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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission file number 0-24630
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MAHASKA INVESTMENT COMPANY
I.R.S. Employer Identification No.
Incorporated in Iowa 42-1003699
222 First Avenue East, Oskaloosa, Iowa 52577
Registrant's telephone number, including area code: 515-673-8448
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $5 par value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 27, 2000, was $30,484,863.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the most recent practicable date, March 27, 2000.
4,269,514 shares Common Stock, $5 par value
DOCUMENTS INCORPORATED BY REFERENCE
The Annual Report to Shareholders for the 1999 fiscal year is incorporated
by reference into Part II hereof to the extent indicated in such Part.
The definitive proxy statement of Mahaska Investment Company for the 2000
annual meeting of shareholders is incorporated by reference into Part II and
Part III hereof to the extent indicated in such Parts.
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TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS....................................................... 1
A. GENERAL DESCRIPTION......................................... 1
B. SUBSIDIARIES................................................ 1
C. LOAN POOL PARTICIPATIONS.................................... 2
D. COMPETITION................................................. 6
E. SUPERVISION AND REGULATION.................................. 6
F. EMPLOYEES................................................... 8
G. STATISTICAL DISCLOSURE...................................... 9
ITEM 2. PROPERTIES..................................................... 17
ITEM 3. LEGAL PROCEEDINGS.............................................. 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................ 19
ITEM 6. SELECTED FINANCIAL DATA........................................ 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................... 19
ITEM 7A. MARKET RISK DISCLOSURE......................................... 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE........................................... 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 20
ITEM 11. EXECUTIVE COMPENSATION......................................... 20
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..................................................... 20
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 20
PART IV
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-
ITEM 14. K.............................................................. 21
PART I
ITEM 1. BUSINESS
A. General Description
Mahaska Investment Company (the "Company") is a financial services holding
company headquartered in Oskaloosa, Mahaska County, Iowa. The Company was
incorporated in Iowa in 1973 and is a bank holding company registered under the
Bank Holding Company Act of 1956 and a savings and loan holding company under
the Savings and Loan Holding Company Act. The Company owns 100% of the stock of
four bank subsidiaries (collectively referred to as the "Banks"). These four
banks are Mahaska State Bank ("MSB"), Central Valley Bank ("CVB"), Pella State
Bank ("PSB") and Midwest Federal Savings and Loan Association of Eastern Iowa
("MFS"). The Company also owns 100% of the stock of a commercial finance
company On-Site Credit Services, Inc. ("On-Site").
The Bank subsidiaries engage in retail and commercial banking and related
financial services, providing the usual products and services such as deposits,
commercial, real estate, and consumer loans, and trust services. MSB also
provides data processing services to affiliated and non-affiliated banks. On-
Site provides factoring, equipment leasing and accounts receivable financing.
Since 1988, the Company, either directly or through the Banks, has invested
in loan pool participations that have been purchased by certain non-affiliated
independent service corporations (collectively, the "Servicer") from the
Federal Deposit Insurance Corporation ("FDIC"), the Resolution Trust
Corporation ("RTC"), or from other sources. These loan pool investments
generally consist of performing, nonperforming, or distressed loans, that have
been sold at prices reflecting varying discounts from the aggregate outstanding
principal amount of the underlying loans depending on the credit quality of the
portfolio. The Servicer collects these loans from the borrowers.
The Company provides services to the Banks and to On-Site including
management assistance, auditing services, human resources administration,
marketing assistance and coordination, assistance with respect to accounting
and operating systems and procedures, and loan review. Charges for these
services are based on the nature and extent of these services.
B. Subsidiaries
Mahaska State Bank--MSB is a full-service, commercial bank which was
chartered as an Iowa state bank in 1931. The Bank operates in south central
Iowa and serves all of Mahaska county from its main bank and two branch offices
in Oskaloosa and serves portions of Keokuk and Iowa counties from its branch
office in North English. The Bank also maintains one drive-up automated teller
machine located in Oskaloosa. The Bank provides a wide array of retail and
commercial banking services, including demand, savings and time deposits,
loans, trust services, and data processing services to the bank subsidiaries
and to three non-affiliated banks. The Bank also provides full-service
brokerage services to its customers through an affiliation with an independent
broker.
Central Valley Bank--CVB is a full-service, federally-chartered savings bank
which was formed as a de novo institution by the Company in June 1994. CVB also
operates in south central Iowa from its main office in Ottumwa, which serves
Wapello County, and from its two branches located in Fairfield and one branch
in Sigourney, which serve Jefferson and Keokuk counties, respectively. CVB
provides retail deposit services including demand, savings, and time deposit
products and offers commercial, agricultural, real estate, and consumer loans.
The Bank wholly-owns a service corporation, Valley Financial Services, Inc.,
that provides crop insurance products and investment brokerage services to its
customers.
Pella State Bank--PSB is a full-service, Iowa state chartered commercial
bank which the Company formed as a de novo institution in December 1997. PSB
mainly serves the community of Pella, Iowa and the surrounding area located in
Marion County. The office of the bank is a facility which the Company purchased
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and renovated in 1997. The Bank provides full retail and commercial banking
services to its customers. The Bank also provides full-service brokerage
services to its customers through an affiliation with an independent broker.
Midwest Federal Savings and Loan Association of Eastern Iowa--MFS is a full-
service federally-chartered savings bank which was acquired by the Company on
September 30, 1999. MFS is headquartered in Burlington, Iowa and serves the Des
Moines county market through its main office and a branch in Burlington and a
Wal-Mart Super Center branch in West Burlington. MFS also serves the Lee County
market through a branch in Fort Madison, Iowa and the Wapello County area
through a branch in Wapello, Iowa. MFS is a community-oriented financial
institution which offers a variety of financial services to meet the needs of
the communities it serves. MFS is primarily engaged in attracting retail
deposits from the general public and investing those funds primarily in first
mortgages on single family residences and mortgage-backed securities. MFS also
originates and purchases residential construction, small-business commercial,
consumer and other loans in its market area. Tax-deferred annuities and other
financial products are sold by MFS through its wholly-owned subsidiary Midwest
Financial Products, Inc.
On-Site Credit Services, Inc.--On-Site is an Iowa corporation which was
formed by the Company in 1974 under the name of MIC Leasing Co. The company
operated under the name of On-Site Commercial Services until June 1997 when the
name was officially changed to On-Site Credit Services, Inc. On-Site originates
and services machinery and equipment leases to small businesses and farmers.
The funding of these leases is provided by On-Site through funds provided by
the Company. On-Site also provides accounts receivable financing and factoring
services to small businesses mainly in the state of Iowa. In April of 1999, the
Company's Board of Directors determined that it would discontinue the
activities of On-Site. Management continues to evaluate the options and/or
alternatives related to the assets of the entity. Effective March 21, 2000, the
name of On-Site was changed to MIC Financial, Inc.
C. Loan Pool Participations
The Company, directly and through the Banks, has participation interests in
pools of loans currently held and serviced by four separate independent
servicing corporations (referred to collectively as the "Servicer"). The four
independent servicing corporations are Central States Resources Corporation,
Midstates Resources Corporation, All States Resources Corporation, and States
Resources Corporation. The Company does not have any ownership interest in or
control over these servicing corporations. Two of the independent servicing
corporations are owned solely by Randal Vardaman and two are owned by Mr.
Vardaman in conjunction with other individuals. Mr. Vardaman has been engaged
in credit analysis and loan portfolio management in various positions since
1970. He founded Central States Resources Corporation in 1988 and organized
Midstates Resources Corporation in 1991, All States Resources Corporation in
1993, and States Resources Corporation in 1998. Prior to the formation of the
servicing corporations, he participated in the liquidation of certain banking
institutions in Iowa, and served as assistant liquidator at the FDIC's Division
of Liquidation.
The Company has invested in loan pools purchased by the Servicer at varying
discounts from the aggregate outstanding principal amount of the underlying
loans. The loan pools were sold by the FDIC or the RTC acting as conservator,
receiver, or liquidator of failed banks and savings and loan institutions, and
by other large nonaffiliated banking organizations. The loans comprising the
pools were originated throughout the United States. As part of the agreement to
purchase participation interests in the loan pools, the Company and its
subsidiaries have contracted with the Servicer to service the underlying loans
within the respective loan pools which are owned of record by the Servicer. The
Servicer also evaluates various loan pools prior to purchase and makes
recommendations to the Company concerning the creditworthiness of proposed loan
pool purchases and proposes appropriate bids to the Company and any other
potential loan pool participants.
The Servicer has bid on loan pools from various regional offices of the FDIC
and the RTC, and from other sources. The Company and the Banks have purchased
participation interests in such pools of loans. The purchase prices paid by the
Company for loan pool participations have ranged from 5.5% to 97.7% of the
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aggregate outstanding principal amount of the loans comprising such pools at
the time of purchase. The Servicer acquires the loan pools without recourse
against the sellers and, accordingly, the risk of noncollectibility is, for the
most part, assumed by the Company and any other investors in a particular pool.
Federal law mandated that after July 1, 1995, the RTC no longer was
appointed to act as conservator or liquidator and was phased out of existence
by year end 1995; however, the FDIC assumed the RTC's role with respect to
failed savings and loans, as well as continuing in its role as conservator for
failed banks. While only the FDIC currently offers loan pools, there is no
assurance that it will continue to do so. Beginning in 1996, the Servicer
successfully bid on packages of loans offered for sale by large banking
organizations. The Servicer continues to bid on packages offered by the FDIC
and large banking organizations throughout the country. Should the opportunity
to invest in loan pools not exist in the future, the Company intends to invest
available funds in other income producing assets.
Each pool has a different composition and different characteristics. The
composition of a loan pool is generally determined by the seller based on its
desire to maximize the price it receives for all loans among the various pools.
Some pools may consist of a large number of small consumer loans which are
unsecured or are secured by other assets such as automobiles or mobile homes,
while other pools may consist of loans primarily secured by real estate, and
yet other pools may consist of small to medium balance commercial loans. Still
other pools may contain a mixture of such loans and other types of loans. Some
pools may contain significant numbers of past-due nonperforming loans while
other pools are comprised almost entirely of performing loans. The price bid
and paid for such a loan pool is determined based on the composition of the
particular pool, the amounts the Servicer believes can be collected on such a
pool, and the risks associated with the collection of such amounts.
In considering an investment in a loan pool, the Servicer will evaluate
loans owned and being offered and make recommendations to the Company and other
prospective investors concerning the creditworthiness of the proposed loan pool
purchase. The Servicer performs a comprehensive analysis of the loan pool in an
attempt to ensure proper valuation and adequate safeguards in the event of
default. The bid price on the loan pools will be reflective of the results of
the Servicer's pre-acquisition review of the loan files. In many cases the loan
files may not be current and substantial uncertainties may exist regarding the
collectibility of the various loans in the pool. Management believes that in
many instances the non-current loans can be brought current once the Servicer
has an opportunity to contact the debtor. The Company makes its own decisions
as to whether or not to participate in a particular loan pool which has been
recommended by the Servicer, based on the Company's experience with the various
categories and qualities of loans.
The sales of loan pools by the FDIC and by other sellers is generally
conducted by sealed bid auction. A sealed bid auction requires each bidder to
submit a confidential bid on the subject loan pool and the loan pool is awarded
to the highest bidder. In recent years, the Servicer and the Company have faced
increasing competition in bidding for loan pools.
Since 1988, the Servicer, on behalf of the Company and other investors, has
bid on a large number of loan pools and has been successful in purchasing 81
loan pools. The Company and other investors in the loan pools fund the purchase
by the Servicer and each investor receives a percentage interest in the loan
pool based on its proportional investment relative to the total purchase price
of the pool. Each investor receives a loan pool participation certificate
reflecting this interest.
The purchased loan pools consist, for the most part, of loans evidenced by
promissory notes and secured by either real property or personal property. The
value of the collateral may range from nominal to substantial and often may be
impossible to establish prior to acquisition of the pools with the level of
certainty that is typically required in a financial institution.
Upon the acquisition of a participation interest in a loan pool, the Company
assumes the risk that the Servicer will be unable to recover an amount equal to
the purchase price plus the carrying costs, if any,
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collection costs and expected profits on such accounts. The extent of such risk
is dependent on a number of factors, including the Servicer's ability to locate
the debtors, the debtors' financial condition, the possibility that a debtor
may file for protection under applicable bankruptcy laws, the Servicer's
ability to locate the collateral, if any, for the loan and to obtain possession
of such collateral, the value of such collateral, and the length of time it
takes to realize the ultimate recovery either through collection procedures or
through a resale of the loans following a restructure.
A cost "basis" is assigned to each individual loan acquired on a cents per
dollar (discounted price) based on the Servicer's assessment of the recovery
potential of each such loan. This methodology assigns a higher basis to
performing loans with greater potential collectibility and a lower basis to
those loans identified as having little or no potential for collection.
Loan pool participations are shown on the Company's balance sheet as a
separate asset category. The original carrying value of loan pool
participations represents the discounted price paid by the Company to acquire
its participation interests in various loan pools purchased by the Servicer.
The Company's investment balance is reduced as the Servicer collects principal
payments on the loans and remits the proportionate share of such payments to
the Company.
The investment in loan pools is accounted for on a nonaccrual (or cash)
basis in one of three methods, depending on the circumstances. First, if a
borrower makes regular payments on a loan, the payment received is first
applied to interest income in the amount of interest due at the contract rate.
Further payments are applied to principal in a ratio reflecting the proportion
of cost basis to loan principal amount. Payments in excess of interest and this
ratio are recorded as discount income. Discount income earned over the life of
a loan represents loan principal collected in excess of the price originally
paid to acquire the loan from the FDIC, the RTC, or any other sellers, which
price constitutes the cost "basis" of the loan.
Secondly, if the borrower fails to make regular payments, the Servicer
evaluates the collateral supporting the loan. If the Servicer determines that
the loan is well secured, then payments are applied as previously described. If
the Servicer determines that the collateral is deficient, payments are applied
to the principal balance of the loan with no recognition of interest due. The
cost recovery method governs the application of payments received to the
outstanding principal balance. Under this method, any amount received is
initially applied to the cost "basis" of the loan and any additional amounts
received are recognized as discount income.
Third, where the Servicer negotiates a settlement of a loan for a lump sum,
the payment is first applied to principal to the extent of the assigned cost
"basis" with the excess treated as discount income up to the original principal
value of the loan, and any remainder is treated as interest income on loan pool
participations. In each case, where changed circumstances or new information
lead the Servicer to believe that collection of the note or recovery of the
basis through collateral would be less than originally determined, the cost
basis assigned to the loan is written down or written off through a charge
against discount income.
Collection expenses incurred by the Servicer are netted against discount
income. These costs include salary and benefits paid by the Servicer to its
employees, legal fees, costs to maintain and insure real estate owned, and
other operating expenses. Discount income is added to interest income and
reflected as one amount on the Company's consolidated statement of income.
Profit (or loss) from collection activities is determined on a monthly basis
for each servicing corporation from which loan pool participation interests
have been purchased.
The Company does not recognize as income any accrued interest receivable on
the loan pools. Interest income is only recognized when collected and actually
remitted to the Company by the Servicer. Many of the pools that have been
purchased by the Servicer do not include purchased interest in the cost basis;
thus, interest collected does not have a cost basis and represents profit.
Interest income collected by the Servicer is reflected in the Company's
consolidated financial statements as interest income included as part of
interest income and discount on loan pool participations.
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The Servicer provides the Company with monthly reports detailing collections
of principal and interest, face value of loans collected and those written off,
actual operating expenses incurred, remaining asset balances (both in terms of
cost basis and principal amount of loans), a comparison of actual collections
and expenses with target collections and budgeted expenses, and summaries of
remaining collection targets. Recently, the Servicer has begun providing aging
reports and "watch lists" for the loan pools purchased by States Resources.
Monthly meetings are held between the Company and representatives of the
Servicer to review collection efforts and results, to discuss future plans of
action, and to discuss potential opportunities. Additionally, the Company's and
the Servicer's personnel communicate via telephone and telecopy on a regular
basis to discuss various issues regarding the loan pools. Company management
personnel visit the Servicer's operation in Omaha, Nebraska on a regular basis;
and the Company's loan review officer and its internal auditor perform asset
reviews and audit procedures on a regular basis.
The terms of the MidStates and All States collection agreements provide for
tracking of each loan pool investment on an individual basis with the Servicer
receiving a "Servicing Fee" of up to twenty-five percent of net interest
collected based on the percentage of net loan principal collections to the
original investment amount. Once the original investment amount has been fully
recovered, the Servicer is no longer entitled to the Servicing Fee. In lieu of
the Servicing Fee, the Servicer receives a "Bonus Fee" of ten percent of all
subsequent net collections and receives a twenty-five percent participation
interest in the individual pool and shares proportionally in all future
collections, net of costs and Bonus Fees. All pools purchased between 1991 and
1997 were subject to the terms of the MidStates and All States arrangement.
Beginning in 1998, all purchases of loan pools were made by a new servicing
organization called States Resources Corporation. This corporation utilizes a
different collection fee arrangement from MidStates and All States that was
created to enable the Company and the Servicer to invest in higher-quality
performing assets and still provide both parties with an acceptable return.
Under the terms of the States Resources agreement, the Servicer receives a
servicing fee based on one percent of the gross monthly collections of
principal and interest, net of collection costs. Additionally, the Servicer
receives a tiered percentage share of the recovery profit in excess of the
investors' required return on investment on each individual loan pool. In the
event that the return on a particular pool does not exceed the required return
on investment, the Servicer does not receive a percentage share.
The Company's overall cost basis in its loan pool participations represents
a discount from the aggregate outstanding principal amount of the loans
underlying the pools. For example, as of December 31, 1999 and 1998, such cost
basis was $67,756,000 and $54,510,000, respectively, while the contractual
outstanding principal amounts of the underlying loans as of such dates were
approximately $95,707,000 and $83,058,000, respectively. Because this
discounted cost basis inherently reflects the assessed collectibility of the
underlying loans and thus creates a built-in reserve against the risk of
nonpayment in the loan pools, the Company has not established an allowance for
loan losses relating to the loan pool participations. The Company does not
include any amounts related to the loan pool participations in its totals of
nonperforming loans. As part of the on-going collection process, the servicer
may, from time-to-time, foreclose on real estate mortgages and acquire title to
property in satisfaction of such debts. This real estate may be held by the
servicer as "real estate owned" for a period of time until it can be sold.
Since the Company's investment in loan pools are classified as participtions in
pools of loans, the Company does not include the real estate owned that is held
by the servicer with the amount of any other real estate it may hold directly
as a result of its own foreclosure activities.
The underlying loans in the loan pool participations include both fixed rate
and variable rate instruments, but are accounted for on a nonaccrual basis, and
no amounts for interest due are reflected in the carrying value of the loan
pool participations. Based on historical experience, the average period of
collectibility for loans underlying the Company's loan pool participations,
many of which have exceeded contractual maturity dates, is approximately three
to five years. Management has reviewed the recoverability of the underlying
loans and believes that the carrying value does not exceed the net realizable
value of its investment in loan pool participations.
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D. Competition
The Company competes in the commercial banking and thrift industries through
its subsidiary banks. These industries are highly competitive, and all the bank
subsidiaries face strong direct competition for deposits, loans, and other
financial-related services. The Banks in Des Moines, Iowa, Jefferson, Keokuk,
Lee, Mahaska, Marion, and Wapello counties in south central and south east Iowa
compete with other commercial banks, other thrifts, credit unions,
stockbrokers, finance divisions of auto and farm equipment companies,
agricultural suppliers, and other agricultural-related lenders. Some of these
competitors are local, while others are statewide or nationwide. The Banks
compete for deposits principally by offering depositors a wide variety of
deposit programs, convenient office locations, hours and other services, and
for loan originations primarily through interest rates and loan fees they
charge, the efficiency and quality of services they provide to borrowers and
the variety of their loan products. Some of the financial institutions and
financial service organizations with which the Banks compete are not subject to
the same degree of regulation as that imposed on bank and thrift holding
companies, federally insured Iowa-chartered banks, and federal savings banks.
As a result, such competitors have advantages over the Banks in providing
certain services. As of December 31, 1999, there were approximately forty other
banks having 99 offices or branches operating within the eight counties that
the Company has locations. New competitors may develop that are substantially
larger and have significantly greater resources than any of the Banks.
Currently, major competitors in certain of the Company's markets include
banking subsidiaries of Wells Fargo (Norwest) Corporation, Firstar Corporation,
Commercial Federal Bank, FSB, and Brenton Banks. As a result of recently passed
federal legislation to allow unlimited interstate branching, the Company may
experience heightened competition from these and other major financial
institutions seeking to expand their regional banking presence in Iowa.
The Company also faces competition with respect to its investments in loan
pool participations. The Company's financial success to date is largely
attributable to the Servicer's ability to determine the loan pools to bid on
and ultimately purchase, the availability of assets to fund the purchases and
the Servicer's ability to collect on the underlying assets. Investments in loan
pools have become increasingly popular in recent years, leading financial
institutions and other competitors to become active at loan pool auctions
conducted by the FDIC and other sellers. There is no assurance that the
Company, through the Servicer, will be able to bid successfully in the future.
Certain existing competitors of the Company are substantially larger and have
significantly greater financial resources than the Company. Increased
participation by new institutions or other investors may also create increased
buying interest which could also result in higher bid prices for the type of
loan pools considered for investment by the Company. In addition, new and
existing competitors may develop due diligence procedures comparable to the
Servicer's procedures. The emergence of such competition could have a material
adverse effect on the Company's business and financial results. The Company
expects that its success in the future will depend more on the performance of
its bank subsidiaries and less on the investment in loan pool participations.
E. Supervision and Regulation
Bank holding companies, banks, savings and loan holding companies, and
savings and loan associations are extensively regulated under federal and state
law. References under this heading to applicable statutes or regulations are
brief summaries of the portions thereof which do not purport to be complete and
which are qualified in their entirety by reference to those statutes and
regulations. Any change in applicable laws or regulation may have a material
adverse effect on the business of the Company and the Banks.
The Company, as a bank holding company, is subject to regulation under the
Bank Holding Company Act of 1956 (the "Act") and is registered with the Board
of Governors of the Federal Reserve System. Under the Act, the Company is
prohibited, with certain exceptions, from acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any company which
is not a bank and from engaging in any business other than that of banking,
managing and controlling banks or furnishing services to affiliated banks,
except that the Company may engage in and own shares of companies engaged in
certain businesses found by the Board of Governors to be so closely related to
banking "as to be proper incident thereto," such as owning a
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savings association. The Act does not place territorial restrictions on the
activities of bank-related subsidiaries of bank holding companies. The Company
is required by the Act to file periodic reports of its operations with the
Board of Governors and is subject to examination by the Board of Governors.
Under the Act and Federal Reserve Board regulations, the Company and the Bank
are prohibited from engaging in certain tie-in arrangements in connection with
an extension of credit, lease, sale of property, or furnishing of services.
Iowa law permits bank holding companies domiciled in Iowa to make
acquisitions throughout the state. Iowa law also permits bank holding companies
located in the Midwestern Region (defined to include Illinois, Iowa, Minnesota,
Missouri, Nebraska, South Dakota, and Wisconsin) to acquire banks or bank
holding companies located in Iowa subject to approval by the Iowa Division of
Banking and subject to certain statutory limitations. In addition, the Company
may acquire banks or bank holding companies located in the Midwestern Region or
outside the Midwestern Region, provided the Company's principal place of
business remains in the Midwestern Region and the acquisition is authorized by
the laws of the state in which the acquisition is to be made.
As a savings and loan holding company, the Company is subject to federal
regulation and examination by the Office of Thrift Supervision (the "OTS"). The
OTS has enforcement authority over the Company. This authority permits the OTS
to restrict or prohibit activities that are determined to be a serious risk to
the subsidiary savings association. Generally, the activities for a bank
holding company are more limited than the authorized activities for a savings
and loan holding company.
The Company and its subsidiaries are affiliates within the meaning of the
Federal Reserve Act and OTS regulations. As affiliates, they are subject to
certain restrictions on loans by an affiliated bank or thrift (collectively
"affiliated banks") to the Company, other affiliated banks or such other
subsidiaries, on investments by an affiliated bank in their stock or securities
and on an affiliated bank taking such stock and securities as collateral for
loans to any borrower. The Company is also subject to certain restrictions with
respect to direct issuance, flotation, underwriting, public sale or
distribution of certain securities.
Under Iowa law, Mahaska State Bank and Pella State Bank are subject to
supervision and examination by the Iowa Division of Banking. As an affiliate of
these banks, the Company is also subject to examination by the Iowa Division of
Banking.
The deposits of the Banks are insured by the Federal Deposit Insurance
Corporation (the "FDIC") and the Banks are, therefore, also subject to the
supervision and examination by the FDIC. The Banks are required to maintain
certain minimum capital ratios established by these regulators. The Banks are
assessed fees based on the institutions' deposits by the FDIC, to insure the
funds of customers on deposit with the institutions.
In addition, Iowa state law imposes restrictions on the operations of the
state-chartered banks including limitations on the amount a bank can lend to a
single borrower and limitations on the nature and amount of securities in which
it may invest. Among other things, Iowa law imposes restrictions on certain
types of loans made by a bank, limiting the bank from making loans (or
purchasing participation interests in loan pools) secured by real estate
located outside Iowa and its contiguous states in amounts exceeding 25% of its
regulatory capital. There can be no assurance that the Iowa or federal
regulators will not in the future impose further restrictions or limits on the
Company's loan pool activities.
Iowa law strictly regulates the establishment of bank offices and thus may
affect the Company's future plans to establish additional offices of its banks.
Under Iowa law, a state bank may not establish a bank office outside the
boundaries of the counties contiguous to or cornering upon the county in which
the principal place of business of the state bank is located. The number of
offices a state bank may establish in a particular municipality is also limited
depending upon the municipality's population.
Central Valley Bank and Midwest Federal Savings are subject to the
supervision of and are regularly examined by the OTS and are assessed fees by
the OTS based upon their individual assets totals. As savings
7
institutions, both CVB and MFS must maintain certain minimum capital ratios
established by the OTS and are required to meet a qualified thrift lender test
(the "QTL") to avoid certain restrictions upon its operations. The QTL was
modified by the passage of the Economic Growth and Regulatory Paperwork
Reduction Act of 1996. On December 31, 1999, both CVB and MFS complied with the
current minimum capital guidelines and met the QTL test.
OTS regulations permit federally chartered savings associations to branch
nationwide to the extent allowed by federal statute, enabling federal savings
associations with interstate networks to diversify their loan portfolios and
lines of business.
The Company operates within a regulatory structure that continuously
evolves. In the last several years significant changes have occurred that
affect the Company.
The FDIC Improvement Act of 1991 (the "FDICIA") was primarily designed to
recapitalize the FDIC's Bank Insurance Fund (the "BIF") and the Savings
Association Insurance Fund (the "SAIF"). To accomplish this purpose the FDIC
was granted additional borrowing authority, granted the power to levy emergency
special assessments on all insured depository institutions, granted the power
to change the BIF and SAIF rates on deposits on a semiannual basis, and
directed to draft regulations that provided for a "Risk-Based Assessment
System" that was implemented on January 1, 1994. The FDICIA also imposed
additional regulatory safety and soundness standards upon depository
institutions and granted additional authority to the FDIC. The FDICIA generally
requires that all institutions be examined by the FDIC annually. Under the
provisions of the FDICIA, all regulatory authorities are required to examine
their regulatory accounting standards and, to the extent possible, are required
to conform to generally accepted accounting principles. Finally, the FDICIA
requires the federal banking regulators to take prompt corrective action with
respect to depository institutions that fall below certain capital standards
and prohibits any depository institution from making any capital distribution
that would cause it to be undercapitalized.
Legislation became effective on September 30, 1995 which served to lessen or
remove certain legal barriers to interstate banking and branching by financial
institutions. The legislation has resulted in an increase in the nationwide
consolidation activity occurring among financial institutions by facilitating
interstate bank operations and acquisitions.
On November 2, 1999, the Gramm-Leach-Bliley Act was enacted into law. This
legislation provides for significant financial services reform by repealing key
provisions of the Glass Steagall Act thereby permitting commercial banks to
affiliate with investment banks, it substantially modifies the Bank Holding
Company Act of 1956 to permit companies that own banks to engage in any type of
financial activity, and it allows subsidiaries of banks to engage in a broad
range of financial activities that are not permitted for banks themselves. The
effects of this legislation, both from the opportunities for new activities
that the Company may undertake and from the changes in competitors' activities,
have not been fully ascertained at this time.
The earnings of the Company are affected by the policies of regulatory
authorities, including the Federal Reserve System. Federal Reserve System
monetary policies have had a significant effect on the operating results of
banks and thrifts in the past and are expected to do so in the future. Because
of changing conditions in the economy and in the money markets as a result of
actions by monetary and fiscal authorities, interest rates, credit availability
and deposit levels may change due to circumstances beyond the control of the
Company. Future policies of the Federal Reserve System and other authorities
cannot be predicted, nor can their effect on future earnings be predicted.
F. Employees
On December 31, 1999, the Company had 148 full-time employees and 19 part-
time employees of which 56 full-time and 10 part-time employees were employed
by MSB, 30 full-time and 3 part-time employees were employed by CVB, 8 full-
time and 2 part-time employees were employed by PSB, 4 full-time employed by
8
On-Site, 39 full-time and 4 part-time employed by MFS, and 11 full-time
employees were employed directly by the Company. The Company provides its
employees with a comprehensive program of benefits, some of which are on a
contributory basis, including comprehensive medical and dental plans, life
insurance, long-term and short-term disability coverage, a 401(k) plan, and an
employee stock ownership plan. None of the employees are represented by unions.
Management considers its relationship with its employees to be excellent.
I. Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates
and Interest Differential
The following table details average balances, interest income/expense and
average rates/yield for the Company's earning assets and interest bearing
liabilities for the years ended December 31, 1999, 1998 and 1997 reported on a
fully tax-equivalent basis assuming a 34% tax rate.
Year ended December 31,
-----------------------------------------------------------------------------------
1999 1998 1997
--------------------------- --------------------------- ---------------------------
Interest Average Interest Average Interest Average
Average Income(2)/ Rate/ Average Income(2)/ Rate/ Average Income(2)/ Rate/
Balance Expense Yield Balance Expense Yield Balance Expense Yield
-------- ---------- ------- -------- ---------- ------- -------- ---------- -------
(dollars in thousands)
Average earning assets:
Loans(1).................. $202,733 $17,577 8.67% $157,712 $15,026 9.53% $131,081 $12,293 9.38%
Loan pool participations.. 59,564 7,668 12.87 49,805 7,970 16.00 49,399 8,474 17.15
Interest-bearing
deposits................. 1,868 82 4.37 2,359 122 5.20 2,085 108 5.20
Investment securities
available for sale:
Taxable investments..... 34,617 2,094 6.05 25,730 1,617 6.28 26,052 1,705 6.55
Tax exempt investments.. 2,249 182 8.11 0 0 0.00 0 0 0.00
Investment securities held
to maturity:
Taxable investments..... 10,639 696 6.54 9,821 569 5.80 16,421 928 5.65
Tax exempt investments.. 7,595 505 6.65 7,265 491 6.75 7,459 486 6.51
Federal funds sold........ 5,368 260 4.86 6,465 338 5.24 2,375 128 5.39
-------- ------- -------- ------- -------- -------
Total earning assets.. $324,633 $29,064 8.95 $259,157 $26,133 10.08 $234,872 $24,122 10.27
======== ======= ======== ======= ======== =======
Average interest-bearing
liabilities:
Interest-bearing demand
deposits................. $ 35,477 $ 637 1.80 $ 33,248 $ 656 1.97 $ 32,225 $ 677 2.10
Savings deposits.......... 74,609 2,837 3.80 59,419 2,241 3.77 59,019 2,259 3.83
Certificates of deposit... 132,656 7,060 5.32 107,284 6,102 5.69 96,609 5,442 5.63
Federal funds purchased... 1,683 94 5.56 201 12 5.87 534 32 5.93
Federal Home Loan Bank
advances................. 21,522 1,287 5.98 6,840 405 5.92 2,274 138 6.07
Note payable.............. 16,621 1,280 7.70 13,342 1,074 8.05 9,292 764 8.23
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities............ $282,568 $13,195 4.67 $220,334 $10,490 4.76 $199,953 $ 9,312 4.66
======== ======= ======== ======= ======== =======
Net interest income....... $15,869 4.28 $15,643 5.32 $14,810 5.61
======= ======= =======
Net interest margin(3).... 4.89% 6.04% 6.31%
===== ===== =====
- --------
(1) Average loans outstanding includes the daily average balance of non-
performing loans. Interest on these loans does not include additional
interest of $258,000, $109,000, and $122,000 for 1999, 1998 and 1997,
respectively, which would have been accrued based on the original terms of
these loans compared to the interest that was actually recorded. Interest
earned on loans includes loan fees (which are not material in amount).
(2) Includes interest income and discount realized on loan pool participations.
(3) Net interest margin is net interest income divided by average total earning
assets.
9
The following table sets forth an analysis of volume and rate changes in
interest income and interest expense of the Company's average earning assets
and average interest-bearing liabilities reported on a fully tax-equivalent
basis assuming a 34% tax rate. The table distinguishes between the changes
related to average outstanding balances (changes in volume holding the initial
interest rate constant) and the changes related to average interest rates
(changes in average rate holding the initial outstanding balance constant). The
change in interest due to both volume and rate has been allocated to volume and
rate changes in proportion to the relationship of the absolute dollar amounts
of the change in each.
Year ended December 31,
----------------------------------------------
1999 Compared to 1998 1998 Compared to
Increase/ (Decrease) 1997 Increase/
Due to (Decrease) Due to
----------------------- ---------------------
Volume Rate Net Volume Rate Net
------ ------- ------ ------ ----- ------
(in thousands)
Interest income from average-
earning assets:
Loans....................... $3,996 $(1,445) $2,551 $2,534 $ 199 $2,733
Loan pool
participations(1).......... 1,409 (1,711) (302) 69 (573) (504)
Interest-bearing deposits... (23) (17) (40) 14 0 14
Investment securities
available for sale:
Taxable investments....... 540 (63) 477 (20) (68) (88)
Tax exempt investments ... 91 91 182 0 0 0
Investment securities held
to maturity:
Taxable investments....... 50 77 127 (382) 23 (359)
Tax exempt investments.... 22 (8) 14 (13) 18 5
Federal funds sold.......... (55) (23) (78) 214 (4) 210
------ ------- ------ ------ ----- ------
Total income from
earning assets......... 6,030 (3,099) 2,931 2,416 (405) 2,011
------ ------- ------ ------ ----- ------
Average expense of average
interest-bearing liabilities:
Interest-bearing demand
deposits................... 42 (61) (19) 21 (42) (21)
Savings deposits............ 578 18 596 15 (33) (18)
Certificates of deposit..... 1,370 (412) 958 606 54 660
Federal funds purchased..... 83 (1) 82 (20) 0 (20)
Federal Home Loan Bank
advances................... 878 4 882 271 (4) 267
Note payable................ 254 (48) 206 327 (17) 310
------ ------- ------ ------ ----- ------
Total expense form
interest-bearing
liabilities............ 3,205 (500) 2,705 1,220 (42) 1,178
------ ------- ------ ------ ----- ------
Net interest income......... $2,825 $(2,599) $ 226 $1,196 $(363) $ 833
====== ======= ====== ====== ===== ======
- --------
(1) Includes interest income and discount realized on loan pool
participations.
10
Interest Rate Sensitivity Analysis
The following table sets forth the scheduled repricing or maturity of the
Company's assets and liabilities as of December 31, 1999, based on the
assumptions described below. The effect of these assumptions is to quantify the
dollar amount of items that are interest rate-sensitive and can be repriced
within each of the periods specified. The table does not necessarily indicate
the impact of general interest rate movements on the Company's net interest
margin because the repricing of certain categories of assets and liabilities is
subject to competitive and other pressures beyond the Company's control. As a
result, certain assets and liabilities indicated as maturing or otherwise
repricing within a stated period may, in fact, mature or reprice at different
times and at different volumes.
Over
Three Three One to Three
Months or Months to Three Years or
Less One Year Years More Total
--------- --------- --------- -------- --------
(dollars in thousands)
Interest earning assets:
Loans.................... $ 55,725 $ 42,424 $ 63,495 $120,447 $282,091
Loan pool
participations.......... 5,420 16,260 42,456 3,620 67,756
Interest-bearing deposits
in banks................ 1,700 0 0 0 1,700
Investment securities:
Available for sale..... 773 3,496 14,426 41,835 60,530
Held to maturity....... 1,297 1,178 4,667 22,303 29,445
Federal funds sold....... 7,865 0 0 0 7,865
--------- --------- --------- -------- --------
Total interest
earning assets...... 72,780 63,358 125,044 188,205 449,387
--------- --------- --------- -------- --------
Interest-bearing
liabilities:
Now and Super NOW
deposits................ 42,378 0 0 0 42,378
Savings deposits......... 96,377 0 0 0 96,377
Certificates of deposit.. 38,575 75,919 64,262 7,964 186,720
Federal funds purchased.. 2,965 0 0 0 2,965
Federal Home Loan Bank
advances................ 23,468 11,404 9,756 18,793 63,421
Note payable............. 18,000 0 0 0 18,000
--------- --------- --------- -------- --------
Total interest-
bearing
liabilities......... 221,763 87,323 74,018 26,757 409,861
--------- --------- --------- -------- --------
Interest sensitivity gap
per period.............. $(148,983) $ (23,965) $ 51,026 $161,448
========= ========= ========= ========
Cumulative Interest
sensitivity gap......... $(148,983) $(172,948) $(121,922) $ 39,526
========= ========= ========= ========
Interest sensitivity gap
ratio................... 0.33% 0.73% 1.69% 7.03%
Cumulative Interest
sensitivity gap ratio... 0.33% 0.44% 1.17% 3.11%
In the table above, NOW and Super NOW deposit account balances and savings
deposits are included as interest-bearing liabilities in the three months or
less.
Loan pool participations are included in the interest rate sensitivity
analysis using an estimated three-year average life. The historical average for
the return of original investment on the pools is approximately 36 months.
Given the non-performing aspect of the loan pool portfolio, management feels
that the use of contractual weighted-average maturity data is inappropriate.
11
II. Investment Portfolio
The following table sets forth certain information with respect to the book
value of the Company's investment portfolio as of December 31, 1999, 1998 and
1997.
December 31,
-----------------------
1999 1998 1997
------- ------- -------
(in thousands)
Securities available for sale:
U.S. government securities............................ $ 5,021 $ 4,603 $ 4,563
U.S. government agency securities..................... 35,302 16,408 15,313
Obligations of states and political subdivisions...... 7,780 0 0
Other investment securities........................... 12,427 8,644 3,352
------- ------- -------
Total securities available for sale................. 60,530 29,655 23,228
------- ------- -------
Securities held to maturity:
U.S. government securities............................ 0 0 5,046
U.S. government agency securities..................... 19,685 1,290 2,885
Obligations of states and political subdivisions...... 7,573 8,291 6,793
Other investment securities........................... 2,187 4,098 5,109
------- ------- -------
Total securities held to maturity................... 29,445 13,679 19,833
------- ------- -------
Total investment securities............................. $89,975 $43,334 $43,061
======= ======= =======
The following table sets forth the contractual maturities of investment
securities as of December 31, 1999, and the weighted average yields (for tax-
exempt obligations on a fully tax-equivalent basis assuming as 34% tax rate) of
such securities. As of December 31, 1999, the Company held no securities with a
book value exceeding 10% of shareholders' equity.
Maturity
----------------------------------------------------------------------------
After One but After Five but
Within One Year Within Five Years Within Ten Years After Ten Years
---------------- ------------------- ----------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------- ------- ---------- -------- --------- ------- --------- -------
(dollars in thousands)
Securities available for
sale:
U.S. government
securities........... $ 1,503 6.03% $ 3,519 5.60% $ 0 0.00% $ 0 0.00%
U.S. government agency
securities........... 773 6.27 20,692 5.74 1,982 6.11 11,854 7.38
Obligations of states
and political
subdivisions......... 0 0.00 1,096 4.12 1,651 4.98 5,033 5.04
Other investment
securities........... 1,993 5.88 5,519 5.68 0 0.00 4,915 6.45
-------- ---------- --------- ---------
Total securities
available for sale.. 4,269 6.00 30,826 5.65 3,633 5.60 21,802 6.63
-------- ---------- --------- ---------
Securities held to
maturity:
U.S. government agency
securities........... 0 0.00 2,072 7.01 3,432 7.06 14,181 6.87
Obligations of states
and political
subdivisions......... 881 6.46 6,367 6.51 125 8.63 200 7.57
Other investment
securities........... 1,594 5.91 493 6.00 0 0.00 100 7.15
-------- ---------- --------- ---------
Total securities held
to maturity.......... 2,475 6.11 8,932 6.60 3,557 7.12 14,481 6.88
-------- ---------- --------- ---------
Total investment
securities............. $ 6,744 6.04% $ 39,758 5.87% $ 7,190 6.35% $ 36,283 6.73%
======== ========== ========= =========
12
III. Loan Portfolio
The Company's loan portfolio largely reflects the profile of the communities
in which it operates. Approximately two-thirds of the total loans as of
December 31, 1999, were agricultural, commercial or residential real estate
loans. The following table shows the composition of the Company's loan
portfolio as of the dates indicated.
December 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- -------------- -------------- -------------- --------------
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
(dollars in thousands)
Agricultural............ $ 42,022 14.9% $ 27,504 16.6% $ 24,779 17.2% $ 19,940 17.0% $ 16,319 18.9%
Commercial.............. 38,238 13.6 38,959 23.6 31,198 21.6 23,613 20.1 22,235 25.7
Real estate:
1-4 family
residences........... 131,925 46.7 38,087 23.0 32,341 22.4 27,274 23.3 15,765 18.2
5+residential
property............. 4,064 1.4 240 0.1 251 0.2 261 0.2 0 0.0
Agricultural............ 21,677 7.7 21,297 12.9 19,647 13.6 16,952 14.4 9,855 11.4
Construction............ 5,593 2.0 5,956 3.6 4,430 3.1 4,017 3.4 2,502 2.9
Commercial.............. 23,613 8.4 17,007 10.3 15,634 10.8 11,895 10.1 10,097 11.7
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Real estate total..... 186,872 66.2 82,587 49.9 72,303 50.1 60,399 51.4 38,219 44.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Installment............. 13,866 4.9 12,847 7.8 13,268 9.2 11,522 9.8 7,637 8.8
Lease financing......... 1,093 0.4 3,530 2.1 2,785 1.9 1,942 1.7 2,067 2.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans(1)....... $282,091 100.0% $165,427 100.0% $144,333 100.0% $117,416 100.0% $ 86,477 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Total assets............ $486,189 $298,389 $274,873 $251,851 $205,162
======== ======== ======== ======== ========
Loans to total assets... 58.0% 55.4% 52.5% 46.6% 42.1%
- --------
(1) Total loans do not include the Company's investments in loan pool
participations.
The following table sets forth the remaining maturities for certain loan
categories as of December 31, 1999.
Total for Loans
Due After One
Year Having:
One to Due After ----------------
Due Within Five Five Fixed Variable
One Year Years Years Total Rates Rates
---------- ------- --------- ------- ------- --------
(in thousands)
Agricultural............ $27,602 $10,975 $3,445 $42,022 $ 7,062 $7,358
Commercial.............. 20,680 14,900 2,658 38,238 15,929 1,629
Real estate--
construction........... 3,776 882 935 5,593 1,350 467
------- ------- ------ ------- ------- ------
Total................. $52,058 $26,757 $7,038 $85,853 $24,341 $9,454
======= ======= ====== ======= ======= ======
The following table provides information on the Company's non-performing
loans as of the dates indicated.
December 31,
------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ----
(dollars in thousands)
90 days past due........................ $1,426 $ 663 $ 522 $ 625 $134
Restructured............................ 515 164 387 380 409
Nonaccrual.............................. 2,874 561 927 1,085 124
------ ------ ------ ------ ----
Total non-performing loans............ $4,815 $1,388 $1,836 $2,090 $667
====== ====== ====== ====== ====
Ratio of nonperforming loans to total
loans.................................. 1.71% 0.84% 1.27% 1.78% 0.78%
13
IV. Summary of Loan Loss Experience
The following table sets forth loans charged off and recovered by the type
of loan and an analysis of the allowance for loan losses for the years ended
December 31, 1999, 1998, 1997, 1996 and 1995.
Year ended December 31,
-----------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- -------
(dollars in thousands)
Amount of loans outstanding
at end of period
(net of unearned
interest)(1)................ $282,091 $165,427 $144,333 $117,416 $85,869
======== ======== ======== ======== =======
Average amount of loans
outstanding for the period
(net of unearned interest).. $202,733 $157,712 $131,081 $105,372 $81,175
======== ======== ======== ======== =======
Allowance for possible loan
losses at beginning of
period...................... $ 2,177 $ 1,816 $ 1,491 $ 1,001 $ 881
-------- -------- -------- -------- -------
Charge-offs:
Agricultural............... 303 135 19 41 53
Commercial................. 1,724 638 14 10 18
Real estate--construction.. 0 0 0 0 0
Real estate--mortgage...... 229 0 30 0 2
Installment................ 56 63 63 38 18
Lease financing............ 63 4 11 616 0
-------- -------- -------- -------- -------
Total charge-offs........ 2,375 840 137 705 91
-------- -------- -------- -------- -------
Recoveries:
Agricultural............... 26 1 11 6 24
Commercial................. 2 8 18 1 1
Real estate--construction.. 0 0 0 0 0
Real estate--mortgage...... 6 0 1 0 0
Installment................ 12 13 15 8 10
Lease financing............ 14 0 0 23 8
-------- -------- -------- -------- -------
Total recoveries......... 60 22 45 38 43
-------- -------- -------- -------- -------
Net loans charged off........ 2,315 818 92 667 48
Provision for possible loan
losses...................... 3,628 1,179 417 987 168
Allowance at date of
acquisition................. 516 0 0 170 0
-------- -------- -------- -------- -------
Allowance for possible loan
losses at beginning of
period...................... $ 4,006 $ 2,177 $ 1,816 $ 1,491 $ 1,001
======== ======== ======== ======== =======
Net loans charged off to
average loans............... 1.14% 0.52% 0.07% 0.63% 0.06%
Allowance for possible loan
losses to total loans at end
of period................... 1.42% 1.32% 1.26% 1.27% 1.17%
- --------
(1) Loans do not include, and the allowance for loan losses not include any
reserve for, investments in loan pool participations.
14
The Company has allocated the allowance for loan losses to provide for the
possibility of loan losses being incurred within the categories of loans set
forth in the table below. The allocation of the allowance and the ratio of
loans within each category to total loans as of the dates indicated are as
follows:
December 31,
--------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------- -------------------- -------------------- -------------------- --------------------
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to
Allowance Total Allowance Total Allowance Total Allowance Total Allowance Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
--------- ---------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
(dollars in thousands)
Agricultural..... $ 597 14.9% $ 361 16.6% $3,310 17.2% $ 254 17.0% $ 262 18.9%
Commercial....... 545 13.6 514 23.6 392 21.6 300 20.1 248 25.7
Real estate--
mortgage........ 2,652 66.2 1,086 49.9 912 50.1 766 51.4 392 44.2
Installment...... 196 4.9 170 7.8 167 9.2 146 9.8 78 8.8
Lease financing.. 16 0.4 46 2.1 35 1.9 25 1.7 21 2.4
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total........... $4,006 100.0% $2,177 100.0% $1,816 100.0% $1,491 100.0% $1,001 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
V. Deposits
The following table sets forth the average amount of and the average rate
paid on deposits by deposit category for the years ended December 31, 1999,
1998 and 1997.
Year ended December 31,
-------------------------------------------
1999 1998 1997
------------- ------------- -------------
Average Average Average
Balance Rate Balance Rate Balance Rate
-------- ---- -------- ---- -------- ----
(dollars in thousands)
Non-interest bearing demand
deposits........................ $ 21,052 N/A $ 19,159 N/A $ 17,465 N/A
Interest-bearing demand (NOW and
money market)................... 35,477 1.80% 33,248 1.97% 32,225 2.10%
Savings deposits................. 74,609 3.80 59,419 3.77 59,019 3.83
Certificates of deposit.......... 132,656 5.32 107,284 5.69 96,609 5.63
-------- -------- --------
Total deposits................. $263,794 5.27% $219,110 4.11% $205,318 4.08%
======== ==== ======== ==== ======== ====
The following table summarizes certificates for deposit in amounts of
$100,000 or more by time remaining until maturity as of December 31, 1999.
These times deposits are made by individuals, corporations and public entities,
all of which are located in the Company's market area or are State of Iowa
public funds.
December 31,
1999
--------------
(in thousands)
Three months or less.......................................... $ 9,887
Over three through six months................................. 4,232
Over six months through one year.............................. 7,207
Over one year................................................. 4,855
-------
Total....................................................... $26,181
=======
15
VI. Return on Equity and Assets
Various operating and Equity Ratios for the years indicated are presented
below:
Year ended
December 31,
--------------------
1999 1998 1997
------ ----- -----
Return on average total assets......................... 0.64% 1.65% 1.98%
Return on average equity............................... 5.29 12.16 14.47
Dividend payout ratio.................................. 103.45 44.44 34.78
Average equity to average assets....................... 12.04 13.54 13.69
Equity to assets ratio................................. 10.33 12.81 13.37
====== ===== =====
VII. Borrowed Funds
The following table summaries the outstanding amount of and the average rate
on borrowed funds as of December 31, 1999, 1998 and 1997.
December 31,
-----------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
Average Average Average
Balance Rate Balance Rate Balance Rate
------- ------- ------- ------- ------- -------
(dollars in thousands)
Note payable(1)............... $18,000 8.13% $17,000 7.38% $14,050 8.25%
Federal Home Loan Bank
advances..................... 63,421 5.79 7,595 5.68 6,000 5.96
Federal funds purchased....... 2,965 5.22 0 0.00 0 0.00
------- ------- -------
Total....................... $84,386 6.27% $24,595 6.83% $20,050 7.56%
======= ==== ======= ==== ======= ====
- --------
(1) The notes payable balance at December 31, 1999 consists of advances on a
$20,000,000 revolving line of credit. The line has a variable interest rate
which currently is three-eights of a percent below the lender's prime rate.
Interest is payable quarterly and the line is due June 30, 2000.
The maximum amount of borrowed funds outstanding at any month end for the
years ended December 31, 1999, 1998 and 1997 were as follows:
1999 1998 1997
------- ------- -------
(in thousands)
Note payable........................................... $19,860 $17,000 $14,050
Federal Home Loan Bank advances........................ 65,410 12,299 6,000
Federal funds purchased................................ 8,665 3,775 2,150
======= ======= =======
The following table sets forth the average amount of and the average rate
paid on borrowed funds for the years ended December 31, 1999, 1998 and 1997.
Year ended December 31,
-----------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ------- ------- ------- ------- -------
(dollars in thousands)
Note payable.................. $16,621 7.70% $13,342 8.05% $ 9,292 8.23%
Federal Home Loan Bank
advances..................... 21,522 5.98 6,840 5.92 2,274 6.07
Federal funds purchased....... 1,683 5.56 201 5.87 534 5.93
------- ------- -------
Total....................... $39,826 6.68% $20,383 7.31% $12,100 7.72%
======= ==== ======= ==== ======= ====
16
ITEM 2. PROPERTIES
The Company's headquarters are located at 222 First Avenue East, Oskaloosa,
Iowa. This building is a two-story combination office and motor bank and was
constructed in 1975. The Company's offices are located on the second floor and
MSB leases the first floor and the basement from the Company. The ground floor
houses MSB's data processing department and motor bank operation which includes
four drive-up lanes and two walk-up windows. The basement contains a meeting
room, kitchen, and storage. The bank's lease runs through the year 2005.
The principal offices of Mahaska State Bank are located at 124 South First
Street, Oskaloosa, Iowa, in a two-story building owned by the bank which
contains a full banking facility. The bank also owns a second building in
Oskaloosa located at 301 A Avenue West. This one-story, full-banking facility,
including two drive-up lanes, is located five blocks northwest of the bank's
principal offices. In addition, the bank owns a 24-hour automatic teller
machine located at 211 South First Street, Oskaloosa, Iowa. The bank also has a
branch office located in North English, Iowa which is 40 miles northeast of
Oskaloosa. The branch is a one-story building with a full banking facility,
including two drive-up lanes and a 24-hour automatic teller machine.
Central Valley Bank owns three facilities in the communities of Ottumwa,
Fairfield, and Sigourney, Iowa. The Ottumwa building is a single-story brick
structure constructed in 1981. The approximately 4,200 square foot building has
several offices and a potential for three drive-up lanes, with two presently in
operation. The building is located at 116 West Main in Ottumwa's downtown
business district. The Fairfield facility is a two-story building located at 58
East Burlington on the southeast corner of the downtown square. The building's
three floors have 8,932 total square feet, which is all utilized by CVB. The
Sigourney facility located at 112 North Main Street is one-half block northwest
of the community's courthouse square in the downtown business district. The
4,596 square foot one-story masonry building was constructed in 1972 as a
banking facility with one drive-up window.
CVB leases its "In-Store" branch facility in Fairfield. The branch is
located in an Econofoods grocery store and occupies approximately 400 square
feet of the store. The lease agreement expires in October, 2000 and may be
renewed for two additional terms of five years each. Management of CVB is
currently re-evaluating the future of this branch facility.
Pella State Bank owns its facility at 500 Oskaloosa Street in Pella, Iowa.
The facility is located approximately six blocks south of the community's main
business district on a heavily-traveled thoroughfare that connects the main
business district with retail stores located in a developing area on the east
side of the city. The one-time restaurant building was acquired in the summer
of 1997 and was completely renovated to become a modern banking facility. The
facility contains approximately 1,860 square feet of usable space and has two
drive-up teller lanes. PSB is currently negotiating a lease arrangement whereby
it would move its main office into a new facility presently under construction
in Pella's main business district. The current facility would be maintained as
a branch location. It is anticipated that the move would take place early in
the year 2001.
Midwest Federal Savings owns its main office in Burlington, Iowa and three
of its branch office facilities. The main office located at 3225 Division
Street, on the western side of the community, is adjacent to one of the major
highways through Burlington. It is a one-story facility of approximately 10,300
square feet, constructed in 1974, with four drive-up lanes and one ATM. MFS
also owns a branch facility located in Burlington's main downtown business
district at 323 Jefferson Street. This facility is approximately 2,400 square
feet and was the main office until 1974. The branch located in Fort Madison,
Iowa at 926 Avenue G was acquired in 1975, has one drive-up window, and
contains approximately 3,300 square feet on one level. The 960 square foot
Wapello, Iowa branch is located on Highway 61 and was acquired in 1974. MFS
leases a 540 square foot branch facility located in the Wal-Mart Super Center
at 324 W. Agency Road in West Burlington. The branch was opened in 1997 under
an initial lease term of 5 years, with a 5 year option to extend.
17
ITEM 3. LEGAL PROCEEDINGS
Mahaska Investment Company and its subsidiaries are involved in various
claims and legal actions arising in the ordinary course of business. In the
opinion of management, the ultimate disposition of these matters will not have
a material adverse effect on the Company's financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information appearing on page 8 of the Company's Annual Report, filed as
Exhibit 13 hereto, is incorporated herein by reference.
There were approximately 469 holders of record of the Company's $5 common
stock as of March 8, 2000. Additionally, there are an estimated 750 beneficial
holders whose stock was held in street name by brokerage houses as of that
date. The closing price of the Company's common stock was $8.5625 on March 27,
2000.
The Company increased dividends to common shareholders in 1999 to $.60 per
share, a 7.1 percent increase over $.56 for 1998. Dividend declarations are
evaluated and determined by the Board of Directors on a quarterly basis. In
February 2000, the Board of Directors declared a dividend of $.15 per common
share. The Company's loan agreement requires that the Company does not pay any
dividends in excess of forty percent of net income without the lenders'
permission. Except for certain regulatory restrictions that may affect dividend
payments, there are no other restrictions on the Company's present or future
ability to pay dividends.
ITEM 6. SELECTED FINANCIAL DATA
The information appearing on page 4 of the Company's Annual Report, filed as
Exhibit 13 hereto, is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information appearing on pages A-1 through A-10 of the Appendix to the
Company's definitive proxy Statement, is incorporated herein by reference.
ITEM 7A. MARKET RISK DISCLOSURE
The information appearing on pages A-8 and A-9 of the Appendix to the
Company's definitive proxy statement, is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information appearing on pages A-11 through A-33 of the Appendix to the
Company's definitive proxy statement, is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Within the twenty-four months prior to the date of the most recent financial
statements, there have been no changes in or disagreements with accountants of
the Company.
19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The definitive proxy statement of Mahaska Investment Company is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The definitive proxy statement of Mahaska Investment Company is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The definitive proxy statement of Mahaska Investment Company is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The definitive proxy statement of Mahaska Investment Company is incorporated
herein by reference.
20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following exhibits and financial statement schedules are filed as part
of this report:
(a)1. Financial Statements: See the financial statements on pages A-11
through A-33 of the Appendix to the Company's definitive proxy statement, which
are incorporated by reference herein.
2. Exhibits (not covered by independent auditors' report).
Exhibit Description
------- -----------
3.1 Articles of Incorporation, as amended through April 30, 1998, of
Mahaska Investment Company. The Articles of Incorporation, as amended,
of Mahaska Investment Company are incorporated by reference to the
Company's quarterly report on Form 10-Q for the quarter ended
September 30, 1998.
3.2 Bylaws of Mahaska Investment Company. The Amended and Restated Bylaws
of Mahaska Investment Company dated July 23, 1998, are incorporated by
reference to the Company's quarterly report on Form 10-Q for the
Quarter ended September 30, 1998.
10.1 Mahaska Investment Company Employee Stock Ownership Plan & Trust as
restated and amended. This Plan & Trust is incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994.
10.2.1 1993 Stock Incentive Plan. This 1993 Stock Incentive Plan is
incorporated by reference to Form S-1 Registration Number 33-81922 of
Mahaska Investment Company.
10.2.2 1996 Stock Incentive Plan. This 1996 Stock Incentive Plan is
incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
10.2.3 1998 Stock Incentive Plan. This 1998 Stock Incentive Plan is
incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
10.3.1 Midstates Resources Corp. Loan Participation and Servicing Agreement
dated December 9, 1992 between Midstates Resources Corp., Mahaska
Investment Company and Mahaska State Bank. This Midstates Resources
Corp. Agreement is incorporated by Reference to Form S-1 Registration
Number 33-81922 of Mahaska Investment Company.
10.3.2 Central States Resources Corp. Liquidation Agreement dated April 18,
1988 between Central States Resources Corp., Mahaska State Bank,
National Bank & Trust Co., and Randal Vardaman. This Central States
Resources Corp. Agreement is incorporated by reference to Form S-1
Registration Number 33-81922 of Mahaska Investment Company.
10.3.3 All States Resources Corp. Loan Participation and Servicing Agreement
dated September 13, 1993 between All States Resources Corp., Mahaska
Investment Company and West Gate Bank. This All States Resources Corp.
Agreement is incorporated by reference to Form S-1 Registration Number
33-81922 of Mahaska Investment Company.
10.3.4 States Resources Corp. Loan Participation and Servicing Agreement
dated February 5, 1999 between States Resources Corp. and Mahaska
Investment Company.
10.5.1 Revolving Loan Agreement dated January 31, 1996 between Mahaska
Investment Company and Harris Trust and Savings Bank. This Loan
Agreement is incorporated herein by reference to the Form 8-K report
filed by Mahaska Investment Company on February 29, 1996.
10.5.2 Sixth Amendment and Waiver to Credit Agreement between Mahaska
Investment Company and Harris Trust & Savings Bank dated June 30,
1999. This Amendment and Waiver to the Credit Agreement is
incorporated herein by reference to the Form 10-Q report filed by
Mahaska Investment Company for the Quarter ended September 30, 1999.
21
Exhibit Description
------- -----------
10.6 Agreement and Plan of Merger By and Between Mahaska Investment Company
and Midwest Bancshares, Inc. dated February 2, 1999. This agreement
and plan of merger is incorporated herein by reference to Amendment
No. 1 to the Form S-4 Registration number 333-79291 filed by Mahaska
Investment Company on August 17, 1999.
11 Computation of Per Share Earnings
13 The Annual Report to Shareholders of Mahaska Investment Company for
the 1999 calendar year.
21 Subsidiaries
23 Consent of Auditor
The Company will furnish to any shareholder upon request and upon payment of
a fee of $.50 per page, a copy of any exhibit. Requests for copies should be
directed to Karen K. Baack, Secretary/Treasurer, Mahaska Investment Company,
P.O. Box 1104, Oskaloosa, Iowa 52577-1104.
(b) Reports on Form 8-K: No reports on Form 8-K were required to be filed
during the last quarter of 1999.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Mahaska Investment Company
(Registrant)
/s/ Charles S. Howard
By: _________________________________
Charles S. Howard
Chairman, President, Chief
Executive Officer and Director
March 28, 2000
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Charles S. Howard Director, Chairman of the March 28, 2000
______________________________________ Board, President and
Charles S. Howard Chief Executive Officer
/s/ David A. Meinert Director, Executive Vice March 28, 2000
______________________________________ President and Chief
David A. Meinert Financial Officer
(Principal Accounting
Officer)
/s/ Martin L. Bernstein Director March 28, 2000
______________________________________
Martin L. Bernstein
/s/ Richard R. Donahue Director March 28, 2000
______________________________________
Richard R. Donahue
/s/ William D. Hassel Director March 28, 2000
______________________________________
William D. Hassel
______________________________________ (resigned as a director
R. Spencer Howard effective February 29,
2000)
______________________________________ (incapacitated due to
James F. Mathew illness)
/s/ John P. Pothoven Director March 28, 2000
______________________________________
John P. Pothoven
/s/ John W. N. Steddom Director March 28, 2000
______________________________________
John W. N. Steddom
23