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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 Commission file number 0-24630
December 31, 2000
MAHASKA INVESTMENT COMPANY
Incorporated in Iowa I.R.S. Employer Identification No. 42-1003699
222 First Avenue East, Oskaloosa, Iowa 52577
Registrant's telephone number, including area code: 641-673-8448
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
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 8, 2001, was $39,039,881.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the most recent practicable date, March 8, 2001.
3,971,168 shares Common Stock, $5 par value
DOCUMENTS INCORPORATED BY REFERENCE
The Annual Report to Shareholders for the 2000 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 2001 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................................................................
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A. General Description..............................................3
B. Subsidiaries.....................................................3
C. Loan Pool Participations.........................................4
D. Competition......................................................8
E. Supervision and Regulation.......................................8
F. Employees........................................................11
G. Statistical Disclosure...........................................11
Item 2. Properties....................................................21
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Item 3. Legal Proceedings.............................................22
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Item 4. Submission of Matters to a Vote of Security Holders...........22
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PART II
Item 5. Market for the Registrant's Common Equity and Related
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Stockholder Matters...........................................22
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Item 6. Selected Financial Data.......................................22
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Item 7. Management's Discussion and Analysis of Financial Condition
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and Results of Operations.....................................22
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Item 7a. Market Risk Disclosure........................................22
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Item 8. Financial Statements and Supplementary Data...................22
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Item 9. Changes in and Disagreements with Accountants on Accounting
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and Financial Disclosure.....................................23
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PART III
Item 10. Directors and Executive Officers of the Registrant............23
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Item 11. Executive Compensation........................................23
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Item 12. Security Ownership of Certain Beneficial Owners and
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Management....................................................23
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Item 13. Certain Relationships and Related Transactions................23
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PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
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Form 8-K......................................................23
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PART I
Item 1. Business
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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 MIC Financial, Inc. ("MIC Financial").
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. MIC
Financial has provided factoring, equipment leasing and accounts receivable
financing to small business clients. The Company is no longer offering these
services and is in the process of collecting the remaining assets of MIC
Financial.
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") 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 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 that 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,
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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 bank relocated its main office to a leased facility in
downtown Pella early in 2001 and maintains a branch office on the south side of
the community that 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.
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 that 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.
MIC Financial, Inc. - MIC Financial is an Iowa corporation that 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. Effective March 21,
2000, the name was changed to MIC Financial, Inc. In April 1999, the Company's
Board of Directors determined that it would discontinue the activities of MIC
Financial and subsequently sold, collected, or charged-off a substantial portion
of the entities' assets. Management continues to evaluate the options and/or
alternatives related to the remaining assets of the company. MIC Financial
originated and serviced machinery and equipment leases to small businesses and
farmers and also provided 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 a separate independent
servicing corporation (referred to as the "Servicer") known as States Resources
Corporation. During 2000, the three other loan servicing corporations that the
Company previously held loan pool participations from were phased out of
existence. The Company does not have any ownership interest in or control over
States Resources Corporation or any of the former servicing corporations. States
Resources Corporation was founded in 1998 and is owned by Randal Vardaman and
other individuals. Mr. Vardaman has been engaged in credit analysis and loan
portfolio management in various positions since 1970. Prior to the formation of
the first servicing corporation in 1988, 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 acting as receiver of
failed banks and savings and loan institutions, and by other large nonaffiliated
banking organizations. The loans
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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 and its predecessor organizations has bid on loan pools from
various regional offices of the FDIC and from other sources since 1988. 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.
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 that 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. Some may
contain a mixture of such loans and other types of loans. Most of the pools the
Company is currently investing in are comprised primarily of performing loans
while others may contain a number of past-due nonperforming 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 88
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
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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 loan
represents loan principal collected in excess of the price originally paid to
acquire the loan from the FDIC 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
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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. 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.
Beginning in 1998, all purchases of loan pools were made by the servicing
organization called States Resources Corporation. This corporation 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, 2000 and 1999, such cost
basis was $74,755,000 and $67,756,000, respectively, while the contractual
outstanding principal amounts of the underlying loans as of such dates were
approximately $87,648,000 and $95,707,000, 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 participations 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
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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 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, 2000, 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
Corporation, Firstar Corporation, and Commercial Federal Bank, FSB. As a result
of 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
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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.
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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 asset totals. As savings 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, 2000, 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.
Page 11 of 32
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, 2000, the Company had 147 full-time employees and 28 part-
time employees of which 56 full-time and 14 part-time employees were employed by
MSB, 27 full-time and 8 part-time employees were employed by CVB, 10 full-time
and 3 part-time employees were employed by PSB, 41 full-time and 3 part-time
employed by MFS, and 13 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.
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.
Page 12 of 32
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, 2000, 1999 and 1998 reported on a
fully tax-equivalent basis assuming a 34% tax rate.
Year ended December 31,
--------------------------------------------------------------------------------------
2000 1999
-------------------------------------- ----------------------------------------
Interest Interest
Income Average Income Average
Average (2)/ Rate/ Average (2)/ Rate/
Balance Expense Yield Balance Expense Yield
-------- -------- --------- -------- ----------- ---------
(dollars in thousands)
Average earning assets:
Loans (1)........................... $ 302,153 $ 25,298 8.37 % $ 202,733 $ 17,577 8.67 %
Loan pool participations............ 61,553 7,275 11.82 59,564 7,668 12.87
Interest-bearing deposits........... 2,206 116 5.23 1,868 82 4.37
Investment securities
available for sale:
Taxable investments.............. 55,942 3,786 6.77 34,617 2,094 6.05
Tax exempt investments........... 7,171 600 8.37 2,249 182 8.11
Investment securities
held to maturity:
Taxable investments.............. 19,918 1,423 7.14 10,639 696 6.54
Tax exempt investments........... 8,007 557 6.96 7,595 505 6.65
Federal funds sold.................. 2,748 164 5.98 5,368 260 4.86
--------- -------- --------- --------
Total earning assets............. $ 459,698 $ 39,219 8.53 $ 324,633 $ 29,064 8.95
========= ======== ========= ========
Average interest-bearing
liabilities:
Interest-bearing demand
deposits......................... $ 43,861 $ 782 1.78 $ 35,477 $ 637 1.80
Savings deposits.................... 92,656 3,779 4.08 74,609 2,837 3.80
Certificates of deposit............. 194,225 10,788 5.55 132,656 7,060 5.32
Federal funds purchased............. 3,181 191 6.00 1,68 94 5.56
Federal Home Loan Bank
advances......................... 67,873 4,494 6.61 21,522 1,287 5.98
Notes payable....................... 15,473 1,403 9.07 16,621 1,280 7.70
--------- -------- --------- --------
Total interest-bearing
liabilities................... $ 417,269 $ 21,437 5.14 $ 282,568 $ 13,195 4.67
========= ======== ========= ========
Net interest income.................... $ 17,782 3.40 $ 15,869 4.28
======== ========
Net interest margin (3)................ 3.87 % 4.89 %
===== =====
Year ended December 31,
-------------------------------------------
1998
-------------------------------------------
Interest
Income Average
Average (2)/ Rate/
Balance Expense Yield
--------- ----------- --------
(dollars in thousands)
Average earning assets:
Loans (1)........................... $157,712 $ 15,026 9.53 %
Loan pool participations............ 49,805 7,970 16.00
Interest-bearing deposits........... 2,359 122 5.20
Investment securities
available for sale:
Taxable investments.............. 25,730 1,617 6.28
Tax exempt investments........... 0 0 0
Investment securities
held to maturity:
Taxable investments.............. 9,821 569 5.80
Tax exempt investments........... 7,265 491 6.75
Federal funds sold.................. 6,465 338 5.24
--------- --------
Total earning assets............. $ 259,157 $ 26,133 10.08
========= ========
Average interest-bearing
liabilities:
Interest-bearing demand
deposits......................... $ 33,248 $ 656 1.97
Savings deposits.................... 59,419 2,241 3.77
Certificates of deposit............. 107,284 6,102 5.69
Federal funds purchased............. 201 12 5.87
Federal Home Loan Bank
advances......................... 6,840 405 5.92
Notes payable....................... 13,342 1,074 8.05
--------- --------
Total interest-bearing
liabilities................... $ 220,334 $ 10,490 4.76
========= ========
Net interest income.................... $ 15,643 5.32
========
Net interest margin (3)................ 6.04 %
=====
(1) Average loans outstanding includes the daily average balance of non-
performing loans. Interest on these loans does not include additional interest
of $418,000, $258,000, and $109,000 for 2000, 1999 and 1998, 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.
Page 13 of 32
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,
-------------------------------------------------------------------------
2000 Compared to 1999 1999 Compared to 1998
Increase/ (Decrease) Due to Increase/ (Decrease) Due to
---------------------------------- -----------------------------------
Volume Rate Net Volume Rate Net
-------- -------- -------- -------- -------- --------
(in thousands)
Interest income from average-earning
assets:
Loans................................................. $8,343 $(622) $ 7,721 $3,996 $(1,445) $ 2,551
Loan pool participations (1).......................... 250 (643) (393) 1,409 (1,711) (302)
Interest-bearing deposits............................. 16 18 34 (23) (17) (40)
Investment securities available for sale:
Taxable investments................................. 1,418 274 1,692 540 (63) 477
Tax exempt investments.............................. 412 6 418 91 91 182
Investment securities held to maturity:
Taxable investments................................. 658 69 727 50 77 127
Tax exempt investments.............................. 28 24 52 22 (8) 14
Federal funds sold.................................... (147) 51 (96) (55) (23) (78)
------- -------- -------- -------- -------- --------
Total income from earning assets..................... 10,978 (823) 10,155 6,030 (3,099) 2,931
------- -------- -------- -------- -------- --------
Average expense of average
interest-bearing liabilities:
Interest-bearing demand deposits...................... 149 (4) 145 42 (61) (19)
Savings deposits...................................... 725 217 942 578 18 596
Certificates of deposit............................... 3,408 320 3,728 1,370 (412) 958
Federal funds purchased............................... 89 8 97 83 (1) 82
Federal Home Loan Bank advances....................... 3,049 148 3,197 878 4 882
Notes payable......................................... (93) 216 123 254 (48) 206
------- -------- -------- -------- -------- --------
Total expense form interest-bearing
liabilities....................................... 7,327 905 8,232 3,205 (500) 2,705
------- -------- -------- -------- -------- --------
Net interest income..................................... $3,651 $(1,728) $ 1,923 $2,825 $(2,599) $ 226
======= ======= ======== ======= ======== ========
(1) Includes interest income and discount realized on loan pool participations.
Page 14 of 32
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, 2000, 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........................................................... $ 43,814 $ 57,573 $ 54,375 $ 156,319 $ 312,081
Loan pool participations........................................ 6,230 18,689 49,836 0 74,755
Interest-bearing deposits in banks.............................. 3,818 0 0 0 3,818
Investment securities:
Available for sale........................................... 5,092 5,781 10,405 39,480 60,758
Held to maturity............................................. 194 1,447 8,310 15,970 25,921
Federal funds sold.............................................. 1,155 0 0 0 1,155
--------- -------- -------- -------- -------
Total interest earning assets................................ 60,303 83,490 122,926 211,769 478,488
--------- -------- -------- -------- -------
Interest-bearing liabilities:
Now accounts.................................................... 43,380 0 0 0 43,380
Savings deposits................................................ 88,378 0 0 0 88,378
Certificates of deposit......................................... 37,277 102,333 64,890 7,855 212,355
Federal funds purchased......................................... 2,345 0 0 0 2,345
Federal Home Loan Bank advances................................. 9,426 18,838 25,769 21,017 75,050
Notes payable................................................... 5,150 900 4,050 3,100 13,200
---------- --------- --------- -------- -------
Total interest-bearing liabilities........................... 185,956 122,071 94,709 31,972 434,708
---------- --------- --------- --------- --------
Interest sensitivity gap per period................................ $(125,653) $(38,581) $ 28,217 $179,797
========= ======== ====== ========
Cumulative Interest sensitivity gap................................ $(125,653) $(164,234) $(136,017) $ 43,780
========= ========= ========= ========
Interest sensitivity gap ratio..................................... 0.32% 0.68% 1.30% 6.62%
Cumulative Interest sensitivity gap ratio.......................... 0.32% 0.47% 0.66% 1.10%
In the table above, NOW accounts 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.
Page 15 of 32
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, 2000, 1999 and
1998.
December 31,
------------------------------
2000 1999 1998
-------- -------- --------
(in thousands)
Securities available for sale:
U.S. government securities.................... $ 1,005 $ 5,021 $ 4,603
U.S. government agency securities............. 35,656 35,302 16,408
Obligations of states and political
subdivisions............................... 6,669 7,780 0
Other investment securities................... 17,428 12,427 8,644
-------- -------- --------
Total securities available for sale........ 60,758 60,530 29,655
-------- -------- --------
Securities held to maturity:
U.S. government agency securities............. 16,263 19,685 1,290
Obligations of states and political
subdivisions............................... 8,968 7,573 8,291
Other investment securities................... 690 2,187 4,098
-------- -------- --------
Total securities held to maturity.......... 25,921 29,445 13,679
-------- -------- --------
Total investment securities...................... $86,679 $89,975 $43,334
======== ======== ========
The following table sets forth the contractual maturities of investment
securities as of December 31, 2000, 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, 2000, 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.......................... $ 1,005 6.72% $ 0 0.00% $ 0 0.00% $ 0 0.00%
U.S. government agency securities................... 2,991 5.98 19,334 5.96 2,138 6.39 11,193 7.47
Obligations of states and political subdivisions.... 0 0.00 1,698 6.66 1,869 7.44 3,102 7.37
Other investment securities......................... 2,535 5.52 10,025 7.13 0 0.00 4,868 6.32
------- ------- ------ -------
Total securities available for sale ............. 6,531 6.00 31,057 6.38 4,007 6.88 19,163 7.16
------- ------- ------ -------
Securities held to maturity:
U.S. government agency securities................... 311 7.02 3,300 6.54 351 7.70 12,301 6.53
Obligations of states and political subdivisions.... 845 6.40 5,188 6.52 1,225 8.30 1,710 7.85
Other investment securities......................... 491 6.00 99 7.26 100 7.15 0 0.00
------- ------- ------ -------
Total securities held to maturity................ 1,647 6.40 8,587 6.54 1,676 8.11 14,011 6.69
------- ------- ------ -------
Total investment securities............................ $ 8,178 6.01% $39,644 6.41% $5,683 7.24% $33,174 6.96%
======= ======= ====== =======
Page 16 of 32
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, 2000, 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,
------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------- ---------------- ---------------- ---------------- ---------------
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
---------------- ---------------- ---------------- ---------------- ---------------
(dollars in thousands)
Agricultural.................... $ 45,404 14.5 % $ 42,022 14.9 % $ 27,504 16.6 % $ 24,779 17.2 % $ 19,940 17.0 %
Commercial...................... 39,081 12.5 38,238 13.6 38,959 23.6 31,198 21.6 23,613 20.1
Real estate:
1-4 family residences.......... 139,098 44.6 131,925 46.7 38,067 23.0 32,341 22.4 27,274 23.3
5+ residential property........ 3,675 1.2 4,064 1.4 240 0.1 251 0.2 261 0.2
Agricultural................... 23,855 7.6 21,677 7.7 21,297 12.9 19,647 13.6 16,952 14.4
Construction................... 10,007 3.2 5,593 2.0 5,956 3.6 4,430 3.1 4,017 3.4
Commercial..................... 30,239 9.7 23,613 8.4 17,007 10.3 15,634 10.8 11,895 10.1
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Real estate total............. 206,874 66.3 186,872 66.2 82,587 49.9 72,303 50.1 60,399 51.4
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Installment..................... 20,196 6.5 13,866 4.9 12,647 7.8 13,268 9.2 11,522 9.8
Lease financing................. 526 0.2 1,093 0.4 3,530 2.1 2,785 1.9 1,942 1.7
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans (1).............. $312,081 100.0 % $282,091 100.0 % $165,427 100.0 % $144,333 100.0 % $117,416 100.0 %
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Total assets.................... $515,212 $486,189 $298,389 $274,873 $251,851
======= ======= ======= ======= =======
Loans to total assets........... 60.6 % 58.0 % 55.4 % 52.5 % 46.6 %
(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, 2000.
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
----------- ------------ ----------- ------- -------- ---------
(In thousands)
Agricultural.................. $ 37,234 $ 6,250 $ 1,920 $ 45,404 $ 7,315 $ 855
Commercial.................... 24,441 12,906 1,734 39,081 13,192 1,448
Real estate - construction.... 7,199 2,808 0 10,007 2,746 62
---------- ----------- ---------- ------- ------- --------
Total........................ $ 68,874 $ 21,964 $ 3,654 $ 94,492 $ 23,253 $ 2,365
========== =========== ========== ======= ======= ========
The following table provides information on the Company's non-performing loans
as of the dates indicated.
December 31,
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(dollars in thousands)
90 days past due.............................. $ 910 $ 1,426 $ 663 $ 522 $ 625
Restructured.................................. 0 515 164 387 380
Nonaccrual.................................... 2,042 2,874 561 927 1,085
------- --------- -------- ------- --------
Total non-performing loans................... $ 2,952 $ 4,815 $ 1,388 $ 1,836 $ 2,090
======= ========= ======== ======= ========
Ratio of nonperforming loans to total loans... 0.95 % 1.71 % 0.84 % 1.27 % 1.78 %
Page 17 of 32
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, 2000, 1999, 1998, 1997 and 1996.
Year ended December 31,
-------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(dollars in thousands)
Amount of loans outstanding at end of period
(net of unearned interest) (1).......................... $ 312,081 $ 282,091 $ 165,427 $ 144,333 $ 117,416
========= ========= ========= ========= =========
Average amount of loans outstanding for the
period (net of unearned interest)....................... $ 302,153 $ 202,733 $ 157,712 $ 131,081 $ 105,372
========= ========= ========= ========= =========
Allowance for loan losses at
beginning of period..................................... $ 4,006 $ 2,177 $ 1,816 $ 1,491 $ 1,001
--------- --------- --------- --------- ---------
Charge-offs:
Agricultural........................................... 695 303 135 19 41
Commercial............................................. 1,125 1,724 638 14 10
Real estate - construction............................. 0 0 0 0 0
Real estate - mortgage................................. 131 229 0 30 0
Installment............................................ 92 56 63 63 38
Lease financing........................................ 143 63 4 11 616
--------- --------- --------- --------- ---------
Total charge-offs.................................... 2,186 2,375 840 137 705
--------- --------- --------- --------- ---------
Recoveries:
Agricultural........................................... 0 26 1 11 6
Commercial............................................. 182 2 8 18 1
Real estate - construction............................. 0 0 0 0 0
Real estate - mortgage................................. 1 6 0 1 0
Installment............................................ 22 12 13 15 8
Lease financing........................................ 16 14 0 0 23
--------- --------- --------- --------- ---------
Total recoveries..................................... 221 60 22 45 38
--------- --------- --------- --------- ---------
Net loans charged off.................................... 1,965 2,315 818 92 667
Provision for loan losses................................ 892 3,628 1,179 417 987
Allowance at date of acquisition......................... 0 516 0 0 170
--------- --------- --------- --------- ---------
Allowance for loan losses at
end of period.......................................... $ 2,933 $ 4,006 $ 2,177 $ 1,816 $ 1,491
========= ========= ========= ========= =========
Net loans charged off to average loans................... 0.65 % 1.14 % 0.52 % 0.07 % 0.63 %
Allowance for loan losses to
total loans at end of period........................... 0.94 % 1.42 % 1.32 % 1.26 % 1.27 %
(1) Loans do not include, and the allowance for loan losses does not include any
reserve for investments in loan pool participations.
The Company has allocated the allowance for loan losses to provide for 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,
----------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------------- -------------------- -------------------- -------------------- --------------------
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 thousand)
Agricultural..... $ 593 14.5 % $ 597 14.9 % $ 361 17.2 % $ 310 17.2 % $ 254 17.0 %
Commercial....... 791 12.5 545 13.6 514 21.6 392 21.6 300 20.1
Real estate -
mortgage....... 1,329 66.3 2,652 66.2 1,086 50.1 912 50.1 766 51.4
Installment...... 194 6.5 196 4.9 170 9.2 167 9.2 146 9.8
Lease financing.. 26 0.2 16 0.4 46 1.9 35 1.9 25 1.7
--------- ---------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Total........ $ 2,933 100.0 % $ 4,006 100.0 % $ 2,177 100.0 % $ 1,816 100.0 % $ 1,491 100.0 %
========= ========== ========= ========== ========= ========== ========= ========== ========= ==========
Page 18 of 32
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, 2000, 1999 and
1998.
Year ended December 31,
------------------------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- ------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
--------- --------- --------- --------- --------- ----------
(dollars in thousands)
Non-interest bearing demand deposits ............. $ 22,886 N/A $ 21,052 N/A $ 19,159 N/A
Interest-bearing demand (NOW and money market) ... 43,861 1.78 % 35,477 1.80 % 33,248 1.97 %
Savings deposits ................................. 92,656 4.08 74,609 3.80 59,419 3.77
Certificates of deposit .......................... 194,225 5.55 132,656 5.32 107,284 5.69
-------- -------- ---------
Total deposits ................................. $353,628 4.34 % $263,794 3.99 % $ 219,110 4.11 %
======== ======= ======== ======== ========= ==========
The following table summarizes certificates of deposit in amounts of $100,000 or
more by time remaining until maturity as of December 31, 2000. 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,
2000
--------------
(in thousands)
Three months or less ........................................... $ 10,432
Over three through six months .................................. 7,835
Over six months through one year ............................... 8,131
Over one year .................................................. 6,914
---------
Total ......................................................... $ 33,312
=========
Page 19 of 32
VI. Return on Equity and Assets
Various operating and Equity Ratios for the years indicated are presented below:
Year ended December 31,
--------------------------------------------
2000 1999 1998
-------- --------- --------
Return on average total assets .................. 0.81 % 0.64 % 1.65 %
Return on average equity ........................ 8.18 5.29 12.16
Dividend payout ratio ........................... 60.61 103.45 44.44
Average equity to average assets ................ 9.90 12.04 13.54
Equity to assets ratio (at period end) .......... 9.57 10.33 12.81
======== ======== ========
Page 20 of 32
VII. Borrowed Funds
The following table summaries the outstanding amount of and the average rate on
borrowed funds as of December 31, 2000, 1999 and 1998.
December 31,
------------------------------------------------------------------------------------
2000 1999 1998
------------------------ ------------------------- ------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
----------- ----------- ----------- ---------- ----------- ----------
(dollars in thousands)
Notes payable (1) ......................... $ 13,200 9.13 % $ 18,000 8.13 % $ 17,000 7.38 %
Federal Home Loan Bank advances ........... 75,050 6.27 63,421 5.79 7,595 5.68
Federal funds purchased ................... 2,345 6.72 2,965 5.22 0 0.00
----------- ----------- -----------
Total .................................... $ 90,595 6.70 % $ 84,386 6.27 % $ 24,595 6.83 %
=========== ========= =========== =========== =========== ==========
(1) The notes payable balance at December 31, 2000, consists of $5,150,000 in
advances on a revolving line of credit and $8,050,000 on a term note, both with
an unaffiliated bank. Both notes have a variable interest rate at three-eights
of a percent below the lender's prime rate. Interest is payable quarterly. The
revolving line of credit has a maximum limit of $9,000,000 and matures June 30,
2001. The term note calls for annual payments of $1,350,000 for the next three
years with a final payment of $4,000,000 due at maturity on December 31, 2004.
The maximum amount of borrowed funds outstanding at any month end for the years
ended December 31, 2000, 1999 and 1998 were as follows:
2000 1999 1998
-------------- -------------- --------------
(in thousands)
Notes payable ......................................................... $ 18,000 $ 19,860 $ 17,000
Federal Home Loan Bank advances ....................................... 75,050 65,410 12,299
Federal funds purchased ............................................... 8,460 8,665 3,775
============= ============== ==============
The following table sets forth the average amount of and the average rate paid
on borrowed funds for the years ended December 31, 2000, 1999 and 1998.
Year ended December 31,
------------------------------------------------------------------------------------
2000 1999 1998
------------------------ ------------------------- ------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
----------- ----------- ----------- ---------- ----------- ----------
(dollars in thousands)
Notes payable ............................. $ 15,473 9.07 % $ 16,621 7.70 % $ 13,342 8.05 %
Federal Home Loan Bank advances ........... 67,873 6.61 21,522 5.98 6,840 5.92
Federal funds purchased ................... 3,181 6.00 1,683 5.56 201 5.87
----------- ----------- -----------
Total .................................... $ 86,527 7.02 % $ 39,826 6.68 % $ 20,383 7.31 %
=========== ========= =========== =========== =========== ==========
Page 21 of 32
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. MSB'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 MSB that contains a
full banking facility. MSB 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, MSB owns a 24-hour automatic teller machine located at 211 South First
Street, Oskaloosa, Iowa. MSB also has a branch office located in North English,
Iowa that 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
8,932 square feet 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 currently 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 expired in October, 2000 and is
currently on a month-to-month basis pending completion of a new 3,500 square
foot branch facility. The new branch facility will replace the "In-Store" branch
when completed in late March or early April 2001. The existing downtown
Fairfield branch will remain open.
Pella State Bank's main office is a leased facility in Pella's downtown
business district that opened on January 29, 2001. The 5,700 square foot
facility is located in a newly-constructed retail/office complex and is leased
for a period of ten years with options to renew. PSB owns a branch facility at
500 Oskaloosa Street in Pella, Iowa. The facility is located approximately six
blocks south of the community's main business district. The building was
acquired in the summer of 1997 and was completely renovated to become a modern
banking facility containing approximately 1,860 square feet of usable space with
two drive-up teller lanes.
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
21
Page 22 of 32
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.
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.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
-----------------------------------------------------------------
Matters
- -------
The information appearing on page 18 of the Company's Annual Report, filed
as Exhibit 13 hereto, is incorporated herein by reference.
There were approximately 471 holders of record of the Company's $5 common
stock as of March 8, 2001. Additionally, there are an estimated 1,100 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 $10.375 on March 8, 2001.
The Company paid dividends to common shareholders in 2000 of $.60 per
share, which is the same amount paid in 1999. Dividend declarations are
evaluated and determined by the Board of Directors on a quarterly basis. In
February 2001, the Board of Directors declared a dividend of $.15 per common
share. The Company's loan agreement requires that the Company not pay any
dividends in excess of sixty 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 6 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-12 of the Appendix to the
Company's definitive proxy Statement, is incorporated herein by reference.
Item 7a. Market Risk Disclosure
----------------------
The information appearing on page 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-13 through A-37 of the Appendix to the
Company's definitive proxy statement, is incorporated herein by reference.
Page 23 of 32
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.
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 A-13
through A-37 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 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
Page 24 of 32
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.
Exhibit 10.3
- ------------
States Resources Corp. Loan Participation and Servicing Agreement dated February
5, 1999 between States Resources Corp. and Mahaska Investment Company. This
agreement is incorporated herein by reference to the Form 10-K report filed by
Mahaska Investment Company for the Year ended December 31, 1999.
Exhibit 10.5
- ------------
Amended and Restated Credit Agreement dated June 30, 2000 between Mahaska
Investment Company and Harris Trust and Savings Bank. This Amended and Restated
Credit Agreement is incorporated herein by reference to the Form 10-Q report
filed by Mahaska Investment Company for the Quarter ended September 30, 2000.
Exhibit 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.
Exhibit 11
- ----------
Computation of Per Share Earnings
Page 25 of 32
Exhibit 13
----------
The Annual Report to Shareholders of Mahaska Investment Company
for the 2000 calendar year.
Exhibit 21
----------
Subsidiaries
Exhibit 23
----------
Consent of Independent 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. Binns, 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 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Mahaska Investment Company
--------------------------
(Registrant)
By:/s/ Charles S. Howard
---------------------
Charles S. Howard
Chairman, President, Chief Executive Officer
and Director
March 29, 2001
--------------
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 29, 2001
-------------------------------------------------- ---------------
Charles S. Howard Date
Director, Chairman of the Board, President and
Chief Executive Officer
By: /s/ David A. Meinert March 29, 2001
-------------------------------------------------- ---------------
David A. Meinert Date
Director, Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
Page 26 of 32
By: /s/ Richard R. Donahue March 29, 2001
-------------------------------------------------- --------------
Richard R. Donahue Date
Director
By: /s/ William D. Hassel March 29, 2001
-------------------------------------------------- --------------
William D. Hassel Date
Director
By: /s/ John P. Pothoven March 29, 2001
-------------------------------------------------- ---------------
John P. Pothoven Date
Director
By: /s/ John W. N. Steddom March 29, 2001
-------------------------------------------------- ---------------
John W. N. Steddom Date
Director
By: /s/ James G. Wake March 29, 2001
------------------------------------------------- ---------------
James G. Wake Date
Director
By: /s/ Michael R. Welter March 29, 2001
------------------------------------------------- ---------------
Michael R. Welter Date
Director
By: /s/ Edward C. Whitham March 29, 2001
-------------------------------------------------- ---------------
Edward C. Whitham Date
Director