions began to have a positive impact on consumer charge-offs
starting in the second quarter of 1997. Net consumer loan charge-offs in the
second quarter of 1997 totaled $309 thousand compared to $606 thousand in the
first quarter of 1997 and $441 thousand in the second quarter of 1996.
Late in the first quarter of 1997, the Company became aware of a severe
deterioration in the financials of a particular Commercial loan customer. In the
subsequent loan work-out with this company, which resulted in a secured party
sale, a portion of that loan ($750 thousand), was charged-off.
It is anticipated that some of the amounts charged-off in the first six months
will be collected in the future and will be added to the allowance for loan
losses. The timing and amounts of these collections are uncertain at this time.
The trends discussed above will continue to be monitored closely during the year
as the Company evaluates the adequacy of the allowance for loan losses. While
future provisions to the loan loss reserve are dependent upon the growth and
quality of the loan portfolio it is estimated that for the remainder of 1997,
quarterly provisions will approximate those of the first two quarters. At June
30, 1997, the allowance for loan losses totaled $7.919 million or $1.61% of
total loans, compared to $7.375 million or 1.54% at June 30, 1996.
Liquidity and Capital
It is a primary objective of Mahoning National Bancorp, Inc. to maintain a level
of liquidity deemed adequate to meet the expected and potential funding needs of
loan and deposit customers. It is the Company's policy to manage its affairs
such that liquidity needs are fully satisfied through normal bank operations.
Short-term investments (Federal funds sold) and short-term borrowings (Federal
funds purchased and repurchase agreements, U.S. Treasury demand notes and
Federal Home Loan Bank advances) are used as primary cash management and
liquidity tools. Short term Federal fund lines totaling $60 million have been
established at the Company's correspondent banks. When loan demand increases at
a faster rate than deposit growth it may be necessary to manage the available
for sale portion of the investment portfolio to meet that demand, or to sell
conforming residential mortgages on the secondary market. While no loans were
designated as available for sale at June 30, 1997 the $395 thousand of
residential mortgage loans so designated at December 31, 1996 were sold at a
small gain in the second quarter of 1997. At June 30, 1997, $162.314 million of
the investment portfolio was classified as available for sale. This
classification will afford the Company's Asset/Liability Committee the
flexibility to manage the portfolio to meet any liquidity needs that may arise.
16
An additional source of liquidity is derived from the Federal Home Loan Bank of
Cincinnati (FHLB). The FHLB provides short term funding alternatives with a line
of credit of $25.0 million and funding for one-to-four family residential
mortgage loans and allows the Company to better manage its interest rate risk.
The Company had $3.614 million outstanding in FHLB borrowings at June 30, 1997
compared to $4.065 million at December 31, 1996.
Total Capital Accounts have grown $4.036 million or 5% in the first six months
of 1997. This increase reflects retained earnings less dividends paid and also
reflects a $332 thousand unrealized loss on the available for sale investment
portfolio for the first six months of 1997. Dividends paid in 1997 year to date
were $2.016 million or $.32 per share compared to $1.701 million or $.27 per
share for the same period in 1996.
Book value per share as of June 30, 1997 was $12.88 compared to $12.24 on
December 31, 1996.
Under regulations issued by federal banking agencies, banks and bank holding
companies are required to maintain certain minimum capital ratios known as the
risk-based capital ratio and the leverage ratio. At June 30, 1997, Mahoning
National Bancorp's leverage, Tier 1 and total risk-based capital ratios were
10.60%, 16.93% and 18.18%, respectively, compared to 10.27%, 16.31% and 17.57%
at December 31, 1996, respectively. The Company has exceeded all required
regulatory capital ratios for each period presented and is considered "well
capitalized" under all federal banking agency regulations. The Company's
risk-based capital ratios are well above the regulatory minimums due to the
capital strength and low risk nature of the balance sheet and off-balance sheet
commitments. The structure of the Company's balance sheet is such that nearly
all of the investment portfolio is invested in U.S. Government obligations or
other low risk categories, and over 20% of the loan portfolio is invested in
one-to-four family residential mortgage loans which have a 50% risk weight
assessment. It is the Company's intent to prudently manage the capital base in
an effort to increase return on equity performance while maintaining necessary
capital requirements to maintain the "well capitalized" classification.
17
MAHONING NATIONAL BANCORP INC.
SUMMARY OF AVERAGE BALANCES AND INTEREST RATES
TAX EQUIVALENT BASIS
FOR THE SIX MONTHS ENDED
JUNE 30, 1997
(Amounts in thousands) AVERAGE AVERAGE
BALANCE INTEREST RATE%
-----------------------------------------------------------------------
INTEREST YIELDS
Loans $487,698 $21,695 8.97
Investment securities (1) 232,627 7,115 6.14
Other earning assets 11,276 306 5.40
-----------------------------------------------------------------------
Total return on earning assets 731,601 29,116 8.01
INTEREST COSTS
Interest bearing deposits:
Savings deposits 279,639 3,214 2.32
Time deposits 199,505 5,240 5.30
-----------------------------------------------------------------------
Total interest bearing deposits 479,144 8,454 3.56
Federal funds purchased 3,488 99 5.63
Repurchase agreements 125,810 2,960 4.75
Short term borrowings 8,718 226 5.16
Long term borrowings 3,874 105 5.44
-----------------------------------------------------------------------
Total interest bearing liabilities $621,034 $11,844 3.85
Interest spread $17,272 4.16
================================================
AS A PERCENT OF AVERAGE EARNING ASSETS
Total return on earning assets 8.01
Total interest cost 3.26
-------------------------
Net Interest Margin 4.75
=========================
FOR THE SIX MONTHS ENDED
JUNE 30, 1996
(Amounts in thousands) AVERAGE AVERAGE
BALANCE INTEREST RATE%
-----------------------------------------------------------------------
INTEREST YIELDS
Loans $471,581 $21,096 8.97
Investment securities (1) 222,110 6,811 6.15
Other earning assets 6,288 166 5.22
-----------------------------------------------------------------------
Total return on earning assets 699,979 28,073 8.05
INTEREST COSTS
Interest bearing deposits:
Savings deposits 293,875 3,451 2.36
Time deposits 210,271 5,720 5.46
-----------------------------------------------------------------------
Total interest bearing deposits 504,146 9,171 3.65
Federal funds purchased 2,017 54 5.30
Repurchase agreements 83,739 1,873 4.48
Short term borrowings 5,921 145 4.86
Long term borrowings 3,835 104 5.44
-----------------------------------------------------------------------
Total interest bearing liabilities $599,658 $11,347 3.79
Interest spread $16,726 4.26
================================================
AS A PERCENT OF AVERAGE EARNING ASSETS
Total return on earning assets 8.05
Total interest cost 3.26
-------------------------
Net Interest Margin 4.79
=========================
(1) Investment securities average balance is based on average carrying value
while the average rate is calculated using average historical cost.
18
PART II
OTHER INFORMATION
Mahoning National Bancorp, Inc.
Item 1 - Legal Proceedings
None
Item 2 - Changes in the Rights of the Company's Security Holders
None
Item 3 - Default Upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6(a) - Exhibits
(10) Material Contracts:
(10a) Change-In-Control Protective Agreement -
Norman E. Benden, Jr.
(10b) Change-In-Control Protective Agreement -
Richard E. Davies
(10c) Change-In-Control Protective Agreement -
Karen R. DeSalvo
(10d) Change-In-Control Protective Agreement -
Frank Hierro
(10e) Change-In-Control Protective Agreement -
Dexter A. Hollen
(10f) Change-In-Control Protective Agreement -
John R. Lewis
(10g) Change-In-Control Protective Agreement -
Parker T. McHenry
(10h) Change-In-Control Protective Agreement -
Gregory L. Ridler
(10i) Change-In-Control Protective Agreement -
J. David Sabine
(10j) Change-In-Control Protective Agreement -
David E. Westerburg
19
(10k) 1997 Amendment to Supplemental Executive
Retirement Plan between Mahoning National
Bank and Gregory L. Ridler; dated May 14,
1997.
(10l) Supplemental Executive Retirement Plan
between Mahoning National Bank and Gregory
L. Ridler. Originally incorporated by
reference in the December 31, 1995, Form 10K
Annual Report is refiled in EDGAR format and
incorporated by reference in this Form 10Q.
(10m) Split Dollar Life Insurance plan between
Mahoning National Bank and Gregory L.
Ridler. Originally incorporated by reference
in the December 31, 1995, Form 10K Annual
Report is refiled in EDGAR format and
incorporated by reference in this Form 10Q.
(27) Financial Data Schedule
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-Q for the six months
ended June 30, 1997 to be signed on its behalf by the undersigned thereunto duly
authorized.
DATE: August 11, 1997 Mahoning National Bancorp, Inc.
---------------------
/s/ Gregory L. Ridler
----------------------------
Gregory L. Ridler
Chairman of the Board,
President and Chief
Executive Officer
DATE: August 11, 1997 /s/ Norman E. Benden, Jr.
--------------------- ----------------------------
Norman E. Benden, Jr.
Treasurer