SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
0 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 August 13, 1998,
the Registrant had outstanding 1,299,386 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 1-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-12
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 12-13
PART II
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of
Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
Form 10-Q Signature Page 15
<TABLE>
MNB BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash $4,095,934 $3,398,451
Interest-bearing deposits
in other financial institutions 1,300,000 3,300,000
Total cash and cash equivalents 5,395,934 6,698,451
Investment securities:
Held to maturity at amortized cost (estimated fair
value of $2,559,000 and $6,692,000 respectively) 2,684,507 6,669,809
Available-for-sale at estimated fair value 43,923,150 35,409,475
Loans, net 78,817,709 88,724,128
Premises and equipment, net 2,265,725 2,597,658
Other assets 4,232,581 4,652,570
Total assets $ 137,319,606 $ 144,752,091
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 114,474,878 $ 122,208,537
Other borrowings 8,390,360 9,099,379
Accrued expenses, taxes and other liabilities 1,696,807 1,168,326
Total liabilities 124,562,045 132,476,242
Stockholders' equity:
Common stock, $.01 par, 3,000,000 and1,500,000
shares authorized, 1,299,386 and 1,284,460 shares
issued and outstanding at 1998 and 1997,
respectively 12,994 12,845
Additional paid in capital 7,197,659 7,122,795
Retained earnings 5,739,968 5,341,952
Unrealized gain on investment securities
available-for-sale, net of tax 72,249 69,444
Unearned employee benefits (265,309) (271,187)
Total stockholders' equity 12,757,561 12,275,849
Total liabilities and stockholders' equity $ 137,319,606 $ 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 six months
ended June 30,
1998 1997
<S> <C> <C>
Interest income:
Loans $ 3,885,762 $ 2,889,774
Investment securities 1,277,417 931,943
Other 217,954 69,710
Total interest income 5,381,133 3,891,427
Interest expense:
Deposits 2,636,829 1,910,908
Borrowed funds 296,676 103,528
Total interest expense 2,933,505 2,014,436
Net interest income 2,447,628 1,876,991
Provision for loan losses 60,000 30,000
Net interest income after
provision for loan losses 2,387,628 1,846,991
Noninterest income:
Fees and service charges 399,232 254,295
Gains on sale of loans 170,300 21,834
Gain (loss) on sale of investments 10,795 (6,884)
Other 43,277 66,484
Total noninterest income 623,604 335,729
Noninterest expense:
Compensation and benefits 1,038,997 671,278
Occupancy and equipment 339,500 202,476
Federal deposit insurance premiums 31,545 23,903
Data processing 78,161 51,862
Amortization 125,646 54,456
Advertising 30,911 41,997
Professional fees 110,786 78,456
Stationery, printing and office supplies 60,098 39,819
Other 428,274 300,115
Total noninterest expense 2,243,918 1,464,362
Earnings before income taxes 767,314 718,358
Income tax expense 207,808 225,195
Net earnings $ 559,506 $ 493,163
Earnings per share
Basic $ 0.43 $ 0.39
Diluted $ 0.42 $ 0.37
Dividends per share $ 0.125 $ 0.1190
<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
June 30,
1998 1997
<S> <C> <C>
Interest income:
Loans $ 1,888,817 $ 1,485,061
Investment securities 655,893 459,569
Other 101,177 32,055
Total interest income 2,645,887 1,976,685
Interest expense:
Deposits 1,306,255 960,747
Borrowed funds 145,554 51,650
Total interest expense 1,451,809 1,012,397
Net interest income 1,194,078 964,288
Provision for loan losses 30,000 15,000
Net interest income after provision
for loan losses 1,164,078 949,288
Noninterest income:
Fees and service charges 195,168 129,247
Gains on sale of loans 108,574 16,535
Gain (loss) on sale of investments 10,795 (6,884)
Other 19,484 48,584
Total noninterest income 334,021 187,482
Noninterest expense:
Compensation and benefits 546,401 350,446
Occupancy and equipment 174,030 108,253
Federal deposit insurance premiums 17,102 12,012
Data processing 35,952 25,061
Amortization 61,775 26,180
Advertising 15,238 31,841
Professional fees 61,571 39,292
Stationery, printing and office supplies 38,024 27,610
Other 224,136 158,794
Total noninterest expense 1,174,229 779,489
Earnings before income taxes 323,870 357,281
Income tax expense 63,949 106,775
Net earnings $ 259,921 $ 250,506
Earnings per share
Basic $ 0.20 $ 0.20
Diluted $ 0.19 $ 0.19
Dividends per share $ 0.0625 $ 0.0595
<FN>
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
(Unaudited)
For the six months
ended June 30,
1998 1997
<S> <C> <C>
Net cash provided by operating activities $ 2,271,456 $ 32,547
INVESTING ACTIVITIES
Net (increase) decrease in loans 5,895,290 (3,615,917)
Maturities and prepayments of
investments held to maturity 3,297,458 2,986,250
Maturities and prepayments of
investments available for sale 5,672,472 2,125,156
Purchase of investments available for sale (14,741,833) (3,835,601)
Proceeds from sale of investment
securities available for sale 1,228,736 1,091,968
Proceeds from sales of foreclosed assets 16,185 52,677
Net cash used to purchase insurance agency - (30,000)
Net proceeds from sale of Beloit branch 973,283 -
Purchases of equipment and building improvements(142,799) (131,153)
Net cash provided by (used in)
investing activities 2,198,792 (1,356,620)
FINANCING ACTIVITIES
FHLB advances (net) (642,856) -
Net decrease in deposits (4,983,147) (627,163)
Net decrease in securities sold under
agreement to repurchase (60,284) -
Issuance of common stock under stock
option plan 75,013 31,306
Cash dividends paid on common stock (161,491) (160,087)
Net cash used in financing activities (5,772,765) (755,944)
Net decrease in cash and cash equivalents (1,302,515) (2,080,017)
Cash and cash equivalents at beginning
of period 6,698,451 4,570,159
Cash and cash equivalents at end of period $ 5,395,934 $ 2,490,142
Supplemental disclosure of cash flow
information
Cash paid during period for interest $ 2,950,716 $ 2,060,330
Cash paid during period for taxes $ 759,634 $ 300,899
<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 June 30, 1998 are
not necessarily indicative of the results expected for the year ended 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 year. Diluted earnings per
share include the effect of all potential common shares outstanding during
each year. Earnings per share for all periods presented have been adjusted
to give effect to the 5% stock dividends paid by the Company in 1995, 1996,
1997 and 1998, the adoption of SFAS No. 128 in 1997 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 quarters ended For the six months
June 30, ended June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Weighted
average common
shares outstanding 1,298,307 1,278,220 1,292,286 1,277,139
Stock options 51,768 52,814 51,120 40,929
Total 1,350,075 1,331,034 1,343,406 1,318,068
</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 April 2, 1998, the Company entered into an Agreement to sell the
Beloit, Kansas branch to Farmers State Bank of Mankato, Kansas. This
transaction was completed June 5, 1998 and resulted 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.
MNB BANCSHARES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
Proforma revenues, net earnings and diluted earnings per share amounts, as if
the Freedom acquisition had been consummated January 1, 1997, are as follows:
<TABLE>
<CAPTION>
Six Months
ended
June 30,
1997
<S> <C>
Net interest income plus other income $2,946,376
Net earnings 493,106
Diluted earnings per share 0.37
</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 six months
ended June 30,
1998 1997
<S> <C> <C>
Net income $559,506 $493,163
Change in unrealized security gain, net 2,805 19,943
Comprehensive income $562,311 $513,106
</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 distinguishing 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 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 six months
ended June 30, 1998 include Citizens from the date of acquisition.
The home office for the Bank is Manhattan, Kansas, with branches operating in
Auburn, Osage City, and Topeka, Kansas. On April 2, 1998, the Company entered
into an agreement to sell the Beloit, Kansas branch to Farmers State Bank of
Mankato, Kansas. The transaction was completed June 5, 1998.
Net earnings for the first six months of 1998 increased $66,343, or 13.5%, to
$559,506 compared to $493,163 for the first six months of 1997. Net interest
income, after provision for loan losses, increased $540,637 to $2,387,628, or
29.3%. Noninterest income increased $287,875, or 85.8% from $335,729 to
$623,604, due to an increase in gains on sale of loans of $148,466 from $21,834
to $170,300, or 680.0%. Non-interest expense increased $779,556, or 53.2%, to
$2,243,918. With the exception of gains on sale of loans, the acquisition of
Freedom contributed significantly to each of these increases.
Net earnings for the second quarter of 1998 increased 3.6% to $259,921 in
comparison to the same period in 1997. Net interest income, after provision
for loan losses, showed an increase from $949,288 to $1,164,078, or 22.6%,
during this period. Noninterest income increased 79.3% to $334,021 compared to
$187,482. This was partially offset by the increase in noninterest expense of
$394,740, or 50.6%. These increases were also largely due to the acquisition.
Interest Income. Interest income increased 38.3% to $5.4 million compared to
$3.9 million during the first six months of 1997. This increase was a result
of an increase in interest on loans of 34.5% to $3.9 million from $2.9 million
and interest on investment securities of $345,474 or 37.1% to $1.3 million.
The acquisition contributed to the interest income increase, in addition to the
proceeds of maturing securities being reinvested in higher-yielding
securities. Interest income on other investments increased substantially from
$69,710 to $217,954, or 212.7%, as a result of the acquisition and the
increase in funds available for investment in short-term overnight interest-
bearing deposits.
MNB BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONN AND RESULTS OF OPERATIONS (Continued)
Interest income for the second quarter of 1998 increased by $669,201, or
33.9%, compared to the same period of 1997. Interest income on loans
increased $403,756, or 27.2%, and investment securities increased $196,324,
or 42.7%, to $655,893. Other interest income increased to $101,177 or 215.6%
from $32,055 in 1997. These increases were largely due to the acquisition of
Freedom.
Interest Expense. Compared to the same period a year earlier, interest
expense for the first half of 1998 increased from $2.0 million to $2.9
million, or 45.6%. Deposit interest expense increased $725,921 to $2.6
million, or 38.0%. Interest expense on borrowings, consisting of securities
sold under agreements to repurchase, advances from the Federal Home Loan
Bank (the FHLB) and funds borrowed for the acquisition of Freedom
increased $193,148, or 186.6%. The increased expense on deposits is a
result of the acquisition. Interest on borrowed funds increased as a result
of the funds borrowed for the acquisition and the liabilities assumed from
Freedom.
Interest expense for the second quarter of 1998 increased 43.4% to $1.5
million from $1.0 million in 1997. Deposit interest expense increased
$345,508, or 26.5%, to $1.3 million. Interest on borrowed funds increased
$93,904 from $51,650 to $145,554 or 181.8%. These increases were a result of
the acquisition of Freedom.
Provision for Loan Losses. A provision for loan losses of $60,000 for the
first six months of 1998 was made, compared to $30,000 in 1997. The
increased provision is a result of the acquisition. At June 30, 1998, the
allowance for loan losses was $1,341,912, or 1.7% of gross loans outstanding
compared to $852,076 or 1.3% at June 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.
Noninterest Income. Noninterest income increased $287,875, or 85.7%, for the
first six months of 1998 compared to the same period in 1997. Fees and
service charge income increased $144,937, or 57.0%, to $399,232 from
$254,295, while gains on sale of loans increased $148,466 or 680.0% to
$170,300 from $21,834. There was a gain on sale of investment securities
available for sale of $10,795 as the Company sought to reposition its
portfolio, compared to a loss of $6,884 in 1997. The decrease in other
noninterest income of $23,207, or 34.9%, to $43,277 was due to a gain on the
sale of real estate owned of $30,016 in 1997. The gain on sale of loans sold
was a result of increased loan originations due to refinancing because of
lower interest rates. Increases in fees and service charges and other
noninterest income were a result of the acquisition of Freedom.
Noninterest income for the second quarter of 1998 increased 78.2% to $334,021
compared to $187,482 for the second quarter in 1997. Fees and service
charges increased $65,921 or 51.0% to $195,168. Gain on sale of loans
increased 556.6% from $16,535 to $108,574. The gain on the sale of real
estate owned of $30,016 in 1997 occurred during the second quarter, which
resulted in a decrease in other noninterest income of $29,100, or 59.9% in
1998. The gain on sale of investment securities of $10,795 was incurred
during this quarter in 1998 as part of the repositioning of the securities
portfolio previously mentioned.
MNB BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONN AND RESULTS OF OPERATIONS (Continued)
Noninterest Expense. Noninterest expense increased to $2.2 million during
the first six months of 1998. This large increase was due in part to the
acquisition. Occupancy and equipment expense increased $137,024, or 67.7%
and compensation increased 54.8% to $1.0 million, both primarily a result
of the acquisition. Amortization increased 130.7% from $54,456 to $125,646
as a result of the acquisition. Other expenses increased from $300,115 to
$428,274, or 42.7%.
Total noninterest expense increased 52.7% to $1.2 million for the second
quarter of 1998. Occupancy and equipment expenses increased $65,777, or 60.8%,
as a result of the acquisition, along with compensation and benefits and
amortization which increased $195,955 and $35,595 respectively. Other
expenses increased $65,342 or 41.1% to $224,136.
Asset Quality and Distribution. The Company's total assets were $137.3
million at June 30, 1998 compared to $144.8 million at December 31, 1997.
This decrease was largely a result of the sale of the Beloit branch which
was completed June 5, 1998. 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 six months of
1998, the Company originated mortgage loans in the amount of $16.2 million
compared to $9.5 million during the first six 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 six months of 1998, the Company originated consumer and commercial
non-mortgage loans of $9.2 million compared to $12.7 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 evidenced by the small number and amount of loans past due 30 days
or more. As of June 30, 1998, one real estate loan was more than 30 days past
due, with a total balance of $17,383, which was less than 0.1% of total
loans outstanding. Additionally, seven residential mortgage loans totaling
$186,174 were on non-accrual status as of June 30, 1998. Excluding
guaranteed student loans, there were fourteen consumer loans in the amount
of $65,544, or less than 0.1% of the total loan portfolio, over 30 days past
due with two loans totaling $3,369 on non-accrual. Nine commercial loans
totaling $138,935 or 0.2% of the total portfolio, were 30 days or more past
due, with nine loans totaling $67,305 on non-accrual. At June 30, 1998, the
Company had outstanding loan commitments of $9.8 million. The Company
believes sufficient funds will be available to meet existing loan commitments.
During the six months ended June 30, 1998, the Company purchased securities
available for sale in the amount of $14.7 million. These activities were
funded primarily by deposits, proceeds from the sale of fixed rate mortgage
loans totaling $16.4 million and maturing securities.
MNB BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONN AND RESULTS OF OPERATIONS (Continued)
Liability Distribution. At June 30, 1998, total deposits had a net decrease
of $7.7 million from December 31, 1997, with the sale of the Beloit branch
making up $2.8 million of this amount. Borrowings decreased by $709,019 as
FHLB advances were paid in full as they matured and quarterly payments were
made on others.
Checking and NOW accounts at June 30, 1998 were 26.7% of deposits and
totaled $30.6 million compared to 28.0% and $32.4 million at December 31,
1997. Money market deposit accounts were 14.6% of the deposit portfolio and
totaled $16.7 million, compared to 15.3% and $18.7 million at December 31,
1997. Certificates of deposit were $58.0 million, or 50.6% of the portfolio
compared to $62.4 million, or 51.0% at December 31, 1997. the decreases are
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 June 30, 1998, and December 31, 1997,
these liquid assets totaled $49.3 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.
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 June 30,
1998, the Company had outstanding FHLB advances of $4.8 million and had
nothing outstanding on its $15.0 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
$265,309 at June 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 $8.4 million at June 30, 1998, which included $2.9 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
$12.8 million is, however, well in excess of the Federal Reserve Board's
consolidated capital requirements.
At June 30, 1998, the Bank continued to maintain a sound Tier 1 capital
ratio of 9.23% and a risk based capital ratio of 16.65%. As shown by the
following table, the Bank's capital exceeded the minimum capital
requirements: (dollars in thousands):
MNB BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONN AND RESULTS OF OPERATIONS (Continued)
<TABLE>
<CAPTION>
June 30, 1998
Amount Percent Required
<S> <C> <C> <C>
Tier 1 Capital $12,678 9.23% 4.0%
Risk Based Capital 13,641 16.44% 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.
Year 2000. The federal banking regulators have issued several statements
providing guidance to financial institutions on the steps the regulators
expect financial institutions to take to become Year 2000 compliant. Each of
the federal banking regulators is also examining the financial institutions
under its jurisdiction to assess each institution's compliance with the
outstanding guidance. If an institution's progress in addressing the Year
2000 is deemed by its primary federal regulator to be less than
satisfactory, the institution will be required to enter into a memorandum
of understanding with the regulators which will, among other things, require
the institution to promptly develop and submit an acceptable plan to become
Year 2000 compliant and to provide periodic reports describing the
institution's progress in implementing the plan. Failure to satisfactorily
address the Year 2000 problem may also expose a financial institution to
other forms of enforcement action that its primary federal regulator deems
appropriate to address the deficiencies in the institution's Year 2000
remediation program.
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 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 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. Additionally, alarms, elevators, heating and cooling
systems, and other computer-controlled mechanical devices on which the
Company relies are being evaluated. Those found not to be in compliance
will be modified or replaced with a compliant product. 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 cost
expenditures 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. 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.
MNB BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONN AND RESULTS OF OPERATIONS (Continued)
A contingency and business resumption plan have been developed for the
Company to provide for reducing the business interruption and resumption of
normal business operation in the event of a Y2K-related failure.
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
objections 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>
<S> <C> <C>
Scenario $ in thousands % of Net int. income
200 basis point rising $(18.6) (4.13%)
200 basis point falling (15.3) (3.41%)
</TABLE>
The Company 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 placed 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.
On May 18, 1998, the annual meeting of stockholders was held. At the
meeting, Brent A. Bowman, Charles D. Green, and Vernon C. Larson were
elected to serve as Class III directors with terms expiring in 2001.
Continuing as Class I directors (term expires in 1999) are Patrick L.
Alexander, Joseph L. Downey, Rolla W. Goodyear and Jerry R. Pettle; and
continuing as Class II directors (term expires in 2000) are Susan E. Roepke
and Donald J. Wissman The stockholders approved the amendment to the
Certificate of Incorporation increasing the number of authorized shares of
the Company's Common Stock, $.01 par value, from 1,500,000 to 3,000,000. The
stockholders approved the MNB Bancshares, Inc. 1998 Stock Option Plan and
also ratified the appointment of KPMG Peat Marwick LLP as the Company's
independent public accountants for the year ending December 31, 1998.
There were 1,286,996 issued and outstanding shares of Common Stock at the time
of the annual meeting. The voting on each item at the annual meeting was as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For Withheld/Against Abstain Broker Non-Votes
Brent A. Bowman 1,087,778 28,893
Charles D. Green 1,088,990 27,681
Vernon C. Larson 1,088,990 27,681
Amend Certificate of
Incorporation 1,088,566 5,424 22,681
MNB Bancshares, Inc.
1998 Stock Option Plan 946,116 21,284 26,247 123,024
KPMG Peat Marwick LLP 1,086,520 7,470 22,681
</TABLE>
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS 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: August 8, 1998 /s/Patrick L. Alexander
President and Chief Executive Officer
Date: August 8, 1998 /s/Susan E. Roepke
Vice President, Secretary,
Treasurer and Chief Financial Officer
INDEX TO EXHIBITS
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
27 Financial Data Schedule 17
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,095,934
<INT-BEARING-DEPOSITS> 1,300,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 43,923,150
<INVESTMENTS-CARRYING> 2,684,507
<INVESTMENTS-MARKET> 2,559,000
<LOANS> 80,479,981
<ALLOWANCE> 1,341,912
<TOTAL-ASSETS> 137,319,606
<DEPOSITS> 114,474,878
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,696,807
<LONG-TERM> 8,390,360
0
0
<COMMON> 12,994
<OTHER-SE> 13,009,876
<TOTAL-LIABILITIES-AND-EQUITY> 137,319,606
<INTEREST-LOAN> 3,885,762
<INTEREST-INVEST> 1,277,417
<INTEREST-OTHER> 217,954
<INTEREST-TOTAL> 5,381,133
<INTEREST-DEPOSIT> 2,636,829
<INTEREST-EXPENSE> 2,933,505
<INTEREST-INCOME-NET> 2,447,628
<LOAN-LOSSES> 60,000
<SECURITIES-GAINS> 10,795
<EXPENSE-OTHER> 2,243,918
<INCOME-PRETAX> 767,314
<INCOME-PRE-EXTRAORDINARY> 767,314
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 559,506
<EPS-PRIMARY> .43
<EPS-DILUTED> .42
<YIELD-ACTUAL> 3.83
<LOANS-NON> 256,848
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,335,024
<CHARGE-OFFS> 77,248
<RECOVERIES> 24,136
<ALLOWANCE-CLOSE> 1,341,912
<ALLOWANCE-DOMESTIC> 1,076,355
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 265,557
</TABLE>
