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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 0-24630
MAHASKA INVESTMENT COMPANY
INCORPORATED IN IOWA
42-1003699
I.R.S. Employer Identification No.
222 FIRST AVENUE EAST, OSKALOOSA, IOWA 52577
Registrant's telephone number, including area code:
515-673-8448
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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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 ___ No ___.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 12, 1999, was $42,302,480.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the most recent practicable date, March 12, 1999.
3,636,345 shares Common Stock, $5 par value
DOCUMENTS INCORPORATED BY REFERENCE
The Annual Report to Shareholders for the 1998 fiscal year is incorporated
by reference into Part I and Part II hereof to the extent indicated in such
Parts.
The definitive proxy statement of Mahaska Investment Company for the 1999
annual meeting of shareholders is incorporated by reference into Part III hereof
to the extent indicated in such Part.
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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............................... 5
F. Employees................................................ 7
G. Statistical Disclosure................................... 8
Item 2. PROPERTIES.................................................. 16
Item 3. LEGAL PROCEEDINGS........................................... 16
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 16
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 17
Item 6. SELECTED FINANCIAL DATA..................................... 17
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 17
Item 7a. MARKET RISK DISCLOSURE...................................... 17
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 17
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 17
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 18
Item 11. EXECUTIVE COMPENSATION...................................... 18
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 18
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 18
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K....................................................... 18
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PART I
ITEM 1. BUSINESS
A. GENERAL DESCRIPTION
Mahaska Investment Company (the "Company") is a financial services holding
company headquartered in Oskaloosa, Mahaska County, Iowa. The Company was
incorporated in Iowa in 1973 and is a bank holding company registered under the
Bank Holding Company Act of 1956 and a savings and loan holding company under
the Savings and Loan Holding Company Act. The Company owns 100% of the stock of
three bank subsidiaries (collectively referred to as the "Banks"). These three
banks are Mahaska State Bank ( "MSB"), Central Valley Bank ("CVB"), and Pella
State Bank ("PSB"). The Company also owns 100% of the stock of On-Site Credit
Services, Inc. ("On-Site").
The Bank subsidiaries engage in retail and commercial banking and related
financial services, providing the usual products and services such as deposits,
commercial, real estate, and consumer loans, and trust services. MSB also
provides data processing services to affiliated and non-affiliated banks.
On-Site provides equipment leasing and accounts receivable financing.
Since 1988, the Company, either directly or through the Banks, has invested
in loan pool participations that have been purchased by certain non-affiliated
independent service corporations (collectively, the "Servicer") from the Federal
Deposit Insurance Corporation ("FDIC"), the Resolution Trust Corporation
("RTC"), or from other sources. These loan pool investments generally consist of
performing, nonperforming, or distressed loans, that have been sold at prices
reflecting varying discounts from the aggregate outstanding principal amount of
the underlying loans depending on the credit quality of the portfolio. The
Servicer collects these loans from the borrowers.
The Company provides services to the Banks and to On-Site including
management assistance, auditing services, human resources administration,
marketing assistance and coordination, assistance with respect to accounting and
operating systems and procedures, and loan review. Charges for these services
are based on the nature and extent of these services.
B. SUBSIDIARIES
Mahaska State Bank -- MSB is a full-service, commercial bank which was
chartered as an Iowa state bank in 1931. The Bank operates in south central Iowa
and serves all of Mahaska county from its main bank and two branch offices in
Oskaloosa and serves portions of Keokuk and Iowa counties from its branch office
in North English. The Bank also maintains one drive-up automated teller machine
located in Oskaloosa. The Bank provides a wide array of retail and commercial
banking services, including demand, savings and time deposits, loans, trust
services, and data processing services to the bank subsidiaries and to three
non-affiliated banks. The Bank also provides full-service brokerage services to
its customers through an affiliation with an independent broker.
Central Valley Bank -- CVB is a full-service, federally-chartered savings
bank which was formed as a de novo institution by the Company in June 1994. CVB
also operates in south central Iowa from its main office in Ottumwa, which
serves Wapello County, and from its two branches located in Fairfield and one
branch in Sigourney, which serve Jefferson and Keokuk counties, respectively.
CVB provides retail deposit services including demand, savings, and time deposit
products and offers commercial, agricultural, real estate, and consumer loans.
During 1997, the Bank formed a wholly-owned service corporation, Valley
Financial Services, Inc., to provide crop insurance products to its customers.
Pella State Bank -- PSB is a full-service, Iowa state chartered commercial
bank which the Company formed as a de novo institution in December 1997. PSB
mainly serves the community of Pella, Iowa and the surrounding area located in
Marion County. The office of the bank is a newly-remodeled facility which the
Company purchased and renovated in 1997. The Bank provides full retail and
commercial banking services to its customers. The Bank also provides
full-service brokerage services to its customers through an affiliation with an
independent broker.
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On-Site Credit Services, Inc. -- On-Site is an Iowa corporation which was
formed by the Company in 1974 under the name of MIC Leasing Co. The company
operated under the name of On-Site Commercial Services until June 1997 when the
name was officially changed to On-Site Credit Services, Inc. On-Site originates
and services machinery and equipment leases to small businesses and farmers. The
funding of these leases is either provided by On-Site through funds provided by
the Company or by MSB, with On-Site receiving a broker fee. On-Site also
provides accounts receivable financing and factoring services to small
businesses mainly in the state of Iowa.
C. LOAN POOL PARTICIPATIONS
The Company, directly and through the Banks, has participation interests in
pools of loans currently held and serviced by four separate independent
servicing corporations (referred to collectively as the "Servicer"). The four
independent servicing corporations are Central States Resources Corporation,
Midstates Resources Corporation, All States Resources Corporation, and States
Resources Corporation. The Company does not have any ownership interest in or
control over these servicing corporations. Two of the independent servicing
corporations are owned solely by Randal Vardaman and two are owned by Mr.
Vardaman in conjunction with other individuals. Mr. Vardaman has been engaged in
credit analysis and loan portfolio management in various positions since 1970.
He founded Central States Resources Corporation in 1988 and organized Midstates
Resources Corporation in 1991, All States Resources Corporation in 1993, and
States Resources Corporation in 1998. Prior to the formation of the servicing
corporations, he reviewed various FDIC loan pool packages, participated in the
liquidation of certain banking institutions in Iowa, and served as assistant
liquidator at the FDIC's Division of Liquidation.
The Company has invested in loan pools purchased by the Servicer at varying
discounts from the aggregate outstanding principal amount of the underlying
loans. The loan pools were sold by the FDIC or the RTC acting as conservator,
receiver, or liquidator of failed banks and savings and loan institutions, and
by other large nonaffiliated banking organizations. The loans comprising the
pools were originated throughout the United States. As part of the agreement to
purchase participation interests in the loan pools, the Company and its
subsidiaries have contracted with the Servicer to service the underlying loans
within the respective loan pools which are owned of record by the Servicer. The
Servicer also evaluates various loan pools prior to purchase and makes
recommendations to the Company concerning the creditworthiness of proposed loan
pool purchases and proposes appropriate bids to the Company and any other
potential loan pool participants.
The Servicer has bid on loan pools from various regional offices of the
FDIC and the RTC, and from other sources. The Company and the Banks have
purchased participation interests in such pools of loans. The purchase prices
paid by the Company for loan pool participations have ranged from 5.5% to 97.7%
of the aggregate outstanding principal amount of the loans comprising such pools
at the time of purchase. The Servicer acquires the loan pools without recourse
against the sellers and, accordingly, the risk of noncollectibility is, for the
most part, assumed by the Company and any other investors in a particular pool.
Federal law mandated that after July 1, 1995, the RTC no longer was
appointed to act as conservator or liquidator and was phased out of existence by
year end 1995; however, the FDIC assumed the RTC's role with respect to failed
savings and loans, as well as continuing in its role as conservator for failed
banks. While only the FDIC currently offers loan pools, there is no assurance
that it will continue to do so. Beginning in 1996, the Servicer successfully bid
on packages of loans offered for sale by a large banking organization
headquartered in the eastern United States. The Servicer continues to bid on
packages offered by the FDIC and large banking organizations throughout the
country. Should the opportunity to invest in loan pools not exist in the future,
the Company intends to invest available funds in other income producing assets.
Each pool has a different composition and different characteristics. The
composition of a loan pool is generally determined by the seller based on its
desire to maximize the price it receives for all loans among the various pools.
Some pools may consist of a large number of small consumer loans which are
unsecured or are secured by other assets such as automobiles or mobile homes,
while other pools may consist of loans primarily secured by real estate, and yet
other pools may consist of small to medium balance commercial loans. Still other
pools may contain a mixture of such loans and other types of loans. Some pools
may contain significant
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numbers of past-due nonperforming loans while other pools are comprised almost
entirely of performing loans. The price bid and paid for such a loan pool is
determined based on the composition of the particular pool, the amounts the
Servicer believes can be collected on such a pool, and the risks associated with
the collection of such amounts.
In considering an investment in a loan pool, the Servicer will evaluate
loans owned and being offered and make recommendations to the Company and other
prospective investors concerning the creditworthiness of the proposed loan pool
purchase. The Servicer performs a comprehensive analysis of the loan pool in an
attempt to ensure proper valuation and adequate safeguards in the event of
default. The bid price on the loan pools will be reflective of the results of
the Servicer's pre-acquisition review of the loan files. In many cases the loan
files may not be current and substantial uncertainties may exist regarding the
collectibility of the various loans in the pool. Management believes that in
many instances the non-current loans can be brought current once the Servicer
has an opportunity to contact the debtor. The Company makes its own decisions as
to whether or not to participate in a particular loan pool which has been
recommended by the Servicer, based on the Company's experience with the various
categories and qualities of loans.
The sales of loan pools by the FDIC and by other sellers is generally
conducted by sealed bid auction. A sealed bid auction requires each bidder to
submit a confidential bid on the subject loan pool and the loan pool is awarded
to the highest bidder. In recent years, the Servicer and the Company have faced
increasing competition in bidding for loan pools.
Since 1988, the Servicer, on behalf of the Company and other investors, has
bid on a large number of loan pools and has been successful in purchasing 65
loan pools. The Company and other investors in the loan pools fund the purchase
by the Servicer and each investor receives a percentage interest in the loan
pool based on its proportional investment relative to the total purchase price
of the pool. Each investor receives a loan pool participation certificate
reflecting this interest.
The purchased loan pools consist, for the most part, of loans evidenced by
promissory notes and secured by either personal property or real property. The
value of the collateral may range from nominal to substantial and often may be
impossible to establish prior to acquisition of the pools with the level of
certainty that is typically required in a financial institution.
Upon the acquisition of a participation interest in a loan pool, the
Company assumes the risk that the Servicer will be unable to recover an amount
equal to the purchase price plus the carrying costs, if any, collection costs
and expected profits on such accounts. The extent of such risk is dependent on a
number of factors, including the Servicer's ability to locate the debtors, the
debtors' financial condition, the possibility that a debtor may file for
protection under applicable bankruptcy laws, the Servicer's ability to locate
the collateral, if any, for the loan and to obtain possession of such
collateral, the value of such collateral, and the length of time it takes to
realize the ultimate recovery either through collection procedures or through a
resale of the loans following a restructure.
A cost "basis" is assigned to each individual loan acquired on a cents per
dollar (discounted price) based on the Servicer's assessment of the recovery
potential of each such loan. This methodology assigns a higher basis to
performing loans with greater potential collectibility and a lower basis to
those loans identified as having little or no potential for collection.
Loan pool participations are shown on the Company's balance sheet as a
separate asset category. The original carrying value of loan pool participations
represents the discounted price paid by the Company to acquire its participation
interests in various loan pools purchased by the Servicer. The Company's
investment balance is reduced as the Servicer collects principal payments on the
loans and remits the proportionate share of such payments to the Company.
The investment in loan pools is accounted for on a nonaccrual (or cash)
basis in one of three methods, depending on the circumstances. First, if a
borrower makes regular payments on a loan, the payment received is first applied
to interest income in the amount of interest due at the contract rate. Further
payments are applied to principal in a ratio reflecting the proportion of cost
basis to loan principal amount. Payments in excess of interest and this ratio
are recorded as discount income. Discount income earned over the life of a
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loan represents loan principal collected in excess of the price originally paid
to acquire the loan from the FDIC, the RTC, or any other sellers, which price
constitutes the cost "basis" of the loan.
Secondly, if the borrower fails to make regular payments, the Servicer
evaluates the collateral supporting the loan. If the Servicer determines that
the loan is well secured, then payments are applied as previously described. If
the Servicer determines that the collateral is deficient, payments are applied
to the principal balance of the loan with no recognition of interest due. The
cost recovery method governs the application of payments received to the
outstanding principal balance. Under this method, any amount received is
initially applied to the cost "basis" of the loan and any additional amounts
received are recognized as discount income.
Third, where the Servicer negotiates a settlement of a loan for a lump sum,
the payment is first applied to principal to the extent of the assigned cost
"basis" with the excess treated as discount income up to the original principal
value of the loan, and any remainder is treated as interest income on loan pool
participations. In each case, where changed circumstances or new information
lead the Servicer to believe that collection of the note or recovery of the
basis through collateral would be less than originally determined, the cost
basis assigned to the loan is written down or written off through a charge
against discount income.
Collection expenses incurred by the Servicer are netted against discount
income. Discount income is added to interest income and reflected as one amount
on the Company's consolidated statement of income. Profit (or loss) from
collection activities is determined on a monthly basis for each servicing
corporation from which loan pool participation interests have been purchased.
The Company does not recognize as income any accrued interest receivable on
the loan pools. Interest income is only recognized when collected and actually
remitted to the Company by the Servicer. Many of the pools that have been
purchased by the Servicer do not include purchased interest in the cost basis;
thus, interest collected does not have a cost basis and represents profit.
Interest income collected by the Servicer is reflected in the Company's
consolidated financial statements as interest income included as part of
interest income and discount on loan pool participations.
The Servicer provides the Company with monthly reports detailing
collections of principal and interest, face value of loans collected and those
written off, actual operating expenses incurred, remaining asset balances (both
in terms of cost basis and principal amount of loans), a comparison of actual
collections and expenses with target collections and budgeted expenses, and
summaries of remaining collection targets. Monthly meetings are held between the
Company and representatives of the Servicer to review collection efforts and
results, to discuss future plans of action, and to discuss potential
opportunities. Additionally, the Company's and the Servicer's personnel
communicate via telephone and telecopy on a regular basis to discuss various
issues regarding the loan pools. Company management personnel visit the
Servicer's operation in Omaha, Nebraska on a regular basis; and the Company's
internal auditor has performed audit procedures in recent years.
The Servicer is reimbursed for costs incurred to collect loan principal and
interest, which are netted against loan principal and interest collections.
These costs include salary and benefits paid by the Servicer to its employees,
legal fees, and other overhead expenses. Each loan pool investment is tracked on
an individual basis with the Servicer receiving a "Servicing Fee" of up to
twenty-five percent of net interest collected based on the percentage of net
loan principal collections to the original investment amount. Once the original
investment amount has been fully recovered, the Servicer is no longer entitled
to the Servicing Fee. In lieu of the Servicing Fee, the Servicer receives a
"Bonus Fee" of ten percent of all subsequent net collections and receives a
twenty-five percent participation interest in the individual pool and shares
proportionally in all future collections, net of costs and Bonus Fees.
The Company's overall cost basis in its loan pool participations represents
a discount from the aggregate outstanding principal amount of the loans
underlying the pools. For example, as of December 31, 1998 and 1997, such cost
basis was $54,510,000 and $54,326,000, respectively, while the contractual
outstanding principal amounts of the underlying loans as of such dates were
approximately $83,058,000 and $99,948,000, respectively. Because this discounted
cost basis inherently reflects the assessed collectibility of the underlying
loans and thus creates a built-in reserve against the risk of nonpayment in the
loan pools, the Company has not
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established an allowance for loan losses relating to the loan pool
participations. The Company does not include any amounts related to the loan
pool participations in its totals of nonperforming loans.
The underlying loans in the loan pool participations include both fixed
rate and variable rate instruments, but are accounted for on a nonaccrual basis,
and no amounts for interest due are reflected in the carrying value of the loan
pool participations. Based on historical experience, the average period of
collectibility for loans underlying the Company's loan pool participations, many
of which have exceeded contractual maturity dates, is approximately three to
five years. Management has reviewed the recoverability of the underlying loans
and believes that the carrying value does not exceed the net realizable value of
its investment in loan pool participations.
D. COMPETITION
The Company competes in the commercial banking and thrift industries
through its subsidiary banks. These industries are highly competitive, and all
the bank subsidiaries face strong direct competition for deposits, loans, and
other financial-related services. The Banks in Mahaska, Marion, Wapello, Keokuk,
Iowa, and Jefferson counties in south central Iowa compete with other commercial
banks, other thrifts, credit unions, stockbrokers, finance divisions of auto and
farm equipment companies, agricultural suppliers, and other agricultural-related
lenders. Some of these competitors are local, while others are statewide or
nationwide. The Banks compete for deposits principally by offering depositors a
wide variety of deposit programs, convenient office locations, hours and other
services, and for loan originations primarily through interest rates and loan
fees they charge, the efficiency and quality of services they provide to
borrowers and the variety of their loan products. Some of the financial
institutions and financial service organizations with which the Banks compete
are not subject to the same degree of regulation as that imposed on bank and
thrift holding companies, federally insured Iowa-chartered banks, and federal
savings banks. As a result, such competitors have advantages over the Banks in
providing certain services. As of December 31, 1998, approximately twenty
commercial banks, three thrifts, and seven credit unions operated within a
25-mile radius of Oskaloosa, and new competitors may develop that are
substantially larger and have significantly greater resources than any of the
Banks. Currently, major competitors in certain of the Company's markets include
banking subsidiaries of Wells Fargo (Norwest) Corporation, Firstar Corporation
of Iowa, Mercantile Bank, U S Bank, and NationsBank. As a result of recently
passed federal legislation to allow unlimited interstate branching, the Company
may experience heightened competition from these and other major financial
institutions seeking to expand their regional banking presence in Iowa.
The Company also faces competition with respect to its investments in loan
pool participations. The Company's financial success to date is largely
attributable to the Servicer's ability to determine the loan pools to bid on and
ultimately purchase, the availability of assets to fund the purchases and the
Servicer's ability to collect on the underlying assets. Investments in loan
pools have become increasingly popular in recent years, leading financial
institutions and other competitors to become active at loan pool auctions
conducted by the FDIC and other sellers. There is no assurance that the Company,
through the Servicer, will be able to bid successfully in the future. Certain
existing competitors of the Company are substantially larger and have
significantly greater financial resources than the Company. Increased
participation by new institutions or other investors may also create increased
buying interest which could also result in higher bid prices for the type of
loan pools considered for investment by the Company. In addition, new and
existing competitors may develop due diligence procedures comparable to the
Servicer's procedures. The emergence of such competition could have a material
adverse effect on the Company's business and financial results. The Company
expects that its success in the future will depend more on the performance of
its bank subsidiaries and less on the investment in loan pool participations.
E. SUPERVISION AND REGULATION
Bank holding companies, banks, savings and loan holding companies, and
savings and loan associations are extensively regulated under federal and state
law. References under this heading to applicable statutes or regulations are
brief summaries of the portions thereof which do not purport to be complete and
which are
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qualified in their entirety by reference to those statutes and regulations. Any
change in applicable laws or regulation may have a material adverse effect on
the business of the Company and the Banks.
The Company, as a bank holding company, is subject to regulation under the
Bank Holding Company Act of 1956 (the "Act") and is registered with the Board of
Governors of the Federal Reserve System. Under the Act, the Company is
prohibited, with certain exceptions, from acquiring direct or indirect ownership
or control of more than 5% of the voting shares of any company which is not a
bank and from engaging in any business other than that of banking, managing and
controlling banks or furnishing services to affiliated banks, except that the
Company may engage in and own shares of companies engaged in certain businesses
found by the Board of Governors to be so closely related to banking "as to be
proper incident thereto," such as owning a savings association. The Act does not
place territorial restrictions on the activities of bank-related subsidiaries of
bank holding companies. The Company is required by the Act to file periodic
reports of its operations with the Board of Governors and is subject to
examination by the Board of Governors. Under the Act and Federal Reserve Board
regulations, the Company and the Bank are prohibited from engaging in certain
tie-in arrangements in connection with an extension of credit, lease, sale of
property, or furnishing of services.
Iowa law permits bank holding companies domiciled in Iowa to make
acquisitions throughout the state. Iowa law also permits bank holding companies
located in the Midwestern Region (defined to include Illinois, Iowa, Minnesota,
Missouri, Nebraska, South Dakota, and Wisconsin) to acquire banks or bank
holding companies located in Iowa subject to approval by the Iowa Division of
Banking and subject to certain statutory limitations. In addition, the Company
may acquire banks or bank holding companies located in the Midwestern Region or
outside the Midwestern Region, provided the Company's principal place of
business remains in the Midwestern Region and the acquisition is authorized by
the laws of the state in which the acquisition is to be made.
As a savings and loan holding company, the Company is subject to federal
regulation and examination by the Office of Thrift Supervision (the "OTS"). The
OTS has enforcement authority over the Company. This authority permits the OTS
to restrict or prohibit activities that are determined to be a serious risk to
the subsidiary savings association. Generally, the activities for a bank holding
company are more limited than the authorized activities for a savings and loan
holding company.
The Company and its subsidiaries are affiliates within the meaning of the
Federal Reserve Act and OTS regulations. As affiliates, they are subject to
certain restrictions on loans by an affiliated bank or thrift (collectively
"affiliated banks") to the Company, other affiliated banks or such other
subsidiaries, on investments by an affiliated bank in their stock or securities
and on an affiliated bank taking such stock and securities as collateral for
loans to any borrower. The Company is also subject to certain restrictions with
respect to direct issuance, flotation, underwriting, public sale or distribution
of certain securities.
Under Iowa law, Mahaska State Bank and Pella State Bank are subject to
supervision and examination by the Iowa Division of Banking. As an affiliate of
these banks, the Company is also subject to examination by the Iowa Division of
Banking.
The deposits of the Banks are insured by the Federal Deposit Insurance
Corporation (the "FDIC") and the Banks are, therefore, also subject to the
supervision and examination by the FDIC. The Banks are required to maintain
certain minimum capital ratios established by these regulators. The Banks are
assessed fees based on the institutions' deposits by the FDIC, to insure the
funds of customers on deposit with the institutions.
In addition, Iowa state law imposes restrictions on the operations of the
state-chartered banks including limitations on the amount a bank can lend to a
single borrower and limitations on the nature and amount of securities in which
it may invest. Among other things, Iowa law imposes restrictions on certain
types of loans made by a bank, limiting the bank from making loans (or
purchasing participation interests in loan pools) secured by real estate located
outside Iowa and its contiguous states in amounts exceeding 25% of its
regulatory capital. There can be no assurance that the Iowa or federal
regulators will not in the future impose further restrictions or limits on the
Company's loan pool activities.
Iowa law strictly regulates the establishment of bank offices and thus may
affect the Company's future plans to establish additional offices of its banks.
Under Iowa law, a state bank may not establish a bank office
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outside the boundaries of the counties contiguous to or cornering upon the
county in which the principal place of business of the state bank is located.
The number of offices a state bank may establish in a particular municipality is
also limited depending upon the municipality's population.
Central Valley Bank is subject to the supervision of and is regularly
examined by the OTS and is assessed fees by the OTS based upon the thrift's
total assets. As a savings institution, CVB must maintain certain minimum
capital ratios established by the OTS and is required to meet a qualified thrift
lender test (the "QTL") to avoid certain restrictions upon its operations. The
QTL was modified by the passage of the Economic Growth and Regulatory Paperwork
Reduction Act of 1996. On December 31, 1998, CVB complied with the current
minimum capital guidelines and met the QTL test.
OTS regulations permit federally chartered savings associations to branch
nationwide to the extent allowed by federal statute, enabling federal savings
associations with interstate networks to diversify their loan portfolios and
lines of business.
The Company operates within a regulatory structure that continuously
evolves. In the last several years significant changes have occurred that affect
the Company.
The FDIC Improvement Act of 1991 (the "FDICIA") was primarily designed to
recapitalize the FDIC's Bank Insurance Fund (the "BIF") and the Savings
Association Insurance Fund (the "SAIF"). To accomplish this purpose the FDIC was
granted additional borrowing authority, granted the power to levy emergency
special assessments on all insured depository institutions, granted the power to
change the BIF and SAIF rates on deposits on a semiannual basis, and directed to
draft regulations that provided for a "Risk-Based Assessment System" that was
implemented on January 1, 1994. The FDICIA also imposed additional regulatory
safety and soundness standards upon depository institutions and granted
additional authority to the FDIC. The FDICIA generally requires that all
institutions be examined by the FDIC annually. Under the provisions of the
FDICIA, all regulatory authorities are required to examine their regulatory
accounting standards and, to the extent possible, are required to conform to
generally accepted accounting principles. Finally, the FDICIA requires the
federal banking regulators to take prompt corrective action with respect to
depository institutions that fall below certain capital standards and prohibits
any depository institution from making any capital distribution that would cause
it to be undercapitalized.
Legislation became effective on September 30, 1995 which serves to lessen
or remove certain legal barriers to interstate banking and branching by
financial institutions. The legislation has resulted in an increase in the
nationwide consolidation activity occurring among financial institutions by
facilitating interstate bank operations and acquisitions. The legislation does,
however, allow states to "opt out" of interstate branching, and at this time it
is difficult to predict what effect this legislation might have on the Company.
The earnings of the Company are affected by the policies of regulatory
authorities, including the Federal Reserve System. Federal Reserve System
monetary policies have had a significant effect on the operating results of
banks and thrifts in the past and are expected to do so in the future. Because
of changing conditions in the economy and in the money markets as a result of
actions by monetary and fiscal authorities, interest rates, credit availability
and deposit levels may change due to circumstances beyond the control of the
Company. Future policies of the Federal Reserve System and other authorities
cannot be predicted, nor can their effect on future earnings be predicted.
F. EMPLOYEES
On December 31, 1998, the Company had 111 full-time employees and 26
part-time employees of which 55 full-time and 18 part-time employees were
employed by MSB, 30 full-time and 6 part-time employees were employed by CVB, 6
full-time and 1 part-time employees were employed by PSB, 10 full-time employed
by On-Site and 10 full-time employees were employed directly by the Company. The
Company provides its employees with a comprehensive program of benefits, some of
which are on a contributory basis, including comprehensive medical and dental
plans, life insurance, long-term and short-term disability coverage, a 401(k)
plan, and an employee stock ownership plan. None of the employees are
represented by unions. Management considers its relationship with its employees
to be excellent.
7
10
G. STATISTICAL DISCLOSURE
The following statistical disclosures relative to the consolidated
operations of the Company have been prepared in accordance with Guide 3 of the
Guides for the Preparation and Filing of Reports and Registration Statements
under the Securities Exchange Act of 1934. Average balances were primarily
calculated on a daily basis.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES
AND INTEREST DIFFERENTIAL
The following table details average balances, interest income/expense and
average rates/yield for the Company's earning assets and interest bearing
liabilities for the years ended December 31, 1998, 1997 and 1996 reported on a
fully tax-equivalent basis assuming a 34% tax rate.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
INTEREST INTEREST INTEREST
INCOME AVERAGE INCOME AVERAGE INCOME AVERAGE
AVERAGE (2)/ RATE/ AVERAGE (2)/ RATE/ AVERAGE (2)/ RATE/
BALANCE EXPENSE YIELD BALANCE EXPENSE YIELD BALANCE EXPENSE YIELD
------- -------- ------- ------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Average earning assets:
Loans(1)............... $157,712 $15,026 9.53% $131,081 $12,293 9.38% $105,372 $10,203 9.68%
Loan pool
participations....... 49,805 7,970 16.00 49,399 8,474 17.15 50,105 9,097 18.16
Interest-bearing
deposits............. 2,359 122 5.20 2,085 108 5.20 5,097 266 5.23
Investment securities
available for sale:
Taxable
investments....... 25,730 1,617 6.28 26,052 1,705 6.55 20,557 1,348 6.56
Investment securities
held to maturity:
Taxable
investments....... 9,821 569 5.80 16,421 928 5.65 21,616 1,215 5.62
Tax exempt
investments....... 7,265 491 6.75 7,459 486 6.51 9,510 619 6.51
Federal funds sold..... 6,465 338 5.24 2,375 128 5.39 1,704 92 5.39
-------- ------- -------- ------- -------- -------
Total earning
assets.......... $259,157 $26,133 10.08 $234,872 $24,122 10.27 $213,961 $22,840 10.67
======== ======= ======== ======= ======== =======
Average interest-bearing
liabilities:
Interest-bearing demand
deposits............. $ 33,248 $ 656 1.97 $ 32,225 $ 677 2.10 $ 28,786 $ 612 2.13
Savings deposits....... 59,419 2,241 3.77 59,019 2,259 3.83 53,844 2,058 3.82
Certificates of
deposit.............. 107,284 6,102 5.69 96,609 5,442 5.63 86,055 4,845 5.63
Federal funds
purchased............ 201 12 5.87 534 32 5.93 830 48 5.73
Federal Home Loan Bank
advances............. 6,840 405 5.92 2,274 138 6.07 0 0 0.00
Notes payable.......... 13,342 1,074 8.05 9,292 764 8.23 11,323 968 8.55
-------- ------- -------- ------- -------- -------
Total
interest-bearing
liabilities..... $220,334 $10,490 4.76 $199,953 $ 9,312 4.66 $180,838 $ 8,531 4.72
======== ======= ======== ======= ======== =======
Net interest income...... $15,643 5.32 $14,810 5.61 $14,309 5.96
======= ======= =======
Net interest margin(3)... 6.04% 6.31% 6.69%
===== ===== =====
- ---------------
(1) Average loans outstanding includes the daily average balance of
non-performing loans. Interest on these loans does not include additional
interest of $108,000, $122,000, and $90,000 for 1998, 1997 and 1996,
respectively, which would have been accrued based on the original terms of
these loans compared to the interest that was actually recorded. Interest
earned on loans includes loan fees (which are not material in amount).
(2) Includes interest income and discount realized on loan pool participations.
(3) Net interest margin is net interest income divided by average total earning
assets.
8
11
The following table sets forth an analysis of volume and rate changes in
interest income and interest expense of the Company's average earning assets and
average interest-bearing liabilities reported on a fully tax-equivalent basis
assuming a 34% tax rate. The table distinguishes between the changes related to
average outstanding balances (changes in volume holding the initial interest
rate constant) and the changes related to average interest rates (changes in
average rate holding the initial outstanding balance constant). The change in
interest due to both volume and rate has been allocated to volume and rate
changes in proportion to the relationship of the absolute dollar amounts of the
change in each.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1998 COMPARED TO 1997 1997 COMPARED TO 1996
INCREASE/(DECREASE) DUE TO INCREASE/(DECREASE) DUE TO
---------------------------- ----------------------------
VOLUME RATE NET VOLUME RATE NET
------ ---- --- ------ ---- ---
(DOLLARS IN THOUSANDS)
INTEREST INCOME FROM AVERAGE-EARNING ASSETS:
Loans...................................... $2,534 $ 199 $2,733 $2,420 $(330) $2,090
Loan pool participations (1)............... 69 (573) (504) (127) (496) (623)
Interest-bearing deposits.................. 14 0 14 (156) (2) (158)
Investment securities available for sale:
Taxable investments..................... (20) (68) (88) 360 (3) 357
Investment securities held to maturity:
Taxable investments..................... (382) 23 (359) (294) 7 (287)
Tax exempt investments.................. (13) 18 5 (134) 1 (133)
Federal funds sold......................... 214 (4) 210 36 0 36
------ ----- ------ ------ ----- ------
Total income from earning assets........ 2,416 (405) 2,011 2,105 (823) 1,282
------ ----- ------ ------ ----- ------
INTEREST EXPENSE OF AVERAGE INTEREST-BEARING
LIABILITIES:
Interest-bearing demand deposits........... 21 (42) (21) 72 (7) 65
Savings deposits........................... 15 (33) (18) 198 3 201
Certificates of deposit.................... 606 54 660 595 2 597
Federal funds purchased.................... (20) 0 (20) (18) 2 (16)
Federal Home Loan Bank advances............ 271 (4) 267 69 69 138
Notes payable.............................. 327 (17) 310 (168) (36) (204)
------ ----- ------ ------ ----- ------
Total expense from interest-bearing
liabilities........................... 1,220 (42) 1,178 748 33 781
------ ----- ------ ------ ----- ------
Net interest income.......................... $1,196 $(363) $ 833 $1,357 $(856) $ 501
====== ===== ====== ====== ===== ======
- ---------------
(1) Includes interest income and discount realized on loan pool participations.
9
12
INTEREST RATE SENSITIVITY ANALYSIS
The following table sets forth the scheduled repricing or maturity of the
Company's assets and liabilities as of December 31, 1998, based on the
assumptions described below. The effect of these assumptions is to quantify the
dollar amount of items that are interest rate-sensitive and can be repriced
within each of the periods specified. The table does not necessarily indicate
the impact of general interest rate movements on the Company's net interest
margin because the repricing of certain categories of assets and liabilities is
subject to competitive and other pressures beyond the Company's control. As a
result, certain assets and liabilities indicated as maturing or otherwise
repricing within a stated period may, in fact, mature or reprice at different
times and at different volumes.
THREE OVER THREE ONE TO THREE
MONTHS MONTHS THREE YEARS
OR LESS TO ONE YEAR YEARS OR MORE TOTAL
------- ----------- ------ ------- -----
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans..................................... $ 73,630 $ 26,256 $ 19,328 $46,213 $165,427
Loan pool participations.................. 4,543 13,627 36,340 0 54,510
Interest-bearing deposits in banks........ 3,559 0 0 0 3,559
Federal funds sold........................ 9,270 0 0 0 9,270
Investment securities:
Available for sale...................... 1,001 3,010 13,860 11,784 29,655
Held to maturity........................ 198 4,298 3,628 5,555 13,679
-------- -------- -------- ------- --------
Total interest-earning assets........ 92,201 47,191 73,156 63,552 276,100
======== ======== ======== ======= ========
INTEREST-BEARING LIABILITIES:
NOW and Super NOW deposits................ 34,214 0 0 0 34,214
Savings deposits.......................... 59,758 0 0 0 59,758
Certificates of deposit................... 22,457 56,101 32,507 4,667 115,732
Federal Home Loan Bank advances........... 7 3,020 2,058 2,510 7,595
Notes payable............................. 17,000 0 0 0 17,000
-------- -------- -------- ------- --------
Total interest-bearing liabilities... 133,436 59,121 34,565 7,177 234,299
======== ======== ======== ======= ========
Interest sensitivity gap per period....... $(41,235) $(11,930) $ 38,591 $56,375
======== ======== ======== =======
Cumulative interest sensitivity gap....... $(41,235) $(53,165) $(14,574) $41,801
======== ======== ======== =======
Interest sensitivity gap ratio............ 0.69% 0.80% 2.12% 8.85%
Cumulative interest sensitivity gap
ratio................................... 0.69% 0.72% 0.94% 1.18%
In the table above, NOW and Super NOW deposit account balances and savings
deposits are included as interest-bearing liabilities in the three months or
less.
Loan pool participations are included in the interest rate sensitivity
analysis using an estimated three-year average life. The historical average for
the return of original investment on the pools is approximately 36 months. Given
the non-performing aspect of the loan pool portfolio, management feels that the
use of contractual weighted-average maturity data is inappropriate.
10
13
II. INVESTMENT PORTFOLIO
The following table sets forth certain information with respect to the book
value of the Company's investment portfolio as of December 31, 1998, 1997 and
1996.
DECEMBER 31,
-----------------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
SECURITIES AVAILABLE FOR SALE:
U.S. government securities................................ $ 4,603 $ 4,563 $ 5,019
U.S. government agency securities......................... 16,408 15,313 18,679
Other investment securities............................... 8,644 3,352 2,785
------- ------- -------
Total securities available for sale.................... 29,655 23,228 26,483
======= ======= =======
SECURITIES HELD TO MATURITY:
U.S. government securities................................ 0 5,046 8,135
U.S. government agency securities......................... 1,290 2,885 5,445
Obligations of states and political subdivisions.......... 8,291 6,793 8,904
Other investment securities............................... 4,098 5,109 5,221
------- ------- -------
Total securities held to maturity...................... 13,679 19,833 27,705
======= ======= =======
Total investment securities............................... $43,334 $43,061 $54,188
======= ======= =======
The following table sets forth the contractual maturities of investment
securities as of December 31, 1998, and the weighted average yields (for
tax-exempt obligations on a fully tax-equivalent basis assuming a 34% tax rate)
of such securities. As of December 31, 1998, the Company held no securities with
a book value exceeding 10% of shareholders' equity.
MATURITY
---------------------------------------------------------------------------------------
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS
----------------- ------------------ ----------------- -----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
Securities available for sale:
U.S. government securities......... $2,020 6.02% $ 2,583 6.10% $ 0 0.00% 0 0.00%
U.S. government agency
securities....................... 990 4.75 9,074 5.90 2,078 5.91 4,266 6.95
Other investment securities........ 1,001 5.61 6,212 5.61 0 0.00 1,431 5.22
------ ---- ------- ---- ------ ---- ------ ----
Total............................ 4,011 5.61 17,869 5.83 2,078 5.91 5,697 6.52
------ ---- ------- ---- ------ ---- ------ ----
Securities held to maturity:
U.S. government agency
securities....................... 0 0.00 0 0.00 372 6.96 918 7.17
Obligations of states and political
subdivisions..................... 1,796 6.68 5,300 6.83 995 6.42 200 7.57
Other investment securities........ 2,700 5.74 1,298 6.02 100 7.15 0 0.00
------ ---- ------- ---- ------ ---- ------ ----
Total............................ 4,496 6.12 6,598 6.68 1,467 6.61 1,118 7.25
------ ---- ------- ---- ------ ---- ------ ----
Total investment securities.......... $8,507 5.88% $24,467 6.06% $3,545 6.20% $6,815 6.64%
====== ==== ======= ==== ====== ==== ====== ====
11
14
III. LOAN PORTFOLIO
The Company's loan portfolio largely reflects the profile of the
communities in which it operates. Approximately two-thirds of the total loans as
of December 31, 1998, were agricultural, commercial or residential real estate
loans. The following table shows the composition of the Company's loan portfolio
as of the dates indicated.
DECEMBER 31,
------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ---------------- ---------------- ---------------- ----------------
% OF % OF % OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
Agricultural............ $ 27,504 16.6% $ 24,779 17.2% $ 19,940 17.0% $ 16,319 18.9% $ 15,968 21.5%
Commercial.............. 38,959 23.6 31,198 21.6 23,613 20.1 22,235 25.7 18,789 25.3
Real estate:
1-4 family
residences.......... 38,087 23.0 32,341 22.4 27,274 23.2 15,765 18.2 14,261 19.2
5+ residential
property............ 240 0.1 251 0.2 261 0.2 0 0.0 17 0.0
Agricultural.......... 21,297 12.9 19,647 13.6 16,952 14.4 9,855 11.4 8,443 11.4
Construction.......... 5,956 3.6 4,430 3.1 4,017 3.4 2,502 2.9 1,859 2.5
Commercial............ 17,007 10.3 15,634 10.8 11,895 10.1 10,097 11.7 9,018 12.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Real estate total..... 82,587 49.9 72,303 50.1 60,399 51.4 38,219 44.2 33,598 45.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Installment............. 12,847 7.8 13,268 9.2 11,522 9.8 7,637 8.8 4,700 6.3
Lease financing......... 3,530 2.1 2,785 1.9 1,942 1.7 2,066 2.4 1,154 1.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans(1)...... $165,427 100.0% $144,333 100.0% $117,416 100.0% $ 86,475 100.0% $ 74,209 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Total assets............ $298,389 $274,873 $251,851 $205,162 $186,818
======== ======== ======== ======== ========
Loans to total assets... 55.4% 52.5% 46.6% 42.1% 39.7%
- ---------------
(1) Total loans do not include the Company's investments in loan pool
participations.
The following table sets forth the remaining maturities for certain loan
categories as of December 31, 1998.
TOTAL FOR LOANS
DUE AFTER
ONE YEAR HAVING:
DUE IN -------------------
DUE WITHIN ONE TO DUE AFTER FIXED VARIABLE
ONE YEAR FIVE YEARS FIVE YEARS TOTAL RATES RATES
---------- ---------- ---------- ----- ----- --------
(DOLLARS IN THOUSANDS)
Agricultural........................ $23,779 $ 3,380 $ 345 $27,504 $ 3,320 $ 405
Commercial.......................... 25,337 10,921 2,701 38,959 12,682 940
Real estate -- construction......... 3,435 1,961 560 5,956 1,933 588
------- ------- ------ ------- ------- ------
Total............................. $52,551 $16,262 $3,606 $72,419 $17,935 $1,933
======= ======= ====== ======= ======= ======
The following table provides information on the Company's non-performing
loans as of the dates indicated.
DECEMBER 31,
------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
90 days past due.............................. $ 663 $ 522 $ 625 $134 $ 95
Restructured.................................. 164 387 380 409 285
Nonaccrual.................................... 561 927 1,085 124 207
------ ------ ------ ---- ----
Total non-performing loans.................. $1,388 $1,836 $2,090 $667 $587
====== ====== ====== ==== ====
Ratio of non-performing loans to total
loans....................................... 0.84% 1.27% 1.78% 0.78% 0.79%
12
15
IV. SUMMARY OF LOAN LOSS EXPERIENCE
The following table sets forth loans charged off and recovered by the type
of loan and an analysis of the allowance for loan losses for the years ended
December 31, 1998, 1997, 1996, 1995 and 1994.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Amount of loans outstanding at end of
period (net of unearned
interest)(1)......................... $165,427 $144,333 $117,416 $85,869 $74,015
======== ======== ======== ======= =======
Average amount of loans outstanding for
the period (net of unearned
interest)............................ $157,712 $131,081 $105,372 $81,175 $69,043
======== ======== ======== ======= =======
Allowance for possible loan losses at
beginning of period.................. $ 1,816 $ 1,491 $ 1,001 $ 881 $ 833
-------- -------- -------- ------- -------
CHARGE-OFFS:
Agricultural......................... 135 19 41 53 42
Commercial........................... 638 14 10 18 110
Real estate -- construction.......... 0 0 0 0 0
Real estate -- mortgage.............. 0 30 0 2 0
Installment.......................... 63 63 38 18 23
Lease financing...................... 4 11 616 0 14
-------- -------- -------- ------- -------
Total charge-offs................. 840 137 705 91 189
-------- -------- -------- ------- -------
RECOVERIES:
Agricultural......................... 1 11 6 24 11
Commercial........................... 8 18 1 1 36
Real estate -- construction.......... 0 0 0 0 0
Real estate -- mortgage.............. 0 1 0 0 2
Installment.......................... 13 15 8 10 5
Lease financing...................... 0 0 23 8 0
-------- -------- -------- ------- -------
Total recoveries.................. 22 45 38 43 54
-------- -------- -------- ------- -------
Net loans charged off.................. 818 92 667 48 135
Provision for possible loan losses..... 1,179 417 987 168 183
Allowance for branch acquisition....... 0 0 170 0 0
-------- -------- -------- ------- -------
Allowance for possible loan losses at
end of period........................ $ 2,177 $ 1,816 $ 1,491 $ 1,001 $ 881
======== ======== ======== ======= =======
Net loans charged off to average
loans................................ 0.52% 0.07% 0.63% 0.06% 0.20%
Allowance for possible loan losses to
total loans at end of period......... 1.32% 1.26% 1.27% 1.17% 1.19%
- ---------------
(1) Loans do not include, and the allowance for loan losses does not include any
reserve for, investments in loan pool participations.
13
16
The Company has allocated the allowance for loan losses to provide for the
possibility of loan losses being incurred within the categories of loans set
forth in the table below. The allocation of the allowance and the ratio of loans
within each category to total loans as of the dates indicated are as follows:
DECEMBER 31,
------------------------------------------------------------------------------------
1998 1997 1996 1995
---------------------- ---------------------- ---------------------- ---------
PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO
ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
--------- ---------- --------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
Agricultural......... $ 361 16.6% $ 312 17.2% $ 254 17.0% $ 262
Commercial........... 514 23.6 392 21.6 300 20.1 248
Real estate --
mortgage........... 1,086 49.9 910 50.1 766 51.4 392
Installment.......... 170 7.8 167 9.2 146 9.8 78
Lease financing...... 46 2.1 35 1.9 25 1.7 21
------ ----- ------ ----- ------ ----- ------
Total............ $2,177 100.0% $1,818 100.0% $1,491 100.0% $1,001
====== ===== ====== ===== ====== ===== ======
DECEMBER 31,
-----------------------------------
1995 1994
---------- ----------------------
PERCENT OF PERCENT OF
LOANS TO LOANS TO
TOTAL ALLOWANCE TOTAL
LOANS AMOUNT LOANS
---------- --------- ----------
(DOLLARS IN THOUSANDS)
Agricultural......... 18.9% $ 242 21.5%
Commercial........... 25.7 271 25.3
Real estate --
mortgage........... 44.2 302 45.3
Installment.......... 8.8 55 6.3
Lease financing...... 2.4 11 1.6
----- ------ -----
Total............ 100.0% $ 881 100.0%
===== ====== =====
V. DEPOSITS
The following table sets forth the average amount of and the average rate
paid on deposits by deposit category for the years ended December 31, 1998, 1997
and 1996.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------- ---- ------- ---- ------- ----
(DOLLARS IN THOUSANDS)
Non-interest bearing demand
deposits............................ $ 19,159 N/A $ 17,465 N/A $ 15,653 N/A
Interest-bearing demand (NOW and money
market)............................. 33,248 1.97% 32,225 2.10% 28,785 2.13%
Savings deposits...................... 59,419 3.77 59,019 3.83 53,844 3.82
Certificates of deposit............... 107,284 5.69 96,609 5.63 86,056 5.63
-------- -------- --------
Totals.............................. $219,110 4.11% $205,318 4.08% $184,338 4.08%
======== ==== ======== ==== ======== ====
The following table summarizes certificates of deposit in amounts of
$100,000 or more by time remaining until maturity as of December 31, 1998. These
time deposits are made by individuals, corporations and public entities, all of
which are located in the Company's market area or are State of Iowa public
funds.
DECEMBER 31,
1998
------------
(IN THOUSANDS)
Three months or less........................................ $ 7,176
Over three through six months............................... 2,137
Over six months through one year............................ 7,094
Over one year............................................... 8,061
-------
Total..................................................... $24,468
=======
14
17
VI. RETURN ON EQUITY AND ASSETS
Various operating and equity ratios for the years indicated are presented
below:
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
---- ---- ----
Return on average total assets.................... 1.65% 1.98% 1.93%
Return on average equity.......................... 12.16 14.47 13.52
Dividend payout ratio............................. 44.44 34.78 36.50
Average equity to average assets.................. 13.54 13.69 14.31
Equity to assets ratio............................ 12.81 13.37 13.60
===== ===== =====
VII. BORROWED FUNDS
The following table summarizes the oustanding amount of and the average
rate on borrowed funds as of December 31, 1998, 1997 and 1996.
DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Note payable(1)..................... $17,000 7.38% $14,050 8.25% $ 8,500 8.00%
Federal Home Loan Bank advances..... 7,595 5.68 6,000 5.96 0 0.00
Federal funds purchased............. 0 0.00 0 0.00 0 0.00
------- ------- -------
Total............................. $24,595 6.83% $20,050 7.56% $ 8,500 8.00%
======= ==== ======= ==== ======= ====
- ---------------
(1) The note payable balance at December 31, 1998 consists of advances on a
$20,000,000 revolving line of credit. The line has a variable interest rate
which currently is three-eighths of a percent below the lender's prime rate.
Interest is payable quarterly and the line is due June 30, 1999.
The maximum amount of borrowed funds outstanding at any month end for the
years ended December 31, 1998, 1997, and 1996 were as follows:
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
Note payable....................................... $17,000 $14,050 $14,750
Federal Home Loan Bank advances.................... 12,299 6,000 0
Federal funds purchased............................ 3,775 2,150 5,990
======= ======= =======
The following table sets forth the average amount of and the average rate
paid on borrowed funds for the years ended December 31, 1998, 1997 and 1996.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Note payable........................ $13,342 8.05% $ 9,292 8.23% $11,323 8.55%
Federal Home Loan Bank advances..... 6,840 5.92 2,274 6.07 0 0.00
Federal funds purchased............. 201 5.87 534 5.93 830 5.73
------- ------- -------
Total............................. $20,383 7.31% $12,100 7.72% $12,153 8.36%
======= ==== ======= ==== ======= ====
15
18
ITEM 2. PROPERTIES
The Company's headquarters are located at 222 First Avenue East, Oskaloosa,
Iowa. This building is a two-story combination office and motor bank and was
constructed in 1975. The Company's offices are located on the second floor and
MSB leases the first floor and the basement from the Company. The ground floor
houses MSB's data processing department and motor bank operation which includes
four drive-up lanes and two walk-up windows. The basement contains a meeting
room, kitchen, and storage. The bank's lease runs through the year 2005.
The principal offices of Mahaska State Bank are located at 124 South First
Street, Oskaloosa, Iowa, in a two-story building owned by the bank which
contains a full banking facility. The bank also owns a second building in
Oskaloosa located at 301 A Avenue West. This one-story, full-banking facility,
including two drive-up lanes, is located five blocks northwest of the bank's
principal offices. In addition, the bank owns a 24-hour automatic teller machine
located at 211 South First Street, Oskaloosa, Iowa. The bank also has a branch
office located in North English, Iowa which is 40 miles northeast of Oskaloosa.
The branch is a one-story building with a full banking facility, including two
drive-up lanes and a 24-hour automatic teller machine.
Central Valley Bank owns three facilities in the communities of Ottumwa,
Fairfield, and Sigourney, Iowa. The Ottumwa building is a single-story brick
structure constructed in 1981. The approximately 4,200 square foot building has
several offices and a potential for three drive-up lanes, with two presently in
operation. The building is located at 116 West Main in Ottumwa's downtown
business district. The Fairfield facility is a two-story building located at 58
East Burlington on the southeast corner of the downtown square. The building's
three floors have 8,932 total square feet, which is all utilized by CVB. The
Sigourney facility located at 112 North Main Street is one-half block northwest
of the community's courthouse square in the downtown business district. The
4,596 square foot one-story masonry building was constructed in 1972 as a
banking facility with one drive-up window. This building was acquired by CVB in
1996 from Boatmen's Bank, N.A. in conjunction with the purchase of the deposits
of the Sigourney office from Boatmen's.
CVB leases its "In-Store" branch facility in Fairfield. The branch is
located in an Easter's Super Value grocery store and occupies approximately 400
square feet of the store. The lease agreement expires in October, 2000 and may
be renewed for two additional terms of five years each.
Pella State Bank owns its facility at 500 Oskaloosa Street in Pella, Iowa.
The facility is located approximately six blocks south of the community's main
business district on a heavily-traveled thoroughfare that connects the main
business district with retail stores located in a developing area on the east
side of the city. The one-time restaurant building was acquired in the summer of
1997 and was completely renovated to become a modern banking facility. The
facility contains approximately 1,860 square feet of usable space and has two
drive-up teller lanes.
ITEM 3. LEGAL PROCEEDINGS
Mahaska Investment Company and its subsidiaries are involved in various
claims and legal actions arising in the ordinary course of business. In the
opinion of management, the ultimate disposition of these matters will not have a
material adverse effect on the Company's financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the fiscal
year covered by this report to a vote of security holders, through the
solicitation of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information appearing on page 43 of the Company's Annual Report, filed
as Exhibit 13 hereto, is incorporated herein by reference.
There were approximately 243 holders of record of the Company's $5 common
stock as of March 12, 1999. Additionally, there are an estimated 750 beneficial
holders whose stock was held in street name by brokerage houses as of that date.
The closing price of the Company's common stock was $16.00 on March 12, 1999.
The Company increased dividends to common shareholders in 1998 to $.56 per
share, a 16.7 percent increase over $.48 for 1997. Dividend declarations are
evaluated and determined by the Board of Directors on a quarterly basis. The
Company declared a five-for-three stock split effected in the form of a stock
dividend payable to shareholders of record as of October 20, 1997. The
additional shares resulting from this stock split were issued to shareholders on
November 10, 1997. In February 1999, the Board of Directors declared a dividend
of $.15 per common share. The Company's loan agreement requires that the Company
does not pay any dividends in excess of forty percent of net income without the
lenders' permission. Except for certain regulatory restrictions that may affect
dividend payments, there are no other restrictions on the Company's present or
future ability to pay dividends.
ITEM 6. SELECTED FINANCIAL DATA
The information appearing on page 1 of the Company's Annual Report, filed
as Exhibit 13 hereto, is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information appearing on pages 12 through 19 of the Company's Annual
Report, filed as Exhibit 13 hereto, is incorporated herein by reference.
ITEM 7A. MARKET RISK DISCLOSURE
The information appearing on pages 17 and 18 of the Company's Annual
Report, filed as Exhibit 13 hereto, is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information appearing on pages 20 through 40 of the Company's Annual
Report, filed as Exhibit 13 hereto, is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Within the twenty-four months prior to the date of the most recent
financial statements, there has been no changes in or disagreements with
accountants of the Company.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The definitive proxy statement of Mahaska Investment Company is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The definitive proxy statement of Mahaska Investment Company is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The definitive proxy statement of Mahaska Investment Company is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The definitive proxy statement of Mahaska Investment Company is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following exhibits and financial statement schedules are filed as part
of this report:
(a) 1. Financial Statements: See the financial statements on pages 20
through 40 of the Company's Annual Report, filed as Exhibit 13 hereto, which are
incorporated by reference herein.
2. Exhibits (not covered by independent auditors' report).
Exhibit 3.1
Articles of Incorporation, as amended through April 30, 1998, of
Mahaska Investment Company. The Articles of Incorporation, as
amended, of Mahaska Investment Company are incorporated by reference
to the Company's quarterly report on Form 10-Q for the quarter ended
September 30, 1998.
Exhibit 3.2
Bylaws of Mahaska Investment Company. The Amended and Restated Bylaws
of Mahaska Investment Company dated July 23, 1998, are incorporated
by reference to the Company's quarterly report on Form 10-Q for the
Quarter ended September 30, 1998.
Exhibit 10.1
Mahaska Investment Company Employee Stock Ownership Plan & Trust as
restated and amended. This Plan & Trust is incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994.
Exhibit 10.2.1
1993 Stock Incentive Plan. This 1993 Stock Incentive Plan is
incorporated by reference to Form S-1 Registration Number 33-81922 of
Mahaska Investment Company.
Exhibit 10.2.2
1996 Stock Incentive Plan. This 1996 Stock Incentive Plan is
incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
Exhibit 10.2.3
1998 Stock Incentive Plan. This 1998 Stock Incentive Plan is
incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
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Exhibit 10.3.1
Midstates Resources Corp. Loan Participation and Servicing Agreement
dated December 9, 1992 between Midstates Resources Corp., Mahaska
Investment Company and Mahaska State Bank. This Midstates Resources
Corp. Agreement is incorporated by Reference to Form S-1 Registration
Number 33-81922 of Mahaska Investment Company.
Exhibit 10.3.2
Central States Resources Corp. Liquidation Agreement dated April 18,
1988 between Central States Resources Corp., Mahaska State Bank,
National Bank & Trust Co., and Randal Vardaman. This Central States
Resources Corp. Agreement is incorporated by reference to Form S-1
Registration Number 33-81922 of Mahaska Investment Company.
Exhibit 10.3.3
All States Resources Corp. Loan Participation and Servicing Agreement
dated September 13, 1993 between All States Resources Corp., Mahaska
Investment Company and West Gate Bank. This All States Resources
Corp. Agreement is incorporated by reference to Form S-1 Registration
Number 33-81922 of Mahaska Investment Company.
Exhibit 10.5.1
Revolving Loan Agreement dated January 31, 1996 between Mahaska
Investment Company and Harris Trust and Savings Bank. This Loan
Agreement is incorporated herein by reference to the Form 8-K report
filed by Mahaska Investment Company on February 29, 1996.
Exhibit 10.5.2
Fifth Amendment and Waiver to Credit Agreement between Mahaska
Investment Company and Harris Trust & Savings Bank dated December 29,
1998.
Exhibit 11
Computation of Per Share Earnings
Exhibit 13
The Annual Report to Shareholders of Mahaska Investment Company for
the 1998 calendar year.
Exhibit 21
Subsidiaries
Exhibit 23
Consent of Auditor
The Company will furnish to any shareholder upon request and upon payment
of a fee of $.50 per page, a copy of any exhibit. Requests for copies should be
directed to Karen K. Baack, Secretary/Treasurer, Mahaska Investment Company,
P.O. Box 1104, Oskaloosa, Iowa 52577-1104.
(b) Reports on Form 8-K: No reports on Form 8-K were required to be filed
during the last quarter of 1998.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MAHASKA INVESTMENT COMPANY
(Registrant)
March 18, 1999 By: /s/ CHARLES S. HOWARD
-----------------------------------
Charles S. Howard
Chairman, President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ CHARLES S. HOWARD March 18, 1999
----------------------------------------------------------- -----------------------
Charles S. Howard Date
Director, Chairman of the Board, President and Chief
Executive Officer
By: /s/ DAVID A. MEINERT March 18,1999
----------------------------------------------------------- -----------------------
David A. Meinert Date
Director, Executive Vice President and Chief Financial
Officer (Principal Accounting Officer)
By: /s/ R. SPENCER HOWARD March 18, 1999
----------------------------------------------------------- -----------------------
R. Spencer Howard Date
Director and Vice President Corporate Planning
By: /s/ MARTIN L. BERNSTEIN March 18, 1999
----------------------------------------------------------- -----------------------
Martin L. Bernstein Date
Director
By: /s/ ROBERT K. CLEMENTS March 18, 1999
----------------------------------------------------------- -----------------------
Robert K. Clements Date
Director
By: /s/ JAMES F. MATHEW March 18, 1999
----------------------------------------------------------- -----------------------
James F. Mathew Date
Director
By: /s/ JOHN P. POTHOVEN March 18, 1999
----------------------------------------------------------- -----------------------
John P. Pothoven Date
Director
By: /s/ JOHN W. N. STEDDOM March 18, 1999
----------------------------------------------------------- -----------------------
John W. N. Steddom Date
Director