FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED COMMISSION FILE NUMBER SEPTEMBER 30, 1999 0-24630 MAHASKA INVESTMENT COMPANY (Exact Name of Registrant as Specified in its Charter) IOWA 42-1003699 (State of Incorporation) (I.R.S. Employer Identification No.) 222 First Avenue East, Oskaloosa, Iowa 52577 Telephone Number (515) 673-8448 Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of November 1, 1999, there were 4,778,203 shares of common stock $5 par value outstanding. PART 1 -- Item 1. Financial Statements MAHASKA INVESTMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION (unaudited) (dollars in thousands, Sept. 30, Dec. 31, except for share amounts) 1999 1998 --------- --------- ASSETS Cash and due from banks ................................ $ 9,808 9,292 Interest-bearing deposits in banks ..................... 1,232 3,559 Federal funds sold ..................................... 1,000 9,270 --------- --------- Cash and cash equivalents ............................ 12,040 22,121 --------- --------- Investment Securities: Available for sale ................................... 63,460 29,655 Held to maturity ..................................... 32,025 13,679 Loans .................................................. 285,492 165,427 Allowance for loan losses .............................. (3,349) (2,177) --------- --------- Net loans .......................................... 282,143 163,250 --------- --------- Loan pool participations ............................... 70,707 54,510 Premises and equipment, net ............................ 6,866 4,043 Accrued interest receivable ............................ 5,104 3,175 Other assets ........................................... 2,748 2,406 Goodwill ............................................... 13,140 5,550 --------- --------- Total assets ......................................... $ 488,233 298,389 --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand ............................................... $ 20,698 23,029 NOW and Super NOW .................................... 42,265 34,214 Savings .............................................. 95,244 59,758 Certificates of deposit .............................. 183,536 115,732 --------- --------- Total deposits ..................................... 341,743 232,733 Federal funds purchased ................................ 8,665 0 Federal Home Loan Bank advances ........................ 59,986 7,595 Note payable ........................................... 16,250 17,000 Other liabilities ...................................... 4,237 2,829 --------- --------- Total liabilities .................................. 430,881 260,157 --------- --------- Shareholders' equity: Common stock, $5 par value; authorized 20,000,000 shares; issued 4,912,849 shares as of September 30, 1999 and 3,636,345 as of December 31, 1998 .................. 24,564 19,038 Capital surplus ...................................... 13,281 17 Treasury stock at cost, 134,646 shares as of September 30, 1999,and 171,156 shares as of December 31, 1998 ..................... (2,202) (2,799) Retained earnings .................................... 21,880 21,806 Accumulated other comprehensive income (loss) ............................................. (171) 170 --------- --------- Total shareholders' equity ........................ 57,352 38,232 --------- --------- Total liabilities and shareholders' equity .......................................... $ 488,233 298,389 --------- --------- See accompanying notes to consolidated financial statements. PART 1 -- Item 1. Financial Statements, Continued MAHASKA INVESTMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited) Three Months Ended Nine Months Ended (dollars in thousands, September 30 September 30 except per share) 1999 1998 1999 1998 ----------------- ---------------- INTEREST INCOME: Interest and fees on loans ......... $4,090 3,986 11,855 11,038 Interest and discount on loan pools ...................... 2,162 1,527 5,710 6,182 Interest on bank deposits .......... 2 21 53 109 Interest on federal funds sold ..... 4 15 178 238 Interest on investment securities: Available for sale ............... 404 418 1,277 1,196 Held to maturity ................. 166 217 533 693 ------ ------ ------ ------ Total interest income .......... 6,828 6,184 19,606 19,456 ------ ------ ------ ------ INTEREST EXPENSE: Interest on deposits: NOW and Super NOW ................ 149 161 445 502 Savings .......................... 689 553 1,901 1,654 Certificates of deposit .......... 1,510 1,533 4,649 4,477 Interest on federal funds purchased ........................ 57 10 61 11 Interest on Federal Home Loan Bank advances .................... 134 101 351 280 Interest on note payable ........... 295 271 894 750 ------ ------ ------ ------ Total interest expense ......... 2,834 2,629 8,301 7,674 ------ ------ ------ ------ Net interest income ............ 3,994 3,555 11,305 11,782 Provision for loan losses .......... 462 307 2,094 594 ------ ------ ------ ------ Net interest income after provision for loan losses .................... 3,532 3,248 9,211 11,188 ------ ------ ------ ------ NONINTEREST INCOME: Service charges .................... 318 329 935 917 Data processing income ............. 52 48 153 148 Other operating income ............. 70 138 294 307 Investment security gains .......... 0 0 0 26 ------ ------ ------ ------ Total noninterest income .... 440 515 1,382 1,398 ------ ------ ------ ------ NONINTEREST EXPENSE: Salaries and employee benefits expense ................. 1,239 1,210 3,830 3,540 Net occupancy expense .............. 363 348 1,062 1,003 Professional fees .................. 63 95 488 344 Other operating expense ............ 464 439 1,729 1,334 Goodwill amortization .............. 134 153 422 459 ------ ------ ------ ------ Total noninterest expense ........ 2,263 2,245 7,531 6,680 ------ ------ ------ ------ Income before income tax expense ......................... 1,709 1,518 3,062 5,906 Income tax expense (benefit) ....... 622 541 1,137 2,125 ------ ------ ------ ------ Net Income ................ $1,087 977 1,925 3,781 ------ ------ ------ ------ Earnings per common share - basic .................... $ 0.30 0.27 0.53 1.03 Earnings per common share - diluted .................. $ 0.29 0.26 0.51 0.98 Dividends per common share ......... $ 0.15 0.14 0.45 0.42 See accompanying notes to consolidated financial statements. PART 1 -- Item 1. Financial Statements, Continued MAHASKA INVESTMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited) Three Months Ended Nine Months Ended (in thousands, September 30 September 30 1999 1998 1999 1998 ----------------- ---------------- Net Income ........................... $ 1,087 977 1,925 3,781 Other Comprehensive Income: Unrealized gains (losses) on securities available for sale: Unrealized holding gains (losses) arising during the period, net of tax ........... (64) 94 (341) 120 Less: reclassification adjustment for net (gains) losses included in net income, net of tax ....................... 0 0 0 (17) ------- ------- ------- ------- Other comprehensive income (loss), net of tax ................. (64) 94 (341) 103 ------- ------- ------- ------- Comprehensive income (loss) .......... $ 1,023 1,071 1,584 3,884 ------- ------- ------- ------- See accompanying notes to consolidated financial statements. PART 1 -- Item 1. Financial Statements, Continued MAHASKA INVESTMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Nine Months Ended (dollars in thousands) September 30, 1999 1998 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ....................................... $ 1,925 3,781 -------- -------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .................. 912 918 Provision for loan losses ...................... 2,094 594 Investment securities gains .................... 0 (26) Loss on sale of bank premises and equipment .................................... 4 0 Amortization of investment securities premiums ..................................... 144 115 Accretion of investment securities and loan discounts ............................... (369) (323) Increase in other assets ....................... (729) (487) Decrease in other liabilities .................. (3) (184) -------- -------- Total adjustments ............................ 2,053 607 -------- -------- Net cash provided by operating activities ............................. 3,978 4,388 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment securities available for sale: Proceeds from sales ............................ 0 175 Proceeds from maturities ....................... 9,024 3,479 Purchases ...................................... (7,177) (7,137) Investment securities held to maturity: Proceeds from maturities ....................... 3,606 6,902 Purchases ...................................... (2,221) (3,849) Purchases of loan pool participations ............ (31,670) (21,029) Principal recovery on loan pool participations ................................. 20,252 19,105 Net increase in loans ............................ (20,924) (22,145) Purchases of bank premises and equipment ......... (318) (420) Proceeds from acquisition ........................ 3,403 0 -------- -------- Net cash used in investing activities ........ (26,025) (24,919) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits ......................... 1,846 5,249 Net increase in federal funds purchased .......... 8,665 3,775 Federal Home Loan Bank advances .................. 3,500 6,300 Repayment of Federal Home Loan Bank advances ..... (24) (1) Advances on note payable ......................... 3,300 7,200 Principal payments on note payable ............... (4,050) (4,500) Dividends paid ................................... (1,644) (1,542) Purchases of treasury stock ...................... 0 (1,768) Proceeds from exercise of stock options ........................................ 373 605 -------- -------- Net cash provided by financing activities ................................. 11,966 15,318 -------- -------- Net decrease in cash and cash equivalents ....................... (10,081) (5,213) Cash and cash equivalents at beginning of period ...................................... 22,121 19,195 -------- -------- Cash and cash equivalents at end of period ....... $ 12,040 13,982 -------- -------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest ..................................... $ 8,359 7,627 -------- -------- Income taxes ................................. $ 1,378 2,061 -------- -------- See accompanying notes to consolidated financial statements. PART I -- Item 1. Financial Statements, continued. MAHASKA INVESTMENT COMPANY Notes to Consolidated Financial Statements (Unaudited) 1. Basis of Presentation The accompanying consolidated statement of condition as of December 31, 1998, the consolidated statements of income, the consolidated statements of comprehensive income, and the consolidated statements of cash flow for the nine months ended September 30, 1998 include the accounts and transactions of the Company and its four wholly-owned subsidiaries, Mahaska State Bank, Central Valley Bank, Pella State Bank and On-Site Credit Services, Inc. The consolidated statement of condition as of September 30, 1999 includes the accounts of the Company and its aforementioned subsidiaries plus Midwest Federal Savings and Loan Association of Eastern Iowa ("Midwest Federal"). Midwest Federal was acquired as a result of the merger with Midwest Bancshares, Inc.("Midwest"), which closed on September 30, 1999. The consolidated statement of cash flows for the nine months ended September 30, 1999 presents the transactions of the Company and the original four subsidiaries for the nine months and includes the results of the merger transaction with Midwest. All material intercompany balances and transactions have been eliminated in consolidation. The accompanying consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although management believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these interim consolidated financial statements be read in conjunction with the Company's most recent audited financial statements and notes thereto. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of September 30, 1999, and the results of operations for the three months and the nine months ended September 30, 1999 and 1998, and cash flows for the nine months ended September 30, 1999 and 1998. The results for the three months and the nine months ended September 30, 1999 may not be indicative of results for the year ended December 31, 1999, or for any other period. 2. Consolidated Statements of Cash Flows In the consolidated statements of cash flows, cash and cash equivalents include cash and due from banks, interest-bearing deposits with banks, and federal funds sold. 3. Income Taxes Federal income tax expense for the three months and the nine months ended September 30, 1999 and 1998 was computed using the consolidated effective federal tax rate. The Company also recognized income tax expense pertaining to state franchise taxes payable individually by the subsidiary banks. 4. Earnings Per Common Share Basic earnings per common share computations are based on the weighted average number of shares of common stock actually outstanding during the period. The weighted average number of shares for the three-month periods ended September 30, 1999 and 1998 was 3,679,991 and 3,654,768, respectively. The weighted average number of shares for the nine-month periods ended September 30, 1999 and 1998 was 3,656,397 and 3,669,414, respectively. Diluted earnings per share amounts are computed by dividing net income by the weighted average number of shares and all dilutive potential shares outstanding during the period. The computation of diluted earnings per share used a weighted average number of shares outstanding of 3,768,483 and 3,832,830 for the three months ended September 30, 1999 and 1998, respectively, and 3,751,594 and 3,864,608 for the nine months ended September 30, 1999 and 1998, respectively. 5. Effect of New Financial Accounting Standards The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") 131, "Disclosure about Segments of an Enterprise and Related Information" effective January 1, 1998. SFAS No. 131 establishes disclosure requirements for segment operations. The adoption had no effect on the Company's financial statement disclosures because the Company operates as a single business segment. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", will be effective for the Company beginning January 1, 2000. Management is evaluating the impact the adoption of SFAS No. 133 will have on the Company's consolidated financial statements and expects to adopt SFAS 133 when required. SFAS No. 137 has subsequently deferred implementation of SFAS 133 until January 1, 2001. 6. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. A significant estimate that is particularly sensitive to change is the allowance for loan losses. 7. Sale of On-Site Credit Services, Inc. On April 23, 1999, the Company announced that it had elected to seek a buyer for On-Site Credit Services, Inc. ("On-Site"), its wholly-owned commercial finance subsidiary. A letter of intent was executed with a potential buyer for On-Site on July 28, 1999. It was anticipated that a closing on the sale would occur in the fourth quarter of 1999. In October of 1999, it became apparent that a satisfactory agreement would not be reached with the potential buyer due to the proposed structure of the transaction (not due to pricing issues). Management is currently evaluating a number of other alternatives related to On-Site, including a modified transaction with the original potential buyer. As of September 30, 1999, On-Site's loan and lease portfolio totaled $8,394,000, or approximately 3 percent of the Company's total loans as of that date. The Company's financial results for the nine months ended September 30, 1999 include costs and charges related to the proposed sale of the On-Site activity consisting of a loan loss provision of $1,243,000, estimated loss on sale of $220,000, and $21,000 in severance benefits paid to employees. 8. Acquisition of Midwest Bancshares, Inc. The Company announced on February 2, 1999, that it entered into a definitive agreement to acquire all the outstanding shares of Midwest Bancshares, Inc. ("Midwest") of Burlington, Iowa. Midwest Bancshares is the parent company of Midwest Federal Savings and Loan Association of Eastern Iowa ("Midwest Federal"), a community-oriented thrift institution, with locations in Burlington, West Burlington, Fort Madison, and Wapello, Iowa. The transaction with Midwest was accounted for using the purchase method of accounting. On July 22, 1999, the Federal Reserve Bank of Chicago approved the acquisition. The acquisition was approved by shareholders of both companies on September 22, 1999, with the closing occurring on September 30, 1999. Following the merger, Midwest Federal became a wholly-owned subsidiary of the Company, retaining its separate thrift charter. As of September 30, 1999, Midwest Federal had total assets of $176,929,000, loans of $100,239,000 and deposits of $107,164,000. The purchase price for Midwest totaled $19,237,000 including transaction expenses for attorney fees, investment banking fees, accounting, employment agreement settlements, and stock registration costs totaling $640,000. The purchase price was determined based on the Company's average share price at the announcement date times the 1,105,348 shares of Company common stock that were issued to the former shareholders of Midwest on September 30, 1999. The excess of the purchase price over the identifiable fair value of the tangible and identifiable intangible assets acquired and the liabilities assumed of $6,234,000 was recorded as goodwill and will be amortized over 25 years on a straight- line basis. The acquisition has been accounted for by the purchase method of accounting and, accordingly, the income and earnings results of Midwest Federal are not included with the results of the Company for the periods ending September 30. The balance sheet data as of September 30, 1999, does include the amounts acquired from Midwest. The following unaudited proforma financial information presents the combined results of operations of the Company and Midwest Federal as if the acquisition had been effective January 1, 1998, after giving effect to certain adjustments, including amortization and accretion of discounts, premiums, goodwill and deposit base intangibles and related income tax effects. The proforma financial information does not necessarily reflect the results of operations that would have occurred had the Company and Midwest Federal constituted a single entity during such periods. Pro Forma Proforma Condensed Acquisition Pro Forma Statement of Income Mahaska Midwest Adjustment Consolidated - ------------------- ------- ------- ---------- ------------ Nine Months ended September 30, 1999: (in thousands, except per share amounts) Interest income $ 19,608 8,531 455 28,592 Interest expense 8,301 5,392 (61) 13,632 ------- ------ ----- ------ Net interest income 11,305 3,139 516 14,960 Provision for loan losses 2,094 36 - 2,130 Noninterest income 1,382 451 - 1,833 Noninterest expense 7,531 2,520 467 10,518 ------- ------ ----- ------ Income before income tax expense 3,062 1,034 49 4,145 Income tax expense 1,137 382 - 1,519 ------- ------ ----- ------ Net income 1,925 652 49 2,626 ------- ----- ----- ------ Earnings per common share - basic 0.53 0.59 0.55 Earnings per common share - diluted 0.51 0.59 0.54 Nine Months ended September 30, 1998: Interest income $ 19,456 8,521 455 28,432 Interest expense 7,674 5,399 (61) 13,012 -------- ----- ----- ------ Net interest income 11,782 3,122 516 15,420 Provision for loan losses 594 36 - 630 Noninterest income 1,398 543 - 1,941 Noninterest expense 6,680 2,123 467 9,270 -------- ----- ----- ------ Income before income tax expense 5,906 1,506 49 7,461 Income tax expense 2,125 456 - 2,581 ------- ----- ----- ------ Net income 3,781 1,050 49 4,880 ------- ----- ----- ------ Earnings per common share - basic 1.03 1.01 1.04 Earnings per common share - diluted 0.98 0.95 0.98 PART I -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. QUARTER ENDED SEPTEMBER 30, 1999 On September 30, 1999, the Company acquired all of the outstanding common stock of Midwest Federal Savings and Loan Association of Eastern Iowa ("Midwest Federal") as a result of an exchange of Company stock with the shareholders of Midwest Bancshares, Inc. ("MWBI"), the thrift holding company for Midwest Federal. A total of 1,105,348 shares of Company common stock were issued to the former shareholders of MWBI in a transaction valued at $19,237,000, including transaction expenses. The acquisition of Midwest Federal is being accounted for using the purchase method of accounting as of September 30, 1999, Midwest Federal had total assets of $176,929,000, deposits of $107,164,000 and total loans of $100,239,000. Midwest Federal will remain a separate wholly-owned subsidiary of the Company. The Company recorded net income of $1,087,000 for the quarter ended September 30, 1999, compared with net income of $977,000 for the three months ended September 30, 1998, an increase of $110,000 (11 percent). Net income and earnings results for the quarter do not include results from Midwest Federal, since the acquisition was accounted for using the purchase method of accounting. Basic earnings per share for the third quarter of 1999 was $.30 versus $.27 per share for the third quarter of 1998. Diluted earnings per share for the third quarter of 1999 was $.29 versus diluted earnings per share of $.26 for the third quarter of 1998. Actual weighted average shares outstanding were 3,679,991 and 3,654,768 for the third quarter of 1999 and 1998, respectively. The issuance of 1,105,348 shares on September 30, 1999, to shareholders of MWBI as a result of the merger into the Company did not materially change the average for the quarter, but will increase the average shares outstanding in future periods. The Company's return on average assets for the quarter ended September 30, 1999 was 1.41 percent compared with a return of 1.39 percent for the quarter ended September 30, 1998. The Company had a return on average equity of 11.24 percent for the three months ended September 30, 1999 versus 10.15 percent for the three months ended September 30, 1998. RESULTS OF OPERATIONS Net Interest Income Net interest income is computed by subtracting total interest expense from total interest income. Fluctuations in net interest income can result from the changes in the volumes of assets and liabilities as well as changes in interest rates. The Company's net interest income for the quarter ended September 30, 1999 increased $439,000 (12 percent) to $3,994,000 from $3,555,000 for the three months ended September 30, 1998. This increase was mainly due to increased interest income and discount recovery on loan pool participations and increased interest income earned on higher loan volumes. Increased interest expense on deposits and borrowed funds somewhat offset the higher interest income. Total interest income increased $644,000 (10 percent) in the third quarter of 1999 compared with the same period in 1998. The Company's total interest expense for the quarter increased $205,000 (8 percent) compared with the same period in 1998. The Company's net interest margin (on a federal tax-equivalent basis) for the third quarter of 1999 rose to 5.62 percent from 5.54 percent in the third quarter of 1998. Net interest margin is a measure of the net return on interest-earning assets and is computed by dividing annualized net interest income by the average of total interest- earning assets for the period. The Company's overall yield on earning assets was 9.56 percent for the third quarter of 1999 compared to 9.58 percent for the third quarter of 1998. The rate on interest-bearing liabilities also decreased in the third quarter of 1999 to 4.62 percent compared with 4.76 percent for the third quarter of 1998. Interest income and fees on loans increased $104,000 (3 percent) in the third quarter of 1999 compared to the same period in 1998, mainly due to higher real estate loan volumes. The average yield on loans declined to 8.94 percent for the third quarter of 1999, compared to 9.67 percent in the third quarter of 1998 as competition for loans forced the Company to reduce some of its loan rates to remain competitive in its markets. Recent moves by the Federal Reserve to increase interest rates may benefit the Company in future periods as variable rate loans tied to prime have been adjusted upward. Competition for loans in the market areas served by the Company remains strong. Average loans outstanding were $181,547,000 for the third quarter of 1999 compared with $163,574,000 for the third quarter of 1998, an increase of $17,973,000 (11 percent). The Company's subsidiaries all experienced an increase in average loan volume between the third quarter of 1999 and 1998. Average real estate loan volumes increased $18,128,000 (26 percent), commercial loans averaged $633,000 (1 percent) lower, and agricultural loans increased $2,625,000 (8 percent) in average volume for the third quarter of 1999 compared with 1998. Loans to individuals declined an average of $1,782,000 (13 percent) in the third quarter of 1999 compared with 1998 as the Company generally does not attempt to compete for the consumer loan business (especially new car loans). The Company recognized an additional $635,000 in interest and discount income on loan pool participations in the third quarter of 1999 compared with 1998, mainly due to higher loan pool volumes. Interest income and discount collected on the loan pool participations for the three months ended September 30, 1999 was $2,162,000 compared with $1,527,000 collected in the third quarter of 1998. The yield on loan pool participations rose to 13.69 percent for the third quarter of 1999 compared with 12.51 percent for the quarter ended September 30, 1998. The average loan pool participation investment balance was $14,230,000 (29 percent) greater in the third quarter of 1999 than in 1998 as a result of new purchases of pools. Newly purchased loan pools typically do not produce income for a period of up to 120 days from date of purchase which significantly impacts the yield on the investment. These loan pool participations are pools of performing and distressed and nonperforming loans that the Company has purchased at a discount from the aggregate outstanding principal amount of the underlying loans. Income is derived from this investment in the form of interest collected and the repayment of the principal in excess of the purchase cost which is herein referred to as "discount recovery." The Company recognizes interest income and discount recovery on its loan pool participations on a cash basis. The loan pool participations have traditionally been a high-yield activity for the Company, but this yield has fluctuated from period to period based on the amount of cash collections, discount recovery, and net collection expenses of the servicer in any given period. The income and yield on loan pool participations may vary in future periods due to the volume and discount rate on loan pools purchased. The increase in interest expense in the third quarter of 1999 compared with 1998 was mainly attributable to growth in deposits and an increase in borrowed funds. Average interest-bearing deposits for the third quarter of 1999 increased $17,000,000 (9 percent) from the same period in 1998 with the largest increase occurring in the savings deposit category. Borrowings on the Company's commercial bank line of credit averaged $1,470,000 higher in the third quarter of 1999 compared with 1998 as the Company borrowed funds to provide operating cash to purchase loan pools. Federal Home Loan Bank advances during the third quarter of 1999 averaged $2,438,000 greater than in 1998 as the Company utilized these advances to fund asset growth. The higher average balance of these borrowed funds resulted in increased interest expense in 1999 compared with 1998, even though the average rate on all interest-bearing liabilities declined. The Company's overall rate on interest-bearing liabilities decreased to 4.62 percent for the third quarter of 1999 compared to 4.76 percent in 1998. Provision for Loan Losses The Company recorded a provision for loan losses of $462,000 in the third quarter of 1999, of which $207,000 was recorded by On-Site Credit Services, Inc. In the third quarter of 1998, the Company recorded a provision for loan losses of $307,000. Management determines an appropriate provision based on its evaluation of the adequacy of the allowance for loan losses in relationship to a continuing review of problem loans, the current economic conditions, actual loss experience and industry trends. In addition to the large provision at On-Site, one of the Company's banks recorded a significant charge-off on an agricultural loan which necessitated an additional provision of $100,000 during the period. Management believes that the allowance for loan losses is adequate based on the inherent risk in the portfolio as of September 30, 1999, however, continued growth in the loan portfolio and the uncertainty of the agricultural economy require that management continue to evaluate the adequacy of the allowance for loan losses and make additional provisions in future periods as deemed necessary. Other Income Other income results from the charges and fees collected by the Company from its customers for various services performed, data processing income received from nonaffiliated banks, miscellaneous other income and gains (or losses) from the sale of investment securities held in the available for sale category. Total other income was $74,000 (14 percent) lower in the third quarter of 1999 compared with 1998, mainly due a nonrecurring receipt in the 1998 quarter of a settlement of an employee misappropriation of funds. Other Expense Total other noninterest expense for the quarter ended September 30, 1999 increased $19,000 (1 percent) compared to noninterest expense for the third quarter of 1998. Other expense includes all the costs incurred to operate the Company except for interest expense, the loan loss provision and income taxes. Salaries and benefits expense for the third quarter of 1999 increased $29,000 (2 percent) over 1998, primarily as a result of higher salary levels. Net occupancy and equipment expenses for the 1999 quarter increased $15,000 (4 percent) in comparison to 1998 with most of the increase due to the additional facilities of Pella State Bank and the increased depreciation expense incurred on the Company's new mainframe computer. Professional fees in the September 30, 1999 quarter declined by $32,000 compared to 1998. Other operating expense increased by $25,000 in the third quarter of 1999 compared with the three months ended September 30, 1998. Income Tax Expense The Company incurred income tax expense of $621,000 for the three months ended September 30, 1999. For the three months ended September 30, 1998, the Company incurred income tax expense of $541,000. The increased tax expense for the September 1999 quarter was mainly due to higher overall taxable income compared to the same period in the prior year. NINE MONTHS ENDED SEPTEMBER 30, 1999 The Company's net income for the nine months of 1999 was $1,925,000 compared with $3,781,000 earned in the nine months of 1998. The losses attributable to the On-Site operation and a decline in loan pool income in 1999 were primarily responsible for the overall reduction in net income. The income and earnings results for the period do not include Midwest Federal, since the acquisition was required to be accounted for using the purchase method. Basic and diluted earnings per share for the nine months of 1999 were $.53 and $.51, respectively, compared with 1998 basic earnings per share of $1.03 and diluted earnings of $.98 per share. Actual weighted- average shares outstanding were 3,656,397 in the nine months of 1999 and 3,669,414 in 1998. The Company's return on average assets was .85 percent in the nine months of 1999 and 1.83 percent in 1998. Return on average equity was 6.68 percent in 1999 and 13.32 percent for the first nine months of 1998. On April 23, 1999, the Company announced that it had elected to seek a buyer for On-Site Credit Services, Inc. ("On-Site"), its wholly-owned commercial finance subsidiary. A letter of intent was executed with a potential buyer for On-Site on July 28, 1999. It was anticipated that a closing on the sale would occur in the fourth quarter of 1999. In October of 1999, it became apparent that a satisfactory agreement would not be reached with the potential buyer due to the proposed structure of the transaction (not due to pricing issues). Management is currently evaluating a number of other alternatives related to On-Site, including a modified transaction with the original potential buyer. As of September 30, 1999, On-Site's loan and lease portfolio totaled $8,394,000, or approximately 3 percent of the Company's total loans as of that date. The Company's financial results for the nine months ended September 30, 1999 include costs and charges related to the proposed sale of the On-Site activity consisting of a loan loss provision of $1,243,000, estimated loss on sale of $220,000, and $21,000 in severance benefits paid to employees. For the nine months of 1999, net after-tax losses related to On-Site amounted to $877,000, or $.24 per share basic and $.23 per share diluted. Without the On-Site losses, the Company's year-to-date income from on-going operations would have been $2,802,000, or $.77 per share basic. RESULTS OF OPERATIONS Net Interest Income Net interest income for the nine months ended September 30, 1999 declined $477,000 (4 percent) compared with the prior year, mostly due to reduced interest income and discount recovery on loan pools and increased interest expense. Total interest income increased $150,000 (1 percent) in 1999 while interest expense increased $627,000 (8 percent) in 1999 compared with 1998. The Company's net interest margin for the first nine months of 1999 was 5.43 percent compared with 6.25 percent in 1998. The overall yield on earning assets was 9.38 percent in 1999 and 10.29 percent in 1998. The rate on interest-bearing liabilities decreased in 1999 to 4.63 percent compared with 4.75 percent in 1998. Interest and fees on loans increased $817,000 (7 percent) in the nine months of 1999 compared with 1998 primarily due to increased loan volumes. Average loans outstanding of $175,490,000 in 1999 were $21,033,000 greater than in 1998. The overall yield on loans declined to 9.03 percent in 1999 compared with 9.55 percent in 1998 as market interest rates were lower on average. The interest income and discount collected on loan pools decreased $472,000 (8 percent)in the first nine months of 1999 compared with 1998 as a result of higher collection costs incurred by the servicer on loans that had been purchased in 1996 and 1997, and the reduced overall profit margin attributable to the purchase of higher quality assets in more recent periods. The yield on loan pool investments for the nine months of 1999 was 13.57 percent compared with 16.98 percent in 1998. Average loan pool investments in 1999 were $56,263,000 compared with $48,663,000 for 1998. Growth in deposits, additional advances from the Federal Home Loan Bank, and increased borrowings on the Company's commercial bank line of credit were responsible for the higher interest expense incurred by the Company in 1999. Total interest expense on deposits increased $362,000 (5 percent) in 1999 while interest on borrowed funds (including notes payable) increased $265,000 (26 percent) over 1998. Increased borrowings on the Company's bank line of credit were primarily used to fund the On-Site activities and the purchase of loan pool investments. Provision for Loan Losses The year-to-date loan loss provision for 1999 was $2,094,000, with $1,534,000 related to On-Site. The subsidiary banks' provision for loss totaled $560,000 for the first nine months of 1999. For the first nine months of 1998, the Company's provision for loan losses was $594,000, with $180,000 of that amount attributable to On-Site and $414,000 recorded by the bank subsidiaries. Other Income Non-interest income totaled $1,382,000 for the first nine months of 1999 compared with $1,398,000 in 1998, a decline of $16,000 in 1999. Minimal increases were noted in service charges collected on deposit accounts and in data processing income. The Company did record a gain on the sale of investment securities totaling $26,000 in 1998 while there were no sales in 1999. Other Expense Total non-interest expense increased $851,000 (13 percent) in the first nine months of 1999 compared with 1998. Salaries and benefits increased $290,000 (8 percent) mainly as a result of increased staffing at Mahaska State Bank and Pella State Bank and higher salary levels. Occupancy and equipment expenses rose $59,000 (6 percent) due to higher maintenance contract and licensing fees on check processing equipment. Professional fees increased $144,000 (42 percent) in 1999 compared with 1998 mainly due to fees related to the sale of the On-Site subsidiary totaling $220,000. A loss on the sale of real estate held by the Company in the amount of $91,000 and liquidation costs associated with problem credits at On-Site contributed to the $395,000 (30 percent) increase in Other operating expenses in the nine months ended September 30, 1999 compared with 1998. Income Tax Expense The Company recognized income tax expense of $1,137,000 for the first nine months of 1999 compared with $2,125,000 for the same period in 1998. The Company's effective income tax rate for the 1999 period was 37.12 percent compared with 35.98 percent in the nine months ended September 30, 1998. FINANCIAL CONDITION The Company's total assets as of September 30, 1999 were $488,233,000, an increase of $189,844,000 from December 31, 1998. The consummation of the merger with Midwest Bancshares, Inc. (MWBI) on September 30, 1999 added assets of $176,929,000 to the Company total. As of September 30, 1999, the Company had $1,000,000 in federal funds sold and $8,665,000 in federal funds borrowed compared with $9,270,000 sold as of December 31, 1998. The Company's liquidity needs are usually highest in the second and third quarters of each year due to seasonal loan demand and minimal deposit growth in the first nine months of the year. Federal funds are borrowed on a short-term basis to meet this liquidity need. Investment Securities Investment securities available for sale increased $33,805,000 from December 31, 1998 to the September 30, 1999 total of $63,460,000. Midwest Federal's total of $36,285,000 was added while the Company's securities maturing were not reinvested. Investment securities classified as held to maturity rose to $32,025,000 as of September 30, 1999, compared with $13,679,000 on December 31, 1998, with the net increase due to the addition of Midwest Federal. Loans Overall loan volumes continued to increase, with total loans outstanding of $285,492,000 on September 30, 1999, reflecting growth of $19,003,000 (11 percent) from December 31, 1998 in the Company's originated loans, and loans totaling $100,239,000 attributable to the acquisition of Midwest Federal. As of September 30, 1999, the Company's loan to deposit ratio (excluding loan pool investments) was 83.5 percent. This compares with a year-end 1998 loan to deposit ratio of 71.1 percent. As of September 30, 1999, On-Site had total loans outstanding of $8,394,000, mostly in the commercial loan category. This compares with a December 31, 1998 loan total for On-Site of $13,246,000. Loan Pool Participations As of September 30, 1999, the Company had investments in loan pool participations of $70,707,000, an increase of $16,197,000 (30 percent) from the December 31, 1998 balance. Included in the September 30, 1999 loan pool balance is $4,779,000 of pools purchased by Midwest Federal prior to the quarter end. The loan pool investment balance shown as an asset on the Company's Balance Sheet represents the discounted purchase cost of the loan pool participations. The Company actively continued to evaluate and bid on loan pool packages in the third quarter of 1999 and was successful in investing $11,848,000 during the period (plus $5,000,000 invested by Midwest Federal). The loan pool participation investment as of December 31, 1998 was $54,510,000. During 1999, the Company has invested $31,670,000 in loan pool participations compared with $21,029,000 in the first nine months of 1998. The average loan pool participation investment of $56,262,000 for the first nine months of 1999 was $7,599,000 (16 percent) higher than the average balance of $48,663,000 for 1998. Deposits Total deposits as of September 30, 1999 were $341,743,000 compared with $232,733,000 as of December 31,1998. Midwest Federal had deposits of $107,164,000 as of the merger date while deposits at the other bank subsidiaries increased minimally during the nine months of 1999. Borrowed Funds/Notes Payable The Company had $8,665,000 in Federal Funds purchased on September 30, 1999. There were no Federal Funds purchased on December 31, 1998. During the first nine months of 1999, the Company had an average balance of Fed Funds purchased of $1,493,000. Advances from the Federal Home Loan Bank totaled $59,986,000 as of September 30, 1999 compared with $7,595,000 as of December 31, 1998. As of September30, 1999, Midwest Federal had $48,915,000 in variable and fixed rate advances from the Federal Home Loan Bank. Notes payable declined to $16,250,000,000 on September 30, 1999 from $17,000,000 on December 31, 1998. Nonperforming Assets The Company's nonperforming assets totaled $3,059,000 (1.07 percent of total loans) as of September 30, 1999, compared to $1,400,000 (.85 percent of total loans) as of December 31, 1998. All nonperforming asset totals and related ratios exclude the loan pool investments. The following table presents the categories of nonperforming assets for the bank subsidiaries and for On-Site Credit Services, Inc. as of September 30, 1999 compared with December 31, 1998: Nonperforming Assets (dollars in thousands) September 30, 1999 Banks On-Site Total ------ ------ ------ Nonaccrual $ 592 $1,082 $1,674 Loans 90 days past due 735 643 1,378 Other real estate owned 7 0 7 ------ ------ ------ $1,334 $1,725 $3,059 December 31, 1998 Banks On-Site Total ------ ------ ------ Nonaccrual $ 423 $ 138 $ 561 Loans 90 days past due 244 419 663 Restructured loans 164 0 164 Other real estate owned 12 0 12 ------ ------ ------ $ 843 $ 557 $1,400 From December 31, 1998 to September 30, 1999, nonaccrual loans increased $1,113,000 primarily due to concerns related to commercial finance lines which have experienced financial difficulties resulting in them being placed on a nonaccrual classification. Additionally, on September 30, 1999, Midwest Federal had $207,000 in loans on a nonaccrual status which increased the Company's overall totals. As of that date, Midwest Federal had no other loans in nonperforming categories. Loans ninety days past due increased $715,000, primarily related to a Mahaska State Bank loan to a cattle feeding operation. Restructured loans decreased $164,000 as these loans were paid off and other real estate owned decreased by $5,000. The Company's allowance for loan losses as of September 30, 1999 was $3,349,000, which was 1.17 percent of total loans as of that date. This compares with an allowance for loan losses of $2,177,000 as of December 31, 1998, which was 1.32 percent of total loans. The allowance acquired from Midwest Federal totaled $516,000 which accounted for a portion of the $1,172,000 increase between December 31, 1998 and September 30, 1999 with the remainder related to On-Site. As of September 30, 1999, the allowance for loan losses was 109.70 percent of nonperforming loans compared with 156.80 percent as of December 31, 1998. Based on the inherent risk in the loan portfolio, management believes that as of September 30, 1999, the allowance for loan losses is adequate. For the three months ended September 30, 1999, the Company recognized a net loan charge-off of $359,000 compared with a net charge-off of $170,000 during the quarter ended September 30, 1998. For the nine months ended September 30, 1999, the Company charged off net loans of $1,438,000 compared with net charge-offs of $536,000 in the first nine months of 1998. During the nine months of 1999, net charge-offs recorded by On-Site totaled $1,024,000 while the bank subsidiaries charged off $414,000. In comparison, for the nine months ended September 30, 1998, On-Site recorded net charge-offs of $307,000 versus bank net charge-offs of $229,000. Capital Resources As of September 30, 1999, total shareholders' equity as a percentage of total assets was 11.75 percent compared with 12.81 percent as of December 31, 1998. The Company held 134,646 shares of treasury stock at a cost of $2,202,000 as of September 30, 1999. During the third quarter of 1999, the Company reissued 13,592 shares of treasury stock as a result of the exercise of stock options previously granted to directors, officers, and employees. On September 30, 1999, the Company issued a total of 1,105,348 shares of common stock to the shareholders of Midwest Bancshares, Inc. in connection with the merger of the companies. The Company did not repurchase any shares of its stock during the third quarter of 1999. Under risk-based capital rules, the Company's tier 1 capital ratio was 12.97 percent of risk-weighted assets as of September 30, 1999, and was 14.02 percent of risk-weighted assets as of December 31, 1998, compared to a 4.00 percent requirement. Risk-based capital guidelines require the classification of assets and some off-balance-sheet items in terms of credit-risk exposure and the measuring of capital as a percentage of the risk-adjusted asset totals. Tier 1 capital is the Company's total common shareholders' equity reduced by goodwill. Management believes that, as of September 30, 1999, the Company and its subsidiary banks meet all capital adequacy requirements to which they are subject. As of that date, all the bank subsidiaries were "well capitalized" under regulatory prompt corrective action provisions. Liquidity Liquidity management involves meeting the cash flow requirements of depositors and borrowers. The Company conducts liquidity management on both a daily and long-term basis; and it adjusts its investments in liquid assets based on expected loan demand, projected loan maturities and payments, estimated cash flows from the loan pool participations, expected deposit flows, yields available on interest-bearing deposits, and the objectives of its asset/liability management program. The Company had liquid assets (cash and cash equivalents) of $12,040,000 as of September 30, 1999, compared with $22,121,000 as of December 31, 1998. Much of the decrease during the quarter was utilized to fund loan growth and to purchase loan pool participations. Investment securities classified as available for sale could be sold to meet liquidity needs, if necessary. Additionally, the bank subsidiaries maintain lines of credit with correspondent banks and the Federal Home Loan Bank that would allow them to borrow federal funds on a short-term basis if necessary. The Company also maintains a line of credit with a major commercial bank that provides liquidity for the purchase of loan pool participation investments and other corporate needs. Management believes that the Company has sufficient liquidity as of September 30, 1999 to meet the needs of borrowers and depositors. Market Risk Management Market risk is the risk of earnings volatility that results from adverse changes in interest rates and market prices. The Company's market risk is primarily comprised of interest rate risk arising from its core banking activities of lending and deposit taking. Interest rate risk is the risk that changes in market interest rates may adversely affect the Company's net interest income. Management continually develops and applies strategies to mitigate this risk. Management does not believe that the Company's primary market risk exposures and how those exposures were managed in the nine months of 1999 changed when compared to 1998. The Company uses a third-party computer software simulation modeling program to measure its exposure to potential interest rate changes. For various assumed hypothetical changes in market interest rates, numerous other assumptions are made such as prepayment speeds on loans and securities backed by mortgages, the slope of the Treasury yield curve, the rates and volumes of the Company's deposits and the rates and the volumes of the Company's loans. This analysis measures the estimated change in net interest income in the event of hypothetical changes in interest rates. This analysis of the Company's interest rate risk was presented in the Form 10-K filed by the Company for the year ended December 31, 1998. Year 2000 Compliance A critical issue has emerged in the banking industry and for the economy overall regarding how existing computer application software programs, operating systems and hardware can accommodate the date value for the year 2000. This issue is an area of major emphasis as management is actively working with its software and hardware vendors to assure that the Company is compliant. Additionally, the Company is working with material non-information system providers, including but not limited to security, telephone, utilities, ATM cards, elevators, heating and cooling systems, check clearing services, teller machines and proof equipment to determine their year 2000 compliance. An assessment of the readiness of vendors, significant customers and other third parties with which the Company does business is also underway. The Company could be faced with severe consequences if Year 2000 issues are not identified and resolved in a timely manner. A worst-case scenario would result in the short-term inability to update customer financial records due to unforseen processing issues. This would result in customers being unable to receive timely information regarding their account balances. In addition, a worst-case scenario for the Company is that major suppliers of electricity, communication links and outside data processing services may fail in spite of their best efforts to remediate their systems and in spite of our best efforts to test their systems. The major risk as a result of these possibilities would be a loss of customer confidence. The Company has established Year 2000 Committees and Plans at its bank and thrift subsidiaries, and formal project plans have been developed and adopted. Testing and contingency plans have also been developed and adopted by the Company's subsidiaries. Testing procedures are completed for all currently used hardware and software. Any new hardware or software acquired through December 31, 1999 will be tested upon installation. The Company purchased a new main-frame computer system in 1997 that is Year 2000 compliant at a cost of $430,000. This computer system became fully operational in the first quarter of 1998 with the equipment cost being depreciated over a five year period beginning in 1998. The Company's contingency plans include two components which are business remediation and business resumption. The business remediation plan was developed to mitigate the risk associated with the failure to successfully complete system renovation, validation or implementation of the Company's Year 2000 readiness. This plan pertains to mission-critical systems developed in-house, by outside software vendors, and by third-party service providers. The business resumption plan is designed to be implemented in the event there are system failures at critical dates. The Company anticipates that it will incur internal staff costs and other expenses related to the enhancements necessary to become Year 2000 compliant. Based on the Company's current knowledge, the expense related to Year 2000 compliance is not expected to have a material effect on the Company's financial position or results of operations. It is estimated that the costs incurred by the Company for Year 2000 compliance will be approximately $35,000, exclusive of costs associated with the new main-frame computer. The acquisition of Midwest Federal does not significantly change the Company's Year 2000 readiness or contingency planning. Midwest Federal will continue to utilize a third party data processor until converting to the Company's data system (currently planned for the second quarter of 2000). Midwest Federal has developed, implemented and tested its own year 2000 readiness procedures which have been evaluated and examined by regulators and as part of the Company's due diligence prior to the acquisition. Midwest Federal The acquisition of Midwest Federal on September 30, 1999, increased the Company's total assets 59 percent in comparison to December 31, 1998 and allowed the entry into four new markets. Midwest Federal has been a community-based thrift institution and it is managements' intention that it will remain as such in the future. The Company expects that the acquisition of Midwest Federal will enhance future revenues through improved interest rate margins and fee income as a result of expanded product and service offerings to Midwest Federal's customers. The Company also expects to achieve operating cost savings primarily through the consolidation of certain functions such as data processing and back office operations. The revenue enhancements and operating cost savings are expected to be achieved in various amounts at various times during the years subsequent to the acquisition of Midwest Federal and not ratably over, or at the beginning or end of, such periods. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT With the exception of the historical information contained in this report, the matters described herein contain forward-looking statements that involve risk and uncertainties that individually or mutually impact the matters herein described, including but not limited to financial projections, product demand and market acceptance, the effect of economic conditions, the impact of competitive products and pricing, governmental regulations, results of litigation, technological difficulties and/or other factors outside the control of the Company, which are detailed from time to time in the Company's SEC reports. The Company disclaims any intent or obligation to update these forward-looking statements. PART II -- Item 4. Submission of Matters to a Vote of Security Holders. A special meeting of shareholders was held on September 22, 1999. The record date for determination of shareholders entitled to vote at the meeting was August 11, 1999. There were 3,670,380 shares outstanding as of that date, each such share being entitled to one vote. At the shareholders' meeting the holders of 3,081,394 shares of stock were represented in person or by proxy, which constituted a quorum. The following proposal was voted on at the meeting: Proposal 1 - Agreement and Plan of Merger dated February 2, 1999, by and between the Company and Midwest Bancshares, Inc.: The merger whereby Midwest Bancshares, Inc. would merge with and into the Company and the Midwest Shareholders would receive one share of Company common stock for each share of Midwest common stock owned was approved by the Company shareholders with the votes cast as follows: DEALER FOR AGAINST ABSTAIN NON-VOTES --- ------- ------- --------- 2,994,869 73,454 13,071 0 Part II -- Item 6. Exhibits and Reports on Form 8-K. (a) The following exhibits are filed with this Report or, if so indicated, incorporated by reference: Exhibits 3.1 Articles of Incorporation of Mahaska Investment Company. (f) 3.2 Bylaws of Mahaska Investment Company. (f) 10.1 Mahaska Investment Company Employee Stock Ownership Plan & Trust as restated and amended. (b) 10.2.1 1993 Stock Incentive Plan. (a) 10.2.2 1996 Stock Incentive Plan. (d) 10.2.3 1998 Stock Incentive Plan. (e) 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. (a) 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. (a) 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. (a) 10.5.1 Revolving Loan Agreement dated January 31, 1996 between Mahaska Investment Company and Harris Trust & Savings Bank. (c) 10.5.2 Sixth Amendment to Revolving Loan Agreement and Revolving Loan Note between Mahaska Investment Company and Harris Trust & Savings Bank dated June 30, 1999. 10.6 Agreement and Plan of Merger By and Between Mahaska Investment Company and Midwest Bancshares, Inc. dated February 2, 1999. (g) 11 Computation of Per Share Earnings. 27 Financial Data Schedule. (a) Incorporated by reference to the Form S-1 Registration Number 33-81922 of Mahaska Investment Company. (b) Incorporated by reference to the Form 10-K for the year ended December 31, 1994 filed by Mahaska Investment Company. (c) Incorporated by reference to the Form 8-K filed by Mahaska Investment Company on February 29, 1996. (d) Incorporated by reference to the Form 10-K for the year ended December 31, 1996 filed by Mahaska Investment Company. (e) Incorporated by reference to the Form 10-K for the year ended December 31, 1997 filed by Mahaska Investment Company. (f) Incorporated by reference to the Form 10-Q for the quarter ended September 30, 1998 filed by Mahaska Investment Company. (g) Incorporated by reference to the Amendment No. 1 to the Form S-4 Registration number 333-79291 filed by Mahaska Investment Company on August 17, 1999. (b) Reports on Form 8-K -- The Company did not file any reports on Form 8-K for the three months ended September 30, 1999. SIGNATURES Pursuant to the requirements 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) November 10, 1999 /s/ Charles S. Howard Dated Charles S. Howard President November 10, 1999 /s/ David A. Meinert Dated David A. Meinert Executive Vice President and Chief Financial Officer (Principal Accounting Officer) Exhibit 10.5.2 MAHASKA INVESTMENT COMPANY SIXTH AMENDMENT AND WAIVER TO CREDIT AGREEMENT Harris Trust and Savings Bank Chicago, Illinois Ladies and Gentlemen: Reference is hereby made to that certain Credit Agreement dated as of January 31, 1996, as amended (the "Credit Agreement"), between the undersigned, Mahaska Investment Company, an Iowa corporation (the "Borrower"), and you (the "Bank"). All capitalized terms used herein without definition shall have the same meanings herein as such terms have in the Credit Agreement. The Borrower has requested that the Bank extend the Termination Date of the credit facility to June 30, 2000, amend the dividend and restricted payment covenant, and update the list of its Subsidiaries, and the Bank is willing to do so under the terms and conditions set forth in this agreement (herein, the "Amendment"). 1. AMENDMENTS. Subject to the satisfaction of the conditions precedent set forth in Section 2 below, the Credit Agreement shall be and hereby is amended as follows: 1.1 The definition of "Termination Date" appearing in Section 4 of the Credit Agreement shall have be and hereby is amended as follows: "Termination Date" means June 30, 2000, or such earlier date on which the Commitment is terminated in whole pursuant to Section 2.4, 8.2 or 8.3 hereof. 1.2 Section 7.10 of the Credit Agreement shall be amended and restated in its entirety to read as follows: Section 7.10. Dividends and Certain Other Restricted Payments. The Borrower shall not declare or pay any dividends on or make any other distributions in respect of any class or series of its capital stock or directly or indirectly , redeem or otherwise acquire or retire any of its capital stock, except that the Borrower may, during any fiscal year, declare and pay dividends and purchase or otherwise redeem its capital stock, so long as at the time of, and after giving effect to, the payment of any such dividend, repurchase, or redemption, (a) the aggregate amount of all such dividends, repurchases and redemptions during any fiscal year of the Borrower does not exceed 60% of the Borrower's Consolidated Net Income from the immediately preceding fiscal year (computed exclusive of the extraordinary loss booked by the Borrower during the 1999 fiscal year relating to its sale of On-Site Credit Services, Inc.) and (b) no Default or Event of Default shall have occurred and be continuing or would occur as a result thereof. 1.3 Schedule 5.2 of the Credit Agreement shall be updated and restated to read as set forth on Annex A attached hereto. 2. CONDITIONS PRECEDENT. The effectiveness of this Amendment is subject to the satisfaction of all of the following conditions precedent: 2.1 The Borrower and the Bank shall have executed and delivered this Amendment. 2.2 Legal matters incident to the execution and delivery of this Amendment shall be satisfactory to the Bank and its counsel. 3. REPRESENTATIONS. In order to induce the Bank to execute and deliver this Amendment, the Borrower hereby represents to the Bank that as of the date hereof the representations and warranties set forth in Section 5 of the Credit Agreement are and shall be and remain true and correct (except that the representations contained in Section 5.5 shall be deemed to refer to the most recent financial statements of the Borrower delivered to the Bank) and the Borrower is in full compliance with all of the terms and conditions of the Credit Agreement and no Default or Event of Default has occurred and is continuing under the Credit Agreement or shall result after giving effect to this Amendment. 4. MISCELLANEOUS. 4.1 The Borrower has heretofore executed and delivered to the Bank certain Collateral Documents and the Borrower hereby acknowledges and agrees that, notwithstanding the execution and delivery of this Amendment, the Collateral Documents remain in full force and effect and the rights and remedies of the Bank thereunder, the obligations of the Borrower thereunder and the liens and security interests created and provided for thereunder remain in full force and effect and shall not be affected, impaired or discharged hereby. Nothing herein contained shall in any manner affect or impair the priority of the liens and security interests created and provided for by the Collateral Documents as to the indebtedness which would be secured thereby prior to giving effect to this Amendment. 4.2 Except as specifically amended herein or waived hereby, the Credit Agreement shall continue in full force and effect in accordance with its original terms. Reference to this specific Amendment need not be made in the Credit Agreement, the Note, or any other instrument or document executed in connection therewith, or in any certificate, letter or communication issued or made pursuant to or with respect to the Credit Agreement, any reference in any of such items to the Credit Agreement being sufficient to refer to the Credit Agreement as amended hereby. 4.3 The Borrower agrees to pay on demand all costs and expenses of or incurred by the Bank in connection with the negotiation, preparation, execution and delivery of this Amendment, including the fees and expenses of counsel for the Bank. 4.4 This Amendment may be executed in any number of counterparts, and by the different parties on different counterpart signature pages, all of which taken together shall constitute one and the same agreement. Any of the parties hereto may execute this Amendment by signing any such counterpart and each of such counterparts shall for all purposes be deemed to be an original. This Amendment shall be governed by the internal laws of the State of Illinois. This Sixth Amendment and Waiver to Credit Agreement is dated as of June 30, 1999. MAHASKA INVESTMENT COMPANY By \s\ David A. Meinert Its Executive Vice President & CFO Accepted and agreed to in Chicago, Illinois as of the date and year last above written. HARRIS TRUST AND SAVINGS BANK By \s\ Patrick A. Horne Its Vice President Exhibit 11 MAHASKA INVESTMENT COMPANY AND SUBSIDIARIES STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS Three Months Ended Nine Months Ended September 30 September 30 1999 1998 1999 1998 ------------------ ---------------- Earnings per Share Information: Weighted average number of shares outstanding during the year 3,679,991 3,654,768 3,656,397 3,669,414 Weighted average number of shares outstanding during the year including all dilutive potential shares 3,768,483 3,832,830 3,751,594 3,864,608 Net earnings 1,087,288 977,218 1,925,360 3,780,895 Earnings per share - basic $ 0.30 0.27 0.53 1.03 Earnings per share - diluted $ 0.29 0.26 0.51 0.98