FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED COMMISSION FILE NUMBER
JUNE 30, 1998 0-24630
MAHASKA INVESTMENT COMPANY
(Exact Name of Registrant as Specified in its Charter)
IOWA 42-1003699
(State of Incorporation) (I.R.S. Employer Identification No.)
222 First Avenue East, Oskaloosa, Iowa 52577
Telephone Number (515) 673-8448
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No______
As of August 6, 1998, there were 3,651,842 shares of common stock $5 par value
outstanding.
<PAGE>
PART I -- Item 1. Financial Statements
<TABLE>
<CAPTION>
MAHASKA INVESTMENT COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(unaudited)
(dollars in thousands)
June 30, December 31,
1998 1997
<S> <C> <C>
ASSETS
Cash and due from banks $ 13,616 10,854
Interest-bearing deposits in banks 225 1,526
Federal funds sold 817 6,815
Cash and cash equivalents 14,658 19,195
Investment securities:
Available for sale 26,662 23,228
Held to maturity 16,879 19,833
Loans 159,031 144,333
Allowance for loan losses (1,736) (1,816)
Net loans 157,295 142,517
Loan pool participations 45,703 54,326
Premises and equipment, net 4,205 4,183
Accrued interest receivable 2,745 2,927
Other assets 2,530 2,502
Goodwill 5,856 6,162
Total assets $ 276,533 274,873
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 19,188 21,277
NOW and Super NOW 33,410 33,226
Savings 59,664 59,020
Certificates of deposit 104,901 101,785
Total deposits 217,163 215,308
Federal funds purchased 2,000 0
Federal Home Loan Bank advances 6,000 6,000
Note payable 10,300 14,050
Other liabilities 2,568 2,761
Total liabilities 238,031 238,119
Shareholders' equity:
Common stock, $5 par value; authorized
4,000,000 shares; issued 3,807,501
shares 19,038 19,038
Capital surplus 109 119
Treasury stock at cost, 125,905 shares
as of June 30, 1998, and 142,007
shares as of December 31, 1997 (1,777) (1,752)
Retained earnings 21,004 19,230
Accumulated other comprehensive income 128 119
Total shareholders' equity 38,502 36,754
Total liabilities and shareholders'
equity $ 276,533 274,873
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PART I -- Item 1. Financial Statements, continued.
<TABLE>
<CAPTION>
MAHASKA INVESTMENT COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars in thousands, Three Months Ended Six Months Ended
except per share) June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 3,652 2,999 7,052 5,720
Interest and discount on
loan pools 2,191 1,977 4,655 4,417
Interest on bank deposits 47 14 88 56
Interest on federal funds sold 116 12 223 61
Interest on investment securities:
Available for sale 406 460 778 897
Held to maturity 226 329 476 678
Total interest income 6,638 5,791 13,272 11,829
Interest expense:
Interest on deposits:
NOW and Super NOW 176 168 341 333
Savings 557 567 1,101 1,105
Certificates of deposit 1,484 1,358 2,944 2,684
Interest on federal funds
purchased 1 8 1 11
Interest on Federal Home
Loan Bank advances 90 48 179 51
Interest on note payable 225 159 479 317
Total interest expense 2,533 2,308 5,045 4,501
Net interest income 4,105 3,483 8,227 7,328
Provision for loan losses 177 39 287 167
Net interest income after
provision for loan losses 3,928 3,444 7,940 7,161
Noninterest income:
Service charges 300 272 588 535
Data processing income 52 62 100 115
Other operating income 90 97 169 210
Investment security gains 0 (8) 26 (8)
Total noninterest income 442 423 883 852
Noninterest expense:
Salaries and employee benefits
expense 1,173 986 2,330 1,949
Net occupancy expense 331 288 655 559
FDIC assessment 12 12 24 18
Professional fees 163 92 249 189
Other operating expense 396 418 871 925
Goodwill amortization 153 159 306 317
Total noninterest expense 2,228 1,955 4,435 3,957
Income before income tax expense 2,142 1,912 4,388 4,056
Income tax expense 768 685 1,584 1,451
Net income $ 1,374 1,227 2,804 2,605
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Earnings per common share-basic $ 0.37 0.34 0.76 0.71
Earnings per common share-diluted 0.35 0.32 0.72 0.68
Dividends per common share 0.14 0.12 0.28 0.24
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PART I -- Item 1. Financial Statements, continued.
<TABLE>
<CAPTION>
MAHASKA INVESTMENT COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands) Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income $ 1,374 1,227 2,804 2,605
Other Comprehensive Income:
Unrealized gains (losses) on
securities available for sale:
Unrealized holding gains
(losses) arising during the
period, net of tax (6) 105 23 25
Less: reclassification adjustment
for net (gains) losses included
in net income, net of tax 0 5 (17) 5
Other comprehensive income, net of tax (6) 110 6 30
Comprehensive income $ 1,368 $ 1,337 $ 2,810 $ 2,635
------- ------ ------ ------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PART I -- Item 1. Financial Statements, continued.
<TABLE>
<CAPTION>
MAHASKA INVESTMENT COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) Six Months Ended
(dollars in thousands) June 30,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,804 2,605
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 607 555
Provision for loan losses 287 167
Investment securities (gains) losses (26) 8
Loss on sale of bank premises and equipment 0 (7)
Amortization of investment securities premiums 77 123
Accretion of investment securities and
loan discounts (207) (242)
Decrease in other assets 154 50
(Decrease) increase in other liabilities (199) 465
Total adjustments 693 1,119
Net cash provided by operating activities 3,497 3,724
Cash flows from investing activities: Investment securities available for sale:
Proceeds from sales 175 994
Proceeds from maturities 3,196 3,468
Purchases (6,772) (5,540)
Investment securities held to maturity:
Proceeds from maturities 6,348 5,008
Purchases (3,453) (548)
Purchases of loan pool participations (5,952) (8,641)
Principal recovery on loan pool participations 14,575 12,307
Net increase in loans (14,868) (14,886)
Purchases of bank premises and equipment (323) (428)
Proceeds from sale of bank premises
and equipment 0 7
Net cash used in investing activities (7,074) (8,259)
Cash flows from financing activities:
Net increase (decrease) in deposits 1,855 (1,293)
Net increase in federal funds purchased 2,000 0
Advances on note payable 750 0
Principal payments on note payable (4,500) (1,000)
Federal Home Loan Bank advances 0 5,600
Repayment of Federal Home Loan Bank advances 0 (1,750)
Dividends paid (1,030) (882)
Purchases of treasury stock (541) (1,376)
Proceeds from exercise of stock options 506 147
<PAGE>
Net cash used in financing activities (960) (554)
Net decrease in cash and cash equivalents (4,537) (5,089)
Cash and cash equivalents at beginning of period 19,195 16,484
Cash and cash equivalents at end of period $ 14,658 11,395
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 5,024 4,504
Income taxes $ 1,420 1,245
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</TABLE>
<PAGE>
PART I -- Item 1. Financial Statements, continued.
MAHASKA INVESTMENT COMPANY
Notes to Consolidated Financial Statements
(Unaudited)
1. Adjustments and Reclassifications
The accompanying consolidated financial statements (unaudited) include the
accounts and transactions of the Company and its four wholly-owned
subsidiaries, Mahaska State Bank, Central Valley Bank, Pella State Bank and
On-Site Credit Services, Inc. All material intercompany balances and
transactions have been eliminated in consolidation.
The accompanying consolidated financial statements (unaudited) have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. Although
management believes that the disclosures are adequate to make the
information presented not misleading, it is suggested that these interim
consolidated financial statements (unaudited) be read in conjunction with
the Company's most recent audited financial statements and notes thereto.
In the opinion of management, the accompanying consolidated financial
statements (unaudited) contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as
of June 30, 1998, and the results of operations for the three months and
the six months ended June 30, 1998 and 1997, and changes in cash flows for
the six months ended June 30, 1998 and 1997.
2. Statements of Cash Flows
In the statements of cash flows, cash and cash equivalents include cash and
due from banks, interest-bearing deposits with banks, and federal funds
sold.
3. Income Taxes
Federal income tax expense for the three months and the six months ended
June 30, 1998 and 1997 was computed using the consolidated effective
federal tax rate. The Company also recognized income tax expense pertaining
to state franchise taxes payable individually by the subsidiary banks.
4. Earnings Per Common Share
Basic earnings per common share computations are based on the weighted
average number of shares of common stock actually outstanding during the
period. The weighted average number of shares for the three-month periods
ended June 30, 1998 and 1997 was 3,680,490 and 3,650,779 (restated to
reflect the five-for-three stock split effected in the form of a stock
dividend which occurred in November 1997), respectively. For the six-month
periods ended June 30, 1998 and 1997, the
<PAGE>
weighted average number of common shares outstanding was 3,676,858 and
3,682,246, respectively. 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 period. The computation of
diluted earnings per share used a weighted average number of shares
outstanding of 3,871,568 and 3,811,518 for the three months ended June 30,
1998 and 1997, respectively, and 3,877,562 and 3,817,943 for the six months
ended June 30, 1998 and 1997, respectively.
5. Effect of New Financial Accounting Standards
SFAS 130, "Reporting Comprehensive Income" became effective for the Company
on 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. The adoption of SFAS 130 did not have a material effect on
the financial position and results of operations, nor did the adoption
require additional resources.
<PAGE>
Part I -- Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
THREE MONTHS ENDED JUNE 30, 1998
Net income for the Company increased 12 percent to $1,374,000 for the
quarter ended June 30, 1998, compared with $1,227,000 for the three months ended
June 30, 1997. Basic earnings per share for the second quarter of 1998 were $.37
versus basic earnings of $.34 per share for the second quarter of 1997. Diluted
earnings per share for the second quarter of 1998 were $.35 versus diluted
earnings per share of $.32 for the second quarter of 1997. All historical per
share amounts have been restated to reflect the five-for-three stock split
effected in the form of a stock dividend which occurred in November 1997. Actual
weighted average shares outstanding were 3,680,490 and 3,650,779 for the second
quarter of 1998 and 1997, respectively. The Company's return on average assets
for the quarter ended June 30, 1998 was 2.00 percent compared with a return of
1.95 percent for the quarter ended June 30, 1997. The Company had a return on
average equity of 14.41 percent for the three months ended June 30, 1998 versus
14.17 percent for the three months ended June 30, 1997.
<PAGE>
RESULTS OF OPERATIONS
Net Interest Income
Net interest income may fluctuate as a result of changes in the volumes of
assets and liabilities as well as changes in interest rates. The Company's net
interest income for the quarter ended June 30, 1998 increased $621,000 (18
percent) to $4,104,000 from $3,483,000 for the three months ended June 30, 1997.
This was mainly due to increased interest income earned on higher loan volumes
and interest income and discount on loan pool participations. The increase in
total interest income was offset, in part, by additional interest expense
related to increased deposits and borrowed funds. Total interest income
increased $846,000 (15 percent) in the second quarter of 1998 compared with the
same period in 1997. The Company's total interest expense for the quarter
increased $225,000 (10 percent) compared with the same period in 1997. The
Company's net interest margin (on a federal tax-equivalent basis) for the second
quarter of 1998 rose to 6.48 percent from 6.07 percent in the second quarter of
1997. Net interest margin is net return on interest-earning assets and is
computed by dividing annualized net interest income by the average of total
interest-earning assets for the period. The Company's overall yield on earning
assets increased to 10.47 percent for the second quarter of 1998 compared to
10.04 percent for the second quarter of 1997. The rate on interest-bearing
liabilities also increased in the second quarter of 1998 to 4.71 percent
compared with 4.66 percent for the second quarter of 1997.
Interest income and fees on loans increased $653,000 (22 percent) in the
second quarter of 1998 compared to the same period in 1997 due to higher loan
volumes. The average yield on loans rose to 9.50 percent for the second three
months of 1998, up from 9.38 percent for the three months ended June 30, 1997.
Average loans outstanding were $154,154,000 for the second three months of 1998
compared with $128,246,000 for the second quarter of 1997, an increase of
$25,908,000 (20 percent). Each of the Company's subsidiaries (except for Pella
State Bank which did not open until December 1997) experienced an increase in
average loan volume between the second quarter of 1997 and 1998. Average
commercial loan volumes increased $9,515,000 (30 percent), real estate loans
averaged $9,890,000 (17 percent) higher, and agricultural loans increased
$4,578,000 (19 percent) in average volume for the second quarter of 1998
compared with the second quarter of 1997.
Loan pool investments provided the Company with $214,000 additional revenue
in the second quarter of 1998 compared to the same period in 1997. Interest
income and discount collected on the loan pools increased 11 percent in the
second quarter of 1998 to $2,191,000 compared with $1,977,000 earned in the
second quarter of 1997. The yield on loan pool investments rose to 19.26 percent
for the second quarter of 1998 compared with 15.81 percent for the quarter ended
June 30, 1997. The average loan pool participation investment balance was
$4,531,000 (9 percent) lower in the second quarter of
<PAGE>
1998 than in the second quarter of 1997. These loan pool investments are pools
of distressed and nonperforming loans that the Company has 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 the principal in excess of the purchase cost which is
herein referred to as "discount" recovery. Interest income and discount recovery
on the loan pools is recognized on a "cash" basis by the Company.
The increase in interest expense for the second quarter of 1998 compared
with 1997 was mainly attributable to growth in deposits and an increase in
borrowed funds. Interest expense on deposits increased $125,000 (6 percent) in
the second quarter of 1998 as average interest-bearing deposits for the period
were $7,901,000 (5 percent) greater than in the same period in 1997. Federal
Home Loan Bank advances during the second quarter of 1998 averaged $3,304,000
greater in the second quarter of 1998 compared with the second quarter of 1997
resulting in an additional $42,000 in interest expense. Interest expense on the
Company's commercial bank line of credit borrowed funds increased $66,000 as the
amount borrowed averaged $3,145,000 higher in the second quarter of 1998
compared with the second quarter of 1997. The Company utilized these borrowings
to provide operating funds to On-Site Credit Services, Inc. and capital to the
newly-chartered Pella State Bank.
Provision for Loan Losses
The Company's provision for loan loss expense of $177,000 in the second
quarter of 1998 was $138,000 greater than in the second quarter of 1997.
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. During the second quarter of 1998, management deemed it prudent
to charge off a loan that has been on a nonaccrual status since August 1996.
This loan has been in litigation for an extended period of time and is still
unresolved. In view of the charge-off of this credit and the growth of the
Company's overall loan portfolio, management increased the amount of the loan
loss provision charged to expense in the second quarter of 1998.
Other Income
Other income results from the charges and fees collected by the Company
from its customers for various services performed, data processing income
received from nonaffiliated banks, miscellaneous other income and gains (or
losses) from the sale of investment securities held in the available for sale
category. Total other income increased $19,000 (5 percent) in the second quarter
of 1998 compared with 1997, mainly due to higher service charge income from
overdraft fees at the bank subsidiaries.
<PAGE>
Other Expense
Total other noninterest expense for the quarter ended June 30, 1998
increased $273,000 (14 percent) compared to noninterest expense for the second
quarter of 1997. Other expense includes all the costs incurred to operate the
Company except for interest expense, the loan loss provision and income taxes.
Salaries and benefits expense for the second quarter of 1998 increased $187,000
(19 percent) over the second quarter of 1997, primarily as a result of the
additional employees at the newly-chartered Pella State Bank and also due to
increased staffing at other subsidiaries. Net occupancy expenses for the second
quarter of 1998 increased $44,000 (15 percent) in comparison to the second
quarter of 1997 with most of the increase due to the additional facilities of
Pella State Bank. Professional fees increased $71,000 for the second three
months of 1998 over the same period in 1997 due to increased legal expenses.
Other miscellaneous operating expense decreased by $23,000 (5 percent) in the
second quarter of 1998 compared with the three months ended June 30, 1997.
Goodwill amortization expense decreased $5,000 (3 percent) in the second quarter
of 1998 versus 1997 in accordance with the effective yield method of
amortization.
Income Tax Expense
Income tax expense for the three months ended June 30, 1998, increased
$82,000 compared to the amount for the three months ended June 30, 1997,
primarily due to the overall increase in taxable income for the period. The
effective income tax rate in the second quarter of 1998 was 35.84 percent
compared with 35.83 percent in the second quarter of 1997. The Company's
effective income tax rate varies from the statutory rate principally due to
interest income from tax-exempt securities and loans. Changes in the effective
rate for one period in comparison to another are primarily due to changes in the
amount of tax-exempt income.
SIX MONTHS ENDED JUNE 30, 1998
The Company's net income for the six months ended June 30, 1998 increased 8
percent to $2,804,000, compared with $2,605,000 for the first half of 1997.
Basic earnings per share for the first half of 1998 were $.76 versus basic
earnings of $.71 per share for 1997. Diluted earnings per share for the six
months ended June 30, 1998 were $.72 versus diluted earnings per share of $.68
in 1997. All historical per share amounts have been restated to reflect the
five-for-three stock split effected in the form of a stock dividend which
occurred in November 1997. Actual weighted average shares outstanding were
3,676,858 and 3,682,246 for the first six months of 1998 and 1997, respectively.
The Company's return on average assets for the half-year ended June 30, 1998 was
2.06 percent compared with a return of 2.09 percent for the first half of 1997.
The Company had a return on average equity of 14.95 percent for the six months
<PAGE>
ended June 30, 1998 versus 15.05 percent for the six months ended June 30,
1997.
RESULTS OF OPERATIONS
Net Interest Income
The Company's net interest income for the six months ended June 30, 1998
increased $899,000 (12 percent) to $8,226,000 from $7,328,000 for the six months
ended June 30, 1997. This was mainly due to increased interest income earned on
higher loan volumes and interest income and discount on loan pool
participations. The increase in total interest income was offset, in part, by
additional interest expense related to increased deposits and borrowed funds.
Total interest income increased $1,442,000 (12 percent) in the first half of
1998 compared with the same period in 1997. The Company's total interest expense
for the six months ended June 30, 1998 increased $544,000 (12 percent) compared
with the same period in 1997. The Company's net interest margin (on a federal
tax-equivalent basis) for the six months of 1998 rose to 6.61 percent from 6.47
percent in 1997. The Company's overall yield on earning assets increased to
10.63 percent in 1998 compared to 10.40 percent in 1997. The rate on
interest-bearing liabilities also increased in 1998 to 4.75 percent compared
with 4.62 percent for 1997.
Interest income and fees on loans increased $1,332,000 (23 percent) in the
first half of 1998 compared to the same period in 1997 due to higher loan
volumes. Average loans outstanding were $149,822,000 for the first half of 1998
compared with $123,914,000 for the six months ended June 30, 1997, an increase
of $25,908,000 (21 percent). The average yield on loans rose to 9.49 percent for
the first half of 1998, up from 9.31 percent for the six months ended June 30,
1997.
Interest income and discount collected on the loan pools increased 5
percent in the first half of 1998 to $4,655,000 compared with $4,417,000 earned
in the first half of 1997. The yield on loan pool investments rose to 19.25
percent in the 1998 period compared with 18.01 percent for the six months ended
June 30, 1997. The average loan pool participation investment balance for the
first half of 1998 was $48,774,000 compared with $49,459,000 in the first six
months of 1997.
The increase in interest expense for the six months ended June 30, 1998
compared with 1997 was mainly attributable to growth in deposits and an increase
in borrowed funds. Average interest-bearing deposits for the first half of 1998
were $9,873,000 (5 percent) greater than in the same period in 1997 resulting in
an increase in interest expense on deposits of $264,000. Interest expense on
Federal Home Loan Bank advances increased by $128,000 during the first six
months of 1998 compared with 1997 as the average balance of these advances rose
$4,554,000 in comparison with the first half of 1997. Borrowings on the
<PAGE>
Company's commercial bank line of credit which averaged $3,657,000 higher in the
first half of 1998 compared with 1997 produced an increase of $162,000 in
interest expense for the current period.
Provision for Loan Losses
The Company's provision for loan loss expense of $287,000 in the first half
of 1998 was $120,000 greater than in 1997. 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. During the
second quarter of 1998, management deemed it prudent to charge off a loan that
has been on a nonaccrual status since August 1996. This loan has been in
litigation for an extended period of time and is still unresolved. In view of
the charge-off of this credit and the growth of the Company's overall loan
portfolio, management increased the amount of the loan loss provision charged to
expense in 1998.
Other Income
Total other income increased $32,000 (4 percent) in the second quarter of
1998 compared with 1997, mainly due to higher service charge income from
overdraft fees at the bank subsidiaries and investment security gains. The
additional income was offset, in part, by reduced data processing income from
nonaffiliated banks and lower miscellaneous income.
Other Expense
Total other noninterest expense for the six months ended June 30, 1998
increased $479,000 (12 percent) compared to noninterest expense for the first
half of 1997. Salaries and benefits expense for the first half of 1998 increased
$381,000 (20 percent) over 1997, primarily as a result of the additional
employees at the newly-chartered Pella State Bank and also due to increased
staffing at other subsidiaries. Net occupancy expenses for the six months of
1998 increased $97,000 (17 percent) in comparison to 1997 with most of the
increase due to the additional facilities of Pella State Bank. Professional fees
increased $60,000 for the first half of 1998 over the same period in 1997 due to
increased legal expenses. Other miscellaneous operating expense decreased by
$54,000 (6 percent) in 1998 compared with the six months ended June 30, 1997.
Goodwill amortization expense decreased $11,000 (3 percent) in 1998 versus 1997
in accordance with the effective yield method of amortization.
<PAGE>
Income Tax Expense
Income tax expense for the six months ended June 30, 1998, increased
$133,000 compared to the amount for the six months ended June 30, 1997,
primarily due to the overall increase in taxable income for the period. The
effective income tax rate in the first half of 1998 was 36.10 percent compared
with 35.77 percent in the first six months of 1997. The Company's effective
income tax rate varies from the statutory rate principally due to interest
income from tax-exempt securities and loans. Changes in the effective rate for
one period in comparison to another are primarily due to changes in the amount
of tax-exempt income.
FINANCIAL CONDITION
The Company's total assets as of June 30, 1998 were $276,533,000, an
increase of $1,660,000 from December 31, 1997. As of June 30, 1998, the Company
had federal funds sold of $817,000 compared with $6,815,000 as of December 31,
1997.
Investment Securities
Investment securities available for sale increased $3,433,000 (15 percent)
from December 31, 1997 to the June 30, 1998 total of $26,662,000 as a result of
the purchase of securities. Investment securities classified as held to maturity
totaled $16,879,000 as of June 30, 1998, a decline of $2,954,000 as securities
matured or were called during the six-month period from December 31, 1997. These
proceeds were reinvested into securities available for sale.
Loans
Overall loan volumes continued to increase, with total loans outstanding of
$159,031,000 as of June 30, 1998 reflecting growth of $14,699,000 (10 percent)
from December 31, 1997. Most of the growth from December 31, 1997 to June 30,
1998 was spread between real estate, commercial and agricultural loans. Consumer
loans outstanding as of the quarter-end declined approximately $259,000 from the
December 31, 1997 balance. As of June 30, 1998, the Company's loan to deposit
ratio (excluding loan pool investments) was 73.23 percent. This compares with a
year-end 1997 loan to deposit ratio of 67.04 percent.
Loan Pool Participations
As of June 30, 1998, the Company had investments in loan pool
participations of $45,703,000, a decline of $8,622,000 (16 percent) from the
prior year-end balance. The loan pool investment balance shown as an asset on
the Company's Balance Sheet represents the discounted purchase cost of the loan
pool participations. The Company actively continues to evaluate and bid on loan
pool packages. During the second quarter of 1998, the Company did invest
<PAGE>
$5,952,000 in loan pools which were acquired from the FDIC and from a private
seller. The loan pool participation investment as of December 31, 1997 was
$54,326,000 with the reduction in balance from that date attributable to
collections of principal by the loan pool servicer. The average loan pool
participation investment of $48,774,000 for the first half of 1998 was 1 percent
less than the average balance of $49,459,000 for the first six months of 1997.
Deposits
Total deposits grew $1,854,000 (1 percent) during the first half of 1998
with the most growth noted in savings and certificate of deposit accounts.
Demand deposit accounts as of June 30, 1998 decreased $2,089,000 (10 percent)
from December 31, 1997, mostly due to seasonal fluctuation.
Borrowed Funds/Notes Payable
The Company had Fed Funds purchased of $2,000,000 on June 30, 1998. On
December 31, 1997 there were no Fed Funds Purchased. Fixed-rate advances from
the Federal Home Loan Bank totaled $6,000,000 as of June 30, 1998 and December
31, 1997. Notes payable decreased to $10,300,000 on June 30, 1998 from
$14,050,000 on December 31, 1997 as the Company used a dividend from Mahaska
State Bank and cash flow from operations to reduce debt.
Nonperforming Loans
The Company's nonperforming loans totaled $1,561,000 (.98 percent of total
loans) as of June 30, 1998, compared to $1,848,000 (1.28 percent of total loans)
as of December 31, 1997. All nonperforming loan totals and related ratios
exclude the loan pool investments. The following table presents the categories
of nonperforming loans as of June 30, 1998:
<TABLE>
<CAPTION>
Nonperforming Loans
(dollars in thousands)
June 30, 1998
<S> <C>
Nonaccrual $ 533
Loans 90 days past due 856
Renegotiated loans 160
Other real estate owned 12
$1,561
</TABLE>
From December 31, 1997 to June 30, 1998, nonaccrual loans decreased
$394,000, loans ninety days past due increased $334,000, restructured loans
decreased $228,000 and other real estate owned remained unchanged. The Company's
allowance for loan losses as of June 30, 1998 was $1,736,000, which was 1.09
<PAGE>
percent of total loans as of that date. This compares with an allowance for loan
losses of $1,816,000 as of December 31, 1997, which was 1.26 percent of total
loans. As of June 30, 1998, the allowance for loan losses was 111.22 percent of
nonperforming loans compared with 98.24 percent as of December 31, 1997.
Management believes that as of June 30, 1998 the allowance for loan losses is
adequate. For the three months ended June 30, 1998, the Company recognized a net
loan charge-off of $313,000 compared with a recovery of loans previously charged
off of $2,000 during the quarter ended June 30, 1997. For the first six months
of 1998, the Company experienced net charge- offs of loans totalling $366,000,
or .49 percent of average loans outstanding for the period. This compares with
net loan charge-offs of $38,000 during the first six months of 1997.
Capital Resources
As of June 30, 1998, total shareholders' equity as a percentage of total
assets was 13.92 percent compared with 13.31 percent as of December 31, 1997.
Cash dividends paid to shareholders during the second quarter of 1998 were $.14
per share.
The Company held 125,905 shares of treasury stock at a cost of $1,777,000
as of June 30, 1998. These shares were repurchased to satisfy options granted
under the Company's Stock Incentive Plans. During the second quarter of 1998 the
Company reissued 29,786 shares of treasury stock as options were exercised by
employees, officers and directors. On January 22, 1998, the Board of Directors
voted to continue the Company's stock repurchase plan that provides for the
repurchase of up to 200,000 shares through January 31, 1999. The Company
repurchased 24,900 shares of its stock during the second quarter of 1998 at a
cost of $541,000.
Under risk-based capital rules, the Company's tier 1 capital ratio was
15.57 percent of risk-weighted assets as of June 30, 1998, and was 14.74 percent
of risk-weighted assets as of December 31, 1997, compared to a 4.00 percent
requirement. 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
capital is the Company's total common shareholders' equity reduced by goodwill.
The Company continues to pursue acquisition and expansion opportunities
that fit the organization's strategic business and financial plans. There are
currently no pending acquisitions that would require the Company to secure
capital from public or private markets.
Liquidity
Liquidity management involves meeting the cash flow requirements of
depositors and borrowers. The Company conducts liquidity management on both a
daily and long-term basis; and it adjusts its investments in liquid assets
<PAGE>
based on expected loan demand, projected loan maturities and payments, estimated
cash flows from the loan pool participations, expected deposit flows, yields
available on interest-bearing deposits, and the objectives of its
asset/liability management program. The Company had liquid assets (cash and cash
equivalents) of $14,658,000 as of June 30, 1998, compared with $19,195,000 as of
December 31, 1997. Some of this decrease is attributable to the additional
funding of loans. Investment securities classified as available for sale could
be sold to meet liquidity needs, if necessary. Additionally, the bank
subsidiaries maintain lines of credit with correspondent banks and the Federal
Home Loan Bank that would allow them to borrow federal funds on a short-term
basis if necessary. The Company also maintains a line of credit with Harris
Trust & Savings Bank of Chicago, Illinois that provides liquidity for the
purchase of loan pool participation investments and other corporate needs.
Management believes that the Company has sufficient liquidity as of June 30,
1998 to meet the needs of borrowers and depositors.
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
primarily comprised 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 believe that the Company's primary market risk
exposures and how those exposures were managed in the first half of 1998 changed
when compared to 1997.
The Company uses a third-party computer software simulation modelling
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 the 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 estimated changes in projected net interest income for the next twelve
months for the various rate shock levels at June 30, 1998.
<PAGE>
<TABLE>
<S> <C> <C>
Interest Rate Movement $ Change %Change
+300 basis points $(674,000) -4%
+200 bp (456,000) -3%
+100 bp (229,000) -2%
Base 0 0%
-100 bp 227,000 +2%
-200 bp 394,000 +3%
-300 bp 576,000 +4%
(Note: 100 basis points (bp) = 1.00%)
</TABLE>
As shown above, at June 30, 1998, the effect of an immediate and sustained 300
basis point increase in interest rates would reduce the Company's projected net
interest income in the next twelve months by 4 percent or approximately
$674,000. The effect of an immediate and sustained 300 basis point decrease in
rates would increase the Company's projected net interest income by
approximately $576,000 or 4 percent.
Computations of the prospective effects of hypothetical interest rate
changes are based on numerous assumptions. Actual 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 rates. Current
interest rates on certain liabilities are at a level that does not allow for
significant repricing should market interest rates decline significantly.
YEAR 2000 Compliance
A critical issue has emerged in the banking industry and for the economy
overall regarding how existing computer application software programs, operating
systems and hardware can accommodate the date value for the year 2000. This
issue is an area of major emphasis as management is actively working with its
software and hardware vendors to assure that the Company is compliant. The
Company has established Year 2000 Committees and Plans at its bank and thrift
subsidiaries, and formal project plans have been developed and adopted. Testing
and contingency plans have also been developed. The Company purchased a new
main-frame computer system that is year 2000 compliant in 1997. This computer
system became fully operational in the first quarter of 1998.
The Company anticipates that it will incur internal staff costs and other
expenses related to the enhancements necessary to become year 2000 compliant.
Based on the Company's current knowledge, the expense related to year 2000
compliance is not expected to have a material effect on the Company's financial
position or results of operations.
<PAGE>
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
With the exception of the historical information contained in this report,
the matters described herein contain forward-looking statements that involve
risk and uncertainties that individually or mutually impact the matters herein
described, including but not limited to financial projections, product demand
and market acceptance, the effect of economic conditions, the impact of
competitive products and pricing, governmental regulations, results of
litigation, technological difficulties and/or other factors outside the control
of the Company, which are detailed from time to time in the Company's SEC
reports. The Company disclaims any intent or obligation to update these
forward-looking statements.
PART II -- Item 4. Submission of Matters to a Vote of Security
Holders.
The Company's annual meeting of shareholders was held on April 30, 1998.
The record date for determination of shareholders entitled to vote at the
meeting was March 2, 1998. There were 3,673,816 shares outstanding as of that
date, each such share being entitled to one vote. At the shareholders' meeting
the holders of 3,413,621 shares of stock were represented in person or by proxy,
which constituted a quorum. The following proposals were voted on at the
meeting:
Proposal 1 - Election of Directors:
The following members of the Company's board of directors were elected to
serve for the specified term or until their successors shall have been elected
and qualified. Such persons received the number of votes set opposite their
names:
<TABLE>
VOTE
FOR WITHHELD
<S> <C> <C>
Three-year term (2001):
Robert K. Clements 3,396,860 16,761
John P. Pothoven 3,399,159 14,462
John W. N. Steddom 3,393,191 20,430
</TABLE>
<PAGE>
Proposal 2 - Amendment to Articles of Incorporation:
The proposal to approve an amendment to the Company's Articles of
Incorporation to increase to 20,000,000 the aggregate number of authorized
shares which the Company shall have the authority to issue was adopted by the
following vote:
<TABLE>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
3,169,655 214,216 29,750
</TABLE>
Proposal 3 - Approval of 1998 Stock Incentive Plan:
The proposal to approve the 1998 Stock Incentive Plan was adopted by the
following vote of shareholders:
<TABLE>
DEALER
FOR AGAINST ABSTAIN NON-VOTES
<S><C> <C> <C> <C>
2,878,647 230,892 74,335 229,747
</TABLE>
Proposal 4 - Ratification of Appointment of KPMG Peat Marwick LLP as independent
auditor:
A vote was also taken on the ratification of the appointment of KPMG Peat
Marwick LLP as independent auditors of the Company for the fiscal year ending
December 31, 1998. The results of the vote were as follows:
<TABLE>
DEALER
FOR AGAINST ABSTAIN NON-VOTES
<S> <C> <C> <C> <C>
3,375,154 21,194 17,273 0
</TABLE>
PART II -- Item 5. Other Information
On June 30, 1998, the Company and Harris Trust & Savings Bank entered into
a Fourth Amendment to the Revolving Loan Agreement dated January 31, 1996. This
amendment to the loan agreement is included as Exhibit 10.5.2 to this 10-Q
filing.
Part II -- Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed with this Report or, if so indicated,
incorporated by reference:
Exhibits
3.1 Articles of Incorporation of Mahaska Investment
Company. (d)
3.2 Bylaws of Mahaska Investment Company. (d)
<PAGE>
10.1 Mahaska Investment Company Employee Stock Ownership
Plan & Trust as restated and amended. (b)
10.2.1 1993 Stock Incentive Plan. (a)
10.2.2 1996 Stock Incentive Plan. (d)
10.2.3 1998 Stock Incentive Plan. (e)
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. (a)
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. (a)
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. (a)
10.5.1 Revolving Loan Agreement dated January 31, 1996
between Mahaska Investment Company and Harris Trust
& Savings Bank. (c)
10.5.2 Fourth Amendment to Revolving Loan Agreement and
Revolving Loan Note between Mahaska Investment
Company and Harris Trust & Savings Bank dated
June 30, 1998.
11 Computation of Per Share Earnings.
27 Financial Data Schedule.
(a) Incorporated by reference to the Form S-1
Registration Number 33-81922 of Mahaska Investment
Company.
(b) Incorporated by reference to the Form 10-K for the
year ended December 31, 1994 filed by Mahaska
Investment Company.
(c) Incorporated by reference to the Form 8-K filed by
Mahaska Investment Company on February 29, 1996.
(d) Incorporated by reference to the Form 10-K for the
year ended December 31, 1996 filed by Mahaska
Investment Company.
(e) Incorporated by reference to the Form 10-K for the
year ended December 31, 1997 filed by Mahaska
Investment Company.
<PAGE>
(b) Reports on Form 8-K -- No reports on Form 8-K were filed during the
three months ended June 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAHASKA INVESTMENT COMPANY
(Registrant)
August 10, 1998 /s/ Charles S. Howard
Dated Charles S. Howard
President
August 10, 1998 /s/ David A. Meinert
Dated David A. Meinert
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
<PAGE>
Exhibit 11
<TABLE>
<CAPTION>
MAHASKA INVESTMENT COMPANY
AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Earnings per Share
information:
Weighted average number
of shares outstanding
during the year 3,680,490 3,650,779 3,676,858 3,682,246
Weighted average number
of shares outstanding
during the year including
all dilutive potential
shares 3,871,568 3,811,518 3,877,562 3,817,943
Net earnings $1,374,130 1,227,241 2,803,677 2,605,473
Earnings per share-basic $ 0.37 0.34 0.76 0.71
Earnings per share-diluted $ 0.35 0.32 0.72 0.68
</TABLE>
