10-Q 1 d10q.txt FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED COMMISSION FILE NUMBER JUNE 30, 2002 0-24630 MAHASKA INVESTMENT COMPANY (Exact Name of Registrant as Specified in its Charter) IOWA 42-1003699 (State of Incorporation) (I.R.S. Employer Identification No.) 222 First Avenue East, Oskaloosa, Iowa 52577 Telephone Number (641) 673-8448 Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No______ ------- As of July 31, 2002, there were 3,875,604 shares of common stock $5 par value outstanding. 1 PART I -- Item 1. Financial Statements MAHASKA INVESTMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION
(unaudited) (dollars in thousands, except for share amounts) June 30, December 31, 2002 2001 ----------- ------------ ASSETS Cash and due from banks .................................................. $ 8,749 $ 12,872 Interest-bearing deposits in banks ....................................... 2,464 2,965 ----------- ------------ Cash and cash equivalents ............................................ 11,213 15,837 ----------- ------------ Investment securities: Available for sale ................................................... 73,692 50,206 Held to maturity (fair value of $18,543 as of June 30, 2002 and $22,034 as of December 31, 2001) ............................... 17,724 21,332 Loans .................................................................... 314,268 322,681 Allowance for loan losses ................................................ (3,849) (3,381 ----------- ------------ Net loans ............................................................ 310,419 319,300 ----------- ------------ Loan pool participations ................................................. 98,509 110,393 Premises and equipment, net .............................................. 8,224 8,355 Accrued interest receivable .............................................. 4,050 4,540 Goodwill ................................................................. 5,667 5,667 Other intangible assets .................................................. 4,640 5,008 Other assets ............................................................. 6,495 5,157 ----------- ------------ Total assets ....................................................... $ 540,633 $ 545,795 =========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand ............................................................... $ 25,310 $ 26,961 NOW and Super NOW .................................................... 43,987 45,372 Savings .............................................................. 101,546 97,989 Certificates of deposit .............................................. 213,976 208,323 ----------- ------------ Total deposits ..................................................... 384,819 378,645 Federal funds purchased .................................................. 5,800 10,650 Federal Home Loan Bank advances .......................................... 80,234 91,174 Notes payable ............................................................ 2,350 9,200 Long-term debt ........................................................... 10,000 - Other liabilities ........................................................ 4,753 5,299 ----------- ------------ Total liabilities .................................................. 487,956 494,968 ----------- ------------ Shareholders' equity: Common stock, $5 par value; authorized 20,000,000 shares; issued 4,912,849 shares as of June 30, 2002 and December 31, 2001.......... 24,564 24,564 Capital surplus ...................................................... 13,013 13,033 Treasury stock at cost, 1,037,295 shares as of June 30, 2002, and 1,040,255 shares as of December 31, 2001 ....................... (12,563) (12,595) Retained earnings .................................................... 26,662 25,082 Accumulated other comprehensive income ............................... 1,001 743 ----------- ------------ Total shareholders' equity ......................................... 52,677 50,827 ----------- ------------ Total liabilities and shareholders' equity ......................... $ 540,633 $ 545,795 =========== ============
See accompanying notes to consolidated financial statements. 2 PART I -- Item 1. Financial Statements, Continued MAHASKA INVESTMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
(unaudited) Three Months Ended Six Months Ended (dollars in thousands, except per share amounts) June 30, June 30, ------------------ -------------------- 2002 2001 2002 2001 -------- -------- -------- --------- Interest income: Interest and fees on loans ..................................... $ 5,794 $ 6,304 $ 11,650 $ 12,771 Interest and discount on loan pool participations .............. 2,657 2,159 5,354 4,150 Interest on bank deposits ...................................... 5 24 11 35 Interest on federal funds sold ................................. 34 87 51 162 Interest on investment securities: Available for sale ........................................... 856 1,111 1,555 2,125 Held to maturity ............................................. 293 381 612 786 ------- ------- -------- -------- Total interest income ...................................... 9,639 10,066 19,233 20,029 ------- ------- -------- -------- Interest expense: Interest on deposits: NOW and Super NOW ............................................ 72 143 146 311 Savings ...................................................... 507 811 984 1,678 Certificates of deposit ...................................... 2,358 3,135 4,798 6,257 Interest on federal funds purchased ............................ 4 - 18 9 Interest on Federal Home Loan Bank advances .................... 1,299 1,291 2,618 2,498 Interest on notes payable ...................................... 121 216 221 489 Interest on long-term debt ..................................... 6 - 6 - ------- ------- -------- -------- Totallinteresttexpensee..................................... 4,367 5,596 8,791 11,242 ------- ------- -------- -------- Nettinteresttincomee........................................ 5,272 4,470 10,442 8,787 Provision for loan losses .......................................... 276 354 536 501 ------- ------- -------- -------- Net interest income after provision for loan losses ........ 4,996 4,116 9,906 8,286 ------- ------- -------- -------- Noninterest income: Service charges ................................................ 561 540 1,072 1,013 Data processing income ......................................... 60 55 117 108 Other operating income ......................................... 333 253 645 479 Gains (losses) on sale of available for sale securities ........ - 395 - 393 ------- ------- -------- -------- Total noninterest income ................................... 954 1,243 1,834 1,993 ------- ------- -------- -------- Noninterest expense: Salaries and employee benefits ................................. 1,978 1,908 3,689 3,543 Net occupancy .................................................. 572 530 1,104 1,057 Professional fees .............................................. 162 427 334 621 Goodwill amortization .......................................... - 63 - 126 Other intangible asset amortization ............................ 184 200 368 400 Other operating expense ........................................ 884 760 1,851 1,558 ------- ------- -------- -------- Total noninterest expense .................................. 3,780 3,888 7,346 7,305 ------- ------- -------- -------- Income before income tax expense ........................... 2,170 1,471 4,394 2,974 Income tax expense ................................................. 768 492 1,575 1,003 ------- ------- -------- -------- Net income ................................................. $ 1,402 $ 979 $ 2,819 $ 1,971 ======= ======= ======== ======== Earnings per common share - basic .................................. $ 0.36 $ 0.25 $ 0.73 $ 0.50 Earnings per common share - diluted ................................ $ 0.35 $ 0.24 $ 0.71 $ 0.49 Dividends per common share ......................................... $ 0.16 $ 0.15 $ 0.32 $ 0.30
See accompanying notes to consolidated financial statements. 3 PART I -- Item 1. Financial Statements, Continued MAHASKA INVESTMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited) Three Months Ended Six Months Ended (in thousands) June 30, June 30, ------------------ ---------------- 2002 2001 2002 2001 -------- -------- ------- ------- Net income ........................................................ $ 1,402 $ 979 $ 2,819 $1,971 Other Comprehensive Income: Unrealized gains (losses) on securities available for sale: Unrealized holding gains arising during the period, net of tax .................................... 663 71 258 818 Less: reclassification adjustment for net gains included in net income, net of tax ................................. - (247) - (246) -------- -------- ------- ------- Other comprehensive income (loss), net of tax ..................... 663 (176) 258 572 -------- -------- ------- ------- Comprehensive income .............................................. $ 2,065 $ 803 $ 3,077 $2,543 ======== ======== ======= =======
See accompanying notes to consolidated financial statements. 4 PART I -- Item 1. Financial Statements, Continued MAHASKA INVESTMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) Six Months Ended (dollars in thousands) June 30, ------------------------- 2002 2001 --------- --------- Cash flows from operating activities: Net income ................................................... $ 2,819 $ 1,971 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .............................. 965 932 Provision for loan losses .................................. 536 501 Gain on sale of available for sale securities .............. - (393) (Gain) loss on sale of premises and equipment .............. (3) 3 Amortization of investment securities and loans premiums ... 228 123 Accretion of investment securities and loan discounts ...... (107) (148) (Increase) decrease in other assets ........................ (848) 2,151 Decrease in other liabilities .............................. (697) (273) --------- --------- Net cash provided by operating activities ................ 2,893 4,867 --------- --------- Cash flows from investing activities: Investment securities available for sale: Proceeds from sales ........................................ - 14,910 Proceeds from maturities ................................... 4,836 5,858 Purchases .................................................. (28,060) (22,881) Investment securities held to maturity: Proceeds from maturities ................................... 3,895 3,435 Purchases .................................................. (244) - Net decrease (increase) in loans ............................. 8,338 (3,120) Purchases of loan pool participations ........................ (17,104) (28,913) Principal recovery on loan pool participations ............... 28,988 11,695 Purchases of premises and equipment .......................... (401) (1,941) Proceeds from sale of premises and equipment ................. 24 3 --------- --------- Net cash provided by (used in) investing activities ...... 272 (20,954) --------- --------- Cash flows from financing activities: Net increase in deposits ..................................... 6,174 10,416 Net decrease in federal funds purchased ...................... (4,850) (2,345) Federal Home Loan Bank advances .............................. 1,000 18,500 Repayment of Federal Home Loan Bank advances ................. (12,036) (6,784) Advances on notes payable .................................... 3,000 - Principal payments on notes payable .......................... (9,850) (1,900) Advances on long-term debt ................................... 10,000 - Dividends paid ............................................... (1,239) (1,191) Purchases of treasury stock .................................. (72) - Proceeds from exercise of stock options ...................... 84 302 --------- --------- Net cash (used in) provided by financing activities ...... (7,789) 16,998 --------- --------- Net (decrease) increase in cash and cash equivalents ..... (4,624) 911 Cash and cash equivalents at beginning of period ................. 15,837 15,517 --------- --------- Cash and cash equivalents at end of period ....................... $ 11,213 $ 16,428 ========= ========= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest ................................................... $ 5,950 $ 11,280 ========= ========= Income taxes ............................................... $ 2,285 $ 1,035 ========= =========
See accompanying notes to consolidated financial statements. 5 1. Basis of Presentation The accompanying consolidated statements of income, the consolidated statements of comprehensive income, and the consolidated statements of cash flow for the three months and the six months ended June 30, 2002 and 2001 and the consolidated statements of condition as of December 31, 2001 and June 30, 2002 include the accounts and transactions of the Company and its five wholly-owned subsidiaries, Mahaska State Bank, Central Valley Bank, Pella State Bank, Midwest Federal Savings and Loan, and MIC Financial, Inc. All material intercompany balances and transactions have been eliminated in consolidation. The accompanying consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although management believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these interim consolidated financial statements be read in conjunction with the Company's most recent audited financial statements and notes thereto. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of June 30, 2002, and the results of operations for the three months and the six months ended June 30, 2002 and 2001, and cash flows for the six months ended June 30, 2002 and 2001. The results for the three months and the six months ended June 30, 2002 may not be indicative of results for the year ending December 31, 2002, or for any other period. 2. Consolidated Statements of Cash Flows In the consolidated statements of cash flows, cash and cash equivalents include cash and due from banks, interest-bearing deposits with banks, and federal funds sold. 3. Income Taxes Federal income tax expense for the three months and the six months ended June 30, 2002 and 2001 was computed using the consolidated effective federal tax rate. The Company also recognized income tax expense pertaining to state franchise taxes payable individually by the subsidiary banks. 4. Earnings Per Common Share Basic earnings per common share computations are based on the weighted average number of shares of common stock actually outstanding during the period. The weighted average number of shares for the three-month periods ended June 30, 2002 and 2001 was 3,873,120 and 3,971,202, respectively. Weighted average shares outstanding for the six-month periods ended June 30, 2002 and 2001 was 3,872,085 and 3,962,386, respectively. Diluted earnings per share amounts are computed by dividing net income by the weighted average number of shares and all dilutive potential shares outstanding during the period. The computation of diluted earnings per share used a weighted average number of shares outstanding of 3,963,563 and 4,002,096 for the three months ended June 30, 2002 and 2001, respectively. For the six-months ended June 30, 2002 and 2001, diluted earnings per share was calculated using weighted average shares outstanding of 3,950,719 and 3,991,143, respectively. 6 5. Effect of New Financial Accounting Standards Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - An Amendment to FASB Statement No. 133," were adopted by the Company beginning January 1, 2001. The adoption of the standards did not have a material effect on the Company's consolidated financial statements. SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (a replacement of FASB Statement No. 125)," was issued in September 2000. The Statement revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of the provisions of Statement No. 125 without reconsideration. The Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The adoption of the SFAS No. 140 did not have a material impact on the financial condition or results of operation of the Company. SFAS No. 141, "Business Combinations," was adopted by the Company on July 1, 2001. The Statement requires that the purchase method of accounting be used for all business combinations completed after June 30, 2001. The adoption of this Statement did not have a material effect on the Company's financial statements. SFAS No. 142, "Goodwill and Other Intangible Assets," was adopted by the Company on January 1, 2002. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The adoption of SFAS No. 142 reduced the Company's goodwill amortization expense $63,000 in the second quarter of 2002 and $126,000 for the first six months of 2002 since the goodwill attributable to the acquisition of Midwest Federal Savings is no longer being amortized. As of January 1, 2002, the goodwill attributable to the Midwest Federal Savings acquisition totaled $5,667,000. Goodwill in the amount of $3,684,000 as of January 1, 2002 continues to be amortized under SFAS Statement No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions." Under the provisions of this Statement, the goodwill relating to the acquisitions of the United Federal Savings branches in 1994 and the acquisition of the Boatmen's Bank branch in 1996 is defined as "unidentifiable intangible assets" and must continue to be amortized. The table below reconciles the reported earnings for the three months ended June 30, 2001 to "adjusted earnings," which exclude goodwill amortization. 7
(unaudited) Three Months Ended (dollars in thousands, except per share amounts) June 30, --------------------------------------------------- 2002 2001 ---------- --------------------------------------- Reported Reported Goodwill Adjusted Earnings Earnings Amortization Earnings ---------- ---------- ------------ ---------- Net income .................................................... $ 1,402 $ 979 $ 63 $ 1,042 Earnings per share: Basic ..................................................... $ 0.36 $ 0.25 $ 0.01 $ 0.26 Diluted ................................................... $ 0.35 $ 0.24 $ 0.02 $ 0.26
The following table reconciles the reported earnings for the six months ended June 30, 2001 to "adjusted earnings," which exclude goodwill amortization.
Six Months Ended June 30, --------------------------------------------------- 2002 2001 ---------- --------------------------------------- Reported Reported Goodwill Adjusted Earnings Earnings Amortization Earnings ---------- ---------- ------------ ---------- Net income .................................................... $ 2,819 $ 1,971 $ 126 $ 2,097 Earnings per share: Basic ..................................................... $ 0.73 $ 0.50 $ 0.03 $ 0.53 Diluted ................................................... $ 0.71 $ 0.49 $ 0.04 $ 0.53
The gross carrying amount of intangible assets and the associated accumulated amortizaion at June 30, 2002, is presented in the table below. Amortization expense for intangible assets was $184 thousand for the quarter ended June 30, 2002 and $368 thousand for the six months ended June 30, 2002.
(unaudited) June 30, 2002 ---------------------------- (in thousands) Gross Carrying Accumulated Amount Amortization ------------ -------------- Intangible assets: Core deposit premium ............................................................. $ 2,727 $ 1,548 Other intangible assets .......................................................... 6,702 3,241 ------------ -------------- Total ........................................................................... $ 9,429 $ 4,789 ------------ -------------- Unamortized intangible assets ..................................................... $ 4,640 --------------
Core deposit intangibles are amortized using the effective-yield method based on a useful life of 10 years. Other unidentifiable intangible assets are being amortized using the straight-line method based on a useful life of 15 years. Amortization expense related to core deposit intangibles for the three months and the six months ended June 30, 2002 was $73,000 and $145,000, respectively. Amortization expense related to core deposit intangibles was $88,000 and $176,000, respectively for the three months and the six months ended June 30, 2001. Amortization expense related to other unidentifiable intangible assets was $111,000 for the three months ended June 30, 2002 and $112,000 for the three months ended June 30, 2001. Amortization expense related to other unidentifiable intangible assets was $223,000 for the six months ended June 30, 2002 and $224,000 for the six months ended June 30, 2001. Projections of amortization expense are based on existing asset balances and the remaining useful lives. The following table shows the estimated future amortization expense for 8 amortized intangible assets:
(unaudited) Core (dollars in thousands) Deposit Premium Other Total ----------- ------------ ------------ Six months ended December 31, 2002 .......... $ 145 $ 223 $ 368 Year ended December 31, 2003 ................................... 245 447 692 2004 ................................... 189 447 636 2005 ................................... 153 447 600 2006 ................................... 132 447 579 2007 ................................... 115 446 561
Effective January 1, 2002 goodwill will be assessed at least annually for impairment by applying a fair-value-based test using discounted cash flows. The Company completed its initial goodwill impairment assessment in the second quarter. No transitional impairment charge was required. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," was issued in August 2001 and was adopted by the Company on January 1, 2002. SFAS addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The adoption of SFAS 144 did not have a material effect on the results of operations or financial condition of the Company. SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" was issued April 2002. This Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This Statement amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of this Statement related to the rescission of Statement 4 shall be applied in fiscal years beginning after May 15, 2002. The provisions in paragraphs 8 and 9(c) of this Statement related to Statement 13 shall be effective for transactions occurring after May 15, 2002. All other provisions of this Statement shall be effective for financial statements issued on or after May 15, 2002. The effects of implementation are not material. SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" was issued June 2002. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nulifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The provisions of this Statement are effective for exit and disposal activities that are initiated after December 31, 2002. 6. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. A significant estimate that is particularly sensitive to change is the allowance for loan losses. 7. Sale of MIC Financial, Inc. On April 23, 1999, the Company announced that it had elected to seek a buyer for MIC Financial, Inc. ("MIC Financial"), its wholly-owned commercial finance subsidiary. A satisfactory agreement could not be reached with any potential buyers, so the decision was made to sell groups of leases and assets. As of June 30, 2002, MIC Financial's loan and lease portfolio totaled $861,000, less than 1 percent of the Company's total loans as of that date. Management continues to evaluate options on the remaining assets of MIC Financial. 9 PART I -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. QUARTER ENDED JUNE 30, 2002 The Company recorded net income of $1,402,000 for the quarter ended June 30, 2002, compared with net income of $979,000 for the quarter ended June 30, 2001, an increase of $423,000 or 43 percent. The increase in net income was primarily due to improved net interest income. Basic earnings per share for the second quarter of 2002 were $.36 versus $.25 for the second quarter of 2001. Diluted earnings per share were $.35 in 2002 and $.24 for the second quarter of 2001. Actual weighted average shares outstanding were 3,873,120 and 3,971,202 for the second quarter of 2002 and 2001, respectively. For the second quarter of 2002 and 2001, diluted weighted average shares outstanding were 3,963,563 and 4,002,096, respectively. The Company's return on average assets for the quarter ended June 30, 2002 was 1.03 percent compared with a return of .74 percent for the quarter ended June 30, 2001. The Company's return on average equity was 10.87 percent for the three months ended June 30, 2002 versus 7.74 percent for the three months ended June 30, 2001. RESULTS OF OPERATIONS Net Interest Income Net interest income is computed by subtracting total interest expense from total interest income. Fluctuations in net interest income can result from the changes in the volumes of assets and liabilities as well as changes in interest rates. Market interest rates on a national and local level moved downward throughout the year 2001. Interest rates remained relatively constant during the second quarter of 2002. The Company's net interest income for the quarter ended June 30, 2002 increased $802,000 or 18 percent to $5,272,000 from $4,470,000 for the three months ended June 30, 2001. Total interest income of $9,639,000 for the second quarter of 2002 was $427,000 or 4 percent lower compared with $10,066,000 for the 2001 quarter primarily due to reduction in interest rates. The Company's total interest expense for the second quarter of 2002 was $4,367,000, which was $1,229,000 or 22 percent less compared with $5,596,000 for the 2001 quarter due to the lower interest rate environment. The Company's net interest margin on a federal tax-equivalent basis for the second quarter of 2002 increased to 4.19 percent from 3.69 percent in the second quarter of 2001. Net interest margin is a measure of the net return on interest-earning assets and is computed by dividing annualized net interest income by the average of total interest-earning assets for the period. The Company's overall yield on earning assets was 7.61 percent for the second quarter of 2002 compared with 8.21 percent for the second quarter of 2001. The rate on interest-bearing liabilities decreased in the second quarter of 2002 to 3.78 percent compared to 4.98 percent for the second quarter of 2001. Interest income and fees on loans decreased $510,000 or 8 percent in the second quarter of 2002 compared to the same period in 2001, mainly due to lower interest rates. The Company recognized interest income and fees on loans of $5,794,000 for the second quarter of 2002 and $6,304,000 for the 2001 quarter. The average 10 yield on loans decreased to 7.40 percent for the second quarter of 2002, compared to 8.06 percent in the second quarter of 2001. The yield on the Company's loan portfolio is affected by the amount of nonaccrual loans (which do not earn interest income), the mix of the portfolio (real estate loans generally have a lower overall yield than commercial and agricultural loans), the effects of competition and the interest rate environment on the amounts and volumes of new loan originations, and the mix of variable rate versus fixed rate loans in the Company's portfolio. The lower interest rates were not beneficial to the Company as variable rate loans tied to prime were adjusted downward and produced less interest income. Renewing fixed-rate loans have been rewritten at lower rates reflecting the market interest rate environment. Loan demand by customers in the market areas served by the Company has become "soft" as general economic conditions have weakened and potential borrowers are less willing to increase their debt load. Average loans outstanding were $314,277,000 in second quarter of 2002 compared with $313,760,000 for the second quarter of 2001, an increase of $517,000 or less than 1 percent. Interest and discount income on loan pool participations increased $498,000 or 23 percent for the second quarter of 2002 compared with the quarter ended June 30, 2001. The increase was mainly due to the greater volume of loan pool participations. Interest income and discount collected on the loan pool participations for the three months ended June 30, 2002 was $2,657,000 compared with $2,159,000 collected in the second quarter of 2001. The yield on loan pool participations was 10.89 percent for the second quarter of 2002 compared with 11.46 percent for the quarter ended June 30, 2001. The average loan pool participation investment balance was $22,301,000 or 30 percent higher in the second quarter of 2002 than in same period for 2001 as a result of pool purchases in the second, third, and fourth quarters of 2001. Newly purchased loan pools typically do not produce income for a period of up to 120 days from date of purchase, which significantly impacts the overall yield on pools. These loan pool participations are pools of performing, distressed and nonperforming loans that the Company has purchased at a discount from the aggregate outstanding principal amount of the underlying loans. Income is derived from this investment in the form of interest collected and the repayment of the principal in excess of the purchase cost which is herein referred to as "discount recovery." The Company recognizes interest income and discount recovery on its loan pool participations on a cash basis. The loan pool participations have traditionally been a high-yield activity for the Company, but this yield has fluctuated from period to period based on the amount of cash collection, discount recovery, and net collection expenses of the servicer in any given period. The income and yield on loan pool participations may vary in future periods due to the volume and discount rate on loan pools purchased. Interest income on investment securities decreased $343,000 or 23 percent in the quarter ended June 30, 2002, compared with the quarter ended June 30, 2001 due to decreased volume in the portfolio and also due to the decreased interest rates. Interest income on investment securities totaled $1,149,000 for the second quarter of 2002 compared with $1,492,000 in same quarter of 2001. The average balance of investments for the quarter ended June 30, 2002 was $89,002,000, down from $96,423,000 in the second quarter of 2001. The yield on the Company's investment portfolio in the second quarter of 2002 decreased to 5.50 percent from 6.59 percent in the comparable period of 2001. 11 Interest expense on deposits decreased $1,152,000 or 28 percent in the second quarter of 2002 compared with 2001 mainly due to the lowered national and local market interest rate environment. Total interest expense on deposits was $2,937,000 for the quarter ended June 30, 2002 and was $4,089,000 for the second quarter of 2001. Average interest-bearing deposits for the second quarter of 2002 increased $3,939,000 or 1 percent from the same period in 2001. Interest-bearing NOW and savings accounts increased in 2002 while average certificates of deposit decreased. The weighted average rate paid on interest-bearing deposits was 3.27 percent in the second quarter of 2002 compared with 4.60 percent in the second quarter of 2001. The full benefit of lower market deposit rates may not be realized if the competitive environment forces the Company to pay above-market rates to attract or retain deposits in future periods. Interest expense on borrowed funds was $1,430,000 for the three months ended June 2002 compared with $1,507,000 in the 2001 quarter, a decrease of $77,000 or 5 percent. Interest expense on Federal Home Loan Bank advances was $8,000 higher in the second quarter of 2002 reflecting the Company's greater utilization of this alternative funding method, which was offset, in part, by a reduction in the average rate reflecting the repricing of advances at lower rates. Interest expense on notes payable decreased $95,000 in the second quarter of 2002 compared with 2001 reflecting lower average borrowings on the Company's commercial bank line of credit and decreased interest rates. The Company's notes payable line is variable with the national prime rate and any changes in this rate will affect the amount of interest expense incurred in future periods. Provision for Loan Losses The Company recorded a provision for loan losses of $276,000 in the second quarter of 2002 compared with $354,000 in the second quarter of 2001. Management determines an appropriate provision based on its evaluation of the adequacy of the allowance for loan losses in relationship to a continuing review of problem loans, the current economic conditions, actual loss experience and industry trends. Management believes that the allowance for loan losses is adequate based on the inherent risk in the portfolio as of June 30, 2002, however, growth in the loan portfolio and the uncertainty of the general economy require that management continue to evaluate the adequacy of the allowance for loan losses and make additional provisions in future periods as deemed necessary. Non-interest Income Non-interest income results from the charges and fees collected by the Company from its customers for various services performed, data processing income received from nonaffiliated banks, miscellaneous other income and gains (or losses) from the sale of investment securities held in the available for sale category. Total non-interest income was $954,000 in the second quarter of 2002, $289,000 or 23 percent less than $1,243,000 from the quarter ended June 30, 2001. Most of the reduction was due to the realization of $395,000 in investment security gains during the second quarter of 2001 that was nonrecurring in the quarter ended June 30, 2002. All other categories of non-interest income including service charges, data processing income and other operating income were greater in the second quarter of 2002 compared with the same period of 2001. 12 Excluding gains from the sale of investment securities, non-interest income was $106,000 greater for 2002 due to higher service charge income and origination fees on loans sold to the secondary market. Non-interest Expense Non-interest expense for the quarter ended June 30, 2002 decreased $108,000 or 3 percent to $3,780,000 compared with $3,888,000 for the second quarter of 2001. Non-interest expense includes all the costs incurred to operate the Company except for interest expense, the loan loss provision and income taxes. Salaries and benefits expense for the second quarter of 2002 increased $70,000 or 4 percent from 2001 as a result of increased salary levels and health insurance costs. Professional fees decreased $265,000 for the second quarter of 2002 as the Company incurred costs for the utilization of an outside firm to conduct profit enhancement evaluation in 2001. Other operating expense increased by $124,000 in the second quarter of 2002 compared with the three months ended June 30, 2001 primarily due to the settlement of litigation involving one of the subsidiary banks. Goodwill amortization decreased $63,000 in the second quarter of 2002 as a result of the adoption of FASB Statement No. 142, which permitted the discontinuation of amortization of goodwill effective January 1, 2002. The Company does continue to amortize core deposit intangibles and Statement 72 unidentifiable intangible assets, which decreased $16,000 for the second quarter of 2002 compared with the same period in 2001 reflecting the utilization of the effective-yield method of amortization. Income Tax Expense The Company incurred income tax expense of $768,000 for the three months ended June 30, 2002 compared with $492,000 for the three months ended June 30, 2001. The increased tax expense for the June 2002 quarter was mainly due to higher overall taxable income compared to the same period in the prior year. The effective income tax rate as a percent of income before taxes for the three months ended June 30, 2002 and 2001 was 35.4 percent and 33.4 percent, respectively. SIX MONTHS ENDED JUNE 30, 2002 Net income for the six months ended June 30, 2002 was $2,819,000 or $.73 per share basic and $.71 per share diluted. Net income was $848,000 or 43 percent greater in 2002 compared with $1,971,000 for the first six months of 2001. Earnings per share for the first half of 2001 was $.50 basic and $.49 diluted. For the first six months of 2002, average shares outstanding were 3,872,085 and average diluted shares were 3,950,719. Average shares outstanding in the first six months of 2001 were 3,962,386 and average diluted shares for the period were 3,991,143. Return on average assets increased to 1.05 percent in 2002 from .76 percent for the six months ended June 30, 2001. The Company's return on average shareholder equity rose to 11.04 percent for the first six months of 2002 compared with 7.90 percent for the same period of 2001. 13 RESULTS OF OPERATION Net Interest Income Net interest income for the six months ended June 30, 2002 was $1,655,000 or 19 percent greater than the comparable period of 2001. Net interest income was $10,442,000 in 2002 versus $8,787,000 for the first half of 2001. The Company benefited from the effects of the lower market interest rate environment that helped reduce the overall cost of funds and the amount of interest expense for the first half of 2002. Total interest income was $19,233,000 for the six months ended June 30, 2002, a decline of $796,000 or 4 percent from $20,029,000 for the first half of 2001 primarily attributable to the lower interest rate environment. Interest expense decreased $2,451,000 or 22 percent in the first six months of 2002 compared with the same period in 2001. Interest expense was $8,791,000 for the six months of 2002 and $11,242,000 in the same period of 2001. The yield on earning assets declined to 7.68 percent in 2002 from 8.36 percent for the first half of 2001 while the rate on interest-bearing liabilities was reduced to 3.84 percent in 2002 from 5.11 percent for the six months ended June 30, 2001. The net interest margin on a tax-equivalent basis was 4.20 percent for the six months ended June 30, 2002 compared with 3.71 percent for the six-month period of 2001. Interest income and fees on loans was $11,650,000 in 2002 compared with $12,771,000 for the six months ended June 30, 2001. The decrease of $1,121,000 or 9 percent was primarily due to the lower interest rate environment in 2002. Average loan volumes for the first six months were $2,744,000 greater in 2002, but the Company's yield on its loan portfolio declined to 7.45 percent in 2002 compared with 8.24 percent for the first half of 2001. Interest income and discount on loan pool participations for the first half of 2002 was $5,354,000 compared with $4,150,000 in the same period of 2001, an increase of $1,204,000 or 29 percent. The increase was mainly attributable to the greater amount of loan pools held by the Company in 2002. Loan pools averaged $102,112,000 for the first half of 2002 compared with $73,361,000 for the six months ended June 30, 2001. The yield on loan pool participations was 10.57 percent in 2002 and 11.41 percent for the first six months of 2001. Interest income on investment securities of $2,167,000 was $744,000 lower in 2002 compared with $2,911,000 earned in the first half of 2001 both as a result of lower interest rates and due to decreased balances. On a tax-equivalent basis, the yield on the Company's investment portfolio was 5.68 percent for 2002 and was 6.76 percent for the first six months of 2001. Due to market interest rates, the yields that could be obtained on newly acquired securities were considerably lower than the yields on those that matured. The average balance of investment securities was $10,316,000 or 11 percent lower in 2002 than in the first half of 2001. Securities were sold in the second and third quarters of 2001 with the proceeds reinvested in loan pool participations. Interest expense on deposits in 2002 totaled $5,928,000 compared with $8,246,000 for the first half of 2001, a decrease of $2,318,000 or 28 percent. The reduction in market interest rates, a decline in fixed-rate certificates of deposit, and an increase in lower-rate NOW, savings and money-market accounts were responsible for the decrease in interest expense. The average rate paid by the Company on 14 interest-bearing deposits was 3.34 percent in the first half of 2002 compared with 4.72 percent for the six months ended June 30, 2001. Average interest-bearing deposits were $5,498,000 greater in 2002 compared with the first half of 2001. Interest expense on borrowed funds decreased $133,000 or 4 percent in 2002 due to the lower interest rate environment. Interest on borrowed funds totaled $2,863,000 for the first six months of 2002 compared with $2,996,000 for the same period of 2001. The average amount of borrowed funds was $12,261,000 higher for the first half of 2002 as Federal Home Loan Bank advances were utilized to fund growth in the loan pools. The average rate on borrowed funds was 5.57 percent in 2002 compared with 6.61 percent for the six months ended June 30, 2001. Provision for Loan Losses The Company's provision for loan losses was $35,000 greater in 2002 than it was for the first six months of 2001. Provision for loan losses was $536,000 in the current year compared with $501,000 for the first half of 2001. Non-interest Income Total non-interest income for the six months ended June 30, 2002 was $1,834,000. This was $159,000 or 8 percent lower than the $1,993,000 earned in the first half of 2001. Investment security gains realized in the first six months of 2001 were $393,000. No investment security gains were realized in the first half of 2002. Service charges, data processing income and other income were all greater in 2002. Excluding security gains, non-interest income was $234,000 or 15 percent greater in the first half of 2002 than in the same period of 2001. Non-interest Expense Non-interest expense for the first six months of 2002 was $7,346,000 compared with $7,305,000 for the first half of 2001, an increase of $41,000 or less than 1 percent. Salaries and benefits were $146,000 or 4 percent greater in 2002 due to higher salary levels and increased health insurance costs. Professional fees were $287,000 or 46 percent lower in 2002 compared with the first half of 2001 due to the non-recurring costs incurred in 2001 to have an outside consultant conduct a profitability improvement study. Other operating expenses were $293,000 or 19 percent greater in 2002 primarily due to the write-down in the value of property held in other real estate and the settlement of litigation involving one of the Company's subsidiary banks. Goodwill amortization was $126,000 for the first six months of 2001, with none incurred in 2002. Core deposit premium amortization was $32,000 lower in 2002 as a result of the utilization of the effective-yield method of amortization. Income Tax Expense Income tax expense was $1,575,000 for the first half of 2002 compared with $1,003,000 primarily due to the increased before-tax income earned by the 15 Company. The effective tax rate was 35.8 percent in 2002 versus 33.7 percent in the first half of 2001. FINANCIAL CONDITION Total assets as of June 30, 2002 were $540,633,000 compared with $545,795,000 as of December 31, 2001. As of June 30, 2002, the Company had no federal funds sold and $5,800,000 federal funds purchased compared with $10,650,000 purchased as of December 31, 2001. The Company's liquidity needs are usually highest in the second and third quarters of each year due to seasonal loan demand and minimal deposit growth in the first six months of the year. Federal funds are purchased on a short-term basis to meet this liquidity need. Investment Securities Investment securities available for sale totaled $73,692,000 as of June 30, 2002. This is an increase of $23,486,000 from the December 31, 2001 balance of $50,206,000 as securities were purchased for the portfolio. Investment securities classified as held to maturity declined to $17,724,000 as of June 30, 2002, compared with $21,332,000 on December 31, 2001, as the proceeds from maturities were reinvested in available for sale securities. Loans Loan volumes declined in the first half of 2002 to $314,268,000 on June 30, 2002. The $8,413,000 or 3 percent decrease from December 31, 2001 was, in part, due to the payoff of a large commercial real estate line, continued refinancing of residential real estate loans into long-term fixed rate secondary market loans, and a general weakening in economic conditions in the markets served by the Company. As of June 30, 2002, the Company's loan to deposit ratio (excluding loan pool investments) was 81.7 percent compared with a year-end 2001 loan to deposit ratio of 85.2 percent. The decrease in the loan to deposit ratio is attributable to the decline in loan volume and the increase in deposits since December 31, 2001. As of June 30, 2002, loans secured by real estate (including 1 to 4 family, multi-family, commercial and agricultural) comprised the largest category in the portfolio at approximately 71 percent of total loans. Commercial loans were approximately 12 percent of the portfolio and agricultural loans remained at approximately 13 percent of total loans. Loans to individuals and other loans constituted approximately 4 percent of the portfolio. Loan Pool Participations As of June 30, 2002, the Company had loan pool participations of $98,509,000, a decrease of $11,884,000 or 11 percent from the December 31, 2001 balance of $110,393,000. The reduction in the loan pool participations is primarily due to collections made in the normal course of business and to the sale of a package of long-term fixed low-rate loans during the second quarter. The loan pool investment balance shown as an asset on the Company's Statement of Condition represents the discounted purchase cost of the loan pool participations. The 16 Company purchased loan pool packages of $8,707,000 in the second quarter of 2002. A total of $17,104,000 was purchased in the first six months of this year. During the second quarter of 2001, the Company purchased $28,913,000 in loan pool participations, which was the year-to-date total for first half of 2001. Deposits Total deposits as of June 30, 2002 were $384,819,000 compared with $378,645,000 as of December 31, 2001. Certificates of deposit remain the largest category of deposits at June 30, 2002 representing approximately 56 percent of total deposits. Deposits grew 2 percent during the first quarter of 2002, with most of the increase occurring in savings and certificates of deposit. Borrowed Funds/Notes Payable The Company had $5,800,0000 in Federal Funds purchased on June 30, 2002. There was $10,650,000 in Federal Funds purchased on December 31, 2001. During the second quarter of 2002 the Company had an average balance of Federal Funds purchased of $801,000. Federal Funds purchased averaged $1,686,000 for the first six months of 2002. Advances from the Federal Home Loan Bank totaled $80,234,000 as of June 30, 2002 compared with $91,174,000 as of December 31, 2001. A $10,000,000 advance that matured late in June was paid off with available funds. Notes payable decreased to $2,350,000 on June 30, 2002 from $9,200,000 on December 31, 2001 as the Company paid down its commercial bank line of credit with the proceeds from its participation in a pooled trust preferred security issuance. Trust Preferred Security On June 27, 2002, the Company obtained $10,000,000 in long-term subordinated debt from its participation in the issuance of a pooled trust preferred security. This security is a hybrid capital instrument that is included as Tier 1 capital for regulatory purposes, yet it is non-dilutive to common shareholders and to return on equity. The trust preferred has a 30-year maturity, does not require any principal amortization and is callable in five years at par at the issuer's option. The interest rate is variable based on the 3-month LIBOR rate (1.86 percent on date of issue) plus 3.65 percent, with the interest payable quarterly. Proceeds from the pooled trust preferred were used to pay down the Company's commercial bank line of credit. Nonperforming Assets The Company's nonperforming assets totaled $3,998,000 (1.27 percent of total loans) as of June 30, 2002, compared to $3,670,000 (1.14 percent of total loans) as of December 31, 2001. Nonperforming assets were $441,000 lower at June 30, 2002 than the total of $4,439,000 on March 31, 2002. All nonperforming asset totals and related ratios exclude the loan pool participations. The following table presents the categories of nonperforming assets as of June 30, 2002 compared with December 31, 2001: 17 Nonperforming Assets (dollars in thousands) June 30, December 31, 2002 2001 ---- ---- Nonaccrual $ 2,722 $ 2,559 Loans 90 days past due 1,243 926 Other real estate owned 33 185 -------- -------- $ 3,998 $ 3,670 ======== ======== From December 31, 2001 to June 30, 2002, nonaccrual loans increased $163,000 as the result of concerns with the quality of an agricultural line of credit. Loans ninety days past due increased $317,000. Other real estate owned decreased by $152,000 as property held in this category was reduced to its current market value. The Company's allowance for loan losses as of June 30, 2002 was $3,849,000, which was 1.22 percent of total loans as of that date. This compares with an allowance for loan losses of $3,381,000 as of December 31, 2001, which was 1.05 percent of total loans. As of June 30, 2002, the allowance for loan losses was 97.06 percent of nonperforming loans compared with 96.99 percent as of December 31, 2001. Based on the inherent risk in the loan portfolio, management believes that as of June 30, 2002, the allowance for loan losses is adequate. For the three months ended June 30, 2002, the Company's net loan charge-offs were $27,000 compared with net charge-offs of $124,000 during the quarter ended June 30, 2001. Net loan charge-offs for the six months ended June 30, 2002 were $68,000 or .04 percent of loans outstanding on an annualized basis. This compares with net loan charge-offs of $142,000 during the first six months of 2001. Capital Resources Total shareholders' equity was 9.7 percent of total assets as of June 30, 2002 and was 9.3 percent as of December 31, 2001. The Company's Tier 1 Capital Ratio was 13.6 percent of risk-weighted assets as of June 30, 2002 and was 9.6 percent as of December 31, 2001, compared to a 4.0 percent regulatory requirement. The increase in Tier 1 ratio at June 30 is attributable to the addition of the $10,000,000 trust preferred to regulatory capital. Risk-based capital guidelines require the classification of assets and some off-balance-sheet items in terms of credit-risk exposure and the measuring of capital as percentage of the risk-adjusted asset totals. Tier 1 Capital is the Company's total common shareholders' equity plus the qualifying trust preferred reduced by goodwill. Management believes that, as of June 30, 2002, the Company and its subsidiary banks meet all capital adequacy requirements to which they are subject. As of that date, all the bank subsidiaries were "well capitalized" under regulatory prompt corrective action provisions. During the first quarter of 2002, the Company repurchased 5,000 shares of common stock on the open market in accordance with the terms of its previously-approved stock repurchase authorization. No shares were repurchased during the second quarter. During the second quarter of 18 2002, a total of 8,560 shares of common stock were issued to employees and directors of the Company upon their exercise of stock options previously awarded. Liquidity Liquidity management involves meeting the cash flow requirements of depositors and borrowers. The Company conducts liquidity management on both a daily and long-term basis; and it adjusts its investments in liquid assets based on expected loan demand, projected loan maturities and payments, estimated cash flows from the loan pool participations, expected deposit flows, yields available on interest-bearing deposits, and the objectives of its asset/liability management program. The Company had liquid assets (cash and cash equivalents) of $11,213,000 as of June 30, 2002, compared with $15,837,000 as of December 31, 2001. Most of the decrease during the period was from the reduction in federal funds sold. Investment securities classified as available for sale could be sold to meet liquidity needs if necessary. Additionally, the bank subsidiaries maintain lines of credit with correspondent banks and the Federal Home Loan Bank that would allow them to borrow federal funds on a short-term basis if necessary. The Company also maintains a line of credit with a major commercial bank that provides liquidity for the purchase of loan pool participations and other corporate needs. Management believes that the Company has sufficient liquidity as of June 30, 2002 to meet the needs of borrowers and depositors. Market Risk Management Market risk is the risk of earnings volatility that results from adverse changes in interest rates and market prices. The Company's market risk is primarily comprised of interest rate risk arising from its core banking activities of lending and deposit taking. Interest rate risk is the risk that changes in market interest rates may adversely affect the Company's net interest income. Management continually develops and applies strategies to mitigate this risk. The Company has not experienced any material changes to its market risk position since December 31, 2001, from that disclosed in the Company's 2001 Form 10-K Annual Report. Management does not believe that the Company's primary market risk exposures and how those exposures were managed in the first six months of 2002 changed when compared to 2001. The Company uses a third-party computer software simulation modeling program to measure its exposure to potential interest rate changes. For various assumed hypothetical changes in market interest rates, numerous other assumptions are made such as prepayment speeds on loans and securities backed by mortgages, the slope of the Treasury yield curve, the rates and volumes of the Company's deposits and the rates and volumes of the Company's loans. This analysis measures the estimated change in net interest income in the event of hypothetical changes in interest rates. This analysis of the Company's interest rate risk was presented in the Form 10-K filed by the Company for the year ended December 31, 2001. 19 Commitments and Contingencies In the ordinary course of business, the Company is engaged in various issues involving litigation. Management believes that none of this litigation is material to the Company's results of operations. Critical Accounting Policies The Company has identified two critical accounting policies and practices relative to the financial condition and results of operation. These two accounting policies relate to the allowance for loan losses and to loan pool accounting. The allowance for loan losses is based on management's opinion, and is adequate to absorb losses in the existing portfolio. In evaluating the portfolio, management takes into consideration numerous factors, including current economic conditions, prior loan loss experience, the composition of the loan portfolio, and management's estimate of probable credit losses. The allowance for loan loss is established through a provision for loss based on management's evaluation of the risk inherent in the loan portfolio, the composition of the portfolio, specific impaired loans, and current economic conditions. Such evaluation, which includes a review of all loans on which full collectibility may not be reasonably assured, considers among other matters, the estimated net realizable value or the fair value of the underlying collateral, economic conditions, historical loss experience, and other factors that warrant recognition in providing for an adequate allowance for loan loss. The loan pool accounting practice relates to management's opinion that the investment amount reflected on the Company's financial statements does not exceed the estimated net realizable value or the fair value of the underlying collateral securing the purchased loans. In evaluating the purchased loan portfolio, management takes into consideration many factors, including the borrowers' current financial situation, the underlying collateral, current economic conditions, historical collection experience, and other factors relative to the collection process. In the event that management's evaluation of the level of the allowance for loan losses is inadequate, the Company would need to increase its provision for loan losses. If the estimated realizable value of the loan pool participations is understated, the Company's yield on the loan pools would be reduced. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT With the exception of the historical information contained in this report, the matters described herein contain forward-looking statements that involve risk and uncertainties that individually or mutually impact the matters herein described, including but not limited to financial projections, product demand and market acceptance, the effect of economic conditions, the impact of competitive products and pricing, governmental regulations, results of litigation, technological difficulties and/or other factors outside the control of the Company, which are detailed from time to time in the Company's SEC reports. The Company disclaims any intent or obligation to update these forward-looking statements. 20 Part II - Item 4. Submission of Matters to a vote of Security Holders. The Company's annual meeting of shareholders was held on April 30, 2002. The record date for determination of shareholders entitled to vote at the meeting was February 25, 2002. There were 3,872,594 shares outstanding as of that date, each such share being entitled to one vote. At the shareholders' meeting the holders of 3,422,298 or 88.37 percent of the outstanding shares were represented in person or by proxy, which constituted a quorum. The following proposals were voted on at the meeting: Proposal I - Election of Directors: Three directors were to be elected to serve for the specified term or until their successors shall have been elected and qualified. At the shareholders' meeting, the individuals received the number of votes set opposite their names: VOTE FOR WITHHELD --- -------- Three-year term (2005): Charles S. Howard 3,410,597 11,701 David A. Meinert 3,405,410 16,888 James G. Wake 3,410,426 11,872 Proposal II - Ratification of Auditors' Appointment: A vote was also taken on the ratification of the appointment of KPMG LLP as independent auditors of the Company for the fiscal year ending December 31, 2002. The results of the vote were as follows: BROKER FOR AGAINST ABSTAIN NON-VOTES --- ------- ------- --------- 3,268,773 6,426 147,098 1 21 Part II - Item 6. Exhibits and Reports on Form 8-K. (a) The following exhibits and financial statement schedules are filed as part of this report: Exhibits -------- 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 States Resources Corp. Loan Participation and Servicing Agreement dated February 5, 1999 between States Resources Corp. and Mahaska Investment Company. This agreement is incorporated herein by reference to the Form 10-K report filed by Mahaska Investment Company for the Year ended December 31, 1999. 10.5 Amended and Restated Credit Agreement dated June 30, 2000 between Mahaska Investment Company and Harris Trust and Savings Bank. This Amended and Restated Credit Agreement is incorporated herein by reference to the Form 10-Q report filed by Mahaska Investment Company for the Quarter ended September 30, 2000. 10.5.1 First Amendment to Amended and Restated Credit agreement dated June 30, 2001. This amendment is incorporated herein by reference to the Form 10-Q report filed by Mahaska Investment Company for the Quarter ended September 30, 2001. 11 Computation of Per Share Earnings. 23 (b) Reports on Form 8-K: No reports on Form 8-K were required to be filed during the three months ended June 30, 2002. 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) By: /s/ Charles S. Howard --------------------- Charles S. Howard Chairman, President, Chief Executive Officer August 9, 2002 -------------- Dated By: /s/ David A. Meinert -------------------- David A. Meinert Executive Vice President and Chief Financial Officer (Principal Accounting Officer) August 9, 2002 -------------- Dated 23