-----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, LZ/7MUcYm3CCXxVp423cYnswpTXqhs3ZIZlEEJZQNYKSH8sNjf09Fad0469Ot1fT 8/rXteVFdiNymIJkBK/CDg== 0000950137-99-000682.txt : 19990331 0000950137-99-000682.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950137-99-000682 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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: 99578067 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 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1998 COMMISSION FILE NUMBER 0-24630 MAHASKA INVESTMENT COMPANY INCORPORATED IN IOWA 42-1003699 I.R.S. Employer Identification No. 222 FIRST AVENUE EAST, OSKALOOSA, IOWA 52577 Registrant's telephone number, including area code: 515-673-8448 Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- None None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $5 PAR VALUE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ___ No ___. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 12, 1999, was $42,302,480. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the most recent practicable date, March 12, 1999. 3,636,345 shares Common Stock, $5 par value DOCUMENTS INCORPORATED BY REFERENCE The Annual Report to Shareholders for the 1998 fiscal year is incorporated by reference into Part I and Part II hereof to the extent indicated in such Parts. The definitive proxy statement of Mahaska Investment Company for the 1999 annual meeting of shareholders is incorporated by reference into Part III hereof to the extent indicated in such Part. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS PART I
PAGE ---- Item 1. BUSINESS.................................................... 1 A. General Description...................................... 1 B. Subsidiaries............................................. 1 C. Loan Pool Participations................................. 2 D. Competition.............................................. 5 E. Supervision and Regulation............................... 5 F. Employees................................................ 7 G. Statistical Disclosure................................... 8 Item 2. PROPERTIES.................................................. 16 Item 3. LEGAL PROCEEDINGS........................................... 16 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 16 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....................................... 17 Item 6. SELECTED FINANCIAL DATA..................................... 17 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................. 17 Item 7a. MARKET RISK DISCLOSURE...................................... 17 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 17 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................. 17 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 18 Item 11. EXECUTIVE COMPENSATION...................................... 18 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................ 18 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 18 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K....................................................... 18
3 PART I ITEM 1. BUSINESS A. GENERAL DESCRIPTION Mahaska Investment Company (the "Company") is a financial services holding company headquartered in Oskaloosa, Mahaska County, Iowa. The Company was incorporated in Iowa in 1973 and is a bank holding company registered under the Bank Holding Company Act of 1956 and a savings and loan holding company under the Savings and Loan Holding Company Act. The Company owns 100% of the stock of three bank subsidiaries (collectively referred to as the "Banks"). These three banks are Mahaska State Bank ( "MSB"), Central Valley Bank ("CVB"), and Pella State Bank ("PSB"). The Company also owns 100% of the stock of On-Site Credit Services, Inc. ("On-Site"). The Bank subsidiaries engage in retail and commercial banking and related financial services, providing the usual products and services such as deposits, commercial, real estate, and consumer loans, and trust services. MSB also provides data processing services to affiliated and non-affiliated banks. On-Site provides equipment leasing and accounts receivable financing. Since 1988, the Company, either directly or through the Banks, has invested in loan pool participations that have been purchased by certain non-affiliated independent service corporations (collectively, the "Servicer") from the Federal Deposit Insurance Corporation ("FDIC"), the Resolution Trust Corporation ("RTC"), or from other sources. These loan pool investments generally consist of performing, nonperforming, or distressed loans, that have been sold at prices reflecting varying discounts from the aggregate outstanding principal amount of the underlying loans depending on the credit quality of the portfolio. The Servicer collects these loans from the borrowers. The Company provides services to the Banks and to On-Site including management assistance, auditing services, human resources administration, marketing assistance and coordination, assistance with respect to accounting and operating systems and procedures, and loan review. Charges for these services are based on the nature and extent of these services. B. SUBSIDIARIES Mahaska State Bank -- MSB is a full-service, commercial bank which was chartered as an Iowa state bank in 1931. The Bank operates in south central Iowa and serves all of Mahaska county from its main bank and two branch offices in Oskaloosa and serves portions of Keokuk and Iowa counties from its branch office in North English. The Bank also maintains one drive-up automated teller machine located in Oskaloosa. The Bank provides a wide array of retail and commercial banking services, including demand, savings and time deposits, loans, trust services, and data processing services to the bank subsidiaries and to three non-affiliated banks. The Bank also provides full-service brokerage services to its customers through an affiliation with an independent broker. Central Valley Bank -- CVB is a full-service, federally-chartered savings bank which was formed as a de novo institution by the Company in June 1994. CVB also operates in south central Iowa from its main office in Ottumwa, which serves Wapello County, and from its two branches located in Fairfield and one branch in Sigourney, which serve Jefferson and Keokuk counties, respectively. CVB provides retail deposit services including demand, savings, and time deposit products and offers commercial, agricultural, real estate, and consumer loans. During 1997, the Bank formed a wholly-owned service corporation, Valley Financial Services, Inc., to provide crop insurance products to its customers. Pella State Bank -- PSB is a full-service, Iowa state chartered commercial bank which the Company formed as a de novo institution in December 1997. PSB mainly serves the community of Pella, Iowa and the surrounding area located in Marion County. The office of the bank is a newly-remodeled facility which the Company purchased and renovated in 1997. The Bank provides full retail and commercial banking services to its customers. The Bank also provides full-service brokerage services to its customers through an affiliation with an independent broker. 1 4 On-Site Credit Services, Inc. -- On-Site is an Iowa corporation which was formed by the Company in 1974 under the name of MIC Leasing Co. The company operated under the name of On-Site Commercial Services until June 1997 when the name was officially changed to On-Site Credit Services, Inc. On-Site originates and services machinery and equipment leases to small businesses and farmers. The funding of these leases is either provided by On-Site through funds provided by the Company or by MSB, with On-Site receiving a broker fee. On-Site also provides accounts receivable financing and factoring services to small businesses mainly in the state of Iowa. C. LOAN POOL PARTICIPATIONS The Company, directly and through the Banks, has participation interests in pools of loans currently held and serviced by four separate independent servicing corporations (referred to collectively as the "Servicer"). The four independent servicing corporations are Central States Resources Corporation, Midstates Resources Corporation, All States Resources Corporation, and States Resources Corporation. The Company does not have any ownership interest in or control over these servicing corporations. Two of the independent servicing corporations are owned solely by Randal Vardaman and two are owned by Mr. Vardaman in conjunction with other individuals. Mr. Vardaman has been engaged in credit analysis and loan portfolio management in various positions since 1970. He founded Central States Resources Corporation in 1988 and organized Midstates Resources Corporation in 1991, All States Resources Corporation in 1993, and States Resources Corporation in 1998. Prior to the formation of the servicing corporations, he reviewed various FDIC loan pool packages, participated in the liquidation of certain banking institutions in Iowa, and served as assistant liquidator at the FDIC's Division of Liquidation. The Company has invested in loan pools purchased by the Servicer at varying discounts from the aggregate outstanding principal amount of the underlying loans. The loan pools were sold by the FDIC or the RTC acting as conservator, receiver, or liquidator of failed banks and savings and loan institutions, and by other large nonaffiliated banking organizations. The loans comprising the pools were originated throughout the United States. As part of the agreement to purchase participation interests in the loan pools, the Company and its subsidiaries have contracted with the Servicer to service the underlying loans within the respective loan pools which are owned of record by the Servicer. The Servicer also evaluates various loan pools prior to purchase and makes recommendations to the Company concerning the creditworthiness of proposed loan pool purchases and proposes appropriate bids to the Company and any other potential loan pool participants. The Servicer has bid on loan pools from various regional offices of the FDIC and the RTC, and from other sources. The Company and the Banks have purchased participation interests in such pools of loans. The purchase prices paid by the Company for loan pool participations have ranged from 5.5% to 97.7% of the aggregate outstanding principal amount of the loans comprising such pools at the time of purchase. The Servicer acquires the loan pools without recourse against the sellers and, accordingly, the risk of noncollectibility is, for the most part, assumed by the Company and any other investors in a particular pool. Federal law mandated that after July 1, 1995, the RTC no longer was appointed to act as conservator or liquidator and was phased out of existence by year end 1995; however, the FDIC assumed the RTC's role with respect to failed savings and loans, as well as continuing in its role as conservator for failed banks. While only the FDIC currently offers loan pools, there is no assurance that it will continue to do so. Beginning in 1996, the Servicer successfully bid on packages of loans offered for sale by a large banking organization headquartered in the eastern United States. The Servicer continues to bid on packages offered by the FDIC and large banking organizations throughout the country. Should the opportunity to invest in loan pools not exist in the future, the Company intends to invest available funds in other income producing assets. Each pool has a different composition and different characteristics. The composition of a loan pool is generally determined by the seller based on its desire to maximize the price it receives for all loans among the various pools. Some pools may consist of a large number of small consumer loans which are unsecured or are secured by other assets such as automobiles or mobile homes, while other pools may consist of loans primarily secured by real estate, and yet other pools may consist of small to medium balance commercial loans. Still other pools may contain a mixture of such loans and other types of loans. Some pools may contain significant 2 5 numbers of past-due nonperforming loans while other pools are comprised almost entirely of performing loans. The price bid and paid for such a loan pool is determined based on the composition of the particular pool, the amounts the Servicer believes can be collected on such a pool, and the risks associated with the collection of such amounts. In considering an investment in a loan pool, the Servicer will evaluate loans owned and being offered and make recommendations to the Company and other prospective investors concerning the creditworthiness of the proposed loan pool purchase. The Servicer performs a comprehensive analysis of the loan pool in an attempt to ensure proper valuation and adequate safeguards in the event of default. The bid price on the loan pools will be reflective of the results of the Servicer's pre-acquisition review of the loan files. In many cases the loan files may not be current and substantial uncertainties may exist regarding the collectibility of the various loans in the pool. Management believes that in many instances the non-current loans can be brought current once the Servicer has an opportunity to contact the debtor. The Company makes its own decisions as to whether or not to participate in a particular loan pool which has been recommended by the Servicer, based on the Company's experience with the various categories and qualities of loans. The sales of loan pools by the FDIC and by other sellers is generally conducted by sealed bid auction. A sealed bid auction requires each bidder to submit a confidential bid on the subject loan pool and the loan pool is awarded to the highest bidder. In recent years, the Servicer and the Company have faced increasing competition in bidding for loan pools. Since 1988, the Servicer, on behalf of the Company and other investors, has bid on a large number of loan pools and has been successful in purchasing 65 loan pools. The Company and other investors in the loan pools fund the purchase by the Servicer and each investor receives a percentage interest in the loan pool based on its proportional investment relative to the total purchase price of the pool. Each investor receives a loan pool participation certificate reflecting this interest. The purchased loan pools consist, for the most part, of loans evidenced by promissory notes and secured by either personal property or real property. The value of the collateral may range from nominal to substantial and often may be impossible to establish prior to acquisition of the pools with the level of certainty that is typically required in a financial institution. Upon the acquisition of a participation interest in a loan pool, the Company assumes the risk that the Servicer will be unable to recover an amount equal to the purchase price plus the carrying costs, if any, collection costs and expected profits on such accounts. The extent of such risk is dependent on a number of factors, including the Servicer's ability to locate the debtors, the debtors' financial condition, the possibility that a debtor may file for protection under applicable bankruptcy laws, the Servicer's ability to locate the collateral, if any, for the loan and to obtain possession of such collateral, the value of such collateral, and the length of time it takes to realize the ultimate recovery either through collection procedures or through a resale of the loans following a restructure. A cost "basis" is assigned to each individual loan acquired on a cents per dollar (discounted price) based on the Servicer's assessment of the recovery potential of each such loan. This methodology assigns a higher basis to performing loans with greater potential collectibility and a lower basis to those loans identified as having little or no potential for collection. Loan pool participations are shown on the Company's balance sheet as a separate asset category. The original carrying value of loan pool participations represents the discounted price paid by the Company to acquire its participation interests in various loan pools purchased by the Servicer. The Company's investment balance is reduced as the Servicer collects principal payments on the loans and remits the proportionate share of such payments to the Company. The investment in loan pools is accounted for on a nonaccrual (or cash) basis in one of three methods, depending on the circumstances. First, if a borrower makes regular payments on a loan, the payment received is first applied to interest income in the amount of interest due at the contract rate. Further payments are applied to principal in a ratio reflecting the proportion of cost basis to loan principal amount. Payments in excess of interest and this ratio are recorded as discount income. Discount income earned over the life of a 3 6 loan represents loan principal collected in excess of the price originally paid to acquire the loan from the FDIC, the RTC, or any other sellers, which price constitutes the cost "basis" of the loan. Secondly, if the borrower fails to make regular payments, the Servicer evaluates the collateral supporting the loan. If the Servicer determines that the loan is well secured, then payments are applied as previously described. If the Servicer determines that the collateral is deficient, payments are applied to the principal balance of the loan with no recognition of interest due. The cost recovery method governs the application of payments received to the outstanding principal balance. Under this method, any amount received is initially applied to the cost "basis" of the loan and any additional amounts received are recognized as discount income. Third, where the Servicer negotiates a settlement of a loan for a lump sum, the payment is first applied to principal to the extent of the assigned cost "basis" with the excess treated as discount income up to the original principal value of the loan, and any remainder is treated as interest income on loan pool participations. In each case, where changed circumstances or new information lead the Servicer to believe that collection of the note or recovery of the basis through collateral would be less than originally determined, the cost basis assigned to the loan is written down or written off through a charge against discount income. Collection expenses incurred by the Servicer are netted against discount income. Discount income is added to interest income and reflected as one amount on the Company's consolidated statement of income. Profit (or loss) from collection activities is determined on a monthly basis for each servicing corporation from which loan pool participation interests have been purchased. The Company does not recognize as income any accrued interest receivable on the loan pools. Interest income is only recognized when collected and actually remitted to the Company by the Servicer. Many of the pools that have been purchased by the Servicer do not include purchased interest in the cost basis; thus, interest collected does not have a cost basis and represents profit. Interest income collected by the Servicer is reflected in the Company's consolidated financial statements as interest income included as part of interest income and discount on loan pool participations. The Servicer provides the Company with monthly reports detailing collections of principal and interest, face value of loans collected and those written off, actual operating expenses incurred, remaining asset balances (both in terms of cost basis and principal amount of loans), a comparison of actual collections and expenses with target collections and budgeted expenses, and summaries of remaining collection targets. Monthly meetings are held between the Company and representatives of the Servicer to review collection efforts and results, to discuss future plans of action, and to discuss potential opportunities. Additionally, the Company's and the Servicer's personnel communicate via telephone and telecopy on a regular basis to discuss various issues regarding the loan pools. Company management personnel visit the Servicer's operation in Omaha, Nebraska on a regular basis; and the Company's internal auditor has performed audit procedures in recent years. The Servicer is reimbursed for costs incurred to collect loan principal and interest, which are netted against loan principal and interest collections. These costs include salary and benefits paid by the Servicer to its employees, legal fees, and other overhead expenses. Each loan pool investment is tracked on an individual basis with the Servicer receiving a "Servicing Fee" of up to twenty-five percent of net interest collected based on the percentage of net loan principal collections to the original investment amount. Once the original investment amount has been fully recovered, the Servicer is no longer entitled to the Servicing Fee. In lieu of the Servicing Fee, the Servicer receives a "Bonus Fee" of ten percent of all subsequent net collections and receives a twenty-five percent participation interest in the individual pool and shares proportionally in all future collections, net of costs and Bonus Fees. The Company's overall cost basis in its loan pool participations represents a discount from the aggregate outstanding principal amount of the loans underlying the pools. For example, as of December 31, 1998 and 1997, such cost basis was $54,510,000 and $54,326,000, respectively, while the contractual outstanding principal amounts of the underlying loans as of such dates were approximately $83,058,000 and $99,948,000, respectively. Because this discounted cost basis inherently reflects the assessed collectibility of the underlying loans and thus creates a built-in reserve against the risk of nonpayment in the loan pools, the Company has not 4 7 established an allowance for loan losses relating to the loan pool participations. The Company does not include any amounts related to the loan pool participations in its totals of nonperforming loans. The underlying loans in the loan pool participations include both fixed rate and variable rate instruments, but are accounted for on a nonaccrual basis, and no amounts for interest due are reflected in the carrying value of the loan pool participations. Based on historical experience, the average period of collectibility for loans underlying the Company's loan pool participations, many of which have exceeded contractual maturity dates, is approximately three to five years. Management has reviewed the recoverability of the underlying loans and believes that the carrying value does not exceed the net realizable value of its investment in loan pool participations. D. COMPETITION The Company competes in the commercial banking and thrift industries through its subsidiary banks. These industries are highly competitive, and all the bank subsidiaries face strong direct competition for deposits, loans, and other financial-related services. The Banks in Mahaska, Marion, Wapello, Keokuk, Iowa, and Jefferson counties in south central Iowa compete with other commercial banks, other thrifts, credit unions, stockbrokers, finance divisions of auto and farm equipment companies, agricultural suppliers, and other agricultural-related lenders. Some of these competitors are local, while others are statewide or nationwide. The Banks compete for deposits principally by offering depositors a wide variety of deposit programs, convenient office locations, hours and other services, and for loan originations primarily through interest rates and loan fees they charge, the efficiency and quality of services they provide to borrowers and the variety of their loan products. Some of the financial institutions and financial service organizations with which the Banks compete are not subject to the same degree of regulation as that imposed on bank and thrift holding companies, federally insured Iowa-chartered banks, and federal savings banks. As a result, such competitors have advantages over the Banks in providing certain services. As of December 31, 1998, approximately twenty commercial banks, three thrifts, and seven credit unions operated within a 25-mile radius of Oskaloosa, and new competitors may develop that are substantially larger and have significantly greater resources than any of the Banks. Currently, major competitors in certain of the Company's markets include banking subsidiaries of Wells Fargo (Norwest) Corporation, Firstar Corporation of Iowa, Mercantile Bank, U S Bank, and NationsBank. As a result of recently passed federal legislation to allow unlimited interstate branching, the Company may experience heightened competition from these and other major financial institutions seeking to expand their regional banking presence in Iowa. The Company also faces competition with respect to its investments in loan pool participations. The Company's financial success to date is largely attributable to the Servicer's ability to determine the loan pools to bid on and ultimately purchase, the availability of assets to fund the purchases and the Servicer's ability to collect on the underlying assets. Investments in loan pools have become increasingly popular in recent years, leading financial institutions and other competitors to become active at loan pool auctions conducted by the FDIC and other sellers. There is no assurance that the Company, through the Servicer, will be able to bid successfully in the future. Certain existing competitors of the Company are substantially larger and have significantly greater financial resources than the Company. Increased participation by new institutions or other investors may also create increased buying interest which could also result in higher bid prices for the type of loan pools considered for investment by the Company. In addition, new and existing competitors may develop due diligence procedures comparable to the Servicer's procedures. The emergence of such competition could have a material adverse effect on the Company's business and financial results. The Company expects that its success in the future will depend more on the performance of its bank subsidiaries and less on the investment in loan pool participations. E. SUPERVISION AND REGULATION Bank holding companies, banks, savings and loan holding companies, and savings and loan associations are extensively regulated under federal and state law. References under this heading to applicable statutes or regulations are brief summaries of the portions thereof which do not purport to be complete and which are 5 8 qualified in their entirety by reference to those statutes and regulations. Any change in applicable laws or regulation may have a material adverse effect on the business of the Company and the Banks. The Company, as a bank holding company, is subject to regulation under the Bank Holding Company Act of 1956 (the "Act") and is registered with the Board of Governors of the Federal Reserve System. Under the Act, the Company is prohibited, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to affiliated banks, except that the Company may engage in and own shares of companies engaged in certain businesses found by the Board of Governors to be so closely related to banking "as to be proper incident thereto," such as owning a savings association. The Act does not place territorial restrictions on the activities of bank-related subsidiaries of bank holding companies. The Company is required by the Act to file periodic reports of its operations with the Board of Governors and is subject to examination by the Board of Governors. Under the Act and Federal Reserve Board regulations, the Company and the Bank are prohibited from engaging in certain tie-in arrangements in connection with an extension of credit, lease, sale of property, or furnishing of services. Iowa law permits bank holding companies domiciled in Iowa to make acquisitions throughout the state. Iowa law also permits bank holding companies located in the Midwestern Region (defined to include Illinois, Iowa, Minnesota, Missouri, Nebraska, South Dakota, and Wisconsin) to acquire banks or bank holding companies located in Iowa subject to approval by the Iowa Division of Banking and subject to certain statutory limitations. In addition, the Company may acquire banks or bank holding companies located in the Midwestern Region or outside the Midwestern Region, provided the Company's principal place of business remains in the Midwestern Region and the acquisition is authorized by the laws of the state in which the acquisition is to be made. As a savings and loan holding company, the Company is subject to federal regulation and examination by the Office of Thrift Supervision (the "OTS"). The OTS has enforcement authority over the Company. This authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. Generally, the activities for a bank holding company are more limited than the authorized activities for a savings and loan holding company. The Company and its subsidiaries are affiliates within the meaning of the Federal Reserve Act and OTS regulations. As affiliates, they are subject to certain restrictions on loans by an affiliated bank or thrift (collectively "affiliated banks") to the Company, other affiliated banks or such other subsidiaries, on investments by an affiliated bank in their stock or securities and on an affiliated bank taking such stock and securities as collateral for loans to any borrower. The Company is also subject to certain restrictions with respect to direct issuance, flotation, underwriting, public sale or distribution of certain securities. Under Iowa law, Mahaska State Bank and Pella State Bank are subject to supervision and examination by the Iowa Division of Banking. As an affiliate of these banks, the Company is also subject to examination by the Iowa Division of Banking. The deposits of the Banks are insured by the Federal Deposit Insurance Corporation (the "FDIC") and the Banks are, therefore, also subject to the supervision and examination by the FDIC. The Banks are required to maintain certain minimum capital ratios established by these regulators. The Banks are assessed fees based on the institutions' deposits by the FDIC, to insure the funds of customers on deposit with the institutions. In addition, Iowa state law imposes restrictions on the operations of the state-chartered banks including limitations on the amount a bank can lend to a single borrower and limitations on the nature and amount of securities in which it may invest. Among other things, Iowa law imposes restrictions on certain types of loans made by a bank, limiting the bank from making loans (or purchasing participation interests in loan pools) secured by real estate located outside Iowa and its contiguous states in amounts exceeding 25% of its regulatory capital. There can be no assurance that the Iowa or federal regulators will not in the future impose further restrictions or limits on the Company's loan pool activities. Iowa law strictly regulates the establishment of bank offices and thus may affect the Company's future plans to establish additional offices of its banks. Under Iowa law, a state bank may not establish a bank office 6 9 outside the boundaries of the counties contiguous to or cornering upon the county in which the principal place of business of the state bank is located. The number of offices a state bank may establish in a particular municipality is also limited depending upon the municipality's population. Central Valley Bank is subject to the supervision of and is regularly examined by the OTS and is assessed fees by the OTS based upon the thrift's total assets. As a savings institution, CVB must maintain certain minimum capital ratios established by the OTS and is required to meet a qualified thrift lender test (the "QTL") to avoid certain restrictions upon its operations. The QTL was modified by the passage of the Economic Growth and Regulatory Paperwork Reduction Act of 1996. On December 31, 1998, CVB complied with the current minimum capital guidelines and met the QTL test. OTS regulations permit federally chartered savings associations to branch nationwide to the extent allowed by federal statute, enabling federal savings associations with interstate networks to diversify their loan portfolios and lines of business. The Company operates within a regulatory structure that continuously evolves. In the last several years significant changes have occurred that affect the Company. The FDIC Improvement Act of 1991 (the "FDICIA") was primarily designed to recapitalize the FDIC's Bank Insurance Fund (the "BIF") and the Savings Association Insurance Fund (the "SAIF"). To accomplish this purpose the FDIC was granted additional borrowing authority, granted the power to levy emergency special assessments on all insured depository institutions, granted the power to change the BIF and SAIF rates on deposits on a semiannual basis, and directed to draft regulations that provided for a "Risk-Based Assessment System" that was implemented on January 1, 1994. The FDICIA also imposed additional regulatory safety and soundness standards upon depository institutions and granted additional authority to the FDIC. The FDICIA generally requires that all institutions be examined by the FDIC annually. Under the provisions of the FDICIA, all regulatory authorities are required to examine their regulatory accounting standards and, to the extent possible, are required to conform to generally accepted accounting principles. Finally, the FDICIA requires the federal banking regulators to take prompt corrective action with respect to depository institutions that fall below certain capital standards and prohibits any depository institution from making any capital distribution that would cause it to be undercapitalized. Legislation became effective on September 30, 1995 which serves to lessen or remove certain legal barriers to interstate banking and branching by financial institutions. The legislation has resulted in an increase in the nationwide consolidation activity occurring among financial institutions by facilitating interstate bank operations and acquisitions. The legislation does, however, allow states to "opt out" of interstate branching, and at this time it is difficult to predict what effect this legislation might have on the Company. The earnings of the Company are affected by the policies of regulatory authorities, including the Federal Reserve System. Federal Reserve System monetary policies have had a significant effect on the operating results of banks and thrifts in the past and are expected to do so in the future. Because of changing conditions in the economy and in the money markets as a result of actions by monetary and fiscal authorities, interest rates, credit availability and deposit levels may change due to circumstances beyond the control of the Company. Future policies of the Federal Reserve System and other authorities cannot be predicted, nor can their effect on future earnings be predicted. F. EMPLOYEES On December 31, 1998, the Company had 111 full-time employees and 26 part-time employees of which 55 full-time and 18 part-time employees were employed by MSB, 30 full-time and 6 part-time employees were employed by CVB, 6 full-time and 1 part-time employees were employed by PSB, 10 full-time employed by On-Site and 10 full-time employees were employed directly by the Company. The Company provides its employees with a comprehensive program of benefits, some of which are on a contributory basis, including comprehensive medical and dental plans, life insurance, long-term and short-term disability coverage, a 401(k) plan, and an employee stock ownership plan. None of the employees are represented by unions. Management considers its relationship with its employees to be excellent. 7 10 G. STATISTICAL DISCLOSURE The following statistical disclosures relative to the consolidated operations of the Company have been prepared in accordance with Guide 3 of the Guides for the Preparation and Filing of Reports and Registration Statements under the Securities Exchange Act of 1934. Average balances were primarily calculated on a daily basis. I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL The following table details average balances, interest income/expense and average rates/yield for the Company's earning assets and interest bearing liabilities for the years ended December 31, 1998, 1997 and 1996 reported on a fully tax-equivalent basis assuming a 34% tax rate.
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------------------------------- 1998 1997 1996 ----------------------------- ----------------------------- ----------------------------- INTEREST INTEREST INTEREST INCOME AVERAGE INCOME AVERAGE INCOME AVERAGE AVERAGE (2)/ RATE/ AVERAGE (2)/ RATE/ AVERAGE (2)/ RATE/ BALANCE EXPENSE YIELD BALANCE EXPENSE YIELD BALANCE EXPENSE YIELD ------- -------- ------- ------- -------- ------- ------- -------- ------- (DOLLARS IN THOUSANDS) Average earning assets: Loans(1)............... $157,712 $15,026 9.53% $131,081 $12,293 9.38% $105,372 $10,203 9.68% Loan pool participations....... 49,805 7,970 16.00 49,399 8,474 17.15 50,105 9,097 18.16 Interest-bearing deposits............. 2,359 122 5.20 2,085 108 5.20 5,097 266 5.23 Investment securities available for sale: Taxable investments....... 25,730 1,617 6.28 26,052 1,705 6.55 20,557 1,348 6.56 Investment securities held to maturity: Taxable investments....... 9,821 569 5.80 16,421 928 5.65 21,616 1,215 5.62 Tax exempt investments....... 7,265 491 6.75 7,459 486 6.51 9,510 619 6.51 Federal funds sold..... 6,465 338 5.24 2,375 128 5.39 1,704 92 5.39 -------- ------- -------- ------- -------- ------- Total earning assets.......... $259,157 $26,133 10.08 $234,872 $24,122 10.27 $213,961 $22,840 10.67 ======== ======= ======== ======= ======== ======= Average interest-bearing liabilities: Interest-bearing demand deposits............. $ 33,248 $ 656 1.97 $ 32,225 $ 677 2.10 $ 28,786 $ 612 2.13 Savings deposits....... 59,419 2,241 3.77 59,019 2,259 3.83 53,844 2,058 3.82 Certificates of deposit.............. 107,284 6,102 5.69 96,609 5,442 5.63 86,055 4,845 5.63 Federal funds purchased............ 201 12 5.87 534 32 5.93 830 48 5.73 Federal Home Loan Bank advances............. 6,840 405 5.92 2,274 138 6.07 0 0 0.00 Notes payable.......... 13,342 1,074 8.05 9,292 764 8.23 11,323 968 8.55 -------- ------- -------- ------- -------- ------- Total interest-bearing liabilities..... $220,334 $10,490 4.76 $199,953 $ 9,312 4.66 $180,838 $ 8,531 4.72 ======== ======= ======== ======= ======== ======= Net interest income...... $15,643 5.32 $14,810 5.61 $14,309 5.96 ======= ======= ======= Net interest margin(3)... 6.04% 6.31% 6.69% ===== ===== =====
- --------------- (1) Average loans outstanding includes the daily average balance of non-performing loans. Interest on these loans does not include additional interest of $108,000, $122,000, and $90,000 for 1998, 1997 and 1996, respectively, which would have been accrued based on the original terms of these loans compared to the interest that was actually recorded. Interest earned on loans includes loan fees (which are not material in amount). (2) Includes interest income and discount realized on loan pool participations. (3) Net interest margin is net interest income divided by average total earning assets. 8 11 The following table sets forth an analysis of volume and rate changes in interest income and interest expense of the Company's average earning assets and average interest-bearing liabilities reported on a fully tax-equivalent basis assuming a 34% tax rate. The table distinguishes between the changes related to average outstanding balances (changes in volume holding the initial interest rate constant) and the changes related to average interest rates (changes in average rate holding the initial outstanding balance constant). The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 1998 COMPARED TO 1997 1997 COMPARED TO 1996 INCREASE/(DECREASE) DUE TO INCREASE/(DECREASE) DUE TO ---------------------------- ---------------------------- VOLUME RATE NET VOLUME RATE NET ------ ---- --- ------ ---- --- (DOLLARS IN THOUSANDS) INTEREST INCOME FROM AVERAGE-EARNING ASSETS: Loans...................................... $2,534 $ 199 $2,733 $2,420 $(330) $2,090 Loan pool participations (1)............... 69 (573) (504) (127) (496) (623) Interest-bearing deposits.................. 14 0 14 (156) (2) (158) Investment securities available for sale: Taxable investments..................... (20) (68) (88) 360 (3) 357 Investment securities held to maturity: Taxable investments..................... (382) 23 (359) (294) 7 (287) Tax exempt investments.................. (13) 18 5 (134) 1 (133) Federal funds sold......................... 214 (4) 210 36 0 36 ------ ----- ------ ------ ----- ------ Total income from earning assets........ 2,416 (405) 2,011 2,105 (823) 1,282 ------ ----- ------ ------ ----- ------ INTEREST EXPENSE OF AVERAGE INTEREST-BEARING LIABILITIES: Interest-bearing demand deposits........... 21 (42) (21) 72 (7) 65 Savings deposits........................... 15 (33) (18) 198 3 201 Certificates of deposit.................... 606 54 660 595 2 597 Federal funds purchased.................... (20) 0 (20) (18) 2 (16) Federal Home Loan Bank advances............ 271 (4) 267 69 69 138 Notes payable.............................. 327 (17) 310 (168) (36) (204) ------ ----- ------ ------ ----- ------ Total expense from interest-bearing liabilities........................... 1,220 (42) 1,178 748 33 781 ------ ----- ------ ------ ----- ------ Net interest income.......................... $1,196 $(363) $ 833 $1,357 $(856) $ 501 ====== ===== ====== ====== ===== ======
- --------------- (1) Includes interest income and discount realized on loan pool participations. 9 12 INTEREST RATE SENSITIVITY ANALYSIS The following table sets forth the scheduled repricing or maturity of the Company's assets and liabilities as of December 31, 1998, based on the assumptions described below. The effect of these assumptions is to quantify the dollar amount of items that are interest rate-sensitive and can be repriced within each of the periods specified. The table does not necessarily indicate the impact of general interest rate movements on the Company's net interest margin because the repricing of certain categories of assets and liabilities is subject to competitive and other pressures beyond the Company's control. As a result, certain assets and liabilities indicated as maturing or otherwise repricing within a stated period may, in fact, mature or reprice at different times and at different volumes.
THREE OVER THREE ONE TO THREE MONTHS MONTHS THREE YEARS OR LESS TO ONE YEAR YEARS OR MORE TOTAL ------- ----------- ------ ------- ----- (DOLLARS IN THOUSANDS) INTEREST-EARNING ASSETS: Loans..................................... $ 73,630 $ 26,256 $ 19,328 $46,213 $165,427 Loan pool participations.................. 4,543 13,627 36,340 0 54,510 Interest-bearing deposits in banks........ 3,559 0 0 0 3,559 Federal funds sold........................ 9,270 0 0 0 9,270 Investment securities: Available for sale...................... 1,001 3,010 13,860 11,784 29,655 Held to maturity........................ 198 4,298 3,628 5,555 13,679 -------- -------- -------- ------- -------- Total interest-earning assets........ 92,201 47,191 73,156 63,552 276,100 ======== ======== ======== ======= ======== INTEREST-BEARING LIABILITIES: NOW and Super NOW deposits................ 34,214 0 0 0 34,214 Savings deposits.......................... 59,758 0 0 0 59,758 Certificates of deposit................... 22,457 56,101 32,507 4,667 115,732 Federal Home Loan Bank advances........... 7 3,020 2,058 2,510 7,595 Notes payable............................. 17,000 0 0 0 17,000 -------- -------- -------- ------- -------- Total interest-bearing liabilities... 133,436 59,121 34,565 7,177 234,299 ======== ======== ======== ======= ======== Interest sensitivity gap per period....... $(41,235) $(11,930) $ 38,591 $56,375 ======== ======== ======== ======= Cumulative interest sensitivity gap....... $(41,235) $(53,165) $(14,574) $41,801 ======== ======== ======== ======= Interest sensitivity gap ratio............ 0.69% 0.80% 2.12% 8.85% Cumulative interest sensitivity gap ratio................................... 0.69% 0.72% 0.94% 1.18%
In the table above, NOW and Super NOW deposit account balances and savings deposits are included as interest-bearing liabilities in the three months or less. Loan pool participations are included in the interest rate sensitivity analysis using an estimated three-year average life. The historical average for the return of original investment on the pools is approximately 36 months. Given the non-performing aspect of the loan pool portfolio, management feels that the use of contractual weighted-average maturity data is inappropriate. 10 13 II. INVESTMENT PORTFOLIO The following table sets forth certain information with respect to the book value of the Company's investment portfolio as of December 31, 1998, 1997 and 1996.
DECEMBER 31, ----------------------------- 1998 1997 1996 ---- ---- ---- (DOLLARS IN THOUSANDS) SECURITIES AVAILABLE FOR SALE: U.S. government securities................................ $ 4,603 $ 4,563 $ 5,019 U.S. government agency securities......................... 16,408 15,313 18,679 Other investment securities............................... 8,644 3,352 2,785 ------- ------- ------- Total securities available for sale.................... 29,655 23,228 26,483 ======= ======= ======= SECURITIES HELD TO MATURITY: U.S. government securities................................ 0 5,046 8,135 U.S. government agency securities......................... 1,290 2,885 5,445 Obligations of states and political subdivisions.......... 8,291 6,793 8,904 Other investment securities............................... 4,098 5,109 5,221 ------- ------- ------- Total securities held to maturity...................... 13,679 19,833 27,705 ======= ======= ======= Total investment securities............................... $43,334 $43,061 $54,188 ======= ======= =======
The following table sets forth the contractual maturities of investment securities as of December 31, 1998, and the weighted average yields (for tax-exempt obligations on a fully tax-equivalent basis assuming a 34% tax rate) of such securities. As of December 31, 1998, the Company held no securities with a book value exceeding 10% of shareholders' equity.
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......... $2,020 6.02% $ 2,583 6.10% $ 0 0.00% 0 0.00% U.S. government agency securities....................... 990 4.75 9,074 5.90 2,078 5.91 4,266 6.95 Other investment securities........ 1,001 5.61 6,212 5.61 0 0.00 1,431 5.22 ------ ---- ------- ---- ------ ---- ------ ---- Total............................ 4,011 5.61 17,869 5.83 2,078 5.91 5,697 6.52 ------ ---- ------- ---- ------ ---- ------ ---- Securities held to maturity: U.S. government agency securities....................... 0 0.00 0 0.00 372 6.96 918 7.17 Obligations of states and political subdivisions..................... 1,796 6.68 5,300 6.83 995 6.42 200 7.57 Other investment securities........ 2,700 5.74 1,298 6.02 100 7.15 0 0.00 ------ ---- ------- ---- ------ ---- ------ ---- Total............................ 4,496 6.12 6,598 6.68 1,467 6.61 1,118 7.25 ------ ---- ------- ---- ------ ---- ------ ---- Total investment securities.......... $8,507 5.88% $24,467 6.06% $3,545 6.20% $6,815 6.64% ====== ==== ======= ==== ====== ==== ====== ====
11 14 III. LOAN PORTFOLIO The Company's loan portfolio largely reflects the profile of the communities in which it operates. Approximately two-thirds of the total loans as of December 31, 1998, were agricultural, commercial or residential real estate loans. The following table shows the composition of the Company's loan portfolio as of the dates indicated.
DECEMBER 31, ------------------------------------------------------------------------------------------------ 1998 1997 1996 1995 1994 ---------------- ---------------- ---------------- ---------------- ---------------- % OF % OF % OF % OF % OF AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- (DOLLARS IN THOUSANDS) Agricultural............ $ 27,504 16.6% $ 24,779 17.2% $ 19,940 17.0% $ 16,319 18.9% $ 15,968 21.5% Commercial.............. 38,959 23.6 31,198 21.6 23,613 20.1 22,235 25.7 18,789 25.3 Real estate: 1-4 family residences.......... 38,087 23.0 32,341 22.4 27,274 23.2 15,765 18.2 14,261 19.2 5+ residential property............ 240 0.1 251 0.2 261 0.2 0 0.0 17 0.0 Agricultural.......... 21,297 12.9 19,647 13.6 16,952 14.4 9,855 11.4 8,443 11.4 Construction.......... 5,956 3.6 4,430 3.1 4,017 3.4 2,502 2.9 1,859 2.5 Commercial............ 17,007 10.3 15,634 10.8 11,895 10.1 10,097 11.7 9,018 12.2 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Real estate total..... 82,587 49.9 72,303 50.1 60,399 51.4 38,219 44.2 33,598 45.3 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Installment............. 12,847 7.8 13,268 9.2 11,522 9.8 7,637 8.8 4,700 6.3 Lease financing......... 3,530 2.1 2,785 1.9 1,942 1.7 2,066 2.4 1,154 1.6 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total loans(1)...... $165,427 100.0% $144,333 100.0% $117,416 100.0% $ 86,475 100.0% $ 74,209 100.0% ======== ===== ======== ===== ======== ===== ======== ===== ======== ===== Total assets............ $298,389 $274,873 $251,851 $205,162 $186,818 ======== ======== ======== ======== ======== Loans to total assets... 55.4% 52.5% 46.6% 42.1% 39.7%
- --------------- (1) Total loans do not include the Company's investments in loan pool participations. The following table sets forth the remaining maturities for certain loan categories as of December 31, 1998.
TOTAL FOR LOANS DUE AFTER ONE YEAR HAVING: DUE IN ------------------- DUE WITHIN ONE TO DUE AFTER FIXED VARIABLE ONE YEAR FIVE YEARS FIVE YEARS TOTAL RATES RATES ---------- ---------- ---------- ----- ----- -------- (DOLLARS IN THOUSANDS) Agricultural........................ $23,779 $ 3,380 $ 345 $27,504 $ 3,320 $ 405 Commercial.......................... 25,337 10,921 2,701 38,959 12,682 940 Real estate -- construction......... 3,435 1,961 560 5,956 1,933 588 ------- ------- ------ ------- ------- ------ Total............................. $52,551 $16,262 $3,606 $72,419 $17,935 $1,933 ======= ======= ====== ======= ======= ======
The following table provides information on the Company's non-performing loans as of the dates indicated.
DECEMBER 31, ------------------------------------------------------ 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS) 90 days past due.............................. $ 663 $ 522 $ 625 $134 $ 95 Restructured.................................. 164 387 380 409 285 Nonaccrual.................................... 561 927 1,085 124 207 ------ ------ ------ ---- ---- Total non-performing loans.................. $1,388 $1,836 $2,090 $667 $587 ====== ====== ====== ==== ==== Ratio of non-performing loans to total loans....................................... 0.84% 1.27% 1.78% 0.78% 0.79%
12 15 IV. SUMMARY OF LOAN LOSS EXPERIENCE The following table sets forth loans charged off and recovered by the type of loan and an analysis of the allowance for loan losses for the years ended December 31, 1998, 1997, 1996, 1995 and 1994.
YEAR ENDED DECEMBER 31, -------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Amount of loans outstanding at end of period (net of unearned interest)(1)......................... $165,427 $144,333 $117,416 $85,869 $74,015 ======== ======== ======== ======= ======= Average amount of loans outstanding for the period (net of unearned interest)............................ $157,712 $131,081 $105,372 $81,175 $69,043 ======== ======== ======== ======= ======= Allowance for possible loan losses at beginning of period.................. $ 1,816 $ 1,491 $ 1,001 $ 881 $ 833 -------- -------- -------- ------- ------- CHARGE-OFFS: Agricultural......................... 135 19 41 53 42 Commercial........................... 638 14 10 18 110 Real estate -- construction.......... 0 0 0 0 0 Real estate -- mortgage.............. 0 30 0 2 0 Installment.......................... 63 63 38 18 23 Lease financing...................... 4 11 616 0 14 -------- -------- -------- ------- ------- Total charge-offs................. 840 137 705 91 189 -------- -------- -------- ------- ------- RECOVERIES: Agricultural......................... 1 11 6 24 11 Commercial........................... 8 18 1 1 36 Real estate -- construction.......... 0 0 0 0 0 Real estate -- mortgage.............. 0 1 0 0 2 Installment.......................... 13 15 8 10 5 Lease financing...................... 0 0 23 8 0 -------- -------- -------- ------- ------- Total recoveries.................. 22 45 38 43 54 -------- -------- -------- ------- ------- Net loans charged off.................. 818 92 667 48 135 Provision for possible loan losses..... 1,179 417 987 168 183 Allowance for branch acquisition....... 0 0 170 0 0 -------- -------- -------- ------- ------- Allowance for possible loan losses at end of period........................ $ 2,177 $ 1,816 $ 1,491 $ 1,001 $ 881 ======== ======== ======== ======= ======= Net loans charged off to average loans................................ 0.52% 0.07% 0.63% 0.06% 0.20% Allowance for possible loan losses to total loans at end of period......... 1.32% 1.26% 1.27% 1.17% 1.19%
- --------------- (1) Loans do not include, and the allowance for loan losses does not include any reserve for, investments in loan pool participations. 13 16 The Company has allocated the allowance for loan losses to provide for the possibility of loan losses being incurred within the categories of loans set forth in the table below. The allocation of the allowance and the ratio of loans within each category to total loans as of the dates indicated are as follows:
DECEMBER 31, ------------------------------------------------------------------------------------ 1998 1997 1996 1995 ---------------------- ---------------------- ---------------------- --------- PERCENT OF PERCENT OF PERCENT OF LOANS TO LOANS TO LOANS TO ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT --------- ---------- --------- ---------- --------- ---------- --------- (DOLLARS IN THOUSANDS) Agricultural......... $ 361 16.6% $ 312 17.2% $ 254 17.0% $ 262 Commercial........... 514 23.6 392 21.6 300 20.1 248 Real estate -- mortgage........... 1,086 49.9 910 50.1 766 51.4 392 Installment.......... 170 7.8 167 9.2 146 9.8 78 Lease financing...... 46 2.1 35 1.9 25 1.7 21 ------ ----- ------ ----- ------ ----- ------ Total............ $2,177 100.0% $1,818 100.0% $1,491 100.0% $1,001 ====== ===== ====== ===== ====== ===== ====== DECEMBER 31, ----------------------------------- 1995 1994 ---------- ---------------------- PERCENT OF PERCENT OF LOANS TO LOANS TO TOTAL ALLOWANCE TOTAL LOANS AMOUNT LOANS ---------- --------- ---------- (DOLLARS IN THOUSANDS) Agricultural......... 18.9% $ 242 21.5% Commercial........... 25.7 271 25.3 Real estate -- mortgage........... 44.2 302 45.3 Installment.......... 8.8 55 6.3 Lease financing...... 2.4 11 1.6 ----- ------ ----- Total............ 100.0% $ 881 100.0% ===== ====== =====
V. DEPOSITS The following table sets forth the average amount of and the average rate paid on deposits by deposit category for the years ended December 31, 1998, 1997 and 1996.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 1998 1997 1996 ---------------- ---------------- ---------------- AVERAGE AVERAGE AVERAGE BALANCE RATE BALANCE RATE BALANCE RATE ------- ---- ------- ---- ------- ---- (DOLLARS IN THOUSANDS) Non-interest bearing demand deposits............................ $ 19,159 N/A $ 17,465 N/A $ 15,653 N/A Interest-bearing demand (NOW and money market)............................. 33,248 1.97% 32,225 2.10% 28,785 2.13% Savings deposits...................... 59,419 3.77 59,019 3.83 53,844 3.82 Certificates of deposit............... 107,284 5.69 96,609 5.63 86,056 5.63 -------- -------- -------- Totals.............................. $219,110 4.11% $205,318 4.08% $184,338 4.08% ======== ==== ======== ==== ======== ====
The following table summarizes certificates of deposit in amounts of $100,000 or more by time remaining until maturity as of December 31, 1998. These time deposits are made by individuals, corporations and public entities, all of which are located in the Company's market area or are State of Iowa public funds.
DECEMBER 31, 1998 ------------ (IN THOUSANDS) Three months or less........................................ $ 7,176 Over three through six months............................... 2,137 Over six months through one year............................ 7,094 Over one year............................................... 8,061 ------- Total..................................................... $24,468 =======
14 17 VI. RETURN ON EQUITY AND ASSETS Various operating and equity ratios for the years indicated are presented below:
YEAR ENDED DECEMBER 31, ----------------------------- 1998 1997 1996 ---- ---- ---- Return on average total assets.................... 1.65% 1.98% 1.93% Return on average equity.......................... 12.16 14.47 13.52 Dividend payout ratio............................. 44.44 34.78 36.50 Average equity to average assets.................. 13.54 13.69 14.31 Equity to assets ratio............................ 12.81 13.37 13.60 ===== ===== =====
VII. BORROWED FUNDS The following table summarizes the oustanding amount of and the average rate on borrowed funds as of December 31, 1998, 1997 and 1996.
DECEMBER 31, -------------------------------------------------------------------- 1998 1997 1996 ------------------ ------------------ ------------------ AVERAGE AVERAGE AVERAGE BALANCE RATE BALANCE RATE BALANCE RATE ------- ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Note payable(1)..................... $17,000 7.38% $14,050 8.25% $ 8,500 8.00% Federal Home Loan Bank advances..... 7,595 5.68 6,000 5.96 0 0.00 Federal funds purchased............. 0 0.00 0 0.00 0 0.00 ------- ------- ------- Total............................. $24,595 6.83% $20,050 7.56% $ 8,500 8.00% ======= ==== ======= ==== ======= ====
- --------------- (1) The note payable balance at December 31, 1998 consists of advances on a $20,000,000 revolving line of credit. The line has a variable interest rate which currently is three-eighths of a percent below the lender's prime rate. Interest is payable quarterly and the line is due June 30, 1999. The maximum amount of borrowed funds outstanding at any month end for the years ended December 31, 1998, 1997, and 1996 were as follows:
1998 1997 1996 ---- ---- ---- (DOLLARS IN THOUSANDS) Note payable....................................... $17,000 $14,050 $14,750 Federal Home Loan Bank advances.................... 12,299 6,000 0 Federal funds purchased............................ 3,775 2,150 5,990 ======= ======= =======
The following table sets forth the average amount of and the average rate paid on borrowed funds for the years ended December 31, 1998, 1997 and 1996.
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 1998 1997 1996 ------------------ ------------------ ------------------ AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE RATE BALANCE RATE BALANCE RATE ------- ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Note payable........................ $13,342 8.05% $ 9,292 8.23% $11,323 8.55% Federal Home Loan Bank advances..... 6,840 5.92 2,274 6.07 0 0.00 Federal funds purchased............. 201 5.87 534 5.93 830 5.73 ------- ------- ------- Total............................. $20,383 7.31% $12,100 7.72% $12,153 8.36% ======= ==== ======= ==== ======= ====
15 18 ITEM 2. PROPERTIES The Company's headquarters are located at 222 First Avenue East, Oskaloosa, Iowa. This building is a two-story combination office and motor bank and was constructed in 1975. The Company's offices are located on the second floor and MSB leases the first floor and the basement from the Company. The ground floor houses MSB's data processing department and motor bank operation which includes four drive-up lanes and two walk-up windows. The basement contains a meeting room, kitchen, and storage. The bank's lease runs through the year 2005. The principal offices of Mahaska State Bank are located at 124 South First Street, Oskaloosa, Iowa, in a two-story building owned by the bank which contains a full banking facility. The bank also owns a second building in Oskaloosa located at 301 A Avenue West. This one-story, full-banking facility, including two drive-up lanes, is located five blocks northwest of the bank's principal offices. In addition, the bank owns a 24-hour automatic teller machine located at 211 South First Street, Oskaloosa, Iowa. The bank also has a branch office located in North English, Iowa which is 40 miles northeast of Oskaloosa. The branch is a one-story building with a full banking facility, including two drive-up lanes and a 24-hour automatic teller machine. Central Valley Bank owns three facilities in the communities of Ottumwa, Fairfield, and Sigourney, Iowa. The Ottumwa building is a single-story brick structure constructed in 1981. The approximately 4,200 square foot building has several offices and a potential for three drive-up lanes, with two presently in operation. The building is located at 116 West Main in Ottumwa's downtown business district. The Fairfield facility is a two-story building located at 58 East Burlington on the southeast corner of the downtown square. The building's three floors have 8,932 total square feet, which is all utilized by CVB. The Sigourney facility located at 112 North Main Street is one-half block northwest of the community's courthouse square in the downtown business district. The 4,596 square foot one-story masonry building was constructed in 1972 as a banking facility with one drive-up window. This building was acquired by CVB in 1996 from Boatmen's Bank, N.A. in conjunction with the purchase of the deposits of the Sigourney office from Boatmen's. CVB leases its "In-Store" branch facility in Fairfield. The branch is located in an Easter's Super Value grocery store and occupies approximately 400 square feet of the store. The lease agreement expires in October, 2000 and may be renewed for two additional terms of five years each. Pella State Bank owns its facility at 500 Oskaloosa Street in Pella, Iowa. The facility is located approximately six blocks south of the community's main business district on a heavily-traveled thoroughfare that connects the main business district with retail stores located in a developing area on the east side of the city. The one-time restaurant building was acquired in the summer of 1997 and was completely renovated to become a modern banking facility. The facility contains approximately 1,860 square feet of usable space and has two drive-up teller lanes. ITEM 3. LEGAL PROCEEDINGS Mahaska Investment Company and its subsidiaries are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise. 16 19 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information appearing on page 43 of the Company's Annual Report, filed as Exhibit 13 hereto, is incorporated herein by reference. There were approximately 243 holders of record of the Company's $5 common stock as of March 12, 1999. Additionally, there are an estimated 750 beneficial holders whose stock was held in street name by brokerage houses as of that date. The closing price of the Company's common stock was $16.00 on March 12, 1999. The Company increased dividends to common shareholders in 1998 to $.56 per share, a 16.7 percent increase over $.48 for 1997. Dividend declarations are evaluated and determined by the Board of Directors on a quarterly basis. The Company declared a five-for-three stock split effected in the form of a stock dividend payable to shareholders of record as of October 20, 1997. The additional shares resulting from this stock split were issued to shareholders on November 10, 1997. In February 1999, the Board of Directors declared a dividend of $.15 per common share. The Company's loan agreement requires that the Company does not pay any dividends in excess of forty percent of net income without the lenders' permission. Except for certain regulatory restrictions that may affect dividend payments, there are no other restrictions on the Company's present or future ability to pay dividends. ITEM 6. SELECTED FINANCIAL DATA The information appearing on page 1 of the Company's Annual Report, filed as Exhibit 13 hereto, is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information appearing on pages 12 through 19 of the Company's Annual Report, filed as Exhibit 13 hereto, is incorporated herein by reference. ITEM 7A. MARKET RISK DISCLOSURE The information appearing on pages 17 and 18 of the Company's Annual Report, filed as Exhibit 13 hereto, is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information appearing on pages 20 through 40 of the Company's Annual Report, filed as Exhibit 13 hereto, is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Within the twenty-four months prior to the date of the most recent financial statements, there has been no changes in or disagreements with accountants of the Company. 17 20 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The definitive proxy statement of Mahaska Investment Company is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The definitive proxy statement of Mahaska Investment Company is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The definitive proxy statement of Mahaska Investment Company is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The definitive proxy statement of Mahaska Investment Company is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The following exhibits and financial statement schedules are filed as part of this report: (a) 1. Financial Statements: See the financial statements on pages 20 through 40 of the Company's Annual Report, filed as Exhibit 13 hereto, which are incorporated by reference herein. 2. Exhibits (not covered by independent auditors' report). Exhibit 3.1 Articles of Incorporation, as amended through April 30, 1998, of Mahaska Investment Company. The Articles of Incorporation, as amended, of Mahaska Investment Company are incorporated by reference to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1998. Exhibit 3.2 Bylaws of Mahaska Investment Company. The Amended and Restated Bylaws of Mahaska Investment Company dated July 23, 1998, are incorporated by reference to the Company's quarterly report on Form 10-Q for the Quarter ended September 30, 1998. Exhibit 10.1 Mahaska Investment Company Employee Stock Ownership Plan & Trust as restated and amended. This Plan & Trust is incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. Exhibit 10.2.1 1993 Stock Incentive Plan. This 1993 Stock Incentive Plan is incorporated by reference to Form S-1 Registration Number 33-81922 of Mahaska Investment Company. Exhibit 10.2.2 1996 Stock Incentive Plan. This 1996 Stock Incentive Plan is incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. Exhibit 10.2.3 1998 Stock Incentive Plan. This 1998 Stock Incentive Plan is incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 18 21 Exhibit 10.3.1 Midstates Resources Corp. Loan Participation and Servicing Agreement dated December 9, 1992 between Midstates Resources Corp., Mahaska Investment Company and Mahaska State Bank. This Midstates Resources Corp. Agreement is incorporated by Reference to Form S-1 Registration Number 33-81922 of Mahaska Investment Company. Exhibit 10.3.2 Central States Resources Corp. Liquidation Agreement dated April 18, 1988 between Central States Resources Corp., Mahaska State Bank, National Bank & Trust Co., and Randal Vardaman. This Central States Resources Corp. Agreement is incorporated by reference to Form S-1 Registration Number 33-81922 of Mahaska Investment Company. Exhibit 10.3.3 All States Resources Corp. Loan Participation and Servicing Agreement dated September 13, 1993 between All States Resources Corp., Mahaska Investment Company and West Gate Bank. This All States Resources Corp. Agreement is incorporated by reference to Form S-1 Registration Number 33-81922 of Mahaska Investment Company. Exhibit 10.5.1 Revolving Loan Agreement dated January 31, 1996 between Mahaska Investment Company and Harris Trust and Savings Bank. This Loan Agreement is incorporated herein by reference to the Form 8-K report filed by Mahaska Investment Company on February 29, 1996. Exhibit 10.5.2 Fifth Amendment and Waiver to Credit Agreement between Mahaska Investment Company and Harris Trust & Savings Bank dated December 29, 1998. Exhibit 11 Computation of Per Share Earnings Exhibit 13 The Annual Report to Shareholders of Mahaska Investment Company for the 1998 calendar year. Exhibit 21 Subsidiaries Exhibit 23 Consent of Auditor The Company will furnish to any shareholder upon request and upon payment of a fee of $.50 per page, a copy of any exhibit. Requests for copies should be directed to Karen K. Baack, Secretary/Treasurer, Mahaska Investment Company, P.O. Box 1104, Oskaloosa, Iowa 52577-1104. (b) Reports on Form 8-K: No reports on Form 8-K were required to be filed during the last quarter of 1998. 19 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MAHASKA INVESTMENT COMPANY (Registrant) March 18, 1999 By: /s/ CHARLES S. HOWARD ----------------------------------- Charles S. Howard Chairman, President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ CHARLES S. HOWARD March 18, 1999 ----------------------------------------------------------- ----------------------- Charles S. Howard Date Director, Chairman of the Board, President and Chief Executive Officer By: /s/ DAVID A. MEINERT March 18,1999 ----------------------------------------------------------- ----------------------- David A. Meinert Date Director, Executive Vice President and Chief Financial Officer (Principal Accounting Officer) By: /s/ R. SPENCER HOWARD March 18, 1999 ----------------------------------------------------------- ----------------------- R. Spencer Howard Date Director and Vice President Corporate Planning By: /s/ MARTIN L. BERNSTEIN March 18, 1999 ----------------------------------------------------------- ----------------------- Martin L. Bernstein Date Director By: /s/ ROBERT K. CLEMENTS March 18, 1999 ----------------------------------------------------------- ----------------------- Robert K. Clements Date Director By: /s/ JAMES F. MATHEW March 18, 1999 ----------------------------------------------------------- ----------------------- James F. Mathew Date Director By: /s/ JOHN P. POTHOVEN March 18, 1999 ----------------------------------------------------------- ----------------------- John P. Pothoven Date Director By: /s/ JOHN W. N. STEDDOM March 18, 1999 ----------------------------------------------------------- ----------------------- John W. N. Steddom Date Director
EX-10.5.2 2 FIFTH AMENDMENT AND WAIVER TO CREDIT AGREEMENT 1 Exhibit 10.5.2 MAHASKA INVESTMENT COMPANY FIFTH AMENDMENT AND WAIVER TO CREDIT AGREEMENT Harris Trust and Savings Bank Chicago, Illinois Ladies and Gentlemen: Reference is hereby made to that certain Credit Agreement dated as of January 31, 1996, as amended (the "Credit Agreement"), between the undersigned, Mahaska Investment Company, an Iowa corporation (the "Borrower"), and you (the "Bank"). All capitalized terms used herein without definition shall have the same meanings herein as such terms have in the Credit Agreement. The Borrower has requested that the Bank waive the Borrower's non-compliance with Section 7.10 of the Credit Agreement (Dividends and Certain Other Restricted Payments) as of September 30, 1998, and increase the Commitment to $20,000,000, and the Bank is willing to do so under the terms and conditions set forth in this agreement (herein, the "Amendment"). 1. WAIVER. The Borrower has advised the Bank that as of September 30, 1998, it was not in compliance with Section 7.10 of the Credit Agreement (Dividends and Certain Other Restricted Payments). The Borrower has requested that the Bank waive the Borrower's non-compliance with Section 7.10 of the Credit Agreement as of September 30, 1998, and, by signing in the space provided for that purpose below, the Bank hereby agrees to waive compliane with the same for, and only for, the period ended on September 30, 1998. This waiver shall not become effective unless and until the conditions precedent set forth in Section 3 below have been satisfied. 2. AMENDMENTS. Subject to the satisfaction of the conditions precedent set forth in Section 3 below, the Credit Agreement shall be and hereby is amended as follows: 2.1 Section 1.1 of the Credit Agreement shall have been amended by deleting the amount $"17,000,000" appearing therein and inserting the amount "$20,000,000" in lieu thereof. 2.2 Exhibit A to the Credit Agreement shall have been amended in its entirety, and as amended it shall be restated to read as set forth on Exhibit A attached hereto and made a part hereof. Page 1 2 3. CONDITIONS PRECEDENT. The effectiveness of this Amendment is subject to the satisfaction of all of the following conditions precedent: 3.1 The Borrower and the Bank shall have executed and delivered this Amendment, and the Borrower shall have executed and delivered to the Bank a replacement Note in the form attached hereto as Exhibit A. 3.2 The Borrower shall have delivered to the Bank certified resolutions of the Borrower's Board of Directors authorizing its execution and delivery of this Amendment and replacement Note and the Borrower's performance thereunder in form and substance satisfactory to the Bank. 4. REPRESENTATIONS. In order to induce the Bank to execute and deliver this Amendment, the Borrower hereby represents to the Bank that as of the date hereof, and after giving effect to the waiver set forth in Section 1 above, the representations and warranties set forth in Section 5 of the Credit Agreement are and shall be and remain true and correct (except that the representations contained in Section 5.5 shall be deemed to refer to the most recent financial statements of the Borrower delivered to the Bank) and the Borrower is in full compliance with all of the terms and conditions of the Credit Agreement and no Default or Event of Default has occurred and is continuing under the Credit Agreement or shall result after giving effect to this Amendment. S. MISCELLANEOUS. 5.1 Except as specifically amended herein or waived hereby, the Credit Agreement shall continue in full force and effect in accordance with its original terms. Reference to this specific Amendment need not be made in the Credit Agreement, the Note, or any other instrument or document executed in connection therewith, or in any certificate, letter or communication issued or made pursuant to or with respect to the Credit Agreement, any reference in any of such items to the Credit Agreement being sufficient to refer to the Credit Agreement as amended hereby. 5.2 The Borrower agrees to pay on demand all costs and expenses of or incurred by the Bank in connection with the negotiation, preparation, execution and delivery of this Amendment, including the fees and expenses of counsel for the Bank. 5.3 This Amendment may be executed in any number of counterparts, and by the different parties on different counterpart signature pages, all of which taken together shall constitute one and the same agreement. Any of the parties hereto may execute this Amendment by signing any such counterpart and each of such counterparts shall for all purposes be deemed to be an original. This Amendment shall be governed by the internal laws of the State of Illinois. This Fifth Amendment and Waiver to Credit Agreement is dated as of December 29, 1998. Page 2 3 MAHASKA INVESTMENT COMPANY By /s/ David A. Meinert --------------------------------- Its Executive Vice President Accepted and agreed to in Chicago, Illinois as of the date and year last above written. HARRIS TRUST AND SAVINGS BANK By /s/ Patrick A. Horne --------------------------------- Its Vice President Page 3 EX-11 3 COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 MAHASKA INVESTMENT COMPANY AND SUBSIDIARIES STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (Not Covered by Auditor's Report)
1998 1997 1996 ---------- --------- --------- EARNINGS PER SHARE INFORMATION: - --------------------------------------- Weighted average number of shares outstanding during the year .......... 3,660,070 3,652,908 3,744,418 Weighted average number of shares outstandlng during the year including all dilutive potential shares ............................... 3,842,151 3,789,577 3,772,495 Net earnings .......................... $4,622,749 5,058,225 4,494,394 Earnings per share - basic ............ $ 1.26 1.38 1.20 Earnings per share - diluted .......... $ 1.20 1.33 1.19
EX-13 4 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13 MAHASKA INVESTMENT COMPANY [LOGO] 2 MAHASKA INVESTMENT COMPANY 1998 ANNUAL REPORT [LOGO] 3 Mahaska Investment Company Fundamentals of Success At Mahaska Investment Company, our growth and above-average earnings can be attributed to four major principles: We build on our Iowa roots, we respond to our markets with individual solutions, we strengthen our company and community through teamwork, and we foster relationships with our customers face to face. Adherence to these fundamentals resulted in significant loan growth and overall increases in assets in 1998. FINANCIAL HIGHLIGHTS 1 MESSAGE TO SHAREHOLDERS 2 COMPANY PHILOSOPHY 4 CONTENTS MANAGEMENT'S DISCUSSION AND ANALYSIS 12 CONSOLIDATED FINANCIAL STATEMENTS 20 INDEPENDENT AUDITORS' REPORT 40 BOARD OF DIRECTORS 42 STOCK INFORMATION 43 4 MAHASKA INVESTMENT COMPANY Financial Highlights
YEAR ENDED DECEMBER 31 (In thousands, except per share data) 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------- SUMMARY OF INCOME DATA: Interest income excluding loan pool participations $ 17,996 15,483 13,532 10,463 8,500 Interest and discount on loan pool participations 7,970 8,474 9,097 7,864 4,479 Total interest income 25,966 23,957 22,629 18,327 12,979 Total interest expense 10,490 9,312 8,531 7,100 4,676 Net interest income 15,476 14,645 14,098 11,227 8,303 Provision for loan losses 1,179 417 987 168 183 Other income 1,857 1,739 1,506 1,301 1,457 Total other operating expenses 8,948 8,315 7,738 6,450 5,452 Income before income tax 7,206 7,652 6,879 5,910 4,125 Income tax expense 2,583 2,594 2,385 1,987 1,345 Net income $ 4,623 5,058 4,494 3,923 2,780 - --------------------------------------------------------------------------------------------------------- PER SHARE DATA: Net income - basic $ 1.26 1.38 1.20 1.03 .99 Net income - diluted 1.20 1.33 1.19 1.03 .99 Cash dividends declared .56 .48 .44 .40 .36 Book value 10.51 10.03 9.22 8.49 7.82 Tangible book value 8.99 8.35 7.39 7.34 6.56 SELECTED FINANCIAL RATIOS: Net income to average assets 1.65% 1.98% 1.93% 2.04% 1.68% Net income to average equity 12.16% 14.47% 13.52% 12.67% 12.45% Dividend payout ratio 44.44% 34.78% 36.50% 38.45% 36.27% Average equity to average assets 13.54% 13.69% 14.31% 16.09% 13.46% Tier 1 capital to risk weighted assets at end of period 14.02% 14.74% 16.25% 19.84% 19.92% Net interest margin 6.04% 6.31% 6.69% 6.48% 5.58% Gross revenue of loan pools to total gross revenue 28.64% 32.98% 37.69% 40.06% 31.03% Interest and discount income of loan pools to total interest income 30.69% 35.37% 40.20% 42.91% 34.51% Allowance for loan losses to total loans 1.32% 1.26% 1.27% 1.17% 1.19% Nonperforming loans to total loans 0.85% 1.28% 1.79% 0.81% 0.79% Net loans charged off to average loans 0.52% 0.07% 0.63% 0.06% 0.20% DECEMBER 31 (In thousands) 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------- SELECTED BALANCE SHEET DATA: Total assets $298,389 274,873 251,851 205,162 186,818 Total loans net of unearned discount 165,427 144,333 117,416 85,882 74,015 Total loan pool participations 54,510 54,326 50,687 45,318 46,852 Allowance for loan losses 2,177 1,816 1,491 1,001 881 Total deposits 232,733 215,308 206,952 161,505 146,476 Total shareholders' equity 38,232 36,754 34,243 32,106 29,780
5 2/3 MESSAGE TO SHAREHOLDERS Throughout 1998, Mahaska Investment Company's subsidiaries made significant contributions to asset growth. Mahaska State Bank's loan volumes continued to grow, while Central Valley Bank enjoyed a substantial increase in both total loans and deposits. We were also pleased to see loans and deposits grow steadily at the newly-chartered Pella State Bank. Concerns about the Asian economy put downward pressure on the stock prices of large and small banks throughout the United States. The Company, like other financial institutions in the Midwest, faced additional pressures when hog and grain prices fell to historic lows. Mahaska Investment Company stock began the year at a price of $19 7/8, rose to a high of $23 5/8 in mid-March, then closed at $16 7/8 on December 31, 1998. This rise and subsequent decline in the stock price generally paralleled the movement of the NASDAQ Combined Bank Stock Index, which also experienced a 15 percent net decline from the beginning of the year through the end of December. Although lower interest rates helped the overall economy maintain momentum, the Company, like many financial institutions nationwide, experienced a squeeze on net interest margins as loan and investment rates moved downward faster than interest rates paid on deposits. Earnings in the first quarter of 1998 set a new record. Second-quarter earnings were 12 percent higher than for the same period in 1997. Third- and fourth-quarter earnings, however, were lower than expected due to increased loan loss provision expense and reduced loan pool income. Although earnings for the year were lower, the Company remained profitable in comparison to its peers. We realize that some of the economic uneasiness that contributed to a mixed year in 1998 will remain with us as we enter 1999. As the world economy becomes increasingly integrated, the ramifications of events in other parts of the globe will trigger more volatility in our local economies. We will continue to watch the farm economy carefully, but we are cautiously optimistic. In general, today's farm customers are better able to weather economic downturns than were farmers in the 1980s. Farmers now tend to be better financial managers and more savvy marketers. They enjoy a stronger financial position, due in part to lower interest rates and more realistic land prices than were present during the 1980s farm crisis. In February 1999, the Company announced important news--the signing of a merger agreement with Midwest Bancshares, Inc. of Burlington, Iowa. Midwest Bancshares, Inc. is the parent of Midwest Federal Savings and Loan Association of Eastern Iowa. It is anticipated that the merger will be completed in the third quarter of 1999. This merger will add approximately $163 million in assets and $106 million in deposits to Mahaska Investment Company. Looking forward to the remainder of 1999, we continue to make progress toward Year 2000 readiness. We are excited about possible new acquisitions and increased contributions from our subsidiaries. Mahaska Investment Company anticipates continued growth and profitability during the coming year, resulting in increased value to our shareholders. Thank you for your continued support and confidence. 1998 MESSAGE TO SHAREHOLDERS 6 MAHASKA INVESTMENT COMPANY [PHOTO] Charles S. Howard David A. Meinert R. Spencer Howard Charles S. Howard David A. Meinert R. Spencer Howard Chairman Executive Vice Vice President President & CEO President & CFO Corporate Planning 7 4/5 COMPANY PHILOSOPHY The Iowa landscape is a testament to hard work. In the six southeast Iowa communities we serve--Fairfield, North English, Oskaloosa, Ottumwa, Pella, and Sigourney--you can see it in the rows of corn and soybeans, in the small businesses and industrial buildings, and in the busy main streets. In an environment ripe for growth, Mahaska Investment Company has put down deep roots. A strong staff and good relationships with our customers allow the Company to grow, even in uncertain economic times. In the past year, for example, our subsidiaries continued to thrive despite uneasiness in the Midwestern economy. While the national economy remains strong, Iowa was impacted by falling commodity prices, which put new pressures on the many agricultural customers we serve. The impact of this situation on Mahaska Investment Company will be minimized for two reasons. First, both our subsidiaries and our customers have learned to effectively weather changes in the agricultural climate. Since the farm crisis of the 1980s, we have become better lenders, developing greater expertise and understanding of the business of farming. Our customers, too, have become better business managers and are in a stronger financial position. Second, we have a more diverse loan portfolio than ever before. We now serve more markets and have a broader mix of real estate and commercial loans than in the 1980s. This diversity will lessen the impact of downturns in any one segment of the economy. All in all, our continued success is indicated by this fact: In 1998, U.S. Banker magazine ranked Mahaska Investment Company as the 16th best community bank holding company in the country, based on leverage ratio, nonperforming assets ratio, return on average assets, return on average equity, and efficiency ratio. We were the only Iowa company in the top 100, demonstrating our commitment to hard work and consistent growth. THE DEEPER THE ROOTS, THE STRONGER THE GROWTH. In 1998, U.S. Banker magazine ranked Mahaska Investment Company as the 16th best community bank holding company in the country. 8 [LOGO] MAHASKA INVESTMENT COMPANY [PHOTO] 9 6/7 COMPANY PHILOSOPHY [PHOTO] 10 [LOGO] MAHASKA INVESTMENT COMPANY EVERY COMMUNITY IS DIFFERENT, AND SO IS EVERY BANK. There's a management philosophy that says, "Hire good people, then let them do their jobs." We take that principle a step further with this fundamental imperative: Launch strong community banks, then let them grow and prosper. Although part of a larger organization, our subsidiaries are closer in character to independent, home-owned community banks than to institutions operated by multi-bank holding companies. Each Mahaska Investment Company subsidiary has its own distinct "personality," shaped by its customers and community. For example, each of our six southeast Iowa markets has its own economic base--its own mix of small business, industry, and agriculture. To respond best to these individual needs, our banks work with their customers in unique partnerships. For instance, each bank sets its own deposit and loan rates and its own service charge schedule based on its market. On-Site Credit Services, a subsidiary of Mahaska Investment Company, offers a complete range of financing to small- and medium-sized businesses. Designed to help start-up enterprises, it's more than just financing or working capital--it's a program that offers individual solutions for individual needs. To reinforce the independent nature of our community banks, we strive for local representation on our boards of directors, and our bank presidents and managers make their own decisions about their bank's operations--from loan approvals to staffing needs. This local autonomy and responsiveness to market conditions has helped our subsidiaries establish themselves as customer-focused institutions. Whether we're helping people turn dreams into reality or making loans to established businesses, we're there to help, one person and one company at a time. Although part of a larger organization, our subsidiaries are closer in character to independent, home-owned community banks than to institutions operated by multi-bank holding companies. Each Mahaska Investment Company subsidiary has its own distinct "personality," shaped by its customers and community. [LOGO] 11 8/9 COMPANY PHILOSOPHY While our subsidiaries operate independently in their markets, Mahaska Investment Company provides a framework that keeps all our subsidiaries and employees focused on our common goal: to provide value to our shareholders, customers, and communities. The Company actively fosters team-building within the organization and with our customers in many ways. - Our management style. While we give our subsidiaries freedom to make decisions in their communities, our bank presidents and senior managers meet regularly with each other and Company personnel to share information and concerns. During these sessions, managers develop solutions to common problems, identify issues that call for cooperative efforts throughout the Company, and discuss ideas that increase responsiveness to customer needs. - Internal support. Our subsidiaries are backed by the strength of the holding company. This gives them flexibility and resources that their competitors may not enjoy, such as larger lines of credit and the ability to offer a broader range of services. - Employee Stock Ownership Plan. Through the Company's ESOP, our employees hold 11 percent of our stock, the largest block of shares held by any one group of investors. Because all employees have a financial stake in the Company, they have an extra incentive to provide a strong return to shareholders. - Employee incentive program. Our employees participate in an incentive compensation plan that's based on performance. Therefore, our employees have a vested interest in contributing to customer satisfaction and Company success. Performance is measured by growth, profitability, productivity and loan quality. - Shared vision. The Company and its subsidiaries share a common philosophy and principles of business. As a result, all of our banks work together toward the same goals. And as our team continues to grow, our members will share the same underlying philosophy of exceptional service. WORKING TOGETHER HELPS EVERYONE WORK SMARTER. While our subsidiaries operate independently in their markets, Mahaska Investment Company provides a framework that keeps all our subsidiaries and employees focused on our common goal: to provide value to our shareholders, customers, and communities. 12 [LOGO] MAHASKA INVESTMENT COMPANY [PHOTO] 13 10/11 COMPANY PHILOSOPHY [PHOTO] 14 [LOGO] MAHASKA INVESTMENT COMPANY One of the most important elements of Mahaska Investment Company's success is a commitment to our customers and communities. Company employees demonstrate this commitment every day. - We understand our customers and their needs. For example, several of our loan officers are farmers, too. Their intimate knowledge of agriculture and its day-to-day challenges enables them to make knowledgeable decisions and offer their customers valuable advice. - We look for ways to build partnerships with our customers and to give them added value. We work with our customers to provide products and services that are tailored to meet their individual needs. Last year, in cooperation with a local CPA firm and local Chambers of Commerce, we presented seminars in three communities to help small business customers understand and prepare for the Year 2000 issue. - We're involved in the communities we serve. By taking an active role in community affairs, our employees foster personal relationships with their neighbors and stay in touch with their markets. In addition, our subsidiaries provide financial support to civic and charitable groups and activities, and our employees volunteer hundreds of hours to worthy causes. Ultimately, these contacts provide our directors and officers with the information and insight to make good business decisions. By meeting our customers face to face, we build the mutual trust and reputation for service that are hallmarks of our success. MEETING FACE TO FACE HELPS IN SEEING EYE TO EYE. Our employees stay in touch with their markets by taking an active role in community affairs. These contacts provide our directors and officers with the information and insight needed to make good business decisions and develop strong relationships. 15 12/13 MANAGEMENT'S DISCUSSION & ANALYSIS MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- FISCAL YEAR 1998 The following discussion and analysis is intended as a review of significant factors affecting the financial condition and results of operation of Mahaska Investment Company and subsidiaries (the "Company") for the periods indicated. The discussion should be read in conjunction with the consolidated financial statements and the notes thereto. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ significantly from those anticipated in these forward-looking statements. OVERVIEW The Company's principal business is conducted by its subsidiary banks and consists of full service community-based commercial and retail banking. Additionally, the Company derives a substantial portion of its operating revenue from its investments in pools of performing and nonperforming loans referred to as loan pool participations. The Company also operates a commercial finance subsidiary which provides services to small business organizations. The profitability of the Company depends primarily on its net interest income, provision for loan losses, other income, and operating expense. Net interest income is the difference between total interest income and total interest expense. Interest income is earned by the Company on its loans made to customers, the investment securities it holds in its portfolio, and the interest and discount recovery generated from its loan pool participations. The interest expense incurred by the Company results from the interest paid on customer deposits and borrowed funds. Fluctuations in net interest income can result from the changes in volumes of assets and liabilities as well as changes in market interest rates. The provision for loan losses reflects the cost of credit risk in the Company's loan portfolio and is dependent on increases in the loan portfolio and management's assessment of the collectibility of the loan portfolio under current economic conditions. Other income consists of service charges on deposit accounts, fees received for outside data processing services provided, other fees and commissions, and security gains. Operating expenses include salaries and employee benefits, occupancy and equipment expenses, and other noninterest expenses. These operating expenses are significantly influenced by the growth of operations, with additional employees necessary to staff new banking centers. PERFORMANCE SUMMARY The Company recorded net income of $4,623,000, or $1.26 per share - basic ($1.20 - - diluted), for the year ended December 31, 1998, which is a decrease of 8.6 percent compared with the net income of $5,058,000, or $1.38 per share - basic ($1.33 - diluted), earned in 1997. A significant increase in the amount of the provision for loan losses occurred in 1998 which contributed to the decrease in net income for the year in comparison with 1997. The net income for 1997 increased 12.6 percent from the $4,494,000, or $1.20 per share - basic ($1.19 - diluted), earned in 1996. Total assets of the Company grew 8.6 percent to a year-end 1998 level of $298,389,000. Deposits increased 8.1 percent to $232,733,000 as of December 31, 1998, while the Company's total loans outstanding grew 14.6 percent to $165,427,000. Loan pool participation investments as of December 31, 1998, totaled $54,510,000. Return on average assets is a measure of profitability that indicates how efficiently a financial institution utilizes its assets. It is calculated by dividing net income by average total assets. The Company's return on average assets was 1.65 percent in 1998, 1.98 percent in 1997, and 1.93 percent in 1996. Return on average equity indicates what the Company earned on its shareholders' investment and is calculated by dividing net income by average total shareholders' equity. The return on average equity for the Company was 12.16 percent in 1998 compared with 14.47 percent in 1997, and 13.52 percent in 1996. 16 [LOGO] MAHASKA INVESTMENT COMPANY RESULTS OF OPERATIONS -- 1998 COMPARED TO 1997 NET INTEREST INCOME Net interest income for the year 1998 increased $831,000, or 5.7 percent, to $15,476,000 compared with $14,645,000 in 1997. Total interest income on earning assets increased $2,009,000 in 1998 from 1997. Interest and fees on loans increased $2,733,000, or 22.2 percent, in 1998. The growth in the Company's average loan volumes of $26,631,000, or 20.3 percent, in 1998 contributed significantly to the overall increase in interest income. Interest income and discount recovery on loan pool participations declined $504,000, or 6.0 percent, in 1998 compared with 1997. The amount of interest income earned on investment securities decreased $444,000, or 15.0 percent, in 1998 as proceeds from maturing securities were utilized to fund loan growth. The Company's total interest expense increased $1,178,000, or 12.7 percent, in 1998 from 1997. This increase was mainly attributable to the overall growth in deposits and borrowed funds in 1998. Average deposits increased $13,792,000, or 6.7 percent, in 1998 while average borrowed funds were up $8,283,000, or 68.5 percent. The Company's net interest margin on a tax-equivalent basis declined to 6.04 percent in 1998 compared with 6.31 percent in 1997, mainly as a result of the lower income recognized on loan pool participations. Net interest margin is a measurement of the net return on interest-earning assets and is computed by dividing net interest income by the average of total interest-earning assets. PROVISION FOR LOAN LOSSES The Company recorded a provision for loan loss expense of $1,179,000 in 1998 compared to $417,000 in 1997. Management determines an appropriate provision based on its evaluation of the adequacy of the allowance for loan losses in relationship to a continuing review of current collection risks within its loan portfolio, identified problem loans, the current local and national economic conditions, actual loss experience, and industry trends. The substantial increase in the loss provision recorded in 1998 reflects an increase in the net loan charge-offs experienced by the Company in 1998, growth in the Company's loan portfolio throughout the year, and general uncertainties in the local and national economy. OTHER INCOME Noninterest income increased $118,000, or 6.7 percent, in 1998 over the amount earned in 1997. Most of this increase was the result of higher service charges and overdraft fees collected on deposit accounts. In 1998, data processing income earned from nonaffiliated banks declined $15,000, or 7.1 percent, compared with 1997. During 1998, the Company recognized $58,000 in gains on the sale of investment securities classified as available for sale. These securities were sold to satisfy liquidity needs. OTHER EXPENSE The Company's other expense increased $633,000, or 7.6 percent, for the year 1998 in comparison to 1997. The salary and benefits, net occupancy, and other operating expense categories all increased in some measure due to the opening of Pella State Bank in December 1997. Additional staffing at On-Site Credit Services also increased the amount of salaries and benefits expense. During the first quarter of 1998, the Company's new mainframe computer was placed in service which increased net occupancy expense by $74,000 in comparison to 1997 as additional depreciation expense was recorded. INCOME TAX EXPENSE Income tax expense declined $11,000, or 0.4 percent, in 1998 compared with 1997. The Company's consolidated income tax rate varies from the statutory rates mainly due to tax-exempt interest income. The effective income tax rate as a percent of income before taxes was 35.9 percent in 1998 compared with 33.9 percent for 1997.
RETURN ON AVERAGE ASSETS TOTAL ASSETS (In thousands) '94 1.68% $ 186,818 '95 2.04 205,162 '96 1.93 251,851 '97 1.98 274,873 '98 1.65 298,389
17 14/15 MANAGEMENT'S DISCUSSION & ANALYSIS RESULTS OF OPERATIONS -- 1997 COMPARED TO 1996 NET INTEREST INCOME The Company's net interest income increased $547,000 in 1997 compared with 1996. A $1,328,000 increase in total 1997 interest income was partially offset by a $781,000 increase in overall interest expense. The interest income earned on loans rose by $2,090,000 in 1997 mainly as a result of the growth in loan volumes the Com-pany experienced during the year. The $623,000 decrease in interest income and discount on loan pool participations reduced the overall growth in interest income for the year. Interest income on investment securities decreased $17,000 as the average volume of securities held by the Company declined slightly. During 1997, the Company maintained a lower balance in interest-bearing deposits at other banks which resulted in a decrease of $158,000 in interest income from these accounts. Interest expense on deposits increased $863,000 primarily due to the higher average volume of customer deposits at the Company's subsidiary banks. The interest incurred on notes payable in 1997 decreased $204,000 compared with 1996 primarily due to lower interest rates. The Company's net interest margin on a tax-equivalent basis declined to 6.31 percent for 1997 compared with 6.69 percent in 1996 mainly as a result of the lower income recognized on loan pool participations. PROVISION FOR LOAN LOSSES The 1997 provision for loan losses of $417,000 decreased by $570,000 in comparison to the provision of $987,000 recorded in 1996. The substantial reduction in 1997 compared with 1996 reflected improvements in the Company's problem loans and lower loan charge-offs in 1997. OTHER INCOME In 1997, noninterest income increased $233,000, or 15.5 percent, over the amount earned in 1996. Most of this increase was the result of higher service charges and overdraft fees collected on deposit accounts. Data processing income received in 1997 from nonaffiliated banks declined 5.2 percent compared with 1996. OTHER EXPENSE The Company's operating expenses increased $577,000, or 7.5 percent, for the year 1997 compared with 1996. The amounts of salary and benefits, net occupancy, other operating, and goodwill amortization expense for 1997 all reflected a full twelve months of the operation of a new branch of Central Valley Bank whereas 1996 only reflected expenses for six months of operations of the branch. Additionally, the Company incurred expenses related to the new Pella State Bank in late 1997 that it did not incur in 1996. Higher staffing levels in general and increased payouts as a result of the Company's incentive compensation program also increased salaries and benefit expense in 1997 compared with 1996. INCOME TAX EXPENSE Income tax expense increased $209,000, or 8.8 percent, in 1997 compared with 1996 primarily due to the overall increase in pre-tax earnings generated by the Company. The effective income tax rate as a percent of income before taxes was 33.9 percent in 1997 compared with 34.7 percent in 1996. ANALYSIS OF FINANCIAL CONDITION LOANS The Company continued to focus on the growth of its loan portfolio in 1998. Its portfolio largely reflects the profile of the communities in which it operates. Total loans as of December 31, 1998, were $165,427,000, which is an increase of $21,094,000, or 14.6 percent, from 1997. Most of this growth was in the real estate and commercial loan categories. As of December 31, 1998, the Company's loan to deposit ratio was 71.1 percent, compared with 67.0 percent in 1997.
DIVIDENDS PER SHARE '94 $ .36 '95 .40 '96 .44 '97 .48 '98 .56
18 [LOGO] MAHASKA INVESTMENT COMPANY Agricultural loans totaled approximately $28,939,000 as of December 31, 1998, compared with $26,500,000 in 1997. In 1998, agricultural loans represented 17.5 percent of the Company's total loans compared with 18.4 per- cent in 1997. Concerns with the agricultural economy have caused management to require that subsidiary lending officers closely review all ag lines and identify those specific credits that would be more at risk in the event of continued deterioration in that sector of the economy. Contingency plans are being developed for those credits that will enable the lending officers to work with these borrowers in an effort to prevent or minimize any potential loss to the Company. INVESTMENT IN LOAN POOLS The Company invests in pools of performing and nonperforming loans categorized as loan pool participations. These loan pool participations are purchased at a discount from the aggregate outstanding principal amount of the underlying loans. Income is derived from this investment in the form of interest collected and the repayment of principal in excess of the purchase cost which is herein referred to as "discount." The average loan pool participation investment for 1998 was $49,805,000 compared with an average for 1997 of $49,399,000. New loan pool participation investments made by the Company during 1998 totaled $25,710,000 compared with $25,589,000 purchased in 1997. As of December 31, 1998, the breakdown of the loan pool participation investment of $54,510,000 was $37,486,000 of performing loans and $17,024,000 of nonperforming loans. In comparison, the December 31, 1997, breakdown of the loan pool participation investment of $54,326,000 was $25,625,000 of performing loans and $28,701,000 of nonperforming loans. The change in the performing and nonperforming totals was due to principal collections and the acquisition in 1998 of higher-quality performing assets which were purchased at a lower discount from the stated principal balance. The lowered discount from par will result in a lower discount recovery and a subsequent reduction in the overall return on the investment. Throughout 1998, loan pool participation investments averaged 19.2 percent of earning assets while in 1997 they represented 21.0 percent of average earning assets. The yield on loan pool participation investments declined to 16.0 percent for 1998, compared with 17.2 percent in 1997. This was due in part to the higher quality assets being purchased which, when collected, resulted in a lower amount of discount recovery. The yield was also somewhat reduced by higher legal and other collection costs incurred by the servicer related to the collection of assets acquired in previous years. INVESTMENT SECURITIES The Company manages its investment portfolio to provide both a source of liquidity and earnings. Investment securities available for sale increased $6,427,000 at December 31, 1998, in comparison with 1997. Securities classified as held to maturity declined by $6,154,000 in 1998 as maturing investments were reinvested in the available for sale category. The Company did not increase its overall securities portfolio in 1998 given the low interest rate environment and the increased loan demand that it experienced. DEPOSITS Total deposits grew to $232,733,000 as of December 31, 1998, an increase of $17,425,000, or 8.1 percent, from 1997. Most of the growth was in certificate of deposit volumes which grew $13,947,000, or 13.7 percent, in 1998. CAPITAL RESOURCES As of December 31, 1998, total shareholders' equity was $38,232,000. Total equity increased $1,478,000 in 1998 primarily as a result of earnings retained by the Company. Total shareholders' equity as of December 31, 1997, was $36,754,000. Shareholders' equity as a percentage of total assets was 12.8 percent on December 31, 1998, versus 13.4 percent on December 31, 1997. The decrease in the percentage of shareholders' equity to total assets reflects the increase in total assets in 1998. During 1998, the Company repurchased a total of 87,368 shares of its common stock to be used to satisfy the exercise of stock options granted to employees and directors of the Company. A total of 58,219 option shares were reissued from treasury stock throughout 1998, leaving 3,636,345 shares outstanding as of December 31, 1998. The Company's risk-based Tier 1 core capital ratio was 14.0 percent as of December 31, 1998, and the total capital ratio was 14.9 percent. Risk-based capital guidelines require the classification of assets and some off-balance sheet 19 16/17 MANAGEMENT'S DISCUSSION & ANALYSIS items in terms of credit-risk exposure and the measuring of capital as a percentage of the risk-adjusted asset totals. Tier 1 core capital is the Company's total common shareholders' equity reduced by goodwill. Total capital adds the allowance for loan losses to the Tier 1 capital amount. As of December 31, 1997, the Company's Tier 1 capital ratio was 14.7 percent, and the total capital ratio was 15.6 percent. Although these ratios declined in 1998 from 1997 due to an increase in risk-based asset totals, they substantially exceeded the minimum regulatory requirements of 4.0 percent for Tier 1 capital and 8.0 percent for total capital. The Company's Tier 1 leverage ratio, which measures Tier 1 capital in relation to total assets, was 11.3 percent as of December 31, 1998, and 11.8 percent at December 31, 1997, exceeding the regulatory minimum requirement range of 3.0 percent to 5.0 percent. As of December 31, 1998, the Company had borrowed $17,000,000 on a revolving line of credit from a major commercial bank to fund loan pool participation investments and to provide additional capital to Pella State Bank, Central Valley Bank, and On-Site Credit Services. The Company entered into this revolving line of credit agreement on January 31, 1996, with an amendment to the agreement as of December 29, 1998. The agreement provides for a maximum line of $20,000,000 and matures on June 30, 1999. Additionally, as of December 31, 1998, the Company's subsidiaries had borrowed $7.6 million in fixed-rate advances from the Federal Home Loan Bank of Des Moines. The Company had no material commitments for capital expenditures as of December 31, 1998. The Company's common stock closed the year at a bid price of $16.875 per share, representing 1.61 times the book value per share of $10.51 on December 31, 1998. Tangible book value per share was $8.99 on December 31, 1998, compared with $8.35 in 1997. The year-end stock price represented a price-to-1998 basic earnings per share multiple of 13.4 times. LIQUIDITY Liquidity management involves the ability to meet the cash flow requirements of depositors and borrowers. Liquidity management is conducted by the Company on both a daily and long-term basis. The Company adjusts its investments in liquid assets based upon management's assessment of expected loan demand, projected loan sales, expected deposit flows, yields available on interest-bearing deposits, and the objectives of its asset/liability management program. Excess liquidity is invested generally in short-term U.S. Government and agency securities, short-term state and political subdivision securities, and other investment securities. Liquid assets (including cash and federal funds sold) are maintained to meet customer needs. The Company had liquid assets of $22,121,000 as of December 31, 1998, compared with $19,195,000 as of December 31, 1997. Investment securities classified as available for sale and securities and loans maturing within one year totaled $102,772,000 and $98,248,000 as of December 31, 1998 and 1997, respectively. Assets maturing within one year combined with liquid assets on December 31, 1998, were 53.7 percent and on December 31, 1997, were 47.4 percent of total deposits as of the same dates. The Company's principal sources of funds are deposits, advances from the Federal Home Loan Bank, principal repayments on loans, proceeds from the sale of loans, principal recoveries on loan pool participations, proceeds from the maturity and sale of investment securities, its commercial bank line of credit, and funds provided by operations. While scheduled loan amortization and maturing interest-bearing deposits are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by economic conditions, the general level of interest rates, and competition. Principal recoveries on loan pool participations are also influenced by economic conditions and, to a lesser extent, the interest rate environment. The Company utilizes particular sources of funds based on comparative costs and availability. This includes fixed-rate advances from the Federal Home Loan Bank which were obtained at a more favorable cost than deposits. The Company generally manages the pricing of its deposits to maintain a steady deposit base, but has from time to time decided not to pay rates on deposits as high as its competition. Net cash provided by operations is another major source of liquidity. The net cash provided by operating activities was $6,589,000 in 1998, $6,017,000 in 1997, and $7,137,000 in 1996. This trend of strong cash from operations is expected to continue into the foreseeable future.
BOOK VALUE PER SHARE '94 $ 7.82 '95 8.49 '96 9.22 '97 10.03 '98 10.51
20 [LOGO] MAHASKA INVESTMENT COMPANY The Company anticipates that it will have sufficient funds available to fund its loan commitments. As of December 31, 1998, the Company had outstanding commitments to originate loans of $18,755,000 and had no commitments to sell loans. Certificates of deposit maturing in one year or less totaled $78,558,000 as of December 31, 1998. Management believes that a significant portion of these deposits will remain with the Company. The Company continues to seek acquisition opportunities that would strengthen its presence in current and new market areas. On February 2, 1999, the Company entered into a definitive agreement to acquire all the outstanding shares of Midwest Bancshares, Inc. in a tax-free one-for-one exchange of Company shares. It is intended that the transaction will be accounted for as a pooling of interests and is expected to be consummated sometime in the third quarter of 1999, subject to shareholder and regulatory approvals. There are currently no other pending acquisitions that would require the Company to secure capital from public or private markets. ASSET-LIABILITY MANAGEMENT The Company's strategy with respect to asset-liability management is to maximize net interest income while limiting exposure to risks associated with volatile interest rates. This strategy is implemented by subsidiary banks' asset-liability committees which take action based upon their analysis of expected changes in the composition and volumes of the balance sheet and the fluctuations in market interest rates. One of the measures of interest-rate sensitivity is the gap ratio. This ratio indicates the amount of interest-earning assets repricing within a given period in comparison to the amount of interest-bearing liabilities repricing within the same period of time. A gap ratio of 1.0 indicates a matched position, in which case the effect on net interest income due to interest rate movements will be minimal. A gap ratio of less than 1.0 indicates that more liabilities than assets reprice within the time period and a ratio greater than 1.0 indicates that more assets reprice than liabilities. As of December 31, 1998, the Company's gap ratios for assets and liabilities repricing within three months and within one year were .69 and .72, respectively, meaning more liabilities than assets are scheduled to reprice within these periods. This situation suggests that a decrease in market interest rates may benefit net interest income and that an increase in interest rates may negatively impact the Company. The gap position is largely the result of classifying interest-bearing NOW accounts, money market accounts, and savings accounts as immediately repriceable and the classification of loan pool participations as repricing over a three-year period based on the historical average for return of loan pool participations. MARKET RISK MANAGEMENT Market risk is the risk of earnings volatility that results from adverse changes in interest rates and market prices. The Company's market risk is comprised primarily of interest rate risk arising from its core banking activities of lending and deposit taking. Interest rate risk results from changes in market interest rates and changes in net interest income due to the repricing characteristics of assets and liabilities. Management continually develops and applies strategies to mitigate this risk. Management does not believe that the Company's primary market risk exposures and how those exposures were managed in 1998 changed when compared to 1997. The Company uses a third-party computer software simulation modeling program to measure its exposure to potential interest rate changes. For various assumed hypothetical changes in market interest rates, numerous other assumptions are made such as prepayment speeds on loans and securities backed by mortgages, the slope of the Treasury yield curve, the rates and volumes of the Company's deposits, and the rates and volumes of the Company's loans. This analysis measures the estimated change in net interest income in the event of hypothetical changes in interest rates. The following table presents the Company's projected changes in net interest income for the various rate shock levels at December 31, 1998.
$ CHANGE % CHANGE - -------------------------------------------------------------------------------- +300 bp........................................... $(468,000) -3% +200 bp........................................... (326,000) -2 +100 bp........................................... (179,000) -1 Base.............................................. 0 0 -100 bp........................................... 170,000 +1 -200 bp........................................... 275,000 +2 -300 bp........................................... 424,000 +3
21 18/19 MANAGEMENT'S DISCUSSION & ANALYSIS As shown on the preceding table, at December 31, 1998, the effect of an immediate and sustained 300 basis point increase in interest rates would reduce the Company's net interest income by 3 percent, or approximately $468,000. The effect of an immediate and sustained 300 basis point decrease in rates would increase the Company's net interest income by 3 percent, or approximately $424,000. Computations of the prospective effects of hypothetical interest rate changes are based on numerous assumptions. Actual values may differ from those projections set forth above. Further, the computations do not contemplate any actions the Company may undertake in response to changes in interest rates. Current interest rates on certain liabilities are at a level that does not allow for significant repricing should market interest rates decline significantly. LOAN QUALITY Total loans increased 14.6 percent during 1998 to a year-end total of $165,427,000. The $21,094,000 increase in loans from 1997 was mainly in the real estate and commercial loan categories. Nonperforming assets as of December 31, 1998, totaled $1,400,000. As of December 31, 1997, nonperforming loans totaled $1,848,000. The ratio of nonperforming loans to total loans was .85 percent for year-end 1998 and was 1.28 percent for year-end 1997. The allowance for loan losses was $2,177,000 as of December 31, 1998, and $1,816,000 as of year-end 1997. The allowance represented 1.32 percent of total loans at December 31, 1998, and 1.26 percent of loans on December 31, 1997. The allowance as a percentage of nonperforming assets was 155.5 percent on December 31, 1998, and was 98.2 percent as of year-end 1997. Net loan charge-offs for 1998 totaled $818,000, or .52 percent of average loans, compared with 1997 net charge-offs of $92,000, or .07 percent of average loans. Much of the net loan charge-off experienced in 1998 was attributable to three separate lines of credit. Two of these lines were commercial loans that experienced financial difficulties during the year. The other significant charge-off was a factoring account that had been in litigation for an extended period of time. Although management believes that the present level of the allowance for loan losses is an adequate assessment of the risk inherent in the loan portfolio, there can be no assurance that significant provisions for losses will not be required in the future based on factors such as loan portfolio growth, deterioration of market conditions, major changes in borrowers' financial conditions, delinquencies, and defaults. Future provisions will continue to be determined in relation to overall asset quality as well as other factors mentioned previously. FUTURE PROSPECTS Inflation can have a significant effect on the operating results of all industries. Management believes that inflation does not affect the banking industry as much as it does other industries with a high proportion of fixed assets and inventory. Inflation does, however, have an impact on the growth of total assets and the need to maintain a proper level of equity capital. Interest rates are significantly affected by inflation, but it is difficult to assess the impact since neither the timing nor the magnitude of changes in the various inflation indices coincides with changes in interest rates. There is, of course, an impact on longer-term earning assets; however, this effect continues to diminish as investment maturities are shortened and interest-earning assets and interest-bearing liabilities shift from fixed-rate long-term to rate-sensitive short-term. During 1998, the national inflation rate remained historically low. Interest rates continued to decline throughout the year. Management of the Company believes that the 1999 rate of inflation will remain consistent with 1998 and that interest rates in 1999 will hold relatively stable. Given the Company's negative gap position (greater amount of interest-bearing liabilities repricing than interest-earning assets), a decrease in interest rates may improve the Company's net interest margin through the year 1999. Conversely, if interest rates do increase, the Company's net interest margin may deteriorate. Management continues to focus on improving the net interest margin in 1999.
INTEREST AND DISCOUNT ON LOAN POOL PARTICIPATIONS (In thousands) '94 $ 4,479 '95 7,864 '96 9,097 '97 8,474 '98 7,970
22 [LOGO] MAHASKA INVESTMENT COMPANY Concerns with the uncertainty in the economy in general and the agricultural economy in particular will continue in 1999. Management will continually evaluate the situation. As a result of these uncertainties or due to adverse developments in the agricultural economy or other industries, it is conceivable that additional loan loss provisions could be necessary in 1999. Management anticipates that in 1999 they will continue to explore opportunities to acquire additional loan pool participation investments. Bids on pool participations during the year will take into account the availability of funds to invest, the market for such pools in terms of price and availability, and the potential return on the pools relative to risk. YEAR 2000 COMPLIANCE A critical issue has emerged in the banking industry and for the economy overall regarding how existing computer application software programs, operating systems, and hardware can accommodate the date value for the year 2000. Many existing application software products in the marketplace were designed only to accommodate a two-digit date position which represents the year (e.g., "98" is stored on the system and represents the year 1998). As a result, the year 1999 (i.e., "99") could be the maximum date value these systems will be able to accurately process. This issue is an area of major emphasis as management is actively working with its software and hardware vendors to assure that the Company is compliant. Additionally, the Company is working with material non- information system providers, including but not limited to security, telephone, utilities, ATM cards, elevators, heating and cooling systems, check clearing services, teller machines, and proof equipment to determine their Year 2000 compliance. An assessment of the readiness of vendors, significant customers, and other third parties with which the Company does business is also underway. The Company could be faced with severe consequences if Year 2000 issues are not identified and resolved in a timely manner. A worst-case scenario would result in the short-term inability to update customer financial records due to unforeseen processing issues. This would result in customers being unable to receive timely information regarding their account balances. In addition, a worst-case scenario for the Company is that major suppliers of electricity, communication links, and outside data processing services may fail in spite of their best efforts to remediate their systems and in spite of our best efforts to test their systems. The major risk as a result of these possibilities would be a loss of customer confidence. The Company has established Year 2000 Committees and Plans at its bank and thrift subsidiaries, and formal project plans have been developed and adopted. Testing and contingency plans have also been developed and adopted by the Company's subsidiaries. Required testing procedures were completed prior to December 31, 1998. Additional testing will continue in 1999 whenever new or updated software is installed. In 1997, the Company purchased a new mainframe computer system that is Year 2000 compliant at a cost of $430,000. This computer system became fully operational in the first quarter of 1998 with the equipment cost being depreciated over a five-year period beginning in 1998. The Company's contingency plans include two components which are business remediation and business resumption. The business remediation plan was developed to mitigate the risk associated with the failure to successfully complete system renovation, validation or implementation of the Company's Year 2000 readiness. This plan pertains to mission-critical systems developed in-house, by outside software vendors, and by third-party service providers. The business resumption plan is designed to be implemented in the event there are system failures at critical dates. The Company anticipates that it will incur internal staff costs and other expenses related to the enhancements necessary to become Year 2000 compliant. Based on the Company's current knowledge, the expense related to Year 2000 compliance is not expected to have a material effect on the Company's financial position or results of operations. It is estimated that the Company's total cost for Year 2000 compliance will be approximately $35,000, exclusive of costs associated with the new mainframe computer. 23 20/21 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS
DECEMBER 31 (In thousands) 1998 1997 - ----------------------------------------------------------------------------------------------- ASSETS: Cash and due from banks ...................................................$ 9,292 10,854 Interest-bearing deposits in banks ........................................ 3,559 1,526 Federal funds sold ........................................................ 9,270 6,815 -------------------- Cash and cash equivalents ............................................... 22,121 19,195 -------------------- Investment securities (notes 2 and 8): Available for sale ...................................................... 29,655 23,228 Held to maturity (fair value of $13,838 in 1998 and $19,869 in 1997) .................................................. 13,679 19,833 Loans, net of unearned discount (notes 3, 5, and 8) ....................... 165,427 144,333 Allowance for loan losses (note 4) ...................................... (2,177) (1,816) -------------------- Net loans ............................................................. 163,250 142,517 -------------------- Loan pool participations .................................................. 54,510 54,326 Premises and equipment, net (note 6) ...................................... 4,043 4,183 Accrued interest receivable ............................................... 3,175 2,927 Other assets .............................................................. 7,956 8,664 -------------------- Total assets ..........................................................$298,389 274,873 ==================== LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits (notes 2 and 7): Demand ..................................................................$ 23,029 21,277 NOW and Super NOW ....................................................... 34,214 33,226 Savings ................................................................. 59,758 59,020 Certificates of deposit ................................................. 115,732 101,785 -------------------- Total deposits ........................................................ 232,733 215,308 Federal Home Loan Bank advances (note 8) .................................. 7,595 6,000 Notes payable (note 9) .................................................... 17,000 14,050 Other liabilities ......................................................... 2,829 2,761 -------------------- Total liabilities ..................................................... 260,157 238,119 -------------------- Shareholders' equity: Common stock, $5 par value; authorized 20,000,000 shares; issued and outstanding 3,636,345 as of December 31, 1998, and 3,665,494 shares as of December 31, 1997 ............................................... 19,038 19,038 Capital surplus ......................................................... 17 118 Treasury stock at cost, 171,156 and 142,007 shares as of December 31, 1998 and 1997, respectively .............................. (2,799) (1,752) Retained earnings (note 15) ............................................. 21,806 19,231 Accumulated other comprehensive income .................................. 170 119 -------------------- Total shareholders' equity ............................................ 38,232 36,754 -------------------- Commitments and contingencies (note 16) ................................. -- -- -------------------- Total liabilities and shareholders' equity ............................$298,389 274,873 ====================
See accompanying notes to consolidated financial statements. 24 [LOGO] MAHASKA INVESTMENT COMPANY CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 (In thousands, except per share amounts) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans ............................................... $ 15,026 12,293 10,203 Interest income and discount on loan pool participations ................. 7,970 8,474 9,097 Interest on bank deposits ................................................ 122 108 266 Interest on federal funds sold ........................................... 338 128 92 Interest on investment securities: Available for sale ..................................................... 1,617 1,705 1,348 Held to maturity ....................................................... 893 1,249 1,623 ------------------------------- Total interest income ................................................ 25,966 23,957 22,629 ------------------------------- INTEREST EXPENSE: Interest on deposits (note 7): NOW and Super NOW ...................................................... 656 677 612 Savings ................................................................ 2,241 2,259 2,058 Certificates of deposit ................................................ 6,102 5,442 4,845 Interest on federal funds purchased ...................................... 12 32 48 Interest on Federal Home Loan Bank advances .............................. 405 138 -- Interest on notes payable ................................................ 1,074 764 968 ------------------------------- Total interest expense ................................................. 10,490 9,312 8,531 ------------------------------- Net interest income .................................................... 15,476 14,645 14,098 Provision for loan losses (note 4) ....................................... 1,179 417 987 ------------------------------- Net interest income after provision for loan losses .................. 14,297 14,228 13,111 ------------------------------- OTHER INCOME: Service charges .......................................................... 1,215 1,130 922 Data processing income ................................................... 195 209 221 Other operating income ................................................... 389 408 437 Investment securities gains (losses), net (note 2) ....................... 58 (8) (74) ------------------------------- Total other income ................................................... 1,857 1,739 1,506 ------------------------------- OTHER EXPENSE: Salaries and employee benefits expense (note 13) ......................... 4,796 4,343 3,774 Net occupancy expense .................................................... 1,349 1,173 1,011 Federal Deposit Insurance Corporation assessment ......................... 47 42 282 Professional fees ........................................................ 394 407 459 Other operating expense .................................................. 1,750 1,717 1,683 Goodwill amortization .................................................... 612 633 529 ------------------------------- Total other expense .................................................. 8,948 8,315 7,738 ------------------------------- Income before income tax expense ..................................... 7,206 7,652 6,879 Income tax expense (note 11) ............................................. 2,583 2,594 2,385 ------------------------------- Net income ........................................................... $ 4,623 5,058 4,494 ------------------------------- Net income per share - basic ............................................. $ 1.26 1.38 1.20 ------------------------------- Net income per share - diluted ........................................... $ 1.20 1.33 1.19 -------------------------------
See accompanying notes to consolidated financial statements. 25 22/23 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
ACCUMULATED OTHER COMMON CAPITAL TREASURY RETAINED COMPREHENSIVE (in thousands except share data) STOCK SURPLUS STOCK EARNINGS INCOME TOTAL - -------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 ............ $11,423 7,787 (231) 13,070 57 32,106 --------------------------------------------------------------------------------- Comprehensive income: Net income ............................ -- -- -- 4,494 -- 4,494 Unrealized losses arising during the year on securities available for sale ............................ -- -- -- -- (143) (143) Plus realized losses on securities available for securities, net of tax .............................. -- -- -- -- 46 46 --------------------------------------------------------------------------------- Total comprehensive income ............ -- -- -- 4,494 (97) 4,397 --------------------------------------------------------------------------------- Dividends paid (.44 per share) .......... -- -- -- (1,638) -- (1,638) Treasury stock purchased (66,667 shares) ....................... -- -- (622) -- -- (622) --------------------------------------------------------------------------------- Balance at December 31, 1996 ............ 11,423 7,787 (853) 15,926 (40) 34,243 ================================================================================= Comprehensive income: Net income ............................ -- -- -- 5,058 -- 5,058 Unrealized gains arising during the year on securities available for sale ............................ -- -- -- -- 154 154 Plus realized losses on securities available for sale, net of tax ...... -- -- -- -- 5 5 --------------------------------------------------------------------------------- Total comprehensive income ............ -- -- -- 5,058 159 5,017 --------------------------------------------------------------------------------- Dividends paid (.48 per share) .......... -- -- -- (1,753) -- (1,753) Stock split effected in the form of a dividend (five-for-three) ............. 7,615 (7,615) -- -- -- -- Stock options exercised (65,970 shares) ....................... -- (54) 783 -- -- 729 Treasury stock purchased (116,310 shares) ...................... -- -- (1,682) -- -- (1,682) --------------------------------------------------------------------------------- Balance at December 31, 1997 ............ 19,038 118 (1,752) 19,231 119 36,754 ================================================================================= Comprehensive income: Net income ............................ -- -- -- 4,623 -- 4,623 Unrealized gains arising during the year on securities available for sale ............................ -- -- -- -- 88 88 Less realized gains on securities available for securities, net of tax .............................. -- -- -- -- (37) (37) --------------------------------------------------------------------------------- Total comprehensive income ............ -- -- -- 4,623 51 4,674 --------------------------------------------------------------------------------- Dividends paid (.56 per share) .......... -- -- -- (2,048) -- (2,048) Stock options exercised (58,219 shares) ....................... -- (101) 790 -- -- 689 Treasury stock purchased (87,368 shares) ....................... -- -- (1,837) -- -- (1,837) --------------------------------------------------------------------------------- Balance at December 31, 1998 ............ $19,038 17 (2,799) 21,806 170 38,232 =================================================================================
See accompanying notes to consolidated financial statements. 26 [LOGO] MAHASKA INVESTMENT COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 (in thousands) 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ...................................................................... $ 4,623 5,058 4,494 --------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................................................. 1,247 1,129 930 Provision for loan losses ..................................................... 1,179 417 987 Investment securities (gains) losses, net ..................................... (58) 8 74 Loss on sale of bank premises and equipment ................................... -- 14 7 Amortization of premiums on investment securities ............................. 155 225 301 Accretion of investment securities and loan discounts ......................... (447) (578) (353) (Increase) decrease in other assets ........................................... (152) (759) 256 Increase in other liabilities ................................................. 42 503 441 --------------------------------------------- Total adjustments ........................................................... 1,966 959 2,643 --------------------------------------------- Net cash provided by operating activities ................................... 6,589 6,017 7,137 --------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment securities available for sale: Proceeds from sales ........................................................... 3,205 1,994 6,022 Proceeds from maturities ...................................................... 5,810 10,807 3,285 Purchases ..................................................................... (15,347) (9,330) (24,310) Investment securities held to maturity: Proceeds from maturities ...................................................... 10,390 9,639 8,611 Purchases ..................................................................... (4,333) (1,936) (5,698) Purchases of loan pool participations ........................................... (25,710) (25,589) (29,827) Principal recovery on loan pool participations .................................. 25,526 21,950 24,458 Net increase in loans ........................................................... (21,483) (26,450) (17,227) Purchase of bank premises and equipment ......................................... (495) (1,615) (650) Proceeds from sale of bank premises and equipment ............................... -- 24 12 Proceeds from branch acquisition, net ........................................... -- -- 14,246 --------------------------------------------- Net cash used in investing activities ....................................... (22,437) (20,506) (21,078) --------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits ........................................................ 17,425 8,356 13,364 Federal Home Loan Bank advances ................................................. 8,000 11,600 -- Repayment of Federal Home Loan Bank advances .................................... (6,405) (5,600) -- Advances on notes payable ....................................................... 7,450 6,550 6,400 Principal payments on notes payable ............................................. (4,500) (1,000) (7,900) Dividends paid .................................................................. (2,048) (1,753) (1,638) Purchases of treasury stock ..................................................... (1,837) (1,682) (622) Proceeds from exercise of stock options ......................................... 689 729 -- --------------------------------------------- Net cash provided by financing activities ................................... 18,774 17,200 9,604 --------------------------------------------- Net increase (decrease) in cash and cash equivalents ........................ 2,926 2,711 (4,337) Cash and cash equivalents at beginning of year .................................. 19,195 16,484 20,821 --------------------------------------------- Cash and cash equivalents at end of year ........................................ $ 22,121 19,195 16,484 ============================================= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest ...................................................................... $ 10,382 9,299 8,299 ============================================= Income taxes .................................................................. $ 2,128 2,894 2,239 =============================================
See accompanying notes to consolidated financial statements. 27 24/25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997, AND 1996 1 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Mahaska Investment Company and subsidiaries (the "Company") conform to generally accepted accounting principles and to general practices within the banking industry. The consolidated financial statements of the Company include the accounts of its 100 percent owned subsidiaries, Mahaska State Bank, Central Valley Bank, Pella State Bank, and On-Site Credit Services. All material intercompany transactions have been eliminated in consolidation. FORMATION OF PELLA STATE BANK Pella State Bank is a full service, state-chartered, commercial bank which was formed as a de novo institution by the Company in December 1997. The Company provided initial capitalization of $5,000,000 to Pella State Bank from cash on hand and an advance on its commercial bank line of credit. BANK OFFICE ACQUISITION On June 21, 1996, Central Valley Bank acquired the Sigourney, Iowa, bank office of Boatmen's Bank Iowa, N.A. and assumed approximately $32.1 million in deposits and purchased certain loans totaling approximately $14.6 million. Central Valley Bank's existing branch facility in Sigourney was consolidated into the newly acquired facility. A premium of approximately $3.0 million was paid by Central Valley Bank to acquire the deposits. The acquisition was accounted for as a purchase transaction and, as such, did not require any restatement of prior period financial statements. NATURE OF OPERATIONS The bank subsidiaries engage in retail and commercial banking and related financial services, providing the usual products and services such as deposits, commercial, real estate, and consumer loans, and trust services. Mahaska State Bank also provides data processing services to affiliated and non-affiliated banks. On-Site Credit Services provides equipment leasing and accounts receivable financing. Since 1988, the Company, either directly or through the bank subsidiaries, has invested in loan pool participations that have been purchased by certain non-affiliated independent service corporations (collectively, the "Servicer") from the Federal Deposit Insurance Corporation ("FDIC"), the Resolution Trust Corporation ("RTC"), or other sources. These loan pool investments are comprised of packages of loans previously made by financial institutions, which often include distressed or nonperforming loans, that have been sold at prices reflecting varying discounts from the aggregate outstanding principal amount of the underlying loans depending on the credit quality of the portfolio. The Servicer collects and remits these amounts, less servicing fees, to the participants. EFFECT OF NEW FINANCIAL ACCOUNTING STANDARDS The Company adopted the provisions of SFAS No. 130, Reporting Comprehensive Income, effective January 1, 1998. SFAS No. 130 establishes the standards for the reporting and display of comprehensive income in the financial statements. Comprehensive income represents net income and certain amounts reported directly in shareholders' equity, such as the net unrealized gain or loss on available-for-sale securities. The statement requires additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations. Prior year consolidated financial statements have been reclassified to conform to the requirements of SFAS No. 130. The Company adopted the provisions of SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information, effective January 1, 1998. SFAS No. 131 establishes disclosure requirements for segment operations. The adoption had no effect on the Company's financial statement disclosures because the Company operates as a single business segment. SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, will be effective for the Company for the year beginning January 1, 2000. Management is evaluating the impact the adoption of SFAS No. 133 will have on the Company's consolidated financial statements. The Company expects to adopt SFAS No. 133 when required. 28 [LOGO] MAHASKA INVESTMENT COMPANY EARNINGS PER SHARE Basic earnings per share amounts are computed by dividing net income by the weighted average number of shares outstanding during the year. Diluted earnings per share amounts are computed by dividing net income by the weighted average number of shares and all dilutive potential shares outstanding during the year. In November 1997, the Company issued a five-for-three stock split in the form of a dividend. All prior year share amounts have been restated to reflect this stock dividend. The Company has had a Stock Repurchase Plan in effect since April 1995. In accordance with this plan, 87,368, 116,310 and 66,667 shares of common stock were repurchased by the Company during 1998, 1997, and 1996, respectively. The following information was used in the computation of earnings per share on both a basic and diluted basis for the years ended December 31, 1998, 1997 and 1996:
(In thousands) 1998 1997 1996 - -------------------------------------------------------------------------------------------------------- BASIC EPS COMPUTATION Numerator: Net Income ............................................................... $4,623 5,058 4,494 ------------------------- Denominator: Average Shares Outstanding ............................................... 3,660 3,653 3,744 ------------------------- Basic EPS .................................................................. $ 1.26 1.38 1.20 ------------------------- DILUTED EPS COMPUTATION Numerator: Net Income ............................................................... $4,623 5,058 4,494 ------------------------- Denominator: Average Shares Outstanding ............................................... 3,660 3,653 3,744 Stock Options ............................................................ 182 137 28 ------------------------- 3,842 3,790 3,772 ------------------------- Diluted EPS ................................................................ $ 1.20 1.33 1.19 =========================
FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering the Company's entire holdings of a particular financial instrument for sale at one time. Unless included in assets available for sale, it is the Company's general practice and intent to hold its financial instruments to maturity and not to engage in trading or sale activities. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Estimated fair values have been determined by the Company using the best available data and an estimation method suitable for each category of financial instruments. CASH AND DUE FROM BANKS The Company is required to maintain certain daily reserve balances on hand in accordance with federal banking regulations. The average reserve balances maintained in accordance with such regulations for the years ended December 31, 1998, 1997, and 1996 were $1,048,000, $897,000 and $835,000, respectively. 29 26/27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INVESTMENT SECURITIES The Company classifies its investment securities based on the intended holding period. Securities which may be sold prior to maturity to meet liquidity needs, to respond to market changes, or to adjust the Company's asset-liability position are classified as available for sale. Securities held principally for the purpose of near-term sales are classified as trading. Securities which the Company intends to hold until maturity are classified as held to maturity. Investment securities available for sale are recorded at fair value. The aggregate unrealized gains or losses, net of the income tax effect, are recorded as a component of other comprehensive income until realized. Securities held to maturity are recorded at cost, adjusted for amortization of premiums and accretion of discounts. Net gains or losses on the sales of securities are shown in the consolidated statements of income using the specific identification method. LOANS Loans are stated at the principal amount outstanding, net of unearned discount and allowance for loan losses. Unearned discount on installment loans is transferred to income over the term of the loan using the level-yield method. Interest on all other loans is credited to income as earned based on the principal amount outstanding. It is the Company's policy to discontinue the accrual of interest income on any loan when, in the opinion of management, there is reasonable doubt as to the timely collectibility of interest or principal. Nonaccrual loans are returned to an accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to timely payment of principal or interest. CONCENTRATIONS OF CREDIT RISK The Company originates real estate, consumer, and commercial loans primarily in its southeast Iowa market area and adjacent counties. Although the Company has a diversified loan portfolio, a substantial portion of its borrowers' ability to repay their loans is dependent upon economic conditions in the Company's market area. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes collectibility of the principal is unlikely. Management believes the allowance for loan losses is adequate to absorb losses in the loan portfolio. While management uses available information to recognize loan losses, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of the examination process, periodically review the subsidiary banks' allowance for loan losses. Such agencies may require the subsidiary banks to increase their allowance for loan losses based on their judgments and interpretations about information available to them at the time of their examinations. LOAN POOL PARTICIPATIONS The Company has invested in participations in pools of loans acquired from the FDIC, the RTC, and other sources at substantial discounts. The pools, all acquired since 1988, consist of loans to borrowers located throughout the United States. The Company carries its investment in the loan pools as a separate earning asset on its balance sheet. Principal or interest restructures, write-downs, or write-offs within the pools are not included in the Company's disclosures for its loan portfolio. The loan pools are managed by the Servicer operating in Omaha, Nebraska, the sole incentive of which is cash collection without regard to principal or income allocation of the payment. The investment in loan pools is accounted for on a nonaccrual basis. For loans receiving regular payments, cash is applied first to interest income for interest due at the contract rate. Additional payment is then applied to principal in a ratio of cost basis to loan face amount and to discount income for the remainder. For loans where payments are received on an irregular basis, the Servicer evaluates the collateral position of the loan and, where well-secured, the payments are applied as described above. When the loan is judged to be other than 30 [LOGO] MAHASKA INVESTMENT COMPANY well-secured, the payment is applied to principal and discount income with no recognition of interest due at the contract rate. For loans where the circumstances or new information lead the Servicer to believe that collection of the note or recovery through collateral is less than originally determined, the cost basis assigned to the loan is written down or off through a charge to discount income. For loans where the Servicer negotiates a settlement of the obligation for a lump sum, the payment is applied first to principal, then to discount income and last to interest due at the contract rate. PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line or accelerated method over the estimated useful lives of respective assets, which range from 5 to 40 years for building and improvements and 3 to 10 years for furniture and equipment. EXCESS OF COST OVER UNDERLYING NET ASSETS The excess of cost over underlying net assets of $5,550,000, $6,162,000 and $6,795,000 at December 31, 1998, 1997, and 1996, respectively, is being amortized primarily using the straight-line method over 15 years. Amortization expenses for 1998, 1997, and 1996 were $612,000, $633,000 and $529,000, respectively. OTHER REAL ESTATE OWNED Other real estate owned represents property acquired through foreclosure or deeded to the subsidiary banks in lieu of foreclosure on real estate mortgage loans on which the borrowers have defaulted as to payment of principal and interest. Other real estate owned is carried at the lower of the cost of acquisition or the asset's fair market value, less estimated costs of disposition, and is included in other assets on the consolidated balance sheets. Reductions in the balance of other real estate at the date of acquisition are charged to the allowance for loan losses. Expenses incurred subsequent to the acquisition of the property and any subsequent write-downs to reflect current fair market value are charged as noninterest expense as incurred. Gains or losses on the disposition of other real estate are recognized in other income or expense in the period in which they are realized. Other real estate owned of $12,000 at December 31, 1998 and 1997 was included in other assets. TRUST DEPARTMENT ASSETS Property held for customers in fiduciary or agency capacities is not included in the accompanying consolidated balance sheets, as such items are not assets of the Company. INCOME TAXES The Company files a consolidated federal income tax return. Federal income taxes are allocated based on each entity computing its taxes on a separate company basis. For state purposes, the bank subsidiaries each file a franchise return and the remaining entities file a consolidated income tax return. STATEMENTS OF CASH FLOWS For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, interest-bearing deposits in banks, and federal funds sold. RECLASSIFICATIONS Certain reclassifications have been made to prior years' consolidated financial statements in order to conform to current year presentation. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A significant estimate that is particularly sensitive to change relates to the allowance for loan losses. 31 28/29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2 | INVESTMENT SECURITIES A summary of investment securities by type as of December 31, 1998 and 1997, follows:
GROSS GROSS APPROX. AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31, 1998 (In thousands) COST GAINS LOSSES VALUE - ----------------------------------------------------------------------------------------------- INVESTMENT SECURITIES AVAILABLE FOR SALE: U.S. government securities ...................... $ 4,501 102 -- 4,603 U.S. government agency securities ............... 18,257 164 13 16,408 Other investment securities ..................... 8,627 29 12 8,644 --------------------------------------------- Total ......................................... $ 29,385 295 25 29,655 INVESTMENT SECURITIES HELD TO MATURITY: U.S. government agency securities ............... $ 1,290 26 -- 1,316 Obligations of states and political subdivisions. 8,291 127 9 8,409 Other investment securities .................... 4,098 15 -- 4,113 --------------------------------------------- Total ........................................ $ 12,679 168 9 13,838 GROSS GROSS APPROX. AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31, 1997 (In thousands) COST GAINS LOSSES VALUE - ----------------------------------------------------------------------------------------------- INVESTMENT SECURITIES AVAILABLE FOR SALE: U.S. government securities ..................... $ 4,506 57 -- 4,563 U.S. government agency securities .............. 15,177 143 7 15,313 Other investment securities .................... 3,352 5 5 3,352 --------------------------------------------- Total ........................................ $ 23,035 205 12 23,228 ============================================= INVESTMENT SECURITIES HELD TO MATURITY: U.S. government securities ..................... $ 5,046 -- 12 5,034 U.S. government agency securities .............. 2,885 34 5 2,914 Obligations of states and political subdivisions .................................. 6,793 52 18 6,827 Other investment securities .................... 5,109 -- 15 5,094 --------------------------------------------- Total ........................................ $ 19,833 86 50 19,869 =============================================
Proceeds from the sale of investment securities available for sale during 1998, 1997, and 1996 were $3,205,000, $1,994,000, and $6,022,000, respectively. Gross gains and losses realized on the sale of investment securities available for sale for each of the following years ended December 31 were as follows:
(In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------------------------- Realized gains ...................................................... $ 58 -- 6 Realized losses ..................................................... -- (8) (80) ------------------------- Total ............................................................. $ 58 (8) (74) =========================
As of December 31, 1998 and 1997, investment securities of approximately $9,557,000 and $16,103,000, respectively, were pledged as collateral to secure public fund deposits and for other purposes required or permitted by law. Public funds approximated $27,181,000 and $25,781,000 at December 31, 1998 and 1997, respectively. The amortized cost and approximate fair value of investment securities as of December 31, 1998, by contractual maturity, are shown as follows. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. 32 [LOGO] MAHASKA INVESTMENT COMPANY
AMORTIZED APPROXIMATE (In thousands) COST FAIR VALUE - ------------------------------------------------------------------------------------------------ INVESTMENT SECURITIES AVAILABLE FOR SALE: Due in 1 year or less .................................................... $ 4,005 4,011 Due after 1 year through 5 years ......................................... 17,734 17,869 Due after 5 years through 10 years ....................................... 2,043 2,078 Due after 10 years ....................................................... 5,603 5,697 --------------------- Total .................................................................. $ 29,385 29,655 --------------------- INVESTMENT SECURITIES HELD TO MATURITY: Due in 1 year or less .................................................... $ 4,496 4,514 Due after 1 year through 5 years ......................................... 6,598 6,691 Due after 5 years through 10 years ....................................... 1,467 1,506 Due after 10 years ....................................................... 1,118 1,127 --------------------- Total .................................................................. $ 13,679 13,838 =====================
3 | LOANS A summary of the respective loan categories as of December 31, 1998 and 1997, follows:
(In thousands) 1998 1997 - ------------------------------------------------------------------------------------------------ Real estate loans ........................................................ $ 82,587 72,303 Commercial and agricultural loans ........................................ 66,463 55,977 Loans to individuals ..................................................... 12,847 13,268 Other loans .............................................................. 3,530 2,785 --------------------- Total .................................................................... $165,427 144,333 =====================
Total nonperforming loans and assets at December 31, 1998 and 1997, were:
(In thousands) 1998 1997 - ------------------------------------------------------------------------------------------------ Impaired loans and leases: Nonaccrual ............................................................. $ 561 927 Restructured ........................................................... 164 387 --------------------- Total impaired loans and leases ..................................... 725 1,314 Loans and leases past due 90 days or more ................................ 663 522 --------------------- Total nonperforming loans ................................................ 1,388 1,836 Other real estate owned .................................................. 12 12 --------------------- Total nonperforming assets ............................................... $ 1,400 1,848 =====================
The average balances of nonperforming loans for the years ended December 31, 1998 and 1997, were $1,626,000 and $1,669,000, respectively. The allowance for credit losses related to nonperforming loans at December 31, 1998 and 1997, was $103,000 and $368,000, respectively. Nonperforming loans of $1,343,000 and $902,000 at December 31, 1998 and 1997, respectively, were not subject to a related allowance for credit losses because of the net realizable value of loan collateral, guarantees and other factors. The effect of nonaccrual and restructured loans on interest income for each of the three years ended December 31, 1998, 1997, and 1996 was:
(In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------------------------- INTEREST INCOME: As originally contracted .......................................... $ 126 213 131 As recognized ..................................................... 17 91 41 ------------------------- Reduction of interest income ................................... $ 109 122 90 =========================
33 30/31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4 | ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses for the years ended December 31, 1998, 1997, and 1996 were as follows:
(In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------------------------- Balance at beginning of year ....................................... $1,816 1,491 1,001 Provision for loan losses .......................................... 1,179 417 987 Recoveries on loans previously charged off ......................... 22 45 38 Loans charged off .................................................. (840) (137) (705) Acquisition allowance .............................................. -- -- 170 ------------------------- Balance at end of year ............................................. $2,177 1,816 1,491 =========================
5 | LOANS TO RELATED PARTIES Certain directors and officers of the Company, including their immediate families and companies in which they are principal owners, were loan customers of the Company's subsidiaries. All loans to this group were made in the ordinary course of business at prevailing terms and conditions. The loan activity of this group included in loans as of December 31, 1998 and 1997, was as follows:
(In thousands) 1998 1997 - ----------------------------------------------------------------------------------------------- Aggregate balance at beginning of year .................................... $ 7,633 6,421 Advances .................................................................. 12,829 10,334 Payments .................................................................. 12,442 9,122 ------------------- Aggregate balance at end of year .......................................... $ 8,020 7,633 ===================
6 | PREMISES AND EQUIPMENT A summary of premises and equipment as of December 31, 1998 and 1997 was as follows:
(In thousands) 1998 1997 - ----------------------------------------------------------------------------------------------- Land and improvements .................................................... $ 603 603 Building and improvements ................................................ 3,670 3,571 Furniture and equipment .................................................. 4,962 4,614 ------------------- Total office properties and equipment at cost .......................... 9,235 8,788 Less accumulated depreciation ............................................ 5,192 4,605 ------------------- Total .................................................................. $ 4,043 4,183 ===================
7 | DEPOSITS The scheduled maturities of certificate accounts are as follows as of December 31, 1998:
(In thousands) - -------------------------------------------------------------------------------- 1999 ................................................................. $ 78,558 2000 ................................................................. 23,420 2001 ................................................................. 9,087 2002 ................................................................. 3,062 2003 ................................................................. 1,605 Thereafter ........................................................... -- --------- Total .............................................................. $ 115,732 =========
Time deposits in excess of $100,000 approximated $24,468,000 and $19,755,000 as of December 31, 1998 and 1997, respectively. Interest expense on such deposits for the years ended December 31, 1998, 1997, and 1996 was approximately $1,189,000, $871,000, and $663,000, respectively. 34 [LOGO] MAHASKA INVESTMENT COMPANY 8 | FEDERAL HOME LOAN BANK ADVANCES At December 31, 1998 and 1997, Federal Home Loan Bank (FHLB) advances consisted of the following:
WEIGHTED- WEIGHTED- AVERAGE AVERAGE (in thousands) 1998 INTEREST RATE 1997 INTEREST RATE - ------------------------------------------------------------------------------------------------- Maturity in year ending 1998 .......................................... $ -- --% 1,000 5.82% 1999 .......................................... 3,027 5.96 3,000 5.96 2000 .......................................... 2,029 6.01 2,000 6.02 2001 .......................................... 30 5.40 -- -- Over 3 Years .................................. 2,509 5.07 -- -- ------------------------------------------------- Total ....................................... $ 7,595 6,000 =================================================
Advances from the FHLB are secured by stock in the FHLB. In addition, Mahaska State Bank has pledged certain U.S. Agency securities, and Central Valley Bank and Pella State Bank have agreed to maintain unencumbered additional security in the form of certain residential mortgage loans aggregating not less than 125 percent and 150 percent of outstanding advances, respectively. 9 | NOTES PAYABLE The notes payable balance at December 31, 1998, consists of advances on a $20,000,000 line of credit. The line has a variable interest rate and is due June 30, 1999. The current notes are secured by all of the common stock of the subsidiaries. Interest is payable quarterly at 3/8 below the lender's prime rate, which ranged from 7 3/8 percent to 8 1/2 percent in 1998. 35 32/33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10 | FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of the Company's financial instruments as of December 31, 1998 and 1997, were as follows:
CARRYING FAIR 1998 (In thousands) VALUE VALUE - ----------------------------------------------------------------------------------------------- FINANCIAL ASSETS: Cash and due from banks .................................................. $ 9,292 9,292 Interest-bearing deposits with banks ..................................... 3,559 3,559 Federal funds sold ....................................................... 9,270 9,270 Investment securities .................................................... 43,334 43,493 Loans, net ............................................................... 163,250 163,809 Loan pool participations ................................................. 54,510 54,510 FINANCIAL LIABILITIES: Deposits ................................................................. $232,733 233,444 Federal Home Loan Bank advances .......................................... 7,595 7,609 Notes payable ............................................................ 17,000 17,000 OFF BALANCE SHEET ITEMS: Commitments to extend credit ............................................. $ -- -- Letters of credit ........................................................ -- -- CARRYING FAIR 1997 (In thousands) VALUE VALUE - ----------------------------------------------------------------------------------------------- FINANCIAL ASSETS: Cash and due from banks .................................................. $ 10,854 10,854 Interest-bearing deposits with banks ..................................... 1,526 1,526 Federal funds sold ....................................................... 6,815 6,815 Investment securities .................................................... 43,061 43,097 Loans, net ............................................................... 142,517 143,405 Loan pool participations ................................................. 54,326 54,326 FINANCIAL LIABILITIES: Deposits ................................................................. $215,308 216,494 Federal Home Loan Bank advances .......................................... 6,000 6,000 Notes payable ............................................................ 14,050 14,050 OFF BALANCE SHEET ITEMS: Commitments to extend credit ............................................. $ -- -- Letters of credit ........................................................ -- --
The recorded amount of cash and due from banks, interest-bearing deposits with banks, and federal funds sold approximates fair value. The estimated fair value of investment securities has been determined using available quoted market prices. The estimated fair value of loans is net of an adjustment for credit risk. For loans with floating interest rates, it is presumed that estimated fair values generally approximate the recorded book balances. Fixed rate loans were valued using a present value discounted cash flow with a discount rate approximating the market rate for similar assets. The recorded amount of the loan pools participations approximates fair value due to the characteristics of the loan pool participations. Any additional value attained in the loan pool participations over purchase cost is directly attributable to the expertise of the Servicer to collect a higher percentage of the book value of loans in the pools over the percentage paid. 36 [LOGO] MAHASKA INVESTMENT COMPANY Deposit liabilities with no stated maturities have an estimated fair value equal to the recorded balance. Deposits with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating the current market for similar deposits. The fair value estimate does not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. The Company believes the value of these depositor relationships to be significant. The estimated fair value of the Federal Home Loan Bank advances was determined using a present-value discounted cash flow with a discount rate approximating the current market for similar borrowings. The recorded amount of the notes payable approximates fair value as a result of the short-term nature of these instruments. The fair value of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements. 11 | INCOME TAXES Income tax expense (benefit) for the years ended December 31, 1998, 1997, and 1996 is as follows:
1998 (In thousands) FEDERAL STATE TOTAL - ----------------------------------------------------------------------------------------------- Current ........................................................... $2,297 370 2,667 Deferred .......................................................... (57) (27) (84) ------------------------- $2,240 343 2,583 ========================= 1997 (In thousands) FEDERAL STATE TOTAL - ----------------------------------------------------------------------------------------------- Current ........................................................... $2,389 350 2,739 Deferred .......................................................... (133) (12) (145) ------------------------- $2,256 338 2,594 ========================= 1996 (In thousands) FEDERAL STATE TOTAL - ----------------------------------------------------------------------------------------------- Current ........................................................... $2,198 276 2,474 Deferred .......................................................... (89) -- (89) ------------------------- $2,109 276 2,385 =========================
Income tax expense differs from the amount computed by applying the United States federal income tax rate of 34 percent in 1998, 1997, and 1996 to income before income tax expense. The reasons for these differences are as follows:
(In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------------------------- Provision at statutory rate ......................................... $2,450 2,602 2,239 State franchise tax (net of federal tax benefit) .................... 227 223 182 Nontaxable interest income .......................................... (113) (115) (144) Nondeductible goodwill amortization ................................. 21 21 21 Life insurance cash value increase .................................. (26) (26) (31) Other, net .......................................................... 24 (111) 18 ------------------------- Total ............................................................. $2,583 2,594 2,385 =========================
37 34/35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 1998 and 1997, are as follows:
(In thousands) 1998 1997 - ----------------------------------------------------------------------------------------------- DEFERRED TAX ASSETS: Allowance for loan losses ................................................. $ 569 438 Deferred compensation ..................................................... 72 79 Premium amortization ...................................................... 73 58 ------------------- Gross deferred tax assets ............................................... 714 575 ------------------- DEFERRED TAX LIABILITIES: Depreciation and amortization ............................................. (105) (94) Federal Home Loan Bank stock .............................................. (11) (17) Deferred loan fees ........................................................ (87) (70) Unrealized gain on available for sale securities .......................... (100) (74) Other ..................................................................... (49) (15) ------------------- Gross deferred tax liabilities .......................................... (352) (270) ------------------- Net deferred tax asset .................................................. $ 362 305 -------------------
No valuation allowance was required for the deferred tax asset at December 31, 1998 or 1997. 12 | STOCK INCENTIVE PLAN The Company has a stock incentive plan under which up to 750,000 shares of common stock are reserved for issuance pursuant to options or other awards which may be granted to officers, key employees, and certain non-affiliated directors of the Company. The exercise price of each option equals the market price of the Company's stock on the date of grant. The option's maximum term is ten years, with vesting occurring at the rate of thirty-three percent on the one-year anniversary of date of grant, sixty-six percent vesting on the two-year anniversary, and one hundred percent vesting on the three-year anniversary of date of grant. The Company applies APB Opinion No. 25 and related interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had compensation cost for the Company's stock incentive plan been determined consistent with SFAS No. 123, the Company's net income and net income per share would have been reduced to the pro forma amounts indicated below:
(In thousands) 1998 1997 - ----------------------------------------------------------------------------------------------- NET INCOME: As reported .............................................................. $ 4,623 5,058 Pro forma ................................................................ 4,362 4,770 NET INCOME PER SHARE: As reported - basic ...................................................... $ 1.26 1.38 As reported - diluted .................................................... 1.20 1.33 Pro forma - basic ........................................................ 1.19 1.31 Pro forma - diluted ...................................................... 1.18 1.28
The fair value of each option grant has been estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998 and 1997, respectively: dividend yield of 2.80 percent for 1998 and 2.80 percent for 1997; expected volatility of 24 percent for 1998 and 25 percent for 1997; risk free interest rates of 4.71 percent for 1998 and 5.74 percent for 1997; and expected lives of 7.5 years for both years. 38 [LOGO] MAHASKA INVESTMENT COMPANY A summary of the status of the Company's stock incentive plan as of December 31, 1998 and 1997, and the activity during the years ended on those dates is presented below:
1998 1997 -------------------------- ------------------------ EXERCISE EXERCISE SHARES PRICE SHARES PRICE - ------------------------------------------------------------------------------------------------------------------------------ Balance at beginning of year ............................................ 519,769 $ 7.50-19.875 440,827 $ 7.50-11.10 Granted ................................................................. 43,041 16.875-22.00 151,819 11.10-19.875 Exercised ............................................................... 58,219 7.50-13.95 65,970 7.50-9.00 Forfeited ............................................................... 7,292 11.10-22.00 6,907 9.00-11.10 ------- ------- Outstanding at end of year .............................................. 497,299 $ 7.50-22.00 519,769 $ 7.50-19.875 Options exercisable at year-end ......................................... 363,494 $ 7.50-19.875 308,671 $ 7.50-19.875 Weighted-average fair value of options granted during the year $ 4.65 $ 4.65
13 | EMPLOYEE BENEFIT PLANS The Company maintains an employee stock ownership plan ("ESOP") covering substantially all employees meeting minimum age and service requirements. Contributions are determined by the board of directors of each subsidiary. Contributions relating to the plan were $161,000, $142,000 and $114,000 for 1998, 1997, and 1996, respectively. As of December 31, 1998 and 1997, the ESOP owned 417,667 and 421,025 shares of the Company's Common Stock, respectively. A 401(k) plan was adopted by the Company in 1994. The Company does not make any contributions to this plan. The Company has also provided deferred compensation plans to certain executive officers, which provide for a series of payments to be made after retirement. The present value of the future payments is being accrued over the respective employees' remaining active service periods. The total expense related to these plans was ($19,000), $39,000 and $33,000 for the years ended December 31, 1998, 1997, and 1996, respectively. The Company provides no material post-retirement benefits. 39 36/37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14 | REGULATORY CAPITAL REQUIREMENTS The Company is subject to various capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possible additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the following table) of total capital and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. Management believes, as of December 31, 1998, that the Company meets all capital adequacy requirements to which it is subject.The Company and significant subsidiaries actual capital amounts and ratios are also presented in the following table.
TO BE WELL CAPITALIZED MINIMUM FOR CAPITAL UNDER PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - ------------------------------------------------------------------------------------------------------------------------------------ AS OF DECEMBER 31, 1998: TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS): Consolidated .................................................$34,858 14.9% $18,656 8.0% N/A N/A Mahaska State Bank ........................................... 15,638 11.2 11,162 8.0 $13,953 10.0% Central Valley Bank .......................................... 8,364 14.0 4,763 8.0 5,954 10.0 Pella State Bank ............................................. 4,924 44.3 890 8.0 1,113 10.0 TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS): Consolidated .................................................$32,682 14.0% $ 9,328 4.0% N/A N/A Mahaska State Bank ........................................... 14,518 10.4 5,581 4.0 $ 8,372 6.0% Central Valley Bank .......................................... 7,966 13.4 2,382 4.0 3,572 6.0 Pella State Bank ............................................. 4,765 42.8 445 4.0 668 6.0 TIER 1 CAPITAL (TO AVERAGE ASSETS): Consolidated .................................................$32,682 11.3% $ 8,682 3.0% N/A N/A Mahaska State Bank ........................................... 14,518 8.6 5,041 3.0 $ 8,402 5.0% Central Valley Bank .......................................... 7,966 9.3 2,569 3.0 4,282 5.0 Pella State Bank ............................................. 4,765 33.8 423 3.0 705 5.0 AS OF DECEMBER 31, 1997: TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS): Consolidated .................................................$32,408 15.6% $16,602 8.0% N/A N/A Mahaska State Bank ........................................... 16,084 12.2 10,541 8.0 $13,176 10.0% Central Valley Bank .......................................... 7,055 12.7 4,428 8.0 5,536 10.0 Pella State Bank ............................................. 4,940 207.1 191 8.0 239 10.0 TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS): Consolidated .................................................$30,592 14.7% $ 8,301 4.0% N/A N/A Mahaska State Bank ........................................... 15,022 11.4 5,270 4.0 $ 7,905 6.0% Central Valley Bank .......................................... 6,756 12.2 2,214 4.0 3,321 6.0 Pella State Bank ............................................. 4,926 206.5 95 4.0 14 6.0 TIER 1 CAPITAL (TO AVERAGE ASSETS): Consolidated .................................................$30,592 11.8% $ 7,773 3.0% N/A N/A Mahaska State Bank ........................................... 15,022 9.1 4,946 3.0 $ 8,244 5.0% Central Valley Bank .......................................... 6,756 8.9 2,278 3.0 3,796 5.0 Pella State Bank ............................................. 4,926 378.5 39 3.0 65 5.0
40 [LOGO] MAHASKA INVESTMENT COMPANY 15 | DIVIDEND RESTRICTIONS The Company derives a substantial portion of its cash flow, including that available for dividend payments to shareholders, from its bank subsidiaries in the form of dividends received. The bank subsidiaries are subject to certain statutory and regulatory restrictions that affect dividend payments. Based on minimum regulating guidelines as published by those regulators, the maximum dividends which could be paid by the bank subsidiaries to the Company at December 31, 1998, approximated $12,271,000. 16 | COMMITMENTS AND CONTINGENCIES The Company is a party to financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of its customers, which include commitments to extend credit. The Company's exposure to credit loss in the event of nonperformance by the other party to the commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. As of December 31, 1998 and 1997, outstanding commitments to extend credit totaled approximately $18,755,000 and $15,597,000, respectively. Commitments under standby letters of credit outstanding aggregated $3,018,000 and $2,297,000 as of December 31, 1998 and 1997, respectively. The Company does not anticipate any losses as a result of these transactions. The Company is involved in various legal actions and proceedings arising from the normal course of operations. Management believes, based on known facts and the advice of legal counsel, that the ultimate liability, if any, not covered by insurance, arising from all legal actions and proceedings will not have a material adverse effect upon the consolidated financial position of the Company. 17 | SUBSEQUENT EVENT On February 2, 1999, the Company announced execution of a definitive merger agreement with Midwest Bancshares, Inc. of Burlington, Iowa ("Midwest"). The merger will be accomplished through a tax-free fixed exchange of one (1) share of Company common stock for each share of outstanding common stock of Midwest Bancshares, Inc. The transaction is intended to qualify as a tax-free reorganization and be accounted for as a pooling of interests. The transaction is expected to be completed in the third quarter of 1999, after customary regulatory and shareholder approvals have been received. Based on the Company's closing price of $17.00 on February 2, 1999, the transaction will be valued at $19.0 million. Based on Midwest's total shares outstanding of approximately 1.1 million shares as of February 2, 1999, the Company will have approximately 4.7 million shares outstanding after the merger. This merger will add approximately $163,000,000 in assets and $106,000,000 in deposits to the Company. 41 38/39 NOTES CONSOLIDATED FINANCIAL STATEMENTS 18 | MAHASKA INVESTMENT COMPANY (PARENT COMPANY ONLY) BALANCE SHEETS
DECEMBER 31 (In thousands) 1998 1997 - ----------------------------------------------------------------------------------------------- ASSETS: Cash on deposit at bank subsidiary ....................................... $ 309 617 Cash at other institutions ............................................... 22 19 -------------------- Cash and cash equivalents .............................................. 331 636 Investment securities .................................................... 377 299 Loans .................................................................... 7,511 2,447 Loan pool participations ................................................. 7,607 7,734 Investments in: Bank subsidiaries ...................................................... 32,678 32,782 Bank-related subsidiary ................................................ 5,274 5,059 Excess cost over net assets .............................................. 21 83 Premises and equipment ................................................... 685 733 Other assets ............................................................. 923 1,182 -------------------- Total assets ........................................................... 55,407 50,955 -------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Notes payable ............................................................ $ 17,000 14,050 Accrued expenses payable and other liabilities ........................... 175 151 -------------------- Total liabilities ...................................................... 17,175 14,201 ==================== Shareholders' equity: Common stock ............................................................. 19,038 19,038 Capital surplus .......................................................... 17 7,734 Treasury stock at cost ................................................... (2,799) (1,752) Retained earnings ........................................................ 21,806 11,615 Accumulated other comprehensive income ................................... 170 119 -------------------- Total shareholders' equity ............................................. 38,232 36,754 -------------------- Total liabilities and shareholders' equity ............................. $ 55,407 50,955 ====================
42 [LOGO] MAHASKA INVESTMENT COMPANY
STATEMENTS OF INCOME YEAR ENDED DECEMBER 31 (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- INCOME: Dividends from subsidiaries ......................................................... $ 4,600 2,400 2,000 Interest income and discount on loan pool participations ............................ 1,878 2,713 3,498 Management, audit, and loan review fees ............................................. 236 398 285 Other operating income .............................................................. 433 146 247 ---------------------------------- Total income ...................................................................... 7,147 5,657 6,030 ================================== EXPENSE: Salaries and benefits expense ....................................................... 859 1,026 925 Interest on short-term borrowings ................................................... 1,074 800 968 Other operating expense ............................................................. 638 646 642 ---------------------------------- Total expense ..................................................................... 2,571 2,472 2,535 ================================== Income before income tax expense and equity in undistributed earnings of subsidiaries ...................................................................... 4,576 3,185 3,495 Income tax expense .................................................................. 13 151 529 ---------------------------------- Income before equity in undistributed earnings of subsidiaries .................... 4,563 3,034 2,966 Equity in undistributed earnings of subsidiaries .................................... 60 2,024 1,528 ---------------------------------- Net income ........................................................................ $ 4,623 5,058 4,494 ================================== STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31 (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income .......................................................................... $ 4,623 5,058 4,494 ---------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries .................................. (60) (2,024) (1,528) Depreciation and amortization ..................................................... 124 121 105 Investment securities gains ....................................................... (26) -- -- Decrease (increase) in other assets ............................................... 259 (504) (41) Increase (decrease) in other liabilities .......................................... 24 (133) 238 ---------------------------------- Total adjustments ................................................................. 320 (2,540) (1,226) ---------------------------------- Net cash provided by operating activities ......................................... 4,943 2,518 3,268 ================================== CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investment securities .................................................. (227) -- (149) Proceeds from investment securities sales ........................................... 175 -- -- Purchases of loan pool participations: .............................................. (4,610) (2,091) (1,033) Principal recovery on loan pool participations ...................................... 4,737 5,665 7,590 Net (increase) decrease in loans .................................................... (5,064) (2,243) 2,655 Purchases of premises and equipment ................................................. (13) (151) (55) Investment in subsidiaries .......................................................... -- (5,000) (10,000) ---------------------------------- Net cash used in investing activities ............................................. (5,002) (3,820) (992) ---------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Advances on notes payable ........................................................... 7,450 6,500 7,800 Principal payments on notes payable ................................................. (4,500) (2,400) (7,900) Dividends paid ...................................................................... (2,048) (1,753) (1,638) Purchases of treasury stock ......................................................... (1,837) (1,682) (622) Proceeds from stock issued .......................................................... 689 729 -- ---------------------------------- Net cash (used in) provided by financing activities ............................... (246) 1,444 (2,360) ---------------------------------- Net (decrease) increase in cash and cash equivalents .............................. (305) 142 (84) Cash and cash equivalents at beginning of year ...................................... 636 494 578 ---------------------------------- Cash and cash equivalents at end of year ............................................ $ 331 636 494 ==================================
43 40/41 INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS MAHASKA INVESTMENT COMPANY: We have audited the accompanying consolidated balance sheets of Mahaska Investment Company and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mahaska Investment Company and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP KPMG Peat Marwick LLP February 12, 1999 Des Moines, Iowa 44 [LOGO] MAHASKA INVESTMENT COMPANY BANK SUBSIDIARY HIGHLIGHTS The bank subsidiary schedule is not covered by the Independent Auditors' Report.
DECEMBER 31 (In thousands) 1998 1997 - ----------------------------------------------------------------------------------------------- MAHASKA STATE BANK Total assets ............................................................ $169,524 $167,754 Total loans, net of unearned discount ................................... 97,176 95,905 Total loan pool participations .......................................... 26,341 26,964 Allowance for loan losses ............................................... (1,120) (1,062) Total deposits .......................................................... 149,610 147,432 Total shareholders' equity .............................................. 15,413 16,021 CENTRAL VALLEY BANK Total assets ............................................................ $ 90,951 $84,749 Total loans, net of unearned discount ................................... 46,370 39,242 Total loan pool participations .......................................... 18,965 19,627 Allowance for loan losses ............................................... (398) (299) Total deposits .......................................................... 73,575 69,098 Total shareholders' equity .............................................. 12,501 11,835 PELLA STATE BANK Total assets ............................................................ $ 15,583 $ 5,191 Total loans, net of unearned discount ................................... 8,461 1,028 Total loan pool participations .......................................... 1,598 0 Allowance for loan losses ............................................... (159) (14) Total deposits .......................................................... 10,195 238 Total shareholders' equity .............................................. 4,765 4,926
45 42/43 DIRECTORS AND OFFICERS / STOCK INFORMATION BOARD OF DIRECTORS MARTIN L. BERNSTEIN Owner, Bernstein Realty ROBERT K. CLEMENTS Attorney, Clements Law Firm CHARLES S. HOWARD Chairman, President & CEO R. SPENCER HOWARD Vice President Corporate Planning JAMES F. MATHEW President, Mathew Lumber Company DAVID A. MEINERT Executive Vice President & CFO JOHN P. POTHOVEN Chairman & President, Mahaska State Bank JOHN W. N. STEDDOM Civil Engineer, Retired CORPORATE OFFICERS CHARLES S. HOWARD Chairman, President & CEO DAVID A. MEINERT Executive Vice President & CFO R. SPENCER HOWARD Vice President Corporate Planning KAREN K. BAACK Secretary/Treasurer & Administrative Assistant JEFFREY L. RHOADS Controller MARK T. GIBBONS Loan Review Officer LORI J. SEUBERT Assistant Controller BRYCE C. ABBAS Auditor BARBARA J. BONE Human Resources Officer SHEILA DAVIS-WELKER Marketing Director Board of Directors pictured below, left to right: Charles S. Howard, John P. Pothoven, Robert K. Clements, Martin L. Bernstein, James F. Mathew, R. Spencer Howard, John W. N. Steddom, and David A. Meinert. [PHOTO] 46 [LOGO] MAHASKA INVESTMENT COMPANY STOCK INFORMATION Mahaska Investment Company's Common Stock trades on The NASDAQ National Market and the quotations are furnished by the NASDAQ system. There were 239 shareholders of record on December 31, 1998, and an estimated 750 additional beneficial holders whose stock was held in street name by brokerage houses. The following table sets forth the quarterly high and low sales per share for the Company's stock during 1998, 1997, and 1996: 1998 QUARTER ENDED HIGH LOW - --------------------------------------------------- March 31 $23.63 18.50 June 30 22.63 20.75 September 30 21.81 19.63 December 31 20.00 16.75 1997 Quarter Ended HIGH LOW - --------------------------------------------------- March 31 $14.41 11.10 June 30 16.81 13.96 September 30 19.51 15.76 December 31 21.00 18.01 NASDAQ symbol: OSKY WALL STREET JOURNAL AND OTHER NEWSPAPERS: MahaskaInv MARKET MAKERS: Howe Barnes Investments, Inc. Knight Securities L.P. Midwest Stock Exchange CORPORATE HEADQUARTERS 222 First Avenue East P.O. Box 1104 Oskaloosa, IA 52577 515-673-8448 ANNUAL SHAREHOLDERS' MEETING April 30, 1999, 10:30 a.m. Elmhurst Country Club 2214 South 11th Street Oskaloosa, IA 52577 INTERNET www.mahaskainv.com TRANSFER AGENT/DIVIDEND DISBURSING AGENT Illinois Stock Transfer Company 209 West Jackson Boulevard, Suite 903 Chicago, IL 60606 INDEPENDENT AUDITOR KPMG Peat Marwick LLP 2500 Ruan Center Des Moines, IA 50309 ANNUAL REPORT DESIGN Designgroup, Inc., Des Moines, IA The Company has declared per share cash dividends with respect to its Common Stock as follows:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter - ------------------------------------------------------------ 1998 $ .14 $ .14 $ .14 $ .14 1997 .12 .12 .12 .12 1996 .1095 .1095 .1095 .1095
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. EX-21 5 SUBSIDIARIES 1 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
EX-23 6 CONSENT OF AUDITOR 1 EXHIBIT 23 CONSENT OF AUDITORS The Board of Directors Mahaska Investment Company: We consent to incorporation by reference in the Registration Statement on Form S-8 of Mahaska Investment Company of our report dated February 12, 1999, relating to the consolidated balance sheets of Mahaska Investment Company and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in shareholder's equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1998, which report appears in the December 31, 1998, annual report on Form 10-K of Mahaska Investment Company. /s/ KPMG Peat Marwick LLP Des Moines, Iowa March 26,1999 EX-27 7 FDS
9 1,000 3-MOS DEC-31-1998 DEC-31-1998 9,292 3,559 9,270 0 0 13,679 13,838 165,427 (2,177) 298,389 232,733 17,000 2,829 7,595 0 0 19,038 19,194 298,389 3,988 621 1,901 6,510 2,366 2,816 3,694 585 32 2,268 1,300 1,300 0 0 842 0.23 0.22 10.27 561 663 164 0 (1,873) 288 (7) (2,177) (2,177) 0 (2,177)
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