-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ue9hbUjPR8tLHYHOTuin0WI2OtY0na6w1f2JnEahCAs3Jxnkm4O8fuDgRTf8CfFf IPBgTb2QCpDKn+CMx1qkTw== 0000950131-00-002242.txt : 20000331 0000950131-00-002242.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950131-00-002242 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAHASKA INVESTMENT CO CENTRAL INDEX KEY: 0000741390 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 421003699 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24630 FILM NUMBER: 586991 BUSINESS ADDRESS: STREET 1: 222 FIRST AVENUE EAST CITY: OSKALOOSA STATE: IA ZIP: 52577 BUSINESS PHONE: 5156738448 MAIL ADDRESS: STREET 1: 222 FIRST AVDNUE EAST CITY: OSKALOOSA STATE: IA ZIP: 52577 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- 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, 1999 Commission file number 0-24630 ---------------- MAHASKA INVESTMENT COMPANY I.R.S. Employer Identification No. Incorporated in Iowa 42-1003699 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 ------------------- ----------------------------------------- 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 [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 27, 2000, was $30,484,863. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the most recent practicable date, March 27, 2000. 4,269,514 shares Common Stock, $5 par value DOCUMENTS INCORPORATED BY REFERENCE The Annual Report to Shareholders for the 1999 fiscal year is incorporated by reference into Part II hereof to the extent indicated in such Part. The definitive proxy statement of Mahaska Investment Company for the 2000 annual meeting of shareholders is incorporated by reference into Part II and Part III hereof to the extent indicated in such Parts. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS PART I ITEM 1. BUSINESS....................................................... 1 A. GENERAL DESCRIPTION......................................... 1 B. SUBSIDIARIES................................................ 1 C. LOAN POOL PARTICIPATIONS.................................... 2 D. COMPETITION................................................. 6 E. SUPERVISION AND REGULATION.................................. 6 F. EMPLOYEES................................................... 8 G. STATISTICAL DISCLOSURE...................................... 9 ITEM 2. PROPERTIES..................................................... 17 ITEM 3. LEGAL PROCEEDINGS.............................................. 18 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 18 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................................ 19 ITEM 6. SELECTED FINANCIAL DATA........................................ 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................................... 19 ITEM 7A. MARKET RISK DISCLOSURE......................................... 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 19 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................................... 19 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 20 ITEM 11. EXECUTIVE COMPENSATION......................................... 20 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................................................... 20 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 20 PART IV EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8- ITEM 14. K.............................................................. 21
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 four bank subsidiaries (collectively referred to as the "Banks"). These four banks are Mahaska State Bank ("MSB"), Central Valley Bank ("CVB"), Pella State Bank ("PSB") and Midwest Federal Savings and Loan Association of Eastern Iowa ("MFS"). The Company also owns 100% of the stock of a commercial finance company 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 factoring, 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. The Bank wholly-owns a service corporation, Valley Financial Services, Inc., that provides crop insurance products and investment brokerage services 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 facility which the Company purchased 1 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. Midwest Federal Savings and Loan Association of Eastern Iowa--MFS is a full- service federally-chartered savings bank which was acquired by the Company on September 30, 1999. MFS is headquartered in Burlington, Iowa and serves the Des Moines county market through its main office and a branch in Burlington and a Wal-Mart Super Center branch in West Burlington. MFS also serves the Lee County market through a branch in Fort Madison, Iowa and the Wapello County area through a branch in Wapello, Iowa. MFS is a community-oriented financial institution which offers a variety of financial services to meet the needs of the communities it serves. MFS is primarily engaged in attracting retail deposits from the general public and investing those funds primarily in first mortgages on single family residences and mortgage-backed securities. MFS also originates and purchases residential construction, small-business commercial, consumer and other loans in its market area. Tax-deferred annuities and other financial products are sold by MFS through its wholly-owned subsidiary Midwest Financial Products, Inc. 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 provided by On-Site through funds provided by the Company. On-Site also provides accounts receivable financing and factoring services to small businesses mainly in the state of Iowa. In April of 1999, the Company's Board of Directors determined that it would discontinue the activities of On-Site. Management continues to evaluate the options and/or alternatives related to the assets of the entity. Effective March 21, 2000, the name of On-Site was changed to MIC Financial, Inc. 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 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 2 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 large banking organizations. 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 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 81 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 real property or personal 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, 3 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 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. These costs include salary and benefits paid by the Servicer to its employees, legal fees, costs to maintain and insure real estate owned, and other operating expenses. 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. 4 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. Recently, the Servicer has begun providing aging reports and "watch lists" for the loan pools purchased by States Resources. 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 loan review officer and its internal auditor perform asset reviews and audit procedures on a regular basis. The terms of the MidStates and All States collection agreements provide for tracking of each loan pool investment 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. All pools purchased between 1991 and 1997 were subject to the terms of the MidStates and All States arrangement. Beginning in 1998, all purchases of loan pools were made by a new servicing organization called States Resources Corporation. This corporation utilizes a different collection fee arrangement from MidStates and All States that was created to enable the Company and the Servicer to invest in higher-quality performing assets and still provide both parties with an acceptable return. Under the terms of the States Resources agreement, the Servicer receives a servicing fee based on one percent of the gross monthly collections of principal and interest, net of collection costs. Additionally, the Servicer receives a tiered percentage share of the recovery profit in excess of the investors' required return on investment on each individual loan pool. In the event that the return on a particular pool does not exceed the required return on investment, the Servicer does not receive a percentage share. 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, 1999 and 1998, such cost basis was $67,756,000 and $54,510,000, respectively, while the contractual outstanding principal amounts of the underlying loans as of such dates were approximately $95,707,000 and $83,058,000, 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 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. As part of the on-going collection process, the servicer may, from time-to-time, foreclose on real estate mortgages and acquire title to property in satisfaction of such debts. This real estate may be held by the servicer as "real estate owned" for a period of time until it can be sold. Since the Company's investment in loan pools are classified as participtions in pools of loans, the Company does not include the real estate owned that is held by the servicer with the amount of any other real estate it may hold directly as a result of its own foreclosure activities. 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. 5 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 Des Moines, Iowa, Jefferson, Keokuk, Lee, Mahaska, Marion, and Wapello counties in south central and south east 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, 1999, there were approximately forty other banks having 99 offices or branches operating within the eight counties that the Company has locations. 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, Commercial Federal Bank, FSB, and Brenton Banks. 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 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 6 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 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 and Midwest Federal Savings are subject to the supervision of and are regularly examined by the OTS and are assessed fees by the OTS based upon their individual assets totals. As savings 7 institutions, both CVB and MFS must maintain certain minimum capital ratios established by the OTS and are 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, 1999, both CVB and MFS 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 served 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. On November 2, 1999, the Gramm-Leach-Bliley Act was enacted into law. This legislation provides for significant financial services reform by repealing key provisions of the Glass Steagall Act thereby permitting commercial banks to affiliate with investment banks, it substantially modifies the Bank Holding Company Act of 1956 to permit companies that own banks to engage in any type of financial activity, and it allows subsidiaries of banks to engage in a broad range of financial activities that are not permitted for banks themselves. The effects of this legislation, both from the opportunities for new activities that the Company may undertake and from the changes in competitors' activities, have not been fully ascertained at this time. 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, 1999, the Company had 148 full-time employees and 19 part- time employees of which 56 full-time and 10 part-time employees were employed by MSB, 30 full-time and 3 part-time employees were employed by CVB, 8 full- time and 2 part-time employees were employed by PSB, 4 full-time employed by 8 On-Site, 39 full-time and 4 part-time employed by MFS, and 11 full-time employees were employed directly by the Company. The Company provides its employees with a comprehensive program of benefits, some of which are on a contributory basis, including comprehensive medical and dental plans, life insurance, long-term and short-term disability coverage, a 401(k) plan, and an employee stock ownership plan. None of the employees are represented by unions. Management considers its relationship with its employees to be excellent. 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, 1999, 1998 and 1997 reported on a fully tax-equivalent basis assuming a 34% tax rate.
Year ended December 31, ----------------------------------------------------------------------------------- 1999 1998 1997 --------------------------- --------------------------- --------------------------- Interest Average Interest Average Interest Average Average Income(2)/ Rate/ Average Income(2)/ Rate/ Average Income(2)/ Rate/ Balance Expense Yield Balance Expense Yield Balance Expense Yield -------- ---------- ------- -------- ---------- ------- -------- ---------- ------- (dollars in thousands) Average earning assets: Loans(1).................. $202,733 $17,577 8.67% $157,712 $15,026 9.53% $131,081 $12,293 9.38% Loan pool participations.. 59,564 7,668 12.87 49,805 7,970 16.00 49,399 8,474 17.15 Interest-bearing deposits................. 1,868 82 4.37 2,359 122 5.20 2,085 108 5.20 Investment securities available for sale: Taxable investments..... 34,617 2,094 6.05 25,730 1,617 6.28 26,052 1,705 6.55 Tax exempt investments.. 2,249 182 8.11 0 0 0.00 0 0 0.00 Investment securities held to maturity: Taxable investments..... 10,639 696 6.54 9,821 569 5.80 16,421 928 5.65 Tax exempt investments.. 7,595 505 6.65 7,265 491 6.75 7,459 486 6.51 Federal funds sold........ 5,368 260 4.86 6,465 338 5.24 2,375 128 5.39 -------- ------- -------- ------- -------- ------- Total earning assets.. $324,633 $29,064 8.95 $259,157 $26,133 10.08 $234,872 $24,122 10.27 ======== ======= ======== ======= ======== ======= Average interest-bearing liabilities: Interest-bearing demand deposits................. $ 35,477 $ 637 1.80 $ 33,248 $ 656 1.97 $ 32,225 $ 677 2.10 Savings deposits.......... 74,609 2,837 3.80 59,419 2,241 3.77 59,019 2,259 3.83 Certificates of deposit... 132,656 7,060 5.32 107,284 6,102 5.69 96,609 5,442 5.63 Federal funds purchased... 1,683 94 5.56 201 12 5.87 534 32 5.93 Federal Home Loan Bank advances................. 21,522 1,287 5.98 6,840 405 5.92 2,274 138 6.07 Note payable.............. 16,621 1,280 7.70 13,342 1,074 8.05 9,292 764 8.23 -------- ------- -------- ------- -------- ------- Total interest-bearing liabilities............ $282,568 $13,195 4.67 $220,334 $10,490 4.76 $199,953 $ 9,312 4.66 ======== ======= ======== ======= ======== ======= Net interest income....... $15,869 4.28 $15,643 5.32 $14,810 5.61 ======= ======= ======= Net interest margin(3).... 4.89% 6.04% 6.31% ===== ===== =====
- -------- (1) Average loans outstanding includes the daily average balance of non- performing loans. Interest on these loans does not include additional interest of $258,000, $109,000, and $122,000 for 1999, 1998 and 1997, 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. 9 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.
Year ended December 31, ---------------------------------------------- 1999 Compared to 1998 1998 Compared to Increase/ (Decrease) 1997 Increase/ Due to (Decrease) Due to ----------------------- --------------------- Volume Rate Net Volume Rate Net ------ ------- ------ ------ ----- ------ (in thousands) Interest income from average- earning assets: Loans....................... $3,996 $(1,445) $2,551 $2,534 $ 199 $2,733 Loan pool participations(1).......... 1,409 (1,711) (302) 69 (573) (504) Interest-bearing deposits... (23) (17) (40) 14 0 14 Investment securities available for sale: Taxable investments....... 540 (63) 477 (20) (68) (88) Tax exempt investments ... 91 91 182 0 0 0 Investment securities held to maturity: Taxable investments....... 50 77 127 (382) 23 (359) Tax exempt investments.... 22 (8) 14 (13) 18 5 Federal funds sold.......... (55) (23) (78) 214 (4) 210 ------ ------- ------ ------ ----- ------ Total income from earning assets......... 6,030 (3,099) 2,931 2,416 (405) 2,011 ------ ------- ------ ------ ----- ------ Average expense of average interest-bearing liabilities: Interest-bearing demand deposits................... 42 (61) (19) 21 (42) (21) Savings deposits............ 578 18 596 15 (33) (18) Certificates of deposit..... 1,370 (412) 958 606 54 660 Federal funds purchased..... 83 (1) 82 (20) 0 (20) Federal Home Loan Bank advances................... 878 4 882 271 (4) 267 Note payable................ 254 (48) 206 327 (17) 310 ------ ------- ------ ------ ----- ------ Total expense form interest-bearing liabilities............ 3,205 (500) 2,705 1,220 (42) 1,178 ------ ------- ------ ------ ----- ------ Net interest income......... $2,825 $(2,599) $ 226 $1,196 $(363) $ 833 ====== ======= ====== ====== ===== ======
- -------- (1) Includes interest income and discount realized on loan pool participations. 10 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, 1999, 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.
Over Three Three One to Three Months or Months to Three Years or Less One Year Years More Total --------- --------- --------- -------- -------- (dollars in thousands) Interest earning assets: Loans.................... $ 55,725 $ 42,424 $ 63,495 $120,447 $282,091 Loan pool participations.......... 5,420 16,260 42,456 3,620 67,756 Interest-bearing deposits in banks................ 1,700 0 0 0 1,700 Investment securities: Available for sale..... 773 3,496 14,426 41,835 60,530 Held to maturity....... 1,297 1,178 4,667 22,303 29,445 Federal funds sold....... 7,865 0 0 0 7,865 --------- --------- --------- -------- -------- Total interest earning assets...... 72,780 63,358 125,044 188,205 449,387 --------- --------- --------- -------- -------- Interest-bearing liabilities: Now and Super NOW deposits................ 42,378 0 0 0 42,378 Savings deposits......... 96,377 0 0 0 96,377 Certificates of deposit.. 38,575 75,919 64,262 7,964 186,720 Federal funds purchased.. 2,965 0 0 0 2,965 Federal Home Loan Bank advances................ 23,468 11,404 9,756 18,793 63,421 Note payable............. 18,000 0 0 0 18,000 --------- --------- --------- -------- -------- Total interest- bearing liabilities......... 221,763 87,323 74,018 26,757 409,861 --------- --------- --------- -------- -------- Interest sensitivity gap per period.............. $(148,983) $ (23,965) $ 51,026 $161,448 ========= ========= ========= ======== Cumulative Interest sensitivity gap......... $(148,983) $(172,948) $(121,922) $ 39,526 ========= ========= ========= ======== Interest sensitivity gap ratio................... 0.33% 0.73% 1.69% 7.03% Cumulative Interest sensitivity gap ratio... 0.33% 0.44% 1.17% 3.11%
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. 11 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, 1999, 1998 and 1997.
December 31, ----------------------- 1999 1998 1997 ------- ------- ------- (in thousands) Securities available for sale: U.S. government securities............................ $ 5,021 $ 4,603 $ 4,563 U.S. government agency securities..................... 35,302 16,408 15,313 Obligations of states and political subdivisions...... 7,780 0 0 Other investment securities........................... 12,427 8,644 3,352 ------- ------- ------- Total securities available for sale................. 60,530 29,655 23,228 ------- ------- ------- Securities held to maturity: U.S. government securities............................ 0 0 5,046 U.S. government agency securities..................... 19,685 1,290 2,885 Obligations of states and political subdivisions...... 7,573 8,291 6,793 Other investment securities........................... 2,187 4,098 5,109 ------- ------- ------- Total securities held to maturity................... 29,445 13,679 19,833 ------- ------- ------- Total investment securities............................. $89,975 $43,334 $43,061 ======= ======= =======
The following table sets forth the contractual maturities of investment securities as of December 31, 1999, and the weighted average yields (for tax- exempt obligations on a fully tax-equivalent basis assuming as 34% tax rate) of such securities. As of December 31, 1999, the Company held no securities with a book value exceeding 10% of shareholders' equity.
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) Securities available for sale: U.S. government securities........... $ 1,503 6.03% $ 3,519 5.60% $ 0 0.00% $ 0 0.00% U.S. government agency securities........... 773 6.27 20,692 5.74 1,982 6.11 11,854 7.38 Obligations of states and political subdivisions......... 0 0.00 1,096 4.12 1,651 4.98 5,033 5.04 Other investment securities........... 1,993 5.88 5,519 5.68 0 0.00 4,915 6.45 -------- ---------- --------- --------- Total securities available for sale.. 4,269 6.00 30,826 5.65 3,633 5.60 21,802 6.63 -------- ---------- --------- --------- Securities held to maturity: U.S. government agency securities........... 0 0.00 2,072 7.01 3,432 7.06 14,181 6.87 Obligations of states and political subdivisions......... 881 6.46 6,367 6.51 125 8.63 200 7.57 Other investment securities........... 1,594 5.91 493 6.00 0 0.00 100 7.15 -------- ---------- --------- --------- Total securities held to maturity.......... 2,475 6.11 8,932 6.60 3,557 7.12 14,481 6.88 -------- ---------- --------- --------- Total investment securities............. $ 6,744 6.04% $ 39,758 5.87% $ 7,190 6.35% $ 36,283 6.73% ======== ========== ========= =========
12 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, 1999, 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.
December 31, ------------------------------------------------------------------------------ 1999 1998 1997 1996 1995 -------------- -------------- -------------- -------------- -------------- % of % of % of % of % of Amount Total Amount Total Amount Total Amount Total Amount Total -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- (dollars in thousands) Agricultural............ $ 42,022 14.9% $ 27,504 16.6% $ 24,779 17.2% $ 19,940 17.0% $ 16,319 18.9% Commercial.............. 38,238 13.6 38,959 23.6 31,198 21.6 23,613 20.1 22,235 25.7 Real estate: 1-4 family residences........... 131,925 46.7 38,087 23.0 32,341 22.4 27,274 23.3 15,765 18.2 5+residential property............. 4,064 1.4 240 0.1 251 0.2 261 0.2 0 0.0 Agricultural............ 21,677 7.7 21,297 12.9 19,647 13.6 16,952 14.4 9,855 11.4 Construction............ 5,593 2.0 5,956 3.6 4,430 3.1 4,017 3.4 2,502 2.9 Commercial.............. 23,613 8.4 17,007 10.3 15,634 10.8 11,895 10.1 10,097 11.7 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Real estate total..... 186,872 66.2 82,587 49.9 72,303 50.1 60,399 51.4 38,219 44.2 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Installment............. 13,866 4.9 12,847 7.8 13,268 9.2 11,522 9.8 7,637 8.8 Lease financing......... 1,093 0.4 3,530 2.1 2,785 1.9 1,942 1.7 2,067 2.4 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total loans(1)....... $282,091 100.0% $165,427 100.0% $144,333 100.0% $117,416 100.0% $ 86,477 100.0% ======== ===== ======== ===== ======== ===== ======== ===== ======== ===== Total assets............ $486,189 $298,389 $274,873 $251,851 $205,162 ======== ======== ======== ======== ======== Loans to total assets... 58.0% 55.4% 52.5% 46.6% 42.1%
- -------- (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, 1999.
Total for Loans Due After One Year Having: One to Due After ---------------- Due Within Five Five Fixed Variable One Year Years Years Total Rates Rates ---------- ------- --------- ------- ------- -------- (in thousands) Agricultural............ $27,602 $10,975 $3,445 $42,022 $ 7,062 $7,358 Commercial.............. 20,680 14,900 2,658 38,238 15,929 1,629 Real estate-- construction........... 3,776 882 935 5,593 1,350 467 ------- ------- ------ ------- ------- ------ Total................. $52,058 $26,757 $7,038 $85,853 $24,341 $9,454 ======= ======= ====== ======= ======= ======
The following table provides information on the Company's non-performing loans as of the dates indicated.
December 31, ------------------------------------ 1999 1998 1997 1996 1995 ------ ------ ------ ------ ---- (dollars in thousands) 90 days past due........................ $1,426 $ 663 $ 522 $ 625 $134 Restructured............................ 515 164 387 380 409 Nonaccrual.............................. 2,874 561 927 1,085 124 ------ ------ ------ ------ ---- Total non-performing loans............ $4,815 $1,388 $1,836 $2,090 $667 ====== ====== ====== ====== ==== Ratio of nonperforming loans to total loans.................................. 1.71% 0.84% 1.27% 1.78% 0.78%
13 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, 1999, 1998, 1997, 1996 and 1995.
Year ended December 31, ----------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- ------- (dollars in thousands) Amount of loans outstanding at end of period (net of unearned interest)(1)................ $282,091 $165,427 $144,333 $117,416 $85,869 ======== ======== ======== ======== ======= Average amount of loans outstanding for the period (net of unearned interest).. $202,733 $157,712 $131,081 $105,372 $81,175 ======== ======== ======== ======== ======= Allowance for possible loan losses at beginning of period...................... $ 2,177 $ 1,816 $ 1,491 $ 1,001 $ 881 -------- -------- -------- -------- ------- Charge-offs: Agricultural............... 303 135 19 41 53 Commercial................. 1,724 638 14 10 18 Real estate--construction.. 0 0 0 0 0 Real estate--mortgage...... 229 0 30 0 2 Installment................ 56 63 63 38 18 Lease financing............ 63 4 11 616 0 -------- -------- -------- -------- ------- Total charge-offs........ 2,375 840 137 705 91 -------- -------- -------- -------- ------- Recoveries: Agricultural............... 26 1 11 6 24 Commercial................. 2 8 18 1 1 Real estate--construction.. 0 0 0 0 0 Real estate--mortgage...... 6 0 1 0 0 Installment................ 12 13 15 8 10 Lease financing............ 14 0 0 23 8 -------- -------- -------- -------- ------- Total recoveries......... 60 22 45 38 43 -------- -------- -------- -------- ------- Net loans charged off........ 2,315 818 92 667 48 Provision for possible loan losses...................... 3,628 1,179 417 987 168 Allowance at date of acquisition................. 516 0 0 170 0 -------- -------- -------- -------- ------- Allowance for possible loan losses at beginning of period...................... $ 4,006 $ 2,177 $ 1,816 $ 1,491 $ 1,001 ======== ======== ======== ======== ======= Net loans charged off to average loans............... 1.14% 0.52% 0.07% 0.63% 0.06% Allowance for possible loan losses to total loans at end of period................... 1.42% 1.32% 1.26% 1.27% 1.17%
- -------- (1) Loans do not include, and the allowance for loan losses not include any reserve for, investments in loan pool participations. 14 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:
December 31, -------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 -------------------- -------------------- -------------------- -------------------- -------------------- Percent of Percent of Percent of Percent of Percent of Loans to Loans to Loans to Loans to Loans to Allowance Total Allowance Total Allowance Total Allowance Total Allowance Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans --------- ---------- --------- ---------- --------- ---------- --------- ---------- --------- ---------- (dollars in thousands) Agricultural..... $ 597 14.9% $ 361 16.6% $3,310 17.2% $ 254 17.0% $ 262 18.9% Commercial....... 545 13.6 514 23.6 392 21.6 300 20.1 248 25.7 Real estate-- mortgage........ 2,652 66.2 1,086 49.9 912 50.1 766 51.4 392 44.2 Installment...... 196 4.9 170 7.8 167 9.2 146 9.8 78 8.8 Lease financing.. 16 0.4 46 2.1 35 1.9 25 1.7 21 2.4 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total........... $4,006 100.0% $2,177 100.0% $1,816 100.0% $1,491 100.0% $1,001 100.0% ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
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, 1999, 1998 and 1997.
Year ended December 31, ------------------------------------------- 1999 1998 1997 ------------- ------------- ------------- Average Average Average Balance Rate Balance Rate Balance Rate -------- ---- -------- ---- -------- ---- (dollars in thousands) Non-interest bearing demand deposits........................ $ 21,052 N/A $ 19,159 N/A $ 17,465 N/A Interest-bearing demand (NOW and money market)................... 35,477 1.80% 33,248 1.97% 32,225 2.10% Savings deposits................. 74,609 3.80 59,419 3.77 59,019 3.83 Certificates of deposit.......... 132,656 5.32 107,284 5.69 96,609 5.63 -------- -------- -------- Total deposits................. $263,794 5.27% $219,110 4.11% $205,318 4.08% ======== ==== ======== ==== ======== ====
The following table summarizes certificates for deposit in amounts of $100,000 or more by time remaining until maturity as of December 31, 1999. These times 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.
December 31, 1999 -------------- (in thousands) Three months or less.......................................... $ 9,887 Over three through six months................................. 4,232 Over six months through one year.............................. 7,207 Over one year................................................. 4,855 ------- Total....................................................... $26,181 =======
15 VI. Return on Equity and Assets Various operating and Equity Ratios for the years indicated are presented below:
Year ended December 31, -------------------- 1999 1998 1997 ------ ----- ----- Return on average total assets......................... 0.64% 1.65% 1.98% Return on average equity............................... 5.29 12.16 14.47 Dividend payout ratio.................................. 103.45 44.44 34.78 Average equity to average assets....................... 12.04 13.54 13.69 Equity to assets ratio................................. 10.33 12.81 13.37 ====== ===== =====
VII. Borrowed Funds The following table summaries the outstanding amount of and the average rate on borrowed funds as of December 31, 1999, 1998 and 1997.
December 31, ----------------------------------------------- 1999 1998 1997 --------------- --------------- --------------- Average Average Average Balance Rate Balance Rate Balance Rate ------- ------- ------- ------- ------- ------- (dollars in thousands) Note payable(1)............... $18,000 8.13% $17,000 7.38% $14,050 8.25% Federal Home Loan Bank advances..................... 63,421 5.79 7,595 5.68 6,000 5.96 Federal funds purchased....... 2,965 5.22 0 0.00 0 0.00 ------- ------- ------- Total....................... $84,386 6.27% $24,595 6.83% $20,050 7.56% ======= ==== ======= ==== ======= ====
- -------- (1) The notes payable balance at December 31, 1999 consists of advances on a $20,000,000 revolving line of credit. The line has a variable interest rate which currently is three-eights of a percent below the lender's prime rate. Interest is payable quarterly and the line is due June 30, 2000. The maximum amount of borrowed funds outstanding at any month end for the years ended December 31, 1999, 1998 and 1997 were as follows:
1999 1998 1997 ------- ------- ------- (in thousands) Note payable........................................... $19,860 $17,000 $14,050 Federal Home Loan Bank advances........................ 65,410 12,299 6,000 Federal funds purchased................................ 8,665 3,775 2,150 ======= ======= =======
The following table sets forth the average amount of and the average rate paid on borrowed funds for the years ended December 31, 1999, 1998 and 1997.
Year ended December 31, ----------------------------------------------- 1999 1998 1997 --------------- --------------- --------------- Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate ------- ------- ------- ------- ------- ------- (dollars in thousands) Note payable.................. $16,621 7.70% $13,342 8.05% $ 9,292 8.23% Federal Home Loan Bank advances..................... 21,522 5.98 6,840 5.92 2,274 6.07 Federal funds purchased....... 1,683 5.56 201 5.87 534 5.93 ------- ------- ------- Total....................... $39,826 6.68% $20,383 7.31% $12,100 7.72% ======= ==== ======= ==== ======= ====
16 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. CVB leases its "In-Store" branch facility in Fairfield. The branch is located in an Econofoods 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. Management of CVB is currently re-evaluating the future of this branch facility. 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. PSB is currently negotiating a lease arrangement whereby it would move its main office into a new facility presently under construction in Pella's main business district. The current facility would be maintained as a branch location. It is anticipated that the move would take place early in the year 2001. Midwest Federal Savings owns its main office in Burlington, Iowa and three of its branch office facilities. The main office located at 3225 Division Street, on the western side of the community, is adjacent to one of the major highways through Burlington. It is a one-story facility of approximately 10,300 square feet, constructed in 1974, with four drive-up lanes and one ATM. MFS also owns a branch facility located in Burlington's main downtown business district at 323 Jefferson Street. This facility is approximately 2,400 square feet and was the main office until 1974. The branch located in Fort Madison, Iowa at 926 Avenue G was acquired in 1975, has one drive-up window, and contains approximately 3,300 square feet on one level. The 960 square foot Wapello, Iowa branch is located on Highway 61 and was acquired in 1974. MFS leases a 540 square foot branch facility located in the Wal-Mart Super Center at 324 W. Agency Road in West Burlington. The branch was opened in 1997 under an initial lease term of 5 years, with a 5 year option to extend. 17 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. 18 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information appearing on page 8 of the Company's Annual Report, filed as Exhibit 13 hereto, is incorporated herein by reference. There were approximately 469 holders of record of the Company's $5 common stock as of March 8, 2000. 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 $8.5625 on March 27, 2000. The Company increased dividends to common shareholders in 1999 to $.60 per share, a 7.1 percent increase over $.56 for 1998. Dividend declarations are evaluated and determined by the Board of Directors on a quarterly basis. In February 2000, 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 4 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 A-1 through A-10 of the Appendix to the Company's definitive proxy Statement, is incorporated herein by reference. ITEM 7A. MARKET RISK DISCLOSURE The information appearing on pages A-8 and A-9 of the Appendix to the Company's definitive proxy statement, is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information appearing on pages A-11 through A-33 of the Appendix to the Company's definitive proxy statement, is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Within the twenty-four months prior to the date of the most recent financial statements, there have been no changes in or disagreements with accountants of the Company. 19 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. 20 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The following exhibits and financial statement schedules are filed as part of this report: (a)1. Financial Statements: See the financial statements on pages A-11 through A-33 of the Appendix to the Company's definitive proxy statement, which are incorporated by reference herein. 2. Exhibits (not covered by independent auditors' report).
Exhibit Description ------- ----------- 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. 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. 10.1 Mahaska Investment Company Employee Stock Ownership Plan & Trust as restated and amended. This Plan & Trust is incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 10.2.1 1993 Stock Incentive Plan. This 1993 Stock Incentive Plan is incorporated by reference to Form S-1 Registration Number 33-81922 of Mahaska Investment Company. 10.2.2 1996 Stock Incentive Plan. This 1996 Stock Incentive Plan is incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 10.2.3 1998 Stock Incentive Plan. 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. 10.3.1 Midstates Resources Corp. Loan Participation and Servicing Agreement dated December 9, 1992 between Midstates Resources Corp., Mahaska Investment Company and Mahaska State Bank. This Midstates Resources Corp. Agreement is incorporated by Reference to Form S-1 Registration Number 33-81922 of Mahaska Investment Company. 10.3.2 Central States Resources Corp. Liquidation Agreement dated April 18, 1988 between Central States Resources Corp., Mahaska State Bank, National Bank & Trust Co., and Randal Vardaman. This Central States Resources Corp. Agreement is incorporated by reference to Form S-1 Registration Number 33-81922 of Mahaska Investment Company. 10.3.3 All States Resources Corp. Loan Participation and Servicing Agreement dated September 13, 1993 between All States Resources Corp., Mahaska Investment Company and West Gate Bank. This All States Resources Corp. Agreement is incorporated by reference to Form S-1 Registration Number 33-81922 of Mahaska Investment Company. 10.3.4 States Resources Corp. Loan Participation and Servicing Agreement dated February 5, 1999 between States Resources Corp. and Mahaska Investment Company. 10.5.1 Revolving Loan Agreement dated January 31, 1996 between Mahaska Investment Company and Harris Trust and Savings Bank. This Loan Agreement is incorporated herein by reference to the Form 8-K report filed by Mahaska Investment Company on February 29, 1996. 10.5.2 Sixth Amendment and Waiver to Credit Agreement between Mahaska Investment Company and Harris Trust & Savings Bank dated June 30, 1999. This Amendment and Waiver to the Credit Agreement is incorporated herein by reference to the Form 10-Q report filed by Mahaska Investment Company for the Quarter ended September 30, 1999.
21
Exhibit Description ------- ----------- 10.6 Agreement and Plan of Merger By and Between Mahaska Investment Company and Midwest Bancshares, Inc. dated February 2, 1999. This agreement and plan of merger is incorporated herein by reference to Amendment No. 1 to the Form S-4 Registration number 333-79291 filed by Mahaska Investment Company on August 17, 1999. 11 Computation of Per Share Earnings 13 The Annual Report to Shareholders of Mahaska Investment Company for the 1999 calendar year. 21 Subsidiaries 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 1999. 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) /s/ Charles S. Howard By: _________________________________ Charles S. Howard Chairman, President, Chief Executive Officer and Director March 28, 2000 POWER OF ATTORNEY Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Charles S. Howard Director, Chairman of the March 28, 2000 ______________________________________ Board, President and Charles S. Howard Chief Executive Officer /s/ David A. Meinert Director, Executive Vice March 28, 2000 ______________________________________ President and Chief David A. Meinert Financial Officer (Principal Accounting Officer) /s/ Martin L. Bernstein Director March 28, 2000 ______________________________________ Martin L. Bernstein /s/ Richard R. Donahue Director March 28, 2000 ______________________________________ Richard R. Donahue /s/ William D. Hassel Director March 28, 2000 ______________________________________ William D. Hassel ______________________________________ (resigned as a director R. Spencer Howard effective February 29, 2000) ______________________________________ (incapacitated due to James F. Mathew illness) /s/ John P. Pothoven Director March 28, 2000 ______________________________________ John P. Pothoven /s/ John W. N. Steddom Director March 28, 2000 ______________________________________ John W. N. Steddom
23 EX-10.3.4 2 LOAN PARTICIPATION & SERVICING AGREEMENT EXHIBIT 10.3.4 -------------- STATES RESOURCES CORP. LOAN PARTICIPATION AND SERVICING AGREEMENT ----------------------- THIS AGREEMENT is effective as of this 5th day of February 1999, between States Resources Corp., an Iowa Corporation (SRC) and Mahaska Investment Company, an Iowa Corporation ("MIC" and/or "Participants"). WITNESSETH: WHEREAS, SRC is engaged in the business of purchasing assets from banks, savings associations or other entities (collectively referred to as the "Seller(s)"); WHEREAS, the Participant may from time to time approve and agree to fund SRC's bids to purchase such assets: WHEREAS, SRC and the Participant wish to formalize their Agreement providing for the liquidation of the assets purchased from Seller (Assets) and division of the revenue from the liquidation of the Assets. NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, it is agreed: SECTION 1: DEFINITIONS ----------------------- 1.1 The term "Agreement" shall mean this States Resources Corp. Loan Participation and Servicing Agreement. 1.2 The term "Allocated Costs" shall have the meaning given to it in Section 6.2 of this Agreement. 1.3 The term "Assets" shall mean the Assets purchased by SRC from Seller and described in the Loan Sale Agreements between SRC and Seller(s). 1.4 The term "Participants' Return on Investment (ROI)" shall have the meaning given to it in Section 7 of this Agreement. 1.5 The term "Budget" shall have the meaning given to it in Section 6.4 of this Agreement. 1.6 The term "Certificates of Participation" shall have that meaning given to it in Section 3.3 of this Agreement. -1- 1.7 The term "Costs" shall have that meaning given to it in Section 6.2 of this Agreement. 1.8 The term "Costs Reimbursement" shall have that meaning given to it in Section 2.3 of this Agreement. 1.9 The term "CSRC/MRC/ARC Loans" shall have the meaning given to it in Section 6.2 of this Agreement. 1.10 The term "Interest Income" shall mean that portion of the Receipts attributable to interest paid on the unpaid principal balances of the Assets. 1.11 The term "Net Interest Income" shall mean the Interest Income less that portion of the Costs which bears the same relationship to total Costs as the Interest Income bears to the Receipts. In the event of a Termination With Cause, the term "Net Interest Income" shall include the meaning given to it in Section 9.4(c) of this Agreement. 1.12 The term "Net Basis Recoveries" shall mean the Basis Recoveries less that portion of the Costs which bears the same relationship to the total Costs as the Basis Recoveries bears to the Receipts. 1.13 The term "Net Receipts" shall mean the Receipts less items set forth in Section 7.3. 1.14 The term "New Servicing Corporations" shall have the meaning given to it in Section 6.2 of this Agreement. 1.15 The term "New Servicing Corporations' Loans"shall have the meaning given to it in Section 6.2 of this Agreement. 1.16 The term "Other SRC Loans" shall have the meaning given to it in Section 6.2 of this Agreement. 1.17 The term "Participants" shall mean the participants identified in the first paragraph of this Agreement. 1.18 The term "Participants' Account" shall have that meaning given to it in Section 6.1 of this Agreement. 1.19 The term "Parties" shall mean the parties to this Agreement. 1.20 The term "Basis Recoveries" shall mean that portion of the Receipts attributable to reductions of the Purchase Price. The Basis Recoveries portion of Receipts shall be equal to the same ratio as the principal recoveries on the Assets bears to the total principal of the Assets. -2- 1.21 The term "Purchase Price" shall have that meaning given to it in Section 3.2 of this Agreement. 1.22 The term "Receipts" shall have that meaning given to it in Sections 6.1. 1.23 The term "Seller" shall have that meaning given to it in the first recital paragraph of this Agreement. 1.24 The term "Servicing Fee" shall have the meaning given to it in Section 7.1 of this Agreement. 1.25 The term "Termination Date" shall have the meaning given to it in Section 9.1 of this Agreement. 1.26 The term "Termination With Cause" shall have the meaning given to it in Section 9.1 of this Agreement. SECTION 2: REVIEW, EVALUATION AND PURCHASE OF THE ASSETS -------------------------------------------------------- 2.1 SRC purchased the Assets with the prior approval of the Participants. This Agreement shall not be construed as creating an exclusive right of any Participant to participate in funding the purchase of any particular assets in the future if the Parties fail to agree on the terms of a bid to purchase such assets or the terms of a servicing agreement with respect thereto; provided, however, that SRC does commit to sell participations to Mahaska Investment Company ("MIC"), or its related or affiliated entities to the extent they have funds available for such purchases if this same Servicing Agreement is implemented and the terms of the bid are agreed to by SRC and MIC or such related or affiliated entity. In order to provide SRC with the ability to plan purchases of assets, MIC and its related and affiliated entities shall provide SRC with a statement each month of the funds they will have available for the purchase of participation interests in assets purchased by SRC during the following sixty (60) day period. SRC shall periodically provide to Participants relevant information about prospective Asset acquisitions to permit Participants the opportunity to anticipate and plan for future capital needs. 2.2 The Participants acknowledge and agree that SRC's assessment of the value of the Assets was a matter of judgment and that SRC shall not be liable to the Participants for any errors in judgment in valuing the Assets. 2.3 The costs actually incurred by SRC in evaluating the Assets including any fee charged by Seller for reviewing the Assets (Costs Reimbursement) shall be expensed by SRC as part of SRC's costs to be reimbursed as provided by Section 6.2. 2.4 SRC will not receive any compensation for the evaluation of the Assets separate from the -3- compensation set out in this Agreement. 2.5 MIC has already approved the bids submitted by SRC to Sellers for the purchase of certain Assets as evidenced by copies of the Agreements and Certificates of Participation attached hereto as Exhibits 1 through 7. The MIC has funded the purchase of the Assets by paying the purchase price (bid amount) to Seller required by the terms of the Loan Sale Agreement between SRC and Sellers. MIC has purchased a participation representing a 100% participation interest in the Assets. 2.6 SRC shall not purchase a specific group of Assets without the prior approval of the Participants who are going to participate in funding the purchase of such specific group of Assets. Such prior approval may be oral, but shall subsequently be memorialized by a Purchase Addenda. This Agreement shall not be construed as creating an exclusive right of the Participants to participate in funding the purchase of any particular assets. If the parties fail to agree on the terms of a bid to purchase assets or the terms of a Purchase Addenda with respect thereto SRC may seek funding from a different participant but shall notify MIC in writing prior to using any other participant for the funding of a particular asset. 2.7 Upon SRC being the successful bidder for the purchase of each specific group of Assets, the Participants shall fund the purchase of such specific group of Assets. SECTION 3: OWNERSHIP OF THE ASSETS ---------------------------------- 3.1 The Assets shall be owned by SRC and shall be subject to the interests of the Participants. 3.2 The money transferred by Participants to SRC to fund the bid to purchase the Assets shall equal the Purchase Price of the Participants for their participation interests in the Assets. Money advanced by Participants to SRC to fund escrows or purchased interest related to a bid to purchase Assets shall not be included in the Purchase Price, but shall be deemed an advance to be returned to the Participants by SRC as soon as the escrows or purchased interest is returned. 3.3 Subject to SRC's fees to be paid by the Participants to SRC and SRC's Costs, the Participants shall hold participations representing 100% of the interests in the Assets. The Participants' interests shall be represented by Certificates of Participation, a sample copy of which is attached hereto and labeled Exhibit "A". Each Participant shall own an undivided participation interest in the Assets equal to that percentage calculated by dividing the amount of the Purchase Price funded by each of them by the total Purchase Price. 3.4 The Purchase Price advanced by the Participants for their participation interests in the Assets is not a loan by the Participants to SRC. Nothing contained in this Agreement shall be construed to create a debtor- creditor relationship between SRC and the Participants. SECTION 4: ASSET DOCUMENTATION ------------------------------- 4.1 SRC shall cooperate with any regulators having authority over any Participant in their -4- examination of the Assets or the documentation related to the Assets. 4.2 If required by regulators having authority over any Participant, SRC will obtain such lien searches and current collateral inspections and appraisals with respect to the Assets as may be necessary. In all other cases, SRC shall not be required to obtain formal collateral appraisals or inspections from third party contractors when SRC determines that the cost is prohibitive or that inspections and appraisals by SRC's employees will sufficiently demonstrate the value of the Assets. SECTION 5: ---------- SRC REPORTING REQUIREMENTS AND AUDITS OF SRC'S RECORDS ------------------------------------------------------ 5.1 SRC shall provide the Participants with such reports, in an agreed upon format, showing all Receipts and Costs and SRC's activities with respect to the Assets as shall be mutually agreed upon by SRC and the Participants. 5.2 The Participants shall have an unlimited right, at the sole expense of the Participant exercising such right, to audit SRC's records. SECTION 6: SRC'S OPERATIONS AND COSTS OF LIQUIDATION ----------------------------------------------------- 6.1 The Participants shall open a bank account into which all funds received by SRC from the collection of the Assets, including without limitation principal repayment, interest, loan fees and other charges (Receipts) shall be deposited (Participants' Account). Subject to the obligations of the Participants to fund SRC's Costs of operation as provided in Paragraph 6.2 below, the Participants shall have the right to withdraw the interests of the Participants in the Receipts and the Receipts shall be deemed to have been paid to the Participants on the day the Receipts are deposited in the Participants' Account. MIC or such other Participant as may be designated in writing by the Parties shall be responsible for distributing the interests of the Participants in the Receipts to the other Participants. SRC shall not be responsible for the distribution of Receipts to the Participants after deposits are made by SRC in the Participants' Account. MIC or such other Participant as may be designated in writing by the Parties shall give SRC written advices of all funds withdrawn by it from the Participants' Account, showing the amounts and dates of each withdrawal. 6.2 The funds necessary to meet SRC's actual costs of operation, including expenses for protective advances and similar costs with respect to the Assets (Costs), shall be funded from the Receipts by the Participants issuing checks drawn on the Participants' Account payable to SRC. Such funds paid to SRC shall be sufficient to continue the operation of SRC with respect to the Assets for the ensuing thirty (30) day period and on a month to month basis thereafter. -5- The funds paid by the Participants to SRC to meet the Costs shall not be deemed to be an advance under Paragraph 3.2 above and shall not be included in the Purchase Price of the Participants for their participation interests in the Assets. The Parties acknowledge and agree that (i) Central States Resources, Corp. (CSRC), a corporation wholly owned by Randal Vardaman; All States Resources Corp. (ARC), a corporation wholly owned by Randal Vardaman and Nyle Johnson, and Midstates Resources Corp. (MRC), a corporation wholly owned by Randal Vardaman and Nyle Johnson have purchased loans from FDIC, RTC and other entities and may in the future purchase additional loans or other assets from other sellers (collectively referred to herein as the "CSRC/MRC/ARC Loans"), (ii) Randal Vardaman may form additional corporations (collectively referred to herein as the "New Servicing Corporations") for the purchase of loans or other assets from sellers (collectively referred to herein as the "New Servicing Corporations' Loans"), (iii) SRC has purchased and may in the future purchase additional assets from sellers (collectively referred to herein as the "Other SRC Loans") and (iv) CSRC, ARC, SRC and the New Servicing Corporations now employ and may in the future employ common facilities and employees. Certain costs and expenses incurred by SRC (with respect to the Assets and Other SRC Loans), CSRC, MRC and ARC (with respect to the CSRC/MRC/ARC Loans) and/or the New Servicing Corporations (with respect to the New Servicing Corporations' Loans), such as rent, heat, light, wages (excluding contractors' fees), FICA, federal and state unemployment, health insurance, pension or retirement plan contributions, employee benefits, equipment repairs and maintenance, casualty insurance, office supplies, telephone and postage, are not, or will not be, readily allocable to the service and collection of the Assets, Other SRC Loans, the CSRC/MRC/ARC Loans or New Servicing Corporations' Loans ("Allocated Costs"). The Parties therefore agree with SRC that for purposes of calculating SRC's Costs (as defined in Section 6.2 of this Agreement), and for the purpose of preparing SRC's Budget (as defined in Section 6.4 of this Agreement) all Allocated Costs shall be allocated between the Assets and Other SRC Loans, CSRC, MRC, ARC and the New Servicing Corporations at the end of each month in the same ratio, calculated as of the first business day of the same month, that (i) the book value on the date of calculation (unpaid principal amount, excluding charge offs) of the Assets bears to (ii) the book value on the date of calculation (unpaid principal amount excluding charge offs) of the sum of the Assets, Other SRC Loans, CSRC/MRC/ARC Loans and New Servicing Corporations' Loans. Costs which are directly attributable to the servicing and collection of the Assets, the Other SRC Loans, the CSRC/MRC/ARC Loans or the New Servicing Corporations' Loans (such as contractor's fees, attorney's fees, owned real estate expenses plus other expenses as the parties agree, protective advances and other asset or other real estate expenses) shall not be allocated, but shall be charged directly to the Assets, Other SRC Loans, CSRC/MRC/ARC Loans or New Servicing Corporations' Loans as such costs are incurred. The Allocated Costs shall further be attributed to the each Pool that comprises the Assets and as is separately identified on SRC's books by ledger number. 6.4 As soon as practicable, SRC shall prepare and forward to the Participants a budget showing anticipated Receipts and anticipated Costs for a period of twelve (12) months (Budget). The Budget shall be revised and forwarded by SRC to the Participants after the first six months of operations and every six months thereafter. SRC shall include in its Budget projected expenses for protective advances and similar costs. SRC shall submit a revised Budget in the event there is a material change in its operations or a material change in the book value of the Assets and Other SRC Loans, the CSRC/MRC/ARC Loans or the New -6- Servicing Corporations' Loans that would materially effect the budget projection. The Budget shall not be strictly binding on SRC. In the event of increases in Costs of 15% or more over the Costs reflected in the Budget (unless Receipts have also increased a proportionate amount), SRC shall report such deviations from the Budget to the Participants. 6.5 The cost of any equipment purchased by SRC shall be an Allocated Cost. SRC shall not make any significant purchases of equipment which shall be Allocated Costs without the Participants' prior consent. 6.6 The Loan Sale Agreement with Seller may provide that a portion of cash collected by Seller following submission of the bid will be transferred to SRC. All such cash shall be deposited by SRC in the Participants' Account and shall be included in the meaning of the term "Receipts" as that term is used in this Agreement. Proceeds of the return of advances for escrows and purchased interest as defined in Section 3.2 shall be deposited in the Participant's Account but shall not be included in the meaning of the term "Receipts." 6.7 In the event the cash transferred by Seller to SRC is not sufficient to fund the initial Costs, the Participants shall, upon SRC's written request, advance to SRC additional funds to enable SRC to initiate its operations. Any such funds advanced by the Participants to SRC shall be deemed to be an operating cost under Paragraph 6.2 above. 6.8 Nothing contained herein shall be construed as creating a liability of SRC to pay money to the Participants except to the extent of Receipts to be distributed to the Participants under the terms of this Agreement. The sales or conveyances by SRC to the Participants of their participation interests in the Assets are made without recourse to SRC. SECTION 7: DISTRIBUTION OF RECEIPTS ----------------------------------- 7. 1 The Receipts shall be distributed in the following order: (1) to SRC's Costs until paid in full; (2) to fund the Costs budgeted by SRC as provided by Secton 6.2; (3) to the Participants and to SRC for its Servicing Fee (as defined in Section 7.2) and to SRC for its share of the Net Receipts (as defined in Section 7.3). 7.2 SRC shall be paid a Servicing Fee in the amount of 1.0 percent of the Gross Receipts (Less operating/miscellaneous costs) which shall be credited to SRC at the end of each month. 7.3 SRC shall receive a share of the "Net Receipts" as determined in the following manner for each pool of assets which are separately identified on the books of SRC by ledger number ("Pool"). For each six (6) month period of time ending on June 20th and December 20th of each calendar year, for each Pool the -7- Net Receipts shall be determined for each such six (6) month period equal to the total Receipts for such period for such Pool less a) the Basis Recoveries, b) SRC's 1.0 percent servicing fee, c) the operating Costs as allocated to that Pool. Next, the Participants' Return on Investment (ROI) percentage shall be determine for each Pool on a annualized basis by obtaining a fraction the numerator of which shall be Net Receipts (as determined above) for the Pool multiplied by two (2) over the denominator which shall be the Pool Purchase Price less the Pool Basis Recoveries. The fraction shall be expressed as a decimal number rounded to four (4) places. Said decimal shall be expressed as the Participants' ROI percentage by moving the decimal point two places to the right. On the date of confirmation of the purchase bid for said Pool an Index of ROI Rates ("Index") shall be determined from the sum of: (1) the 2-year Treasury Note Yield (note rate) ("Treasury Note Rate") as of the date of confirmation of the purchase bid (included on the face of the Participation Certificate labeled Exhibit "A") and (2) the following chart of basis points, (Column A), which shall create the Index divided into ten (10) Tiers (Column B): COLUMN A COLUMN B MINIMUM MARGINS INDEX 4.00 ............................. ROI FIRST TIER 4.01 - 5.01 .......................... ROI SECOND TIER 5.02 - 6.01 .......................... ROI THIRD TIER 6.02 - 7.01 .......................... ROI FOURTH TIER 7.02 - 8.01........................... ROI FIFTH TIER 8.02 - 9.01 .......................... ROI SIXTH TIER 9.02 - 10.01........................... ROI SEVENTH TIER 10.02 - 11.01 .......................... ROI EIGHTH TIER 11.02 - 12.01........................... ROI NINTH TIER *12.01................................... ROI TENTH TIER * Greater than The above Index shall be determined for each pool in a form equivalent to Schedule "1." SRC shall receive a portion of the Pool Net Receipts according to the following Table of Share Rates: TABLE OF SRC'S PERCENTAGE SHARE RATES To the extent Pool Net Receipts exceed the ROI Ninth Tier, then 27% of such amount; -8- To the extent Pool Net Receipts exceed the ROI Eighth Tier, but within the Ninth Tier, then 25% of such amount; To the extent Pool Net Receipts exceed the ROI Seventh Tier, but within the Eighth Tier, then 23% of such amount; To the extent Pool Net Receipts exceed the ROI Sixth Tier, but within the Seventh Tier, then 20% of such amount; To the extent Pool Net Receipts exceed the ROI Fifth Tier, but within the Sixth Tier, then 17% of such amount; To the extent Pool Net Receipts exceed the ROI Fourth Tier, but within the Fifth Tier, then 15% of such amount; To the extent Pool Net Receipts exceed the ROI Third Tier, but within the Fourth Tier, then 12% of such amount; To the extent Pool Net Receipts exceed the ROI Second Tier, but within the Third Tier, then 7.5% of such amount; To the extent Pool Net Receipts exceed the ROI First Tier, but within the Second Tier, then 5% of such amount; To the extent Pool Net Receipts do not exceed the First Tier, then 0% of the amount. The Participants shall pay from the Participants' Account to SRC its portion of the Pool Net Receipts as soon as practical after the share amount is determined on June 20th and December 20th of each calendar year. 7.4 The Participants shall pay to SRC the Servicing Fee from the Participants' Account contemporaneous with deposits of the Receipts in the Participants' Account. 7.5 SRC shall not be liable to the Participants for the repayment of the Purchase Price except to the extent there are Receipts available in accordance with the terms of this Agreement. The sales or conveyances by SRC to the Participants of their participations are made without recourse to SRC. SECTION 8: SRC'S STANDARD OF CARE ---------------------------------- 8.1 SRC shall not be liable to the Participants for ordinary errors in judgment or errors in receipting the Assets transferred by Seller. SRC shall work to obtain the highest and best value for the Assets. 8.2 The Participants acknowledge and agree that SRC's standard of care is not that standard of care governing a banker. Rather, SRC's standard of care is that which a reasonable person would employ in the management and disposition of distressed assets. 8.3 SRC shall be liable to the Participants for active misconduct, i.e., dishonesty, gross negligence or willful and wanton disregard of SRC's obligations in managing the Assets. 8.4 SRC shall make the decisions regarding the appropriate dispositions of the Assets to obtain their highest value. SRC has no obligation to sell Assets to the Participants unless SRC first makes a determination that a sale of an Asset at a particular time will obtain the highest value for that Asset and that the Participant is willing to pay the same or a higher price than SRC could obtain from some other source. -9- In the event that more than one Participant is interested in purchasing a particular Asset held by SRC and SRC has determined that a sale of that Asset at that time will obtain the highest value for that Asset, the Participants shall determine the procedure which shall govern which Participant is first entitled to purchase the Asset. SRC shall not be liable to any Participant for the failure of the Participant to purchase any particular Asset. 8.5 SRC shall meet with the Participants on a regular basis to review SRC's progress in liquidating the Assets. The Participants may make recommendations on liquidating the Assets and the Parties shall make every effort to form a consensus on such matters. SECTION 8A: SALE OF ASSETS -------------------------- The Parties agree that the highest value for the Assets, or a portion of the Assets, may be realized by SRC bulk selling the Assets. SRC agrees that it will obtain the Participants' consent prior to concluding any bulk sale of the Assets. The Participants acknowledge that SRC may give certain representations and warranties to the purchaser of the Assets and may agree to repurchase certain Assets as a part of such sales. In the event SRC is obligated to repurchase any such Assets sold or to make payments based upon a breach of such representations or warranties or sale agreement, such obligations shall be paid from the current Receipts and shall be a Cost. If the Receipts are not sufficient to fund such obligations, then to the extent the Participants and SRC have been paid Receipts, they shall repay such Receipts to SRC in such amount as may be necessary to fund such obligation. The amount paid by each Participant and SRC shall be the amount of the obligation times a fraction, the numerator of which shall be the Net Receipts paid to such Party and the denominator of which shall be the sum of all Net Receipts. Thereafter, Net Receipts shall be distributed to each Party in the same proportion until such repaid amounts are returned to the Parties. This Section 8A shall survive the termination of this Agreement. SECTION 9: TERMINATION OF AGREEMENT ----------------------------------- 9.1 Subject to the provisions of this Paragraph 9.1 or unless the Parties otherwise mutually agree in writing, this Agreement shall continue with respect to the Assets until all of the Assets have been liquidated and the proceeds thereof have been distributed to the Parties hereto. The Participants shall not have the right to terminate this Agreement prior to the date 10 years following the date of the purchase of the first Pool of Assets, unless SRC has substantially failed to meet its obligations to the Participants (Termination With Cause). On or after the ten (10) year anniversary following the date of the purchase of the first Pool of Assets, any Party to this Agreement may terminate this Agreement without cause upon six months prior written notice to the other Parties to this Agreement. Any such notice of termination shall specify the date of termination of this Agreement (Termination Date) which shall not be less than six months after the date of such notice. 9.2 SRC shall have no obligation to continue servicing the Assets following the Termination Date. 9.3 In the event this Agreement is terminated other than a Termination With Cause, SRC shall determine the final disposition to be made of the remaining Assets. SRC may offer such remaining Assets -10- for sale in bulk unless the Participants request SRC to distribute such remaining Assets in kind, if permitted by law with respect to each Participant, or to distribute such remaining Assets in kind with respect to each Participant's share to a liquidating agent designated by such Participant. SRC is not obligated to make any such distribution in kind unless all of the Participants have agreed to the proposed distribution in kind and SRC consents to the proposed distribution as to those Assets to be conveyed to it or the cash equivalent to be paid to SRC. The value of all such property distributed in kind shall be included in the meaning of the term "Receipts" as that term is used in this Agreement. 9.4 In the event there is a rightful Termination With Cause of SRC, SRC shall nevertheless be entitled to (1) its Servicing Fee accrued as of the date of Termination and (2) that part of SRC's share of the Net Receipts as of the date of termination. In such event the formula set forth in Section 7 for determining SRC's share of Net Receipts shall be modified so that the Receipts acquired as of the Termination date will be include projected Receipts (based on experience of performance) for the remainder of the six (6) month period which would have been used in the absence of such Termination. 9.5 In the event there is a rightful Termination With Cause of SRC, as soon as practical after the termination date Participants shall direct SRC to transfer the Assets in kind to the Participants or to a successor servicing agent or liquidating agent, PROVIDED, HOWEVER, before any such TERMINATION WITH CAUSE, Participants shall give SRC a written notice specifying in detail each such default(s) related to the TERMINATION WITH CAUSE, and stating that this Agreement will be terminated for cause one hundred and twenty (120) days after the giving of such notice, ("termination date") unless such default, or defaults, are remedied within such grace period. SECTION 10: EMPLOYMENT AND OTHER AGREEMENTS OF SRC --------------------------------------------------- 10.1 The Participants' willingness to enter into this Agreement is premised on the expertise and experience of Randal Vardaman in collecting loans. SRC agrees that Randal Vardaman or another person of comparable skill and experience will devote a sufficient amount of his time to the performance of the services described in this Agreement. SRC shall consult with Participants prior to appointing any successor to Randy Vardaman or otherwise making any significant change in company leadership that could adversely affect the interests of the Participants. 10.2 SRC may enter into agreements with its employees or other persons or entities whose services are desired by SRC in performing this Agreement and may contract to pay them a portion of SRC's share of the Receipts. Any such agreements shall be liabilities of SRC. SECTION 11: MISCELLANEOUS -------------------------- 11.1 Any disputes between SRC and the Participants or claims by any of them arising out of this Agreement shall be settled by arbitration in accordance with the rules then existing of the American Arbitration Association. Such arbitration shall be conducted in Omaha, Nebraska. Any arbitration award -11- may be entered as a judgment in any court of competent jurisdiction. 11.2 In the event of Randal Vardaman's death, upon written demand by Randal Vardaman's heirs or estate, MIC agrees to purchase his Participation interest in the Assets, if any, at par, meaning basis plus accrued interest to date of payment. 11.3 Nothing contained in this Agreement shall be construed as limiting the right of any Participant to sell subparticipations in their Participation interests, provided that no such subparticipation shall give the subparticipant the rights of a Participant under this Agreement. Rather, any subparticipation shall be an agreement separate and distinct from this Agreement. 11.4 Each Party warrants it has been authorized by its Board of Directors to to execute this Agreement. 11.5 Nothing contained in this Agreement shall be construed as requiring any act by SRC which would be contrary to SRC's obligations under the Loan Sale Agreement between the Seller and SRC. 11.6 The Parties agree that this Agreement will not be disclosed in any way to any person or persons, except to an attorney, accountant or similar professional working on behalf of any of the Parties, without the consent of the others. The Parties further agree to advise any such professional that this Agreement is not to be disclosed by that professional. Notwithstanding the foregoing, the Parties hereto may disclose this Agreement pursuant to a lawful subpoena or an order requiring such disclosure of a court having jurisdiction over any of the Parties hereto, or as may be required by authorized government security regulators, such as the Security and Exchange Commission. 11.7 This Agreement, and the Participation Certificates shall be construed whenever possible as being consistent. In the event of a conflict between the construction of such documents, this Agreement shall control and be deemed a modification of the Participation Certificates to the extent of such conflict. 11.8 The Parties have entered into this Agreement solely for the purposes set forth herein. Nothing contained herein shall be construed as creating (1) an employer/employee relationship between SRC and any of its employees on the one hand and the Participants on the other, (2) any partnership or (3) any joint venture. 11.9 All terms not defined herein shall have the meaning set forth in the Iowa Code unless the context in which such words appear requires otherwise. 11.10 The Parties shall execute such documents and do such acts as are necessary to make this Agreement effective. 11.11 Acceptance of or acquiescence in a course of performance rendered under this Agreement shall neither modify its terms nor be relevant to its interpretation, even though the accepting or acquiescing party had knowledge of the nature of the performance and opportunity for objection. -12- 11.12 The covenants and agreement of the Parties shall be binding upon them, their legal representatives and successors. This Agreement may not be assigned by the Parties without the written consent of all the other Parties. 11.13 All notices provided for in this Agreement shall be given by mail, which shall be addressed as set forth below, until any party gives written notice of a change of mailing address to all other Parties. 11.14 The words and phrases contained in this Agreement shall be construed as singular or plural in number, and in the masculine, feminine or neuter gender according to the context in which such words and phrases appear. 11.15 This Agreement shall be construed under the laws of the State of Iowa. 11.16 If for any reason any provision of this Agreement shall be inoperative, the validity and effect of the other provisions shall not be affected thereby. 11.17 This Agreement may be executed in one or more identical counterparts, which, when executed by all Parties, shall constitute one and the same Agreement. 11.18 The Parties hereto may accept this Agreement by sending an executed copy of the signature page by telefax to the other parties and by forwarding on the same date to the other Parties the originally executed signature page. 11.19 The Participants acknowledge that neither this Agreement, the Participation Certificates, or any other document executed in connection herewith is intended to constitute a "Security" within the meaning of the Securities Act of 1933 as amended (the "Securities Act"), or any applicable state securities laws or regulations. The Participants hereby represent and warrant to, and agree with, SRC that they are acquiring such participations with the intent of holding the same for investment for their own account and without the intent to sell or otherwise transfer all or any part thereof or interest therein, and without the intent to participate directly or indirectly in any distribution thereof within the meaning of the Securities Act or any applicable state securities laws or regulations. The Participants further represent and warrant that they will not sell or transfer their participations or their other interests in this Agreement or any part thereof except in a transaction which is in compliance with the Securities Act and all applicable state securities laws and regulations (or in exemption therefrom). 11.20 This writing contains the entire agreement of the Parties, integrates all the terms and conditions mentioned in or incidental to this Agreement and supersedes all prior negotiations and writings. No modification or waiver of any provision of this Agreement shall be valid unless in writing and signed by all the Parties hereto. -13- STATES RESOURCES CORP. 14803 Frontier Road Omaha, NE 68138 By /s/ Randal Vardaman ------------------------------------ Randal Vardaman, CEO By /s/ Douglas Bartzatt ------------------------------------ Douglas Bartzatt, President MAHASKA INVESTMENT COMPANY, Participant Box 1104 222 First Avenue, East Oskaloosa, Iowa 52577 By /s/ David A. Meinert --------------------------------------- David A. Meinert, Executive Vice President -14- EXHIBIT "A" Certificate No. _______________ AGREEMENT AND CERTIFICATE OF PARTICIPATION (Not Negotiable) TO: Date: ____________, 19____ (Herein called "Participant") Maturity Date:__________________ or such maturity date as may be established under the Loan Participation and Servicing 2-year Treasury Note Yield (note rate) Agreement as of the date of the settlement of the purchase bid:_________________% Percentage of Participation:_______________% Participation Share $_______________ States Resources Corp. (herein called "SRC") hereby acknowledges that SRC has sold to Participant an undivided participation in loans and other assets (herein collectively called "Assets") purchased by SRC from ___________________________ _________________________, pursuant to a Loan Sale Agreement, dated __________ ________________, a copy of which is attached hereto and marked Exhibit "A" and incorporated herein by reference. The Assets are evidenced by notes, security agreements, deeds of trust, real estate contracts and other documents of title and evidences of loans made by banks or savings associations or other lenders described in the Loan Sale Agreement, the total purchase price for said Assets being in the amount of$__________________________. The interest of the Participant herein represents __________% of all Assets purchased . Participant shall share in the Assets pursuant to the terms and conditions of the States Resources Corp. Loan Participation and Servicing Agreement dated __________________________, 19____ between SRC and the Participant, and attached hereto, marked Exhibit "B" and incorporated herein by reference. The Assets purchased pursuant to the Loan Sale Agreement are described in the list of assets and balances attached hereto, marked Exhibit "C", and incorporated herein by reference. Said list of Assets shall be revised on a monthly basis, pursuant to the terms and conditions of the States Resources Corp. Loan Participation and Servicing Agreement, to reflect the current status of Assets and their balances on a monthly basis. -15- In consideration of said purchase, SRC agrees to hold and distribute Participant's pro rata interest in the Assets including the unpaid principal thereof, any and all interest thereon, and any and all collateral securing same in accordance with the States Resources Corp. Loan Participation and Servicing Agreement. The maturity date of this Agreement and Certificate of Participation shall be automatically extended as provided in the States Resources Corp. Loan Participation and Servicing Agreement. Dated at __________________________this _____ day of __________________________, 19____. STATES RESOURCES CORP. By ____________________________________ Randal D. Vardaman, CEO Accepted this _____ day of __________________________, 19____. _______________________________________ Participant -16- Schedule "1" SCHEDULE OF INDEX ROI FOR USE WITH SECTION 7.3 OF STATES RESOURCES CORP. LOAN PARTICIPATION AND SERVICING AGREEMENT ----------------------- LEDGER NO. ----------
COLUMN A COLUMN B MINIMUM MARGINS INDEX ROI 2 yr. Treasury Note Yield + 4.00 ...................FIRST TIER.....--------- % - --- - % 2 yr. Treasury Note Yield + 4.01 - 5.01 ............SECOND TIER....--------- - % 2 yr. Treasury Note Yield + 5.02 - 6.01 ............THIRD TIER.....--------- - % 2 yr. Treasury Note Yield + 6.02 - 7.01 ....... ....FOURTH TIER....--------- - 2 yr. Treasury Note Yield + 7.02 - 8.01.............FIFTH TIER....._________ % - --- - % 2 yr. Treasury Note Yield + 8.02 - 9.01 ............SIXTH TIER ...._________ - % 2 yr. Treasury Note Yield + 9.02 -10.01.............SEVENTH TIER..._________ - % 2 yr. Treasury Note Yield + 10.02 - 11.01 ..........EIGHTH TIER...._________ - % 2 yr. Treasury Note Yield + 11.02 - 12.01...........NINTH TIER ...._________ - 2 yr. Treasury Note Yield + *12.01..............TENTH TIER.... _________ % ---
-17- * Greater than EX-11 3 COMPUTATION OF PER SHARE EARNINGS Exhibit 11 MAHASKA INVESTMENT COMPANY AND SUBSIDIARIES STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
1999 1998 1997 ---------- --------- --------- Earnings per Share Information: - --------------------------------------------------- Weighted average number of shares outstanding during the year .................... 3,864,108 3,660,070 3,652,908 Weighted average number of shares outstanding during the year including all dilutive potential shares ........ 3,946,171 3,842,151 3,789,577 Net earnings ...................................... $2,222,483 4,622,749 5,058,225 Earnings per share - basic ........................ $ 0.58 1.26 1.38 Earnings per share - diluted ...................... $ 0.56 1.20 1.33
EX-13 4 ANNUAL REPORT TO SHAREHOLDERS Financial Highlights -------------------------- MAHASKA INVESTMENT COMPANY AND SUBSIDIARIES
Year Ended December 31 (In thousands, except per share data) 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Summary of income data: Interest income excluding loan pool participations....................... $ 21,162 17,996 15,483 13,532 10,463 Interest and discount on loan pool participations........................ 7,668 7,970 8,474 9,097 7,864 Total interest income.................................................... 28,830 25,966 23,957 22,629 18,327 Total interest expense................................................... 13,195 10,490 9,312 8,531 7,100 Net interest income...................................................... 15,635 15,476 14,645 14,098 11,227 Provision for loan losses................................................ 3,628 1,179 417 987 168 Other income............................................................. 1,947 1,856 1,739 1,506 1,301 Total other operating expenses........................................... 10,462 8,947 8,315 7,738 6,450 Income before income tax and minority interest........................... 3,492 7,206 7,652 6,879 5,910 Income tax expense....................................................... 1,270 2,583 2,594 2,385 1,987 Net income............................................................... $ 2,222 4,623 5,058 4,494 3,923 ------------------------------------------------------- Per share data: - ------------------------------------------------------------------------- Net income - basic....................................................... $ 0.58 1.26 1.38 1.20 1.03 Net income - diluted..................................................... 0.56 1.20 1.33 1.19 1.03 Cash dividends declared.................................................. 0.60 0.56 0.48 0.44 0.40 Book value............................................................... 11.59 10.51 10.03 9.22 8.49 Net tangible book value.................................................. 8.62 8.99 8.35 7.39 7.34 ------------------------------------------------------- Selected financial ratios: - ------------------------------------------------------------------------- Net income to average assets............................................. 0.64% 1.65% 1.98% 1.93% 2.04% Net income to average equity............................................. 5.29% 12.16% 14.47% 13.52% 12.67% Dividend payout ratio.................................................... 103.45% 44.44% 34.78% 36.50% 38.37% Average equity to average assets......................................... 12.04% 13.54% 13.69% 14.31% 16.09% Tier 1 capital to assets at end of period................................ 11.42% 14.02% 14.74% 10.91% 13.53% Net interest margin...................................................... 4.89% 6.04% 6.31% 6.69% 6.48% Gross revenue of loan pools to total gross revenue....................... 24.91% 28.64% 32.98% 37.69% 40.06% Interest and discount income of loan pools to total interest income...... 26.59% 30.69% 35.37% 40.20% 42.91% Allowance for loan losses to total loans................................. 1.42% 1.32% 1.26% 1.27% 1.17% Non-performing loans to total loans...................................... 1.71% 0.84% 1.27% 1.78% 0.78% Net loans charged off to average loans................................... 1.14% 0.52% 0.07% 0.63% 0.06% ------------------------------------------------------- December 31 (In thousands) 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Selected balance sheet data: Total assets............................................................. $ 486,189 298,389 274,873 251,851 205,162 Total loans net of unearned discount..................................... 282,091 165,427 144,333 117,416 85,869 Total loan pool participations........................................... 67,756 54,510 54,326 50,687 45,318 Allowance for loan losses................................................ 4,006 2,177 1,816 1,491 1,001 Total deposits........................................................... 348,672 232,733 215,308 206,952 161,504 Total shareholders' equity............................................... 50,235 38,232 36,754 34,243 32,106 -------------------------------------------------------
[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 460 shareholders of record on December 31, 1999, and an estimated 750 additional beneficial holders whose stock was held in street name by brokerage houses. NASDAQ symbol: OSKY Wall Street Journal and Other newspapers: MahaskaInv Market Markers: Howe Barnes Investments, Inc. Knight Securities L.P. Spear, Leeds & Kellogg Corporate Headquarters 222 1/st/ Avenue East P.O. Box 1104 Oskaloosa, IA 52577 (515) 673-8448 www.mahaskainv.com Annual Shareholders' Meeting April 27, 2000, 10.30 a.m. Elmhurst Country Club 2214 South 11/th/ Street Oskaloosa, IA 52577 Transfer Agent/Dividend Disbursing Agent Illinois Stock Transfer Company 209 West Jackson Boulevard, Suite 903 Chicago, IL 60606 (312) 427-2953 Independent Auditor KPMG LLP 2500 Ruan Center Des Moines, IA 50309 Annual Report Design Designgroup, Inc., Des Moines, IA The following table sets forth the quarterly high and low sales per share for the Company's stock during 1999 and 1998: 1999 Quarter Ended High Low - ------------------------------------------------------------------- March 31......................... $ 17.75 15.50 June 30.......................... 16.00 14.88 September 30..................... 15.63 14.38 December 31...................... 15.25 11.56 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 As of December 31, 1999, The Company had 4,335,114 shares of Common Stock outstanding. On December 31, 1998, there were 3,636,345 shares outstanding. The Company has declared per share cash dividends with respect to its Common Stock as follows: 1/st/ Quarter 2/nd/ Quarter 3/rd/ Quarter 4/th/ Quarter - ----------------------------------------------------------------------------- 1999............... $ .15 $ .15 $ .15 $ .15 1998............... .14 .14 .14 .14 ________________ 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. [LOGO] MAHASKA INVESTMENT COMPANY EX-21 5 SUBSIDIARIES Exhibit 21 ---------- Subsidiaries of Mahaska Investment Company State or Other Name Under Jurisdiction Which Doing in which Subsidiary Name Business Incorporated - --------------- ----------- ------------ Mahaska State Bank ---- Iowa Central Valley Bank ---- United States On-Site Credit Services, Inc. ---- Iowa Pella State Bank ---- Iowa Midwest Federal Savings and Loan ---- United States Association of Eastern Iowa EX-23 6 CONSENT OF KPMG LLP Exhibit 23 ---------- CONSENT OF INDEPENDENT AUDITORS The Board of Directors Mahaska Investment Company: We consent to incorporation by reference in the Mahaska Investment Company and subsidiaries Form 10-K, our report dated February 18, 2000, relating to the consolidated balance sheets of Mahaska Investment Company and subsidiaries as of December 31, 1999 and 1998, 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, 1999, which report appears in the Proxy dated March 27, 2000. /s/ KPMG LLP March 29, 2000 Des Moines, Iowa EX-27 7 FINANCIAL DATA SCHEDULE
9 1,000 12-MOS DEC-31-1999 DEC-31-1999 13,354 1,700 7,865 0 0 29,445 29,291 282,091 (4,006) 486,189 348,672 84,386 2,896 0 24,564 0 0 25,671 486,189 17,577 3,243 8,010 28,830 10,534 13,195 15,635 3,628 (28) 10,462 3,492 3,492 0 0 2,222 0.58 0.56 8.95 2,874 1,426 515 0 (2,177) 2,375 (60) (4,006) (4,006) 0 (4,006)
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