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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED COMMISSION FILE NUMBER
SEPTEMBER 30, 2002 0-24630
MAHASKA INVESTMENT COMPANY
(Exact Name of Registrant as Specified in its Charter)
IOWA 42-1003699
(State of Incorporation) (I.R.S. Employer Identification No.)
222 First Avenue East, Oskaloosa, Iowa 52577
Telephone Number (641) 673-8448
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
------ -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
------ -----
As of October 31, 2002, there were 3,920,490 shares of common stock $5 par value
outstanding.
PART I -- Item 1. Financial Statements
MAHASKA INVESTMENT COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(unaudited)
(dollars in thousands, except for share amounts)
September 30, December 31,
2002 2001
--------- ---------
ASSETS
Cash and due from banks .................................................. $ 11,820 $ 12,872
Interest-bearing deposits in banks ....................................... 2,608 2,965
Federal funds sold ....................................................... 6,350 --
--------- ---------
Cash and cash equivalents .......................................... 20,778 15,837
--------- ---------
Investment securities:
Available for sale ................................................. 78,330 50,206
Held to maturity (fair value of $17,373 as of September 30, 2002
and $22,034 as of December 31, 2001) .......................... 16,451 21,332
Loans .................................................................... 314,848 322,681
Allowance for loan losses ................................................ (3,964) (3,381)
--------- ---------
Net loans .......................................................... 310,884 319,300
--------- ---------
Loan pool participations ................................................. 85,042 110,393
Premises and equipment, net .............................................. 8,095 8,355
Accrued interest receivable .............................................. 4,720 4,540
Goodwill ................................................................. 5,667 5,667
Other intangible assets .................................................. 4,456 5,008
Other assets ............................................................. 6,364 5,157
--------- ---------
Total assets .................................................. $ 540,787 $ 545,795
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand ............................................................. $ 26,416 $ 26,961
NOW and Super NOW .................................................. 44,222 45,372
Savings ............................................................ 98,503 97,989
Certificates of deposit ............................................ 219,652 208,323
--------- ---------
Total deposits ................................................ 388,793 378,645
Federal funds purchased .................................................. -- 10,650
Federal Home Loan Bank advances .......................................... 79,764 91,174
Notes payable ............................................................ 2,350 9,200
Long-term debt ........................................................... 10,000 --
Other liabilities ........................................................ 5,108 5,299
--------- ---------
Total liabilities ............................................. 486,015 494,968
--------- ---------
Shareholders' equity:
Common stock, $5 par value; authorized 20,000,000 shares; issued
4,912,849 shares as of September 30, 2002 and December 31, 2001 24,564 24,564
Capital surplus .................................................... 12,889 13,033
Treasury stock at cost, 982,359 shares as of September 30, 2002,
and 1,040,255 shares as of December 31, 2001 .................. (11,909) (12,595)
Retained earnings .................................................. 27,504 25,082
Accumulated other comprehensive income ............................. 1,724 743
--------- ---------
Total shareholders' equity .................................... 54,772 50,827
--------- ---------
Total liabilities and shareholders' equity .................... $ 540,787 $ 545,795
========= =========
See accompanying notes to consolidated financial statements.
-2-
PART I -- Item 1. Financial Statements, Continued
MAHASKA INVESTMENT COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2002 2001 2002 2001
------- ------- ------- -------
Interest income:
Interest and fees on loans .................................................... $ 5,669 $ 6,271 $17,319 $19,042
Interest and discount on loan pool participations ............................. 2,450 2,829 7,804 6,979
Interest on bank deposits ..................................................... 6 13 17 48
Interest on federal funds sold ................................................ 16 57 67 219
Interest on investment securities:
Available for sale ....................................................... 891 741 2,446 2,866
Held to maturity ......................................................... 260 360 872 1,146
------- ------- ------- -------
Total interest income ................................................ 9,292 10,271 28,525 30,300
------- ------- ------- -------
Interest expense:
Interest on deposits:
NOW and Super NOW ........................................................ 64 130 210 441
Savings .................................................................. 467 733 1,451 2,411
Certificates of deposit .................................................. 2,363 2,945 7,161 9,202
Interest on federal funds purchased ........................................... 2 40 20 49
Interest on Federal Home Loan Bank advances ................................... 1,145 1,360 3,763 3,858
Interest on notes payable ..................................................... 24 194 245 683
Interest on long-term debt .................................................... 147 -- 153 --
------- ------- ------- -------
Total interest expense ..................................................... 4,212 5,402 13,003 16,644
------- ------- ------- -------
Net interest income ........................................................ 5,080 4,869 15,522 13,656
Provision for loan losses ........................................................... 245 1,006 781 1,507
------- ------- ------- -------
Net interest income after provision for loan losses .................. 4,835 3,863 14,741 12,149
------- ------- ------- -------
Noninterest income:
Service charges ............................................................... 564 541 1,636 1,554
Data processing income ........................................................ 56 48 173 156
Other operating income ........................................................ 388 188 1,033 667
Gains on sale of available for sale securities ................................ -- 579 -- 972
------- ------- ------- -------
Total noninterest income ............................................. 1,008 1,356 2,842 3,349
------- ------- ------- -------
Noninterest expense:
Salaries and employee benefits ................................................ 1,766 1,714 5,455 5,257
Net occupancy ................................................................. 585 555 1,689 1,612
Professional fees ............................................................. 199 205 533 826
Goodwill amortization ......................................................... -- 63 -- 189
Other intangible asset amortization ........................................... 184 199 552 599
Other operating expense ....................................................... 836 814 2,687 2,372
------- ------- ------- -------
Total noninterest expense ............................................ 3,570 3,550 10,916 10,855
------- ------- ------- -------
Income before income tax expense ..................................... 2,273 1,669 6,667 4,643
Income tax expense .................................................................. 801 582 2,376 1,585
------- ------- ------- -------
Net income ........................................................... $ 1,472 $ 1,087 $ 4,291 $ 3,058
======= ======= ======= =======
Earnings per common share - basic ................................................... $ 0.38 $ 0.27 $ 1.11 $ 0.77
Earnings per common share - diluted ................................................. $ 0.37 $ 0.27 $ 1.08 $ 0.77
Dividends per common share .......................................................... $ 0.16 $ 0.15 $ 0.48 $ 0.45
See accompanying notes to consolidated financial statements.
-3-
PART I -- Item 1. Financial Statements, Continued
MAHASKA INVESTMENT COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(in thousands)
September 30, September 30,
Three Months Ended Nine Months Ended
------------------ ------------------
2002 2001 2002 2001
------- ------- ------- -------
Net income .................................................... $ 1,472 $ 1,087 $ 4,291 $ 3,058
Other Comprehensive Income:
Unrealized gains on securities available for sale:
Unrealized holding gains arising during
the period, net of tax ............................... 723 440 981 1,258
Less: reclassification adjustment for net gains included
in net income, net of tax ............................ -- (362) -- (608)
------- ------- ------- -------
Other comprehensive income, net of tax ........................ 723 78 981 650
------- ------- ------- -------
Comprehensive income .......................................... $ 2,195 $ 1,165 $ 5,272 $ 3,708
======= ======= ======= =======
See accompanying notes to consolidated financial statements
-4-
PART I -- Item 1. Financial Statements, Continued
MAHASKA INVESTMENT COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
Nine Months Ended
September 30,
---------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net income ................................................ $ 4,291 $ 3,058
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .......................... 1,452 1,461
Provision for loan losses .............................. 781 1,507
Gain on sale of available for sale securities .......... (972)
Loss on sale of premises and equipment ................. 46 53
Amortization of investment securities and loans premiums 378 185
Accretion of investment securities and loan discounts .. (158) (220)
(Increase) decrease in other assets .................... (1,387) 544
(Decrease) increase in other liabilities ............... (772) 213
-------- --------
Net cash provided by operating activities .......... 4,631 5,829
-------- --------
Cash flows from investing activities:
Investment securities available for sale:
Proceeds from sales .................................... -- 35,806
Proceeds from maturities ............................... 6,751 6,513
Purchases .............................................. (33,571) (25,291)
Investment securities held to maturity:
Proceeds from maturities ............................... 5,189 4,583
Purchases .............................................. (244) (700)
Net decrease (increase) in loans .......................... 7,624 (10,353)
Purchases of loan pool participations ..................... (18,410) (77,703)
Resale of loan pool participations ........................ 4,356 25,870
Principal recovery on loan pool participations ............ 39,405 25,150
Purchases of premises and equipment ....................... (583) (2,145)
Proceeds from sale of premises and equipment .............. 26 3
-------- --------
Net cash provided by (used in) investing activities 10,543 (18,267)
-------- --------
Cash flows from financing activities:
Net increase in deposits .................................. 10,148 10,052
Net decrease in federal funds purchased ................... (10,650) (775)
Federal Home Loan Bank advances ........................... 1,000 27,500
Repayment of Federal Home Loan Bank advances .............. (12,554) (24,051)
Advances on notes payable ................................. 3,000 3,000
Principal payments on notes payable ....................... (9,850) (4,400)
Advances on long-term debt ................................ 10,000 --
Dividends paid ............................................ (1,869) (1,787)
Purchases of treasury stock ............................... (161) (547)
Proceeds from exercise of stock options ................... 703 314
-------- --------
Net cash (used in) provided by financing activities.. (10,233) 9,306
-------- --------
Net increase (decrease) in cash and cash equivalents. 4,941 (3,132)
Cash and cash equivalents at beginning of period .............. 15,837 15,517
-------- --------
Cash and cash equivalents at end of period .................... $ 20,778 $ 12,385
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ............................................... $ 10,168 $ 16,683
======== ========
Income taxes ........................................... $ 3,109 $ 1,133
======== ========
See accompanying notes to consolidated financial statements.
-5-
1. Basis of Presentation
The accompanying consolidated statements of income, the consolidated
statements of comprehensive income for the three months and the nine months
ended September 30, 2002 and 2001, the consolidated statements of cash flow
for the nine months ended September 30, 2002 and 2001 and the consolidated
statements of condition as of September 30, 2002 and December 31, 2001
include the accounts and transactions of the Company and its five
wholly-owned subsidiaries, Mahaska State Bank, Central Valley Bank, Pella
State Bank, Midwest Federal Savings and Loan, and MIC Financial, Inc. All
material intercompany balances and transactions have been eliminated in
consolidation.
The accompanying consolidated financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. Although
management believes that the disclosures are adequate to make the
information presented not misleading, it is suggested that these interim
consolidated financial statements be read in conjunction with the Company's
most recent audited financial statements and notes thereto. In the opinion
of management, the accompanying consolidated financial statements contain
all adjustments (consisting of only normal recurring accruals) necessary to
present fairly the financial position as of September 30, 2002 and December
31, 2001, and the results of operations for the three months and the nine
months ended September 30, 2002 and 2001, and cash flows for the nine
months ended September 30, 2002 and 2001.
The results for the three months and the nine months ended September 30,
2002 may not be indicative of results for the year ending December 31,
2002, or for any other period.
2. Consolidated Statements of Cash Flows
In the consolidated statements of cash flows, cash and cash equivalents
include cash and due from banks, interest-bearing deposits in banks, and
federal funds sold.
3. Income Taxes
Federal income tax expense for the three months and the nine months ended
September 30, 2002 and 2001 was computed using the consolidated effective
federal tax rate. The Company also recognized income tax expense pertaining
to state franchise taxes payable individually by the subsidiary banks.
4. Earnings Per Common Share
Basic earnings per common share computations are based on the weighted
average number of shares of common stock actually outstanding during the
period. The weighted average number of shares for the three-month periods
ended September 30, 2002 and 2001 was 3,895,825 and 3,965,326,
respectively. Weighted average shares outstanding for the nine-month
periods ended September 30, 2002 and 2001 was 3,880,085 and 3,963,377,
respectively. Diluted earnings per share amounts are computed by dividing
net income by the weighted average number of shares and all dilutive
potential shares outstanding during the period. The computation of diluted
earnings per share used a weighted average number of shares outstanding of
3,977,102 and 4,009,252 for the three months ended September 30, 2002 and
2001, respectively. For the nine-months ended September 30, 2002 and 2001,
diluted earnings per share was calculated using weighted average shares
outstanding of 3,958,864 and 3,996,971, respectively.
-6-
5. Effect of New Financial Accounting Standards
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities - An Amendment to FASB Statement No. 133," were adopted by the
Company beginning January 1, 2001. The adoption of the standards did not
have a material effect on the Company's consolidated financial statements.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities (a replacement of FASB Statement No.
125)," was issued in September 2000. The statement revises the standards
for accounting for securitizations and other transfers of financial assets
and collateral and requires certain disclosures, but it carries over most
of the provisions of Statement No. 125 without reconsideration. The
Statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The adoption
of the SFAS No. 140 did not have a material impact on the financial
condition or results of operation of the Company.
SFAS No. 141, "Business Combinations," was adopted by the Company on July
1, 2001. The statement requires that the purchase method of accounting be
used for all business combinations completed after June 30, 2001. The
adoption of this Statement did not have a material effect on the Company's
financial statements.
SFAS No. 142, "Goodwill and Other Intangible Assets," was adopted by the
Company on January 1, 2002. Statement No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of Statement No. 142. Statement No. 142 also requires that
intangible assets with estimable useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." The adoption of SFAS No. 142 reduced the Company's goodwill
amortization expense $63,000 in the third quarter of 2002 and $189,000 for
the first nine months of 2002 since the goodwill attributable to the
acquisition of Midwest Federal Savings is no longer being amortized. As of
January 1, 2002, the goodwill attributable to the Midwest Federal Savings
acquisition totaled $5,667,000. Goodwill in the amount of $3,684,000 as of
January 1, 2002 continues to be amortized under SFAS Statement No. 72,
"Accounting for Certain Acquisitions of Banking or Thrift Institutions."
Under the provisions of this Statement, the goodwill relating to the
acquisitions of the United Federal Savings branches in 1994 and the
acquisition of the Boatmen's Bank branch in 1996 is defined as
"unidentifiable intangible assets" and must continue to be amortized.
The table below reconciles the reported earnings for the three months ended
September 30, 2001 to "adjusted earnings," which exclude goodwill
amortization.
-7-
(unaudited)
(dollars in thousands, except per share amounts)
Three Months Ended
September 30,
-------------------------------------------------
2002 2001
-------- ------------------------------------
Reported Reported Goodwill Adjusted
Earnings Earnings Amortization Earnings
-------- -------- ------------ --------
Net income .................. $ 1,472 $ 1,087 $ 63 $ 1,150
Earnings per share:
Basic .................... $ 0.38 $ 0.27 $ 0.02 $ 0.29
Diluted .................. $ 0.37 $ 0.27 $ 0.01 $ 0.28
The following table reconciles the reported earnings for the nine months ended
September 30, 2001 to "adjusted earnings," which exclude goodwill amortization.
Nine Months Ended
September 30,
-------------------------------------------------
2002 2001
-------- ------------------------------------
Reported Reported Goodwill Adjusted
Earnings Earnings Amortization Earnings
-------- -------- ------------ --------
Net income .................. $ 4,291 $ 3,058 $ 189 $ 3,247
Earnings per share:
Basic .................... $ 1.11 $ 0.77 $ 0.05 $ 0.82
Diluted .................. $ 1.08 $ 0.77 $ 0.04 $ 0.81
The gross carrying amount of intangible assets and the associated accumulated
amortization at September 30, 2002, is presented in the table below.
Amortization expense for intangible assets was $184 thousand and $552 thousand
for the quarter and the nine months ended September 30, 2002, respectively.
(unaudited)
(in thousands)
September 30, 2002
-------------------------
Gross
Carrying Accumulated
Amount Amortization
-------- ------------
Intangible assets:
Core deposit premium......................... $ 2,727 $ 1,620
Other intangible assets...................... 6,702 3,353
-------- --------
Total................................. $ 9,429 $ 4,973
-------- --------
Unamortized intangible assets $ 4,456
========
Core deposit intangibles are amortized using the effective-yield method based on
a useful life of 10 years. Other unidentifiable intangible assets are being
amortized using the straight-line method based on a useful life of 15 years.
Amortization expense related to core deposit intangibles for the three months
and the nine months ended September 30, 2002 was $72,000 and $217,000,
respectively. Amortization expense related to core deposit intangibles was
$88,000 and $264,000, respectively for the three months and the nine months
-8-
ended September 30, 2001. Amortization expense related to other
unidentifiable intangible assets was $112,000 for the three months ended
September 30, 2002 and $111,000 for the three months ended September 30,
2001. Amortization expense related to other unidentifiable intangible
assets was $335,000 for the nine months ended September 30, 2002 and 2001.
(unaudited)
(dollars in thousands)
Core
Deposit
Premium Other Total
------- ----- ------
Three months ended December 31, 2002.. $ 73 $111 $184
Year ended December 31,
2003............................... 245 447 692
2004............................... 189 447 636
2005............................... 153 447 600
2006............................... 132 447 579
2007............................... 115 446 561
Projections of amortization expense are based on existing asset balances
and the remaining useful lives. The following table shows the estimated
future amortization expense for amortized intangible assets:
Effective January 1, 2002 goodwill will be assessed at least annually for
impairment by applying a fair-value-based test using discounted cash flows.
The Company completed its initial goodwill impairment assessment in the
second quarter. No transitional impairment charge was required.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," was issued in August 2001 and was adopted by the Company on
January 1, 2002. SFAS No. 144 addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. The adoption of SFAS
No. 144 did not have a material effect on the results of operations or
financial condition of the Company.
SFAS No. 147, "Acquisitions of Certain Financial Institutions," was issued
on October 1, 2002. SFAS 147 reclassifies the unidentifiable intangible
assets acquired in business combinations under SFAS 72, "Accounting for
Certain Acquisitions of Banking or Thrift Institutions," as goodwill. The
Company adopted SFAS 147 as of October 1, 2002 and will retroactively
reclassify the unidentifiable intangible assets to goodwill as of January
1, 2002 and restate in the fourth quarter of 2002 previously issued income
statements to remove the amortization expense previously recognized through
September 30, 2002. The effect will be to increase before tax income for
the year 2002 by $335,000. No amortization expense of unidentifiable
intangible assets will be recorded in future periods.
6. Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reported period. Actual results
could differ from those estimates. A significant estimate that is
particularly sensitive to change is the allowance for loan losses.
-9-
7. Acquisition of Belle Plaine Service Corp.
On October 4, 2002, the Company announced that it had entered into an
agreement to acquire the Belle Plaine Service Corp. in a 100 percent cash
transaction. Belle Plaine Service Corp. is the parent company of Citizens
Bank & Trust Co., headquartered in Hudson, Iowa. Citizens Bank & Trust Co.
also has offices in Belle Plaine and Waterloo, Iowa. The Company
anticipates that the transaction will be completed in the fourth quarter of
2002, subject to regulatory approval. As of September 30, 2002, Citizens
Bank & Trust Co. had total assets of $75 million.
-10-
PART I -- Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
QUARTER ENDED SEPTEMBER 30, 2002
The Company recorded net income of $1,472,000 for the quarter ended September
30, 2002, compared with net income of $1,087,000 for the quarter ended September
30, 2001, an increase of $385,000 or 35 percent. The increase in net income was
primarily due to improved net interest income and reduced loan loss provision.
Basic earnings per share for the third quarter of 2002 were $.38 versus $.27 for
the third quarter of 2001. Diluted earnings per share were $.37 in 2002 and $.27
for the third quarter of 2001. Actual weighted average shares outstanding were
3,895,825 and 3,965,326 for the third quarter of 2002 and 2001, respectively.
For the third quarter of 2002 and 2001, diluted weighted average shares
outstanding were 3,977,102 and 4,009,252, respectively. The Company's return on
average assets for the quarter ended September 30, 2002 was 1.09 percent
compared with a return of .80 percent for the quarter ended September 30, 2001.
The Company's return on average equity was 10.92 percent for the three months
ended September 30, 2002 versus 8.44 percent for the three months ended
September 30, 2001.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is computed by subtracting total interest expense from total
interest income. Fluctuations in net interest income can result from the changes
in the volumes of assets and liabilities as well as changes in interest rates.
Market interest rates on a national and local level moved downward throughout
the year 2001. Interest rates remained relatively constant during the third
quarter of 2002. The Company's net interest income for the quarter ended
September 30, 2002 increased $211,000 or 4 percent to $5,080,000 from $4,869,000
for the three months ended September 30, 2001. Total interest income of
$9,292,000 for the third quarter of 2002 was $979,000 or 10 percent lower
compared with $10,271,000 for the 2001 quarter primarily due to reduction in
interest rates. The Company's total interest expense for the third quarter of
2002 was $4,212,000, which was $1,190,000 or 22 percent less compared with
$5,402,000 for the 2001 quarter due to the lower interest rate environment. The
Company's net interest margin on a federal tax-equivalent basis for the third
quarter of 2002 was 4.06 percent compared with 3.92 percent in the third quarter
of 2001. Net interest margin is a measure of the net return on interest-earning
assets and is computed by dividing annualized net interest income by the average
of total interest-earning assets for the period. The Company's overall yield on
earning assets was 7.38 percent for the third quarter of 2002 compared with 8.20
percent for the third quarter of 2001. The rate on interest-bearing liabilities
decreased in the third quarter of 2002 to 3.70 percent compared to 4.71 percent
for the third quarter of 2001.
Interest income and fees on loans decreased $602,000 or 10 percent in the third
quarter of 2002 compared to the same period in 2001, mainly due to lower
interest rates. The Company recognized interest income and fees on loans of
$5,669,000 for the third quarter of 2002 and $6,271,000 for the 2001 quarter.
The average
-11-
yield on loans decreased to 7.17 percent for the third quarter of 2002, compared
to 7.82 percent in the third quarter of 2001. The yield on the Company's loan
portfolio is affected by the amount of nonaccrual loans (which do not earn
interest income), the mix of the portfolio (real estate loans generally have a
lower overall yield than commercial and agricultural loans), the effects of
competition and the interest rate environment on the amounts and volumes of new
loan originations, and the mix of variable rate versus fixed rate loans in the
Company's portfolio. The lower interest rates were not beneficial to the Company
as variable rate loans tied to prime were adjusted downward and produced less
interest income. Renewing fixed-rate loans have been rewritten at lower rates
reflecting the market interest rate environment. Loan demand by customers in the
market areas served by the Company has become "soft" as general economic
conditions have weakened and potential borrowers are less willing to increase
their debt load. Average loans outstanding were lower at $313,553,000 for the
third quarter of 2002 compared with $318,334,000 for the third quarter of 2001,
a decrease of $4,781,000 or 2 percent.
Interest and discount income on loan pool participations decreased $379,000 or
13 percent for the third quarter of 2002 compared with the quarter ended
September 30, 2001. The decrease was due to the lower volume and yields on loan
pool participations. Interest income and discount collected on the loan pool
participations for the three months ended September 30, 2002 was $2,450,000
compared with $2,829,000 collected in the third quarter of 2001. The yield on
loan pool participations was 10.73 percent for the third quarter of 2002
compared with 11.25 percent for the quarter ended September 30, 2001. The
average loan pool participation investment balance was $9,100,000 or 9 percent
lower in the third quarter of 2002 than in same period for 2001 as a result of
pool collections and the sale of under-performing loans. There were minimal
purchases of new loan pools during the quarter. Newly purchased loan pools
typically do not produce income for a period of up to 120 days from date of
purchase, which significantly impacts the overall yield on pools. These loan
pool participations are pools of performing, distressed and nonperforming loans
that the Company has purchased at a discount from the aggregate outstanding
principal amount of the underlying loans. Income is derived from this investment
in the form of interest collected and the repayment of the principal in excess
of the purchase cost which is herein referred to as "discount recovery." The
Company recognizes interest income and discount recovery on its loan pool
participations on a cash basis. The loan pool participations have traditionally
been a high-yield activity for the Company, but this yield has fluctuated from
period to period based on the amount of cash collection, discount recovery, and
net collection expenses of the servicer in any given period. The income and
yield on loan pool participations may vary in future periods due to the volume
and discount rate on loan pools purchased.
Interest income on investment securities increased $50,000 or 5 percent in the
quarter ended September 30, 2002, compared with the quarter ended September 30,
2001 due to higher volume in the portfolio, which was largely offset by
decreased interest rates. Interest income on investment securities totaled
$1,151,000 for the third quarter of 2002 compared with $1,101,000 in same
quarter of 2001. The average balance of investments for the quarter ended
September 30, 2002 was $92,183,000, up from $73,749,000 in the third quarter of
2001. The yield on the Company's investment portfolio in the third quarter of
2002 decreased to 5.23 percent from 6.36 percent in the comparable period of
2001 as newly purchased investments were at lower rates reflecting the current
market environment.
-12-
Interest expense on deposits decreased $914,000 or 24 percent in the third
quarter of 2002 compared with 2001 mainly due to the lowered national and local
market interest rate environment. Total interest expense on deposits was
$2,894,000 for the quarter ended September 30, 2002 and was $3,808,000 for the
third quarter of 2001. Average interest-bearing deposits for the third quarter
of 2002 increased $6,544,000 or 2 percent from the same period in 2001. All
categories of interest-bearing deposits increased in 2002 over the same period
in 2001. The weighted average rate paid on interest-bearing deposits was 3.20
percent in the third quarter of 2002 compared with 4.28 percent in the third
quarter of 2001. The full benefit of lower market deposit rates may not be
realized if the competitive environment forces the Company to pay above-market
rates to attract or retain deposits in future periods.
Interest expense on borrowed funds was $1,318,000 for the three months ended
September 30, 2002 compared with $1,594,000 in the third quarter of 2001, a
decrease of $276,000 or 17 percent. Interest expense on Federal Home Loan Bank
advances was $215,000 lower in the third quarter of 2002 reflecting lower
interest rates and lesser utilization of this alternative funding method.
Interest expense on notes payable decreased $170,000 in the third quarter of
2002 compared with 2001 reflecting lower average borrowings on the Company's
commercial bank line of credit and decreased interest rates. The Company's notes
payable line is variable with the national prime rate and any changes in this
rate will affect the amount of interest expense incurred in future periods.
Interest expense on the Company's trust preferred borrowings totaled $147,000
for the third quarter of 2002.
Provision for Loan Losses
The Company recorded a provision for loan losses of $245,000 in the third
quarter of 2002 compared with $1,006,000 in the third quarter of 2001. During
the third quarter of 2001, the Company recorded a charge-off of one agricultural
line of credit totaling $1,000,000, which necessitated the increased loan loss
provision for that period. Management determines an appropriate provision based
on its evaluation of the adequacy of the allowance for loan losses in
relationship to a continuing review of problem loans, the current economic
conditions, actual loss experience and industry trends. Management believes that
the allowance for loan losses is adequate based on the inherent risk in the
portfolio as of September 30, 2002, however, growth in the loan portfolio and
the uncertainty of the general economy require that management continue to
evaluate the adequacy of the allowance for loan losses and make additional
provisions in future periods as deemed necessary.
Non-interest Income
Non-interest income results from the charges and fees collected by the Company
from its customers for various services performed, data processing income
received from nonaffiliated banks, miscellaneous other income and gains (or
losses) from the sale of investment securities held in the available for sale
category. Total non-interest income was $1,008,000 in the third quarter of 2002,
$348,000 or 26 percent less than $1,356,000 from the quarter ended September 30,
2001. Most of the reduction was due to the realization of $579,000 in investment
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security gains during the third quarter of 2001 that was nonrecurring in the
quarter ended September 30, 2002. All other categories of non-interest income
including service charges, data processing income and other operating income
were greater in the third quarter of 2002 compared with the same period of 2001.
Excluding gains from the sale of investment securities, non-interest income was
$231,000 greater for 2002 primarily due to origination fees on loans sold to the
secondary market.
Non-interest Expense
Non-interest expense for the quarter ended September 30, 2002 increased $20,000
to $3,570,000 compared with $3,550,000 for the third quarter of 2001.
Non-interest expense includes all the costs incurred to operate the Company
except for interest expense, the loan loss provision and income taxes. Salaries
and benefits expense for the third quarter of 2002 increased $52,000 or 3
percent from 2001 as a result of increased salary levels and health insurance
costs. Occupancy expense increased $30,000 in the third quarter of 2002 compared
with the same period in 2001 mainly due to higher property tax assessments.
Professional fees decreased $6,000 for the third quarter of 2002 compared to
2001. Other operating expense increased by $22,000 in the third quarter of 2002
compared with the three months ended September 30, 2001. Goodwill amortization
decreased $63,000 in the third quarter of 2002 as a result of the adoption of
FASB Statement No. 142, which required the discontinuation of amortization of
goodwill effective January 1, 2002. The Company does continue to amortize core
deposit intangibles and Statement 72 unidentifiable intangible assets, which
decreased $15,000 for the third quarter of 2002 compared with the same period in
2001 reflecting the utilization of the effective-yield method of amortization.
As a result of the adoption of FASB Statement No. 147 on October 1, 2002, the
Company will discontinue the amortization of unidentifiable intangible assets,
which will reduce expense in future periods.
Income Tax Expense
The Company incurred income tax expense of $801,000 for the three months ended
September 30, 2002 compared with $582,000 for the three months ended September
30, 2001. The increased tax expense for the September 2002 quarter was mainly
due to higher overall taxable income compared to the same period in the prior
year. The effective income tax rate as a percent of income before taxes for the
three months ended September 30, 2002 and 2001 was 35.3 percent and 34.9
percent, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2002
Net income for the nine months ended September 30, 2002 was $4,291,000 or $1.11
per share basic and $1.08 per share diluted. Net income was $1,233,000 or 40
percent greater in 2002 compared with $3,058,000 for the first nine months of
2001. Earnings per share for the nine months of 2001 was $.77 basic and diluted.
For the first nine months of 2002, average shares outstanding were 3,880,085
and average diluted shares were 3,958,864. Average shares outstanding in the
first nine months of 2001 were 3,963,377 and average diluted shares for the
period were 3,996,971. Return on average assets increased to 1.06 percent in
2002 from .78
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percent for the nine months ended September 30, 2001. The Company's return on
average shareholder equity rose to 11.00 percent for the first nine months of
2002 compared with 8.08 percent for the same period of 2001.
RESULTS OF OPERATION
Net Interest Income
Net interest income for the nine months ended September 30, 2002 was $1,866,000
or 14 percent greater than the comparable period of 2001. Net interest income
was $15,522,000 in 2002 versus $13,656,000 for the first nine months of 2001.
The Company benefited from the effects of the lower market interest rate
environment that helped reduce the overall cost of funds and the amount of
interest expense for the nine months of 2002. Total interest income was
$28,525,000 for the nine months ended September 30, 2002, a decline of
$1,775,000 or 6 percent from $30,300,000 for the first nine months of 2001
primarily attributable to the lower interest rate environment. Interest expense
decreased $3,641,000 or 22 percent in the first nine months of 2002 compared
with the same period in 2001. Interest expense was $13,003,000 for the nine
months of 2002 and $16,644,000 in the same period of 2001. The yield on earning
assets declined to 7.58 percent in 2002 from 8.30 percent for the first nine
months of 2001 while the rate on interest-bearing liabilities was reduced to
3.79 percent in 2002 from 4.98 percent for the nine months ended September 30,
2001. The net interest margin on a tax-equivalent basis was 4.15 percent for the
nine months ended September 30, 2002 compared with 3.78 percent for the
nine-month period of 2001.
Interest income and fees on loans was $17,319,000 in 2002 compared with
$19,042,000 for the nine months ended September 30, 2001. The decrease of
$1,723,000 or 9 percent was primarily due to the lower interest rate environment
in 2002. Average loan volumes for the first nine months of both periods were
comparable, but the Company's yield on its loan portfolio declined to 7.36
percent in 2002 compared with 8.09 percent for the first nine months of 2001.
Interest income and discount on loan pool participations for the first nine
months of 2002 was $7,804,000 compared with $6,979,000 in the same period of
2001, an increase of $825,000 or 12 percent. The increase was mainly
attributable to the higher average volume of loan pools held by the Company in
2002. Loan pools averaged $98,244,000 for the first nine months of 2002 compared
with $82,248,000 for the nine months ended September 30, 2001. The yield on loan
pool participations was 10.62 percent in 2002 and 11.34 percent for the first
nine months of 2001.
Interest income on investment securities of $3,318,000 was $694,000 lower in
2002 compared with $4,012,000 earned in the first nine months of 2001 mainly due
to decreased rates. On a tax-equivalent basis, the yield on the Company's
investment portfolio was 5.51 percent for 2002 and was 6.64 percent for the
first nine months of 2001. Due to market interest rates, the yields that could
be obtained on newly acquired securities were considerably lower than the yields
on those that matured. The average balance of investment securities decreased
$628,000 or 1 percent for the period ended September 30, 2002 compared with the
same period of 2001.
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Interest expense on deposits in 2002 totaled $8,822,000 compared with
$12,054,000 for the first nine months of 2001, a decrease of $3,232,000 or 27
percent. The reduction in market interest rates, a decline in fixed-rate
certificates of deposit, and an increase in lower-rate NOW, savings and
money-market accounts were responsible for the decrease in interest expense. The
average rate paid by the Company on interest-bearing deposits was 3.29 percent
in the first nine months of 2002 compared with 4.58 percent for the nine months
ended September 30, 2001. Average interest-bearing deposits were $5,850,000
greater in 2002 compared with the first nine months of 2001.
Interest expense on borrowed funds decreased $409,000 or 9 percent in 2002
mainly due to the lower interest rate environment. Interest on borrowed funds
totaled $4,181,000 for the first nine months of 2002 compared with $4,590,000
for the same period of 2001. The average amount of borrowed funds was $5,034,000
higher for the first nine months of 2002 as Federal Home Loan Bank advances were
utilized to fund growth in the loan pools. The average rate on borrowed funds
was 5.59 percent in 2002 compared with 6.46 percent for the nine months ended
September 30, 2001.
Provision for Loan Losses
The Company's provision for loan losses was $726,000 lower in 2002 than it was
for the first nine months of 2001. Provision for loan losses was $781,000 in the
current year compared with $1,507,000 for the first nine months of 2001. During
the third quarter of 2001, the Company recorded a charge-off of one agricultural
line of credit totaling $1,000,000, which necessitated the increased loan loss
provision for the first nine months of 2001.
Non-interest Income
Total non-interest income for the nine months ended September 30, 2002 was
$2,842,000. This was $507,000 lower than the $3,349,000 earned in the first nine
months of 2001. Investment security gains realized in the first nine months of
2001 were $972,000. No investment security gains were realized in the first nine
months of 2002. Service charges and loan origination fees were greater in 2002.
Excluding security gains, non-interest income was $465,000 or 20 percent greater
in the first nine months of 2002 than in the same period of 2001.
Non-interest Expense
Non-interest expense for the first nine months of 2002 was $10,916,000 compared
with $10,855,000 for the first nine months of 2001, an increase of $61,000 or
less than 1 percent. Salaries and benefits were $198,000 or 4 percent greater in
2002 due to higher salary levels and increased health insurance costs.
Professional fees were $293,000 or 35 percent lower in 2002 compared with the
first nine months of 2001 due to the non-recurring costs incurred in 2001 to
have an outside consultant conduct a profitability improvement study. Other
operating expenses were $315,000 or 13 percent greater in 2002 primarily due to
the write-down in the value of property held in other real estate and the
settlement of litigation involving one of the Company's subsidiary banks.
Goodwill amortization was $189,000 for the first nine months of 2001, with none
incurred in 2002. Core
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deposit premium amortization was $47,000 lower in 2002 as a result of the
utilization of the effective-yield method of amortization. As a result of the
adoption of FASB Statement No. 147 on October 1, 2002, the Company will
discontinue the amortization of unidentifiable intangible assets, which will
reduce expense in future periods.
Income Tax Expense
Income tax expense was $2,376,000 for the first nine months of 2002 compared
with $1,585,000 for the same period in 2001, primarily due to the increased
before-tax income earned by the Company. The effective tax rate was 35.6 percent
in 2002 versus 34.1 percent in the first six months of 2001.
FINANCIAL CONDITION
Total assets as of September 30, 2002 were $540,787,000 compared with
$545,795,000 as of December 31, 2001. As of September 30, 2002, the Company had
$6,350,000 federal funds sold compared with $10,650,000 purchased as of December
31, 2001. The Company typically has excess liquidity at the end of the third
quarter and throughout the fourth quarter of each year as deposit balances grow
and seasonal operating loans are paid down by customers. Federal funds are sold
on a short-term basis to utilize this liquidity.
Investment Securities
Investment securities available for sale totaled $78,330,000 as of September 30,
2002. This is an increase of $28,124,000 from the December 31, 2001 balance of
$50,206,000 as securities were purchased for the portfolio utilizing funds
available from the decline in loans and loan pool participations. Investment
securities classified as held to maturity declined to $16,451,000 as of
September 30, 2002, compared with $21,332,000 on December 31, 2001, as the
proceeds from maturities were reinvested in available for sale securities.
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Loans
Loan volumes declined in the first nine months of 2002 to $314,848,000 on
September 30, 2002. The $7,833,000 or 2 percent decrease from December 31, 2001
was, in part, due to the payoff of a large commercial real estate line,
continued refinancing of residential real estate loans into long-term fixed rate
secondary market loans, and a general weakening in economic conditions in the
markets served by the Company. As of September 30, 2002, the Company's loan to
deposit ratio (excluding loan pool investments) was 81.0 percent compared with a
year-end 2001 loan to deposit ratio of 85.2 percent. The decrease in the loan to
deposit ratio is attributable to the decline in loan volume and the increase in
deposits since December 31, 2001. Through September 30, 2002, loans secured by
real estate (including 1 to 4 family, multi-family, commercial and agricultural)
comprised the largest category in the portfolio, averaging approximately 71
percent of total loans. Commercial loans averaged approximately 12 percent of
the portfolio and agricultural loans remained at approximately 13 percent of
total loans. Loans to individuals and other loans constituted approximately 4
percent of the portfolio.
Loan Pool Participations
As of September 30, 2002, the Company had loan pool participations of
$85,042,000, a decrease of $25,351,000 or 23 percent from the December 31, 2001
balance of $110,393,000. The reduction in the loan pool participations is
primarily due to collections made in the normal course of business, the sale of
a package of long-term fixed low-rate loans during the second quarter, and the
sale of a group of non-performing litigation credits in the third quarter. The
Company purchased loan pool packages of $1,306,000 in the third quarter of 2002.
A total of $18,410,000 has been purchased in the first nine months of this year.
During the third quarter of 2001, the Company purchased $48,790,000 in loan pool
participations, with year-to-date purchases through September 30, 2001 of
$77,703,000. Generally, in 2002 the opportunities to purchase loan pools have
been very limited. The interest rate environment and deteriorating economic
conditions have also affected the loan pool market. The loan pool investment
balance shown as an asset on the Company's Statement of Condition represents the
discounted purchase cost of the loan pool participations.
Deposits
Total deposits as of September 30, 2002 were $388,793,000 compared with
$378,645,000 as of December 31, 2001. Certificates of deposit remain the largest
category of deposits at September 30, 2002 representing approximately 56 percent
of total deposits. Deposits grew 3 percent during the first nine months of 2002,
with most of the increase occurring in certificates of deposit.
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Borrowed Funds/Notes Payable
The Company had no Federal Funds purchased on September 30, 2002. There was
$10,650,000 in Federal Funds purchased on December 31, 2001. During the third
quarter of 2002 the Company had an average balance of Federal Funds purchased of
$547,000. Federal Funds purchased averaged $1,302,000 for the first nine months
of 2002. Advances from the Federal Home Loan Bank totaled $79,764,000 as of
September 30, 2002 compared with $91,174,000 as of December 31, 2001. A
$10,000,000 advance that matured late in June was paid off with available funds.
Notes payable decreased to $2,350,000 on September 30, 2002 from $9,200,000 on
December 31, 2001 as the Company paid down its commercial bank line of credit
with the proceeds from its participation in a pooled trust preferred security
issuance.
Trust Preferred Security
On June 27, 2002, the Company obtained $10,000,000 in long-term subordinated
debt from its participation in the issuance of a pooled trust preferred
security. This security is a hybrid capital instrument that is included as Tier
1 capital for regulatory purposes, yet it is non-dilutive to common shareholders
and to return on equity. The trust preferred has a 30-year maturity, does not
require any principal amortization and is callable in five years at par at the
issuer's option. The interest rate is variable based on the 3-month LIBOR rate
(1.86 percent on date of issue) plus 3.65 percent, with the interest payable
quarterly. Proceeds from the pooled trust preferred were used to pay down the
Company's commercial bank line of credit.
Nonperforming Assets
The Company's nonperforming assets totaled $3,819,000 (1.21 percent of total
loans) as of September 30, 2002, compared to $3,670,000 (1.14 percent of total
loans) as of December 31, 2001. Nonperforming assets were $179,000 lower at
September 30, 2002 than the total of $3,998,000 on June 30, 2002. All
nonperforming asset totals and related ratios exclude the loan pool
participations. The following table presents the categories of nonperforming
assets as of September 30, 2002 compared with December 31, 2001:
Nonperforming Assets
(dollars in thousands)
September 30, December 31,
2002 2001
--------- ---------
Nonaccrual ................................ $ 2,595 $ 2,559
Loans 90 days past due .................... 1,182 926
Other real estate owned ................... 42 185
------- -------
$ 3,819 $ 3,670
======= =======
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From December 31, 2001 to September 30, 2002, nonaccrual loans increased
$36,000. Loans ninety days past due increased $256,000. Other real estate owned
decreased by $143,000 as property held in this category was sold. The Company's
allowance for loan losses as of September 30, 2002 was $3,964,000, which was
1.26 percent of total loans as of that date. This compares with an allowance for
loan losses of $3,381,000 as of December 31, 2001, which was 1.05 percent of
total loans. As of September 30, 2002, the allowance for loan losses was 104.96
percent of nonperforming loans compared with 96.99 percent as of December 31,
2001. Based on the inherent risk in the loan portfolio, management believes that
as of September 30, 2002, the allowance for loan losses is adequate. For the
three months ended September 30, 2002, the Company's net loan charge-offs were
$130,000 compared with net charge-offs of $1,036,000 during the quarter ended
September 30, 2001. Net loan charge-offs for the nine months ended September 30,
2002 were $198,000 or .08 percent of loans outstanding on an annualized basis.
This compares with net loan charge-offs of $1,178,000 during the first nine
months of 2001, or .50 percent of average loans outstanding.
Subsequent to September 30, 2002, nonperforming loans decreased $1,140,000 as a
result of the confirmation of a borrower's bankruptcy plan and the receipt of a
payoff from another borrower on loans that had been classified as nonaccrual.
The loan related to the bankruptcy plan was placed on an interest-earning status
on October 1, 2002 and did not meet the criteria to be classified as a
restructured credit.
Capital Resources
Total shareholders' equity was 10.1 percent of total assets as of September 30,
2002 and was 9.3 percent as of December 31, 2001. The Company's Tier 1 Capital
Ratio was 13.9 percent of risk-weighted assets as of September 30, 2002 and was
9.6 percent as of December 31, 2001, compared to a 4.0 percent regulatory
requirement. The increase in Tier 1 ratio at September 30 is attributable to the
addition of the $10,000,000 trust preferred to regulatory capital. Risk-based
capital guidelines require the classification of assets and some
off-balance-sheet items in terms of credit-risk exposure and the measuring of
capital as percentage of the risk-adjusted asset totals. Tier 1 Capital is the
Company's total common shareholders' equity plus the qualifying trust preferred
reduced by goodwill. Management believes that, as of September 30, 2002, the
Company and its subsidiary banks meet all capital adequacy requirements to which
they are subject. As of that date, all the bank subsidiaries were "well
capitalized" under regulatory prompt corrective action provisions. During the
first quarter of 2002, the Company repurchased 5,000 shares of common stock on
the open market in accordance with the terms of its previously-approved stock
repurchase authorization. No shares were repurchased during the second or third
quarter of 2002. The Company has repurchased 10,000 shares of stock subsequent
to September 30, 2002. During the third quarter of 2002, a total of 61,436
shares of common stock were issued to employees and directors of the Company
upon their exercise of stock options previously awarded. Year-to-date, a total
of 69,996 shares have been issued upon the exercise of stock options. Shares
outstanding have increased as a result of the exercise of these options.
-20-
Liquidity
Liquidity management involves meeting the cash flow requirements of depositors
and borrowers. The Company conducts liquidity management on both a daily and
long-term basis; and it adjusts its investments in liquid assets based on
expected loan demand, projected loan maturities and payments, estimated cash
flows from the loan pool participations, expected deposit flows, yields
available on interest-bearing deposits, and the objectives of its
asset/liability management program. The Company had liquid assets (cash and
cash equivalents) of $20,778,000 as of September 30, 2002, compared with
$15,837,000 as of December 31, 2001. Most of the increase during the period was
from the reduction in loans and loan pool participations. Investment
securities classified as available for sale could be sold to meet liquidity
needs if necessary. Additionally, the bank subsidiaries maintain lines of credit
with correspondent banks and the Federal Home Loan Bank that would allow them to
borrow federal funds on a short-term basis if necessary. The Company also
maintains a line of credit with a major commercial bank that provides
liquidity for the purchase of loan pool participations and other corporate
needs. Management believes that the Company has sufficient liquidity as of
September 30, 2002 to meet the needs of borrowers and depositors.
Commitments and Contingencies
In the ordinary course of business, the Company is engaged in various issues
involving litigation. Management believes that none of this litigation is
material to the Company's results of operations.
Critical Accounting Policies
The Company has identified two critical accounting policies and practices
relative to the financial condition and results of operation. These two
accounting policies relate to the allowance for loan losses and to loan pool
accounting.
The allowance for loan losses is based on management's opinion, and is
adequate to absorb losses in the existing portfolio. In evaluating the
portfolio, management takes into consideration numerous factors, including
current economic conditions, prior loan loss experience, the composition of the
loan portfolio, and management's estimate of probable credit losses. The
allowance for loan loss is established through a provision for loss based on
management's evaluation of the risk inherent in the loan portfolio, the
composition of the portfolio, specific impaired loans, and current economic
conditions. Such evaluation, which includes a review of all loans on which full
collectibility may not be reasonably assured, considers among other matters, the
estimated net realizable value or the fair value of the underlying collateral,
economic conditions, historical loss experience, and other factors that warrant
recognition in providing for an adequate allowance for loan loss.
The loan pool accounting practice relates to management's opinion that the
investment amount reflected on the Company's financial statements does not
exceed the estimated net realizable value or the fair value of the underlying
collateral securing the purchased loans. In evaluating the purchased loan
portfolio, management takes into consideration many factors, including the
borrowers' current financial situation, the underlying collateral, current
economic conditions, historical collection experience, and other factors
relative to the
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collection process.
In the event that management's evaluation of the level of the allowance for
loan losses is inadequate, the Company would need to increase its provision for
loan losses. If the estimated realizable value of the loan pool participations
is understated, the Company's yield on the loan pools would be reduced.
Belle Plaine Service Corp.
On October 4, 2002, the Company announced that it had entered into an
agreement to acquire The Belle Plaine Service Corp. of Belle Plaine, Iowa in a
100 percent cash transaction. The Belle Plaine Service Corp. is the parent
company of Citizens Bank & Trust Company of Hudson, with offices in Belle Plaine
and Waterloo, Iowa. Citizens Bank & Trust had total assets of $75,026,000 as of
September 30, 2002.
It is anticipated that the transaction will be consummated late in the
fourth quarter of 2002, subject to regulatory approval. The Company plans to
fund the purchase of Belle Plaine Service Corp. through utilization of cash on
hand and through an advance on its commercial bank line of credit.
Part I - Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Market risk is the risk of earnings volatility that results from adverse
changes in interest rates and market prices. The Company's market risk is
primarily comprised of interest rate risk arising from its core banking
activities of lending and deposit taking. Interest rate risk is the risk that
changes in market interest rates may adversely affect the Company's net interest
income. Management continually develops and applies strategies to mitigate this
risk. The Company has not experienced any material changes to its market risk
position since December 31, 2001, from that disclosed in the Company's 2001 Form
10-K Annual Report. Management does not believe that the Company's primary
market risk exposures and how those exposures were managed in the first nine
months of 2002 changed when compared to 2001.
The Company uses a third-party computer software simulation modeling program to
measure its exposure to potential interest rate changes. For various assumed
hypothetical changes in market interest rates, numerous other assumptions are
made such as prepayment speeds on loans and securities backed by mortgages, the
slope of the Treasury yield curve, the rates and volumes of the Company's
deposits and the rates and volumes of the Company's loans. This analysis
measures the estimated change in net interest income in the event of
hypothetical changes in interest rates. This analysis of the Company's interest
rate risk was presented in the Form 10-K filed by the Company for the year ended
December 31, 2001.
Part I - Item 4. Controls and Procedures.
Within the 90-day period prior to the filing of this report, an evaluation
was carried out under the supervision and with the participation of the
Company's management, including the Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), of the effectiveness or our disclosure controls and
procedures.
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Based on that evaluation, the CEO and CFO have concluded that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within time periods specified in Securities and Exchange Commission
rules and forms. Subsequent to the date of their evaluation, there were no
significant changes in the Company's internal controls, including any corrective
actions with regard to significant deficiencies and material weaknesses.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
With the exception of the historical information contained in this report, the
matters described herein contain forward-looking statements that involve risk
and uncertainties that individually or mutually impact the matters herein
described, including but not limited to financial projections, product demand
and market acceptance, the effect of economic conditions, the impact of
competitive products and pricing, governmental regulations, results of
litigation, technological difficulties and/or other factors outside the control
of the Company, which are detailed from time to time in the Company's SEC
reports. The Company disclaims any intent or obligation to update these
forward-looking statements.
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Part II - Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits and financial statement schedules are filed as part
of this report:
Exhibits
--------
3.1 Articles of Incorporation, as amended through April 30, 1998, of
Mahaska Investment Company. The Articles of Incorporation, as amended,
of Mahaska Investment Company are incorporated by reference to the
Company's quarterly report on Form 10-Q for the quarter ended
September 30, 1998.
3.2 Bylaws of Mahaska Investment Company. The Amended and Restated Bylaws
of Mahaska Investment Company dated July 23, 1998, are incorporated by
reference to the Company's quarterly report on Form 10-Q for the
Quarter ended September 30, 1998.
10.1 Mahaska Investment Company Employee Stock Ownership Plan & Trust as
restated and amended. This Plan & Trust is incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994.
10.2.1 1993 Stock Incentive Plan. This 1993 Stock Incentive Plan is
incorporated by reference to Form S-1 Registration Number 33-81922 of
Mahaska Investment Company.
10.2.2 1996 Stock Incentive Plan. This 1996 Stock Incentive Plan is
incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
10.2.3 1998 Stock Incentive Plan. This 1998 Stock Incentive Plan is
incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
10.3 States Resources Corp. Loan Participation and Servicing Agreement
dated February 5, 1999 between States Resources Corp. and Mahaska
Investment Company. This agreement is incorporated herein by reference
to the Form 10-K report filed by Mahaska Investment Company for the
Year ended December 31, 1999.
10.5 Amended and Restated Credit Agreement dated June 30, 2000 between
Mahaska Investment Company and Harris Trust and Savings Bank. This
Amended and Restated Credit Agreement is incorporated herein by
reference to the Form 10-Q report filed by Mahaska Investment Company
for the Quarter ended September 30, 2000.
10.5.1 First Amendment to Amended and Restated Credit agreement dated June
30, 2001. This amendment is incorporated herein by reference to the
Form 10-Q report filed by Mahaska Investment Company for the Quarter
ended September 30, 2001.
11 Computation of Per Share Earnings.
99.1 Additional Exhibits
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(b) Reports on Form 8-K: No reports on Form 8-K were required to be filed
during the three months ended September 30, 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Mahaska Investment Company
--------------------------------
(Registrant)
By: /s/ Charles S. Howard
----------------------------
Charles S. Howard
Chairman, President,
Chief Executive Officer
November 8, 2002
----------------------------
Dated
By: /s/ David A. Meinert
----------------------------
David A. Meinert
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
November 8, 2002
----------------------------
Dated
-25-
CERTIFICATIONS
I, Charles S. Howard, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mahaska Investment
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statement made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
November 8, 2002
- -----------------------
Date
/s/ Charles S. Howard
- -----------------------
Charles S. Howard
President and Chief Executive Officer
CERTIFICATIONS
I, David A. Meinert, Executive Vice President and Chief Financial Officer,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mahaska Investment
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statement made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
November 8, 2002
- -----------------------
Date
/s/ David A. Meinert
- -----------------------
David A. Meinert
Executive Vice President and
Chief Financial Officer