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MAHONING NATIONAL BANCORP, INC.
FORM 10-K
EXHIBIT 13
1996 Annual Report To Shareholders
Page 14 of 81
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[PHOTO]
1996 Annual Report
Contributing to our
Community
The Local Bank That Does It All!
[MNB NATIONAL BANK LOGO]
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Cover photo: (L-R) Frank Constantino, Centralized Banking Officer; Dave
Westerburg, Senior Vice President, Operations; (on ladder) Joe Haus, Assistant
Manager, Boardman.
Mahoning National Employees took part in Operation Beautification, an intensive
spring cleaning of downtown Youngstown. Volunteers were kept busy cleaning
windows, sweeping, picking up trash and painting backdrops and boarded buildings
in an effort to make immediate aesthetic improvements and enhancements to
existing and available properties in the downtown area.
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FINANCIAL
HIGHLIGHTS
(Amounts in thousands, except share data) For the year
----------------------------------------
For the Year (1) 1996 1995 Change
- ----------------------------------------------------------------------------------
Net income $ 11,611 $ 10,070 15.3%
Per share 1.84 1.60 15.0
Cash dividends 3,559 2,930 21.5
Per share 0.565 0.465 21.5
At Year End
- ----------------------------------------------------------------------------------
Assets $769,560 $720,135 6.9%
Loans 477,795 462,435 3.3
Investment securities 229,332 210,087 9.2
Deposits 550,998 574,808 (4.1)
Stockholders' equity 77,095 69,641 10.7
Book value 12.24 11.05 10.8
Financial Ratios
- ----------------------------------------------------------------------------------
Return on assets 1.55% 1.40%
Return on equity 15.83 15.37
Net interest margin 4.78 4.68
Capital:
Primary leverage 10.27 9.62
Tier I 16.31 15.02
Risk based 17.57 16.27
<FN>
(1) All share data has been adjusted for the 2:1 stock split in the form of a
100% stock dividend in 1996.
Dividends
- ----------------------------------------------------
Quarterly payments for 1996 and 1995 are as follows:
Quarter 1996 1995
- ------- ---- ----
1st $ .135 $ .110
2nd .135 .110
3rd .135 .110
4th .160 .135
-----------------------------
Total Per Share $ .565 $ .465
Market and Sale Price
- ------------------------------------------------------------------------
The Company's common stock is traded Over-The-Counter, generally in the
Youngstown area.
Quarter 1996 1995
- ------- ---- ----
High Low High Low
1st 22.13 19.00 14.25 14.00
2nd 30.00 19.63 14.25 13.75
3rd 28.75 24.50 14.50 14.13
4th 26.25 22.50 20.00 14.50
- --------------------------------------------------------------------------------
Contents
Financial Highlights......................1
Chairman's Letter.....................2 - 7
Contributing to Our Community........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
[MNB logo]
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A LETTER
FROM THE
CHAIRMAN
The cover of our 1996 Annual Report introduces this year's theme - Contributing
to our Community. Our Report focuses on what Mahoning National has accomplished
through its strong commitment to investing in the Mahoning Valley. Whether it's
through our Mortgage Assist Program, Church and Community Affiliated Banking
Programs or Caring for Our Community Projects, Mahoning National continues to
make significant contributions to the social and economic well being of the
entire Valley.
From employee volunteer work to charitable contributions, Mahoning National
Bank's involvement within the communities it serves is limitless. One of
Mahoning National's most significant contributions in 1996 was the donation of
$100,000.00 to the Youngstown State University Foundation to fund the Mahoning
National Bank Minority Scholarship Program. The Foundation in conjunction with
Youngstown State University matched our gift creating a $200,000.00 endowment,
that will fund the program for generations. This program will enable minority
students throughout the region to pursue careers in business and, in turn, make
significant contributions to our community.
Our success has been influenced by two key factors: first and foremost, the
dedicated commitment of an extremely talented
[PHOTO]
Minority Scholarships: (l-r) Gregory L. Ridler, Chairman of the Board, President
& CEO; Rose Missik; Deborah A. Rosendary; Tonette Bufford; Charlotte Williams;
Rochelle Anderson; Dr. Leslie Cochran, President of YSU.
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[PHOTO]
Gregory L. Ridler
Chairman of the Board, President
and Chief Executive Officer
work force and secondly, 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 1996 for the sixth consecutive
year. Net income for 1996 amounted to $11.611 million or $1.84 per share. This
represents an increase of 15% over net income earned during 1995 ($10.070
million or $1.60 per share).
Total assets increased to $769.560 million on December 31, 1996. This increase
in assets is primarily reflected in growth in the loan and investment securities
portfolios.
Total deposits of $550.998 million resulted in a decrease of $23.810 million for
the year, reflecting a decline in both non-interest bearing and 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 1996.
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
$4.629 million on December 31, 1996; this category of loans amounted to 0.97% of
total loans at year end and is slightly higher than our peer group ratio of
0.83%.
Nineteen ninety-six results show $1.669 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.
Mahoning National's allowance for possible loan losses stands at 1.70% of loans
outstanding at year end; this reflects an increase in the allowance of $956
thousand for 1996. The strategy of increasing the Bank's allowance for possible
loan losses results from the continued growth in the loan portfolio and the
desire to strengthen our allowance to accommodate that growth.
Mahoning National's capital ratios remain well above regulatory guidelines; our
Capital to Asset ratio at year end was 10.02%. In fact, under the risk-based
capital guidelines, Mahoning has one of the strongest ratios in the industry at
17.57%.
At Mahoning National's Annual Meeting on March 19, 1996, shareholders
overwhelmingly approved an increase in the total number of the Corporation's
authorized common shares from 7,000,000 to 15,000,000 and to eliminate "par
value" from such shares of the Corporation. This action affords your management
and the Board of Directors with greater flexibility in paying future share
dividends, negotiating expansion opportunities and issuing shares for other
corporate purposes; it also provides the Corporation with more flexibility in
structuring its equity accounts.
At a regular meeting of the Corporation's Board of Directors on April 15, 1996,
the Directors approved a 2:1 stock split in the form of a 100% stock dividend to
be paid on May 15, 1996 to shareholders of record on April 30, 1996. The stock
split, in the form of a stock dividend, represents one share of common stock
being issued for every one share held. The reasoning behind this action was to
facilitate a wider distribution of the common stock of the Corporation to make
it more readily available for investment purposes, thereby broadening investor
interest.
The strength of Mahoning National's balance sheet was increased as common
stockholder's equity rose during the year to $77.095 million from $69.641
million in 1995, resulting
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[PHOTO] Mahoning National Bank's Centralized Customer Service Center provides
customers with quick and efficient banking services via the
telephone.
in a per share book value of $12.24 compared to $11.05 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 $.16 per common share, an
indicated annual rate of $.64. This represents an increase of 13% over the prior
year and represents the thirty-first consecutive annual dividend increase.
Historically a strong, safe institution, it is extremely gratifying to note that
in 1996 Mahoning National was recognized by the independent research firm
VERIBANC, Inc., as a "Blue Ribbon" bank for the twenty-sixth consecutive
quarter. Only 2 1/2 percent of the Nation's 10,000 banks earn this rating, and
Mahoning National was the only Bank of its size in the State of Ohio to receive
this designation for twenty-six consecutive quarters. To obtain the Blue Ribbon
rating, banks must meet stringent standards of asset quality, capital strength,
earnings and liquidity.
Also Mahoning National earned a five-star rating, the highest possible rating,
for the twelfth consecutive quarter from the independent research company of
Bauer Financial Reports, Inc. To earn the five-star rating a financial
institution's tangible capital and risk-based capital ratios must exceed two
times the federal regulatory requirements.
In addition to the continued improvement in our level of profitability, many
other significant events within our organization took place during 1996.
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-six 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 8% increase in our volume of high quality commercial loans
and mortgages during the year.
Our Consumer Loan Department experienced a slight increase in loan volume during
1996. While automobile financing declined during the year, increases in
residential mortgages, home equity loans and credit cards resulted in positive
growth in the consumer loan portfolio.
During 1996, Mahoning National continued to meet the needs of our community with
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
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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 1996.
State-of-the-art client server technology was expanded at Mahoning National Bank
during 1996 in order to enhance the delivery of products and services. By
streamlining and standardizing the application of technology, Mahoning National
has been afforded the opportunity to better communicate with its customers,
providing quick, efficient and more effective service.
In May, bill paying was added as an enhancement to TeleBank, Mahoning National's
automated twenty-four-hour-a-day customer service system. Now Mahoning National
customers -- at their convenience -- can pay all their bills by telephone, in
addition to having access to account information, interest rates, branch
locations, branch hours, ATM locations, merchant check verification and the
ability to transfer funds between accounts.
To further meet the needs of today's busy customers, Mahoning National's
Centralized Customer Service Center expanded its hours of operation, as well as
its offering of products and services. Its employees have been empowered to
provide exceptional quality customer service; in addition to calls regarding
customer statements, checks deposited/checks cashed, branch hours, rates and
questions regarding Bank's products and services, customers can now call the
Center to open accounts and apply for loans, receiving quick loan approvals.
In August, Mahoning National consolidated its Belmont & Colonial Drive Office
into its Liberty Plaza Office. A new drive-in facility, including a drive-up
ATM, was established in the Liberty Plaza parking lot to complement Mahoning
National's Liberty Plaza Office. This consolidation, resulting in the expansion
of banking hours and increased visibility of the Liberty Plaza Office, will
enable Mahoning National Bank to more effectively serve its customers.
Kathleen Dillon, Assistant Vice
President, (right) congratulates
John and Mary Petrony after [PHOTO]
attaining their goal of becoming
homeowners through Mahoning
National's Mortgage Loan
Program.
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[PHOTO] During a visit as part of Mahoning National's
"Pacesetter" campaign, United Way
Committee member Jody Jackson, Branch
Administration, (r) interacts with the boys and
girls at the Millcreek Children's Center as
Taniqua Cochran, an employee at the Center,
paints their faces.
Following its business strategy of providing customers with value-added products
and services, Mahoning National introduced its new VISA Check Card in October.
The Visa Check Card allows customers to access their checking accounts via the
ATM network and will be accepted by over twelve million merchants world-wide
wherever the VISA logo is displayed. Now Mahoning National customers can use the
funds from their checking accounts without writing checks and avoid the hassles
of presenting identification. With its VISA Check Card, Mahoning National
continues to be a member of the MAC(R) Network.
To accommodate our business customers, Mahoning National Bank in November
introduced Business Manager, a complete system by which the Bank purchases
existing receivables and takes over responsibilities for billing customers and
processing payments. It enables the business to convert receivables to cash
which very often results in continued growth. Business Manager improves cash
flow to those companies that often need it, allowing companies to reinvest in
their businesses, take advantage of suppliers' discounts, payoff existing debt
- -- whatever helps create additional profits.
Mahoning National's Financial Services Center, operating within the Bank's Trust
and Investment Department, continues to grow. This Center 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; these services will enhance our
competitive position, increase our ability to generate additional non-interest
income and offer our customers more investment alternatives to pursue their
financial goals.
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.
Vincent R. Roth, Senior Vice President of Consumer Loans, retired in July after
39 years of service with our organization. Vince, who joined Mahoning National
in 1957, held several positions in our Bank before becoming head of Consumer
Loans in 1990; we thank him for his numerous contributions to Mahoning National
and we wish Vince a long, happy and healthy retirement.
We would like to express our sincere appreciation for the support and counsel of
Dr. Dominic A. Bitonte, who retired from the Board of Mahoning National Bank in
July. After 20 years of distinguished service to the Bank's Board, Dominic has
been designated Director Emeritus; he continues his term as a Director of
Mahoning National Bancorp, Inc.
We welcome Dr. David A. Bitonte to the Board of Mahoning National Bank. David,
who joined the Board in August, serves as President of Alliance Anesthesia, Inc.
and brings to our organization additional insights and perspectives in business
management.
We extend our sympathies to the family of Warren P. Williamson, Jr., Director
Emeritus of Mahoning National Bank, who passed away in July. Mr. Williamson
served as a Director of Mahoning National Bank from 1946 to 1988; his many years
of dedicated service to our Bank is recognized and appreciated by all. A
broadcasting pioneer in the Mahoning Valley, Mr. Williamson will be fondly
remembered and greatly missed by all who knew him.
We also offer our condolences to the family of Ralph W. Skerratt, Jr., Director
Emeritus of Mahoning National Bank who passed away in October. Mr. Skerratt
served as a Director of Mahoning National Bank from 1975 to 1989 and his 14
years of loyal service to the Bank is hereby gratefully acknowledged.
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
[MNB logo]
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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:
- - Offering financial products and services of excellent quality and value;
- - Realizing superior levels of financial performance;
- - Achieving consistently higher levels of asset growth;
- - Generating the profits required to fuel our growth; and
- - Developing people who contribute superior performance in all levels.
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
[PHOTO]
Residents of Boardman and the surrounding communities enjoy the sights and
sounds of "Music in the Park," a Mahoning National Bank-sponsored event at the
Boardman Township Park.
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Contributing
to Our
Community
[PHOTO]
Breen Bannon, Manager of our Brookfield Office, helps passengers out of the
Brookfield Senior Citizens Van to do their banking after picking them up at
their places of residence.
Local Investment
Since its founding in 1868, Mahoning National Bank has steadfastly served
residents of the Mahoning Valley as an independent and locally-owned financial
institution and has become vital to the growth and prosperity of the community,
assisting in the increase of economic activity throughout the Valley.
Today, Mahoning National continues to play an important role in the growth and
success of all facets of our community. Whether it's on Main Street or on the
farm, in our schools or in the factory, Mahoning National is helping people
realize their dreams in many ways, especially through our local lending efforts,
resulting in increased employment opportunities and major economic advancement.
As we progress toward the next millennium, Mahoning National Bank has taken
great strides to ensure a better future for the residents of the Mahoning
Valley. It has continuously upheld its commitment to reinvesting in the
community and assuring its involvement in numerous financial, civic and
community organizations and activities.
From continual enhancements in our products, services and customer relations to
charitable donations and community care programs, Mahoning National and its
employees are helping to establish a better way of life.
Community Interest
Each year, Mahoning National Bank's involvement with local charities and
volunteer organizations increases dramatically. This past year, Mahoning
National raised over $70,000 during the United Way's "Pacesetter" campaign;
employee donations alone approximated $30,000. All monies raised will benefit
over 30 local agencies, such as the Sojourner House, the Visiting Nurse
Association and the Millcreek Children's Center, to help fund programs that
strengthen family units, promote self-sufficiency and aid Mahoning Valley's
youth, disabled and elderly.
Mahoning National Bank also donated funds to the Cortland Community to help it
purchase materials to build a playground in the Bazetta Township Park. The
community saved over $160,000 by enlisting the help of volunteers -- who
included MNB employees Mark Homrighouse, Manager of our Cortland Office, and
Kimberly G. Hebb, Assistant Compliance Officer -- to construct the playground,
which now provides children with a safe, friendly environment and a challenging
place to play.
The Cortland community wasn't the only area this year to make positive changes
in the Valley through funds donated by Mahoning National Bank; MNB was also a
major contributor to the development of a series of new baseball fields in the
Boardman Community referred to as the "Fields of Dreams."
From the young to the young at heart, everyone benefits from Mahoning National's
commitment to the community. Breen Bannon, Manager of our Brookfield Office,
volunteers every Tuesday to lend a helping hand as the driver of the Senior
Citizens Van in Brookfield. Picking up passengers at their places of residence,
Breen transports participants to their various destinations throughout the
Valley, from doctor's offices to grocery stores to, of course, Mahoning National
Bank. Senior citizens, Medicare recipients and mildly handicapped or disabled
residents in Brookfield are all eligible for this highly successful volunteer
transportation service.
This past spring, in a conscious effort to beautify downtown Youngstown, sixteen
Mahoning National Bank employees volunteered for "Operation Beautification," an
intensive, one-day clean up event. By taking part in this action-oriented task
force, sponsored by area businesses and organizations, MNB employees made
immediate aesthetic improvements and enhancements to existing and available
properties in the downtown area.
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[PHOTO]
LITTLE LEAGUE BASEBALL
Tom Gacse, Mahoning National's Legal Counsel, gives a few batting pointers while
coaching one of the many Bank-sponsored little league baseball teams.
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[PHOTO]
Wilson High School Principal Vincent Procopio (l) poses with senior Christine
Calabretta as she accepts a $500 Mahoning National Bank scholarship, which was
presented by Ron Clifton, Manager of our South Side Office.
A Valley Commitment
Mahoning National Bank has a long-standing tradition of supporting programs and
activities that focus on the betterment of the quality of life in our community.
From sponsoring such events as "Music in the Park" and Little League Baseball
and Soccer teams to participating as a major corporate sponsor for WKBN TV-27's
Caring For Our Community program, MNB contributes time and money to develop
community projects and help Valley residents in need.
Mahoning National has always had a special commitment to the Valley's youth and
its educational system. The "ABCs of Giving," a special event held as part of
Caring For Our Community, provides residents with a chance to give
underprivileged children a better start at the beginning of the school year by
donating school supplies to those whose families are unable to afford them. The
Bank furthered this commitment to education by continuing our sponsorship of the
"Adopt-A-School Program," awarding two area youths a $500 scholarship through
the Youngstown State University Foundation to help defer the expenses of higher
education. Mahoning National also awarded Savings Bonds each month to "Students
of the Month" at both Woodrow Wilson High and Kirkmere Elementary, the two
schools sponsored in the program.
Child safety was the focus of the "Kids Identi-kit," a Caring For Our Community
event that was held at the Eastwood and Southern Park Malls. "Kids Identi-kit"
assisted parents in assembling a free "kit" of important information regarding
their children, which included a photo, fingerprints, video tape and a critical
card with pertinent medical information. Nine Mahoning National Bank employees
volunteered their time to help conduct the videotape sessions and photograph the
participating children.
The spotlight on children continued with the "Warm Feelings" campaign, which
involved the collection of warm winter clothing for the less fortunate in the
Valley. Along with the Salvation Army, Mahoning National Bank helped organize
the entire event, serving as both a drop-off site and a solicitor for donations.
However, this wasn't the first joint venture between Mahoning National and the
Salvation Army; each year, MNB and its employees also participate in the
Salvation Army's "Red Kettle" and "Angel Tree" campaigns.
Mahoning National Bank is paving the way into the 21st Century with programs and
services dedicated to the community. MNB offers local solutions, such as quick
and convenient Small Business Loans and our Mortgage Assist Program (MAP), to
help people's dreams become a reality. With its ongoing commitment to Valley
residents, Mahoning National Bank is truly the local bank that does it all.
[MNB logo]
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[PHOTO]
(Full page) With the help of Mahoning National Bank Marketing Director Karen
DeSalvo (r) a local sheriff fingerprints a young boy as part of Caring for Our
Community's "Kids Identi-kit."
(Inset) Liberty customers Jennifer (l) and Melissa Sanson donate school
supplies during the "ABCs of Giving" campaign.
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FINANCIAL
INFORMATION
Net Income (in millions)
1992 5,664
1993 7,103
1994 8,560
1995 10,070
1996 11,611
Return on Average Equity (percentage)
1992 11.39
1993 13.22
1994 14.59
1995 15.37
1996 15.83
Return on Average Assets (percentage)
1992 .95
1993 1.13
1994 1.26
1995 1.40
1996 1.55
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 31,1997
upon written request to: Norman E. Benden, Jr., Treasurer Mahoning
National Bancorp, Inc. 23 Federal Plaza Youngstown, Ohio 44501-0479
Loans (in millions)
1992 343,185
1993 377,240
1994 425,367
1995 462,435
1996 477,795
Deposits (in millions)
1992 517,892
1993 542,690
1994 554,609
1995 574,808
1996 550,998
Assets (in millions)
1992 626,544
1993 657,468
1994 707,874
1995 720,135
1996 769,560
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COMPARATIVE
FINANCIAL DATA
Years ended December 31,
-------------------------------------------------------------------
(Amounts in thousands, except share data) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
EARNINGS
Interest income $ 56,081 $ 53,145 $ 47,135 $ 44,792 $ 46,901
Interest expense 22,982 22,193 17,410 17,650 21,074
-------------------------------------------------------------------
Net interest income 33,099 30,952 29,725 27,142 25,827
Provision for loan losses 2,625 1,900 1,900 2,405 3,700
Non-interest income 7,174 6,038 5,495 5,139 5,097
Non-interest expense 20,497 20,380 20,642 20,295 19,340
-------------------------------------------------------------------
Income before income taxes 17,151 14,710 12,678 9,581 7,884
Income taxes 5,540 4,640 4,118 2,835 2,220
-------------------------------------------------------------------
Income before cumulative effect of a
change in accounting principle 11,611 10,070 8,560 6,746 5,664
Cumulative effect on prior years of change
in accounting for income taxes -- -- -- 357 --
-------------------------------------------------------------------
Net income $ 11,611 $ 10,070 $ 8,560 $ 7,103 $ 5,664
========== ========== ========== ========== ==========
YEAR END BALANCES
Assets $ 769,560 $ 720,135 $ 707,874 $ 657,468 $ 626,544
Loans 477,795 462,435 425,367 377,240 343,185
Investment securities 229,332 210,087 235,174 237,633 206,485
Deposits 550,998 574,808 554,609 542,690 517,892
Stockholders' equity 77,095 69,641 60,031 55,764 50,818
AVERAGE BALANCES
Assets $ 749,811 $ 717,097 $ 676,745 $ 625,824 $ 598,368
Loans 478,237 445,594 407,028 369,266 326,665
Investment securities 225,042 221,580 226,952 206,023 211,595
Deposits 565,219 558,546 547,450 523,799 499,263
Stockholders' equity 73,328 65,527 58,657 53,726 49,723
PER SHARE DATA (1)
Shares outstanding 6,300,000 3,150,000 3,150,000 1,575,000 1,575,000
Net income (2) $ 1.84 $ 1.60 $ 1.36 $ 1.13 $ .90
Dividends 0.565 0.465 0.395 0.342 0.307
Book value 12.24 11.05 9.53 8.85 8.07
RATIOS
Return on average assets 1.55% 1.40% 1.26% 1.13% 0.95%
Return on average equity 15.83 15.37 14.59 13.22 11.39
Net interest margin (3) 4.78 4.68 4.76 4.73 4.74
Stockholders' equity to assets 10.02 9.67 8.48 8.48 8.11
Dividends to net income 30.66 29.09 29.07 30.38 34.20
Loans to deposits 86.71 80.45 76.70 69.51 66.27
Allowance for loan losses
to total loans 1.70 1.55 1.57 1.38 1.14
Non-performing loans
to total loans 0.97 0.49 0.51 0.46 0.64
<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
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CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
December 31,
---------------------
(Amounts in thousands, except share data) 1996 1995
- ----------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 29,257 $ 30,731
Federal funds sold 19,500 2,800
Investment securities available for sale - at market value 143,600 128,397
Investment securities held to maturity - at cost
(Market value $85,646 in 1996 and $82,255 in 1995) 85,732 81,690
Loans 477,795 462,435
Less allowance for possible loan losses 8,112 7,156
----------------------
Net loans 469,683 455,279
Bank premises and equipment 8,981 9,502
Other assets 12,807 11,736
---------------------
Total assets $769,560 $720,135
======== ========
- ----------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities
Deposits
Non-interest bearing $ 70,706 $ 73,432
Interest bearing
Savings 282,929 292,494
Time 197,363 208,882
---------------------
Total deposits 550,998 574,808
Federal funds purchased and securities
sold under agreement to repurchase 122,467 65,042
Short term borrowings 10,235 5,424
Long term borrowings 4,065 1,302
Other liabilities 4,700 3,918
---------------------
Total liabilities 692,465 650,494
---------------------
Commitments and contingencies
- ----------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock (No par value, $1 stated value in 1996,
$10 par value in 1995)
Authorized - 15,000,000 shares in 1996 and 7,000,000 shares in 1995, issued
and outstanding - 6,300,000 shares in 1996 and
3,150,000 shares in 1995 6,300 31,500
Additional paid-in capital 44,100 15,750
Retained earnings 26,627 21,725
Unrealized gain on investment securities
available for sale, net of deferred taxes 68 666
---------------------
Total stockholders' equity 77,095 69,641
---------------------
Total liabilities and stockholders' equity $769,560 $720,135
======== ========
The accompanying notes are an integral part of these statements.
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CONSOLIDATED
STATEMENTS OF INCOME
Years ended December 31,
----------------------------------
(Amounts in thousands, except per share data) 1996 1995 1994
- -------------------------------------------------------------------------------------------
Interest Income
Interest and fees on loans $ 42,397 $ 39,358 $ 33,865
Interest on investment securities
Taxable 12,490 12,462 12,405
Nontaxable 894 712 597
Interest on federal funds sold 300 613 268
----------------------------------
56,081 53,145 47,135
Interest Expense
Interest on deposits 18,080 17,791 15,036
Interest on federal funds purchased and securities
sold under agreement to repurchase 4,379 3,879 2,072
Interest on short term borrowings 303 439 235
Interest on long term borrowings 220 84 67
----------------------------------
22,982 22,193 17,410
----------------------------------
Net interest income 33,099 30,952 29,725
Provision for Loan Losses 2,625 1,900 1,900
----------------------------------
Net interest income after provision
for loan losses 30,474 29,052 27,825
Other Operating Revenue
Trust department income 2,837 2,441 2,184
Service charges on deposit accounts 3,623 2,840 2,525
Other service charges 756 711 648
Other revenue 277 201 223
Loss on sale of investment securities
available for sale (319) (155) (85)
----------------------------------
7,174 6,038 5,495
Other Operating Expenses
Salaries and employee benefits 10,789 10,385 10,054
Net occupancy expense 1,485 1,661 1,619
Equipment rental, depreciation and maintenance 1,727 1,603 1,946
Federal deposit insurance 2 636 1,214
State franchise tax 1,028 899 835
Other expenses 5,466 5,196 4,974
----------------------------------
20,497 20,380 20,642
----------------------------------
Income before income taxes 17,151 14,710 12,678
Income Tax Expense 5,540 4,640 4,118
----------------------------------
Net Income $ 11,611 $ 10,070 $ 8,560
======== ======== ========
Net Income per Common Share $ 1.84 $ 1.60 $ 1.36
======== ======== ========
The accompanying notes are an integral part of these statements.
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CONSOLIDATED
STATEMENTS OF CHANGE IN STOCKHOLDERS' EQUITY
Years ended December 31, 1996, 1995 and 1994
--------------------------------------------------------------
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
Balance at January 1, 1994 $ 15,750 $ 8,500 $ 31,514 -- $ 55,764
Unrealized gain on adoption of SFAS No. 115 at
January 1, 1994 on available for sale
investment securities, net of deferred taxes -- -- -- $ 232 232
Net income for 1994 -- -- 8,560 -- 8,560
Stock split in the form of a dividend 15,750 -- (15,750) -- --
Transfer from retained earnings to additional paid-in capital -- 7,250 (7,250) -- --
Increase in unrealized loss on available for sale
investment securities, net of deferred taxes -- -- -- (2,036) (2,036)
Cash dividends paid - $.395 per share -- -- (2,489) -- (2,489)
--------------------------------------------------------------
Balance at December 31, 1994 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
======== ======== ======== ======== ========
The accompanying notes are an integral part of these statements.
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CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years ended December 31,
----------------------------------
(Amounts in thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 11,611 $ 10,070 $ 8,560
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,072 980 863
Provision for loan losses 2,625 1,900 1,900
Amortization and accretion of discounts and premiums (92) 788 1,049
Amortization of deferred loan costs 975 1,488 1,218
Deferred tax (benefit) expense (71) 175 (253)
Loss on sale of investment securities available for sale 319 155 85
Loss on assets sold 16 72 26
Increase (decrease) in taxes payable 274 (231) 67
(Increase) decrease in interest receivable (167) 503 (1,110)
Increase in interest payable 37 233 150
Increase (decrease) in other liabilities 470 (612) 130
Increase in other assets (224) (1,778) (618)
----------------------------------
Net cash provided by operating activities 16,845 13,743 12,067
Cash flows from investing activities
Proceeds from the sales of investment securities available for sale 24,658 30,129 9,883
Proceeds from maturities of investment securities held to maturity 32,575 52,942 46,255
Proceeds from maturities of investment securities available for sale 27,367 29,412 23,142
Purchase of investment securities held to maturity (36,738) (19,735) (24,797)
Purchase of investment securities available for sale (68,254) (64,845) (55,893)
Net increase in loans (18,292) (40,030) (49,764)
Net (increase) decrease in federal funds sold (16,700) (100) 4,300
Capital expenditures (565) (2,989) (1,247)
----------------------------------
Net cash used in investing activities (55,949) (15,216) (48,121)
Cash flows from financing activities
Net (decrease) increase in deposits (23,810) 20,199 11,919
Net increase (decrease) in federal funds purchased and
securities sold under agreement to repurchase 57,425 (16,205) 41,415
Net increase (decrease) in short term borrowings 4,811 (672) (8,904)
Proceeds from long term borrowings 3,500 -- 1,400
Payments on long term borrowings (737) (60) (38)
Dividends paid (3,559) (2,930) (2,489)
----------------------------------
Net cash provided by financing activities 37,630 332 43,303
----------------------------------
Net (decrease) increase in cash and cash equivalents (1,474) (1,141) 7,249
Cash and cash equivalents at beginning of year 30,731 31,872 24,623
----------------------------------
Cash and cash equivalents at end of year $ 29,257 $ 30,731 $ 31,872
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 22,945 $ 21,960 $ 17,260
======== ======== ========
Income taxes $ 5,355 $ 4,719 $ 4,340
======== ======== ========
Non-cash transactions:
Transfer from loans to other real estate owned $ 287 $ 97 $ --
======== ======== ========
Transfer of investment securities from
held to maturity to available for sale $ -- $ 32,586 $ --
======== ======== ========
The accompanying notes are an integral part of these statements.
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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 Corporation 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 Corporation's deposit, loan
and trust activities. The majority of the Corporation'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 Corporation'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 and
clearance accounts as cash equivalents.
5. INVESTMENT AND AVAILABLE FOR SALE SECURITIES
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115 (SFAS), "Accounting for Certain Investments in Debt and
Equity Securities." The statement addresses the accounting and reporting for
investments in equity securities that have readily determinable fair values
and all investments in debt securities. Those 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 or 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 1996, 1995 or 1994. 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 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 charge-off experience;
and 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
(note E).
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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A CONTINUED
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 at December 31, 1996
and 1995 totaled $269 thousand and $36 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 $251 thousand,
$420 thousand and $92 thousand in connection with these benefit plans for
the years ended December 31, 1996, 1995 and 1994, 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 1996, 1995 and 1994 were
6.300 million. Weighted-average shares outstanding for the years ended 1995
and 1994 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, 1996 and 1995, 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 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 that 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A CONTINUED
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 years' 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, 1996 and 1995 are as follows:
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
(Amounts in thousands) Cost Gains Losses Value Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 70,124 $ 346 $ (190) $ 70,280 $ 54,737 $ 775 $ (197) $ 55,315
Securities of other U.S.
government agencies 54,808 158 (295) 54,671 54,944 349 (118) 55,175
Obligations of states and
political subdivisions 9,787 93 (6) 9,874 7,506 103 (2) 7,607
Mortgage-backed securities and
collateralized mortgage obligations 5,402 27 (27) 5,402 6,975 115 -- 7,090
---------------------------------------------------------------------------------------
Total debt securities available for sale 140,121 624 (518) 140,227 124,162 1,342 (317) 125,187
Federal Reserve Bank Stock 945 -- -- 945 945 -- -- 945
Federal Home Loan Bank Stock 2,428 -- -- 2,428 2,265 -- -- 2,265
---------------------------------------------------------------------------------------
Total investment securities
available for sale $143,494 $ 624 $ (518) $143,600 $127,372 $ 1,342 $ (317) $128,397
======== ====== ====== ======== ======== ======= ====== ========
Pledged securities $127,621 $127,619 $ 91,900 $ 92,380
======== ======== ======== ========
The amortized cost and estimated fair values of debt securities at December 31,
1996, 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.
Estimated
Amortized Fair
Cost Value
---------------------
Due in one year or less $ 26,395 $ 26,588
Due after one year through five years 108,200 108,111
Due after five years through ten years 124 126
---------------------
134,719 134,825
Mortgage-backed securities and
collateralized mortgage obligations 5,402 5,402
---------------------
Total debt securities available for sale $140,121 $140,227
======== ========
Proceeds from the sales of securities available for sale during 1996, 1995 and
1994 were $24.658 million, $30.129 million and $9.883 million, 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.
Gross gains and losses in 1994 were $0 and $85 thousand, respectively.
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Notes to Consolidated Financial Statements
NOTE B CONTINUED
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 1996 or 1995.
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, 1996 and 1995 are as follows:
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
(Amounts in thousands) Cost Gains Losses Value Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 49,807 $ 48 $ (224) $ 49,631 $ 39,161 $ 223 $ (79) $ 39,305
Securities of other U.S. government agencies 24,527 67 (53) 24,541 34,571 396 (31) 34,936
Obligations of states and political subdivisions 11,338 104 (28) 11,414 7,898 67 (11) 7,954
Other debt securities 60 -- -- 60 60 -- -- 60
--------------------------------------------------------------------------------
Total debt securities $ 85,732 $ 219 $ (305) $ 85,646 $ 81,690 $ 686 $ (121) $ 82,255
======== ======== ======== ======== ======== ======== ======== ========
Pledged securities $ 68,646 $ 69,462 $ 65,990 $ 66,685
======== ======== ======== ========
The amortized cost and estimated fair values of debt securities at December 31,
1996, 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.
Estimated
Amortized Fair
Cost Value
--------------------
Due in one year or less $24,691 $24,716
Due after one year through five years 61,036 60,925
Due after five years through ten years 5 5
--------------------
$85,732 $85,646
======= =======
During 1996, 1995 and 1994 there were no sales of investment securities held to
maturity.
NOTE D
LOANS
The loan portfolio is comprised of:
December 31,
-------------------------
(Amounts in thousands) 1996 1995
- --------------------------------------------------------------------------
Residential mortgage loans $ 156,693 $ 144,708
Nonresidential mortgage loans 95,312 86,757
Commercial and industrial loans 87,130 80,310
Consumer loans to individuals 127,947 138,443
Nonrated industrial development obligations 7,253 8,806
Other loans 2,481 2,732
-------------------------
476,816 461,756
Unearned discount (123) (149)
Unamortized deferred loan costs, net 1,102 828
-------------------------
$ 477,795 $ 462,435
========= =========
Residential mortgage loans held for sale at December 31, 1996 and 1995 totaled
$394 thousand and $0, respectively.
Loans made to directors, executive officers, principal stockholders or to
entities in which these persons are associated totaled $10.004 million and
$14.165 million at December 31, 1996 and 1995, respectively. The terms and
conditions of these loans are established within the normal lending policies of
the Bank. A summary of transactions during 1996 is as follows:
Loan balances at January 1, 1996 $ 14,165
New loans during the year 24,100
Repayment of loan principal (28,261)
------------
Loan balances at December 31, 1996 $ 10,004
============
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Notes to Consolidated Financial Statements
NOTE E
ALLOWANCE FOR POSSIBLE LOAN LOSSES
Transactions in the allowance for possible loan losses are summarized as
follows:
(Amounts in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
Balance at beginning of year $7,156 $6,694 $5,213
Provision charged to operating expense 2,625 1,900 1,900
Losses charged to allowance
Mortgage loans 71 72 43
Installment loans 1,981 1,439 1,000
Credit card and related plans 308 183 108
Commercial loans -- 382 5
------------------------------
Total charge-offs 2,360 2,076 1,156
Recoveries of loans charged-off
Mortgage loans 23 136 49
Installment loans 522 423 442
Credit card and related plans 48 43 48
Commercial loans 98 36 198
------------------------------
Total recoveries 691 638 737
------------------------------
Balance at end of year $8,112 $7,156 $6,694
====== ====== ======
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;
(Amounts in thousands) 1996 1995
- ---------------------------------------------------------------------------------------
Year-end impaired loans with no allowance for loan losses allocated $319 $258
Year-end impaired loans with allowance for loan losses allocated 890 372
Amount of the allowance allocated 350 125
Average of impaired loans during the year 663 859
Interest income recognized during impairment 2 2
Cash-basis interest income recognized 2 2
Loans with carrying values of $287 thousand and $97 thousand were transferred to
other real estate owned in 1996 and 1995, respectively.
NOTE F
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are summarized as follows:
December 31,
(Amounts in thousands) 1996 1995
- -------------------------------------------------------------------
Buildings and improvements $ 5,920 $ 5,732
Furniture, fixtures and equipment 5,869 5,739
Leasehold improvements 2,228 2,274
--------------------
14,017 13,745
Accumulated depreciation and amortization 6,871 6,053
--------------------
7,146 7,692
Construction in progress 18 --
Land 1,817 1,810
--------------------
$ 8,981 $ 9,502
======= =======
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 $19.048 million
and $17.045 million in 1996 and 1995, respectively.
At December 31, 1996, the scheduled maturities of time deposits were as follows:
1997 $133,053
1998 35,770
1999 16,161
2000 7,475
2001 and thereafter 4,904
--------
$197,363
========
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Notes to Consolidated Financial Statements
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:
(Amounts in thousands) 1996 1995 1994
- ------------------------------------------------------------------------------
Average balance of borrowings
outstanding during the year $ 101,883 $ 86,199 $ 65,349
Maximum balance of borrowings
at any month end $ 132,702 $ 108,500 $ 90,265
Weighted average interest rate:
December 31 4.58% 4.77% 4.79%
For entire year 4.60% 5.01% 3.53%
NOTE I
LONG TERM BORROWINGS
Advances from the Federal Home Loan Bank were collateralized as of December 31,
1996 by pledges of certain residential mortgage loans totaling $6.1 million and
the Bank's investment in Federal Home Loan Bank stock. As of December 31, 1996,
the Bank had two advances from the Federal Home Loan Bank in the amounts of
$2.826 million at 4.90% and $1.239 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:
(Amounts in thousands) 1996 1995 1994
- --------------------------------------------------------------
Current expense $ 5,611 $ 4,465 $ 4,371
Deferred (benefit) expense (71) 175 (253)
----------------------------------
$ 5,540 $ 4,640 $ 4,118
========= ======== ========
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:
(Amounts in thousands) 1996 1995
- -------------------------------------------------------------------------------
Allowance for possible loan losses $2,839 $2,505
Deferred compensation, pension
and other postretirement benefits 352 322
Deferred loan fees and costs 135 170
Other 253 189
----------------
Total deferred tax assets 3,579 3,186
----------------
Unrealized gain on investment securities available for sale 37 359
Investment securities accretion 215 127
Depreciation on premises and equipment 326 319
Deferred pension 170 --
FHLB stock dividends 150 93
----------------
Total deferred tax liabilities 898 898
----------------
Net deferred tax asset $2,681 $2,288
====== ======
A reconciliation setting forth the difference between the effective tax rate of
the Company and the U.S. statutory rate is as follows:
Year ended December 31,
1996 1995 1994
- ------------------------------------------------------------------------------
Income tax at statutory rate 35.0% 35.0% 35.0%
Reductions in tax resulting from nontaxable
investment and loan income (3.1) (2.9) (3.3)
Other 0.4 (0.5) 0.8
---------------------------
32.3% 31.6% 32.5%
==== ==== ====
Tax benefits attributable to losses on sales of securities available for sale
approximated $112 thousand, $54 thousand and $30 thousand for the years ended
December 31, 1996, 1995 and 1994, respectively.
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Notes to Consolidated Financial Statements
NOTE K
BENEFIT PLANS
The components of pension expense for the years ended December 31, are as
follows:
(Amounts in thousands) 1996 1995 1994
- -----------------------------------------------------------------------
Service cost $ 425 $ 325 $ 403
Interest cost 611 527 495
Return on assets (1,199) (961) (49)
Net amortization and deferral 553 332 (432)
-----------------------------------
$ 390 $ 233 $ 417
======= ======= =======
The following table sets forth the plan's funded status and amount recognized in
the accompanying statements of financial condition as of December 31, 1996 and
1995:
(Amounts in thousands) 1996 1995
- ----------------------------------------------------------------------------------
Accumulated benefit obligation (substantially all vested) $ 6,647 $ 5,811
Salary increases 2,626 2,536
--------------------
Projected benefit obligation 9,273 8,347
Plan assets - at fair value 8,799 7,008
--------------------
Plan assets less than projected benefit obligation (474) (1,339)
Unrecognized net loss 1,116 1,505
Remaining balance of initial unrecognized net asset (27) (53)
Unrecognized prior service cost (138) (171)
--------------------
Prepaid (accrued) pension cost $ 477 $ (58)
======= =======
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:
1996 1995 1994
- ------------------------------------------------------------------------
Discount rate 7.25% 7.25% 8.25%
Increase in future compensation levels 5.00% 5.00% 5.00%
Expected return on assets 9.75% 9.75% 9.75%
The components of postretirement benefit expense for the years ended December
31, are as follows:
(Amounts in thousands) 1996 1995 1994
- -------------------------------------------------------------
Service cost $ -- $ 37 $ 34
Interest cost 141 211 156
Amortization of transition obligation 101 130 107
--------------------
$242 $378 $297
==== ==== ====
The following table sets forth the plan's funded status and amount recognized in
the accompanying statements of financial condition as of December 31, 1996 and
1995:
(Amounts in thousands) 1996 1995
- ------------------------------------------------------------------------------
Accumulated postretirement benefit obligation (APBO)
Retirees $ (1,767) $(2,081)
Unrecognized transition obligation 859 913
Unrecognized loss 621 881
---------------------
Accrued postretirement cost
included in other liabilities $ (287) $ (287)
======== =======
For purposes of measuring the expected postretirement benefit obligation, an 11
percent annual rate of health care cost increase was assumed, with the rate
decreasing gradually to 6 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, 1996 would have increased by approximately 4 percent.
The effect of this change on the aggregate of service and interest cost for 1996
would be an increase of approximately 16 percent. The assumed discount rate used
to measure the APBO at December 31, 1996 and 1995 was 7.25 and 8.25 percent,
respectively.
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.
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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 financial condition or results of operations.
At year-end 1996 and 1995, reserves of $11.606 million and $10.537 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, 1996 are
variable rate commitments, with approximately 24% or $38 million having fixed
rates. A summary of estimated commitments to extend credit at December 31, 1996
and 1995, follows:
(Amounts in thousands) 1996 1995
- -------------------------------------------------------
Commitment Commitment
Amount Amount
----------------------
Standby letters of credit $ 13,080 $ 9,743
Commitments to extend credit 131,586 99,908
Credit card arrangements 8,719 7,534
Unfunded loans in process 6,615 9,825
---------------------
$160,000 $127,010
======== ========
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, 1996,
approximately $8.180 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:
Capital to risk-
weighted assets Tier 1 capital
Total Tier 1 to average assets
------------------------------------
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
The Company was considered well capitalized as of December 31, 1996 and 1995.
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Notes to Consolidated Financial Statements
NOTE M
CONTINUED
At year end, actual capital levels and minimum required levels were:
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
(Amounts in thousands) Actual Adequacy Purposes Action Regulations
- --------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------
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%
1995
Total capital (to risk weighted assets)
Consolidated $ 74,733 16.27% $ 36,735 8.00% $ 45,919 10.00%
Bank $ 74,632 16.26% $ 36,728 8.00% $ 45,911 10.00%
Tier I capital (to risk weighted assets)
Consolidated $ 68,975 15.02% $ 18,367 4.00% $ 27,551 6.00%
Bank $ 68,876 15.00% $ 18,364 4.00% $ 27,546 6.00%
Tier I capital (to average assets)
Consolidated $ 68,975 9.62% $ 28,684 4.00% $ 35,854 5.00%
Bank $ 68,876 9.60% $ 28,681 4.00% $ 35,851 5.00%
NOTE N
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table provides summary information on the fair value of financial
instruments.
December 31,
1996 1995
-----------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount of Fair Value of Amount of Fair Value of
Assets and Assets and Assets and Assets and
(Amounts in thousands) (Liabilities) (Liabilities) (Liabilities) (Liabilities)
- ------------------------------------------------------------------------------------------
Cash and cash equivalents $ 29,257 $ 29,257 $ 30,731 $ 30,731
Federal funds sold 19,500 19,500 2,800 2,800
Investment securities 229,332 229,246 210,087 210,652
Loans receivable 477,795 481,547 462,435 466,097
Accrued interest receivable 5,965 5,965 5,798 5,798
Deposits (550,998) (551,070) (574,808) (575,458)
Short term borrowings (132,702) (132,702) (70,466) (70,466)
Long term borrowings (4,065) (4,022) (1,302) (1,314)
Accrued interest payable (1,873) (1,873) (1,823) (1,823)
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Notes to Consolidated Financial Statements
NOTE O
PARENT COMPANY FINANCIAL INFORMATION
STATEMENTS OF FINANCIAL CONDITION
Mahoning National Bancorp, Inc.
(Parent Company Only)
December 31,
(Amounts in thousands) 1996 1995
- ------------------------------------------------------------
Assets
Cash $ 55 $ 16
Short term deposits 15,000 --
Investment in subsidiary 61,962 69,542
Other assets 78 83
--------------------
Total assets $77,095 $69,641
======= =======
Stockholders' equity
Common stock $ 6,300 $31,500
Additional paid in capital 44,100 15,750
Retained earnings 26,695 22,391
--------------------
Total stockholders' equity $77,095 $69,641
======= =======
STATEMENTS OF INCOME
Mahoning National Bancorp, Inc.
(Parent Company Only)
For the years ended December 31,
(Amounts in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
Income
Dividends from bank subsidiary $ 18,644 $ 2,980 $ 2,524
Interest income 12 -- --
-------------------------------------
18,656 2,980 2,524
Expenses
Other expenses 94 66 51
-------------------------------------
Income before tax benefit and equity in
undistributed net income of subsidiary 18,562 2,914 2,473
Income tax benefit 31 23 17
-------------------------------------
Income before equity in undistributed net income of subsidiary 18,593 2,937 2,490
Equity in undistributed net income of subsidiary (6,982) 7,133 6,070
-------------------------------------
Net income $ 11,611 $ 10,070 $ 8,560
======== ======== ========
STATEMENTS OF CASH FLOW
Mahoning National Bancorp, Inc.
(Parent Company Only)
For the years ended December 31,
(Amounts in thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 11,611 $ 10,070 $ 8,560
Adjustments to reconcile net income to
net cash provided by operating activities
Equity in undistributed net income of subsidiary 6,982 (7,133) (6,070)
Amortization 14 14 14
Increase in other assets (9) (23) (17)
--------------------------------------
Net cash provided by operating activities 18,598 2,928 2,487
Cash flows from investing activities:
Increase in short term deposits (15,000) -- --
--------------------------------------
Net cash used in investing activities (15,000) -- --
Cash flows from financing activities:
Cash dividends paid (3,559) (2,930) (2,489)
--------------------------------------
Net cash used in financing activities (3,559) (2,930) (2,489)
--------------------------------------
Net increase (decrease) in cash 39 (2) (2)
Cash at beginning of year 16 18 20
--------------------------------------
Cash at end of year $ 55 $ 16 $ 18
======== ======== ========
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Notes to Consolidated Financial Statements
NOTE P
QUARTERLY FINANCIAL DATA (UNAUDITED)
1996
Three Months Ended
------------------------------------------------
(Amounts in thousands, except per share data) March 31 June 30 September 30 December 31
- -------------------------------------------------------------------------------------------------
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
1995
Three Months Ended
---------------------------------------------
(Amounts in thousands, except per share data) March 31 June 30 September 30 December 31
- ---------------------------------------------------------------------------------------------
Interest income $12,765 $13,148 $13,450 $13,782
Interest expense 5,180 5,571 5,730 5,712
-----------------------------------------
Net interest income 7,585 7,577 7,720 8,070
Provision for loan losses 450 450 450 550
Non-interest income 1,458 1,611 1,510 1,459
Non-interest expense 5,107 5,077 4,915 5,281
-----------------------------------------
Income before income taxes 3,486 3,661 3,865 3,698
Income taxes 1,159 1,187 1,256 1,038
-----------------------------------------
Net income $ 2,327 $ 2,474 $ 2,609 $ 2,660
======= ======= ======= =======
Per share data:
Net income $ 0.37 $ 0.39 $ 0.42 $ 0.42
Dividends $ 0.110 $ 0.110 $ 0.110 $ 0.135
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Report of Independent Auditors
[CROWE CHIZEK LOGO]
Board of Directors and Stockholders
Mahoning National Bancorp, Inc.
We have audited the accompanying consolidated statement of financial
condition of Mahoning National Bancorp, Inc. as of December 31, 1996 and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the year 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
and 1994 consolidated financial statements were audited by other auditors whose
report dated January 19, 1996 expressed an unqualified opinion.
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 provided 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, 1996 and the consolidated
results of its operations and its consolidated cash flows for the year then
ended, in conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Cleveland, Ohio
January 9, 1997 Crowe, Chizek and Company LLP
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Report On Internal Control Structure 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 an effective internal control structure 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 structure contains monitoring mechanisms, and actions are
taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any structure of
internal control, including the possibility of human error and the circumvention
or overriding of controls. Accordingly, even an effective internal control
structure can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the
effectiveness of an internal control structure may vary over time.
Management assessed the Company's internal control structure over financial
reporting presented in conformity with both generally accepted accounting
principles and call report instructions as of December 31, 1996. This assessment
was based on criteria for effective internal control over financial reporting
described in Statement on Auditing Standards No. 55 "Consideration of the
Internal Control Structure 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, 1996, Mahoning National Bancorp, Inc. maintained an effective internal
control structure 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
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Independent Auditor's Report
[CROWE CHIZEK LOGO]
Board of Directors and Stockholders
Mahoning National Bancorp, Inc.
We have examined management's assertion that Mahoning National Bancorp, Inc.
maintained an effective internal control structure over financial reporting as
of December 31, 1996, included in the accompanying report on internal control
structure 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 control structure over financial
reporting, testing, and evaluating the design and operating effectiveness of the
internal control structure, 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 control structure, errors or
irregularities may occur and not be detected. Also, projections of any
evaluation of the internal control structure over financial reporting to future
periods are subject to the risk that the internal control structure 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 an effective internal control structure over financial reporting as
of December 31, 1996, is fairly stated, in all material aspects, based on
Statement on Auditing Standards No. 55 "Consideration of the Internal Control
Structure 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
Cleveland, Ohio
January 9, 1997 Crowe, Chizek and Company LLP
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BUSINESS
OVERVIEW
Mahoning National Bancorp, Inc.
Mahoning National Bancorp, Inc. (the Company or Mahoning National) is a one-bank
holding company located in Youngstown, Ohio, and has total assets of $769.560
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-four (24) banking locations in
Mahoning and Trumbull Counties. As of December 31, 1996, Mahoning National
employed 435 individuals, or a full-time equivalent of 391 employees.
Mahoning National offers a full range of financial products and services. The
core accounts are represented by checking accounts, which include: regular
checking, budget checking, Sports Club Checking, NOW accounts, Super NOW
accounts and packaged checking accounts, which include Ultimate Club, Ultimate
50 and Ultimate 50 Plus. A comprehensive offering of credit products includes:
installment loans, student loans, home mortgages, construction loans, commercial
loans, revolving lines of credit, MasterCard and Visa 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 cashier's checks.
In May, bill paying was added as an enhancement to TeleBank, Mahoning National's
automated twenty-four-hour-a-day customer service system. Now Mahoning National
customers -- at their convenience -- can pay all their bills by telephone, in
addition to having access to account information, interest rates, branch
locations, branch hours, ATM locations, merchant check verification and the
ability to transfer funds between accounts.
To further meet the needs of today's busy customers, Mahoning National's
Centralized Customer Service Center expanded its hours of operation, as well as
its offering of products and services. Its employees have been empowered to
provide exceptional quality customer service; customers can now call the Center
to open accounts and apply for loans, receiving quick loan approvals.
In August, Mahoning National consolidated its Belmont & Colonial Drive-In Office
into its Liberty Plaza Office. A new drive-in facility, including a drive-up
ATM, was established in the Liberty Plaza parking lot to complement Mahoning
National's Liberty Plaza Office. This consolidation, resulting in the expansion
of banking hours and increased visibility of the Liberty Plaza Office, will
enable Mahoning National Bank to more effectively serve its customers.
Following its business strategy of providing customers with value-added products
and services, Mahoning National introduced its new VISA Check Card in October.
The Visa Check Card allows customers to access their checking accounts via the
ATM network and is accepted by over twelve million merchants world-wide wherever
the VISA logo is displayed. Now Mahoning National customers can use the funds
from their checking accounts without writing checks and avoid the hassles of
presenting identification. With its VISA Check Card, Mahoning National continues
to be a member of the MAC(R) Network.
To accommodate our business customers, Mahoning National Bank in November
introduced Business Manager, a complete system by which the Bank purchases
existing receivables and takes over responsibilities for billing customers and
processing payments. This program enables businesses to convert receivables to
cash, which very often results in continued growth. Business Manager also
improves cash flow to those companies that often need it, allowing them to
reinvest in their businesses, take advantage of suppliers' discounts, payoff
existing debts -- whatever helps create additional profits.
ExecuBanc is an on-line computer reporting service that will be available for
our business customers during 1997. This new product will allow our customers
access to their account information via their personal computers. In addition to
the information immediately available, businesses will be able to transfer
funds, make payments, initiate wire transfers and invest excess funds, as well
as perform a number of other transactions that typically required a trip to the
Bank. Businesses will enjoy immediate improvements in the efficiency of handling
their banking relationships, enabling them to operate more cost effectively.
Mahoning National's Financial Services Center continued to grow in 1996. 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.
The Company also offers a full range of trust services through its Trust and
Investments Department. The services are provided through 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 the Company are
required to be closely related to the business of banking. The only subsidiary
of the Company 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.
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MANAGEMENT'S
DISCUSSION & ANALYSIS
Mahoning National Bancorp, Inc.
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, Mahoning National's operations and Mahoning National's
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 Mahoning
National's market area.
STATEMENTS OF CONDITION
Total assets at December 31, 1996 reached $769.560 million, which was an
increase of $49.425 million or 6.9% over December 31, 1995 total assets of
$720.135 million. In 1996, total loans increased $15.360 million or 3.3%, while
the investment portfolio increased by $19.245 million. The growth in earning
assets was primarily funded with a $57.425 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 $23.810
million. The significant growth in securities sold under agreements to
repurchase are the result of more corporate customers and political subdivisions
depositing into overnight "sweep" checking accounts. Overnight sweep account
balances were $102.317 million on December 31, 1996, an increase of $42.059
million from December 31, 1995 balances of $60.258 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 1997.
INVESTMENT PORTFOLIO:
The deposits and other borrowings of Mahoning National, in excess of required
reserves and operating funds of the 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, 1996 the investment portfolio totaled $229.332 million (which
included a $106 thousand net unrealized gain on available for sale securities)
which was an increase of $19.245 million from December 31, 1995. In 1996,
$59.942 million of the portfolio matured compared to $82.354 million in 1995,
and $24.658 million was sold in 1996 compared to $30.129 million in 1995. A
majority of the matured and sold securities were reinvested back into the
portfolio with the excess funds used to fund 1996 loan growth.
At December 31, 1996, the Company has 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. At December 31, 1995, the
Company had classified investment securities with amortized cost and fair value
of $127.372 million and $128.397 million, respectively, or 61% of the portfolio,
as available for sale, with the remainder of
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.
December 31, 1996 December 31, 1995 December 31, 1994
Book Fair Average Book Fair Average Book Fair Average
Value Value Yield* Value Value Yield* Value Value Yield*
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury and agencies:
Within one year $ 48,594 $ 48,568 6.41% $ 39,227 $ 39,413 6.64% $ 69,068 $ 68,823 6.04%
After one but within five years 150,691 150,555 5.97% 144,995 145,317 5.94% 137,878 133,905 6.08%
-------------------------- ------------------------- ----------------------------
199,285 199,123 6.07% 184,222 184,730 6.09% 206,946 202,728 6.07%
Mortgaged-backed securities and
collateralized mortgage obligations:
After one but within five years 5,009 5,009 7.14% 6,547 6,547 7.35% 9,371 9,371 7.81%
After five but within ten years 393 393 9.36% -- -- -- -- -- --
After ten years -- -- -- 543 543 9.32% 671 671 9.12%
-------------------------- ------------------------- ----------------------------
5,402 5,402 7.30% 7,090 7,090 7.50% 10,042 10,042 7.42%
Obligations of states and political
subdivisions:
Within one year 2,685 2,686 4.22% 4,365 4,380 4.34% 8,116 8,083 3.82%
After one but within five years 18,401 18,476 4.45% 10,890 10,932 4.51% 7,165 7,068 4.39%
After five but within ten years 126 126 4.65% 250 250 4.25% -- -- --
-------------------------- ------------------------- ----------------------------
21,212 21,288 4.42% 15,505 15,562 4.45% 15,281 15,151 4.14%
Other 3,433 3,433 3,270 3,270 2,905 2,905
------------------ ------------------ ------------------
Total investment securities $ 229,332 $229,246 $210,087 $210,652 $235,174 $230,826
========= ======== ======== ======== ======== ========
<FN>
* Yields on tax exempt securities have not been calculated on a tax equivalent
basis.
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Management's Discussion and Analysis
the portfolio classified as held to maturity. 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 an amortized cost of $32.586 million. 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 1996 or 1995, and does not expect to in
1997. The carrying amount of investment securities available for sale at
December 31, 1996, reflects a net increase of $106 thousand with a corresponding
increase to stockholders' equity, net of deferred taxes, of $68 thousand,
compared to a net increase in the carrying amount at December 31, 1995, of
$1.025 million with a corresponding $666 thousand increase in stockholders'
equity.
The Company's portfolio is comprised mainly of U.S. Treasuries and agencies
(87%), obligations of states and political subdivisions (9%) 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.
During 1996, 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 1996 was $20.226 million, an
increase of $3.705 million over the 1995 average balance of $16.521 million and
$4.502 million over the 1994 average balance of $15.724 million. The Company
expects to continue to add to this portfolio in 1997.
At December 31, 1996, the Company had $2.428 million of Federal Home Loan Bank
stock in its available for sale portfolio.
The tax equivalent yield of the investment portfolio increased by 3 basis points
from 6.12% in 1995 to 6.15% in 1996. For additional 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, 1996, loans outstanding totaled $477.795 million, which was an
increase of $15.360 million or 3.3% over the December 31, 1995, total of
$462.435 million. This increase followed a $37.068 million or 8.7% increase in
1995 over 1994. This growth coupled with a decrease in deposits resulted in a
loan to deposit ratio of 86.71% at December 31, 1996 compared to 80.45% at
December 31, 1995.
The increase in the loan portfolio during 1996 is the result of continued loan
demand coupled with an emphasis on business development by Mahoning National in
the residential mortgage and commercial loan areas. The areas of largest growth
in 1996
FIVE YEAR LOAN HISTORY
December 31,
(Amounts in thousands) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
Residential mortgage loans $ 156,693 $ 144,708 $ 135,840 $ 110,081 $ 90,088
Nonresidential mortgage loans 95,312 86,757 85,713 77,488 64,395
Commercial and industrial loans 87,130 80,310 69,202 72,592 64,308
Consumer loans to individuals 127,947 138,443 119,938 102,389 103,158
Nonrated industrial
development obligations 7,253 8,806 10,485 11,347 17,002
Other loans 2,481 2,732 3,960 3,392 3,908
---------------------------------------------------------------------
476,816 461,756 425,138 377,289 342,859
Unearned discount (123) (149) (125) (156) (190)
Unamortized deferred
loan costs, net 1,102 828 354 107 516
---------------------------------------------------------------------
477,795 462,435 425,367 377,240 343,185
Allowance for possible
loan losses (8,112) (7,156) (6,694) (5,213) (3,920)
---------------------------------------------------------------------
Net loans $ 469,683 $ 455,279 $ 418,673 $ 372,027 $ 339,265
========= ========= ========= ========= =========
MATURITIES AND SENSITIVITIES OF COMMERCIAL LOANS TO CHANGES IN RATES
As of December 31, 1996
Over One
One Year through Over
(Amounts in thousands) or Less Five Years Five Years Total
- --------------------------------------------------------------------------------
Commercial and
industrial loans $22,331 $58,096 $ 6,703 $87,130
Nonrated industrial
development obligations 1,938 3,935 1,380 7,253
-------------------------------------------
$24,269 $62,031 $ 8,083 $94,383
======= ======= ======= =======
Fixed interest rates $17,631 $ 6,027
======= =======
Variable interest rates $44,400 $ 2,056
======= =======
were residential and nonresidential mortgages and commercial loans. Consumer
loans declined in 1996 after increasing in 1995.
Residential mortgages continued to grow, approximately $12.0 million or 8.3% in
1996, following $8.9 million or 6.5% growth in 1995. Declining interest rates
throughout 1996 as well as a strong calling effort on realtors contributed to
the continued growth of residential mortgages during the year.
Home equity loans, which are a component of residential mortgages increased $2.9
million or 9.1% in 1996 as the Company maintained an aggressive rate for this
product throughout the year.
Nonresidential mortgages increased $8.6 million or 9.9% and commercial loans
increased $6.8 million or 8.5% during 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 and good environment for construction also
contributed to the strong growth. Modest commercial loan growth is projected for
1997.
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Management's Discussion and Analysis
Consumer loans decreased $10.5 million or 7.6% in 1996 after increasing $18.5
million or 15.4% in 1995. Consumer loan balances are primarily dependent on the
level of indirect automobile financing purchased by the Bank. Substantial growth
of the past years was not sustained in 1996 due to a slower market, greater
competition among local lenders and the Company's close monitoring of
underwriting criteria due to increased charge-offs and delinquency trends.
Competition from leasing by captive automobile finance companies (i.e. GMAC,
Ford Motor Credit) will impact future growth and necessitate a commitment to
providing the dealer network with a very high level of service. Given the rapid
amortization of the automobile loan portfolio, which has a short average
maturity, and a projected slow down in our national economy, consumer loan
totals are expected to continue to decline in 1997.
DEPOSITS:
Total deposits for 1996 declined $23.810 million or 4.1% to $550.998 million,
compared to a $20.199 million or 3.6% increase in 1995. Savings and interest
bearing checking accounts decreased $9.565 million or 3.3%, while time deposits
decreased $11.519 million or 5.5% and non-interest bearing demand deposits
decreased $2.726 million or 3.7% in 1996. While actual deposit balances at
December 31, 1996, declined from year end balances of 1995, the Company's
average deposit base increased $6.673 million in 1996 to $565.219 million from
$558.546 million for 1995. The Company does not maintain any brokered deposits.
The deposit declines experienced in 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. These competitive pressures make it 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.
An area of significant growth in 1996 was the Company's repurchase agreements
which include corporate investment accounts. Balances at December 31, 1996
totaled $122.467 million, an increase of $57.425 million over year end balances
of 1995. Average balances in these accounts grew $18.298 million in 1996 from
1995 compared to a $17.004 million increase in 1995 from 1994. 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. This funding source is expected to
remain stable in 1997.
STOCKHOLDERS' EQUITY:
Total stockholders' equity grew $7.454 million or 10.7% to a record high of
$77.095 million in 1996. This increase reflects net income less dividends paid
and also reflects a net $598 thousand decrease in the unrealized gain on
available for sale securities, net of deferred taxes, during 1996, that is
recorded as a component of equity. At December 31, 1995 a net $666 thousand
unrealized gain on available for sale securities, net of deferred taxes in
addition to net income less dividends paid served to increase stockholders'
equity. The stockholders' equity-to-asset ratio of 10.02% and 9.67% for 1996 and
1995, 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, 1996, Mahoning
National Bancorp's leverage, Tier I and total risk-based capital ratios were
10.27%, 16.31% and 17.57%, respectively, compared to 9.62%, 15.02% and 16.27% at
December 31, 1995, 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. Mahoning National's
risk-based capital ratios are well above the regulatory minimums due to the
capital strength and low risk nature of the balance sheet and off-balance sheet
commitments. The structure of the Company's balance sheet is such that nearly
all of the investment portfolio is invested in U.S. Government obligations or
other low risk categories, and over 20% of the loan portfolio is invested in
one-to-four family residential mortgage loans which have a 50% risk weight
assessment. It is the Company's intent to prudently manage the capital base in
an effort to increase return on equity performance while maintaining necessary
capital requirements to maintain the "well capitalized" classification. For
additional information on the Company's risk-based capital ratios and equity
transactions refer to Note M - Stockholders' Equity on pages 25 and 26 of this
report.
The 18.5% dividend increase in the fourth quarter of 1996 represented the
thirty-first consecutive year Mahoning National has increased the annual
dividend. Dividends paid in 1996 amounted to $3.559 million or $.565 per share
compared to $2.930 million or $.465 per share in 1995 and $2.489 million or
$.395 per share in 1994. The book value per share as of December 31, 1996,
reached a record high of $12.24 compared to $11.05 and $9.53 at year end 1995
and 1994, respectively.
ASSET QUALITY
Provision For Loan Losses:
The policies of Mahoning National provide for loan loss reserves to adequately
protect the Company against potential unidentified and/or identified loan losses
consistent with sound and prudent banking practice.
In determining the monthly provision for loan losses and the adequacy of the
loan loss reserve, management reviews the current and forecasted economic
conditions and portfolio trends. The primary focus is placed on current problem
loans, delinquencies and anticipated charge-offs. As of December 31, 1996, all
loans classified for regulatory purposes do not represent or result from trends
or uncertainties which management reasonably expects will materially impact
future
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Management's Discussion and Analysis
operating results, liquidity, or capital resources. The following 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.
ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
1996 1995 1994 1993
Amount Loans to Amount Loans to Amount Loans to Amount Loans to
(Amounts in thousands) Allocated Total Loans Allocated Total Loans Allocated Total Loans Allocated Total Loans
- -----------------------------------------------------------------------------------------------------------------------
Commercial and industrial $1,806 18.8% $1,527 18.0% $1,597 17.2% $1,112 20.1%
Commercial real estate 2,017 20.0 1,779 18.7 1,738 20.2 1,138 20.5
Non rated industrial
development obligations 156 1.5 119 1.9 161 2.5 129 3.0
Residential real estate 298 32.9 550 31.2 534 31.9 449 29.1
Consumer loans 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 350 -- 125 -- -- -- -- --
General risk 1,216 -- 1,217 -- 1,093 -- 995 --
- ------------------------------------------------------------------------------------------------------------------
Allowance for loan losses $8,112 100.0% $7,156 100.0% $6,694 100.0% $5,213 100.0%
====== ===== ====== ===== ====== ===== ====== =====
1992
Amount Loans to
(Amounts in thousands) Allocated Total Loans
- ------------------------------------------------------
Commercial and industrial $1,082 19.9%
Commercial real estate 1,317 18.8
Non rated industrial
development obligations 178 5.0
Residential real estate 350 26.2
Consumer loans 993 30.1
Off balance sheet commitments -- --
Impaired loans -- --
General risk -- --
- -------------------------------------------------
Allowance for loan losses $3,920 100.0%
====== =====
ALLOWANCE FOR POSSIBLE LOAN LOSSES
(Amounts in thousands) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------
Balance at beginning of year $7,156 $6,694 $5,213 $3,920 $4,011
Provision charged to
operating expense 2,625 1,900 1,900 2,405 3,700
Losses charged to allowance
Mortgage loans 71 72 43 365 14
Installment loans 1,981 1,439 1,000 1,185 1,207
Credit card and related plans 308 183 108 91 54
Commercial loans -- 382 5 121 2,988
----------------------------------------------
Total charge-offs 2,360 2,076 1,156 1,762 4,263
Recoveries of loans charged off
Mortgage loans 23 136 49 3 2
Installment loans 522 423 442 450 423
Credit card and related plans 48 43 48 21 19
Commercial loans 98 36 198 176 28
----------------------------------------------
Total recoveries 691 638 737 650 472
----------------------------------------------
Balance at end of year $8,112 $7,156 $6,694 $5,213 $3,920
====== ====== ====== ====== ======
The provision for loan losses charged to expense for the year ended
December 31, 1996 was $2.625 million, representing a 38% increase over the
$1.900 million provision charged to expense for both 1995 and 1994. In the
three-year period ended December 31, 1996, the provision charged to expense was
due in part to growth of the overall loan portfolio and in respect to certain
credits and general economic uncertainties. In 1996, additional amounts were
charged to the provision as a result of an increase in consumer loan charge-offs
and non-performing loans. Net charge-offs as a percent of average loans were
0.35%, 0.32% and 0.10% in 1996, 1995 and 1994, respectively.
The increase in 1996 was primarily due to the $563 thousand increase in net
consumer loan and credit card charge-offs. Net charge-offs of consumer loans and
credit card and related plans totaled $1.719 million in 1996, compared to $1.156
million in 1995 and $618 thousand in 1994.
The national trend of a high level of consumer debt, delinquencies and
bankruptcies is reflected in the Company's charge-off and non-performing loan
totals. A complete analysis of the loan underwriting and loan collection
departments was performed throughout 1996. As a result of this analysis and the
strengthening of controls a reduction in delinquencies and charge-offs is
expected in 1997.
This area will continue to be monitored closely during the coming year as the
Company evaluates 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.
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
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. Mahoning National normally considers loans to be
non-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 $4.629 million
at December 31, 1996 a $2.371 million increase over the December 31, 1995 total
of $2.258 million.
Nonaccrual loans of $3.698 million at December 31, 1996 were $2.376 million
greater than December 31, 1995 nonaccrual balances of $1.322 million. Commercial
loan nonaccruals increased $579 thousand as a result of one commercial credit
that was placed on nonaccrual in the fourth quarter of 1996. This credit is
currently being worked out and a specific reserve has been established as
required by SFAS No. 114 to cover expected losses. Residential mortgage loan
nonaccruals increased by $1.021 million in 1996. This increase is mainly
attributed to three mortgages which combined, approximated $900 thousand. Based
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Management's Discussion and Analysis
on the collateral value of these loans minimal loss is expected in 1997.
Consumer loan nonaccruals increased $776 thousand from December 31, 1995 to
December 31, 1996. The increase in indirect loan volume in 1995 and the first
six months of 1996 and the significant increase in bankruptcy filings throughout
1996 were the reasons for the increase in nonaccrual consumer loans. These
nonaccrual loans are in various stages of collection and losses on these loans
are expected to approximate those experienced in 1996.
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
(Amounts in thousands) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------
Nonaccrual loans $3,698 $1,322 $1,944 $1,529 $2,013
Accruing loans 90 days or
more past due 931 936 211 195 183
------ ------ ------ ------ ------
Nonperforming loans 4,629 2,258 2,155 1,724 2,196
Restructured loans in
compliance with modified
terms 411 690 1,076 1,042 2,886
Other real estate owned 269 36 -- -- 97
------ ------ ------ ------ ------
Total problem assets $5,309 $2,984 $3,231 $2,766 $5,179
====== ====== ====== ====== ======
Nonperforming loans to
total loans 0.97% 0.49% 0.51% 0.46% 0.64%
Nonperforming loans to
allowance for loan losses 57.06% 31.55% 32.20% 33.07% 56.02%
Allowance for loan losses
to total loans 1.70% 1.55% 1.57% 1.38% 1.14%
Total problem assets to
total assets 0.69% 0.41% 0.46% 0.42% 0.83%
While the Company's nonperforming loans to allowance for loan losses and
nonperforming loans to total loan ratios increased significantly in 1996 they
are currently just above peer levels. The allowance for loan losses to total
loan ratio increased from 1.55% at December 31, 1995 to 1.70% at December 31,
1996, which is approximately 20 basis points above peer.
In May, 1993, the FASB issued Statement of Financial Accounting Standards No.
114 (SFAS 114) "Accounting by Creditors for Impairment of a Loan", which was
subsequently amended in October, 1994 with the issuance of Statement of
Financial Accounting Standards No. 118 (SFAS 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 $3.698 million of nonaccrual loans at December 31, 1996, only
$1.209 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 sixth consecutive year Mahoning National Bancorp, Inc. achieved record
earnings. 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.
Net interest income and non-interest income, exclusive of security transactions
increased 7% and 21%, respectively in 1996 compared to 1995 while the provision
for loan losses and non-interest expense increased 38% and 1%, respectively over
that same time period.
The primary component of Mahoning National's earnings growth in 1996 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
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 the
past two years have declined modestly Mahoning National has been 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.
Mahoning National'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. Mahoning National 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.
As of December 31, 1996, 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 Mahoning National'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.
Mahoning National's return on interest earning assets increased from 7.96% in
1995 to 8.02% in 1996 while funding costs remained approximately the same at
3.80% in 1996 compared to 3.81% in 1995. The increased return on earning assets
coupled with a $31.348 million increase in average earning asset balances
account for the increased net interest income in 1996.
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Management's Discussion and Analysis
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
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 are recorded at carrying value.
Year Ended December 31,
1996 1995 1994
Average Average Average Average Average Average
(Amounts in thousands) Balance Interest Rate (%) Balance Interest Rate(%) Balance Interest Rate(%)
- -----------------------------------------------------------------------------------------------------------------------------------
Assets
Loans:
Industrial revenue and tax-exempt
financing $ 10,545 $ 938 8.90% $ 11,083 $1,067 9.63% $ 13,769 $ 1,188 8.63%
All other loans 467,692 41,788 8.93 434,511 38,664 8.90 393,259 33,093 8.42
--------------------------------------------------------------------------------------
Total 478,237 42,726 8.93 445,594 39,731 8.92 407,028 34,281 8.42
Investment securities:
Taxable 204,816 12,490 6.09 205,059 12,462 6.08 211,228 12,405 5.87
Tax-exempt 20,226 1,375 6.82 16,521 1,095 6.63 15,724 918 5.84
--------------------------------------------------------------------------------------
Total 225,042 13,865 6.15 221,580 13,557 6.12 226,952 13,323 5.87
Federal funds sold 5,590 300 5.37 10,347 613 5.92 6,155 268 4.35
--------------------------------------------------------------------------------------
Total earning assets 708,869 56,891 8.02 677,521 53,901 7.96 640,135 47,872 7.48
Allowance for loan losses (7,519) (7,093) (6,037)
Cash and due from banks 26,567 26,744 24,959
Premises and equipment 9,321 8,720 7,378
Other assets 12,573 11,205 10,310
--------------------------------------------------------------------------------------
Total assets $ 749,811 $ 717,097 $676,745
========= ========= ========
Liabilities and stockholders' equity
Interest bearing deposits:
Savings deposits $ 192,562 4,782 2.48% $ 200,469 4,997 2.49% $217,824 5,430 2.49%
Interest checking and money market 99,227 2,095 2.11 93,952 2,000 2.13 94,072 1,982 2.11
Time deposits 207,573 11,203 5.40 200,512 10,794 5.38 173,913 7,624 4.38
--------------------------------------------------------------------------------------
Total interest bearing deposits 499,362 18,080 3.62 494,933 17,791 3.59 485,809 15,036 3.10
Federal funds purchased 2,158 119 5.51 3,183 193 6.05 568 26 4.58
Repurchase agreements 93,810 4,260 4.54 75,512 3,686 4.88 58,508 2,046 3.50
Short term borrowings 5,916 303 5.12 7,504 439 5.85 6,273 235 3.75
Long term borrowings 4,079 220 5.39 1,335 84 6.30 1,044 67 6.42
--------------------------------------------------------------------------------------
Total interest bearing liabilities 605,325 22,982 3.80 582,467 22,193 3.81 552,202 17,410 3.15
Demand deposits 65,857 63,613 61,641
Other liabilities 5,301 5,490 4,245
Stockholders' equity 73,328 65,527 58,657
--------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $ 749,811 $ 717,097 $ 676,745
========= ========= ==========
Net interest income $33,909 $31,708 $ 30,462
======= ======= ========
Interest spread 4.22% 4.15% 4.33%
Interest margin 4.78% 4.68% 4.76%
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Management's Discussion and Analysis
in February of 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.
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 $21.084 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
place 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 loss of deposits in 1996 can be attributed to a more competitive market for
bank deposits with customers seeking the highest return available for their
investment. The Company expects to continue to offer competitive deposit rates
in the future and will expand its marketing and sales efforts in order to
attract new depositors and maintain existing relationships. Corporate investment
accounts (overnight "sweep" repurchase agreements) are expected to remain a
stable source of funds for the Company in 1997 as existing relationships expand
and new customers are solicited.
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. Mahoning National 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 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 can be attributed to two factors: an influx of
new trust accounts and market value based fees which increased due to the
significant increase in account market values due to rises in the
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.
- -----------------------------------------------------------------------------------------------------------------------------
From 1995 to 1996 From 1994 to 1995
Change due to Total Change due to Total
(Amounts in thousands) Volume Rate Change Volume Rate Change
- ---------------------------------------------------------------------------------------------------------------------------
Interest Income
Loans:
Industrial revenue and tax-exempt financing $ (50) $ (79) $ (129) $ (250) $ 129 $ (121)
All other loans 2,993 131 3,124 3,610 1,961 5,571
--------------------------------------------------------------------
Total 2,943 52 2,995 3,360 2,090 5,450
Investment securities:
Taxable (5) 33 28 (374) 431 57
Tax-exempt 249 31 280 49 128 177
--------------------------------------------------------------------
Total 244 64 308 (325) 559 234
Federal funds sold (261) (52) (313) 225 120 345
--------------------------------------------------------------------
Total interest income 2,926 64 2,990 3,260 2,769 6,029
Interest expense
Interest bearing deposits:
Savings and interest bearing checking (60) (60) (120) (415) - (415)
Time deposits 369 40 409 1,271 1,899 3,170
--------------------------------------------------------------------
Total interest bearing deposits 309 (20) 289 856 1,899 2,755
Federal funds purchased (57) (17) (74) 157 10 167
Repurchase agreements 850 (276) 574 695 945 1,640
Short term borrowings (85) (51) (136) 53 151 204
Long term borrowings 150 (14) 136 18 (1) 17
--------------------------------------------------------------------
Total interest expense 1,167 (378) 789 1,779 3,004 4,783
--------------------------------------------------------------------
Change in net interest income $ 1,759 $ 442 $ 2,201 $ 1,481 $ (235) $ 1,246
========= ========= ========= ========= ======== ========
- -----------------------------------------------------------------------------------------------------------------------------
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Management's Discussion and Analysis
stock market over the past year. 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. This followed a $262 thousand or $1.3% decrease in 1995. As a
percentage of average assets, other operating expense was 2.73% in 1996 compared
to 2.84% in 1995.
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 bank regulator's ratings 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, 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 $635 thousand over 1995 premium
assessments.
On September 30, 1996 the "Deposit Insurance Fund Act of 1996" was enacted. This
Act requires FDIC insured banks to pay a 1.29 basis point assessment ($.0129 per
$100 of deposits) for Bank Insurance Fund deposits, in 1997, 1998 and 1999. As a
result of this assessment, management expects FDIC premium expense for 1997 to
increase by approximately $75 thousand over 1996 expense.
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 adjustments which took effect January 1, 1996
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.
In November 1995 the Company increased the amount of employer provided life
insurance on all active employees, however coverage is discontinued at the
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 are expected to continue to reduce health care expense
and post retirement benefit expense in future years. As a result of this change
in benefits, post retirement benefit expense decreased $136 thousand in 1996
compared to 1995 expense.
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 is 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.
In 1995 the Company constructed two new branch facilities in Boardman and
Canfield, Ohio. The Boardman branch, which opened in October 1995, replaced two
existing branch locations and provides improved customer service through the use
of drive-in facilities at a more convenient location. The Canfield branch, which
opened in December 1995, has allowed Mahoning National to expand its market base
and provide improved service to customers living in that community. The cost of
these two locations resulted in a capital expenditure of approximately $1.900
million. The costs associated with operating these two locations have not had a
material impact on the Company's earnings.
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Management's Discussion and Analysis
INCOME TAXES:
Income tax expense for 1996 was $5.540 million compared with $4.640 million in
1995. Mahoning National'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 are the primary reason the Company's
effective tax rate is less than the statutory tax rate.
The components of Mahoning National'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, 1995 and 1994
Net Income:
Net income for 1995 was $10.070 million or $1.60 per share, an increase of
$1.510 million or 18% over 1994 earnings of $8.560 million or $1.36 per share.
Mahoning National's return on assets (ROA) for 1995 increased to 1.40% from
1.26% in 1994. The return on average stockholders' equity (ROE) for 1995 was
15.37%, an increase from 14.59% in 1994. Mahoning National was able to
significantly improve its return on equity, and at the same time increase its
very strong stockholders' equity to asset ratio to 9.67% in 1995 from 8.48% in
1994. The primary component of Mahoning National's earnings growth in 1995 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 $30.952 million for 1995, an increase of 4.1% over 1994
net interest income of $29.725 million. In 1995, the most significant factor in
the increase in net interest income was loan volume which accounted for
additional tax adjusted interest income of $3.360 million, as average loan
balances grew by $38.566 million during 1995. The tax equivalent yield of the
loan portfolio in 1995 was 8.92% which was 50 basis points greater than the 1994
average yield of 8.42%. The increase in the Company's tax adjusted net interest
income as a result of changes in volume amounted to $1.481 million in 1995 as a
result of the increase in the average outstanding balances of the loan
portfolio. The loss of tax adjusted net interest income due to rate was $235
thousand in 1995 due to increased funding costs of interest bearing liabilities.
In 1995 average time deposits increased $26.599 million and the average rate
paid on those deposits increased 100 basis points over 1994 balances and rates.
The significant increase in time deposits was attributable to increases in
market share and funds transferred from savings and interest bearing checking
accounts, as customers were seeking to improve their yields. This was a reversal
of the trend that had occurred over the past few years when interest rates were
declining and customers were seeking liquidity and did not want to lock their
money into longer term certificates at lower yields. The average balance of
savings accounts decreased $17.355 million in 1995 from 1994, while the cost of
these funds remained the same. The cost of interest bearing liabilities
increased to 3.81% in 1995 from 3.15% in 1994.
Mahoning National's return on interest-earning assets and cost of
interest-bearing liabilities increased significantly in 1995 after decreasing in
1994. This increase was the result of the dramatic rise in interest rates
experienced throughout 1994 and the first six months of 1995. The prime interest
rate which increased 250 basis points in 1994, increased an additional 50 basis
points in the first two quarters of 1995 before receding back to 1994 year end
levels by December 1995. While interest rates over that period of time changed
dramatically, Mahoning National was able to maintain a relatively stable net
interest margin of 4.68% in 1995 compared to 4.76% in 1994 due to the growth in
the loan portfolio. The loan to deposit ratio for 1995 was 80.45% compared to
76.70% in 1994.
Other Operating Revenue:
Other operating revenue of $6.193 million, exclusive of security transactions,
increased $613 thousand or 11.0% over 1994. The largest component of other
operating revenue in 1995 was service charges on deposit accounts which
increased $315 thousand or 12.5% over 1994. Other operating revenue, exclusive
of security transactions, as a percent of average assets was 0.86% in 1995
compared to 0.82% in 1994. A 3% growth in the number of checking accounts in
1995, accompanied by adjustments to fees for the Company's products and
services, and the strengthening of controls for the collection of such fees,
were the reasons for the significant increase.
Mahoning National Bank's Trust and Investment Department generated $2.441
million in other operating revenue in 1995, an increase of $257 thousand or
11.8% over 1994. This increase can be attributed to two factors: an influx of
new trust accounts and market value based fees which increased due to the
significant increase in account market values due to rises in the stock market
over 1994.
In 1995 the Company incurred a $155 thousand loss when $30.129 million of U.S.
Government securities were sold from the available for sale portfolio. This
compared to a loss of $85 thousand in 1994 when $9.883 million of U.S.
Government securities were sold. The 1995 loss resulted primarily from an
investment portfolio repositioning strategy executed late in the fourth quarter
which was designed to enhance future net interest income performance.
Specifically, $15 million of available for sale securities with a weighted
average yield of approximately 4.30% and a weighted average maturity of 9 months
were sold at a $125 thousand loss. The proceeds of this sale were used to
purchase $10 million of securities with a weighted average yield of
approximately 5.41%, a yield improvement of 111 basis points, and a weighted
average maturity of 27 months. The remaining $5 million was used to fund loan
growth in the fourth quarter of 1995.
Other Operating Expense:
Other operating expense of $20.380 million decreased $262 thousand or 1.3%
during 1995. As a percentage of average assets, other operating expense was
2.84% in 1995 compared to 3.05% in 1994. A significant component of the
reduction in other operating expense in 1995 was the reduction in the Company's
deposit insurance premium.
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Management's Discussion and Analysis
In September 1995 the Federal Deposit Insurance Corporation (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, which realized a $343 thousand reduction for the
period June 1, 1995 through September 30, 1995 therefore reducing third quarter
operating expense. The total premium paid to the FDIC for deposit insurance
amounted to $636 thousand in 1995 compared to $1.214 million in 1994.
In 1995, total salaries and employee benefit expense increased $331 thousand or
3.3% from 1994. Salary expense alone for 1995 increased $309 thousand or 3.9%
compared to an increase of $461 thousand or 6.1% in 1994 and can be attributed
primarily to staffing adjustments and merit increases. The number of full time
equivalent employees decreased from 409.5 in 1994 to 406 in 1995.
Net occupancy expense, which represents various facility management expenses,
increased $42 thousand in 1995 to $1.661 million from $1.619 million in 1994.
This increase was the result of branch renovations, building maintenance,
increased utility costs and a $67 thousand non-recurring write-off of a lease
obligation related to the closing of a branch facility. Equipment rental,
depreciation and maintenance of $1.603 million decreased $343 thousand or 17.6%
from 1994. In the fourth quarter of 1994 the Company disposed of certain data
processing equipment and software leases due to obsolescence or capacity needs,
resulting in a non-recurring loss of approximately $255 thousand.
Other expenses for 1995 were $5.196 million, an increase of $222 thousand over
1994. In 1995 additional expenses were realized as the result of the purchase of
system software, increased donations to local organizations, increased costs
associated with the promotion and processing of the Company's Visa/MasterCard
program as well as increased business activity and the rising costs associated
with doing business.
Income Taxes:
Income tax expense for 1995 was $4.640 million compared with $4.118 million in
1994. Mahoning National's effective tax rates were 31.6% and 32.5% for 1995 and
1994, respectively in comparison to the statutory federal income tax rate of
35%. In 1994, the Company's statutory tax rate increased to 35% and in the
fourth quarter additional provisions were made for that increase. Significant
increases in income subject to taxation in 1995 and 1994 account for the
increase in the Company's effective and statutory tax rate.
LIQUIDITY:
It is a primary objective of Mahoning National Bancorp, Inc. to maintain a level
of liquidity deemed adequate to meet the expected and potential funding needs of
loan and deposit customers. It is the Company's policy to manage its affairs 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
Mahoning National'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, 1996 and 1995,
$394 thousand and $0 of residential mortgage loans were designated as available
for sale respectively. At December 31, 1996, $143.600 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 $18.5 million and funding for one-to-four family residential
mortgage loans and allows the Company to better manage its interest rate risk.
Mahoning National had $4.065 million outstanding in FHLB borrowings at December
31, 1996 compared to $1.302 million at December 31, 1995.
Mahoning National has been serving the Mahoning Valley for 128 years and has
developed a solid core deposit base. Of the $550.998 million in deposits on
December 31, 1996 only $25.344 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, Mahoning National's core
deposit to total asset ratio is still strong at 68.31%. With Mahoning'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, 1996, and throughout the past
twelve months key liquidity ratios were within established Company and
regulatory guidelines.
The maturity distribution of Mahoning National's total time deposits in amounts
of $100 thousand or greater as of December 31,1996, is summarized below:
(Amounts in thousands)
- --------------------------------------------------------------------------------
Within three months $ 12,753
After three months
but within six months 6,318
After six months
but within twelve months 3,538
After twelve months 2,735
----------
$ 25,344
==========
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Management's Discussion and Analysis
INFLATION AND INTEREST RATE SENSITIVITY:
The primary objective of Mahoning National'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, 1996 the Company analyzed the effect of a
presumed 100 and 200 basis point shift in interest rates through its simulation
analysis. The results indicated no significant impact on net interest income for
1997, and were within the five percent (5%) of net interest income guidelines
established by the Company.
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, 1996.
The following table shows the dollar impact of various rate changes on the net
present value of the Company's assets and liabilities.
Changes In
Interest Rate Change In % Change NPV of Equity/
(basis points) NPV of Equity In NPV NPV of Assets
- --------------------------------------------------------------------------------
-200 $ 7,321 9.50% 10.83%
-100 4,137 5.37 10.48
0 1,001 1.30 10.13
+100 (2,087) (2.71) 9.78
+200 (5,129) (6.65) 9.44
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 FASB that were
effective for the Company's consolidated financial statements for the year
ending December 31, 1996. SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of," requires a
review of long-term assets for impairment of recorded value and resulting
write-downs if the value is impaired. SFAS No. 122, "Accounting for Mortgage
Servicing Rights," requires recognition of an asset when servicing rights are
retained on in-house originated loans that are sold. SFAS No. 123, "Accounting
for Stock-Based Compensation," encourages, but does not require, entities to use
a "fair value based method" to account for stock-based compensation plans. If
the fair value accounting is not adopted, entities must disclose the pro forma
effect on net income and on earnings per share had the accounting been adopted.
These statements did not have a material effect on the Company's consolidated
financial position or results of operation. In addition, SFAS No. 125,
"Accounting for Transfer and Servicing of Financial Assets and Extinguishment of
Liabilities," provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities and requires a
consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred and derecognizes liabilities when extinguished. SFAS No. 125 also
supersedes SFAS No. 122, and requires that servicing assets and liabilities be
subsequently measured by amortization in proportion to and over the period of
estimated net servicing income or loss and requires assessment for asset
impairment or increased obligation based on their fair values. SFAS No. 125
applies to transfers and extinguishments occurring after December 31, 1996, and
early or retroactive application is not permitted. This statement is not
expected to have a material impact on the Company's consolidated financial
position or results of operations.
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Mahoning National Bancorp, Inc.
DIRECTORS OFFICERS
Dominic A. Bitonte Gregory L. Ridler
Retired Doctor of Dental Surgery Chairman of the Board,
Private Investments President and
Chief Executive Officer
Frank A. Kramer Parker T. McHenry
President Vice President
Brenner Industrial Sales & Supply Co.
Charles J. McCrudden, Jr. Richard E. Davies
President Secretary
McCrudden Heating Supply
Gregory L. Ridler Norman E. Benden, Jr.
President and Chief Executive Officer Treasurer
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.
Mahoning National Bank
DIRECTORS
David A. Bitonte Frank A. Kramer
Anesthesiologist/Physician President
President Brenner Industrial
Alliance Anesthesia, Inc. Sales & Supply Co.
William J. Bresnahan Charles J. McCrudden, Jr.
President President
Hynes Industries, Inc. McCrudden Heating Supply
Lee Burdman Gregory L. Ridler
Partner President and
Redstone Investments Chief Executive Officer
Mahoning National Bank
Howard W. Cailor, Jr.
President Daniel B. Roth
Cailor Fleming & Associates, Inc. President
Roth, Blair, Roberts,
Louis M. Davies Strasfeld & Lodge, L.P.A.
Retired Attorney Vice Chairman, Torent, Inc.
Vice Chairman, McDonald Steel Corp.
Eleanor Beecher Flad
Private Investments Warren P. Williamson III
Chairman, Sygnet Wireless, Inc.
Howard C. Hargate Chairman, WKBN Broadcasting Corp.
Chairman of the Board
Scholl-Choffin Sprinkler Corp. Philip N. Winkelstern
Retired Senior Vice President and
Chief Financial Officer
Commercial Intertech Corp.
ADVISORY DIRECTORS
BOARD EMERITI
Charles H. Byers J. Roy Barefoot
Sallie Tod Dutton John D. Beeghly
Robert J. Edwards, D.V. M. Dominic A. Bitonte
Ralph Fagert Kenneth J. Black
Robert M. Hammond William W. Bresnahan
Paul A. Johnson Alfred M. Clark, Jr.
Donald F. Leonhart William F. Courtney
James E. Mitchell John Nelson
C.F. Morain John M. Newman
Robert M. Morain Fred Tod, Jr.
Charles V. Rudge Ambrose J. Wardle, Jr.
Helene Gran Salreno
Dale R. Sheely
Gregory B. Smith
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Mahoning National Bank - Official Organization
Gregory L. Ridler Parker T. McHenry Richard E. Davies
President & Executive Vice President Senior Vice President &
Chief Executive Officer Cashier
LOANS BANK OPERATIONS
Frank Hierro David E. Westerburg
Senior Vice President Senior Vice President
COMMERCIAL LOANS CENTRALIZED BANKING
Dale W. Reese Frank A. Constantino
Vice President Centralized Banking Officer
Timothy A. Beaumont
Vice President DEPOSIT SERVICES
Richard L. Gorby Melinda M. Davies
Vice President & Vice President
Loan Review Officer David R. Merva
Kenneth G. Goldsboro Operations Officer
Vice President
Timothy F. Shaffer INFORMATION SERVICES
Vice President Marianne Yeager
J. Gregory Yaskulka Vice President
Assistant Vice President
Patrick J. McElhaney LOAN SERVICES
Commercial Loan Officer Beth E. Soroka
Operations Officer
CONSUMER LOANS
Kathleen R. Patrone FINANCE &
Vice President ACCOUNTING
Gilbert R. Smith Norman E. Benden, Jr.
Assistant Vice President Senior Vice President &
Edward D. Lancy Chief Financial Officer
Assistant Vice President Harold E. Erickson, Jr.
Kathleen M. Dillon Vice President
Assistant Vice President Kathleen A. Rish
David W. Howard Accounting Officer
Consumer Collection Officer Cathy A. Barrios
Carol M. Lewis Accounting Officer
Consumer Loan Officer
Betty J. Willis COMPLIANCE
Mortgage Loan Officer Dexter A. Hollen
Vice President &
CORPORATE BANKING Compliance Officer
James D. Fisher Kimberly G. Hebb
Vice President Assistant Compliance Officer
TRUST & INVESTMENTS AUDITING
Patrick A. Sebastiano Martha Drabiski
Senior Vice President & Vice President & Auditor
Senior Trust Officer
Stephen D. Panak MARKETING AND
Vice President & Trust Officer PUBLIC RELATIONS
John M. Zador Karen R. DeSalvo
Vice President & Trust Officer Assistant Vice President
Clinton S. Pelfrey
Vice President & HUMAN RESOURCES
Trust Investment Officer Nadine E. Cummins
Terrence F. Cloonan Vice President
Trust Officer Beverly J. Mackey
Carol A. Chamberlain Payroll Officer
Trust Officer Donna J. Mowrey
Paulette C. Pasquale Human Resources Officer
Trust Officer Stanley C. Simons
Daniel L. McCullough Employee Benefits Officer
Trust Operations Officer
Janice M. Korechko SECURITY
Assistant Trust Officer John Rosan
Paula L. Wayne Security Officer
Assistant Trust Officer
Bruce D. Hendryx LEGAL
Assistant Trust Officer Thomas M. Gacse
Legal Counsel
BRANCH ADMINISTRATION
John R. Lewis Robert D. Meek David L. Pringle
Senior Vice President Assistant Vice President Assistant Vice President &
Branch Sales Manager
BRANCH MANAGERS
MAIN OFFICE LIBERTY OFFICE AND
Emma L. Titler LIBERTY DRIVE-IN
Gillian A. Smith
AUSTINTOWN OFFICE Assistant Vice President &
Gerald J. Tekac District Manager
Branch Banking Officer
NEW MIDDLETOWN OFFICE
BOARDMAN OFFICE Beth Fallen
Caroline L. Wilbert Assistant Vice President &
Assistant Vice President District Manager
BROOKFIELD OFFICE NORTH LIMA OFFICE
Breen O. Bannon Richard N. Chase
Branch Banking Officer Assistant Vice President
CAMPBELL OFFICE SOUTH & MIDLOTHIAN
Thomas R. Papa OFFICE
Assistant Vice President James Colaluca
Branch Banking Officer
CANFIELD OFFICE
Judith A. Larson SOUTH & 224 OFFICE
Branch Banking Officer James D. Horvath
Assistant Vice President
CORNERSBURG OFFICE
Randall Rivello SOUTH SIDE OFFICE
Assistant Vice President Ronald C. Clifton
Assistant Vice President &
CORTLAND OFFICE District Manager
Mark E. Homrighouse
Assistant Vice President STRUTHERS-POLAND
OFFICE AND STRUTHERS-
HOWLAND OFFICE POLAND DRIVE-IN
Roberta L. Harding David R. Bompage
Assistant Vice President Assistant Vice President
HUBBARD OFFICE WEDGEWOOD OFFICE
Daniel E. Hackett Rhonda A. Kempe
Branch Banking Officer Branch Banking Officer
JACKSON-MILTON OFFICE WEST SIDE OFFICE
Carole A. Senediak AND MAHONING &
SCHENLEY OFFICE
KINSMAN OFFICE Thomas E. Reardon
Shari L. Polchosky Branch Banking Officer
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CONTRIBUTING TO OUR
COMMUNITY
MAHONING NATIONAL BANCORP, INC.
YOUNGSTOWN, OHIO
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