SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
_____TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For transition period from ________ to ________
Commission File Number 0-20878
MNB BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 48-1120026
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
800 Poyntz Avenue, Manhattan, Kansas 66502
(Address of principal executive offices) (Zip Code)
(785) 565-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No __
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock as of the latest practicable date:
As of November 12, 1998, the Registrant had outstanding 1,364,230 shares
of its common stock, $.01 par value per share.
MNB BANCSHARES, INC.
Form 10-Q Quarterly Report
Table of Contents
PART I
Page Number
Item 1. Financial Statements and
Related Notes 1-7
Item 2. Management's Discussion and
Analysis of Financial
Condition and Results of
Operations 8-13
Item 3. Quantitative and Qualitative
Disclosures about Market Risk 14-15
PART II
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of
Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Form 10-Q Signature Page 17
<TABLE>
MNB BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash $ 4,302,002 $ 3,398,451
Interest-bearing
deposits in other
financial institutions 4,700,000 3,300,000
Total cash and cash
equivalents 9,002,002 6,698,451
Investment securities:
Held to maturity at
amortized cost
(estimated fair value of
$2,302,000 and $6,692,000
respectively) 2,308,411 6,669,809
Available-for-sale at
estimated fair
value 45,730,707 35,409,475
Loans, net 74,414,072 88,724,128
Premises and
equipment, net 2,215,947 2,597,658
Other assets 4,161,283 4,652,570
Total assets $ 137,832,422 $ 144,752,091
LIABILITIES AND
STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 115,694,757 $ 122,208,537
Other borrowings 7,603,486 9,099,379
Accrued expenses, taxes
and other liabilities 1,484,312 1,168,326
Total liabilities 124,782,555 132,476,242
Stockholders' equity:
Common stock, $.01 par,
3,000,000 and1,500,000
shares authorized,
1,364,230 and 1,284,460
shares issued and
outstanding at 1998
and 1997, respectively 13,642 12,845
Additional paid in
capital 8,165,553 7,122,795
Retained earnings 4,878,119 5,341,952
Unrealized gain on
investment securities
available-for-sale,
net of tax 255,165 69,444
Unearned employee
benefits (262,612) (271,187)
Total stockholders'
equity 13,049,867 12,275,849
Total liabilities
and stockholders'
equity $ 137,832,422 $ 144,752,091
<FN>
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
MNB BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
For the nine months
ended September 30,
1998 1997
<S> <C> <C>
Interest income:
Loans $ 5,642,154 $ 4,398,957
Investment securities 1,923,880 1,412,354
Other 300,497 124,278
Total interest income 7,866,531 5,935,589
Interest expense:
Deposits 3,860,201 2,901,372
Borrowed funds 433,243 144,328
Total interest expense 4,293,444 3,045,700
Net interest income 3,573,087 2,889,889
Provision for loan losses 90,000 45,000
Net interest income after
provision for loan losses 3,483,087 2,844,889
Noninterest income:
Fees and service charges 570,294 379,057
Gains on sale of loans 277,906 64,395
Gains (loss) on sale of
investments 10,795 (21,309)
Other 67,139 86,102
Total noninterest income 926,134 508,245
Noninterest expense:
Compensation and benefits 1,523,875 1,039,456
Occupancy and equipment 500,814 322,504
Federal deposit
insurance premiums 39,907 35,536
Data processing 109,198 76,964
Amortization 185,775 80,636
Advertising 52,350 59,391
Professional fees 181,300 112,133
Stationery, printing
and office supplies 76,017 55,312
Other 653,039 449,259
Total noninterest expense 3,322,275 2,231,191
Earnings before
income taxes 1,086,946 1,121,943
Income tax expense 333,610 344,320
Net earnings $ 753,336 $ 777,623
Earnings per share
Basic $ 0.55 $ 0.58
Diluted $ 0.53 $ 0.56
Dividends per share $ 0.1875 $ 0.1875
<FN>
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
MNB BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
For the three months
ended September 30
1998 1997
<S> <C> <C>
Interest income:
Loans $ 1,756,392 $ 1,509,183
Investment securities 646,463 480,409
Other 82,544 54,570
Total interest income 2,485,399 2,044,162
Interest expense:
Deposits 1,223,372 990,464
Borrowed funds 136,567 40,800
Total interest expense 1,359,939 1,031,264
Net interest income 1,125,460 1,012,898
Provision for loan losses 30,000 15,000
Net interest income
after provision for
loan losses 1,095,460 997,898
Noninterest income:
Fees and service charges 171,063 124,762
Gains on sale of loans 107,606 42,561
Loss on sale of investments - (14,425)
Other 23,861 19,618
Total noninterest income 302,530 172,516
Noninterest expense:
Compensation and benefits 484,878 368,178
Occupancy and equipment 161,315 120,028
Federal deposit
insurance premiums 8,361 11,633
Data processing 31,038 25,102
Amortization 60,129 26,180
Advertising 21,439 17,394
Professional fees 70,514 33,677
Stationery, printing
and other supplies 15,919 15,493
Other 224,764 149,144
Total noninterest expense 1,078,357 766,829
Earnings before
income taxes 319,633 403,585
Income tax expense 125,803 119,125
Net earnings $ 193,830 $ 284,460
Earnings per share
Basic $ 0.14 $ 0.21
Diluted $ 0.14 $ 0.20
Dividends per share $ 0.0625 $ 0.0625
<FN>
See accompanying notes to condensed
consolidated financial statements.
</TABLE>
<TABLE>
MNB BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the nine months
ended September 30,
1998 1997
<S> <C> <C>
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 2,260,820 $ 253,924
INVESTING ACTIVITIES
Net decrease (increase)
in loans 10,230,550 (1,712,470)
Maturities and prepayments
of investments held
to maturity 3,667,504 3,758,946
Maturities and prepayments of
investments available for sale 9,854,520 3,462,291
Purchase of investments
available for sale (20,438,296) (8,178,591)
Proceeds from sale of
investment securities
available for sale 1,228,736 2,582,280
Proceeds from sales of
foreclosed assets 70,515 53,300
Net cash used to purchase insurance
agency - (30,000)
Net proceeds from Beloit Sale 973,283 -
Purchases of equipment and
building improvements (158,494) (291,539)
Net cash provided by (used in)
investing activities 5,428,318 (355,783)
FINANCING ACTIVITIES
FHLB advances and
other borrowings (net) (964,284) (800,000)
Net increase (decrease)
in deposits (3,724,657) 1,390,450
Net decrease in securities sold
under agreement to repurchase (523,032) -
Issuance of common stock under
stock plan 75,013 31,306
Cash dividends paid on
common stock (248,627) (239,977)
Net cash provided by (used in)
financing activities (5,385,587) 381,779
Net increase in cash and
cash equivalents 2,303,551 279,920
Cash and cash equivalents at
beginning of period 6,698,451 4,570,159
Cash and cash equivalents
at end of period $ 9,002,002 $ 4,850,079
Supplemental disclosure of cash flow information
Cash paid during period
for interest $ 4,267,000 $ 3,112,000
Cash paid during period
for taxes $ 838,000 $ 347,000
Supplemental disclosure of noncash
investing and financing activities:
Conversion of loans
to real estate owned $ 10,000 -
<FN>
See accompanying notes to condensed
consolidated financial statements.
</TABLE>
MNB BANCSHARES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
1. Interim Financial Statements
The condensed consolidated financial statements of MNB Bancshares, Inc.
(the "Company") and subsidiaries have been prepared in accordance with
the instructions to Form 10-Q. To the extent that information and
footnotes required by generally accepted accounting principles for complete
financial statements are contained in or consistent with the audited
financial statements incorporated by reference in the Company's Form
10-K for the year ended December 31, 1997, such information and
footnotes have not been duplicated herein. In the opinion of management,
all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation of financial statements have been
reflected herein. The December 31, 1997 condensed consolidated
balance sheet has been derived from the audited balance sheet as of
that date. The results of interim periods ended September 30,
1998 are not necessarily indicative of the results expected for
the year ending December 31, 1998.
2. Earnings Per Share
Basic earnings per share have been computed based upon the weighted
average number of common shares outstanding during each period.
Diluted earnings per share include the effect of all potential
common shares outstanding during each period. Earnings per share
presented for 1997 have been adjusted to give effect to the 5%
stock dividends paid by the Company in 1998 and the two-for-one
stock split paid on February 9, 1998.
The shares used in the calculation of basic and diluted income
per share are shown below:
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Weighted
average common
shares outstanding 1,364,230 1,343,064 1,359,523 1,342,347
Stock options 52,700 56,944 54,180 50,063
Total 1,416,930 1,400,008 1,413,703 1,392,410
</TABLE>
3. Acquisition
On December 31, 1997, the Company acquired 100% of the outstanding
common stock of Freedom Bancshares, Inc., Osage City, Kansas ("Freedom"),
the holding company for Citizens State Bank, Osage City ("Citizens"),
with a branch in Beloit, Kansas. Subsequently, Security National Bank
and Citizens State Bank were merged. Consolidated assets acquired in
this transaction were approximately $43 million. This acquisition,
which was accounted for using the purchase method of accounting, resulted
in goodwill of approximately $2.3 million. On June 5, 1998, the
Company sold the Beloit, Kansas branch, resulting in a premium, net
of tax, of $119,666. This premium offset previous goodwill related
to the acquisition. Total assets and liabilities sold were $3.7
million and $2.8 million respectively.
Proforma revenues, net earnings and diluted earnings per share amounts,
as if the Freedom acquisition and subsequent disposition of the
Beloit branch, had been consummated January 1, 1997, are as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
1997
<S> <C>
Net interest income plus
Other income $4,411,392
Net earnings 809,073
Diluted earnings per share 0.58
</TABLE>
4. Comprehensive Income The Company adopted SFAS No. 130,
"Reporting Comprehensive Income", in the first quarter of 1998.
SFAS No. 130 requires the reporting of comprehensive income and its
components. Comprehensive income is defined as the change in equity from
transactions and other events and circumstances from non-owner sources
and excludes investments by and distributions to owners. Comprehensive
income includes net income and other items of comprehensive income
meeting the above criteria. The Company's only component of other
comprehensive income is the unrealized holding gains and losses on
available for sale securities.
<TABLE>
<CAPTION>
For the nine months
ended September 30,
1998 1997
<S> <C> <C>
Net income $ 753,336 $ 777,623
Change in unrealized
security gain, net 185,721 64,501
Comprehensive income 939,057 842,154
</TABLE)
5. Impact of Accounting Standards
In January, 1997, the Company adopted SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of SFAS No. 125". SFAS No. 125
provided consistent standards for distinguished transfers of financial
assets that are sales from transfers that are secured borrowings.
The adoption of SFAS No. 127 did not have a material effect on
the Company's financial statements.
The Financial Accounting Standards Board ("FASB") issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities", in
June 1998. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. This Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Management believes adoption of
SFAS No. 133 will not have a material effect on the Company's financial
position or results of operations, nor will adoption require additional
capital resources.
MNB BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General. MNB Bancshares, Inc. (the "Company") is a bank holding
company incorporated under the laws of the State of Delaware and is
engaged in the banking business through its wholly-owned subsidiary,
Security National Bank (the "Bank"). The home office for the Bank is
Manhattan, Kansas, with branches operating in Auburn, Osage City, and
Topeka, Kansas. The Company's results of operations depend primarily
on net interest income, which is the difference between interest
income from interest-earning assets and interest expense on
interest-bearing liabilities. The Company's operations are also affected
by non-interest income, such as service charges, loan fees and gains
and losses from the sale of newly originated loans. The Company's
principal operating expenses, aside from interest expense, consist
of compensation and employee benefits, occupancy costs, federal
deposit insurance, data processing, and provision for loan losses.
On December 31, 1997, the Company acquired Freedom Bancshares, Inc.,
Osage City, Kansas ("Freedom"), the holding company for Citizens
State Bank, Osage City ("Citizens"), with a branch in Beloit, Kansas.
Consolidated assets acquired in this transaction were approximately
$43 million. This acquisition, which was accounted for using the
purchase method of accounting, resulted in goodwill of approximately
$2.3 million. Accordingly, the consolidated operating results of the
Company for the three and nine months ended September 30, 1998
include Citizens from the date of acquisition. On June 5, 1998, the
Company sold the Beloit branch.
Net earnings for the first nine months of 1998 decreased to $753,336
compared to $777,623 for the first nine months of 1997. This decrease
in net earnings is the result of a decrease in loans outstanding related
to increased levels of home mortgage refinancing resulting from lower
interest rates. Additionally, expenses have increased due to the
acquisition of Freedom, along with new personnel and Year 2000 expenses.
Net interest income after provision for loan losses increased $638,198,
or 22.4%, to $3,483,087. Gains on sale of loans increased 331.6%, or
$213,511, to $277,906; and non-interest expense increased $1,091,084
or 48.9%, to $3,322,275. Gains on sale of loans resulted from
increased loan origination due to refinancings.
Net earnings for the third quarter of 1998 decreased to $193,830
compared to $284,460 in the same period in 1997. Net interest
income after provision for loan losses increased from $997,898 to
$1,095,460, or 9.8%, during this period. Total noninterest income
increased $130,014 or 75.4% from $172,516 to $302,530. This was offset
by an increase of $311,528 or 40.6% in noninterest expense. This increase
was a result of the acquisition, along with Year 2000 expenses of $35,000,
some of which were accrued and will be paid during the fourth
quarter of 1998.
Interest Income. Interest income increased by $1,930,942, or 32.5%,
to $7.9 million during the first nine months of 1998. This increase
was the result of an increase in interest on loans of 28.3%, or
$1,243,197 to $5.6 million from $4.4 million, and interest on investment
securities of $511,526, or 36.2% to $1.9 million. The acquisition was
the primary reason for the increased interest income. Interest income
on other investments increased substantially from $124,278 to $300,497
or 141.8% as a result of an increase in funds available for
short-term overnight interest bearing deposits.
Interest income for the third quarter of 1998 increased by $441,237,
or 21.6%, compared to the same period of 1997. Interest income on
loans increased $247,209 to $1.8 million from $1.5 million, or 16.4%
and interest income from investment securities increased $166,054,
or 34.6%, to $646,463. Other interest income increased $23,974, or
43.9%, from $54,570 to $82,544. These increases were largely due to
the acquisition.
Interest Expense. Interest expense increased from $3.0 million
in the third quarter of 1997 to $4.3 million in the third quarter of
1998, or 41.0%. Deposit interest expense increased 33.1% to $3.9
million compared to $2.9 million for 1997. Interest expense on
borrowings, consisting of advances from the Federal Home Loan Bank
of Topeka (the "FHLB") and funds borrowed for the acquisition of
Freedom increased $288,915, or 200.2% during this time period.
The increased expense on deposits was a result of the acquisition.
Interest on borrowed funds increased as a result of the funds
borrowed for the acquisition and the liabilities assumed.
Interest expense for the third quarter of 1998 increased
slightly from $1.0 million to $1.4 million from the third quarter
of 1997. Deposit interest expenses increased $232,908, or 23.5%,
to $1.2 million. Interest on borrowed funds increased $95,766
from $40,800 to $136,567 or 66.4%. These increases were a result
of the acquisition of Freedom.
Provision for Loan Losses. A provision for loan losses of $90,000
for the first nine months of 1998 was made, compared to $45,000 in 1997.
The increased provision was primarily the result of the acquisition.
At September 30, 1998, the allowance for loan losses was $1,351,399,
or 1.8% of gross loans outstanding, compared to $869,104, or 1.3%,
at September 30, 1997. The acquisition of Freedom increased the
allowance by $461,389. The allowance for loan losses was $1.3 million
at December 31, 1997, or 1.5% of gross loans outstanding.
Following review and analysis of the loan portfolio at the end of the
third quarter in 1998, management believes that the reserve is adequate.
Included in the analysis was a special reserve allocation on $28
million of selected commercial loans which are considered as possible
Year 2000 credit risks. Based upon the results and conclusions drawn
from the review and analysis of the allowance for loan losses, it was
determined that no provision will be required during the fourth quarter
of 1998. This analysis will continue and changes will be made if
circumstances warrant.
Noninterest Income. Noninterest income increased $417,889, or 82.2%,
for the first nine months of 1998. Fees and service charge income
increased from $379,057 to $570,294, or by 50.5%. Gains on sale of
loans increased $213,511, or 331.6% to $277,906. A loss on sale of
investment securities available for sale of $21,309 was incurred in
1997 compared to a gain of $10,795 in 1998 as the Company sought to
reposition its portfolio. There was a decrease in other noninterest
income of $18,963, or 22.0%, to $67,139. The gain on sale of loans
was a result of increased loan originations due to refinancing
because of lower interest rates. The increase in fees and service
charge income was primarily a result of the acquisition. The decrease
in other noninterest income was due to a gain on the sale of real
estate owned of $30,016 in 1997.
Noninterest income for the third quarter of 1998 compared to 1997
increased $130,014, or by 75.4%. Fees and service charges increased
$46,301, or 37.1%, to $171,063. Gains on sale of loans increased 152.8%
from $42,561 to $107,606. This increase in gains on sale of loans was
also a result of increased refinancing due to lower interest rates.
Losses on sale of investment securities of $14,425 were incurred
during 1997. Other income increased slightly from $19,618 to $23,681,
or by 20.7%.
Noninterest Expense. Noninterest expense increased to $3.3 million
for the first nine months of 1998. This large increase was due
in part to the acquisition. Amortization increased 130.4% from
$80,636 to $185,775 as a result of the acquisition. Compensation
and benefits increased 46.6% from $1.0 million to $1.5 million along
with occupancy and equipment expense which increased $178,310 to
$500,814, both primarily as a result of the acquisition. Professional
fees increased $69,167 from $112,133 to $181,300 as a result of the
acquisition, expenses related to Year 2000 issues and fees incurred
for professional services used for acquiring new personnel.
Other operating expense increased 45.4% to $653,039 due primarily
to the acquisition.
Total noninterest expense increased 40.6% to $1.1 million for the
third quarter of 1998. This was due in part to the acquisition.
Amortization expenses increased $33,949 or 129.7% as a result of
the acquisition, along with compensation and benefits and occupancy
and equipment which increased $116,700 and $41,287 respectively.
Professional fees increased $36,837 or 109.1% due mainly to Year
2000 issues and professional services for acquiring new personnel.
Other operating expenses increased to $224,764 from $149,144 due to
the acquisition.
Asset Quality and Distribution. The Company's total assets were
$137.8 million at September 30, 1998 compared to $144.8 million at
December 31, 1997. This decrease was partially a result of the sale
of the Beloit branch, which was completed June 5, 1998. Additionally,
loans outstanding for 1-4 family homes decreased due to the refinancing
and sale of those loans to the secondary market. The Company's primary
ongoing sources of funds are deposits, proceeds from principal and
interest payments on loans and investment securities and proceeds
from the sale of mortgage loans and investment securities.
While maturities and scheduled amortization of loans are a predictable
source of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions, competition,
and the restructuring of the financial services industry.
The primary investing activities of the Company are the origination of
loans and the purchase of investment securities. During the first nine
months of 1998, the Company originated mortgage loans in the amount of
$37.5 million compared to $19.1 million during the first nine months of
1997. Generally, the Company originates fixed rate residential mortgage
loans for immediate sale and does not warehouse loans to speculate on
interest rates. During the first nine months of 1998, the Company
originated consumer and commercial non-mortgage loans of $12.7 million
compared to $16.8 million during the same time period for 1997.
Originations in 1997 included one credit in the amount of $5.0 million.
Management believes that the quality of the loan portfolio continues
to be strong. As of September 30, 1998, eight real estate loans were
more than 30 days past due, with a total balance of $721,165, which
was 1.0% of total loans outstanding. Additionally, four residential
mortgage loans totaling $126,883 were on non-accrual status as of
September 30, 1998. Excluding guaranteed student loans, there were
fourteen consumer loans in the amount of $64,431, or 0.1% of the
portfolio over 30 days past due and three on non-accrual with a
balance of $3,117. Three commercial loans totaling $55,354, or
0.1% of the total loan portfolio, were past due over 30 days.
One commercial loan with a balance of $13,689 was on non-accrual.
At September 30, 1998, the Company had outstanding loan
commitments of $13.3 million. Management of the Company believes
sufficient funds will be available to meet existing loan commitments.
During the nine months ended September 30, 1998 the Company
purchased available for sale securities in the amount of $20.4 million.
These purchases were funded primarily by deposits, proceeds from the
sale of fixed rate mortgage loans totaling $24.6 million, and maturing
securities.
Liability Distribution. At September 30, 1998, total deposits
decreased $6.5 million from December 31, 1997 with the sale of the
Beloit branch making up $2.8 million of this amount along with an
additional approximately $3.0 million in public funds withdrawn just
prior to the sale. Borrowings decreased $1.5 million as FHLB advances
were paid in full as they matured and quarterly payments were made on
others. In addition, $250,000 was paid on funds borrowed for the
acquisition and there was a decrease of $523,032 in securities sold
under agreement to repurchase.
Checking and NOW accounts at the end of the first nine months of 1998
totaled $32.7 million, or 28.3% of deposits, compared to $34.2 million,
or 28.0% of deposits at December 31, 1997. Money market deposit accounts
were 14.2% of the portfolio and totaled $16.4 million, compared to $18.7
million at December 31, 1997 and savings accounts totaled $10.8 million
compared to $6.8 million at December 31, 1997. Certificates of deposit
were $55.8 million, or 48.2% of the portfolio compared to $62.4 million,
or 51.0% at December 31, 1997. The decreases were primarily due to
the sale of the Beloit branch.
Liquidity. The Company's most liquid assets are cash and cash
equivalents and investment securities available for sale. The level of
these assets are dependent on the Company's operating, financing,
lending and investing activities during any given period. At September
30, 1998, and December 31, 1997, these liquid assets totaled $54.7
million and $42.1 million, respectively. During periods in which
the Company is not able to originate a sufficient amount of loans
and/or periods of high principal prepayments, the Company increases
its liquid assets by investing in short-term U.S. Government
and agency securities or high grade municipal securities.
Liquidity management is both a daily and long-term function of
management's strategy. Excess funds are generally invested in
short-term investments. In the event the Company requires funds
beyond its ability to generate them internally, additional funds are
available through the use of FHLB advances, a line of credit with the
FHLB or through sales of securities. At September 30, 1998, the Company
had outstanding FHLB advances of $4.7 million and no borrowing was
outstanding on its $15 million line of credit with the FHLB. Additionally,
the Company has guaranteed a loan made to the Company's Employee
Stock Ownership Plan (the "ESOP"), with an outstanding balance of
$262,612 at September 30, 1998, to fund the ESOP's purchase of shares
in the Company's 1993 common stock offering. The total borrowings by
the Company were $7.6 million at September 30, 1998, which included
$2.6 million borrowed by the Company for the acquisition of Freedom,
compared to $9.1 million at December 31, 1997.
Capital. The Federal Reserve Board has established capital requirements
for bank holding companies which generally parallel the capital
requirements for national banks under the Office of the Comptroller
of the Currency (the "OCC") regulations. The regulations provide that
such standards will generally be applied on a bank-only basis (rather
than a consolidated basis) in the case of a bank holding company with
less than $150 million in total consolidated assets, such as the Company.
The Company's total capital of $13.0 million at September 30, 1998 was,
however, well in excess of the Federal Reserve Board's consolidated
capital requirements.
At September 30, 1998, the Bank continued to maintain a sound Tier 1
capital ratio of 9.32% and a risk based capital ratio of 18.30%. As
shown by the following table, the Bank's capital exceeded the minimum
capital requirements: (dollars in thousands):
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998
Amount Percent Required
<S> <C> <C> <C>
Tier 1 Capital $12,849 9.32% 4.0%
Risk Based Capital 13,791 18.30% 8.0%
</TABLE>
Banks and bank holding companies are generally expected to operate at or
above the minimum capital requirements. The above ratios are well in
excess of regulatory minimums and should allow the Company to operate
without capital adequacy concerns. The Federal Deposit Insurance
Corporation Improvement Act of 1991 established a bank rating system
based on the capital levels of banks. The Bank is rated "well
capitalized", which is the highest rating available under this
capital-based rating system.
Recent Regulatory Developments/Year 2000. The federal banking regulators
recently issued guidelines establishing minimum safety and soundness
standards for achieving Year 2000 compliance. The guidelines, which
took effect October 15, 1998 and apply to all FDIC-insured depository
institutions, establish standards for developing and managing Year
2000 project plans, testing remediation efforts and planning for
contingencies. The guidelines are based upon guidance previously
issued by the agencies under the auspices of the Federal Financial
Institutions Examination Council (the "FFIEC"), but are not intended
to replace or supplant the FFIEC guidance which will continue to
apply for all federally insured depository institutions.
The guidelines were issued under section 39 of the Federal Deposit
Insurance Act, as amended (the "FDIA"), which requires the federal
banking regulators to establish standards for the safe and sound
operation of federally insured depository institutions. Under section
39 of the FDIA, if an institution fails to meet any of the standards
established in the guidelines, the institution's primary federal
regulator may require the institution to submit a plan for achieving
compliance. If an institution fails to submit an acceptable compliance
plan, or fails in any material respect to implement a compliance plan
that has been accepted by its primary federal regulator, the regulator
is required to issue an order directing the institution to cure the
deficiency. Such an order is enforceable in court in the same manner
as a cease and desist order. Until the deficiency cited in the
regulator's order is cured, the regulator may restrict the institution's
rate of growth, require the institution to increase its capital, restrict
the rates the institution pays on deposits or require the institution
to take any action the regulator deems appropriate under the circumstances.
In addition to the enforcement procedures established in section 39 of
the FDIA, noncompliance with the standards established by the guidelines
may also be grounds for other enforcement action by the federal banking
regulators, including cease and desist orders and civil money
penalty assessments.
Year 2000. The Company utilizes and is dependent upon data processing
systems and software to conduct its business. The data processing
systems and software include those developed and maintained by the
Company's data processing provider and purchased software which is run
on in-house computer networks. In 1997, the Company established a
committee and initiated a review and assessment of all hardware and
software to confirm that it will function properly in the year 2000.
The Company's data processing provider and those vendors providing
mission critical systems and software which have been contacted have
indicated that they expect their hardware and/or software will be Year
2000 compliant by the end of 1998. This will allow time for compliance
testing. Testing of the Mission Critical systems and software will be
substantially completed by December 31, 1998 with all final testing done
by March 31, 1999. Additionally, alarms, elevators, heating and cooling
systems, and other computer-controlled mechanical devices on which the
Company relies have been evaluated and no significant problems are
anticipated with such systems.
While there will be expenses incurred during the next two years, the
Company has not identified any situations at this time that it anticipates
will require material expenditures in order to become fully compliant.
It is currently estimated that costs could be approximately $150,000,
although this number could vary significantly based upon the results of
testing and other factors. In the event utility companies services to
the Company are significantly curtailed or interrupted, it would have
an adverse effect on the Company's ability to conduct its business.
However, the Year 2000 problem is pervasive and complex and can
potentially affect any computer process. Accordingly, no assurance
can be given that Year 2000 compliance can be achieved without
additional unanticipated expenditure and uncertainties that might
affect future financial results.
An analysis has been done for the Company's borrowing customers and the
Company has initiated a program to visit with those identified to
communicate with key bank customers to ensure they are properly
prepared for the Year 2000 and do not anticipate that they will suffer
serious adverse consequences. This same analysis has been performed
for large depositors and funds providers.
A contingency and business resumption plan has been developed for the
Company to provide for reducing the business interruption of normal
business operation in the event of a Y2K-related failure. This plan
continues to be evaluated and revised if necessary, based on testing
results and vendor notifications.
MNB BANCSHARES, INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's assets and liabilities are principally financial in nature
and the resulting net interest income thereon is subject to changes
in market interest rates and the mix of various assets and liabilities.
Interest rates in the financial markets affect the Company's decision
on pricing its assets and liabilities which impacts net interest income,
a significant cash flow source for the Company. As a result, a substantial
portion of the Company's risk management activities relates to managing
interest rate risk.
The Company's Asset/Liability Management Committee monitors the interest
rate sensitivity of the Company's balance sheet using earnings simulation
models and interest sensitivity GAP analysis. The Company has set policy
limits of interest rate risk to be assumed in the normal course of
business and monitors such limits through its simulation process.
The Company has been successful in meeting the interest rate sensitivity
objectives set forth in its policy. Simulation models are prepared
to determine the impact on net interest income for the coming
twelve months, including one using rates at June 30, 1998
and forecasting volumes for the twelve month projection. This
position is then subjected to a shift in interest rates of
200 basis points rising and 200 basis points falling with an
impact to the Company's monthly net interest income on a one year
horizon as follows:
<TABLE>
<CAPTION>
$ change in net interest % of net
Scenario income int. income
<S> <C> <C>
200 basis points rising $(18,600) (4.13%)
200 basis points falling $(15,300) (3.41%)
</TABLE>
The Company believes that no significant changes in its interest rate
sensitivity position have occurred since June 30, 1998. The Company also
believes it is appropriately positioned for future interest rate movements,
although it may experience some fluctuations in net interest income due
to short term timing differences between the repricing of assets and
liabilities.
Safe Harbor Statement Under the Private Securities Litigation Reform Act
of 1995. This quarterly report contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of
1933, as amended and Section 21E of the Securities Exchange Act of 1934,
as amended. The Company intends such forward-looking statements to be
covered by the safe harbor provisions for forward-looking statements
contained in the Private Securities Report Act of 1995, and is
including this statement for purposes of these safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and
describe future plans, strategies and expectations of the Company, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Company's
ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material
adverse effect on operations and future prospects of the Company and the
subsidiaries include, but are not limited to, changes in: interest rates,
general economic conditions, legislative/regulatory changes, monetary
and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality or composition
of the loan or investment portfolios, demand for loan products, deposit
flows, competition, demand for financial services in the Company's
market area and accounting principles, policies and guidelines. These
risks and uncertainties should be considered in evaluating forward-
looking statements and undue reliance should not be place on such
statements. Further information concerning the company and its
business, including additional factors that could materially affect the
Company's financial results, is included in the Company's filings
with the Securities and Exchange Commission.
MNB BANCSHARES, INC. AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which the
Company or its subsidiaries are a party other than ordinary
routine litigation incidental to their respective businesses.
ITEM 2. CHANGES IN SECURITIES.
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
NONE
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
NONE
ITEM 5. OTHER INFORMATION.
NONE
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K.
A. Exhibits
Exhibit 27. Financial Data Schedule.
B. Reports on Form 8-K
NONE
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
MNB BANCSHARES, INC.
Date: November 13, 1998 /s/Patrick L. Alexander
President and Chief Executive Officer
Date: November 13, 1998 /s/Susan E. Roepke
Vice President, Secretary, Treasurer
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,302,002
<INT-BEARING-DEPOSITS> 4,700,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 45,730,707
<INVESTMENTS-CARRYING> 2,308,411
<INVESTMENTS-MARKET> 2,302,000
<LOANS> 75,803,965
<ALLOWANCE> 1,351,399
<TOTAL-ASSETS> 137,832,422
<DEPOSITS> 115,694,757
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,324,758
<LONG-TERM> 7,576,904
0
0
<COMMON> 13,642
<OTHER-SE> 13,298,836
<TOTAL-LIABILITIES-AND-EQUITY> 137,832,422
<INTEREST-LOAN> 5,642,154
<INTEREST-INVEST> 1,923,880
<INTEREST-OTHER> 300,498
<INTEREST-TOTAL> 7,866,532
<INTEREST-DEPOSIT> 3,860,201
<INTEREST-EXPENSE> 4,293,444
<INTEREST-INCOME-NET> 3,573,088
<LOAN-LOSSES> 90,000
<SECURITIES-GAINS> 10,795
<EXPENSE-OTHER> 3,322,275
<INCOME-PRETAX> 1,086,946
<INCOME-PRE-EXTRAORDINARY> 753,336
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 753,336
<EPS-PRIMARY> .055
<EPS-DILUTED> .053
<YIELD-ACTUAL> 3.68
<LOANS-NON> 143,689
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,335,024
<CHARGE-OFFS> 108,075
<RECOVERIES> 34,449
<ALLOWANCE-CLOSE> 1,351,399
<ALLOWANCE-DOMESTIC> 906,426
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 444,973
</TABLE>
