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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
0-24630
December 31, 2002
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:
Name of each exchange on
Title of each class 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 18, 2003, was $56,608,694.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the most recent practicable date, March 18, 2003.
3,894,563 shares Common Stock, $5 par value
DOCUMENTS INCORPORATED BY REFERENCE
The Annual Report to Shareholders for the 2002 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 2003
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
Page
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Item 1. Business............................................................................. 1
A. General Description............................................................... 1
B. Subsidiaries...................................................................... 1
C. Loan Pool Participations.......................................................... 2
D. Competition....................................................................... 5
E. Supervision and Regulation........................................................ 6
F. Employees......................................................................... 8
G. Statistical Disclosure............................................................ 8
Item 2. Properties........................................................................... 17
Item 3. Legal Proceedings.................................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders.................................. 18
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............ 18
Item 6. Selected Financial Data.............................................................. 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18
Item 7a. Market Risk Disclosure............................................................... 18
Item 8. Financial Statements and Supplementary Data.......................................... 19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 19
PART III
Item 10. Directors and Executive Officers of the Registrant................................... 19
Item 11. Executive Compensation............................................................... 19
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 19
Item 13. Certain Relationships and Related Transactions....................................... 19
Item 14. Controls and Procedures.............................................................. 19
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................... 19
PART I
Item 1. Business
A. General Description
Mahaska Investment Company (the "Company") is a financial services holding
company headquartered in Oskaloosa, Mahaska County, Iowa. The Company was
incorporated in Iowa in 1973 and is a bank holding company registered under the
Bank Holding Company Act of 1956 and a savings and loan holding company under
the Savings and Loan Holding Company Act. The Company owns 100% of the stock of
four bank subsidiaries (collectively referred to as the "Banks"). These four
banks are Mahaska State Bank ("MSB"), Central Valley Bank ("CVB"), Pella State
Bank ("APSB") 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"). On October 4, 2002, the Company
announced that it had entered into an agreement to acquire 100% of the stock of
the Belle Plaine Service Corp. of Belle Plaine, Iowa. The Belle Plaine Service
Corp. is the parent company of Citizens Bank & Trust of Hudson, with branches
in Belle Plaine and Waterloo, Iowa. The transaction with the Belle Plaine
Service Corp. was consummated effective February 1, 2003, at which time it
became a wholly -owned subsidiary of the Company.
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. 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. Effective January 1, 2002, the Company began
providing data processing and check processing services to the Banks. These
functions were previously performed by MSB. Charges for these services are
based on the nature and extent of these services. The Company also provides
data processing services to two non-affiliated banks.
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, and trust services. 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
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
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including demand, savings, and time deposit products and offers commercial,
agricultural, real estate, and consumer loans. The Bank wholly-owns a service
corporation, Valley Financial Services, Inc., that provides crop insurance
products and investment brokerage services to its customers.
Pella State Bank--PSB is a full-service, Iowa state chartered commercial
bank which the Company formed as a de novo institution in December 1997. PSB
mainly serves the community of Pella, Iowa and the surrounding area located in
Marion County. The 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, located in the
southeast part of Iowa. MFS serves the Des Moines county market through its
main office and a branch in Burlington. MFS also serves the Lee County market
through a branch in Fort Madison and the Louisa County area through a branch in
Wapello. 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
by offering checking accounts, savings accounts, and certificate of deposits.
MFS offers residential real estate and construction loans, small-business
commercial loans, 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 purchased at varying discounts from the aggregate outstanding
principal amount of the underlying loans. The Company has been purchasing
participation interests in discounted loans since 1988. These pools of loans
are currently held and serviced by a separate independent servicing corporation
(referred to as the "Servicer") known as States Resources Corporation. The
Company does not have any ownership interest in or control over States
Resources Corporation. States Resources Corporation was founded in 1998 and is
owned by Randal Vardaman. Prior to the formation of States Resources
Corporation, Mr. Vardaman owned various other independent loan servicing
corporations. The Company has maintained a business relationship with Mr.
Vardaman and the various predecessor corporations owned by him since 1988. Mr.
Vardaman has been engaged in credit analysis and loan portfolio management in
various positions since 1970.
The Company has invested in loan pools purchased by the Servicer from the
FDIC acting as receiver of failed banks and savings and loan institutions, and
by other large nonaffiliated banking organizations. The loans comprising the
pools were originated throughout the United States. As part of the agreement to
purchase participation interests in the loan pools, the Company and its
subsidiaries have contracted with the Servicer to service the underlying loans
within the respective loan pools which are owned of record by the Servicer. The
Servicer also evaluates various loan pools prior to purchase and makes
recommendations to the Company concerning the creditworthiness of proposed loan
pool purchases and proposes appropriate bids to the Company and any other
potential loan pool participants.
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The Servicer and its predecessor organizations have 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.
Many of the pools consist of loans primarily secured by single-family,
multi-family, and small commercial real estate. Some pools may consist of a
large number of small consumer loans that are secured by other assets such as
automobiles or mobile homes, while 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, although some 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 that 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 and its predecessor organizations, on behalf of the
Company and other investors, have bid on a large number of loan pools and have
been successful in purchasing 110 loan pools. The Company and other investors
in the loan pools fund the purchase by the Servicer and each investor receives
a percentage interest in the loan pool based on its proportional investment
relative to the total purchase price of the pool. Each investor receives a loan
pool participation certificate reflecting this interest.
The purchased loan pools consist, for the most part, of loans evidenced by
promissory notes and secured by either real property or personal property. The
value of the collateral may range from nominal to substantial and often may be
impossible to establish prior to acquisition of the pools with the level of
certainty that is typically required in a financial institution.
Upon the acquisition of a participation interest in a loan pool, the Company
assumes the risk that the Servicer will be unable to recover an amount equal to
the purchase price plus the carrying costs, if any, 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.
3
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 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. The Servicer also provides 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
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future plans of action, and to discuss potential opportunities. Additionally,
the Company's and the Servicer's personnel communicate via telephone, fax, and
electronic mail 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, 2002 and 2001, such cost
basis was $82,341,000 and $110,393,000, respectively, while the contractual
outstanding principal amounts of the underlying loans as of such dates were
approximately $105,823,000 and $133,826,000, respectively. Because this
discounted cost basis inherently reflects the assessed collectibility of the
underlying loans and thus creates a built-in reserve against the risk of
nonpayment in the loan pools, the Company has not established an allowance for
loan losses relating to the loan pool participations. The Company does not
include any amounts related to the loan pool participations in its totals of
nonperforming loans. As part of the on-going collection process, the servicer
may, from time-to-time, foreclose on real estate mortgages and acquire title to
property in satisfaction of such debts. This real estate may be held by the
servicer as "real estate owned" for a period of time until it can be sold.
Since the Company's investment in loan pools are classified as participtions in
pools of loans, the Company does not include the real estate owned that is held
by the servicer with the amount of any other real estate it may hold directly
as a result of its own foreclosure activities.
The underlying loans in the loan pool participations include both fixed rate
and variable rate instruments, but are accounted for on a nonaccrual basis, and
no amounts for interest due are reflected in the carrying value of the loan
pool participations. Based on historical experience, the average period of
collectibility for loans underlying the Company's loan pool participations,
many of which have exceeded contractual maturity dates, is approximately three
to five years. Management has reviewed the recoverability of the underlying
loans and believes that the carrying value does not exceed the net realizable
value of its investment in loan pool participations.
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, Louisa, 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, 2002, there were approximately 44
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other banks having 112 offices or branches operating within the 9 counties that
the Company has locations. Based on deposit information collected by the FDIC
as of June 30, 2002, the Company maintained approximately 12 percent of the
bank deposits within the 9 counties. 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 & Company, U.S. Bancorp, and Commercial
Federal Bank. 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 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.
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As a savings and loan holding company, the Company is subject to federal
regulation and examination by the Office of Thrift Supervision (the "OTS"). The
OTS has enforcement authority over the Company. This authority permits the OTS
to restrict or prohibit activities that are determined to be a serious risk to
the subsidiary savings association. Generally, the activities for a bank
holding company are more limited than the authorized activities for a savings
and loan holding company.
The Company and its subsidiaries are affiliates within the meaning of the
Federal Reserve Act and OTS regulations. As affiliates, they are subject to
certain restrictions on loans by an affiliated bank or thrift (collectively
"affiliated banks") to the Company, other affiliated banks or such other
subsidiaries, on investments by an affiliated bank in their stock or securities
and on an affiliated bank taking such stock and securities as collateral for
loans to any borrower. The Company is also subject to certain restrictions with
respect to direct issuance, flotation, underwriting, public sale or
distribution of certain securities.
Under Iowa law, Mahaska State Bank and Pella State Bank are subject to
supervision and examination by the Iowa Division of Banking. As an affiliate of
these banks, the Company is also subject to examination by the Iowa Division of
Banking.
The deposits of the Banks are insured by the Federal Deposit Insurance
Corporation (the "FDIC") and the Banks are, therefore, also subject to the
supervision and examination by the FDIC. The Banks are required to maintain
certain minimum capital ratios established by these regulators. The Banks are
assessed fees based on the institutions' deposits by the FDIC, to insure the
funds of customers on deposit with the institutions.
In addition, Iowa state law imposes restrictions on the operations of the
state-chartered banks including limitations on the amount a bank can lend to a
single borrower and limitations on the nature and amount of securities in which
it may invest. Among other things, Iowa law imposes restrictions on certain
types of loans made by a bank, limiting the bank from making loans (or
purchasing participation interests in loan pools) secured by real estate
located outside Iowa and its contiguous states in amounts exceeding 25% of its
regulatory capital. There can be no assurance that the Iowa or federal
regulators will not in the future impose further restrictions or limits on the
Company's loan pool activities.
Iowa law strictly regulates the establishment of bank offices and thus may
affect the Company's future plans to establish additional offices of its banks.
Under current Iowa law, a state bank may not establish more than three bank
offices outside the corporate limits of the municipality in which the principal
place of business of the state bank is located. The number of offices a state
bank may establish within the municipal corporation in which the principal
place of business of the bank is located is not limited. The limitations on the
number of offices will cease effective July 1, 2004.
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, 2002, 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.
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The FDIC Improvement Act of 1991 (the "FDICIA") was primarily designed to
recapitalize the FDIC's Bank Insurance Fund (the "BIF") and the Savings
Association Insurance Fund (the "SAIF"). To accomplish this purpose the FDIC
was granted additional borrowing authority, granted the power to levy emergency
special assessments on all insured depository institutions, granted the power
to change the BIF and SAIF rates on deposits on a semiannual basis, and
directed to draft regulations that provided for a "Risk-Based Assessment
System" that was implemented on January 1, 1994. The FDICIA also imposed
additional regulatory safety and soundness standards upon depository
institutions and granted additional authority to the FDIC. The FDICIA generally
requires that all institutions be examined by the FDIC annually. Under the
provisions of the FDICIA, all regulatory authorities are required to examine
their regulatory accounting standards and, to the extent possible, are required
to conform to generally accepted accounting principles. Finally, the FDICIA
requires the federal banking regulators to take prompt corrective action with
respect to depository institutions that fall below certain capital standards
and prohibits any depository institution from making any capital distribution
that would cause it to be undercapitalized.
Legislation became effective on September 30, 1995, which served to lessen
or remove certain legal barriers to interstate banking and branching by
financial institutions. The legislation has resulted in an increase in the
nationwide consolidation activity occurring among financial institutions by
facilitating interstate bank operations and acquisitions.
On November 2, 1999, the Gramm-Leach-Bliley Act was enacted into law. This
legislation provides for significant financial services reform by repealing key
provisions of the Glass Steagall Act thereby permitting commercial banks to
affiliate with investment banks, it substantially modifies the Bank Holding
Company Act of 1956 to permit companies that own banks to engage in any type of
financial activity, and it allows subsidiaries of banks to engage in a broad
range of financial activities that are not permitted for banks themselves. The
effects of this legislation, both from the opportunities for new activities
that the Company may undertake and from the changes in competitors' activities,
have not been fully ascertained at this time.
The earnings of the Company are affected by the policies of regulatory
authorities, including the Federal Reserve System. Federal Reserve System
monetary policies have had a significant effect on the operating results of
banks and thrifts in the past and are expected to do so in the future. Because
of changing conditions in the economy and in the money markets as a result of
actions by monetary and fiscal authorities, interest rates, credit availability
and deposit levels may change due to circumstances beyond the control of the
Company. Future policies of the Federal Reserve System and other authorities
cannot be predicted, nor can their effect on future earnings be predicted.
F. Employees
On December 31, 2002, the Company had 150 full-time employees and 31
part-time employees of which 42 full-time and 9 part-time employees were
employed by MSB, 29 full-time and 9 part-time employees were employed by CVB,
13 full-time and 2 part-time employees were employed by PSB, 35 full-time and
10 part-time employed by MFS, and 31 full-time and 1 part-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.
8
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, 2002, 2001 and 2000 reported on a
fully tax-equivalent basis assuming a 34% tax rate.
Year ended December 31,
----------------------------------------------------------------------------
2002 2001 2000
------------------------ ------------------------ ------------------------
Interest Interest Interest
Income Average Income Average Income Average
Average (2)/ Rate/ Average (2)/ Rate/ Average (2)/ Rate/
Balance Expense Yield Balance Expense Yield Balance Expense Yield
-------- -------- ------- -------- -------- ------- -------- -------- -------
(dollars in thousands)
Average earning assets:
Loans (1)..................... $313,041 $22,845 7.30% $316,033 $25,172 7.96% $302,153 $25,298 8.37%
Loan pool participations...... 94,861 10,058 10.60 87,970 9,595 10.91 61,553 7,275 11.82
Interest-bearing deposits..... 2,346 22 0.92 2,389 56 2.38 2,206 116 5.23
Investment securities
available for sale:
Taxable investments.......... 67,039 3,215 4.80 52,952 3,258 6.15 55,942 3,786 6.77
Tax exempt investments....... 3,324 244 7.33 5,703 430 7.54 7,171 600 8.37
Investment securities held to
maturity:
Taxable investments.......... 10,501 742 7.07 15,207 1,106 7.27 19,918 1,423 7.14
Tax exempt investments....... 8,162 578 7.09 8,148 580 7.11 8,007 557 6.96
Federal funds sold............ 8,069 115 1.42 6,838 252 3.69 2,748 164 5.98
-------- ------- -------- ------- -------- -------
Total earning assets........ $507,343 $37,819 7.45 $495,240 $40,449 8.17 $459,698 $39,219 8.53
======== ======= ======== ======= ======== =======
Average interest-bearing
liabilities:
Interest-bearing demand
deposits..................... $ 45,010 $ 270 0.60 $ 42,556 $ 521 1.22 $ 43,861 $ 782 1.78
Savings deposits.............. 100,172 1,876 1.87 94,762 2,961 3.12 92,656 3,779 4.08
Certificates of deposit....... 215,250 9,422 4.38 216,328 11,920 5.51 194,225 10,788 5.55
Federal funds purchased....... 1,011 21 2.07 1,485 57 3.80 3,181 191 6.00
Federal Home Loan Bank
advances..................... 84,863 4,872 5.74 82,317 5,166 6.28 67,873 4,484 6.61
Notes payable................. 6,572 270 4.11 12,135 802 6.61 15,473 1,403 9.07
Long-term debt................ 5,150 296 5.76 -- -- -- -- -- --
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities................ $458,028 $17,027 3.72 $449,583 $21,427 4.77 $417,269 $21,427 5.14
======== ======= ======== ======= ======== =======
Net interest income............. $20,792 3.74 $19,022 3.40 $17,792 3.40
======= ======= =======
Net interest margin (3)......... 4.10% 3.84% 3.87%
===== ===== =====
- --------
(1) Average loans outstanding includes the daily average balance of
non-performing loans. Interest on these loans does not include additional
interest of $241,000, $356,000, and $418,000 for 2002, 2001 and 2000,
respectively, which would have been accrued based on the original terms of
these loans compared to the interest that was actually recorded. Interest
earned on loans includes loan fees (which are not material in amount).
(2) Includes interest income and discount realized on loan pool participations.
(3) Net interest margin is net interest income divided by average total earning
assets.
9
The following table sets forth an analysis of volumne 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,
---------------------------------------------------
2002 Compared to 2001 2001 Compared to 2000
Increase/ (Decrease) Due to Increase/(Decrease) Due to
-------------------------- -----------------------
Volume Rate Net Volume Rate Net
------ ------- ------- ------ ------- ------
(in thousands)
Interest income from average-earning assets:
Loans............................................. $(237) $(2,090) $(2,327) $1,135 $(1,261) $ (126)
Loan pool participations (1)...................... 736 (273) 463 2,918 (598) 2,320
Interest-bearing deposits......................... (1) (33) (34) 8 (68) (60)
Investment securities available for sale:
Taxable investments........................... 762 (805) (43) (195) (333) (528)
Tax exempt investments........................ (174) (12) (186) (115) (55) (170)
Investment securities held to maturity:
Taxable investments........................... (334) (30) (364) (342) 25 (317)
Tax exempt investments........................ 1 (3) (2) 10 13 23
Federal funds sold................................ 40 (177) (137) 170 (82) 88
----- ------- ------- ------ ------- ------
Total income from earning assets........... 793 (3,423) (2,630) 3,589 (2,359) 1,230
----- ------- ------- ------ ------- ------
Average expense of average interest-bearing
liabilities:
Interest-bearing demand deposits.................. 29 (280) (251) (22) (239) (261)
Savings deposits.................................. 160 (1,245) (1,085) 84 (902) (818)
Certificates of deposit........................... (59) (2,439) (2,498) 1,218 (86) 1,132
Federal funds purchased........................... (15) (21) (36) (79) (55) (134)
Federal Home Loan Bank advances................... 156 (450) (294) 916 (234) 682
Notes payable..................................... (291) (241) (532) (267) (334) (601)
Long-term debt.................................... 148 148 296 -- -- --
----- ------- ------- ------ ------- ------
Total expense form interest-bearing
liabilities.............................. 128 (4,528) (4,400) 1,850 (1,850) --
----- ------- ------- ------ ------- ------
Net interest income.................................. $ 665 $ 1,105 $ 1,770 $1,739 $ (509) $1,230
===== ======= ======= ====== ======= ======
- --------
(1) Includes interest income and discount realized on loan pool participations.
10
Interest Rate Sensitivity Analysis
The following table sets forth the scheduled repricing or maturity of the
Company's assets and liabilities as of December 31, 2002, 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 otherwirse
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............................................ $ 48,159 $ 51,091 $ 66,464 $140,310 $306,024
Loan pool participations......................... 6,862 20,585 54,894 -- 82,341
Interest-bearing deposits in banks............... 2,662 -- -- -- 2,662
Investment securities:
Available for sale........................... 9,508 7,393 59,790 14,502 91,193
Held to maturity............................. -- 2,752 2,879 11,040 16,671
Federal funds sold............................... 1,950 -- -- -- 1,950
--------- --------- -------- -------- --------
Total interest earning assets............. 69,141 81,821 184,027 165,852 500,841
--------- --------- -------- -------- --------
Interest-bearing liabilities:
Now accounts..................................... 44,848 -- -- -- 44,848
Savings deposits................................. 102,358 -- -- -- 102,358
Certificates of deposit.......................... 46,218 82,324 65,179 25,383 219,104
Federal funds purchased.......................... 1,500 -- -- -- 1,500
Federal Home Loan Bank advances.................. 3,991 6,511 16,037 42,754 69,293
Long-term debt................................... -- -- -- 10,310 10,310
--------- --------- -------- -------- --------
Total interest-bearing liabilities........ 198,915 88,835 81,216 78,447 447,413
--------- --------- -------- -------- --------
Interest sensitivity gap per period................. $(129,774) $ (7,014) $102,811 $ 87,405
========= ========= ======== ========
Cumulative Interest sensitivity gap................. $(129,774) $(136,788) $(33,977) $ 53,428
========= ========= ======== ========
Interest sensitivity gap ratio...................... 0.35% 0.92% 2.27% 2.11%
Cumulative Interest sensitivity gap ratio........... 0.35% 0.52% 0.91% 1.12%
In the table above, NOW accounts and savings deposits are included as
interest-bearing liabilities in the three months or less category.
Loan pool participations are included in the interest rate sensitivity
analysis using an estimated three-year average life. The historical average for
the return of original investment on the pools is approximately 36 months.
Given the non-performing aspect of the loan pool portfolio, management feels
that the use of contractual weighted-average maturity data is inappropriate.
11
II. Investment Portfolio
The following table sets forth certain information with respect to the book
value of the Company's investment portfolio as of December 31, 2002, 2001 and
2000.
December 31,
------------------------
2002 2001 2000
-------- ------- -------
(in thousands)
Securities available for sale:
U.S. government securities....................... $ -- $ -- $ 1,005
U.S. government agency securities................ 49,610 20,579 35,656
Obligations of states and political..............
Obligations of states and political subdivisions. 3,173 3,450 6,669
Other investment securities...................... 38,410 26,177 17,428
-------- ------- -------
Total securities available for sale.......... 91,193 50,206 60,758
-------- ------- -------
Securities held to maturity:
U.S. government agency securities................ 7,259 12,047 16,263
Obligations of states and political subdivisions. 9,329 9,098 8,968
Other investment securities...................... 83 187 690
-------- ------- -------
Total securities held to maturity............ 16,671 21,332 25,921
-------- ------- -------
Total investment securities......................... $107,864 $71,538 $86,679
======== ======= =======
The following table sets forth the contractual maturities of investment
securities as of December 31, 2002, 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, 2002, the Company held no
securities with a book value exceeding 10% of shareholders' equity.
Maturity
-------------------------------------------------------
After One After Five
Within but Within but Within
One Year Five Years Ten Years After Ten Years
------------ ------------ ----------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield
------- ----- ------- ----- ------ ----- ------- -----
(dollars in thousands)
Securities available for sale:
U.S. government agency securities................. $ 4,100 3.18% $43,334 3.92% $ 314 6.82% $ 1,862 6.72%
Obligations of states and political subdivisions.. 544 6.55 2,186 6.82 443 8.33 -- --
Other investment securities....................... 4,072 6.41 28,252 5.36 -- -- 6,086 2.63
------- ------- ------ -------
Total securities available for sale............ 8,716 4.90 73,772 4.56 757 7.70 7,948 3.59
------- ------- ------ -------
Securities held to maturity:
U.S. government agency securities.................... -- -- 847 6.67 474 7.06 5,938 6.42
Obligations of states and political subdivisions.. 2,378 6.18 2,440 6.16 4,036 7.34 475 7.90
Other investment securities....................... -- -- 83 7.15 -- -- -- --
------- ------- ------ -------
Total securities held to maturity.............. 2,378 6.18 3,370 6.31 4,510 7.31 6,413 6.53
------- ------- ------ -------
Total investment securities.......................... $11,094 5.17% $77,142 4.63% $5,267 7.37% $14,361 4.90%
======= ======= ====== =======
12
III. Loan Portfolio
The Company's loan portfolio largely reflects the profile of the communities
in which it operates. Apporximately two-thirds of the total loans as fo
December 31, 2002, 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,
------------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------------- -------------- -------------- -------------- --------------
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
(dollars in thousands)
Agricultural.............. $ 38,004 12.4% $ 41,084 12.7% $ 45,404 14.5% $ 42,022 14.9% $ 27,504 16.6%
Commercial................ 39,324 12.9 40,180 12.5 39,081 12.5 38,238 13.6 38,959 23.6
Real estate:
1-4 family residences... 133,850 43.7 138,900 43.0 139,098 44.6 131,925 46.7 38,087 23.0
5+ residential property. 4,373 1.4 3,712 1.2 3,675 1.2 4,064 1.4 240 0.1
Agricultural............ 28,947 9.5 28,075 8.7 23,855 7.6 21,677 7.7 21,297 12.9
Construction............ 8,058 2.6 12,555 3.9 10,007 3.2 5,593 2.0 5,956 3.6
Commercial.............. 41,622 13.6 39,884 12.4 30,239 9.7 23,613 8.4 17,007 10.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Real estate total...... 216,850 70.8 223,126 69.2 206,874 66.3 186,872 66.2 82,587 49.9
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Installment............... 11,517 3.8 17,854 5.5 20,196 6.5 13,866 4.9 12,847 7.8
Lease financing........... 329 0.1 437 0.1 526 0.2 1,093 0.4 3,530 2.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans (1)....... $306,024 100.0% $322,681 100.0% $312,081 100.0% $282,091 100.0% $165,427 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Total assets.............. $537,782 $545,795 $515,212 $486,189 $298,389
======== ======== ======== ======== ========
Loans to total assets..... 56.9% 59.1% 60.6% 58.0% 55.4%
- --------
(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, 2002.
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
---------- ---------- ---------- ------- ------- --------
Agricultural............. $16,586 $12,168 $ 9,250 $38,004 $ 8,398 $13,020
Commercial............... 18,255 17,765 3,304 39,324 15,936 5,133
Real estate--construction 6,552 642 864 8,058 1,022 484
------- ------- ------- ------- ------- -------
Total................. $41,393 $30,575 $13,418 $85,386 $25,356 $18,637
======= ======= ======= ======= ======= =======
The following table provides information on the Company's non-performing
loans as of the dates indicated.
December 31,
--------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(dollars in thousands)
90 days past due........................... $1,401 $ 926 $ 910 $1,426 $ 663
Restructured............................... 206 -- -- 515 164
Nonaccrual................................. 1,038 2,559 2,042 2,874 561
------ ------ ------ ------ ------
Total non-performing loans................. $2,645 $3,485 $2,952 $4,815 $1,388
====== ====== ====== ====== ======
Ratio of nonperforming loans to total loans 0.86% 1.08% 0.95% 1.71% 0.84%
13
IV. Summary of Loan Loss Experience
The following table sets forth loans charged off and recovered by the type
of loan and an analysis of the allowance for loan losses for the years ended
December 31, 2002, 2001, 2000, 1999 and 1998.
Year ended December 31,
------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(dollars in thousands)
Amount of loans outstanding at end of period (net of
unearned interest) (1)............................ $306,024 $322,681 $312,081 $282,091 $165,427
======== ======== ======== ======== ========
Average amount of loans outstanding for the period
(net of unearned interest)........................ $313,041 $316,033 $302,153 $202,733 $157,712
======== ======== ======== ======== ========
Allowance for loan losses at beginning of period.... $ 3,381 $ 2,933 $ 4,006 $ 2,177 $ 1,816
-------- -------- -------- -------- --------
Charge-offs:
Agricultural..................................... 43 1,130 695 303 135
Commercial....................................... 204 166 1,125 1,724 638
Real estate--construction........................ -- -- -- -- --
Real estate--mortgage............................ 221 114 131 229 --
Installment...................................... 105 76 92 56 63
Lease financing.................................. -- -- 143 63 4
-------- -------- -------- -------- --------
Total charge-offs............................ 573 1,486 2,186 2,375 840
-------- -------- -------- -------- --------
Recoveries:
Agricultural..................................... 42 3 -- 26 1
Commercial....................................... 15 52 182 2 8
Real estate--construction........................ -- -- -- -- --
Real estate--mortgage............................ 1 92 1 6 --
Installment...................................... 31 11 22 12 13
Lease financing.................................. -- -- 16 14 --
-------- -------- -------- -------- --------
Total recoveries............................. 89 158 221 60 22
-------- -------- -------- -------- --------
Net loans charged off............................... 484 1,328 1,965 2,315 818
Provision for loan losses........................... 1,070 1,776 892 3,628 1,179
Allowance at date of acquisition.................... -- -- -- 516 --
-------- -------- -------- -------- --------
Allowance for loan losses at end of period.......... $ 3,967 $ 3,381 $ 2,933 $ 4,006 $ 2,177
======== ======== ======== ======== ========
Net loans charged off to average loans.............. 0.15% 0.42% 0.65% 1.14% 0.52%
Allowance for loan losses to total loans at end of
period............................................ 1.30% 1.05% 0.94% 1.42% 1.32%
- --------
(1) Loans do not include, and the allowance for loan losses does not include
any reserve for investments in loan pool participations.
14
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 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,
---------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------------- ----------------- ----------------- ----------------- -----------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
Allowance to Total Allowance to Total Allowance to Total Allowance to Total Allowance to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
(dollars in thousands)
Agricultural... $ 831 12.4% $ 916 12.7% $ 593 14.5% $ 597 14.9% $ 361 17.2%
Commercial..... 626 12.9 497 12.5 791 12.5 545 13.6 514 21.6
Real estate--
mortgage...... 2,199 70.8 1,642 69.2 1,329 66.3 2,652 66.2 1,086 50.1
Installment.... 255 3.8 273 5.5 194 6.5 196 4.9 170 9.2
Lease financing 56 0.1 53 0.1 26 0.2 16 0.4 46 1.9
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total....... $3,967 100.0% $3,381 100.0% $2,933 100.0% $4,006 100.0% $2,177 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
V. Deposits
The following table sets forth the average amount of and the average rate
paid on deposits by deposit category for the years ended December 31, 2002,
2001 and 2000.
Year ended December 31,
-------------------------------------------
2002 2001 2000
------------- ------------- -------------
Average Average Average
Balance Rate Balance Rate Balance Rate
-------- ---- -------- ---- -------- ----
(dollars in thousands)
Non-interest bearing demand deposits.......... $ 24,917 N/A $ 23,511 N/A $ 22,886 N/A
Interest-bearing demand (NOW and money market) 45,010 0.60% 42,556 1.22% 43,861 1.78%
Savings deposits.............................. 100,172 1.87 94,762 3.12 92,656 4.08
Certificates of deposit....................... 215,250 4.38 216,328 5.51 194,225 5.55
-------- -------- --------
Total deposits............................. $385,349 3.00% $377,157 4.08% $353,628 4.34%
======== ==== ======== ==== ======== ====
The following table summarizes certificates fo deposit in amounts of
$100,000 or more by time remaining until maturity as of December 31, 2002.
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,
2002
--------------
(in thousands)
Three months or less............ $ 9,800
Over three through six months... 5,729
Over six months through one year 6,286
Over one year................... 10,237
-------
Total........................ $32,052
=======
15
VI. Return on Equity and Assets
Various operating and equity ratios for the years indicated are presented
below:
Year ended December 31,
----------------------
2002 2001 2000
----- ----- -----
Return on average total assets........ 1.07% 0.82% 0.81%
Return on average equity.............. 10.91 8.59 8.18
Dividend payout ratio................. 42.95 54.55 60.61
Average equity to average assets...... 9.79 9.57 9.90
Equity to assets ratio (at period end) 10.36 9.31 9.57
===== ===== =====
VII. Borrowed Funds
The following table summaries the outstanding amount of and the average rate
on borrowed funds as of December 31, 2002, 2001 and 2000.
December 31,
-----------------------------------------------
2002 2001 2000
-------------- --------------- --------------
Average Average Average
Balance Rate Balance Rate Balance Rate
------- ------- -------- ------- ------- -------
(dollars in thousands)
Long-term debt (1)............. $10,310 5.46% $ -- -- % $ -- -- %
Notes payable (2).............. -- 3.45 9,200 3.95 13,200 9.13
Federal Home Loan Bank advances 69,293 5.26 91,174 5.56 75,050 6.27
Federal funds purchased........ 1,500 1.28 10,650 2.10 2,345 6.72
------- -------- -------
Total....................... $81,103 5.21% $111,024 5.09% $90,595 6.70%
======= ==== ======== ==== ======= ====
- --------
(1) On June 27, 2002, the Company obtained $10,310,000 in long-term
subordinated debt from its participation in the issuance of a pooled trust
preferred security. The trust preferred has a 30 year maturity, does not
require any principal amortization and is callable after five years at par
at the issuers' option. The interest rate is variable based on the three
month Libor rate plus 3.65 percent, with interest payable quarterly.
(2) As of December 31, 2002, the Company had no borrowings on its revolving
line of credit with an unaffiliated bank. The note has a variable interest
rate at 0.80 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, 2003.
The maximum amount of borrowed funds outstanding at any month end for the
years ended December 31, 2002, 2001 and 2000 were as follows:
2002 2001 2000
------- ------- -------
(in thousands)
Long-term debt................. $10,310 $ -- $ --
Notes payable.................. 12,200 13,200 18,000
Federal Home Loan Bank advances 92,204 91,174 75,050
Federal funds purchased........ 5,800 10,650 8,460
======= ======= =======
16
The following table sets forth the average amount of and the average rate
paid on borrowed funds for the years ended December 31, 2002, 2001 and 2000.
Year ended December 31,
----------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ------- ------- ------- ------- -------
(dollars in thousands)
Long-term debt................. $ 5,150 5.76% $ -- -- % $ -- -- %
Notes payable.................. 6,572 4.11 12,135 6.61 15,473 9.07
Federal Home Loan Bank advances 84,863 5.74 82,317 6.28 67,873 6.61
Federal funds purchased........ 1,011 2.07 1,485 3.80 3,181 6.00
------- ------- -------
Total....................... $97,596 5.59% $95,937 6.28% $86,527 7.02%
======= ==== ======= ==== ======= ====
Item 2. Properties
The Company's headquarters are located at 222 First Avenue East, Oskaloosa,
Iowa. This building is a two-story combination office, data processing
facility, and motor bank that was constructed in 1975. The Company's offices
are located on the second floor and the data processing area is located on the
first floor. MSB rents the first floor motor bank area, which includes four
drive-up lanes and two walk-up windows and the basement from the Company. 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 four 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. In 2001, CVB occupied a new 3,500
square foot branch facility at 2408 West Burlington Street in Fairfield. This
facility replaced a leased grocery store branch that was closed. 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.
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
17
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 leased a 540 square foot branch
facility located in the Wal-Mart Super Center at 324 W. Agency Road in West
Burlington. The branch was opened in 1997 under an initial lease term of 5
years. MFS closed this branch facility at the expiration of the lease term on
December 31, 2002.
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 12 of the Company's Annual Report, filed
as Exhibit 13 hereto, is incorporated herein by reference.
There were approximately 445 holders of record of the Company's $5 common
stock as of March 3, 2003. Additionally, there are an estimated 750 beneficial
holders whose stock was held in street name by brokerage houses as of that
date. The closing price of the Company's common stock was $16.45 on March 18,
2003.
The Company paid dividends to common shareholders in 2002 of $.64 per share,
which is $.04 per share greater than the amount paid in 2001. Dividend
declarations are evaluated and determined by the Board of Directors on a
quarterly basis. In February 2003, the Board of Directors declared a dividend
of $.16 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 2 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-13 of the Appendix to the
Company's definitive proxy Statement, is incorporated herein by reference.
Item 7a. Market Risk Disclosure
The information appearing on pages A-9 and A-10 of the Appendix to the
Company's definitive proxy statement, is incorporated herein by reference.
18
Item 8. Financial Statements and Supplementary Data
The information appearing on pages F-1 through F-26 of the Appendix to the
Company's definitive proxy statement, is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Within the twenty-four months prior to the date of the most recent financial
statements, there have been no changes in or disagreements with accountants of
the Company.
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.
Item 14. Controls and Procedures
Within 90 days of the filing of this Form 10-K we carried out an evaluation,
under the supervision and with the participation of management, including the
Chief Executive Officer and Chief Financial Officer, of our disclosure controls
and procedures (as defined in Rules 13a-14 and 15d-14 under the Securities
Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures are effective in timely altering them to material information
required to be included in periodic filings with the Securities and Exchange
Commission. There were no significant changes in our internal controls
subsequent to the date of our most recent evaluation.
PART IV
Item 15. 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 F-1
through F-27 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 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.
19
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 10.5.1
Second Amendment to Amended and Restated Credit Agreement dated October
15, 2002 between Mahaska Investment Company and Harris Trust and
Savings Bank.
Exhibit 10.6
Stock Purchase Agreement By and Between Mahaska Investment Company and
Belle Plaine Service Corp. dated October 4, 2002.
Exhibit 11
Computation of Per Share Earnings
Exhibit 13
The Annual Report to Shareholders of Mahaska Investment Company for the
2002 calendar year.
Exhibit 21
Subsidiaries
Exhibit 23
Consent of Independent Auditor
Exhibit 99.1
Certification of Chief Executive Officer Pursuant to 18 USC (S) 1350.
Exhibit 99.2
Certification of Chief Financial Officer Pursuant to 18 USC (S) 1350.
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: The Company filed a Form 8-K on October 18, 2002,
reporting that it had entered into an agreement on October 4, 2002, to
acquire the Belle Plaine Service Corp. of Belle Plaine, IA.
20
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
By: /S/ David A. Meinert
-----------------------------
David A. Meinert
Executive Vice President,
Chief Financial Officer and
Director
March 20, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ RICHARD R. DONAHUE Director March 20, 2003
- -----------------------------
Richard R. Donahue
/S/ WILLIAM D. HASSEL Director March 24, 2003
- -----------------------------
William D. Hassel
/S/ CHARLES S. HOWARD Director, Chairman of the March 20, 2003
- ----------------------------- Board, President and Chief
Charles S. Howard Executive Officer
/S/ DAVID A. MEINERT Director, Executive Vice March 20, 2003
- ----------------------------- President and Chief
David A. Meinert Financial Officer
(Principal Accounting
Officer)
/S/ JOHN P. POTHOVEN Director March 20, 2003
- -----------------------------
John P. Pothoven
/S/ JOHN W. N. STEDDOM Director March 20, 2003
- -----------------------------
John W. N. Steddom
/S/ JAMES G. WAKE Director March 20, 2003
- -----------------------------
James G. Wake
/S/ MICHAEL R. WELTER Director March 20, 2003
- -----------------------------
Michael R. Welter
/S/ EDWARD C. WHITHAM Director March 20, 2003
- -----------------------------
Edward C. Whitham
21
CERTIFICATIONS
I, Charles S. Howard, President and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Mahaska Investment
Company;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
(c) presented in this annual 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 annual 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.
/S/ CHARLES S. HOWARD
--------------------------------------
Charles S. Howard
President and Chief Executive
Officer
Date: March 20, 2003
22
CERTIFICATIONS
I, David A. Meinert, Executive Vice President and Chief Financial Officer,
certify that:
1. I have reviewed this annual report on Form 10-K of Mahaska Investment
Company;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
(c) presented in this annual 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.
/S/ DAVID A. MEINERT
--------------------------------------
David A. Meinert
Executive Vice President and Chief
Financial Officer
Date: March 20, 2003
23