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 September 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 October 31, 1997.
2
MAHONING NATIONAL BANCORP, INC.
INDEX
Page Number
-----------
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements Consolidated
Balance Sheet (unaudited) - September 30, 1997 and
December 31, 1996 3
Consolidated Statements of Income-Three and
Nine Months Ended September 30, 1997
and 1996 (unaudited) 4
Condensed Consolidated Statement of Cash Flows -
Nine Months Ended September 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
Exhibit Number 10 - Material Contracts 19-94
Exhibit Number 27 - Financial Data Schedule
SIGNATURES 95
3
PART I
FINANCIAL INFORMATION
MAHONING NATIONAL BANCORP INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Amounts in thousands)
SEPTEMBER 30 DECEMBER 31,
ASSETS 1997 1996
------------- -------------
Cash and due from banks $ 27,533 $ 29,257
Federal funds sold -- 19,500
Investment securities available for sale - at fair value 175,030 143,600
Investment securities held to maturity - at cost
(Market value $61,609 at September 30, 1997
and $85,646 at December 31, 1996) 61,548 85,732
Loans 494,581 477,795
Less allowance for possible loan losses 7,679 8,112
------------- -------------
Net loans 486,902 469,683
Bank premises and equipment 8,799 8,981
Other assets 14,327 12,807
------------- -------------
Total assets $ 774,139 $ 769,560
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $ 67,340 $ 70,706
Interest bearing
Savings 269,176 282,929
Time 196,510 197,363
------------- -------------
Total deposits 533,026 550,998
Federal funds purchased and securities
sold under agreement to repurchase 134,230 122,467
Short term borrowings 13,978 10,235
Long term borrowings 3,384 4,065
Other liabilities 5,157 4,700
------------- -------------
Total liabilities 689,775 692,465
------------- -------------
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 33,342 26,627
Unrealized gain (loss) on investment securities
available for sale, net of deferred taxes 622 68
------------- -------------
Total stockholders' equity 84,364 77,095
------------- -------------
Total liabilities and
stockholders' equity $ 774,139 $ 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 NINE FOR THE NINE
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
(Amounts in thousands, except per share data) SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
-------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 11,096 $ 10,710 $ 32,691 $ 31,662
Interest on investment securities
Taxable 3,193 3,097 9,526 9,288
Nontaxable 281 245 789 648
Interest on federal funds sold 25 90 331 256
-------------------------------------------------------------
14,595 14,142 43,337 41,854
INTEREST EXPENSE
Interest on deposits 4,237 4,517 12,691 13,688
Interest on federal funds purchased and
securities sold under agreement to repurchase 1,563 1,158 4,622 3,085
Interest on short term borrowings 94 100 320 245
Interest on long term borrowings 48 59 153 163
-------------------------------------------------------------
5,942 5,834 17,786 17,181
-------------------------------------------------------------
Net interest income 8,653 8,308 25,551 24,673
PROVISION FOR LOAN LOSSES 725 600 2,250 1,675
-------------------------------------------------------------
Net interest income after
provision for loan losses 7,928 7,708 23,301 22,998
OTHER OPERATING REVENUE
Trust department income 702 679 2,199 1,945
Service charges on deposit accounts 1,088 928 3,102 2,626
Other service charges 224 211 619 556
Other revenue 87 68 231 212
Gain on sale of investment securities
available for sale -- -- 178 --
-------------------------------------------------------------
2,101 1,886 6,329 5,339
OTHER OPERATING EXPENSE
Salaries and employee benefits 2,739 2,851 8,184 8,171
Expenses of premises and fixed assets 695 775 2,201 2,397
Other expense 1,621 1,532 4,806 4,817
-------------------------------------------------------------
5,055 5,158 15,191 15,385
-------------------------------------------------------------
Income before income taxes 4,974 4,436 14,439 12,952
APPLICABLE INCOME TAXES 1,619 1,432 4,699 4,198
-------------------------------------------------------------
NET INCOME $ 3,355 $ 3,004 $ 9,740 $ 8,754
=============================================================
EARNINGS PER COMMON SHARE $ 0.53 $ 0.48 $ 1.55 $ 1.39
DIVIDENDS PER SHARE $ 0.16 $ 0.135 $ 0.48 $ 0.405
See Notes to Consolidated Financial Statements
5
MAHONING NATIONAL BANCORP INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS NINE MONTHS
ENDED ENDED
(Amounts in thousands) SEPTEMBER 30, SEPTEMBER 30,
1997 1996
(UNAUDITED) (UNAUDITED)
--------------------------------------
Cash flows from operating activities $ 12,220 $ 12,134
Cash flows from investing activities
Proceeds from maturities of investment securities available for sale 10,723 17,016
Proceeds from maturities of investment securities held to maturity 24,235 26,365
Sale of investment securities available for sale 20,075 --
Purchase of investment securities available for sale (61,202) (26,915)
Purchase of investment securities held to maturity -- (36,518)
Net increase in loans (20,472) (25,999)
Net decrease (increase) in federal funds sold 19,500 (14,000)
Capital expenditures (632) (562)
--------------------------------------
Net cash used in investing activities (7,773) (60,613)
Cash flows from financing activities
Net decrease in deposits (17,973) (13,307)
Net increase in federal funds purchased and
securities sold under agreement to repurchase 11,763 50,050
Net increase in short term borrowings 3,743 9,576
Proceeds from long term borrowings -- 3,500
Payments on long term borrowings (680) (516)
Dividends paid (3,024) (2,552)
--------------------------------------
Net cash (used) provided by financing activities (6,171) 46,751
Net decrease cash and cash equivalents (1,724) (1,728)
Cash and cash equivalents at beginning of year 29,257 30,731
--------------------------------------
Cash and cash equivalents at end of nine months $ 27,533 $ 29,003
======================================
Supplemental disclosures of cash flow information:
Cash paid during the first nine months for:
Interest $ 17,797 $ 17,118
======================================
Income Taxes $ 4,266 $ 3,735
======================================
Non-cash transactions:
Transfer from loans to other real estate owned $ 159 $ 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 nine months of 1997 amounted to $9.740 million or $1.55
per share. This represents an increase of 11% over net income earned during the
same period in 1996. ($8.754 million or $1.39 per share). Mahoning National
Bancorp, Inc.'s net income for the current quarter increased 12% to $3.355
million or $0.53 per share from $3.004 million or $0.48 per share for the same
quarter in 1996.
The primary component of earnings is net interest income. Net interest income
for the first nine months of 1997 was $25.551 million compared with $24.673
million or a 4% increase from the comparable period in 1996. Net interest income
for the current quarter increased 4% over the comparable period of 1996 ($8.653
million from $8.308 million). Interest and fees on loans increased $1.029
million in the first nine months of 1997 compared to the first nine months of
1996. This increase was the result of a $13.112 million increase in average loan
balances for the first nine months of 1997 compared to 1996; $489.293 million
compared to $476.181 million. The increase in average loan balances in the first
nine months of 1997 accounted for nearly all of the additional interest and fee
income on loans. Interest expense increased $605 thousand in the first nine
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 $35.659 million over average
balances in the same period of 1996. This increase in funding offset the $14.810
million decrease in average savings deposits in the first nine months of 1997
compared to the same period in 1996. The average balance of time deposits for
the first nine months of 1997 decreased $10.455 million from the average
balances for the same period of 1996. The cost of these funds also decreased
from 5.41% for the first nine months of 1996 to 5.30% for the first nine months
of 1997, an 11 basis point decrease. While time deposit costs for 1997 are
currently lower than 1996 costs, they should increase over the next three months
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
8
significant portion of the Company's loan portfolio was repriced upward
immediately, 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 third
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 each of the
first three quarters of 1997. Strategic funding and pricing decisions on the
Company's deposits and other borrowings have resulted in a steady 3.84% cost on
interest bearing liabilities for the first nine months of 1997. The net interest
margin for the first nine months of 1997 was 4.77%, which is the same net
interest margin experienced in the first nine 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 nine months of 1997, exclusive of security
transactions, was $6.151 million or a 15% increase over the first nine months of
1996 total of $5.339 million. Other operating revenue for the current quarter
was $2.101 million compared to $1.886 million for the same quarter of 1996, an
11% increase. Other operating revenue, exclusive of security transactions, as a
percentage of average assets was 1.06% for the first nine months of 1997
compared to .96% for the same period in 1996.
The largest component of other operating revenue in the first nine months of
1997 was service charges on deposit accounts which increased $476 thousand or
18% over the first nine months of 1996. Service charges on deposit accounts for
the current quarter increased by $160 thousand or 17% over the same period in
1996, $1.088 million from $928 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 $2.199 million in other
revenue in the first nine months of 1997, an increase of $254 thousand or 13%
over the $1.945 million earned in the same period of 1996. The Trust Department
generated $702 thousand of operating income in the third quarter of 1997, a 3%
increase over the $679 thousand earned in the comparable quarter of 1996. This
increase can be attributed to 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 September 30, 1997, Trust department assets totaled
$454.502 million with a market value of $653.778 million
9
compared to $580.055 million with a market value of $743.932 million at
September 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 third quarter of 1997 or in the
first nine months of 1996.
Provision for loan losses for the first nine months of 1997 amounted to $2.250
million compared to $1.675 million for the comparable period in 1996. The
provision for the current quarter was $725 thousand compared to $600 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 nine months decreased $194 thousand or 1%
from the comparable period in 1996 to $15.191 million from $15.385 million. For
the current quarter other operating expense totaled $5.055 million compared to
$5.158 million in the same quarter of 1996. As a percentage of average assets,
other operating expense was 2.63% for the first nine months of 1997 compared to
2.75% in the same time period of 1996.
On September 30, 1996, the "Deposit Insurance Fund Act of 1996" was enacted.
This Act required Federal Deposit Insurance Corporation (FDIC) insured banks to
pay a 1.29 basis point assessment ($.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 nine months of 1997 totaled $53 thousand
compared to $2 thousand for the same period in 1996.
Salaries and employee benefits expense for the first nine months of 1997
increased $13 thousand but decreased $112 thousand or 4% for the most recent
quarter when compared to 1996. Salary expense alone decreased $125 thousand or
2% for the first nine months of 1997 and $204 thousand for the current quarter
when compared to the same periods in 1996. In the third quarter of 1996, as a
result of departmental restructuring and selective staff reductions a one time
charge of approximately $306 thousand was charged to salary expense. Health care
expenses for the first nine months of 1997 were $583 thousand compared to $414
thousand for the same period in 1996, an increase of $169 thousand or 41%. 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.
Expenses of premises and fixed assets for the first nine months of 1997 totaled
$2.201 million, an 8% decrease ($196 thousand) from the same period in 1996.
Current quarter
10
expense totaled $695 thousand, a 10% 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 $62
thousand in the first nine months of 1997, to $4.753 million from $4.815 million
for the same period of 1996, a 1% decrease. For the third quarter of 1997 other
expense, exclusive of the FDIC insurance assessment, totaled $1.604 million, an
increase of $73 thousand or 5%. Increases in third quarter expenses are the
result of increased marketing expenses and software amortization and support.
Overhead expenses for the remainder of 1997 are expected to approximate those
incurred in the first three quarters of the year. Management has decided to
close the South Side branch office and consolidate it into the South and
Midlothian office in the first quarter of 1998. Expenses to close this office
are not expected to be material. This consolidation will reduce overhead
expenses beginning in 1998.
Income Taxes
Income tax expense for the first nine months of 1997 amounted to $4.699 million
compared to $4.198 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 $2.384 million and $2.681
million of net deferred tax assets at September 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
nine months of 1997 compared to the same time period of 1996:
For the nine For the nine
months ended months ended
September 30, 1997 September 30, 1996
------------------ ------------------
Return on Average Assets 1.69% 1.56%
Return on Average Equity 16.19 16.14
Return on Earning Assets
- -Taxable Equivalent 8.02 8.01
Interest Cost as a
percentage of Earnings Assets 3.25 3.24
Net Interest Margin 4.77 4.77
11
Statements of Condition
As of September 30, 1997, total assets of the Company amounted to $774.139
million, an increase from December 31, 1996 total assets of $769.560 million.
Average assets for the first nine months of 1997 amounted to $772.307 million
compared to $746.370 million for the same period of 1996, a 3% increase. Through
the first nine months of 1997 total loans increased $16.786 million or 4% from
year end while the investment portfolio increased $7.246 million or 3% 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. Short term borrowings and federal funds purchased increased $3.743
million and $4.900 million respectively in the first nine months of 1997,
securities sold under agreements to repurchase increased $6.863 million from
$122.467 million on December 31, 1996 to $129.330 million at September 30, 1997.
A significant decline in securities sold under agreements to repurchase which
resulted in a 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 was offset with an increase in account relationships generated
throughout the first nine months of 1997.
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 September 30, 1997 the investment portfolio which includes a $956 thousand
unrealized gain on available for sale securities, totaled $236.578 million an
increase of $7.246 million from December 31, 1996.
At September 30, 1997 the Company has classified investment securities with
amortized cost and fair market value of $174.074 and $175.030 million
respectively, or 74% 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 an increase in the carrying amount of investment securities of $956
thousand with an increase in stockholders' equity of $622 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 third quarter of 1997, or the first nine months of 1996. No securities
were transferred between categories in the first nine months of 1997.
12
Loans
Total loans outstanding increased by $16.786 million or 4% from $477.795 million
on December 31, 1996, to $494.581 million on September 30, 1997. This growth,
coupled with a decline in deposits resulted in a loan to deposit ratio of 92.79%
at September 30, 1997, compared to 86.71% at December 31, 1996.
This increase in the loan portfolio in the first nine 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 nine months of 1997 were
nonresidential mortgages, residential mortgages and commercial loans.
Nonresidential mortgages increased $9.984 million or 10% from $95.081 million at
December 31, 1996 to $105.065 million at September 30, 1997 and commercial loans
increased $1.201 million or 1% from $87.117 million at December 31, 1996 to
$88.318 million at September 30, 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 a favorable interest rate environment has
contributed to the growth. Lower demand for real estate and commercial loans is
anticipated for the next several quarters.
Residential mortgages increased $4.423 million or 3% from $156.574 million at
December 31, 1996 to $160.997 million at September 30, 1997. Strong demand for
equity loan products continues to result in increased loan balances. Equity loan
balances account for $3.478 million of the $4.423 million increase in
residential mortgages. The demand for purchase money mortgage loans lessened in
the second and third quarters as did refinancings.
Consumer loans which through six months of 1997 were down $3.966 million from
December 31, 1996 increased in the third quarter and are now up $733 thousand
through September 30, 1997. This follows a decrease of $10.496 million or 8% in
consumer loan balances from December 31, 1995 to December 31, 1996. Consumer
loan balances are primarily dependent on the level of indirect automobile
financing purchased by the Bank. Substantial growth of past years was not
sustained in 1996 and in the first nine 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 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 remain flat through 1998.
13
As of September 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
$3.685 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) September 30, 1997 December 31, 1996
- ------------------------- ------------------ -----------------
Non accrual loans $2,449 $3,698
Accruing loans 90 days
or more past due 1,236 931
------ ------
Non performing loans 3,685 4,629
Restructured loans in
compliance with modified
terms - 411
Other real estate owned 147 269
------ ------
Total problem assets $3,832 $5,309
====== ======
Total problem assets to
total assets 0.50% 0.69%
The following ratios will provide additional information on the status of the
loan portfolio:
As of As of
September 30, 1997 December 31, 1996
------------------ -----------------
Loan to deposit ratio 92.79% 86.71%
Non performing loans to
total loans .75 .97
Non performing loans to
allowance for loan losses 47.99 57.06
Allowance for loan losses
to total loans 1.55 1.70
Shown below is a summary of the allowance for loan losses:
For the nine For the nine
months ended months ended
(Amounts in thousands) September 30, 1997 September 30, 1996
---------------------- ------------------ ------------------
Balance at beginning of period $8,112 $7,156
Provision charged to operating
expense 2,250 1,675
Recoveries of loans charged off 461 480
Losses charged to allowance (3,144) (1,749)
-------- -------
Balance at end of period $7,679 $7,562
====== ======
Net charge-offs to average loans .55% .27%
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 nine months ended September 30:
1997 1996
---- ----
Principal amount of impaired loans $844 $462
Allowance allocated to impaired loans - 125
---- ----
Portion for which no allowance is allocated $844 $337
==== ====
Average investment in impaired loans for
the nine months ended September 30: $927 $515
==== ====
Total cash collected on impaired loans during the first nine months of 1997 and
1996 was $582 thousand and $170 thousand respectively; $573 thousand was
credited to the principal balance outstanding and $9 thousand was credited to
interest in the first nine months of 1997, while $168 thousand was credited to
the principal balance and $2 thousand recognized as interest income on such
loans in 1996. Interest that would have been accrued on impaired loans in the
first nine months of 1997 and 1996 was $35 thousand and $39 thousand
respectively. Interest income of $9 thousand and $2 thousand was recognized
during the first nine 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 September 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 nine months of
1997 was $2.250 million, an increase of $575 thousand from the 1996 first nine
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 $1.384
million for the first nine months of 1997 compared to $1.286 million for the
same period in 1996.
15
The Company's experience in 1996 and the first nine months of 1997 followed
national trends of deteriorating credit quality in consumer loans and credit
card and related plans brought on by the high level of consumer debt and record
personal bankruptcy filings. It is expected that net charge-offs on consumer and
credit card related plans in the fourth quarter will approximate those incurred
in recent quarters. 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. Net
commercial loan charge-offs for the first nine months of 1997 totaled $1.181
million compared to a net $53 thousand recovery in the first nine months of
1996. This increase in charge-offs is attributed to the deterioration of two
commercial loan credits in 1997.
It is anticipated that some of the amounts charged-off in the first nine 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 three quarters. At
September 30, 1997, the allowance for loan losses totaled $7.679 million or
1.55% of total loans, compared to $7.562 million or 1.55% at September 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. At September 30, 1997,
$315 thousand of residential mortgage loans were designated as available for
sale. At September 30, 1997, $175.030 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.
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 $25.459 million and funding for one-to-four family residential
mortgage loans
16
and allows the Company to better manage its interest rate risk. The Company had
$3.384 million outstanding in FHLB borrowings at September 30, 1997 compared to
$4.065 million at December 31, 1996.
Total Capital Accounts have grown $7.269 million or 9% in the first nine months
of 1997. This increase reflects retained earnings less dividends paid and also
reflects a $554 thousand unrealized gain on the available for sale investment
portfolio for the first nine months of 1997. Dividends paid in 1997 year to date
were $3.024 million or $.48 per share compared to $2.552 million or $.405 per
share for the same period in 1996.
Book value per share as of September 30, 1997 was $13.39 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 September 30, 1997, Mahoning
National Bancorp's leverage, Tier 1 and total risk-based capital ratios were
10.84%, 17.33% and 18.58%, 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 NINE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
(Amounts in thousands) AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE%(2) BALANCE INTEREST RATE%(2)
------------------------------------- -----------------------------------------
INTEREST YIELDS
Loans $489,293 $ 32,845 8.97 $476,181 $ 31,901 8.92
Investment securities (1) 234,447 10,740 6.12 223,436 10,285 6.13
Other earning assets 8,070 331 5.40 6,425 256 5.23
------------------------------------- -----------------------------------------
Total return on earning assets 731,810 43,916 8.02 706,042 42,442 8.01
INTEREST COSTS
Interest bearing deposits:
Savings deposits 278,495 4,793 2.30 293,305 5,179 2.35
Time deposits 199,220 7,898 5.30 209,675 8,509 5.41
------------------------------------- -----------------------------------------
Total interest bearing deposits 477,715 12,691 3.55 502,980 13,688 3.63
Federal funds purchased 4,979 213 5.63 1,530 64 5.50
Repurchase agreements 124,862 4,409 4.72 89,203 3,021 4.51
Short term borrowings 3,760 153 5.42 6,370 245 5.05
Long term borrowings 8,124 320 5.20 4,035 163 5.39
------------------------------------- -----------------------------------------
Total interest bearing liabilities $619,440 $ 17,786 3.84 $604,118 $ 17,181 3.79
Interest spread $ 26,130 4.18 $ 25,261 4.22
============================= =============================
AS A PERCENT OF AVERAGE EARNING ASSETS
Total return on earning assets 8.02 8.01
Total interest cost 3.25 3.24
-------- --------
Net Interest Margin 4.77 4.77
======== ========
(1) Investment securities average balance is based on average carrying
value while the average rate is calculated using average historical cost.
(2) Annualized
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) Executive Phantom Stock Bonus Plan - Norman E. Benden, Jr.
(10b) Executive Phantom Stock Bonus Plan - Frank Hierro
(10c) Executive Phantom Stock Bonus Plan - Gregory L. Ridler
(10d) Executive Phantom Stock Bonus Plan - David E. Westerburg
(10e) Executive Deferred Cash Bonus Plan - Parker T. McHenry
(27) Financial Data Schedule
19
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 nine
months ended September 30, 1997 to be signed on its behalf by the undersigned
thereunto duly authorized.
DATE: November 4, 1997 Mahoning National Bancorp, Inc.
-----------------------
/s/ Gregory L. Ridler
------------------------------
Gregory L. Ridler
Chairman of the Board,
President and Chief
Executive Officer
DATE: November 4, 1997 /s/ Norman E. Benden, Jr.
----------------------- ------------------------------
Norman E. Benden, Jr.
Treasurer