<PAGE>
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, 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 October 31, 1998.
<PAGE>
MAHONING NATIONAL BANCORP, INC.
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Statements of Financial Condition (unaudited) -
September 30, 1998 and
December 31, 1997 3
Consolidated Statements of Income-
Nine Months Ended September 30, 1998
and 1997 (unaudited) 4
Consolidated Statements of Comprehensive Income-
Nine Months Ended September 30, 1998 and 1997
(unaudited) 5
Condensed Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 1998 and 1997
(unaudited) 6
Notes to Consolidated Financial Statements 7 - 8
Item 2 - Management Discussion and Analysis
of Financial Condition and Results of Operations 9 - 23
Item 3 - Summary of Average Balances and Interest Rates 24
PART II - OTHER INFORMATION 25
Exhibit Number 10 - Material Contract 26 - 34
Exhibit Number 27 - Financial Data Schedule
SIGNATURES 35
</TABLE>
<PAGE>
PART I
FINANCIAL INFORMATION
MAHONING NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
(Amounts in thousands)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
------------- ------------
<S> <C> <C>
Cash and due from banks $ 21,867 $ 29,143
Federal funds sold - 8,800
Investment securities available for sale - at fair value 231,689 189,578
Investment securities held to maturity - at cost
(Market value $29,676 at September 30, 1998
and $61,248 at December 31, 1997) 29,486 61,178
Loans 487,336 492,487
Less allowance for possible loan losses 7,535 7,524
------------- ------------
Net loans 479,801 484,963
Bank premises and equipment 8,596 8,653
Other assets 14,472 14,551
------------- ------------
Total assets $785,911 $796,866
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $ 70,112 $ 74,500
Interest bearing
Savings 262,913 275,139
Time 204,698 195,472
------------- ------------
Total deposits 537,723 545,111
Federal funds purchased and securities
sold under agreement to repurchase 122,441 146,245
Short term borrowings 12,400 10,954
Long term borrowings 12,435 3,151
Other liabilities 5,164 4,826
------------- ------------
Total liabilities 690,163 710,287
------------- ------------
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 41,643 35,221
Unrealized gain on investment securities
available for sale, net of deferred taxes 3,705 958
------------- ------------
Total stockholders' equity 95,748 86,579
------------- ------------
Total liabilities and
stockholders' equity $785,911 $796,866
------------- ------------
------------- ------------
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
MAHONING NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
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,
1998 1997 1998 1997
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $10,827 $11,096 $32,572 $32,691
Interest on investment securities
Taxable 3,241 3,193 9,861 9,526
Nontaxable 490 281 1,053 789
Interest on federal funds sold 138 25 442 331
------------------------------------------------------------------------
14,696 14,595 43,928 43,337
INTEREST EXPENSE
Interest on deposits 3,940 4,237 11,905 12,691
Interest on federal funds purchased and
securities sold under agreement to repurchase 1,457 1,563 4,692 4,622
Interest on short term borrowings 105 94 307 320
Interest on long term borrowings 165 48 394 153
------------------------------------------------------------------------
5,667 5,942 17,298 17,786
------------------------------------------------------------------------
Net interest income 9,029 8,653 26,630 25,551
PROVISION FOR LOAN LOSSES 726 725 2,178 2,250
------------------------------------------------------------------------
Net interest income after
provision for loan losses 8,303 7,928 24,452 23,301
OTHER OPERATING REVENUE
Trust department income 807 702 2,382 2,199
Service charges on deposit accounts 1,085 1,088 3,161 3,102
Other service charges 225 224 614 619
Other revenue 71 80 209 215
Gain on sale of loans 106 7 246 16
Gain on sale of investment securities
available for sale - - - 178
------------------------------------------------------------------------
2,294 2,101 6,612 6,329
OTHER OPERATING EXPENSE
Salaries and employee benefits 2,770 2,739 8,275 8,184
Expenses of premise and fixed assets 719 695 2,170 2,201
Other expense 1,701 1,621 5,185 4,806
------------------------------------------------------------------------
5,190 5,055 15,630 15,191
------------------------------------------------------------------------
Net Income before income taxes 5,407 4,974 15,434 14,439
INCOME TAX EXPENSE 1,774 1,619 5,043 4,699
------------------------------------------------------------------------
NET INCOME $ 3,633 $ 3,355 $10,391 $ 9,740
------------------------------------------------------------------------
------------------------------------------------------------------------
NET INCOME PER COMMON SHARE $0.58 $0.53 $1.65 $1.55
DIVIDENDS PER COMMON SHARE $ 0.21 $ 0.16 $ 0.63 $ 0.48
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
MAHONING NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
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, 1998 SEPTEMBER 30, 1997 SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net Income $3,633 $3,355 $10,391 $ 9,740
------------------ ------------------ ------------------ ------------------
Other comprehensive income, before tax:
Unrealized holding gains (losses) arising
during period 3,757 1,363 4,226 1,029
Less: reclassification adjustment for gains
(losses) included in net income - - - 178
------------------ ------------------ ------------------ ------------------
Other comprehensive income, before tax 3,757 1,363 4,226 851
Income tax expense (benefit) related to
items of other comprehensive income 1,315 477 1,479 298
------------------ ------------------ ------------------ ------------------
Comprehensive income $6,075 $4,241 $13,138 $10,293
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
Comprehensive income per common share $ 0.96 $ 0.67 $ 2.09 $ 1.63
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
MAHONING NATIONAL BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
(Amounts in thousands) SEPTEMBER 30, SEPTEMBER 30,
1998 1997
(UNAUDITED) (UNAUDITED)
------------------------------------
<S> <C> <C>
Cash flows from operating activities $13,443 $ 12,220
Cash flows from investing activities
Proceeds from maturities of investment securities available for sale 17,152 10,723
Proceeds from maturities of investment securities held to maturity 31,760 24,235
Sale of investment securities available for sale - 20,075
Purchase of investment securities available for sale (55,040) (61,202)
Purchase of investment securities held to maturity - -
Net decrease (increase) in loans 1,840 (20,472)
Net decrease in federal funds sold 8,800 19,500
Capital expenditures (800) (632)
------------------------------------
Net cash used in investing activities 3,712 (7,773)
Cash flows from financing activities
Net decrease in deposits (7,388) (17,973)
Net (decrease) increase in federal funds purchased and
securities sold under agreement to repurchase (23,804) 11,763
Net increase in short term borrowings 1,446 3,743
Proceeds from long term borrowings 10,000 -
Payments on long term borrowings (716) (680)
Dividends paid (3,969) (3,024)
------------------------------------
Net cash (used) provided by financing activities (24,431) (6,171)
Net decrease cash and cash equivalents (7,276) (1,724)
Cash and cash equivalents at beginning of year 29,143 29,257
------------------------------------
Cash and cash equivalents at end of nine months $21,867 $27,533
------------------------------------
------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the first nine months for:
Interest $17,260 $17,797
------------------------------------
------------------------------------
Income Taxes $ 4,980 $ 4,266
------------------------------------
------------------------------------
Non-cash transactions:
Transfer from loans to other real estate owned $ 50 $ 159
------------------------------------
------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
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 stockholders 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
Mahoning National Bancorp, Inc. (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.
<PAGE>
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 nine months ended
September 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 stockholders. 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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
EARNINGS REVIEW
Net income for the first nine months of 1998 amounted to $10.391 million or
$1.65 per share. This represents an increase of 7% over net income earned
during the same period in 1997. ($9.740 million or $1.55 per share).
Mahoning National Bancorp, Inc.'s net income for the current quarter
increased 8% to $3.633 million or $0.58 per share from $3.355 million or
$0.53 per share for the same quarter in 1997.
The primary component of earnings is net interest income. Net interest
income for the first nine months of 1998 was $26.630 million compared with
$25.551 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 ($9.029 million from $8.653 million).
The average balance of investment securities, at carrying value, increased
$13.488 million for the first nine months of 1998 compared to 1997. This
increase in average investment security balances accounted for approximately
$605 thousand in additional tax effective interest income in the first nine
months of 1998 compared to the same period 1997.
Interest and fees on loans decreased $119 thousand in the first nine months
of 1998 compared to the first nine months of 1997. For the three months
ended September 30, 1998, interest and fees on loans were down $269 thousand
or 2% as a result of reduced loan fees compared to the same period in 1997.
Average loan balances increased $2.398 million for the first nine months of
1998 compared to 1997; $491.691 million compared to $489.293 million. The
increase in average loan balances for the first nine months of 1998 accounted
for approximately $153 thousand in additional tax effective interest income
on loans. This increase was more than offset by a reduction in tax effective
interest income of approximately $307 thousand due to an eight (8) basis
point reduction in loan yields. This reduction in loan yields was the result
of a reduction in loan fees and competitive market pressures. With the
Company's 50 basis point reduction in its prime lending rate since October 1,
1998, loan yields will be further pressured into 1999.
Interest expense decreased $275 thousand for the three months ended September
30, 1998, and $488 thousand for the nine months ended September 30, 1998,
compared to the same time periods in 1997. This decrease can be attributed
to a fourteen (14) basis point reduction in the cost of funds which reduced
the Company's interest expense by approximately $752 thousand. This
reduction was partially offset by a $5.103 million increase in the average
balance of interest bearing liabilities, in the first nine months of 1998,
which accounted for approximately $265 thousand of additional interest
expense.
<PAGE>
The average balance of interest bearing deposits totaled $469.789 million for
the first nine months of 1998, a $7.926 million decrease over the same period
in 1997, average balance of $477.715 million. This decrease, in average
interest bearing deposits, accounted for a $190 thousand reduction in
interest expense, while the sixteen (16) basis point reduction in average
rates reduced interest expense by approximately $596 thousand. Volume
increases in other interest bearing liabilities accounted for an approximate
$455 thousand increase in interest expense for the first nine months of 1998
while a reduction in the funding cost of those liabilities accounted for an
approximate $155 thousand reduction in interest expense. The Company expects
funding cost to remain well below 1997 levels throughout the remainder of
1998 as the impact of the Federal Reserve 50 basis point reduction in the
federal funds rate will reduce interest bearing liability funding costs. The
Company reduced rates on all interest bearing checking accounts in the second
and third quarters of 1998 and expects further reductions in the fourth
quarter. On November 2, 1998, the Company reduced its savings rate 25 basis
points for a total 50 basis point reduction since the early first quarter of
1998.
In addition, time deposit costs for 1998 are currently lower than 1997 costs and
should remain well below 1997 levels for the remainder of 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 remained for the past eighteen months. The net interest margin for the
first nine months of 1998 was 4.85%, an eight (8) basis point increase from the
4.77% net interest margin in the first nine months of 1997.
Subsequent to the quarter ended September 30, 1998, the Federal Reserve Bank
took the following actions: (1)on October 1, 1998, lowered the federal funds
rate by 25 basis points, (2)on October 16, 1998, lowered the federal funds rate
an additional 25 basis points and reduced the discount rate by 25 basis points.
As a result of these Federal Reserve rate adjustments the Company reduced its
prime lending rate by 50 basis points in October to 8.00%. As the Company's
interest rate simulations and net economic value analysis indicated, due to the
liability sensitive nature of the Company's balance sheet, these rate reductions
are expected to positively impact net interest income into 1999.
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
<PAGE>
present value analysis. The simulation analysis monitors interest rate risk
through the impact changes in interest rates can have on net income. At
September 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 value (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 September 30, 1998:
<TABLE>
<CAPTION>
Changes In
Interest Rate Change In % Change NPV of Equity/
(basis points) NPV of Equity In NPV NPV of Assets
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
-200 $ 22,219 23.21% 14.55%
-100 14,081 14.71% 13.70%
0 6,163 6.44% 12.86%
+100 (1,544) -1.61% 12.02%
+200 (9,047) -9.45% 11.18%
</TABLE>
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 23.21%. This increase, which is above the 20%
guideline established by the Board was deemed acceptable due to the degree of
variance and positive impact on equity.
Other operating revenue for the first nine months of 1998, exclusive of security
transactions, was $6.612 million or a 7% increase over the first nine months of
1997 total
<PAGE>
of $6.151 million. Other operating revenue for the current quarter was
$2.294 million compared to $2.101 million for the same quarter of 1997, a 9%
increase. Other operating revenue, exclusive of security transactions, as a
percentage of average assets was 1.11% for the first nine months of 1998
compared to 1.06% for the same period in 1997.
The largest component of other operating revenue in the first nine months of
1998 was service charges on deposit accounts which increased $59 thousand or
2% over the first nine months of 1997. Service charges on deposit accounts
for the current quarter decreased by $3 thousand over the same period in
1997. In the first nine months of 1998, service charges on deposit accounts
as a percentage of average deposits increased to .78% from .76% 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 nine months of 1998 are the result of growth in the number of retail
checking accounts over the past twelve months which coincided with the
introduction of two new checking account products. Management expects other
operating revenue to continue to exceed 1997 levels.
Mahoning National Bank's Trust Department generated $2.382 million in other
revenue in the first nine months of 1998, an increase of $183 thousand or 8%
over the $2.199 million earned in the same period of 1997. The Trust
Department generated $807 thousand of operating income in the third quarter
of 1998, a 15% increase over the $702 thousand earned in the same quarter of
1997. At September 30, 1998, Trust Department Assets totaled $448.292 million
with a market value of $654.780 million compared to $454.502 million with a
market value of $653.778 million at September 30, 1997. While asset totals
have remained relatively flat the past twelve months the year-to-date
increase in Trust Department income can be attributed to several factors: an
increase in market values for much of the first three quarters of the year,
an improved account mix of higher fee paying accounts, and increased
executorship fees.
In February 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 first nine months of 1998.
Provision for loan losses for the first nine months of 1998 amounted to
$2.178 million compared to $2.250 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 nine months of 1998 increased $439
thousand or approximately 3% for the comparable period in 1997, to $15.630
million from $15.191 million. For the current quarter other operating
expense totaled $5.190 million compared to $5.055 million in the same quarter
of 1997. As a percentage of average assets, other operating expense was
2.63% for the first nine months of both 1998 and 1997. The Company's
efficiency ratio which measures non-interest expense as a percent of
non-interest income
<PAGE>
plus net interest income on a fully tax equivalent basis declined 52 basis
points from 47.08% in 1997 to 46.56% in 1998. This efficiency ratio would
place the Company in the top ten percent of its peer group.
Salaries and employee benefits expense for the first nine months of 1998
increased $91 thousand or 1% and increased $31 thousand or 1% for the most
recent quarter when compared to the same period in 1997. Salary expense
alone increased $345 thousand or 5% for the first nine months of 1998 and
$113 thousand or 5% 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 expense for the first nine months of 1998 were $628
thousand compared to $583 thousand for the same period in 1997, an increase
of $45 thousand or 8%. These increases were somewhat offset by a reduction
in pension and workers compensation expense in the first nine months of 1998.
The number of full time equivalent employees decreased from 393 at September
30, 1997 to 374 at September 30, 1998, a reduction of 5%.
Expenses of premises and fixed assets for the first nine months of 1998,
totaled $2.170 million, a 1% decrease ($31 thousand) from the same period in
1997. Current quarter expense totaled $719 thousand, a 3% increase from the
same quarter in 1997.
Other expenses increased $379 thousand in the first nine months of 1998 to
$5.185 million from $4.806 million for the same period of 1997, an 8%
increase. For the third quarter of 1998, other expenses increased $80
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. A senior officer who devotes
100% of their time to the project, was appointed project manager. It is the
project managers responsibility to provide the Board of Directors with
quarterly status reports, detailing the Company's internal Year 2000
corrective efforts and the ability of the Company's major vendors to provide
Year 2000 ready products and services. The reports include at a minimum, the
overall progress of the Year 2000 effort, including new efforts initiated
since the last report, the Company's progress as compared to its overall Year
2000 project plan and critical benchmarks, status reports regarding vendors,
business partners, and major loan customers, results of internal and external
testing, and contingency planning.
The Year 2000 Committee, identified all information technology and
non-information technology applications and systems that could be impacted by
the Year 2000 date
<PAGE>
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 has been developed based on the five (5) phases outlined by
the Federal Financial Institutions Examination Council (FFIEC): Awareness,
Assessment, Renovation, Validation and Implementation. The Awareness Phase
encompasses establishing a budget and project plan for dealing with the Year
2000 issue. The Assessment Phase is the actual process of identifying and
preparing an inventory of all its systems and individual components of those
systems. During this phase all system components were reviewed for Year 2000
compliance, and through a risk analysis process, were identified as to
whether they were mission critical. The Renovation Phase is when changes are
made to systems. This phase deals primarily with the technical issues of
converting existing systems, or switching to compliant systems. During this
phase, decisions are made on how to make the systems or processes Year 2000
compliant, and the required system changes are made. The Validation Phase is
when a determination is made that no errors were introduced during the
conversion process and that the renovation was successful. The development
of test data and test scripts, the running of test scripts, and the review of
test results are crucial for this phase of the conversion process to be
successful. If testing results show anomalies, the testing area is corrected
and re-tested. The Implementation Phase is when a tested Year 2000 compliant
system is ready for use. At the end of September 1998, the Awareness and
Assessment phases had been completed and documentation supporting the
comprehensive Year 2000 project plan was completed. The Company is currently
at various stages of the Renovation, Validation and Implementation phases on
those applications or systems identified as mission-critical to the Company.
The Company expects to complete the Renovation, Validation and Implementation
phases on the majority of applications and systems identified as
mission-critical by December 31, 1998, with the remainder completed by March
31, 1999.
During the first quarter of 1998, the Company initiated a vendor management
process that aggressively ascertains the Year 2000 readiness of third party
relationships. The Company has established monitoring procedures to verify
the service provider and/or software vendor is taking appropriate action to
achieve Year 2000 readiness. In addition, the Company has established a
process for testing remediated services and products in the Company's own
environment whenever possible. At this point in time, the only major concern
the Company has with third parties is with the possible interruption of
electrical power, which is certainly a concern that all businesses face due
to the interdependencies within the nations power grid. The Company is in
the process of evaluating alternatives and developing procedures to operate
in the event there are interruptions to the electrical power supply.
<PAGE>
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. The Company is in the
process of developing a Business Resumption Contingency Plan for the Year
2000 in order to mitigate the risks associated with; (1) the failure to
successfully complete renovation, validation, or implementation of the
Company's Remediation Contingency Plan, and (2) failure of systems at
critical dates. In Business Resumption Contingency Planning, risks
associated with the failure of core business processes are evaluated. These
are groups of related tasks that must be performed in a cohesive manner to
ensure that the Company remains viable. Evaluation of these risks compare
costs, time, and resources needed to implement the contingency alternatives.
The Business Resumption Contingency Plan will be completed by December 31,
1998.
The estimated cost for the Company's Year 2000 Remediation project should be
approximately $765 thousand. These costs include various hardware and
software purchases and modification, employee training, professional services
and additional employee man hours. Through September 30, 1998, approximately
$190 thousand has been expensed on Year 2000 Remediation with the remaining
expense expected to occur over the next 18 months.
An additional area under review by the Company is the Year 2000 risk arising
from relationships with three broad categories of customers: fund takers
(borrowers), fund providers (depositors), and capital market/asset management
counterparties (brokers). The potential risks associated with these
customers and counterparties include increased credit, liquidity or
counterparty trading risk when a customer encounters Year 2000 related
problems. The Company has implemented a due diligence process that has
identified, assessed and established controls for Year 2000 risk by
customers. This process was completed by September 30, 1998, with
appropriate risk controls in place to manage and mitigate Year 2000 customer
risk.
INCOME TAXES
Income tax expense for the first nine months of 1998 amounted to $5.043
million compared to $4.699 million for the same period in 1997. Income tax
expense for 1998 is being accrued at an effective rate of approximately
32.7%, which compares to an effective tax rate of 32.2% for all of 1997.
The Statement of Condition includes approximately $402 thousand and $1.881
million of net deferred tax assets at September 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.
<PAGE>
The following annualized ratios reflect the earnings performance for the first
nine months of 1998 compared to the same time period of 1997:
<TABLE>
<CAPTION>
For the nine For the nine
months ended months ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Return on Average Assets 1.75% 1.69%
Return on Average Equity 15.43 16.19
Return on Earning Assets
-Taxable Equivalent 7.93 8.02
Interest Cost as a
percentage of Earning 3.08 3.25
Assets
Net Interest Margin 4.85 4.77
</TABLE>
STATEMENTS OF CONDITION
As of September 30, 1998, total assets of the Company amounted to $785.911
million, a 1% decrease from December 31, 1997 total assets of $796.866
million. Average assets for the first nine months of 1998 amounted to
$794.062 million compared to $772.307 million for the same period of 1997, a
3% increase. Through the first nine months of 1998, total loans decreased
$5.151 million or 1% from year end and the investment portfolio increased
$10.419 million or 4%. Cash and due from banks, a non-earning asset, was
reduced by $7.276 million over the first nine months of 1998 as the result of
implementing a program that lowered the Company's reserve requirement at the
Federal Reserve Bank and reduced cash held in the Company's branches. The
decline in assets was primarily the result of a $7.388 million decrease in
deposits and a $24.404 million decrease in securities sold under agreement to
repurchase, which includes Corporate Investment accounts. The deposit
declines experienced in the first nine months of 1998 continue the trend
which began in 1996 and are representative of industry trends. Consumers
continue to move their funds from the banking industry into mutual funds or
other investment products which tend to offer higher returns. In addition,
competitive pressures from within the banking and savings and loan industries
to increase market share are making it much more difficult to retain
deposits. It is imperative that the Company offer the products that our
customers want at competitive prices and that we continue to provide the
quality service that distinguishes Mahoning National from its peers.
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
<PAGE>
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, 1998, the investment portfolio totaled $261.175 million
(which included a $5.700 million unrealized gain on available for sale
securities) which was a increase of $10.419 million from December 31, 1997.
At September 30, 1998, the Company has classified investment securities with
amortized cost and fair market value of $225.989 and $231.689 million
respectively, or 88% 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 1998.
In the first nine 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
was no security sales in the first nine months of 1998. No securities were
transferred between categories in the first nine months of 1998.
LOANS
Total loans decreased by $5.151 million or 1% from $492.487 million on
December 31, 1997, as the Company was more active in selling conforming
mortgages in the secondary market in 1998 and continued to maintain strict
underwriting standards across all loan products. The Company's loan to
deposit ratio was 90.63% at September 30, 1998 compared to 90.35% at December
31, 1997.
The loan portfolio, with the exception of commercial real estate 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 real estate increased $7.561 million or 7% in the first nine
months of 1998 from $106.521 million at December 31, 1997 to $114.082
million. Commercial loans, which declined by 9% for the year ended December
31, 1997, decreased by $7.246 million or 9% from $79.517 million at December
31, 1997, to $72.271 million at September 30, 1998. The dollar fluctuation
of commercial real estate and 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 real estate and
commercial loans increases throughout 1998 into 1999, with banks looking to
<PAGE>
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 $3.657 million or 3% in the first nine 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 nine 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 and
into 1999.
Residential mortgage loans declined approximately $5.9 million or 4% in the
first nine months of 1998. The Company, which has been more active in the
secondary market in 1998, sold approximately $16 million in long term fixed
rate mortgages in the first nine months of 1998 ($6 million in the third
quarter) after selling approximately $1.0 million for all of 1997. The
Company will continue to place emphasis on generating salable loans, with
servicing retained, over the remainder of 1998 and into 1999. With this
increased emphasis on selling long term fixed rate mortgages in the secondary
market and current refinancing pressures due to the low mortgage interest
rate environment, a continued decline in the residential mortgage loan
portfolio is expected into 1999. The increase in the sale of long term fixed
rate mortgages is a result of an asset liability management strategy of not
holding long term fixed rate assets.
Loans for purchasing or carrying securities which increased from $6 thousand
at December 31, 1997 to approximately $17 million at June 30, 1998, declined
to approximately $4 million at September 30, 1998. This fluctuation in loan
balances was the result of customers borrowing, on 90 day notes, to purchase
the stock of a local mutual savings and loan association which converted to a
stock company in July 1998.
As of September 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 $1.624 million compared to $2.881 million at December 31, 1997.
Listed below is a schedule of the Company's non-performing assets:
<PAGE>
<TABLE>
<CAPTION>
(Amounts in thousands) September 30, 1998 December 31, 1997
--------------------- ------------------ -----------------
<S> <C> <C>
Non accrual loans $1,019 $2,227
Accruing loans 90 days or
more past due 605 654
------ ------
Non performing loans 1,624 2,881
Restructured loans in
compliance with
modified terms 54 --
Other real estate owned 611 1,112
------ ------
Total non performing assets $2,289 $3,993
------ ------
------ ------
Total non performing assets to
total assets 0.29% 0.50%
</TABLE>
The following ratios provide additional information on the status of the loan
portfolio:
<TABLE>
<CAPTION>
As of As of
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Loan deposit ratio 90.63% 92.79%
Non performing loans to
total loans .33 .75
Non performing loans to
allowance for loan losses 21.55 47.99
Allowance for loan losses
to total loans 1.55 1.55
Net charge-offs ($000) $2,167 $2,683
</TABLE>
Shown below is a summary of the allowance for loan losses:
<TABLE>
<CAPTION>
For the nine For the nine
months ended months ended
(Amounts in thousands) September 30, 1998 September 30, 1997
-------------------- ------------------ ------------------
<S> <C> <C>
Balance at beginning of period $7,524 $8,112
Provision charged to operating
expense 2,178 2,250
Recoveries of loans charged off 633 461
Losses charged to allowance (2,800) (3,144)
------ ------
Balance at end of period $7,535 $7,679
------ ------
------ ------
Year to date net charge-offs
to average loans .44% .55%
</TABLE>
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:
<PAGE>
<TABLE>
<CAPTION>
1998 1997
------ ----
<S> <C> <C>
Principal amount of impaired loans $226 $844
Allowance allocated to impaired
loans -- --
------ ----
Portion for which no allowance is
allocated $226 $844
------ ----
------ ----
Average investment in impaired
loans for the nine months
ended September 30, 1998: $1,153 $927
------ ----
------ ----
</TABLE>
Total cash collected on impaired loans during the first nine months of 1998
and 1997 was $383 thousand and $582 thousand respectively; $381 thousand was
credited to the principal balance outstanding and $2 thousand was credited to
interest in the first nine months of 1998, while $573 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 nine months of 1998 and 1997 was $31 thousand and
$35 thousand respectively. Interest income of $2 thousand and $9 thousand
was recognized during the first nine 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 September 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 nine months
of 1998 was $2.178 million, a decrease of $72 thousand from the 1997 first
nine month provision. Net charge-offs on consumer loans and credit card
related plans totaled $1.328 million for the first nine months of 1998
compared to $1.384 million for the same period in 1997, a $56 thousand
decrease. The Company's experience in 1997 and the first nine 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, strict underwriting
guidelines have been
<PAGE>
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 and into 1999. As of September 30, 1998, consumer loan
delinquencies have shown significant improvement over the delinquencies at
September 30, 1997. In addition, the number of bankruptcy notices received
and automobile repossessions were down 21% and 22% respectively for the first
nine months of 1998 compared to 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.
At September 30, 1998, the allowance for loan losses totaled $7.535 million
or 1.55% of total loans, compared to $7.679 million or 1.55% of total loans
at September 30, 1997. Through the first nine months of 1998 the Company's
net charge-offs totaled $2.167 million, a $516 thousand or 19% decrease
compared to the $2.683 million charged-off in the first nine months of 1997.
Over this same period the Company's non-performing loans to total loans ratio
improved 42 basis points from .75% at September 30, 1997 to .33% at September
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
the 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 September 30, 1998, and December 31, 1997, $0 and $298 thousand of
residential mortgage loans were designated as held for sale, respectively.
At September 30, 1998, $231.689 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.
<PAGE>
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 borrowings of $42.579 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 $12.435 million
outstanding in FHLB borrowings at September 30, 1998, compared to $3.151
million at December 31, 1997.
Total capital accounts have grown $9.169 million or 11% in the first nine
months of 1998. This increase reflects retained earnings less dividends paid
and also reflects a $2.747 million unrealized gain, net of deferred taxes, on
the available for sale investment portfolio for the first nine months of
1998. Dividends paid in 1998 year to date were $3.969 million or $.63 per
share compared to $3.024 million or $.48 per share for the same period in
1997. Book value per share as of September 30, 1998 was $15.20 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 September 30, 1998,
the Company's leverage, Tier 1 and total risk-based capital ratios were
11.62%, 18.83% and 20.09%, 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. Due to the increased level of capital in
1998, management is reviewing various capital management strategies. 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.
<PAGE>
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 statement. 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.
<PAGE>
MAHONING NATIONAL BANCORP, INC.
SUMMARY OF AVERAGE BALANCES AND INTEREST RATES
TAX EQUIVALENT
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------------------------ ----------------------------------
(Amounts in thousands) AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE%(2) BALANCE INTEREST RATE%(2)
------------------------------------ ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST YIELDS
Loans $491,691 $ 32,691 8.89 $489,293 $32,845 8.97
Investment securities (1) 247,935 11,379 6.14 234,447 10,740 6.12
Other earning assets 10,644 442 5.47 8,070 331 5.40
------------------------------------ ----------------------------------
Total return on earning assets 750,270 44,512 7.93 731,810 43,916 8.02
INTEREST COSTS
Interest bearing deposits:
Savings deposits 272,954 4,267 2.09 278,495 4,793 2.30
Time deposits 196,835 7,638 5.19 199,220 7,898 5.30
------------------------------------ ----------------------------------
Total interest bearing deposits 469,789 11,905 3.39 477,715 12,691 3.55
Federal funds purchased 3,314 139 5.55 4,979 213 5.63
Repurchase agreements 133,608 4,553 4.56 124,862 4,409 4.72
Short term borrowings 7,749 307 5.22 3,760 153 5.42
Long term borrowings 10,083 394 5.23 8,124 320 5.20
------------------------------------ ----------------------------------
Total interest bearing liabilities $624,543 $17,298 3.70 $619,440 $17,786 3.84
Interest spread $27,214 4.23 $26,130 4.18
--------------------- ---------------------
--------------------- ---------------------
AS A PERCENT OF AVERAGE EARNING ASSETS
Total return on earning assets 7.93 8.02
Total interest cost 3.08 3.25
------ ------
Net Interest Margin 4.85 4.77
------ ------
------ ------
</TABLE>
(1) Investment securities average balance is based on average carrying
value while the average rate is calculated using average historical
cost.
(2) Annualized
<PAGE>
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 -
Martha A. Drabiski
(27) Financial Data Schedule
<PAGE>
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, 1998 to be signed on its behalf by the undersigned
thereunto duly authorized.
DATE: November 04, 1998 Mahoning National Bancorp, Inc.
-----------------------
/s/Gregory L. Ridler
-------------------------------
Gregory L. Ridler
Chairman of the Board,
President and Chief
Executive Officer
DATE: November 04, 1998 /s/Norman E. Benden, Jr.
----------------------- -------------------------------
Norman E. Benden, Jr.
Treasurer
<PAGE>
Mahoning National Bancorp, Inc.
Form 10-Q
Item 6(a)
Exhibit 10(a) Material Contracts
Change-In-Control Protective Agreement
Martha A Drabiski
<PAGE>
THE MAHONING NATIONAL BANK OF YOUNGSTOWN
---------------------------
Guarantee Agreement
---------------------------
AGREEMENT entered into this 17th day August, 1998 (the "Effective
Date"), by and between The Mahoning National Bank of Youngstown (the "Bank")
and Martha Drabiski (the "Employee").
WHEREAS, the Employee is currently employed by the Bank in an executive
capacity, and has entered into a change-in-control protective agreement (the
"Company Agreement") with Mahoning National Bancorp, Inc. (the "Company"); and
WHEREAS, the Board of Directors of the Bank has determined that it is in
the best interest of the Bank to enter into this Agreement in order to assure
continuity of the Bank's management through encouraging the long-term
retention of the Employee; and
WHEREAS, the parties desire by this writing to set forth the Bank's
commitment to guarantee the Company's obligations under the Company Agreement.
NOW, THEREFORE, it is AGREED as follows:
1. The Bank shall be jointly and severally liable with the Company for
its obligations under the Company Agreement.
2. This Agreement shall have a term that coincides with the term of
the Company Agreement (including any and all extensions thereunder), shall be
binding on any successors to the interest of the parties, shall be amended
only through a written instrument executed by both parties, and shall be
governed by the laws of the State of Ohio.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first written above.
ATTEST: THE MAHONING NATIONAL BANK
OF YOUNGSTOWN
/s/ Richard E. Davies By /s/ Daniel B. Roth
- ------------------------- -----------------------------
Secretary Its duly authorized Director
WITNESS:
/s/ Sandra L. Douglas /s/ Martha A. Drabiski
- ------------------------- -----------------------------
Employee
<PAGE>
CHANGE-IN-CONTROL PROTECTIVE AGREEMENT
THIS AGREEMENT entered into this 17th day of August, 1998, (the
"Effective Date") by and between, Mahoning National Bancorp, Inc. (the
"Company"), and Martha Drabiski (the "Employee").
WHEREAS, the Employee has heretofore been employed as an executive
officer of The Mahoning National Bank of Youngstown (the "Bank"), and thereby
has directly contributed to the financial success and operational stability
of the Company; and
WHEREAS, the Company deems it to be in the best interests of its
stockholders to enter into this Agreement as additional incentive to the
Employee to continue to serve in such capacity; and
WHEREAS, the parties desire by this writing to set forth their
understanding as to their respective rights and obligations in the event a
change of control occurs with respect to the Bank or the Company.
NOW, THEREFORE, the undersigned parties AGREE as follows:
1. DEFINED TERMS
When used anywhere in the Agreement, the following terms shall have
the meaning set forth herein.
(a) "BENEFICIARY" shall mean the person or persons as stated in the
last designation of beneficiary concerning this Agreement signed by the
Employee and filed with Company, and if not, then the personal representative
of the Employee.
(b) "CHANGE IN CONTROL" shall mean any one of the following events:
(i) the acquisition of ownership, holding or power to vote more than 30% of
the Bank's or the Company's voting stock, (ii) the acquisition of the ability
to control the election of a majority of the Bank's or the Company's
directors, (iii) the acquisition of a controlling influence over the
management or policies of the Bank or the Company by any person or by persons
acting as a "group" (within the meaning of Section 13(d) of the Securities
Exchange Act of 1934), or (iv) during any period of two consecutive years,
individuals (the "Continuing Directors") who at the beginning of such period
constitute the Board of Directors of the Bank or the Company (the "Existing
Board") cease for any reason to constitute at least two-thirds thereof,
provided that any individual whose election or nomination for election as a
member of the Existing Board was approved by a vote of at least two-thirds of
the Continuing Directors then in office shall be
<PAGE>
considered a Continuing Director. Notwithstanding the foregoing, in the case
of (i), (ii) and (iii) hereof, ownership or control of the Bank by the
Company itself shall not constitute a Change in Control. For purposes of
this paragraph only, the term "person" refers to an individual or a
corporation, partnership, trust, association, joint venture, pool, syndicate,
sole proprietorship, unincorporated organization or any other form of entity
not specifically listed herein.
(c) "CODE" shall mean the Internal Revenue Code of 1986, as amended
from time to time, and as interpreted through applicable rulings and
regulations in effect from time to time.
(d) "CODE Section 280G MAXIMUM" shall mean the product of 2.99 and the
Employee's "base amount" as defined in Code Section 280G(b)(3).
(e) "GOOD REASON" shall mean any of the following events, which has not
been consented to in advance by the Employee in writing: (i) the requirement
that the Employee move his or her personal residence, or perform his or her
principal executive functions, more than thirty (30) miles from his primary
office as of the date of the Change in Control; (ii) a material reduction in
the Employee's base compensation as in effect on the date of the Change in
Control or as the same may be increased from time to time; (iii) the failure
by the Bank or the Company to continue to provide the Employee with
compensation and benefits provided for on the date of the Change in Control,
as the same may be increased from time to time, or with benefits
substantially similar to those provided under any of the employee benefit
plans in which the Employee now or hereafter becomes a participant, or the
taking of any action by the Bank or the Company which would directly or
indirectly reduce any of such benefits or deprive the Employee of any
material fringe benefit enjoyed at the time of the Change in Control; (iv)
the assignment to the Employee of duties and responsibilities materially
different from those normally associated with his or her position; (v) a
failure to elect or reelect the Employee to the Board of Directors of the
Bank or the Company, if the Employee is serving on such Board on the date of
the Change in Control; (vi) a material diminution or reduction in the
Employee's responsibilities or authority (including reporting
responsibilities) in connection with employment with the Bank or the
Company; or (vii) a material reduction in the secretarial or other
administrative support of the Employee.
(f) "JUST CAUSE" shall mean, in the good faith determination of the
Bank's Board of Directors, the Employee's personal dishonesty, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order, or material breach of any provision of this
Agreement. The Employee shall have no right to receive compensation or other
benefits for any period after termination for Just Cause. No act, or failure
to act, on the Employee's part shall be considered "willful" unless the
Employee has
<PAGE>
acted, or failed to act, with an absence of good faith and without a
reasonable belief that such action or failure to act was in the best interest
of the Bank and the Company.
(g) "PROTECTED PERIOD" shall mean the period that begins on the date
six months before a Change in Control and ends on the later of the first
annual anniversary of the Change in Control or the expiration date of this
Agreement.
(h) "TRUST" shall mean a grantor trust designed in accordance with
Revenue Procedure 92-64 and having a trustee independent of the Bank and the
Company,
2. TRIGGER EVENTS
The Employee shall be entitled to receive the severance benefits set
forth in Section 3 of this Agreement in the event that (i) the Employee
voluntarily terminates employment either for any reason within 30 days of a
Change in Control, (ii) the Employee voluntarily terminates employment within
90 days of an event that both occurs during the Protected Period and
constitutes Good Reason, or (iii) the Bank, the Company, or their
successor(s) in interest terminate the Employee's employment for any reason
other than Just Cause during the Protected Period.
3. SEVERANCE BENEFITS
If the Employee becomes entitled to receive severance benefits pursuant
to Section 2 hereof, the Company shall BOTH provide the Employee with the
opportunity, until the Employee first begins to participate in Medicare, to
purchase, at the Employee's own expense which shall not exceed applicable
COBRA rates, family medical and dental insurance under any group health plans
that the Bank or the Company maintains for its employees, AND pay the
Employee (or the Employee's Beneficiary in the event of the Employee's death
before all required payments have been made under this Agreement) a severance
benefit, for 12 months after termination of employment, in an amount equal to
the Employee's highest monthly salary in effect between the date that the
Protected Period begins and the date of the Change in Control. In no event,
however, will the present value of these severance payments exceed the
difference between the Code Section 280G Maximum and the sum of any other
"parachute payments" as defined under Code Section 280G(b)(2) that the
Employee receives on account of the Change in Control. Said payments shall
commence within ten days of the later of the date of the Change in Control
and the Employee's last day of employment with the Bank or the Company.
In the event that the Employee and the Company agree that the Employee
has collected an amount exceeding the Code Section 280G Maximum, the parties
may jointly agree in writing that such excess shall be treated as a loan AB
INITIO which the Employee shall repay to the Company, on
<PAGE>
terms and conditions mutually agreeable to the parties, together with
interest at the applicable federal rate provided for in Section 7872(f)(2)(B)
of the Code.
4. FUNDING OF GRANTOR TRUST UPON CHANGE IN CONTROL
Notwithstanding any other provision of this Agreement that may be
contrary or inconsistent herewith, not later than ten (10) business days
after a Change in Control, the Company shall (i) establish a grantor trust
(the "Trust") that is designed in accordance with Revenue Procedure 92-64 and
has a trustee (the "Trustee") independent of the Company and any successor to
their interest, (ii) deposit in the Trust an amount equal to the present
value of all benefits that may become payable under this Agreement, and (iii)
provide the Trustee with an irrevocable written direction both to hold all
Trust assets and any investment return thereon in a segregated account for
the benefit of the Employee, and to follow the procedures set forth in the
next paragraph as to the payment of amounts from the Trust.
At any time after a Change in Control, the Employee may provide the
Trustee with a written affidavit (the "Affidavit") in which the Employee
attests that he has terminated employment with the Company or any successor
to its interest, and has become entitled to commence receiving the monthly
benefit payments (required by Section 3 hereof). The Affidavit shall also
specify the amount of each such monthly payment to be made from the Trust.
On the first business day of the month following the Trustee's receipt of the
Affidavit, the Trustee shall commence paying the Employee, in immediately
available funds, the monthly benefit specified in the Affidavit, and shall
send a copy of it to the Company via overnight and registered mail (return
receipt requested). Upon the receipt of the Employee's written release of
all claims under this Agreement, the Trustee shall pay to the Company any
remaining assets in the Trust. The Company shall pay any and all expenses
associated with maintaining the Trust, and shall hold the Trustee harmless
from any liability for making the payments required hereunder.
5. TERM OF THE AGREEMENT. This Agreement shall remain in effect for
the period commencing on the Effective Date and ending on the earlier of (i)
the date 36 months after the Effective Date, and (ii) the date on which the
Employee terminates employment with the Bank; provided that the Employee's
rights hereunder shall continue following the termination of this employment
with the Bank or the Company under any of the circumstances described in
Section 2 hereof. Additionally, on each annual anniversary date from the
Effective Date, the term of this Agreement shall automatically be extended
for an additional one-year period beyond the then effective expiration date
unless the Board of Directors of the Company determines to the contrary in a
duly adopted resolution AND delivers a certified copy of the resolution to
the Employee BEFORE the date on which the Agreement would otherwise renew.
6. EXPENSE REIMBURSEMENT.
<PAGE>
In the event that any dispute arises between the Employee and the
Bank or the Company as to the terms or interpretation of this Agreement,
whether instituted by formal legal proceedings or otherwise, including any
action that the Employee takes to enforce the terms of this Agreement or to
defend against any action taken by the Bank or the Company, the Employee
shall be reimbursed for all costs and expenses, including reasonable
attorneys' fees, arising from such dispute, proceedings or actions, provided
that the Employee shall obtain a final judgement in favor of the Employee in
a court of competent jurisdiction or in binding arbitration under the rules
of the American Arbitration Association. Such reimbursement shall be paid
within ten days of Employee's furnishing to the Bank and the Company written
evidence, which may be in the form, among other things, of a cancelled check
or receipt, of any costs or expenses incurred by the Employee.
7. SUCCESSORS AND ASSIGNS.
(a) This Agreement shall inure to the benefit of and be binding
upon any corporate or other successor of the Company which shall acquire,
directly or indirectly, by merger, consolidation, purchase or otherwise, all
or substantially all of the assets or stock of the Bank or Company.
(b) Since the Company is contracting for the unique and personal
skills of the Employee, the Employee shall be precluded from assigning or
delegating his rights or duties hereunder without first obtaining the written
consent of the Company.
8. AMENDMENTS. No amendments or additions to this Agreement shall be
binding unless made in writing and signed by all of the parties, except as
herein otherwise specifically provided.
9. APPLICABLE LAW. Except to the extent preempted by Federal law, the
laws of the State of Ohio shall govern this Agreement in all respects,
whether as to its validity, construction, capacity, performance or otherwise.
10. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
11. ENTIRE AGREEMENT. This Agreement, together with any understanding
or modifications thereof as agreed to in writing by the parties, shall
constitute the entire agreement between the parties hereto.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first hereinabove written.
ATTEST: MAHONING NATIONAL BANCORP, INC.
/s/ Richard E. Davies By: /s/ Daniel B. Roth
- ------------------------ ----------------------------
Its Secretary Its duly authorized Director
WITNESS:
/s/ Sandra L. Douglas /s/ Martha A. Drabiski
- ------------------------ ----------------------------
Employee
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MAHONING
NATIONAL BANCORP, INC., CONSOLIDATED STATEMENT OF CONDITION AT SEPTEMBER 30,
1998 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 21,867
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 231,689
<INVESTMENTS-CARRYING> 29,486
<INVESTMENTS-MARKET> 29,676
<LOANS> 487,336
<ALLOWANCE> 7,535
<TOTAL-ASSETS> 785,911
<DEPOSITS> 537,723
<SHORT-TERM> 134,841
<LIABILITIES-OTHER> 5,164
<LONG-TERM> 12,435
0
0
<COMMON> 6,300
<OTHER-SE> 89,448
<TOTAL-LIABILITIES-AND-EQUITY> 785,911
<INTEREST-LOAN> 32,572
<INTEREST-INVEST> 10,914
<INTEREST-OTHER> 442
<INTEREST-TOTAL> 43,928
<INTEREST-DEPOSIT> 11,905
<INTEREST-EXPENSE> 17,298
<INTEREST-INCOME-NET> 26,630
<LOAN-LOSSES> 2,178
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 15,630
<INCOME-PRETAX> 15,434
<INCOME-PRE-EXTRAORDINARY> 10,391
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,391
<EPS-PRIMARY> 1.65
<EPS-DILUTED> 1.65
<YIELD-ACTUAL> 7.93
<LOANS-NON> 1,019
<LOANS-PAST> 605
<LOANS-TROUBLED> 54
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,524
<CHARGE-OFFS> 2,800
<RECOVERIES> 633
<ALLOWANCE-CLOSE> 7,535
<ALLOWANCE-DOMESTIC> 7,535
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,028
</TABLE>
