<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT
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(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
X SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
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For the fiscal year ended December 31, 1997
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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For the transition period from to
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Commission file number 0-20255
Mahoning National Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
OHIO 34-1692031
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
23 FEDERAL PLAZA, YOUNGSTOWN, OH 44501-0479
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(Address of principal executive offices) (Zip Code)
(330) 742-7000
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(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
NONE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE, STATED VALUE $1.00
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(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
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 and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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The aggregate market value of Common Stock, No Par Value, $1 Stated
Value Per Share, held by non-affiliates on February 28, 1998, was approximately
$233,100,000.
As of February 28, 1998, there were 6,300,000 shares of Common Stock,
No Par Value, $1 Stated Value Per Share, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the registrant's Annual Report to Shareholders for the year
ended December 31, 1997, are incorporated by reference into Parts I, II,
and IV.
(2) The Notice of Annual Meeting of Shareholders and Proxy Statement relating
to the 1998 Annual Meeting of Shareholders of the Corporation on March 17,
1998, is incorporated by reference into Part III.
<PAGE> 2
Mahoning National Bancorp, Inc.
Form 10-K
PART I
ITEM 1. BUSINESS
Mahoning National Bancorp, Inc. ("the Registrant") was incorporated in 1992
under the laws of the state of Ohio as a bank holding company.
The Registrant has one wholly-owned subsidiary, The Mahoning National Bank
of Youngstown (Mahoning National), which was organized under the laws of
the State of Ohio in 1868.
The Registrant has no employees; however, as of December 31, 1997 Mahoning
National employed approximately 388 full-time equivalent employees.
The Registrant and its subsidiary do not have any banking offices in a
foreign country and with the exception of State of Israel Bonds totaling
$60 thousand, has no foreign assets, liabilities or related income and
expense for the years presented.
A description of the Registrant's business and discussion of operations is
set forth on pages 32 through 43 of the 1997 Annual Report to Shareholders,
included in this Form 10-K as Exhibit 13, and is incorporated herein by
reference.
The following additional financial information as required under Guide 3
disclosure is included in this Form 10-K and is incorporated herein by
reference:
Items I, II, IV, V - the information required is contained in Management's
Discussion and Analysis on pages 33 through 43 in the 1997 Annual Report to
Shareholders, included in this Form 10-K as Exhibit 13, incorporated herein
by reference.
Item III - the information required is contained in Management's Discussion
and Analysis on pages 34 through 37 in the 1997 Annual Report to
Shareholders, included in this Form 10-K as Exhibit 13, incorporated herein
by reference. Potential problem loans at December 31, 1997, that were not
disclosed as nonaccrual, accruing loans 90 days or more past due or
troubled debt restructurings totaled $2.444 million. These loans represent
borrowers with possible credit problems that may effect the ability of the
borrowers to comply with the present loan repayment terms and result in the
disclosure of such loans pursuant to Item III. C.1. All interest bearing
assets have been disclosed as required under Item III. C.1. or 2.
Item VI - the information required can be found on page 13 of the 1997
Annual Report to Shareholders, included in this Form 10-K as Exhibit 13,
incorporated herein by reference.
<PAGE> 3
Mahoning National Bancorp, Inc.
Form 10-K
Item VII - the information required can be found on page 14 Consolidated
Statements of Financial Condition, for year end balances, and on page 23,
Note H - Short Term Borrowings, of the 1997 Annual Report to Shareholders,
included in this Form 10-K as Exhibit 13, incorporated herein by reference.
ITEM 2. PROPERTIES
The main office of the Registrant and its sole subsidiary, Mahoning
National, is a thirteen-story office building located at 23 Federal Plaza
in Youngstown, Ohio. Mahoning National owns both the land and the building
at this location. The Registrant and Mahoning National occupy, and use for
banking business 88,343 square feet of the approximately 182,000 square
feet of usable space. The remainder of the building is leased to business
and professional tenants.
In January 1998 the Company consolidated its Southside branch office into
the South and Midlothian branch office at 525 E. Midlothian Boulevard,
Youngstown, Ohio. The Southside office building, a two-story, 5,080 square
foot office building located at 2901 Market Street, Youngstown Ohio was
sold to a local real-estate management company.
The Campbell branch office of Mahoning National is located at 809 McCartney
Road, Campbell, Ohio. This 3,600 square foot office is used strictly for
banking services. Mahoning National owns both the land and building at this
location.
The South and Midlothian branch of Mahoning National is located at 525 E.
Midlothian, Youngstown, Ohio. This 3,400 square foot office is used
strictly for banking services. Mahoning National owns both the land and
building at this location.
The Kinsman branch office of Mahoning National is located at 8222 Main
Street, Kinsman, Ohio. This 4,680 square foot office is used strictly for
banking services. Mahoning National owns both the land and building at this
location.
The Brookfield branch office of Mahoning National is located at 579 Bedford
Road, Brookfield, Ohio. This 3,700 square foot office is used strictly for
banking services. Mahoning National owns both the land and the building at
this location.
The South & 224 branch office of Mahoning National, a 3,460 square foot
office located at 7235 South Avenue, Youngstown, Ohio is used strictly for
banking services. Mahoning National owns the building but leases the land
at this location. The lease on the land at South & 224 expires on 05/31/04
with two 5 year options.
The Boardman branch office of Mahoning National is located at 711
Boardman-Canfield Road, Boardman, Ohio. This 3,500 square foot office
<PAGE> 4
Mahoning National Bancorp, Inc.
Form 10-K
is used strictly for banking services. Mahoning National owns both the land
and building at this location.
The Canfield branch office of Mahoning National is located at 11 Manor Hill
Drive, Canfield, Ohio. This 3,100 square foot office is used strictly for
banking services. Mahoning National owns both the land and building at this
location.
The Registrant's subsidiary, Mahoning National maintains an additional
fifteen banking offices which are located in Mahoning and Trumbull Counties
in northeastern Ohio. All of these locations are leased and used strictly
for banking services.
All of the properties owned or leased by the Registrant's subsidiary are
considered by management to be suitable and adequate for current
operations.
ITEM 3. LEGAL PROCEEDINGS
There is no pending material litigation, other than the ordinary routine
litigation incidental to the business, to which the Registrant or its
subsidiary is a party to or of which any property is subject to. Further,
there are no material proceedings to which any director, officer or
affiliate of the Registrant, or any associate of any such director, officer
or affiliate is a party adverse to the Registrant or its subsidiary.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of the Registrant
during the fourth quarter of 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Market Information:
The Company's common shares were traded Over-The-Counter, generally in the
Youngstown area in 1997 and 1996. Effective January 5, 1998, the Company's
common shares were listed on The NASDAQ National Market System under the
symbol "MGNB". Currently the following five brokerage firms serve as market
makers for the Company's common stock: McDonald & Company Securities, Inc.,
The Ohio Company, Sandler O'Neill & Partners, L.P., F. J. Morrissey & Co.,
Inc. and Everen Securities, Inc.
The prices presented below are bid prices which represent prices between
broker-dealers and do not include retail mark-ups or mark-downs or any
commission to the broker-dealer. These prices may not reflect prices in
actual transactions.
<PAGE> 5
Mahoning National Bancorp, Inc.
Form 10-K
<TABLE>
<CAPTION>
Quarter 1997 1996
High Low High Low
<S> <C> <C> <C> <C>
1st 22.75 21.50 21.13 19.00
2nd 22.50 21.50 25.50 20.75
3rd 26.25 22.50 26.25 24.50
4th 33.00 26.00 25.50 22.50
</TABLE>
For additional information on the Company's common stock and related
stockholder matters refer to Note-M on pages 25 and 26 of the 1997 Annual
Report to Shareholders, included in this Form 10-K as Exhibit 13,
incorporated herein by reference.
Holders of Registrant's Stock:
At the close of business on January 31, 1998 there were approximately 1,608
stockholders of record of Mahoning National Bancorp, Inc. common stock.
Dividend Information:
For the frequency and amount of cash dividends declared in the past two
years refer to "Common Share Information" on page 1 of the 1997 Annual
Report to Shareholders, included in this Form 10-K as Exhibit 13, included
herein by reference. While the Company expects comparable cash dividends
will be paid in the future, they will be dependent upon earnings, financial
condition of the Company and other business factors.
The dividend payout ratio of the Registrant for the past five years
was as follows:
1997 = 33.59%
1996 = 30.66%
1995 = 29.09%
1994 = 29.07%
1993 = 30.38%
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for each of the five years in the period
ending December 31, 1997 can be found on pages 12 and 13 in the 1997
Annual Report to Shareholders, included in this Form 10-K as Exhibit
13, incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This information is contained on pages 33 through 43 in the 1997
Annual Report to Shareholders, included in this Form 10-K as Exhibit
13, incorporated herein by reference.
<PAGE> 6
Mahoning National Bancorp, Inc.
Form 10-K
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of the Company's asset/liability management process
is to maximize profits through management of the pricing and mix of assets
and liabilities, while achieving acceptable levels of interest rate risk
and liquidity risk and providing for adequate capitalization. Due to the
fact that the assets and liabilities of a financial institution are
monetary in nature, changes in interest rates and monetary or fiscal policy
affect its financial condition and have potentially the greatest impact on
the net income of the Company. The Company's asset/liability management
program is designed to minimize the impact of sudden and sustained changes
in interest rates on the net present value (NPV) of equity and net interest
income.
The Company's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. All of the Company's transactions are
denominated in U.S. dollars with no specific foreign exchange exposure. The
Company has minimal agricultural loan assets and therefore would not have a
specific exposure to changes in commodity prices. The Company has no market
risk sensitive instruments held for trading purposes.
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 December 31, 1997, 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 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
December 31, 1997. All market risk sensitive instruments presented in this
table are
<PAGE> 7
Mahoning National Bancorp, Inc.
Form 10-K
held to maturity or available for sale. The Company has no trading
securities.
<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 $ 14,969 17.29% 12.47%
-100 8,853 10.23 11.82
0 2,852 3.29 11.18
+100 (3,038) (3.51) 10.53
+200 (8,819) (10.19) 9.89
</TABLE>
The above table indicates that at December 31, 1997, in the event of a
sudden and sustained increase in prevailing market interest rates, the
Company's NPV would be expected to decrease, and that in the event of a
sudden and sustained decrease in prevailing market interest rates, the
Company's NPV would be expected to increase. At December 31, 1997, the
Company's estimated changes in NPV were within the targets established by
the Board of Directors.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may
react in different degrees to changes in market interest rates. Also, as a
result of competition, the interest rates on certain assets and liabilities
may fluctuate in advance of changes in market interest rates, while
interest rates on other types of assets and liabilities may lag behind
changes in market rates. In the event of a change in interest rates,
expected rates of repayment on assets and early withdrawal levels from
certificates of deposit would likely deviate from those scheduled. In
addition, the proportion of adjustable-rate loans in the Bank's portfolio
could decrease in future periods if market interest rates remain at or
decrease below current levels due to refinance activity. Further, in the
event of a change in interest rates, prepayment and early withdrawal levels
would likely deviate from those assumed in the table. Finally, the ability
of many borrowers to repay their adjustable-rate debt may decrease in the
event of an increase in interest rates.
In order to minimize the potential for adverse effects of material and
prolonged increases in interest rates on the Company's results of
operations, management has implemented and continues to monitor asset and
liability management strategies to better match the maturities and
repricing terms of the Company's interest-earning assets and
interest-bearing liabilities. These strategies include: (1) emphasizing the
origination of adjustable-rate mortgage loans ("ARMs"); and (2) selling a
portion of its fixed-rate residential mortgage loan originations with
servicing retained.
Deposits, which are the Company's primary funding source, are priced based
upon competitive factors and the availability of prudent lending
<PAGE> 8
Mahoning National Bancorp, Inc.
Form 10-K
and investment opportunities. Pursuant to this strategy, the Company has
generally not offered the highest rates available in its deposit market
except upon specific occasions and for specific products, to control
deposit flow or when market conditions have created opportunities to
attract longer-term deposits at favorable rates. In addition, the Company
does not pursue an aggressive growth strategy which would force the Company
to focus exclusively on competitors' rates rather than deposit
affordability. This policy has assisted the Company in controlling its cost
of funds. The Company has also adopted a strategy of emphasizing
transaction deposit account growth as these products are less susceptible
to repricing in a rising interest rate environment.
An additional source of liquidity is derived from the Federal Home Loan
Bank of Cincinnati (FHLB). The FHLB provides short term funding
alternatives, with an available line of credit of $52.138 million at
December 31, 1997, and funding for one-to-four family residential mortgage
loans and allows the Company to better manage its interest rate risk.
A derivative financial instrument includes futures, forwards, interest rate
swaps, option contracts and other financial instruments with similar
characteristics. The Company has not purchased derivative financial
instruments in the past and does not presently intend to purchase such
instruments in the near future. However, the Company is party to financial
instruments with off-balance sheet risk in the normal course of business to
meet the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit. These
instruments involve to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the consolidated balance
sheets. The commitments to extend credit generally have fixed expiration
dates or other termination clauses and may require payment of a fee. Since
some of these commitments may not be utilized, or utilized in amounts less
than the total committed, the total commitment amounts do not necessarily
represent future cash requirements. The majority of the unfunded
commitments at December 31, 1997 ($153.115 million) are variable rate
commitments, with approximately 20% or $31 million having fixed rates.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party up to a
stipulated amount and with specified terms and conditions.
The Company's exposure to interest rate risk is reviewed on a quarterly
basis by the Board of Directors and the ALCO. If estimated changes to NPV
and net interest income are not within the limits established by the Board,
the Board may direct management to adjust its asset and liability mix to
bring interest rate risk within board-approved limits.
<PAGE> 9
Mahoning National Bancorp, Inc.
Form 10-K
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, Notes to Consolidated Financial
Statements, and the Report of Independent Auditors can be found on pages 14
through 29 of the 1997 Annual Report to Shareholders, included in this Form
10-K as Exhibit 13, incorporated herein by reference. The report of the
predecessor auditors for the year ended December 31, 1995 is incorporated
herein by reference as Exhibit 99(a) - Report of Independent Certified
Public Accountants.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
For information regarding the registrants change in accountants in 1996
refer to Form 8-K dated May 13, 1996, Change in Registrant's Certifying
Accountant.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "Election of Directors and
Information with Respect to Directors and Officers" on pages 2 and 3 of the
Notice of Annual Meeting and Proxy Statement, included in this Form 10-K as
Exhibit 99(b), is incorporated herein by reference.
Listed below are the names, ages, positions held and terms in office for
the Registrant's executive officers and their positions held with the sole
subsidiary, The Mahoning National Bank of Youngstown. The executive
officers of the Registrant and the subsidiary serve at the direction of the
Board of Directors, and are elected annually by the Board of Directors of
the appropriate entity.
Gregory L. Ridler
Age - 51
Current Positions - Chairman of the Board, President and Chief
Executive Officer of Mahoning National Bancorp, Inc. (1992).
President and Chief Executive Officer of Mahoning National Bank
(1989).
Parker T. McHenry
Age - 64
Current Positions - Vice President of Mahoning National Bancorp,
Inc. (1992). Executive Vice President of Mahoning National Bank
(1989).
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Mahoning National Bancorp, Inc.
Form 10-K
Richard E. Davies
Age - 58
Current Positions - Secretary for Mahoning National Bancorp, Inc.
(1992). Senior Vice President and Cashier for Mahoning National Bank
(1989).
Norman E. Benden, Jr.
Age - 39
Current Positions - Treasurer for Mahoning National Bancorp, Inc.
(1992). Senior Vice President and Chief Financial Officer of Mahoning
National Bank(1996).
Previous five year experience - Senior Vice
President and Comptroller of Mahoning National Bank (1994), Vice
President and Comptroller of Mahoning National Bank (1992).
Compliance with Section 16(a) of the Securities Exchange Act of 1934.
The information pertaining to compliance with Section 16(a) of the
Securities Exchange Act of 1934 can be found on page 11 of the Notice
of Annual Meeting and Proxy Statement, included in this Form 10-K as
Exhibit 99(b), incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information pertaining to executive compensation can be found on
pages 6 through 10 of the Notice of Annual Meeting and Proxy
Statement, included in this Form 10-K as Exhibit 99(b), incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security ownership of certain beneficial owners.
None
(b) Security ownership of management.
The information pertaining to security ownership of management can be
found on page 4 of the Notice of Annual Meeting and Proxy Statement,
included in this Form 10-K as Exhibit 99(b), incorporated herein by
reference.
The following details the security ownership of the executive officers
of the Registrant:
Richard E. Davies - 3,145 shares of common stock
(.050% of class)
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Mahoning National Bancorp, Inc.
Form 10-K
Norman E. Benden, Jr. - 3,459 shares of common stock
(.055% of class)
(c) Changes in control.
There are no contracts or arrangements known to the Registrant, that
at a subsequent date, could result in a change in control of the
Registrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION
The information pertaining to certain relationships and related
transactions can be found under the caption "Transactions with Management"
on page 11 of the Notice of Annual Meeting and Proxy Statement, included in
this Form 10-K as Exhibit 99(b), incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The following consolidated financial statements of the Registrant
appear on pages 14 through 29 of the Registrant's 1997 Annual
Report to Shareholders, Exhibit 13 to this Form 10-K, and are
incorporated herein by reference:
Consolidated Statements of Financial Condition -
December 31, 1997 and 1996
Consolidated Statements of Income -
Three years ended December 31, 1997
Consolidated Statements of Changes in
Stockholders' Equity -
Three years ended December 31, 1997
Consolidated Statements of Cash Flows -
Three years ended December 31, 1997
Notes to Consolidated Financial Statements
Report of Independent Auditors
1a. Report of Predecessor Independent Auditors:
The report of the predecessor auditors for the year ended
December 31, 1995 is incorporated herein by reference as Exhibit
99(a) - Report of Independent Certified Public Accountants.
2. Financial Statement Schedules:
Schedules normally required of Form 10-K are omitted since the
required information is not applicable, not deemed material or is
shown in the respective consolidated financial statements or
notes thereto.
<PAGE> 12
Mahoning National Bancorp, Inc.
Form 10-K
(b) 1. Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during the
fourth quarter of 1997. On January 2, 1998, the Registrant filed
a report on Form 8-K which announced that the Registrant,
Mahoning National Bancorp, Inc. had listed its shares of common
stock on the NASDAQ National Market System. The common stock will
trade under the symbol "MGNB".
(c) 1. Exhibits:
(2) Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession.
Not applicable.
(3a) The Articles of Incorporation of Mahoning National
Bancorp, Inc., filed on the Registrant's Form S-4, File
# 33-45045 effective February 11, 1992, in addition
Form 8-K, dated March 21, 1995, Certificate of
Amendment by Shareholders to the Articles of
Incorporation of Mahoning National Bancorp,Inc.,
and Form 8-K, dated March 19, 1996, Certificate
of Amendment by Shareholders to the Articles of
Incorporation of Mahoning National Bancorp, Inc., and
Amendment of Article Fourth of the Articles of
Incorporation of Mahoning National Bancorp, Inc., is
incorporated herein by reference.
(3b) The Bylaws of Mahoning National Bancorp, Inc., filed on
the Registrant's Form S-4, File #33-45045 effective
February 11, 1992, is incorporated herein by reference.
(4) Instruments defining the Rights of Security Holders,
Including Indentures, filed on the Registrant's Form
S-4, File #33-45045 effective February 11, 1992, is
incorporated herein by reference.
(9) Voting Trust Agreement
Not applicable.
(10) Material Contracts:
(10a) Change-In-Control Protective Agreement between
Mahoning National Bancorp, Inc., and Norman E.
Benden, Jr. - Treasurer (Mahoning National
Bancorp, Inc.), Senior Vice President and Chief
Financial Officer (Mahoning National Bank of
Youngstown), filed with the
<PAGE> 13
Mahoning National Bancorp, Inc.
Form 10-K
Registrant's Form 10-Q dated June 30, 1997,
is incorporated herein by reference.
(10b) Change-In-Control Protective Agreement
between Mahoning National Bancorp, Inc., and
Richard E. Davies - Secretary (Mahoning
National Bancorp, Inc.), Senior Vice
President and Cashier (Mahoning National
Bank of Youngstown), filed with the
Registrant's Form 10-Q dated June 30, 1997,
is incorporated herein by reference.
(10c) Change-In-Control Protective Agreement
between Mahoning National Bancorp, Inc., and
Parker T. McHenry - Vice President (Mahoning
National Bancorp, Inc.), Executive Vice
President (Mahoning National Bank of
Youngstown), filed with the Registrant's
Form 10-Q dated June 30, 1997, is
incorporated herein by reference.
(10d) Change-In-Control Protective Agreement
between Mahoning National Bancorp, Inc., and
Gregory L. Ridler - Chairman of the Board,
President and Chief Executive Officer
(Mahoning National Bancorp, Inc.), President
and Chief Executive Officer (Mahoning
National Bank of Youngstown), filed with the
Registrant's Form 10-Q dated June 30, 1997,
is incorporated herein by reference.
(10e) Change-In-Control Protective Agreement
between Mahoning National Bancorp, Inc., and
Karen R. DeSalvo - Assistant Vice President
- Marketing (Mahoning National Bank of
Youngstown), filed with the Registrant's
Form 10-Q dated June 30, 1997, is
incorporated herein by reference.
(10f) Change-In-Control Protective Agreement
between Mahoning National Bancorp, Inc., and
Frank Hierro - Senior Vice President
(Mahoning National Bank of Youngstown),
filed with the Registrant's Form 10-Q dated
June 30, 1997, is incorporated herein by
reference.
<PAGE> 14
Mahoning National Bancorp, Inc.
Form 10-K
(10g) Change-In-Control Protective Agreement
between Mahoning National Bancorp, Inc., and
Dexter Hollen - Vice President and
Compliance Officer (Mahoning National Bank
of Youngstown), filed with the Registrant's
Form 10-Q dated June 30, 1997, is
incorporated herein by reference.
(10h) Change-In-Control Protective Agreement
between Mahoning National Bancorp, Inc., and
John R. Lewis - Senior Vice President
(Mahoning National Bank of Youngstown),
filed with the Registrant's Form 10-Q dated
June 30, 1997, is incorporated herein by
reference.
(10i) Change-In-Control Protective Agreement
between Mahoning National Bancorp, Inc., and
J. David Sabine - Senior Vice President and
Senior Trust Officer (Mahoning National Bank
of Youngstown), filed with the Registrant's
Form 10-Q dated June 30, 1997, is
incorporated herein by reference.
(10j) Change-In-Control Protective Agreement
between Mahoning National Bancorp, Inc., and
David E. Westerburg - Senior Vice President
(Mahoning National Bank of Youngstown),
filed with the Registrant's Form 10-Q dated
June 30, 1997, is incorporated herein by
reference.
(10k) Change-In-Control Protective Agreement
between Mahoning National Bancorp, Inc., and
Donna J. Mowrey - Assistant Vice President
Human Resources (Mahoning National Bank of
Youngstown), included in this form as
Exhibit 10(k), is incorporated herein by
reference.
(10l) Supplemental Executive Retirement Plan
between Mahoning National Bank of Youngstown
and Gregory L. Ridler, originally filed with
the Registrant's Form 10-K dated December
31, 1995, was amended and refiled with the
Registrant's Form 10-Q dated June 30, 1997,
and is incorporated herein by reference.
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Mahoning National Bancorp, Inc.
Form 10-K
(10m) Split Dollar Life Insurance Plan between
Mahoning National Bank and Gregory L. Ridler
filed with the Registrant's Form 10-Q dated
June 30, 1997, is incorporated herein by
reference.
(10n) Executive Phantom Stock Bonus Plan between
The Mahoning National Bank of Youngstown and
Norman E. Benden, Jr., filed with the
Registrant's Form 10-Q dated September 30,
1997, is incorporated herein by reference.
(10o) Executive Phantom Stock Bonus Plan between
The Mahoning National Bank of Youngstown and
Frank Hierro, filed with the Registrant's
Form 10-Q dated September 30, 1997, is
incorporated herein by reference.
(10p) Executive Phantom Stock Bonus Plan between
The Mahoning National Bank of Youngstown and
Gregory L. Ridler, filed with the
Registrant's Form 10-Q dated September 30,
1997, is incorporated herein by reference.
(10q) Executive Phantom Stock Bonus Plan between
The Mahoning National Bank of Youngstown and
David E. Westerburg, filed with the
Registrant's Form 10-Q dated September 30,
1997, is incorporated herein by reference.
(10r) Executive Deferred Cash Bonus Plan between
The Mahoning National Bank of Youngstown and
Parker T. McHenry, filed with the
Registrant's Form 10-Q dated September 30,
1997, is incorporated herein by reference.
(11) Statement Regarding Computation of Per Share
Earnings.
The necessary information can be found under
Note A-12 of the Notes to Consolidated
Financial Statements on page 19 of the 1997
Annual Report to Shareholders, included in
this Form 10-K as Exhibit 13, incorporated
herein by reference.
<PAGE> 16
Mahoning National Bancorp, Inc.
Form 10-K
(12) Statement Regarding Computation of Ratios.
Not applicable.
(13) 1997 Annual Report to Shareholders.
(16) Letter Regarding Change in Certifying
Accountant.
Refer to Form 8-K, dated May 13, 1996,
Change in Registrants Certifying
Accountant, incorporated herein by
reference.
(18) Letter Regarding Change in Accounting
Principles
Not applicable.
(21) Subsidiaries of the Registrant.
(22) Published Report Regarding Matters Submitted
to Vote of Security Holders. Not applicable.
(23) Consents of Experts and Counsel.
Not applicable.
(24) Power of Attorney. Not applicable.
(27) Financial Data Schedule.
(28) Information from Reports Furnished to State
Insurance Regulatory Authorities. Not
applicable.
(99) Additional Exhibits.
(a) Report of Independent Certified
Public Accountants. Predecessor
auditors report for the year ended
December 31, 1995.
(b) The Registrant's Notice of Annual
Meeting and Proxy Statement dated
March 17, 1998.
<PAGE> 17
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 17th day of March,
1998.
MAHONING NATIONAL BANCORP, INC.
(Registrant)
/s/ Gregory L. Ridler
-------------------------------------
GREGORY L. RIDLER
President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on the 17th day of March, 1998.
<TABLE>
<S> <C>
/s/ Norman E. Benden, Jr. /s/ Gregory L. Ridler
- ----------------------------------- --------------------------------------
Norman E. Benden, Jr. - Treasurer Gregory L. Ridler
(Principal Financial and Chairman of the Board,
Accounting Officer) President and Chief Executive Officer
/s/ Frank A. Kramer /s/ Warren P. Williamson, III
- ----------------------------------- --------------------------------------
Frank A. Kramer - Director Warren P. Williamson, III- Director
/s/ Daniel B. Roth /s/ Charles J. McCrudden, Jr.
- ----------------------------------- --------------------------------------
Daniel B. Roth - Director Charles J. McCrudden, Jr.- Director
</TABLE>
<PAGE> 18
Mahoning National Bancorp, Inc.
Form 10-K
EXHIBIT INDEX
Exhibit
Number
10(k) Change-In-Control Protective Agreement-Donna J. Mowrey
13 1997 Annual Report to Shareholders
21 Subsidiaries of the Registrant
27 Financial Data Schedule
99(a) Report of Independent Certified Public Accountants. Predecessor
Auditors Report for the year ended December 31, 1995.
99(b) Registrant's Notice of Annual Meeting and Proxy Statement dated March
17, 1998
<PAGE> 1
Exhibit 10(k)
Mahoning National Bancorp, Inc.
Form 10-K
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K
Exhibit 10 Material Contracts (10k)
Change-In-Control Protective Agreement
Donna J. Mowrey
<PAGE> 2
THE MAHONING NATIONAL BANK OF YOUNGSTOWN
-------------------------------
Guarantee Agreement
--------------------------------
AGREEMENT entered into this 17th day November, 1997 (the "Effective
Date"), by and between The Mahoning National Bank of Youngstown (the "Bank") and
Donna J. Mowrey (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/ Donna J. Mowrey
- --------------------- --------------------------------
Employee
<PAGE> 3
CHANGE-IN-CONTROL PROTECTIVE AGREEMENT
THIS AGREEMENT entered into this 17th day of November, 1997, (the
"Effective Date") by and between, Mahoning National Bancorp, Inc. (the
"Company"), and Donna J. Mowrey (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> 4
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 280G Maximum" shall mean the product of 2.99 and the
Employee's "base amount" as defined in Code 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 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.
<PAGE> 5
(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 280G Maximum
and the sum of any other "parachute payments" as defined under Code 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 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 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.
<PAGE> 6
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.
----------------------
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
<PAGE> 7
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.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first hereinabove written.
<PAGE> 8
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/ Donna J. Mowrey
- --------------------- ------------------------------------
Employee
<PAGE> 1
[PICTURE]
PEOPLE
[PICTURE]
VISION
[PICTURE]
COMMITMENT
Exhibit 13
1997 ANNUAL REPORT TO SHAREHOLDERS
[MNB LOGO]
MAHONING NATIONAL BANCORP, INC.
<PAGE> 2
PEOPLE
VISION
COMMIT-
MENT
<PAGE> 3
<TABLE>
<CAPTION>
(Amounts in thousands, except share data) For the year
---------------------------------
For the Year 1997 1996 Change
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 12,941 $ 11,611 11.4%
Per share 2.05 1.84 11.4
Cash dividends 4,347 3,559 22.1
Per share 0.690 0.565 22.1
At Year End
- --------------------------------------------------------------------------
Assets $796,866 $769,560 3.5%
Loans 492,487 477,795 3.1
Investment securities 250,756 229,332 9.3
Deposits 545,111 550,998 (1.1)
Stockholders' equity 86,579 77,095 12.3
Book value 13.74 12.24 12.3
Financial Ratios
- --------------------------------------------------------------------------
Return on assets 1.67% 1.55%
Return on equity 15.82 15.83
Net interest margin 4.79 4.78
Capital:
Primary leverage 11.05 10.27
Tier I 17.70 16.31
Risk based 18.95 17.57
</TABLE>
FINANCIAL HIGHLIGHTS
Common Share Information
The Company's common shares were traded Over-the-Counter, generally in the
Youngstown area, in 1997 and 1996. Effective January 5, 1998, the Company's
common shares were listed on The NASDAQ National Market System under the symbol
"MGNB". Currently the following five brokerage firms serve as market makers for
the Company's common stock: McDonald & Company Securities, Inc., The Ohio
Company, Sandler O'Neill & Partners, L.P., F.J. Morrissey & Co., Inc. and Everen
Securities, Inc. The following table lists the high and low bid prices during
the periods presented; these do not necessarily reflect prices in actual
transactions. The table also lists the dividends declared by the Company during
1997 and 1996.
The prices and dividends listed below have been restated to reflect the
two-for-one stock split in the form of a 100% stock dividend paid in 1996.
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------
Quarters Ended Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $22.75 $22.50 $26.25 $33.00 $21.13 $25.50 $26.25 $25.50
Low 21.50 21.50 22.50 26.00 19.00 20.75 24.50 22.50
Dividends 0.16 0.16 0.16 0.21 0.135 0.135 0.135 0.16
</TABLE>
CONTENTS
Financial Highlights...............1
Chairman's Letter................2-7
People. Vision. Commitment......8-11
Financial Information and
Comparative Financial Data...12-13
Consolidated Statements
of Financial Condition..........14
Consolidated Statements
of Income.......................15
Consolidated Statements of
Changes in Stockholders' Equity.16
Consolidated Statements
of Cash Flows...................17
Notes to Consolidated
Financial Statements.........18-28
Auditor's and Management's
Reports......................29-31
Business Overview.................32
Management's Discussion
and Analysis.................33-43
Mahoning National Bancorp, Inc.
Directors and Officers..........44
Mahoning National Bank
Directors and Advisory Board....44
Official Organization.............45
<PAGE> 4
[PICTURE "THE PRESIDENT"]
Gregory L. Ridler
Chairman of the Board,
President and Chief Executive Officer
A Letter from the Chairman...
The cover of our 1997 Annual Report introduces this year's theme - People.
Vision. Commitment. The focus is on "Our People," Mahoning National Bank's
valued employees, their visions for the Bank's success and their commitment to
Mahoning National and the communities it serves.
THE PRESIDENT
For nearly 130 years, Mahoning National Bank has been an active partner in the
economic growth and development of the Mahoning Valley. Our success in
establishing a long-term relationship with Valley residents and businesses has
stemmed from our unique ability to know our customers and our market.
Our success has been influenced by three key factors: the dedicated commitment
of an extremely talented work force, their understanding and insight into the
financial needs of our clientele and the fact that our Board of Directors and
employees never lose sight of Mahoning National's commitment to the Mahoning
Valley. We are proud to be actively involved in all the communities we serve and
we understand that our success as an institution is only as great as the
viability and vitality of our region and its populace.
Mahoning National achieved record earnings in 1997 for the seventh consecutive
year. Net income for 1997 amounted to $12.941 million or $2.05 per share. This
represents an increase of 11% over net income earned during 1996 ($11.611
million or $1.84 per share).
Total assets increased to $796.866 million on December 31, 1997. This increase
in assets is primarily reflected in growth in the loan and investment securities
portfolios.
Total deposits of $545.111 million resulted in a decrease of $5.887 million for
the year, reflecting a decline in interest bearing deposits. This decrease
mirrors an industry trend as consumers continue to move funds from financial
institutions into annuities and mutual funds.
Liquidity of Mahoning National remained at consistent levels throughout the
year; the Bank's liquidity ratios which analyze temporary assets and volatile
liabilities have compared favorably with peer banks in 1997.
Loan quality has become a focal point within the banking industry over the last
several years. A common measurement of a bank's loan quality is its percentage
of nonperforming loans to total loans.
Non-accrual loans, consisting of loans on which interest is no longer accrued
but recorded only when received, and loans over 90 days past due, amounted to
$2.881 million on December 31, 1997; this category of loans amounted
2
<PAGE> 5
[PICTURE]
"Mahoning National's
participation in the YMCA's Youngstown
Area Community Cup helps foster
employee pride, teamwork and creates an
awareness of the benefits
of physical fitness."
Gregory L. Ridler
Community Cup 5K run
to 0.58% of total loans at year end and compares favorably with our peer group
ratio of 0.73%.
Nineteen ninety-seven results show $3.563 million of net loans charged off after
recoveries; these loans represent loans fully or partially charged off where the
ultimate amount to be collected was deemed to be uncertain at the time of charge
off. It is anticipated that some of these amounts charged off will be collected
in the future and will be added to the Bank's allowance for possible loan
losses.
As a result of the amount of loans charged off and additional allocations to the
Bank's loan allowance during 1997, Mahoning National's allowance for possible
loan losses stands at 1.53% of loans outstanding at year end.
Mahoning National's capital ratios remain well above regulatory guidelines; our
Capital to Asset ratio at year end was 10.86%. In fact, under the risk-based
capital guidelines, Mahoning has one of the strongest ratios in the industry at
18.95%.
The strength of Mahoning National's balance sheet was increased as common
stockholder's equity rose during the year to $86.579 million from $77.095
million in 1996, resulting in a per share book value of $13.74 compared to
$12.24 a year ago.
As evidence of management's continued confidence in Mahoning National's earnings
performance, the Board of Directors in November concurred with management's
recommendation to increase the December dividend to $.21 per common share, an
indicated annual rate of $.84. This represents an increase of 22% over the prior
year and represents the thirty-second consecutive annual dividend increase.
Historically a strong, safe institution, it is extremely gratifying to note that
in 1997 Mahoning National was recognized by the independent research firm
VERIBANC, Inc., as a "Blue Ribbon" bank for the thirtieth consecutive quarter.
Only 2 percent of the Nation's 9,500 banks have earned this rating over that
time frame, and Mahoning National was the only Bank of its size in the State of
Ohio to receive this designation for thirty consecutive quarters. To obtain the
Blue Ribbon rating, banks must meet stringent standards of asset quality,
capital strength, earnings and liquidity.
In addition to the continued improvement in our level of profitability, many
other significant events within our organization took place during 1997.
A major commitment of resources has been allocated to our Commercial and
Consumer Loan Departments to ensure the necessary expertise and systems to allow
us to aggressively compete in and meet the credit needs of retail customers and
the business community.
Nineteen ninety-seven witnessed an overall growth in our loan portfolio. An
active calling program, not only for existing Bank customers but potential
customers as well, resulted in a $2.588 million increase in our volume of high
quality commercial loans and mortgages during the year.
Our Consumer Loan Department experienced a significant increase in loan volume
during 1997. Increases in automobile financing, residential mortgages, home
equity loans and credit cards resulted in $11.548 million growth in the consumer
loan portfolio.
3
<PAGE> 6
[PICTURE]
"It's very rewarding to brighten someone's day
with a nutritious meal, which he or she could not
otherwise prepare. `Meals on Wheels' helps
ensure that these recipients get a balanced diet."
Terrence F. Cloonan, Assistant Vice President & Trust Officer (r), pictured
with Patrick J. McElhaney, Assistant Vice President, Commercial Loans
Mahoning National Bank once again achieved an "Outstanding" Community
Reinvestment Act (CRA) rating for meeting community credit needs. This rating,
received by The Office of the Comptroller of the Currency during its most recent
performance evaluation in February 1997, acknowledges that Mahoning National is
meeting the credit needs of the community by assuming a leadership role in local
economic development. In addition to its conventional lending program, Mahoning
National also participates in the Warren-Trumbull County Consortium Reinvestment
Partnership, is a charter member of the Youngstown-Mahoning County Mini-Loan
Fund, Inc. and participates with the State of Ohio in its minority lending
program. These programs are intended to strengthen the region's economic base by
providing resources to small, fledgling companies.
Throughout the year, Mahoning National continued to be one of the leading
mortgage lenders for low-to-moderate income families and minority families; this
was accomplished through the success of our Mortgage Assist Program (MAP). This
program offers consumers more options and alternatives than conventional home
mortgages, including reduced down payment requirements, no private mortgage
insurance, extended loan terms and consideration of non-traditional credit
history sources. The Mortgage Assist Program complements Mahoning National's
other services for low-to-moderate income families, such as Budget Checking,
Five Hundred Dollar minimum consumer loans, Church Affiliated Banking and
Community Affiliated Banking.
Mahoning National continued to meet the needs of its community through the
introduction of new products and services to its customers in 1997.
During the year, Mahoning National continued to enhance and deploy technology to
improve the delivery of its products and services. "Premier II" software was
installed, enabling Mahoning National to operate more efficiently and better
serve its customers.
To further meet the needs of its diversified customer base, the hours of
operation offered at Mahoning National were expanded; in fact, Mahoning National
provides a wide variety of delivery channels from which customers can choose to
accommodate their particular lifestyles. Traditional branch banking with
personalized, one-on-one service, and expanded hours, is available at all
Mahoning National Branch Offices, while telephone banking is also available by
calling Mahoning National's Centralized Customer Service Center, which is
staffed with specialists rendering superior customer service. Continuing to grow
in transaction volume, TeleBank, Mahoning National's automated 24-hour-a-day
telephone response system, allows all customers to bank at their convenience.
Following its business strategy of providing customers with value-added products
and services, Mahoning National introduced two new
4
<PAGE> 7
[PICTURE]
"The March of Dimes WalkAmerica is an
excellent way to raise money to help educate
and finance prenatal care for women who
cannot afford it."
Joanne Jordan, Teller, Cornersburg Office
packaged checking accounts in September, which offer customers an array of
benefits. Easy Checking(sm) and Elite Checking(sm) provide free personalized
checks, unlimited checking, Shoppers Advantage(R), travel discounts, accidental
death insurance, no fee Hometown VISA(R) or MasterCard(R), discounted consumer
loan fees and more. Easy Checking(sm) and Elite Checking(sm) accounts are
designed to meet the needs of today's value-conscious consumer.
Mahoning National continued its commitment to the Mahoning Valley by reinvesting
in its franchise. In the fourth quarter of 1997, Mahoning National Bank
renovated its South & Midlothian Office. Expanded drive-in facilities, including
a drive-up ATM, allows for the expansion of banking hours and enables Mahoning
National to more effectively serve its customers.
As part of the renovations made at its South & Midlothian Office, Mahoning
National Bank has become the first financial institution in the Valley to
implement a fully functional Customer Service Counter, a new concept in banking
aimed at providing better, more efficient customer service. Instead of having to
wait in line for a teller, customers are now able to perform all non-cash
transactions, such as deposits and payments, at the counter, as well as obtain
information regarding new accounts, check orders, loans, account changes, safe
deposit boxes and other financial products and services.
As the merger and acquisition trend in the financial services industry
continues, we expect our market share to increase, since as a locally owned and
independent financial institution, we are well positioned to meet the financial
needs of the businesses and individuals in the communities we serve. The size of
our institution affords us the opportunity to provide our customers with the
personalized service they expect and deserve. Mahoning National remains
committed to our local community and will continue to provide quality financial
services to the people of the Mahoning Valley.
On December 31, 1997 Mahoning National Bancorp, Inc. received notification that
its application to list and trade the Company's shares on the NASDAQ National
Market System was approved and that the Company would be listed and begin
trading on NASDAQ on January 5, 1998.
Mahoning National Bancorp, Inc., which has a total of 6,300,000 outstanding
common shares, trades under the symbol "MGNB." Market makers in the Company's
common stock include: Everen Securities, Inc., F.J. Morrissey & Co., Inc.,
McDonald & Company Securities, Inc., The Ohio Company and Sandler O'Neill &
Partners, L.P.
J. David Sabine, Esquire, Senior Vice President and Senior Trust Officer, joined
Mahoning National Bank in April. Dave, a graduate of the University of Michigan
Law School, brings to our organization over twenty-seven years of trust and
estate planning experience; his
5
<PAGE> 8
[PICTURE]
"It's very rewarding to see the children
develop and grow spiritually through our
Sunday school class at Martin Luther
Lutheran Church. "
Gail Hall, Teller, Struthers-Poland Office (l)
legal and managerial expertise will enhance the quality and delivery of our
trust and investment products and services to our customers.
We would like to express our sincere appreciation for the support and counsel of
Eleanor Beecher Flad, who retired from the Board of Mahoning National Bank in
January. After 15 years of distinguished service to the Bank's Board, Eleanor
has been designated Director Emeritus.
Further, we welcome Parker T. McHenry, Executive Vice President, Mahoning
National Bank, to the Bank's Board of Directors. Parker, whose primary
responsibilities include management of the credit administration and retail
banking functions, joined the Board in February; he has been associated with
Mahoning National for the past 8 years.
We extend our sympathies to the family of Clifford F. Morain, an Advisory Board
member, who passed away in June. Mr. Morain's association with Mahoning National
Bank began in 1964 and his 33 years of dedicated service to our Bank is
recognized and appreciated by all.
It is the objective of The Mahoning National Bank, as a locally owned and
independent financial institution, to provide a full range of financial products
and services to our clientele. We strive to achieve profit levels which assure
the continued growth of our organization for the benefit of our stockholders,
customers, employees and the community we serve.
The one standard for which Mahoning National strives is excellence in the
quality of our products and services, and in our relationships with people --
our customers, our employees, our community and our stockholders.
To meet the standard, we are committed to:
o Offering financial products and services of excellent quality and value;
o Realizing superior levels of financial performance;
o Achieving consistently higher levels of asset growth;
o Generating the profits required to fuel our growth; and
o Developing people who contribute superior performance in all levels.
6
<PAGE> 9
[PICTURE]
"The holidays were made a little brighter
for many area children through Mahoning
National's participation in the Salvation
Army's 'Angel Tree' Campaign."
Sandra Douglas, Executive Secretary
Meeting that commitment will require us to extend ourselves in our planning,
executing our plans and following up on our daily tasks without sacrificing
quality service to our customers. Bankwide, we must strive to raise the level of
expectation associated with both collective and individual performance.
Be assured, the Board and management of Mahoning National Bancorp, Inc.
appreciate the continued support and interest of our stockholders. Your Company
has accomplished a great deal during the past year and we continue to build a
solid foundation to meet the challenges of an ever changing financial services
industry.
Our high expectations for the future are founded on the financial strength of
our organization and the abilities of our employees. We are confident of our
ability to contribute significantly to the continued success of the community we
serve.
For the Board of Directors
/s/ Gregory L. Ridler
Gregory L. Ridler
Chairman of the Board,
President and Chief Executive Officer
7
<PAGE> 10
[PICTURE]
"Mahoning National commits loan
dollars and volunteer hours to support the
Mahoning-Youngstown Mini Loan Fund, which helps to
provide for small businesses that don't qualify
for conventional loans."
Frank Hierro
[PICTURE]
"Spending time with a child in Big Brothers
& Big Sisters can help make a positive
difference in a child's life."
Kathy Patrone
LOANS
Frank Hierro, Senior Vice President, Commercial Loans
A 13-year veteran of Mahoning National Bank, Frank Hierro has demonstrated his
commitment to local business efforts by focusing on improving customer service.
Hierro and his Commercial Loan team take the time to meet with each customer
one-on-one, personally catering to specific needs and providing quick
turn-around time on credit issues.
"Superior customer service is definitely the key to our success," Hierro
explained. "Differentiating financial services is often difficult, but we pride
ourselves in meeting and exceeding our customers' needs and their expectations.
We have been able to accomplish this goal through proper planning and
leadership, consistently maintaining high credit standards and delivering
products and services in an efficient manner."
Under Hierro's guidance, the Bank's Commercial Loan team has recently introduced
a new accounts receivable product, expanded the credit department and made an
overall commitment to on-line deposit services.
Kathleen Patrone, Vice President, Consumer Loans
"Local means having a person to talk to face-to-face instead of an unknown
person on an 800 number," proclaimed Kathy Patrone regarding the advantage of
banking with Mahoning National, a local bank. "Whether it's questions about a
new or past loan, our customers can talk to someone they know and trust while
receiving quick, personalized service."
Patrone and her Consumer Loan team are gearing up to successfully enter the next
millennium of consumer lending by expanding products, offering secondary market
mortgage rates and improving efficiency and turn-around times. They are also
updating their customer service program, which, in addition to consumers, is
also provided to Dealers, Realtors and Title Agents.
8
<PAGE> 11
[PICTURE]
"Through my volunteer efforts with the Canfield Swim Team, I have
helped these young adults learn the importance of achieving team
success while also striving to meet their individual goals."
Carol Chamberlain
[PICTURE]
"I am thankful I have the
opportunity to help New Hope Academy and
children like Bryant Youngblood. Mahoning
National has been very supportive of my
involvement, and we all benefit when positive
things happen in the community."
J. David Sabine
TRUST &
INVESTMENTS
Carol Chamberlain, Vice President and Manager of
the Personal Trust Division
Carol Chamberlain, Certified Trust and Financial Advisor, and Manager of the
Personal Trust Division of Mahoning National's Trust and Investments Department
has over 24 years of experience in personal trust administration and taxation.
She and her staff provide a complete line of services that are designed to meet
the needs of our clients, both financial and personal. "We are pleased to have
an extremely qualified staff of individuals who are committed to providing our
clients with objective, professional advice," stated Chamberlain.
Services provided include estate planning, financial planning, investment
management, the administration of personal trusts and special accounts for
self-trusteed trusts. "The financial services arena is rapidly changing and the
Trust Department is continuing to introduce innovative products to meet the
increasingly sophisticated needs of our clients," emphasized Chamberlain.
J. David Sabine, Senior Vice President and Senior Trust Officer
With over 27 years experience in the trust, estate planning and investment
management profession, J. David Sabine has been a valuable addition to Mahoning
National's experienced management team. "Our entire staff shares a vision of
high professionalism and a true dedication to the traditional values of a
fiduciary relationship," Sabine proclaimed.
As evidence of this professionalism, Mahoning National Bank's Trust and
Investments Department works hard to deliver investment returns above the market
averages for its clientele while taking below average risks in the market.
Because Mahoning National is truly a local bank, we are able to provide each of
our clients with an investment officer and an administrative officer committed
to the client's account. "Despite this age of merger and cost cutting, we are
able to resist making customer service choices that result in reducing service
quality. Mahoning National continues to be committed to maintaining and
improving its high level of service," emphasized Sabine.
9
<PAGE> 12
Branches, Centralized Banking and Technology
[PICTURE]
"It is rewarding to interact with the
generous people of our area. Year in
and year out, the Salvation Army is
praised for the fine services it provides
to our community. It's truly a joy to
help such a fine organization."
David Westerburg (l)
RETAIL
DELIVERY
NETWORK
David Westerburg, Senior Vice President
"Dedication to exceptional customer service has been paramount to Mahoning
National's success as a local bank," emphasized David Westerburg, Senior Vice
President. "Through this commitment, Mahoning National has developed and held
long-lasting relationships with our customers -- our family, friends and
neighbors. Our employees truly care about the well-being of our customers."
According to Westerburg, who has twenty-four years of banking experience, this
philosophy has led to Mahoning National's commitment to having the best retail
customer delivery system in the Mahoning Valley, providing service that meets
and strives to exceed customer expectations. To help accomplish this, the Bank
has expanded its branch hours, installed TeleBank -- an automated twenty-four
hour a day customer service system -- and formed the Centralized Banking
Department in order to give its customers more convenient banking options.
An automation and technology plan has been developed and implemented to allow
Mahoning National to better serve its customers and maximize profits through
advanced technologies. The Bank has enhanced productivity through acquisition of
the latest delivery systems, including its automated telephone bill payment and
loan phone systems. Customers, at their convenience, can now pay their bills and
apply for loans via the telephone, receiving quick loan approvals.
Westerburg believes that "local" means personal attention and knowing that
financial decisions are made by people who are stakeholders in our Valley. "We
have dedicated employees ready to meet the many challenges facing the banking
industry today," explained Westerburg.
10
<PAGE> 13
[PICTURE]
"Touring the Bank helped the children of
John White Elementary School have a better
understanding of money, banking and the
value of saving."
Emma Titler, Branch Manager, Main Office
[PICTURE]
"Mahoning National's `Student of the Month
Program' enables Kirkmere Elementary to
enhance their students' education with the
purchase of needed supplies."
Randy Rivello, Assistant Vice President and Branch Manager,
Cornersburg Office (l)
[PICTURE]
"Helping to clean up downtown Youngstown through
Operation Beautification gave me a sense of pride in giving
back to the community where I work."
Marianne Yeager, Vice President, Information Services (l),
pictured with Kimberly Heidel, Loan Services Supervisor.
11
<PAGE> 14
FINANCIAL INFORMATION
<TABLE>
NET INCOME
(IN MILLIONS OF DOLLARS)
<CAPTION>
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C>
7,103 8,560 10,070 11,611 12,941
</TABLE>
<TABLE>
EFFICIENCY RATIO
(PERCENTAGE)
<CAPTION>
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C>
61.41 57.27 53.77 49.62 47.71
</TABLE>
<TABLE>
RETURN ON AVERAGE ASSETS
(PERCENTAGE)
<CAPTION>
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C>
1.13 1.26 1.40 1.55 1.67
</TABLE>
<TABLE>
RETURN ON AVERAGE EQUITY
(PERCENTAGE)
<CAPTION>
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C>
13.22 14.59 15.37 15.83 15.82
</TABLE>
<TABLE>
MARKET VALUE PER SHARE BOOK VALUE PER SHARE
(DOLLARS)
<CAPTION>
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
MARKET VALUE 10.00 14.25 19.00 23.88 33.88
BOOK VALUE 8.85 9.53 11.05 12.24 13.74
</TABLE>
Form 10-K
A copy of Mahoning National Bancorp, Inc.'s Annual Report filed with the
Securities and Exchange Commission will be available on March 31, 1998 upon
written request to: Norman E. Benden, Jr., Treasurer
Mahoning National Bancorp, Inc., 23 Federal Plaza,
Youngstown, Ohio 44501-0479.
<TABLE>
ASSETS
(IN MILLIONS OF DOLLARS)
<CAPTION>
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C>
657 708 720 770 797
</TABLE>
<TABLE>
LOANS
(IN MILLIONS OF DOLLARS)
<CAPTION>
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C>
377 425 462 478 492
</TABLE>
12
<PAGE> 15
COMPARATIVE FINANCIAL DATA
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------------
(Amounts in thousands, except share data) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS
Interest income $ 58,130 $ 56,081 $ 53,145 $ 47,135 $ 44,792
Interest expense 23,761 22,982 22,193 17,410 17,650
--------------------------------------------------------
Net interest income 34,369 33,099 30,952 29,725 27,142
Provision for loan losses 2,975 2,625 1,900 1,900 2,405
Non-interest income 8,333 7,174 6,038 5,495 5,139
Non-interest expense 20,626 20,497 20,380 20,642 20,295
--------------------------------------------------------
Income before income taxes 19,101 17,151 14,710 12,678 9,581
Income taxes 6,160 5,540 4,640 4,118 2,835
--------------------------------------------------------
Income before cumulative effect of a
change in accounting principle 12,941 11,611 10,070 8,560 6,746
Cumulative effect on prior years of change
in accounting for income taxes -- -- -- -- 357
--------------------------------------------------------
Net income $ 12,941 $ 11,611 $ 10,070 $ 8,560 $ 7,103
======== ======== ======== ======== ========
YEAR END BALANCES
Assets $796,866 $769,560 $720,135 $707,874 $657,468
Loans 492,487 477,795 462,435 425,367 377,240
Investment securities 250,756 229,332 210,087 235,174 237,633
Deposits 545,111 550,998 574,808 554,609 542,690
Securities sold under agreements to repurchase 146,245 122,467 65,042 81,247 39,832
Stockholders' equity 86,579 77,095 69,641 60,031 55,764
AVERAGE BALANCES
Assets $774,847 $749,811 $717,097 $676,745 $625,824
Loans 490,167 478,237 445,594 407,028 369,266
Investment securities 235,814 225,042 221,580 226,952 206,023
Deposits 543,335 565,219 558,546 547,450 523,799
Securities sold under agreements to repurchase 128,843 93,810 75,512 58,508 36,092
Stockholders' equity 81,802 73,328 65,527 58,657 53,726
PER SHARE DATA (1)
Net income (2) $ 2.05 $ 1.84 $ 1.60 $ 1.36 $ 1.13
Dividends 0.690 0.565 0.465 0.395 0.342
Book value 13.74 12.24 11.05 9.53 8.85
RATIOS
Return on average assets 1.67% 1.55% 1.40% 1.26% 1.13%
Return on average equity 15.82 15.83 15.37 14.59 13.22
Net interest margin (3) 4.79 4.78 4.68 4.76 4.73
Efficiency ratio (4) 47.71 49.62 53.77 57.27 61.41
Stockholders' equity to assets 10.86 10.02 9.67 8.48 8.48
Dividends to net income 33.59 30.66 29.09 29.07 30.38
Loans to deposits 90.35 86.71 80.45 76.70 69.51
Allowance for loan losses to total loans 1.53 1.70 1.55 1.57 1.38
Nonperforming loans to total loans 0.58 0.97 0.49 0.51 0.46
<FN>
(1) Adjusted for 2:1 stock split in the form of a 100% stock dividend in 1996
and 1994.
(2) Includes a $.06 per share adjustment in 1993 for the cumulative effect on
prior years of a change in accounting for income taxes (SFAS 109).
(3) Tax equivalent basis.
(4) Other operating expenses as a percentage of net interest income on a
fully-taxable equivalent basis and non-interest income (excluding security
gains and gains on sales of loans).
</TABLE>
13
<PAGE> 16
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
----------------------
(Amounts in thousands, except share data) 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 29,143 $ 29,257
Federal funds sold 8,800 19,500
Investment securities available for sale - at fair value 189,578 143,600
Investment securities held to maturity - at cost
(Fair value $61,248 in 1997 and $85,646 in 1996) 61,178 85,732
Loans 492,487 477,795
Less allowance for possible loan losses 7,524 8,112
----------------------
Net loans 484,963 469,683
Bank premises and equipment 8,653 8,981
Other assets 14,551 12,807
----------------------
Total assets $796,866 $769,560
======== ========
- ---------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Non-interest bearing $ 74,500 $ 70,706
Interest bearing
Savings 275,139 282,929
Time 195,472 197,363
----------------------
Total deposits 545,111 550,998
Federal funds purchased and securities
sold under agreement to repurchase 146,245 122,467
Short term borrowings 10,954 10,235
Long term borrowings 3,151 4,065
Other liabilities 4,826 4,700
----------------------
Total liabilities 710,287 692,465
----------------------
Commitments and contingencies
- ---------------------------------------------------------------------------------------------------------
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 35,221 26,627
Unrealized gain on investment securities
available for sale, net of deferred taxes 958 68
----------------------
Total stockholders' equity 86,579 77,095
----------------------
Total liabilities and stockholders' equity $796,866 $769,560
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
14
<PAGE> 17
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
(Amounts in thousands, except per share data) 1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $43,823 $ 42,397 $ 39,358
Interest on investment securities
Taxable 12,820 12,490 12,462
Nontaxable 1,065 894 712
Interest on federal funds sold 422 300 613
------------------------------------
58,130 56,081 53,145
INTEREST EXPENSE
Interest on deposits 16,887 18,080 17,791
Interest on federal funds purchased and securities
sold under agreement to repurchase 6,283 4,379 3,879
Interest on short term borrowings 394 303 439
Interest on long term borrowings 197 220 84
------------------------------------
23,761 22,982 22,193
------------------------------------
Net interest income 34,369 33,099 30,952
PROVISION FOR LOAN LOSSES 2,975 2,625 1,900
------------------------------------
Net interest income after provision
for loan losses 31,394 30,474 29,052
OTHER OPERATING REVENUE
Trust department income 2,864 2,837 2,441
Service charges on deposit accounts 4,161 3,623 2,840
Other service charges 827 756 711
Other revenue 299 277 201
Gain (loss) on sale of investment securities
available for sale 182 (319) (155)
------------------------------------
8,333 7,174 6,038
OTHER OPERATING EXPENSES
Salaries and employee benefits 11,119 10,789 10,385
Net occupancy expense 1,462 1,485 1,661
Equipment rental, depreciation and maintenance 1,432 1,727 1,603
Federal deposit insurance 70 2 636
State franchise tax 928 1,028 899
Other expenses 5,615 5,466 5,196
------------------------------------
20,626 20,497 20,380
------------------------------------
Income before income taxes 19,101 17,151 14,710
INCOME TAX EXPENSE 6,160 5,540 4,640
------------------------------------
NET INCOME $12,941 $ 11,611 $ 10,070
======= ======== ========
NET INCOME PER COMMON SHARE $ 2.05 $ 1.84 $ 1.60
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
15
<PAGE> 18
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years ended December 31, 1997, 1996 and 1995
------------------------------------------------------------------------
Additional Unrealized Gain (Loss) Total
Common Paid-in Retained on Available for Sale Stockholders'
(Amounts in thousands, except share data) Stock Capital Earnings Investment Securities Equity
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ 31,500 $15,750 $14,585 $(1,804) $60,031
Net income for 1995 -- -- 10,070 -- 10,070
Increase in unrealized gain on available for sale
investment securities, net of deferred taxes -- -- -- 2,470 2,470
Cash dividends paid - $.465 per share -- -- (2,930) -- (2,930)
----------------------------------------------------------------------
Balance at December 31, 1995 31,500 15,750 21,725 666 69,641
Par value eliminated from common stock,
stated value of $1 per share established (28,350) 28,350 -- -- --
Stock split in the form of a dividend 3,150 -- (3,150) -- --
Net income for 1996 -- -- 11,611 -- 11,611
Decrease in unrealized gain on available for sale
investment securities, net of deferred taxes -- -- -- (598) (598)
Cash dividends paid - $.565 per share -- -- (3,559) -- (3,559)
----------------------------------------------------------------------
Balance at December 31, 1996 6,300 44,100 26,627 68 77,095
Net income for 1997 -- -- 12,941 -- 12,941
Increase in unrealized gain on available for sale
investment securities, net of deferred taxes -- -- -- 890 890
Cash dividends paid - $.69 per share -- -- (4,347) -- (4,347)
----------------------------------------------------------------------
Balance at December 31, 1997 $ 6,300 $44,100 $35,221 $ 958 $86,579
========= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
16
<PAGE> 19
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
(Amounts in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 12,941 $ 11,611 $ 10,070
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 1,098 1,072 980
Provision for loan losses 2,975 2,625 1,900
Amortization and accretion of discounts and premiums (76) (92) 788
Amortization of deferred loan costs 1,176 975 1,488
Deferred tax expense (benefit) 321 (71) 175
(Gain) loss on sale of investment securities available for sale (182) 319 155
Loss on assets sold 117 16 72
(Decrease) increase in taxes payable (104) 274 (231)
(Increase) decrease in interest receivable (281) (167) 503
Increase in interest payable 119 37 233
Increase (decrease) in other liabilities 111 470 (612)
Increase in other assets (1,054) (224) (1,778)
------------------------------------
Net cash provided by operating activities 17,161 16,845 13,743
Cash flows from investing activities
Proceeds from the sales of investment securities available for sale 22,242 24,658 30,129
Proceeds from maturities of investment securities held to maturity 24,640 32,575 52,942
Proceeds from maturities of investment securities available for sale 11,840 27,367 29,412
Purchase of investment securities held to maturity -- (36,738) (19,735)
Purchase of investment securities available for sale (78,519) (68,254) (64,845)
Net increase in loans (20,640) (18,292) (40,030)
Net decrease (increase) in federal funds sold 10,700 (16,700) (100)
Capital expenditures (887) (565) (2,989)
------------------------------------
Net cash used in investing activities (30,624) (55,949) (15,216)
Cash flows from financing activities
Net (decrease) increase in deposits (5,887) (23,810) 20,199
Net increase (decrease) in federal funds purchased and
securities sold under agreement to repurchase 23,778 57,425 (16,205)
Net increase (decrease) in short term borrowings 719 4,811 (672)
Proceeds from long term borrowings -- 3,500 --
Payments on long term borrowings (914) (737) (60)
Dividends paid (4,347) (3,559) (2,930)
------------------------------------
Net cash provided by financing activities 13,349 37,630 332
------------------------------------
Net decrease in cash and cash equivalents (114) (1,474) (1,141)
Cash and cash equivalents at beginning of year 29,257 30,731 31,872
------------------------------------
Cash and cash equivalents at end of year $ 29,143 $ 29,257 $ 30,731
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 23,642 $ 22,945 $ 21,960
======== ======== ========
Income taxes $ 5,945 $ 5,355 $ 4,719
======== ======== ========
Non-cash transactions:
Transfer from loans to other real estate owned $ 1,209 $ 287 $ 97
======== ======== ========
Transfer of investment securities from
held to maturity to available for sale $ -- $ -- $ 32,586
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Accounting Policies
The financial information presented is prepared in accordance with generally
accepted accounting principles (GAAP) and general policies within the financial
services industry. Unless otherwise indicated amounts are in thousands, except
per share data.
1. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Mahoning
National Bancorp, Inc. (the Company) and its wholly-owned subsidiary The
Mahoning National Bank of Youngstown (the Bank). All significant
intercompany balances and transactions have been eliminated in
consolidation.
2. INDUSTRY SEGMENT INFORMATION
The Company is a one-bank holding company engaged in the business of
commercial and retail banking, and trust and investment services, with
operations conducted through its main office and branches located
throughout Mahoning and Trumbull Counties of Ohio. Mahoning and Trumbull
Counties provide the source for substantially all of the Company's deposit,
loan and trust activities. The majority of the Company's income is derived
from commercial and retail business lending activities and investments.
3. USE OF ESTIMATES
In preparing financial statements in conformity with GAAP, management is
required to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from
those estimates. Areas involving the use of management's estimates and
assumptions include the allowance for loan losses, the realization of
deferred tax assets, fair values of certain securities, the determination
and carrying value of impaired loans, the carrying value of loans held for
sale, the carrying value of other real estate, depreciation of premises and
equipment, the post-retirement benefit obligation, the actuarial present
value of pension benefit obligations, net periodic pension expense and
prepaid pension costs recognized in the Company's financial statements.
Estimates that are more susceptible to change in the near term include the
allowance for loan losses and the fair value of certain securities.
4. CASH AND CASH EQUIVALENTS
The Company includes demand deposits at other financial institutions as
cash equivalents.
5. INVESTMENT AND AVAILABLE FOR SALE SECURITIES
Investments are classified in up to three categories and accounted for
based on the respective classification. Debt securities that the Company
has the positive intent and ability to hold to maturity are classified as
held to maturity and reported at amortized cost (note C). Securities bought
and held principally for the purpose of selling them in the near term are
classified as trading securities and reported at fair value, with
unrealized gains and losses included currently in income. Equity securities
and debt securities classified as neither held to maturity nor trading
securities are classified as available for sale and reported at fair value,
with unrealized gains and losses excluded from income and reported as a
separate component of stockholders' equity (note B). The Company did not
classify any debt or equity securities as trading securities in 1997, 1996
or 1995. Realized gains and losses from sales of debt and equity securities
are determined by specific identification of the security sold.
Substantially all interest earned from obligations of state and political
subdivisions is not subject to federal income tax.
6. LOANS
Loans are stated at the principal amount outstanding net of the unamortized
balance of deferred direct loan origination fees and costs (note D). These
net deferred fees and costs are amortized over the lives of the related
loans as an adjustment to interest income using the interest method.
Interest is accrued as earned unless the collectibility of the loan is in
doubt. Uncollectible interest on loans that are contractually past due is
charged off to interest income to the extent of all interest previously
accrued, and income is subsequently recognized only to the extent that cash
payments are received until, in management's judgment, the borrower's
ability to make periodic interest and principal payments has returned to
normal, in which case the loan is returned to accrual status.
The carrying value of loans classified as impaired is periodically adjusted
to reflect cash payments, revised estimates of future cash flows and
increases in the present value of expected cash flows due to the passage of
time. Cash payments representing interest income are reported as such and
other cash payments are reported as reductions in carrying value. Increases
or decreases in carrying value due to changes in estimates of future
payments or the passage of time are reported as reductions or increases in
the provision for loan losses.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights,"
which requires that a mortgage banking enterprise recognize as a separate
asset, rights to service mortgage loans for others, however those servicing
rights are acquired. In circumstances where mortgage loans are originated,
separate asset rights to service mortgage loans are only recorded when the
Company intends to sell such loans. Mortgage servicing assets are amortized
against future service fee income based on the anticipated life of the
loans sold. The adoption of this new statement did not have a material
impact on the Company's consolidated financial position or results of
operations.
Loans held for sale are reported at the lower of cost or market value in
the aggregate.
7. ALLOWANCE FOR POSSIBLE LOAN LOSSES
The determination of the balance of the allowance for possible loan losses
is based on analysis of loans and evaluation of, among other items,
economic factors, identified problem loans, delinquencies and
18
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- continued
charge-off experience. The balance reflects an amount which, in
management's judgment, is adequate to provide for potential loan losses.
The annual provision for loan losses is charged as an operating expense on
the consolidated statement of income.
In May 1993, the Financial Accounting Standards Board issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan." This Statement, which
was amended by SFAS No. 118, requires that impaired loans be measured based
upon the present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or fair value of the collateral. The Company
adopted the Statement effective January 1, 1995, without material effect on
consolidated financial condition or results of operations.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In applying the provisions of SFAS No. 114, the Company
considers its investment in one-to-four family residential loans, consumer
installment loans and credit card loans to be homogeneous and, therefore,
excluded from separate identification for evaluation of impairment. With
respect to the Company's investment in impaired commercial loans,
nonresidential mortgage loans and nonrated industrial development
obligations, such loans are generally collateral-dependent, and as a
result, are carried as a practical expedient at the lower of cost or fair
value.
It is the Company's policy to charge off unsecured commercial credits that
are more than ninety days delinquent. Similarly, collateral-dependent loans
which are more than ninety days delinquent are considered to constitute
more than a minimum delay in repayment and are evaluated for impairment
under SFAS No. 114 at that time.
8. BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation is provided for in amounts
sufficient to relate the cost of depreciable assets to operations over
their estimated service lives on a straight-line basis. Leasehold
improvements are amortized over the lives of the respective leases or the
service lives of the improvements, whichever is less (note F).
9. OTHER REAL ESTATE OWNED
Other real estate owned is comprised of properties acquired through
foreclosure proceedings or acceptances of deeds in lieu of foreclosure.
These properties are included in other assets initially at the lower of
cost or fair value, less estimated selling costs. Any reduction from
carrying value of the related loan to fair value at the time of acquisition
is accounted for as a loan loss. Any subsequent reduction in fair value is
reflected as a charge to income. Expenses to carry other real estate are
charged to operations as incurred. Other real estate owned at December 31,
1997 and 1996 totaled $1.112 million and $269 thousand, respectively.
10. INCOME TAXES
The Company follows the liability method of accounting for income taxes.
The liability method provides that deferred income taxes are recognized for
the tax consequences of temporary differences by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
11. BENEFIT PLANS
The Bank provides certain health care and life insurance benefits for
certain retired employees with twenty or more years of service. The Company
records an accrual for the estimated costs of providing postretirement
benefits over the employee service periods. Upon adoption of SFAS 106, the
Company elected to defer recognition of the accumulated postretirement
benefit obligation existing at January 1, 1993 (transition obligation) of
approximately $2.134 million. The transition obligation is being amortized
as part of postretirement costs over a twenty year period. The funding of
these benefits is made as incurred (note K).
The Bank maintains a non-contributory defined benefit pension plan covering
substantially all full-time employees. Benefit payments for normal
retirement are based on employees' years of service and highest five year
average compensation. The Bank's policy is to contribute an amount annually
to the plan that is tax deductible under the Internal Revenue Code. Plan
assets consist principally of U.S. government securities and listed stocks
and bonds. Pension expense is computed in accordance with SFAS Nos. 87 and
88 (note K).
The Bank has established deferred compensation and phantom stock plans with
certain officers and an elective contributory defined contribution 401(k)
plan which is offered to substantially all employees. The cost of the
deferred compensation and phantom stock plans are recognized over the
participants respective vesting schedules of five to twenty-one years. Bank
contributions to the 401(k) plan, which are discretionary, are expensed
when determined. The Company recognized expenses totaling $537 thousand,
$251 thousand and $420 thousand in connection with these benefit plans for
the years ended December 31, 1997, 1996 and 1995, respectively.
12. EARNINGS PER SHARE
Earnings per share is computed by dividing net income by the weighted
average number of shares outstanding during the year. Weighted average
shares outstanding for each of the years ended 1997, 1996 and 1995 were
6.300 million. Weighted-average shares outstanding for 1995 have been
adjusted for a 2 for 1 stock split effected in the form of a stock dividend
in 1996 (note M).
13. TRUST DEPARTMENT ASSETS AND INCOME
Property (other than cash deposits) held by the Bank in fiduciary or agency
capacities for its customers is not included in the accompanying
consolidated statements of financial condition since such items are not
assets of the Bank. Trust department income is recognized on the cash basis
which materially approximates amounts that would be recognized under the
accrual method.
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
The consolidated financial statements include estimated fair value
information as of December 31, 1997 and 1996, as required by SFAS 107. Such
information, which pertains to the Company's financial instruments, is
based on the requirements set forth in SFAS 107 and
19
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - continued
does not purport to represent the aggregate net fair value of the Company.
Further, the fair value estimates are based on various assumptions,
methodologies and subjective considerations, which may vary widely among
different financial institutions and which are subject to change (note N).
The following methods and assumptions were used by the Company in
estimating financial instrument fair values:
Cash and cash equivalents and federal funds sold
------------------------------------------------
The statement of financial condition carrying amounts for cash and federal
funds sold equal the estimated fair values of such assets.
Investment securities
---------------------
Fair values for investment securities are based on quoted market prices, if
available. If quoted market prices are not available, fair values are based
on quoted market prices of comparable instruments.
Loans receivable
----------------
For variable rate loans which reprice frequently and which entail no
significant change in credit risk, fair values are based on the carrying
values. The estimated fair values of fixed rate loans are estimated based
on discounted cash flow analyses using interest rates currently offered for
loans with similar terms to borrowers of similar credit quality.
Off-balance sheet instruments
-----------------------------
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit through
loans approved, but not yet funded, lines of credit and standby letters of
credit. Since some of these commitments may not be utilized, or utilized in
amounts less than the total committed, the total commitment amounts do not
necessarily represent future cash requirements. Management has determined
that due to the uncertainties of cash flows and difficulty in predicting
the timing of such cash flows, fair values could not be reasonably
estimated for these instruments. However, such amounts would not be
significant.
Accrued interest
----------------
The carrying amounts of accrued interest receivable and accrued interest
payable approximate their fair values.
Deposit liabilities
-------------------
The fair values estimated for deposits subject to withdrawal on demand
(e.g., interest and non-interest bearing checking accounts, savings
accounts, and certain types of money market accounts) are, by definition,
equal to the amount payable at the reporting date (i.e., their carrying
amounts). The carrying amounts of variable rate time deposits approximate
their fair values at the reporting date. Fair values of fixed rate time
deposits are estimated using discounted cash flow analyses using interest
rates currently offered to a schedule of aggregated expected time deposit
maturities.
Short term borrowings
---------------------
The carrying amounts of federal funds purchased, borrowings under
repurchase agreements, and other short term borrowings approximate their
fair values.
Long term borrowings
--------------------
The fair value of fixed-rate long term borrowings are estimated using
discounted cash flow analyses at interest rates currently offered to the
borrowing repayment schedules.
15. RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the current year presentation. The
reclassifications had no effect on net income or stockholders' equity.
Note B - Investment Securities Available for Sale
The amortized cost and estimated fair values of investment securities available
for sale at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities $ 95,257 $ 865 $(34) $ 96,088 $ 70,124 $346 $(190) $ 70,280
Securities of other U.S. government
agencies 69,781 476 (63) 70,194 54,808 158 (295) 54,671
Obligations of states and political
subdivisions 14,427 159 -- 14,586 9,787 93 (6) 9,874
Mortgage-backed securities and
collateralized mortgage obligations 5,087 71 -- 5,158 5,402 27 (27) 5,402
-------------------------------------------------------------------------------------------
Total debt securities available
for sale 184,552 1,571 (97) 186,026 140,121 624 (518) 140,227
Federal Reserve Bank Stock 945 -- -- 945 945 -- -- 945
Federal Home Loan Bank Stock 2,607 -- -- 2,607 2,428 -- -- 2,428
-------------------------------------------------------------------------------------------
Total investment securities
available for sale $188,104 $1,571 $(97) $189,578 $143,494 $624 $(518) $143,600
======== ====== ==== ======== ======== ==== ===== ========
Pledged securities $169,889 $171,061 $127,621 $127,619
======== ======== ======== ========
</TABLE>
20
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note B - continued
The amortized cost and estimated fair values of debt securities available for
sale at December 31, 1997, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
---------------------
<S> <C> <C>
Due in one year or less $ 7,252 $ 7,265
Due after one year through five years 171,713 173,103
Due after five years through ten years 500 500
---------------------
179,465 180,868
Mortgage-backed securities and
collateralized mortgage obligations 5,087 5,158
---------------------
Total debt securities available for sale $184,552 $186,026
======== ========
</TABLE>
Proceeds from the sales of securities available for sale during 1997, 1996 and
1995 were $22.242 million, $24.658 million and $30.129 million, respectively.
Gross gains and losses in 1997 were $184 thousand and $2 thousand, respectively.
Gross gains and losses in 1996 were $0 and $319 thousand, respectively. Gross
gains and losses in 1995 were $84 thousand and $239 thousand, respectively.
During the fourth quarter of 1995, the Financial Accounting Standards Board
permitted financial institutions a one-time opportunity to reassess the
appropriateness of the designations of all securities held in their available
for sale and held to maturity portfolios. As a result of this opportunity, the
Company transferred from held to maturity to available for sale, debt securities
(principally U.S. Treasury obligations) with a fair value of $32.286 million and
a book value of $32.586 million.
The Company did not hold any off-balance sheet derivative financial instruments
such as futures, forwards, swap or option contracts during 1997 or 1996.
Included in the available for sale portfolio are mortgage-backed securities and
collateralized mortgage obligations which are subject to prepayment risk as a
result of interest rate fluctuations.
Note C - Investment Securities Held to Maturity
The amortized cost and estimated fair values of investment securities held to
maturity at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities $39,924 $ 34 $(60) $39,898 $49,807 $ 48 $(224) $49,631
Securities of other U.S. government
agencies 11,000 3 (26) 10,977 24,527 67 (53) 24,541
Obligations of states and
political subdivisions 10,194 120 (1) 10,313 11,338 104 (28) 11,414
Other debt securities 60 -- -- 60 60 -- -- 60
-----------------------------------------------------------------------------------------
Total debt securities $61,178 $157 $(87) $61,248 $85,732 $219 $(305) $85,646
======= ==== ==== ======= ======= ==== ===== =======
Pledged securities $56,891 $56,892 $68,646 $69,462
======= ======= ======= =======
</TABLE>
The amortized cost and estimated fair values of debt securities at December 31,
1997, by contractual maturity, are shown below. Expected maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
---------------------
<S> <C> <C>
Due in one year or less $37,281 $37,285
Due after one year through five years 23,897 23,963
--------------------
$61,178 $61,248
======== =======
</TABLE>
During 1997, 1996 and 1995 there were no sales of investment securities held to
maturity.
21
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note D - Loans
The loan portfolio is comprised of:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
- -----------------------------------------------------------------
<S> <C> <C>
Residential mortgage loans $ 161,236 $ 156,693
Nonresidential mortgage loans 106,738 95,312
Commercial and industrial loans 79,518 87,130
Consumer loans to individuals 134,952 127,947
Nonrated industrial development
obligations 4,379 7,253
Other loans 4,129 2,481
------------------------
490,952 476,816
Unearned discount (90) (123)
Unamortized deferred loan costs, net 1,625 1,102
------------------------
$ 492,487 $ 477,795
========= =========
</TABLE>
Residential mortgage loans held for sale at December 31, 1997 and 1996 totaled
$298 thousand and $394 thousand, respectively.
Loans made to directors, executive officers, principal stockholders or to
entities with which these persons are associated totaled $10.792 million and
$10.004 million at December 31, 1997 and 1996, respectively. The terms and
conditions of these loans are established within the normal lending policies of
the Bank. A summary of transactions during 1997 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Loan balances at January 1, 1997 $ 10,004
New loans during the year 44,540
Repayments of loan principal (43,742)
Other (10)
--------
Loan balances at December 31, 1997 $ 10,792
========
</TABLE>
Note E - Allowance for Possible Loan Losses
Transactions in the allowance for possible loan losses are summarized as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $8,112 $7,156 $6,694
Provision charged to
operating expense 2,975 2,625 1,900
Losses charged to allowance
Mortgage loans 360 71 72
Installment loans 2,051 1,981 1,439
Credit card and related plans 375 308 183
Commercial loans 1,407 -- 382
----------------------------
Total charge-offs 4,193 2,360 2,076
Recoveries of loans charged-off
Mortgage loans 8 23 136
Installment loans 558 522 423
Credit card and related plans 40 48 43
Commercial loans 24 98 36
----------------------------
Total recoveries 630 691 638
----------------------------
Balance at end of year $7,524 $8,112 $7,156
====== ====== ======
</TABLE>
Note E - continued
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" were adopted on January 1, 1995.
Information required under SFAS No. 114 and SFAS No. 118 is as follows for the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------
<S> <C> <C> <C>
Year-end impaired loans with no
allowance for loan losses allocated $419 $319 $258
Year-end impaired loans with
allowance for loan losses allocated 784 890 372
Amount of the allowance allocated 325 350 125
Average of impaired loans
during the year 922 663 859
Interest income recognized during
impairment 9 2 2
Cash-basis interest income recognized 9 2 2
</TABLE>
Loans with carrying values of $1.209 million and $287 thousand were transferred
to other real estate owned in 1997 and 1996, respectively.
Note F - Bank Premises and Equipment
Bank premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
- -----------------------------------------------------------------
<S> <C> <C>
Buildings and improvements $ 5,976 $ 5,920
Furniture, fixtures and equipment 6,361 5,869
Leasehold improvements 2,234 2,228
-------------------
14,571 14,017
Accumulated depreciation and amortization 7,819 6,871
-------------------
6,752 7,146
Construction in progress 150 18
Land 1,751 1,817
-------------------
$ 8,653 $ 8,981
======= =======
</TABLE>
22
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note G - Deposits
The aggregate amount of short-term interest bearing time deposits, each with a
minimum denomination of $100 thousand or more, was approximately $17.004 million
and $19.048 million in 1997 and 1996, respectively.
At December 31, 1997, the scheduled maturities of time deposits were as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $135,979
1999 39,589
2000 10,663
2001 4,746
2002 and thereafter 4,495
--------
$195,472
========
</TABLE>
Note H - Short Term Borrowings
Information pertaining to borrowings arising from federal funds purchased and
securities sold under agreement to repurchase and U.S. Treasury demand note is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Average balance of borrowings
outstanding during the year $140,339 $101,883 $ 86,199
Maximum balance of borrowings
at any month end $157,199 $132,702 $108,500
Weighted average interest rate:
December 31 4.69% 4.58% 4.77%
For entire year 4.76% 4.60% 5.01%
</TABLE>
Note I - Long Term Borrowings
Advances from the Federal Home Loan Bank were collateralized as of December 31,
1997 by pledges of certain residential mortgage loans totaling $4.7 million and
the Bank's investment in Federal Home Loan Bank stock. As of December 31, 1997,
the Bank had two advances from the Federal Home Loan Bank in the amounts of
$1.981 million at 4.90% and $1.170 million at 6.45%, with monthly principal and
interest payments of $80 thousand and $12 thousand, respectively, maturing in
2000 and 2001, respectively.
Note J - Income Taxes
Federal income taxes consist of the following components:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------
<S> <C> <C> <C>
Current expense $5,839 $ 5,611 $4,465
Deferred expenses (benefits) 321 (71) 175
------------------------------
$6,160 $ 5,540 $4,640
====== ======= ======
</TABLE>
The change in net deferred tax each year represents the effect of changes in the
amounts of temporary differences. The Company has not established a valuation
allowance as it is management's belief that it has adequate taxable income and
carrybacks to realize the net deferred tax asset. The sources of gross deferred
tax assets and gross deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------
<S> <C> <C>
Allowance for possible loan losses $2,633 $2,839
Deferred compensation, pension
and other postretirement benefits 568 352
Deferred loan fees and costs 80 135
Other 132 253
-----------------
Total deferred tax assets 3,413 3,579
-----------------
Unrealized gain on investment securities
available for sale 516 37
Investment securities accretion 152 215
Depreciation on premises and equipment 256 326
Deferred pension 393 170
FHLB stock dividends 212 150
Other 3 --
-----------------
Total deferred tax liabilities 1,532 898
-----------------
Net deferred tax asset $1,881 $2,681
====== ======
</TABLE>
A reconciliation setting forth the difference between the effective tax rate of
the Company and the U.S. statutory rate is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
- -----------------------------------------------------------------
<S> <C> <C> <C>
Income tax at statutory rate 35.0% 35.0% 35.0%
Reductions in tax resulting
from nontaxable investment
and loan income (2.6) (3.1) (2.9)
Other (0.2) 0.4 (0.5)
--------------------------
32.2% 32.3% 31.6%
==== ==== ====
</TABLE>
Income tax expense (benefit) attributable to sales of securities available for
sale approximated $64 thousand, ($112) thousand and ($54) thousand for the years
ended December 31, 1997, 1996 and 1995, respectively.
23
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note K - Benefit Plans
The components of pension expense for the years ended December 31, are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 469 $ 425 $ 335
Interest cost 688 611 527
Return on assets (1,401) (1,199) (961)
Net amortization and deferral 576 553 332
-------------------------------
$ 332 $ 390 $ 233
======= ======= =====
</TABLE>
The following table sets forth the plan's funded status and amount recognized in
the accompanying statements of financial condition as of December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation
(substantially all vested) $ 7,819 $ 6,647
Salary increases 2,712 2,626
-------- -------
Projected benefit obligation 10,531 9,273
Plan assets - at fair value 10,902 8,799
-------- -------
Plan assets less projected benefit obligation 371 (474)
Unrecognized net loss 850 1,116
Remaining balance of initial
unrecognized net asset (2) (27)
Unrecognized prior service cost (105) (138)
-------- -------
Prepaid pension cost $ 1,114 $ 477
======== =======
</TABLE>
The discount rate and average rate of increase in future compensation levels
used in determining the actuarial present value of projected benefit obligation
and the expected return on the plan assets are summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.25% 7.25% 7.25%
Increase in future compensation levels 5.00% 5.00% 5.00%
Expected return on assets 9.75% 9.75% 9.75%
</TABLE>
The components of postretirement benefit expense for the years ended December
31, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------
<S> <C> <C> <C>
Service cost $ -- $ -- $ 37
Interest cost 120 141 211
Amortization of
transition obligation 82 101 130
----------------------
$202 $242 $378
==== ==== ====
</TABLE>
The following table sets forth the funded status of the plan and amount
recognized in the accompanying statements of financial condition as of
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit
obligation (APBO)
Retirees $(1,461) $(1,767)
Unrecognized transition obligation 805 859
Unrecognized loss 366 621
--------------------
Accrued postretirement cost
included in other liabilities $ (290) $ (287)
======= =======
</TABLE>
For purposes of measuring the expected postretirement benefit obligation, an
8.78 percent annual rate of health care cost increase was assumed, with the rate
decreasing gradually to 5.5 percent in 2003 and remaining at that level
thereafter. If the health care cost trend rate was increased by 1 percent, the
APBO as of December 31, 1997 would have increased by approximately 5 percent.
The effect of this change on the aggregate of service and interest cost for 1997
would be an increase of approximately 4 percent. The assumed discount rate used
to measure the APBO at December 31, 1997 and 1996 was 7.25 percent.
In November 1995, the Company increased the amount of employer provided life
insurance on all active employees, however coverage is discontinued at
retirement or other termination of employment. In addition, the Company
discontinued providing medical benefits for any employee retiring after December
31, 1995. These changes will allow the Company to have greater control over
health care costs and will reduce postretirement benefit expense in future
years.
24
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note L - Commitments and Contingencies
There are various contingent liabilities that are not reflected in the financial
statements, including claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
the ultimate disposition of these matters is not expected to have a material
effect on the Company's financial condition or results of operations.
At year-end 1997 and 1996, reserves of $11.152 million and $11.606 million were
required as deposits with the Federal Reserve or as cash on hand. These reserves
do not earn interest.
The Bank grants commercial and industrial loans, commercial and residential
mortgages, and consumer loans to customers in the Mahoning Valley. Although the
Bank has a diversified portfolio, exposure to credit loss can be adversely
impacted by downturns in local economic and employment conditions.
The Bank is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit through loans
approved, but not yet funded, lines of credit and standby letters of credit. The
Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. The Bank evaluates each
customer's creditworthiness on a case-by-case basis, and the amount of
collateral obtained is based upon the credit evaluation. Collateral held varies
but may include accounts receivable, inventory, property, plant and equipment,
income-producing properties, stocks, bonds, certificates of deposit and other
deposit accounts, real estate and vehicles. Commercial loans may also require
the personal guarantees of various business owners and/or key management.
The commitments to extend credit generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some of these
commitments may not be utilized, or utilized in amounts less than the total
committed, the total commitment amounts do not necessarily represent future cash
requirements. The majority of the unfunded commitments at December 31, 1997 are
variable rate commitments, with approximately 20% or $31 million having fixed
rates. A summary of estimated commitments to extend credit at December 31, 1997
and 1996, follows:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------
Commitment Commitment
Amount Amount
-----------------------
<S> <C> <C>
Standby letters of credit $ 11,685 $ 13,080
Commitments to extend credit 121,478 131,586
Credit card arrangements 12,343 8,719
Unfunded loans in process 7,609 6,615
---------------------
$153,115 $160,000
======== ========
</TABLE>
Note M - Stockholders' Equity
On April 15, 1996, the Board of Directors authorized a stock split in the amount
of 3,150,000 shares. The stock split, effected in the form of a stock dividend,
was issued on May 15, 1996. After issuance of the stock dividend, the Company
had 6,300,000 shares of its 15,000,000 authorized shares of no par value common
stock issued and outstanding. All net income and dividend per share information
presented has been adjusted to reflect the stock split on a retroactive basis.
On March 19, 1996, at the Annual Stockholders' Meeting of Mahoning National
Bancorp, Inc., the stockholders approved increasing the authorized common shares
of the Company from 7,000,000 shares to 15,000,000 shares, and to eliminate "par
value" from its authorized common shares.
The approval of the Comptroller of the Currency is required for national banks
to pay dividends in excess of earnings retained in the current year plus
retained net profits for the preceding two years. As of December 31, 1997,
approximately $4.083 million of undistributed earnings of the Bank was available
for distribution to the parent company as dividends without prior regulatory
approval.
The Company and Bank are subject to regulatory capital requirements administered
by federal banking agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings, and other factors,
and the regulators can lower classifications in certain cases. Failure to meet
various capital requirements can initiate regulatory action that could have a
direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
<TABLE>
<CAPTION>
Capital to risk-
weighted assets Tier 1 capital
Total Tier 1 to average assets
- ----------------------------------------------------------------
<S> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
</TABLE>
The Company was considered well capitalized as of December 31, 1997 and 1996.
Management is not aware of any events or circumstances that have occurred since
year-end that would change the Company's capital category.
25
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M - continued
At year end, actual capital levels and minimum required levels are:
<TABLE>
<CAPTION>
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
- --------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997
Total capital (to risk weighted assets)
Consolidated $91,687 18.95% $38,709 8.00% $48,387 10.00%
Bank $71,339 14.75% $38,704 8.00% $48,380 10.00%
Tier I capital (to risk weighted assets)
Consolidated $85,621 17.70% $19,355 4.00% $29,032 6.00%
Bank $65,273 13.49% $19,352 4.00% $29,028 6.00%
Tier I capital (to average assets)
Consolidated $85,621 11.05% $30,994 4.00% $38,742 5.00%
Bank $65,273 8.42% $30,992 4.00% $38,739 5.00%
1996
Total capital (to risk weighted assets)
Consolidated $82,956 17.57% $37,774 8.00% $47,218 10.00%
Bank $67,822 14.37% $37,769 8.00% $47,211 10.00%
Tier I capital (to risk weighted assets)
Consolidated $77,027 16.31% $18,887 4.00% $28,331 6.00%
Bank $61,893 13.11% $18,884 4.00% $28,328 6.00%
Tier I capital (to average assets)
Consolidated $77,027 10.27% $29,992 4.00% $37,491 5.00%
Bank $61,893 8.26% $29,989 4.00% $37,486 5.00%
</TABLE>
Note N - Fair Value of Financial Instruments
The following table provides summary information on the fair value of financial
instruments.
<TABLE>
<CAPTION>
December 31,
1997 1996
-----------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount of Fair Value of Amount of Fair Value of
Assets and Assets and Assets and Assets and
(Liabilities) (Liabilities) (Liabilities) (Liabilities)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 29,143 $ 29,143 $ 29,257 $ 29,257
Federal funds sold 8,800 8,800 19,500 19,500
Investment securities 250,756 250,826 229,332 229,246
Loans receivable 484,963 488,437 469,683 473,435
Accrued interest receivable 6,246 6,246 5,965 5,965
Deposits (545,111) (545,355) (550,998) (551,070)
Short term borrowings (157,199) (157,199) (132,702) (132,702)
Long term borrowings (3,151) (3,122) (4,065) (4,022)
Accrued interest payable (2,014) (2,014) (1,873) (1,873)
</TABLE>
26
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note O - Parent Company Financial Information
Statements of Financial Condition
<TABLE>
<CAPTION>
Mahoning National Bancorp, Inc.
(Parent Company Only)
For the years ended December 31,
1997 1996
- ----------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 250 $ 55
Short term deposits -- 15,000
Advances to subsidiary 15,000 --
Investment in subsidiary 66,231 61,962
Other assets 5,098 78
---------------------
Total assets $86,579 $77,095
======= =======
Stockholders' equity
Common stock 6,300 6,300
Additional paid-in capital 44,100 44,100
Retained earnings 36,179 26,695
---------------------
Total stockholders' equity $86,579 $77,095
======= =======
</TABLE>
Statements of Income
<TABLE>
<CAPTION>
Mahoning National Bancorp, Inc.
(Parent Company Only)
For the years ended December 31,
1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Dividends from bank subsidiary $ 9,377 $ 18,644 $ 2,980
Interest income 424 12 --
---------------------------------------
9,801 18,656 2,980
Expenses
Other expenses 122 94 66
---------------------------------------
Income before tax benefit and equity in
undistributed net income of subsidiary 9,679 18,562 2,914
Income tax (expense) benefit (117) 31 23
---------------------------------------
Income before equity in undistributed
net income of subsidiary 9,562 18,593 2,937
Equity in undistributed net income of subsidiary 3,379 (6,982) 7,133
---------------------------------------
Net income $ 12,941 $ 11,611 $10,070
======== ======== =======
</TABLE>
Statements of Cash Flows
<TABLE>
<CAPTION>
Mahoning National Bancorp, Inc.
(Parent Company Only)
For the years ended December 31,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 12,941 $ 11,611 $ 10,070
Adjustments to reconcile net income to
net cash provided by operating activities
Equity in undistributed net income of subsidiary (3,379) 6,982 (7,133)
Amortization 5 14 14
Increase in other assets (5,025) (9) (23)
----------------------------------------
Net cash provided by operating activities 4,542 18,598 2,928
Cash flows from investing activities:
Increase in short term advances (15,000) -- --
Decrease (increase) in short term deposits 15,000 (15,000) --
----------------------------------------
Net cash used in investing activities -- (15,000) --
Cash flows from financing activities:
Cash dividends paid (4,347) (3,559) (2,930)
----------------------------------------
Net cash used in financing activities (4,347) (3,559) (2,930)
----------------------------------------
Net increase (decrease) in cash 195 39 (2)
Cash at beginning of year 55 16 18
----------------------------------------
Cash at end of year $ 250 $ 55 $ 16
======== ======== ========
</TABLE>
27
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note P - Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1997
Three Months Ended
---------------------------------------------------
March 31 June 30 September 30 December 31
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $14,188 $14,554 $14,595 $14,793
Interest expense 5,861 5,983 5,942 5,975
-------------------------------------------------
Net interest income 8,327 8,571 8,653 8,818
Provision for loan losses 800 725 725 725
Non-interest income 2,143 2,085 2,101 2,004
Non-interest expense 5,025 5,111 5,055 5,435
-------------------------------------------------
Income before income taxes 4,645 4,820 4,974 4,662
Income taxes 1,512 1,568 1,619 1,461
-------------------------------------------------
Net income $ 3,133 $ 3,252 $ 3,355 $ 3,201
======= ======= ======= =======
Per share data:
Net income $ 0.50 $ 0.51 $ 0.53 $ 0.51
Dividends $ 0.16 $ 0.16 $ 0.16 $ 0.21
</TABLE>
<TABLE>
<CAPTION>
1996
Three Months Ended
----------------------------------------------------
March 31 June 30 September 30 December 31
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $13,776 $13,936 $14,142 $14,227
Interest expense 5,676 5,671 5,834 5,801
-------------------------------------------------
Net interest income 8,100 8,265 8,308 8,426
Provision for loan losses 525 550 600 950
Non-interest income 1,663 1,790 1,886 1,835
Non-interest expense 5,103 5,124 5,158 5,112
-------------------------------------------------
Income before income taxes 4,135 4,381 4,436 4,199
Income taxes 1,343 1,423 1,432 1,342
-------------------------------------------------
Net income $ 2,792 $ 2,958 $ 3,004 $ 2,857
======= ======= ======= =======
Per share data:
Net income $ 0.44 $ 0.47 $ 0.48 $ 0.45
Dividends $ 0.135 $ 0.135 $ 0.135 $ 0.160
</TABLE>
28
<PAGE> 31
REPORT OF INDEPENDENT AUDITORS
[LOGO]
CROWE, CHIZEK
Board of Directors and Stockholders
Mahoning National Bancorp, Inc.
We have audited the accompanying consolidated statements of financial
condition of Mahoning National Bancorp, Inc. as of December 31, 1997 and 1996
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits. The December 31,
1995 consolidated financial statements were audited by other auditors whose
report dated January 19, 1996 expressed an unqualified opinion.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Mahoning
National Bancorp, Inc. as of December 31, 1997 and 1996 and the consolidated
results of its operations and its consolidated cash flows for the years then
ended, in conformity with generally accepted accounting principles.
/s/ CROWE, CHIZEK AND COMPANY LLP
---------------------------------
Crowe, Chizek and Company LLP
Cleveland, Ohio
January 6, 1998
29
<PAGE> 32
REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING
MAHONING NATIONAL BANCORP, INC.
23 FEDERAL PLAZA
YOUNGSTOWN, OHIO 44501-0479
Management is responsible for preparing financial statements and
establishing and maintaining effective internal controls over financial
reporting presented in conformity with both generally accepted accounting
principles and the Federal Financial Institutions Examination Council
instructions for Consolidated Reports of Condition and Income (call report
instructions). The internal control system contains monitoring mechanisms, and
actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any system of
internal control, including the possibility of human error and the circumvention
or overriding of controls. Accordingly, even an effective internal control
system can provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, the effectiveness of an
internal control system may vary over time.
Management assessed the Company's internal controls over financial
reporting presented in conformity with both generally accepted accounting
principles and call report instructions as of December 31, 1997. This assessment
was based on criteria for effective internal control over financial reporting
described in Statement on Auditing Standards No. 78 "Internal Control in a
Financial Statement Audit" issued by the Auditing Standards Board of the
American Institute of Certified Public Accountants. Based on this assessment,
management believes that, as of December 31, 1997, Mahoning National Bancorp,
Inc. maintained effective internal controls over financial reporting presented
in conformity with both generally accepted accounting principles and call report
instructions.
/s/ GREGORY L. RIDLER /s/ NORMAN E. BENDEN, JR.
- ---------------------------- -----------------------------
Gregory L. Ridler Norman E. Benden, Jr.
Chairman of the Board, Treasurer
President and
Chief Executive Officer
30
<PAGE> 33
INDEPENDENT AUDITOR'S REPORT
[LOGO]
CROWE CHIZEK
Board of Directors and Stockholders
Mahoning National Bancorp, Inc.
We have examined management's assertion that Mahoning National Bancorp,
Inc. maintained effective internal controls over financial reporting as of
December 31, 1997, included in the accompanying report on internal control over
financial reporting.
Our examination was made in accordance with standards established by the
American Institute of Certified Public Accountants and, accordingly, included
obtaining an understanding of the internal controls over financial reporting,
testing, and evaluating the design and operating effectiveness of internal
controls, and such other procedures as we considered necessary in the
circumstances. We believe that our examination provides a reasonable basis for
our opinion.
Because of inherent limitations in any internal controls, errors or
irregularities may occur and not be detected. Also, projections of any
evaluation of the internal controls over financial reporting to future periods
are subject to the risk that the internal controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assertion that Mahoning National Bancorp, Inc.
maintained effective internal controls over financial reporting as of December
31, 1997, is fairly stated, in all material aspects, based on Statement on
Auditing Standards No. 78 "Internal Control in a Financial Statement Audit"
issued by the Auditing Standards Board of the American Institute of Certified
Public Accountants.
/s/ CROWE, CHIZEK AND COMPANY LLP
---------------------------------
Crowe, Chizek and Company LLP
Cleveland, Ohio
January 6, 1998
31
<PAGE> 34
BUSINESS OVERVIEW
Mahoning National Bancorp, Inc.
Mahoning National Bancorp, Inc. (Mahoning National) is a one-bank holding
company located in Youngstown, Ohio, and has total assets of $796.866 million.
The sole subsidiary of the Company is The Mahoning National Bank of Youngstown.
Mahoning National, locally owned and independent, serves the Mahoning-Shenango
Valley market area. This area has a population of approximately 600,000
residents served by Mahoning National's twenty-three (23) banking locations in
Mahoning and Trumbull Counties. As of December 31, 1997, Mahoning National
employed 427 individuals, or a full-time equivalent of 388 employees.
Mahoning National offers a full range of financial products and services. The
core accounts are represented by an array of personal and non-personal checking
products that include interest and non-interest bearing checking accounts. A
comprehensive offering of credit products includes: installment loans, student
loans, home mortgages, construction loans, commercial loans, revolving lines of
credit, MasterCard(R), VISA(R) and home equity loans, which can accommodate a
full range of individual borrowers' needs.
Other retail products and services offered are: Certificates of Deposit, IRAs,
safe deposit boxes, wire transfers, night depository, U.S. savings bonds,
travelers' checks, money orders and cashiers checks.
To further meet the needs of its diversified customer base, the hours of
operation offered at Mahoning National were expanded in 1997; in fact, Mahoning
National provides a wide variety of delivery channels from which customers can
choose to accommodate their particular lifestyles. Traditional branch banking
with personalized, one-on-one service is available at all Mahoning National
Branch Offices, while telephone banking is also available by calling Mahoning
National's Centralized Customer Service Center, which is staffed with
specialists rendering superior customer service. Continuing to grow in
popularity, TeleBank, Mahoning National's automated 24-hour-a-day telephone
response system, is also available, allowing all customers to bank at their
convenience.
Following its business strategy of providing customers with value-added products
and services, Mahoning National introduced two new packaged checking accounts in
September 1997, which offer customers an array of benefits. Easy Checking(sm)
and Elite Checking(sm) provide free personalized checks, unlimited checking,
Shoppers Advantage(R), travel discounts, accidental death insurance, no fee
Hometown VISA(R) or MasterCard(R), discounted consumer loan fees and more. Easy
Checking(sm) and Elite Checking(sm) accounts are designed to meet the needs of
today's value-conscious consumer.
In December 1997, Mahoning National became the first financial institution in
the Mahoning Valley to implement a fully functional Customer Service Counter, a
new concept in banking aimed at providing better, more efficient customer
service, at its South & Midlothian Office. Instead of having to wait in line for
a teller, customers are now able to perform all non-cash transactions, such as
deposits and payments, at the counter, as well as obtain information regarding
new accounts, check orders, loans, account changes, safe deposit boxes and other
financial products and services.
Mahoning National also expanded its South & Midlothian Office's drive-in
facility to include a drive-up ATM and longer banking hours, enhancing customer
service.
Mahoning National's Financial Services Center continued to grow in 1997. This
Center, located within the Bank's Trust and Investments Department, makes
alternative investment products, such as annuities, mutual funds and
accommodative brokerage services, available to our customers and the general
public through an arrangement with a third-party vendor.
Mahoning National also offers a full range of trust services through its Trust
and Investments Department. The services are provided by highly educated
professionals and include Recordkeeping, Investment Management and Full
Administration for Agency, Estate, Trust and Employee Benefit accounts. The
Department also offers two, highly flexible and unique services known as
Preferred Living Trust and MNB Select Asset Allocation. These specialized
services are designed to cater specifically to investors growing their
portfolios and living trust clients not currently utilizing full administration
services.
A highly competitive financial market environment with both intra- and
interstate competition can be found throughout the State of Ohio. Mahoning
National's major competitors include local financial institutions, regional
financial institutions and large non-banking investment concerns, such as
insurance and brokerage firms.
Mahoning National Bancorp, Inc., is subject to supervision and regulation by the
Federal Reserve Board under the Bank Holding Company Act of 1956, as amended.
Since it is a bank holding company, the services provided by Mahoning National
are required to be closely related to the business of banking. The only
subsidiary of Mahoning National is The Mahoning National Bank of Youngstown,
which is a national commercial bank. As a result of being a national bank,
Mahoning National Bank is supervised and regulated by the Office of the
Comptroller of the Currency and is subject to yearly examination.
32
<PAGE> 35
MANAGEMENT's DISCUSSION & ANALYSIS
Mahoning National Bancorp, Inc.
The following Management's Discussion and Analysis of the financial condition
and results of operations of Mahoning National Bancorp, Inc., (Company) should
be read in conjunction with the Consolidated Financial Statements, related Notes
and the Comparative Financial Data contained in this annual report.
Note regarding forward-looking statements
In addition to historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties.
Economic circumstances, the Company's operations and actual results could differ
significantly from those discussed in the forward-looking statements. Some of
the factors that could cause or contribute to such differences are changes in
the economy and interest rates in the Company's market area.
Statements of Condition
Total assets at December 31, 1997 reached $796.866 million, which was an
increase of $27.306 million or 3.5% over December 31, 1996 total assets of
$769.560 million. In 1997, total loans increased $14.692 million or 3.1%, while
the investment portfolio increased $21.424 million or 9.3%. The growth in
earning assets was primarily funded with a $23.778 million increase in federal
funds purchased and securities sold under agreements to repurchase, and earnings
retention, which were partially offset by a decline in deposits of $5.887
million. The significant growth in securities sold under agreements to
repurchase is the result of more corporate customers and political subdivisions
depositing into overnight "sweep" checking accounts. Overnight sweep account
balances were $131.145 million on December 31, 1997, an increase of $28.828
million from December 31, 1996 balances of $102.317 million. This source of
funds has grown significantly over the past three years and is expected to
continue to grow, at more modest levels in 1998.
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 (Bank), 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 December 31, 1997 the investment portfolio totaled $250.756 million (which
included a $1.474 million net unrealized gain on available for sale securities)
which was an increase of $21.424 million from December 31, 1996. In 1997,
$36.480 million of the portfolio matured compared to $59.942 million in 1996,
and $22.242 million was sold in 1997 compared to $24.658
The book values, fair values, average yields and maturity distributions of all
investment securities are summarized in the following table, with all
investments recorded at their carrying values.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996 December 31, 1995
Book Fair Average Book Fair Average Book Fair Average
(Amounts in thousands) Value Value Yield* Value Value Yield* Value Value Yield*
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and agencies:
Within one year $ 40,934 $ 40,930 5.79% $ 48,594 $ 48,568 6.41% $ 39,227 $ 39,413 6.64%
After one but within five years 176,272 176,227 6.08% 150,691 150,555 5.97% 144,995 145,317 5.94%
-------------------------- ------------------------ --------------------------
217,206 217,157 6.02% 199,285 199,123 6.07% 184,222 184,730 6.09%
Mortgaged-backed securities and
collateralized mortgage obligations:
Within one year 874 874 9.16% -- -- -- -- -- --
After one but within five years 4,284 4,284 6.78% 5,009 5,009 7.14% 6,547 6,547 7.35%
After five but within ten years -- -- -- 393 393 9.36% -- -- --
After ten years -- -- -- -- -- -- 543 543 9.32%
-------------------------- ------------------------ --------------------------
5,158 5,158 7.18% 5,402 5,402 7.30% 7,090 7,090 7.50%
Obligations of states and
political subdivisions:
Within one year 3,612 3,620 4.59% 2,685 2,686 4.22% 4,365 4,380 4.34%
After one but within five years 20,668 20,779 4.41% 18,401 18,476 4.45% 10,890 10,932 4.51%
After five but within ten years 500 500 4.30% 126 126 4.65% 250 250 4.25%
-------------------------- ------------------------ --------------------------
24,780 24,899 4.43% 21,212 21,288 4.42% 15,505 15,562 4.45%
Other 3,612 3,612 3,433 3,433 3,270 3,270
------------------- ------------------ -------------------
Total investment securities $250,756 $250,826 $229,332 $229,246 $210,087 $210,652
======== ======== ======== ======== ======== ========
<FN>
* Yields on tax exempt securities have not been calculated on a tax
equivalent basis.
</TABLE>
33
<PAGE> 36
MANAGEMENT'S DISCUSSION AND ANALYSIS
million in 1996. These matured and sold securities were reinvested into the
portfolio in both 1997 and 1996.
At December 31, 1997, the Company has classified investment securities with
amortized cost and fair value of $188.104 million and $189.578 million,
respectively, or 75% of the portfolio, as available for sale, with the remainder
of the portfolio classified as held to maturity. At December 31, 1996, the
Company had classified investment securities with amortized cost and fair value
of $143.494 million and $143.600 million, respectively, or 63% of the portfolio,
as available for sale, with the remainder of the portfolio classified as held to
maturity. No securities were transferred between categories in 1997 or 1996.
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 or 1996, and does not expect to in
1998. The carrying amount of investment securities available for sale at
December 31, 1997, reflects a net increase, related to unrealized gains, of
$1.474 million with a corresponding increase to stockholders' equity, net of
deferred taxes, of $958 thousand, compared to a net increase in the carrying
amount at December 31, 1996, of $106 thousand with a corresponding $68 thousand
increase in stockholders' equity.
The Company's portfolio is comprised mainly of U.S. Treasuries and agencies
(88%), obligations of states and political subdivisions (10%) and
government-sponsored, mortgage-backed securities and collateralized mortgage
obligations (2%). The quality of the portfolio is evidenced by 99% of the
investments being AAA rated. At December 31, 1997, the weighted average maturity
of the portfolio was 2 years 3 months compared to 2 years 4 months at December
31, 1996. It is the Company's intent to keep the average duration of the
portfolio at this level in order to assure adequate liquidity and to capitalize
on potential changes in interest rate environments.
During 1997, the Company continued to add tax-free municipals to the investment
portfolio in an effort to reduce its effective tax rate and improve net income.
The average balance of tax-free municipals for 1997 was $24.076 million, an
increase of $3.850 million over the 1996 average balance of $20.226 million and
$7.555 million over the 1995 average balance of $16.521 million. The Company
expects to continue to add to this portfolio in 1998.
The tax equivalent yield of the investment portfolio decreased by 2 basis points
from 6.15% in 1996 to 6.13% in 1997. For additional investment portfolio
information refer to, Notes B and C - Investment Securities Available for Sale
and Investment Securities Held to Maturity, found on pages 20 and 21 of this
report.
Loans
At December 31, 1997, loans outstanding totaled $492.487 million, which was an
increase of $14.692 million or 3.1% over the December 31, 1996 total of $477.795
million. This increase followed a $15.360 million or 3.3% increase in 1996 over
1995. The loan portfolio growth coupled with a decrease in deposits resulted in
a loan to deposit ratio of 90.35% at December 31, 1997 compared to 86.71% at
December 31, 1996. This increase in the loan portfolio in 1997 was the result of
continued loan demand and good results from business development efforts. The
areas of largest growth in 1997 were nonresidential mortgages, consumer loans
and residential mortgages. Commercial loans declined in 1997 after increasing in
1996.
Nonresidential mortgages increased approximately $11.4 million or 12% in 1997,
following $8.6 million or 10% growth in 1996. The momentum established the past
several years with a strong sales culture in the corporate and branch business
development areas continue to result in new relationships. The continued
strength of the local economy, a good environment for construction and a
favorable interest rate environment has contributed to the growth. The modest
nonresidential mortgage loan growth projected for 1998 could be enhanced if
interest rates were to remain at or fall from current levels which may stimulate
refinancing activity.
Five Year Loan History
<TABLE>
<CAPTION>
December 31,
(Amounts in thousands) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential mortgage loans $161,236 $156,693 $144,708 $135,840 $110,081
Nonresidential mortgage loans 106,738 95,312 86,757 85,713 77,488
Commercial and industrial loans 79,518 87,130 80,310 69,202 72,592
Consumer loans to individuals 134,952 127,947 138,443 119,938 102,389
Nonrated industrial
development obligations 4,379 7,253 8,806 10,485 11,347
Other loans 4,129 2,481 2,732 3,960 3,392
-------------------------------------------------------------
490,952 476,816 461,756 425,138 377,289
Unearned discount (90) (123) (149) (125) (156)
Unamortized deferred
loan costs, net 1,625 1,102 828 354 107
-------------------------------------------------------------
492,487 477,795 462,435 425,367 377,240
Allowance for possible
loan losses (7,524) (8,112) (7,156) (6,694) (5,213)
-------------------------------------------------------------
Net loans $484,963 $469,683 $455,279 $418,673 $372,027
======== ======== ======== ======== ========
</TABLE>
Maturities and Sensitivities of Commercial Loans to Changes in Rates
<TABLE>
<CAPTION>
As of December 31, 1997
Over One
One Year through Over
(Amounts in thousands) or Less Five Years Five Years Total
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and
industrial loans $24,418 $51,413 $ 3,687 $79,518
Nonrated industrial
development obligations 956 2,344 1,079 4,379
-----------------------------------------
$25,374 $53,757 $ 4,766 $83,897
======= ======= ======= =======
Fixed interest rates $17,951 $ 3,460
======= =======
Variable interest rates $35,806 $ 1,306
======= =======
</TABLE>
Consumer loans increased $7.0 million or 5% in 1997 following a $10.5 million or
8% decrease in 1996. Consumer loan balances are primarily dependent on the level
of indirect automobile financing purchased by the Bank. While the automobile
financing market remains highly competitive, the Company was able to increase
market share through the development of new dealer relationships and incentive
plans for the dealer network. In addition, the Company has benefited from
regional bank competitors consolidating operations out of the market area, which
has not allowed them to service the dealer network as efficiently as Mahoning
National. The Company currently purchases indirect auto loans from 100 dealers
throughout the Company's market area. Competition from local and regional banks
in our market area and from leasing by captive automobile finance companies
(e.g. GMAC, Ford Motor Credit) will impact future growth and necessitate a
commitment to providing the dealer network with a very high level of service.
Given the rapid amortization of the automobile loan portfolio, which has a short
average maturity, competition in the market area and a projected
34
<PAGE> 37
MANAGEMENT'S DISCUSSION AND ANALYSIS
slow down in our national economy, consumer loan totals are expected to increase
modestly in 1998.
Residential mortgages continued to grow, approximately $4.5 million or 3% in
1997, following $12.0 million or 8% growth in 1996. The demand for purchase
money mortgage loans lessened in 1997, as did refinancings. In 1997, the Company
entered the secondary market and sold approximately $1 million in residential
mortgages with the servicing retained. The Company expects to be more active in
the secondary market in 1998 with more emphasis placed on generating salable
loans and retaining the servicing. As with nonresidential mortgage lending, a
declining rate environment could stimulate refinancing activity and improve upon
the modest growth projections for residential mortgages in 1998.
Home equity loans, which are a component of residential mortgages, grew $3.8
million or 11% in 1997, following a $2.9 million or 9% increase in 1996. These
increases over the last two years were the result of aggressive marketing and
competitive rates for equity products. The Company expects to continue to
aggressively market and price its equity products in 1998 with growth
projections approximating those experienced in 1997.
Commercial loans, which increased $6.8 million or 8% in 1996, declined $7.6
million or 9% in 1997. The decline experienced in 1997 can be attributed to
reduced equipment and working capital loan demands by commercial customers and
two large lines of credit which had been funded at December 31, 1996 but paid
down during 1997, reducing year end balances. As the competition for commercial
loans increases in 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.
Deposits
Total deposits for 1997 declined $5.887 million, or 1.1%, to $545.111 million,
compared to a $23.810 million or 4.1% decrease in 1996. Savings and interest
bearing checking accounts decreased $7.790 million or 2.8%, time deposits
decreased $1.891 million or 1.0% while non-interest bearing demand deposits
increased $3.794 million or 5.4% in 1997. The Company does not maintain any
brokered deposits. While actual deposit balances at December 31, 1997 declined
$5.887 million from year end balances of 1996, the Company's average deposit
base decreased by $23.753 million from $499.362 million for 1996 to $475.609
million for 1997. The deposit declines experienced in 1997 and 1996 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. To address these competitive pressures,
in 1997, the Company continued to evaluate its branch network and alternative
delivery channels in order to improve the delivery of its products and services.
The hours of operation offered to the Company's customer base were expanded at
all branch offices and the Centralized Customer Service Center. In addition, the
Company's automated 24-hour-a-day telephone response system and automated bill
payment system saw continued growth in transaction volumes. Two new value-added
checking accounts were introduced in the fourth quarter of 1997 to meet the
needs of today's value-conscious customer. 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.
The Company's repurchase agreements, which include Corporate Investment
accounts, was an area of significant growth again in 1997. Balances at December
31, 1997, totaled $146.245 million, an increase of $23.778 million over year end
balances of 1996. This increase followed a $57.425 million increase in 1996.
Average balances in these accounts grew $35.033 million in 1997 from 1996
compared to a $18.298 million increase in 1996 from 1995. The Company's
Corporate Investment account is an overnight "sweep" repurchase agreement which
is used by large corporate customers and local political subdivisions. While
these types of accounts are considered more volatile than traditional deposit
liabilities, management believes they provide a strong base of funds which
allows the Company to support loan growth and expand its investment security
portfolio. Corporate Investment accounts (overnight "sweep" repurchase
agreements) are expected to remain a stable source of funds for the Company in
1998 as existing relationships expand and new customers are solicited.
Stockholders' Equity
Total stockholders' equity grew $9.484 million or 12.30% to a record high of
$86.579 million in 1997. This increase reflects net income less dividends paid
and also reflects a net $890 thousand increase in the unrealized gain on
available for sale securities, net of deferred taxes, during 1997, that is
recorded as a component of equity. The stockholders' equity-to-asset ratio of
10.86% and 10.02% for 1997 and 1996 continues to remain very strong when
compared to industry standards.
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 December 31, 1997, the
Company's leverage, Tier 1 and total risk-based capital ratios were 11.05%,
17.70% and 18.95%, respectively, compared to 10.27%, 16.31% and 17.57% at
December 31, 1996, respectively. The Company has exceeded all required
regulatory capital ratios for each period presented and is considered "well
capitalized" under all federal banking agency regulations. The Company's
risk-based capital ratios are well above the regulatory minimums due to the
capital strength and the low risk nature of the balance sheet and of 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. For additional information on the Company's risk-based capital
ratios and equity transactions refer to Note M-Stockholders' Equity on page 25
and 26 of this report.
The 31% dividend increase, from $.16 per share to $.21 per share in the fourth
quarter of 1997, represented the thirty-second consecutive year the Company has
increased the annual dividend. Dividends paid in 1997 amounted to $4.347 million
or $.69 per share compared to $3.559 million or $.565 per share in 1996 and
$2.930 million or $.465 per share in 1995. The Company's dividend payout ratio
increased for the third consecutive year to 33.59% for 1997 from 30.66% in 1996
and 29.09% in 1995. The book value per share as of December 31, 1997, reached a
record high of $13.74 compared to $12.24 and $11.05 at year end 1996 and 1995,
respectively.
35
<PAGE> 38
MANAGEMENT'S DISCUSSION AND ANALYSIS
Asset Quality
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
December 31, 1997, all loans classified for regulatory purposes do not represent
or result from trends or uncertainties which management reasonably expects will
materially impact future operating results, liquidity, or capital resources.
Allowance for Possible Loan Losses
<TABLE>
<CAPTION>
(Amounts in thousands) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $8,112 $7,156 $6,694 $5,213 $3,920
Provision charged to
operating expense 2,975 2,625 1,900 1,900 2,405
Losses charged to allowance
Mortgage loans 360 71 72 43 365
Installment loans 2,051 1,981 1,439 1,000 1,185
Credit cards and related plans 375 308 183 108 91
Commercial loans 1,407 -- 382 5 121
--------------------------------------------------
Total charge-offs 4,193 2,360 2,076 1,156 1,762
Recoveries of loans charged off
Mortgage loans 8 23 136 49 3
Installment loans 558 522 423 442 450
Credit cards and related plans 40 48 43 48 21
Commercial loans 24 98 36 198 176
--------------------------------------------------
Total recoveries 630 691 638 737 650
--------------------------------------------------
Balance at end of year $7,524 $8,112 $7,156 $6,694 $5,213
====== ====== ====== ====== ======
</TABLE>
Allocation of the Allowance for Possible Loan Losses
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
Loans to Loans to Loans to Loans to Loans to
(Amounts in Amount Total Amount Total Amount Total Amount Total Amount Total
thousands) Allocated Loans Allocated Loans Allocated Loans Allocated Loans Allocated Loans
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial
and
industrial $1,801 17.0% $1,806 18.8% $1,527 18.0% $1,597 17.2% $1,112 20.1%
Commercial
real
estate 2,202 21.7 2,017 20.0 1,779 18.7 1,738 20.2 1,138 20.5
Non rated
industrial
development
obligations 60 0.9 156 1.5 119 1.9 161 2.5 129 3.0
Residential
real estate 303 32.8 298 32.9 550 31.2 534 31.9 449 29.1
Consumer loans 2,130 27.6 2,034 26.8 1,657 30.2 1,375 28.2 1,210 27.3
Off balance
sheet
commitments -- -- 235 -- 182 -- 196 -- 180 --
Impaired loans 325 -- 350 -- 125 -- -- -- -- --
General risk 703 -- 1,216 -- 1,217 -- 1,093 -- 995 --
---------------------------------------------------------------------------------------------------------
Allowance for
loan losses $7,524 100.0% $8,112 100.0% $7,156 100.0% $6,694 100.0% $5,213 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
The above exhibits show the allocation of the allowance for loan losses to the
various risk categories of the loan portfolio and a five year history of the
allowance.
The provision for loan losses charged to expense for the year ended December 31,
1997 was $2.975 million, representing a 13% increase over the $2.625 million
provision charged to expense in 1996 and a 57% increase over the $1.900 million
provision charged to expense in 1995. In the three-year period ended December
31, 1997, the increase in provision charged to expense was due in part to growth
of the overall loan portfolio and in response to certain credits and general
economic uncertainties.
In 1997, additional amounts were charged to the provision as a result of the
growth in the loan portfolio and increases in commercial and consumer loan
charge-offs. Net charge-offs as a percent of average loans were 0.73%, 0.35% and
0.32% in 1997, 1996 and 1995, respectively. The increase in 1997 was primarily
due to the $1.481 million increase in net commercial loan charge-offs. Net
charge-offs of commercial loans totaled $1.383 million compared to a net $98
thousand recovery in 1996 and net $346 thousand charge-off in 1995. In 1997, the
Company became aware of the severe deterioration in the financial condition of
two commercial loan customers. In the subsequent loan work-outs with those
companies, a portion of the loans ($1.365 million) was charged-off.
The Company's experience in 1997 and 1996 also 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. Net charge-offs of consumer loans and credit card and related plans
totaled $1.828 million in 1997 compared to $1.719 million in 1996 and $1.156
million in 1995.
A complete analysis of the loan underwriting and loan collection departments was
performed throughout 1997. As a result of this analysis, stricter underwriting
guidelines have been established along with more pro-active collection efforts.
These changes should begin to have a positive impact in 1998. This area will
continue to be monitored closely during the coming 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.
The charge-offs detailed in the five-year Allowance for Possible Loan Losses
schedule represent loans fully or partially charged-off where the ultimate
amount to be collected was deemed to be uncertain at the time of charge-off. It
is anticipated that some of the amounts charged-off will be collected in the
future and will be added to the allowance for loan losses. The timing and the
amounts of these collections are uncertain at this time.
Non-Performing Assets:
----------------------
It is the Company's objective to maintain above average asset quality of its
loan portfolio through conservative lending policies and prudent underwriting.
Detailed reviews of the loan portfolio are undertaken regularly to identify
potential problem loans or trends early and to provide for adequate estimates of
potential losses. The Company normally considers loans to be non-
36
<PAGE> 39
MANAGEMENT'S DISCUSSION AND ANALYSIS
performing when payments are 90 days or more past due or when the loan review
analysis indicates that repossession of the collateral may be necessary to
satisfy the loan. In addition, loans are considered to be impaired when, in
management's opinion, it is probable that the borrower will be unable to meet
the contractual terms of the loan. Non-performing loans totaled $2.881 million
at December 31, 1997, a $1.748 million decrease over the December 31, 1996 total
of $4.629 million.
Nonaccrual loans of $2.227 million at December 31, 1997, were $1.471 million
less than December 31, 1996 nonaccrual balances of $3.698 million. While
commercial loan nonaccruals at December 31, 1997, approximate 1996 year end
totals, consumer loan and residential mortgage loan nonaccruals decreased $880
thousand and $585 thousand, respectively, at December 31, 1997, compared to
December 31, 1996. These nonaccrual loans are in various stages of collection
and significant principal losses are not anticipated due to their underlying
collateral values.
Other Real Estate Owned ("OREO") represents properties acquired through
foreclosure or acceptances of deeds in lieu of foreclosure. OREO balances
increased $843 thousand to $1.112 million from December 31, 1996 to December 31,
1997. This increase is the result of three properties, two residential and one
commercial, that totaled $1.000 million. Potential loss exposure should be
minimal because of the collateral positions of these properties.
The following schedule is a five year summary of non-accrual, past due,
restructured loans and other real estate owned of the Company.
Nonaccrual, Past Due and Restructured Loans
<TABLE>
<CAPTION>
(Amounts in thousands) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $2,227 $3,698 $1,322 $1,944 $1,529
Accruing loans 90 days or
more past due 654 931 936 211 195
--------------------------------------
Nonperforming loans 2,881 4,629 2,258 2,155 1,724
Restructured loans in
compliance with modified
terms -- 411 690 1,076 1,042
Other real estate owned 1,112 269 36 -- --
--------------------------------------
Total problem assets $3,993 $5,309 $2,984 $3,231 $2,766
====== ====== ====== ====== ======
Nonperforming loans to
total loans 0.58% 0.97% 0.49% 0.51% 0.46%
Nonperforming loans to
allowance for loan losses 38.29% 57.06% 31.55% 32.20% 33.07%
Allowance for loan losses
to total loans 1.53% 1.70% 1.55% 1.57% 1.38%
Total problem assets to
total assets 0.50% 0.69% 0.41% 0.46% 0.42%
</TABLE>
The Company's nonperforming loans to allowance for loan losses and nonperforming
loans to total loan ratios decreased significantly in 1997 and are currently
well below peer levels. The allowance for loan losses to total loan ratio
decreased from 1.70% at December 31, 1996 to 1.53% at December 31, 1997, and is
approximately 10 basis points above peer.
In May, 1993, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 114 "Accounting by Creditors for Impairment of a Loan", which was
subsequently amended in October, 1994 with the issuance of SFAS No. 118
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures". The Company adopted these standards on January 1, 1995.
The initial adoption of these standards did not have a material effect on the
Company's consolidated financial position or results of operations as loans
meeting the criteria to be considered impaired have typically been evaluated as
part of the overall allowance for possible loan losses. The Company considers
investment in one-to-four family residential loans, consumer installment loans
and credit card loans to be homogeneous and therefore excluded from separate
identification for evaluation of impairment. As a result, of the $2.227 million
of nonaccrual loans at December 31, 1997, only $1.203 million have been
classified as impaired loans. For additional information on SFAS No. 114 and
SFAS No. 118 refer to Note E - Allowance for Possible Loan Losses on page 22 of
this report.
Earnings Review for the Years Ended
December 31, 1997 and 1996
For the seventh consecutive year, the Company achieved record earnings. Net
income for 1997 was $12.941 million or $2.05 per share, an increase of $1.330
million or 11% over 1996 earnings of $11.611 million or $1.84 per share.
Net interest income and non-interest income, exclusive of security transactions
increased 4% and 9%, respectively, in 1997 compared to 1996, while the provision
for loan losses and non-interest expense increased 13% and less than 1%,
respectively, over that same time period.
The primary component of the Company's earnings growth in 1997 was net interest
income, and the significant growth in the loan portfolio has been the primary
reason for that earnings increase. The prime interest rate, which declined from
8.50% to 8.25% in February 1996, increased 25 basis points in March 1997, back
to 8.50% where it remained throughout the year. With interest rates stable over
the past two years, the Company's net interest margin has also remained stable
at 4.79% and 4.78% for 1997 and 1996, respectively. The growth in earning assets
in 1997 helped offset increased funding costs.
The Company's return on assets (ROA) for 1997 increased to 1.67% from 1.55% in
1996. The return on average stockholders' equity (ROE) for 1997 remained
approximately the same at 15.82%, compared to 15.83% for 1996. The Company was
able to maintain its return on equity, and at the same time increase its very
strong stockholders' equity to asset ratio to 10.86% in 1997 from 10.02% in
1996.
As of December 31, 1997, the Company was not aware of any recommendations by the
regulatory authorities which, if implemented, would have a material effect on
the Company's liquidity, capital resources or operations.
Net Interest Income
For the purpose of the Management's Discussion and Analysis, income from
tax-exempt loans and investments has been adjusted to a fully taxable equivalent
basis (FTE) using an incremental tax rate of 35%.
Net interest income is the primary component of the Company's earnings, and is
the difference between interest and fees earned on loans, investments and other
interest-earning assets and the interest expense on deposits and other
interest-bearing liabilities which fund those assets.
The Company's return on interest earning assets increased slightly from 8.02% in
1996 to 8.03% in 1997 while funding costs increased from 3.80% in 1996 to 3.84%
in 1997. The $24.767 million increase in average earning asset balances
accounted for the increased net interest income in 1997.
37
<PAGE> 40
MANAGEMENT'S DISCUSSION AND ANALYSIS
Net interest income was $34.369 million for 1997, an increase of 4% over 1996
net interest income of $33.099 million. In 1997, the most significant factor in
the increase in net interest income was loan volume which accounted for
additional tax adjusted interest income of $1.067 million, as average balances
grew by $11.930 million during 1997. The Company's investment portfolio average
balance, which increased by $10.772 million in 1997, contributed to a $675
thousand increase in tax adjusted interest income compared to an increase of
$244 thousand in 1996. The increase in the Company's tax adjusted net interest
income as a result of changes in volume amounted to $871 thousand compared to
$1.759 million in 1996. The decline in the volume related impact to net interest
income is the result of average loan balances only increasing $11.930 million in
1997 over 1996, compared to a $32.643 million increase in average loan balances
in 1996 over 1995. Average interest-earning assets for 1997 were $733.636
million, or 3.5% greater than the $708.869 million of earning assets in 1996.
The increase in tax adjusted net interest income due to rate was $351 thousand
in 1997 compared to $442 thousand in 1996.
The tax equivalent yield on the loan portfolio for 1997 increased to 8.98%
compared to 8.93% in 1996, a result of the prime lending rate increasing by 25
basis points in March 1997, changes in the portfolio mix and loan fee increases.
The loan to deposit ratio at December 31, 1997 and 1996 was 90.35% and 86.71%,
respectively.
Average interest bearing liabilities for 1997 were $619.591 million, or 2.4%
greater than the $605.325 million of average interest bearing liabilities in
1996. The cost of interest bearing liabilities increased slightly to 3.84% in
1997 from 3.80% in 1996. While actual December 31, 1997 deposit balances
declined only $5.887 million, average balances declined $23.753 million in 1997
from 1996 average balances. This loss of deposits was more than off-set by an
increase in the volume of securities sold under agreements to repurchase as more
corporate and political subdivisions place their funds into overnight "sweep"
repurchase agreements. The average balance of these interest bearing liabilities
increased $35.033 million in 1997 and the cost of these funds increased by 16
basis points from 1996. Actual year end balances for 1997 were up $23.778
million over 1996 year end balances.
Average Balances and Interest Yields and Costs
The following table represents an analysis of Mahoning National Bancorp,
Inc.'s tax-equivalent net interest income for the prior three-year period. The
average balance, related interest income or expense and resulting tax equivalent
yield or cost are presented for each major category of earning asset or interest
bearing liability. Investment securities' average balances are recorded at
carrying value.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
Average Average Average Average Average Average
(Amounts in thousands) Balance Interest Rate (%) Balance Interest Rate(%) Balance Interest Rate(%)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Loans:
Industrial revenue and
tax-exempt financing $ 6,183 $ 542 8.77% $ 10,545 $ 938 8.90% $11,083 $1,067 9.63%
All other loans 483,984 43,471 8.98 467,692 41,788 8.93 434,511 38,664 8.90
----------------------------------------------------------------------------------------
Total 490,167 44,013 8.98 478,237 42,726 8.93 445,594 39,731 8.92
Investment securities:
Taxable 211,738 12,820 6.05 204,816 12,490 6.09 205,059 12,462 6.08
Tax-exempt 24,076 1,638 6.83 20,226 1,375 6.82 16,521 1,095 6.63
----------------------------------------------------------------------------------------
Total 235,814 14,458 6.13 225,042 13,865 6.15 221,580 13,557 6.12
Federal funds sold 7,655 422 5.51 5,590 300 5.37 10,347 613 5.92
----------------------------------------------------------------------------------------
Total earning assets 733,636 58,893 8.03 708,869 56,891 8.02 677,521 53,901 7.96
Allowance for loan losses (7,890) (7,519) (7,093)
Cash and due from banks 26,015 26,567 26,744
Premises and equipment 8,845 9,321 8,720
Other assets 14,241 12,573 11,205
----------------------------------------------------------------------------------------
Total assets $774,847 $749,811 $717,097
======== ======== ========
Liabilities and stockholders'
equity
Interest bearing deposits:
Savings deposits $183,365 $4,564 2.49% $192,562 $ 4,782 2.48% $200,469 $4,997 2.49%
Interest checking
and money market 93,934 1,797 1.91 99,227 2,095 2.11 93,952 2,000 2.13
Time deposits 198,310 10,526 5.31 207,573 11,203 5.40 200,512 10,794 5.38
----------------------------------------------------------------------------------------
Total interest
bearing deposits 475,609 16,887 3.55 499,362 18,080 3.62 494,933 17,791 3.59
Federal funds purchased 4,069 232 5.70 2,158 119 5.51 3,183 193 6.05
Repurchase agreements 128,843 6,051 4.70 93,810 4,260 4.54 75,512 3,686 4.88
Short term borrowings 7,426 394 5.30 5,916 303 5.12 7,504 439 5.85
Long term borrowings 3,644 197 5.43 4,079 220 5.39 1,335 84 6.30
----------------------------------------------------------------------------------------
Total interest bearing
liabilities 619,591 23,761 3.84 605,325 22,982 3.80 582,467 22,193 3.81
Demand deposits 67,726 65,857 63,613
Other liabilities 5,728 5,301 5,490
Stockholders' equity 81,802 73,328 65,527
----------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $774,847 $749,811 $717,097
======== ======== ========
Net interest income $35,132 $33,909 $31,708
======= ======= =======
Interest spread 4.19% 4.22% 4.15%
Interest margin 4.79% 4.78% 4.68%
</TABLE>
38
<PAGE> 41
MANAGEMENT'S DISCUSSION AND ANALYSIS
Change In Net Interest Income Due To Volume And Rate
The following table represents an analysis of the changes in tax-equivalent net
interest income for the prior two year period. These changes to net interest
income were the result of changes in the volume and mix of earning assets and
interest bearing liabilities, and the changes in market interest rates. The
amount of change that was not directly attributable to volume or rate has been
allocated to each variance proportionately.
<TABLE>
<CAPTION>
From 1996 to 1997 From 1995 to 1996
Change due to Total Change due to Total
(Amounts in thousands) Volume Rate Change Volume Rate Change
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Loans:
Industrial revenue and tax-exempt financing $ (383) $ (13) $ (396) $ (50) $ (79) $ (129)
All other loans 1,450 233 1,683 2,993 131 3,124
-----------------------------------------------------------------
Total 1,067 220 1,287 2,943 52 2,995
Investment securities:
Taxable 414 (84) 330 (5) 33 28
Tax-exempt 261 2 263 249 31 280
-----------------------------------------------------------------
Total 675 (82) 593 244 64 308
Federal funds sold 114 8 122 (261) (52) (313)
-----------------------------------------------------------------
Total interest income 1,856 146 2,002 2,926 64 2,990
Interest expense
Interest bearing deposits:
Savings and interest bearing checking (323) (193) (516) (60) (60) (120)
Time deposits (493) (184) (677) 369 40 409
-----------------------------------------------------------------
Total interest bearing deposits (816) (377) (1,193) 309 (20) 289
Federal funds purchased 109 4 113 (57) (17) (74)
Repurchase agreements 1,636 155 1,791 850 (276) 574
Short term borrowings 80 11 91 (85) (51) (136)
Long term borrowings (25) 2 (23) 150 (14) 136
-----------------------------------------------------------------
Total interest expense 984 (205) 779 1,167 (378) 789
-----------------------------------------------------------------
Change in net interest income $ 872 $ 351 $ 1,223 $ 1,759 $ 442 $ 2,201
====== ====== ======= ======= ======= ========
</TABLE>
Other Operating Revenue
Other operating revenue of $8.151 million, exclusive of security transactions,
increased $658 thousand, or 8.8%, over 1996. The largest component of other
operating revenue in 1997 was service charges on deposit accounts which
increased $538 thousand, or 14.8%, over 1996. Other operating revenue, exclusive
of security transactions, as a percent of average assets was 1.05% in 1997
compared to 1.00% in 1996. The Company annually reviews all of its fee-based
products and services for marketability and profitability. Adjustments to fees
for the Company's products and services, and the strengthening of controls for
the collection of such fees, are the reasons for the significant increase. In
1997 service charges on deposit accounts as a percentage of average deposits
increased to .77% from .64% in 1996.
Mahoning National Bank's Trust and Investment Department generated $2.864
million in other operating revenue in 1997, approximately the same amount as the
$2.837 million earned in 1996. Trust Department assets totaled $438.456 million
with a market value of $641.560 million at December 31, 1997 compared to
$575.712 million with a market value of $775.688 million at December 31, 1996.
This decrease was the result of a corporate customer consolidating employee
benefit and custody trust accounts with a financial institution outside of our
market area in the second quarter of 1997. The $27 thousand increase in trust
fees, even with the loss of this large corporate customer, can be attributed to
the department's market 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.
In 1997, the Company realized $182 thousand in gains when $20.075 million of
U.S. government securities coming due in 1997 and $2.167 million of nontaxable
municipals were sold from the available for sale portfolio and reinvested in
longer term U.S. Treasury securities and nontaxable municipals. In 1996, the
Company incurred a $319 thousand loss when $24.658 million of U.S. government
securities were sold from the available for sale portfolio and reinvested into
longer term U.S. Treasury securities.
Other Operating Expense
Other operating expense of $20.626 million increased $129 thousand, or 0.6%,
during 1997. This followed a $117 thousand, or 0.6%, increase in 1996. As a
percentage of average assets, other operating expense was 2.66% in 1997 compared
to 2.73% in 1996. 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 191 basis points from 49.62% in 1996 to 47.71% in
1997. This efficiency ratio would place the Company near the top of its peer
group. Beginning January 1, 1993, a risk weighted insurance premium schedule was
implemented by the Federal Deposit Insurance Corporation (FDIC), which bases
assessment rates on capital levels and the bank regulator's rating of the
institution as required by the Federal Deposit Insurance Corporation Improvement
Act of 1991 (FDICIA). In September 1995, the FDIC determined that the Bank
Insurance Fund (BIF) was fully recapitalized as of the end of May 1995. As a
result,
39
<PAGE> 42
MANAGEMENT'S DISCUSSION AND ANALYSIS
the FDIC reduced deposit insurance premiums for most banks, including Mahoning
National, to a minimum annual contribution of $2 thousand beginning January 1,
1996. On September 30, 1996, the "Deposit Insurance Fund Act of 1996" was
enacted. This Act required FDIC insured banks to pay a 1.29 basis point
assessment ($.0129 per $100 of deposits) for BIF deposits in 1997, 1998 and
1999. As a result of this assessment, FDIC premium expense for 1997 totaled $70
thousand, an increase of $68 thousand over 1996 premiums.
In 1997, total salaries and employee benefit expense increased $330 thousand, or
3.1%, from 1996. Salary expense alone for 1997, increased $211 thousand, or
2.3%, compared to an increase of $699 thousand, or 8.4%, in 1996. This increase
can be attributed to annual merit salary adjustments which took effect January
1, 1997, and increases in various employee incentive programs. In 1996, as a
result of departmental restructuring and selective staff reductions a one-time
charge of approximately $342 thousand was charged to salary expense. This charge
increased 1996 salary expense but will provide for long term salary cost
savings. Health care expenses for 1997 were $755 thousand compared to $585
thousand for the same period in 1996, an increase of $170 thousand or 29%. This
increase was due in part to increased health care claims in 1997 and increased
premium rates on the Company's health care plans. The number of full time
equivalent employees decreased from 391 in 1996 to 388 in 1997.
Net occupancy expense, which represents various facility management expenses
decreased $23 thousand in 1997 to $1.462 million from $1.485 million in 1996.
These decreases were the result of reduced building maintenance and utility
expenses. In late 1997 the Company decided to close the South Side branch office
and consolidate it into the South and Midlothian office in January 1998.
Expenses to close this office are not expected to be material.
This consolidation will reduce overhead expenses beginning in 1998.
Equipment rental, depreciation and maintenance of $1.432 million decreased $295
thousand, or 17.1%, from 1996. This decrease was the result of the termination
of various computer equipment leases and their related service contracts. The
equipment that was covered by these leases was either purchased at a discount or
disposed of.
Other expenses increased $149 thousand in 1997, to $5.615 million from $5.466
million in 1996, a 2.7% increase. This increase was the result of amortization
and support on software purchased in 1996 and 1997, increased marketing expenses
related to the promotion of loan and deposit products, increased business
activity and general inflationary increases.
In early 1997, the Company began to address the Year 2000 issue, which covers
the process of converting computer systems to calculate the Year 2000. A Year
2000 committee was formed consisting of senior management and selected
representatives from all areas of the Company. The committee, which meets
regularly, has developed a project plan 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 December 1997, the Awareness and Assessment phases had been completed
and work had begun on the Renovation phase. The Renovation phase could include
new hardware and/or software to replace those items found to be non-compliant
with Year 2000. At this time it is not expected that expenses to address Year
2000 issues will materially impact future operating results.
Income Taxes
Income tax expense for 1997 was $6.160 million compared to $5.540 million in
1996. The Company's effective tax rates were 32.2% and 32.3% for 1997 and 1996
respectively, compared to the statutory federal income tax rate of 35%. Tax
exempt investment and loan income is the primary reason the Company's effective
tax rate is less than the statutory tax rate.
The components of the Company's deferred income tax asset and reconciliation of
the effective tax rate can be found on page 23 of this report (Note J - Income
Taxes).
Earnings Review for the Years Ended
December 31, 1996 and 1995
For the purpose of the Management's Discussion and Analysis, income from
tax-exempt loans and investments has been adjusted to a fully taxable equivalent
basis (FTE) using an incremental tax rate of 35%.
Net Income:
-----------
Net income for 1996 was $11.611 million or $1.84 per share, an increase of
$1.541 million or 15% over 1995 earnings of $10.070 million or $1.60 per share.
The Company's return on assets (ROA) for 1996 increased to 1.55% from 1.40% in
1995. The return on average stockholders' equity (ROE) for 1996 was 15.83%, an
increase from 15.37% in 1995. The Company was able to significantly improve its
return on equity, and at the same time increase its very strong stockholders'
equity to asset ratio to 10.02% in 1996 from 9.67% in 1995.
The primary component of the Company's earnings growth in 1996 was net interest
income, and the significant growth in the loan portfolio was the primary reason
for that earnings increase.
Net Interest Income:
--------------------
Net interest income was $33.099 million for 1996, an increase of 7% over 1995
net interest income of $30.952 million. In 1996, the most significant factor in
the increase in net interest income was loan volume which accounted for
additional tax adjusted interest income of $2.943 million compared with $3.360
million in 1995, as average balances grew by $32.643 million during 1996. The
Company's investment portfolio average balance, which increased by $3.462
million in 1996, contributed to a $244 thousand increase in tax adjusted
interest income compared to a decrease of $325 thousand in 1995. The increase in
the Company's tax adjusted net interest income as a result of changes in volume
amounted to $1.759 million compared to $1.481 million in 1995. The increase in
tax adjusted net interest income due to rate was $442 thousand in 1996 compared
to a $235 thousand decrease in net interest income in 1995. This was mainly the
result of a decrease in funding costs during 1996 of $378 thousand.
Average interest-earning assets for 1996 were $708.869 million, or 4.6%, greater
than the $677.521 million of earning assets in 1995. The average outstanding
loan balance for 1996 was $478.237 million, an increase of 7.3% over the 1995
average balance of $445.594 million.
The tax equivalent yield on the loan portfolio for 1996 remained approximately
the same at 8.93% compared to 8.92% in 1995, even though the prime lending rate
dropped by 25 basis points in February 1996, as a result of the portfolio mix
and loan fee increases. The loan to deposit ratio at December 31, 1996 and 1995
was 86.71% and 80.45%, respectively.
40
<PAGE> 43
MANAGEMENT'S DISCUSSION AND ANALYSIS
Average interest bearing liabilities for 1996 were $605.325 million, or 3.9%,
greater than the $582.467 million of average interest bearing liabilities in
1995. The cost of interest bearing liabilities decreased slightly to 3.80% in
1996 from 3.81% in 1995. While average interest bearing deposits increased
$4.429 million and the cost of those deposits increased three basis points,
actual year end balances for 1996 were down $23.810 million. This loss of
deposits was more than off-set by an increase in the volume of securities sold
under agreements to repurchase as more corporate and political subdivisions
placed their funds into overnight "sweep" repurchase agreements. The average
balance of these interest bearing liabilities increased $18.298 million in 1996,
while the cost of these funds decreased by 34 basis points from 1995. Actual
year end balances for 1996 were up $57.425 million over 1995 year end balances.
The prime interest rate which increased from 8.50% to 9.00% in the first 6
months of 1995 before receding back to 8.50% by the year end, declined another
25 basis points in February of 1996 to 8.25% where it remained throughout the
year. While interest rates over 1996 and 1995 declined modestly, the Company was
able to improve its net interest margin from 4.68% in 1995 to 4.78% in 1996. The
reasons for an improved net interest margin in 1996 were the continued growth of
the loan portfolio and improved yields on the investment portfolio.
Other Operating Revenue:
------------------------
Other operating revenue of $7.493 million, exclusive of security transactions,
increased $1.300 million, or 21.0%, over 1995. The largest component of other
operating revenue in 1996 was service charges on deposit accounts which
increased $783 thousand, or 27.6%, over 1995. Other operating revenue, exclusive
of security transactions, as a percent of average assets was 1.0% in 1996
compared to 0.86% in 1995. Adjustments to fees for the Company's products and
services, and the strengthening of controls for the collection of such fees,
were the reason for the significant increase. In 1996 service charges on deposit
accounts as a percentage of average deposits increased to .64% from .51% in
1995.
Mahoning National Bank's Trust and Investment Department generated $2.837
million in other operating revenue in 1996, an increase of $396 thousand, or
16.2%, over 1995. This increase was attributed to two factors: an influx of new
trust accounts and market value based fees which increased due to the
significant increase in account market values due to rises in the stock market
over 1995. Trust Department assets totaled $575.712 million with a market value
of $775.688 million at December 31, 1996 compared to $529.555 million with a
market value of $695.437 million at December 31, 1995.
In 1996, the Company incurred a $319 thousand loss when $24.658 million of U.S.
government securities were sold from the available for sale portfolio. This
compared to a loss of $155 thousand in 1995 when $30.129 million of U.S.
government securities were sold. The losses in both 1996 and 1995 resulted
primarily from an investment portfolio repositioning strategy executed in the
fourth quarter of each year which was designed to enhance future net interest
income performance. Specifically in 1996, $25 million of available for sale
securities with a weighted average yield of approximately 4.85% and a weighted
average maturity of 18 months were sold at a $319 thousand loss. The proceeds of
this sale were used to purchase $25 million of securities with a weighted
average yield of approximately 6.02%, a yield improvement of 117 basis points,
and a weighted average maturity of 41 months.
Other Operating Expense:
------------------------
Other operating expense of $20.497 million increased $117 thousand or 0.6%
during 1996. As a percentage of average assets, other operating expense was
2.73% in 1996 compared to 2.84% in 1995.
In September 1995, the FDIC determined that the Bank Insurance Fund (BIF) was
fully recapitalized as of the end of May 1995. As a result, the FDIC reduced
deposit insurance premiums for most banks, including Mahoning National, from
$.23 per $100 of deposits to $.04 per $100 of deposits for the period June 1,
1995 through December 31, 1995, and further reduced rates to a minimum annual
contribution of $2 thousand beginning January 1, 1996. As a result, Mahoning
National received a $343 thousand deposit insurance premium rebate in September
1995 for the period June 1, 1995 through September 30, 1995, which reduced 1995
third quarter operating expense. The additional rate reduction in 1996 resulted
in a savings of $634 thousand over 1995 premium assessments.
In 1996, total salaries and employee benefit expense increased $404 thousand, or
3.9%, from 1995. Salary expense alone for 1996 increased $699, thousand or 8.4%,
compared to an increase of $309 thousand or 3.9% in 1995. This increase can be
attributed to annual merit salary increases and increases in various employee
incentive programs. In addition, as a result of departmental restructuring and
selective staff reductions, a one-time charge of approximately $342 thousand was
charged to salary expense in 1996. While this charge increased 1996 salary
expense above expected levels it will provide for long term salary cost savings.
Health care expenses for 1996 were $585 thousand compared to $616 thousand for
the same period in 1995, a decrease of $31 thousand or 5%, mainly due to lower
hospitalization claims in 1996. The number of full time equivalent employees
decreased from 406 in 1995 to 391 in 1996.
Net occupancy expense, which represents various facility management expenses
decreased $176 thousand in 1996 to $1.485 million from $1.661 million in 1995.
Additional expenses were incurred in 1995 as the Company closed two branch
locations and opened two new facilities. A $67 thousand write-off of lease
obligations related to the closing of those two branches increased 1995
occupancy expense. Additional decreases in 1996 were the result of reduced
building maintenance and utility expenses.
Equipment rental, depreciation and maintenance of $1.727 million increased $124
thousand, or 7.7%, from 1995. This increase was the result of increased
depreciation expense on equipment, furniture and fixtures purchased in the
second half of 1995 and throughout 1996.
Other expenses increased $270 thousand in 1996, to $5.466 million from $5.196
million in 1995, a 5.2% increase. This increase was the result of amortization
and support on software purchased late in the second quarter of 1995, increased
business activity and general inflationary increases. Additional increases in
other expenses resulted from professional fee expenses related to a
profitability study performed in the first half of 1996. These expenses were
off-set by year end due to increased fee income and reduced business expenses
realized as a result of that study.
Income Taxes:
-------------
Income tax expense for 1996 was $5.540 million compared with $4.640 million in
1995. The Company's effective tax rates were 32.3% and 31.6% for 1996 and 1995,
respectively in comparison to the statutory federal income tax rate of 35%. Tax
exempt investment and loan income is the primary reason the Company's effective
tax rate is less than the statutory tax rate.
41
<PAGE> 44
MANAGEMENT'S DISCUSSION AND ANALYSIS
Liquidity
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 and
repurchase agreements, U.S. Treasury demand notes and Federal Home Loan Bank
advances) are used as primary cash management and liquidity tools. Short term
Federal fund lines totaling $60 million have been established at the Company's
correspondent banks. When loan demand increases at a faster rate than deposit
growth it may be necessary to manage the available for sale portion of the
investment portfolio to meet that demand, or to sell conforming residential
mortgages on the secondary market. At December 31, 1997 and 1996, $298 thousand
and $394 thousand of residential mortgage loans were designated as held for
sale, respectively. At December 31, 1997, $189.578 million of the investment
portfolio was classified as available for sale. This classification will afford
the Company's Asset/Liability Committee the flexibility to manage the portfolio
to meet any liquidity needs that may arise.
An additional source of liquidity is derived from the Federal Home Loan Bank of
Cincinnati (FHLB). The FHLB provides short term funding alternatives with a line
of credit of $52.138 million and funding for one-to-four family residential
mortgage loans and allows the Company to better manage its interest rate risk.
The Company had $3.151 million outstanding in FHLB borrowings at December 31,
1997 compared to $4.065 million at December 31, 1996.
Mahoning National has been serving the Mahoning Valley for 129 years and has
developed a solid core deposit base. Of the $545.111 million in deposits on
December 31, 1997, only $23.625 million represent time deposits in excess of
$100 thousand. Even though these deposits which exceed $100 thousand are not
considered core deposits due to their volatile nature, the Company's core
deposit to total asset ratio is still strong at 65.4%. With the Company's strong
core deposit base, growth in corporate investment accounts and access to
funding, the liquidity position of the Company is such that there is still
unused capacity to fund loans. At December 31, 1997, and throughout the past
twelve months key liquidity ratios were within established Company and
regulatory guidelines.
The maturity distribution of the Company's total time deposits in amounts of
$100 thousand or greater as of December 31, 1997, is summarized below:
<TABLE>
<CAPTION>
(Amounts in thousands)
- ------------------------------------------------------
<S> <C>
Within three months $ 8,681
After three months
but within six months 5,794
After six months
but within twelve months 3,696
After twelve months 5,454
-------
$23,625
=======
</TABLE>
Inflation and Interest Rate Sensitivity
The primary objective of the Company's asset/liability management process is to
plan and control profits through management of the pricing and mix of assets and
liabilities, while achieving acceptable levels of interest rate risk and
liquidity risk and providing for adequate capitalization. Due to the fact that
the assets and liabilities of a financial institution are monetary in nature,
changes in interest rates and monetary or fiscal policy affect its financial
condition and have potentially the greatest impact on the net income of the
Company.
Some of the steps being taken by the Company to manage interest rate risk
include: continuing to focus on originating and purchasing adjustable rate
assets, selling fixed rate one-to-four-family loans with servicing retained,
emphasizing transaction account deposit products which are less susceptible to
repricing in a rising interest rate environment and maintaining competitive
pricing on longer term certificates of deposit.
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 December 31, 1997, 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 determines the discounted present value of
the difference between cash flows from assets and cash flows from liabilities.
The application of the methodology attempts to quantify interest rate risk as
the change in NPV which would result from theoretical instantaneous and
sustained parallel shifts of 100 and 200 basis points in market interest rates
and their impact on equity. Presented below is an analysis of the Company's
interest rate risk measured by the NPV methodology at December 31, 1997. The
increased equity value reflected in the longer term net economic value method of
measuring interest rate risk is a function of the current coupons on assets
relative to the decline in interest rates in late 1997.
The following table shows the dollar impact of various rate changes on the net
present value of the Company's assets and liabilities.
<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 $ 14,969 17.29% 12.47%
-100 8,853 10.23 11.82
0 2,852 3.29 11.18
+100 (3,038) (3.51) 10.53
+200 (8,819) (10.19) 9.89
</TABLE>
42
<PAGE> 45
MANAGEMENT'S DISCUSSION AND ANALYSIS
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, as a result of
competition, the interest rates on certain assets and liabilities may fluctuate
in advance of changes in market interest rates, while interest rates on other
types of assets and liabilities may lag behind changes in market rates. Further,
in the event of a change in interest rates, expected rates of repayment on
assets and early withdrawal levels from certificates of deposit would likely
deviate from those scheduled.
Impact of New Accounting Standards
Several new accounting standards have been issued by the Financial Accounting
Standards Board (FASB) that were effective for the Company's consolidated
financial statements for the year ending December 31, 1997. Statement of
Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," was issued by
FASB in 1996. SFAS No. 125 revises the accounting for transfers of financial
assets, such as loans and securities, and for distinguishing between sales and
secured borrowings. It was originally effective for some transactions in 1997
and others in 1998. SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125," was issued in December 1996. SFAS No. 127
defers, for one year, the effective date of provisions related to securities
lending, repurchase agreements and other similar transactions. The remaining
portions of SFAS No. 125 continued to be effective January 1, 1997. SFAS No. 125
did not have a material impact on the Company's financial statements.
In March 1997, the FASB issued 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
year presented.
In February 1997, the FASB issued SFAS No. 129, "Disclosures of Information
about Capital Structure." SFAS No. 129 consolidated existing accounting guidance
relating to disclosure about a company's capital structure. Public companies
generally have been required to make disclosures now required by SFAS No. 129
and, therefore, SFAS No. 129 had no impact on the Company. SFAS No. 129 is
effective for financial statements for periods ending after December 15, 1997.
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.
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 the 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 statements
for periods beginning after December 15, 1997.
43
<PAGE> 46
MAHONING NATIONAL BANCORP, INC.
Directors
Dominic A. Bitonte
Retired Doctor of Dental Surgery
Private Investments
Frank A. Kramer
President
Brenner Industrial Sales & Supply Co.
Charles J. McCrudden, Jr.
President
McCrudden Heating Supply
Gregory L. Ridler
President and Chief Executive Officer
Mahoning National Bank
Daniel B. Roth
President
Roth, Blair, Roberts, Strasfeld & Lodge, L.P.A.
Vice Chairman, Torent, Inc.
Vice Chairman, McDonald Steel Corp.
Warren P. Williamson III
Chairman, Sygnet Wireless, Inc.
Chairman, WKBN Broadcasting Corp.
Officers
Gregory L. Ridler
Chairman of the Board, President and
Chief Executive Officer
Parker T. McHenry
Vice President
Richard E. Davies
Secretary
Norman E. Benden, Jr.
Treasurer
MAHONING NATIONAL BANK
Directors
David A. Bitonte
Anesthesiologist/Physician
President
Alliance Anesthesia, Inc.
William J. Bresnahan
President
Hynes Industries, Inc.
Lee Burdman
Partner
Redstone Investments
Howard W. Cailor, Jr.
Principal
Cailor Fleming & Associates, Inc.
Louis M. Davies
Retired Attorney
Howard C. Hargate
Chairman of the Board
Scholl-Choffin Sprinkler Corp.
Frank A. Kramer
President
Brenner Industrial
Sales & Supply Co.
Charles J. McCrudden, Jr.
President
McCrudden Heating Supply
Parker T. McHenry
Executive Vice President
Mahoning National Bank
Gregory L. Ridler
President and
Chief Executive Officer
Mahoning National Bank
Daniel B. Roth
President
Roth, Blair, Roberts,
Strasfeld & Lodge, L.P.A.
Vice Chairman, Torent, Inc.
Vice Chairman, McDonald Steel Corp.
Warren P. Williamson III
Chairman, Sygnet Wireless, Inc.
Chairman, WKBN Broadcasting Corp.
Philip N. Winkelstern
Retired Senior Vice President and
Chief Financial Officer
Commercial Intertech Corp.
Advisory Board
Charles H. Byers
Sallie Tod Dutton
Robert J. Edwards, D.V. M.
Ralph Fagert
Robert M. Hammond
Paul A. Johnson
Donald F. Leonhart
James E. Mitchell
Robert M. Morain
Charles V. Rudge
Helene Gran Salreno
Dale R. Sheely
Gregory B. Smith
Directors Emeriti
J. Roy Barefoot
John D. Beeghly
Dominic A. Bitonte
Kenneth J. Black
William W. Bresnahan
Alfred M. Clark, Jr.
William F. Courtney
Eleanor Beecher Flad
John Nelson
John M. Newman
Fred Tod, Jr.
Ambrose J. Wardle, Jr.
44
<PAGE> 47
MAHONING NATIONAL BANK - OFFICIAL ORGANIZATION
Gregory L. Ridler
President &
Chief Executive Officer
Parker T. McHenry
Executive Vice President
Richard E. Davies
Senior Vice President &
Cashier
Loans
Frank Hierro
Senior Vice President
Commercial Loans
Kenneth G. Goldsboro
Vice President
Timothy A. Beaumont
Vice President
Stanley Feret
Vice President
Timothy F. Shaffer
Vice President
Karen J. Cessna
Assistant Vice President
Patrick J. McElhaney
Assistant Vice President
Consumer Loans
Kathleen R. Patrone
Vice President
Kathleen M. Dillon
Assistant Vice President
Gilbert R. Smith
Assistant Vice President
David W. Howard
Consumer Loan Manager
Carol M. Lewis
Consumer Loan Officer
Corporate Banking
James D. Fisher
Vice President
Trust & Investments
J. David Sabine
Senior Vice President &
Senior Trust Officer
Carol A. Chamberlain
Vice President & Trust Officer
Bruce D. Hendryx
Vice President & Trust Officer
Clinton S. Pelfrey
Vice President &
Trust Investment Officer
Terrence F. Cloonan
Assistant Vice President &
Trust Officer
Diane M. Playforth
Trust Operations Officer
Kevin Borisenko
Trust Investment Officer
Suzanne Allen
Trust Officer
Crystal L. Hudspeth
Trust Officer
Paulette C. Pasquale
Trust Officer
Paula L. Wayne
Trust Officer
Finance &
Accounting
Norman E. Benden, Jr.
Senior Vice President &
Chief Financial Officer
Harold E. Erickson, Jr.
Vice President
Kathleen A. Rish
Accounting Officer
Cathy A. Barrios
Accounting Officer
Compliance
Dexter A. Hollen
Vice President &
Compliance Officer
Kimberly G. Hebb
Assistant Compliance Officer
Auditing
Martha Drabiski
Vice President & Auditor
Daniel E. Hackett
Assistant Auditor
Marketing &
Public Relations
Karen R. DeSalvo
Assistant Vice President
Human Resources
Donna J. Mowrey
Assistant Vice President
Stanley C. Simons
Employee Benefits Officer
Security
John Rosan
Security Officer
Legal
Thomas M. Gacse
Legal Counsel
Bank Operations & Retail Delivery Network
David E. Westerburg
Senior Vice President
Bank Operations
Centralized Banking
Frank A. Constantino
Centralized Banking Officer
Loan Services
Beth E. Soroka
Assistant Vice President
Deposit Services
Melinda M. Davies
Vice President
David R. Merva
Operations Officer
Information Services
Marianne Yeager
Vice President
Operations Support
Deborah L. Morgan
Operations Officer
Branch Administration
John R. Lewis
Senior Vice President
David L. Pringle
Assistant Vice President &
Branch Sales Manager
Beth Fallen
Assistant Vice President &
Regional Manager
Robert D. Meek
Assistant Vice President &
Regional Manager
Branch Managers
Main Office
Emma L. Titler
Branch Banking Officer
Austintown Office
Gillian A. Smith
Assistant Vice President
Boardman Office
Caroline L. Goldsboro
Assistant Vice President
Brookfield Office
Mary Ann Hudspeth
Branch Manager
Campbell Office
Thomas R. Papa
Assistant Vice President
Canfield Office
Judith A. Larson
Branch Banking Officer
Cornersburg Office
Randall R. Rivello
Assistant Vice President
Cortland Office
Mark E. Homrighouse
Assistant Vice President
Howland Office
Roberta L. Harding
Assistant Vice President
Hubbard Office
Amber R. DeJulio
Branch Banking Officer
Jackson-Milton Office
Amy L. Stacy
Branch Manager
Kinsman Office
Shari L. Polchosky
Branch Banking Officer
Liberty Office and
Liberty Drive-in
Breen O. Bannon
Branch Banking Officer
New Middletown Office
Anita L. Mediate
Branch Banking Officer
North Lima Office
Richard N. Chase
Assistant Vice President
South & Midlothian Office and
South Side Office
Ronald C. Clifton
Assistant Vice President
South & 224 Office
James D. Horvath
Assistant Vice President
Struthers-Poland Office and
Struthers-Poland Drive-In
David R. Bompage
Assistant Vice President
Wedgewood Office
Rhonda A. Kempe
Branch Banking Officer
West Side Office and
Mahoning & Schenley Office
Thomas E. Reardon
Branch Banking Officer
45
<PAGE> 48
PEOPLE
VISION
COMMITMENT
MNB
Mahoning National Bancorp, inc.
Youngstown, Ohio
<PAGE> 1
MAHONING NATIONAL BANCORP, INC.
FORM 10-K
EXHIBIT 21
Subsidiaries of the Registrant
The following is the sole subsidiary of Mahoning National
Bancorp, Inc.:
The Mahoning National Bank of Youngstown
23 Federal Plaza
Youngstown, Ohio 44501-0479
(Incorporated in Ohio)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MAHONING
NATIONAL BANCORP, INC., CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AT
DECEMBER 31, 1997 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 29,143
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 189,578
<INVESTMENTS-CARRYING> 61,178
<INVESTMENTS-MARKET> 61,248
<LOANS> 492,487
<ALLOWANCE> 7,524
<TOTAL-ASSETS> 796,866
<DEPOSITS> 545,111
<SHORT-TERM> 157,199
<LIABILITIES-OTHER> 4,826
<LONG-TERM> 3,151
0
0
<COMMON> 6,300
<OTHER-SE> 80,279
<TOTAL-LIABILITIES-AND-EQUITY> 796,866
<INTEREST-LOAN> 43,823
<INTEREST-INVEST> 13,885
<INTEREST-OTHER> 422
<INTEREST-TOTAL> 58,130
<INTEREST-DEPOSIT> 16,887
<INTEREST-EXPENSE> 23,761
<INTEREST-INCOME-NET> 34,369
<LOAN-LOSSES> 2,975
<SECURITIES-GAINS> 182
<EXPENSE-OTHER> 20,626
<INCOME-PRETAX> 19,101
<INCOME-PRE-EXTRAORDINARY> 12,941
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,941
<EPS-PRIMARY> 2.05
<EPS-DILUTED> 2.05
<YIELD-ACTUAL> 8.03
<LOANS-NON> 2,227
<LOANS-PAST> 654
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,112
<CHARGE-OFFS> 4,193
<RECOVERIES> 630
<ALLOWANCE-CLOSE> 7,524
<ALLOWANCE-DOMESTIC> 7,524
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 703
</TABLE>
<PAGE> 1
MAHONING NATIONAL BANCORP, INC.
FORM 10-K
EXHIBIT 99(a)
Report of Independent Certified Public
Accountants. Predecessor Auditors Report
for the year ended December 31, 1995.
<PAGE> 2
700 One Prudential Plaza
130 E. Randolph Drive
Chicago, IL 60601-6203
312 856-0200
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
[GRANT THORNTON LOGO]
GRANT THORNTON LLP Accountants And
Management Consultants
The U.S. Member Firm of
Grant Thornton International
Board of Directors and Stockholders
Mahoning National Bancorp, Inc.
We have audited the accompanying consolidated statements of income,
changes in stockholders' equity and cash flows of Mahoning National Bancorp,
Inc. and its wholly-owned subsidiary, The Mahoning National Bank of Youngstown
for the year ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows for Mahoning National Bancorp, Inc. and its wholly-owned subsidiary,
The Mahoning National Bank of Youngstown for the year ended December 31, 1995,
in conformity with generally accepted accounting principles.
/S/ GRANT THORNTON LLP
Pittsburgh, Pennsylvania
January 19, 1996
<PAGE> 1
MAHONING NATIONAL BANCORP, INC.
FORM 10-K
EXHIBIT 99(b)
Registrant's Notice of Annual Meeting and
Proxy Statement dated March 17, 1998.
<PAGE> 2
================================================================================
MAHONING NATIONAL BANCORP, INC.
NOTICE OF ANNUAL MEETING
AND
PROXY STATEMENT
ANNUAL SHAREHOLDERS MEETING
MARCH 17, 1998
================================================================================
<PAGE> 3
MAHONING NATIONAL BANCORP, INC.
23 Federal Plaza
P.O. Box 479
Youngstown, OH 44501
NOTICE OF ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD
March 17, 1998
TO THE HOLDERS OF SHARES OF COMMON STOCK:
Notice is hereby given that the Annual Meeting of the Shareholders of
Mahoning National Bancorp, Inc. (the "Corporation") will be held at The Mahoning
National Bank, 23 Federal Plaza, Youngstown, Ohio 44501 on Tuesday, March 17,
1998, at 11:00 a.m. (local time), for the purpose of considering and voting upon
the following matters:
1. The election of three (3) Directors to be elected to Class I of the
Corporation's staggered Board of Directors to serve a two-year term or
until their successors shall have been elected and qualified.
2. TO TRANSACT SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING
OR ANY ADJOURNMENT THEREOF. THE BOARD OF DIRECTORS AT PRESENT KNOWS OF
NO OTHER BUSINESS TO BE PRESENTED BY OR ON BEHALF OF THE CORPORATION.
Shareholders of record at the close of business on January 30, 1998 are
the only shareholders entitled to notice of and to vote at the Annual
Shareholders Meeting.
By order of the Board of Directors
Gregory L. Ridler, Chairman of the Board,
President and Chief Executive Officer
February 13, 1998
IMPORTANT
WHETHER YOU EXPECT TO ATTEND THE MEETING OR NOT, PLEASE MARK, SIGN,
DATE, AND RETURN THE ACCOMPANYING PROXY CARD IN THE ENCLOSED SELF-ADDRESSED
ENVELOPE AS PROMPTLY AS POSSIBLE. NO POSTAGE IS REQUIRED.
<PAGE> 4
MAHONING NATIONAL BANCORP, INC.
YOUNGSTOWN, OHIO
PROXY STATEMENT
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation
by the Board of Directors of Mahoning National Bancorp, Inc. (the "Corporation")
of proxies to be voted at the Annual Meeting of shareholders to be held on
Tuesday, March 17, 1998, in accordance with the foregoing notice.
The Corporation is a one-bank holding company of which The Mahoning
National Bank of Youngstown (hereinafter "Mahoning National Bank") is a wholly
owned subsidiary.
The solicitation of proxies on the enclosed form is made on behalf of
the Board of Directors of the Corporation. All cost associated with the
solicitation will be borne by the Corporation. The Corporation does not intend
to solicit proxies other than by use of the mails, but certain officers and
regular employees of the Corporation or its subsidiaries, without additional
compensation, may use their personal efforts, by telephone or otherwise, to
obtain proxies. The proxy materials are first being mailed to shareholders on
February 13, 1998.
Any shareholder executing a proxy has the right to revoke it by the
execution of a subsequently dated proxy, by written notice delivered to the
Secretary of the Corporation prior to the exercise of the proxy or in person by
voting at the meeting. The shares will be voted in accordance with the direction
of the shareholder as specified on the proxy. In the absence of instructions,
the proxy will be voted "FOR" the election of the three (3) persons listed in
this Proxy Statement.
VOTING SECURITIES
Only shareholders of record at the close of business on January 30,
1998, will be eligible to vote at the Annual Meeting or any adjournment thereof.
As of January 30, 1998, the Corporation had outstanding 6,300,000 shares of
Common Stock, no par value. Shareholders are entitled to one (1) vote for each
share of common stock owned as of the record date, and shall have the right to
cumulate votes in the election of directors, in accordance with Ohio law.
Cumulative voting permits a shareholder to multiply the number of shares held by
the number of directors to be elected, and cast those votes for one candidate or
spread those votes among several candidates as he or she deems appropriate.
As of January 30, 1998, Mahoning National Bank held 892,859 shares of
the Corporation's outstanding shares in their Trust Department in regular or
nominee accounts. This total represents 14.17 percent of the outstanding shares,
which will be voted in accordance with the instructions contained in the various
trust agreements pursuant to which such shares are held and may, therefore, in
certain circumstances in which discretionary voting is granted to the trustee,
be voted at the direction of The Mahoning National Bank as Trustee.
<PAGE> 5
All directors and Named Executive Officers as a group (comprised of
nine individuals), beneficially held 138,880 shares of the Corporation's common
stock as of January 30, 1998, representing 2.204 percent of the outstanding
common stock of the Corporation.
PROPOSAL #1
ELECTION OF DIRECTORS AND INFORMATION
WITH RESPECT TO DIRECTORS AND OFFICERS
CLASSIFICATION SYSTEM FOR THE ELECTION OF DIRECTORS
The Corporation has a classified system for the election of directors.
Directors are divided into classes as nearly equal in number as possible but
with no fewer than three directors per class. The Corporation has six directors
and, therefore, the directors have been divided into two classes comprised of
three directors. Directors are elected to serve a two-year term.
INFORMATION WITH RESPECT TO NOMINEES
The following information is provided with respect to each nominee for
director and each present continuing director whose term of office extends
beyond the Annual Meeting of the Corporation's Shareholders. Those nominees
receiving the greatest number of votes will be elected as Directors. There is no
minimum number of votes required to elect a Director.
CLASS I
(TERM TO EXPIRE 2000)
<TABLE>
<CAPTION>
Director of
Mahoning Director of
Principal Occupation National Bank Corporation
Name and Age Past 5 Years Since Since
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
William J. Bresnahan President, Hynes 1990 N/A
(47) Industries, Inc.
Frank A. Kramer (66) President, Brenner 1981 1994
Industrial Sales and
Supply
Warren P. Williamson, Chairman, Sygnet 1972 1992
III (67) Wireless, Inc;
Chairman, WKBN
Broadcasting Corp.
</TABLE>
2
<PAGE> 6
The following Directors shall continue to serve as Directors until
their respective terms expire and are not standing for reelection at this Annual
Meeting of Shareholders:
INFORMATION WITH RESPECT TO DIRECTORS NOT STANDING FOR REELECTION
CLASS II
(CONTINUING DIRECTORS WITH TERM TO EXPIRE 1999)
<TABLE>
<CAPTION>
Director of
Mahoning Director of
Principal Occupation National Bank Corporation
Name and Age Past 5 Years Since Since
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Charles J. McCrudden, Jr. President, McCrudden 1986 1995
(62) Heating and Air
Conditioning Supplies
Gregory L. Ridler (51) Chairman of the Board, 1988 1992
President & Chief
Executive Officer,
Mahoning National Bancorp,
Inc. and President & Chief
Executive Officer, of The
Mahoning National Bank of
Youngstown
Daniel B. Roth (68) President, Roth, Blair, 1972 1995
Roberts, Strasfeld & Lodge,
L.P.A., Vice Chairman,
Torent, Inc. and Vice
Chairman, McDonald Steel
Corp.
</TABLE>
The business experience of each of the above-listed nominees and
directors during the past five years was that typical to a person engaged in the
principal occupation listed. Unless otherwise indicated, each of the nominees
and directors has had the same position or another executive position with the
same employer during the past five years.
Shareholders desiring to nominate individuals to serve as directors may
do so by following the procedure outlined in the Corporation's Code of
Regulations requiring advance notice to the Corporation of such nomination and
certain information regarding the proposed nominee.
3
<PAGE> 7
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding beneficial
ownership as of January 30, 1998, of the Corporation's common shares of each
director, each Named Executive Officer and all directors and Named Executive
Officers as a group.
<TABLE>
<CAPTION>
Aggregate Number of Shares Percent of Outstanding
Name Beneficially Owned* Shares
---- ------------------- ------
<S> <C> <C>
William J. Bresnahan 881 .014
Frank Hierro 2,289 .036
Frank A. Kramer 39,011 .619
Charles J. McCrudden, Jr. 9,974 .158
Parker T. McHenry 1,437 .023
Gregory L.Ridler 24,400 .387
Daniel B. Roth 10,974 .174
David E. Westerburg 1,219 .019
Warren P. Williamson, III 48,695 .773
All Directors and Named Executive
Officers as a Group (includes nine
persons) 138,880 2.204
<FN>
*Beneficial Ownership includes those shares over which an individual has sole or
shared voting, or investment power, such as beneficial interests of such
person's spouse, minor children and other relatives living in the home of the
named person, trusts, estates and certain affiliated companies.
</TABLE>
COMMITTEES AND COMPENSATION OF THE BOARD OF DIRECTORS
The Corporation's nominating function is performed by the Board of
Directors acting as a committee of the whole. In conducting its nominating
function, the Board of Directors of the Corporation is responsible for making
annual nominations for directors to fill vacancies created by expired terms of
directors and, from time to time, making appointments to fill vacancies created
prior to the expiration of a director's term. During 1997, the Board met once to
consider and act upon the nomination of directors.
During 1997 the Company established an Examining Committee which
performs the functions of an Audit Committee. The Examining Committee's
functions include its obligation to: (a) annually recommend to the Board of
Directors of the Company, and to the Board of Directors of each of the Company's
subsidiaries, for appointment by the respective boards, independent public
accountants as auditor of the books, records and accounts of the Company and
each such subsidiary; (b) review the scope of audits made by the independent
public accountants; and (c) receive and review the audit reports submitted by
the independent public accountants and take such action in respect of such
reports as the Examining Committee may deem appropriate. During 1997 the
Examining Committee of the Bank performed the functions of the Company's
Examining Committee and met four times.
4
<PAGE> 8
The Mahoning National Bank Executive Committee performs the function of
a Compensation Committee. For a complete description of its functions and
members, see "Report of the Executive Committee of The Mahoning National Bank on
Compensation" in this Proxy Statement.
The Board of Directors of the Corporation meets quarterly for its
regular meetings and upon call for special meetings. During 1997, the Board met
five times consisting of four regular meetings and one special meeting. Each of
the directors of the Corporation attended at least 75 percent of all board
meetings and committee meetings they were scheduled to attend.
Directors of the Corporation, other than those persons who serve as
officers of The Mahoning National Bank, receive for their service a quarterly
retainer of $625 and a fee of $300 for each meeting attended.
[THIS SPACE LEFT INTENTIONALLY BLANK]
5
<PAGE> 9
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain summary information concerning
compensation paid or accrued by the Corporation and/or its subsidiaries, to or
on behalf of the Corporation's Chief Executive Officer and each of the other
three most highly compensated officers earning $100,000 or more annually, (the
"Named Executive Officers"):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION All Other
Name and Principal Position Year Salary ($) Bonus ($) Compensation (3)($)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GREGORY L. RIDLER, President 1997 225,000 123,726 (1) 307
and Chief Executive Officer 1996 210,000 73,487 (1) 281
The Mahoning National Bank 1995 195,000 68,248 (1) 532
PARKER T. MCHENRY, Executive Vice 1997 120,000 36,000 (2) 0
President, The Mahoning National Bank 1996 114,000 34,200 (2) 0
1995 107,000 32,100 (2) 0
FRANK HIERRO, Senior Vice President 1997 92,958 27,283 (1) 0
Loans, The Mahoning National Bank 1996 82,000 24,168 (1) 0
DAVID E. WESTERBURG, Senior 1997 85,000 25,471 (1) 0
Vice President Operations/Retail Banking,
The Mahoning National Bank
<FN>
(1) Represents awards under the Corporation's Executive Phantom Stock Bonus
Plan and cash bonuses. For 1997 the amounts disclosed included $78,726 for
Mr. Ridler, $18,597 for Mr. Hierro and $16,971 for Mr. Westerburg awarded
under Executive Stock Bonus Plan, (See "Executive Deferred Cash and
Executive Phantom Stock Bonus Plans"), and $45,000, $8,686 and $8,500 in
cash bonuses awarded to Messrs. Ridler, Hierro and Westerburg. All awards
under the Executive Phantom Stock Bonus Plan are subject to vesting except
for acceleration in the event of death, permanent disability or a change of
control of the Corporation. Vested awards are payable upon termination of
employment or retirement.
(2) Represents amount awarded to Mr. McHenry under the terms of the
Corporation's Executive Deferred Cash Bonus Plan adopted November 15, 1993.
The amount awarded annually is determined by return on stockholder equity
performance requirements as set forth in the Deferred Cash Bonus Plan. For
the year 1997, Mr. McHenry received $36,000 (representing 30% of his 1997
base compensation). See "Executive Deferred Cash and Executive Phantom
Stock Bonus Plans". Vested awards are payable upon termination of
employment or retirement.
(3) The amount for Mr. Ridler represents the premium attributable to his
portion of a Split Dollar Life Insurance policy.
</TABLE>
6
<PAGE> 10
PENSION PLANS
The following table shows the estimated annual pension benefits payable
to a covered participant at normal retirement age (age 65) under the
Corporation's qualified defined benefit pension plan, based on remuneration that
is covered under the plans and years of service with the Corporation and its
subsidiaries:
<TABLE>
<CAPTION>
ESTIMATED ANNUAL RETIREMENT BENEFITS
ANNUAL AVERAGE
OF FINAL 60
MONTHS SALARY 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS 40 YEARS
- ------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$60,000 16,583 22,110 27,638 33,166 38,693 44,221
85,000 24,683 32,910 41,138 49,366 57,593 65,821
110,000 32,783 43,710 54,638 65,566 76,493 87,421
135,000 40,883 54,510 68,138 81,766 95,393 109,021
160,000 48,983 65,310 81,638 97,966 114,293 125,000
185,000 48,983 65,310 81,638 97,966 114,293 125,000
</TABLE>
A participant's remuneration covered by the Corporation's pension plan
is his or her average salary (as reported in the Summary Compensation Table) for
the 60 months before normal retirement. Participants are vested in their pension
benefits after five years of service. Mr. McHenry had 8 years of service, Mr.
Ridler had 27 years of service, Mr. Hierro had 12 years of service and Mr.
Westerburg had 4 years of service, respectively, as of December 31, 1997.
Effective on December 11, 1995, the Corporation entered into a
Supplemental Executive Retirement Plan with Mr. Ridler. The purpose of the Plan
is to replace certain retirement benefits which Mr. Ridler lost under the
Corporation's qualified retirement plans due to the eligible compensation
limitations under current tax law. Pursuant to the terms of the Supplemental
Executive Retirement Plan, upon Mr. Ridler's retirement at his Normal Retirement
Age of 65, he will receive payments of $93,000 from the Corporation, annually,
for twenty years. This amount represents an estimate of the value of the lost
benefits resulting from the reduction in eligible compensation under the
Corporation's tax qualified retirement plan. Reduced benefits are provided to
Mr. Ridler under the Supplemental Executive Retirement Plan in the event of
early retirement.
In addition, contemporaneously with the adoption of the Supplemental
Executive Retirement Plan, the Corporation and Mr. Ridler entered into a Split
Dollar Life Insurance Agreement which provides for the payment, to Mr. Ridler's
beneficiaries, of one-third of the net-at-risk insurance portion of an insurance
policy purchased by the Corporation in connection with the establishment of the
Supplemental Executive Retirement Plan. As of December 31, 1997, this Split
Dollar Life Insurance Agreement would have provided a death benefit of $357,007
to Mr. Ridler's beneficiaries. The Corporation purchased life insurance for the
purpose of funding its obligations under the Supplemental Executive Retirement
Plan in the event of Mr. Ridler's death and as an investment vehicle designed to
fund the payments to Mr. Ridler at retirement.
7
<PAGE> 11
REPORT OF THE EXECUTIVE COMMITTEE OF THE MAHONING NATIONAL BANK ON COMPENSATION
Under rules established by the Securities and Exchange Commission (the
"SEC"), the Corporation is required to provide certain data and information in
regard to the compensation and benefits provided to the Corporation's Chairman
of the Board, President and Chief Executive Officer and, if applicable, the four
other most highly compensated executive officers, whose compensation exceeded
$100,000 during the Corporation's fiscal year. The disclosure requirements, as
applied to the Corporation, includes the Corporation's Chairman of the Board,
President and Chief Executive Officer (Mr. Gregory L. Ridler), Executive Vice
President (Mr. Parker T. McHenry), and Senior Vice President, Loans (Mr. Frank
Hierro), and Senior Vice President, Operations/Retail Banking (Mr. David E.
Westerburg) and includes the use of tables and a report explaining the rationale
and considerations that led to fundamental executive compensation decisions
affecting Mr. Ridler, Mr. McHenry, Mr. Hierro, and Mr. Westerburg. The
Corporation is a holding company and owns a single subsidiary, The Mahoning
National Bank. The Corporation has no direct employees. All disclosures
contained in this Proxy Statement regarding executive compensation reflect
compensation paid by The Mahoning National Bank. The Executive Committee of The
Mahoning National Bank (the "Committee") has the responsibility of determining
the compensation policy and practices with respect to all Executive Officers. At
the direction of the Board of Directors, the Committee has prepared the
following report for inclusion in this Proxy Statement.
COMPENSATION PHILOSOPHY. This report reflects the Corporation's
compensation philosophy as endorsed by the Committee. The Committee determines
the level of compensation for all other executive officers within the
constraints of the amounts approved by the Board.
Essentially, the executive compensation program of the Corporation has
been designed to:
- - Support a pay-for-performance policy that awards executive officers for
corporate performance.
- - Motivate key senior officers to achieve strategic business goals.
- - Provide compensation opportunities which are comparable to those
offered by other peer group companies, thus allowing the Corporation to
compete for and retain talented executives who are critical to the
Corporation's long-term success.
SALARIES. Effective January 1, 1998, the Committee increased the salary
paid to Mr. Ridler, Mr. McHenry, Mr. Hierro, and Mr. Westerburg. The increase
reflected consideration of competitive data reported in compensation surveys and
the Committee's assessment of the performance of such executives over the
intervening year and recognition of the Corporation's performance during 1997.
In addition, the Committee approved compensation increases for all other
executive officers of the Corporation. The Mahoning National Bank Board approved
all of such increases upon recommendation of the Committee. Executive Officer
salary increase determinations are based upon written performance appraisals of
such executives which reviews, among other things, the performance of executives
against goals set in the prior year, extraordinary service and promotions within
the organization.
8
<PAGE> 12
EXECUTIVE DEFERRED CASH AND EXECUTIVE PHANTOM STOCK BONUS PLANS. Mr.
McHenry participates in the Executive Deferred Cash Bonus Plan ("Deferred Cash
Bonus Plan") and Messrs. Ridler, Hierro and Westerburg participate in the
Executive Phantom Stock Bonus Plan ("Phantom Stock Plan"). Pursuant to the terms
of the Deferred Cash Bonus Plan, Mr. McHenry is eligible for a deferred cash
bonus in each year that The Mahoning National Bank's earnings achieve
predetermined corporate earnings levels. Under the terms of the Phantom Stock
Plan, participating executives are eligible for deferred phantom stock bonuses,
according to similar predetermined corporate earnings performance levels. Under
the terms of the plans the participating executives are eligible to receive a
deferred bonus of from 2.5 percent to 35 percent of their compensation. In the
case of the Deferred Cash Bonus Plan, the bonus is credited to the account of
the participating executive and accrues an additional 8 percent per annum in
interest. Under the terms of the Phantom Stock Plan the bonus is credited in the
participant's phantom stock account in Phantom Shares, the value of which is
then determined with reference to the value of the Corporation's common stock,
plus additional credits to the account to reflect dividends paid on the stock.
In connection with both plans, the benefits are payable upon termination of
employment or retirement in a lump sum or over a term at the election of the
participant and are subject to a vesting schedule. The Executive Committee of
The Mahoning National Bank's Board of Directors has complete discretion in the
administration and interpretation of the plans.
THIS REPORT ON COMPENSATION IS SUBMITTED BY THE EXECUTIVE COMMITTEE MEMBERS:
Warren P. Williamson, III, Chairman Charles J. McCrudden, Jr.
William J. Bresnahan Gregory L. Ridler
Frank A. Kramer Daniel B. Roth
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
Mr. Ridler, the Corporation's Chairman of the Board, President and
Chief Executive Officer, served on the Executive Committee (the "Committee") of
The Mahoning National Bank, which is responsible for compensation matters (see
"Report of the Executive Committee of The Mahoning National Bank on
Compensation" in this Proxy Statement).
Although Mr. Ridler served on the Committee, he did not participate in
any decisions regarding his own compensation as an Executive Officer. Each year,
the Executive Committee determines the amount of the bonus award for the
Chairman, President and Chief Executive Officer (pursuant to the Executive
Phantom Stock Bonus Plan described elsewhere in this Proxy Statement) and salary
for the ensuing year. Mr. Ridler did not participate in discussions or
decision-making relative to his compensation.
PERFORMANCE GRAPH - Five-Year Shareholder Return Comparison
The SEC requires that the Corporation include in this Proxy Statement a
line-graph presentation comparing cumulative, five-year shareholder returns on
an indexed basis with a broad equity market index and either a nationally
recognized industry standard or an index of peer companies selected by the
Corporation. The Corporation has selected the Dow Jones Equity Market Index and
the Dow Jones Regional Bank Index for purposes of this performance
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comparison which appears below. The Performance Graph presents a comparison
which assumes $100 invested on December 31, 1992, in the Corporation's common
stock, the Dow Jones Equity Market Index and the Dow Jones Regional Bank Index.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN* AMONG MAHONING
NATIONAL BANCORP, INC., DOW JONES EQUITY MARKET INDEX & DOW JONES MAJOR
REGIONAL BANK INDEX FOR FISCAL YEAR ENDING DECEMBER 31
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
MAHONING NATIONAL BANCORP, INC. $100.00 $127.44 $187.64 $271.61 $332.01 $484.25
DOW JONES EQUITY MARKET INDEX $100.00 $109.95 $110.76 $152.49 $187.63 $251.34
DOW JONES REGIONAL BANK INDEX $100.00 $105.27 $101.31 $162.02 $222.62 $347.78
<FN>
ASSUMES $100 INVESTED ON DECEMBER 31, 1992 IN MAHONING NATIONAL BANCORP, INC.
COMMON STOCK, DOW JONES EQUITY MARKET INDEX & DOW JONES MAJOR REGIONAL BANK
INDEX
*TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS
</TABLE>
CHANGE OF CONTROL AGREEMENT
The Corporation has entered into Change of Control Agreements
(the"Agreements") with Messrs. Ridler, McHenry, Hierro, and Westerburg. The
Agreements provide the executives are entitled to monthly periodic payments in
the event of a termination of employment (other than for cause) following a
Change of Control. A Change of Control is defined to include a merger or other
acquisition of the Corporation or the Mahoning National Bank and certain other
changes in the voting control of the Corporation. In the event of a Change of
Control and termination of the executive, the Agreements provide for the payment
of monthly cash payments equal to the highest monthly base salary of such
executive prior to the Change of Control, for 36 months in the case of Mr.
Ridler and 24 months for each of the other named executive officers. The rights
of the Corporation to choose to employ or terminate the executives prior to a
Change of Control are not affected by the Agreements. In the event a Change of
Control had occurred on January 1, 1998, and each of the executive's employment
had been involuntarily terminated on such date (other than for cause), Mr.
Ridler would have been entitled (subject to certain immaterial modifications
provided for by the Agreements which may lower the amount), to receive a monthly
sum of $18,750 for 36 months; Messrs. McHenry, Hierro and Westerburg would have
been entitled (subject to certain immaterial modifications provided for by the
Agreements which may lower the amount), to receive a monthly sum of $10,000,
$9,166, and $7,083, respectively for 24 months.
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TRANSACTIONS WITH MANAGEMENT
Directors of The Mahoning National Bank and the Corporation and their
associates were customers of, and have had transactions with, The Mahoning
National Bank in the ordinary course of business during 1997.
These transactions consisted of extensions of credit by The Mahoning
National Bank in the ordinary course of business and were made on substantially
the same terms as those prevailing at the time for comparable transactions with
other persons. In the opinion of the management of The Mahoning National Bank,
those transactions do not involve more than a normal risk of being collectible
or present other unfavorable features. The Mahoning National Bank expects to
have, in the future, banking transactions in the ordinary course of its business
with directors and their associates on the same terms, including interest rates
and collateral on loans, as those prevailing at the time of comparable
transactions with others.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Corporation's officers and directors, and persons who own more than 10 percent
of a registered class of the Corporation's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than 10 percent shareholders are required by SEC
regulation to furnish the Corporation with copies of all Section 16(a) forms
they file.
Based solely on review of the copies of such forms furnished to the
Corporation, or written representations that no Form 5s were required, the
Corporation believes that during 1997, all Section 16(a) filing requirements
applicable to its officers, directors, and greater than 10 percent beneficial
owners were complied with.
SELECTION OF AUDITORS
Crowe, Chizek and Company LLP has been appointed to serve as the
Independent Auditor for the Corporation and its subsidiary for the fiscal year
ended December 31, 1997. It is the intention of the Corporation to appoint
Crowe, Chizek and Company LLP as Independent Auditor for 1998. Representatives
of Crowe, Chizek and Company LLP are expected to be present at the Annual
Meeting to respond to appropriate questions from stockholders and to have the
opportunity to make any statements they consider appropriate.
SHAREHOLDER PROPOSALS
Any proposals to be considered for inclusion in the proxy material to
be provided to shareholders of the Corporation for its next annual meeting, to
be held in 1999, must be made by a qualified shareholder and must be received by
the Corporation no later than October 9, 1998.
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OTHER MATTERS
The Board of Directors of the Corporation is not aware of any other
matters that may come before the meeting. However, the enclosed Proxy will
confer discretionary authority with respect to matters which are not known to
the Board of Directors at the time of printing hereof and which may properly
come before the meeting. A copy of the Corporation's 1997 report filed with the
Securities and Exchange Commission, on Form 10-K, will be available without
charge to shareholders on request April 1, 1998. Address all requests, in
writing, for this document to Richard E. Davies, Mahoning National Bancorp,
Inc., 23 Federal Plaza, Youngstown, Ohio 44501.
By Order of the Board of Directors
Richard E. Davies, Secretary
February 13, 1998
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