FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED COMMISSION FILE NUMBER
MARCH 31, 1999 0-24630
MAHASKA INVESTMENT COMPANY
(Exact Name of Registrant as Specified in its Charter)
IOWA 42-1003699
(State of Incorporation) (I.R.S. Employer Identification No.)
222 First Avenue East, Oskaloosa, Iowa 52577
Telephone Number (515) 673-8448
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2)has been subject to such filing requirements for the
past 90 days.
Yes X No
As of April 30, 1999, there were 3,636,345 shares of common stock $5 par value
outstanding.
<PAGE>
PART I -- Item 1. Financial Statements
<TABLE>
<CAPTION>
MAHASKA INVESTMENT COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(unaudited)
(dollars in thousands)
March 30, December 31,
1999 1998
<S> <C> <C>
ASSETS
Cash and due from banks .......................... $ 7,510 9,292
Interest-bearing deposits in banks ............... 1,892 3,559
Federal funds sold ............................... 8,734 9,270
Cash and cash equivalents ..................... $ 18,136 22,121
Investment securities:
Available for sale ............................ 30,456 29,655
Held to maturity .............................. 14,851 13,679
Loans ............................................ 172,198 165,427
Allowance for loan losses ........................ (2,037) (2,177)
Net loans ..................................... $ 170,161 163,250
Loan pool participations ......................... 50,536 54,510
Premises and equipment, net ...................... 3,995 4,043
Accrued interest receivable ...................... 3,095 3,175
Other assets ..................................... 2,624 2,406
Goodwill ......................................... 5,401 5,550
Total assets ............................... $ 299,255 298,389
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand ........................................ $ 19,409 23,029
NOW and Super NOW ............................. 33,133 34,214
Savings ....................................... 66,126 59,758
Certificates of deposit ....................... 114,861 115,732
Total deposits ............................. $ 233,529 232,733
Federal funds purchased .......................... 0 0
Federal Home Loan Bank advances .................. 7,588 7,595
Note payable ..................................... 16,200 17,000
Other liabilities ................................ 3,194 2,829
Total liabilities .......................... $ 260,511 260,157
Shareholders' equity:
Common stock, $5 par value;
authorized 4,000,000 shares;
issued 3,807,501 shares ................. $ 19,038 19,038
Capital surplus ............................... 17 17
Treasury stock at cost, 171,156
shares as of March 31, 1999,
and December 31, 1998 ................... (2,799) (2,799)
Retained earnings ............................. 22,418 21,806
Accumulated other comprehensive income ........ 70 170
Total shareholders' equity ................. $ 38,744 38,232
Total liabilities and shareholders'
equity ......................... $ 299,255 298,389
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PART I -- Item 1. Financial Statements, Continued
<TABLE>
<CAPTION>
MAHASKA INVESTMENT COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited) Three Months Ended
(dollars in thousands, March 31,
except per share) 1999 1998
<S> <C> <C>
Interest income:
Interest and fees on loans .......................... $3,774 3,400
Interest and discount on loan pools ................. 2,209 2,464
Interest on bank deposits ........................... 36 41
Interest on federal funds sold ...................... 97 107
Interest on investment securities:
Available for sale ............................... 446 372
Held to maturity ................................. 187 250
Total interest income ......................... $6,749 6,634
Interest expense:
Interest on deposits:
NOW and Super NOW ................................ $ 147 165
Savings .......................................... 562 544
Certificates of deposit .......................... 1,579 1,460
Interest on federal funds purchased ................. 0 0
Interest on Federal Home Loan Bank advances ......... 108 89
Interest on note payable ............................ 305 254
Total interest expense ........................ 2,701 2,512
Net interst income ........................ 4,048 4,122
Provision for loan losses ................. 167 110
Net interset income after
provision for loan losses ........... $3,881 4,012
Noninterest income:
Service charges ..................................... $ 304 288
Data processing income .............................. 50 48
Other operating income .............................. 138 79
Investment security gains ........................... 0 26
Total noninterest income ...................... 492 441
Noninterest expense:
Salaries and employee benefits expense .............. $1,337 1,157
Net occupancy expense ............................... 357 324
FDIC assessment ..................................... 12 12
Professional fees ................................... 86 86
Other operating expense ............................. 614 475
Goodwill amortization ............................... 149 153
Total noninterest expense ..................... 2,555 2,207
Income before income tax expense .......... $1,818 2,246
Income tax expense ..................................... 661 816
Net income .................................... $1,157 1,430
Earnings per common share - basic ...................... $ 0.32 0.39
Earnings per common share - diluted .................... $ 0.31 0.37
Dividends per common share ............................. $ 0.15 0.14
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PART I -- Item 1. Financial Statements, Continued
<TABLE>
<CAPTION>
MAHASKA INVESTMENT COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited) Three Months Ended
(in thousands) March 31,
1999 1998
<S> <C> <C>
Net income ............................................... $ 1,157 1,430
Other Comprehensive Income:
Unrealized gains (losses)on
securities available for sale:
Unrealized holding gains (losses)
arising during the period, net
of taxes on income of ($59) in
1999 and $12 in 1998 ................... (100) 20
Less: reclassification adjustment
for gains included in net income,
net of taxes on income ................. 0 0
Other comprehensive income, net of tax ................... (100) 20
Comprehensive income ..................................... $ 1,057 1,450
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PART I -- Item 1. Financial Statements, Continued
<TABLE>
<CAPTION>
MAHASKA INVESTMENT COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) Three Months Ended
(dollars in thousands) March 31,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income ...................................... $ 1,157 1,430
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization .......... 314 303
Provision for loan losses .............. 167 110
Investment securities gains ............ 0 (26)
Amortization of investment
securities premiums .................. 46 38
Accretion of investment securities
and loan discounts ................... (120) (104)
(Increase) decrease in other assets .... (138) 138
Increase in other liabilities .......... 424 366
Total adjustments ............. 693 825
Net cash provided by operating
activities .................. $ 1,850 2,255
Cash flows from investing activities:
Investment securities available for sale:
Proceeds from sales .................... 0 175
Proceeds from maturities ............... 3,383 185
Purchases .............................. (4,373) (32)
Investment securities held to maturity:
Proceeds from maturities ............... 644 2,701
Purchases .............................. (1,826) (1,220)
Purchases of loan pool participations ........... (1,628) 0
Principal recovery on loan pool
participations ................................ 5,602 6,206
Net increase in loans ........................... (6,964) (2,620)
Purchases of bank premises and equipment ........ (117) (201)
Net cash (used in) provided by
investing activities ................. $ (5,279) 5,194
Cash flows from financing activities:
Net increase in deposits ........................ $ 796 3,221
Advances on note payable ........................ 150 0
Principal payments on note payable .............. (950) (3,500)
Repayment of Federal Home Loan
Bank advances ................................. (7) 0
Dividends paid .................................. (545) (515)
Proceeds from exercise of stock options ......... 0 106
Net cash used in financing
activities .................. $ (556) (688)
Net (decrease) increase in cash
and cash equivalents .......... $ (3,985) 6,761
Cash and cash equivalents at beginning of
period ................................................. $ 22,121 19,195
Cash and cash equivalents at end of period ............... $ 18,136 25,956
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ............................... $ 2,732 2,533
Income taxes ........................... $ 229 114
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PART I -- Item 1. Financial Statements, continued.
MAHASKA INVESTMENT COMPANY
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements include the accounts and
transactions of the Company and its four wholly-owned subsidiaries, Mahaska
State Bank, Central Valley Bank, Pella State Bank and On-Site Credit Services,
Inc. All material intercompany balances and transactions have been eliminated in
consolidation.
The accompanying consolidated financial statements have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. Although management believes that the disclosures are adequate to
make the information presented not misleading, it is suggested that these
interim consolidated financial statements be read in conjunction with the
Companys most recent audited financial statements and notes thereto. In the
opinion of management, the accompanying consolidated financial statements
contain all adjustments (consisting of only normal recurring accruals) necessary
to present fairly the financial position as of March 31, 1999, and the results
of operations for the three months ended March 31, 1999 and 1998, and changes in
cash flows for the three months ended March 31, 1999 and 1998.
The results for the three months ended March 31, 1999 may not be indicative of
results for the year ended December 31, 1999, or for any other quarter.
2. Statements of Cash Flows
In the statements of cash flows, cash and cash equivalents include cash and due
from banks, interest-bearing deposits with banks, and federal funds sold.
3. Income Taxes
Federal income tax expense for the three months ended March 31, 1999 and 1998
was computed using the consolidated effective federal tax rate. The Company also
recognized income tax expense pertaining to state franchise taxes payable
individually by the subsidiary banks.
4. Earnings Per Common Share
Basic earnings per common share computations are based on the weighted average
number of shares of common stock actually outstanding during the period. The
weighted average number of shares for the three-month periods ended March 31,
1999 and 1998 was 3,636,345 and 3,673,186, respectively. Diluted earnings per
share amounts are computed by dividing net income by the weighted average number
of shares and all dilutive potential shares outstanding during the period. The
computation of diluted earnings per share used a weighted average number of
shares outstanding of 3,757,646 and 3,883,623 for the three months ended
March 31, 1999 and 1998, respectively.
5. Effect of New Financial Accounting Standards
The Company adopted the provisions of SFAS 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.
6. 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 reported period. Actual
results could differ from those estimates. A significant estimate that is
particularly sensitive to change relates to the allowance for losses.
Part I -- Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The Company recorded net income of $1,157,000 for the quarter ended March 31,
1999, compared with $1,430,000 for the three months ended March 31, 1998, which
represents a decrease of 19 percent. The decrease was primarily a result of a
decrease in income from loan pool participations and an increase in noninterest
expense. Basic earnings per share for the first quarter of 1999 were $.32 versus
basic earnings of $.39 per share for the first quarter of 1998. Diluted earnings
per share for the first quarter of 1999 were $.31 versus diluted earnings per
share of $.37 for the first quarter of 1998. Actual weighted average shares
outstanding were 3,636,345 and 3,673,186 for the first quarter of 1999 and 1998,
respectively. Return on average assets is calculated by dividing annualized net
income by average total assets for the period. The Company's return on average
assets for the quarter ended March 31, 1999 was 1.59 percent compared with a
return of 2.13 percent for the quarter ended March 31, 1998. Return on average
equity is calculated by dividing annualized net income by average total
shareholders' equity for the period. The Company had a return on average equity
of 12.22 percent for the three months ended March 31, 1999 versus 15.51 percent
for the three months ended March 31, 1998.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is computed by subtracting total interest expense from total
interest income. Fluctuations in net interest income can result from the changes
in the volumes of assets and liabilities as well as changes in interest rates.
The Company's net interest income for the quarter ended March 31, 1999 decreased
$74,000 (2 percent) to $4,048,000 from $4,122,000 for the three months ended
March 31, 1998. This decrease was mainly due to reduced interest income and
discount recovery on loan pool participations and increased interest expense on
deposits and borrowed funds. Increased interest income earned on higher loan
volumes helped to minimize the decline in net interest income. Total interest
income increased $115,000 (2 percent) in the first quarter of 1999 compared with
the same period in 1998. The Company's total interest expense for the quarter
increased $189,000 (8 percent) compared with the same period in 1998. The
Company's net interest margin (on a federal tax-equivalent basis) for the first
quarter of 1999 declined to 6.04 percent from 6.73 percent in the first quarter
of 1998. Net interest margin is a measure of the net return on interest-earning
assets and is computed by dividing annualized net interest income by the average
of total interest-earning assets for the period. The Company's overall yield on
earning assets decreased to 10.02 percent for the first quarter of 1999 compared
to 10.80 percent for the first quarter of 1998. The reduction in yield on
earning assets and the consequential decline in net interest margin was
primarily attributable to the lower yield on the loan pool participations and to
the lower yield on the Company's loan portfolio in the current quarter. The rate
on interest-bearing liabilities also decreased in the first quarter of 1999 to
4.68 percent compared with 4.79 percent for the first quarter of 1998.
Interest income and fees on loans increased $373,000 (11 percent) in the first
quarter of 1999 compared to the same period in 1998, mainly due to higher loan
volumes. The average yield on loans declined to 9.14 percent for the first three
months of 1999 as competition for loans forced the Company to reduce some of its
loan rates to remain competitive in its markets. Given the current low interest
rate environment and competition for loans in the market areas served by the
Company, management does not anticipate a significant increase in the loan
portfolio yield in near-term future periods. The Company earned an average of
9.48 percent on its loans in the first quarter of 1998. Average loans
outstanding were $167,455,000 for the first three months of 1999 compared with
$145,442,000 for the first quarter of 1998, an increase of $22,013,000 (15
percent). The majority of the increase in average loan volume between the first
quarter of 1999 and 1998 occurred at Pella State Bank and Central Valley Bank.
Mahaska State Bank did experience some loan growth in the first quarter of 1999
when compared with the 1998 period. Average real estate loan volumes increased
$15,231,000 (24 percent), commercial loans averaged $4,621,000 (12 percent)
higher, and agricultural loans increased $2,929,000 (11 percent) in average
volume for the first quarter of 1999 compared with the first quarter of 1998.
Loans to individuals declined $908,000 in the first quarter of 1999 compared
with 1998.
The Company recognized $255,000 less in interest and discount income on loan
pool participations in the first quarter of 1999 compared with 1998. Interest
income and discount collected on the loan pool participations for the first
quarter of 1999 was $2,209,000 compared with $2,464,000 earned in the first
quarter of 1998. The yield on loan pool participations declined to 17.66 percent
for the first quarter of 1999 compared with 19.23 percent for the quarter ended
March 31, 1998. The average loan pool participation investment balance was
$1,216,000 (2 percent) lower in the first quarter of 1999 than in the first
quarter of 1998. These loan pool participations are pools of distressed and
nonperforming loans that the Company has purchased at a discount from the
aggregate outstanding principal amount of the underlying loans. Income is
derived from this investment in the form of interest collected and the repayment
of the principal in excess of the purchase cost which is herein referred to as
"discount recovery." The Company recognizes interest income and discount
recovery on its loan pool participations on a "nonaccrual" basis. The loan pool
participations have traditionally been a high-yield activity for the Company,
but this yield has fluctuated from period to period based on the amount of cash
collections, discount recovery, and net collection expenses of the servicer in
any given period. The yield on loan pool participations may decline in future
periods as the Company has continued to purchase higher-quality, performing loan
pools in recent periods.
The increase in interest expense for the first quarter of 1999 compared with
1998 was mainly attributable to growth in deposits and an increase in borrowed
funds. Average interest-bearing deposits for the first quarter of 1999 increased
$15,302,000 (8 percent) from the same period in 1998 with the greatest increase
occurring in the time deposit category. Borrowings on the Company's commercial
bank line of credit averaged $4,563,000 higher in the first quarter of 1999
compared with the first quarter of 1998 as the Company borrowed funds to provide
operating cash to On-Site Credit Services, Inc. Federal Home Loan Bank advances
during the first quarter of 1999 averaged $1,592,000 greater than in the first
quarter of 1998. The higher average balance of these borrowed funds resulted in
increased interest expense in 1999 compared with 1998, even though the average
rate on all interest-bearing liabilities declined. The Company's overall rate on
interest-bearing liabilities decreased to 4.68 percent for the first quarter of
1999 compared to 4.79 percent for the first quarter of 1998.
Provision for Loan Losses
The Company's provision for loan losses of $167,000 in the first quarter of 1999
was $57,000 (52 percent) higher than in the first quarter of 1998. Management
determines an appropriate provision based on its evaluation of the adequacy of
the allowance for loan losses in relationship to a continuing review of problem
loans, the current economic conditions, actual loss experience and industry
trends.
Other Income
Other income results from the charges and fees collected by the Company from its
customers for various services performed, data processing income received from
nonaffiliated banks, miscellaneous other income and gains (or losses) from the
sale of investment securities held in the available for sale category. Total
other income increased $51,000 (11 percent) in the first quarter of 1999
compared with 1998, mainly due to higher service charge income from overdraft
fees at the bank subsidiaries and also due to increased trust department income.
Other Expense
Total other noninterest expense for the quarter ended March 31, 1999 increased
$347,000 (16 percent) compared to noninterest expense for the first quarter of
1998. Other expense includes all the costs incurred to operate the Company
except for interest expense, the loan loss provision and income taxes. Salaries
and benefits expense for the first quarter of 1999 increased $179,000 (16
percent) over the first quarter of 1998, primarily as a result of the additional
employees at the newly-chartered Pella State Bank and also due to increased
salary levels needed to attract and maintain the caliber of employees required
by the organization. Net occupancy and equipment expenses for the first quarter
of 1999 increased $32,000 (10 percent) in comparison to the first quarter of
1998 with most of the increase due to the additional facilities of Pella State
Bank and the increased depreciation expense incurred on the Company's new
mainframe computer. Other operating expense increased by $138,000 (29 percent)
in the first quarter of 1999 compared with the three months ended March 31,
1998, mainly due to liquidation costs related to a problem credit managed by
On-Site Credit Services.
Income Tax Expense
Income tax expense for the three months ended March 31, 1999, decreased $155,000
compared to the amount for the three months ended March 31, 1998, primarily due
to the overall decrease in taxable income for the period. The effective income
tax rate remained at 36.4 percent in both the first quarter of 1999 and 1998.
The Company's effective income tax rate varies from the statutory rate
principally due to interest income from tax-exempt securities and loans. Changes
in the effective rate for one period in comparison to another are primarily due
to changes in the amount of tax-exempt income.
FINANCIAL CONDITION
The Company's total assets as of March 31, 1999 were $299,255,000, an increase
of $866,000 from December 31, 1998. As of March 31, 1999, the Company had
federal funds sold of $8,734,000 compared with $9,270,000 as of December 31,
1998.
Investment Securities
Investment securities available for sale increased $801,000 from December 31,
1998 to the March 31, 1999 total of $30,456,000 as a result of securities being
purchased. Investment securities classified as held to maturity were $14,851,000
as of March 31, 1999, an increase of $1,172,000 as securities were acquired
during the three-month period from December 31, 1998.
Loans
Overall loan volumes continued to increase, with total loans outstanding of
$172,198,000 as of March 31, 1999, reflecting growth of $6,771,000 (4 percent)
from December 31, 1998. Most of the growth from December 31, 1998 to March 31,
1999 was in real estate loans and agricultural loans. Consumer loans outstanding
as of the quarter-end declined approximately $1,532,000 from the December 31,
1998 balance while commercial loans decreased $3,646,000 from the prior year-end
balance. As of March 31, 1999, the Company's loan to deposit ratio (excluding
loan pool investments) was 73.7 percent. This compares with a year-end 1998 loan
to deposit ratio of 71.1 percent.
Loan Pool Participations
As of March 31, 1999, the Company had investments in loan pool participations of
$50,536,000, a decline of $3,973,000 (7 percent) from the December 31, 1998
balance. The loan pool investment balance shown as an asset on the Company's
Balance Sheet represents the discounted purchase cost of the loan pool
participations. The Company actively continued to evaluate and bid on loan pool
packages during the first quarter of 1999 and was successful in investing
$1,628,000 during the period. The loan pool participation investment as of
December 31, 1998 was $54,510,000 with the net reduction in balance attributable
to collections of principal by the loan pool servicer. The average loan pool
participation investment of $50,742,000 for the first three months of 1999 was
$1,215,000 (2 percent) lower than the average balance of $51,957,000 for the
first three months of 1998.
Deposits
Total deposits grew $795,000 (less than 1 percent) during the first quarter of
1999 with the most growth noted in savings and money market deposit accounts.
Demand deposit accounts as of March 31, 1999 decreased $3,620,000 (16 percent)
from December 31, 1998, mostly due to seasonal fluctuation.
Borrowed Funds/Notes Payable
The Company did not have any Federal Funds purchased on either March 31, 1999 or
December 31, 1998. During the first quarter of 1999, the Company did not
purchase any Fed Funds. Fixed-rate advances from the Federal Home Loan Bank
totaled $7,588,000 as of March 31, 1999 and $7,595,000 as of December 31, 1998.
Notes payable decreased to $16,200,000 on March 31, 1999 from $17,000,000 on
December 31, 1998 as the Company used cash flow from operations to reduce debt.
Nonperforming Assets
The Company's nonperforming assets totaled $2,501,000 (1.45 percent of total
loans) as of March 31, 1999, compared to $1,400,000 (.85 percent of total loans)
as of December 31, 1998. All nonperforming asset totals and related ratios
exclude the loan pool investments. The following table presents the categories
of nonperforming assets as of March 31, 1999:
<TABLE>
<CAPTION>
Nonperforming Assets
(dollars in thousands)
March 31, 1999
<S> <C>
Nonaccrual $1,852
Loans 90 days past due 637
Other real estate owned 12
$2,501
</TABLE>
From December 31, 1998 to March 31, 1999, nonaccrual loans increased $1,291,000
primarily due to concerns related to one commercial finance line which is
experiencing financial difficulties resulting in it being placed on a nonaccrual
classification. Loans ninety days past due decreased $26,000, restructured loans
decreased $164,000 as these loans were paid off and other real estate owned
remained unchanged. The Company's allowance for loan losses as of March 31,
1999, was $2,037,000, which was 1.18 percent of total loans as of that date.
This compares with an allowance for loan losses of $2,177,000 as of December 31,
1998, which was 1.32 percent of total loans. As of March 31, 1999, the allowance
for loan losses was 81.46 percent of nonperforming loans compared with 155.49
percent as of December 31, 1998. Management believes that as of March 31, 1999,
the allowance for loan losses is adequate. For the three months ended March 31,
1999, the Company recognized a net loan charge-off of $306,000 compared with a
net charge-off of $54,000 during the quarter ended March 31, 1998.
Capital Resources
As of March 31, 1999, total shareholders' equity as a percentage of total assets
was 12.95 percent compared with 12.81 percent as of December 31, 1998. The
Company held 171,156 shares of treasury stock at a cost of $2,799,000 as of
March 31, 1999. During the first quarter of 1999, the Company did not reissue
any shares of treasury stock. On January 21, 1999, the Board of Directors voted
to continue the Company's stock repurchase plan that provides for the repurchase
of up to 200,000 shares through January 31, 2000. Repurchased shares will be
used to satisfy options granted under the Company's Stock Incentive Plans. The
Company did not repurchase any shares of its stock during the first quarter of
1999. Under risk-based capital rules, the Company's tier 1 capital ratio was
14.31 percent of risk-weighted assets as of March 31, 1999, and was 14.02
percent of risk-weighted assets as of December 31, 1998, compared to a 4.00
percent requirement. Risk-based capital guidelines require the classification of
assets and some off-balance sheet items in terms of credit-risk exposure and the
measuring of capital as a percentage of the risk-adjusted asset totals. Tier 1
capital is the Company's total common shareholders' equity reduced by goodwill.
Management believes that, as of March 31, 1999, the Company and its subsidiary
banks meet all capital adequacy requirements to which they are subject. As of
that date, all the bank subsidiaries were "well capitalized" under regulatory
prompt corrective action provisions.
Liquidity
Liquidity management involves meeting the cash flow requirements of depositors
and borrowers. The Company conducts liquidity management on both a daily and
long-term basis; and it adjusts its investments in liquid assets based on
expected loan demand, projected loan maturities and payments, estimated cash
flows from the loan pool participations, expected deposit flows, yields
available on interest-bearing deposits, and the objectives of its
asset/liability management program. The Company had liquid assets (cash and cash
equivalents) of $18,136,000 as of March 31, 1999, compared with $22,121,000 as
of December 31, 1998. Much of the decrease during the quarter was utilized to
fund loan growth. Investment securities classified as available for sale could
be sold to meet liquidity needs, if necessary. Additionally, the bank
subsidiaries maintain lines of credit with correspondent banks and the Federal
Home Loan Bank that would allow them to borrow federal funds on a short-term
basis if necessary. The Company also maintains a line of credit with a major
commercial bank that provides liquidity for the purchase of loan pool
participation investments and other corporate needs. Management believes that
the Company has sufficient liquidity as of March 31, 1999 to meet the needs of
borrowers and depositors.
Market Risk Management
Market risk is the risk of earnings volatility that results from adverse changes
in interest rates and market prices. The Company's market risk is primarily
comprised of interest rate risk arising from its core banking activities of
lending and deposit taking. Interest rate risk is the risk that changes in
market interest rates may adversely affect the Company's net interest income.
Management continually develops and applies strategies to mitigate this risk.
Management does not believe that the Company's primary market risk exposures and
how those exposures were managed in the first three months of 1999 changed when
compared to 1998.
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 the volumes of the Company's
loans. This analysis measures the estimated change in net interest income in the
event of hypothetical changes in interest rates. This analysis of the Company's
interest rate risk was presented in the Form 10-K filed by the Company for the
year ended December 31, 1998.
Year 2000 Compliance
A critical issue has emerged in the banking industry and for the economy overall
regarding how existing computer application software programs, operating systems
and hardware can accommodate the date value for the year 2000. This issue is an
area of major emphasis as management is actively working with its software and
hardware vendors to assure that the Company is compliant. 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
unforseen 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. Testing procedures are completed for all currently used
hardware and software. Any new hardware or software acquired through December
31, 1999 will be tested upon installation. The Company purchased a new
main-frame computer system in 1997 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 costs incurred by
the Company for Year 2000 compliance will be approximately $35,000, exclusive of
costs associated with the new main-frame computer.
Effect of New Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, will be effective for the Company
beginning January 1, 2000. Management is evaluating the impact the adoption of
SFAS No. 133 will have on the Company's consolidated financial statements and
expects to adopt SFAS 133 when required.
Pending Acquisition of Midwest Bancshares, Inc.
The Company announced on February 2, 1999, that it had entered into a definitive
agreement to acquire all the outstanding shares of Midwest Bancshares, Inc. of
Burlington, Iowa. Midwest Bancshares is the parent company of Midwest Federal
Savings and Loan Association of Eastern Iowa, with locations in Burlington, Fort
Madison, and Wapello, Iowa. As of March 31, 1999, Midwest had total assets of
approximately $165 million, deposits of approximately $108 million, and
stockholders' equity totaling approximately $12 million. It is anticipated that
the transaction will be accounted for as a pooling-of-interests through a
tax-free exchange of one share of Company common stock for each share of Midwest
common stock outstanding. Following the exchange, Midwest Federal will be a
wholly-owned subsidiary of the Company retaining its own thrift charter. The
acquisition is subject to shareholder and regulatory approvals, with an
anticipated closing to occur in the third quarter of 1999.
Sale of On-Site Credit Services, Inc.
On April 23, 1999, the Company announced that it has elected to seek a buyer for
On-Site Credit Services, Inc., its wholly-owned commercial finance subsidiary.
In the opinion of management and the Company's board of directors, On-Site has
not generated an adequate return on investment for the organization. It is
anticipated that the sale of On-Site will improve overall asset quality in the
future and allow the Company to focus more on core business activities such as
community banking and loan pool investment opportunities. The Company has
retained a broker to market On-Site and advise management on the sale.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
With the exception of the historical information contained in this report, the
matters described herein contain forward-looking statements that involve risk
and uncertainties that individually or mutually impact the matters herein
described, including but not limited to financial projections, product demand
and market acceptance, the effect of economic conditions, the impact of
competitive products and pricing, governmental regulations, results of
litigation, technological difficulties and/or other factors outside the control
of the Company, which are detailed from time to time in the Company's SEC
reports. The Company disclaims any intent or obligation to update these
forward-looking statements.
Part II -- Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed with this Report or, if so indicated,
incorporated by reference:
Exhibits
3.1 Articles of Incorporation of Mahaska Investment Company. (f)
3.2 Bylaws of Mahaska Investment Company. (f)
10.1 Mahaska Investment Company Employee Stock Ownership Plan &
Trust as restated and amended. (b)
10.2.1 1993 Stock Incentive Plan. (a)
10.2.2 1996 Stock Incentive Plan. (d)
10.2.3 1998 Stock Incentive Plan. (e)
10.3.1 Midstates Resources Corp. Loan Participation and Servicing
Agreement dated December 9, 1992 between Midstates Resources
Corp., Mahaska Investment Company, and Mahaska State Bank. (a)
10.3.2 Central States Resources Corp. Liquidation Agreement dated
April 18, 1988 between Central States Resources Corp., Mahaska
State Bank, National Bank & Trust Co., and Randal Vardaman. (a)
10.3.3 All States Resources Corp. Loan Participation and Servicing
Agreement dated September 13, 1993 between All States Resources
Corp., Mahaska Investment Company, and West Gate Bank. (a)
10.5.1 Revolving Loan Agreement dated January 31, 1996 between Mahaska
Investment Company and Harris Trust & Savings Bank. (c)
10.5.2 Fifth Amendment to Revolving Loan Agreement and Revolving Loan
Note between Mahaska Investment Company and Harris Trust &
Savings Bank dated December 29, 1998. (g)
11 Computation of Per Share Earnings.
27 Financial Data Schedule.
(a) Incorporated by reference to the Form S-1 Registration
Number 33-81922 of Mahaska Investment Company.
(b) Incorporated by reference to the Form 10-K for the
year ended December 31, 1994 filed by Mahaska
Investment Company.
(c) Incorporated by reference to the Form 8-K filed by
Mahaska Investment Company on February 29, 1996.
(d) Incorporated by reference to the Form 10-K for the
year ended December 31, 1996 filed by Mahaska
Investment Company.
(e) Incorporated by reference to the Form 10-K for the
year ended December 31, 1997 filed by Mahaska
Investment Company.
(f) Incorporated by reference to the Form 10-Q for the
quarter ended September 30, 1998 filed by Mahaska
Investment Company.
(g) Incorporated by reference to the Form 10-K for the
year ended December 31, 1998 filed by Mahaska
Investment Company.
(b) Reports on Form 8-K -- The Company filed a report on Form 8-K on February
12, 1999 concerning the pending acquisition of Midwest Bancshares, Inc.
This was the only report on Form 8-K filed during the three months ended
March 31, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAHASKA INVESTMENT COMPANY
(Registrant)
May 12, 1999 /s/ Charles S. Howard
Dated Charles S. Howard
President
May 12, 1999 /s/ David A. Meinert
Dated David A. Meinert
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11
MAHASKA INVESTMENT COMPANY
AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
Earnings per Share information:
Weighted average number
of shares outstanding
during the year $3,636,345 3,673,186
Weighted average number
of shares outstanding during
the year including all
dilutive potential shares 3,757,646 3,883,623
Net earnings $1,157,244 1,428,547
Earnings per share-basic $ 0.32 0.39
Earnings per share-diluted $ 0.31 0.37
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDED MARCH 31, 1999
OF MAHASKA INVESTMENT COMPANY AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000741390
<NAME> MAHASKA INVESTMENT COMPANY
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 7,510 9,254
<INT-BEARING-DEPOSITS> 1,892 4,429
<FED-FUNDS-SOLD> 8,734 12,273
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 0 0
<INVESTMENTS-CARRYING> 14,851 18,321
<INVESTMENTS-MARKET> 14,965 18,387
<LOANS> 172,198 146,999
<ALLOWANCE> (2,037) (1,872)
<TOTAL-ASSETS> 299,255 276,013
<DEPOSITS> 233,529 218,529
<SHORT-TERM> 23,788 16,550
<LIABILITIES-OTHER> 3,194 3,140
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 19,038 19,038
<OTHER-SE> 19,706 18,756
<TOTAL-LIABILITIES-AND-EQUITY> 299,255 276,013
<INTEREST-LOAN> 3,774 3,400
<INTEREST-INVEST> 633 622
<INTEREST-OTHER> 2,342 2,612
<INTEREST-TOTAL> 6,749 6,634
<INTEREST-DEPOSIT> 2,288 2,169
<INTEREST-EXPENSE> 2,701 2,512
<INTEREST-INCOME-NET> 4,048 4,122
<LOAN-LOSSES> 167 110
<SECURITIES-GAINS> 0 26
<EXPENSE-OTHER> 2,555 2,207
<INCOME-PRETAX> 1,818 2,246
<INCOME-PRE-EXTRAORDINARY> 1,157 1,430
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,157 1,430
<EPS-PRIMARY> 0.32 0.39
<EPS-DILUTED> 0.31 0.37
<YIELD-ACTUAL> 10.02 10.80
<LOANS-NON> 1,852 972
<LOANS-PAST> 637 519
<LOANS-TROUBLED> 0 351
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> (2,177) (1,816)
<CHARGE-OFFS> 339 64
<RECOVERIES> (32) (10)
<ALLOWANCE-CLOSE> (2,037) (1,872)
<ALLOWANCE-DOMESTIC> (2,037) (1,872)
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> (2,037) (1,872)
</TABLE>
