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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997 COMMISSION FILE NUMBER 0-24630
MAHASKA INVESTMENT COMPANY
42-1003699
Incorporated in Iowa I.R.S. Employer Identification No.
222 FIRST AVENUE EAST, OSKALOOSA, IOWA 52577
Registrant's telephone number, including area code: 515-673-8448
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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NONE NONE
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $5 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate 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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 2, 1998, was $49,709,633.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the most recent practicable date, March 2, 1998.
3,673,816 shares Common Stock, $5 par value
DOCUMENTS INCORPORATED BY REFERENCE
The Annual Report to Shareholders for the 1997 fiscal year is incorporated
by reference into Part II hereof to the extent indicated in such Part.
The definitive proxy statement of Mahaska Investment Company for the
1998 annual meeting of shareholders is incorporated by reference into Part II
and Part III hereof to the extent indicated in such Parts.
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TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 1
A. General Description...................................... 1
B. Subsidiaries............................................. 1
C. Loan Pool Participations................................. 2
D. Competition.............................................. 5
E. Supervision and Regulation............................... 5
F. Employees................................................ 8
G. Statistical Disclosure................................... 8
Item 2. Properties.................................................. 22
Item 3. Legal Proceedings........................................... 22
Item 4. Submission of Matters to a Vote of Security Holders......... 22
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters....................................... 22
Item 6. Selected Financial Data..................................... 23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 23
Item 7a. Market Risk Disclosure...................................... 23
Item 8. Financial Statements and Supplementary Data................. 23
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 23
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 23
Item 11. Executive Compensation...................................... 23
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 23
Item 13. Certain Relationships and Related Transactions.............. 23
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 24
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PART I
ITEM 1. BUSINESS
A. GENERAL DESCRIPTION
Mahaska Investment Company (the "Company") is a financial services holding
company headquartered in Oskaloosa, Mahaska County, Iowa. The Company was
incorporated in Iowa in 1973 and is a bank holding company registered under the
Bank Holding Company Act of 1956 and a savings and loan holding company under
the Savings and Loan Holding Company Act. The Company owns 100% of the stock of
three bank subsidiaries (collectively referred to as the "Banks"). These three
banks are Mahaska State Bank ( "MSB"), Central Valley Bank ("CVB"), and Pella
State Bank ("PSB"). The Company also owns 100% of the stock of On-Site Credit
Services, Inc. ("On-Site").
The Bank subsidiaries engage in retail and commercial banking and related
financial services, providing the usual products and services such as deposits,
commercial, real estate, and consumer loans, and trust services. MSB also
provides data processing services to affiliated and non-affiliated banks.
On-Site provides equipment leasing, factoring and accounts receivable financing
to small-business clients.
Since 1988, the Company, either directly or through the Banks, has invested
in loan pool participations that have been purchased by certain non-affiliated
independent service corporations (collectively, the "Servicer") from the Federal
Deposit Insurance Corporation ("FDIC"), the Resolution Trust Corporation
("RTC"), or from other sources. These loan pool investments generally consist of
distressed or nonperforming loans, that have been sold at prices reflecting
varying discounts from the aggregate outstanding principal amount of the
underlying loans depending on the credit quality of the portfolio. The Servicer
then proceeds to collect these loans from the borrowers.
The Company provides services to the Banks and to On-Site including
management assistance, auditing services, preparation of tax returns, assistance
with respect to accounting and operating systems and procedures, and loan
review. Charges for these services are based on the nature and extent of these
services.
B. SUBSIDIARIES
Mahaska State Bank -- MSB is a full-service, commercial bank which was
chartered as an Iowa state bank in 1931. The Bank operates in south central Iowa
and serves all of Mahaska county from its main bank and two branch offices in
Oskaloosa and serves portions of Keokuk and Iowa counties from its branch office
in North English. The Bank also maintains one drive-up automated teller machine
located in Oskaloosa. The Bank provides a wide array of retail and commercial
banking services, including demand, savings and time deposits, loans, trust
services, and data processing services to CVB and PSB and to two non-affiliated
banks. The Bank also provides full-service brokerage services to its customers
through an affiliation with an independent broker.
Central Valley Bank -- CVB is a full-service, federally-chartered savings
bank which was formed as a de novo institution by the Company in June 1994. CVB
also operates in south central Iowa from its main office in Ottumwa, which
serves Wapello County, and from its two branches located in Fairfield and one
branch in Sigourney, which serve Jefferson and Keokuk counties, respectively.
CVB provides retail deposit services including demand, savings, and time deposit
products and offers commercial, agricultural, real estate, and consumer loans.
During 1997, the Bank formed a wholly-owned service corporation, Valley
Financial Services, Inc., to provide crop insurance products to its customers.
Pella State Bank -- PSB is a full-service, Iowa state chartered commercial
bank which the Company formed as a de novo institution in December 1997. PSB
mainly serves the community of Pella, Iowa and the surrounding area located in
Marion County. The office of the bank is a newly-remodeled facility which the
Company purchased and renovated in 1997. The Bank provides full retail and
commercial banking services to its customers. The Bank also provides
full-service brokerage services to its customers through an affiliation with an
independent broker.
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On-Site Credit Services, Inc. -- On-Site is an Iowa corporation which was
formed by the Company in 1974 under the name of MIC Leasing Co. The company
operated under the name of On-Site Commercial Services until June 1997 when the
name was officially changed to On-Site Credit Services, Inc. On-Site originates
and services machinery and equipment leases to small businesses and farmers. The
funding of these leases is either provided by On-Site through funds provided by
the Company or by MSB, with On-Site receiving a broker fee. On-Site also
provides accounts receivable financing and factoring services to small
businesses mainly in the state of Iowa.
C. LOAN POOL PARTICIPATIONS
The Company, directly and through MSB and CVB, has participation interests
in pools currently held and serviced by three separate independent servicing
corporations (referred to collectively as the "Servicer"). The three independent
servicing corporations are Central States Resources Corporation, Midstates
Resources Corporation, and All States Resources Corporation. The Company does
not have any ownership interest in or control over these servicing corporations.
The independent servicing corporations are owned by Randal Vardaman and Nyle
Johnson. Mr. Vardaman has been engaged in credit analysis and loan portfolio
management in various positions since 1970. He founded Central States Resources
Corporation in 1988 and organized Midstates Resources Corporation in 1991 and
All States Resources Corporation in 1993. Prior to the formation of the
servicing corporations, he reviewed various FDIC loan pool packages,
participated in the liquidation of certain banking institutions in Iowa, and
served as assistant liquidator at the FDIC's Division of Liquidation. Mr.
Johnson has served as credit supervisor with the servicing corporations since
their inceptions. Prior thereto, he served as section chief of commercial loans
for the FDIC Division of Liquidation.
The Company has invested in loan pools purchased by the Servicer at deep
discounts from the aggregate outstanding principal amount of the underlying
loans. The loan pools were sold by the FDIC or the RTC acting as conservator,
receiver, or liquidator of failed banks and savings and loan institutions, and
by other large nonaffiliated banking organizations. The loans comprising the
pools were originated throughout the United States. As part of the agreement to
purchase participation interests in the loan pools, the Company and its
subsidiaries have contracted with the Servicer to service the underlying loans
within the respective loan pools which are owned of record by the Servicer. The
Servicer also evaluates various loan pools prior to purchase and makes
recommendations to the Company concerning the creditworthiness of proposed loan
pool purchases and proposes appropriate bids to the Company and any other
potential pool participants.
The Servicer has bid on loan pools from various regional offices of the
FDIC and the RTC, and from other sources. The Company, MSB and CVB have
purchased participation interests in such pools. The purchase prices paid by the
Company for loan pool participations have ranged from 5.5% to 85.0% of the
aggregate outstanding principal amount of the loans comprising such pools at the
time of purchase. The Servicer acquires the loan pools without recourse against
the sellers and, accordingly, the risk of noncollectibility is, for the most
part, assumed by the Company and any other investors in a particular pool.
The FDIC is the only United States government agency which currently offers
loan pools. There is no assurance that it will continue to do so. Federal law
mandated that after July 1, 1995, the RTC no longer was appointed to act as
conservator or liquidator and was phased out of existence by year end 1995;
however, the FDIC assumed the RTC's role with respect to failed savings and
loans, as well as continuing in its role as conservator for failed banks.
Beginning in 1996, the Servicer successfully bid on packages of loans offered
for sale by large banking organizations headquartered in various regions of the
United States. Should the opportunity to invest in loan pools not exist in the
future, the Company intends to invest available funds in other income producing
assets.
Each pool has a different composition and different characteristics. The
composition of a loan pool is generally determined by the seller based on its
desire to maximize the price it receives for all loans among the various pools.
Some pools may consist of a large number of small consumer loans which are
unsecured or are secured by other assets such as automobiles or mobile homes,
while other pools may consist of loans primarily secured by real estate, and yet
other pools may consist of small to medium balance commercial loans. Still other
pools may contain a mixture of such loans and other types of loans. Some pools
may contain significant
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numbers of past-due nonperforming loans while other pools are comprised almost
entirely of performing loans. The price bid and paid for such a loan pool is
determined based on the composition of the particular pool, the amounts the
Servicer believes can be collected on such a pool, and the risks associated with
the collection of such amounts.
In considering an investment in a loan pool, the Servicer will evaluate
loans owned and being offered and make recommendations to the Company and other
prospective investors concerning the creditworthiness of the proposed loan pool
purchase. The Servicer performs a comprehensive analysis of the loan pool in an
attempt to ensure proper valuation and adequate safeguards in the event of
default. The bid price on the loan pools will be reflective of the results of
the Servicer's pre-acquisition review of the loan files. In many cases the loan
files may not be current and substantial uncertainties may exist regarding the
collectibility of the various loans in the pool. Management believes that in
many instances the non-current loans can be brought current once the Servicer
has an opportunity to contact the debtor. The Company makes its own decisions as
to whether or not to participate in a particular loan pool which has been
recommended by the Servicer, based on the Company's experience with the various
categories and qualities of loans.
The sales of loan pools by the FDIC and by other sellers is generally
conducted by sealed bid auction. A sealed bid auction requires each bidder to
submit a confidential bid on the subject loan pool and the loan pool is awarded
to the highest bidder. In recent years, the Servicer and the Company have faced
increasing competition in bidding for loan pools.
Since 1988, the Servicer, on behalf of the Company and other investors, has
bid on a large number of loan pools and has been successful in purchasing 58
loan pools. The Company and other investors in the loan pools fund the purchase
by the Servicer and each investor receives a percentage interest in the loan
pool based on its proportional investment relative to the total purchase price
of the pool. Each investor receives a loan pool participation certificate
reflecting this interest.
The purchased loan pools consist, for the most part, of loans evidenced by
promissory notes and secured by either personal property or real property. The
value of the collateral may range from nominal to substantial and often may be
impossible to establish prior to acquisition of the pools with the level of
certainty that is typically required in a financial institution.
Upon the acquisition of a participation interest in a loan pool, the
Company assumes the risk that the Servicer will be unable to recover an amount
equal to the purchase price plus the carrying costs, if any, collection costs
and expected profits on such accounts. The extent of such risk is dependent on a
number of factors, including the Servicer's ability to locate the debtors, the
debtors' financial condition, the possibility that a debtor may file for
protection under applicable bankruptcy laws, the Servicer's ability to locate
the collateral, if any, for the loan and to obtain possession of such
collateral, the value of such collateral, and the length of time it takes to
realize the ultimate recovery either through collection procedures or through a
resale of the loans following a restructure.
Loan pool participations are shown on the Company's balance sheet as a
separate asset category. The original carrying value of loan pool participations
represents the discounted price paid by the Company to acquire its participation
interests in various loan pools purchased by the Servicer. The Company's
investment balance is reduced as the Servicer collects principal payments on the
loans and remits the proportionate share of such payments to the Company.
A cost "basis" is assigned to each individual loan acquired on a cents per
dollar (discounted price) based on the Servicer's assessment of the recovery
potential of each such loan. This methodology assigns a higher basis to
performing loans with greater potential collectibility and a lower basis to
those loans identified as having little or no collectibility.
The investment in loan pools is accounted for on a nonaccrual (or cash)
basis in one of three methods, depending on the circumstances. First, if a
borrower makes regular payments on a loan, the payment received is first applied
to interest income in the amount of interest due at the contract rate. Further
payments are applied to principal in a ratio reflecting the proportion of cost
basis to loan principal amount. Payments in excess of interest and this ratio
are recorded as discount income. Discount income earned over the life of a
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loan represents loan principal collected in excess of the price originally paid
to acquire the loan from the FDIC, the RTC, or any other sellers, which price
constitutes the cost "basis" of the loan.
Secondly, if the borrower fails to make regular payments, the Servicer
evaluates the collateral supporting the loan. If the Servicer determines that
the loan is well secured, then payments are applied as previously described. If
the Servicer determines that the collateral is deficient, payments are applied
to the principal balance of the loan with no recognition of interest due. The
cost recovery method governs the application of payments received to the
outstanding principal balance. Under this method, any amount received is
initially applied to the cost "basis" of the loan and any additional amounts
received are recognized as discount income.
Third, where the Servicer negotiates a settlement of a loan for a lump sum,
the payment is first applied to principal to the extent of the assigned cost
"basis" with the excess treated as discount income up to the original principal
value of the loan, and any remainder is treated as interest income on loan pool
participations. In each case, where changed circumstances or new information
lead the Servicer to believe that collection of the note or recovery of the
basis through collateral would be less than originally determined, the cost
basis assigned to the loan is written down or written off through a charge
against discount income.
Collection expenses incurred by the Servicer are netted against discount
income. Discount income is added to interest income and reflected as one amount
on the Company's consolidated statement of income. Profit (or loss) from
collection activities is determined on a monthly basis for each servicing
corporation from which loan pool participation interests have been purchased.
The Company does not recognize as income any accrued interest receivable on
the loan pools. Interest income is only recognized when collected and actually
remitted to the Company by the Servicer. Many of the pools that have been
purchased by the Servicer do not include purchased interest in the cost basis;
thus, interest collected does not have a cost basis and represents profit.
Interest income collected by the Servicer is reflected in the Company's
financial statements as interest income included as part of interest income and
discount on loan pool participations.
The Servicer provides the Company with monthly reports detailing
collections of principal and interest, face value of loans collected and those
written off, actual operating expenses incurred, remaining asset balances (both
in terms of cost basis and principal amount of loans), a comparison of actual
collections and expenses with target collections and budgeted expenses, and
summaries of remaining collection targets. Monthly meetings are held between the
Company and representatives of the Servicer to review collection efforts and
results, to discuss future plans of action, and to discuss potential
opportunities. Additionally, the Company's and the Servicer's personnel
communicate via telephone and telecopy on a regular basis to discuss various
issues regarding the loan pools. Company management personnel visit the
Servicer's operation in Omaha, Nebraska on a regular basis. The Company's loan
review officer performs regular examinations of the Servicer's credit files and
evaluates collection activity.
The Servicer is reimbursed for costs incurred to collect loan principal and
interest, which are netted against loan principal and interest collections.
These costs include salary and benefits paid by the Servicer to its employees,
legal fees, and other overhead expenses. Each loan pool investment is tracked on
an individual basis with the Servicer receiving a "Servicing Fee" of up to
twenty-five percent of net interest collected based on the percentage of net
loan principal collections to the original investment amount. Once the original
investment amount has been fully recovered, the Servicer is no longer entitled
to the Servicing Fee. In lieu of the Servicing Fee, the Servicer receives a
"Bonus Fee" of ten percent of all subsequent net collections and receives a
twenty-five percent participation interest in the individual pool and shares
proportionally in all future collections, net of costs and Bonus Fees.
The Company's overall cost basis in its loan pool participations represents
a deep discount from the aggregate outstanding principal amount of the loans
underlying the pools. For example, as of December 31, 1997 and 1996, such cost
basis was $54,326,000 and $50,687,000, respectively, while the contractual
outstanding principal amounts of the underlying loans as of such dates were
approximately $99,948,000 and $99,888,000, respectively. Because this discounted
cost basis inherently reflects the assessed collectibility of the underlying
loans and thus creates a built-in reserve against the risk of nonpayment in the
loan pools, the
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Company is not required to establish any allowance for loan losses relating to
the loan pool participations. The Company does not include any amounts related
to the loan pool participations in its totals of nonperforming loans.
The underlying loans in the loan pool participations include both fixed
rate and variable rate instruments, but are accounted for on a nonaccrual
basis, and no amounts for interest due are reflected in the carrying value of
the loan pool participations. Based on historical experience, the average
period of collectibility for loans underlying the Company's loan pool
participations, many of which have exceeded contractual maturity dates, is
approximately one to three years. Management has reviewed the recoverability
of the underlying loans and believes that the carrying value does not exceed
the net realizable value of its investment in loan pool participations.
D. COMPETITION
The Company competes in the commercial banking and thrift industries
through its subsidiary banks. These industries are highly competitive, and all
the bank subsidiaries face strong direct competition for deposits, loans, and
other financial-related services. The Banks in Mahaska, Marion, Wapello, Keokuk,
Iowa and Jefferson counties in south-central Iowa compete with other commercial
banks, other thrifts, credit unions, stockbrokers, finance divisions of auto and
farm equipment companies, agricultural suppliers, and other agricultural-related
lenders. Some of these competitors are local, while others are statewide or
nationwide. The Banks compete for deposits principally by offering depositors a
wide variety of deposit programs, convenient office locations, hours and other
services, and for loan originations primarily through interest rates and loan
fees they charge, the efficiency and quality of services they provide to
borrowers and the variety of their loan products. Some of the financial
institutions and financial service organizations with which the Banks compete
are not subject to the same degree of regulation as that imposed on bank and
thrift holding companies, federally insured Iowa-chartered banks, and federal
savings banks. As a result, such competitors have advantages over the Banks in
providing certain services. As of December 31, 1997, approximately twenty
commercial banks, three thrifts, and seven credit unions operated within a
25-mile radius of Oskaloosa, and new competitors may develop that are
substantially larger and have significantly greater resources than any of the
Banks. Currently, major competitors in certain of the Company's markets include
banking subsidiaries of Norwest Corporation, Firstar Corporation of Iowa,
Mercantile Bank and NationsBank. As a result of recently passed federal
legislation to allow unlimited interstate branching, the Company may experience
heightened competition from these and other major financial institutions seeking
to expand their regional banking presence in Iowa.
The Company also faces competition with respect to its investments in loan
pool participations. The Company's financial success to date is largely
attributable to the Servicer's ability to determine the loan pools to bid on and
ultimately purchase, the availability of assets to fund the purchases and the
Servicer's ability to collect on the underlying assets. Investments in loan
pools have become increasingly popular in recent years, leading financial
institutions and other competitors to become active at loan pool auctions
conducted by the FDIC and other sellers. There is no assurance that the Company,
through the Servicer, will be able to bid successfully in the future. Certain
existing competitors of the Company are substantially larger and have
significantly greater financial resources than the Company. Increased
participation by new institutions or other investors may also create increased
buying interest which could also result in higher bid prices for the type of
loan pools considered for investment by the Company. In addition, new and
existing competitors may develop due diligence procedures comparable to the
Servicer's procedures. The emergence of such competition could have a material
adverse effect on the Company's business and financial results.
E. SUPERVISION AND REGULATION
Bank holding companies, banks, savings and loan holding companies, and
savings and loan associations are extensively regulated under federal and state
law. References under this heading to applicable statutes or regulations are
brief summaries of the portions thereof which do not purport to be complete and
which are qualified in their entirety by reference to those statutes and
regulations. Any change in applicable laws or regulation may have a material
adverse effect on the business of the Company and the Banks.
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The Company, as a bank holding company, is subject to regulation under the
Bank Holding Company Act of 1956 (the "Act") and is registered with the Board of
Governors of the Federal Reserve System. Under the Act, the Company is
prohibited, with certain exceptions, 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 affiliated banks, except that the
Company may engage in and own shares of companies engaged in certain businesses
found by the Board of Governors to be so closely related to banking "as to be
proper incident thereto," such as owning a savings association. The Act does not
place territorial restrictions on the activities of bank-related subsidiaries of
bank holding companies. The Company is required by the Act to file periodic
reports of its operations with the Board of Governors and is subject to
examination by the Board of Governors. Under the Act and Federal Reserve Board
regulations, the Company and the Bank are prohibited from engaging in certain
tie-in arrangements in connection with an extension of credit, lease, sale of
property, or furnishing of services.
Iowa law permits bank holding companies domiciled in Iowa to make
acquisitions throughout the state. Iowa law also permits bank holding companies
located in the Midwestern Region (defined to include Illinois, Iowa, Minnesota,
Missouri, Nebraska, South Dakota, and Wisconsin) to acquire banks or bank
holding companies located in Iowa subject to approval by the Iowa Division of
Banking and subject to certain statutory limitations. In addition, the Company
may acquire banks or bank holding companies located in the Midwestern Region or
outside the Midwestern Region, provided the Company's principal place of
business remains in the Midwestern Region and the acquisition is authorized by
the laws of the state in which the acquisition is to be made.
As a savings and loan holding company, the Company is subject to federal
regulation and examination by the Office of Thrift Supervision (the "OTS"). The
OTS has enforcement authority over the Company. This authority permits the OTS
to restrict or prohibit activities that are determined to be a serious risk to
the subsidiary savings association. Generally, the activities for a bank holding
company are more limited than the authorized activities for a savings and loan
holding company.
The Company and its subsidiaries are affiliates within the meaning of the
Federal Reserve Act and OTS regulations. As affiliates, they are subject to
certain restrictions on loans by an affiliated bank to the Company, other
affiliated banks or such other subsidiaries, on investments by an affiliated
bank in their stock or securities and on an affiliated bank taking such stock
and securities as collateral for loans to any borrower. The Company is also
subject to certain restrictions with respect to direct issuance, flotation,
underwriting, public sale or distribution of certain securities.
Under Iowa law, Mahaska State Bank and Pella State Bank are subject to
supervision and examination by the Iowa Division of Banking. As an affiliate of
these banks, the Company is also subject to examination by the Iowa Division of
Banking.
The deposits of the Banks are insured by the Federal Deposit Insurance
Corporation (the "FDIC") and the Banks are, therefore, also subject to the
supervision and examination by the FDIC. The Banks are required to maintain
certain minimum capital ratios established by these regulators.
In addition, Iowa state law imposes restrictions on the operations of the
state-chartered banks including limitations on the amount a bank can lend to a
single borrower and limitations on the nature and amount of securities in which
it may invest. Among other things, Iowa law imposes restrictions on certain
types of loans made by a bank, limiting the bank from making loans (or
purchasing participation interests in loan pools) secured by real estate located
outside Iowa and its contiguous states in amounts exceeding 25% of its
regulatory capital. There can be no assurance that the Iowa or federal
regulators will not in the future impose further restrictions or limits on the
Company's loan pool activities.
Iowa law strictly regulates the establishment of bank offices and thus may
affect the Company's future plans to establish additional offices of its banks.
Under Iowa law, a state bank may not establish a bank office outside the
boundaries of the counties contiguous to or cornering upon the county in which
the principal place of business of the state bank is located. The number of
offices a state bank may establish in a particular municipality is also limited
depending upon the municipality's population.
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Central Valley Bank is subject to the supervision of and is regularly
examined by the OTS and is assessed fees by the OTS based upon the thrift's
total assets. As a savings institution, CVB is a member of the Federal Home Loan
Bank of Des Moines, must maintain certain minimum capital ratios established by
the OTS and is required to meet a qualified thrift lender test (the "QTL") to
avoid certain restrictions upon its operations. The QTL was modified by the
passage of the Economic Growth and Regulatory Paperwork Reduction Act of 1996.
On December 31, 1997, CVB complied with the current minimum capital guidelines
and met the QTL test.
OTS regulations permit federally chartered savings associations to branch
nationwide to the extent allowed by federal statute, enabling federal savings
associations with interstate networks to diversify their loan portfolios and
lines of business.
The Company operates within a regulatory structure that continuously
evolves. In the last several years significant changes have occurred that affect
the Company.
The FDIC Improvement Act of 1991 (the "FDICIA") was primarily designed to
recapitalize the FDIC's Bank Insurance Fund (the "BIF") and the Savings
Association Insurance Fund (the "SAIF"). To accomplish this purpose the FDIC was
granted additional borrowing authority, granted the power to levy emergency
special assessments on all insured depository institutions, granted the power to
change the BIF and SAIF rates on deposits on a semiannual basis, and directed to
draft regulations that provided for a "Risk-Based Assessment System" that was
implemented on January 1, 1994. The FDICIA also imposed additional regulatory
safety and soundness standards upon depository institutions and granted
additional authority to the FDIC. The FDICIA generally requires that all
institutions be examined by the FDIC annually. Under the provisions of the
FDICIA, all regulatory authorities are required to examine their regulatory
accounting standards and, to the extent possible, are required to conform to
Generally Accepted Accounting Principles. Finally, the FDICIA requires the
federal banking regulators to take prompt corrective action with respect to
depository institutions that fall below certain capital standards and prohibits
any depository institution from making any capital distribution that would cause
it to be undercapitalized.
The Banks are assessed fees based on the institutions' deposits by the
FDIC, to insure the funds of customers on deposit with the institutions. The
deposits of MSB (except those acquired from a failed thrift), all of PSB's
deposits and the CVB deposits acquired from Boatmen's are insured by the BIF.
The deposits of CVB and those deposits of MSB acquired from the failed thrift
are insured by the SAIF. On August 8, 1995, the FDIC reduced the assessment rate
applicable to MSB to $.04 per $100 of insured deposits. This reduced assessment
rate was retroactively effective to June 1, 1995. MSB and CVB continued to pay
an insurance rate of $.23 per $100 of deposits on their SAIF deposits through
September 30, 1996. Upon the adoption of the Deposit Insurance Funds Act of
1996, MSB and CVB were assessed a one-time charge equal to $.675 per $100 of
SAIF-insured deposits to recapitalize the SAIF. Subsequent to this special
assessment, all BIF and SAIF-insured deposits are assessed at an equal rate.
Legislation became effective on September 30, 1995 which serves to lessen
or remove certain legal barriers to interstate banking and branching by
financial institutions. The legislation may result in an increase in the
nationwide consolidation activity occurring among financial institutions by
facilitating interstate bank operations and acquisitions. The legislation does,
however, allow states to "opt out" of interstate branching, and at this time it
is difficult to predict what effect this legislation might have on the Company.
The earnings of the Company are affected by the policies of regulatory
authorities, including the Federal Reserve System. Federal Reserve System
monetary policies have had a significant effect on the operating results of
banks and thrifts in the past and are expected to do so in the future. Because
of changing conditions in the economy and in the money markets as a result of
actions by monetary and fiscal authorities, interest rates, credit availability
and deposit levels may change due to circumstances beyond the control of the
Company. Future policies of the Federal Reserve System and other authorities
cannot be predicted, nor can their effect on future earnings be predicted.
7
<PAGE> 10
F. EMPLOYEES
On December 31, 1997, the Company had 108 full-time employees and 22
part-time employees of which 53 full-time and 15 part-time employees were
employed by MSB, 32 full-time and 6 part-time employees were employed by CVB, 5
full-time and 1 part-time employees were employed by PSB, 7 full-time employees
were employed by On-Site, and 11 full-time employees were employed directly by
the Company. The Company provides its employees with a comprehensive program of
benefits, some of which are on a contributory basis, including comprehensive
medical and dental plans, life insurance, long-term and short-term disability
coverage, a 401(k) plan, and an employee stock ownership plan. None of the
employees are represented by unions. Management considers its relationship with
its employees to be excellent.
ITEM 1(G) BUSINESS -- STATISTICAL DISCLOSURE
The following statistical disclosures relative to the consolidated
operations of the Company have been prepared in accordance with Guide 3 of the
Guides for the Preparation and Filing of Reports and Registration Statements
under the Securities Exchange Act of 1934. Average balances were primarily
calculated on a daily basis.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES
AND INTEREST DIFFERENTIAL
The following table details average balances, interest income/expense and
average rates/yield for the Company's earning assets and interest bearing
liabilities for the years ended December 31, 1997, 1996 and 1995 reported on a
fully tax-equivalent basis assuming a 34% tax rate.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1997 1996
------------------------------------ ----------------------------------
INTEREST INTEREST
AVERAGE INCOME(2)/ AVERAGE AVERAGE INCOME(2)/ AVERAGE
BALANCE EXPENSE RATE/YIELD BALANCE EXPENSE RATE/YIELD
------- ---------- ---------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Average earning assets:
Loans(1)................. $131,081 $12,282 9.37% $105,372 $10,203 9.68%
Loan pool
participations......... 49,399 8,474 17.15 50,105 9,097 18.16
Interest-bearing
deposits............... 2,085 108 5.20 5,097 266 5.23
Investment securities
available for sale:
Taxable investments.... 26,052 1,705 6.55 20,557 1,348 6.56
Investment securities
held to maturity:
Taxable investments.... 16,421 928 5.65 21,616 1,215 5.62
Tax exempt
investments.......... 7,459 486 6.51 9,510 619 6.51
Federal funds sold....... 2,375 128 5.39 1,704 92 5.39
-------- ------- -------- -------
Total earning assets... $234,872 $24,111 10.27 $213,961 $22,840 10.67
======== ======= ======== =======
Average interest-bearing
liabilities:
Interest-bearing demand
deposits............... $ 32,225 $ 677 2.10 $ 28,785 $ 612 2.13
Savings deposits......... 59,019 2,259 3.83 53,844 2,058 3.82
Time deposits............ 96,609 5,441 5.63 86,056 4,845 5.63
Federal funds
purchased.............. 534 32 5.93 830 48 5.73
Federal Home Loan Bank
advances............... 2,274 138 6.07 0 0 0.00
Notes payable............ 9,292 765 8.23 11,323 968 8.55
-------- ------- -------- -------
Total interest-bearing
liabilities.......... $199,953 $ 9,312 4.66 $180,838 $ 8,531 4.72
======== ======= ======== =======
Net interest income........ 14,799 5.61 14,309 5.96
Net interest margin(3)..... 6.30% 6.69%
===== =====
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995
----------------------------------
INTEREST
AVERAGE INCOME(2)/ AVERAGE
BALANCE EXPENSE RATE/YIELD
------- ---------- ----------
<S> <C> <C> <C>
Average earning assets:
Loans(1)................. $ 81,174 $ 7,775 9.58%
Loan pool
participations......... 45,582 7,864 17.25
Interest-bearing
deposits............... 3,040 175 5.76
Investment securities
available for sale:
Taxable investments.... 10,391 668 6.43
Investment securities
held to maturity:
Taxable investments.... 23,711 1,251 5.28
Tax exempt
investments.......... 9,106 595 6.53
Federal funds sold....... 3,441 202 5.87
-------- -------
Total earning assets... $176,445 $18,530 10.50
======== =======
Average interest-bearing
liabilities:
Interest-bearing demand
deposits............... $ 25,325 $ 632 2.49
Savings deposits......... 42,699 1,816 4.25
Time deposits............ 71,636 3,959 5.53
Federal funds
purchased.............. 671 42 6.20
Federal Home Loan Bank
advances............... 0 0 0.00
Notes payable............ 7,327 651 8.89
-------- -------
Total interest-bearing
liabilities.......... $147,658 $ 7,100 4.81
======== =======
Net interest income........ 11,430 5.69
Net interest margin(3)..... 6.48%
=====
</TABLE>
- -------------------------
(1) Average loans outstanding includes the daily average balance of
non-performing loans. Interest on these loans does not include additional
interest of $122,000, $90,000, and $15,000 for 1997, 1996 and 1995,
respectively, which would have been accrued based on the original terms of
these loans compared to the
8
<PAGE> 11
ITEM 1(G) BUSINESS -- STATISTICAL DISCLOSURE, CONTINUED
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES
AND INTEREST DIFFERENTIAL, CONTINUED
interest that was actually recorded. Interest earned on loans includes loan
fees (which are not material in amount).
(2) Includes interest income and discount on loan pool participations.
(3) Net interest margin is net interest income divided by average total earning
assets.
The following table sets forth an analysis of volume and rate changes in
interest income and interest expense of the Company's average earning assets and
average interest-bearing liabilities reported on a fully tax-equivalent basis
assuming a 34% tax rate. The table distinguishes between the changes related to
average outstanding balances (changes in volume holding the initial interest
rate constant) and the changes related to average interest rates (changes in
average rate holding the initial outstanding balance constant). The change in
interest due to both volume and rate has been allocated to volume and rate
changes in proportion to the relationship of the absolute dollar amounts of the
change in each.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 COMPARED TO 1996 1996 COMPARED TO 1995
INCREASE/(DECREASE) DUE TO INCREASE/(DECREASE) DUE TO
-------------------------- ---------------------------
VOLUME RATE NET VOLUME RATE NET
------ ---- --- ------ ---- ---
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME FROM AVERAGE-EARNING ASSETS:
Loans...................................... $2,449 $(370) $2,079 $2,330 $ 98 $2,428
Loan pool participations(1)................ (125) (498) (623) 801 432 1,233
Interest-bearing deposits.................. (157) (1) (158) 113 (22) 91
Investment securities available for sale:
Taxable investments..................... 360 (3) 357 660 20 680
Investment securities held to maturity:
Taxable investments..................... (293) 6 (287) (114) 78 (36)
Tax exempt investments.................. (133) 0 (133) 26 (2) 24
Federal funds sold......................... 36 0 36 (98) (12) (110)
------ ----- ------ ------ ------ ------
Total income from earning assets........ 2,137 (866) 1,271 3,718 592 4,310
------ ----- ------ ------ ------ ------
INTEREST EXPENSE OF AVERAGE INTEREST-BEARING
LIABILITIES:
Interest-bearing demand deposits........... 72 (7) 65 80 (100) (20)
Savings deposits........................... 198 3 201 450 (208) 242
Time deposits.............................. 594 2 596 805 81 886
Federal funds purchased.................... (17) 1 (16) 9 (3) 6
Federal Home Loan Bank advances............ 69 69 138 0 0 0
Notes payable.............................. (170) (33) (203) 348 (31) 317
------ ----- ------ ------ ------ ------
Total expense from interestbearing
liabilities........................... 746 35 781 1,692 (261) 1,431
------ ----- ------ ------ ------ ------
Net interest income.......................... $1,391 $(901) $ 490 $2,026 $ 853 $2,879
====== ===== ====== ====== ====== ======
</TABLE>
- -------------------------
(1) Includes interest income from loan pool participations plus discount
realized on loan pool participations.
9
<PAGE> 12
ITEM 1(G) BUSINESS -- STATISTICAL DISCLOSURE, CONTINUED
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES
AND INTEREST DIFFERENTIAL, CONTINUED
INTEREST RATE SENSITIVITY ANALYSIS
The following table sets forth the scheduled repricing or maturity of the
Company's assets and liabilities as of December 31, 1997, based on the
assumptions described below. The effect of these assumptions is to quantify the
dollar amount of items that are interest rate-sensitive and can be repriced
within each of the periods specified. The table does not necessarily indicate
the impact of general interest rate movements on the Company's net interest
margin because the repricing of certain categories of assets and liabilities is
subject to competitive and other pressures beyond the Company's control. As a
result, certain assets and liabilities indicated as maturing or otherwise
repricing within a stated period may, in fact, mature or reprice at different
times and at different volumes.
<TABLE>
<CAPTION>
THREE OVER THREE ONE TO THREE
MONTHS MONTHS THREE YEARS
OR LESS TO ONE YEAR YEARS OR MORE TOTAL
------- ----------- ------ ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans..................................... $ 30,024 $ 35,242 $ 26,461 $52,606 $144,333
Loan pool participations.................. 4,527 13,582 36,217 0 54,326
Interest-bearing deposits in banks........ 1,526 0 0 0 1,526
Federal funds sold........................ 6,815 0 0 0 6,815
Investment securities:
Available for sale...................... 0 499 8,379 14,350 23,228
Held to maturity........................ 2,749 7,005 5,768 4,311 19,833
-------- -------- -------- ------- --------
Total interest-earning assets........ 45,641 56,328 76,825 71,267 250,061
======== ======== ======== ======= ========
INTEREST-BEARING LIABILITIES:
NOW and Super NOW deposits................ 11,629 11,629 9,968 0 33,226
Savings deposits.......................... 11,780 11,810 17,715 17,715 59,020
Certificates of deposit................... 21,372 30,466 45,094 4,853 101,785
Federal Home Loan Bank advances........... 0 1,000 5,000 0 6,000
Notes payable............................. 14,050 0 0 0 14,050
-------- -------- -------- ------- --------
Total interest-bearing liabilities... 58,831 54,905 77,777 22,568 214,081
======== ======== ======== ======= ========
Interest sensitivity gap per period....... $(13,190) $ 1,423 $ (952) $48,699
======== ======== ======== =======
Cumulative interest sensitivity gap....... $(13,190) $(11,767) $(12,719) $35,980
======== ======== ======== =======
Interest sensitivity gap ratio............ 0.78% 1.03% 0.99% 3.16%
Cumulative interest sensitivity gap
ratio................................... 0.78% 0.90% 0.93% 1.17%
</TABLE>
In the table above, NOW and Super NOW deposit account balances and savings
deposits are included as interest-bearing liabilities in the three months or
less, and over three months to one year, and one to three years categories in
accordance with the proposed revision to the banking regulatory authorities'
risk-based capital guidelines issued in August 1992. This results in the
distribution of 70% of NOW and Super NOW account balances to the less than one
year categories and the remaining 30% to the one to three years category.
Savings deposits are included 70% in the less than three year categories and the
remaining 30% in the three years or more category.
Loan pool participations are included in the interest rate sensitivity
analysis using an estimated three-year average life. The historical average for
the return of original investment on the pools is approximately 36 months. Given
the non-performing aspect of the loan pool portfolio, management feels that the
use of contractual weighted-average maturity data in inappropriate.
10
<PAGE> 13
ITEM 1(G) BUSINESS -- STATISTICAL DISCLOSURE, CONTINUED
II. INVESTMENT PORTFOLIO
The following table sets forth certain information with respect to the book
value of the Company's investment portfolio as of December 31, 1997, 1996 and
1995.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. government securities................................ $ 4,563 $ 5,019 $ 5,101
U.S. government agency securities......................... 15,313 18,679 5,059
Other investment securities............................... 3,352 2,785 1,627
------- ------- -------
Total securities available for sale.................... 23,228 26,483 11,787
------- ------- -------
SECURITIES HELD TO MATURITY:
U.S. government securities................................ 5,046 8,135 12,247
U.S. government agency securities......................... 2,885 5,445 6,810
Obligations of states and political subdivisions.......... 6,793 8,904 9,574
Other investment securities............................... 5,109 5,221 2,202
------- ------- -------
Total securities held to maturity...................... 19,833 27,705 30,833
------- ------- -------
Total investment securities............................... $43,061 $54,188 $42,620
======= ======= =======
</TABLE>
The following table sets forth the contractual maturities of investment
securities as of December 31, 1997, and the weighted average yields (for
tax-exempt obligations on a fully tax-equivalent basis assuming a 34% tax rate)
of such securities. As of December 31, 1997, the Company held no securities with
a book value exceeding 10% of shareholders' equity.
<TABLE>
<CAPTION>
MATURITY
--------------------------------------------------------------------------
AFTER ONE BUT AFTER FIVE BUT
WITHIN FIVE WITHIN TEN
WITHIN ONE YEAR YEARS YEARS AFTER TEN YEARS
---------------- ---------------- --------------- ---------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ----- ------- ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government securities...... $ 0 0.00% $ 4,563 6.13 $ 0 0.00% $ 0 0.00%
U.S. government agency
securities................... 499 5.88 9,676 6.52 0 0.00 5,138 7.00
Other Investment securities..... 0 0.00 2,010 5.94 0 0.00 1,342 5.94
------- ------- ------ ------
Total........................ 499 5.88 16,249 6.34 0 0.00 6,480 6.78
------- ------- ------ ------
Securities held to maturity:
U.S. government securities...... 5,046 5.07 0 0.00 0 0.00 0 0.00
U.S. government agency
securities................... 1,000 4.89 0 0.00 474 6.95 1,411 7.44
Obligations of states and
political subdivisions....... 1,916 6.51 3,693 6.84 1,184 6.88 0 0.00
Other investment securities..... 1,793 5.79 3,216 5.78 0 0.00 100 7.15
------- ------- ------ ------
Total........................ 9,755 5.47 6,909 6.35 1,658 6.90 1,511 7.42
------- ------- ------ ------
Total investment securities....... $10,254 5.49% $23,158 6.34% $1,658 6.90% $7,991 6.90%
======= ==== ======= ==== ====== ==== ====== ====
</TABLE>
11
<PAGE> 14
ITEM 1(G) BUSINESS -- STATISTICAL DISCLOSURE, CONTINUED
III. LOAN PORTFOLIO
The Company's loan portfolio largely reflects the profile of the
communities in which it operates. Approximately two-thirds of the total loans as
of December 31, 1997, were agricultural, commercial or residential real estate
loans. The following table shows the composition of the Company's loan portfolio
as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------- ---------------- ---------------- ---------------- ----------------
% OF % OF % OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Agricultural........... $ 24,779 17.2% $ 19,940 17.0% $ 16,319 18.9% $ 15,968 21.5% $ 16,644 25.7%
Commercial............. 31,198 21.6 23,613 20.1 22,235 25.7 18,789 25.3 14,853 22.9
Real estate:
1-4 family
residences......... 32,341 22.4 27,274 23.2 15,765 18.2 14,261 19.2 12,757 19.7
5 + residential
property........... 251 0.2 261 0.2 0 0.0 17 0.0 24 0.0
Agricultural......... 19,647 13.6 16,952 14.4 9,855 11.4 8,443 11.4 7,499 11.6
Construction......... 4,430 3.1 4,017 3.4 2,502 2.9 1,859 2.5 436 0.7
Commercial........... 15,634 10.8 11,895 10.1 10,097 11.7 9,018 12.2 7,288 11.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Real estate total.... 72,303 50.1 60,399 51.4 38,219 44.2 33,598 45.3 28,004 43.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Installment............ 13,268 9.2 11,522 9.8 7,637 8.8 4,700 6.3 4,673 7.2
Lease financing........ 2,785 1.9 1,942 1.7 2,066 2.4 1,154 1.6 596 0.9
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans(1)....... $144,333 100.0% $117,416 100.0% $ 86,475 100.0% $ 74,209 100.0% $ 64,770 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Total assets........... $274,873 $251,851 $205,162 $186,818 $143,752
======== ======== ======== ======== ========
Loans to total
assets............... 52.5% 46.6% 42.1% 39.7% 45.1%
</TABLE>
- -------------------------
(1) Total loans do not include the Company's investments in loan pool
participations.
The following table sets forth the remaining maturities for certain loan
categories as of December 31, 1997.
<TABLE>
<CAPTION>
TOTAL FOR LOANS DUE
AFTER ONE YEAR
HAVING:
DUE IN -------------------
DUE WITHIN ONE TO DUE AFTER FIXED VARIABLE
ONE YEAR FIVE YEARS FIVE YEARS TOTAL RATES RATES
---------- ---------- ---------- ----- ----- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Agricultural........................ $21,227 $ 3,299 $ 253 $24,779 $ 3,354 $ 198
Commercial.......................... 22,407 7,641 1,150 31,198 8,185 606
Real estate -- construction......... 3,003 1,427 0 4,430 877 550
------- ------- ------ ------- ------- ------
Total.......................... $46,637 $12,367 $1,403 $60,407 $12,416 $1,354
======= ======= ====== ======= ======= ======
</TABLE>
The following table provides information on the Company's non-performing
loans as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
90 days past due....................................... $ 522 $ 625 $134 $ 95 $ 22
Renegotiated........................................... 387 380 409 285 440
Nonaccrual............................................. 927 1,085 124 207 129
------ ------ ---- ---- ------
Total non-performing loans........................ $1,836 $2,090 $667 $587 $ 591
====== ====== ==== ==== ======
Ratio of non-performing loans to total loans........... 1.27% 1.78% 0.78% 0.79% 0.91%
</TABLE>
12
<PAGE> 15
ITEM 1(G) BUSINESS -- STATISTICAL DISCLOSURE, CONTINUED
IV. SUMMARY OF LOAN LOSS EXPERIENCE
The following table sets forth loans charged off and recovered by the type
of loan and an analysis of the allowance for loan losses for the years ended
December 31, 1997, 1996, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Amount of loans outstanding at end of period
(net of unearned interest)(1).............. $144,333 $117,416 $85,869 $74,015 $64,700
======== ======== ======= ======= =======
Average amount of loans outstanding for the
period (net of unearned interest)(1)....... $131,081 $105,372 $81,175 $69,043 $61,130
======== ======== ======= ======= =======
Allowance for possible loan losses at
beginning of period........................ $ 1,491 $ 1,001 $ 881 $ 833 $ 820
-------- -------- ------- ------- -------
CHARGE-OFFS:
Agricultural............................... 19 41 53 42 87
Commercial................................. 14 10 18 110 34
Real estate - construction................. 0 0 0 0 0
Real estate - mortgage..................... 30 0 2 0 2
Installment................................ 63 38 18 23 28
Lease financing............................ 11 616 0 14 2
-------- -------- ------- ------- -------
Total charge-offs....................... 137 705 91 189 153
-------- -------- ------- ------- -------
RECOVERIES:
Agricultural............................... 11 6 24 11 11
Commercial................................. 18 1 1 36 7
Real estate - construction................. 0 0 0 0 0
Real estate - mortgage..................... 1 0 0 2 1
Installment................................ 15 8 10 5 4
Lease financing............................ 0 23 8 0 0
-------- -------- ------- ------- -------
Total recoveries........................ 45 38 43 54 23
-------- -------- ------- ------- -------
Net loans charged off........................ 92 667 48 135 130
Provision for possible loan losses........... 417 987 168 183 143
Allowance for branch acquisition............. 0 170 0 0 0
-------- -------- ------- ------- -------
Allowance for possible loan losses at end of
period..................................... $ 1,816 $ 1,491 $ 1,001 $ 881 $ 833
======== ======== ======= ======= =======
Net loans charged off to average loans....... 0.07% 0.63% 0.06% 0.20% 0.21%
Allowance for possible loan losses to total
loans at end of period..................... 1.26% 1.27% 1.17% 1.19% 1.29%
</TABLE>
- -------------------------
(1) Loans do not include, and the allowance for loan losses does not include any
reserve for, investments in loan pool participations.
13
<PAGE> 16
ITEM 1(G) BUSINESS -- STATISTICAL DISCLOSURE, CONTINUED
IV. SUMMARY OF LOAN LOSS EXPERIENCE, CONTINUED
The Company has allocated the allowance for loan losses to provide for the
possibility of loan losses being incurred within the categories of loans set
forth in the table below. The allocation of the allowance and the ratio of loans
within each category to total loans as of the dates indicated are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1997 1996 1995 1994
----------------------- ----------------------- ----------------------- -----------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
ALLOWANCE LOANS TO ALLOWANCE LOANS TO ALLOWANCE LOANS TO ALLOWANCE LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
--------- ----------- --------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Agricultural......... $ 312 17.2% $ 254 17.0% $ 262 18.9% $242 21.5%
Commercial........... 392 21.6 300 20.1 248 25.7 271 25.3
Real estate --
mortgage........... 910 50.1 766 51.4 392 44.2 302 45.3
Installment.......... 167 9.2 146 9.8 78 8.8 55 6.3
Lease financing...... 35 1.9 25 1.7 21 2.4 11 1.6
------ ----- ------ ----- ------ ----- ---- -----
Total............ $1,816 100.0% $1,491 100.0% $1,001 100.0% $881 100.0%
====== ===== ====== ===== ====== ===== ==== =====
<CAPTION>
DECEMBER 31,
-----------------------
1993
-----------------------
PERCENT OF
ALLOWANCE LOANS TO
AMOUNT TOTAL LOANS
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Agricultural......... $308 25.7%
Commercial........... 288 22.9
Real estate --
mortgage........... 200 43.3
Installment.......... 33 7.2
Lease financing...... 4 0.9
---- -----
Total............ $833 100.0%
==== =====
</TABLE>
V. DEPOSITS
The following table sets forth the average amount of and the average rate
paid on deposits by deposit category for the years ended December 31, 1997, 1996
and 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------- ---- ------- ---- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand deposits.... $ 17,465 N/A $ 15,653 N/A $ 12,269 N/A
Interest-bearing demand (NOW and money
market)............................... 32,225 2.10% 28,785 2.13% 25,325 2.49%
Savings deposits........................ 59,019 3.83 53,844 3.82 42,699 4.25
Time deposits........................... 96,609 5.63 86,056 5.63 71,636 5.53
Totals........................... $205,318 4.0% $184,338 4.08% $151,929 4.22%
</TABLE>
The following table summarizes certificates of deposit in amounts of
$100,000 or more by time remaining until maturity as of December 31, 1997. These
time deposits are made by individuals, corporations and public entities, all of
which are located in the Company's market area or are State of Iowa public
funds.
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
(IN THOUSANDS)
<S> <C>
Three months or less........................................ $ 6,611
Over three through six months............................... 3,113
Over six months through one year............................ 1,700
Over one year............................................... 8,331
-------
Total..................................................... $19,755
=======
</TABLE>
14
<PAGE> 17
ITEM 1(G) BUSINESS -- STATISTICAL DISCLOSURE, CONTINUED
VI. RETURN ON EQUITY AND ASSETS
Various operating and equity ratios for the years indicated are presented
below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Return on average total assets...................... 1.98% 1.93% 2.04%
Return on average equity............................ 14.47 13.52 12.67
Dividend payout ratio............................... 34.78 36.50 38.37
Average equity to average assets.................... 13.69 14.31 16.09
Equity to assets ratio.............................. 13.37 13.60 15.65
===== ===== =====
</TABLE>
VII. BORROWED FUNDS
The following table summarizes the outstanding amount of and the average
rate on short-term borrowings as of December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Note payable(1).......................... $14,050 8.25% $8,500 8.00% $10,000 8.50%
Federal Home Loan Bank advances.......... 6,000 5.96 0 0.00 0 0.00
Federal funds purchased.................. 0 0.00 0 0.00 0 0.00
------- ---- ------ ---- ------- ----
Total............................... $20,050 7.56% $8,500 8.00% $10,000 8.50%
======= ==== ====== ==== ======= ====
</TABLE>
- -------------------------
(1) The note payable balance at December 31, 1997 consists of advances on a
$17,000,000 revolving line of credit. The line has a variable interest rate
which currently is twenty-five basis points below the lender's prime rate.
Interest is payable quarterly and the line is due June 30, 1998.
The maximum amount of borrowed funds outstanding at any month end for the
years ended December 31, 1997, 1996, and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Note payable.................................... $14,050 $14,750 $10,000
Federal Home Loan Bank advances................. 6,000 0 0
Federal funds purchased......................... 2,150 5,990 5,475
</TABLE>
The following table sets forth the average amount of and the average rate
paid on borrowed funds for the years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------- ---- ------- ---- ------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Note payable.................................. $ 9,292 8.23% $11,323 8.55% $7,327 8.89%
Federal Home Loan Bank advances............... 2,274 6.07 0 0.00 0 0.00
Federal funds purchased....................... 534 5.93 829 5.73 671 6.20
------- ------- ------
Total.................................... $12,100 7.72% $12,152 8.36% $7,998 8.66%
======= ==== ======= ==== ====== ====
</TABLE>
15
<PAGE> 18
ITEM 2. PROPERTIES
The Company's headquarters are located at 222 First Avenue East, Oskaloosa,
Iowa. This building is a two-story combination office and motor bank and was
constructed in 1975. The Company's offices are located on the second floor and
the Bank leases the first floor and the basement from the Company. The ground
floor houses MSB's data processing department and motor bank operation which
includes four drive-up lanes and two walk-up windows. The basement contains a
meeting room, kitchen, and storage. The bank's lease runs through the year 2005.
The principal offices of Mahaska State Bank are located at 124 South First
Street, Oskaloosa, Iowa, in a two-story building owned by the bank which
contains a full banking facility. The bank also owns a second building in
Oskaloosa located at 301 A Avenue West. This one-story, full-banking facility,
including two drive-up lanes, is located five blocks northwest of the bank's
principal offices. In addition, the bank owns a 24-hour automatic teller machine
located at 211 South First Street, Oskaloosa, Iowa. The bank also has a branch
office located in North English, Iowa which is 40 miles northeast of Oskaloosa.
The branch is a one-story building with a full banking facility, including two
drive-up lanes and a 24-hour automatic teller machine.
Central Valley Bank owns three facilities in the communities of Ottumwa,
Fairfield, and Sigourney, Iowa. The Ottumwa building is a single-story brick
structure constructed in 1981. The approximately 4,200 square foot building has
several offices and a potential for three drive-up lanes, with two presently in
operation. The building is located at 116 West Main in Ottumwa's downtown
business district. The Fairfield facility is a two-story building located at 58
East Burlington on the southeast corner of the downtown square. The building's
three floors have 8,932 total square feet, which is all now utilized by CVB. The
Sigourney facility located at 112 North Main Street is one-half block northwest
of the community's courthouse square in the downtown business district. The
4,596 square foot one-story masonry building was constructed in 1972 as a
banking facility with one drive-up window. This building was acquired by CVB in
1996 from Boatmen's Bank, N.A. in conjunction with the purchase of the deposits
of the Sigourney office from Boatmen's.
CVB leases its "In-Store" branch facility in Fairfield. The branch is
located in an Easter's Super Value grocery store and occupies approximately 400
square feet of the store. The lease agreement expires in October, 2000 and may
be renewed for two additional terms of five years each.
Pella State Bank owns its newly-remodeled facility at 500 Oskaloosa Street
in Pella, Iowa. The facility is located approximately six blocks south of the
community's main business district on a heavily-traveled thoroughfare that
connects the main business district with retail stores located in a developing
area on the east side of the community. The one-time restaurant building was
acquired in the summer of 1997 and was completely renovated to become a modern
banking facility. The facility now contains approximately 1,860 square feet of
usable space and has two drive-up teller lanes.
ITEM 3. LEGAL PROCEEDINGS
Mahaska Investment Company and its subsidiaries are involved in various
claims and legal actions arising in the ordinary course of business. In the
opinion of management, the ultimate disposition of these matters will not have a
material adverse effect on the Company's financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the fiscal
year covered by this report to a vote of security holders, through the
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information appearing on page 23 of the Corporation's Annual Report,
filed as Exhibit 13 hereto, is incorporated herein by reference.
16
<PAGE> 19
There were approximately 235 holders of record of the Company's $5 common
stock as of March 2, 1998. Additionally, there are an estimated 700 additional
beneficial holders whose stock was held in street name by brokerage houses as of
that date. The closing price of the Company's common stock was $20.625 on March
2, 1998.
The Company declared a five-for-three stock split effected in the form of a
stock dividend payable to shareholders of record as of October 20, 1997. The
additional shares resulting from this stock split were issued to shareholders on
November 10, 1997. The Company increased the cash dividends paid to common
shareholders in 1997 to $.48 per share, a 9.1 percent increase over $.44 for
1996. Dividend declarations are evaluated and determined by the Board of
Directors on a quarterly basis. In February 1998, the Board of Directors
declared a dividend of $.14 per common share. The Company's loan agreement
requires that the Company does not pay any dividends in excess of forty percent
of net income without the lenders' permission. Except for certain regulatory
restrictions that may affect dividend payments, there are no other restrictions
on the Company's present or future ability to pay dividends.
ITEM 6. SELECTED FINANCIAL DATA
The information appearing on page 1 of the Company's Annual Report, filed
as Exhibit 13 hereto, is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information appearing on pages 18 through 23 of the Appendix to the
Company's definitive Proxy Statement is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information appearing on pages 24 through 43 of the Appendix to the
Company's definitive Proxy Statement is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Within the twenty-four months prior to the date of the most recent
financial statements, there has been no change of accountants of the Company.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The definitive proxy statement of Mahaska Investment Company is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The definitive proxy statement of Mahaska Investment Company is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The definitive proxy statement of Mahaska Investment Company is
incorporated herein by reference.
17
<PAGE> 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following exhibits and financial statement schedules are filed as part
of this report:
(a) 1. Financial Statements: See the financial statements on pages 24
through 43 of the Company's definitive Proxy Statement which are
incorporated by reference herein.
2. Exhibits (not covered by independent auditors' report).
<TABLE>
<CAPTION>
EXHIBIT
-------
<S> <C>
3.1 Articles of Incorporation, as amended, of Mahaska Investment
Company. The Articles of Incorporation, as amended, of
Mahaska Investment Company are incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
3.2 Bylaws of Mahaska Investment Company. The Bylaws of Mahaska
Investment Company are incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
10.1 Mahaska Investment Company Employee Stock Ownership Plan &
Trust as restated and amended. This Plan & Trust is
incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994.
10.2.1 1993 Stock Incentive Plan. This 1993 Stock Incentive Plan is
incorporated by reference to Form S-1 Registration Number
33-81922 of Mahaska Investment Company.
10.2.2 1996 Stock Incentive Plan. This 1996 Stock Incentive Plan is
incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
10.2.3 1998 Stock Incentive Plan.
10.3.1 Midstates Resources Corp. Loan Participation and Servicing
Agreement dated December 9, 1992 between Midstates Resources
Corp., Mahaska Investment Company and Mahaska State Bank.
This Midstates Resources Corp. Agreement is incorporated by
Reference to Form S-1 Registration Number 33-81922 of
Mahaska Investment Company.
10.3.2 Central States Resources Corp. Liquidation Agreement dated
April 18, 1988 between Central States Resources Corp.,
Mahaska State Bank, National Bank & Trust Co., and Randal
Vardaman. This Central States Resources Corp. Agreement is
incorporated by reference to Form S-1 Registration Number
33-81922 of Mahaska Investment Company.
10.3.3 All States Resources Corp. Loan Participation and Servicing
Agreement dated September 13, 1993 between All States
Resources Corp., Mahaska Investment Company and West Gate
Bank. This All States Resources Corp. Agreement is
incorporated by reference to Form S-1 Registration Number
33-81922 of Mahaska Investment Company.
10.5.1 Revolving Loan Agreement dated January 31, 1996 between
Mahaska Investment Company and Harris Trust and Savings
Bank. This Loan Agreement is incorporated herein by
reference to the Form 8-K report filed by Mahaska Investment
Company on February 29, 1996.
10.5.2 Third Amendment to Revolving Loan Agreement and Revolving
Loan Note between Mahaska Investment Company and Harris
Trust & Savings Bank dated November 20, 1997.
10.6 Purchase and Assumption Agreement between Boatmen's Bank
Iowa, National Association and Central Valley Bank dated
February 15, 1996. This Purchase and Assumption Agreement is
incorporated herein by reference to the Form 8-K report
filed by Mahaska Investment Company on February 29, 1996.
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT
-------
<S> <C>
11 Computation of Per Share Earnings
13 The Annual Report to Shareholders of Mahaska Investment
Company for the 1997 calendar year and the Appendix to
the Proxy Statement for the Fiscal Year 1997.
21 Subsidiaries
23 Consent of Auditor
27 Financial Data Schedule
</TABLE>
The Company will furnish to any shareholder upon request and upon payment
of a fee of $.50 per page, a copy of any exhibit. Requests for copies should be
directed to Karen K. Baack, Secretary/Treasurer, Mahaska Investment Company,
P.O. Box 1104, Oskaloosa, Iowa 52577-1104.
(b) Reports on Form 8-K: No reports on Form 8-K were required to be filed
during the last quarter of 1997.
19
<PAGE> 22
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.
MAHASKA INVESTMENT COMPANY
(Registrant)
March 19, 1998 By: /s/ CHARLES S. HOWARD
------------------------------------
Charles S. Howard
Chairman, President, Chief Executive
Officer and Director
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.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
By: /s/ CHARLES S. HOWARD Director, Chairman of the Board, March 19, 1998
--------------------------------------- President and Chief Executive
Charles S. Howard Officer
By: /s/ DAVID A. MEINERT Director, Executive Vice March 19, 1998
--------------------------------------- President
David A. Meinert and Chief Financial Officer
(Principal Accounting Officer)
By: /s/ R. SPENCER HOWARD Director and Vice President March 19, 1998
--------------------------------------- Corporate Planning
R. Spencer Howard
By: /s/ MARTIN L. BERNSTEIN Director March 19, 1998
---------------------------------------
Martin L. Bernstein
By: /s/ ROBERT K. CLEMENTS Director March 19, 1998
---------------------------------------
Robert K. Clements
By: /s/ JOHN A. FALLON, III Director March 19, 1998
---------------------------------------
John A. Fallon, III
By: /s/ JAMES F. MATHEW Director March 19, 1998
---------------------------------------
James F. Mathew
By: /s/ JOHN P. POTHOVEN Director March 19, 1998
---------------------------------------
John P. Pothoven
By: /s/ JOHN W. N. STEDDOM Director March 19, 1998
---------------------------------------
John W. N. Steddom
</TABLE>
<PAGE> 1
Exhibit 10.2.3
MAHASKA INVESTMENT COMPANY
1998 STOCK INCENTIVE PLAN
SECTION 1. GENERAL PURPOSE OF PLAN; DEFINITIONS.
The name of the plan is the Mahaska Investment Company 1998 Stock
Incentive Plan (the "Plan"). The purpose of the Plan is to enable the Company
(as hereinafter defined) and its Subsidiaries (as hereinafter defined) to
obtain and retain competent personnel who will contribute to the Company's
success by their ability, ingenuity and industry and to provide incentives to
the participating officers, key employees and nonemployee directors which are
related to increases in shareholder value and will therefore inure to the
benefit of all shareholders of the Company.
For purposes of the Plan, the following terms shall be defined as set
forth below:
(a) "Award" means any grant under the Plan in the form of Stock Options.
(b) "Board" means the Board of Directors of the Company.
(c) "Change in Control" has the meaning given in Section 9 of the
Plan.
(d) "Code" means the Internal Revenue Code of 1986, as amended from time
to time, or any successor thereto.
(e) "Committee" means the Compensation Committee or any other committee
the Board may subsequently appoint to administer the Plan. The Committee shall
be composed entirely of directors who meet the qualifications referred to in
Section 2 of the Plan.
(f) "Company" means Mahaska Investment Company, a corporation incorporated
under the laws of the State of Iowa (or any successor corporation).
(g) "Disability" means being permanently and totally disabled under any
insurance program of the Company, any Subsidiary or any Related Entity.
(h) "Disinterested Person" shall have the meaning set forth in Rule 16b-3
("Rule 16b-3"), as promulgated by the Securities and Exchange Commission under
the Securities Exchange Act of 1934, as amended from time to time (the
"Exchange Act"), or any successor definition adopted by the Securities and
Exchange Commission.
- 1 -
<PAGE> 2
(i) "Eligible Employee" means an employee of the Company, any Subsidiary
or any Related Entity as described in Section 4 of the Plan.
(j) "Fair Market Value" means, as of any given date, with respect to any
Awards granted hereunder, the mean of the high and low trading price of the
Stock on such date as reported on the NASDAQ National Market System, or if the
Stock is not then traded on the NASDAQ National Market System, on such other
national securities exchange on which the Stock is admitted to trade or, on the
National Association of Securities Dealers Automated Quotation System if the
Stock is admitted for quotation thereon or, if none, as determined by the
Committee; provided, however, that if any such system, exchange or quotation
system is closed on any day on which Fair Market Value is to be determined,
Fair Market Value shall be determined as of the first day immediately preceding
such day on which such system, exchange or quotation system was open for
trading.
(k) "Incentive Stock Option" means any Stock Option intended to qualify as
an "incentive stock option" within the meaning of Section 422 of the Code..
(l) "Non-affiliated Director" means any member of the Board and any member
of the Board of Directors of a Subsidiary who is not an officer or full-time
employee of the Company, any Subsidiary or any Related Entity and who is not
affiliated with the Company or a shareholder thereof or otherwise has a similar
relationship to the Company.
(m) "Nonqualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
(n) "Optionee" means a Participant granted a Stock Option pursuant to
Section 5 of the Plan which remains outstanding.
(o) "Participant" means any Eligible Employee selected by the Committee,
pursuant to the Committee's authority in Section 2 of the Plan, to receive
Awards and, solely to the extent provided by Section 6 of the Plan, nonemployee
directors of the Company.
(p) "Related Entity" means any corporation, bank, other financial
institution, joint venture or other entity, domestic or foreign, other than a
Subsidiary, in which the Company owns, directly or indirectly, a substantial
equity interest.
(q) "Reporting Person" means any person subject to the reporting
requirements of Section 16(a) of the Exchange Act.
(r) "Retirement" means (i) retirement from active employment under a
pension plan of the Company, any Subsidiary or Related Entity or under an
employment contract with any of them or (ii) termination of employment at or
after age 65 under circumstances which the Committee, in its sole discretion,
deems equivalent to retirement.
- 2 -
<PAGE> 3
(s) "Stock" means the common stock of the Company.
(t) "Stock Option" means any option to purchase shares of Stock granted
pursuant to Section 5 of the Plan.
(u) "Subsidiary" means any corporation, bank, or other financial
institution in an unbroken chain of corporations, banks or other financial
institutions beginning with the Company, if each of the corporations, banks or
other financial institutions (other than the last corporation bank, or other
financial institution in the unbroken chain) owns stock possessing 50% or more
of the total combined voting power of all classes of stock in one of the other
corporations, banks or other financial institutions in the chain.
SECTION 2. ADMINISTRATION.
The Plan shall be administered by the Committee, composed of not less than
two directors who are Disinterested Persons, who shall be appointed by the
Board and who shall serve at the pleasure of the Board. In the event that a
Committee has not been appointed, then the Plan shall be administered by the
Board which shall have all of the power and authority of the Committee set
forth below until such time as a Committee is appointed. The Committee shall
have the power and authority in its sole discretion to grant Awards to Eligible
Employees pursuant to the terms and provisions of the Plan.
In particular, the Committee shall have full authority, not inconsistent
with the Plan:
(a) to select Participants from among the Eligible Employees;
(b) to determine whether and to what extent Awards are to be granted to
Eligible Employees hereunder;
(c) to determine the number of shares of Stock to be covered by each such
Award granted hereunder, but in no case shall such number be in the aggregate
greater than that allowed under the Plan;
(d) to determine the terms and conditions of any Award granted hereunder;
(e) to waive compliance by a Participant with any obligation to be
performed by him or her under any Award and to waive any term or condition of
any such Award (provided, however, that no such waiver shall detrimentally
affect the rights of a Participant without such Participant's consent); and
(f) to determine the terms and conditions which shall govern all written
agreements evidencing the Awards.
- 3 -
<PAGE> 4
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable; to interpret the provisions of the Plan and
the terms and conditions of any Award issued, expired, terminated, canceled or
surrendered under the Plan (and any agreements relating thereto); and to
otherwise supervise the administration of the Plan.
All decisions made by the Committee pursuant to the provisions of the Plan
and as to the terms and conditions of any Award (and any agreements relating
thereto) shall be final and binding on all persons, including the Company and
the Participants.
SECTION 3. NUMBER OF SHARES OF STOCK SUBJECT TO PLAN.
The total number of shares of Stock reserved and available for issuance
under the Plan shall be Five Hundred Fifty Thousand (550,000). Such shares of
Stock may consist, in whole or in part, of authorized and unissued shares of
Stock or issued shares of Stock reacquired by the Company at any time, as the
Board may determine.
To the extent that a Stock Option expires or is otherwise terminated,
canceled or surrendered without being exercised (including, without limitation,
in connection with the grant of a replacement option), the shares of Stock
underlying such Stock Option shall again be available for issuance in
connection with future Awards under the Plan.
The amount of Stock which may be issued under the Plan to any person with
respect to awards granted in any fiscal year shall not exceed an amount
representing or equal to 50,000 shares of Stock.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, or other change in corporate structure or
capitalization affecting the Stock, the Committee in its sole discretion may
make an adjustment or substitution in the number and class of shares reserved
for issuance under the Plan, the number and class of shares set forth as the
annual maximum pursuant to this Section 3, the number and class of shares
covered by outstanding Awards and the option price per share of Stock Options
to reflect the effect of such change in corporate structure or capitalization
on the Stock; provided, however, that any fractional shares resulting from such
adjustment shall be eliminated; provided, further, however, that unless the
Committee in its sole discretion determines otherwise, any issuance by the
Company of shares of stock of any class or securities convertible into shares
of stock of any class shall not affect, and no such adjustment or substitution
by reason thereof shall be made with respect to, the number or class of shares
reserved for issuance under the Plan, the number or class of shares covered by
outstanding Awards or any option price.
SECTION 4. ELIGIBILITY.
- 4 -
<PAGE> 5
Officers and other key employees of the Company, its Subsidiaries and its
Related Entities who are responsible for or contribute to the management,
growth or profitability of the business of the Company, its Subsidiaries or its
Related Entities shall be eligible to be granted Awards; provided, however,
with respect to an employee of a Related Entity, that such person was an
employee of the Company, a Subsidiary or, if originally an employee of the
Company or a Subsidiary, or another Related Entity immediately prior to
becoming employed by such Related Entity and accepted employment with such
Related Entity at the request of the Company or a Subsidiary. The Participants
under the Plan shall be selected, from time to time, by the Committee, in its
sole discretion, from among those Eligible Employees.
SECTION 5. STOCK OPTIONS.
(A) GRANT AND EXERCISE. Any Stock Option granted under the Plan shall be
in such form as the Committee may, from time to time, approve, and the terms
and conditions of Stock Option Awards need not be the same with respect to each
Optionee. Optionees shall enter into a Stock Option agreement ("Stock Option
Agreement") with the Company, in such form as the Committee shall determine,
which agreement shall set forth, among other things, the option price of the
option, the term of the option and conditions regarding exercisability of the
option granted thereunder.
(i) NATURE OF OPTIONS. The Committee shall have the authority to
grant any Participant either Incentive Stock Options, Nonqualified Stock
Options or both types of Stock Options, except that the Committee shall
not grant any Incentive Stock Options to an employee of a Related Entity.
Any Stock Option which does not qualify as an Incentive Stock Option, or
the terms of which at the time of its grant provide that it shall not be
treated as an Incentive Stock Option, shall constitute a Nonqualified
Stock Option.
(ii) EXERCISABILITY. Subject to such terms and conditions as shall
be determined by the Committee in its sole discretion at or after the
time of grant, Stock Options shall be exercisable from time to time to
the extent of 33% of the number of shares of Stock covered by the Stock
Option on and after the first anniversary and before the second
anniversary of the date of grant of the Stock Option, to the extent of
66% of the number of shares of Stock covered by the Stock Option on and
after the second anniversary and before the third anniversary of the date
of grant of the Stock Option and to the extent of 100% of the number of
shares of Stock covered by the Stock Option on and after the third
anniversary of the date of grant of the Stock Option and before the
expiration of the stated term of the Stock Option (or to such lesser
extent as the Committee in its sole discretion shall determine at the
time of grant or to such greater extent as the Committee in its sole
discretion shall determine at or after the time of grant).
(iii) METHOD OF EXERCISE. Stock Options may be exercised by giving
written notice of exercise delivered in person or by mail as required by
the terms of any Stock Option Agreement at the Company's principal
executive office, specifying the number of shares of Stock with respect
to which the Stock Option is being exercised, accompanied
- 5 -
<PAGE> 6
by payment in full of the option price in cash or its equivalent as
determined by the Committee in its sole discretion. If requested by the
Committee, the Optionee shall deliver to the Company the Stock Option
Agreement evidencing the Stock Option being exercised for notation
thereon of such exercise and return thereafter of such agreement to the
Optionee. As determined by the Committee in its sole discretion at or
after the time of grant, payment of the option price in full or in part
may also be made in the form of shares of Stock already owned by the
Optionee (based on the Fair Market Value of the Stock on the date the
Stock Option is exercised); provided, however, that in the case of an
Incentive Stock Option, the right to make payment of the option price in
the form of already owned shares of Stock may be authorized only at the
time of grant. An Optionee shall generally have the rights to dividends
or other rights of a shareholder with respect to shares of Stock subject
to the Stock Option when the Optionee has given written notice of
exercise, has paid in full for such shares of Stock, and, if requested,
has made the representations described in Section 10(a) of the Plan.
(b) TERMS AND CONDITIONS. Stock Options granted under the Plan shall be
subject to the following terms and conditions and shall contain such additional
terms and conditions, not inconsistent with the terms of the Plan, as the
Committee shall deem desirable.
(i) OPTION PRICE. The option price per share of Stock purchasable
under a Stock Option shall be determined by the Committee at the time of
grant, but shall be not less than 100% of the Fair Market Value of the
Stock on the date of the grant; provided, however, that if any
Participant owns or is deemed to own (by reason of the attribution rules
of Section 424(d) of the Code) more than 10% of the combined voting power
of all classes of stock of the Company or any Subsidiary when an
Incentive Stock Option is granted to such Participant, the option price
of such Incentive Stock Option (to the extent required by the Code at the
time of grant) shall be not less than 110% of the Fair Market Value of
the Stock on the date such Incentive Stock Option is granted.
(ii) OPTION TERM. The term of each Stock Option shall be fixed by
the Committee at the time of grant, but no Stock Option shall be
exercisable more than ten years after the date such Stock Option is
granted; provided, however, that if any Participant owns or is deemed to
own (by reason of the attribution rules of Section 424(d) of the Code)
more than 10% of the combined voting power of all classes of stock of the
Company or any Subsidiary when an Incentive Stock Option is granted to
such Participant, such Stock Option (to the extent required by the Code
at time of grant) shall not be exercisable more than five years from the
date such Incentive Stock Option is granted.
(iii) TRANSFERABILITY OF OPTIONS. No Stock Options shall be
transferable by the Optionee otherwise than by will or by the laws of
descent and distribution and all Stock Options shall be exercisable,
during the Optionee's lifetime, only by the Optionee.
- 6 -
<PAGE> 7
(iv) OPTION EXERCISE AFTER TERMINATION BY REASON OF DISABILITY OR
RETIREMENT. If an Optionee's employment with the Company, any Subsidiary
or any Related Entity terminates by reason of Disability or Retirement,
all Stock Options held by such Optionee shall vest as of the date of
termination and thereafter may be exercised for a period of three years
from the date of such termination or until the expiration of the stated
term of such Stock Option, whichever period is shorter. In the event of
a termination of employment by reason of Disability or Retirement, if an
Incentive Stock Option is exercised after the expiration of the exercise
period that applies for purposes of Section 422 of the Code, such Stock
Option will thereafter be treated as a Nonqualified Stock Option.
(v) OPTION EXERCISE AFTER TERMINATION BY CONSENT. If an Optionee's
employment with the Company or any Subsidiary is terminated by the
Company or such Subsidiary under mutually satisfactory conditions or if
an Optionee's employment with a Related Entity is terminated under
conditions mutually satisfactory to such Related Entity and the Optionee,
the Committee, in its sole discretion, may permit the Optionee to
exercise any Stock Option held by such Optionee for a period of one year
(or such shorter period as the Committee in its sole discretion shall
specify at or after the time of grant) from the date of such termination
or until the expiration of the stated term of such Stock Option,
whichever period is shorter, to the extent to which the Optionee would on
the date of exercise have been entitled to exercise the Stock Option if
such Optionee had continued to be employed by the Company, such
Subsidiary or such Related Entity (or to such greater or lesser extent as
the Committee in its sole discretion shall determine at or after the time
of grant). If an Optionee's employment with the Company or any
Subsidiary is terminated in connection with such Optionee's acceptance of
employment, at the request of the Company or a Subsidiary, with a Related
Entity (or an Optionee's employment with one Related Entity is terminated
in connection with such Optionee's acceptance of employment, at the
request of the Company or a Subsidiary, with another Related Entity), the
Committee in its sole discretion may permit the Optionee to exercise any
Stock Option held by such Optionee after the date of such termination at
any time until the expiration of the stated term of such Stock Option (or
such shorter period as the Committee in its sole discretion shall specify
at or after the time of grant), to the extent that the Optionee would on
the date of exercise have been entitled to exercise such Stock Option if
such Optionee had continued to be employed by the Company or such
Subsidiary (or such initial Related Entity), provided that the Optionee
has been in continuous employ with the Related Entity to which such
Optionee has moved from the date of acceptance of employment therewith
until the date of exercise. In the event of a termination of employment
by the Company, any Subsidiary or any Related Entity under mutually
satisfactory conditions, if an Incentive Stock Option is exercised after
the expiration of the exercise period that applies for purposes of
Section 422 of the Code, such Stock Option will thereafter be treated as
a Nonqualified Stock Option.
- 7 -
<PAGE> 8
(vi) OPTION EXERCISE AFTER TERMINATION BY DEATH. If (x) an
Optionee's employment with the Company, any Subsidiary or any Related
Entity terminates by reason of death; (y) an Optionee dies within the
three year period following termination by reason of Disability or
Retirement as set forth in Section 5(b)(iv) of the Plan or (z) an
Optionee dies within the one year period following termination under
mutually satisfactory conditions as set forth in the first sentence of
Section 5(b)(v) of the Plan, all Stock Options held by such Optionee
shall vest on the date of death and may thereafter be exercised by the
legal representative of the estate or by the legatee of the Optionee
under the will of the Optionee for a period of two years from the date of
death or until the expiration of the stated term of such Stock Option,
whichever period is shorter.
(vii) RESTRICTION ON EXERCISE AFTER TERMINATION. Notwithstanding
the provisions of this Section 5, but subject to the provisions of
Section 9 of the Plan, the exercise of any Stock Option after termination
of employment shall be subject to satisfaction of the conditions
precedent that the Optionee neither, (x) takes other employment or
renders services to others without the written consent of the Company,
nor (y) conducts himself in a manner adversely affecting the Company.
(viii) OTHER TERMINATION. Except as otherwise provided in this
Section 5 or Section 9 of the Plan, or as determined by the Committee in
its sole discretion, if an Optionee's employment with the Company, any
Subsidiary or any Related Entity terminates, all Stock Options held by
the Optionee will terminate.
(ix) ANNUAL LIMIT ON INCENTIVE STOCK OPTIONS. To the extent required
for incentive stock option treatment under Section 422 of the Code, the
aggregate Fair Market Value (determined as of the date the Incentive
Stock Option is granted) of the shares of Stock with respect to which
Incentive Stock Options granted under the Plan and all other option plans
of the Company or any Subsidiary become exercisable for the first time by
an Optionee during any calendar year shall not exceed $100,000; provided,
however, that if the aggregate Fair Market Value (so determined) of the
shares of Stock covered by such options exceeds $100,000 during any year
in which they become exercisable, such options with a Fair Market Value
in excess of $100,000 will be Nonqualified Stock Options.
SECTION 6. GRANT OF STOCK OPTIONS TO NON-AFFILIATED DIRECTORS.
Each Non-affiliated Director upon the later of the Effective Date of this
Plan or the date of his or her election to the Board or the Board of Directors
of a Subsidiary and any subsequent reelection shall be granted an Award
consisting of a Stock Option to purchase such number of full shares of Common
Stock equal to 5% of the pre-tax profits, if any, of the Company divided by the
option price per share equal to 100% of the Fair Market Value of the Stock on
such date divided by the number of Non-affiliated Directors on the Board and
the Board of Directors of Subsidiaries eligible to receive Awards on such date.
All such Stock Options shall be designated as Nonqualified Stock Options.
Subject to Section 2 of the Plan, a Nonaffiliated Director must
- 8 -
<PAGE> 9
serve continuously as a Non-affiliated Director of the Company for a
period of twelve consecutive months from the date such Award is granted before
he or she can exercise any part of such Award. Thereafter, on and after the
first anniversary of the date of granting the Award and before the second
anniversary, the Non-affiliated Director may exercise the Award with respect to
not more than 33% of the number of shares of Stock covered thereby, on and
after the second anniversary and before the third anniversary, the
Non-affiliated Director may exercise the Award with respect to not more than
66% of the number of shares of Stock covered thereby, and on and after the
third anniversary and before the expiration of the stated term of the Award,
which shall be ten years from the date of its granting, the Non-affiliated
Director may at any time or from time to time exercise the Award with respect
to all or any portion of the shares of Stock covered thereby. If a
Non-affiliated Director's service with the Company terminates by reason of
permanent and total disability or retirement from active service as a director
of the Company, any Award held by such Non-affiliated Director may be exercised
for a period of three years from the date of such termination or until the
expiration of the Award, whichever is shorter, to the extent to which the
individual would on the date of exercise have been entitled to exercise the
Award if such individual had continued to serve as a Non-affiliated Director.
If a Non-affiliated Director's service with the Company terminates by reason of
death or under mutually satisfactory conditions, or if a Non-affiliated
Director dies within the three-year period following termination by reason of
permanent and total disability or retirement from active service as a director
of the Company or within the one year period following termination under
mutually satisfactory conditions, any Award held by such Non-affiliated
Director may be exercised for a period of one year from the date of such
termination or post-termination death, as the case may be, or until the
expiration of the stated term of the Award, whichever is shorter, to the extent
to which the individual would on the date of exercise have been entitled to
exercise the Award if such individual had continued to serve as a
Non-affiliated Director. All applicable provisions of the Plan not
inconsistent with this Section 6 shall apply to Awards granted to Nonaffiliated
Directors; provided, however, that the Committee may not exercise discretion
under any provision of the Plan with respect to Awards granted under this
Section 6 to the extent that such discretion is inconsistent with Rule 16b-3.
SECTION 7. AMENDMENT AND TERMINATION.
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration, or discontinuation shall be made (a) which would impair the rights
of a Participant under any Award theretofore granted without such Participant's
consent, or (b) which, without the approval of the shareholders of the Company
(but only where such approval is necessary to satisfy then-applicable
requirements of Rule 16b-3, any Federal tax law relating to Incentive Stock
Options or applicable state law), would:
(i) modify the formula set forth in Section 6 (other than as may be
required for compliance under applicable federal income tax or the
Employee Retirement Income Security Act of 1974, as amended, laws and
regulations);
- 9 -
<PAGE> 10
(ii) except as provided in Section 3 of the Plan, increase the total
number of shares of Stock which may be issued under the Plan;
(iii) except as provided in Section 3 of the Plan, decrease the
option price of any Stock Option to less than 100% of the Fair Market
Value on the date of the grant of the
Option;
(iv) change the class of employees or directors eligible to
participate in the Plan; or
(v) extend (A) the period during which Stock Options may be granted
or (B) the maximum period of any Award under Section 5(b)(ii) of the
Plan.
Except as restricted herein with respect to Incentive Stock Options, the
Committee may amend or alter the terms and conditions of any Award theretofore
granted, and of any agreement evidencing such Award, prospectively or
retroactively, but no such amendment or alteration shall impair the rights of
any Participant under such Award or agreement without such Participant's
consent.
SECTION 8. UNFUNDED STATUS OF PLAN.
The Plan is intended to constitute an "unfunded" plan. With respect to
any payments not yet made and due to a Participant by the Company, nothing
contained herein shall give any such Participant any rights that are greater
than those of a general unsecured creditor of the Company.
SECTION 9. CHANGE IN CONTROL.
The following acceleration and valuation provisions shall apply in the
event of a Change in Control notwithstanding other provisions of the Plan or
any provisions of any applicable agreement to the contrary:
(a) In the event of a Change in Control any Participant holding an Award
who is terminated by the Company or any Subsidiary for any reason within the
two year period immediately following a Change in Control shall be permitted to
exercise any Stock Option after such termination of employment at any time (x)
within the three month period commencing on the later of the date of
termination of his or her employment or the date on which such Award would
first be exercisable in accordance with the terms of the Plan had such
termination not occurred or (y) until the stated term of such Award, whichever
period is shorter.
(b) For purposes of the Plan, "Change in Control" shall mean a Change in
Control of the Company, which shall be deemed to have occurred if:
- 10 -
<PAGE> 11
(i) any Person (as defined in this Section 9) is or becomes the
Beneficial Owner (as defined in this Section 9) of securities of the
Company representing 20% or more of the combined voting power of the
Company's then outstanding securities (unless the event causing the 20%
threshold to be crossed is an acquisition of securities directly from the
Company);
(ii) during any period of two consecutive years beginning after
December 31,1997, individuals who at the beginning of such period
constitute the Board and any new director (other than a director
designated by a person who has entered into an agreement with the Company
to effect a transaction described in clause (i), (iii) or (iv) of this
Change in Control definition) whose election or nomination for election
was approved by a vote of at least two-thirds of the directors then still
in office who either were directors at the beginning of the period or
whose election or nomination for election was previously so approved
cease for any reason to constitute a majority of the Board;
(iii) the shareholders of the Company approve a merger or
consolidation of the Company with any other corporation (other than a
merger or consolidation which would result in the voting securities of
the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the entity surviving such merger or consolidation), in
combination with voting securities of the Company or such surviving
entity held by a trustee or other fiduciary pursuant to any employee
benefit plan of the Company or such surviving entity or of any Subsidiary
of the Company or such surviving entity, at least 80% of the combined
voting power of the securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation); or
(iv) the shareholders of the Company approve a plan of complete
liquidation or dissolution of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's
assets.
(c) For purposes of the definition of Change in Control, "Person" shall
have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act
as supplemented by Section 13(d)(3) of the Exchange Act; provided, however,
that Person shall not include (i) the Company, any Subsidiary or any other
Person controlled by the Company, (ii) any trustee or other fiduciary holding
securities under any employee benefit plan of the Company or of any Subsidiary,
(iii) a corporation owned, directly or indirectly, by the shareholders of the
Company in substantially the same proportions as their ownership of securities
of the Company, or (iv) any person who, as of December 31, 1997, was the
beneficial owner (as defined in this Section 9) of securities of the Company
representing 20% or more of the combined voting power.
(d) For purposes of the definition of Change in Control, a Person shall be
deemed the Beneficial Owner of any securities which such Person, directly or
indirectly, has the right to vote or dispose of or has "beneficial ownership"
(within the meaning of Rule 13d-3 under the
- 11 -
<PAGE> 12
Exchange Act) of, including pursuant to any agreement, arrangement or
understanding (whether or not in writing); provided, however, that: (i) a
Person shall not be deemed the Beneficial Owner of any security as a result of
an agreement, arrangement or understanding to vote such security (x) arising
solely from a revocable proxy or consent given in response to a public proxy or
consent solicitation made pursuant to, and in accordance with, the Exchange Act
and the applicable rules and regulations thereunder or (y) made in connection
with, or to otherwise participate in, a proxy or consent solicitation made, or
to be made, pursuant to, and in accordance with, the applicable provisions of
the Exchange Act and the applicable rules and regulations thereunder; in either
case described in clause (x) or clause (y) above, whether or not such
agreement, arrangement or understanding is also then reportable by such Person
on Schedule 13 under the Exchange Act (or any comparable or successor report);
and (ii) a Person engaged in business as an underwriter of securities shall not
be deemed to be the Beneficial Owner of any securities acquired through such
Person's participation in good faith in a firm commitment underwriting until
the expiration of forty days after the date of such acquisition.
SECTION 10. GENERAL PROVISIONS.
(a) The Committee may require each Optionee purchasing shares of Stock
pursuant to a Stock Option to represent to and agree with the Company in
writing that such Optionee is acquiring the shares of Stock without a view to
distribution thereof.
All certificates for shares of Stock delivered under the Plan shall be
subject to such stock-transfer orders and other restrictions as the Committee
may deem advisable under the rules, regulations and other requirements of the
Securities and Exchange Commission, any stock exchange upon which the Stock is
then listed or quotation system on which the Stock is admitted for trading and
any applicable federal or state securities law, and the Committee may cause a
legend or legends to be put on any such certificates to make appropriate
reference to such restrictions.
(b) Nothing contained in the Plan shall prevent the Board from adopting
other or additional compensation arrangements, subject to shareholder approval
if such approval is required, and such arrangements may be either generally
applicable or applicable only in specific cases. The adoption of the Plan
shall not confer upon any employee of the Company, any Subsidiary or any
Related Entity any right to continued employment with the Company, any
Subsidiary or any Related Entity, as the case may be, nor shall it interfere in
any way with the right of the Company, any Subsidiary or any Related Entity to
terminate the employment of any of its employees at any time.
(c) Each Participant shall be deemed to have been granted an Award on the
date the Committee took action to grant such Award under the Plan or such later
date as the Committee in its sole discretion shall determine at the time such
grant is authorized.
- 12 -
<PAGE> 13
(d) Unless the Committee otherwise determines, each Participant shall, no
later than the date as of which the value of an Award first becomes includable
in the gross income of the Participant for federal income tax purposes, pay to
the Company, or make arrangements satisfactory to the Committee regarding
payment of, any federal, state or local taxes of any kind required by law to be
withheld with respect to the Award. The obligations of the Company under the
Plan shall be conditional on such payment or arrangements and the Company (and,
where applicable, its Subsidiaries and its Related Entities) shall, to the
extent permitted by law, have the right to deduct any such taxes from any
payment of any kind otherwise due to the Participant. A Participant (other
than a Non-affiliated Director) may elect to have such tax withholding
obligation satisfied, in whole or in part, by (i) authorizing the Company to
withhold from shares of Stock to be issued upon the exercise of a Stock Option
a number of shares of Stock with an aggregate Fair Market Value that would
satisfy the withholding amount due, or (ii) transferring to the Company shares
of Stock owned by the Participant with an aggregate Fair Market Value that
would satisfy the withholding amount due. With respect to any Participant who
is a director or officer, the following additional restrictions shall apply:
(i) the election to satisfy tax withholding obligations relating to
the exercise of a Stock Option in the manner permitted by this subsection
(d) shall be made either (x) during the period beginning on the third
business day following the date of release of quarterly or annual summary
statements of sales and earnings and ending on the twelfth business day
following such date, or (y) at least six months prior to the date on
which the amount of tax to be withheld upon the exercise of such Stock
Option or the vesting of such Restricted Stock Unit Award or Performance
Stock Unit Award is determinable;
(ii) such election shall be irrevocable;
(iii) such election shall be subject to the consent or disapproval
of the Committee; and
(iv) such election shall not be made within six months of the date
of the grant of such Award.
(e) No member of the Board or the Committee, nor any officer or employee
of the Company acting on behalf of the Board or the Committee, shall be
personally liable for any action, failure to act, determination or
interpretation taken or made in good faith with respect to the Plan, and all
members of the Board or the Committee and each and any officer or employee of
the Company acting on their behalf shall, to the extent permitted by law, be
fully indemnified and protected by the Company in respect of any such action,
failure to act, determination or interpretation.
(f) The Plan is intended to satisfy the applicable conditions of Rule
16b-3, and all interpretations of the Plan shall, to the extent permitted by
law, regulations and rulings, be
- 13 -
<PAGE> 14
made in a manner consistent with and so as to satisfy the conditions of
Rule 16b-3. The phrase "director or officer" as used in the Plan means any
director or officer who is subject to the provisions of Section 16(b) of the
Exchange Act. Any provision of the Plan or the application of any provision of
the Plan inconsistent with Rule 16b-3 shall be inoperative and shall not affect
the validity of the Plan.
In interpreting and applying the provisions of the Plan, any Stock Option
granted as an Incentive Stock Option pursuant to the Plan shall to the extent
permitted by law, regulations and rulings be construed as, and any ambiguity
shall be resolved in favor of preserving its status as, an "incentive stock
option" within the meaning of Section 422 of the Code. Once an Incentive Stock
Option has been granted, no action by the Committee that would cause such Stock
Option to lose its status under the Code as an "incentive stock option" shall
be effective as to such Incentive Stock Option unless taken at the request of
or with the consent of the Optionee. Notwithstanding any provision to the
contrary in the Plan or in any Incentive Stock Option granted pursuant to the
Plan, if any change in law or any regulation or ruling of the Internal Revenue
Service shall have the effect of disqualifying any Stock Option granted under
the Plan which is intended to be an "incentive stock option" within the meaning
of Section 422 of the Code, the Stock Option granted shall nevertheless
continue to be outstanding as and shall be deemed to be a Nonqualified Stock
Option under the Plan.
SECTION 11. EFFECTIVE DATE OF PLAN.
The Plan shall be effective as of January 22, 1998 by action of the Board
of Directors conditioned on and subject to approval of the Plan by the vote of
the shareholders of the Company holding a majority of the shares of Stock of
the Company present in person or by proxy at a duly held meeting of
shareholders.
SECTION 12. TERM OF PLAN.
No Award shall be granted under the Plan on or after the tenth anniversary
of the effective date of the Plan; provided, however, that Awards granted prior
to such tenth anniversary may extend beyond that date.
- 14 -
<PAGE> 1
Exhibit 10.5.2
MAHASKA INVESTMENT COMPANY
THIRD AMENDMENT TO CREDIT AGREEMENT
Harris Trust and Savings Bank
Chicago, Illinois
Ladies and Gentlemen:
Reference is hereby made to that certain Credit Agreement dated as of
January 31, 1996, as amended (the "Credit Agreement"), between the undersigned,
Mahaska Investment Company, an Iowa corporation (the "Borrower"), and you (the
"Bank"). All capitalized terms used herein without definition shall have the
same meanings herein as such terms have in the Credit Agreement.
The Borrower and the Bank have agreed to amend the Credit Agreement under
the terms and conditions set forth in this agreement (herein, the "Amendment").
1. AMENDMENTS.
Upon your acceptance hereof in the space provided for that purpose below,
the Credit Agreement shall be and hereby is amended as follows:
(a) The first sentence of Section 3 of the Credit Agreement shall be
amended and restated in its entirety to read as follows:
"The payment and performance of the Obligations shall at all times
be secured by all of the issued and outstanding capital stock
(except for directors' qualifying shares as required by law) of
each Subsidiary of the Borrower, whether now owned or hereafter
formed or acquired, pursuant to a Pledge and Security Agreement
dates as of October 17, 1997, as amended, between the Borrower and
the Bank (the Pledge and Security Agreement, and all other
instruments and documents as shall from time to time secure the
Obligations or any part thereof, being hereinafter referred to as
the "Collateral Documents")."
page 1
<PAGE> 2
(b) Schedule 5.2 to the Credit Agreement shall be amended in its
entirety, and as amended it shall be restated to read as set forth on
Schedule 5.2 attached hereto and made a part hereof.
2. CONDITIONS PRECEDENT.
The effectiveness of this Amendment is subject to the satisfaction of all
of the following conditions precedent:
(a) The Borrower and the Bank shall have executed and delivered this
Amendment.
(b) The Borrower and the Bank shall have executed and delivered an
amendment to the Collateral Documents in form and substance
satisfactory to the Bank, the Borrower shall have executed and
delivered to the Bank such UCC financing statements covering the
Collateral as the Bank may request, and the Borrower shall have
delivered to the Bank certificates for 100% of the capital stock of
Pella State Bank together with executed stock powers therefor.
(c) Legal matters incident to the execution and delivery of this
Amendment shall be satisfactory to the Bank and its counsel.
3. REPRESENTATIONS.
In order to induce the Bank to execute and deliver this Amendment, the
Borrower hereby represents to the Bank that as of the date hereof, the
representations and warranties set forth in Section 5 of the Credit Agreement
are and shall be and remain true and correct (except that the representations
contained in Section 5.5 shall be deemed to refer to the most recent financial
statements of the Borrower delivered to the Bank) and the Borrower is in full
compliance with all of the terms and conditions of the Credit Agreement and no
Default or Event of Default has occurred and is continuing under the Credit
Agreement or shall result after giving effect to this Amendment.
4. MISCELLANEOUS.
page 2
<PAGE> 3
(a) Except as specifically amended herein, the Credit Agreement shall
continue in full force and effect in accordance with its original terms.
Reference to this specific Amendment need not be made in the Credit Agreement,
the Note, or any other instrument or document executed in connection therewith,
or in any certificate, letter or communication issued or made pursuant to or
with respect to the Credit Agreement, any reference in any of such items to the
Credit Agreement being sufficient to refer to the Credit Agreement as amended
hereby.
(b) The Borrower agrees to pay on demand all costs and expenses of or
incurred by the Bank in connection with the negotiation, preparation, execution
and delivery of this Amendment, including the fees and expenses of counsel for
the Bank.
(c) This Amendment may be executed in any number of counterparts, and by
the different parties on different counterpart signature pages, all of which
taken together shall constitute one and the same agreement. Any of the parties
hereto may execute this Amendment by signing any such counterpart and each of
such counterparts shall for all purposes be deemed to be an original. This
Amendment shall be governed by the internal laws of the State of Illinois.
Dated as of November 20, 1997.
MAHASKA INVESTMENT COMPANY
By /s/ Charles S. Howard
Its President
Accepted and agreed to in Chicago, Illinois as of the date and year last
above written.
HARRIS TRUST AND SAVINGS BANK
By /s/ Michael S. Cameli
Its Vice President
page 3
<PAGE> 4
MAHASKA INVESTMENT COMPANY
THIRD AMENDMENT TO PLEDGE AND SECURITY AGREEMENT
Harris Trust and Savings Bank
Chicago, Illinois
Ladies and Gentlemen:
Reference is hereby made to that certain Pledge and Security Agreement
dated as of October 17, 1994, as amended (the Pledge and Security Agreement, as
the same has been amended prior to the date hereof, being referred to herein as
the "Pledge Agreement"), between the undersigned, Mahaska Investment Company,
an Iowa corporation (the "Pledgor") and you (the "Bank"). All capitalized
terms used herein without definition shall have the same meanings herein as
such terms have in the Pledge Agreement.
The Pledgor and the Bank have agreed to amend the Pledge Agreement under
the terms and conditions set forth in this agreement (herein, the "Amendment").
1. AMENDMENTS.
Upon your acceptance hereof in the space provided for that purpose below,
the Pledge Agreement shall be and hereby is amended as follows:
(a) Pledgor is hereby granting the Bank a security interest in all
shares of the capital stock of each subsidiary of the Pledgor, whether
now owned or hereafter formed or acquired. Accordingly, the first
paragraph of the Pledge Agreement is hereby amended and restated to read
as follows:
"FOR VALUE RECEIVED, the undersigned, Mahaska Investment Company, an Iowa
corporation (the "Pledgor", hereby pledges and deposits with, and
reaffirms its pledge and deposit with, Harris Trust and Savings Bank,
Chicago, Illinois (the "Bank"), and hereby grants to, and reaffirms its
grant to, the Bank a continuing security interest in and to (i) all
shares of the capital stock of each subsidiary of the Pledgor, whether
now or existing or hereafter formed or acquired (those shares
page 4
<PAGE> 5
delivered to and deposited with the Bank on or prior to the date hereof
being listed and described on Schedule A attached hereto), (ii) all
substitutions and additions to such shares, (iii) all dividends,
distributions, and other sums distributable or payable from, upon, or in
respect of, such shares, (iv) all other rights and privileges incident to
such shares, and (v) all proceeds and products of the foregoing (all of
the foregoing being hereinafter referred to collectively as the
"Collateral")."
(b) Schedule A to the Pledge Agreement is hereby replaced by
Schedule A attached hereto.
2. MISCELLANEOUS.
(a) Except as specifically amended herein, the Pledge Agreement shall
continue in full force and effect in accordance with its original terms.
Nothing herein contained shall in any manner affect or impair the priority of
the liens and security interests created and provided for by the Pledge
Agreement or any other instrument or document executed in connection therewith,
or in any certificate, letter or communication issued or made pursuant to or
with respect to the Pledge Agreement, any reference in any of such items to the
Pledge Agreement being sufficient to refer to the Pledge Agreement as amended
hereby.
(b) This Amendment may be executed in any number of counterparts, and by
the different parties on different counterpart signature pages, all of which
taken together shall constitute one and the same agreement. Any of the parties
hereto may execute this Amendment by signing any such counterpart and each of
such counterparts shall for all purposes be deemed to be an original. This
Amendment shall be governed by the internal laws of the State of Illinois.
Dated as of November 20, 1997.
MAHASKA INVESTMENT COMPANY
By
Its
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<PAGE> 6
Accepted and agreed to in Chicago, Illinois as of the date and year last
above written.
HARRIS TRUST AND SAVINGS BANK
By /s/ Michael Cameli
Its Vice President
SCHEDULE A
THE COLLATERAL
<TABLE>
<CAPTION>
NAME OF ISSUER NUMBER OF SHARES CERTIFICATE NO(S).
<S> <C> <C>
MAHASKA STATE BANK 20,000 1545
2,400 1546
CENTRAL VALLEY BANK 10,000 2
10,000 3
ON-SITE CREDIT SERVICES 40,000 1
PELLA STATE BANK 10,000 1
</TABLE>
page 6
<PAGE> 7
SCHEDULE 5.2
SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION OF
NAME INCORPORATION PERCENTAGE OF OWNERSHIP
<S> <C> <C>
Mahaska State Bank Iowa 100%
Central Valley Bank United States of America 100%
On-Site Credit Services Iowa 100%
Pella State Bank Iowa 100%
</TABLE>
page 7
<PAGE> 1
EXHIBIT 11
MAHASKA INVESTMENT COMPANY
AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(Not Covered by Auditor's Report)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
EARNINGS PER SHARE INFORMATION:
Weighted average number of shares
outstanding during the year 3,652,908 3,744,418 3,796,574
Weighted average number of shares
outstanding during the year
including all dilutive potential 3,784,657 3,771,093 3,807,571
shares
Net earnings $ 5,058,225 4,494,394 3,922,697
Earnings per share - basic $ 1.38 1.20 1.03
Earnings per share - diluted $ 1.34 1.19 1.03
</TABLE>
<PAGE> 1
Financial Highlights
<TABLE>
<CAPTION>
Year Ended December 31 (In thousands, except per share data) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Summary of income data:
Interest income excluding loan pool participations $ 15,472 13,532 10,463 8,500 7,738
Interest and discount on loan pool participations 8,474 9,097 7,864 4,479 3,929
Total interest income 23,946 22,629 18,327 12,979 11,667
Total interest expense 9,312 8,531 7,100 4,676 3,653
Net interest income 14,634 14,098 11,227 8,303 8,014
Provision for loan losses 417 987 168 183 143
Other income 1,750 1,506 1,301 1,457 1,421
Total other operating expenses 8,315 7,738 6,450 5,452 4,903
Income before income tax 7,652 6,879 5,910 4,125 4,389
Income tax expense 2,594 2,385 1,987 1,345 1,412
Net income $ 5,058 4,494 3,923 2,780 2,977
Per share data:*
Net income - basic $ 1.38 1.20 1.03 .99 1.21
Net income - diluted $ 1.34 1.19 1.03 .99 1.21
Cash dividends declared .48 .44 .40 .36 .26
Book value 10.03 9.22 8.49 7.82 7.04
Net tangible book value $ 8.35 7.39 7.34 6.56 6.91
Selected financial ratios:
Net income to average assets 1.98% 1.93% 2.04% 1.68% 2.26%
Net income to average equity 14.47% 13.52% 12.67% 12.45% 18.46%
Dividend payout ratio 34.78% 36.50% 38.37% 36.27% 21.86%
Average equity to average assets 13.69% 14.31% 16.09% 13.46% 12.25%
Tier 1 capital to risk weighted assets at end of period 14.74% 16.25% 19.84% 19.92% 18.79%
Net interest margin 6.30% 6.69% 6.48% 5.58% 6.75%
Gross revenue of loan pools to total gross revenue 32.98% 37.69% 40.06% 31.03% 30.02%
Interest and discount income of loan pools
to total interest income 35.39% 40.20% 42.91% 34.51% 33.68%
Allowance for loan losses to total loans 1.26% 1.27% 1.17% 1.19% 1.29%
Non-performing loans to total loans 1.28% 1.79% 0.81% 0.79% 0.91%
Net loans charged off to average loans 0.07% 0.63% 0.06% 0.20% 0.21%
</TABLE>
<TABLE>
<CAPTION>
December 31 (In thousands) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Selected balance sheet data:
Total assets $ 274,873 251,851 205,162 186,818 143,752
Total loans net of unearned discount 144,333 117,416 85,869 74,015 64,700
Total loan pool participations 54,326 50,687 45,318 46,852 20,617
Allowance for loan losses 1,816 1,491 1,001 881 833
Total deposits 215,308 206,952 161,504 146,476 121,462
Total shareholdersi equity 36,754 34,243 32,106 29,780 17,371
</TABLE>
* Restated to reflect the five-for-three stock split effected in the form of a
dividend in 1997.
<PAGE> 2
MANAGEMENT'S DISCUSSION & ANALYSIS
The following discussion and analysis is intended as a review of significant
factors affecting the financial condition and results of operation
of Mahaska Investment Company and subsidiaries (the "Company") for the periods
indicated. The discussion should be read in conjunction with the consolidated
financial statements and the notes thereto.
In addition to historical information, this discussion and analysis contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ significantly from those anticipated in these
forward-looking statements.
OVERVIEW
The Company recorded net income of $5,058,000, or $1.38 per share, for the year
ended December 31, 1997, which is an increase of 12.5 percent compared with the
net income of $4,494,000, or $1.20 per share, earned in 1996. The net income
for 1996 increased 14.6 percent from the $3,923,000 ($1.03 per share) earned in
1995.
Total assets of the Company grew 9.1 percent to a year-end 1997 total of
$274,873,000. Deposits increased 4.0 percent to $215,308,000 as of December 31,
1997, while the Company's total loans outstanding grew 22.9 percent to end 1997
at $144,333,000. Throughout 1997, management of the Company continued to focus
on quality loan growth in the markets served by its subsidiaries. This resulted
in significant increases in commercial, agricultural and real estate loan
volumes as of December 31, 1997, in comparison to year-end 1996 totals. The
increase in loan volume contributed additional interest income which
strengthened the Company's profitability.
In June of 1996, one of the Company's subsidiaries purchased a bank branch in
Sigourney, Iowa. Central Valley Bank acquired approximately $14,645,000 in loans
and approximately $32,083,000 in deposits through this acquisition. The existing
branch of Central Valley Bank in Sigourney was merged into the acquired branch
facility.
Return on average assets is a measure of profitability that indicates how
effectively a financial institution utilized its assets. It is calculated by
dividing net income by average total assets. The Company's return on average
assets for 1997 was 1.98 percent, 1.93 percent in 1996, and 2.04 percent in
1995. Return on average equity indicates what the Company earned on its
shareholders' investment and is calculated by dividing net income by average
total shareholders' equity. The return on average equity for the Company has
shown an increase during each of the last three years. For 1997 the return on
average equity was 14.47 percent compared with 13.52 percent in 1996 and 12.67
percent in 1995.
INVESTMENT IN LOAN POOLS
For the year 1997 the Company collected interest income and discount on loan
pool participations of $8,474,000, which is a decrease of 6.8 percent from the
1996 total. The Company invests in pools of distressed and nonperforming loans
categorized as loan pool participations. These loan pool participations are
purchased at a discount from the aggregate outstanding principal amount of the
underlying loans. Income is derived from this investment in the form of interest
collected and the repayment of principal in excess of the purchase cost which is
herein referred to as "discount." Interest income and discount on the loan pool
participations increased 15.7 percent in 1996 to $9,097,000, up from the 1995
total of $7,864,000.
The average loan pool participation investment for 1997 was $49,399,000
compared with an average for 1996 of $50,105,000. New loan pool participation
investments made by the Company during 1997 totaled $25,589,000. During 1996
the Company invested $29,827,000 in loan pool participations. Throughout 1997
loan pool participation investments averaged 21.0 percent of earning assets
while in 1996 they were 23.4 percent of average earning assets.
The yield on loan pool participation investments declined to 17.2 percent for
1997, compared with 18.2 percent in 1996.
NET INTEREST INCOME
Net interest income is the difference between total interest income and total
interest expense. Fluctuations in net interest income can result from the
changes in volumes of assets and liabilities as well as changes in interest
rates. For the year ended December 31, 1997, net interest income increased 3.8
percent to $14,634,000. Net interest income for 1996 was $14,098,000, an
increase of 25.6 percent from $11,227,000 in 1995.
The Company's net interest income increased $536,000 in 1997 compared with
1996. A $1,317,000 increase in total 1997 interest income was partially
offset by a $781,000 increase in overall interest expense. The interest income
earned on loans rose by $2,079,000 in 1997 mainly as a result of the growth in
loan volumes the Company experienced during
18
<PAGE> 3
[MAHASKA INVESTMENT COMPANY LOGO]
the year. The $623,000 decrease in interest income and discount on loan
pool participations reduced the overall gain in interest income for the year.
Interest income on investment securities decreased $17,000 as the average volume
of securities held by the Company declined slightly. During 1997 the Company
maintained a lower balance in interest-bearing deposits at other banks which
resulted in a decrease of $158,000 in interest income from these accounts.
Interest expense on deposits increased $862,000 primarily due to the higher
average volume of customer deposits at the Company's subsidiary banks. Most of
the deposit growth in 1997 occurred in certificates of deposit, with minimal
growth in other types of deposits.The interest expense incurred on notes payable
in 1997 decreased $203,000 compared with 1996 primarily due to lower interest
rates. The Company's net interest margin on a tax-equivalent basis declined to
6.30 percent for 1997 compared with 6.69 percent in 1996 mainly as a result of
the lower income recognized on loan pool participations. Net interest margin is
a measurement of the net return on interest-earning assets and is computed by
dividing net interest income by the average of total interest-earning assets.
Net interest income for 1996 increased $2,871,000 compared with 1995. Total
interest income increased by $4,302,000 in 1996. Interest income on loans
increased by $2,428,000 and interest income and discount collected on loan pool
participations rose by $1,233,000 in 1996. Interest income on investment
securities increased by $660,000 in 1996 compared with 1995. Most of the
increases in interest income on earning assets were attributable to higher
volumes of these assets during 1996 compared to 1995. For 1996, interest expense
on deposits increased by $1,108,000 and the interest expense on borrowed funds
grew by $323,000 as the levels of deposits and borrowed funds increased over
1995. The Company's net interest margin rose to 6.69 percent on a fully tax
equivalent basis for 1996, up from 6.48 percent for 1995.
PROVISION FOR LOAN LOSSES
The Company recorded a provision for loan loss expense of $417,000 for 1997
compared to a 1996 provision of $987,000 and a 1995 provision of $168,000.
Management determines an appropriate provision based on its evaluation of the
adequacy of the allowance for loan losses in relationship to a continuing review
of problem loans, the current economic conditions, actual loss experience and
industry trends. The substantial reduction of the loss provision recorded in
1997 compared with the 1996 provision reflects improvements in the Company's
problem loans and lower loan charge-offs during 1997. The increase in the
provision for 1996 compared with 1995 was primarily attributable to a large line
of credit that was charged off in 1996.
OTHER INCOME
Noninterest income results from the charges and fees collected by the Company
from its customers for various services performed. In 1997 noninterest income
increased $244,000 (16.2 percent) over the amount collected in 1996. Most of
this increase was the result of higher service charges and overdraft fees
collected on deposit accounts. Data processing income received in 1997 from
nonaffiliated banks declined 5.2 percent compared with 1996. During 1997 the
Company did not experience any material losses from the sale of investment
securities classified as available for sale. Noninterest income increased
$205,000 (15.8 percent) in 1996 compared with 1995. An increase in service
charge and fee income attributable to the bank branch acquisition contributed
to the growth in noninterest income. Higher trust income in 1996 also added to
total noninterest income. The Company did recognize a loss of $74,000 on the
sale of some of its investment securities held as available for sale during
the year 1996. These securities were sold to meet liquidity needs throughout
the year.
OTHER EXPENSE
The Company's other expense increased $577,000, or 7.5 percent, for the year
1997 in comparison to 1996. Noninterest expense includes all the costs incurred
to operate the Company except for interest expense, the loan loss provision and
income taxes. The salary and benefits, net occupancy, other operating and
goodwill amortization expense categories all increased in some measure due to
the acquisition of a bank branch by Central Valley Bank in June 1996. Due to
the timing of this acquisition, the 1996 totals for these categories did not
reflect a full year of expense whereas the 1997 amounts do include 12 months.
Costs related to the opening of the Pella State Bank in December 1997 also
added to the overall increase in a limited amount. Salary and benefit expenses
paid to the employees of the Company increased $569,000 (15.1 percent) in 1997
as a result of additional staffing and higher payouts made under the Company's
incentive compensation program. The reduced FDIC premium assessment in 1997
compared to 1996 contributed a significant cost savings to the Company.
Other expense increased 20 percent for the year 1996 compared to 1995. The
additional operating expenses associated with the operation of Central Valley
Bank's Fairfield grocery store branch which opened in December 1995 and the
19
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
acquired Sigourney branch contributed significantly to the increase in
noninterest expense. The Savings Association Insurance Fund one-time assessment
which occurred on September 30, 1996, resulted in a net increase in the
Company's FDIC assessment expense of approximately $69,000. The one-time
assessment was offset by reduced overall FDIC insurance costs for Mahaska State
Bank and Central Valley Bank. The Company incurred additional
amortization expense on the deposit premium paid for the acquisition of the
bank branch.
INCOME TAX EXPENSE
Income tax expense increased $209,000 (8.8 percent) primarily due to the
overall increase in pre-tax earnings generated by the Company. The
Company's income tax expense for the year 1996 increased $398,000 (20 percent)
in 1996 compared with 1995 mainly due to the increase in before tax earnings.
The Company's consolidated income tax rate varies from the statutory rate
principally due to interest income from tax-exempt securities and loans. The
effective income tax rate as a percent of income before taxes was 33.9 percent
in 1997, 34.7 percent for 1996, and 33.6 percent for 1995.
CAPITAL RESOURCES
As of December 31, 1997, total shareholders' equity was $36,754,000. Total
equity increased $2,511,000 in 1997 primarily as a result of earnings retained
by the Company. Total shareholders' equity as of December 31, 1996, was
$34,243,000. Shareholders' equity as a percentage of total assets was 13.4
percent on December 31, 1997, versus 13.6 percent on December 31, 1996. The
decrease in the percentage of shareholders' equity to total assets reflects the
increase in total assets in 1997. The Board of Directors declared a
five-for-three stock split in the form of a dividend to shareholders of record
as of October 20, 1997. The resulting additional shares were issued on November
10, 1997. This stock dividend did not affect the dollar amount of stockholders'
equity, but did increase the number of shares of common stock outstanding.
During 1997 the Company repurchased a total of 116,310 shares of its common
stock to be used to satisfy the exercise of stock options granted to employees
and directors of the Company. A total of 65,970 option shares were reissued from
treasury stock throughout 1997, leaving 3,665,494 shares outstanding as of
year-end 1997.
The Company's risk-based tier 1 core capital ratio was 14.7 percent as of
December 31, 1997, and the total capital ratio was 15.6 percent. Risk-based
capital guidelines require the classification of assets and some off-balance
sheet items in terms of credit-risk exposure and the measuring of capital as a
percentage of the risk-adjusted asset totals. Tier 1 core capital is the
Company's total common shareholders' equity reduced by goodwill. Total capital
adds the allowance for loan losses to the tier 1 capital amount. As of December
31, 1996, the Company's tier 1 capital ratio was 16.3 percent, and the total
capital ratio was 17.1 percent. Although these ratios declined in 1997 from 1996
due to the increased asset level, they substantially exceeded the minimum
regulatory requirements of 4.0 percent for tier 1 capital and 8.0 percent for
total capital. The Company's tier 1 leverage ratio, which measures capital
excluding intangible assets, was 11.8 percent as of December 31, 1997, and 11.8
percent at December 31, 1996, exceeding the regulatory minimum requirement range
of 3.0 percent to 5.0 percent. Each of these capital calculations excludes
unrealized gains or losses on assets available for sale in accordance with
Federal regulations.
As of December 31, 1997, the Company had borrowed $14,050,000 on a revolving
line of credit from a major commercial bank to fund loan pool participation
investments and to provide additional capital to Pella State Bank, Central
Valley Bank and On-Site Credit Services. The Company entered into this
revolving line of credit agreement on January 31, 1996, with an amendment to
the agreement as of October 17, 1997. The agreement provides for a maximum line
of $17,000,000 and matures on June 30, 1998. Additionally, as of December 31,
1997, the Company's subsidiaries had borrowed $6 million in fixed-rate advances
from the Federal Home Loan Bank of Des Moines. The Company had no material
commitments for capital expenditures as of December 31, 1997. The Company's
common stock closed the year at a bid price of $19.875 per share, representing
1.98 times the book value per share of $10.03 on December 31, 1997. The year-end
stock price represented a price-to-1997-earnings multiple of 14.4 times.
LIQUIDITY
Liquidity management involves the ability to meet the cash flow requirements of
depositors and borrowers. Liquidity management is conducted by the Company on
both a daily and long-term basis. The Company adjusts its investments in liquid
assets based upon management's assessment of expected loan demand, projected
loan sales, expected deposit flows, yields available on interest-bearing
deposits, and the objectives of its asset/liability management program. Excess
liquidity is invested generally in short-term U.S. Government and agency
securities, short-term state and political subdivision securities and other
investment securities.
20
<PAGE> 5
[MAHASKA INVESTMENT COMPANY LOGO]
Liquid assets (including cash and federal funds sold) are maintained to meet
customer needs. The Company had liquid assets of $19,195,000 as of December 31,
1997, compared with $16,484,000 as of December 31, 1996. Investment securities
classified as available for sale and securities and loans maturing within one
year totaled $98,248,000 and $93,526,000 as of December 31, 1997 and 1996,
respectively. Assets maturing within one year, combined with liquid assets, on
December 31, 1997, were 47.4 percent and on December 31, 1996, were 45.8
percent of total deposits as of the same dates.
The Company's principal sources of funds are deposits, advances from the
Federal Home Loan Bank, principal repayments on loans, proceeds from the sale
of loans, principal recoveries on loan pool participations, proceeds from the
maturity and sale of investment securities, its commercial bank line of credit,
and funds provided by operations. While scheduled loan amortization and
maturing interest-bearing deposits are relatively predictable sources of
funds, deposit flows and loan prepayments are greatly influenced by economic
conditions, the general level of interest rates and competition. Principal
recoveries on loan pool participations are also influenced by economic
conditions and to a lesser extent, the interest rate environment. Throughout
1997, management elected to utilize the proceeds from maturing investment
securities to fund loan growth, thereby reducing the investment securities total
as of December 31, 1997, in comparison with 1996. The Company utilizes
particular sources of funds based on comparative costs and availability.
Beginning in 1997, the Company utilized fixed-rate advances from the Federal
Home Loan Bank to obtain funds at a more favorable cost. The Company generally
manages the pricing of its deposits to maintain a steady deposit base, but has
from time to time decided not to pay rates on deposits as high as its
competition.
Net cash provided by operations is another major source of liquidity. The net
cash provided by operating activities was $6,017,000 in 1997, $7,137,000 in
1996, and $5,086,000 in 1995. This trend of strong cash from operations is
expected to continue into the foreseeable future.
The Company anticipates that it will have sufficient funds available to fund
its loan commitments. As of December 31, 1997, the Company had outstanding
commitments to originate loans of $15,597,000 and had no commitments
to sell loans. Certificates of deposit maturing in one year or less totaled
$51,838,000 as of December 31, 1997. Management believes that a significant
portion of these deposits will remain with the Company.
The Company continues to seek acquisition opportunities that would strengthen
the Company's presence in current and new market areas. There are currently no
pending acquisitions that would require the Company to secure capital from
public or private markets.
ASSET-LIABILITY MANAGEMENT
The Company's strategy with respect to asset-liability management is to
maximize net interest income while limiting exposure to risks associated with
volatile interest rates. This strategy is implemented by subsidiary
banks' asset-liability committees which take action based upon their analysis of
expected changes in the composition and volumes of the balance sheet and the
fluctuations in market interest rates. One of the measures of interest-rate
sensitivity is the gap ratio. This ratio indicates the amount of
interest-earning assets repricing within a given period in comparison to the
amount of interest-bearing liabilities repricing within the same period of
time. A gap ratio of 1.0 indicates a matched position, in which case the
effect on net interest income due to interest rate movements will be minimal. A
gap ratio of less than 1.0 indicates that more liabilities than assets
reprice withing the time period and a ratio greater than 1.0 indicates that
more assets reprice than liabilities.
As of December 31, 1997, the Company's gap ratio for assets and liabilities
maturing within three months and within one year were .70 and .86 respectively,
meaning more liabilities than assets are scheduled to reprice within these
periods. This situation suggests that a decrease in market interest rates may
benefit net interest income and that an increase in interest rates may
negatively impact the Company. The gap position is largely the result of
classifying interest-bearing NOW accounts, money market accounts, and savings
accounts as short-term repriceable and the classification of loan pool
participations as having a three-year average life based on the historical
average for return of pool investment.
MARKET RISK MANAGEMENT
Market risk is the risk of earnings volatility that results from adverse changes
in interest rates and market prices. The Company's market risk is comprised
primarily of interest rate risk arising from its core banking activities of
lending and deposit taking. Interest rate risk is the risk that changes in
market interest rates may adversely affect the Company's net interest income.
Management continually develops and applies strategies to mitigate this risk.
Management does not
21
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
believe that the Company's primary market risk exposures and how those exposures
were managed in 1997 changed when compared to 1996.
The Company uses a third-party computer software simulation modeling program to
measure its exposure to potential interest rate changes. For various assumed
hypothetical changes in market interest rates, numerous other assumptions are
made such as prepayment speeds on loans and securities backed by mortgages, the
slope of the Treasury yield curve, the rates and volumes of the Company's
deposits and the rates and volumes of the Company's loans. This analysis
measures the estimated change in net interest income in the event of
hypothetical changes in interest rates. The following table presents the
Company's projected changes in net interest income for the various rate shock
levels at December 31, 1997.
INTEREST MOVEMENT
<TABLE>
<CAPTION>
(100 Basis Points=1.00%) $ Change %Change
- -------------------------------------------------------------------------------
<S> <C> <C>
+300 bp................................................ $(502,000) -3%
+200 bp................................................ (354,000) -2%
+100 bp................................................ (181,000) -1%
Base................................................... 0 0%
- -100 bp................................................ 150,000 1%
- -200 bp................................................ 336,000 2%
- -300 bp................................................ 639,000 4%
</TABLE>
As shown above, at December 31, 1997, the effect of an immediate and sustained
300 basis point increase in interest rates would reduce the Company's net
interest income by 3% or approximately $502,000. The effect of an immediate and
sustained 300 basis point decrease in rates would increase the Company's net
interest income by 4% or approximately $639,000.
Computations of the prospective effects of hypothetical interest rate changes
are based on numerous assumptions. Actural values may differ from those
projections set forth above. Further, the computations do not contemplate any
actions the Company may undertake in response to changes in interest rates.
Current interest rates on certain liabilities are at a level that does not allow
for significant repricing should market interest rates decline significantly.
LOAN QUALITY
Total loans increased 22.9 percent during 1997 to a year-end total of
$144,333,000. The $26,917,000 increase in loans from 1996 was mainly in the
commercial, agricultural and real estate categories.
Non-performing assets (including $12,000 in Other Real Estate) as of December
31, 1997, totaled $1,848,000. As of December 31, 1996, non-performing loans
totaled $2,102,000. The ratio of non-performing assets to total loans was 1.28
percent for year-end 1997 and was 1.79 percent for year-end 1996.
The allowance for loan losses was $1,816,000 as of December 31, 1997, and
$1,491,000 as of year-end 1996. The allowance represented 1.26 percent of total
loans at December 31, 1997, and 1.27 percent of loans on December 31, 1996. The
allowance as a percentage of non-performing assets was 98.2 percent on December
31, 1997, and was 70.9 percent as of year-end 1996. Net loan charge-offs for
1997 totaled $92,000, or .07 percent of average loans, compared with 1996 net
charge-offs of $667,000, or .63 percent of average loans. The allowance for
loan losses is maintained at a level considered by management to be
adequate to provide for estimated loan losses.
FUTURE PROSPECTS
Inflation can have a significant effect on the operating results of all
industries. Management believes that inflation does not affect the banking
industry as much as it does other industries with a high proportion of fixed
assets and inventory. Inflation does, however, have an impact on the growth of
total assets and the need to maintain a proper level of equity capital.
Interest rates are significantly affected by inflation, but it is difficult to
assess the impact since neither the timing nor the magnitude of changes in the
various inflation indices coincides with changes in interest rates. There is, of
course, an impact on longer-term earning assets; however, this effect continues
to diminish as investment maturities are shortened and interest-earning assets
and interest-bearing liabilities shift from fixed-rate long-term to
rate-sensitive short-term.
22
<PAGE> 7
[MAHASKA INVESTMENT COMPANY LOGO]
During 1997 the national inflation rate remained historically low. Interest
rates remained relatively constant throughout the year. Management of the
Company believes that the 1998 rate of inflation will remain consistent with
1997 and that interest rates in 1998 will hold relatively stable or decline
slightly. Given the Company's negative gap position (greater amount of
interest-bearing liabilities repricing than interest-earning assets), a
decrease in interest rates may improve the Company's net interest margin
through the year 1998. Conversely, if interest rates do increase, the Company's
net interest margin may deteriorate. Management continues to focus on improving
the net interest margin in 1998.
Much of the increases in interest income, interest expense, noninterest income,
and operating expenses experienced during 1997 and 1996 were a result of the
acquisition of the bank branch by Central Valley Bank. In 1998 there will be
additional increases in income and expense attributable to the new Pella State
Bank which opened on December 8, 1997.
The Company anticipates that it will continue to explore opportunities to
acquire additional loan pool participation investments in 1998. Bids on pool
participations during the year will take into account the availability of funds
to invest, the market for such pools in terms of price and availability, and
the potential return on the pools relative to risk.
A critical issue has emerged in the banking industry and for the economy
overall regarding how existing application software programs, operating systems
and hardware can accommodate the date value for the year 2000. Many existing
application software products in the marketplace were designed only to
accommodate a two digit date position which represents the year (e.g., "97" is
stored on the system and represents the year 1997). As a result, the year 1999
(i.e., "99") could be the maximum date value these systems will be able to
accurately process. Management is in the process of working with its software
and hardware vendors to assure that the Company is prepared for the year 2000.
Management does not anticipate that the Company will incur material operating
expenses to be year 2000 compliant. The Company has acquired a new main-frame
computer system that is year 2000 compliant. The system is expected to be fully
operational in the first quarter of 1998. The decision to purchase a new
computer system was made primarily due to the obsolescence of the current
system.
23
<PAGE> 8
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 (IN THOUSANDS) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks..................................... $ 10,854 9,896
Interest-bearing deposits in banks.......................... 1,526 3,603
Federal funds sold.......................................... 6,815 2,985
-----------------
Cash and cash equivalents.................................. 19,195 16,484
-----------------
Investment securities (notes 2 and 8):
Available for sale......................................... 23,228 26,483
Held to maturity (fair value of $19,869 in 1997
and $27,595 in 1996)...................................... 19,833 27,705
Loans, net of unearned discount (notes 3, 5, and 8)......... 144,333 117,416
Allowance for loan losses (note 4)......................... (1,816) (1,491)
-----------------
Net loans................................................. 142,517 115,925
-----------------
Loan pool participations.................................... 54,326 50,687
Premises and equipment, net (note 6)........................ 4,183 3,102
Accrued interest receivable................................. 2,927 2,518
Other assets................................................ 8,664 8,947
-----------------
Total assets.............................................. $274,873 251,851
=================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits (notes 2 and 7):
Demand..................................................... $ 21,277 19,353
NOW and Super NOW.......................................... 33,226 33,124
Savings.................................................... 59,020 57,831
Certificates of deposit.................................... 101,785 96,644
-----------------
Total deposits............................................ 215,308 206,952
Federal Home Loan Bank advances (note 8).................... 6,000 --
Notes payable (note 9)...................................... 14,050 8,500
Other liabilities........................................... 2,761 2,156
-----------------
Total liabilities......................................... 238,119 217,608
-----------------
Shareholders' equity:
Common stock, $5 par value; authorized 4,000,000 shares;
issued and outstanding 3,665,494 as of December 31, 1997
and 2,229,506 shares as of December 31, 1996............... 19,038 11,423
Capital surplus............................................ 118 7,787
Treasury stock at cost, 142,007 and 55,000 shares as of
December 31, 1997 and 1996................................. (1,752) (853)
Retained earnings (note 15)................................ 19,231 15,926
Unrealized gain (loss) on securities available for sale.... 119 (40)
-----------------
Total shareholders' equity................................ 36,754 34,243
-----------------
Commitments and contingencies (note 16).................... -- --
Total liabilities and shareholders' equity................ $274,873 251,851
=================
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 9
[MAHASKA INVESTMENT COMPANY LOGO]
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
(In thousands, except per share amounts) 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans............................ $12,282 10,203 7,775
Interest income and discount on loan..................
pool participations................................. 8,474 9,097 7,864
Interest on bank deposits............................. 108 266 175
Interest on federal funds sold........................ 128 92 202
Interest on investment securities:
Available for sale................................... 1,705 1,348 668
Held to maturity..................................... 1,249 1,623 1,643
----------------------
Total interest income.............................. 23,946 22,629 18,327
----------------------
INTEREST EXPENSE:
Interest on deposits (note 7):
NOW and Super NOW.................................... 677 612 632
Savings.............................................. 2,259 2,058 1,816
Certificates of deposit.............................. 5,441 4,845 3,959
Interest on federal funds purchased................... 32 48 42
Interest on Federal Home Loan Bank advances........... 138 -- --
Interest on notes payable............................. 765 968 651
----------------------
Total interest expense............................... 9,312 8,531 7,100
----------------------
Net interest income.................................. 14,634 14,098 11,227
Provision for loan losses (note 4).................... 417 987 168
----------------------
Net interest income after provision
for loan losses.................................. 14,217 13,311 11,059
----------------------
OTHER INCOME:
Service charges....................................... 1,130 922 746
Data processing income................................ 209 221 253
Other operating income................................ 419 437 314
Investment securities losses, net (note 2)............ (8) (74) (12)
----------------------
Total other income................................. 1,750 1,506 1,301
----------------------
OTHER EXPENSE:
Salaries and employee benefits expense (note 13)...... 4,343 3,774 3,251
Net occupancy expense................................. 1,227 1,044 863
Federal Deposit Insurance Corporation assessment...... 42 282 213
Professional fees..................................... 407 459 270
Other operating expense............................... 1,663 1,650 1,410
Goodwill amortization................................. 633 529 443
-----------------------
Total other expense................................ 8,315 7,738 6,450
-----------------------
Income before income tax expense................... 7,652 6,879 5,910
Income tax expense (note 11).......................... 2,594 2,385 1,987
-----------------------
Net income......................................... $ 5,058 4,494 3,923
=======================
Net income per share - basic*......................... $ 1.38 1.20 1.03
=======================
Net income per share - diluted*....................... $ 1.34 1.19 1.03
=======================
</TABLE>
* Restated to reflect the five-for-three stock split effected in the form of a
dividend in 1997.
See accompanying notes to consolidated financial statements.
25
<PAGE> 10
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS) ON
SECURITIES
(IN THOUSANDS) COMMON CAPITAL TREASURY RETAINED AVAILABLE
STOCK SURPLUS STOCK EARNINGS FOR SALE TOTAL
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $11,423 7,787 -- 10,650 (80) 29,780
Net income..................................... -- -- -- 3,923 -- 3,923
Dividends paid................................. -- -- -- (1,503) -- (1,503)
Treasury stock purchased (15,000 shares)....... -- -- (231) -- -- (231)
Unrealized gain on securities..................
available for sale............................ -- -- -- -- 137 137
------------------------------------------------------------
Balance at December 31, 1995................... 11,423 7,787 (231) 13,070 57 32,106
Net income..................................... -- -- -- 4,494 -- 4,494
Dividends paid................................. -- -- -- (1,638) -- (1,638)
Treasury stock purchased (40,000 shares)....... -- -- (622) -- -- (622)
Unrealized loss on securities..................
available for sale............................ -- -- -- -- (97) (97)
------------------------------------------------------------
Balance at December 31, 1996................... 11,423 7,787 (853) 15,926 (40) 34,243
Net income..................................... -- -- -- 5,058 -- 5,058
Dividends paid................................. -- -- -- (1,753) -- (1,753)
Stock split effected in the form of a dividend
(five-for-three).............................. 7,615 (7,615) -- -- -- --
Stock options exercised (65,970 shares)........ -- (54) 783 -- -- 729
Treasury stock purchased (116,310 shares)...... -- -- (1,682) -- -- (1,682)
Unrealized gain on securities..................
available for sale............................ -- -- -- -- 159 159
------------------------------------------------------------
Balance at December 31, 1997................... $19,038 118 (1,752) 19,231 119 36,754
============================================================
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 11
[MAHASKA INVESTMENT COMPANY LOGO]
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 (IN THOUSANDS) 1997 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,058 4,494 3,923
-----------------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization......................... 1,129 930 764
Federal Home Loan Bank stock dividend................. -- -- (11)
Provision for loan losses............................. 417 987 168
Investment securities losses, net..................... 8 74 12
Loss on sale of bank premises and equipment........... 14 7 --
Amortization of premiums on investment securities .... 225 301 297
Accretion of investment securities and loan discounts. (578) (353) (226)
(Increase) decrease in other assets................... (759) 256 (450)
Increase in other liabilities......................... 503 441 609
-----------------------------
Total adjustments................................... 959 2,643 1,163
-----------------------------
Net cash provided by operating activities........... 6,017 7,137 5,086
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment securities available for sale:
Proceeds from sales................................... 1,994 6,022 4,993
Proceeds from maturities.............................. 10,807 3,285 1,000
Purchases............................................. (9,330) (24,310) (5,159)
Investment securities held to maturity:
Proceeds from maturities.............................. 9,639 8,611 12,073
Purchases............................................. (1,936) (5,698) (7,834)
Purchases of loan pool participations.................. (25,589) (29,827) (12,468)
Principal recovery on loan pool participations......... 21,950 24,458 14,002
Net increase in loans.................................. (26,450) (17,227) (11,733)
Purchase of bank premises and equipment................ (1,615) (650) (426)
Proceeds from sale of bank premises and equipment...... 24 12 1
Proceeds from branch acquisition, net.................. -- 14,246 --
-----------------------------
Net cash used in investing activities............... (20,506) (21,078) (5,551)
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits............................... 8,356 13,364 15,029
Net decrease in federal funds purchased................ -- -- (4,700)
Advances on notes payable.............................. 6,550 6,400 7,500
Principal payments on notes payable.................... (1,000) (7,900) (2,500)
Federal Home Loan Bank advances........................ 11,600 -- --
Repayment of Federal Home Loan Bank advances........... (5,600) -- --
Dividends paid......................................... (1,753) (1,638) (1,503)
Purchases of treasury stock............................ (1,682) (622) (231)
Proceeds from exercise of stock options................ 729 -- --
-----------------------------
Net cash provided by financing activities........... 17,200 9,604 13,595
-----------------------------
Net increase (decrease) in cash and
cash equivalents.................................. 2,711 (4,337) 13,130
Cash and cash equivalents at beginning of year......... 16,484 20,821 7,691
-----------------------------
Cash and cash equivalents at end of year...............$ 19,195 16,484 20,821
=============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest..............................................$ 9,299 8,299 6,689
=============================
Income taxes..........................................$ 2,894 2,239 1,973
=============================
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
1 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Mahaska Investment Company and
subsidiaries (the "Company") conform to generally accepted accounting
principles and to general practices within the banking industry. The
consolidated financial statements of the Company include the accounts of its
100 percent owned subsidiaries, Mahaska State Bank, Central Valley Bank, Pella
State Bank, and On-Site Credit Services. All material intercompany transactions
have been eliminated in consolidation.
FORMATION OF PELLA STATE BANK
Pella State Bank is a full service, state-chartered, commercial bank which was
formed as a de novo institution by the Company in December 1997. The Company
provided initial capitalization of $5,000,000 to Pella State Bank from cash on
hand and an advance on its commercial bank line of credit.
BANK OFFICE ACQUISITION
On June 21, 1996, Central Valley Bank acquired the Sigourney, Iowa bank office
of Boatmen's Bank Iowa, N.A. and assumed approximately $32.1 million in
deposits and purchased certain loans totaling approximately $14.6 million.
Central Valley Bank's existing branch facility in Sigourney was consolidated
into the newly acquired facility. A premium of approximately $3.0 million was
paid by Central Valley Bank to acquire the deposits. The acquisition was
accounted for as a purchase transaction and, as such, did not require any
restatement of prior period financial statements.
NATURE OF OPERATIONS
The bank subsidiaries engage in retail and commercial banking and related
financial services, providing the usual products and services such as deposits,
commercial, real estate, and consumer loans, and trust services. Mahaska State
Bank also provides data processing services to affiliated and non-affiliated
banks. On-Site Credit Services provides equipment leasing and accounts
receivable financing.
Since 1988, the Company, either directly or through the bank subsidiaries, has
invested in loan pool participations that have been purchased by certain
non-affiliated independent service corporations (collectively, the "Servicer")
from the Federal Deposit Insurance Corporation ("FDIC"), the Resolution Trust
Corporation ("RTC"), or other sources. These loan pool investments are
comprised of packages of loans previously made by financial institutions, which
often include distressed or nonperforming loans, that have been sold at prices
reflecting varying discounts from the aggregate outstanding principal amount of
the underlying loans depending on the credit quality of the portfolio. The
Servicer then proceeds to collect these loans from the borrowers.
EFFECT OF NEW FINANCIAL ACCOUNTING STANDARDS
SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," was effective for the Company for the year
beginning January 1, 1997, and did not have a material effect on the financial
position and results of operations, nor did the adoption require additional
capital resources.
SFAS 128, "Earnings Per Share," was adopted by the Company effective December
31, 1997. This statement replaces the primary earnings per share (EPS)
disclosure with basic and diluted EPS disclosures to simplify the calculation
and improve international comparability. The adoption of SFAS 128 did not have
a material effect on the financial position and results of operations, nor did
the adoption require additional resources.
SFAS 130, "Reporting Comprehensive Income," will be effective for the Company
for the year beginning January 1, 1998, and establishes the standards for the
reporting and display of comprehensive income in the financial statements.
Comprehensive income represents net earnings and certain amounts reported
directly in shareholders' equity, such as net unrealized gain or loss on
available for sale securities.
28
<PAGE> 13
[MAHASKA INVESTMENT COMPANY LOGO]
EARNINGS PER SHARE
Basic earnings per share amounts are computed by dividing net income by the
weighted average number of shares outstanding during the year. Diluted earnings
per share amounts are computed by dividing net income by the weighted
average number of shares and all dilutive potential shares outstanding during
the year. In November 1997, the Company issued a five-for-three stock split in
the form of a dividend. The Company has had a Stock Repurchase Plan in effect
since April 1995. In accordance with this plan, 116,310, 40,000 and 15,000
shares of common stock were repurchased by the Company during 1997, 1996 and
1995, respectively. The following information was used in the computation of
earnings per share on both a basic and diluted basis for the years ended
December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EPS COMPUTATION
Numerator:
Net Income............................................ $ 5,058 4,494 3,923
---------------------
Denominator:
Average Shares Outstanding............................ 3,653 3,744 3,797
---------------------
Basic EPS.............................................. $ 1.38 1.20 1.03
=====================
DILUTED EPS COMPUTATION
Numerator:
Net Income............................................ $ 5,058 4,494 3,923
---------------------
Denominator:
Average Shares Outstanding............................ 3,653 3,744 3,797
Stock Options......................................... 132 27 11
---------------------
3,785 3,771 3,808
---------------------
Diluted EPS............................................ $ 1.34 1.19 1.03
=====================
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at a specific point in time, based on relevant
market information about the financial instrument. These estimates do not
reflect any premium or discount that could result from offering the Company's
entire holdings of a particular financial instrument for sale at one time.
Unless included in assets available for sale, it is the Company's general
practice and intent to hold its financial instruments to maturity and not to
engage in trading or sale activities.
Fair value estimates are based on judgments regarding future expected 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.
Estimated fair values have been determined by the Company using the best
available data, and an estimation method suitable for each category of
financial instruments.
CASH AND DUE FROM BANKS
The Company is required to maintain certain daily reserve balances on hand in
accordance with federal banking regulations. The average reserve balance
maintained in accordance with such regulations for the years ended December 31,
1997, 1996 and 1995 was $897,000, $835,000 and $778,000, respectively.
INVESTMENT SECURITIES
The Company classifies its investment securities based on the intended holding
period. Securities which may be sold prior to maturity to meet liquidity needs,
to respond to market changes, or to adjust the Company's asset-liability
position are classified as available for sale. Securities held principally for
the purpose of near-term sales are classified as trading. Securities which the
Company intends to hold until maturity are classified as held to maturity.
Investment securities available for sale are recorded at fair value. The
aggregate unrealized gains or losses, net of the income tax effect, are
recorded as a component of shareholders' equity. Trading securities are
recorded at fair value with gains and losses, both realized and unrealized,
included in operations. Securities held to maturity are recorded at cost,
adjusted for amortization of premiums and accretion of discounts.
Net gains or losses on the sales of securities are shown in the statements of
operations using the specific identification method.
29
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LOANS
Loans are stated at the principal amount outstanding, net of unearned discount
and allowance for loan losses. Unearned discount on installment loans is
transferred to income over the term of the loan using the level-yield method.
Interest on all other loans is credited to income as earned based on the
principal amount outstanding.
It is the Company's policy to discontinue the accrual of interest income on any
loan when, in the opinion of management, there is reasonable doubt as to the
timely collectibility of interest or principal. Nonaccrual loans are returned
to an accrual status when, in the opinion of management, the financial position
of the borrower indicates there is no longer any reasonable doubt as to timely
payment of principal or interest.
CONCENTRATIONS OF CREDIT RISK
The Company originates real estate, consumer, and commercial loans primarily in
its southeast Iowa market area and adjacent counties. Although the Company has
a diversified loan portfolio, a substantial portion of its borrowers' ability
to repay their loans is dependent upon economic conditions in the Company's
market area.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes collectibility of the principal is unlikely.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio, past loan experience, current economic conditions, and other
relevant factors.
LOAN POOL PARTICIPATIONS
The Company has invested in participations in pools of loans acquired from the
FDIC, the RTC, and other sources at substantial discounts. The pools, all
acquired since 1988, consist of loans to borrowers located throughout the
United States.
The Company carries its investment in the loan pools as a separate earning
asset on its balance sheet. Principal or interest restructures, write-downs, or
write-offs within the pools are not included in the Company's disclosures for
its loan portfolio.
The loan pools are managed by the Servicer operating in Omaha, Nebraska, the
sole incentive of which is cash collection without regard to principal or
income allocation of the payment. The investment in loan pools is accounted for
on a nonaccrual basis. For loans receiving regular payments, cash is applied
first to interest income for interest due at the contract rate. Additional
payment is then applied to principal in a ratio of cost basis to loan face
amount and to discount income for the remainder.
For loans where payments are received on an irregular basis, the Servicer
evaluates the collateral position of the loan and where well-secured, the
payments are applied as described above. When the loan is judged to be other
than well-secured, the payment is applied to principal and discount income with
no recognition of interest due.
For loans where the circumstances or new information lead the Servicer to
believe that collection of the note or recovery through collateral is less than
originally determined, the cost basis assigned to the loan is written down or
off through a charge to discount income.
For loans where the Servicer negotiates a settlement of the obligation for a
lump sum, the payment is applied first to principal, then to discount income
and last to interest due.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line or accelerated method over the
estimated useful lives of respective assets, which range from 5 to 40 years for
building and improvements and 3 to 10 years for furniture and equipment.
EXCESS OF COST OVER UNDERLYING NET ASSETS
The excess of cost over underlying net assets of $6,162,000, $6,795,000 and
$4,342,000 at December 31, 1997, 1996 and 1995, respectively, is being
amortized primarily using the straight-line method over 15 years. Amortization
expenses for 1997, 1996 and 1995 were $633,000, $529,000 and $443,000,
respectively.
30
<PAGE> 15
[MAHASKA INVESTMENT COMPANY LOGO]
OTHER REAL ESTATE OWNED
Other real estate owned represents property acquired through foreclosure or
deeded to the subsidiary banks in lieu of foreclosure on real estate mortgage
loans on which the borrowers have defaulted as to payment of principal and
interest. Other real estate owned is carried at the lower of the cost of
acquisition or the asset's fair market value, less estimated costs of
disposition, and is included in other assets on the consolidated balance
sheets. Reductions in the balance of other real estate at the date of
acquisition are charged to the allowance for loan losses. Expenses incurred
subsequent to the acquisition of the property and any subsequent write-downs to
reflect current fair market value are charged as noninterest expense as
incurred. Gains or losses on the disposition of other real estate are
recognized in other income or expense in the period in which they are realized.
Other real estate owned of $12,000 at December 31, 1997 and 1996, was included
in other assets and is valued at the lower of cost or estimated fair market
value as determined by management.
TRUST DEPARTMENT ASSETS
Property held for customers in fiduciary or agency capacities is not included
in the accompanying consolidated balance sheets, as such items are not assets
of the Company.
INCOME TAXES
The Company files a consolidated federal income tax return. Federal income
taxes are allocated based on each entity computing its taxes on a separate
company basis. For state purposes, the bank subsidiaries each file a franchise
return and the remaining entities file a consolidated income tax return.
STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks and federal funds sold.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year consolidated financial
statements in order to conform to current year presentation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. A significant estimate that
is particularly sensitive to change relates to the allowance for loan losses.
31
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2 | INVESTMENT SECURITIES
A summary of investment securities by type as of December 31, 1997
and 1996 follows:
<TABLE>
<CAPTION>
GROSS GROSS APPROX.
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1997 (IN THOUSANDS) COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES AVAILABLE FOR SALE:
U.S. government securities........................................... $ 4,506 57 -- 4,563
U.S. government agency securities.................................... 15,177 143 7 15,313
Other investment securities.......................................... 3,352 5 5 3,352
-----------------------------------------
Total............................................................... $23,035 205 12 23,228
=========================================
INVESTMENT SECURITIES HELD TO MATURITY:
U.S. government securities........................................... $ 5,046 -- 12 5,034
U.S. government agency securities.................................... 2,885 34 5 2,914
Obligations of states and political subdivisions..................... 6,793 52 18 6,827
Other investment securities.......................................... 5,109 -- 15 5,094
-----------------------------------------
Total............................................................... $19,833 86 50 19,869
=========================================
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS APPROX.
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1996 (IN THOUSANDS) COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES AVAILABLE FOR SALE:
U.S. government securities........................................... $ 5,020 8 9 5,019
U.S. government agency securities.................................... 18,721 43 85 8,679
Other investment securities.......................................... 2,810 -- 25 2,785
-----------------------------------------
Total............................................................... $26,551 51 119 26,483
=========================================
INVESTMENT SECURITIES HELD TO MATURITY:
U.S. government securities........................................... $ 8,135 4 63 8,076
U.S. government agency securities.................................... 5,445 39 23 5,461
Obligations of states and political subdivisions..................... 8,904 30 43 8,891
Other investment securities.......................................... 5,221 -- 54 5,167
-----------------------------------------
Total............................................................... $27,705 73 183 27,595
=========================================
</TABLE>
Proceeds from the sale of investment securities available for sale during 1997,
1996 and 1995 were $1,994,000, $6,022,000 and $4,993,000, respectively. Gross
gains and losses realized on the sale of investment securities available for
sale for each of the following years ended December 31 were as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Realized gains............................................ $ -- 6 8
Realized losses........................................... (8) (80) (20)
-----------------
Total..................................................... $ (8) (74) (12)
=================
</TABLE>
As of December 31, 1997 and 1996, investment securities of approximately
$16,103,000 and $15,297,000, respectively, which were included in the
consolidated balance sheets, were pledged as collateral to secure public fund
deposits and for other purposes required or permitted by law. Public funds
approximated $25,781,000 and $19,478,000 at December 31, 1997 and 1996,
respectively.
The amortized cost and approximate market value of investment securities as of
December 31, 1997, by contractual maturity, are shown as follows. Expected
maturities will differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
32
<PAGE> 17
[MAHASKA INVESTMENT COMPANY LOGO]
<TABLE>
<CAPTION>
AMORTIZED APPROXIMATE
(IN THOUSANDS) COST MARKET VALUE
- ------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT SECURITIES
AVAILABLE FOR SALE:
Due in 1 year or less.................................. $ 499 499
Due after 1 year through 5 years....................... 16,128 16,249
Due after 5 years through 10 years..................... -- --
Due after 10 years..................................... 6,408 6,480
---------------------
Total................................................. $23,035 23,228
=====================
INVESTMENT SECURITIES
HELD TO MATURITY:
Due in 1 year or less.................................. $ 9,755 9,745
Due after 1 year through 5 years....................... 6,909 6,911
Due after 5 years through 10 years..................... 1,658 1,677
Due after 10 years..................................... 1,511 1,536
---------------------
Total................................................. $19,833 19,869
=====================
</TABLE>
3 | LOANS
A summary of the respective loan categories as of December 31, 1997
and 1996 follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Real estate loans...................................... $ 72,303 60,399
Commercial and agricultural loans...................... 55,977 43,553
Loans to individuals................................... 13,268 11,522
Other loans............................................ 2,785 1,942
---------------------
Total.................................................. $144,333 117,416
=====================
</TABLE>
Total non-performing loans and assets at December 31, 1997 and 1996 were:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans and leases:
Non-accrual........................................... $ 927 1,085
Restructured.......................................... 387 380
---------------------
Total impaired loans and leases .................... 1,314 1,465
Loans and leases past due 90 days or more.............. 522 625
---------------------
Total non-performing loans............................. 1,836 2,090
Other real estate owned................................ 12 12
---------------------
Total non-performing assets............................ $ 1,848 2,102
=====================
</TABLE>
The average balances of non-performing assets for the years ended December 31,
1997 and 1996 were $1,669,000 and $1,349,000, respectively. The allowance for
credit losses related to non-performing assets at December 31, 1997 and 1996
was $368,000 and $206,000, respectively. Non-performing assets of $902,000 and
$1,533,000 were not subject to a related allowance for credit losses at
December 31, 1997 and 1996, respectively, because of the net realizable value
of loan collateral, guarantees and other factors. The effect of non-accrual and
restructured loans on interest income for each of the three years ended
December 31, 1997, 1996 and 1995 was:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
As originally contracted....................... $213 131 62
As recognized.................................. 91 41 47
----------------------------
Reduction of interest income................. $122 90 15
============================
</TABLE>
33
<PAGE> 18
34-35 NOTES TO CONSOLIDATED FINANCIAL STTEMENTS
4 | ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31, 1997,
1996 and 1995 were as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year....................... $1,491 1,001 881
Provision for loan losses.......................... 417 987 168
Recoveries on loans previously charged off......... 45 38 43
Loans charged off.................................. (137) (705) (91)
Acquisition allowance.............................. -- 170 --
------------------------
Balance at end of year............................. $1,816 1,491 1,001
========================
</TABLE>
5 | LOANS TO RELATED PARTIES
Certain directors and officers of the Company, including their immediate
families and companies in which they are principal owners, were loan
customers of the Company's subsidiaries. All loans to this group were made in
the ordinary course of business at prevailing terms and conditions. The
aggregate indebtedness of this group included in loans as of December 31, 1997
and 1996 was as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Aggregate balance at beginning of year..................... $ 7,019 6,307
Advances................................................... 10,107 9,345
Payments................................................... 9,132 8,633
-----------------
Aggregate balance at end of year........................... $ 7,994 7,019
=================
</TABLE>
6 | PREMISES AND EQUIPMENT
A summary of premises and equipment as of December 31, 1997 and 1996 was as
follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Land and improvements $ 603 466
Building and improvements 3,571 3,130
Furniture and equipment 4,614 3,774
-----------------
Total office properties and equipment at cost 8,788 7,370
Less accumulated depreciation 4,605 4,268
-----------------
Total $4,183 3,102
=================
</TABLE>
7 | DEPOSITS
The scheduled maturities of certificate accounts are as follows as of December
31, 1997:
<TABLE>
<CAPTION>
(In thousands)
- -------------------------------------------------------------------------------
<S> <C>
1998............................................................... $ 51,838
1999............................................................... 35,691
2000............................................................... 9,403
2001............................................................... 3,845
2002............................................................... 1,001
Thereafter......................................................... 7
--------
Total $101,785
========
</TABLE>
Time deposits in excess of $100,000 approximated $19,755,000 and $13,547,000 as
of December 31, 1997 and 1996, respectively. Interest expense on such deposits
for the years ended December 31, 1997, 1996 and 1995 was approximately
$871,000, $663,000 and $512,000, respectively.
34
<PAGE> 19
[MAHASKA INVESTMENT COMPANY LOGO]
8 | FEDERAL HOME LOAN BANK ADVANCES
At December 31, 1997 and 1996, Federal Home Loan Bank advances consisted of
the following:
<TABLE>
<CAPTION>
WEIGHTED- Weighted-
AVERAGE average
(in thousands) 1997 INTEREST RATE 1996 interest rate
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturity in year ending
1998.............................. $1,000 5.82% -- --
1999.............................. 3,000 5.96 -- --
2000.............................. 2,000 6.02 -- --
Amount drawn on line of credit -- VARIABLE -- Variable
------ ------
$6,000 --
====== ======
</TABLE>
Advances from the FHLB are secured by stock in the FHLB. In addition, Mahaska
State Bank has pledged certain U.S. Agency securities and Central Valley Bank
has agreed to maintain unemcumbered additional security in the in the form of
certain residential mortgage loans aggregating no less than 150 percent of
outstanding advances.
The line of credit with the FHLB with a limit of $2,000,000, matures on October
30, 1998. The line has an interest rate which fluctuates daily. During 1997,
there were no advances on this line. The line is collateralized as described
above.
At December 31, 1997 and 1996, accrued interest payable on advances from the
FHLB totaled $1,000 and $0, respectively.
9 | NOTES PAYABLE
The notes payable balance at December 31, 1997 consists of advances on a
$17,000,000 line of credit. The line has a variable interest rate and is due
June 20, 1998. The current note is secured by all of the common stock of the
subsidiaries. Interest is payable quarterly at a quarter below the lender's
prime rate, which ranged from 8.00 percent to 8.25 percent in 1997.
35
<PAGE> 20
10 | FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments as of
December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
RECORDED FAIR
1997 (IN THOUSANDS) AMOUNT VALUE
- -----------------------------------------------------------------------
<S> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks $10,854 10,854
Interest-bearing deposits with banks 1,526 1,526
Federal funds sold 6,815 6,815
Investment securities 43,061 43,097
Loans, net 142,517 143,405
Lan pools 54,326 54,326
FINANCIAL LIABILITIES:
Deposits $215,308 216,494
Federal Home Loan Bank advances 6,000 6,000
Notes payable 14,050 14,050
OFF-BALANCE SHEET ITEMS:
Commitments to extend credit $-- --
Letters of credit -- --
<CAPTION>
RECORDED FAIR
1996 (IN THOUSANDS) AMOUNT VALUE
- -----------------------------------------------------------------------
<S> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks $9,896 9,896
Interest-bearing deposits with banks 3,603 3,603
Federal funds sold 2,985 2,985
Investment securities 54,188 54,078
Loans, net 115,925 115,905
Loan pools 50,687 50,687
FINANCIAL LIABILITIES:
Deposits $206,952 208,214
Federal Home Loan Bank advances -- --
Notes payable 8,500 8,500
OFF-BALANCE SHEET ITEMS:
Commitments to extend credit $-- --
Letters of credit -- --
</TABLE>
The recorded amount of cash due from banks and interest-bearing deposits with
banks approximates fair value.
The estimated fair value of investment securities has been determined using
available quoted market prices.
The estimated fair value of loans is net of an adjustment for credit risk. For
loans with floating interest rates, it is presumed that estimated fair values
generally approximate the recorded book balances. Fixed rate loans were valued
using a present value discounted cash flow with a discount rate approximating
the market rate for similar assets.
The recorded amount of the loan pools approximates fair value due to the
characteristics of the loan pools. Any additional value attained in the loan
pools over purchase cost is directly attributable to the expertise of the
Servicer to collect a higher percentage of the book value of loans in the pools
over the percentage paid.
36
<PAGE> 21
Deposit liabilities with no stated maturities have an estimated fair value
equal to the recorded balance. Deposits with stated maturities have been valued
using a present value discounted cash flow with a discount rate approximating
the current market for similar deposits. The fair value estimate does not
include the benefit that results from the low-cost funding provided by the
deposit liabilities compared to the cost of borrowing funds in the market. The
Company believes the value of these depositor relationships to be significant.
The estimated fair value of the Federal Home Loan Bank advances was determined
using a present-value discounted cash flow with a discount rate approximating
the current market for similar borrowings.
The recorded amount of the notes payable approximates fair value as a result of
the short-term nature of these instruments.
The fair value of commitments to extend credit and standby letters of credit
are estimated using the fees currently charged to enter into similar
agreements.
11 | INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1997, 1996
and 1995 is as follows:
<TABLE>
<CAPTION>
1997 (In thousands) FEDERAL STATE TOTAL
- ----------------------------------------------
<S> <C> <C> <C>
Current $2,389 350 2,739
Deferred (133) (12) (145)
---------------------
$2,256 338 2,594
---------------------
<CAPTION>
1996 (In thousands) FEDERAL STATE TOTAL
- ----------------------------------------------
<S> <C> <C> <C>
Current $2,198 276 2,474
Deferred (89) 0 (89)
---------------------
$2,109 276 2,385
---------------------
<CAPTION>
1995 (In thousands) FEDERAL STATE TOTAL
- ----------------------------------------------
<S> <C> <C> <C>
Current $1,856 165 2,021
Deferred (30) (4) (34)
---------------------
$1,826 161 1,987
---------------------
</TABLE>
Income tax expense differs from the amount computed by applying the United
States federal income tax rate of 34 percent in 1997, 1996 and 1995 to income
before income tax expense. The reasons for these differences are as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Provision at statutory rate $2,602 2,239 2,009
State franchise tax (net of federal tax benefit) 223 182 106
Nontaxable interest income (115) (144) (138)
Nondeductible goodwill amortization 21 21 21
Life insurance cash value increase (26) (31) (32)
Other, net (111) 18 21
----------------------
Total $2,594 2,385 1,987
----------------------
</TABLE>
37
<PAGE> 22
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Allowance for losses on loans $ 438 326
Deferred compensation 79 64
Premium amortization 58 35
Unrealized loss on available for sale securities -- 28
----------------
Gross deferred tax assets 575 453
----------------
DEFERRED TAX LIABILITIES:
Depreciation and amortization (94) (87)
Leases -- (6)
Federal Home Loan Bank stock (17) (17)
Deferred loan fees (70) (58)
Professional fees (9) (11)
Unrealized gain on available for sale securities (74) --
Other (6) (12)
----------------
Gross deferred tax liabilities (270) (191)
----------------
Net deferred tax asset $ 305 262
----------------
</TABLE>
No valuation allowance was required for the deferred tax asset at December 31,
1997 or 1996.
12 | STOCK INCENTIVE PLAN
The Company has a stock incentive plan under which up to 750,000 shares of
common stock are reserved for issuance pursuant to options or other awards
which may be granted to officers, key employees, and certain non-affiliated
directors of the Company. The exercise price of each option equals the market
price of the Company's stock on the date of grant. The option's maximum term is
ten years, with vesting occurring at the rate of thirty-three percent at the
one-year anniversary of date of grant, sixty-six percent vesting on the
two-year anniversary, and one hundred percent vesting on the three-year
anniversary of date of grant. The Company applies APB Opinion No. 25 and
related interpretations in accounting for its plan. Accordingly, no
compensation cost has been recognized for its stock options in the financial
statements. Had compensation cost for the Company's stock incentive plan been
determined consistent with SFAS No. 123, the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- ----------------------------------------
<S> <C> <C>
NET INCOME:
As Reported $ 5,058 4,494
Pro forma 4,770 4,392
EARNINGS PER SHARE:
As Reported - Basic $ 1.38 1.20
As Reported - Diluted 1.34 1.19
Pro forma - Basic 1.31 1.17
Pro forma - Diluted 1.28 1.17
</TABLE>
The fair value of each option grant has been estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 1997 and 1996, respectively: dividend yield of 2.80 percent for 1997
and 3.89 percent for 1996; expected volatility of 24 percent for 1997 and 25
percent for 1996; risk free interest rates of 5.74 percent for 1997 and 6.17
percent for 1996; and expected lives of 7.5 years for both years.
38
<PAGE> 23
A summary of the status of the Company's stock incentive plan as of December
31, 1997 and 1996 and the activity during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
EXERCISE Exercise
SHARES PRICE Shares Price
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year 440,819 $7.50-11.10 333,305 $7.50 - 9.00
Granted 141,952 11.10-19.875 108,702 11.10
Exercised 65,970 7.50 - 9.00 0 --
Forfeited 6,907 9.00-11.10 1,188 9.00
------- -------
Outstanding at end of year 509,894 $7.50-19.875 440,819 $7.50-11.10
------- -------
Options exercisable at year-end 218,879 $7.50-11.10 161,510 $7.50 - 9.00
Weighted-average fair value of options
granted during the year $4.65 $ 2.68
</TABLE>
13 | EMPLOYEE BENEFIT PLANS
The Company maintains an employee stock ownership plan ("ESOP") covering
substantially all employees meeting minimum age and service requirements.
Contributions are determined by the board of directors of each subsidiary.
Contributions relating to the plan were $142,000, $114,000 and $104,000 for
1997, 1996 and 1995, respectively. As of December 31, 1997 and 1996, the ESOP
owned 421,025 and 421,017 shares of the Company's Common Stock, respectively.
A 401(k) plan was adopted by the Company in 1994. The Company does not make any
contributions to this plan. The Company has also provided deferred compensation
plans to certain executive officers, which provide for a series of payments to
be made after retirement. The present value of the future payments is being
accrued over the respective employees' remaining active service periods. The
total expense related to these plans was $39,000, $33,000 and $24,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
The Company provides no material post-retirement benefits.
14 | REGULATORY CAPITAL REQUIREMENTS
The Company is subject to various capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory -- and possible additional discretionary -- actions
by regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. Quantitative measures
established by regulation to ensure capital adequacy require the Company to
maintain minimum amounts and ratios (set forth in the table below) of total
capital and Tier 1 capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier 1 capital (as defined) to average assets (as
defined). Management believes, as of December 31, 1997, that the Company meets
all capital adequacy requirements to which it is subject. The Company and
significant subsidiaries actual capital amounts and ratios are also presented
in the following table.
39
<PAGE> 24
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
MINIMUM FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------------------------------------------------------------
(in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997:
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS):
Consolidated $32,408 15.6% $16,602 8.0% $20,752 10.0%
Mahaska State Bank 16,084 12.2 10,541 8.0 13,176 10.0
Central Valley Bank 7,055 12.7 4,428 8.0 5,536 10.0
TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS):
Consolidated $30,592 14.7% $ 8,301 4.0% $12,451 6.0%
Mahaska State Bank 15,022 11.4 5,270 4.0 7,905 6.0
Central Valley Bank 6,756 12.2 2,214 4.0 3,321 6.0
TIER 1 CAPITAL (TO AVERAGE ASSETS):
Consolidated $30,592 12.3% $ 7,768 3.0% $12,447 5.0%
Mahaska State Bank 15,022 9.4 4,785 3.0 7,975 5.0
Central Valley Bank 6,756 9.2 2,199 3.0 3,665 5.0
As of December 31, 1996:
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS):
Consolidated $28,939 17.1% $13,512 8.0% $16,890 10.0%
Mahaska State Bank 14,644 13.0 9,039 8.0 11,298 10.0
Central Valley Bank 5,625 14.3 3,143 8.0 3,929 10.0
TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS):
Consolidated $27,448 16.3% $ 6,756 4.0% $10,134 6.0%
Mahaska State Bank 13,688 12.1 4,519 4.0 6,779 6.0
Central Valley Bank 5,376 13.7 1,571 4.0 2,357 6.0
TIER 1 CAPITAL (TO AVERAGE ASSETS):
Consolidated $27,448 2.1% $ 6,800 3.0% $11,333 5.0%
Mahaska State Bank 13,688 9.0 4,552 3.0 7,587 5.0
Central Valley Bank 5,376 10.1 1,603 3.0 2,672 5.0
</TABLE>
15 | DIVIDEND RESTRICTIONS
The Company derives a substantial portion of its cash flow, including that
available for dividend payments to shareholders, from its bank subsidiary in
the form of dividends received. The bank subsidiaries are subject to certain
statutory and regulatory restrictions that affect dividend payments. Based on
minimum regulating guidelines as published by those regulators, the maximum
dividends which could be paid by the Mahaska State Bank to the Company at
December 31, 1997 approximated $3,650,000.
40
<PAGE> 25
16 | COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers,
which include commitments to extend credit. The Company's exposure to credit
loss in the event of nonperformance by the other party to the commitments to
extend credit is represented by the contractual amount of those instruments.
The Company uses the same credit policies in making commitments as it does for
on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any conditions established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. As of December 31, 1997,
outstanding commitments to extend credit totaled approximately $15,597,000.
Commitments under standby letters of credit outstanding aggregated $2,213,000
and $809,000 as of December 31, 1997 and 1996, respectively. The Company does
not anticipate any losses as a result of these transactions.
The Company is involved in various legal actions and proceedings arising from
the normal course of operations. Management believes, based on known facts and
the advice of legal counsel, that the ultimate liability, if any, not covered
by insurance, arising from all legal actions and proceedings will not have a
material adverse effect upon the consolidated financial position of the
Company.
17 | MAHASKA INVESTMENT COMPANY (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
BALANCE SHEETS
DECEMBER 31 (In thousands) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash on deposit at bank subsidiary $617 465
Cash at other institutions 19 29
------- -------
Cash and cash equivalents 636 494
Investment securities 299 299
Loans 2,447 204
Loan pool participations 7,734 11,308
Investments in:
Bank subsidiaries 32,782 25,713
Bank-related subsidiary 5,059 4,945
Excess cost over net assets 83 146
Premises and equipment 733 640
Other assets 1,182 678
------- -------
Total assets $50,955 44,427
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Notes payable $14,050 9,900
Accrued expenses payable and other liabilities 151 284
------- -------
Total liabilities 14,201 10,184
------- -------
Shareholders' equity:
Common stock 19,038 11,423
Capital surplus 7,734 7,787
Treasury stock at cost, 142,007 and 55,000 shares
as of December 31, 1997 and 1996, respectively (1,752) (853)
Retained earnings 11,615 15,926
Unrealized gain (loss) on investments available for sale 119 (40)
------- -------
Total shareholders' equity 36,754 34,243
------- -------
Total liabilities and shareholders' equity $50,955 44,427
------- -------
</TABLE>
41
<PAGE> 26
17 | MAHASKA INVESTMENT COMPANY (PARENT COMPANY ONLY) CONTINUED
<TABLE>
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 (In thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME:
Dividends from subsidiaries $ 2,400 2,000 2,500
Interest income and discount on loan pool participations 2,713 3,498 3,038
Management, audit, and loan review fees 398 285 133
Other operating income 146 247 231
-------- -------- -------
Total income 5,657 6,030 5,902
-------- -------- -------
EXPENSE:
Salaries and benefits expense 1,026 925 922
Interest on short-term borrowings 800 968 651
Other operating expense 646 642 415
-------- -------- -------
Total expense 2,472 2,535 1,988
-------- -------- -------
Income before income tax expense and equity in undistributed
earnings of subsidiaries 3,185 3,495 3,914
Income tax expense 151 529 498
-------- -------- -------
Income before equity in undistributed earnings of subsidiaries 3,034 2,966 3,416
Equity in undistributed earnings of subsidiaries 2,024 1,528 507
-------- -------- -------
Net income $ 5,058 4,494 3,923
-------- -------- -------
<CAPTION>
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 (In thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,058 4,494 3,923
-------- -------- -------
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiaries (2,024) (1,528) (507)
Depreciation and amortization 121 105 96
Increase in other assets (504) (41) (133)
(Decrease)increase in other liabilities (133) 238 (52)
-------- -------- -------
Total adjustments (2,540) (1,226) (596)
-------- -------- -------
Net cash provided by operating activities 2,518 3,268 3,327
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities -- (149) --
Purchases of loan pool participations (2,091) (1,033) (9,866)
Principal recovery on loan pool participations 5,665 7,590 5,942
Net (increase) decrease in loans (2,243) 2,655 (2,321)
Purchases of premises and equipment (151) (55) (34)
Investments in subsidiaries (5,000) (10,000) --
-------- -------- -------
Net cash used in investing activities (3,820) (992) (6,279)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances on note payable 6,550 7,800 7,500
Principal payments on notes payable (2,400) (7,900) (2,500)
Dividends paid (1,753) (1,638) (1,503)
Purchases of treasury stock (1,682) (622) (231)
Proceeds from stock issued 729 -- --
-------- -------- -------
Net cash provided by (used in) financing activities 1,444 (2,360) 3,266
-------- -------- -------
Net increase (decrease) in cash and cash equivalents 142 (84) 314
Cash and cash equivalents at beginning of year 494 578 264
-------- -------- -------
Cash and cash equivalents at end of year $ 636 494 578
-------- -------- -------
</TABLE>
42
<PAGE> 27
INDEPENDENT AUDITOR'S REPORT
THE BOARD OF DIRECTORS
MAHASKA INVESTMENT COMPANY:
We have audited the accompanying consolidated balance sheets of Mahaska
Investment Company and subsidiaries as of December 31, 1997 and 1996 and the
related consolidated statements of income, changes in shareholders' 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 responsiblity is to express an opinion on the
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 financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mahaska Investment
Company and subsidiaries as of December 31, 1997 and 1996 and the results of
their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
February 13, 1998
Des Moines, Iowa
<PAGE> 28
Stock Information
Mahaska Investment Companyis Common Stock trades on The Nasdaq National Market
and the quotations are furnished by the Nasdaq system. There were 237
shareholders of record on December 31, 1997, and an estimated 700 additional
beneficial holders whose stock was held in street name by brokerage houses.
The following table sets forth the quarterly high and low sales per share for
the Companyis stock during 1997 and 1996.
<TABLE>
<S> <C> <C>
1997 Quarter Ended* High Low
March 31 $14.41 11.10
June 30 16.81 13.96
September 30 19.51 15.76
December 31 21.00 18.01
</TABLE>
<TABLE>
<S> <C> <C>
1996 Quarter Ended* High Low
March 31 $9.45 8.85
June 30 9.45 8.85
September 30 11.71 9.00
December 31 11.86 11.10
</TABLE>
The Company has declared per share cash dividends* with respect to its Common
Stock as follows:
*Restated to reflect the five-for-three stock split effected in the form of a
dividend in November 1997.
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
<S> <C> <C> <C> <C>
1997 $.12 $.12 $.12 $.12
1996 .1095 .1095 .1095 .1095
1995 .099 .099 .099 .099
</TABLE>
Nasdaq symbol: OSKY
Wall Street Journal
and other newspapers: MahaskaInv
Market Makers:
Howe Barnes Investments, Inc.
Herzog, Heine, Geduld, Inc.
Principal Financial Securities, Inc.
Form 10-k
Copies of Mahaska Investment Companyis Annual Report to the Securities and
Exchange Commission Form 10-K will be mailed when available without charge to
shareholders upon written request to Karen K. Baack, Secretary/Treasurer, at
the corporate headquarters.
Corporate Headquarters
222 First Avenue East
P.O. Box 1104
Oskaloosa, IA 52577
515-673-8448
Annual Shareholdersi Meeting
April 30, 1998, 10:30 a.m.
Elmhurst Country Club
2214 South 11th Street
Oskaloosa, IA 52577
Internet
www.mahaskainv.com
Transfer Agent/Registrar/
Dividend Disbursing Agent
Illinois Stock Transfer Company
223 West Jackson Boulevard, Suite 1210
Chicago, IL 60606
Independent Auditor
KPMG Peat Marwick LLP
2500 Ruan Center
Des Moines, IA 50309
Annual Report Design
Designgroup, Inc., Des Moines, IA
Photography: Studio AU, Des Moines, IA
<PAGE> 1
Exhibit 21
----------
Subsidiaries of Mahaska Investment Company
<TABLE>
<CAPTION>
State or Other
Name Under Jurisdiction
Which Doing in which
Subsidiary Name Business Incorporated
- --------------- ----------- --------------
<S> <C> <C>
Mahaska State Bank ---- Iowa
Central Valley Bank ---- United States
On-Site Credit Services, Inc. ---- Iowa
Pella State Bank ---- Iowa
</TABLE>
<PAGE> 1
Exhibit 23
AUDITOR'S CONSENT
The Board of Directors
Mahaska Investment Company
We consent to incorporation by reference in the Registration Statement on Form
S-8 of Mahaska Investment Company of our report dated January 31, 1997 relating
to the consolidated balance sheets of Mahaska Investment Company and
subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1996 which report
appears in the December 31, 1996 annual report on Form 10-K of Mahaska
Investment Company.
/S/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Des Moines, Iowa
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 10,854
<INT-BEARING-DEPOSITS> 1,526
<FED-FUNDS-SOLD> 6,815
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 19,833
<INVESTMENTS-MARKET> 19,869
<LOANS> 144,333
<ALLOWANCE> (1,816)
<TOTAL-ASSETS> 274,873
<DEPOSITS> 215,308
<SHORT-TERM> 14,050
<LIABILITIES-OTHER> 2,761
<LONG-TERM> 6,000
0
0
<COMMON> 19,038
<OTHER-SE> 17,716
<TOTAL-LIABILITIES-AND-EQUITY> 274,873
<INTEREST-LOAN> 3,369
<INTEREST-INVEST> 671
<INTEREST-OTHER> 2,024
<INTEREST-TOTAL> 6,064
<INTEREST-DEPOSIT> 2,155
<INTEREST-EXPENSE> 2,472
<INTEREST-INCOME-NET> 3,592
<LOAN-LOSSES> 104
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<EPS-PRIMARY> .33
<EPS-DILUTED> .32
<YIELD-ACTUAL> 10.27
<LOANS-NON> 927
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<ALLOWANCE-OPEN> (1,740)
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<RECOVERIES> (5)
<ALLOWANCE-CLOSE> (1,816)
<ALLOWANCE-DOMESTIC> (1,816)
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<ALLOWANCE-UNALLOCATED> (1,816)
</TABLE>
