-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BVHwLfcxXJsQ0miblYQAQND5gyt6lxN8bKuPtAv9N9bRaGbVL4O13PUdueS3ze9J hP/r4Cu/JxAJS7YrYRyRwg== 0000891284-98-000013.txt : 19980331 0000891284-98-000013.hdr.sgml : 19980331 ACCESSION NUMBER: 0000891284-98-000013 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MNB BANCSHARES INC CENTRAL INDEX KEY: 0000891284 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 481120026 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20878 FILM NUMBER: 98578952 BUSINESS ADDRESS: STREET 1: 800 POYNTZ AVE CITY: MANHATTAN STATE: KS ZIP: 66502 BUSINESS PHONE: 7855652000 MAIL ADDRESS: STREET 1: 800 POYNTZ AVENUE CITY: MANHATTAN STATE: KS ZIP: 66052 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 21549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 (FEE REQUIRED) For fiscal year ended December 31, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For transition period from to Commission File Number 0-21878 MNB BANCSHARES, INC. (Exact name of Registrant as specified in its charter) Delaware 48-1120026 (State or other (IRS Employer jurisdiction Identification of incorporation Number) or organization) 800 Poyntz Avenue, Manhattan, Kansas 66502 (Address of principal executive offices) (785) 565-2000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on which registered None Title of Each Class None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities and 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this 10-K or any amendment to this form 10-K. [ ] The aggregate market value of voting common stock of Registrant held by non- affiliates as of March 27, 1998 was $8,662,857.* At March 27, 1998, the total number of shares of common stock outstanding was 1,288,476. Documents incorporated by Reference: Portions of the 1997 Annual Report to Stockholders for the fiscal year ended December 31, 1997, are incorporated by reference into Parts I and II hereof, to the extent indicated herein. Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held May 18, 1998, are incorporated by reference in Part III hereof, to the extent indicated herein. *Based on the last reported price of actual transactions in Registrant's common stock on March 27, 1998, and reports of beneficial ownership prepared by all directors, executive officers and beneficial owners of more than 5% of the outstanding shares of common stock of Registrant; however, such determination of shares owned by affiliates does not constitute an admission of affiliate status or beneficial interest in shares of common stock of Registrant. MNB BANCSHARES, INC. 1997 Form 10-K Annual Report Table of Contents PART I ITEM 1. BUSINESS 1 ITEM 2. PROPERTIES 20 ITEM 3. LEGAL PROCEEDINGS 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20 ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS 20 ITEM 6. SELECTED FINANCIAL DATA 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA 21 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 21 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 21 ITEM 11. EXECUTIVE COMPENSATION 22 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 22 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 22 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 22 SIGNATURES 24 PART I. ITEM 1. BUSINESS REGISTRANT AND ITS SUBSIDIARIES MNB Bancshares, Inc. (the "Company") is a bank holding company incorporated under the laws of the State of Delaware. Currently, the Company's business consists solely of the ownership of Security National Bank, Manhattan, Kansas (the "Bank"). The Bank is a wholly-owned subsidiary of the Company and is the successor-in-interest to Manhattan National Bank, formerly Manhattan Federal Savings and Loan Association (the "Association"), which, on January 5, 1993, converted concurrently from a federal mutual savings association to a federal stock savings association (the "Stock Conversion") and from a federal stock savings association to a national bank (the "Bank Conversion") (collectively, the "Conversion"). The Bank has a subsidiary, SNB Holdings, Inc., which was formed for the purpose of holding and managing portions of the Bank's investment portfolio. The term "Bank", as used in this Form 10-K, sometimes refers to the Association during the period prior to the Conversion. The Company was organized on August 27, 1992, at the direction of the Board of Directors of the Association to acquire all of the stock issued by the Association upon consummation of the Stock Conversion. On January 5, 1993, in connection with the Stock Conversion, the Company issued and sold 925,750 shares of its common stock, par value $0.01 per share, in a Subscription and Community Offering to the Company's employee stock ownership plan, the Association's members and the general public. Total net proceeds of the Subscription and Community Offering, after Conversion expenses of approximately $600,000, were approximately $4 million. The Company utilized $2 million of the net proceeds to acquire all of the common stock, par value $1.00 per share, issued by the Association in connection with the Stock Conversion. The remaining net proceeds were then invested by the Company in interest bearing deposit accounts at the Bank and in other investment securities. On April 1, 1995, the Company acquired all of the issued and outstanding stock of Auburn Security Bancshares, Inc. ("Auburn"), which had consolidated assets of approximately $20 million. The $2 million purchase price, including related costs of acquisition, included cash of approximately $970,000 and 121,440 shares of the Company's common stock. Auburn was a one-bank holding company which owned 99% of the outstanding stock of Security State Bank, Auburn, Kansas. Subsequent to the acquisition, the Company acquired all of the remaining stock of Security State Bank. On December 31, 1995, the Company merged and consolidated Manhattan National Bank and Security State Bank into Security National Bank. In May, 1997, a de novo branch was opened in Topeka, Kansas. On December 31, 1997, the Company acquired Freedom Bancshares, Inc., Osage City, Kansas ("Freedom"), the holding company for Citizens State Bank, Osage City, Kansas ("Citizens"), with a branch in Beloit, Kansas. Consolidated assets acquired in this transaction were approximately $43 million. As a bank holding company, the Company is subject to regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The Company is also subject to various reporting requirements of the Securities and Exchange Commission (the "SEC"). Pursuant to the Conversion, the Bank succeeded to all of the assets and liabilities of the Association. The Association was organized as a Kansas- chartered mutual building and loan association in 1885, and converted to a federally chartered mutual savings and loan association in 1938. The Bank is principally engaged in the business of attracting deposits from the general public and using such deposits, together with borrowings and other funds, to originate consumer, commercial, multi- family, and one-to-four family residential mortgage loans in the Bank's principal lending areas, consisting primarily of Manhattan, Auburn, Topeka, and Osage City, Kansas and the surrounding communities in Riley, Pottawatomie, Shawnee and Osage Counties in Kansas. Since Conversion, the Bank has focused on originating greater numbers and amounts of consumer, commercial, and agricultural loans. Additionally, greater emphasis has been placed on diversification of the deposit mix through expansion of core deposit accounts such as checking, savings, and money market accounts. The Bank has also diversified its geographical markets with the holding company acquisitions of Auburn and Osage City and the new branch facility in Topeka. The results of operations of the Bank are dependent primarily upon net interest income and, to a lesser extent, upon other income derived from loan servicing fees and customer deposit services. Additional expenses of the Bank include general and administrative expenses such as salaries, employee benefits, federal deposit insurance premiums, data processing, occupancy and related expenses. Deposits of the Manhattan branch of the Bank are insured by the Savings Association Insurance Fund (the "SAIF") of the Federal Deposit Insurance Corporation (the "FDIC") up to the maximum amount allowable under applicable federal laws and regulations. Deposits of the remaining branches of the Bank are insured by the Bank Insurance Fund (the "BIF"). The Bank is regulated by the Office of the Comptroller of the Currency (the "OCC"), as the chartering authority for national banks, and the FDIC, as the administrator of the SAIF and the BIF. The Bank is also subject to regulation by the Federal Reserve Board with respect to reserves required to be maintained against deposits and certain other matters. The Bank is a member of the Federal Reserve Bank of Kansas City and the Federal Home Loan Bank (the "FHLB") of Topeka. The Company's executive office is located at 800 Poyntz Avenue, Manhattan, Kansas 66502. Its telephone number is (785) 565-2000. Market Area The Bank's home office is located at 800 Poyntz Avenue, Manhattan, Kansas, with branches located at 1741 N. Washington, Auburn, Kansas; 6100 SW 21st Street, Topeka, Kansas; 102 S 6th, Osage City, Kansas; and 120 E Main, Beloit, Kansas. Manhattan is located in east central Kansas, approximately 45 miles west of Topeka, Kansas. Manhattan is the county seat and largest city in Riley County, Kansas. Over the past decade, Riley County has experienced population and household growth at an annual rate which is slightly higher than the growth rates for Kansas in general. Auburn is located ten miles southwest of Topeka, Kansas and in an area experiencing the growth and expansion of the metropolitan Topeka area. Topeka, Kansas is the state capital. Osage City is approximately 30 miles south of Topeka, Kansas and has a population of 2,700. The Bank's primary deposit gathering and lending market consists of Riley, Osage, Pottawatomie, and Shawnee Counties, Kansas. Riley County's economy is significantly influenced by employment at Fort Riley Military Base and Kansas State University, the second largest university in Kansas, which is located in Manhattan. Shawnee County's economy is strongly influenced by the City of Topeka and several major private firms and public institutions. Osage County is primarily agricultural with small private industries and business firms. Other sources of employment in the Manhattan branch's market area are derived from a variety of service, trade and manufacturing employers located in southern Riley County and western Pottawatomie County, including the Unified School District, the Kansas Farm Bureau and the McCall Pattern Company. Northern Riley County and eastern Pottawatomie County are primarily rural, agricultural areas. Other sources of employment in the Auburn, Osage City, and Topeka market areas are numerous manufacturing, distribution, and retail centers located in Shawnee County. These include Goodyear Tire & Rubber; Blue Cross/Blue Shield; Volume Shoe Corporation; the Menninger Foundation; and Washburn University. Others in the Topeka area include Frito- Lay, Inc.; Southwestern Bell Corporation; the Veteran's Administration; and Hill's Pet Food. Major employers in Osage City are Kan-Build, Inc., a firm which specializes in manufactured housing, and Mussatto Brothers, Inc., a wholesale beverage distributor. Competition The Bank faces strong competition both in attracting deposits and making real estate and other loans. Its most direct competition for deposits comes from commercial banks and other savings institutions located in its principal market areas of Riley, Osage, Pottawatomie and Shawnee Counties in Kansas, including many large financial institutions which have greater financial and marketing resources available to them. The ability of the Bank to attract and retain deposits generally depends on its ability to provide a rate of return, liquidity and risk comparable to that offered by competing investment opportunities. The Bank competes for loans principally through the interest rates and loan fees it charges and the efficiency and quality of services it provides borrowers. Additionally, competition may increase as a result of the continuing reduction on restrictions on the interstate operations of financial institutions. Pursuant to federal legislation which took effect on September 25, 1995, the Federal Reserve Board may allow a bank holding company to acquire banks located in any state in the United States without regard to geographic restrictions or reciprocity requirements imposed by state law, but subject to certain conditions, including certain deposit concentration limits. See "Supervision and Regulation - The Company - - Investments and Activities." Further, pursuant to a federal statute which will take effect on June 1, 1997, banks will be able to establish branch offices in other states. See "Supervision and Regulation - The Bank - Branching Authority." Employees At December 31, 1997, the Bank had a total of 62 employees (57 full time equivalent employees). The Company has no direct employees. Employees are provided with a comprehensive benefits program, including basic and major medical insurance, life and disability insurance, sick leave, an employee stock ownership plan and a 401(k) profit sharing plan. Employees are not represented by any union or collective bargaining group and the Bank considers its employee relations to be good. SUPERVISION AND REGULATION General Financial institutions and their holding companies are extensively regulated under federal and state law. As a result, the growth and earnings performance of the Company can be affected not only by management decisions and general economic conditions, but also by the requirements of applicable state and federal statutes and regulations and the policies of various governmental regulatory authorities including, but not limited to, the Office of the Comptroller of the Currency (the "OCC"), the Board of Governors of the Federal Reserve System (the "FRB"), the Federal Deposit Insurance Corporation (the "FDIC"), the Internal Revenue Service and state taxing authorities and the Securities and Exchange Commission (the "SEC"). The effect of such statutes, regulations and policies can be significant, and cannot be predicted with a high degree of certainty. Federal and state laws and regulations generally applicable to financial institutions, such as the Company and its subsidiaries, regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to the Company and its subsidiaries establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC's deposit insurance funds and the depositors, rather than the shareholders, of financial institutions. The following references to material statutes and regulations affecting the Company and its subsidiaries are brief summaries thereof and do not purport to be complete, and are qualified in their entirety by reference to such statutes and regulations. Any change in applicable law or regulations may have a material effect on the business of the Company and its subsidiaries. Recent Regulatory Developments Pending Legislation. Legislation is pending in the Congress that would allow bank holding companies to engage in a wider range of nonbanking activities, including greater authority to engage in securities and insurance activities. The expanded powers generally would be available to a bank holding company only if the bank holding company and its bank subsidiaries remain well-capitalized and well-managed. Additionally, the pending legislation would eliminate the federal thrift charter and merge the FDIC's Bank Insurance Fund ("BIF") and Savings Association Insurance Fund ("SAIF"). At this time, the Company is unable to predict whether the proposed legislation will be enacted and, therefore, is unable to predict the impact such legislation may have on the operations of the Company and the Bank. The Company General. The Company, as the sole shareholder of the Bank, is a bank holding company. As a bank holding company, the Company is registered with, and is subject to regulation by, the FRB under the Bank Holding Company Act, as amended (the "BHCA"). In accordance with FRB policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances where the Company might not do so absent such policy. Under the BHCA, the Company is subject to periodic examination by the FRB and is required to file with the FRB periodic reports of its operations and such additional information as the FRB may require. Investments and Activities. Under the BHCA, a bank holding company must obtain FRB approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank; or (iii) merging or consolidating with another bank holding company. Subject to certain conditions (including certain deposit concentration limits established by the BHCA), the FRB may allow a bank holding company to acquire banks located in any state of the United States without regard to whether the acquisition is prohibited by the law of the state in which the target bank is located. In approving interstate acquisitions, however, the FRB is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) or which require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of- state bank holding company. The BHCA also prohibits, with certain exceptions, the Company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. The principal exception to this prohibition allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the FRB to be "so closely related to banking ... as to be a proper incident thereto." Under current regulations of the FRB, the Company and its non-bank subsidiaries are permitted to engage in, among other activities, such banking-related businesses as the operation of a thrift, sales and consumer finance, equipment leasing, the operation of a computer service bureau, including software development, and mortgage banking and brokerage. The BHCA generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank holding companies. Federal law also prohibits acquisition of "control" of a bank, such as the Bank, or bank holding company, such as the Company, without prior notice to certain federal bank regulators. "Control" is defined in certain cases as acquisition of 10% of the outstanding shares of a bank or bank holding company. Capital Requirements. Bank holding companies are required to maintain minimum levels of capital in accordance with FRB capital adequacy guidelines. If capital falls below minimum guideline levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses. The FRB's capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: a risk-based requirement expressed as a percentage of total risk-weighted assets, and a leverage requirement expressed as a percentage of total assets. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. The leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly rated companies, with minimum requirements of 4% to 5% for all others. For purposes of these capital standards, Tier 1 capital consists primarily of permanent stockholders' equity less intangible assets (other than certain mortgage servicing rights and purchased credit card relationships) and total capital means Tier 1 capital plus certain other debt and equity instruments which do not qualify as Tier 1 capital and a portion of the company's allowance for loan and lease losses. The risk-based and leverage standards described above are minimum requirements, and higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the FRB's capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well above the minimum levels. Under the FRB's guidelines, the capital standards described above apply on a consolidated basis to bank holding companies that have more than $150 million in total consolidated assets, but generally apply on a bank-only basis to bank holding companies that, like the Company, have less than $150 million in total consolidated assets. Nevertheless, as of December 31, 1997, the Company's total capital of $12.3 million is well in excess of the Federal Reserve Board's consolidated minimum capital requirements. Dividends. The FRB has issued a policy statement with regard to the payment of cash dividends by bank holding companies. In the policy statement, the FRB expressed its view that a bank holding company should not pay cash dividends which exceed its net income or which can only be funded in ways that weaken the bank holding company's financial health, such as by borrowing. Additionally, the FRB possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. In addition to the restrictions on dividends that may be imposed by the FRB, the Delaware General Corporation Law (the "DGCL") allows the Company to pay dividends only out of its surplus (as defined and computed in accordance with the provisions of the DGCL), or if the Company has no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Federal Securities Regulation. The Company's common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Consequently, the Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act. The Bank General. The Bank is a national bank, chartered by the OCC under the National Bank Act. The deposit accounts of the Bank are insured by the SAIF and the BIF of the FDIC, and the Bank is a member of the Federal Reserve System. As a SAIF-insured national bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the OCC, as the chartering authority for national banks, and the FDIC, as administrator of the SAIF. The Bank is also a member of the Federal Home Loan Bank System, which provides a central credit facility primarily for member institutions. Deposit Insurance. As an FDIC - -insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their respective levels of capital and results of supervisory evaluations. Institutions classified as well-capitalized (as defined by the FDIC) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (as defined by the FDIC) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period. During the year ended December 31, 1997, SAIF assessments ranged from 0% of deposits to 0.27% of deposits. For the semi-annual assessment period beginning January 1, 1998, SAIF assessment rates will continue to range from 0% of deposits to 0.27% of deposits. The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, order, or any condition imposed in writing by, or written agreement with, the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital. Management of the Company is not aware of any activity or condition that could result in termination of the deposit insurance of the Bank. FICO Assessments. Since 1987, a portion of the deposit insurance assessments paid by SAIF members has been used to cover interest payments due on the outstanding obligations of the FICO, the entity created to finance the recapitalization of the Federal Savings and Loan Insurance Corporation, the SAIF's predecessor insurance fund. Pursuant to federal legislation enacted September 30, 1996, commencing January 1, 1997, both SAIF members and BIF members became subject to assessments to cover the interest payments on outstanding FICO obligations. Such FICO assessments are in addition to amounts assessed by the FDIC for deposit insurance. Until January 1, 2000, the FICO assessments made against BIF members may not exceed 20% of the amount of the FICO assessments made against SAIF members. Between January 1, 2000 and the maturity of the outstanding FICO obligations in 2019, BIF members and SAIF members will share the cost of the interest on the FICO bonds on a pro rata basis. During the year ended December 31, 1997, the FICO assessment rate for SAIF members was approximately 0.063% of deposits while the FICO assessment rate for BIF members was approximately 0.013% of deposits. During the year ended December 31, 1997, the Bank paid FICO assessments totaling $47,116. OCC Assessments. All national banks are required to pay supervisory fees to the OCC to fund the operations of the OCC. The amount of such supervisory fees is based upon each institution's total assets, including consolidated subsidiaries, as reported to the OCC. During the year ended December 31, 1997, the Bank paid supervisory fees to the OCC totaling $39,620. Capital Requirements. The OCC has established the following minimum capital standards for national banks, such as the Bank: a leverage requirement consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly- rated banks with minimum requirements of 4% to 5% for all others, and a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one- half of which must be Tier 1 capital. For purposes of these capital standards, Tier 1 capital and total capital consist of substantially the same components as Tier 1 capital and total capital under the FRB's capital guidelines for bank holding companies (see "--The Company--Capital Requirements"). The capital requirements described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions. For example, the regulations of the OCC provide that additional capital may be required to take adequate account of, among other things, interest rate risk or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. During the year ended December 31, 1997, the Bank was not required by the OCC to increase its capital to an amount in excess of the minimum regulatory requirements. As of December 31, 1997, the Bank exceeded its minimum regulatory capital requirements with a leverage ratio of 11.70% and a risk-based capital ratio of 15.74%. Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators' powers depends on whether the institution in question is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Depending upon the capital category to which an institution is assigned, the regulators' corrective powers include: requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution. Dividends. The National Bank Act imposes limitations on the amount of dividends that may be paid by a national bank, such as the Bank. Generally, a national bank may pay dividends out of its undivided profits, in such amounts and at such times as the bank's board of directors deems prudent. Without prior OCC approval, however, a national bank may not pay dividends in any calendar year which, in the aggregate, exceed the bank's year-to-date net income plus the bank's adjusted retained net income for the two preceding years. The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, the Bank exceeded its minimum capital requirements under applicable guidelines as of December 31, 1997. Further, the Bank may not pay dividends in an amount which would reduce its capital below the amount required for the liquidation account established in connection with the Bank's conversion from the mutual to the stock form of ownership in 1993. As of December 31, 1997, approximately $.8 million was available to be paid as dividends to the Company by the Bank. Notwithstanding the availability of funds for dividends, however, the OCC may prohibit the payment of any dividends by the Bank if the OCC determines such payment would constitute an unsafe or unsound practice. Insider Transactions. The Bank is subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to the Company and its subsidiaries, on investments in the stock or other securities of the Company and its subsidiaries and the acceptance of the stock or other securities of the Company or its subsidiaries as collateral for loans. Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to directors and officers of the Company and its subsidiaries, to principal stockholders of the Company, and to "related interests" of such directors, officers and principal stockholders. In addition, federal law and regulations may affect the terms upon which any person becoming a director or officer of the Company or one of its subsidiaries or a principal stockholder of the Company may obtain credit from banks with which the Bank maintains a correspondent relationship. Safety and Soundness Standards. The federal banking agencies have adopted guidelines which establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings. In general, the guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the institution's primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. The preamble to the guidelines states that the agencies expect to require a compliance plan from an institution whose failure to meet one or more of the guidelines is of such severity that it could threaten the safety and soundness of the institution. Failure to submit an acceptable plan, or failure to comply with a plan that has been accepted by the appropriate federal regulator, would constitute grounds for further enforcement action. Branching Authority. National banks headquartered in Kansas, such as the Bank, have the same branching rights in Kansas as banks chartered under Kansas law. Kansas law grants Kansas-chartered banks the authority to establish branches anywhere in the State of Kansas, subject to receipt of all required regulatory approvals. Effective June 1, 1997 (or earlier if expressly authorized by applicable state law), the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") allows banks to establish interstate branch networks through acquisitions of other banks, subject to certain conditions, including certain limitations on the aggregate amount of deposits that may be held by the surviving bank and all of its insured depository institution affiliates. The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of- state bank in its entirety) is allowed by the Riegle-Neal Act only if specifically authorized by state law. The legislation allows individual states to "opt-out" of certain provisions of the Riegle-Neal Act by enacting appropriate legislation prior to June 1, 1997. Kansas banks have the authority to engage in interstate mergers to the extent permitted by the Riegle-Neal Act. Federal Reserve System. FRB regulations, as presently in effect, require depository institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts), as follows: for transaction accounts aggregating $47.8 million or less, the reserve requirement is 3% of total transaction accounts; and for transaction accounts aggregating in excess of $47.8 million, the reserve requirement is $1.434 million plus 10% of the aggregate amount of total transaction accounts in excess of $47.8 million. The first $4.7 million of otherwise reservable balances are exempted from the reserve requirements. These reserve requirements are subject to annual adjustment by the FRB. The Bank is in compliance with the foregoing requirements. Tax Matters Under applicable provisions of the Internal Revenue Code of 1986, as amended ("Code"), effective as of the date of the Association's conversion to a bank, a savings association that met certain definitional tests relating to the composition of its assets and the sources of its income ("qualifying savings association") was permitted to establish reserves for bad debts. A qualifying savings association generally was permitted to make annual additions to such reserves under either the experience method or the percentage of taxable income method. In 1996, the percentage of taxable income method was repealed and savings associations were generally required to recapture their tax bad debt reserves in excess of a base year amount. Delaware imposes a franchise tax on corporations, such as the Company, that are incorporated under the laws of the state of Delaware. The annual Delaware franchise tax is the least of three tax computations based on: (1) the number of shares of authorized capital stock, (2) the corporation's assumed capital, or (3) certain minimum and maximum limits. The state of Kansas imposes a privilege tax measured by net income on certain financial institutions, including both banks and savings and loan associations, doing business in Kansas. The privilege tax consists of a normal state tax on the bank's "net income" and a surtax based on the bank's "net income" in excess of $25,000. In general, "net income" subject to the Kansas privilege tax is based on the taxpayer's Federal taxable income. The Bank was also required to restate its tax bad debt reserves for purposes of the Kansas privilege tax. The tax and financial statement impact of this restatement has been reflected in the use of an assumed combined federal and state tax rate of 38% in calculating the estimated impact of the restatement for federal tax purposes. I. Distribution of Assets, Liabilities, and Stockholders' Equity; Interest Rates and Interest Differentials The average balance sheets are incorporated by reference from the Company's 1997 Annual Report to Stockholders (attached as Exhibit 13.1 hereto). The following table describes the extent to which changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities affected the Bank's interest income and expense during the periods indicated. The table distinguishes between (i) changes attributable to rate (changes in rate multiplied by prior volume), (ii) changes attributable to volume (changes in volume multiplied by prior rate), and (iii) net change (the sum of the previous columns). The net changes attributable to the combined effect of volume and rate, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
Dec 1997 vs 1996 Dec 1996 vs 1995 Inc/(Decr) Inc/(Decr) Attributable to Attributable to Volume Rate Net Volume Rate Net (Dollars in (Dollars in thousands) thousands) Interest income: Investment securities $(166) $ 73 $(93) $ 64 $(10) $ 54 Mortgage-backed securities 202 (25) 177 139 10 149 Loans 104 71 175 380 36 416 Total 140 119 259 583 36 619 Interest expense: Deposits $ 27 $(36) $ (9) $ 419 $(148) $271 Other borrowings (20) 18 (2) (27) (15) (42) Total 7 (18) (11) 392 (163) 229 Net interest income $ 133 $137 $270 $ 191 $ 199 $390 December 1995 vs 1994 Increase/(Decrease) Attributable to Volume Rate Net (Dollars in thousands) Interest income: Investment securities $200 $183 $ 383 Mortgage-backed securities 74 76 150 Loans 710 397 1,107 Total 984 656 1,640 Interest expense: Deposits $563 $612 $1,175 Other borrowings (155) 12 (143) Total 408 624 1,032 Net interest income $576 $ 32 $ 608
II. Investment Portfolio Investments Investment Securities. The following table sets forth the carrying value of the investment securities portfolio at the dates indicated.
At December 31, 1997 1996 1995 (Dollars in thousands) Investment securities: U.S. government and agency obligations $26,087 $16,965 $20,700 Mortgage-backed securities 11,401 11,734 8,717 Municipal bonds 3,097 2,962 1,968 Bankers' acceptances 108 491 0 FHLB, Federal Reserve, and Bankers Bank of Kansas stock 1,386 1,087 944 Total $ 42,079 $33,239 $32,329
As of December 31, 1997, the carrying value, maturities and the weighted average yields of investment securities were as follows:
After 1 After 5 Year Years 1 Year Through 5 Through 10 After 10 or Less Years Years Years Total Amt Yield Amt Yield Amt Yield Amt Yield Amt Yield (Dollars in thousands) U.S. government and agency securities $9,499 5.11% $15,127 6.18% $1,311 6.76% $150 8.35% $26,087 5.88% Mortgage- backed securities 0 0.00 4,332 6.41 2,953 6.26 4,116 6.64 11,401 6.49 Municipal bonds 285 5.60 2,052 4.59 760 4.70 0 0.00 3,097 4.73 Bankers' acceptances 0 0.00 0 0.00 0 0.00 108 7.65 108 7.65 FHLB, Federal Reserve, and Bankers Bank of Kansas stock 0 0.00 0 0.00 0 0.00 1,386 4.12 1,386 4.12 Total $9,784 5.16% $21,511 5.81% $5,024 5.70% $5,760 6.00% $42,079 5.67% With the exception of U.S. government and federal agency obligations, there were no investment securities of any single issuer the book value of which exceeded 10% of consolidated stockholders' equity at December 31, 1997.
III. Loan Portfolio Loan Portfolio Composition. The following table sets forth the composition of the loan portfolio by type of loan at the dates indicated.
At December 31 1997 1996 1995 %of % of % of Amount Total Amount Total Amount Total (Dollars in thousands) Real estate loans: Residential 1-4family(1) $37,218 41.95% $33,677 53.84% $34,678 55.41% Multi-family 4,758 5.36 4,271 6.83 5,225 8.35 Commercial real estate 20,713 23.35 10,041 16.05 7,879 12.59 Total real estate loans(2) 62,689 70.66 47,989 76.72 47,782 76.35 Consumer loans 6,357 7.16 4,696 7.51 4,294 6.86 Commercial non-real estate loans 18,305 20.63 7,410 11.42 7,075 11.31 Student loans 2,887 3.25 3,709 5.93 4,428 7.08 Less: Unearned fees, discounts and premiums 120 0.18 151 0.24 159 0.25 undisbursed loan funds 59 0.01 14 0.02 12 0.01 Allowance for loan losses 1,335 1.51 820 1.32 826 0.90 Total loans $88,724 100.00% $62,549 100.00% $ 62,582 100.00% (1) Includes loans held for sale totaling $743,762, $179,190 and $699,000 at December 31, 1997, 1996 and 1995, respectively. (2) Includes construction loans totaling $2,162,000, $2,706,000 and $1,195,000 at December 31, 1997, 1996 and 1995, respectively.
The following table sets forth the contractual maturities of loans at December 31, 1997. The table does not include unscheduled prepayments.
At December 31, 1997 (Dollars in thousands) Up to After 1 After 3 After 5 10 through Beyond 1 year to 3 years to 5 years to 10 years 20 years 20 years Total Mortgage loans $6,150 $2,486 $ 2,368 $ 9,140 $28,778 $10,885 $59,807 Other loans 11,101 6,419 6,941 3,579 2,391 0 30,431 Total $17,251 $8,905 $ 9,309 $12,719 $31,169 $10,885 $90,238 Less: Unearned discounts and deferred loan fees (120) Undisbursed loan funds (59) Allowance for loan losses (1,335) Loans, net $88,724
The following table sets forth at December 31, 1997 the dollar amount of all loans due after December 31, 1997 and whether such loans had fixed interest rates or adjustable interest rates:
Fixed Adjustable Total (Dollars in thousands) Residential 1 - 4 family $11,910 $20,608 $32,518 Multi-family & non-residential 5,273 15,866 21,139 Other 14,172 5,158 19,330 Total $31,355 $41,632 $72,987
Nonperforming Assets. The following table sets forth information with respect to nonperforming assets, including non- accrual loans and real estate acquired through foreclosure or by deed in lieu of foreclosure ("real estate owned"). Under the original terms of the Bank's non- accrual loans at December 31, 1997, interest earned on such loans during year ended December 31, 1997 would not have been significantly different than reported. For each year shown, the Company had no loans greater than 90 days past due which were still accruing interest.
At December 31, 1997 1996 1995 1994 1993 (Dollars in thousands) Total non-accrual loans $172 $140 $ 39 $209 $138 Real estate owned ("REO") 125 27 5 51 54 Total nonperforming assets $297 $167 $ 44 $260 $192 Nonperforming assets to total adjusted loans 0.34% 0.27% 0.07% 0.50% 0.38% Nonperforming assets to total assets 0.21% 0.16% 0.04% 0.33% 0.24% Allowance for loan losses to non-accrual loans and REO 448.89% 490.88% 1,871.30% 269.60% 307.00%
IV. Summary of Loan Loss Experience Allowance for Losses on Loans and Real Estate. The following table sets forth an analysis of the allowance for loan losses at the dates indicated.
At December 31, 1997 1996 1995 1994 1993 (Dollars in thousands) Balance at beginning of year $ 820 $826 $562 $587 $546 Provision for loan losses: Mortgage loans 18 4 23 0 0 Non-mortgage loans 42 11 17 5 75 Total provision for loan losses 60 15 40 5 75 Allowance for loans of acquired bank: Allowance for mortgage loans of acquired bank 92 0 103 0 0 Allowance for non-mortgage loans of acquired bank 369 0 126 0 0 Total of allowance for loans of acquired bank 461 0 229 0 0 Recoveries: Mortgage loans 1 0 8 12 0 Non-mortgage loans 10 6 16 4 0 Total recoveries 11 6 24 16 0 Charge-offs: Mortgage loans 0 1 10 16 34 Non-mortgage loans 17 26 19 30 0 Total charge-offs 17 27 29 46 34 Balance at end of year $1,335 $820 $826 $562 $587 Ratio of allowance for loan losses to total outstanding loans (gross) 1.48% 1.29% 1.30% 1.07% 1.16% Ratio of net charge- offs during the year to average loans outstanding (gross) during the year 0.01% 0.03% 0.01% 0.06% 0.06% Ratio of allowance for loan losses to total non-performing loans 773.92% 584.91% 2,107.57% 269.00% 307.00%
The following table sets forth the allocation of the allowance for loan losses at the dates indicated by category of loans. This allocation reflects management's judgment as to risks inherent in the types of loans indicated, but the general reserves included in the table are not restricted and are available to absorb all loan losses. The amount allocated in the following table to any category should not be interpreted as an indication of expected actual charge-offs in that category.
At December 31, 1997 1996 1995 % of Loans % of Loans % of Loans in Each in Each in Each Category to Category to Category to Total Total Total Amount Loans Amount Loans Amount Loans (Dollars in thousands) Allocated to: Mortgage loans $ 486 36% $ 375 46% $ 372 45% Non-mortgage loans 849 64 445 54 454 55 Total $1,335 100% $ 820 100% $ 826 100%
V. Average Deposits by Classification The following table sets forth the amounts of deposits by type of account at the dates indicated.
At December 31, 1997 1996 1995 % of Average % of Average % of Average Amount Total Rate Amount Total Rate Amount Total Rate (Dollars in thousands) Transaction Accounts: Checking/NOW $20,748 23.61% 2.44% $18,677 21.39% 2.64% $15,372 19.77% 2.74% Money market deposits 15,378 17.50 3.76 15,984 18.31 3.71 10,102 12.99 4.61 Savings 5,100 5.80 2.44 5,526 6.33 2.04 5,227 6.72 2.61 Total transaction accounts 41,226 46.91 2.93 40,187 46.03 3.04 30,701 39.48 3.33 Certificates of deposit 46,666 53.09 5.66 47,113 53.97 5.60 47,062 60.52 5.45 Total deposits $87,892 100.00%4.38% $87,300 100.00% 4.42% $77,763 100.00%4.61%
As of December 31, 1997, the aggregate amount outstanding of jumbo certificates of deposit (amounts of $100,000 or more) was $11.6 million. The following table presents the maturities of these time certificates of deposit at such date:
(Dollars in thousands) 3 months or less $ 5,584 Over 3 months through 6 months 1,457 Over 6 months through 12 months 1,925 Over 12 months 2,664 Total $11,631
VI. Return on Equity and Assets
At or for the years ended December 31, 1997 1996 1995 1994 1993 Return on average assets 1.03% 0.70% 0.78% 0.82% 0.86% Return on average equity 9.18 6.54 7.48 7.39 7.99 Equity to total assets 8.48 10.96 10.68 11.72 10.84 Dividend payout ratio 31.00 27.43 19.08 18.94 13.02 Earnings per share before extraordinary item, basic(1) 0.84 0.56 0.61 0.61 0.59 Earnings per share before extraordinary item, diluted(1) 0.81 0.54 0.59 0.60 0.59 Net earnings per share, basic(1) 0.84 0.56 0.61 0.58 0.59 Net earnings per share, diluted(1) 0.81 0.54 0.59 0.57 0.59 (1) All per share amounts have been adjusted to give effect to the 5% stock dividends paid by the Company in 1997, 1996, 1995 and 1994, and the February, 1998 two-for-one stock split.
ITEM 2. PROPERTIES The following table sets forth information concerning the offices of the Bank.
Year Opened Square Address or Acquired Square Title 800 Poyntz Avenue Manhattan, KS 66502 1974 12,000 Owned 1741 N. Washington Auburn, KS 66402 1991 8,000 Owned 6100 SW 21st Street Topeka, KS 1989 3,500 Leased 102 S 6th Osage City, KS 1997 7,932 Owned 120 E. Main Beloit, KS 1997 7,236 Owned
ITEM 3. LEGAL PROCEEDINGS There are no pending legal proceedings to which the Company or the Bank is a party, other than ordinary routine litigation incidental to the Bank's business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II. ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company incorporates by reference the information called for by Item 5 on this Form 10-K from the sections captioned "Stock Price Information" of the Company's 1997 Annual Report to Stockholders for the fiscal year ended December 31, 1997 (attached as Exhibit 13.1 hereto). ITEM 6. SELECTED FINANCIAL DATA The Company incorporates by reference the information called for by Item 6 of this Form 10-K from the sections entitled "Selected Financial and Other Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Company's 1997 Annual Report to Stockholders for the fiscal year ended December 31, 1997 (attached as Exhibit 13.1 hereto). ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company incorporates by reference the information called for by Item 7 of this Form 10-K from the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Company's 1997 Annual Report to Stockholders for the fiscal year ended December 31, 1997 (attached as Exhibit 13.1 hereto). ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA The Company incorporates by reference the information called for by Item 8 of this Form 10-K from the Financial Statements set forth in the Company's 1997 Annual Report to Stockholders for the fiscal year ended December 31, 1997 (attached as exhibit 13.1 hereto). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors The Company incorporates by reference the information called for by Item 10 of this Form 10-K regarding directors of the Company from the section entitled "Election of Directors" of the Company's Proxy Statement for the annual meeting of stockholders to be held May 18, 1998 (the "1998 Proxy Statement") (attached as Exhibit 99.1 hereto). Section 16(a) of the Exchange Act requires that the Company's executive officers, directors and persons who own more than 10% of their Company's Common Stock file reports of ownership and changes in ownership with the Securities and Exchange Commission and with the exchange on which the Company's shares of Common Stock are traded. Such persons are also required to furnish the Company with copies of all Section 16(a) forms they file. Based solely on the Company's review of the copies of such forms, the Company is not aware that any of its directors and executive officers or 10% stockholders failed to comply with the filing requirements of Section 16(a) during the period commencing January 1, 1997 through December 31, 1997. Executive Officers The executive officers of the Company, each of whom is also currently an executive officer of the Bank and both of whom serve at the discretion of the Board of Directors, are identified below:
Name Age Positions With the Company Patrick L. Alexander 45 President and Chief Executive Officer Susan E. Roepke 58 Vice President, Secretary and Treasurer
ITEM 11. EXECUTIVE COMPENSATION The Company incorporates by reference the information called for by Item 11 of this Form 10-K from the section entitled "Executive Compensation" of the 1998 Proxy Statement, except for information contained under the headings "Compensation Committee Report on Executive Compensation" and "Performance Graph". ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Company incorporates by reference the information called for by Item 12 of this Form 10-K from the section entitled "Security Ownership of Certain Beneficial Owners" of the 1998 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company incorporates by reference the information called for by Item 13 of this Form 10-K from the section entitled "Transactions with Directors, Officers and Associates" of the 1998 Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ITEM 14(a)1 and 2. Financial Statements and Schedules MNB BANCSHARES, INC. AND SUBSIDIARIES LIST OF FINANCIAL STATEMENTS The following audited Consolidated Financial Statements of the Company and its subsidiaries and related notes and auditors' report are incorporated by reference from the Company's 1997 Annual Report to Stockholders for the fiscal year ended December 31, 1997 (attached as Exhibit 13.1 hereto). Report of Independent Public Accountants Consolidated Balance Sheets - December 31, 1997 and 1996 Consolidated Statements of Earnings - Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity - Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows - Years Ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements All schedules are omitted because they are not required or are not applicable or the required information is shown in the financial statements incorporated by reference or notes thereto. Item 14(a)3. Exhibits The exhibits required by Item 601 of Regulation S-K are included with this Form 10-K and are listed on the "Index to Exhibits" immediately following the signature page. Item 14(b). Reports on Form 8-K Reports on Form 8-K were filed on the following dates: October 22, 1997 and December 31, 1997. On October 22, 1997, a report on 8-K to report under Item 5 the signing of an Agreement and Plan of merger with Freedom Bancshares, Inc., a Kansas corporation. On December 31, 1997, a report on 8-K to report under Item 2 the acquisition of all of the issued and outstanding stock of Freedom Bancshares, Inc., a Kansas corporation. *** Upon written request to the President of the Company, P.O. Box 308, Manhattan, Kansas 66505-0308, copies of the exhibits listed above are available to stockholders of the Company by specifically identifying each exhibit desired in the request. A fee of $.20 per page of exhibit will be charged to stockholders requesting copies to cover copying and mailing costs. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MNB BANCSHARES, INC. (Registrant) By: /s/ Patrick L. Alexander President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE DATE TITLE /s/ Patrick L. Alexander March 18, 1998 President, Chief Executive Officer and Director /s/ Susan E. Roepke March 18, 1998 Chief Financial Officer, Chief Accounting Officer, and Director /s/ Brent A. Bowman March 18, 1998 Chairman of the Board /s/ Joseph L. Downey March 18, 1998 Director /s/ Rolla W. Goodyear March 18, 1998 Director /s/ Charles D. Green March 18, 1998 Director /s/ Vernon C. Larson March 18, 1998 Director /s/ Jerry R. Pettle March 18, 1998 Director /s/ Donald J. Wissman March 18, 1998 Director
INDEX TO EXHIBITS Exhibit Sequential Number Description Page No. 3.1 Articles of Incorporation of the Company- N/A Incorporated by reference from Exhibit 3.1 of the Form S-1 of the Company, as amended, filed on September 3, 1992 (Registration No. 33-51710) 3.2 Bylaws of the Company-Incorporated by N/A reference from Exhibit 3.2 of the Form S-1 of the Company, as amended, filed on September 3, 1992 (Registration No. 33-51710) 4.1 Specimen Common Stock Certificate of the N/A Company-Incorporated by Reference from Exhibit 4.1 of the Form S-1 of the Company, as amended, filed on September 3, 1994 Registration No. 33-51710) 10.1 MNB Bancshares, Inc. 1992 Stock Option N/A Plan-Incorporated by reference from Exhibit A to the Company's Proxy Statement for the Annual Meeting of Stockholders held May 17, 1994 10.2 Stock Option Agreement between the Company N/A and Patrick L. Alexander-Incorporated by reference from Exhibit 10.2 to Form 10-K dated March 26, 1994 10.3 Stock Option Agreement between the Company N/A and Vernon C. Larson-Incorporated by reference from Exhibit 10.3 to Form 10-K dated March 26, 1994 10.4 Stock Option Agreement between the Company N/A and Brent A. Bowman-Incorporated by reference from Exhibit 10.4 to Form 10-K dated March 26, 1994 10.5 Stock Option Agreement between the Company N/A and Charles D. Green-Incorporated by reference from Exhibit 10.6 to Form 10-K dated March 26, 1994 10.6 Stock Option Agreement between the Company N/A and Jerry R. Pettle-Incorporated by reference from Exhibit 10.9 to Form 10-K dated March 26, 1994 10.7 Stock Option Agreement between the Company N/A and Susan E. Roepke-Incorporated by reference from Exhibit 10.11 to Form 10-K dated March 26, 1994 10.8 Stock Option Agreement between the Company N/A and Michael R. Toy-Incorporated by reference from Exhibit 10.13 to Form 10-K dated March 26, 1994 10.9 Stock Option Agreement between the Company N/A and Dennis D. Wohler-Incorporated by reference from Exhibit 10.14 to Form 10-K dated March 26, 1994 10.10 Employment Agreement among the Company, N/A Security National Bank and Patrick L. Alexander-Incorporated by reference from Exhibit 10.15 to Form 10-K dated March 26, 1994 10.11 Security National Bank Deferred Compensation N/A Plan, dated December 21, 1994-Incorporated by reference from Exhibit 10.20 dated March 26, 1994 10.12 Agreement and Plan of Merger between the N/A Company and Auburn Security Bancshares, Inc., dated November 10, 1994-Incorporated by reference from Exhibit 2.1 to Form 8-K dated November 10, 1994 10.13 Stock Option Agreement between the Company N/A and Michael E. Scheopner,Dated May 13, 1996- Incorporated by reference from Exhibit 10.15 to Form 10-K dated March 31, 1997. 10.14 Agreement and Plan of Merger between the N/A Company and Freedom Bancshares, Inc., dated September 16, 1997-Incorporated by reference from Exhibit 2.1 to Form 8-K dated September 18, 1997. 13.1 1997 Annual Report to Stockholders of the Company for the fiscal year ended December 31, 1997 21.1 Subsidiaries of the Company 23.1 Consent of KPMG Peat Marwick LLP 27.1 Financial Data Schedule 99.1 Proxy Statement of the Company for the Annual Meeting of Stockholders to be held May 18, 1998 EXHIBIT 13.1 ANNUAL REPORT TO STOCKHOLDERS OF THE COMPANY FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 CORPORATE PROFILE MNB Bancshares, Inc. (the "Company") is a holding company which is headquartered in Manhattan, Kansas. Its wholly-owned subsidiary, Security National Bank (the "Bank"), also has its home office in Manhattan, Kansas, with branch offices operating in Auburn, Beloit, Osage City and Topeka, Kansas. The Bank is dedicated to providing quality services to its local communities and continues to originate commercial real estate and non real estate loans, small business loans, residential mortgage loans, consumer loans, home equity loans and student loans. The Company was formed on August 27, 1992 to become the holding company for Manhattan Federal Savings and Loan Association (the "Association") in the conversion of the Association from a federal mutual savings association to a national bank. The Association completed its conversion to a national bank on January 5, 1993, and operated as Manhattan National Bank. As part of that conversion, the Company became the sole stockholder of Manhattan National Bank. On April 1, 1995, the Company acquired all of the issued and outstanding stock of Auburn Security Bancshares, Inc., a one- bank holding company which owned 99% of the outstanding stock of Security State Bank, Auburn, Kansas. Subsequent to the acquisition, the Company acquired all of the remaining stock of Security State Bank. Consolidated assets acquired in this transaction were approximately $20 million. This acquisition was accounted for using the purchase method of accounting. On December 31, 1995, the Company merged and consolidated Manhattan National Bank and Security State Bank, and the resulting institution was named Security National Bank. 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, is reflected in the December 31, 1997 consolidated balance sheet. However, Freedom's results of operations are not reflected in the Company's 1997 results of operations. The common stock of the Company is listed on the Nasdaq Stock Market Small-Cap Market System under the symbol "MNBB". The newspaper abbreviation is "MNB Bn". CONTENTS Letter To Stockholders 2 Selected Financial and Other Data 4 Management's Discussion and Analysis 5 Independent Auditors' Report 17 Consolidated Financial Statements 18 Notes to Consolidated Financial Statements 22 Corporate Information 32 TO OUR STOCKHOLDERS, CUSTOMERS AND FRIENDS I am excited to report once again that your Company has experienced another record-breaking year in 1997. Net earnings exceeded $1 million, which resulted in a return on average assets of 1.03%. Cash dividends continued at the rate of fifty cents per share, twenty-five cents per share as adjusted for the 1998 two-for-one stock split, and we also continued our annual five percent stock dividend. We opened a new banking facility in Topeka, Kansas and acquired Freedom Bancshares, Inc., with banks in Osage City and Beloit, Kansas. Total assets grew to approximately $144.8 million. Finally, reflecting our continued growth and profitability, a two- for-one stock split was declared in January of 1998 and paid in February. All of these significant achievements reflect the growth and success of your Company. This success continues to strengthen our resources and allows us to gain increased momentum in the delivery of financial services in a community bank environment. All of this translates into enhanced value for you, our stockholders. Net earnings for the year grew to $1.1 million, or diluted earnings per share of $1.61 ($.81 adjusted for the stock split). This increase was driven by growth in net interest income to $3.9 million in 1997 versus $3.6 million in 1996, an increase of 7.5%. Noninterest income remained steady at $690,000. Exclusive of the FDIC assessment recorded in 1996 to recapitalize the insurance fund, noninterest expense rose a modest $193,000 in 1997 due in large part to the opening of the Topeka branch in May, 1997. These financial performance achievements are the result of the efficiencies we have garnered as we have integrated our bank facilities into one comprehensive organization. This concentration of effort allows us to remain focused on the person- to-person delivery of community banking services to our customers. The ability of our customers to deal with decision makers allows us to continue diversifying our balance sheet to have less dependence on residential real estate lending and increasing emphasis on consumer and commercial lending. Additionally, we continue to grow and expand our core deposit base which provides us with lower-cost funds and loyal customers. We are extremely excited about the reception Security National Bank has received in the Topeka, Kansas market. On May 5, 1997, we opened a de novo branch at the commercial hub of 21st and Wanamaker Streets in Topeka. Normally, the expense associated with opening a new facility would decrease a company's performance in its first year of operation. The Topeka bank, however, was virtually a turnkey operation and our physical facility and occupancy costs were minimal. Since opening its doors, the Topeka branch has performed extremely well and has generated over $5 million of commercial and consumer loans and approximately $2 million in deposits. We are very pleased by these results and the commitment of our staff to making our Topeka presence grow and be felt throughout the Topeka marketplace. We look for this momentum to continue to accelerate in 1998. Adding to our growth and enthusiasm in the northeast Kansas market was our year-end acquisition of Freedom Bancshares, Inc., the holding company for Citizens State Bank, Osage City, Kansas. With approximately $43 million in assets, Citizens State Bank had the dominant banking market share in Osage City. The acquisition of Citizens State Bank, now a part of Security National Bank, provides us with another attractive community bank that will complement our efforts in Topeka and Auburn. The former Citizens State Bank staff will provide us with continuity in the Osage City market, and the resources of Security National Bank will allow for improved delivery of financial services to the community. Additionally, the acquisition of this bank via an all-cash transaction allowed us to further leverage our balance sheet and provide a better allocation of our capital resources in order to achieve an improved return on equity for our stockholders. Over the last three years, your Company has doubled in size from $77.8 million to $144.8 million in total assets. Net earnings have increased from $655,000 to $1.1 million. This dramatic increase in assets and earnings was accomplished without corresponding incremental increases in our managerial infrastructure. In order to continue to achieve our goals of sustained asset and earnings growth, it will be necessary to add to our managerial resources and talent pool. We plan to selectively and carefully augment our managerial resources in order to continue our growth and expansion efforts. Although the attraction of top- quality banking talent is not an inexpensive venture, we feel that this investment will pay handsome dividends in the long-term growth and profitability of the Company. There has been much media coverage recently regarding the Year 2000 and the impact this event will have on data processing in general and banking in particular. Year 2000 issues have been given the highest priority and are being vigorously addressed by your Company's senior management group. Resources have been dedicated to the timely and thorough resolution of any Year 2000 compliance issues. 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 we know there will be some expense associated with remediation of any existent problems, at this time we have not identified any situations that will require material cost expenditures to become fully compliant. We are also communicating with key bank customers to evaluate whether they are properly prepared for the Year 2000 and will not suffer serious adverse consequences. MNB Bancshares, Inc. is extremely well positioned to continue the growth and successes of the past several years. There are more than 400 banks in the state of Kansas. Most are family owned and have management succession issues which need to be addressed. We feel these families will be more comfortable joining our community- oriented organization than selling out to a large, possibly out-of-state based institution. The trend in the banking industry is toward consolidation and increasing size in order to compete effectively. As one of only two publicly traded bank holding companies domiciled in Kansas, we are extremely excited about the potential and prospects for continued growth and acquisitions. It is imperative that we continue to expand, but we do not intend to do so to the detriment of our existing stockholder base. We will continue to look for strategic acquisitions that will enhance our market presence and create value for our stockholders. We feel we have a banking strategy that will accomplish that goal. As we continue to grow, we will not lose sight of the importance and value of maintaining and developing relationships with our customers. We will stay focused on the delivery of financial services to our customers in a community bank setting. Our customers will continue to be able to deal with professional bankers who can answer their questions and provide solutions to their financial services needs. We must continue to differentiate ourselves as a community bank that is quick, flexible, innovative and responsive. People have been the key ingredient to our past successes and will continue to be the key to our future. I would like to personally thank all of our associates whose efforts have brought about your Company's successes. I would also like to thank our customers who have placed their confidence in us to meet their banking needs. Finally, I would like to thank you, our stockholders, for your investment and belief in our efforts and our vision. I am excited about our opportunities and prospects for the future. Sincerely, Patrick L. Alexander President and Chief Executive Officer
SELECTED FINANCIAL AND OTHER DATA OF MNB BANCSHARES, INC. At or for the years ended December 31, 1997 1996 1995 1994 1993 (Dollars in thousands, except per share amounts and percentages) Selected Financial Data: Total assets $144,752 $103,420 $101,185 $77,797 $80,265 Loans, net (1) 88,724 62,549 62,582 51,882 50,141 Mortgage-backed securities 11,401 11,734 8,717 5,569 5,098 Deposits 122,209 86,710 86,399 61,440 61,351 Borrowings 9,099 3,615 2,881 6,694 9,130 Stockholders' equity 12,276 11,334 10,810 9,114 8,702 Book value per share (2) 9.56 8.92 8.51 7.93 7.60 Selected Operating Data: Total interest income $ 7,929 $ 7,670 $ 7,051 $ 5,411 $ 5,513 Total interest expense 4,038 4,049 3,820 2,788 3,060 Net interest income 3,891 3,621 3,231 2,623 2,453 Provision for loan losses 60 15 40 5 75 Net interest income after provision for loan losses 3,831 3,606 3,191 2,618 2,378 Gains on sales of loans 99 75 95 79 389 Other noninterest income 591 608 432 264 198 Total noninterest income 690 683 527 343 587 Total noninterest expense 2,977 3,233 2,618 1,869 1,884 Income tax expense 471 339 347 398 413 Net earnings before extraordinary item 1,073 717 753 694 668 Extraordinary item 0 0 0 39 0 Net earnings $ 1,073 $ 717 $ 753 $ 655 $ 668 Net earnings per share before extraordinary item (2): Basic .84 .56 .61 .61 .59 Diluted (3) .81 .54 .59 .60 .59 Net earnings per share (2): Basic .84 .56 .61 .58 .59 Diluted (3) .81 .54 .59 .57 .59 Dividends per share (2) .25 .15 .11 .11 .08 Other Data: Return on average assets 1.03% 0.70% 0.78% 0.82% 0.86% Return on average equity 9.18 6.54 7.48 7.39 7.99 Equity to total assets 8.48 10.96 10.68 11.72 10.84 Net interest rate spread (4) 3.49 3.28 3.02 2.96 2.86 Net yield on average interest-earning assets (5) 3.89 3.67 3.55 3.38 3.23 Average interest-earning assets to average interest-bearing liabilities 109.82 109.56 112.58 111.67 109.30 Other expenses to average assets 2.86 3.15 2.71 2.34 2.42 Nonperforming loans to total loans 0.19 0.22 0.06 0.40 0.28 Net charge-offs to average loans 0.01 0.03 0.01 0.06 0.07 Nonperforming assets to total assets 0.21 0.16 0.04 0.33 0.24 Dividend payout ratio 31.00 27.43 19.08 18.94 13.02 Number of full service banking offices 5 2 2 1 1 (1) Loans are presented after adjustments for undisbursed loan funds, unearned fees and discounts and the allowance for losses. (2) All per share amounts have been adjusted to give effect to the 5% stock dividends paid by the Company in 1997, 1996, 1995 and 1994 and the February, 1998 two-for-one stock split. (3) Diluted net earnings per share, before FDIC special assessment (net of tax) was $0.76 in 1996. (4) Represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (5) Represents net interest income as a percentage of average interest- earning assets.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW MNB Bancshares, Inc. (the "Company") is a one-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"). On December 31, 1995, the Company merged and consolidated its two banking subsidiaries, Manhattan National Bank and Security State Bank, to form Security National Bank. On December 31, 1997, the Company acquired Freedom Bancshares, Inc. ("Freedom"), Osage City, the holding company for Citizens State Bank, Osage City, Kansas, ("Citizens"), with a branch in Beloit, Kansas. Consolidated assets acquired in this transaction were approximately $43 million and are reflected in the December 31, 1997 consolidated balance sheet. This acquisition, which was accounted for using the purchase method of accounting, is reflected in the December 31, 1997 consolidated balance sheet. However, Freedom's results of operations are not reflected in the Company's 1997 results of operations. The Company had record net earnings of $1.1 million in 1997, an increase of $356,014, or 49.7%, over 1996. The return on average assets was 1.03% compared to .70% in 1996. Return on average equity was 9.18% and diluted net earnings per share was $1.61. Based on this financial performance, the Board of Directors declared dividends of fifty cents per share in 1997, a five percent stock dividend in May, and in February, 1998, a two-for-one stock split was paid to stockholders of record on January 28, 1998. 1997 earnings per share, adjusted for this stock split, was $.81. Adjusted dividends per share, was $.25 in 1997. The tradition of quality assets continues and management's ongoing strategy to diversify the deposit and loan portfolios in order to increase profitability in the future has been successful. Focusing on customers' needs and the development of full-service banking relationships has been instrumental to the Company's success. Management believes that the strong capital position of the Company puts it on solid ground and provides an excellent base for further growth and expansion. The Bank is principally engaged in the business of attracting deposits from the general public and using such deposits, together with borrowings and other funds, to originate commercial and consumer loans, multi-family residential mortgage loans and one-to-four family residential mortgage loans. Deposits of the Bank are insured by both the Savings Association Insurance Fund (the "SAIF") and the Bank Insurance Fund (the "BIF") of the Federal Deposit Insurance Corporation (the "FDIC") up to the maximum amount allowed by applicable federal law and regulation. The Bank's primary regulator is the Office of the Comptroller of the Currency (the "OCC"). Additionally, the Bank is subject to regulation by the FDIC, as administrator of the SAIF and the BIF and by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") with respect to reserves required to be maintained against deposits and certain other matters. The Bank is a member of the Federal Home Loan Bank of Topeka (the "FHLB") and the Federal Reserve Bank of Kansas City. As a bank holding company, the Company is subject to regulation and supervision by the Federal Reserve Board. The Company is also subject to various reporting and other requirements under the federal securities laws and the regulations of the Securities and Exchange Commission (the "SEC"). Currently, the Company's business consists of ownership of the Bank, with its main office in Manhattan and branch offices in Auburn, Beloit, Osage City and Topeka, Kansas. In January of 1997, the Bank acquired the Goodyear Insurance Agency of Auburn, Kansas. This acquisition allows the Bank to offer a full line of insurance products to its entire customer base. The Company plans to continue to expand and enter complementary markets in an effort to enhance its asset base, long-term earnings, and resources. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 GENERAL. Net earnings for 1997 increased 49.7% to $1.1 million from $716,530 in 1996. In 1996, the Company had an expense of $449,000, a one-time assessment to recapitalize the SAIF of the FDIC. Absent this expense, net earningswould have been $1.0 million in 1996. Net interest income increased $270,400 or 7.5% to $3.9 million compared to $3.6 million in 1996. Gains on sale of loans increased 31.7%, or $23,931, to $99,381, while fees and service charges decreased $10,225, or 2.0%, to $506,899. Non-interest expense increased $193,389, exclusive of the FDIC special assessment recorded in 1996, or 6.9%, to $3.0 million. This increase was due in large part to the opening of the new branch facility in Topeka in May, 1997. INTEREST INCOME. Interest income increased $258,961, or 3.4% to $7.9 million from $7.7 million in 1996. Average interest- earning assets increased from $98.7 million in 1996 to $100.1 million in 1997. The average yield on interest-earning assets increased slightly from 7.8% to 7.9% in 1997. Interest income on loans increased $175,174, or 3.1%, to $5.9 million. The increase in interest income on loans was higher due to both an increase in average loans outstanding and loans which repriced at higher rates. Interest earned on securities increased as securities matured and the proceeds were reinvested in higher yielding securities. Loans on one-to-four family residences held in the portfolio increased 8.9% to $36.5 million from $33.5 million while commercial real estate increased 78.0% to $25.5 million from $14.3 million. Additionally, consumer, student and non- mortgage commercial loans outstanding at December 31, 1997 increased 77.2% to $27.5 million from $15.5 million. Prior to the Freedom acquisition, loans on one-to-four family residences held in the portfolio decreased 11.4% to $29.7 million from $33.5 million. Commercial real estate loans increased from $14.3 million to $17.5 million, or 22.2%, and consumer and commercial non-mortgage loans increased 14.2% from $15.5 million to $17.7 million. Interest income on investment and mortgage-backed securities increased 4.3% to $2.1 million from $2.0 million in 1996. INTEREST EXPENSE. Interest expense decreased $11,439, or 0.3%, compared to 1996. Deposit interest expense remained level at $3.9 million in 1997. Interest on borrowings, consisting of advances from the FHLB, declined 1.3% to $186,822, despite an increase in the average balances from $2.7 million to $3.2 million. Freedom had borrowings from the FHLB of $2.9 million which the Company assumed, and the Company also borrowed an additional $2.9 million for the Freedom acquisition. These amounts contributed to the increased total borrowings of $9.1 million at December 31, 1997. NET INTEREST INCOME. Net interest income represents the difference between income derived from interest-earning assets and the expense on interest-bearing liabilities. Net interest income is affected by both (i) the difference between the rates of interest earned on interest-earning assets and the rates paid on interest-bearing liabilities ("interest rate spread") and (ii) the relative amounts of interest-earning assets and interest- bearing liabilities. Net interest income increased to $3.9 million in 1997 compared to $3.6 million in 1996. This was the result of the yield on interest-earning assets increasing slightly from 7.8% in 1996 to 7.9% in 1997, while the cost of interest-bearing liabilities decreased from 4.5% in 1996 to 4.4% in 1997. The Company's ratio of interest-earning assets to interest- bearing liabilities increased to 109.8% in 1997 versus 109.6% in 1996, which also contributed to the net interest margin increasing from 3.7% in 1996 to 3.9% in 1997. PROVISION FOR LOAN LOSSES. The provision for loan losses increased from $15,000 during 1996 to $60,000 in 1997. At December 31, 1997, the allowance for loan losses was $1.3 million, which was 1.5% of gross loans outstanding. The acquisition of Freedom caused the allowance for loan losses to increase by $461,389 as Freedom's allowance for loan losses was combined with the Company's allowance. At December 31, 1996, the ratio of the allowance to gross loans outstanding was 1.3%. No provision for loan losses was made during the first nine months of 1996. After reviewing the portfolio and completing an economic analysis, a provision of $5,000 per month was resumed during the fourth quarter of 1996 and continued in 1997. This was due to the Bank's plans to expand its commercial lending activities. At the same time, new guidelines for credit risk evaluation and documentation were created and implemented in response to the Bank's plans to increase its commercial loan portfolio. These factors will continue to be assessed and further changes in the provision will be made if circumstances warrant such changes. Net charge-offs in 1997 were $6,025, compared to $21,704 in 1996. NONINTEREST INCOME. Noninterest income increased 1.0% to $690,109 in 1997 from $683,297 in 1996. The increase resulted from an increase of 31.7% in gains on sale of loans from $75,450 in 1996 to $99,381 in 1997. The decrease of 7.6% to $83,829 for other income included a receipt of $69,808 in 1996 in interest on an income tax refund for tax years of 1978 and 1979. Absent this refund, other noninterest income would have increased $62,914, or 300.8%. These increases were partially offset by a decrease in fees and service charge income of $10,225 from $517,124 to $506,899, or 2.0%, and a loss on sale of investment securities available for sale of $21,309 as the Company sought to reposition its portfolio and lengthen its maturities. Some lower-yield, short-term securities were sold and the proceeds reinvested in intermediate maturity securities with higher yields.
Noninterest Income: 1997 1996 1995 Fees and service charges $506,899 $517,124 $391,314 Gains on sales of loans 99,381 75,450 95,425 Other 83,829 90,723 39,921 Total noninterest income $690,109 $683,297 $526,660
NONINTEREST EXPENSE. Noninterest expense decreased $255,611, or 7.9%, to $3.0 million, primarily due to the $449,000 one-time 1996 FDIC assessment. Stationery, printing and office supplies decreased $14,516, or 17.0%, as a result of the change of name and the consolidation of the bank subsidiaries in 1996. Additionally, there were decreases in professional fees of $33,033, or 21.9%, from $151,041 in 1996 to $118,008 in 1997, and regular FDIC premiums from $121,633 in 1996 to $47,116, or 61.3% in 1997. Partially offsetting these decreases was a 14.4% increase in occupancy and equipment expense to $431,110 in 1997 from $376,823 in 1996, due in large part to the new Topeka branch facility opened in May. Compensation and benefits increased from $1.2 million in 1996 to $1.4 million, also largely due to the new branch. Other operating expenses increased $70,833, or 11.8%. AVERAGE ASSETS/LIABILITIES. The following table sets forth information relating to average balances of interest-earning assets and interest-bearing liabilities for the years ended December 31, 1997, 1996 and 1995. This table reflects the average yields on assets and average costs of liabilities for the periods indicated (derived by dividing income or expense by the monthly average balance of assets or liabilities, respectively) as well as the "net interest margin" (which reflects the effect of the net earnings balance) for the periods shown.
AVERAGE BALANCE SHEETS-AVERAGE YIELDS AND RATES Year Ended 12/31/97 Year Ended 12/31/96 Year Ended 12/31/95 Average Average Average Average Average Average Bal Int Yield/ Bal Int Yield/ Bal Int Yield/ Rate Rate Rate Assets: Interest-earning assets: Investment securities (1) $23,232 $1,292 5.56% $26,149 $1,385 5.30% $24,914 $1,331 5.34% Mortgage- backed and mortgage- derivative securities 11,769 758 6.44 8,609 581 6.75 6,541 432 6.60 Loans receivable, net (2) 65,057 5,879 9.04 63,894 5,704 8.93 59,603 5,288 8.87 Total interest- earning assets 100,058 7,929 7.92 98,652 7,670 7.77 91,058 7,051 7.74 Noninterest- earning assets 4,111 4,065 5,415 Total $104,169 $102,717 $96,473 Liabilities and Stockholders' Equity: Interest-bearing liabilities: Certificates of deposit $46,666 $2,642 5.66% $47,113 $2,638 5.60% $47,062 $2,566 5.45% Money market deposits 15,378 578 3.76 15,984 594 3.71 10,102 466 4.61 Other deposits 25,847 631 2.44 24,203 628 2.59 20,599 557 2.70 FHLB advances and other borrowings 3,221 187 5.81 2,746 189 6.88 3,122 231 7.40 Total interest- bearing liabilities 91,112 4,038 4.43 90,046 4,049 4.49 80,885 3,820 4.72 Noninterest- bearing liabilities 1,375 1,715 5,519 Stockholders' equity 11,682 10,956 10,069 Total $104,169 $102,717 $96,473 Net interest income $3,891 $3,621 $3,231 Interest rate spread (3) 3.49% 3.28% 3.02% Net interest margin (4) 3.89% 3.67% 3.55% Ratio of average interest-earning assets to average interest-bearing liabilities 109.82% 109.56% 112.58% (1) Income on investment securities includes all securities, interest bearing deposits in other financial institutions and stock owned in the FHLB and the Federal Reserve. (2) Includes non-accrual loans. (3) Interest rate spread represents the difference between the average rate on interest-earning assets and the average cost of interest-bearing liabilities. (4) Net interest margin represents net interest income divided by average interest-earning assets.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 GENERAL. Net earnings for 1996 decreased 4.9% to $716,530 from $753,406 in 1995. Contributing to this decrease was an expense of $449,000 for the Company's one- time special assessment to fund the FDIC's recapitalization of the SAIF as mandated by the Omnibus Appropriations Bill which was signed into law on September 30, 1996. Absent this expense, earnings, net of tax would have been $1,006,032, an increase of $252,626, or 33.5%, over 1995. Net interest income after provision for loan losses increased $414,640 or 13.0% to $3,605,759. Gains on sale of loans decreased 20.9%, or $19,975, to $75,450, while fees and service charges increased $125,810, or 32.2%, to $517,124. Non- interest expense increased $615,366, or 23.5%, to $3,233,192. A major factor in the increase of both net interest income and fees and service charges was that operating results of Auburn were not reflected in the Company's results for the first quarter of 1995. The acquisition of Auburn also contributed to the increase in noninterest expense, along with one-time expenses of approximately $60,000 associated with the consolidation of the subsidiary as well as the FDIC special assessment. INTEREST INCOME. Interest income increased $619,146, or 8.8% to $7.7 million. Average interest-earning assets increased from $91.1 million in 1995 to $98.7 million in 1996. The average yield on interest- earning assets increased slightly from 7.7% to 7.8% in 1996. Interest income on loans increased $.4 million, or 7.9% to $5.7 million. The increase in interest income on loans was higher due to both an increase in average loans outstanding and loans which repriced at higher rates. Interest earned on securities increased as securities matured and the proceeds were reinvested in higher yielding securities. Loans on one-to-four family residences held in the portfolio decreased 1.4% to $33.5 million from $34.0 million while commercial real estate increased 9.2% to $14.3 million. Additionally, consumer, student and non-mortgage commercial loans outstanding at December 31, 1996 decreased 1.6% to $15.5 million from $15.8 million. Interest income on investment and mortgage-backed securities increased 11.5% to $2.0 million from $1.8 million in 1995. INTEREST EXPENSE. Interest expense increased $229,256, or 6.0%, compared to 1995. This increase was due in large part to a full year of expense at the Auburn facility and increased balances of interest-bearing liabilities. Deposit interest expense increased from $3.6 million in 1995 to $3.9 million in 1996, or 7.6%, due to an increase in average interest-bearing deposits of $9.5 million. Interest on borrowings, consisting of advances from the FHLB, declined 18.1% to $189,312, as these average balances outstanding declined $376,000. NET INTEREST INCOME. Net interest income represents the difference between income derived from interest-earning assets and the expense on interest-bearing liabilities. Net interest income is affected by both (i) the difference between the rates of interest earned on interest-earning assets and the rates paid on interest-bearing liabilities ("interest rate spread") and (ii) the relative amounts of interest-earning assets and interest- bearing liabilities. Net interest income increased 12.1% to $3.6 million in 1996 compared to $3.2 million in 1995. This was the result of the yield on interest-earning assets remaining steady at approximately 7.7% while the cost of interest-bearing liabilities decreased from 4.7% to 4.5%. The Company had a ratio of interest- earning assets to interest-bearing liabilities of 109.6% in 1996 which resulted in the net interest margin increasing from 3.6% in 1995 to 3.7% in 1996. PROVISION FOR LOAN LOSSES. The provision for loan losses decreased from $39,750 in 1995 to $15,000 in 1996. At December 31, 1996, the allowance for loan losses was $819,660, which was 1.3% of gross loans outstanding. At December 31, 1995, this ratio was also 1.3%. No provision for loan losses was made during the first nine months of 1996. After reviewing the portfolio and completing an economic analysis, a provision of $5,000 per month was resumed during the fourth quarter of 1996. This was due to the Bank's plans to expand its commercial lending activities. At the same time, new guidelines for credit risk evaluation and documentation were created and implemented in response to the Bank's plans to increase its commercial loan portfolio. Net charge-offs in 1996 were $21,704, compared to $4,835 in 1995. NONINTEREST INCOME. Noninterest income increased 29.7% to $683,297 in 1996 from $526,660 in 1995. The increase resulted from an increase of 32.2% in fees and service charges for deposit accounts and fees on loans to $517,124 from $391,314 in 1995 as a result of the acquisition of Auburn and a restructuring of fees and service charges on deposit accounts. The increase of 127.3% to $90,723 for other income includes the receipt of $69,808 in interest on an income tax refund for tax years of 1978 and 1979. This increase was partially offset by a decrease in the gains on sale of loans of $19,975 from $95,425 to $75,450, or 20.9%, and a loss of sale of investment securities available for sale of $15,213 as the Company sought to reposition its portfolio and lengthen its maturities. Some lower-yield, short- term securities were sold and the proceeds reinvested in intermediate securities. NONINTEREST EXPENSE. Noninterest expense increased $615,366, or 23.5%, to $3.2 million. Of this amount, $449,000 was attributable to the FDIC assessment. The inclusion of Auburn's operating results for the full year and several one-time expenses totaling approximately $60,000 due to consolidation of the subsidiary also contributed to this increase. The amortization of goodwill and core deposit intangibles related to the acquisition of Auburn increased $30,052, or 36.6%. Stationery, printing and office supplies increased $25,886, or 43.5%, as a result of the change of name and the consolidation of the bank subsidiaries. Occupancy and equipment expense increased 20.7% to $376,823 from $312,224 as the Auburn acquisition was reflected for the entire year and several one-time expenses were incurred during the conversion of the Auburn branch to the same data processing system as the main Manhattan facility. Other expenses increased $27,806, or 4.8%, also reflecting the acquisition. Partially offsetting these increases were decreases in advertising from $75,078 to $61,151, or by 18.6%. Absent the special assessment of $449,000, FDIC premiums decreased $39,395 as a refund of the premium for the fourth quarter was received as a result of the recapitalization of the SAIF fund. CAPITAL RESOURCES AND LIQUIDITY ASSETS. The Company's total assets increased to $144.8 million at December 31, 1997 compared to $103.4 million at December 31, 1996. This significant increase was largely due to the December 31, 1997 acquisition of Freedom. The primary ongoing sources of funds of the Company are deposits, proceeds from principal and interest payments on loans and mortgage backed securities and proceeds from the sale of mortgage loans and mortgage backed 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 years ended December 31, 1997, 1996 and 1995, the Company originated mortgage loans in the amounts of $30 million, $29 million and $20 million, respectively. Mortgage loans originated for retention in the Company's portfolio, which includes commercial real estate loans, amounted to $16.0 million, $19.9 million and $9.5 million, for the years ended December 31, 1997, 1996 and 1995, respectively. The balance of the loans originated were sold in the secondary market. Generally, the Company originates fixed rate mortgage loans for immediate sale and does not originate and warehouse those loans for resale in order to speculate on interest rates. During the years ended December 31, 1997, 1996 and 1995, the Company originated a total of consumer, commercial non-mortgage, and guaranteed student loans of approximately $19.3 million, $11.1 million and $9.4 million, respectively. Management will continue its efforts to diversify the loan portfolio. The quality of the loan portfolio continues to be strong. As of December 31, 1997, eight real estate loans were more than 30 days past due with a total balance of $223,970, which is 0.3% of total loans outstanding. Additionally, four residential loans totaling $38,601 were on non-accrual status as of December 31, 1997. Excluding guaranteed student loans, there were twenty-four consumer loans over 30 days past due in the amount of $115,363, which was 0.1% of total loans outstanding, and nine loans totaling $39,243 were on non-accrual. Six commercial loans totaling $54,566, or 0.1% of total loans outstanding, were over 30 days past due, and six loans totaling $94,657 were on non-accrual. During the years ended December 31, 1997, 1996, and 1995, the Company purchased securities to be held-to-maturity and available-for-sale in the amounts of $9.3 million, $15.6 million and $16.1 million, respectively. This was funded primarily by deposits and maturities of existing securities
LOAN PORTFOLIO COMPOSITION COMPARISON Balance Balance (after (before % Change acquisition) acquisition) Balance (after Type 12/31/97 12/31/97 12/31/96 acquisition) 1-4 Family Residential $36,474,564 $29,683,874 $33,498,175 8.89% Commercial Real Estate 25,470,886 17,486,395 14,311,542 77.97% Consumer & Commercial Non-Mortgage 27,549,571 17,474,473 15,544,832 77.23% $89,495,021 $64,917,743 $63,354,549
LIABILITIES. Interest-bearing liabilities at December 31, 1997 totaled $118.4 million. This increased from $85.1 million at December 31, 1996 due to the Freedom acquisition. The deposit base continues to diversify consistent with management's overall efforts to lower interest costs. Noninterest-bearing demand deposits increased $7.6 million from December 31, 1996 to $12.9 million, or 10.6% of total deposits at December 31, 1997. NOW account deposits increased $6.1 million to $21.3 million at the end of 1997 from $15.2 million at December 31, 1996 and represented 17.4% of the deposit base at December 31, 1997. Money market accounts increased $4.9 million to $18.7 million in 1997 compared to $13.8 million in 1996 and remained steady at 15.3% of the portfolio. Savings accounts remained steady at 5.7% and certificates of deposit represented 51.0% of the deposit base at December 31, 1997, compared to 54.6% of the deposit base at the end of 1996. The acquisition of Freedom was responsible for most of the increases.
DEPOSIT PORTFOLIO COMPOSITION COMPARISON Balance Balance (after (before % Change acquisition) acquisition) Balance (after Type 12/31/97 12/31/97 12/31/96 acquisition) DDA $ 12,882,942 $ 9,585,815 $ 5,260,221 144.91% NOW 21,299,194 13,946,563 15,151,441 40.58% MMDA 18,671,116 14,674,565 13,784,369 35.45% Savings 6,974,204 4,850,860 5,162,275 35.10% Certificates 62,381,081 45,087,425 47,351,374 31.74% $122,208,537 $88,145,228 $86,709,950
Certificates of deposit at December 31, 1997, which were scheduled to mature in one year or less totaled $41.7 million. Historically, maturing deposits have remained and management believes that a significant portion of the deposits maturing in one year or less will remain with the Company upon maturity. CASH FLOWS. Cash flows used in operating activities was $110,458 for the year ended December 31, 1997, compared to cash flows provided by operating activities of $2.4 million in 1996. Net cash used in investing activities was $1.1 million in 1997 compared to $1.6 million in 1996, exclusive of the December 31, 1997 acquisition of Freedom. Net loans increased approximately $1.5 million in 1997 versus an increase of $485,488 in 1996. Maturities and prepayments of investment securities held-to-maturity were $4.6 million in 1997 versus $6.9 million in 1996. No purchases of securities held-to-maturity were made in 1997 compared to $898,789 in 1996. Purchases of securities available-for-sale in 1997 were $9.3 million compared to $14.7 million in 1996. Net cash provided by financing activities was $3.4 million in 1997 compared to $893,716 provided in 1996. Exclusive of the acquisition, deposits increased $1.4 million in 1997 compared to $310,507 in 1996 and FHLB advances decreased $800,000 in 1997 compared to an increase of $775,000 in 1996. In addition, $2.9 million of a $3.5 million line of credit was borrowed by the Company to finance the purchase of Freedom. LIQUIDITY. The Company's most liquid assets are cash and cash equivalents and investment securities available-for-sale. The levels of these assets are dependent on the Company's operating, financing, lending and investing activities during any given period. At December 31, 1997 and 1996 these assets totaled $42.1 million and $27.7 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 strategy. Excess funds are generally invested in short-term investments. In the event that 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 December 31, 1997, the Company had outstanding FHLB advances of $5.4 million, and no borrowings were outstanding on its $15.0 million line of credit with the FHLB. FHLB borrowings of $2.9 million were acquired in the Freedom acquisition. Additionally, the Company has guaranteed a loan made to the Company's Employee Stock Ownership Plan (the "ESOP") with a balance at December 31, 1997 of $271,187. The loan was made to fund the ESOP's purchase of shares in the Company's common stock offering in 1994. The total borrowings by the Company were $9.1 million at December 31, 1997 compared to $3.6 million at December 31, 1996. This includes the $2.9 million borrowed by the Company for the acquisition of Freedom. At December 31, 1997, the Company had outstanding loan commitments of $15.5 million. Management anticipates that sufficient funds will be available to meet current loan commitments. These commitments consist of letters of credit, unfunded lines of credit and commitments to finance real estate loans. The following table shows the commitments outstanding for each category. LOAN COMMITMENTS Amount Letters of credit $591,400 Unfunded lines of credit 11,358,647 Real Estate Loans: Construction 3,104,719 Purchases 450,075 Total $15,504,841 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 (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 $12.3 million is, however, well in excess of the Federal Reserve Board's consolidated minimum capital requirements. At December 31, 1997, the Bank continued to maintain a sound Tier 1 capital ratio of 11.70% and a risk based capital ratio of 15.74%. As shown by the following table, the Bank's capital exceeded the minimum capital requirements: (dollars in thousands) Amount Percent Required Tier 1 Leverage Capital $12,109 11.70% 4.00% Risk Based Capital $13,153 15.74% 8.00% 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 establishes 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. DIVIDENDS During 1997, dividends of $.25 per share were paid to the stockholders and a 5% stock dividend was paid May 15, 1997 to all stockholders of record on May 1, 1997. The cash dividend is an increase of $.10 per share over 1996 which was $.15 per share. In addition, a two-for-one stock split was paid February 9, 1998, to stockholders of record January 28, 1998. The National Bank Act imposes limitations on the amount of dividends that a national bank may pay without prior regulatory approval. Generally, the amount is limited to the bank's current year's net earnings plus the adjusted retained earnings for the two preceding years. The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations. As described above, the Bank exceeded its minimum capital requirements under applicable guidelines as of December 31, 1997. As of December 31, 1997, approximately $869,000 was available to be paid as dividends to the Company by the Bank. RECENT ACCOUNTING DEVELOPMENTS The Company will adopt Statement of Financial Accounting Standard (SFAS) Nos. 125 and 127 relating to transfers and servicing of financial assets and extinguishments of liabilities during 1997 and 1998, according to the required implementation dates. SFAS No. 125, adopted January 1, 1997, did not have a material effect on the financial statements. The adoption of SFAS No. 127 is not expected to have a material effect on the financial statements. SFAS No. 130, "Reporting Comprehensive Income", requires the reporting of comprehensive income and its components in the fiscal 1998 financial statements. 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 most significant component of other comprehensive income is unrealized holding gains and losses on available for sale securities. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", requires reporting about operating segments, products and services, geographic areas and major customers. Its objective is to provide information about the different types of business activities and economic environments in which businesses operate. The adoption of SFAS No. 131 is not expected to require any additional disclosure in fiscal 1998. EFFECTS OF INFLATION The Company's financial statements and accompanying footnotes have been prepared in accordance with GAAP (generally accepted accounting principles), which generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation can be found in the increased cost of the Company's operations because the assets and liabilities of the Company are primarily monetary and interest rates have a greater impact on the Company's performance than do the effects of inflation. YEAR 2000 COMPLIANCE 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 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 will require material cost expenditures to become fully compliant. An unknown element at this time is the impact of the Year 2000 on the Company's borrowing customers and their ability to repay. The Company has initiated a program to communicate with key bank customers to evaluate whether they are properly prepared for the Year 2000 and will not suffer serious adverse consequences. ASSET/LIABLILITY MANAGEMENT Since the mid 1980s, the Bank has emphasized the origination of adjustable rate mortgages for portfolio retention along with shorter-term consumer and commercial loans to reduce the sensitivity of its earnings to interest rate fluctuations. Interest rate "gap" analysis is a common, though imperfect, measure of interest rate risk which measures the relative dollar amounts of interest- earning assets and interest bearing liabilities which reprice within a specific time period, either through maturity or rate adjustment. The "gap" is the difference between the amounts of such assets and liabilities that are subject to such repricing. A "positive" gap for a given period means that the amount of interest-earning assets maturing or otherwise repricing within that period exceeds the amount of interest-bearing liabilities maturing or otherwise repricing during that same period. In a rising interest rate environment, an institution with a positive gap would generally be expected, absent the effects of other factors, to experience a greater increase in the yield of its assets relative to the cost of its liabilities. Conversely, the cost of funds for an institution with a positive gap would generally be expected to decline less quickly than the yield on its assets in a falling interest rate environment. Changes in interest rates generally have the opposite effect on an institution with a "negative" gap. Following is the "static gap" schedule for the Company. All loans are based on scheduled repricing, with no prepayment assumptions. All assets are reflected at amortized cost. Certificates of deposit reflect contractual maturities only. Money market accounts are rate sensitive and have been included as repricing immediately in the first period. Savings and NOW accounts are not as rate sensitive as money market accounts and for that reason are not included in the calculation. The Company has been successful in meeting the interest sensitivity objectives set forth in its policy. This has been accomplished primarily by managing the assets and liabilities while maintaining the traditional high credit standards of the Company. The Company also evaluates its interest rate risk position using simulation models. Such models are prepared using a variety of assumptions and interest rate scenarios. 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. At December 31, 1997, the simulation model indicates the impact of an immediate 100 basis point rise or fall in interest rates would be approximately 1% of net interest income. Management believes the Company 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.
At December 31, 1997 (dollars in thousands) More than More than 3 months 3 to 6 6 to 12 1 to 3 3 to 5 Over or less months months years years 5 years Total Interest-earning assets: Overnight investments $ 4,576 $ 0 $ 0 $ 0 $ 0 $ 0 $ 4,576 Investment securities 6,268 5,110 5,159 20,161 4,241 1,140 42,079 Loans 21,727 12,411 22,789 16,267 5,460 11,599 90,253 Total interest- earning assets $32,571 $17,521 $27,948 $36,428 $9,701 $12,739 $136,908 Interest- bearing liabilities Certificates of deposit $16,955 $ 8,466 $16,298 $17,115 $3,218 $ 329 $ 62,381 Money market deposit accounts 18,672 0 0 0 0 0 18,672 Borrowed money 535 292 1,231 1,958 3,974 1,109 9,099 Total interest- bearing liabilities $36,162 $ 8,758 $17,529 $19,073 $7,192 $ 1,438 $90,152 Interest sensitivity gap per period $(3,591) $8,763 $10,419 $17,355 $2,509 $11,301 $46,756 Cumulative interest sensitivity gap $(3,591) $5,172 $15,591 $32,946 $35,455 $46,756 Cumulative gap as a percent of total interest- earning assets (2.62%) 3.78% 11.39% 24.06% 25.90% 34.15% Cumulative interest sensitive assets as a percent of cumulative interest sensitive liabilities 90.07% 111.51% 124.97% 140.41% 139.97% 151.86%
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This annual report, including the President's Letter to Stockholders, 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 Reform 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 affect on the operations and future prospects of the Company and the subsidiary 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. INDEPENDENT AUDITORS' REPORT The Board of Directors MNB Bancshares, Inc.: We have audited the accompanying consolidated balance sheets of MNB Bancshares, Inc. and subsidiaries (the Company) as of December 31, 1997 and 1996 and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three- year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1997 and 1996 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. January 30, 1998 Kansas City, Missouri
MNB BANCSHARES, INC. AND SUBSIDIARIES MANHATTAN, KANSAS CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 Assets 1997 1996 Cash and cash equivalents: Cash $3,398,451 $2,670,159 Interest-bearing deposits in other financial institutions 3,300,000 1,900,000 Total cash and cash equivalents 6,698,451 4,570,159 Investment securities: Held-to-maturity 6,669,809 10,113,010 Available-for-sale 35,409,475 23,125,844 Loans, net 87,980,366 62,369,858 Loans held for sale 743,762 179,190 Premises and equipment, net of accumulated depreciation 2,597,658 1,325,798 Accrued interest and other assets 4,652,570 1,736,565 Total assets $144,752,091 $103,420,424 Liabilities and Stockholders' Equity Liabilities: Deposits: Noninterest bearing demand $ 12,882,942 $ 5,260,221 Money market and NOW 39,970,310 28,936,080 Savings 6,974,204 5,162,275 Time, $100,000 and greater 11,631,384 6,760,011 Time, other 50,749,697 40,591,363 Total deposits 122,208,537 86,709,950 Federal Home Loan Bank advances 5,428,577 3,300,000 Other borrowings 3,670,802 315,020 Accrued interest and expenses, taxes and other liabilities 1,168,326 1,761,289 Total liabilities 132,476,242 92,086,259 Stockholders' equity: Common stock, $.01 par; 1,500,000 shares authorized; 1,284,460 and 1,210,430 shares issued and outstanding at 1997 and 1996 12,845 12,104 Additional paid-in capital 7,122,795 6,314,964 Retained earnings 5,341,952 5,340,873 Unearned employee benefits (271,187) (315,020) Unrealized gain (loss) on investment securities available- for-sale, net of tax 69,444 (18,756) Total stockholders' equity 12,275,849 11,334,165 Commitments and contingencies Total liabilities and stockholders' equity $144,752,091 $103,420,424 See accompanying notes to consolidated financial statements.
MNB BANCSHARES, INC. AND SUBSIDIARIES MANHATTAN, KANSAS CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 1997 1996 1995 Interest income: Loans $5,879,204 5,704,030 5,287,738 Investment securities 1,944,663 1,852,665 1,595,203 Other 105,003 113,214 167,822 Total interest income 7,928,870 7,669,909 7,050,763 Interest expense: Deposits 3,850,889 3,859,838 3,588,740 Other borrowings 186,822 189,312 231,154 Total interest expense 4,037,711 4,049,150 3,819,894 Net interest income 3,891,159 3,620,759 3,230,869 Provision for loan losses 60,000 15,000 39,750 Net interest income after provision for loan losses 3,831,159 3,605,759 3,191,119 Noninterest income: Fees and service charges 506,899 517,124 391,314 Gains on sales of loans 99,381 75,450 95,425 Other 83,829 90,723 39,921 Total noninterest income 690,109 683,297 526,660 Noninterest expense: Compensation and benefits 1,429,665 1,220,615 1,165,023 Occupancy and equipment 431,110 376,823 312,224 Federal deposit insurance premiums 47,116 570,633 161,028 Data processing 101,878 115,312 124,679 Amortization 106,816 12,097 82,045 Stationery, printing and office supplies 70,889 85,405 59,519 Professional fees 118,008 151,041 139,848 Other 672,099 601,266 573,460 Total noninterest expense 2,977,581 3,233,192 2,617,826 Earnings before income taxes 1,543,687 1,055,864 1,099,953 Income taxes 471,143 339,334 346,547 Net earnings $1,072,544 $716,530 $753,406 Earnings per share: Basic $.84 $.56 $.61 Diluted $.81 $.54 $.59 See accompanying notes to consolidated financial statements.
MNB BANCSHARES, INC. AND SUBSIDIARIES MANHATTAN, KANSAS CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 Net unrealized Additional Unearned gain Common paid-in Retained employee (loss) on stock capital earnings benefits securities Total Balance at December 31, 1994 $9,768 4,390,941 5,289,649 (394,067) (182,255) 9,114,036 Net earnings 0 0 753,406 0 0 753,406 Dividends paid ($.11 per share) 0 0 (139,018) 0 0 (139,018) Reduction of unearned employee benefits 0 0 0 38,152 0 38,152 Issuance of 104 shares under stock option plan 1 519 0 0 0 520 5% stock dividend (54,684 shares) 547 492,757 (493,304) 0 0 0 Issuance of 121,440 shares in purchase acquisition 1,214 836,722 0 0 0 837,936 Change in fair value of investment securities available-for- sale, net of tax 0 0 0 0 205,217 205,217 Balance at December 31, 1995 11,530 5,720,939 5,410,733 (355,915) 22,962 10,810,249 Net earnings 0 0 716,530 0 0 716,530 Dividends paid ($.15 per share) 0 0 (191,791) 0 0 (191,791) Reduction of unearned employee benefits 0 0 0 40,895 0 40,895 5% stock dividend (57,402 shares) 574 594,025 (594,599) 0 0 0 Change in fair value of investment securities available - -for-sale, net of tax 0 0 0 0 (41,718) (41,718) Balance at December 31, 1996 12,104 6,314,964 5,340,873 (315,020) (18,756) 11,334,165 Net earnings 0 0 1,072,544 0 0 1,072,544 Dividends paid ($.25 per share) 0 0 (319,866) 0 0 (319,866) Reduction of unearned employee benefits 0 0 0 43,833 0 43,833 Issuance of 13,488 shares under stock option plan 135 56,838 0 0 0 56,973 5% stock dividend (60,542 shares) 606 750,993 (751,599) 0 0 0 Change in fair value of investment securities available-for- sale,net of tax 0 0 0 0 88,200 88,200 Balance at December 31, 1997 $12,845 7,122,795 5,341,952 (271,187) 69,444 12,275,849 See accompanying notes to consolidated financial statements.
MNB BANCSHARES, INC. AND SUBSIDIARIES MANHATTAN, KANSAS
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 1997 1996 1995 Cash flows from operating activities: Net earnings $1,072,544 716,530 753,406 Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for loan losses 60,000 15,000 39,750 Depreciation and amortization 211,635 315,757 241,850 Amortization of loan fees (67,873) (44,858) (36,798) Deferred income taxes (116,929) (53,365) (194,727) Net (gain) loss on sales of investment securities available-for-sale, premises and equipment and other real estate (9,907) 22,667 (5,470) Net gain on sales of loans (99,381) (75,450) (95,425) Proceeds from sale of loans 14,260,381 10,316,625 10,630,608 Origination of loans for sale (14,725,572) (9,721,236) (11,234,312) Accretion of discounts and amortization of premiums on investment securities, net (40,931) 12,969 (34,399) Changes in assets and liabilities: Accrued interest and other assets 100,857 138,334 57,908 Accrued expenses, taxes and other liabilities (755,282) 744,068 364,626 Net cash provided by (used in) operating activities (110,458) 2,387,041 487,017 Cash flows from investing activities: Net (increase) decrease in loans (1,476,399) (485,488) 878,548 Maturities and prepayments of investment securities held-to-maturity 4,583,747 6,905,474 7,538,050 Purchases of investment securities held-to- maturity 0 (898,789) (6,253,745) Maturities and prepayments of investment securities available-for-sale 4,465,881 4,159,394 5,036,531 Purchases of investment securities available- for-sale (9,340,259) (14,681,433) (9,831,440) Proceeds from sale of investment securities available-for-sale 2,582,280 3,511,808 1,139,674 Proceeds from sales of foreclosed assets 53,922 7,279 90,972 Purchases of premises and equipment, net (352,578) (152,860) (97,193) Net cash (paid) received in acquisitions (1,650,353) 0 317,115 Net cash used in investing activities (1,133,759) (1,634,615) (1,181,488) Cash flows from financing activities: Net increase in deposits 1,435,787 310,507 5,920,757 Net increase in securities sold under agreements to repurchase 149,615 0 0 Federal Home Loan Bank advances (repayment) and federal funds purchased, net (800,000) 775,000 (3,775,000) Proceeds from notes payable 2,850,000 0 0 Issuance of common stock under stock option plan 56,973 0 520 Payment of dividends (319,866) (191,791) (139,018) Net cash provided by financing activities 3,372,509 893,716 2,007,259 Net increase in cash and cash equivalents 2,128,292 1,646,142 1,312,788 Cash and cash equivalents at beginning of year 4,570,159 2,924,017 1,611,229 Cash and cash equivalents at end of year $6,698,451 $4,570,159 $2,924,017 Supplemental disclosure of cash flow information: Cash paid during the year for income taxes $619,000 $531,000 $522,000 Cash paid during the year for interest $3,949,000 $4,206,000 $3,860,000 Supplemental schedule of noncash investing and financing activities: Transfer of loans to real estate owned $0 $29,000 $0 Bank acquisitions: Liabilities assumed 37,617,000 0 19,290,000 Fair value of assets acquired 39,267,000 0 19,865,000 See accompanying notes to consolidated financial statements.
MNB BANCSHARES, INC. AND SUBSIDIARIES MANHATTAN, KANSAS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Principles of Consolidation The accompanying consolidated financial statements include the accounts of MNB Bancshares, Inc. (the Company) and its wholly-owned subsidiaries, principally Security National Bank (the Bank, including the merger with the former Citizens State Bank on December 31, 1997). Intercompany balances and transactions have been eliminated in consolidation. (b) Investment Securities The Company classifies its investment securities portfolio as held-to-maturity, which are recorded at amortized cost, or available-for-sale, which are recorded at fair value with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity until realized. Premiums and discounts are amortized over the estimated lives of the securities using a method which approximates the interest method. Gains and losses on sales are calculated using the specific identification method. (c) Loans, Loans Serviced for Others and Related Earnings Management determines at the time of origination whether loans will be held for the portfolio or sold in the secondary market. Generally, fixed rate mortgage loans are originated and underwritten for resale in the secondary mortgage market. That decision depends on a number of factors, including the yield on the loan and the term of the loan, market conditions and the current gap position. Mortgage loans originated and intended for sale in the secondary market are recorded at the lower of aggregate cost or estimated fair value. Fees received on such loans are deferred and recognized in income as part of the gain or loss on sale. Net unrealized losses are recognized in a valuation allowance by charges to income. Fees received on other loans in excess of amounts representing the estimated costs of origination are deferred and credited to interest income using the interest method. Accrual of interest on nonperforming loans is suspended when, in the opinion of management, the collection of such interest or the related principal is less than probable. Any interest received on nonaccrual loans is credited to principal. The Company adopted the provisions of SFAS No. 122, Accounting for Mortgage Servicing Rights, effective January 1, 1996. Under the provisions of SFAS No. 122, the value of servicing rights are capitalized when the related loan is sold with servicing retained, and the resulting asset is amortized over the expected life of the loan. The adoption of SFAS No. 122 was not material to the Company's reported results. (d) Allowance for Loan Losses Provisions for losses on loans are based upon management's estimate of the amount required to maintain an adequate allowance for losses, relative to the risk in the loan portfolio. The estimate is based on reviews of the loan portfolio, including assessment of the estimated net realizable value of the related underlying collateral, and upon consideration of past loss experience, current economic conditions and such other factors which, in the opinion of management, deserve current recognition. Amounts are charged off as soon as probability of loss is established, taking into consideration such factors as the borrower's financial condition, underlying collateral and guarantees. Loans are also subject to periodic examination by regulatory agencies. Such agencies may require charge-offs or additions to the allowance based upon their judgments about information available at the time of their examination. (e) Stock in Federal Home Loan Bank and Federal Reserve Bank The Bank is a member of the Federal Home Loan Bank (FHLB) and the Federal Reserve Bank (FRB) systems. As a FHLB member, the Bank is required to purchase and hold stock in the FHLB of Topeka in an amount equal to the greater of (a) 1% of unpaid residential loans, (b) 5% of outstanding FHLB advances, or (c) 0.3% of total assets. FHLB and FRB stock are included in available-for-sale securities. (f) Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation is provided principally using the straight-line method over the estimated useful lives, ranging from 3 to 31.5 years, of the assets. Major replacements and betterments are capitalized while maintenance and repairs are charged to expense when incurred. Gains or losses on dispositions are reflected in current operations. (g) Intangible Assets The Company's core deposit intangible asset and goodwill is being amortized over ten (accelerated) and fifteen (straight- line) years, respectively. When facts and circumstances indicate potential impairment, the Company evaluates the recoverability of asset carrying values, including intangible assets, using estimates of undiscounted future cash flows over remaining asset lives. When impairment is indicated, any impairment loss is measured by the excess of carrying values over fair values. (h) Income Taxes The Company records deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (i) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (j) Stock Split On January 21, 1998, the Company declared a two-for-one stock split of the Company's common stock for all issued shares. All share and per share data has been restated for the stock split. (k) 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 and 1997, the adoption of SFAS No. 128 in 1997 and the two-for-one stock split declared on January 21, 1998. The shares used in the calculation of basic and diluted income per share, which have been restated for the annual 5% stock dividends and the 1998 stock split, are shown below:
For the years ended December 31, 1997 1996 1995 Weighted average common shares outstanding 1,277,700 1,270,972 1,238,164 Stock options 52,388 53,842 30,246 1,330,088 1,324,814 1,268,410
(2) ACQUISITIONS On December 31, 1997, the Company acquired 100% of the outstanding common stock of Freedom Bancshares, Inc. (Freedom) and its wholly-owned subsidiary, Citizens State Bank. Subsequently, Security National Bank and Citizens State Bank were merged. Freedom had consolidated assets of approximately $43 million. The purchase price, including related costs of acquisition, consisted of cash of approximately $5.3 million. The acquisition, which was accounted for as a purchase, resulted in goodwill of approximately $2.2 million. Pro forma revenues, net earnings and diluted earnings per share amounts, as if the Freedom acquisition had been consummated January 1, 1996, are as follows:
1997 1996 Net interest income plus other income $10,158,690 $9,827,290 Net earnings 1,002,733 565,421 Diluted earnings per share .75 .43
On April 1, 1995, the Company acquired Auburn Security Bancshares, Inc. (Auburn) and its wholly-owned subsidiary, Security State Bank. Security State Bank was subsequently merged with Security National Bank. Auburn had consolidated assets of approximately $20 million. The purchase price, including related costs of acquisition, included cash of approximately $970,000 and 121,440 shares of the Company's common stock. The acquisition, which was accounted for as a purchase, resulted in a core deposit intangible asset and goodwill of approximately $461,000 and $512,000, respectively. (3) INVESTMENT SECURITIES A summary of investment securities information is as follows:
Gross Gross Amortized unrealized unrealized Estimated December 31, 1997 cost gains losses fair value Held-to-maturity: U. S. government and agency obligations $3,026,592 4,000 0 3,031,000 Municipal obligations 2,286,210 16,000 2,000 2,300,000 Mortgage-backed securities 1,249,202 4,000 0 1,253,000 Other investments 107,805 0 0 108,000 Total $6,669,809 24,000 2,000 6,692,000 Available-for-sale: U. S. government and agency obligations $23,010,128 58,460 7,835 23,060,753 Municipal obligations 800,963 11,472 1,521 810,914 Mortgage-backed securities 10,100,389 63,612 12,293 10,151,708 FHLB stock 1,223,000 0 0 1,223,000 Other investments 163,100 0 0 163,100 Total $35,297,580 133,544 21,649 35,409,475
Gross Gross Amortized unrealized unrealized Estimated December 31, 1997 cost gains losses fair value Held-to-maturity: U. S. government and obligations $5,095,357 31,000 0 5,126,000 Municipal obligations 2,303,055 7,000 9,000 2,301,000 Mortgage-backed securities 2,714,598 16,000 4,000 2,727,000 Total $10,113,010 54,000 13,000 10,154,000 Available-for-sale: U. S. government and agency obligations $11,879,815 37,706 48,249 11,869,272 Municipal obligations 660,684 0 1,872 658,812 Mortgage-backed securities 9,036,473 28,036 44,982 9,019,527 FHLB stock 941,700 0 0 941,700 Other investments 637,461 0 928 636,533 Total $23,156,133 65,742 96,031 23,125,844
Maturities of investment securities at December 31, 1997 are as follows: Amortized Estimated cost fair value Held-to-maturity: Due in less than one year $ 2,432,821 2,437,299 Due after one year but within five years 2,153,766 2,166,129 Due after five years but within ten years 726,215 727,554 Mortgage-backed securities and other investments 1,357,007 1,360,854 Total $6,669,809 6,691,836 Available-for-sale: Due in less than one year $7,357,618 7,356,458 Due after one year but within five years 15,173,395 15,225,381 Due after five years but within ten years 1,280,078 1,289,828 Mortgage-backed securities and other investments 11,486,489 11,537,808 Total $35,297,580 35,409,475
Except for U. S. government and agency obligations, no investment in a single issuer exceeded 10% of stockholders' equity. At December 31, 1997 and 1996, securities pledged to secure public funds on deposit had a carrying value of approximately $29.9 million and $20.3 million. (4) LOANS Loans consist of the following at December 31:
1997 1996 Mortgage loans: One-to-four family residential $36,474,564 33,498,175 Commercial 25,470,886 14,311,542 Commercial loans 18,305,041 7,139,729 Consumer loans 6,357,088 4,696,385 Student loans 2,887,442 3,708,718 Total 89,495,021 63,354,549 Less: Loans in process 59,678 14,031 Deferred loan fees 119,953 151,000 Allowance for loan losses 1,335,024 819,660 Loans, net $87,980,366 62,369,858
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet customer financing needs. These financial instruments consist principally of commitments to extend credit. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company's exposure to credit loss in the event of nonperformance by the other party is represented by the contractual amount of those instruments. The Company generally requires collateral or other security on unfunded loan commitments and irrevocable letters of credit. The Company's outstanding commitments to originate and sell loans are immaterial. The Company is exposed to varying risks associated with concentrations of credit relating primarily to lending activities in specific geographic areas. The Company's principal lending area consists of the cities of Manhattan, Auburn, Topeka and Osage City, Kansas and the surrounding communities, and substantially all of the Company's loans are to residents of or secured by properties located in its principal lending area. Accordingly, the ultimate collectibility of the Company's loan portfolio is dependent upon market conditions in those areas. These geographic concentrations are considered in management's establishment of the allowance for loan losses. A summary of the activity in the allowance for loan losses is as follows:
1997 1996 1995 Balance at beginning of year $ 819,660 826,364 562,041 Provision 60,000 15,000 39,750 Allowance for loan loss of acquired bank 461,389 0 229,408 Charge-offs (17,398) (27,136) (28,608) Recoveries 11,373 5,432 23,773 Balance at end of year $1,335,024 819,660 826,364
At December 31, 1997 and 1996, impaired loans, as defined by SFAS No. 114, aggregated approximately $172,000 and $145,000. The Bank serviced loans for others of $24.4 million and $25.9 million at December 31, 1997 and 1996. Because the Bank sold substantially all loans originated for sale on a servicing released basis, no additional gains on sales or related mortgage servicing assets, as required under SFAS No. 122, were recorded during 1997 or 1996. The Bank had loans to directors and officers at December 31, 1997 and 1996, which carry terms similar to those for other loans. A summary of such loans is as follows:
1997 1996 Balance at beginning of year $1,255,689 114,036 New loans 693,869 1,185,983 Payments (90,043) (44,330) Balance at end of year $1,859,515 1,255,689
(5) PREMISES AND EQUIPMENT Premises and equipment consist of the following at December 31:
1997 1996 Land $ 323,912 253,412 Office buildings and improvements 2,451,193 1,272,000 Furniture and equipment 1,615,459 1,024,330 Automobiles 128,572 128,572 Total 4,519,136 2,678,314 Less accumulated depreciation 1,921,478 1,352,516 Total $2,597,658 1,325,798
(6) TIME DEPOSITS Maturities of time deposits are as follows at December 31, 1997: Year Amount 1998 $41,725,868 1999 10,393,567 2000 6,716,743 2001 2,872,003 2002 344,285 Thereafter 328,615 Total $ 62,381,081 During 1996, the Federal Deposit Insurance Corporation imposed a one-time special assessment on Savings Association Insurance Fund (SAIF) assessable deposits. The assessment on the Company's SAIF deposits was $449,000 and is included in federal deposit insurance premiums in the accompanying 1996 consolidated statement of earnings. (7) FEDERAL HOME LOAN BANK ADVANCES Long-term advances from the FHLB at December 31, 1997 and 1996 amount to $5,428,577 and $3,300,000, respectively. Maturities of such advances at December 31, 1997 are summarized as follows:
Year ending December 31, Amount Rates 1998 $ 500,000 5.21% 1999 0 0 2000 0 0 2001 0 0 2002 2,714,288 6.24 to 6.95% Thereafter 2,214,289 6.44 to 7.23% $5,428,577
The Bank has a $15,000,000 line of credit, renewable annually in September, with the FHLB under which there were no borrowings outstanding at December 31, 1997 and 1996. Interest on any outstanding balances on the line of credit accrues at the federal funds rate plus .15% (6.90% at December 31, 1997). Although no loans are specifically pledged, the FHLB requires the Company to maintain eligible collateral that has a lending value at least equal to its required collateral. Eligible collateral includes single and multifamily first mortgage loans, mortgage-backed securities, U. S. government and agency obligations, stock in the FHLB and FHLB overnight deposits. (8) OTHER BORROWINGS Other borrowings include a note payable relating to the Company's Employee Stock Ownership Plan (the ESOP) (see note 10) with an unrelated financial institution and a note payable to another unrelated financial institution and securities sold under agreements to repurchase of $549,615. The ESOP loan of $271,187 and $315,020 at December 31, 1997 and 1996, respectively, bears interest at the prime rate (8.5% at December 31, 1997), is due in 2002 and is secured by the 63,006 unallocated shares of Company common stock held by the ESOP. The Company's other note payable of $2,850,000 at December 31, 1997, bearing interest at the prime rate less .5%, is due December 31, 2002 and is secured by all of the Bank stock owned by the Company. (9) INCOME TAXES Total income tax expense for 1997, 1996 and 1995 is allocated as follows:
1997 1996 1995 Operations $471,143 339,334 346,547 Stockholders' equity 53,984 (23,743) 123,915 $525,127 315,591 470,462
The components of income tax expense allocated to earnings are as follows:
1997 1996 1995 Current $588,072 392,699 524,692 Deferred (116,929) (53,365) (178,145) $471,143 339,334 346,547 Federal $434,143 271,070 346,547 State 37,000 68,264 0 $471,143 339,334 346,547
The reasons for the difference between actual income tax expense and expected income tax expense allocated to earnings before extraordinary loss at the 34% statutory federal income tax rate are as follows:
1997 1996 1995 Expected income tax expense at statutory rate $524,854 358,994 373,984 Tax-exempt interest (31,900) (37,838) (14,707) Nondeductible amortization 9,406 11,752 6,522 State income taxes 24,420 56,188 0 Other, net (55,637) (49,762) (19,252) $471,143 339,334 346,547
The tax effects of temporary differences that give rise to the significant portions of the deferred tax assets and liabilities at December 31, 1997 and 1996 are as follows:
1997 1996 1995 Deferred tax assets: Unrealized loss on investment securities available-for-sale $ 0 11,533 0 Allowance for loan losses 198,400 108,646 39,260 Other 18,400 18,895 8,463 Total deferred tax assets 216,800 139,074 47,723 Deferred tax liabilities: Unrealized gain on investment securities available-for-sale 42,451 0 12,210 Core deposit intangible 85,500 109,006 135,367 FHLB stock dividends 191,800 167,994 143,446 Premises and equipment 1,000 7,294 10,356 State taxes 21,800 21,645 0 Other 17,100 38,931 29,248 Total deferred tax liabilities 359,651 344,870 330,627 Net deferred tax liability $142,851 205,796 282,904
(10) EMPLOYEE BENEFIT PLANS Qualified employees of the Company and the Bank may participate in an employee stock ownership plan. The ESOP borrowed under a bank loan agreement (note 8) with the proceeds used to acquire the Company's common stock. Contributions, along with dividends on unallocated shares of common stock, are used by the ESOP to make payments of principal and interest on the bank loan. Because the Company has guaranteed the ESOP's borrowing, the outstanding note payable balance is recorded as unearned compensation, which is presented as a reduction of stockholders' equity in the accompanying consolidated balance sheets. Unearned compensation is reduced as the related note payable is reduced. ESOP contributions by the Bank charged to compensation and benefits expense in 1997, 1996 and 1995 were approximately $50,000, $57,000 and $70,000 respectively. The Company has a stock option plan for directors and selected officers and employees. The exercise price of options granted under the plan is at least equal to the fair market value on the date of grant. The options vest over varying periods of time and are exercisable for up to ten years. Information with respect to option activity (as adjusted for stock dividends and split) is as follows:
Number of Weighted average shares exercise price per share Outstanding at January 1, 1995 81,136 $4.76 Effect of 5% stock dividend 4,036 0 Exercised (104) 4.76 Outstanding at December 31, 1995 85,068 4.53 Issued 8,000 10.50 Effect of 5% stock dividend 4,642 0 Outstanding at December 31, 1996 97,710 4.81 Effect of 5% stock dividend 4,514 0 Exercised (13,488) 4.81 Outstanding at December 31, 1997 88,736 $4.65 Options exercisable at December 31, 1997 74,102 $4.24
Options outstanding at December 31, 1997 were exercisable at prices ranging from $4.11 to $9.52. In accordance with SFAS No. 123, Accounting for Stock-based Compensation, the Company has chosen not to apply the accounting provision of SFAS No. 123 in its consolidated financial statements but rather to disclose pro forma amounts. The fair value of the options granted in 1996 was established utilizing the following assumptions: dividend yield of 1.2%, volatility of 4.7%, risk-free interest rate of 7.0% and an expected life of five years. Pro forma net earnings and earnings per share for 1996, applying the disclosure provisions of SFAS No. 123, would be the same as those amounts reflected in the accompanying consolidated statements of earnings. The Company has adopted an incentive program whereby bonuses are awarded if certain annual profitability thresholds are achieved. The incentive program also allows for discretionary bonuses. The Company recorded bonuses under the incentive programs of approximately $75,000, $53,000 and $56,000 in 1997, 1996 and 1995, respectively. Fair value estimates of the Company's(11) FAIR VALUE OF FINANCIAL INSTRUMENTS financial instruments as of December 31, 1997 and 1996, including methods and assumptions utilized, are set forth below:
1997 1996 Carrying Estimated Carrying Estimated amount fair value amount fair value Investment securities $ 42,079,284 42,101,000 33,238,854 33,280,000 Loans, net of unearned fees and allowance for loan losses $ 87,980,366 85,988,000 62,369,858 60,785,000 Noninterest bearing demand deposits $ 12,882,942 12,883,000 5,260,221 5,260,000 Money market and NOW deposits 39,970,310 39,970,000 28,936,080 28,936,000 Savings deposits 6,974,204 6,974,000 5,162,275 5,162,000 Time deposits 62,381,081 62,449,000 47,351,374 47,493,000 Total deposits $122,208,537 122,276,000 86,709,950 86,851,000 FHLB advances $ 5,428,577 5,439,000 3,300,000 3,305,000 Other borrowings $ 3,670,802 3,671,000 315,020 315,000
Methods and Assumptions Utilized The carrying amount of cash and cash equivalents, loans held for sale, federal funds sold and accrued interest receivable and payable are considered to approximate fair value. The estimated fair value of investment securities, except certain obligations of states and political subdivisions, is based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of certain obligations of states and political subdivisions is not readily available through market sources other than dealer quotations, so fair value estimates are based upon quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued. The estimated fair value of the Company's loan portfolio is based on the segregation of loans by collateral type, interest terms and maturities. In estimating the fair value of each category of loans, the carrying amount of the loan is reduced by an allocation of the allowance for loan losses. Such allocation is based on management's loan classification system which is designed to measure the credit risk inherent in each classification category. The estimated fair value of performing variable rate loans is the carrying value of such loans, reduced by an allocation of the allowance for loan losses. The estimated fair value of performing fixed rate loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the interest rate risk inherent in the loan, reduced by an allocation of the allowance for loan losses. The estimate of maturity is based on the Company's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. The fair value for significant nonperforming loans is the estimated fair value of the underlying collateral based on recent external appraisals or other available information, which generally approximates carrying value, reduced by an allocation of the allowance for loan losses. The estimated fair value of deposits with no stated maturity, such as noninterest bearing demand deposits, savings, money market accounts and NOW accounts, is equal to the amount payable on demand. The fair value of interest-bearing time deposits is based on the discounted value of contractual cash flows of such deposits. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The carrying amounts of FHLB advances and other borrowings approximate fair value because such borrowings have relatively short terms or adjustable interest rates. Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. (12) REGULATORY CAPITAL REQUIREMENTS Current regulatory capital regulations require financial institutions to meet three different regulatory capital requirements. Institutions are required to have minimum leverage capital equal to 4% of total average assets, minimum Tier I risk-based capital equal to 4% of total risk-weighted assets and total qualifying capital equal to 8% of total risk-weighted assets in order to be considered adequately capitalized. Management believes that, as of December 31, 1997, the Company meets all capital adequacy requirements to which it is subject. The following is a comparison of the Company's regulatory capital to minimum capital requirements at December 31, 1997 (dollars in thousands):
To be well For capital capitalized under adequacy prompt corrective Actual purposes action provisions Amount Ratio Amount Ratio Amount Ratio As of December 31, 1997: Total Capital (to Risk Weighted Assets) $13,153 15.7% $6,684 8.0% $8,354 10.0% Tier I Capital (to Risk Weighted Assets) 12,109 14.5 3,342 4.0 5,013 6.0 Tier I Capital (to Average Assets) 12,109 11.7 4,139 4.0 5,174 5.0 As of December 31, 1996: Total Capital (to Risk Weighted Assets) $9,616 18.2% $4,222 8.0% $5,278 10.0% Tier I Capital (to Risk Weighted Assets) 8,956 17.0 2,111 4.0 3,167 6.0 Tier I Capital (to Average Assets) 8,956 8.7 4,043 4.0 5,054 5.0
(13) PARENT COMPANY CONDENSED FINANCIAL STATEMENTS Following is condensed financial information of the Company as of and for the years ended December 31, 1997 and 1996:
CONDENSED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 Assets 1997 1996 Cash $ 129,987 1,582,283 Investment securities 171,403 416,566 Investment in subsidiary 15,086,801 9,625,100 Other 8,337 31,972 Total assets $15,396,528 11,655,921 Liabilities and Stockholders' Equity Borrowed funds $ 3,121,187 315,020 Other (508) 6,736 Stockholders' equity 12,275,849 11,334,165 Total liabilities and stockholders' equity $15,396,528 11,655,921
CONDENSED STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 1997 1996 1995 Dividends from subsidiary $ 937,242 650,194 778,842 Interest income 86,582 66,749 54,897 Other expense, net (69,898) (115,386) (103,082) Income before equity in undistributed earnings of subsidiary 953,926 601,557 730,657 Increase (decrease) in undistributed equity of subsidiary 43,000 100,485 (22,405) Net earnings before income taxes 996,926 702,042 708,252 Income tax benefit 75,618 14,488 45,154 Net earnings $1,072,544 716,530 753,406
CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 1997 1996 1995 Cash flows from operating activities: Net earnings $ 1,072,544 716,530 753,406 (Increase) decrease in undistributed equity of subsidiary (43,000) (100,485) 22,405 Other 18,215 (21,509) 18,170 Net cash provided by operating activities 1,047,759 594,536 793,981 Cash flows from investing activities: Purchase of investment securities (154,907) (867,137) (501,110) Maturity of investment securities 400,000 950,000 0 Investment in subsidiary (5,332,255) 0 (1,378,193) Net cash provided by (used in) investing activities (5,087,162) 82,863 (1,879,303) Cash flows from financing activities: Issuance of 13,488 common shares under stock option plan 56,973 0 520 Proceeds from note payable 2,850,000 0 0 Payment of dividends (319,866) (191,791) (139,018) Net cash provided by (used in) financing activities 2,587,107 (191,791) (138,498) Net increase (decrease) in cash (1,452,296) 485,608 (1,223,820) Cash at beginning of year 1,582,283 1,096,675 2,320,495 Cash at end of year $ 129,987 1,582,283 1,096,675
Dividends paid by the Company are provided through subsidiary Bank dividends. At December 31, 1997, the Bank could distribute dividends of up to $869,000 without regulatory approvals. CORPORATE INFORMATION DIRECTORS OF MNB BANCSHARES, INC.,AND SECURITY NATIONAL BANK Brent A. Bowman, Chairman President Brent A. Bowman and Associates Architects, P.A. Patrick L. Alexander President and Chief Executive Officer MNB Bancshares, Inc., MNB Acquisition Corporation and Security National Bank William F. Caton* President Kansas Development Finance Authority Rolla W. Goodyear Chief Financial Officer, Financial Institutions Technology, dba Suntell Joseph L. Downey Senior Consultant and Director Dow Chemical Company Chairman, DowAgroSciences Charles D. Green Retired Attorney Arthur, Green, Arthur, Conderman & Stutzman Vernon C. Larson Retired Assistant Provost and Director of International Programs Kansas State University Jerry R. Pettle Dentist Dental Associates of Manhattan, PA. Susan E. Roepke Vice President, Secretary and Treasurer, MNB Bancshares, Inc. and MNB Acquisition Corporation; and Senior Vice President/ Secretary/Cashier, Security National Bank Donald J. Wissman President, Grain Industry Alliance *Bank Director only EXECUTIVE OFFICERS OF MNB BANCSHARES, INC. Patrick L. Alexander President and Chief Executive Officer Susan E. Roepke Vice President, Secretary and Treasurer EXECUTIVE OFFICERS OF SECURITY NATIONAL BANK Patrick L. Alexander President and Chief Executive Officer Susan E. Roepke Vice President, Secretary and Treasurer EXECUTIVE OFFICERS OF SECURITY NATIONAL BANK Patrick L. Alexander President and Chief Executive Officer Susan E. Roepke Senior Vice President, Secretary and Cashier Michael E. Scheopner Senior Vice President Michael R. Toy Senior Vice President Dennis D. Wohler Senior Vice President STOCK PRICE INFORMATION The Company's common stock trades on the Nasdaq Small-Cap Market tier of the Nasdaq Stock Market under the symbol "MNBB". At December 31, 1997, the Company had approximately 420 stockholders of record. Set forth below are the reported high and low prices of the common stock and dividends paid during the past two years. Information presented below has not been restated to give effect to the 5% stock dividends paid in 1997 and 1996 or the two-for-one stock split announced by the Company in January of 1998.
1997 High Low Dividends First Quarter $22.75 $22.75 $0.125 Second Quarter 22.75 20.00 0.125 Third Quarter 23.50 21.00 0.125 Fourth Quarter 26.00 23.50 0.125 1996 First Quarter $20.50 $19.75 $0.0625 Second Quarter 20.50 20.00 0.0656 Third Quarter 20.00 19.00 0.0656 Fourth Quarter 22.75 19.00 0.1250 CORPORATE HEADQUARTERS 800 Poyntz Avenue Manhattan, Kansas 66502 ANNUAL MEETING The annual meeting of stockholders will be held at the Kansas State University Student Union, Room 212 Conference Room, Manhattan, Kansas 66506, on Monday, May 18, 1998 at 2:00 PM. FORM 10-K A copy of the Annual Report on Form 10-K filed with the Securities and Exchange Commission may be obtained by stockholders without charge on written request to Patrick L. Alexander, President and Chief Executive Officer, MNB Bancshares, Inc., PO Box 308, Manhattan, Kansas 66505-0308 REGISTRAR AND TRANSFER AGENT Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016-3572 INDEPENDENT ACCOUNTANTS KPMG Peat Marwick LLP 1000 Walnut, Suite 1600 Kansas City, Missouri 64199 EXHIBIT 21.1 SUBSIDIARIES OF MNB BANCSHARES, INC. The only subsidiaries of the Company are MNB Acquisition Corporation, Inc. and Security National Bank, a national banking association with its main office located in Manhattan, Kansas, and with branch offices located in Auburn, Beloit, Osage City, and Topeka, Kansas. EXHIBIT 23.1 CONSENT OF KPMG PEAT MARWICK LLP The Board of Directors MNB Bancshares, Inc.: We consent to incorporation by reference in the registration statement (No. 33- 51710) on Form S-8 of MNB Bancshares, Inc. of our report, dated January 30, 1998, relating to the consolidated balance sheets of MNB Bancshares, Inc. and subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of earnings, stockholders equity and cash flows for each of the years in the three-year period ended December 31, 1997, which report appears in the December 31, 1997 annual report on Form 10-K of MNB Bancshares, Inc. Kansas City, Missouri March 27, 1998 EXHIBIT 99.1 PROXY STATEMENT OF THE COMPANY FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD MAY 18, 1998 MNB Bancshares, Inc. 800 Poyntz Avenue Manhattan, Kansas 66502 (785) 565-2000 NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD MAY 18, 1998 To the stockholders of MNB BANCSHARES, INC. The Annual Meeting of the Stockholders of MNB Bancshares, Inc., a Delaware corporation (the "Company"), will be held at the Kansas State University Student Union, 17th and Anderson Avenue, Manhattan, Kansas, 66506, on Monday, May 18, 1998, at 2:00 p.m., local time, for the following purposes: 1. to elect three (3) Class III directors for a term of three years. 2. to amend the Certificate of Incorporation of the Company to increase the authorized common stock to 3,000,000 shares. 3. to approve the MNB Bancshares, Inc. 1998 Stock Incentive Plan. 4. to approve the appointment of KPMG Peat Marwick LLP as independent public accountants for the Company for the fiscal year ending December 31, 1998. 5. to transact such other business as may properly be brought before the meeting and any adjournments or postponements thereof. The Board of Directors has fixed the close of business on April 3, 1998, as the record date for the determination of stockholders entitled to notice of, and to vote at, the meeting. By order of the Board of Directors /s/Patrick L. Alexander President and Chief Executive Officer Manhattan, Kansas April 17, 1998 PROXY STATEMENT This Proxy Statement is furnished in connection with the solicitation by the Board of Directors of MNB Bancshares, Inc. (the "Company") of proxies to be voted at the Annual Meeting of Stockholders to be held at the Kansas State University Student Union, 17th and Anderson Avenue, Manhattan, Kansas, 66506, on Monday, May 18, 1998, at 2:00 p.m., local time, and at any adjournments or postponements thereof. The Board of Directors would like to have all stockholders represented at the meeting. If you do not expect to be present, please sign and return your proxy card in the enclosed self-addressed, stamped envelope. You have the power to revoke your proxy at any time before it is voted, by giving written notice to the Secretary of the Company, provided such written notice is received by the Secretary prior to the annual meeting or any adjournments or postponements thereof, by submitting a later dated proxy or by attending the annual meeting and choosing to vote in person. The giving of a proxy will not affect your right to vote in person if you attend the meeting. The Company's principal executive office is located at 800 Poyntz Avenue, Manhattan, Kansas and its mailing address is P.O. Box 308, Manhattan, Kansas 66505. This Proxy Statement and the accompanying proxy card are being mailed to stockholders on or about April 17, 1998. The 1997 Annual Report of the Company, which includes consolidated financial statements of the Company and its subsidiary, is enclosed. The Company is the holding company for Security National Bank, Manhattan, Kansas (the "Bank"). In addition to its main office in Manhattan, the Bank also has branch offices in Topeka, Auburn, Osage City and Beloit, Kansas. Only holders of record of the Company's Common Stock at the close of business on April 3, 1998, will be entitled to vote at the annual meeting or any adjournments or postponements of such meeting. On April 3, 1998, the Company had 1,288,476 shares of Common Stock, par value $0.01 per share, issued and outstanding. In the election of directors, and for all other matters to be voted upon at the annual meeting, each issued and outstanding share is entitled to one vote. All shares of Common Stock represented at the annual meeting by properly executed proxies received prior to or at the annual meeting, and not revoked, will be voted at the annual meeting in accordance with the instructions thereon. If no instructions are indicated, properly executed proxies will be voted for the nominees and for adoption of the proposals set forth in this Proxy Statement. A majority of the shares of the Common Stock, present in person or represented by proxy, shall constitute a quorum for purposes of the annual meeting. Abstentions and broker non-votes will be counted for purposes of determining a quorum. Directors shall be elected by a plurality of the votes present in person or represented by proxy at the meeting and entitled to vote. Approval of the amendment to the Company's Certificate of Incorporation requires the approval of a majority of the outstanding shares of Common Stock. In all other matters, the affirmative vote of a majority of shares required to constitute a quorum and voting on the subject matter shall be required to constitute stockholder approval. Abstentions will be counted as votes against a proposal and broker non-votes will have no effect on the vote. ELECTION OF DIRECTORS At the Annual Meeting of the Stockholders to be held on May 18, 1998, the stockholders will be entitled to elect three (3) Class III directors for a term expiring in 2001. The directors of the Company are divided into three classes having staggered terms of three years. The nominees for election as Class III directors are incumbent directors. The Company has no knowledge that any of the nominees will refuse or be unable to serve, but if any of the nominees becomes unavailable for election, the holders of the proxies reserve the right to substitute another person of their choice as a nominee when voting at the meeting. Set forth below is information concerning the nominees for election and for the other persons whose terms of office will continue after the meeting, including the age, year first elected a director and business experience during the previous five years as of April 3, 1998. The three nominees, if elected at the Annual Meeting of Stockholders, will serve as Class III directors for a three year term expiring in 2001. The Board of Directors recommends you vote your shares FOR the nominees.
NOMINEES Name Age Position with the Director Since Company and the Bank CLASS III (Term Expires 2001) Brent A. Bowman 48 Chairman of the Board of the Company and the Bank 1987 Charles D. Green 72 Director of the Company and the Bank 1957 Vernon C. Larson 74 Director of the Company and the Bank 1974 CONTINUING DIRECTORS CLASS I (Term Expires 1999) Patrick L. Alexander 45 President, Chief Executive Officer and Director of the Company and the Bank 1990 Joseph L. Downey 61 Director of the Company and the Bank 1996 Rolla W. Goodyear 40 Director of the Company and the Bank 1995 Jerry R. Pettle 59 Director of the Company and the Bank 1978 CLASS II (Term Expires 2000) Susan E. Roepke 58 Director, Vice President, Secretary and Treasurer of the Company and Director, Senior Vice President and Cashier of the Bank 1997 Donald J. Wissman 60 Director of the Company and the Bank 1994
All of the Company's directors will hold office for the terms indicated, or until their earlier death, resignation, removal or disqualification, and until their respective successors are duly elected and qualified, and all executive officers hold office for a term of one year. There are no arrangements or understandings between any of the directors, executive officers or any other person pursuant to which any of the Company's directors or executive officers have been selected for their respective positions, except that the Company and the Bank have entered into an employment contract with Mr. Alexander. No director is related to any other director or executive officer of the Company or the Bank by blood, marriage or adoption, except that Mr. Goodyear is the brother-in-law of Mr. William F. Caton, who is a director of the Bank. The business experience of each nominee and continuing director for the past five years is as follows: Patrick L. Alexander became President and Chief Executive Officer of the Manhattan Federal Savings and Loan Association (the predecessor-in-interest to the Bank) in 1990, and became the President and Chief Executive Officer of the Company and the Bank on August 28, 1992 and January 5, 1993, respectively. From 1986 to 1990, Mr. Alexander served as President of the Kansas State Bank of Manhattan, Manhattan, Kansas. Mr. Alexander serves as a member of the Board of Directors of the Big Lakes Foundation, Inc. Mr. Alexander serves on the Economic Development Committee for the Manhattan Chamber of Commerce. Brent A. Bowman has been President of Brent Bowman and Associates Architects, P.A., an architectural firm in Manhattan, Kansas, since 1979. Mr. Bowman serves on the Manhattan Historic District Review Board. Joseph L. Downey has been a director of Dow Chemical Co. since 1989 and a Dow Senior Consultant since 1995 after having served in a variety of executive positions with that company, including Senior Vice President from 1991 to 1994. Rolla W. Goodyear was the Chairman of the Board of Auburn Security Bancshares, Inc. and President and Chief Executive Officer of Security State Bank from 1983 until its acquisition by the Company in April 1995. Mr. Goodyear served as President of the Auburn branch of the Bank from January, 1996 through July, 1997. In August, 1997, Mr. Goodyear joined Financial Institutions Technology, dba Suntell, as Chief Financial Officer. Charles D. Green is a former partner in the Manhattan, Kansas law firm of Arthur, Green, Arthur, Conderman & Stutzman from 1950 to July 1, 1993. Mr. Green formerly served as a director of the Commerce Bank, N.A., a wholly- owned subsidiary of CBI-Central Kansas, Inc., which is a wholly owned subsidiary of Commerce Bancshares, Inc., Kansas City, Missouri. Vernon C. Larson was the Assistant Provost and Director of International Programs at Kansas State University, Manhattan, Kansas from 1962 until his retirement in 1991. Jerry R. Pettle is a dentist who has practiced with Dental Associates of Manhattan, P.A., in Manhattan, Kansas, since 1970. Dr. Pettle serves on the Board of Directors of the Manhattan Medical Center and is an examiner for the Kansas Dental Board. Dr. Pettle is a past member of the Board of Directors of the Friends of the Konza Prairie and a past member of the Kansas State University Foundation. Susan E. Roepke became Vice President of the Company on August 28, 1992 and Senior Vice President, Secretary and Cashier of the Bank on January 5, 1993. She was elected Secretary of the Association in 1992 and became Vice President/Operations Division of the Association in 1991, and had been Treasurer of the Association since 1970. She held these positions with the Association until the Conversion in 1993. Donald J. Wissman is President of the Grain Industry Alliance, a consortium of Kansas State University, American Institute of Baking, DPRA Incorporated and the USDA Grain Marketing and Production Research Center. He was Chairman of DPRA from 1987 to 1998, an independent environmental/economic research firm headquartered in Manhattan, Kansas. Dr. Wissman was with DPRA since 1965, having served in a variety of positions, including Senior Vice President and Senior Economist. He is a past Chairman and Director of the Manhattan Chamber of Commerce, past Director of Kansas State University Research Foundation and a Director of the mid American Commercialization Corporation. Board Committees and Meetings There presently are two committees of the Board of Directors of the Company, a Stock Option Committee which administers the Company's Stock Option Plan and an Audit Committee. The full Board of Directors considers nominations to the Board, and will consider nominations made by stockholders if such nominations are in writing and otherwise comply with Section 3.1 of the Company's bylaws. The Board of Directors of the Bank has an Executive Committee, and a Directors' Loan Committee. The Executive Committee consists of Directors Bowman (Chairman), Alexander, Roepke, Wissman and Mr. William F. Caton, a director of the Bank. The Executive Committee has authority to perform policy reviews, oversee and direct compensation and personnel functions, monitor marketing and CRA activities, review and approve the budget and asset/liability position and undertake other organizational issues and planning discussions as deemed appropriate. The committee meets monthly on a regularly scheduled basis and more frequently if necessary. During 1997 the committee met 12 times. The Directors' Loan Committee consists of Directors Green (Chairman), Alexander, Downey, Goodyear, Larson and Pettle. The Directors' Loan Committee is responsible for policy review and oversight of the loan and investment functions. It has the authority to approve loans in excess of the Officers' Loan Committee lending authority up to legal lending limits, subject to certain exceptions which apply to certain levels of unsecured and insider loans which must be approved by the entire Board of Directors. The committee reviews the loan loss reserve for adequacy and reviews in detail lending and investment activities. The committee meets monthly on a regularly scheduled basis and more frequently if necessary. During 1997 the committee met 14 times. The Audit Committee consists of Directors Pettle (Chairman), Bowman, Larson, Wissman and Mr. William F. Caton, a director of the Bank. The Audit Committee is responsible for overseeing the internal and external audit functions. It approves internal audit staffing, salaries and programs. The Internal Auditor reports directly to the committee on audit and compliance matters. The committee also reviews and approves the scope of the annual external audit and consults with the independent auditors regarding the results of their auditing procedures. The committee normally meets quarterly. During 1997 the committee met 4 times. The Stock Option Committee consists of Directors Bowman (Chairman) Pettle and Wissman. The Stock Option Committee administers the Stock Option Plan and has the authority, among other things, to select the employees to whom options will be granted, to determine the terms of each option, to interpret the provisions of the Stock Option Plan and to make all determinations that it may deem necessary or advisable for the administration of the Stock Option Plan. During 1997 the committee did not meet. A total of 12 regularly scheduled and special meetings were held by the Board of Directors of the Company during 1997. During 1997, all directors attended at least 75 percent of the meetings of the Board and the committees on which they serve. Directors of the Company receive no fees for attendance at regularly scheduled meetings of the Board of Directors of the Company and they receive $100 for attendance at special meetings. Directors of the Bank receive fees of $400 per month plus $100 per meeting for attendance at regularly scheduled meetings of the Board of Directors of the Bank and $100 per month for attendance at regularly scheduled meetings of committees, except that Mr. Alexander and Mrs. Roepke do not receive additional amounts for attendance at committee meetings. EXECUTIVE COMPENSATION The following table sets forth information concerning the compensation paid or granted to the Company's Chief Executive Officer for the past three fiscal years. None of the remaining executive officers of the Company or the Bank had an aggregate salary and bonus which exceeded $100,000.
SUMMARY COMPENSATION TABLE Securities Name and Underlying All other Principal Year ended Options/ Compensation Position December 31 Salary($)(1) Bonus($) SARs(3) ($)(2) Patrick L. 1997 $119,957 $32,045 --- $12,975 Alexander 1996 114,993 30,473 --- 13,105 President/ 1995 108,648 18,000 --- 12,994 CEO 1. Includes amounts deferred. 2. Represents contributions made to the MNB Bancshares, Inc. Employee Stock Ownership Plan (the "ESOP"), of which the 1997 contributions have not yet been determined, and also includes premium payments for an insurance policy purchased for disability and death benefit available to all employees. The contribution to the ESOP was $11,880 for 1995, $11,919 for 1996, and is expected to be approximately $12,000 for 1997.
The following table sets forth certain information concerning the number and value of stock options at December 31, 1997 held by the Chief Executive Officer. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options/SARs at Options/SARs at FY-End (#) FY-End ($) Shares Acquired on Value Exer- Unexer- Exer- Unexer- Name Exercise(#) Realized cisable cisable cisable cisable Patrick L. Alexander 6,240 $56,232 31,786(1) --- $286,440 $--- (1) Includes options resulting from stock dividends paid by the Company. Employment Agreement In January, 1993 the Company and the Bank entered into an employment agreement with Patrick L. Alexander. The employment agreement initially provided for an initial base salary of $94,605, which may be increased but not decreased, and an initial term of three years, with one year extensions thereafter unless the agreement has been terminated or the Company or Mr. Alexander has provided a notice of non-renewal prior thereto. Notwithstanding any such notice, the term of the agreement will be extended to three years upon any change in control of the Company or the Bank, as defined in the agreement. The employment agreement will terminate upon the death or disability of Mr. Alexander, in the event of certain regulatory actions or upon notice by either the Company or Mr. Alexander, with or without cause. The employment agreement will be suspended in the event of a regulatory suspension of Mr. Alexander's employment. In the event of termination of Mr. Alexander's employment due to disability or without cause, the Company will be obligated to pay or to provide to him, as applicable, continued salary and benefits until the earlier of the expiration of the term of the agreement or his death. In the event Mr. Alexander's employment discontinues following a change in control of the Company or the Bank, the successor to the Company or the Bank is obligated to make a lump sum payment to him equal to three times his then annual salary and to continue benefits until the earlier of three years or his death. For purposes of the employment agreement, Mr. Alexander's employment will be considered terminated following a change in control in the event his right to retain his position with the Bank or to exercise fully the authority, duties and responsibilities of such position is changed or terminated. The employment agreement includes a covenant which will limit the ability of Mr. Alexander to compete with the Bank in an area encompassing a fifty mile radius from the Bank's main office for a period of one year following the termination of his employment with the Bank. The geographic area covered by this provision constitutes a portion of the Bank's primary service area. The Executive Committee has furnished the following report on executive compensation. The incorporation by reference of this Proxy Statement into any document filed with the Securities and Exchange Commission by the Company shall not be deemed to include the report unless the report is specifically stated to be incorporated by reference into such document. Executive Committee Report on Executive Compensation The Executive Committee of the Board of Directors of the Bank is composed of five directors and is responsible for recommendations to the Board of Directors of the Company for compensation of executive officers of the Bank and the Company. At this time no separate salary is paid to the officers of the Company. In determining compensation, the following factors are generally taken into consideration: 1. The performance of the executive officers in achieving the short and long term goals of the Company. 2. Payment of compensation commensurate with the ability and expertise of the executive officers. 3. Attempt to structure compensation packages so that they are competitive with similar companies. The committee considers the foregoing factors, as well as others, in determining compensation. There is no assigned weight given to any of these factors. Additionally, the Executive Committee considers various benefits, such as the ESOP and the Stock Option Plan, together with perquisites in determining compensation. The committee believes that the benefits provided through the stock based plans more closely tie the compensation of the officers to the interests of the stockholders and provide significant additional performance incentives for the officers which directly benefit the stockholders through an increase in the stock value. Annually, the Executive Committee evaluates four primary areas of performance in determining Mr. Alexander's level of compensation. These areas are: long-range strategic planning and implementation; Company financial performance; Company compliance with regulatory requirements and relations with regulatory agencies; and effectiveness of managing relationships with stockholders and the Board of Directors. When evaluating the financial performance of the Company, the committee considers profitability, asset growth and risk management. The primary evaluation criteria are considered to be essential to the long-term viability of the Company and are given equal weight in the evaluation. Finally, the committee reviews compensation packages of peer institutions to ensure that Mr. Alexander's compensation is competitive and commensurate with his level of performance. The 1997 compensation of Mr. Alexander was based upon the factors described above and his substantial experience and length of service with the organization. During 1997, Mr. Alexander successfully headed the Company's acquisition program, which included planning, analysis, contacting a number of financial institutions and completing the acquisition of Freedom Bancshares, Inc. The Executive Committee also considered the continuing additional duties required in completing the transition of the Bank from a mutual savings association to a commercial bank which is a stock institution. Mr. Alexander did not participate in any decisions pertaining to his compensation. Members of the Executive Committee are: Brent A. Bowman, Chairman Patrick L. Alexander Susan E. Roepke Donald J. Wissman William F. Caton Performance Graph The incorporation by reference of this Proxy Statement into any document filed with the Securities and Exchange Commission by the Company shall not be deemed to include the following performance graph and related information unless the graph and related information are specifically stated to be incorporated by reference into the document. The following graph shows a five year comparison of cumulative total returns for the Company, the Nasdaq Stock Market (U.S. Companies) and the Nasdaq Bank Stocks index. The Common Stock of the Company was first listed for quotation on the Nasdaq National Market System on January 6, 1993.
COMPARISON OF CUMULATIVE TOTAL RETURN* ASSUMES $100 INVESTED ON JANUARY 6, 1993 *Total return assumes reinvestment of dividends 1/6/93 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 MNB Bancshares, Inc. $100 $123 $156 $190 $230 $274 Nasdaq Market - U.S. $100 $114 $111 $157 $194 $238 Nasdaq Bank Stocks $100 $114 $113 $169 $223 $377
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSThe following table sets forth certain information regarding the Company's Common Stock beneficially owned on April 3, 1998 with respect to all persons known to the Company to be the beneficial owner of more than five percent of the Company's Common Stock, each director and nominee, each executive officer named in the Summary Compensation Table and all directors and executive officers of the Company as a group.
Name of Individual and Amount and Nature of Percent of Number of Persons in Group Beneficial Ownership(1) Class First Manhattan Co. 94,096(2) 7.3% 437 Madison Avenue New York, New York 10022 MNB Bancshares, Inc. 109,700(3) 8.5% Employee Stock Ownership Plan 800 Poyntz Avenue Manhattan, Kansas 66502 Jack Goldstein 89,368(4) 6.9% 555 Poyntz Avenue Manhattan, Kansas 66502 Patrick L. Alexander 96,095(5) 7.3% 2801 Brad Lane Manhattan, Kansas 66502 Mr. Rolla Goodyear 110,140(6) 8.6% 8840 Hanover Auburn, Kansas 66402 Susan E. Roepke 99,905(7) 7.7% 2600 Sumac Drive Manhattan, Kansas 66502 Directors Brent A. Bowman 4,964(8) * Joseph L. Downey 6,098 * Charles D. Green 26,844(8) 2.1% Vernon C. Larson 9,064(9) * Jerry R. Pettle 14,688 1.1% Donald J. Wissman 3,546(10) * All directors and executive officers as a group (12 persons) 436,418(11) 32.0% *Less than 1%. 1. The information contained in this column is based upon information furnished to the Company by the persons named above and the members of the designated group. The nature of beneficial ownership for shares shown in this column is sole voting and investment power, except as set forth in the footnotes below. Inclusion of shares in this table shall not be deemed to be an admission of beneficial ownership of such shares. Amounts shown include shares issued pursuant to a stock dividends paid by the Company and the two-for-one stock split declared in January of 1998. 2. Pursuant to an Amendment dated February 9, 1998, to a Schedule 13D filed by First Manhattan Co. 3. Includes 49,982 shares which have been allocated to participants' accounts under the Company's ESOP. 4. Pursuant to a Schedule 13D dated November 1, 1996. 5. Includes 4,502 shares held in an IRA of which the power to vote such shares is shared with the IRA administrator and 39,742 shares over which voting and investment power is shared with his spouse. Also includes 31,786 shares presently obtainable through the exercise of options granted under the Company's Stock Option Plan, over which shares Mr. Alexander has no voting and sole investment power. 6. Includes 2,128 shares held by Mr. Goodyear's spouse, over which shares Mr. Goodyear has no voting or investment power. 7. This includes 18,914 shares held in an Investment Retirement Account ("IRA"), of which the power to vote such shares is shared with the IRA administrator, 30,166 shares held by her spouse and over which Ms. Roepke has shared voting and investment power and 16,166 shares presently obtainable through the exercise of options granted under the Company's Stock Option Plan, over which shares Ms. Roepke has no voting and sole investment power. 8. Includes an aggregate of 2,536 shares presently obtainable through the exercise of options granted under the Company's Stock Option Plan for each named individual, over which shares each such person has no voting and sole investment power. 9. Represents 9,064 shares held jointly with his spouse and over which Mr. Larson has shared voting and investment power. 10. Includes 1,460 shares held by his spouse and over which Mr. Wissman has shared voting and investment power. 11. Includes an aggregate of 76,628 shares presently obtainable through the exercise of options granted under the Company's Stock Option Plan. Section 16(a) of the Securities Exchange Act of 1934 requires that the Company's executive officers, directors and persons who own more than 10% of the Company's Common Stock file reports of ownership and changes in ownership with the Securities and Exchange Commission and with the exchange on which the Company's shares of Common Stock are traded. Such persons are also required to furnish the Company with copies of all Section 16(a) forms they file. Based solely on the Company's review of the copies of such forms, the Company is not aware that any of its directors, executive officers or 10% stockholders failed to comply with the filing requirements of Section 16(a) during the period commencing January 1, 1997 through December 31, 1997.
TRANSACTIONS WITH MANAGEMENT Directors and officers of the Company and the Bank and their associates were customers of and had transactions with the Company and the Bank during 1997. Additional transactions are expected to take place in the future. All outstanding loans, commitments to loan, and certificates of deposit and depository relationships, in the opinion of management, were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risk of collectibility or present other unfavorable features. PROPOSED AMENDMENT TO THE CERTIFICATE OF INCORPORATION The Board of Directors of the Company has unanimously approved an amendment (the "Amendment") to Article IV of the Company's Certificate of Incorporation (the "Certificate") that would increase the number of authorized shares of the Company's Common Stock, $.01 par value per share, from 1,500,000 shares to 3,000,000 shares. As of April 3, 1998, the Company had 1,288,476 shares of Common Stock issued and outstanding following a two-for-one stock split effected in February, 1998. The Board of Directors has proposed adoption of the Amendment for several reasons, including those set forth below. First, the Amendment will provide additional shares of Common Stock following the effectuation of the stock split in February. As a result of the stock split, the number of shares of Common Stock owned by each of the Company's stockholders as of the record date for the stock split doubled, and each such share then had approximately half of the per share value of Common Stock prior to the stock split. The decrease in the per share value of Common Stock has lead to a commensurate decrease in the per share market price, thus making an investment in Common Stock by existing or potential stockholders of the Company more readily possible. Following the stock split, only 211,524 shares of authorized and unissued (and unreserved) Common Stock remained for future issuance by the Company. Second, the additional shares authorized by the Amendment will provide management with enough shares of Common Stock to enter into certain transactions involving the use of Common Stock that may be advisable from time to time. Such transactions could include, but are not limited to, the acquisition by the Company of additional branch locations, subsidiaries or bank or thrift holding companies. Although no such transactions are planned for the immediate future, management and the Board of Directors believe that it is in the Company's best interests to have available a sufficient number of authorized shares of Common Stock if such transactions become advisable. Third, the additional shares of Common Stock authorized by the Amendment could be used to raise additional working capital for the Company or the Bank. The Board of Directors does not currently have any plans to raise capital through the issuance of additional shares or otherwise, but these shares would be available for that purpose. The increase in the number of shares of Common Stock authorized by the Amendment will allow for the possibility of substantial dilution of the voting power of current stockholders of the Company, although no dilution occurred as a direct result of the stock split. The degree of any such dilution which would occur following the issuance of any additional shares of Common Stock, including any newly authorized Common Stock, would depend upon the number of shares of Common Stock that are actually issued in the future, which number cannot be determined at this time. Issuance of a large number of such shares could significantly dilute the voting power of existing stockholders. The existence of a substantial number of authorized and unissued shares of Common Stock could also impede an attempt to acquire control of the Company because the Company would have the ability to issue additional shares of Common Stock in response to any such attempt. The Company is not aware of any such attempt to acquire control at this time, and no decision has been made as to whether any or all newly authorized but unissued shares of Common Stock would be issued in response to any such attempt. To be approved by the Company's stockholders, the Amendment must receive the affirmative vote of a majority of the outstanding shares of Common Stock. The Board of Directors recommends that you vote your shares FOR the Amendment. PROPOSAL TO ADOPT STOCK INCENTIVE PLAN On January 21, 1998, the Board of Directors unanimously adopted resolutions approving the MNB Bancshares, Inc. 1998 Stock Incentive Plan (the "Incentive Plan"), subject to stockholder approval, to promote equity ownership of the Company by directors of the Company and selected officers and employees of the Bank, to increase their proprietary interest in the success of the Company, and to encourage them to remain in the employ of the Company. Administration The Incentive Plan is to be administered by the MNB Bancshares, Inc. Stock Option Plan Administrative Committee which is composed of three non-employee directors appointed by the Board of Directors (the "Stock Option Committee"). The Stock Option Committee will have the authority, subject to approval by the Board of Directors, to select the employees to whom awards may be granted, to determine the terms of each award, to interpret the provisions of the Incentive Plan and to make all other determinations that it may deem necessary or advisable for the administration of the Incentive Plan. The Incentive Plan provides for the grant of "incentive stock options," as defined under Section 422(b) of the Internal Revenue Code of 1986, as amended, options that do not so qualify (referred to herein as "nonstatutory options"), restricted stock and stock appreciation rights ("SARs"), as determined in each individual case by the Stock Option Committee. The Board of Directors has reserved 100,000 shares of Common Stock for issuance under the Incentive Plan. In general, if any award (including an award granted to a non-employee director) granted under the Incentive Plan expires, terminates, is forfeited or is canceled for any reason, the shares of Common Stock allocable to such award may again be made subject to an award granted under the Incentive Plan. Awards Directors of the Company and key policy-making employees of the Bank are eligible to receive grants under the Incentive Plan. Directors may receive nonstatutory options based upon a formula. Employee awards may be granted subject to a vesting requirement and in any event will become fully vested upon a merger or change of control of the Company. The exercise price of incentive stock options granted under the Incentive Plan must at least equal the fair market value of the Common Stock subject to the option (determined as provided in the plan) on the date the option is granted. The exercise price of nonstatutory options and SARs will be determined by the Stock Option Committee. An incentive stock option granted under the Incentive Plan to an employee owning more than 10% of the total combined voting power of all classes of capital stock of the Company is subject to the further restriction that such option must have an exercise price of at least 110% of the fair market value of the shares of Common Stock issuable upon exercise of the option (determined as of the date the option is granted) and may not have an exercise term of more than five years. Incentive stock options are also subject to the further restriction that the aggregate fair market value (determined as of the date of grant) of Common Stock as to which any such incentive stock option first becomes exercisable in any calendar year, is limited to $100,000. To the extent options covering more than $100,000 worth of Common Stock first become exercisable in any one calendar year, the excess will be nonstatutory options. For purposes of determining which, if any, options have been granted in excess of the $100,000 limit, options will be considered to become exercisable in the order granted. Each director and key employee eligible to participate in the Incentive Plan will be notified by the Stock Option Committee. To receive an award under the Incentive Plan, an award agreement must be executed which specifies the type of award to be granted, the number of shares of Common Stock (if any) to which the award relates, the terms and conditions of the award and the date granted. In the case of an award of options, the award agreement will also specify the price at which the shares of Common Stock subject to the option may be purchased, the date(s) on which the option becomes exercisable and whether the option is an incentive stock option or a nonstatutory option. The full exercise price for all shares of Common Stock purchased upon the exercise of options granted under the Incentive Plan must be paid by cash, personal check, personal note, award surrender or Common Stock owned at the time of exercise. Incentive stock options granted to employees under the Incentive Plan may remain outstanding and exercisable for ten years from the date of grant or until the expiration of ninety days (or such lesser period as the Stock Option Committee may determine) from the date on which the person to whom they were granted ceases to be employed by the Company. Nonstatutory options and SARs granted under the Incentive Plan remain outstanding and exercisable for such period as the Stock Option Committee may determine. No awards have been made by the Stock Option Committee pursuant to the Stock Incentive Plan at this time. Income Tax Incentive stock options granted under the Incentive Plan have certain advantageous tax attributes to the recipient under the income tax laws. No taxable income is recognized by the option holder for income tax purposes at the time of the grant or exercise of an incentive stock option, although neither is there any income tax deduction available to the Company as a result of such a grant or exercise. Any gain or loss recognized by an option holder on the later disposition of shares of Common Stock acquired pursuant to the exercise of an incentive stock option generally will be treated as capital gain or loss if such disposition does not occur prior to one year after the date of exercise of the option, or two years after the date the option was granted. As in the case of incentive stock options, the grant of nonstatutory stock options, restricted stock or SARs will not result in taxable income for income tax purposes to the recipient of the awards, nor will the Company be entitled to an income tax deduction. Upon the exercise of nonstatutory stock options or SARs, or the lapse of restrictions on restricted stock, the award holder will generally recognize ordinary income for income tax purposes equal to the difference between the exercise price and the fair market value of the shares of Common Stock acquired or deemed acquired on the date of exercise, and the Company will be entitled to an income tax deduction in the amount of the ordinary income recognized by the option holder. In general, any gain or loss realized by the option holder on the subsequent disposition of such shares will be a capital gain or loss. Amendment and Termination The Stock Incentive Plan expires ten years after its adoption, unless sooner terminated by the Board of Directors. The Board of Directors has authority to amend the Stock Incentive Plan in such manner as it deems advisable, except that the Board of Directors is not permitted without stockholder approval to amend the plan in a manner which would prevent the grant of incentive stock options or increase the number of shares of Common Stock available. The Incentive Plan provides for appropriate adjustment, as determined by the Stock Option Committee, in the number and kind of shares subject to unexercised options, in the event of any change in the outstanding shares of Common Stock by reason of a stock split, stock dividend, combination or reclassification of shares, recapitalization, merger or similar event. Required Affirmative Vote The affirmative vote of the holders of a majority of the shares of Common Stock present in person or by proxy at the 1998 Annual Meeting is required to approve the Incentive Plan. The Board of Directors unanimously recommends a vote FOR the proposed Incentive Plan. INDEPENDENT PUBLIC ACCOUNTANTS Stockholders will be asked to approve the appointment of KPMG Peat Marwick LLP as the Company's independent public accountants for the year ending December 31, 1998. A proposal will be presented at the annual meeting to ratify the appointment of KPMG Peat Marwick LLP. If the appointment of KPMG Peat Marwick LLP is not ratified, the matter of the appointment of independent public accountants will be considered by the Board of Directors. Representatives of KPMG Peat Marwick LLP are expected to be present at the meeting and will be given the opportunity to make a statement if they desire to do so and will be available to respond to appropriate questions. The Board of Directors unanimously recommends a vote FOR this appointment. SUBMISSION OF STOCKHOLDER PROPOSALS Any proposal which a stockholder of the Company wishes to have included in the proxy materials of the Company relating to the next annual meeting of stockholders of the Company, which is scheduled to be held in May 1999, must be received at the principal executive offices of the Company (MNB Bancshares, Inc., 800 Poyntz Avenue, Manhattan, Kansas 66502, attention: Mr. Patrick L. Alexander, President) no later than December 18, 1998, and must otherwise comply with the notice and other provisions of the Company's Bylaws. GENERAL Your proxy is solicited by the Board of Directors and the cost of solicitation will be paid by the Company. In addition to the solicitation of proxies by use of the mails, officers, directors and regular employees of the Company or the Bank, acting on the Company's behalf, may solicit proxies by telephone, telegraph or personal interview. The Company will, at its expense, upon the receipt of a request from brokers and other custodians, nominees and fiduciaries, forward proxy soliciting material to the beneficial owners of shares held of record by such persons. OTHER BUSINESS It is not anticipated that any action will be asked of the stockholders other than that set forth above, but if other matters properly are brought before the meeting, the persons named in the proxy will vote in accordance with their best judgment. FAILURE TO INDICATE CHOICE If any stockholder fails to indicate a choice in items (1), (2), (3) or (4) on the proxy card, the shares of such stockholder shall be voted (FOR) in each instance. REPORT ON FORM 10-K THE COMPANY WILL FURNISH WITHOUT CHARGE TO EACH PERSON REPRESENTING THAT HE OR SHE WAS A BENEFICIAL OWNER OF THE COMPANY'S COMMON STOCK AS OF THE RECORD DATE FOR THE MEETING, UPON WRITTEN REQUEST, A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K. SUCH WRITTEN REQUEST SHOULD BE SENT TO MR. PATRICK L. ALEXANDER, MNB BANCSHARES, INC., P.O. BOX 308, MANHATTAN, KANSAS 66505. By order of the Board of Directors /s/Patrick L. Alexander President and Chief Executive Officer Manhattan, Kansas April 17, 1998 ALL STOCKHOLDERS ARE URGED TO SIGN AND MAIL THEIR PROXIES PROMPTLY PROXY FOR COMMON SHARES ON BEHALF OF BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF THE STOCKHOLDERS OF MNB BANCSHARES, INC. TO BE HELD MAY 18, 1998 The undersigned hereby appoints Patrick L. Alexander and Brent A. Bowman, or either of them acting in the absence of the other, with power of substitution, attorneys and proxies, for and in the name and place of the undersigned, to vote the number of shares of Common Stock that the undersigned would be entitled to vote if then personally present at the Annual Meeting of the Stockholders of MNB Bancshares, Inc., to be held at the Kansas State University Student Union, 17th and Anderson Avenue, Manhattan, Kansas 66506, on Monday, May 18, 1998, at 2:00 p.m., local time, or any adjournments or postponements thereof, upon the matters set forth in the Notice of Annual Meeting and Proxy Statement, receipt of which is hereby acknowledged, as follows: 1. ELECTION OF DIRECTORS: FOR all nominees listed below (except as marked to the contrary below) WITHHOLD AUTHORITYto vote for all nominees listed below(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE A LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW.)Class III (term expires 2001): Brent A. Bowman, Charles D. Green and Vernon C. Larson 2. AMEND THE CERTIFICATE OF INCORPORATION OF THE COMPANY TO INCREASE THE AUTHORIZED COMMON STOCK TO 3,000,000 SHARES: For ____ Against ____ Abstain _____ 3. APPROVE THE MNB BANCSHARES, INC. 1998 STOCK INCENTIVE PLAN: For ____ Against ____ Abstain _____ 4. APPROVE THE APPOINTMENT OF KPMG PEAT MARWICK LLP AS THE COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS FOR THE YEAR ENDING DECEMBER 31, 1998: For ____ Against _____ Abstain _____ 5. In accordance with their discretion, upon all other matters that may properly come before said meeting and any adjournment or postponements thereof. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE NOMINEES LISTED UNDER PROPOSAL 1 AND FOR PROPOSALS 2, 3 and 4. Dated: ________________________, 1998 Signature(s)_____________________________ _________________________________________ NOTE: PLEASE DATE PROXY AND SIGN IT EXACTLY AS NAME OR NAMES APPEAR ABOVE. ALL JOINT OWNERS OF SHARES SHOULD SIGN. STATE FULL TITLE WHEN SIGNING AS EXECUTOR, ADMINISTRATOR, TRUSTEE, GUARDIAN, ETC. PLEASE RETURN SIGNED PROXY IN THE ENCLOSED ENVELOPE. EXHIBIT A MNB BANCSHARES, INC. STOCK INCENTIVE PLAN 1. Purpose of the Plan The MNB BANCSHARES, INC., 1998 STOCK INCENTIVE PLAN (hereinafter referred to as the "Plan") is intended to provide a means whereby directors, employees, consultants and advisors of MNB BANCSHARES, INC., and its Related Corporations may sustain a sense of proprietorship and personal involvement in the continued development and financial success of the Company, and to encourage them to remain with and devote their best efforts to the business of the Company, thereby advancing the interests of the Company and its shareholders. Accordingly, the Company may permit certain directors, employees, consultants and advisors to acquire Shares or otherwise participate in the financial success of the Company, on the terms and conditions established herein. 2. Definitions The following terms shall be defined as set forth below: (a) Board. Shall mean the Board of Directors of the Company. (b) Cause. Shall mean the commitment of fraud, the misappropriation of or intentional material damage to the property or business of the Company, the substantial failure to fulfill the duties and responsibilities of a regular position and/or comply with Company policies, rules or regulations, or the conviction of a felony. (c) Change of Control. Shall mean: (i) the consummation of the acquisition by any person (as such term is defined in Section 13(d) or 14(d) of the '34 Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the '34 Act) of fifty percent (50%) or more of the combined voting power of the then outstanding voting securities of the Company other than through the receipt of Shares pursuant to the Plan; or (ii) the individuals who, as of the date hereof, are members of the Board cease for any reason to constitute a majority of the Board, unless the election, or nomination for election by the stockholders of the Company, of any new director was approved by a vote of a majority of the Board, and such new director shall, for purposes of this Agreement, be considered as a member of the Board; or (iii) approval by stockholders of the Company of: (1) a merger or consolidation if the stockholders, immediately before such merger or consolidation, do not, as a result of such merger or consolidation, own, directly or indirectly, more than fifty percent (50%) of the combined voting power of the then outstanding voting securities of the entity resulting from such merger or consolidation in substantially the same proportion as their ownership of the combined voting power of the voting securities of the Company outstanding immediately before such merger or consolidation; or (2) a complete liquidation or dissolution or an agreement for the sale or other disposition of all or substantially all of the assets of the Company. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because fifty percent (50%) or more of the combined voting power of the then outstanding securities of the Company are acquired by: (1) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained for employees of the Company; or (2) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders of the Company in the same proportion as their ownership of stock of the Company immediately prior to such acquisition. (d) Code. Shall mean the Internal Revenue Code of 1986, and any amendments thereto. (e) Committee. Shall mean a committee appointed by the Board in accordance with Section 3 hereof. (f) Company. Shall mean MNB Bancshares, Inc. (g) Compete. Shall mean within a period of one (1) year after the termination of service, the direct or indirect competition with the business of the Company and its Related Corporations, including, but not by way of limitation, the direct or indirect owning, managing, operating, controlling, financing or serving as an officer, employee, director or consultant to, or by soliciting or inducing, or attempting to solicit or induce, any employee or agent of the Company or a Related Corporation to terminate employment and become employed by any person, firm, partnership, corporation, trust or other entity which owns or operates, a business similar to that of the Company and its Related Corporations, within the counties in which the Company and its Related Corporations is operating, except with the express prior written consent of the Company. (h) Disability. Shall mean a physical or mental disability (within the meaning of Section 22(e)(3) of the Code) which impairs the individual's ability to substantially perform his or her current duties for a period of at least twelve (12) consecutive months, as determined by the Committee. (i) ERISA. Shall mean the Employee Retirement Income Security Act of 1974, and any amendment thereto. (j) Incentive Stock Option. Shall mean an award under the Plan that satisfies the general requirements of Code Section 422, namely: (i) grantees must be employees; (ii) the exercise price may not be less than the fair market value of the underlying Shares at the date of grant; (iii) no more than $100,000 worth of Shares may become exercisable in any year; (iv) the maximum duration of an award may be ten (10) years; (v) awards must be exercised within three (3) months after termination of employment, except in the event of Disability or death; and (vi) Shares received upon exercise must be retained for the greater of two (2) years from the date of grant or one (1) year from the date of exercise. (k) Nonqualified Options. Shall mean an option award under the Plan that is not an Incentive Stock Option. (l) Related Corporation. Shall mean Security National Bank and any corporation which would be a parent or subsidiary corporation with respect to the Company as defined in Section 424(e) or (f), respectively, of the Code. (m) Retirement. Shall have the same meaning as is provided under the MNB Bancshares, Inc. Employee Stock Ownership Plan, and shall mean termination of service, other than for Cause, after attainment of age sixty (60) for directors, consultants and advisors. (n) Restricted Stock. Shall mean an award of Shares under the Plan that are restricted as to transfer and subject to forfeiture. (o) Rule 16b-3. Shall mean Rule 16b-3 promulgated under the '34 Act, and any amendments thereto. (p) Shares. Shall mean common stock of the Company. (q) Stock Appreciation Rights. Shall mean rights entitling the grantee to receive the appreciation in the market value of a stated number of Shares. (r) '33 Act. Shall mean the Securities Act of 1933, and any amendments thereto. (s) '34 Act. Shall mean the Securities Exchange Act of 1934, and any amendments thereto. 3. Administration of the Plan The Plan shall be administered by the Board, or a Committee appointed by the Board. The Board, or the appointed Committee, shall have sole authority to: (a) select the directors, employees, consultants and advisors to whom awards shall be granted under the Plan; (b) establish the amount and conditions of each such award; (c) prescribe any legend to be affixed to certificates representing such awards; (d) interpret the Plan; and (e) adopt such rules, regulations, forms and agreements, not inconsistent with the provisions of the Plan, as it may deem advisable to carry out the Plan. All decisions made by the Board, or the Committee, in administering the Plan shall be final. 4. Shares Subject to the Plan The aggregate number of Shares that may be obtained by directors, employees, consultants and advisors under the Plan shall be 100,000 Shares. Any Shares that remain unissued at the termination of the Plan shall cease to be subject to the Plan, but until termination of the Plan, the Company shall at all times make available sufficient Shares to meet the requirements of the Plan. 5. Stock Options (a) Type of Options. The Company may issue options that constitute Incentive Stock Options to employees and Nonqualified Options to directors, employees, consultants and advisors under the Plan. The grant of each option shall be confirmed by a stock option agreement that shall be executed by the Company and the optionee as soon as practicable after such grant. The stock option agreement shall expressly state or incorporate by reference the provisions of the Plan and state whether the option is an Incentive Option or a Nonqualified Option. (b) Terms of Options. Except as provided in Subparagraphs (c) and (d) below, each option granted under the Plan shall be subject to the terms and conditions set forth by the Board in the stock option agreement including, but not limited to, option price and option term. (c) Additional Terms Applicable to All Options. Each option shall be subject to the following terms and conditions: (i) Written Notice. An option may be exercised only by giving written notice to the Company specifying the number of Shares to be purchased. (ii) Method of Exercise. The aggregate option price may be paid in any one or a combination of cash, personal check, Shares already owned or Plan awards which the optionee has an immediate right to exercise, as provided by the Board. (iii) Term of Option. An option shall be exercisable as provided under the Plan or by the Board. (iv) Disability or Death of Optionee. If an optionee terminates service due to Retirement, Disability or death prior to exercise in full of any options, he or she or his or her beneficiary, executor, administrator or personal representative shall have the right to exercise the options within a period of twelve (12) months after the date of such termination to the extent that the right was exercisable at the date of such termination as provided in the stock option agreement, or as may otherwise be provided by the Board. (v) Transferability. No option may be transferred, assigned or encumbered by an optionee, except: (A) by will or the laws of descent and distribution; (B) by gifting for the benefit of descendants for estate planning purposes; or (C) pursuant to a certified domestic relations order. (d) Additional Terms Applicable to Incentive Options. Each Incentive Option shall be subject to the following terms and conditions: (i) Option Price. The option price per Share shall be 100% of the fair market value of a Share on the date the option is granted. Notwithstanding the preceding sentence, the option price per Share granted to an individual who, at the time such option is granted, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company (hereinafter referred to as a "10% Shareholder") shall not be less than 110% of the fair market value of a Share on the date the option is granted. (ii) Term of Option. No option may be exercised more than ten (10) years after the date of grant. No option granted to a 10% Shareholder may be exercised more than five (5) years after the date of grant. Notwithstanding any other provisions hereof, no option may be exercised more than three (3) months after the optionee terminates employment with the Company, except in the event of death or Disability as provided under Subparagraph (c)(iv) above. (iii) Annual Exercise Limit. The aggregate fair market value of Shares which first become exercisable during any calendar year shall not exceed $100,000. For purposes of the preceding sentence, the fair market value of each Share shall be determined on the date the option with respect to such Share is granted. (iv) Transferability. No option may be transferred, assigned or encumbered by an optionee, except by will or the laws of descent and distribution, and during the optionee's lifetime an option may only be exercised by him or her. 6. Restricted Stock Awards (a) Grants. Restricted Stock Awards ("RSAs") under the Plan shall be evidenced by restricted stock agreements in such form and consistent with the Plan as the Board shall approve from time to time. (b) Restriction Period. RSAs awarded under the Plan shall be subject to such terms, conditions, and restrictions, including without limitation: prohibitions against transfer; substantial risks of forfeiture; attainment of performance objectives; repurchase by the Company or right of first refusal for such period or periods as shall be determined by the Board at the time of grant. The Board shall have the power to permit, in its discretion, anacceleration of the expiration of the applicable restriction period with respect to any part or all of the RSAs awarded to a grantee. (c) Restrictions Upon Transfer. RSAs awarded, and the right to vote underlying Shares and to receive dividends thereon, may not be sold, assigned, transferred, exchanged, pledged, hypothecated, or otherwise encumbered during the restriction period applicable to such Shares, except: (i) by will or the laws of descent and distribution; (ii) by gifting for the benefit of descendants for estate planning purposes; or (iii) pursuant to a certified domestic relations order. Subject to the foregoing, and except as otherwise provided in the Plan, the grantee shall have all the other rights of a stockholder including, but not limited to, the right to receive dividends and the right to vote such Shares. (d) Certificates. Each certificate issued in respect of RSAs awarded to a grantee shall be deposited with the Company, or its designee, and shall bear the following legend: "This certificate and the shares represented hereby are subject to the terms and conditions (including forfeiture and restrictions against transfer) contained in the MNB Bancshares, Inc. 1998 Stock Incentive Plan and an Agreement entered into by the registered owner. Release from such terms and conditions shall be obtained only in accordance with the provisions of the Plan and Agreement, a copy of each of which is on file in the office of the Secretary of said Company." (e) Lapse of Restrictions. The Agreement shall specify the terms and conditions upon which any restrictions upon Shares awarded under the Plan shall lapse, as determined by the Board. Upon the lapse of such restrictions, Shares, free of the foregoing restrictive legend, shall be issued to the grantee or his or her legal representative. (f) Termination Prior to Lapse of Restrictions. In the event of a grantee's termination of service prior to the lapse of restrictions applicable to any RSAs awarded to such grantee, all Shares as to which there still remain restrictions shall be forfeited by such grantee without payment of any consideration to the grantee, and neither the grantee nor any successors, heirs, assigns, or personal representatives of such grantee shall thereafter have any further rights or interest in such Shares or certificates. 7. Stock Appreciation Rights (a) Grants. Stock Appreciation Rights ("SARs") may be granted separately or in tandem with or by reference to an option granted prior to or simultaneously with the grant of such rights, to such eligible directors, employees, consultants and advisors as may be selected by the Board. (b) Terms of Grant. SARs may be granted in tandem with or with reference to a related option, in which event the grantee may elect to exercise either the option or the SAR, but not both, as to the same Share subject to the option and the SAR, or the SAR may be granted independently of a related option. SARs shall not be transferable, except: (i) by will or the laws of descent and distribution; (ii) by gifting for the benefit of descendants for estate planning purposes; or (iii) pursuant to a certified domestic relations order. (c) Payment on Exercise. Upon exercise of a SAR, the grantee shall be paid the excess of the then fair market value of the number of Shares to which the SAR relates over the fair market value of such number of Shares at the date of grant of the SAR or of the related option, as the case may be. Such excess shall be paid in cash or in Shares having a fair market value equal to such excess or in such combination thereof as the Board shall determine. 8. Amendment or Termination of the Plan The Board may amend, suspend or terminate the Plan or any portion thereof at any time, but (except as provided in Section 13 hereof) no amendment shall be made without approval of the stockholders of the Company which shall: (i) materially increase the aggregate number of Shares with respect to which Incentive Stock Option awards may be made under the Plan; or (ii) change the class of persons eligible to receive Incentive Stock Option awards under the Plan; provided, however, that no amendment, suspension or termination shall impair the rights of any individual, without his or her consent, in any award theretofore made pursuant to the Plan. 9. Term of Plan The Plan shall be effective upon the date of its adoption by the Board; provided that, Incentive Options may be granted only if the Plan is approved by the shareholders within twelve (12) months before or after the date of adoption. Unless sooner terminated under the provisions of Section 9, Shares and SARs shall not be granted under the Plan after the expiration of ten (10) years from the effective date of the Plan. However, awards may be exercisable after the end of the term of the Plan. 10. Rights as Shareholder Upon delivery of any Share to a director, employee, consultant or advisor, such person shall have all of the rights of a shareholder of the Company with respect to such Share, including the right to vote such Share and to receive all dividends or other distributions paid with respect to such Share. 11. Merger or Consolidation In the event the Company is merged or consolidated with another corporation and the Company is not the surviving corporation, the surviving corporation may agree to exchange options and SARs issued under this Plan for options and SARs (with the same aggregate option price) to acquire and participate in that number of shares in the surviving corporation that have a fair market value equal to the fair market value (determined on the date of such merger or consolidation) of Shares that the grantee is entitled to acquire and participate in under this Plan on the date of such merger or consolidation. In the event of a Change of Control, options, Restricted Stock and SARs shall become immediately and fully exercisable. 12. Changes in Capital and Corporate Structure The aggregate number of Shares and interests awarded and which may be awarded under the Plan shall be adjusted to reflect a change in the outstanding Shares of the Company by reason of a recapitalization, reclassification, reorganization, stock split, reverse stock split, combination of shares, stock dividend or similar transaction. The adjustment shall be made in an equitable manner which will cause the awards to remain unchanged as a result of the applicable transaction. 13. Service An individual shall be considered to be in the service of the Company or a Related Corporation as long as he or she remains a director, employee, consultant or advisor of the Company or such Related Corporation. Nothing herein shall confer on any individual the right to continued service with the Company or a Related Corporation or affect the right of the Company or such Related Corporation to terminate such service. 14. Withholding of Tax To the extent the award, issuance or exercise of Shares or SARs results in the receipt of compensation by a director, employee, consultant or advisor, the Company is authorized to withhold a portion of such Shares receivable or any cash compensation then or thereafter payable to such person to pay any tax required to be withheld by reason of the receipt of the compensation. Alternatively, the director, employee, consultant or advisor may tender Shares with a value equal to, or a personal check in the amount of, the tax required to be withheld. 15. Delivery and Registration of Stock The Company's obligation to deliver Shares with respect to an award shall, if the Board so requests, be conditioned upon the receipt of a representation as to the investment intention of the individual to whom such Shares are to be delivered, in such form as the Board shall determine to be necessary or advisable to comply with the provisions of the '33 Act or any other federal, state or local securities legislation or regulation. It may be provided that any representation requirement shall become inoperative upon a registration of the Shares or other action eliminating the necessity of such representation under securities legislation. The Company shall not be required to deliver any Shares under the Plan prior to (i) the admission of such Shares to listing on any stock exchange on which Shares may then be listed, and (ii) the completion of such registration or other qualification of such Shares under any state or federal law, rule or regulation, as the Board shall determine to be necessary or advisable. The Plan is intended to comply with Rule 16b-3, if applicable. any provision of the Plan which is inconsistent with said rule should to the extent of such inconsistency, be inoperative and shall not affect the validity of the remaining provisions of the Plan. EX-27 2
9 0000891284 MNB BANCSHARES, INC. YEAR DEC-31-1997 DEC-31-1998 3,398,451 3,300,000 0 0 35,409,475 6,669,809 6,692,000 90,238,783 1,335,024 144,752,091 122,208,537 1,049,615 1,168,326 8,049,764 0 0 12,845 12,263,004 144,752,091 5,879,204 1,944,663 105,003 7,928,870 3,850,889 4,037,711 3,891,159 60,000 (21,309) 2,977,581 1,543,687 1,543,687 0 0 1,072,544 .84 .81 2.87 172,501 0 0 32 819,660 17,655 11,630 1,335,024 1,219,994 0 115,030
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