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, 1998
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, 1998
MAHONING NATIONAL BANCORP, INC.
INDEX
Page Number
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet (unaudited) -
June 30, 1998 and
December 31, 1997 3
Consolidated Statements of Income -
Six Months Ended June 30, 1998
and 1997 (unaudited) 4
Consolidated Statements of Comprehensive Income -
Six Months Ended June 30, 1998 and 1997
(unaudited) 5
Condensed Consolidated Statement of Cash Flows -
Six Months Ended June 30, 1998 and 1997
(unaudited) 6
Notes to Consolidated Financial Statements 7 - 8
Item 2 - Management Discussion and Analysis
of Operations and Liquidity and Capital Resources 9 - 20
Item 3 - Summary of Average Balances and Interest Rates 21
PART II - OTHER INFORMATION 22
Exhibit Number 27 - Financial Data Schedule
SIGNATURES 23
PART I
FINANCIAL INFORMATION
MAHONING NATIONAL BANCORP INC.
CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)
(Amounts in thousands)
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
ASSETS
Cash and due from banks $28,735 $29,143
Federal funds sold - 8,800
Investment securities available for sale - at fair value 217,724 189,578
Investment securities held to maturity - at cost
(Market value $35,015 at June 30, 1998
and $61,248 at December 31, 1997) 34,925 61,178
Loans 507,315 492,487
Less allowance for possible loan losses 7,548 7,524
------------ ------------
Net loans 499,767 484,963
Bank premises and equipment 8,729 8,653
Other assets 14,767 14,551
------------ ------------
Total assets $804,647 $796,866
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $77,669 $74,500
Interest bearing
Savings 266,806 275,139
Time 193,868 195,472
------------ ------------
Total deposits 538,343 545,111
Federal funds purchased and securities
sold under agreement to repurchase 142,159 146,245
Short term borrowings 15,483 10,954
Long term borrowings 12,677 3,151
Other liabilities 4,990 4,826
------------ ------------
Total liabilities 713,652 710,287
------------ ------------
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 39,332 35,221
Unrealized gain (loss) on investment securities
available for sale, net of deferred taxes 1,263 958
------------ ------------
Total stockholders' equity 90,995 86,579
------------ ------------
Total liabilities and
stockholders' equity $804,647 $796,866
------------ ------------
------------ ------------
See Notes to Consolidated Financial Statements
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, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------- ------------- ------------- -------------
INTEREST INCOME
Interest and fees on loans $10,853 $10,946 $21,745 $21,595
Interest on investment securities
Taxable 3,344 3,215 6,620 6,333
Nontaxable 290 265 563 508
Interest on federal funds sold 239 128 304 306
------------- ------------- ------------- -------------
14,726 14,554 29,232 28,742
INTEREST EXPENSE
Interest on deposits 3,953 4,234 7,965 8,454
Interest on federal funds purchased and
securities sold under agreement to repurchase 1,551 1,570 3,235 3,059
Interest on short term borrowings 122 128 202 226
Interest on long term borrowings 167 51 229 105
------------- ------------- ------------- -------------
5,793 5,983 11,631 11,844
------------- ------------- ------------- -------------
Net interest income 8,933 8,571 17,601 16,898
PROVISION FOR LOAN LOSSES 726 725 1,452 1,525
------------- ------------- ------------- -------------
Net interest income after
provision for loan losses 8,207 7,846 16,149 15,373
OTHER OPERATING REVENUE
Trust department income 787 787 1,575 1,497
Service charges on deposit accounts 1,067 1,019 2,076 2,014
Other service charges 201 204 389 395
Other revenue 72 66 138 135
Gain on sale of loans 126 9 140 9
Gain on sale of investment securities
available for sale - - - 178
------------- ------------- ------------- -------------
2,253 2,085 4,318 4,228
------------- ------------- ------------- -------------
OTHER OPERATING EXPENSE
Salaries and employee benefits 2,671 2,741 5,505 5,445
Expenses of premises and fixed assets 731 704 1,451 1,506
Other expense 1,849 1,666 3,484 3,185
------------- ------------- ------------- -------------
5,251 5,111 10,440 10,136
------------- ------------- ------------- -------------
Income before income taxes 5,209 4,820 10,027 9,465
INCOME TAX EXPENSE 1,703 1,568 3,269 3,080
------------- ------------- ------------- -------------
NET INCOME $3,506 $3,252 $6,758 $6,385
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
EARNINGS PER COMMON SHARE $0.55 $0.51 $1.07 $1.01
DIVIDENDS PER SHARE $0.21 $0.16 $0.42 $0.32
See Notes to Consolidated Financial Statements
MAHONING NATIONAL BANCORP INC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE 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, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------- ------------- ------------- -------------
Net Income $ 3,506 $ 3,252 $ 6,758 $ 6,385
------------- ------------- ------------- -------------
Other comprehensive income, before tax:
Unrealized holding gains (losses) arising
during period 434 1,683 469 (334)
Less: reclassification adjustment for gains
(losses) included in net income - - - 178
------------- ------------ ------------- ------------
Other comprehensive income, before tax 434 1,683 469 (512)
Income tax expense (benefit) related to
items of other comprehensive income 152 589 164 (179)
------------- ------------ ------------- -------------
Comprehensive income $ 3,788 $ 4,346 $ 7,063 $ 6,052
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Comprehensive income per common share $ 0.60 $ 0.69 $ 1.12 $ 0.96
------------- ------------ ------------- ------------
------------- ------------ ------------- ------------
See Notes to Consolidated Financial Statements
MAHONING NATIONAL BANCORP INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS SIX MONTHS
ENDED ENDED
(Amounts in thousands) JUNE 30, 1998 JUNE 30, 1997
(UNAUDITED) (UNAUDITED)
------------- -------------
Cash flows from operating activities $ 9,256 $ 6,926
Cash flows from investing activities
Proceeds from maturities of investment securities
available for sale 10,859 10,172
Proceeds from maturities of investment securities
held to maturity 26,315 13,735
Sale of investment securities available for sale 0 20,075
Purchase of investment securities available for sale (38,532) (49,286)
Purchase of investment securities held to maturity - -
Net increase in loans (17,013) (15,095)
Net decrease in federal funds sold 8,800 19,500
Capital expenditures (646) (262)
----------- ----------
Net cash (used in) provided by investing
activities (10,217) (1,161)
Cash flows from financing activities
Net (decrease) increase in deposits (6,769) 74
Net decrease in federal funds purchased and
securities sold under agreement to repurchase (4,086) (6,608)
Net increase in short term borrowings 4,528 4,765
Proceeds from long term borrowings 10,000 -
Payments on long term borrowings (474) (451)
Dividends paid (2,646) (2,016)
----------- ----------
Net cash provided by (used in) financing activities 553 (4,236)
Net (decrease) increase in cash and cash
equivalents (408) 1,529
Cash and cash equivalents at beginning of year 29,143 29,257
----------- ----------
Cash and cash equivalents at end of six months $ 28,735 $ 30,786
----------- ----------
----------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the first six months for:
Interest $ 11,774 $ 11,735
----------- ----------
----------- ----------
Income Taxes $ 3,222 $ 2,874
----------- ----------
----------- ----------
Non-cash transactions:
Transfer from loans to other real estate owned $ 40 $ 107
----------- ----------
----------- ----------
See Notes to Consolidated Financial Statements
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
transaction 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, 1998.
NOTE B - STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128
- EARNING PER SHARE
In March 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 128, "Earnings Per Share" which is
effective for financial statements for periods ending after December 15, 1997,
including interim periods. SFAS No. 128 simplifies the calculation of earnings
per share (EPS) by replacing primary EPS with basic EPS. It also requires dual
presentation of basic EPS and diluted EPS for entities with complex capital
structures. Basic EPS includes no dilution and is computed by dividing income
available to common shareholders by the weighted-average common shares
outstanding for the period. Diluted EPS reflects the potential dilution of
securities that could share in earnings such as stock options, warrants or
other common stock equivalents. Since the Company had no stock options,
warrants or other common stock equivalents basic EPS and diluted EPS were the
same in each period presented.
NOTE C - STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130
- REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. It does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in
that financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. The consolidated
Statements of Comprehensive Income for six months ended June 30, 1998 and 1997
are included in this form 10-Q on page 5.
NOTE D - STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 131
- DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement significantly changes the
way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about reportable segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 uses a "management approach" to disclose financial and descriptive
information about an enterprise's reportable operating segments which is based
on reporting information the way that management organizes the segments within
the enterprise for making operating decisions and assessing performance. For
many enterprises, the management approach will likely result in more segments
being reported. In addition, the Statement requires significantly more
information to be disclosed for each reportable segment than is presently being
reported in annual financial statements. The Statement also requires that
selected information be reported in interim financial statements. SFAS No. 131
is effective for financial statement disclosure for the year ended December 31,
1998. At this time, the Company does not anticipate additional segment
reporting will be required.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
EARNINGS REVIEW
Net income for the first six months of 1998 amounted to $6.758 million or
$1.07 per share. This represents an increase of 6% over net income earned
during the same period in 1997 ($6.385 million or $1.01 per share). Mahoning
National Bancorp, Inc.'s, (the Company) net income for the current quarter
increased 8% to $3.506 million or $0.55 per share from $3.252 million or $0.51
per share for the same quarter in 1997.
The primary component of earnings is net interest income. Net interest income
for the first six months of 1998 was $17.601 million compared with $16.898
million or a 4% increase from the comparable period in 1997. Net interest
income for the current quarter increased 4% over the comparable period of 1997
($8.933 million from $8.571 million).
The average balance of investment securities, at carrying value, increased
$12.701 million for the first six months of 1998 compared to 1997. This
increase in average investment security balances accounted for approximately
$360 thousand in additional tax effective interest income in the first six
months of 1998 compared to the same period in 1997.
Interest and fees on loans increased $150 thousand in the first six months of
1998 compared to the first six months of 1997. For the three months ended June
30, 1998, interest and fees on loans were down less than 1% as a result of
reduced loan fees compared to the same period in 1997. Average loan balances
increased $7.758 million for the first six months of 1998 compared to 1997;
$495.456 million compared to $487.698 million. The increase in average loan
balances for the first six months of 1998 accounted for approximately $346
thousand in additional tax effective interest income on loans. This increase
was partially offset by a reduction in tax effective interest income of
approximately $218 thousand due to a nine (9) basis point reduction in loan
yields.
Interest expense decreased $190 thousand for the three months ended June 30,
1998 and $213 thousand for the six months ended June 30, 1998, compared to the
same time periods in 1997. This decrease can be attributed to a twelve (12)
basis point reduction in the cost of funds which reduced the Company's interest
expense by approximately $439 thousand. This reduction was partially offset by
a $6.713 million increase in the average balances of interest bearing
liabilities, in the first six months of 1998, which accounted for approximately
$226 thousand in additional interest expense.
The average balance of securities sold under agreement to repurchase totaled
$136.695 million for the first six months of 1998, a $10.885 million increase
over the same period of 1997, average balance of $125.810 million. This
increase, in the average balance of securities sold under agreement to
repurchase, accounted for $251 thousand of the additional $226 thousand of
interest expense due to volume increases, with volume decreases in other
interest bearing liabilities accounting for the difference. The Company
expects funding costs to remain below 1997 levels throughout the remainder of
1998 as the impact of a 25 basis point reduction in the savings rate early in
the first quarter of 1998
and a reduction in the interest bearing checking rates late in the second
quarter, continue to positively impact 1998 earnings. In addition, time
deposit costs for 1998 are currently lower than 1997 costs and should remain
below 1997 levels throughout the year as maturing certificates reprice at
lower rates. 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.
Based on projected loan balances, forecast for the remainder of 1998, the
Company does not expect to aggressively price its time deposits. 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 21.
In late March 1997 the Federal Reserve Bank increased the discount rate and
Mahoning National increased its prime lending rate by 25 basis points to 8.50%
where it has remained for the past fifteen months. The net interest margin for
the first six months of 1998 was 4.82%, a seven (7) basis point increase from
the 4.75% net interest margin in the first six months of 1997.
The Company's primary market risk exposure is interest rate risk. As part of
its effort to monitor and manage interest rate risk the Company uses simulation
analysis and net present value analysis. The simulation analysis monitors
interest rate risk through the impact changes in interest rates can have on net
income. At June 30, 1998, the Company analyzed the effect of a presumed 100
and 200 basis point increase and decrease in interest rates through its
simulation analysis. The results indicated no significant impact on net
interest income for 1998, and were within the five percent (5%) of net interest
income guidelines established by the Company. 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.
The net present valve (NPV) analysis is used to measure the Company's interest
rate risk by computing estimated changes in NPV of its cash flows from assets,
liabilities and off-balance sheet items in the event of a range of assumed
changes in market interest rates. NPV represents the market value of equity
and is equal to the market value of assets minus the market value of
liabilities, with adjustments made for off-balance sheet items. This analysis
assesses the risk of loss in market risk sensitive instruments in the event of
a sudden and sustained 100 to 200 basis point increase or decrease in market
interest rates. The Board of Directors has adopted an interest rate risk
policy which establishes maximum changes in the NPV of 20% in the event of a
sudden and sustained 100 to 200 basis point increase or decrease in market
interest rates. The following table presents the Company's projected change in
NPV for the various rate shock levels at June 30, 1998:
Changes In
Interest Rate Change In % Change NPV of Equity/
(basis points) NPV of Equity In NPV NPV of Assets
---------------------------------------------------------------
(200) $ 18,865 20.73% 13.30%
(100) 10,772 11.84 12.46
0 2,899 3.19 11.62
+100 (4,762) (5.23) 10.79
+200 (12,219) (13.43) 9.96
While there were no significant changes from the analysis prepared December
31, 1997, a sudden and sustained 200 basis point decrease in market interest
rates would increase the NPV of equity 20.73%. This increase, which is
slightly above the 20% guideline established by the Board was deemed
acceptable due to the small degree of variance and positive impact on equity.
At June 30, 1998, the NPV analysis indicated that a sudden and sustained 200
basis point increase in interest rates would reduce equity by $12.219 million
or 13.43% compared to an $8.819 million or 10.19% reduction at December 31,
1997. While the negative impact to equity was greater at June 30, 1998,
compared to December 31, 1997, it is still well within the 20% guideline
established by the Company and would result in a net present value of equity
to net present value of total asset ratio of 9.96% which would still qualify
the Company as well capitalized.
Other operating revenue for the first six months of 1998, exclusive of
security transactions, was $4.318 million or a 7% increase over the first six
months of 1997 total of $4.050 million. Other operating revenue for the
current quarter, exclusive of security transactions, was $2.253 million
compared to $2.085 million for the same quarter of 1997, an 8% increase.
Other operating revenue, exclusive of security transactions, as a percentage
of average assets was 1.09% for the first six months of 1998 compared to
1.06% for the same period in 1997.
The largest component of other operating revenue in the first six months of
1998 was service charges on deposit accounts which increased $62 thousand or 3%
over the first six months of 1997. Service charges on deposit accounts for the
current quarter increased by $48 thousand or 5% over the same period in 1997,
$1.067 million from $1.019 million. In the first six months of 1998, service
charges on deposit accounts as a percentage of average deposits increased to
.77% from .74% for the same period in 1997. The Company annually reviews all
of its fee-based products and services for marketability and profitability.
Increases realized in the first six months of 1998 are the result of growth in
the number of retail checking accounts over the past ten months which coincided
with the introduction of two new package checking accounts. Management expects
other operating revenue to continue to exceed 1997 levels, but the increases
will not be as significant as those realized in 1997.
Mahoning National Bank's Trust Department generated $1.575 million in other
revenue in the first six months of 1998, an increase of $78 thousand or 5% over
the $1.497 million earned in the same period of 1997. The Trust Department
generated $787 thousand of operating income in the second quarter of both 1998
and 1997. The year-to-date increase in Trust Department income 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 as a result of rises in the stock market
over the past year. At June 30, 1998, Trust Department Assets totaled
$436.695 million with a market value of $676.344 million compared to $433.596
million with a market value of $628.924 million at June 30, 1997.
In February 1997 the Company realized a $178 thousand gain when $20.075 million
of U.S. Government Securities were sold from the available for sale portfolio.
There were no security sales in the first six months of 1998.
Provision for loan losses for the first six months of 1998 amounted to $1.452
million compared to $1.525 million for the comparable period in 1997. The
provision for the current quarter was $726 thousand compared to $725 thousand
for the same quarter of 1997. This decrease is discussed in more detail under
the Provision For Loan Losses heading later in this discussion.
Other operating expense for the first six months increased $304 thousand or
approximately 3% from the comparable period in 1997 to $10.440 million from
$10.136 million. For the current quarter other operating expense totaled
$5.251 million compared to $5.111 in the same quarter of 1997. As a
percentage of average assets, other operating expense was 2.65% for the first
six months of both 1998 and 1997. The Company's efficiency ratio which
measures non-interest expense as a percent of non-interest income plus net
interest income on a fully tax equivalent basis declined 45 basis points from
47.56% in 1997 to 47.11% in 1998. This efficiency ratio would place the
Company near the top of its peer group.
Salaries and employee benefits expense for the first six months of 1998
increased $60 thousand or 1% but decreased $70 thousand or 3% for the most
recent quarter when compared to the same period in 1997. Salary expense
alone increased $232 thousand or 5% for the first six months of 1998 and $130
thousand for the current quarter when compared to the same periods in 1997.
This increase can be attributed to annual merit salary adjustments which took
effect January 1, 1998 and increases in various employee incentive programs.
Health care expenses for the first six months of 1998 were $415 thousand
compared to $387 thousand for the same period in 1997, an increase of $28
thousand or 7%. The number of full time equivalent employees decreased from
394 at June 30, 1997 to 381 at June 30, 1998.
Expenses of premises and fixed assets for the first six months of 1998
totaled $1.451 million, a 4% decrease ($55 thousand) from the same period in
1997. Current quarter expense totaled $731 thousand, a 4% increase from the
same quarter in 1997.
Other expenses increased $299 thousand in the first six months of 1998 to
$3.484 million from $3.185 million for the same period of 1997, a 9%
increase. For the second quarter of 1998, other expenses increased $183
thousand from the same period in 1997. The increase in other expenses was
the result of: increased amortization and support of software purchased in
1997 and 1998, expenses associated with other real estate owned, increased
marketing expenses related to the promotion of loan and deposit products,
increased business activity and general inflationary increases. Other
expenses for the remainder of 1998 are expected to exceed 1997 expenses by
approximately 5% to 10%.
In early 1997, the Company began to address the Year 2000 issue, which covers
the process of converting computer systems to identify the Year 2000. A Year
2000 committee was formed consisting of senior management and selected
representatives from all areas of the Company. The committee, identified all
information technology and non-information technology applications and
systems that could be impacted by the Year 2000 date change and identified
any third party vendors that impact the daily operation of the Company.
Those applications, systems and vendors that the Company identified as
mission-critical were prioritized based on their potential impact to the
ongoing operation of the Company. An application, system or vendor is
considered mission-critical if it is vital to the successful continuance of
core business activity or is an application that interfaces with a
mission-critical system. A project plan was developed based on the five (5)
phases the Federal Financial Institutions Examination Council (FFIEC) had
outlined to effectively manage Year 2000 issues. The following are the five
(5) phases as outlined by the FFIEC: Awareness, Assessment, Renovation,
Validation and Implementation. At the end of June 1998, the Awareness and
Assessment phases have been completed and documentation that supports the
comprehensive Year 2000 project plan has been completed. The Company is at
various stages of Renovation, Validation and Implementation on those
applications or systems identified as mission-critical to the Company. The
Company expects to complete the Renovation, Validation and Implementation
phase on the majority of applications and systems identified as
mission-critical by December 31, 1998, with the remainder completed by March
31, 1999. The Renovation phase includes the purchase or renovation or
hardware and/or software to replace those items found to be non-compliant
with Year 2000.
Remediation contingency plans have been developed and alternative vendors
identified for each issue listed as mission-critical. These plans include
various dates, which if certain requirements have not been met by current
vendors to validate their Year 2000 readiness, will require a switch to an
alternative vendor identified as Year 2000 compliant.
While the Company currently has a "Disaster Recovery Plan" in place, it has not
completed a Year 2000 business resumption contingency plan. This plan is being
developed and is expected to be completed by late in the fourth quarter of
1998.
The estimated cost for the Company's Year 2000 remediation project should
approximate $765 thousand. These costs include: various hardware and software
purchases and modifications, employee training, professional services and
additional employee man hours. Through June 30, 1998, approximately $50
thousand has been expensed on Year 2000 remediation with the remaining expense
expected to occur over the next 24 months. The Company has budgeted for the
expected expense of Year 2000 compliance and at this time the remaining expense
to address Year 2000 Renovation, Validation and Implementation issues are not
expected to materially impact future operating results.
An additional area under review by the Company is the Year 2000 risk arising
from relationships with three broad categories of customers: funds takers
(borrowers), funds
providers (depositors), and capital market/asset management counterparties
(brokers). The potential risks associated with these customers include
increased credit, liquidity or counterparty trading risk when a customer
encounters Year 2000 related problems. The Company has implemented a due
diligence process which will identify, assess and establish controls for Year
2000 risk by customers. This process will be completed by September 30,
1998, with appropriate risk controls in place to manage and mitigate Year
2000 customer risk. Contingency plans are being developed to address each of
the three categories of customer risk and will be completed by December 31,
1998.
INCOME TAXES
Income tax expense for the first six months of 1998 amounted to $3.269 million
compared to $3.080 million for the same period in 1997. Income tax expense for
1998 is being accrued at an effective rate of approximately 32.6%, which
compares to an effective tax rate of 32.2% for all of 1997.
The Statement of Condition includes approximately $1.717 million and $1.881
million of net deferred tax assets at June 30, 1998 and December 31, 1997
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 1998 compared to the same time period of 1997:
For the six For the six
months ended months ended
June 30, 1998 June 30, 1997
------------- -------------
Return on Average Assets 1.71% 1.67%
Return on Average Equity 15.27 16.30
Return on Earnings Assets
- -Taxable Equivalent 7.94 8.01
Interest Cost 3.12 3.26
Net Interest margin 4.82 4.75
STATEMENTS OF CONDITION
As of June 30, 1998, total assets of the Company amounted to $804.647
million, an increase from December 31, 1997, total assets of $796.866
million. Average assets for the first six months of 1998 amounted to
$795.964 million compared to $772.242 million for the same period of 1997, a
3% increase. Through the first six months of 1998, total loans increased
$14.828 million or 3% from year end and the investment portfolio increased
$1.893 million or 1% in that same period. The growth in earnings assets was
primarily funded with a $9.526 million increase in long term borrowings and
earnings retention, which were partially offset by a decline in deposits of
$6.768 million.
INVESTMENT PORTFOLIO
The deposits and other borrowings of the Company, in excess of required
reserves and operating funds of the Mahoning National Bank of Youngstown, 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, 1998, the investment portfolio totaled $252.649 million (which
included a $1.943 million unrealized gain on available for sale securities)
which was an increase of $1.893 million from December 31, 1997.
At June 30, 1998, the Company has classified investment securities with
amortized cost and fair market value of $215.781 and $217.724 million
respectively, or 86% of the portfolio as available for sale, with the
remainder of the portfolio classified as held to maturity. 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. The Company did not hold any on or off balance sheet
derivatives during 1997, and does not expect to in 1998.
In the first six months 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 first six months of 1998. No securities were transferred
between categories in the first six months of 1998.
LOANS
Total loans outstanding increased by $14.828 million or 3% from $492.487
million on December 31, 1997, to a historic high of $507.315 million on June
30, 1998. This growth, coupled with a decline in deposits resulted in a loan
to deposit ratio of 94.24% at June 30, 1998, compared to 90.35% at December 31,
1997.
The increase in the loan portfolio for the first six months of 1998 was the
result of a local mutual savings and loan association converting to a stock
company. Loans for purchasing or carrying securities totaled approximately $17
million at June 30, 1998, compared to $6 thousand at December 31, 1997. These
loans, most of which were 90 day notes, are expected to pay-off early in the
third quarter.
The remainder of the loan portfolio, with the exception of commercial loans
experienced a decline from December 31, 1997 totals, due to a competitive loan
pricing environment and the Company's decision to maintain stricter
underwriting standards. As interest margins continue to shrink due to the flat
yield curve, loan pricing and loan terms have become very competitive. The
Company has made a decision not to chase loan volume with rates or terms that
would jeopardize the quality of the loan portfolio.
Commercial loans, which declined by 9% for the year ended December 31, 1997,
increased by $2.669 million or 3% from $79.517 million at December 31, 1997
to $82.186 million at June 30, 1998. The dollar fluctuation of commercial
loans can be more volatile than other loan products due to the nature of the
product and larger dollar amount of individual loans. As the competition for
commercial loans increases throughout 1998, with banks looking to continue
past growth trends in their loan portfolios, the Company does not intend to
compromise its credit standards for the sake of loan growth.
Consumer loans decreased $2.479 million in the first six months of 1998 after
increasing $7.0 million, or 5%, in 1997. Consumer loan balances are
primarily dependent on the level of indirect automobile financing purchased
by the Bank. The growth rate of 1997 was not sustained in the first six
months of 1998 due to a slower market, greater competition among local
lenders and the Company's close monitoring of underwriting criteria due to
the increased charge-offs and delinquency trends of the past few years.
Competition from leasing by captive automobile finance companies (i.e. GMAC,
Ford Motor Credit) continues to remain strong. These companies have been
offering a variety of below market lease and loan programs which has reduced
the amount of new car financing available to bank lenders. To effectively
compete in this environment the Company must continue to provide the dealer
network with a very high level of quality service that can help off-set lower
rate alternatives. Given the rapid amortization of the automobile loan
portfolio, which has a short average maturity, competition in the market
area, and a projected slowdown in our national economy, consumer loan totals
are expected to continue moderate declines over the remainder of 1998.
Residential mortgage loans declined approximately $1.5 million or 1% in the
first six months of 1998. The Company, which has been more active in the
secondary market in 1998, sold approximately $11 million in mortgages in the
first six months of 1998 ($10 million in the second quarter) after selling
approximately $1.0 million in all of 1997. The Company will continue to
place emphasis on generating salable loans, with servicing retained, over the
remainder of 1998. With the increased emphasis on secondary market sales, a
modest decline in the residential mortgage portfolio is expected over the
remainder of 1998.
As of June 30, 1998, non-performing loans, defined as those loans which are on
non-accrual or are 90 days or more past due and still accruing, totaled $2.346
million compared to $2.881 million at December 31, 1997. Listed below is a
schedule of the Company's non-performing assets:
(Amounts in thousands) June 30, 1998 December 31, 1997
- --------------------------- ------------- -----------------
Non accrual loans $1,811 $2,227
Accruing loans 90 days
or more past due 535 654
------ -----
Non performing loans 2,346 2,881
Restructured loans in
compliance with modified terms 56 --
Other real estate owned 713 1,112
------ -----
Total problem assets $3,115 $3,993
------ -----
------ -----
Total problem assets to
total assets $0.39% 0.50%
The following ratios provide additional information on the status of the loan
portfolio:
As of As of
June 30, 1998 June 30, 1997
------------- --------------
Loan deposit ratio 94.24% 89.01%
Non performing loans to total loans .46 .73
Non performing loans to allowance
for loan losses 31.08 45.47
Allowance for loan losses to
total loans 1.49 1.61
Net charge-offs to average loans .29 .35
Net charge-offs ($000) $1,428 $1,718
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, 1998 June 30, 1997
- ------------------------------ ------------- -------------
Balance at beginning of period $7,524 $8,112
Provision charged to operating
expense 1,452 1,525
Recoveries of loans charged off 353 295
Losses charged to allowance (1,781) (2,013)
------ -------
Balance at end of period $7,548 $7,919
------ ------
------ ------
Year to date net charge-offs
to average loans .29% .35%
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:
1998 1997
------ ------
Principal amount of impaired loans $928 $934
Allowance allocated to impaired loans 351 450
------ ------
Portion for which no allowance is allocated $577 $484
------ ------
------ ------
Average investment in impaired loans for
the six months ended June 30: $1,150 $1,071
------ ------
------ ------
Total cash collected on impaired loans during the first six months of 1998
and 1997 was $55 thousand and $556 thousand respectively; $53 thousand was
credited to the principal balance outstanding and $2 thousand was credited to
interest in the first six months of 1998, while $547 thousand was credited to
the principal balance outstanding and $9 thousand was credited to interest in
the same time period in 1997. Interest that would have been accrued on
impaired loans in the first six months of 1998 and 1997 was $67 thousand and
$47 thousand respectively. Interest income of $2 thousand and $9 thousand
was recognized during the first six months of 1998 and 1997, respectively.
PROVISION FOR LOAN LOSSES
The policies of the Company provide for loan loss reserves to adequately
protect the Company against reasonably probable 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, 1998, 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
1998 was $1.452 million, a decrease of $73 thousand from the 1997 first six
month provision. Net charge-offs on consumer loans and credit card related
plans totaled $960 thousand for the first six months of 1998 compared to $915
thousand for the same period in 1997, a 5% increase. The Company's experience
in 1997 and the first six months of 1998 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.
A complete analysis of the loan underwriting and loan collection departments
was performed in 1997. As a result of that analysis, stricter underwriting
guidelines have been established along with more pro-active collection efforts.
These actions should have a positive impact on reducing consumer loan charge-
offs over the remainder of 1998. As of June 30, 1998, the dollar delinquency
of all consumer loan products have shown significant improvement over
delinquencies at June 30, 1997. In addition, the number of bankruptcy notices
received and automobile repossessions were down 21% and 19% respectively for
the first six months of 1998 compared to 1997.
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.
At June 30, 1998, the allowance for loan losses totaled $7.548 million or 1.49%
of total loans, compared to $7.919 million or 1.61% of total loans at June 30,
1997. The decrease in the allowance to total loan ratio was the result of the
significant loan growth late in the second quarter and the reduction of non-
performing loans to total loans, from .73% at
June 30, 1997, to .46% at June 30, 1998. This area will continue to be
monitored closely over the remainder of the year as the Company continues to
evaluate the adequacy of the allowance for loan losses with future provisions
to the allowance being dependent upon the growth and quality of the loan
portfolio. As a result of possible changes in economic conditions there can
be no guarantee that the level of the provision or allowance for loan losses
will not be increased by the Company.
LIQUIDITY AND CAPITAL
It is a primary objective of the Company 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 so that
liquidity needs are fully satisfied through normal bank operations. Short
term investments (Federal funds sold) and short term borrowings (Federal
funds purchased, repurchase agreements, U.S. Treasury demand notes and
Federal Home Loan Bank advances) are used primarily as 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 June
30, 1998, and December 31, 1997, $976 thousand and $298 thousand of
residential mortgage loans were designated as held for sale, respectively.
At June 30, 1998, $217.724 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 remaining available line of credit of $41.351 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 $12.677 million
outstanding in FHLB borrowings at June 30, 1998, compared to $3.151 million
at December 31, 1997.
Total capital accounts have grown $4.416 million or 5% in the first six months
of 1998. This increase reflects retained earnings less dividends paid and also
reflects a $305 thousand unrealized gain, net of deferred taxes, on the
available for sale investment portfolio for the first six months of 1998.
Dividends paid in 1998 year to date were $2.646 million or $.42 per share
compared to $2.016 million or $.32 per share for the same period in 1997. Book
value per share as of June 30, 1998 was $14.44 per share compared to $13.74 on
December 31, 1997.
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, 1998, the
Company's leverage, Tier 1 and total risk-based capital ratios were 11.27%,
17.85% and 19.10%, respectively, compared to 11.05%, 17.70% and 18.95% at
December 31, 1997, 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.
FORWARD LOOKING STATEMENTS
Certain statements contained in this report that are not historical facts are
forward looking statements that are subject to certain risks and
uncertainties. When used herein, the terms "anticipates," "plans," "expects,"
"believes," and similar expressions as they relate to the Company or its
management are intended to identify such forward looking statements. The
Company's actual results, performance or achievements may materially differ
from those expressed or implied in the forward looking statements. Risks and
uncertainties that could cause or contribute to such material differences
include, but are not limited to, general economic conditions, interest rate
environment, competitive conditions in the financial services industry,
changes in law, governmental policies and regulations, and rapidly changing
technology affecting financial services.
MAHONING NATIONAL BANCORP INC.
SUMMARY OF AVERAGE BALANCES AND INTEREST RATES
TAX EQUIVALENT BASIS
FOR THE SIX MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
(Amounts in thousands) AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE% (2) BALANCE INTEREST RATE% (2)
---------------------------------- ---------------------------------------
INTEREST YIELDS
Loans $ 495,456 $ 21,823 8.88 $ 487,698 $ 21,695 8.97
Investment securities (1) 245,328 7,486 6.15 232,627 7,115 6.14
Other earning assets 11,029 304 5.48 11,276 306 5.40
---------- --------- ----- ---------- --------- -----
Total return on earning assets 751,813 29,613 7.94 731,601 29,116 8.01
INTEREST COSTS
Interest bearing deposits:
Savings deposits 274,004 2,885 2.12 279,639 3,214 2.32
Time deposits 195,988 5,080 5.23 199,505 5,240 5.30
---------------------------------- --------------------------------------
Total interest bearing deposits 469,992 7,965 3.42 479,144 8,454 3.56
Federal funds purchased 4,514 126 5.57 3,488 99 5.63
Repurchase agreements 136,695 3,109 4.59 125,810 2,960 4.75
Short term borrowings 7,740 202 5.17 8,718 226 5.16
Long term borrowings 8,806 229 5.24 3,874 105 5.44
---------------------------------- ---------------------------------------
Total interest bearing liabilities $ 627,747 $ 11,631 3.73 $ 621,034 $ 11,844 3.85
Interest spread $ 17,982 4.21 $ 17,272 4.16
-------------------- ---------------------------
-------------------- ---------------------------
AS A PERCENT OF AVERAGE EARNING ASSETS
Total return on earning assets 7.94 8.01
Total interest cost 3.12 3.26
---------- ---------
Net Interest Margin 4.82 4.75
---------- ---------
---------- ---------
(1) Investment securities average balance is based on average carrying
value while the average rate is calculated using average historical cost.
(2) Annualized average rate
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
(27) Financial Data Schedule
Item 6(b) - Reports on Form 8-K
None
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, 1998 to be signed on its behalf by the undersigned
thereunto duly authorized.
DATE: August 10, 1998 Mahoning National Bancorp, Inc.
-------------------
/s/ Gregory L. Ridler
--------------------------------------
Gregory L. Ridler
Chairman of the Board,
President and Chief
Executive Officer
DATE: August 10, 1998 /s/ Norman E. Benden, Jr.
------------------- ---------------------------------------
Norman E. Benden, Jr.
Treasurer