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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, 1998 COMMISSION FILE NUMBER 0-24630
MAHASKA INVESTMENT COMPANY
INCORPORATED IN IOWA
42-1003699
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:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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None None
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 ___ 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 12, 1999, was $42,302,480.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the most recent practicable date, March 12, 1999.
3,636,345 shares Common Stock, $5 par value
DOCUMENTS INCORPORATED BY REFERENCE
The Annual Report to Shareholders for the 1998 fiscal year is incorporated
by reference into Part I and Part II hereof to the extent indicated in such
Parts.
The definitive proxy statement of Mahaska Investment Company for the 1999
annual meeting of shareholders is incorporated by reference into Part III hereof
to the extent indicated in such Part.
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TABLE OF CONTENTS
PART I
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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................................................ 7
G. Statistical Disclosure................................... 8
Item 2. PROPERTIES.................................................. 16
Item 3. LEGAL PROCEEDINGS........................................... 16
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 16
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 17
Item 6. SELECTED FINANCIAL DATA..................................... 17
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 17
Item 7a. MARKET RISK DISCLOSURE...................................... 17
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 17
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 17
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 18
Item 11. EXECUTIVE COMPENSATION...................................... 18
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 18
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 18
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K....................................................... 18
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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 and accounts receivable financing.
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
performing, nonperforming, or distressed 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 collects these loans from the borrowers.
The Company provides services to the Banks and to On-Site including
management assistance, auditing services, human resources administration,
marketing assistance and coordination, 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 the bank subsidiaries and to three
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 the Banks, has participation interests in
pools of loans currently held and serviced by four separate independent
servicing corporations (referred to collectively as the "Servicer"). The four
independent servicing corporations are Central States Resources Corporation,
Midstates Resources Corporation, All States Resources Corporation, and States
Resources Corporation. The Company does not have any ownership interest in or
control over these servicing corporations. Two of the independent servicing
corporations are owned solely by Randal Vardaman and two are owned by Mr.
Vardaman in conjunction with other individuals. 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, All States Resources Corporation in 1993, and
States Resources Corporation in 1998. 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.
The Company has invested in loan pools purchased by the Servicer at varying
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 loan 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 and the Banks have
purchased participation interests in such pools of loans. The purchase prices
paid by the Company for loan pool participations have ranged from 5.5% to 97.7%
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.
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. While only the FDIC currently offers loan pools, there is no assurance
that it will continue to do so. Beginning in 1996, the Servicer successfully bid
on packages of loans offered for sale by a large banking organization
headquartered in the eastern United States. The Servicer continues to bid on
packages offered by the FDIC and large banking organizations throughout the
country. 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 65
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.
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 potential for collection.
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.
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
consolidated 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; and the Company's
internal auditor has performed audit procedures in recent years.
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 discount from the aggregate outstanding principal amount of the loans
underlying the pools. For example, as of December 31, 1998 and 1997, such cost
basis was $54,510,000 and $54,326,000, respectively, while the contractual
outstanding principal amounts of the underlying loans as of such dates were
approximately $83,058,000 and $99,948,000, 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 Company has not
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established an 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 three to
five 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, 1998, 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 Wells Fargo (Norwest) Corporation, Firstar Corporation
of Iowa, Mercantile Bank, U S 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. The Company
expects that its success in the future will depend more on the performance of
its bank subsidiaries and less on the investment in loan pool participations.
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
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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.
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 or thrift (collectively
"affiliated banks") 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. The Banks are
assessed fees based on the institutions' deposits by the FDIC, to insure the
funds of customers on deposit with the institutions.
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
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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.
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 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, 1998, 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.
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 has resulted 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.
F. EMPLOYEES
On December 31, 1998, the Company had 111 full-time employees and 26
part-time employees of which 55 full-time and 18 part-time employees were
employed by MSB, 30 full-time and 6 part-time employees were employed by CVB, 6
full-time and 1 part-time employees were employed by PSB, 10 full-time employed
by On-Site and 10 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.
7
<PAGE> 10
G. 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, 1998, 1997 and 1996 reported on a
fully tax-equivalent basis assuming a 34% tax rate.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
INTEREST INTEREST INTEREST
INCOME AVERAGE INCOME AVERAGE INCOME AVERAGE
AVERAGE (2)/ RATE/ AVERAGE (2)/ RATE/ AVERAGE (2)/ RATE/
BALANCE EXPENSE YIELD BALANCE EXPENSE YIELD BALANCE EXPENSE YIELD
------- -------- ------- ------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average earning assets:
Loans(1)............... $157,712 $15,026 9.53% $131,081 $12,293 9.38% $105,372 $10,203 9.68%
Loan pool
participations....... 49,805 7,970 16.00 49,399 8,474 17.15 50,105 9,097 18.16
Interest-bearing
deposits............. 2,359 122 5.20 2,085 108 5.20 5,097 266 5.23
Investment securities
available for sale:
Taxable
investments....... 25,730 1,617 6.28 26,052 1,705 6.55 20,557 1,348 6.56
Investment securities
held to maturity:
Taxable
investments....... 9,821 569 5.80 16,421 928 5.65 21,616 1,215 5.62
Tax exempt
investments....... 7,265 491 6.75 7,459 486 6.51 9,510 619 6.51
Federal funds sold..... 6,465 338 5.24 2,375 128 5.39 1,704 92 5.39
-------- ------- -------- ------- -------- -------
Total earning
assets.......... $259,157 $26,133 10.08 $234,872 $24,122 10.27 $213,961 $22,840 10.67
======== ======= ======== ======= ======== =======
Average interest-bearing
liabilities:
Interest-bearing demand
deposits............. $ 33,248 $ 656 1.97 $ 32,225 $ 677 2.10 $ 28,786 $ 612 2.13
Savings deposits....... 59,419 2,241 3.77 59,019 2,259 3.83 53,844 2,058 3.82
Certificates of
deposit.............. 107,284 6,102 5.69 96,609 5,442 5.63 86,055 4,845 5.63
Federal funds
purchased............ 201 12 5.87 534 32 5.93 830 48 5.73
Federal Home Loan Bank
advances............. 6,840 405 5.92 2,274 138 6.07 0 0 0.00
Notes payable.......... 13,342 1,074 8.05 9,292 764 8.23 11,323 968 8.55
-------- ------- -------- ------- -------- -------
Total
interest-bearing
liabilities..... $220,334 $10,490 4.76 $199,953 $ 9,312 4.66 $180,838 $ 8,531 4.72
======== ======= ======== ======= ======== =======
Net interest income...... $15,643 5.32 $14,810 5.61 $14,309 5.96
======= ======= =======
Net interest margin(3)... 6.04% 6.31% 6.69%
===== ===== =====
</TABLE>
- ---------------
(1) Average loans outstanding includes the daily average balance of
non-performing loans. Interest on these loans does not include additional
interest of $108,000, $122,000, and $90,000 for 1998, 1997 and 1996,
respectively, which would have been accrued based on the original terms of
these loans compared to the interest that was actually recorded. Interest
earned on loans includes loan fees (which are not material in amount).
(2) Includes interest income and discount realized on loan pool participations.
(3) Net interest margin is net interest income divided by average total earning
assets.
8
<PAGE> 11
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,
------------------------------------------------------------
1998 COMPARED TO 1997 1997 COMPARED TO 1996
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...................................... $2,534 $ 199 $2,733 $2,420 $(330) $2,090
Loan pool participations (1)............... 69 (573) (504) (127) (496) (623)
Interest-bearing deposits.................. 14 0 14 (156) (2) (158)
Investment securities available for sale:
Taxable investments..................... (20) (68) (88) 360 (3) 357
Investment securities held to maturity:
Taxable investments..................... (382) 23 (359) (294) 7 (287)
Tax exempt investments.................. (13) 18 5 (134) 1 (133)
Federal funds sold......................... 214 (4) 210 36 0 36
------ ----- ------ ------ ----- ------
Total income from earning assets........ 2,416 (405) 2,011 2,105 (823) 1,282
------ ----- ------ ------ ----- ------
INTEREST EXPENSE OF AVERAGE INTEREST-BEARING
LIABILITIES:
Interest-bearing demand deposits........... 21 (42) (21) 72 (7) 65
Savings deposits........................... 15 (33) (18) 198 3 201
Certificates of deposit.................... 606 54 660 595 2 597
Federal funds purchased.................... (20) 0 (20) (18) 2 (16)
Federal Home Loan Bank advances............ 271 (4) 267 69 69 138
Notes payable.............................. 327 (17) 310 (168) (36) (204)
------ ----- ------ ------ ----- ------
Total expense from interest-bearing
liabilities........................... 1,220 (42) 1,178 748 33 781
------ ----- ------ ------ ----- ------
Net interest income.......................... $1,196 $(363) $ 833 $1,357 $(856) $ 501
====== ===== ====== ====== ===== ======
</TABLE>
- ---------------
(1) Includes interest income and discount realized on loan pool participations.
9
<PAGE> 12
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, 1998, 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..................................... $ 73,630 $ 26,256 $ 19,328 $46,213 $165,427
Loan pool participations.................. 4,543 13,627 36,340 0 54,510
Interest-bearing deposits in banks........ 3,559 0 0 0 3,559
Federal funds sold........................ 9,270 0 0 0 9,270
Investment securities:
Available for sale...................... 1,001 3,010 13,860 11,784 29,655
Held to maturity........................ 198 4,298 3,628 5,555 13,679
-------- -------- -------- ------- --------
Total interest-earning assets........ 92,201 47,191 73,156 63,552 276,100
======== ======== ======== ======= ========
INTEREST-BEARING LIABILITIES:
NOW and Super NOW deposits................ 34,214 0 0 0 34,214
Savings deposits.......................... 59,758 0 0 0 59,758
Certificates of deposit................... 22,457 56,101 32,507 4,667 115,732
Federal Home Loan Bank advances........... 7 3,020 2,058 2,510 7,595
Notes payable............................. 17,000 0 0 0 17,000
-------- -------- -------- ------- --------
Total interest-bearing liabilities... 133,436 59,121 34,565 7,177 234,299
======== ======== ======== ======= ========
Interest sensitivity gap per period....... $(41,235) $(11,930) $ 38,591 $56,375
======== ======== ======== =======
Cumulative interest sensitivity gap....... $(41,235) $(53,165) $(14,574) $41,801
======== ======== ======== =======
Interest sensitivity gap ratio............ 0.69% 0.80% 2.12% 8.85%
Cumulative interest sensitivity gap
ratio................................... 0.69% 0.72% 0.94% 1.18%
</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.
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 is inappropriate.
10
<PAGE> 13
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, 1998, 1997 and
1996.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. government securities................................ $ 4,603 $ 4,563 $ 5,019
U.S. government agency securities......................... 16,408 15,313 18,679
Other investment securities............................... 8,644 3,352 2,785
------- ------- -------
Total securities available for sale.................... 29,655 23,228 26,483
======= ======= =======
SECURITIES HELD TO MATURITY:
U.S. government securities................................ 0 5,046 8,135
U.S. government agency securities......................... 1,290 2,885 5,445
Obligations of states and political subdivisions.......... 8,291 6,793 8,904
Other investment securities............................... 4,098 5,109 5,221
------- ------- -------
Total securities held to maturity...................... 13,679 19,833 27,705
======= ======= =======
Total investment securities............................... $43,334 $43,061 $54,188
======= ======= =======
</TABLE>
The following table sets forth the contractual maturities of investment
securities as of December 31, 1998, 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, 1998, the Company held no securities with
a book value exceeding 10% of shareholders' equity.
<TABLE>
<CAPTION>
MATURITY
---------------------------------------------------------------------------------------
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN 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......... $2,020 6.02% $ 2,583 6.10% $ 0 0.00% 0 0.00%
U.S. government agency
securities....................... 990 4.75 9,074 5.90 2,078 5.91 4,266 6.95
Other investment securities........ 1,001 5.61 6,212 5.61 0 0.00 1,431 5.22
------ ---- ------- ---- ------ ---- ------ ----
Total............................ 4,011 5.61 17,869 5.83 2,078 5.91 5,697 6.52
------ ---- ------- ---- ------ ---- ------ ----
Securities held to maturity:
U.S. government agency
securities....................... 0 0.00 0 0.00 372 6.96 918 7.17
Obligations of states and political
subdivisions..................... 1,796 6.68 5,300 6.83 995 6.42 200 7.57
Other investment securities........ 2,700 5.74 1,298 6.02 100 7.15 0 0.00
------ ---- ------- ---- ------ ---- ------ ----
Total............................ 4,496 6.12 6,598 6.68 1,467 6.61 1,118 7.25
------ ---- ------- ---- ------ ---- ------ ----
Total investment securities.......... $8,507 5.88% $24,467 6.06% $3,545 6.20% $6,815 6.64%
====== ==== ======= ==== ====== ==== ====== ====
</TABLE>
11
<PAGE> 14
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, 1998, 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,
------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ---------------- ---------------- ---------------- ----------------
% 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............ $ 27,504 16.6% $ 24,779 17.2% $ 19,940 17.0% $ 16,319 18.9% $ 15,968 21.5%
Commercial.............. 38,959 23.6 31,198 21.6 23,613 20.1 22,235 25.7 18,789 25.3
Real estate:
1-4 family
residences.......... 38,087 23.0 32,341 22.4 27,274 23.2 15,765 18.2 14,261 19.2
5+ residential
property............ 240 0.1 251 0.2 261 0.2 0 0.0 17 0.0
Agricultural.......... 21,297 12.9 19,647 13.6 16,952 14.4 9,855 11.4 8,443 11.4
Construction.......... 5,956 3.6 4,430 3.1 4,017 3.4 2,502 2.9 1,859 2.5
Commercial............ 17,007 10.3 15,634 10.8 11,895 10.1 10,097 11.7 9,018 12.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Real estate total..... 82,587 49.9 72,303 50.1 60,399 51.4 38,219 44.2 33,598 45.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Installment............. 12,847 7.8 13,268 9.2 11,522 9.8 7,637 8.8 4,700 6.3
Lease financing......... 3,530 2.1 2,785 1.9 1,942 1.7 2,066 2.4 1,154 1.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans(1)...... $165,427 100.0% $144,333 100.0% $117,416 100.0% $ 86,475 100.0% $ 74,209 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Total assets............ $298,389 $274,873 $251,851 $205,162 $186,818
======== ======== ======== ======== ========
Loans to total assets... 55.4% 52.5% 46.6% 42.1% 39.7%
</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, 1998.
<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........................ $23,779 $ 3,380 $ 345 $27,504 $ 3,320 $ 405
Commercial.......................... 25,337 10,921 2,701 38,959 12,682 940
Real estate -- construction......... 3,435 1,961 560 5,956 1,933 588
------- ------- ------ ------- ------- ------
Total............................. $52,551 $16,262 $3,606 $72,419 $17,935 $1,933
======= ======= ====== ======= ======= ======
</TABLE>
The following table provides information on the Company's non-performing
loans as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
90 days past due.............................. $ 663 $ 522 $ 625 $134 $ 95
Restructured.................................. 164 387 380 409 285
Nonaccrual.................................... 561 927 1,085 124 207
------ ------ ------ ---- ----
Total non-performing loans.................. $1,388 $1,836 $2,090 $667 $587
====== ====== ====== ==== ====
Ratio of non-performing loans to total
loans....................................... 0.84% 1.27% 1.78% 0.78% 0.79%
</TABLE>
12
<PAGE> 15
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, 1998, 1997, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Amount of loans outstanding at end of
period (net of unearned
interest)(1)......................... $165,427 $144,333 $117,416 $85,869 $74,015
======== ======== ======== ======= =======
Average amount of loans outstanding for
the period (net of unearned
interest)............................ $157,712 $131,081 $105,372 $81,175 $69,043
======== ======== ======== ======= =======
Allowance for possible loan losses at
beginning of period.................. $ 1,816 $ 1,491 $ 1,001 $ 881 $ 833
-------- -------- -------- ------- -------
CHARGE-OFFS:
Agricultural......................... 135 19 41 53 42
Commercial........................... 638 14 10 18 110
Real estate -- construction.......... 0 0 0 0 0
Real estate -- mortgage.............. 0 30 0 2 0
Installment.......................... 63 63 38 18 23
Lease financing...................... 4 11 616 0 14
-------- -------- -------- ------- -------
Total charge-offs................. 840 137 705 91 189
-------- -------- -------- ------- -------
RECOVERIES:
Agricultural......................... 1 11 6 24 11
Commercial........................... 8 18 1 1 36
Real estate -- construction.......... 0 0 0 0 0
Real estate -- mortgage.............. 0 1 0 0 2
Installment.......................... 13 15 8 10 5
Lease financing...................... 0 0 23 8 0
-------- -------- -------- ------- -------
Total recoveries.................. 22 45 38 43 54
-------- -------- -------- ------- -------
Net loans charged off.................. 818 92 667 48 135
Provision for possible loan losses..... 1,179 417 987 168 183
Allowance for branch acquisition....... 0 0 170 0 0
-------- -------- -------- ------- -------
Allowance for possible loan losses at
end of period........................ $ 2,177 $ 1,816 $ 1,491 $ 1,001 $ 881
======== ======== ======== ======= =======
Net loans charged off to average
loans................................ 0.52% 0.07% 0.63% 0.06% 0.20%
Allowance for possible loan losses to
total loans at end of period......... 1.32% 1.26% 1.27% 1.17% 1.19%
</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
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,
------------------------------------------------------------------------------------
1998 1997 1996 1995
---------------------- ---------------------- ---------------------- ---------
PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO
ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
--------- ---------- --------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Agricultural......... $ 361 16.6% $ 312 17.2% $ 254 17.0% $ 262
Commercial........... 514 23.6 392 21.6 300 20.1 248
Real estate --
mortgage........... 1,086 49.9 910 50.1 766 51.4 392
Installment.......... 170 7.8 167 9.2 146 9.8 78
Lease financing...... 46 2.1 35 1.9 25 1.7 21
------ ----- ------ ----- ------ ----- ------
Total............ $2,177 100.0% $1,818 100.0% $1,491 100.0% $1,001
====== ===== ====== ===== ====== ===== ======
<CAPTION>
DECEMBER 31,
-----------------------------------
1995 1994
---------- ----------------------
PERCENT OF PERCENT OF
LOANS TO LOANS TO
TOTAL ALLOWANCE TOTAL
LOANS AMOUNT LOANS
---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Agricultural......... 18.9% $ 242 21.5%
Commercial........... 25.7 271 25.3
Real estate --
mortgage........... 44.2 302 45.3
Installment.......... 8.8 55 6.3
Lease financing...... 2.4 11 1.6
----- ------ -----
Total............ 100.0% $ 881 100.0%
===== ====== =====
</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, 1998, 1997
and 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------- ---- ------- ---- ------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand
deposits............................ $ 19,159 N/A $ 17,465 N/A $ 15,653 N/A
Interest-bearing demand (NOW and money
market)............................. 33,248 1.97% 32,225 2.10% 28,785 2.13%
Savings deposits...................... 59,419 3.77 59,019 3.83 53,844 3.82
Certificates of deposit............... 107,284 5.69 96,609 5.63 86,056 5.63
-------- -------- --------
Totals.............................. $219,110 4.11% $205,318 4.08% $184,338 4.08%
======== ==== ======== ==== ======== ====
</TABLE>
The following table summarizes certificates of deposit in amounts of
$100,000 or more by time remaining until maturity as of December 31, 1998. 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,
1998
------------
(IN THOUSANDS)
<S> <C>
Three months or less........................................ $ 7,176
Over three through six months............................... 2,137
Over six months through one year............................ 7,094
Over one year............................................... 8,061
-------
Total..................................................... $24,468
=======
</TABLE>
14
<PAGE> 17
VI. RETURN ON EQUITY AND ASSETS
Various operating and equity ratios for the years indicated are presented
below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Return on average total assets.................... 1.65% 1.98% 1.93%
Return on average equity.......................... 12.16 14.47 13.52
Dividend payout ratio............................. 44.44 34.78 36.50
Average equity to average assets.................. 13.54 13.69 14.31
Equity to assets ratio............................ 12.81 13.37 13.60
===== ===== =====
</TABLE>
VII. BORROWED FUNDS
The following table summarizes the oustanding amount of and the average
rate on borrowed funds as of December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Note payable(1)..................... $17,000 7.38% $14,050 8.25% $ 8,500 8.00%
Federal Home Loan Bank advances..... 7,595 5.68 6,000 5.96 0 0.00
Federal funds purchased............. 0 0.00 0 0.00 0 0.00
------- ------- -------
Total............................. $24,595 6.83% $20,050 7.56% $ 8,500 8.00%
======= ==== ======= ==== ======= ====
</TABLE>
- ---------------
(1) The note payable balance at December 31, 1998 consists of advances on a
$20,000,000 revolving line of credit. The line has a variable interest rate
which currently is three-eighths of a percent below the lender's prime rate.
Interest is payable quarterly and the line is due June 30, 1999.
The maximum amount of borrowed funds outstanding at any month end for the
years ended December 31, 1998, 1997, and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Note payable....................................... $17,000 $14,050 $14,750
Federal Home Loan Bank advances.................... 12,299 6,000 0
Federal funds purchased............................ 3,775 2,150 5,990
======= ======= =======
</TABLE>
The following table sets forth the average amount of and the average rate
paid on borrowed funds for the years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Note payable........................ $13,342 8.05% $ 9,292 8.23% $11,323 8.55%
Federal Home Loan Bank advances..... 6,840 5.92 2,274 6.07 0 0.00
Federal funds purchased............. 201 5.87 534 5.93 830 5.73
------- ------- -------
Total............................. $20,383 7.31% $12,100 7.72% $12,153 8.36%
======= ==== ======= ==== ======= ====
</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
MSB 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 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 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 city. The one-time restaurant building was acquired in the summer of
1997 and was completely renovated to become a modern banking facility. The
facility 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.
16
<PAGE> 19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information appearing on page 43 of the Company's Annual Report, filed
as Exhibit 13 hereto, is incorporated herein by reference.
There were approximately 243 holders of record of the Company's $5 common
stock as of March 12, 1999. Additionally, there are an estimated 750 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 $16.00 on March 12, 1999.
The Company increased dividends to common shareholders in 1998 to $.56 per
share, a 16.7 percent increase over $.48 for 1997. Dividend declarations are
evaluated and determined by the Board of Directors on a quarterly basis. 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. In February 1999, the Board of Directors declared a dividend
of $.15 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 12 through 19 of the Company's Annual
Report, filed as Exhibit 13 hereto, is incorporated herein by reference.
ITEM 7A. MARKET RISK DISCLOSURE
The information appearing on pages 17 and 18 of the Company's Annual
Report, filed as Exhibit 13 hereto, is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information appearing on pages 20 through 40 of the Company's Annual
Report, filed as Exhibit 13 hereto, 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 changes in or disagreements with
accountants of the Company.
17
<PAGE> 20
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 11. EXECUTIVE COMPENSATION
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.
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 20
through 40 of the Company's Annual Report, filed as Exhibit 13 hereto, which are
incorporated by reference herein.
2. Exhibits (not covered by independent auditors' report).
Exhibit 3.1
Articles of Incorporation, as amended through April 30, 1998, of
Mahaska Investment Company. The Articles of Incorporation, as
amended, of Mahaska Investment Company are incorporated by reference
to the Company's quarterly report on Form 10-Q for the quarter ended
September 30, 1998.
Exhibit 3.2
Bylaws of Mahaska Investment Company. The Amended and Restated Bylaws
of Mahaska Investment Company dated July 23, 1998, are incorporated
by reference to the Company's quarterly report on Form 10-Q for the
Quarter ended September 30, 1998.
Exhibit 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.
Exhibit 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.
Exhibit 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.
Exhibit 10.2.3
1998 Stock Incentive Plan. This 1998 Stock Incentive Plan is
incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
18
<PAGE> 21
Exhibit 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.
Exhibit 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.
Exhibit 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.
Exhibit 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.
Exhibit 10.5.2
Fifth Amendment and Waiver to Credit Agreement between Mahaska
Investment Company and Harris Trust & Savings Bank dated December 29,
1998.
Exhibit 11
Computation of Per Share Earnings
Exhibit 13
The Annual Report to Shareholders of Mahaska Investment Company for
the 1998 calendar year.
Exhibit 21
Subsidiaries
Exhibit 23
Consent of Auditor
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 1998.
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 18, 1999 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>
<S> <C>
By: /s/ CHARLES S. HOWARD March 18, 1999
----------------------------------------------------------- -----------------------
Charles S. Howard Date
Director, Chairman of the Board, President and Chief
Executive Officer
By: /s/ DAVID A. MEINERT March 18,1999
----------------------------------------------------------- -----------------------
David A. Meinert Date
Director, Executive Vice President and Chief Financial
Officer (Principal Accounting Officer)
By: /s/ R. SPENCER HOWARD March 18, 1999
----------------------------------------------------------- -----------------------
R. Spencer Howard Date
Director and Vice President Corporate Planning
By: /s/ MARTIN L. BERNSTEIN March 18, 1999
----------------------------------------------------------- -----------------------
Martin L. Bernstein Date
Director
By: /s/ ROBERT K. CLEMENTS March 18, 1999
----------------------------------------------------------- -----------------------
Robert K. Clements Date
Director
By: /s/ JAMES F. MATHEW March 18, 1999
----------------------------------------------------------- -----------------------
James F. Mathew Date
Director
By: /s/ JOHN P. POTHOVEN March 18, 1999
----------------------------------------------------------- -----------------------
John P. Pothoven Date
Director
By: /s/ JOHN W. N. STEDDOM March 18, 1999
----------------------------------------------------------- -----------------------
John W. N. Steddom Date
Director
</TABLE>
<PAGE> 1
Exhibit 10.5.2
MAHASKA INVESTMENT COMPANY
FIFTH AMENDMENT AND WAIVER 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 has requested that the Bank waive the Borrower's
non-compliance with Section 7.10 of the Credit Agreement (Dividends and Certain
Other Restricted Payments) as of September 30, 1998, and increase the Commitment
to $20,000,000, and the Bank is willing to do so under the terms and conditions
set forth in this agreement (herein, the "Amendment").
1. WAIVER.
The Borrower has advised the Bank that as of September 30, 1998, it was not in
compliance with Section 7.10 of the Credit Agreement (Dividends and Certain
Other Restricted Payments). The Borrower has requested that the Bank waive the
Borrower's non-compliance with Section 7.10 of the Credit Agreement as of
September 30, 1998, and, by signing in the space provided for that purpose
below, the Bank hereby agrees to waive compliane with the same for, and only
for, the period ended on September 30, 1998. This waiver shall not become
effective unless and until the conditions precedent set forth in Section 3 below
have been satisfied.
2. AMENDMENTS.
Subject to the satisfaction of the conditions precedent set forth in
Section 3 below, the Credit Agreement shall be and hereby is amended as follows:
2.1 Section 1.1 of the Credit Agreement shall have been amended by
deleting the amount $"17,000,000" appearing therein and inserting the
amount "$20,000,000" in lieu thereof.
2.2 Exhibit A to the Credit Agreement shall have been amended in
its entirety, and as amended it shall be restated to read as set forth on
Exhibit A attached hereto and made a part hereof.
Page 1
<PAGE> 2
3. CONDITIONS PRECEDENT.
The effectiveness of this Amendment is subject to the satisfaction of all
of the following conditions precedent:
3.1 The Borrower and the Bank shall have executed and delivered
this Amendment, and the Borrower shall have executed and delivered to the
Bank a replacement Note in the form attached hereto as Exhibit A.
3.2 The Borrower shall have delivered to the Bank certified
resolutions of the Borrower's Board of Directors authorizing its
execution and delivery of this Amendment and replacement Note and the
Borrower's performance thereunder in form and substance satisfactory to
the Bank.
4. 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, and after
giving effect to the waiver set forth in Section 1 above, 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.
S. MISCELLANEOUS.
5.1 Except as specifically amended herein or waived hereby, 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.
5.2 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.
5.3 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.
This Fifth Amendment and Waiver to Credit Agreement is dated as of
December 29, 1998.
Page 2
<PAGE> 3
MAHASKA INVESTMENT COMPANY
By /s/ David A. Meinert
---------------------------------
Its Executive Vice President
Accepted and agreed to in Chicago, Illinois as of the date and year last above
written.
HARRIS TRUST AND SAVINGS BANK
By /s/ Patrick A. Horne
---------------------------------
Its Vice President
Page 3
<PAGE> 1
EXHIBIT 11
MAHASKA INVESTMENT COMPANY
AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(Not Covered by Auditor's Report)
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
EARNINGS PER SHARE INFORMATION:
- ---------------------------------------
Weighted average number of shares
outstanding during the year .......... 3,660,070 3,652,908 3,744,418
Weighted average number of shares
outstandlng during the year
including all dilutive potential
shares ............................... 3,842,151 3,789,577 3,772,495
Net earnings .......................... $4,622,749 5,058,225 4,494,394
Earnings per share - basic ............ $ 1.26 1.38 1.20
Earnings per share - diluted .......... $ 1.20 1.33 1.19
</TABLE>
<PAGE> 1
EXHIBIT 13
MAHASKA INVESTMENT COMPANY
[LOGO]
<PAGE> 2
MAHASKA INVESTMENT COMPANY
1998 ANNUAL REPORT
[LOGO]
<PAGE> 3
Mahaska Investment Company
Fundamentals of Success
At Mahaska Investment Company, our growth and above-average earnings can be
attributed to four major principles:
We build on our Iowa roots, we respond to our markets with individual solutions,
we strengthen our company and community through teamwork, and we foster
relationships with our customers face to face. Adherence to these fundamentals
resulted in significant loan growth and overall increases in assets in 1998.
FINANCIAL HIGHLIGHTS 1
MESSAGE TO SHAREHOLDERS 2
COMPANY PHILOSOPHY 4
CONTENTS MANAGEMENT'S DISCUSSION AND ANALYSIS 12
CONSOLIDATED FINANCIAL STATEMENTS 20
INDEPENDENT AUDITORS' REPORT 40
BOARD OF DIRECTORS 42 STOCK
INFORMATION 43
<PAGE> 4
MAHASKA INVESTMENT COMPANY
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 (In thousands, except per share data) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF INCOME DATA:
Interest income excluding loan pool participations $ 17,996 15,483 13,532 10,463 8,500
Interest and discount on loan pool participations 7,970 8,474 9,097 7,864 4,479
Total interest income 25,966 23,957 22,629 18,327 12,979
Total interest expense 10,490 9,312 8,531 7,100 4,676
Net interest income 15,476 14,645 14,098 11,227 8,303
Provision for loan losses 1,179 417 987 168 183
Other income 1,857 1,739 1,506 1,301 1,457
Total other operating expenses 8,948 8,315 7,738 6,450 5,452
Income before income tax 7,206 7,652 6,879 5,910 4,125
Income tax expense 2,583 2,594 2,385 1,987 1,345
Net income $ 4,623 5,058 4,494 3,923 2,780
- ---------------------------------------------------------------------------------------------------------
PER SHARE DATA:
Net income - basic $ 1.26 1.38 1.20 1.03 .99
Net income - diluted 1.20 1.33 1.19 1.03 .99
Cash dividends declared .56 .48 .44 .40 .36
Book value 10.51 10.03 9.22 8.49 7.82
Tangible book value 8.99 8.35 7.39 7.34 6.56
SELECTED FINANCIAL RATIOS:
Net income to average assets 1.65% 1.98% 1.93% 2.04% 1.68%
Net income to average equity 12.16% 14.47% 13.52% 12.67% 12.45%
Dividend payout ratio 44.44% 34.78% 36.50% 38.45% 36.27%
Average equity to average assets 13.54% 13.69% 14.31% 16.09% 13.46%
Tier 1 capital to risk weighted assets at end of period 14.02% 14.74% 16.25% 19.84% 19.92%
Net interest margin 6.04% 6.31% 6.69% 6.48% 5.58%
Gross revenue of loan pools to total gross revenue 28.64% 32.98% 37.69% 40.06% 31.03%
Interest and discount income of loan pools
to total interest income 30.69% 35.37% 40.20% 42.91% 34.51%
Allowance for loan losses to total loans 1.32% 1.26% 1.27% 1.17% 1.19%
Nonperforming loans to total loans 0.85% 1.28% 1.79% 0.81% 0.79%
Net loans charged off to average loans 0.52% 0.07% 0.63% 0.06% 0.20%
DECEMBER 31 (In thousands) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
SELECTED BALANCE SHEET DATA:
Total assets $298,389 274,873 251,851 205,162 186,818
Total loans net of unearned discount 165,427 144,333 117,416 85,882 74,015
Total loan pool participations 54,510 54,326 50,687 45,318 46,852
Allowance for loan losses 2,177 1,816 1,491 1,001 881
Total deposits 232,733 215,308 206,952 161,505 146,476
Total shareholders' equity 38,232 36,754 34,243 32,106 29,780
</TABLE>
<PAGE> 5
2/3 MESSAGE TO SHAREHOLDERS
Throughout 1998, Mahaska Investment Company's subsidiaries made significant
contributions to asset growth. Mahaska State Bank's loan volumes continued to
grow, while Central Valley Bank enjoyed a substantial increase in both total
loans and deposits. We were also pleased to see loans and deposits grow steadily
at the newly-chartered Pella State Bank.
Concerns about the Asian economy put downward pressure on the stock prices
of large and small banks throughout the United States. The Company, like other
financial institutions in the Midwest, faced additional pressures when hog and
grain prices fell to historic lows.
Mahaska Investment Company stock began the year at a price of $19 7/8, rose
to a high of $23 5/8 in mid-March, then closed at $16 7/8 on December 31, 1998.
This rise and subsequent decline in the stock price generally paralleled the
movement of the NASDAQ Combined Bank Stock Index, which also experienced a 15
percent net decline from the beginning of the year through the end of December.
Although lower interest rates helped the overall economy maintain momentum,
the Company, like many financial institutions nationwide, experienced a squeeze
on net interest margins as loan and investment rates moved downward faster than
interest rates paid on deposits.
Earnings in the first quarter of 1998 set a new record. Second-quarter
earnings were 12 percent higher than for the same period in 1997. Third- and
fourth-quarter earnings, however, were lower than expected due to increased loan
loss provision expense and reduced loan pool income. Although earnings for the
year were lower, the Company remained profitable in comparison to its peers.
We realize that some of the economic uneasiness that contributed to a mixed
year in 1998 will remain with us as we enter 1999. As the world economy becomes
increasingly integrated, the ramifications of events in other parts of the globe
will trigger more volatility in our local economies.
We will continue to watch the farm economy carefully, but we are cautiously
optimistic. In general, today's farm customers are better able to weather
economic downturns than were farmers in the 1980s. Farmers now tend to be better
financial managers and more savvy marketers. They enjoy a stronger financial
position, due in part to lower interest rates and more realistic land prices
than were present during the 1980s farm crisis.
In February 1999, the Company announced important news--the signing of
a merger agreement with Midwest Bancshares, Inc. of Burlington, Iowa. Midwest
Bancshares, Inc. is the parent of Midwest Federal Savings and Loan Association
of Eastern Iowa. It is anticipated that the merger will be completed in the
third quarter of 1999. This merger will add approximately $163 million in assets
and $106 million in deposits to Mahaska Investment Company.
Looking forward to the remainder of 1999, we continue to make progress
toward Year 2000 readiness. We are excited about possible new acquisitions and
increased contributions from our subsidiaries. Mahaska Investment Company
anticipates continued growth and profitability during the coming year, resulting
in increased value to our shareholders.
Thank you for your continued support and confidence.
1998 MESSAGE TO SHAREHOLDERS
<PAGE> 6
MAHASKA INVESTMENT COMPANY
[PHOTO]
Charles S. Howard David A. Meinert R. Spencer Howard
Charles S. Howard David A. Meinert R. Spencer Howard
Chairman Executive Vice Vice President
President & CEO President & CFO Corporate Planning
<PAGE> 7
4/5 COMPANY PHILOSOPHY
The Iowa landscape is a testament to hard work. In the six southeast Iowa
communities we serve--Fairfield, North English, Oskaloosa, Ottumwa, Pella, and
Sigourney--you can see it in the rows of corn and soybeans, in the small
businesses and industrial buildings, and in the busy main streets. In an
environment ripe for growth, Mahaska Investment Company has put down deep roots.
A strong staff and good relationships with our customers allow the
Company to grow, even in uncertain economic times. In the past year, for
example, our subsidiaries continued to thrive despite uneasiness in the
Midwestern economy.
While the national economy remains strong, Iowa was impacted by falling
commodity prices, which put new pressures on the many agricultural customers we
serve. The impact of this situation on Mahaska Investment Company will be
minimized for two reasons.
First, both our subsidiaries and our customers have learned to
effectively weather changes in the agricultural climate. Since the farm crisis
of the 1980s, we have become better lenders, developing greater expertise and
understanding of the business of farming. Our customers, too, have become better
business managers and are in a stronger financial position.
Second, we have a more diverse loan portfolio than ever before. We now
serve more markets and have a broader mix of real estate and commercial loans
than in the 1980s. This diversity will lessen the impact of downturns in any one
segment of the economy.
All in all, our continued success is indicated by this fact: In 1998,
U.S. Banker magazine ranked Mahaska Investment Company as the 16th best
community bank holding company in the country, based on leverage ratio,
nonperforming assets ratio, return on average assets, return on average equity,
and efficiency ratio. We were the only Iowa company in the top 100,
demonstrating our commitment to hard work and consistent growth.
THE DEEPER THE ROOTS, THE STRONGER THE GROWTH.
In 1998, U.S. Banker magazine ranked Mahaska Investment Company as the 16th
best community bank holding company in the country.
<PAGE> 8
[LOGO] MAHASKA INVESTMENT COMPANY
[PHOTO]
<PAGE> 9
6/7 COMPANY PHILOSOPHY
[PHOTO]
<PAGE> 10
[LOGO] MAHASKA INVESTMENT COMPANY
EVERY COMMUNITY IS DIFFERENT, AND SO IS EVERY BANK.
There's a management philosophy that says, "Hire good people, then let them do
their jobs." We take that principle a step further with this fundamental
imperative: Launch strong community banks, then let them grow and prosper.
Although part of a larger organization, our subsidiaries are closer in
character to independent, home-owned community banks than to institutions
operated by multi-bank holding companies. Each Mahaska Investment Company
subsidiary has its own distinct "personality," shaped by its customers and
community.
For example, each of our six southeast Iowa markets has its own
economic base--its own mix of small business, industry, and agriculture. To
respond best to these individual needs, our banks work with their customers in
unique partnerships. For instance, each bank sets its own deposit and loan rates
and its own service charge schedule based on its market.
On-Site Credit Services, a subsidiary of Mahaska Investment Company,
offers a complete range of financing to small- and medium-sized businesses.
Designed to help start-up enterprises, it's more than just financing or working
capital--it's a program that offers individual solutions for individual needs.
To reinforce the independent nature of our community banks, we strive
for local representation on our boards of directors, and our bank presidents
and managers make their own decisions about their bank's operations--from loan
approvals to staffing needs.
This local autonomy and responsiveness to market conditions has helped
our subsidiaries establish themselves as customer-focused institutions. Whether
we're helping people turn dreams into reality or making loans to established
businesses, we're there to help, one person and one company at a time.
Although part of a larger organization, our subsidiaries are closer in
character to independent, home-owned community banks than to institutions
operated by multi-bank holding companies. Each Mahaska Investment Company
subsidiary has its own distinct "personality," shaped by its customers and
community.
[LOGO]
<PAGE> 11
8/9 COMPANY PHILOSOPHY
While our subsidiaries operate independently in their markets, Mahaska
Investment Company provides a framework that keeps all our subsidiaries and
employees focused on our common goal: to provide value to our shareholders,
customers, and communities. The Company actively fosters team-building within
the organization and with our customers in many ways.
- Our management style. While we give our subsidiaries freedom to make
decisions in their communities, our bank presidents and senior managers meet
regularly with each other and Company personnel to share information and
concerns. During these sessions, managers develop solutions to common problems,
identify issues that call for cooperative efforts throughout the Company, and
discuss ideas that increase responsiveness to customer needs.
- Internal support. Our subsidiaries are backed by the strength of the
holding company. This gives them flexibility and resources that their
competitors may not enjoy, such as larger lines of credit and the ability to
offer a broader range of services.
- Employee Stock Ownership Plan. Through the Company's ESOP, our
employees hold 11 percent of our stock, the largest block of shares held by any
one group of investors. Because all employees have a financial stake in the
Company, they have an extra incentive to provide a strong return to
shareholders.
- Employee incentive program. Our employees participate in an incentive
compensation plan that's based on performance. Therefore, our employees have a
vested interest in contributing to customer satisfaction and Company success.
Performance is measured by growth, profitability, productivity and loan quality.
- Shared vision. The Company and its subsidiaries share a common
philosophy and principles of business. As a result, all of our banks work
together toward the same goals. And as our team continues to grow, our members
will share the same underlying philosophy of exceptional service.
WORKING TOGETHER HELPS EVERYONE WORK SMARTER.
While our subsidiaries operate independently in their markets, Mahaska
Investment Company provides a framework that keeps all our subsidiaries and
employees focused on our common goal: to provide value to our shareholders,
customers, and communities.
<PAGE> 12
[LOGO] MAHASKA INVESTMENT COMPANY
[PHOTO]
<PAGE> 13
10/11 COMPANY PHILOSOPHY
[PHOTO]
<PAGE> 14
[LOGO] MAHASKA INVESTMENT COMPANY
One of the most important elements of Mahaska Investment Company's success is a
commitment to our customers and communities. Company employees demonstrate this
commitment every day.
- We understand our customers and their needs. For example, several of our
loan officers are farmers, too. Their intimate knowledge of agriculture and its
day-to-day challenges enables them to make knowledgeable decisions and offer
their customers valuable advice.
- We look for ways to build partnerships with our customers and to give
them added value. We work with our customers to provide products and services
that are tailored to meet their individual needs. Last year, in cooperation with
a local CPA firm and local Chambers of Commerce, we presented seminars in three
communities to help small business customers understand and prepare for the Year
2000 issue.
- We're involved in the communities we serve. By taking an active role in
community affairs, our employees foster personal relationships with their
neighbors and stay in touch with their markets. In addition, our subsidiaries
provide financial support to civic and charitable groups and activities, and our
employees volunteer hundreds of hours to worthy causes.
Ultimately, these contacts provide our directors and officers with the
information and insight to make good business decisions. By meeting our
customers face to face, we build the mutual trust and reputation for service
that are hallmarks of our success.
MEETING FACE TO FACE HELPS IN SEEING EYE TO EYE.
Our employees stay in touch with their markets by taking an active role in
community affairs. These contacts provide our directors and officers with the
information and insight needed to make good business decisions and develop
strong relationships.
<PAGE> 15
12/13 MANAGEMENT'S DISCUSSION & ANALYSIS
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION -- FISCAL YEAR 1998
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's principal business is conducted by its subsidiary banks and
consists of full service community-based commercial and retail banking.
Additionally, the Company derives a substantial portion of its operating revenue
from its investments in pools of performing and nonperforming loans referred to
as loan pool participations. The Company also operates a commercial finance
subsidiary which provides services to small business organizations. The
profitability of the Company depends primarily on its net interest income,
provision for loan losses, other income, and operating expense.
Net interest income is the difference between total interest income and total
interest expense. Interest income is earned by the Company on its loans made to
customers, the investment securities it holds in its portfolio, and the interest
and discount recovery generated from its loan pool participations. The interest
expense incurred by the Company results from the interest paid on customer
deposits and borrowed funds. Fluctuations in net interest income can result from
the changes in volumes of assets and liabilities as well as changes in market
interest rates. The provision for loan losses reflects the cost of credit risk
in the Company's loan portfolio and is dependent on increases in the loan
portfolio and management's assessment of the collectibility of the loan
portfolio under current economic conditions. Other income consists of service
charges on deposit accounts, fees received for outside data processing services
provided, other fees and commissions, and security gains. Operating expenses
include salaries and employee benefits, occupancy and equipment expenses, and
other noninterest expenses. These operating expenses are significantly
influenced by the growth of operations, with additional employees necessary to
staff new banking centers.
PERFORMANCE SUMMARY
The Company recorded net income of $4,623,000, or $1.26 per share - basic ($1.20
- - diluted), for the year ended December 31, 1998, which is a decrease of 8.6
percent compared with the net income of $5,058,000, or $1.38 per share - basic
($1.33 - diluted), earned in 1997. A significant increase in the amount of the
provision for loan losses occurred in 1998 which contributed to the decrease in
net income for the year in comparison with 1997. The net income for 1997
increased 12.6 percent from the $4,494,000, or $1.20 per share - basic ($1.19 -
diluted), earned in 1996.
Total assets of the Company grew 8.6 percent to a year-end 1998 level of
$298,389,000. Deposits increased 8.1 percent to $232,733,000 as of December 31,
1998, while the Company's total loans outstanding grew 14.6 percent to
$165,427,000. Loan pool participation investments as of December 31, 1998,
totaled $54,510,000.
Return on average assets is a measure of profitability that indicates how
efficiently a financial institution utilizes its assets. It is calculated by
dividing net income by average total assets. The Company's return on average
assets was 1.65 percent in 1998, 1.98 percent in 1997, and 1.93 percent in 1996.
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 was 12.16
percent in 1998 compared with 14.47 percent in 1997, and 13.52 percent in 1996.
<PAGE> 16
[LOGO] MAHASKA INVESTMENT COMPANY
RESULTS OF OPERATIONS -- 1998 COMPARED TO 1997
NET INTEREST INCOME
Net interest income for the year 1998 increased $831,000, or 5.7 percent, to
$15,476,000 compared with $14,645,000 in 1997. Total interest income on earning
assets increased $2,009,000 in 1998 from 1997. Interest and fees on loans
increased $2,733,000, or 22.2 percent, in 1998. The growth in the Company's
average loan volumes of $26,631,000, or 20.3 percent, in 1998 contributed
significantly to the overall increase in interest income. Interest income and
discount recovery on loan pool participations declined $504,000, or 6.0 percent,
in 1998 compared with 1997. The amount of interest income earned on investment
securities decreased $444,000, or 15.0 percent, in 1998 as proceeds from
maturing securities were utilized to fund loan growth. The Company's total
interest expense increased $1,178,000, or 12.7 percent, in 1998 from 1997. This
increase was mainly attributable to the overall growth in deposits and borrowed
funds in 1998. Average deposits increased $13,792,000, or 6.7 percent, in 1998
while average borrowed funds were up $8,283,000, or 68.5 percent. The Company's
net interest margin on a tax-equivalent basis declined to 6.04 percent in 1998
compared with 6.31 percent in 1997, 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.
PROVISION FOR LOAN LOSSES
The Company recorded a provision for loan loss expense of $1,179,000 in 1998
compared to $417,000 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 current collection risks within its loan
portfolio, identified problem loans, the current local and national economic
conditions, actual loss experience, and industry trends. The substantial
increase in the loss provision recorded in 1998 reflects an increase in the net
loan charge-offs experienced by the Company in 1998, growth in the Company's
loan portfolio throughout the year, and general uncertainties in the local and
national economy.
OTHER INCOME
Noninterest income increased $118,000, or 6.7 percent, in 1998 over the amount
earned in 1997. Most of this increase was the result of higher service charges
and overdraft fees collected on deposit accounts. In 1998, data processing
income earned from nonaffiliated banks declined $15,000, or 7.1 percent,
compared with 1997. During 1998, the Company recognized $58,000 in gains on the
sale of investment securities classified as available for sale. These securities
were sold to satisfy liquidity needs.
OTHER EXPENSE
The Company's other expense increased $633,000, or 7.6 percent, for the year
1998 in comparison to 1997. The salary and benefits, net occupancy, and other
operating expense categories all increased in some measure due to the opening of
Pella State Bank in December 1997. Additional staffing at On-Site Credit
Services also increased the amount of salaries and benefits expense. During the
first quarter of 1998, the Company's new mainframe computer was placed in
service which increased net occupancy expense by $74,000 in comparison to 1997
as additional depreciation expense was recorded.
INCOME TAX EXPENSE
Income tax expense declined $11,000, or 0.4 percent, in 1998 compared with 1997.
The Company's consolidated income tax rate varies from the statutory rates
mainly due to tax-exempt interest income. The effective income tax rate as a
percent of income before taxes was 35.9 percent in 1998 compared with 33.9
percent for 1997.
<TABLE>
<CAPTION>
RETURN ON AVERAGE ASSETS TOTAL ASSETS
(In thousands)
<S> <C> <C>
'94 1.68% $ 186,818
'95 2.04 205,162
'96 1.93 251,851
'97 1.98 274,873
'98 1.65 298,389
</TABLE>
<PAGE> 17
14/15 MANAGEMENT'S DISCUSSION & ANALYSIS
RESULTS OF OPERATIONS -- 1997 COMPARED TO 1996
NET INTEREST INCOME
The Company's net interest income increased $547,000 in 1997 compared with 1996.
A $1,328,000 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 $2,090,000 in 1997 mainly as a result of the growth in loan
volumes the Com-pany experienced during the year. The $623,000 decrease in
interest income and discount on loan pool participations reduced the overall
growth 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 $863,000 primarily due to the higher average volume of customer
deposits at the Company's subsidiary banks. The interest incurred on notes
payable in 1997 decreased $204,000 compared with 1996 primarily due to lower
interest rates. The Company's net interest margin on a tax-equivalent basis
declined to 6.31 percent for 1997 compared with 6.69 percent in 1996 mainly as a
result of the lower income recognized on loan pool participations.
PROVISION FOR LOAN LOSSES
The 1997 provision for loan losses of $417,000 decreased by $570,000 in
comparison to the provision of $987,000 recorded in 1996. The substantial
reduction in 1997 compared with 1996 reflected improvements in the Company's
problem loans and lower loan charge-offs in 1997.
OTHER INCOME
In 1997, noninterest income increased $233,000, or 15.5 percent, over the amount
earned 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.
OTHER EXPENSE
The Company's operating expenses increased $577,000, or 7.5 percent, for the
year 1997 compared with 1996. The amounts of salary and benefits, net occupancy,
other operating, and goodwill amortization expense for 1997 all reflected a full
twelve months of the operation of a new branch of Central Valley Bank whereas
1996 only reflected expenses for six months of operations of the branch.
Additionally, the Company incurred expenses related to the new Pella State Bank
in late 1997 that it did not incur in 1996. Higher staffing levels in general
and increased payouts as a result of the Company's incentive compensation
program also increased salaries and benefit expense in 1997 compared with 1996.
INCOME TAX EXPENSE
Income tax expense increased $209,000, or 8.8 percent, in 1997 compared with
1996 primarily due to the overall increase in pre-tax earnings generated by the
Company. The effective income tax rate as a percent of income before taxes was
33.9 percent in 1997 compared with 34.7 percent in 1996.
ANALYSIS OF FINANCIAL CONDITION
LOANS
The Company continued to focus on the growth of its loan portfolio in 1998. Its
portfolio largely reflects the profile of the communities in which it operates.
Total loans as of December 31, 1998, were $165,427,000, which is an increase of
$21,094,000, or 14.6 percent, from 1997. Most of this growth was in the real
estate and commercial loan categories. As of December 31, 1998, the Company's
loan to deposit ratio was 71.1 percent, compared with 67.0 percent in 1997.
<TABLE>
<CAPTION>
DIVIDENDS PER SHARE
<S> <C>
'94 $ .36
'95 .40
'96 .44
'97 .48
'98 .56
</TABLE>
<PAGE> 18
[LOGO] MAHASKA INVESTMENT COMPANY
Agricultural loans totaled approximately $28,939,000 as of December 31, 1998,
compared with $26,500,000 in 1997. In 1998, agricultural loans represented 17.5
percent of the Company's total loans compared with 18.4 per- cent in 1997.
Concerns with the agricultural economy have caused management to require that
subsidiary lending officers closely review all ag lines and identify those
specific credits that would be more at risk in the event of continued
deterioration in that sector of the economy. Contingency plans are being
developed for those credits that will enable the lending officers to work with
these borrowers in an effort to prevent or minimize any potential loss to the
Company.
INVESTMENT IN LOAN POOLS
The Company invests in pools of performing 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."
The average loan pool participation investment for 1998 was $49,805,000 compared
with an average for 1997 of $49,399,000. New loan pool participation investments
made by the Company during 1998 totaled $25,710,000 compared with $25,589,000
purchased in 1997. As of December 31, 1998, the breakdown of the loan pool
participation investment of $54,510,000 was $37,486,000 of performing loans and
$17,024,000 of nonperforming loans. In comparison, the December 31, 1997,
breakdown of the loan pool participation investment of $54,326,000 was
$25,625,000 of performing loans and $28,701,000 of nonperforming loans. The
change in the performing and nonperforming totals was due to principal
collections and the acquisition in 1998 of higher-quality performing assets
which were purchased at a lower discount from the stated principal balance. The
lowered discount from par will result in a lower discount recovery and a
subsequent reduction in the overall return on the investment. Throughout 1998,
loan pool participation investments averaged 19.2 percent of earning assets
while in 1997 they represented 21.0 percent of average earning assets. The yield
on loan pool participation investments declined to 16.0 percent for 1998,
compared with 17.2 percent in 1997. This was due in part to the higher quality
assets being purchased which, when collected, resulted in a lower amount of
discount recovery. The yield was also somewhat reduced by higher legal and other
collection costs incurred by the servicer related to the collection of assets
acquired in previous years.
INVESTMENT SECURITIES
The Company manages its investment portfolio to provide both a source of
liquidity and earnings. Investment securities available for sale increased
$6,427,000 at December 31, 1998, in comparison with 1997. Securities classified
as held to maturity declined by $6,154,000 in 1998 as maturing investments were
reinvested in the available for sale category. The Company did not increase its
overall securities portfolio in 1998 given the low interest rate environment and
the increased loan demand that it experienced.
DEPOSITS
Total deposits grew to $232,733,000 as of December 31, 1998, an increase of
$17,425,000, or 8.1 percent, from 1997. Most of the growth was in certificate of
deposit volumes which grew $13,947,000, or 13.7 percent, in 1998.
CAPITAL RESOURCES
As of December 31, 1998, total shareholders' equity was $38,232,000. Total
equity increased $1,478,000 in 1998 primarily as a result of earnings retained
by the Company. Total shareholders' equity as of December 31, 1997, was
$36,754,000.
Shareholders' equity as a percentage of total assets was 12.8 percent on
December 31, 1998, versus 13.4 percent on December 31, 1997. The decrease in the
percentage of shareholders' equity to total assets reflects the increase in
total assets in 1998. During 1998, the Company repurchased a total of 87,368
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 58,219 option
shares were reissued from treasury stock throughout 1998, leaving 3,636,345
shares outstanding as of December 31, 1998.
The Company's risk-based Tier 1 core capital ratio was 14.0 percent as of
December 31, 1998, and the total capital ratio was 14.9 percent. Risk-based
capital guidelines require the classification of assets and some off-balance
sheet
<PAGE> 19
16/17 MANAGEMENT'S DISCUSSION & ANALYSIS
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, 1997, the Company's Tier 1 capital ratio was 14.7 percent, and the total
capital ratio was 15.6 percent. Although these ratios declined in 1998 from 1997
due to an increase in risk-based asset totals, 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
Tier 1 capital in relation to total assets, was 11.3 percent as of December 31,
1998, and 11.8 percent at December 31, 1997, exceeding the regulatory minimum
requirement range of 3.0 percent to 5.0 percent.
As of December 31, 1998, the Company had borrowed $17,000,000 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 December 29, 1998. The agreement provides for a maximum line of
$20,000,000 and matures on June 30, 1999. Additionally, as of December 31, 1998,
the Company's subsidiaries had borrowed $7.6 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, 1998. The Company's
common stock closed the year at a bid price of $16.875 per share, representing
1.61 times the book value per share of $10.51 on December 31, 1998. Tangible
book value per share was $8.99 on December 31, 1998, compared with $8.35 in
1997. The year-end stock price represented a price-to-1998 basic earnings per
share multiple of 13.4 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.
Liquid assets (including cash and federal funds sold) are maintained to meet
customer needs. The Company had liquid assets of $22,121,000 as of December 31,
1998, compared with $19,195,000 as of December 31, 1997. Investment securities
classified as available for sale and securities and loans maturing within one
year totaled $102,772,000 and $98,248,000 as of December 31, 1998 and 1997,
respectively. Assets maturing within one year combined with liquid assets on
December 31, 1998, were 53.7 percent and on December 31, 1997, were 47.4 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. The Company utilizes particular sources
of funds based on comparative costs and availability. This includes fixed-rate
advances from the Federal Home Loan Bank which were obtained at a more favorable
cost than deposits. 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 $6,589,000 in 1998, $6,017,000 in
1997, and $7,137,000 in 1996. This trend of strong cash from operations is
expected to continue into the foreseeable future.
<TABLE>
<CAPTION>
BOOK VALUE PER SHARE
<S> <C>
'94 $ 7.82
'95 8.49
'96 9.22
'97 10.03
'98 10.51
</TABLE>
<PAGE> 20
[LOGO] MAHASKA INVESTMENT COMPANY
The Company anticipates that it will have sufficient funds available to fund its
loan commitments. As of December 31, 1998, the Company had outstanding
commitments to originate loans of $18,755,000 and had no commitments to sell
loans. Certificates of deposit maturing in one year or less totaled $78,558,000
as of December 31, 1998. Management believes that a significant portion of these
deposits will remain with the Company.
The Company continues to seek acquisition opportunities that would strengthen
its presence in current and new market areas. On February 2, 1999, the Company
entered into a definitive agreement to acquire all the outstanding shares of
Midwest Bancshares, Inc. in a tax-free one-for-one exchange of Company shares.
It is intended that the transaction will be accounted for as a pooling of
interests and is expected to be consummated sometime in the third quarter of
1999, subject to shareholder and regulatory approvals. There are currently no
other 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 within the
time period and a ratio greater than 1.0 indicates that more assets reprice than
liabilities.
As of December 31, 1998, the Company's gap ratios for assets and liabilities
repricing within three months and within one year were .69 and .72,
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 immediately repriceable and the classification of loan pool
participations as repricing over a three-year period based on the historical
average for return of loan pool participations.
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 results from changes in market
interest rates and changes in net interest income due to the repricing
characteristics of assets and liabilities. 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
1998 changed when compared to 1997.
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, 1998.
<TABLE>
<CAPTION>
$ CHANGE % CHANGE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
+300 bp........................................... $(468,000) -3%
+200 bp........................................... (326,000) -2
+100 bp........................................... (179,000) -1
Base.............................................. 0 0
-100 bp........................................... 170,000 +1
-200 bp........................................... 275,000 +2
-300 bp........................................... 424,000 +3
</TABLE>
<PAGE> 21
18/19 MANAGEMENT'S DISCUSSION & ANALYSIS
As shown on the preceding table, at December 31, 1998, the effect of an
immediate and sustained 300 basis point increase in interest rates would reduce
the Company's net interest income by 3 percent, or approximately $468,000. The
effect of an immediate and sustained 300 basis point decrease in rates would
increase the Company's net interest income by 3 percent, or approximately
$424,000.
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 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 14.6 percent during 1998 to a year-end total of
$165,427,000. The $21,094,000 increase in loans from 1997 was mainly in the real
estate and commercial loan categories.
Nonperforming assets as of December 31, 1998, totaled $1,400,000. As of December
31, 1997, nonperforming loans totaled $1,848,000. The ratio of nonperforming
loans to total loans was .85 percent for year-end 1998 and was 1.28 percent for
year-end 1997.
The allowance for loan losses was $2,177,000 as of December 31, 1998, and
$1,816,000 as of year-end 1997. The allowance represented 1.32 percent of total
loans at December 31, 1998, and 1.26 percent of loans on December 31, 1997. The
allowance as a percentage of nonperforming assets was 155.5 percent on December
31, 1998, and was 98.2 percent as of year-end 1997. Net loan charge-offs for
1998 totaled $818,000, or .52 percent of average loans, compared with 1997 net
charge-offs of $92,000, or .07 percent of average loans. Much of the net loan
charge-off experienced in 1998 was attributable to three separate lines of
credit. Two of these lines were commercial loans that experienced financial
difficulties during the year. The other significant charge-off was a factoring
account that had been in litigation for an extended period of time. Although
management believes that the present level of the allowance for loan losses is
an adequate assessment of the risk inherent in the loan portfolio, there can be
no assurance that significant provisions for losses will not be required in the
future based on factors such as loan portfolio growth, deterioration of market
conditions, major changes in borrowers' financial conditions, delinquencies, and
defaults. Future provisions will continue to be determined in relation to
overall asset quality as well as other factors mentioned previously.
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.
During 1998, the national inflation rate remained historically low. Interest
rates continued to decline throughout the year. Management of the Company
believes that the 1999 rate of inflation will remain consistent with 1998 and
that interest rates in 1999 will hold relatively stable. 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 1999. 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 1999.
<TABLE>
<CAPTION>
INTEREST AND DISCOUNT ON LOAN
POOL PARTICIPATIONS
(In thousands)
<S> <C>
'94 $ 4,479
'95 7,864
'96 9,097
'97 8,474
'98 7,970
</TABLE>
<PAGE> 22
[LOGO] MAHASKA INVESTMENT COMPANY
Concerns with the uncertainty in the economy in general and the agricultural
economy in particular will continue in 1999. Management will continually
evaluate the situation. As a result of these uncertainties or due to adverse
developments in the agricultural economy or other industries, it is conceivable
that additional loan loss provisions could be necessary in 1999.
Management anticipates that in 1999 they will continue to explore opportunities
to acquire additional loan pool participation investments. 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.
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. Many
existing application software products in the marketplace were designed only to
accommodate a two-digit date position which represents the year (e.g., "98" is
stored on the system and represents the year 1998). As a result, the year 1999
(i.e., "99") could be the maximum date value these systems will be able to
accurately process. 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. Additionally, the Company is working with material non-
information system providers, including but not limited to security, telephone,
utilities, ATM cards, elevators, heating and cooling systems, check clearing
services, teller machines, and proof equipment to determine their Year 2000
compliance. An assessment of the readiness of vendors, significant customers,
and other third parties with which the Company does business is also underway.
The Company could be faced with severe consequences if Year 2000 issues are not
identified and resolved in a timely manner. A worst-case scenario would result
in the short-term inability to update customer financial records due to
unforeseen processing issues. This would result in customers being unable to
receive timely information regarding their account balances. In addition, a
worst-case scenario for the Company is that major suppliers of electricity,
communication links, and outside data processing services may fail in spite of
their best efforts to remediate their systems and in spite of our best efforts
to test their systems. The major risk as a result of these possibilities would
be a loss of customer confidence.
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 and adopted by the
Company's subsidiaries. Required testing procedures were completed prior to
December 31, 1998. Additional testing will continue in 1999 whenever new or
updated software is installed. In 1997, the Company purchased a new mainframe
computer system that is Year 2000 compliant at a cost of $430,000. This computer
system became fully operational in the first quarter of 1998 with the equipment
cost being depreciated over a five-year period beginning in 1998.
The Company's contingency plans include two components which are business
remediation and business resumption. The business remediation plan was developed
to mitigate the risk associated with the failure to successfully complete system
renovation, validation or implementation of the Company's Year 2000 readiness.
This plan pertains to mission-critical systems developed in-house, by outside
software vendors, and by third-party service providers. The business resumption
plan is designed to be implemented in the event there are system failures at
critical dates.
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. It is estimated that the Company's total cost
for Year 2000 compliance will be approximately $35,000, exclusive of costs
associated with the new mainframe computer.
<PAGE> 23
20/21 CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 (In thousands) 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks ...................................................$ 9,292 10,854
Interest-bearing deposits in banks ........................................ 3,559 1,526
Federal funds sold ........................................................ 9,270 6,815
--------------------
Cash and cash equivalents ............................................... 22,121 19,195
--------------------
Investment securities (notes 2 and 8):
Available for sale ...................................................... 29,655 23,228
Held to maturity (fair value of $13,838 in 1998
and $19,869 in 1997) .................................................. 13,679 19,833
Loans, net of unearned discount (notes 3, 5, and 8) ....................... 165,427 144,333
Allowance for loan losses (note 4) ...................................... (2,177) (1,816)
--------------------
Net loans ............................................................. 163,250 142,517
--------------------
Loan pool participations .................................................. 54,510 54,326
Premises and equipment, net (note 6) ...................................... 4,043 4,183
Accrued interest receivable ............................................... 3,175 2,927
Other assets .............................................................. 7,956 8,664
--------------------
Total assets ..........................................................$298,389 274,873
====================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits (notes 2 and 7):
Demand ..................................................................$ 23,029 21,277
NOW and Super NOW ....................................................... 34,214 33,226
Savings ................................................................. 59,758 59,020
Certificates of deposit ................................................. 115,732 101,785
--------------------
Total deposits ........................................................ 232,733 215,308
Federal Home Loan Bank advances (note 8) .................................. 7,595 6,000
Notes payable (note 9) .................................................... 17,000 14,050
Other liabilities ......................................................... 2,829 2,761
--------------------
Total liabilities ..................................................... 260,157 238,119
--------------------
Shareholders' equity:
Common stock, $5 par value; authorized 20,000,000 shares; issued and
outstanding 3,636,345 as of December 31, 1998, and 3,665,494 shares
as of December 31, 1997 ............................................... 19,038 19,038
Capital surplus ......................................................... 17 118
Treasury stock at cost, 171,156 and 142,007 shares as of
December 31, 1998 and 1997, respectively .............................. (2,799) (1,752)
Retained earnings (note 15) ............................................. 21,806 19,231
Accumulated other comprehensive income .................................. 170 119
--------------------
Total shareholders' equity ............................................ 38,232 36,754
--------------------
Commitments and contingencies (note 16) ................................. -- --
--------------------
Total liabilities and shareholders' equity ............................$298,389 274,873
====================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 24
[LOGO] MAHASKA INVESTMENT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 (In thousands, except per share amounts) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans ............................................... $ 15,026 12,293 10,203
Interest income and discount on loan pool participations ................. 7,970 8,474 9,097
Interest on bank deposits ................................................ 122 108 266
Interest on federal funds sold ........................................... 338 128 92
Interest on investment securities:
Available for sale ..................................................... 1,617 1,705 1,348
Held to maturity ....................................................... 893 1,249 1,623
-------------------------------
Total interest income ................................................ 25,966 23,957 22,629
-------------------------------
INTEREST EXPENSE:
Interest on deposits (note 7):
NOW and Super NOW ...................................................... 656 677 612
Savings ................................................................ 2,241 2,259 2,058
Certificates of deposit ................................................ 6,102 5,442 4,845
Interest on federal funds purchased ...................................... 12 32 48
Interest on Federal Home Loan Bank advances .............................. 405 138 --
Interest on notes payable ................................................ 1,074 764 968
-------------------------------
Total interest expense ................................................. 10,490 9,312 8,531
-------------------------------
Net interest income .................................................... 15,476 14,645 14,098
Provision for loan losses (note 4) ....................................... 1,179 417 987
-------------------------------
Net interest income after provision for loan losses .................. 14,297 14,228 13,111
-------------------------------
OTHER INCOME:
Service charges .......................................................... 1,215 1,130 922
Data processing income ................................................... 195 209 221
Other operating income ................................................... 389 408 437
Investment securities gains (losses), net (note 2) ....................... 58 (8) (74)
-------------------------------
Total other income ................................................... 1,857 1,739 1,506
-------------------------------
OTHER EXPENSE:
Salaries and employee benefits expense (note 13) ......................... 4,796 4,343 3,774
Net occupancy expense .................................................... 1,349 1,173 1,011
Federal Deposit Insurance Corporation assessment ......................... 47 42 282
Professional fees ........................................................ 394 407 459
Other operating expense .................................................. 1,750 1,717 1,683
Goodwill amortization .................................................... 612 633 529
-------------------------------
Total other expense .................................................. 8,948 8,315 7,738
-------------------------------
Income before income tax expense ..................................... 7,206 7,652 6,879
Income tax expense (note 11) ............................................. 2,583 2,594 2,385
-------------------------------
Net income ........................................................... $ 4,623 5,058 4,494
-------------------------------
Net income per share - basic ............................................. $ 1.26 1.38 1.20
-------------------------------
Net income per share - diluted ........................................... $ 1.20 1.33 1.19
-------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 25
22/23 CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON CAPITAL TREASURY RETAINED COMPREHENSIVE
(in thousands except share data) STOCK SURPLUS STOCK EARNINGS INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 ............ $11,423 7,787 (231) 13,070 57 32,106
---------------------------------------------------------------------------------
Comprehensive income:
Net income ............................ -- -- -- 4,494 -- 4,494
Unrealized losses arising during the
year on securities available
for sale ............................ -- -- -- -- (143) (143)
Plus realized losses on securities
available for securities, net
of tax .............................. -- -- -- -- 46 46
---------------------------------------------------------------------------------
Total comprehensive income ............ -- -- -- 4,494 (97) 4,397
---------------------------------------------------------------------------------
Dividends paid (.44 per share) .......... -- -- -- (1,638) -- (1,638)
Treasury stock purchased
(66,667 shares) ....................... -- -- (622) -- -- (622)
---------------------------------------------------------------------------------
Balance at December 31, 1996 ............ 11,423 7,787 (853) 15,926 (40) 34,243
=================================================================================
Comprehensive income:
Net income ............................ -- -- -- 5,058 -- 5,058
Unrealized gains arising during the
year on securities available
for sale ............................ -- -- -- -- 154 154
Plus realized losses on securities
available for sale, net of tax ...... -- -- -- -- 5 5
---------------------------------------------------------------------------------
Total comprehensive income ............ -- -- -- 5,058 159 5,017
---------------------------------------------------------------------------------
Dividends paid (.48 per share) .......... -- -- -- (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)
---------------------------------------------------------------------------------
Balance at December 31, 1997 ............ 19,038 118 (1,752) 19,231 119 36,754
=================================================================================
Comprehensive income:
Net income ............................ -- -- -- 4,623 -- 4,623
Unrealized gains arising during the
year on securities available
for sale ............................ -- -- -- -- 88 88
Less realized gains on securities
available for securities, net
of tax .............................. -- -- -- -- (37) (37)
---------------------------------------------------------------------------------
Total comprehensive income ............ -- -- -- 4,623 51 4,674
---------------------------------------------------------------------------------
Dividends paid (.56 per share) .......... -- -- -- (2,048) -- (2,048)
Stock options exercised
(58,219 shares) ....................... -- (101) 790 -- -- 689
Treasury stock purchased
(87,368 shares) ....................... -- -- (1,837) -- -- (1,837)
---------------------------------------------------------------------------------
Balance at December 31, 1998 ............ $19,038 17 (2,799) 21,806 170 38,232
=================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 26
[LOGO] MAHASKA INVESTMENT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 (in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income ...................................................................... $ 4,623 5,058 4,494
---------------------------------------------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................. 1,247 1,129 930
Provision for loan losses ..................................................... 1,179 417 987
Investment securities (gains) losses, net ..................................... (58) 8 74
Loss on sale of bank premises and equipment ................................... -- 14 7
Amortization of premiums on investment securities ............................. 155 225 301
Accretion of investment securities and loan discounts ......................... (447) (578) (353)
(Increase) decrease in other assets ........................................... (152) (759) 256
Increase in other liabilities ................................................. 42 503 441
---------------------------------------------
Total adjustments ........................................................... 1,966 959 2,643
---------------------------------------------
Net cash provided by operating activities ................................... 6,589 6,017 7,137
---------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment securities available for sale:
Proceeds from sales ........................................................... 3,205 1,994 6,022
Proceeds from maturities ...................................................... 5,810 10,807 3,285
Purchases ..................................................................... (15,347) (9,330) (24,310)
Investment securities held to maturity:
Proceeds from maturities ...................................................... 10,390 9,639 8,611
Purchases ..................................................................... (4,333) (1,936) (5,698)
Purchases of loan pool participations ........................................... (25,710) (25,589) (29,827)
Principal recovery on loan pool participations .................................. 25,526 21,950 24,458
Net increase in loans ........................................................... (21,483) (26,450) (17,227)
Purchase of bank premises and equipment ......................................... (495) (1,615) (650)
Proceeds from sale of bank premises and equipment ............................... -- 24 12
Proceeds from branch acquisition, net ........................................... -- -- 14,246
---------------------------------------------
Net cash used in investing activities ....................................... (22,437) (20,506) (21,078)
---------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ........................................................ 17,425 8,356 13,364
Federal Home Loan Bank advances ................................................. 8,000 11,600 --
Repayment of Federal Home Loan Bank advances .................................... (6,405) (5,600) --
Advances on notes payable ....................................................... 7,450 6,550 6,400
Principal payments on notes payable ............................................. (4,500) (1,000) (7,900)
Dividends paid .................................................................. (2,048) (1,753) (1,638)
Purchases of treasury stock ..................................................... (1,837) (1,682) (622)
Proceeds from exercise of stock options ......................................... 689 729 --
---------------------------------------------
Net cash provided by financing activities ................................... 18,774 17,200 9,604
---------------------------------------------
Net increase (decrease) in cash and cash equivalents ........................ 2,926 2,711 (4,337)
Cash and cash equivalents at beginning of year .................................. 19,195 16,484 20,821
---------------------------------------------
Cash and cash equivalents at end of year ........................................ $ 22,121 19,195 16,484
=============================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ...................................................................... $ 10,382 9,299 8,299
=============================================
Income taxes .................................................................. $ 2,128 2,894 2,239
=============================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 27
24/25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
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 collects and remits these amounts, less servicing fees, to the
participants.
EFFECT OF NEW FINANCIAL ACCOUNTING STANDARDS
The Company adopted the provisions of SFAS No. 130, Reporting Comprehensive
Income, effective January 1, 1998. SFAS No. 130 establishes the standards for
the reporting and display of comprehensive income in the financial statements.
Comprehensive income represents net income and certain amounts reported directly
in shareholders' equity, such as the net unrealized gain or loss on
available-for-sale securities. The statement requires additional disclosures in
the consolidated financial statements; it does not affect the Company's
financial position or results of operations. Prior year consolidated financial
statements have been reclassified to conform to the requirements of SFAS No.
130.
The Company adopted the provisions of SFAS No. 131, Disclosure about Segments of
an Enterprise and Related Information, effective January 1, 1998. SFAS No. 131
establishes disclosure requirements for segment operations. The adoption had no
effect on the Company's financial statement disclosures because the Company
operates as a single business segment.
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, will
be effective for the Company for the year beginning January 1, 2000. Management
is evaluating the impact the adoption of SFAS No. 133 will have on the Company's
consolidated financial statements. The Company expects to adopt SFAS No. 133
when required.
<PAGE> 28
[LOGO] MAHASKA INVESTMENT COMPANY
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. All prior year share amounts have been restated to reflect this
stock dividend. The Company has had a Stock Repurchase Plan in effect since
April 1995. In accordance with this plan, 87,368, 116,310 and 66,667 shares of
common stock were repurchased by the Company during 1998, 1997, and 1996,
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,
1998, 1997 and 1996:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EPS COMPUTATION
Numerator:
Net Income ............................................................... $4,623 5,058 4,494
-------------------------
Denominator:
Average Shares Outstanding ............................................... 3,660 3,653 3,744
-------------------------
Basic EPS .................................................................. $ 1.26 1.38 1.20
-------------------------
DILUTED EPS COMPUTATION
Numerator:
Net Income ............................................................... $4,623 5,058 4,494
-------------------------
Denominator:
Average Shares Outstanding ............................................... 3,660 3,653 3,744
Stock Options ............................................................ 182 137 28
-------------------------
3,842 3,790 3,772
-------------------------
Diluted EPS ................................................................ $ 1.20 1.33 1.19
=========================
</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 balances
maintained in accordance with such regulations for the years ended December 31,
1998, 1997, and 1996 were $1,048,000, $897,000 and $835,000, respectively.
<PAGE> 29
26/27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 other comprehensive income until realized. 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 consolidated
statements of income using the specific identification method.
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.
Management believes the allowance for loan losses is adequate to absorb losses
in the loan portfolio. While management uses available information to recognize
loan losses, future additions to the allowance may be necessary based on changes
in economic conditions. In addition, various regulatory agencies, as an integral
part of the examination process, periodically review the subsidiary banks'
allowance for loan losses. Such agencies may require the subsidiary banks to
increase their allowance for loan losses based on their judgments and
interpretations about information available to them at the time of their
examinations.
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
<PAGE> 30
[LOGO] MAHASKA INVESTMENT COMPANY
well-secured, the payment is applied to principal and discount income with no
recognition of interest due at the contract rate.
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 at the contract rate.
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 $5,550,000, $6,162,000 and
$6,795,000 at December 31, 1998, 1997, and 1996, respectively, is being
amortized primarily using the straight-line method over 15 years. Amortization
expenses for 1998, 1997, and 1996 were $612,000, $633,000 and $529,000,
respectively.
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, 1998 and 1997 was included in
other assets.
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, interest-bearing deposits in banks, and federal funds sold.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' 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.
<PAGE> 31
28/29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2 | INVESTMENT SECURITIES
A summary of investment securities by type as of December 31, 1998 and 1997,
follows:
<TABLE>
<CAPTION>
GROSS GROSS APPROX.
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1998 (In thousands) COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT SECURITIES AVAILABLE FOR SALE:
U.S. government securities ...................... $ 4,501 102 -- 4,603
U.S. government agency securities ............... 18,257 164 13 16,408
Other investment securities ..................... 8,627 29 12 8,644
---------------------------------------------
Total ......................................... $ 29,385 295 25 29,655
INVESTMENT SECURITIES HELD TO MATURITY:
U.S. government agency securities ............... $ 1,290 26 -- 1,316
Obligations of states and political subdivisions. 8,291 127 9 8,409
Other investment securities .................... 4,098 15 -- 4,113
---------------------------------------------
Total ........................................ $ 12,679 168 9 13,838
<CAPTION>
GROSS GROSS APPROX.
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1997 (In thousands) COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------
<S> <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>
Proceeds from the sale of investment securities available for sale during 1998,
1997, and 1996 were $3,205,000, $1,994,000, and $6,022,000, 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) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Realized gains ...................................................... $ 58 -- 6
Realized losses ..................................................... -- (8) (80)
-------------------------
Total ............................................................. $ 58 (8) (74)
=========================
</TABLE>
As of December 31, 1998 and 1997, investment securities of approximately
$9,557,000 and $16,103,000, respectively, were pledged as collateral to secure
public fund deposits and for other purposes required or permitted by law. Public
funds approximated $27,181,000 and $25,781,000 at December 31, 1998 and 1997,
respectively.
The amortized cost and approximate fair value of investment securities as of
December 31, 1998, 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.
<PAGE> 32
[LOGO] MAHASKA INVESTMENT COMPANY
<TABLE>
<CAPTION>
AMORTIZED APPROXIMATE
(In thousands) COST FAIR VALUE
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT SECURITIES AVAILABLE FOR SALE:
Due in 1 year or less .................................................... $ 4,005 4,011
Due after 1 year through 5 years ......................................... 17,734 17,869
Due after 5 years through 10 years ....................................... 2,043 2,078
Due after 10 years ....................................................... 5,603 5,697
---------------------
Total .................................................................. $ 29,385 29,655
---------------------
INVESTMENT SECURITIES HELD TO MATURITY:
Due in 1 year or less .................................................... $ 4,496 4,514
Due after 1 year through 5 years ......................................... 6,598 6,691
Due after 5 years through 10 years ....................................... 1,467 1,506
Due after 10 years ....................................................... 1,118 1,127
---------------------
Total .................................................................. $ 13,679 13,838
=====================
</TABLE>
3 | LOANS
A summary of the respective loan categories as of December 31, 1998 and 1997,
follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate loans ........................................................ $ 82,587 72,303
Commercial and agricultural loans ........................................ 66,463 55,977
Loans to individuals ..................................................... 12,847 13,268
Other loans .............................................................. 3,530 2,785
---------------------
Total .................................................................... $165,427 144,333
=====================
</TABLE>
Total nonperforming loans and assets at December 31, 1998 and 1997, were:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans and leases:
Nonaccrual ............................................................. $ 561 927
Restructured ........................................................... 164 387
---------------------
Total impaired loans and leases ..................................... 725 1,314
Loans and leases past due 90 days or more ................................ 663 522
---------------------
Total nonperforming loans ................................................ 1,388 1,836
Other real estate owned .................................................. 12 12
---------------------
Total nonperforming assets ............................................... $ 1,400 1,848
=====================
</TABLE>
The average balances of nonperforming loans for the years ended December 31,
1998 and 1997, were $1,626,000 and $1,669,000, respectively. The allowance for
credit losses related to nonperforming loans at December 31, 1998 and 1997, was
$103,000 and $368,000, respectively. Nonperforming loans of $1,343,000 and
$902,000 at December 31, 1998 and 1997, respectively, were not subject to a
related allowance for credit losses because of the net realizable value of loan
collateral, guarantees and other factors. The effect of nonaccrual and
restructured loans on interest income for each of the three years ended December
31, 1998, 1997, and 1996 was:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
As originally contracted .......................................... $ 126 213 131
As recognized ..................................................... 17 91 41
-------------------------
Reduction of interest income ................................... $ 109 122 90
=========================
</TABLE>
<PAGE> 33
30/31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4 | ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31, 1998,
1997, and 1996 were as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year ....................................... $1,816 1,491 1,001
Provision for loan losses .......................................... 1,179 417 987
Recoveries on loans previously charged off ......................... 22 45 38
Loans charged off .................................................. (840) (137) (705)
Acquisition allowance .............................................. -- -- 170
-------------------------
Balance at end of year ............................................. $2,177 1,816 1,491
=========================
</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 loan activity of this
group included in loans as of December 31, 1998 and 1997, was as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Aggregate balance at beginning of year .................................... $ 7,633 6,421
Advances .................................................................. 12,829 10,334
Payments .................................................................. 12,442 9,122
-------------------
Aggregate balance at end of year .......................................... $ 8,020 7,633
===================
</TABLE>
6 | PREMISES AND EQUIPMENT
A summary of premises and equipment as of December 31, 1998 and 1997 was as
follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Land and improvements .................................................... $ 603 603
Building and improvements ................................................ 3,670 3,571
Furniture and equipment .................................................. 4,962 4,614
-------------------
Total office properties and equipment at cost .......................... 9,235 8,788
Less accumulated depreciation ............................................ 5,192 4,605
-------------------
Total .................................................................. $ 4,043 4,183
===================
</TABLE>
7 | DEPOSITS
The scheduled maturities of certificate accounts are as follows as of December
31, 1998:
<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------
<C> <C>
1999 ................................................................. $ 78,558
2000 ................................................................. 23,420
2001 ................................................................. 9,087
2002 ................................................................. 3,062
2003 ................................................................. 1,605
Thereafter ........................................................... --
---------
Total .............................................................. $ 115,732
=========
</TABLE>
Time deposits in excess of $100,000 approximated $24,468,000 and $19,755,000 as
of December 31, 1998 and 1997, respectively. Interest expense on such deposits
for the years ended December 31, 1998, 1997, and 1996 was approximately
$1,189,000, $871,000, and $663,000, respectively.
<PAGE> 34
[LOGO] MAHASKA INVESTMENT COMPANY
8 | FEDERAL HOME LOAN BANK ADVANCES
At December 31, 1998 and 1997, Federal Home Loan Bank (FHLB) advances consisted
of the following:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
(in thousands) 1998 INTEREST RATE 1997 INTEREST RATE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturity in year ending
1998 .......................................... $ -- --% 1,000 5.82%
1999 .......................................... 3,027 5.96 3,000 5.96
2000 .......................................... 2,029 6.01 2,000 6.02
2001 .......................................... 30 5.40 -- --
Over 3 Years .................................. 2,509 5.07 -- --
-------------------------------------------------
Total ....................................... $ 7,595 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
and Pella State Bank have agreed to maintain unencumbered additional security in
the form of certain residential mortgage loans aggregating not less than 125
percent and 150 percent of outstanding advances, respectively.
9 | NOTES PAYABLE
The notes payable balance at December 31, 1998, consists of advances on a
$20,000,000 line of credit. The line has a variable interest rate and is due
June 30, 1999. The current notes are secured by all of the common stock of the
subsidiaries. Interest is payable quarterly at 3/8 below the lender's prime
rate, which ranged from 7 3/8 percent to 8 1/2 percent in 1998.
<PAGE> 35
32/33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10 | FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments as of December 31, 1998
and 1997, were as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
1998 (In thousands) VALUE VALUE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks .................................................. $ 9,292 9,292
Interest-bearing deposits with banks ..................................... 3,559 3,559
Federal funds sold ....................................................... 9,270 9,270
Investment securities .................................................... 43,334 43,493
Loans, net ............................................................... 163,250 163,809
Loan pool participations ................................................. 54,510 54,510
FINANCIAL LIABILITIES:
Deposits ................................................................. $232,733 233,444
Federal Home Loan Bank advances .......................................... 7,595 7,609
Notes payable ............................................................ 17,000 17,000
OFF BALANCE SHEET ITEMS:
Commitments to extend credit ............................................. $ -- --
Letters of credit ........................................................ -- --
<CAPTION>
CARRYING FAIR
1997 (In thousands) VALUE 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
Loan pool participations ................................................. 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 ........................................................ -- --
</TABLE>
The recorded amount of cash and due from banks, interest-bearing deposits with
banks, and federal funds sold 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 participations approximates fair value due
to the characteristics of the loan pool participations. Any additional value
attained in the loan pool participations 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.
<PAGE> 36
[LOGO] MAHASKA INVESTMENT COMPANY
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, 1998, 1997, and
1996 is as follows:
<TABLE>
<CAPTION>
1998 (In thousands) FEDERAL STATE TOTAL
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current ........................................................... $2,297 370 2,667
Deferred .......................................................... (57) (27) (84)
-------------------------
$2,240 343 2,583
=========================
<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) -- (89)
-------------------------
$2,109 276 2,385
=========================
</TABLE>
Income tax expense differs from the amount computed by applying the United
States federal income tax rate of 34 percent in 1998, 1997, and 1996 to income
before income tax expense. The reasons for these differences are as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision at statutory rate ......................................... $2,450 2,602 2,239
State franchise tax (net of federal tax benefit) .................... 227 223 182
Nontaxable interest income .......................................... (113) (115) (144)
Nondeductible goodwill amortization ................................. 21 21 21
Life insurance cash value increase .................................. (26) (26) (31)
Other, net .......................................................... 24 (111) 18
-------------------------
Total ............................................................. $2,583 2,594 2,385
=========================
</TABLE>
<PAGE> 37
34/35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31, 1998 and 1997, are as
follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Allowance for loan losses ................................................. $ 569 438
Deferred compensation ..................................................... 72 79
Premium amortization ...................................................... 73 58
-------------------
Gross deferred tax assets ............................................... 714 575
-------------------
DEFERRED TAX LIABILITIES:
Depreciation and amortization ............................................. (105) (94)
Federal Home Loan Bank stock .............................................. (11) (17)
Deferred loan fees ........................................................ (87) (70)
Unrealized gain on available for sale securities .......................... (100) (74)
Other ..................................................................... (49) (15)
-------------------
Gross deferred tax liabilities .......................................... (352) (270)
-------------------
Net deferred tax asset .................................................. $ 362 305
-------------------
</TABLE>
No valuation allowance was required for the deferred tax asset at December 31,
1998 or 1997.
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 on 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 net income per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
NET INCOME:
As reported .............................................................. $ 4,623 5,058
Pro forma ................................................................ 4,362 4,770
NET INCOME PER SHARE:
As reported - basic ...................................................... $ 1.26 1.38
As reported - diluted .................................................... 1.20 1.33
Pro forma - basic ........................................................ 1.19 1.31
Pro forma - diluted ...................................................... 1.18 1.28
</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 1998 and 1997, respectively: dividend yield of 2.80 percent for 1998
and 2.80 percent for 1997; expected volatility of 24 percent for 1998 and 25
percent for 1997; risk free interest rates of 4.71 percent for 1998 and 5.74
percent for 1997; and expected lives of 7.5 years for both years.
<PAGE> 38
[LOGO] MAHASKA INVESTMENT COMPANY
A summary of the status of the Company's stock incentive plan as of December 31,
1998 and 1997, and the activity during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1998 1997
-------------------------- ------------------------
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year ............................................ 519,769 $ 7.50-19.875 440,827 $ 7.50-11.10
Granted ................................................................. 43,041 16.875-22.00 151,819 11.10-19.875
Exercised ............................................................... 58,219 7.50-13.95 65,970 7.50-9.00
Forfeited ............................................................... 7,292 11.10-22.00 6,907 9.00-11.10
------- -------
Outstanding at end of year .............................................. 497,299 $ 7.50-22.00 519,769 $ 7.50-19.875
Options exercisable at year-end ......................................... 363,494 $ 7.50-19.875 308,671 $ 7.50-19.875
Weighted-average fair value of options granted during the year $ 4.65 $ 4.65
</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 $161,000, $142,000 and $114,000 for
1998, 1997, and 1996, respectively. As of December 31, 1998 and 1997, the ESOP
owned 417,667 and 421,025 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 ($19,000), $39,000 and $33,000 for the
years ended December 31, 1998, 1997, and 1996, respectively.
The Company provides no material post-retirement benefits.
<PAGE> 39
36/37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 following table) of total
capital and Tier 1 capital to risk-weighted assets and of Tier 1 capital to
average assets. Management believes, as of December 31, 1998, 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.
<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, 1998:
TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS):
Consolidated .................................................$34,858 14.9% $18,656 8.0% N/A N/A
Mahaska State Bank ........................................... 15,638 11.2 11,162 8.0 $13,953 10.0%
Central Valley Bank .......................................... 8,364 14.0 4,763 8.0 5,954 10.0
Pella State Bank ............................................. 4,924 44.3 890 8.0 1,113 10.0
TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS):
Consolidated .................................................$32,682 14.0% $ 9,328 4.0% N/A N/A
Mahaska State Bank ........................................... 14,518 10.4 5,581 4.0 $ 8,372 6.0%
Central Valley Bank .......................................... 7,966 13.4 2,382 4.0 3,572 6.0
Pella State Bank ............................................. 4,765 42.8 445 4.0 668 6.0
TIER 1 CAPITAL (TO AVERAGE ASSETS):
Consolidated .................................................$32,682 11.3% $ 8,682 3.0% N/A N/A
Mahaska State Bank ........................................... 14,518 8.6 5,041 3.0 $ 8,402 5.0%
Central Valley Bank .......................................... 7,966 9.3 2,569 3.0 4,282 5.0
Pella State Bank ............................................. 4,765 33.8 423 3.0 705 5.0
AS OF DECEMBER 31, 1997:
TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS):
Consolidated .................................................$32,408 15.6% $16,602 8.0% N/A N/A
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
Pella State Bank ............................................. 4,940 207.1 191 8.0 239 10.0
TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS):
Consolidated .................................................$30,592 14.7% $ 8,301 4.0% N/A N/A
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
Pella State Bank ............................................. 4,926 206.5 95 4.0 14 6.0
TIER 1 CAPITAL (TO AVERAGE ASSETS):
Consolidated .................................................$30,592 11.8% $ 7,773 3.0% N/A N/A
Mahaska State Bank ........................................... 15,022 9.1 4,946 3.0 $ 8,244 5.0%
Central Valley Bank .......................................... 6,756 8.9 2,278 3.0 3,796 5.0
Pella State Bank ............................................. 4,926 378.5 39 3.0 65 5.0
</TABLE>
<PAGE> 40
[LOGO] MAHASKA INVESTMENT COMPANY
15 | DIVIDEND RESTRICTIONS
The Company derives a substantial portion of its cash flow, including that
available for dividend payments to shareholders, from its bank subsidiaries 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 bank subsidiaries to the Company at
December 31, 1998, approximated $12,271,000.
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, 1998 and 1997,
outstanding commitments to extend credit totaled approximately $18,755,000 and
$15,597,000, respectively.
Commitments under standby letters of credit outstanding aggregated $3,018,000
and $2,297,000 as of December 31, 1998 and 1997, 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 | SUBSEQUENT EVENT
On February 2, 1999, the Company announced execution of a definitive merger
agreement with Midwest Bancshares, Inc. of Burlington, Iowa ("Midwest"). The
merger will be accomplished through a tax-free fixed exchange of one (1) share
of Company common stock for each share of outstanding common stock of Midwest
Bancshares, Inc. The transaction is intended to qualify as a tax-free
reorganization and be accounted for as a pooling of interests. The transaction
is expected to be completed in the third quarter of 1999, after customary
regulatory and shareholder approvals have been received. Based on the Company's
closing price of $17.00 on February 2, 1999, the transaction will be valued at
$19.0 million. Based on Midwest's total shares outstanding of approximately 1.1
million shares as of February 2, 1999, the Company will have approximately 4.7
million shares outstanding after the merger. This merger will add approximately
$163,000,000 in assets and $106,000,000 in deposits to the Company.
<PAGE> 41
38/39 NOTES CONSOLIDATED FINANCIAL STATEMENTS
18 | MAHASKA INVESTMENT COMPANY (PARENT COMPANY ONLY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 (In thousands) 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash on deposit at bank subsidiary ....................................... $ 309 617
Cash at other institutions ............................................... 22 19
--------------------
Cash and cash equivalents .............................................. 331 636
Investment securities .................................................... 377 299
Loans .................................................................... 7,511 2,447
Loan pool participations ................................................. 7,607 7,734
Investments in:
Bank subsidiaries ...................................................... 32,678 32,782
Bank-related subsidiary ................................................ 5,274 5,059
Excess cost over net assets .............................................. 21 83
Premises and equipment ................................................... 685 733
Other assets ............................................................. 923 1,182
--------------------
Total assets ........................................................... 55,407 50,955
--------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Notes payable ............................................................ $ 17,000 14,050
Accrued expenses payable and other liabilities ........................... 175 151
--------------------
Total liabilities ...................................................... 17,175 14,201
====================
Shareholders' equity:
Common stock ............................................................. 19,038 19,038
Capital surplus .......................................................... 17 7,734
Treasury stock at cost ................................................... (2,799) (1,752)
Retained earnings ........................................................ 21,806 11,615
Accumulated other comprehensive income ................................... 170 119
--------------------
Total shareholders' equity ............................................. 38,232 36,754
--------------------
Total liabilities and shareholders' equity ............................. $ 55,407 50,955
====================
</TABLE>
<PAGE> 42
[LOGO] MAHASKA INVESTMENT COMPANY
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 (In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME:
Dividends from subsidiaries ......................................................... $ 4,600 2,400 2,000
Interest income and discount on loan pool participations ............................ 1,878 2,713 3,498
Management, audit, and loan review fees ............................................. 236 398 285
Other operating income .............................................................. 433 146 247
----------------------------------
Total income ...................................................................... 7,147 5,657 6,030
==================================
EXPENSE:
Salaries and benefits expense ....................................................... 859 1,026 925
Interest on short-term borrowings ................................................... 1,074 800 968
Other operating expense ............................................................. 638 646 642
----------------------------------
Total expense ..................................................................... 2,571 2,472 2,535
==================================
Income before income tax expense and equity in undistributed earnings of
subsidiaries ...................................................................... 4,576 3,185 3,495
Income tax expense .................................................................. 13 151 529
----------------------------------
Income before equity in undistributed earnings of subsidiaries .................... 4,563 3,034 2,966
Equity in undistributed earnings of subsidiaries .................................... 60 2,024 1,528
----------------------------------
Net income ........................................................................ $ 4,623 5,058 4,494
==================================
<CAPTION>
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 (In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................................... $ 4,623 5,058 4,494
----------------------------------
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries .................................. (60) (2,024) (1,528)
Depreciation and amortization ..................................................... 124 121 105
Investment securities gains ....................................................... (26) -- --
Decrease (increase) in other assets ............................................... 259 (504) (41)
Increase (decrease) in other liabilities .......................................... 24 (133) 238
----------------------------------
Total adjustments ................................................................. 320 (2,540) (1,226)
----------------------------------
Net cash provided by operating activities ......................................... 4,943 2,518 3,268
==================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities .................................................. (227) -- (149)
Proceeds from investment securities sales ........................................... 175 -- --
Purchases of loan pool participations: .............................................. (4,610) (2,091) (1,033)
Principal recovery on loan pool participations ...................................... 4,737 5,665 7,590
Net (increase) decrease in loans .................................................... (5,064) (2,243) 2,655
Purchases of premises and equipment ................................................. (13) (151) (55)
Investment in subsidiaries .......................................................... -- (5,000) (10,000)
----------------------------------
Net cash used in investing activities ............................................. (5,002) (3,820) (992)
----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances on notes payable ........................................................... 7,450 6,500 7,800
Principal payments on notes payable ................................................. (4,500) (2,400) (7,900)
Dividends paid ...................................................................... (2,048) (1,753) (1,638)
Purchases of treasury stock ......................................................... (1,837) (1,682) (622)
Proceeds from stock issued .......................................................... 689 729 --
----------------------------------
Net cash (used in) provided by financing activities ............................... (246) 1,444 (2,360)
----------------------------------
Net (decrease) increase in cash and cash equivalents .............................. (305) 142 (84)
Cash and cash equivalents at beginning of year ...................................... 636 494 578
----------------------------------
Cash and cash equivalents at end of year ............................................ $ 331 636 494
==================================
</TABLE>
<PAGE> 43
40/41 INDEPENDENT AUDITORS' 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, 1998 and 1997, and the
related consolidated statements of income, changes in shareholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
February 12, 1999
Des Moines, Iowa
<PAGE> 44
[LOGO] MAHASKA INVESTMENT COMPANY
BANK SUBSIDIARY HIGHLIGHTS
The bank subsidiary schedule is not covered by the Independent Auditors' Report.
<TABLE>
<CAPTION>
DECEMBER 31 (In thousands) 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
MAHASKA STATE BANK
Total assets ............................................................ $169,524 $167,754
Total loans, net of unearned discount ................................... 97,176 95,905
Total loan pool participations .......................................... 26,341 26,964
Allowance for loan losses ............................................... (1,120) (1,062)
Total deposits .......................................................... 149,610 147,432
Total shareholders' equity .............................................. 15,413 16,021
CENTRAL VALLEY BANK
Total assets ............................................................ $ 90,951 $84,749
Total loans, net of unearned discount ................................... 46,370 39,242
Total loan pool participations .......................................... 18,965 19,627
Allowance for loan losses ............................................... (398) (299)
Total deposits .......................................................... 73,575 69,098
Total shareholders' equity .............................................. 12,501 11,835
PELLA STATE BANK
Total assets ............................................................ $ 15,583 $ 5,191
Total loans, net of unearned discount ................................... 8,461 1,028
Total loan pool participations .......................................... 1,598 0
Allowance for loan losses ............................................... (159) (14)
Total deposits .......................................................... 10,195 238
Total shareholders' equity .............................................. 4,765 4,926
</TABLE>
<PAGE> 45
42/43 DIRECTORS AND OFFICERS / STOCK INFORMATION
BOARD OF DIRECTORS
MARTIN L. BERNSTEIN
Owner, Bernstein Realty
ROBERT K. CLEMENTS
Attorney, Clements Law Firm
CHARLES S. HOWARD
Chairman, President & CEO
R. SPENCER HOWARD
Vice President Corporate Planning
JAMES F. MATHEW
President,
Mathew Lumber Company
DAVID A. MEINERT
Executive Vice President & CFO
JOHN P. POTHOVEN
Chairman & President,
Mahaska State Bank
JOHN W. N. STEDDOM
Civil Engineer, Retired
CORPORATE OFFICERS
CHARLES S. HOWARD
Chairman, President & CEO
DAVID A. MEINERT
Executive Vice President
& CFO
R. SPENCER HOWARD
Vice President Corporate Planning
KAREN K. BAACK
Secretary/Treasurer &
Administrative Assistant
JEFFREY L. RHOADS
Controller
MARK T. GIBBONS
Loan Review Officer
LORI J. SEUBERT
Assistant Controller
BRYCE C. ABBAS
Auditor
BARBARA J. BONE
Human Resources Officer
SHEILA DAVIS-WELKER
Marketing Director
Board of Directors pictured below, left to right: Charles S. Howard, John P.
Pothoven, Robert K. Clements, Martin L. Bernstein, James F. Mathew, R. Spencer
Howard, John W. N. Steddom, and David A. Meinert.
[PHOTO]
<PAGE> 46
[LOGO] MAHASKA INVESTMENT COMPANY
STOCK INFORMATION
Mahaska Investment Company's Common Stock trades on The NASDAQ National Market
and the quotations are furnished by the NASDAQ system. There were 239
shareholders of record on December 31, 1998, and an estimated 750 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 Company's stock during 1998, 1997, and 1996:
1998 QUARTER ENDED HIGH LOW
- ---------------------------------------------------
March 31 $23.63 18.50
June 30 22.63 20.75
September 30 21.81 19.63
December 31 20.00 16.75
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
NASDAQ symbol: OSKY
WALL STREET JOURNAL
AND OTHER NEWSPAPERS: MahaskaInv
MARKET MAKERS:
Howe Barnes Investments, Inc.
Knight Securities L.P.
Midwest Stock Exchange
CORPORATE HEADQUARTERS
222 First Avenue East
P.O. Box 1104
Oskaloosa, IA 52577
515-673-8448
ANNUAL SHAREHOLDERS' MEETING
April 30, 1999, 10:30 a.m.
Elmhurst Country Club
2214 South 11th Street
Oskaloosa, IA 52577
INTERNET
www.mahaskainv.com
TRANSFER AGENT/DIVIDEND
DISBURSING AGENT
Illinois Stock Transfer Company
209 West Jackson Boulevard, Suite 903
Chicago, IL 60606
INDEPENDENT AUDITOR
KPMG Peat Marwick LLP
2500 Ruan Center
Des Moines, IA 50309
ANNUAL REPORT DESIGN
Designgroup, Inc., Des Moines, IA
The Company has declared per share cash dividends with respect to its Common
Stock as follows:
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ------------------------------------------------------------
<C> <C> <C> <C> <C>
1998 $ .14 $ .14 $ .14 $ .14
1997 .12 .12 .12 .12
1996 .1095 .1095 .1095 .1095
</TABLE>
FORM 10-K
Copies of Mahaska Investment Company's 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. It is also available on the Securities and
Exchange Commission's Internet
web site at http://www.sec.gov/cgi-bin/srch-edgar.
<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
CONSENT OF AUDITORS
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 February 12, 1999,
relating to the consolidated balance sheets of Mahaska Investment Company and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, changes in shareholder's equity and comprehensive income,
and cash flows for each of the years in the three-year period ended December 31,
1998, which report appears in the December 31, 1998, annual report on Form 10-K
of Mahaska Investment Company.
/s/ KPMG Peat Marwick LLP
Des Moines, Iowa
March 26,1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,292
<INT-BEARING-DEPOSITS> 3,559
<FED-FUNDS-SOLD> 9,270
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 13,679
<INVESTMENTS-MARKET> 13,838
<LOANS> 165,427
<ALLOWANCE> (2,177)
<TOTAL-ASSETS> 298,389
<DEPOSITS> 232,733
<SHORT-TERM> 17,000
<LIABILITIES-OTHER> 2,829
<LONG-TERM> 7,595
0
0
<COMMON> 19,038
<OTHER-SE> 19,194
<TOTAL-LIABILITIES-AND-EQUITY> 298,389
<INTEREST-LOAN> 3,988
<INTEREST-INVEST> 621
<INTEREST-OTHER> 1,901
<INTEREST-TOTAL> 6,510
<INTEREST-DEPOSIT> 2,366
<INTEREST-EXPENSE> 2,816
<INTEREST-INCOME-NET> 3,694
<LOAN-LOSSES> 585
<SECURITIES-GAINS> 32
<EXPENSE-OTHER> 2,268
<INCOME-PRETAX> 1,300
<INCOME-PRE-EXTRAORDINARY> 1,300
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 842
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.22
<YIELD-ACTUAL> 10.27
<LOANS-NON> 561
<LOANS-PAST> 663
<LOANS-TROUBLED> 164
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> (1,873)
<CHARGE-OFFS> 288
<RECOVERIES> (7)
<ALLOWANCE-CLOSE> (2,177)
<ALLOWANCE-DOMESTIC> (2,177)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> (2,177)
</TABLE>
