SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
Mahaska Investment Company
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 26, 2001
To The Shareholders Of Mahaska Investment Company:
The Annual Meeting of Shareholders of Mahaska Investment Company will be
held at the Elmhurst Country Club, 2214 South 11th Street, Oskaloosa, Iowa, on
Thursday, April 26, 2001, at 10:30 a.m., for the following purposes:
1. To elect directors to serve until the Annual Meeting of Shareholders at
which their term expires, and until their successors shall have been
elected and qualified;
2. To ratify the appointment of KPMG LLP as independent auditors for the
current fiscal year; and
3. To transact such other business as may properly come before the meeting
or any adjournment thereof.
* * * * *
The Board of Directors has fixed the close of business on February 22,
2001, as the record date for the determination of shareholders entitled to
receive notice of and to vote at the Annual Meeting or any adjournment
thereof.
To be sure that your shares are represented at the meeting, please either
complete and promptly mail the enclosed proxy card in the envelope provided
for this purpose or vote through the telephone or Internet voting procedures
described on the proxy card. If your shares are registered in the name of a
bank or brokerage firm, telephone or Internet voting will be available to you
only if offered by your bank or broker and such procedures are described on
the voting form sent to you.
By Order of the Board of Directors
Charles S. Howard, Chairman of the
Board
Oskaloosa, Iowa
March 23, 2001
1
PROXY STATEMENT
Mahaska Investment Company
222 First Avenue East
Oskaloosa, Iowa 52577
INTRODUCTION
The enclosed Proxy is solicited by the Board of Directors of Mahaska
Investment Company, an Iowa corporation (the "Company"), for use at the Annual
Meeting of Shareholders to be held on April 26, 2001, and at any adjournment
thereof. The Proxy may be revoked at any time before it is exercised by
submitting a later dated Proxy, by giving notice of such revocation to the
Company in writing, or by attending and requesting such revocation at the
Annual Meeting. Attendance at the Annual Meeting will not in and of itself
constitute the revocation of the Proxy. If the Proxy is not revoked, the
shares represented thereby will be voted in the manner specified in the Proxy.
A Proxy properly executed and received prior to the Annual Meeting which does
not give specific voting instructions will be voted FOR the election of the
nominees to the Board of Directors set forth herein and FOR the ratification
of the appointment of KPMG LLP as independent auditors for the current fiscal
year and as the persons designated as proxies on the enclosed proxy card
determine is in the best interests of the Company in any other business that
may properly come before the meeting or any adjournment thereof. Abstentions
will be treated as shares present and entitled to vote for purposes of
determining whether a quorum is present, but not voted for purposes of
determining the approval of any matter submitted to the shareholders for a
vote. If a Proxy returned by a broker indicates that the broker does not have
discretionary authority to vote some or all of the shares covered thereby for
any matter submitted to the shareholders for a vote (broker non-votes), such
shares will be considered to be present for the purpose of determining whether
a quorum is present, but will not be entitled to vote at the Annual Meeting of
Shareholders.
For participants in the Mahaska Investment Company Employee Stock Ownership
Plan and Trust (the "ESOP"), the proxy card will also serve as a voting
instruction card for Mahaska State Bank, the trustee of the ESOP (the
"Trustee"), with respect to shares held in the participants' accounts. A
participant cannot direct the voting of shares allocated to the participant's
account in the ESOP unless the proxy card is signed and returned. If proxy
cards representing shares in the ESOP are not returned, those shares will be
voted by the Trustee in the same proportion as the shares for which signed
proxy cards are returned by the other participants in the ESOP.
The cost of preparing, assembling, and mailing this Proxy Statement, the
Notice of Annual Meeting of Shareholders, and the accompanying Proxy is being
borne by the Company. In addition to the solicitation by mail, officers,
directors, and regular employees of the Company may solicit Proxies by
telephone or personal interview. Such persons will receive no additional
compensation for such services. Brokerage houses, nominees, fiduciaries, and
other custodians will be requested to forward soliciting material to the
beneficial owners of shares held of record by them and will be reimbursed by
the Company for their reasonable expenses.
The record date for shareholders entitled to vote at the meeting is the
close of business on February 22, 2001, at which time the Company had issued
and outstanding 3,971,168 shares of Common Stock, and all of those shares are
eligible to vote at the Annual Meeting of Shareholders. Holders of Common
Stock are entitled to one vote per share on any matter which may properly come
before the meeting.
This Proxy Statement, the enclosed Proxy, and the attached Notice were
first sent to shareholders on approximately March 23, 2001.
2
PROPOSAL 1
Election Of Directors
Six directors are to be elected at the Annual Meeting of Shareholders by
holders of Common Stock to serve until the Annual Meeting of Shareholders at
which their respective term expires and until their respective successor has
been elected and qualified. The Articles of Incorporation and Bylaws of the
Company state that the Board of Directors of the Company shall set the size of
the Board of Directors in a range of not less than five directors nor greater
than fifteen directors. The Company had nine directors during the 2000 fiscal
year until the resignation of R. Spencer Howard effective February 29, 2000
and the deaths of James F. Mathew on March 28, 2000 and Martin L. Bernstein on
April 28, 2000. At its meeting on June 22, 2000, the Board of Directors
elected James G. Wake to fill the vacancy caused by the death of James F.
Mathew and elected Michael R. Welter and Edward C. Whitham, Jr. to fill the
vacancies caused by the resignation of R. Spencer Howard and the death of
Martin L. Bernstein.
Each shareholder of record shall be entitled to as many votes as the total
of the number of shares of Common Stock, $5.00 par value per share, held of
record by such shareholder. Proxies cannot be voted for a greater number of
persons than the number of nominees named. The Company does not have
cumulative voting.
Under applicable provisions of Iowa law and the Bylaws of the Company, a
majority of the outstanding shares of the Company entitled to vote,
represented in person or by Proxy, constitute a quorum. If a quorum is
present, the affirmative vote of a majority of the shares represented at the
meeting and entitled to vote on the election of directors in the manner set
forth above, will be required to elect directors.
In the absence of instructions to the contrary, the Proxies solicited by
the Board of Directors will be voted in favor of the election of the nominees
identified in the following table, all of whom are members of the present
Board of Directors.
The nominees and the directors of the Company whose terms continue beyond
the 2001 Annual Meeting of Shareholders are identified in the following table.
The term for which nominees Richard R. Donohue, John P. Pothoven, and John W.
N. Steddom are nominated will expire at the 2004 Annual Meeting of
Shareholders, the term for which nominee James G. Wake is nominated will
expire at the 2002 Annual Meeting of Shareholders, and the term for which
nominees Michael R. Welter and Edward C. Whitham, Jr. are nominated will
expire at the 2003 Annual Meeting of Shareholders. Richard R. Donohue, John P.
Pothoven, and John W. N. Steddom have previously been elected as a director by
the holders of the Company's Common Stock. James G. Wake, Michael R. Welter,
and Edward C. Whitham, Jr. were previously elected by the Board of Directors
during 2000 after the Annual Meeting of Shareholders. Except as may be
otherwise expressly stated, the nominees for director have been employed in
the capacities indicated for more than five years. Additional information
regarding these nominees and each director as of February 22, 2001 is set
forth in the following table. The number of shares of Common Stock of the
Company beneficially owned by each of the nominees and directors as of
February 22, 2001, is set forth on pages 12 and 13.
3
Present
Term
First Expires at
Became a Annual
Name and Principal Occupation for the last five years Director Meeting Age
- ----------------------------------------------------- -------- ---------- ---
Nominees:
Richard R. Donohue.................................... 1999 2001 51
Managing Partner, Theobald, Donohue & Thompson,
Oskaloosa, Iowa
John P. Pothoven...................................... 1994 2001 58
President and, since January 1998, Chairman of Mahaska
State Bank(1)
John W. N. Steddom.................................... 1975 2001 70
Civil Engineer for the County of Keokuk, Iowa from
1988 to February 1995, Retired
James G. Wake......................................... 2000 2001 61
General Manager, Smith-Wake Investments, Inc.,
Oskaloosa, Iowa
Michael R. Welter..................................... 2000 2001 50
General Contractor, Sigourney, Iowa
Edward C. Whitham, Jr................................. 2000 2001 61
President, Financial Management Accounting, Inc.,
Burlington, Iowa
Other Directors:
William D. Hassel..................................... 1999 2003 52
President and, since April 2000, Vice Chairman of
Midwest Federal Savings and Loan Association of
Eastern Iowa(1)
Charles S. Howard..................................... 1988 2002 45
Chairman of the Company since January 1998 and
President and Chief Executive Officer of the Company
since June 1993; previously Executive Vice President
of the Company; Chairman of Central Valley Bank(1)
from June 1994 to January 2000; Vice Chairman of
Mahaska State Bank since January 1996; Chairman of
Pella State Bank since November 1997; Chairman of MIC
Financial Services, Inc. since January 1998
David A. Meinert...................................... 1991 2002 47
Executive Vice President of the Company since June
1993 and Chief Financial Officer since September
1984; President of Central Valley Bank(1) from June
1994 to January 1997; Chairman of Central Valley Bank
from January 2000; President of MIC Financial
Services, Inc. since March 2000
- --------
(1) Mahaska State Bank, Midwest Federal Savings and Loan Association of
Eastern Iowa, Central Valley Bank, Pella State Bank, and MIC Financial
Services, Inc. are subsidiaries of the Company (all located in Iowa).
4
MANAGEMENT
Executive Officers
Name Age Position with the Company
- ---- --- -------------------------
Charles S. Howard........... 45 Chairman, President and Chief Executive Officer
David A. Meinert............ 47 Executive Vice President and Chief Financial
Officer
John P. Pothoven............ 58 Chairman and President of Mahaska State Bank
William D. Hassel........... 52 Vice Chairman and President of Midwest Federal
Savings and Loan Association of Eastern Iowa
Charles S. Howard and David A. Meinert were elected by the Board of
Directors of the Company to the positions described above for a term of one
year in April 2000. John P. Pothoven and William D. Hassel were elected by
their respective Board of Directors to the positions described above for a
term of one year in January 2001. The responsibilities and experience of each
executive officer are described below.
Charles S. Howard has been a director of the Company since 1988 and a
director of Mahaska State Bank since 1993. He was elected President and Chief
Executive Officer of the Company in June 1993 and elected Chairman of the
Company in January 1998. Mr. Howard was elected Vice Chairman of Mahaska State
Bank in January 1996. Mr. Howard served as Chairman of Central Valley Bank
from June 1994 until January 2000 and has served as a director of Central
Valley Bank since June 1994. He has also served as Chairman and as a director
of Pella State Bank since November 1997. He is also a director of Midwest
Federal Savings and Loan Association of Eastern Iowa (Midwest Federal Savings)
since October 1999. Prior thereto, he served as Executive Vice President and
Chief Operating Officer of the Company. Before joining the Company in 1984,
Mr. Howard was a Commercial Loan Officer of Mahaska State Bank from 1977 to
1984.
David A. Meinert, C.P.A., has been a director of the Company since 1991. He
also serves as Executive Vice President and Chief Financial Officer of the
Company. Mr. Meinert was elected as Chairman of Central Valley Bank in January
2000, has served as a director of Central Valley Bank since 1994, and served
as President of Central Valley Bank from June 1994 to January 1997. He has
also been a director of Pella State Bank since November 1997 and a director of
Midwest Federal Savings since October 1999. Mr. Meinert was elected as
President of MIC Financial Services, Inc. effective March 1, 2000. Prior to
joining the Company in 1984, Mr. Meinert was the Auditor for Mahaska State
Bank from 1978 to 1984. Before joining Mahaska State Bank, Mr. Meinert worked
for the Liberty Trust & Savings Bank, Durant, Iowa, for three years.
John P. Pothoven has been a director of the Company since 1994 and a
director of Mahaska State Bank since 1976. He has served as President and
Chief Executive Officer of Mahaska State Bank since 1984 and as Chairman of
Mahaska State Bank since January 1998. Mr. Pothoven joined Mahaska State Bank
in 1976 as a Vice President and was promoted to Executive Vice President in
1978. Before joining the Bank, Mr. Pothoven worked in the Correspondent
Department of Merchants National Bank, Cedar Rapids, Iowa.
William D. Hassel has been a director of the Company since 1999 and a
director of Midwest Federal Savings since 1985. He has served as President and
Chief Executive Officer of Midwest Federal Savings since 1989, and he was
elected Vice Chairman of Midwest Federal Savings in April 2000. Mr. Hassel
joined Midwest Federal Savings in 1972 as Comptroller, before being promoted
to Treasurer in 1974 and to Chief Financial Officer in 1983. Mr. Hassel was
President and Chief Executive Officer of Midwest Bancshares, Inc. since its
organization in 1992 until September 1999.
Directors
Information about directors who are not executive officers is shown in the
table set forth on page 4.
Director and Committee Meetings
Twelve regularly scheduled meetings of the Board of Directors of the
Company were held during 2000. Each director attended at least 75 percent of
the Board meetings and any meetings of committees on which he
5
served. The Company has an Audit Committee and a Compensation Committee. The
Company does not have a Nominating Committee.
For a description of the Compensation Committee, see "REPORT ON EXECUTIVE
COMPENSATION FOR MAHASKA INVESTMENT COMPANY." For a description of the Audit
Committee, see "REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS."
Directors' Compensation
Directors of the Company are paid an annual retainer of $2,500, payable
quarterly in advance, plus $300 per regular meeting and $50 per special
meeting for directors' meetings attended. In addition, each non-affiliated
director is paid $50 per meeting for committee meetings attended. After one
year of service as a director, non-affiliated directors are also entitled to
annual option grants under the Company's 1996 Stock Incentive Plan pursuant to
a formula based on the financial performance of the Company for the fiscal
year. On April 27, 2000, each non-affiliated director of Mahaska Investment
Company and its subsidiaries was granted a non-qualified stock option for
2,048 shares at an option price of $7.75 per share. The number of shares to be
awarded pursuant to non-qualified stock options for non-affiliated directors
is determined by dividing the fair market value (the bid price) of the
underlying shares on the date of grant of the options into five percent of the
pre-tax profits of the Company for the previous fiscal year. The number of
shares so determined is then allocated equally among the eligible non-
affiliated directors on the date of grant of the options (the date of the
Annual Meeting of Shareholders of the Company).
Executive Compensation
The following table sets forth information concerning the annual and long-
term compensation of those persons who were at December 31, 2000, the
Chairman, President, and Chief Executive Officer of the Company, the Executive
Vice President of the Company, the Chairman and President of Mahaska State
Bank, and the Vice Chairman and President of Midwest Federal Savings for the
last three fiscal years ended December 31, 2000. No other executive officer
was paid more than $100,000 for any such year.
Summary Compensation Table
Long-Term
Compensation
------------
Annual
Compensation Awards
------------------ ------------
Securities
Name and Principal Underlying All Other
Position Year Salary(1) Bonus(2) Options Compensation(3)
- ------------------ ---- --------- -------- ------------ ---------------
Charles S. Howard, 2000 $193,800 $12,852 4,000 $ 12,512(4)
Chairman, President and
Chief Executive Officer
1999 185,955 0 2,500 11,804(4)
1998 162,600 29,400 5,000 11,053(4)
David A. Meinert, 2000 $135,700 $ 9,072 3,750 $ 10,450(5)
Executive Vice President
and Chief Financial
Officer
1999 129,580 0 2,000 9,734(5)
1998 106,200 17,150 4,000 8,790(5)
John P. Pothoven, 2000 $147,700 $ 7,500 3,750 $ 29,751(6)
Chairman and President,
Mahaska State Bank
1999 142,025 0 2,000 26,822(6)
1998 127,300 13,110 4,000 27,406(6)
William D. Hassel, (9) 2000 $129,600 $ 5,606 3,750 $ 45,274(7)
Vice Chairman and
President, Midwest
Federal Savings
1999 123,025 25,254 0 129,289(8)
1998 118,500 25,152 0 8,007
- --------
(1) Amounts include director compensation of $6,500 from Mahaska Investment
Company and $6,100 from Mahaska State Bank for 1998, $6,150 from Mahaska
Investment Company, $6,175 from Mahaska State
6
Bank, and $3,630 from Pella State Bank for 1999, and $6,100 from Mahaska
Investment Company, $5,800 from Mahaska State Bank, and $3,400 from Pella
State Bank for 2000 to Charles S. Howard; $6,200 from Mahaska Investment
Company for 1998, $6,150 from Mahaska Investment Company and $3,430 from
Pella State Bank for 1999, and $6,100 from Mahaska Investment Company and
$3,600 from Pella State Bank for 2000 to David A. Meinert; $6,200 from
Mahaska Investment Company and $6,100 from Mahaska State Bank for 1998,
$5,850 from Mahaska Investment Company and $6,175 from Mahaska State Bank
for 1999, and $6,100 from Mahaska Investment Company and $6,100 from
Mahaska State Bank for 2000 to John P. Pothoven; and $1,525 from Mahaska
Investment Company for 1999 and $6,100 from Mahaska Investment Company for
2000 to William D. Hassel.
(2) Executive bonuses for Charles S. Howard and David A. Meinert for 2000 were
determined pursuant to the "Performance Compensation for Stakeholders"
plan described in the "REPORT ON EXECUTIVE COMPENSATION FOR MAHASKA
INVESTMENT COMPANY." Executive bonuses for John P. Pothoven and William D.
Hassel for 2000 were determined pursuant to bonus plans established for
the respective subsidiary bank for which that person serves. Executive
bonuses for all employees other than William D. Hassel for 1998 and 1999
were determined pursuant to the "Performance Compensation for
Stakeholders" plan. William D. Hassel for all periods prior to the merger
with the Company on September 30, 1999 received a bonus pursuant to the
bonus plan maintained by Midwest Federal Savings.
(3) Amounts include Company contributions to the ESOP based upon a percentage
of salary and bonus in 1998 to the accounts of Charles S. Howard, David A.
Meinert, and John P. Pothoven in the amounts of $8,423, $5,538, and
$6,190, respectively; in 1999 to the accounts of Charles S. Howard, David
A. Meinert, and John P. Pothoven in the amounts of $9,043, $6,319, and
$6,716, respectively; and in 2000 to the accounts of Charles S. Howard,
David A. Meinert, John P. Pothoven, and William D. Hassel in the amounts
of $9,461, $6,678, $7,150, and $6,188, respectively. Amounts include
Midwest Federal Savings contributions to its ESOP based upon a percentage
of salary and bonus in 1998 of $8,007 and in 1999 of $9,289 to the account
of William D. Hassel.
(4) Amount includes $2,630 for 1998, $2,761 for 1999, and $3,051 for 2000
contributed by the Company to a salary continuation plan pursuant to which
Charles S. Howard is to receive $29,900 per year for 15 years starting at
age 65.
(5) Amount includes $3,252 for 1998, $3,415 for 1999, and $3,772 for 2000
contributed by the Company to a salary continuation plan pursuant to which
David A. Meinert is to receive $29,900 per year for 15 years starting at
age 65.
(6) Amount includes $21,216 for 1998, $20,106 for 1999, and $22,601 for 2000
contributed by the Company to a salary continuation plan pursuant to which
John P. Pothoven is to receive $51,000 per year for 15 years starting at
age 65.
(7) Amount includes $39,086 for 2000 contributed by the Company to a salary
continuation plan pursuant to which William D. Hassel is to receive
$50,000 per year for 10 years starting at age 65.
(8) William D. Hassel had an employment agreement with Midwest Federal Savings
prior to the merger of Midwest Federal Savings with the Company on
September 30, 1999. Mr. Hassel received a $120,000 cash payment in
consideration for the termination of his employment agreement.
(9) William D. Hassel participated in a defined benefit pension plan
maintained by Midwest Federal Savings prior to the merger of Midwest
Federal Savings into the Company on September 30, 1999. The pension plan
was frozen upon completion of the merger and no additional contributions
to the plan will be made by the Company. Mr. Hassel will receive benefits
at the time and in the amount as provided by the plan.
7
Stock Options
The following table sets forth information concerning the grant of stock
options under the Company's 1996 Stock Incentive Plan during the last fiscal
year.
Option Grants in Last Fiscal Year
Potential
Realizable
Value at
Assumed Annual
Rates of Stock
Price
Appreciation
for Option
Individual Grants Term(1)
----------------------------------------- ---------------
% of Total
Number of Options
Shares Granted to
Underlying Employees Exercise
Options in Fiscal Price Expiration
Name Granted Year ($/Sh) Date 5% 10%
- ---- ---------- ---------- -------- ---------- ------- -------
Charles S. Howard.... 4,000 8.47% $8.375 12/29/10 $21,060 $53,380
David A. Meinert..... 3,750 7.94% $8.375 12/29/10 $19,744 $50,044
John P. Pothoven..... 3,750 7.94% $8.375 12/29/10 $19,744 $50,044
William D. Hassel.... 3,750 7.94% $8.375 12/29/10 $19,744 $50,044
- --------
(1) The amounts set forth represent the value that would be received by the
Named Executive Officers upon exercise of the option on the date before
the expiration date of the option based upon assumed annual growth rates
in the market value of the Company's shares of 5 percent and 10 percent,
rates prescribed by applicable SEC rules. Actual gains, if any, on stock
option exercises are dependent on the future performance of the Company's
shares and other factors such as the general condition of the stock market
and the timing of the exercise of the options.
Aggregated Option Exercises In Last Fiscal Year
And Fiscal Year-End Option Values
Value of Unexercised
Shares Number of Unexercised In-The-Money
Acquired on Value Options at FY-End (#) Options at FY-End ($)
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ----------- -------- ------------------------- -------------------------
Charles S. Howard....... -0- -0- 68,575/7,375 $ 0/$500
David A. Meinert........ -0- -0- 61,501/6,450 $744/$469
John P. Pothoven........ -0- -0- 30,145/6,450 $ 0/$469
William D. Hassel....... 7,300 $52,925 0/3,750 $ 0/$469
Employment Contracts
Midwest Federal Savings had entered into an employment agreement with
William D. Hassel prior to the merger of Midwest Federal Savings into the
Company on September 30, 1999. The previous employment agreement was
terminated upon the effective date of the merger, and a new employment
agreement was entered into between Midwest Federal Savings and Mr. Hassel. The
employment agreement is designed to assist Midwest Federal Savings to maintain
a stable and competent management base. The continued success of Midwest
Federal Savings depends to a significant degree on the skills and competence
of its officers. The employment agreement provides for an annual base salary
in an amount not less than the employee's current salary and an initial term
of three years. The agreement provides for a one year extension on each
anniversary date, subject to review and approval of the extension by the Board
members of Midwest Federal Savings following the Board's review of a formal
performance evaluation of Mr. Hassel by the disinterested members of the
Board. The agreement provides for termination upon the employee's death, for
cause, or in certain events specified by the Office of Thrift Supervision
regulations. The employment agreement provides for payment to the employee of
up to 299% of the employee's then-current annual compensation in the event
there is a change in control of the Company where employment terminates
involuntarily in connection with such change in control or within twelve
months thereafter. This termination payment is subject to reduction by the
amount of all other compensation to the employee deemed for purposes of the
Internal Revenue Code to be contingent on a change in control. Such
8
termination payment is provided on a similar basis in connection with a
voluntary termination of employment, where the change in control was at any
time opposed by the Board of Directors of the Company. For the purposes of the
employment agreement, a change in control is defined to mean any acquisition
of control as defined in 12 C.F.R. Section 574.4. The employment agreement
provides, among other things, for participation in an equitable manner in
employee benefits applicable to executive personnel of the Company.
REPORT ON EXECUTIVE COMPENSATION FOR MAHASKA INVESTMENT COMPANY
Compensation Committee Participation
The Compensation Committee of the Board of Directors of the Company reviews
and approves the Company's executive compensation policies and evaluates the
performance of the executive officers. The Compensation Committee consists of
John W. N. Steddom, James G. Wake, and Michael R. Welter. All members of the
Compensation Committee are outside directors and were present for the five
meetings held during the fiscal year.
Compensation Philosophy
The philosophy of the Compensation Committee in setting its compensation
policies for executive officers is to maximize stockholder value over time.
The Compensation Committee believes that executive compensation should be
directly linked to continuous improvements in corporate performance and
increases in stockholder value. In this regard, the Compensation Committee has
adopted the following guidelines for compensation decisions:
. Provide a competitive total compensation package that enables the Company
to attract and retain key executive talent.
. Align executive compensation programs with the Company's annual and long-
term business strategies and objectives.
. Provide variable compensation opportunities that are directly linked to
the performance of the Company and the performance of the individual
employee.
The Compensation Committee focuses primarily on the following three
components in forming the total compensation package for its executive
officers:
. Base salary
. Annual incentive bonus
. Long-term incentives
Base Salary
The Compensation Committee intends to compensate the executive officers
competitively within the industry. In order to evaluate the Company's
competitive posture in the industry, the Compensation Committee reviews and
analyzes the compensation packages, including base salary levels, offered by
its peer group. In addition, the Compensation Committee, together with the
Board of Directors, subjectively evaluates the level of performance of each
executive officer in order to determine current and future appropriate base
pay levels.
The Compensation Committee also reviewed the compensation of the President
and Executive Vice President and recommended an increase of 8 percent in the
base salary for each individual. The recommendations for the President and
Executive Vice President were based upon peer review data, management
recommendations for other employees, cost of living, and performance.
Annual Incentive Bonus
The Company has adopted a "Performance Compensation for Stakeholders" plan
(the "Plan") for employees of the Company and one of its subsidiaries. The
Plan is designed to assist the Board of Directors and
9
management in communicating to the employees each year where the Company is
focusing its efforts. To measure the results and establish the incentive, the
Plan is divided into four key performance areas: growth, profitability,
quality, and productivity. Various financial ratios are monitored under each
of the four key performance areas. At the beginning of each year, a weighting
is established for each of the ratios to focus performance for the year.
Each employee participating in the Plan is eligible to be considered to
receive an annual bonus calculated as a percentage of the employee's annual
salary. The bonus for employees of the Company is determined on the basis of
the overall Company results. Progress in the Plan is communicated to the
employees quarterly. The bonuses for 2000 were paid 90% in December 2000 and
10% in January 2001.
For the President of the Company and the chief executive officer of the
participating subsidiary, the percentage factor calculated pursuant to the
Plan is multiplied by two. For the other management personnel designated by
the Board of Directors, the percentage factor is multiplied by 1.75.
Additionally, the Board of Directors retains the discretion to deviate from
the formula if warranted. The Compensation Committee recommended payment of
the annual incentive bonus to the eligible management employees pursuant to
the Plan formula.
Long-term Incentives
The Company provides its executive officers with long-term incentive
compensation through grants of stock options. The Compensation Committee is
responsible for determining the individuals to whom grants should be made, the
timing of grants, the exercise price per share, and the number of shares
subject to each option. Other than the stock options, the Compensation
Committee made no other long-term performance awards during the last fiscal
year. The stock option grants are subject to a predetermined formula which
relates to the increase in profits which occurred in the Company over the
prior fiscal year. The Compensation Committee does, however, retain the right
to make adjustments in the grant of stock options as determined subjectively
by the Compensation Committee. Due to the aberrationally low profits for the
Company during the 1999 fiscal year, the formula would have produced an award
of a higher number of stock options for fiscal year 2000 than the Compensation
Committee believed was justified by current economic conditions. The
Compensation Committee, therefore, granted options in an amount less than the
formula would have allowed.
The Compensation Committee believes that stock options provide the
Company's executive officers with the opportunity to purchase and maintain an
equity interest in the Company and to share in the appreciation of the value
of the stock. The Compensation Committee believes that stock options directly
motivate an executive to maximize long-term stockholder value. The options
also utilize vesting periods in order to encourage key employees to continue
in the employ of the Company. All options to executive officers to date have
been granted at the fair market value of the Company's common stock determined
on the basis of the bid price of the stock. All options for 2000 were granted
at the bid price of the stock on December 29, 2000. The amount of the stock
option awards are reflected in the compensation table for the executive
officers.
Summary
The Compensation Committee believes that its executive compensation
philosophy of paying its executive officers well by means of competitive base
salaries and annual bonus and long-term incentives, as described in this
report, serves the interests of the Company and the Company's stockholders.
John W. N. Steddom
James G. Wake
Michael R. Welter
10
Financial Performance
The following graph illustrates the cumulative total return (assuming the
reinvestment of dividends) experienced by the Company's shareholders since
December 31, 1995, through December 31, 2000, compared to the SNL Index
comprised of Midwestern bank holding companies, NASDAQ Bank Index, and the
performance of all NASDAQ US stocks.
MAHASKA INVESTMENT COMPANY
Stock Price Performance
Period Ending
-----------------------------------------------------
Index 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00
- ----- -------- -------- -------- -------- -------- --------
Mahaska Investment
Company 100.00 132.53 238.36 208.04 160.46 117.38
NASDAQ--Total US* 100.00 123.04 150.69 212.51 394.92 237.62
SNL Midwest Bank Index 100.00 136.05 220.58 234.63 184.35 223.24
NASDAQ Bank Index* 100.00 132.04 221.06 219.64 211.14 241.08
*Source: CRSP, Center for Research in Security Prices, Graduate School of
Business, The University of Chicago 2001. Used with permission. All rights
reserved. crsp.com.
11
Loans to Officers and Directors and Other Transactions With Officers and
Directors
During 2000, Mahaska State Bank, Midwest Federal Savings, Central Valley
Bank, and Pella State Bank made loans or loan commitments, in the ordinary
course of business, to directors and officers of the Company and to
corporations or partnerships with which one or more of the officers or
directors of the Company were associated. In the opinion of management of the
Company, all such loans and loan commitments were made on substantially the
same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other persons, and did not involve
more than the normal risk of collectibility or present other unfavorable
features.
Ownership of Securities by Certain Beneficial Owners
The following table sets forth certain information as of February 22, 2001,
with respect to the Common Stock beneficially owned by each director of the
Company, by all executive officers and directors as a group and by each
shareholder known by the Company to be the beneficial owner of more than five
percent of the Common Stock.
Amount and
Nature of
Beneficial Percent
Name Ownership(1) of Class(1)
- ---- ------------ -----------
Mahaska Investment Company Employee Stock Ownership
Plan (ESOP)(2, 3).................................... 580,170 14.6%
Ames National Corporation(4).......................... 212,202 5.3%
R. Spencer Howard(5).................................. 227,853 5.7%
Richard R. Donohue(6)................................. 1,635 *
William D. Hassel(7).................................. 46,923 1.2%
Charles S. Howard(8).................................. 276,962 6.9%
David A. Meinert(9)................................... 92,868 2.3%
John P. Pothoven(10).................................. 97,403 2.4%
John W. N. Steddom(11)................................ 54,438 1.4%
James G. Wake(12)..................................... 5,778 *
Michael R. Welter(13)................................. 1,217 *
Edward C. Whitham, Jr.(14)............................ 660 *
Executive Officers and Directors as a group (9
persons)(15)......................................... 577,884 13.9%
- --------
*Less than 1%.
(1) Except as described in the following notes, each person or group owns the
shares directly and has sole voting and investment power with respect to
such shares. The shares listed include shares subject to options
exercisable within sixty days of February 22, 2001.
(2) The Company's ESOP holds shares of the Company's Common Stock pursuant to
the terms of the ESOP. The Trustee of the ESOP, the Trust Department of
Mahaska State Bank, has the power to dispose of ESOP shares in accordance
with the terms of the ESOP and votes any unallocated ESOP shares at the
direction of the Committee acting as ESOP Administrators. The ESOP
Administrators are Thomas W. Campbell, President of Central Valley Bank,
Robert D. Maschmann, Executive Vice President and Treasurer of Midwest
Federal Savings, David A. Meinert, Michael T. Patrick, President of Pella
State Bank, and John P. Pothoven. Shares allocated to participants'
accounts are voted by the respective participants. Shares not voted by a
participant will be voted by the Trustee in the same proportion as the
shares for which signed proxy cards are returned by the other participants
in the ESOP. The Trustee disclaims beneficial ownership of all of the
shares, and the ESOP Administrators disclaim beneficial ownership of all
shares other than those allocated to their respective accounts held by the
ESOP. The amount of beneficial ownership shown for the ESOP includes those
shares allocated to accounts of directors and executive officers of the
Company, which shares are also reflected in the individual's respective
beneficial ownership as indicated in the footnotes below.
12
(3) The address of the ESOP Administrators is 222 First Avenue East,
Oskaloosa, IA 52577. The Company merged the Midwest Bancshares, Inc.
Employee Stock Ownership Plan into the Mahaska Investment Company Employee
Stock Ownership Plan during the 2000 fiscal year.
(4) The address of the shareholder listed is P. O. Box 846, Ames, IA 50010.
Such shares were held as of December 31, 2000.
(5) Such shares include 1,273 shares held in an IRA, a total of 552 shares
held by his two minor children, 57,503 shares in Howard Partners, L.P., in
which Mr. Howard is a one-third partner, 24,825 shares subject to
currently exercisable options, 4,416 shares allocated to his spouse's ESOP
account, and 15,385 shares allocated to his ESOP account.
(6) Such shares include 1,616 shares owned by his spouse and 19 shares held by
a partnership.
(7) Such shares include 9,000 shares owned jointly with his spouse, 75 shares
owned jointly with his son, 75 shares owned jointly with his daughter,
4,536 shares held in an IRA, 1,878 shares held in his spouse's IRA, 2,160
shares held in a Keogh, 7,800 shares held in his spouse's profit sharing
plan, and 14,099 shares allocated to his ESOP account.
(8) Such shares include 51,539 shares owned by his spouse, 3,030 shares owned
jointly with his spouse, a total of 1,992 shares owned as custodian for
his two minor children, 57,503 shares in Howard Partners, L.P., in which
Mr. Howard is a one-third partner, 68,575 shares subject to currently
exercisable options, 18,362 shares allocated to his spouse's ESOP account,
and 25,551 shares allocated to his ESOP account.
(9) Such shares include 6,897 shares owned jointly with his spouse, a total of
532 shares owned as custodian for his two minor children, 61,501 shares
subject to currently exercisable options, and 23,938 shares allocated to
his ESOP account. Excludes the remaining 556,232 ESOP shares with respect
to which Mr. Meinert shares dispositive power as an ESOP Administrator.
(10) Such shares include 4,117 shares held in an IRA, 30,145 shares subject to
currently exercisable options, and 38,046 shares allocated to his ESOP
account. Excludes the remaining 542,124 ESOP shares with respect to which
Mr. Pothoven shares dispositive power as an ESOP Administrator.
(11) Such shares include 600 shares held in his spouse's IRA and 8,949 shares
subject to currently exercisable options.
(12) Such shares include 223 shares owned by his spouse, 380 shares owned by a
corporation of which Mr. Wake has control, 8 shares held by his spouse's
partnership, and 4,818 shares subject to currently exercisable options.
(13) Such shares include 500 shares owned by a corporation of which Mr. Welter
has control and 717 shares subject to currently exercisable options.
(14) Such shares include 370 shares held in a profit sharing plan and 290
shares held in his spouse's IRA.
(15) Such shares include a total of 119,996 ESOP shares allocated to the
accounts of directors and executive officers and a total of 174,705
shares subject to currently exercisable options.
PROPOSAL 2
Ratification Of Auditors' Appointment
The Board of Directors of the Company, at the recommendation of the Audit
Committee, has approved the accounting firm of KPMG LLP, independent certified
public accountants, as the principal accountant for the Company. KPMG LLP will
conduct the audit examination of the Company and its subsidiaries for 2001.
KPMG LLP was also the principal accountant and performed the audit in 2000.
A representative from KPMG LLP is anticipated to be present at the Annual
Meeting of Shareholders. He will have the opportunity to make a statement if
he desires to do so and is expected to be available to respond to appropriate
questions from shareholders.
The Board recommends that shareholders vote FOR the ratification of the
appointment of KPMG LLP as independent auditors for 2001. In the absence of
instructions to the contrary, proxies solicited by the Board of Directors will
be voted FOR ratification of the appointment of KPMG LLP as independent
auditors.
13
INDEPENDENT PUBLIC ACCOUNTANTS
Audit Fees:
The aggregate fees billed for professional services rendered for the audit
of the Company's annual financial statements for the 2000 fiscal year and the
reviews of the financial statements included in the Company's Forms 10-Q for
that fiscal year were $89,500.
Financial Information Systems Design and Implementation Fees:
There were no fees billed by KPMG LLP for professional services for
financial information systems design and implementation for the 2000 fiscal
year.
All Other Fees:
The aggregate fees billed for services rendered by KPMG LLP other than the
services covered in the preceding two paragraphs for the 2000 fiscal year were
$42,900.
Independence:
The Audit Committee has determined that the fees charged under the
preceding two sections of this section are compatible with the maintenance of
the independence of KPMG LLP.
14
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The Audit Committee of the Board of Directors of the Company serves as the
representative of the Board for general oversight of the Company's financial
accounting and reporting process, systems of internal controls regarding
finance, accounting and legal compliance and monitoring the independence and
performance of the Company's independent auditors and internal auditing
department. The Company's management has primary responsibility for preparing
the Company's financial statements and the Company's financial reporting
process. The Company's independent accountants, KPMG LLP, are responsible for
expressing an opinion on the conformity of the Company's audited financial
statements to generally accepted accounting principles.
The Board adopted a written Charter for the Audit Committee. A copy of the
Charter is attached to this Proxy Statement as Exhibit 1. The Audit Committee
met five times during the 2000 fiscal year.
As part of its responsibilities, the Audit Committee hereby reports as
follows:
1. The Audit Committee has reviewed and discussed the audited financial
statements with the Company's management.
2. The Audit Committee has discussed with the independent accountants the
matters required to be discussed by SAS 61 (Codification of Statements
on Auditing Standards, AU 380).
3. The Audit Committee has received the written disclosures and the letter
from the independent accountants required by Independence Standards
Board Standard No. 1 (Independence Standards Board Standard No. 1,
Independence Discussions With Audit Committees) and has discussed with
the independent accountants the independent accountants' independence.
4. Based on the review and discussions referred to in paragraphs 1 through
3 above, the Audit Committee recommended to the Board of Directors of
the Company, and the Board has approved, that the audited financial
statements be included in the Company's annual report on Form 10-K for
the fiscal year ended December 31, 2000, for filing with the Securities
and Exchange Commission.
Each of the members of the Audit Committee is independent as defined under
the listing standards of the NASD/AMEX exchange.
The undersigned members of the Audit Committee have submitted this Report.
Richard R. Donohue
Michael R. Welter
Edward C. Whitham, Jr.
15
GENERAL MATTERS
Financial Statements
The Company's 2000 Annual Report to Shareholders has accompanied the mailing
of this Proxy Statement.
The Company will provide without charge to each shareholder solicited, upon
the written request of any such shareholder, a copy of its annual report on
Form 10-K as filed with the Securities and Exchange Commission, including the
financial statements, for the fiscal year ended December 31, 2000. Such written
request should be directed to Karen K. Binns, Secretary/Treasurer, Mahaska
Investment Company, P. O. Box 1104, Oskaloosa, Iowa 52577-1104. It is also
available on the Securities and Exchange Commission's Internet web site at
http://www.sec.gov/cgi-bin/srch-edgar.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires that the
Company's directors and executive officers and persons who own more than 10
percent of the Company's Common Stock file initial reports of ownership and
reports of changes of ownership with the Securities and Exchange Commission and
Nasdaq. Specific due dates for these reports have been established, and the
Company is required to disclose in its Proxy Statement any failure to file by
these dates during the Company's 2000 fiscal year.
All the applicable filing requirements were satisfied by the officers,
directors and 10 percent owners during 2000. In making this statement, the
Company is relying upon written representations of its incumbent officers,
directors, and 10 percent owners and copies of applicable reports furnished to
the Company.
Shareholder Proposals
In order for any proposals of shareholders pursuant to the procedures
prescribed in Rule 14a-8 under the Securities Exchange Act of 1934 to be
presented as an item of business at the Annual Meeting of Shareholders of the
Company to be held in 2002, the proposal must be received at the Company's
principal executive offices no later than November 20, 2001. A shareholder
proposal submitted outside the procedures prescribed in Rule 14a-8 shall be
considered untimely unless received no later than February 4, 2002.
Other Matters
Management does not know of any other matters to be presented at the
meeting, but should other matters properly come before the meeting, the proxies
will vote on such matters in accordance with their best judgment.
By Order of the Board of Directors
Karen K. Binns, Secretary
March 23, 2001
16
EXHIBIT 1
MAHASKA INVESTMENT COMPANY
CHARTER OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
I. Audit Committee Purpose
The Audit Committee is appointed by the Board of Directors to assist the
Board in oversight responsibilities. The Audit Committee's primary duties and
responsibilities are to:
* Monitor the integrity of the Company's financial reporting process and
systems of internal controls regarding finance, accounting, and legal
compliance.
* Monitor the independence and performance of the Company's independent
auditors and internal auditing department.
* Provide an avenue of communication among the independent auditors,
management, the internal auditing department, and the Board of Directors.
The Audit Committee has the authority to conduct any investigation
appropriate to fulfilling its responsibilities, and it has direct access to
the independent auditors, as well as anyone in the organization. The Audit
Committee has the ability to retain, at the Company's expense, special legal,
accounting, or other consultants or experts, it deems necessary in the
performance of its duties.
II. Audit Committee Composition and Meetings
Audit Committee members shall meet the requirements of the NASD/AMEX
Exchange. The Audit Committee shall be comprised of three or more directors as
determined by the Board, each of whom shall be independent nonexecutive
directors, free from any relationship that would interfere with the exercise
of his or her independent judgment. All members of the Committee shall have a
basic understanding of finance and accounting and be able to read and
understand fundamental financial statements, and at least one member of the
Committee shall have accounting or related financial management expertise.
Audit Committee members shall be appointed by the Board. If an Audit
Committee Chair is not designated or present, the members of the Committee may
designate a Chair by majority vote of the Committee membership.
The Committee shall meet at least four times annually, or more frequently
as circumstances dictate. The Audit Committee Chair shall prepare and/or
approve an agenda in advance of each meeting. The Committee should meet
privately in executive session at least annually with management, the director
of the internal auditing department, the independent auditor, and as a
committee to discuss any matters that the Committee or each of these groups
believe should be discussed. In addition, the Committee, or at least its
Chair, should communicate with management and the independent auditors
quarterly to review the Company's financial statements and significant
findings based upon the auditors limited review procedures.
III. Audit Committee Responsibilities and Duties
Review Procedures
1. Review and reassess the adequacy of this Charter at least annually. Submit
the charter to the Board of Directors for approval and have the document
published at least every three years in accordance with SEC regulations.
2. Review the Company's annual audited financial statements prior to filing or
distribution. Review should include discussion with management and
independent auditors of significant issues regarding accounting principles,
practice, and judgments.
E-1
3. In consultation with the management, the independent auditors, and the
internal auditors, consider the integrity of the Company's financial
reporting processes and controls. Discuss significant financial risk
exposures and the steps management has taken to monitor, control, and
report such exposures. Review significant findings prepared by the
independent auditors and the internal auditing department together with
management's responses.
4. Review with financial management and the independent auditors the Company's
quarterly financial results prior to the release of earnings and/or the
Company's quarterly financial statements prior to filing or distribution.
Discuss any significant changes to the Company's accounting principles and
any items required to be communicated by the independent auditors in
accordance with SAS 61 (see item 9). The Chair of the Committee may
represent the entire Audit Committee for purposes of this review.
Independent Auditors
5. The independent auditors are ultimately accountable to the Audit Committee
and the Board of Directors. The Audit Committee shall review the
independence and performance of the auditors and annually recommend to the
Board of Directors the appointment of the independent auditors or approve
any discharge of auditors when circumstances warrant.
6. Approve the fees and other significant compensation to be paid to the
independent auditors.
7. On an annual basis, the Committee should review and discuss with the
independent auditors all significant relationships they have with the
Company that could impair the auditor's independence.
8. Review the independent auditors audit plan--discuss scope, staffing,
locations, reliance upon management, and internal audit and general audit
approach.
9. Prior to releasing the year-end earnings, discuss the results of the audit
with the independent auditors. Discuss certain matters required to be
communicated to audit committees in accordance with AICPA SAS 61.
10. Consider the independent auditors' judgments about the quality and
appropriateness of the Company's accounting principles as applied in its
financial reporting.
Internal Audit Department and Legal Compliance
11. Review the budget, plan, changes in plan activities, organizational
structure, and qualifications of the internal audit department, as needed.
12. Review the appointment, performance, and replacement of the senior
internal audit executive.
13. Review significant reports prepared by the internal audit department
together with management's response and follow-up to these reports.
14. On at least an annual basis, review with the Company's counsel, any legal
matters that could have a significant impact on the organization's
financial statements, the Company's compliance with applicable laws and
regulations, and inquiries received from regulators or governmental
agencies.
Other Audit Committee Responsibilities
15. Annually prepare a report to shareholders as required by the Securities
and Exchange Commission. The report should be included in the Company's
annual proxy statement.
E-2
16. Perform any other activities consistent with this Charter, the Company's
bylaws, and governing law, as the committee or the Board deems necessary
or appropriate.
17. Maintain minutes of meetings and periodically report to the Board of
Directors on significant results of the foregoing activities.
Other Optional Charter Disclosures
18. Establish, review, and update periodically a Code of Ethical Conduct and
ensure that management has established a system to enforce this Code.
19. Periodically perform self-assessment of audit committee performance.
20. Review financial and accounting personnel succession planning within the
Company.
21. Annually review policies and procedures as well as audit results
associated with directors' and officers' expense accounts and perquisites.
Annually review a summary of directors' and officers' related party
transactions and potential conflicts of interest.
E-3
MAHASKA INVESTMENT COMPANY
APPENDIX TO THE PROXY STATEMENT
FISCAL YEAR 2000
Contents
Management's Discussion and Analysis...................................... A-1
Consolidated Balance Sheets............................................... A-13
Consolidated Statements of Income......................................... A-14
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income..................................................... A-15
Consolidated Statements of Cash Flows..................................... A-16
Notes to Consolidated Financial Statements................................ A-17
Independent Auditors' Report.............................................. A-37
MAHASKA INVESTMENT COMPANY
MANAGEMENT'S DISCUSSION & ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Fiscal Year 2000
The following discussion and analysis is intended as a review of
significant factors affecting the financial condition and results of operation
of Mahaska Investment Company and subsidiaries (the "Company") for the periods
indicated. The discussion should be read in conjunction with the consolidated
financial statements and the notes thereto. In addition to historical
information, this discussion and analysis contains forward-looking statements
that involve risks and uncertainties. The Company's actual results could
differ significantly from those anticipated in these forward-looking
statements.
Overview
The Company's principal business is conducted by its subsidiary banks and
consists of full service community-based commercial and retail banking.
Additionally, the Company derives a substantial portion of its operating
revenue from its investments in pools of performing and nonperforming loans
referred to as loan pool participations. The Company has also operated a
commercial finance subsidiary ("MIC Financial") to provide services to small
business organizations. MIC Financial is no longer making loans or funding
advances to customers and all remaining assets of the entity are in the
process of collection. The profitability of the Company depends primarily on
its net interest income, provision for loan losses, other income, and
operating expense.
Net interest income is the difference between total interest income and
total interest expense. Interest income is earned by the Company on its loans
made to customers, the investment securities it holds in its portfolio, and
the interest and discount recovery generated from its loan pool
participations. The interest expense incurred by the Company results from the
interest paid on customer deposits and borrowed funds. Fluctuations in net
interest income can result from the changes in volumes of assets and
liabilities as well as changes in market interest rates. The provision for
loan losses reflects the cost of credit risk in the Company's loan portfolio
and is dependent on increases in the loan portfolio and management's
assessment of the collectibility of the loan portfolio under current economic
conditions. Other income consists of service charges on deposit accounts, fees
received for data processing services provided to nonaffiliated banks, other
fees and commissions, and security gains or losses. Operating expenses include
salaries and employee benefits, occupancy and equipment expenses, other
noninterest expenses, and the amortization of goodwill and other intangibles.
These operating expenses are significantly influenced by the growth of
operations, with additional employees necessary to staff new banking centers.
Performance Summary
The year 2000 was the first full year the Company included the results of
Midwest Federal Savings & Loan Association ("Midwest") in its operations. The
Company acquired Midwest on September 30, 1999 through an exchange of stock
that was accounted for as a purchase transaction. In accordance with
accounting principles generally accepted in the United States of America, the
Company's operating results for 1999 only included Midwest operations for the
fourth quarter.
The Company recorded net income of $4,001,000, or $.99 per basic and
diluted share, for the year ended December 31, 2000. This compares with
$2,222,000, or $.58 per share--basic and $.56 per share--diluted, for the year
ended December 31, 1999. The 80 percent increase of $1,779,000 in 2000 net
income is primarily the result of reduced loan loss provisions in 2000
compared with 1999. The loan loss provision for 2000 was $892,000 compared
with $3,628,000 for 1999.
A-1
Total assets of the Company increased 6 percent to a year-end 2000 total of
$515,212,000 compared with a 1999 year-end total of $486,189,000 as a result
of growth in deposits and borrowed funds. Deposits increased 6 percent to
$370,144,000 as of December 31, 2000 through competitive pricing of deposit
rates and active marketing programs. The Company's total loans outstanding
increased 11 percent throughout 2000 to $312,081,000 at December 31, 2000, as
loan demand remained strong and efforts to grow the loan portfolio continued.
Loan pool participation investments as of December 31, 2000 totaled
$74,755,000, an increase of 10 percent from 1999 reflecting the Company's
desire to remain active in this area.
Return on average assets is a measure of profitability that indicates how
effectively a financial institution utilizes its assets. It is calculated by
dividing net income by average total assets. The Company's return on average
assets was .81 percent for 2000, .64 percent for 1999, and 1.65 percent for
1998. The improvement in the return on average assets for 2000 compared with
1999 was the result of increased net income mainly due to the decrease in loan
loss provision. Return on average equity indicates what the Company earned on
its shareholders' investment and is calculated by dividing net income by
average total shareholders' equity. The return on average equity for the
Company was 8.18 percent for 2000 and 5.29 percent for 1999 compared with
12.16 percent for 1998. The increased return on average equity for 2000
compared to 1999 is attributable to the higher earnings. The lower earnings
and increased average equity due to the merger of Midwest were responsible for
the lower return on average equity in 1999 compared with 1998.
Results of Operations
2000 compared to 1999
Net Interest Income. The Company's net interest income increased 11 percent
to $17,399,000 in 2000. This is $1,764,000 greater than the net interest
income of $15,635,000 for 1999. The net interest margin on a tax-equivalent
basis was 3.87 percent for 2000 versus 4.89 percent in 1999. Net interest
margin is a measurement of the net return on interest-earning assets and is
computed by dividing net interest income for the year by the annual average
balance of all interest-earning assets. For 2000, the increase in net interest
income was proportionately less than the increase of average earning assets.
The net interest margin generated by Midwest was significantly lower than the
historical average for the Company, thus reducing the overall net interest
margin for 2000 in comparison with 1999.
Total interest income for 2000 was $38,826,000, an increase of $9,996,000
over 1999. The additional earning assets of Midwest and growth in average
loans at the other subsidiaries provided greater interest income in 2000.
Interest income on loans increased $7,721,000, or 44 percent, to $25,298,000
in 2000 compared with $17,577,000 in 1999 primarily due to increased loan
volumes. The Company's overall yield on loans declined to 8.37 percent in 2000
due to the higher proportion of real estate loans in the Midwest portfolio.
Real estate loans typically have a lower interest rate than commercial or
agricultural loans. Nonaccrual loans remained higher than desired throughout
2000 with an average balance of approximately $2,721,000. Nonaccrual loans are
non-earning assets that affect the amount of interest income recognized by the
Company. For 1999, the Company's overall yield on loans was 8.67 percent.
Interest income and discount received on loan pools totaled $7,275,000 in
2000, a decline of $393,000, or 5 percent, compared with 1999 primarily as a
result of lower rates on the pool assets. Interest on bank deposits in 2000 of
$116,000 was up by $34,000 compared to 1999 as both the balances maintained
and the interest rate earned increased. The reduced average balance of fed
funds sold in 2000 resulted in $96,000 less interest income received by the
Company. Interest income on investment securities totaled $5,973,000 for 2000,
with the increase of $2,730,000 primarily due to the acquired portfolio of
Midwest. The Company's overall yield on earning assets was 8.53 percent for
2000 compared with 8.95 percent in 1999.
Interest expense increased $8,232,000, or 62 percent, in 2000 reflecting
the additional interest-bearing liabilities of Midwest, growth in deposit
volumes, and the higher rates required to be paid by the Company to maintain
and attract deposits. The Company's total interest expense for 2000 was
$21,427,000 compared with
A-2
$13,195,000 for 1999. The overall rate paid on deposits increased to 4.64
percent in 2000 compared with 4.34 percent in 1999. Increased rates on
borrowed funds also contributed to the additional interest expense. Rates paid
on federal funds purchased, Federal Home Loan Bank advances, and notes payable
all were greater in 2000 reflecting higher market interest rates compared with
1999. The Company's overall rate paid on interest-bearing liabilities was 5.14
percent for 2000 versus 4.67 percent for 1999.
Provision for Loan Losses. The Company's provision for loan loss expense
was $892,000 in 2000, a decrease of $2,736,000 compared with 1999. The amount
the Company provides for loan losses is charged against earnings. The major
factor contributing to the decrease in 2000 was the reduced provision related
to MIC Financial compared with 1999. MIC Financial's 2000 provision was
$62,000 while the 1999 provision totaled $2,439,000. 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 current collection
risks within its loan portfolio, identified problem loans, the current local
and national economic conditions, actual loss experience, regulatory policies,
and industry trends. The Company recorded a provision of $830,000, excluding
the $62,000 provision related to MIC Financial, in 2000 due to concerns with
specific identified problem credits, additional loan charge-offs, growth in
the loan portfolio throughout the year, and general uncertainties in the local
and national economy. Excluding MIC Financial, the 1999 provision for loan
loss expense was $1,189,000. The $359,000 reduction in the 2000 loan loss
provision compared with 1999, exclusive of MIC Financial, mainly reflects a
lower amount of identified problem loans in 2000.
Other Income. During 2000, noninterest income increased $619,000, or 32
percent, to $2,566,000. Noninterest income for 1999 was $1,947,000. The
increase was primarily related to additional service charges collected from
customers and the charges and fees collected by Midwest. The Company
recognized a gain of $40,000 on the sale of available for sale investment
securities, which were sold throughout the year to meet liquidity needs.
During 1999, the Company recorded a loss on the sale of investment securities
of $28,000.
Other Expense. Other expense was $13,313,000 in 2000 compared with
$10,462,000 in 1999. Other expense increased $2,851,000, or 27 percent, in
2000 primarily due to the additional costs related to Midwest. Salaries and
employee benefit costs rose $1,234,000 to $6,378,000 in 2000. The amount of
the increase is less than the additional salary and benefit costs related to
Midwest. The elimination of the staff of MIC Financial and other staff
reductions enabled the Company to minimize the increase in 2000 personnel
costs compared to 1999. Net occupancy expense increased $360,000, or 24
percent, to $1,877,000 in 2000 due to the additional costs of the Midwest
facilities. Other operating expense grew $616,000, or 23 percent, mainly due
to Midwest. Goodwill and other intangible asset amortization expense increased
$414,000 due to the goodwill and intangible assets created by the Midwest
acquisition.
Income Tax Expense. Income taxes increased $489,000 principally due to an
increase in the amount of income before income taxes. The Company recognized a
state franchise tax credit of $270,000 in 2000 related to prior years' taxes
following an Iowa Department of Revenue determination that a portion of the
income attributable to the interest and discount recovery on loan pools is not
taxable by the state. Exclusive of the state tax adjustment in 2000, the
Company's consolidated income tax rate varies from the statutory rates mainly
due to tax-exempt interest income. The state franchise tax credit reduced the
2000 effective income tax rate as a percent of income before taxes to 30.5
percent compared with 36.4 percent in 1999.
1999 compared to 1998
Net Interest Income. In 1999, net interest income increased $159,000, or 1
percent, to $15,635,000 compared with $15,476,000 in 1998. Excluding the
contribution of Midwest for the fourth quarter of 1999, net interest income
for the Company declined 7 percent, or $1,047,000, for the year compared with
1998. The net interest margin on a tax-equivalent basis for 1999 was 4.89
percent compared with 6.04 percent in 1998. For
A-3
1999, the increase in net interest income was proportionately less than the
increase of average interest-earning assets. The net interest margin generated
by Midwest was significantly lower than the historical average for the
Company. Excluding Midwest, the 1999 net interest margin would have been .88
percent lower compared with 1998 due to the reduced overall yield on earning
assets.
Total interest income for 1999 increased $2,864,000 over the previous year.
Interest and fees on loans rose $2,551,000 or 17 percent in 1999. The increase
in the Company's 1999 average loan volumes of $45,021,000 or 29 percent
contributed significantly to the overall increase in interest and fees on
loans. Without the addition of Midwest, interest income on loans would have
shown a $631,000 increase in comparison with 1998, primarily due to the
Company's higher volume of loans during 1999. The Company had a higher level
of nonaccrual loans throughout 1999 that reduced interest income on loans and
net interest income by an estimated $258,000. Interest income and discount
recovery on loan pool participations declined $302,000, or 4 percent, in 1999
compared to 1998 with Midwest included, and would have shown a $560,000
decline if Midwest were excluded. The interest income earned on investment
securities rose $733,000, or 29 percent, in 1999 as the volume of investment
securities increased following the Midwest acquisition. Interest income on
investments excluding that generated by Midwest in the fourth quarter would
have been $149,000 less for 1999 than in 1998 due both to lower volume of
securities held by the banks and due to lower yields on the portfolio.
Interest income on fed funds sold and time deposits in other banks was
$118,000 less in 1999 as the balances maintained in these accounts and the
rate earned on them was lower than in 1998. The Company's overall yield on
earning assets for 1999 declined to 8.95 percent compared with 10.08 percent
in 1998, mainly due to lower interest income. The lower interest income was
the result of competition for loans in the market forcing the Company to
reduce the rate charged to many of its borrowing customers, reduced rates on
investment securities due to market conditions, and lower interest income and
discount recovery on loan pools due to less discount collection and higher
collection costs.
The Company's total interest expense increased $2,705,000, or 26 percent,
in 1999 from 1998. This increase was mainly attributable to the overall growth
in deposits and the increase in borrowed funds in 1999. Without Midwest, total
interest expense would have increased $798,000 in 1999 compared with 1998,
mostly due to higher volumes. Average deposits of the Company's previously
existing subsidiaries grew $17,763,000, or 8 percent, in 1999 while average
borrowed funds increased $6,503,000, or 32 percent. The Company's rate paid on
deposits decreased slightly in 1999 to 4.34 percent, down from 4.50 percent in
1998. The overall cost of funds declined to 4.67 percent in 1999 from 4.76
percent in 1998.
Provision for Loan Losses. The Company recorded a provision for loan loss
expense of $3,628,000 in 1999 compared to $1,179,000 in 1998, an increase of
$2,449,000. The substantial increase in the loss provision recorded in 1999
reflects an increase in the net loan charge-offs actually experienced by the
Company in 1999, particularly the charge-offs related to the MIC Financial
portfolio. The provision was also increased due to concerns with specific
identified problem credits, growth in the Company's loan portfolio throughout
the year, and general uncertainties in the local and national economy.
Other Income. Noninterest income increased $90,000, or 5 percent, in 1999
over the amount recorded in 1998. Without Midwest, noninterest income would
have increased by $4,000 in 1999 as compared to 1998, with increases in
service charges and overdraft fees collected on deposit accounts in 1999
offset by minimal securities gains compared with 1998. Including Midwest for
1999, the Company recognized $28,000 in losses on the sale of investment
securities classified as available for sale compared with a gain of $58,000 in
1998. Most of these losses were incurred by Midwest in the fourth quarter of
1999 as securities were sold to improve the overall portfolio position and to
meet a regulatory directive whereby Midwest was required to divest $6,855,000
in non-rated municipal bonds. As of December 31, 1999, Midwest had sold all
but one non-rated municipal bond having a face value of $900,000 and a
carrying value approximating its market value. This security was subsequently
sold in 2000 at a minimal gain of $1,000.
Other Expense. The Company's other expense increased $1,514,000, or 17
percent, for the year 1999 in comparison to 1998. All operating expense
categories reflected an increase in 1999 due to the inclusion of
A-4
Midwest for the fourth quarter. Additional goodwill and other intangible
amortization expense for the fourth quarter of 1999 attributable to the
acquisition of Midwest totaled $156,000. Excluding the expenses of Midwest for
the fourth quarter of 1999, the Company's noninterest expenses grew by
$634,000, or 7 percent, in 1999 compared with 1998 totals. Excluding Midwest,
salary and benefits and goodwill amortization expense would have declined in
1999 compared with 1998. Nonrecurring costs related to the management and
liquidation of problem credits and the sale of MIC Financial assets totaled
approximately $385,000 in 1999 and were classified as other operating expense.
Salary and benefits and other operating costs attributable to the operations
of MIC Financial declined throughout the year as assets were sold and
employees were released.
Income Tax Expense. Income tax expense decreased $1,313,000, principally
due to a decrease in the amount of income before income taxes. The Company's
consolidated income tax rate varies from the statutory rates mainly due to
tax-exempt interest income. The effective income tax rate as a percent of
income before taxes was 36.4 percent in 1999 compared with 35.9 percent for
1998.
Analysis of Financial Condition
The Company's consolidated statement of condition as of December 31, 1999
included all balances related to Midwest. The acquisition of Midwest occurred
on September 30, 1999. All comparisons between December 31, 1999 and 2000
reflect the net change in consolidated balances.
Loans
From December 31, 1999 to December 31, 2000, the Company's loan portfolio
totals increased $29,990,000, or 11 percent. Total loans as of December 31,
2000 were $312,081,000, compared with $282,091,000 in 1999. Most of the
increase was in the real estate and agricultural loan categories. As of
December 31, 2000, the Company's loan to deposit ratio was 84.3 percent,
compared with 80.9 percent at December 31, 1999. The loan portfolio largely
reflects the profile of the communities in which the Company operates.
The Company's total real estate loans (including 1-4 family residential,
commercial, agricultural, construction, and multi-family real estate) were
$206,874,000 as of December 31, 2000 compared with $186,872,000 at year-end
1999. Real estate loans of all types are the Company's largest category of
loans, comprising 66.3 percent of total loans at year-end 2000 and 66.2
percent at December 31, 1999. Agricultural loans are the next largest category
of loans totaling approximately $45,404,000 as of December 31, 2000, compared
with $42,022,000 at December 31, 1999. As a percentage of the Company's total
loans, at December 31, 2000 agricultural loans were 14.5 percent compared with
14.9 percent at December 31, 1999. Concerns with the agricultural economy have
caused management to require that lending officers closely monitor all
agricultural credits and identify those specific credits that would be more at
risk in the event of continued deterioration in that sector of the economy.
The government subsidy payments provided to agricultural operators in 2000
aided the financial situation of many borrowers. The long-term financial
stability of the agricultural sector will be mostly affected by improvements
and stability in the market prices for the commodities produced and continued
funding of government support programs. Commercial loans make up approximately
12.5 percent (down slightly from 13.6 percent as of year-end 1999) of the
Company's loan portfolio as of December 31, 2000, with consumer loans
representing the remainder of the portfolio.
Investment in Loan Pools
The Company invests in pools of performing and nonperforming loans
categorized as loan pool participations. These loan pool participations are
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 principal in excess of the purchase
cost which is herein referred to as "discount."
A-5
At year-end 2000, the Company's loan pool participation total was
$74,755,000 compared with $67,756,000 in 1999. The average loan pool
participation investment for 2000 was $61,553,000 compared with an average for
1999 of $59,564,000. New loan pool participation investments made by the
Company during 2000 totaled $39,546,000 compared with $41,440,000 purchased in
1999. Approximately 58 percent of the total dollars of new pool purchases in
2000 were made in the last quarter of the year. Given the typical time of
three to six months required for a pool to start performing satisfactorily,
the majority of the pools purchased in 2000 did not contribute significantly
to 2000 results. Most of the loan pools acquired in 2000 and 1999 were higher-
quality performing assets that were purchased at a lower discount from the
stated principal balance. The lowered discount from par will result in a lower
discount recovery and a subsequent reduction in the overall return on the
investment in future years. Throughout 2000, loan pool participation
investments averaged 13.4 percent of earning assets while in 1999 they
represented 18.3 percent of average earning assets. The reduction in
investment percentage was due in part to the additional assets of Midwest that
contributed to a higher amount of earning assets in 2000. The loan pool
participation investments at Midwest were not as proportionately high as the
Company's other banks. The yield on loan pool participation investments
declined to 11.8 percent for 2000, compared with 12.9 percent in 1999. This
was partially due to the higher quality assets being purchased, which, when
collected, results in a lower amount of discount recovery.
In May 2000, the Company and the loan pool servicer agreed to sell the
remaining loans in three of the four nonaffiliated servicing corporations.
Assets having a purchase basis of approximately $6,400,000 of Central States
Resources, Midstates Resources, and All States Resources Corporations were
sold. Management of the Company and the servicer determined that it was in the
best interest of all parties to sell these remaining assets in order to
maximize the potential return on investment and to reduce credit risk. The
assets in these servicing corporations were purchased from various sources
between 1988 and 1997. These remaining assets were becoming increasingly
costly to service and the cash flow was projected to decline. The assets were
felt to be subject to greater than average credit risk in the event of
deterioration in the national economy. Without the sale of these assets, the
Company's loan pool balances would have been greater in 2000. States Resources
Corporation is the remaining servicing entity, with all new loan pool
purchases since 1998 made through this organization.
Investment Securities
The Company manages its investment portfolio to provide both a source of
liquidity and earnings. Investment securities available for sale totaled
$60,758,000 on December 31, 2000 compared to $60,530,000 at December 31, 1999.
Securities classified as held to maturity decreased by $3,524,000 in 2000 as
proceeds from maturing investments were utilized to fund loan demand. The
Company did not increase its overall securities portfolio in 2000 given the
low interest rate environment and the loan demand that it experienced.
Goodwill and Other Intangible Assets
The amount of goodwill and other intangible assets decreased to $11,725,000
as of December 31, 2000 as a result of amortization. Goodwill and other
intangible assets on December 31, 1999 was $12,850,000. Goodwill of $6,234,000
resulting from the acquisition of Midwest on September 30, 1999 is being
amortized over a 25-year period on a straight-line basis. A core deposit
intangible of $1,777,000 was also established as of the merger date and is
included in the total for goodwill and other intangible assets. The core
deposit intangible is being amortized utilizing the effective yield method
over an estimated useful life of 10 years.
Deposits
Total deposits were $370,144,000 on December 31, 2000 compared with
$348,672,000 as of December 31, 1999, an increase of $21,472,000. This growth
was in certificates of deposit, which increased $25,635,000, or 14 percent, in
2000. Demand and NOW account deposits increased by $3,836,000 in 2000 while
savings balances declined $7,999,000.
A-6
Capital Resources
As of December 31, 2000, total shareholders' equity was $49,295,000. Total
equity decreased by $940,000 in 2000 from $50,235,000 at December 31, 1999 as
a result of the repurchase of stock. The Company's Board of Directors in
January and in April of 2000 authorized the repurchase of a total of 380,000
shares of common stock. During the period from January 1 through May 22, 2000,
the Company repurchased 403,100 shares of stock (including 23,100 shares from
a repurchase authorized in 1999) on the open market at an average cost of
$8.52 per share. The Company did not repurchase any additional shares of its
common stock during the remainder of the year. A total of 7,300 shares were
reissued upon the exercise of stock options throughout 2000, resulting in
3,939,314 shares outstanding at December 31, 2000.
Shareholders' equity as a percentage of total assets was 9.57 percent on
December 31, 2000, versus 10.33 percent on December 31, 1999. Tangible
shareholders' equity was 7.5 percent at year-end 2000 compared with 7.9
percent in 1999. Tangible equity is the ratio of shareholders' equity less
goodwill and intangible assets in proportion to total assets less goodwill and
intangible assets. The decrease in the percentage of shareholders' equity to
total assets reflects the overall increase in total assets in 2000 and the
lower amount of capital resulting from the repurchase of shares by the
Company.
The Company's risk-based Tier 1 core capital ratio was 10.6 percent as of
December 31, 2000, and the Total Capital ratio was 11.4 percent. 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 core capital is the
Company's total common shareholders' equity reduced by goodwill. Total Capital
adds the allowance for loan losses to the Tier 1 capital amount. As of
December 31, 1999, the Company's Tier 1 capital ratio was 11.4 percent, and
the Total Capital ratio was 12.7 percent. These ratios declined in 2000 from
1999 due to the growth in risk-based assets. They substantially exceeded the
minimum regulatory requirements of 4.0 percent for Tier 1 capital and 8.0
percent for Total Capital. The Company's Tier 1 Leverage ratio, which measures
Tier 1 capital in relation to total assets, was 7.8 percent as of December 31,
2000 and 7.9 percent at December 31, 1999, exceeding the regulatory minimum
requirement of 3.0 percent.
As of December 31, 2000, the Company had borrowed $5,150,000 on a revolving
line of credit and $8,050,000 under a term loan agreement from a major
commercial bank to fund loan pool participation investments and to provide
additional capital to Pella State Bank, Central Valley Bank, and MIC
Financial. The Company entered into this revised credit agreement arrangement
on June 30, 2000. The revolving agreement provides for a maximum line of
$9,000,000 and matures on June 30, 2001. The term loan agreement provides for
annual principal amortization of the debt with the final payment due December
31, 2004. Additionally, as of December 31, 2000, the Company's subsidiaries
had borrowed $75,050,000 in fixed-rate advances from the Federal Home Loan
Bank of Des Moines. Advances from the Federal Home Loan Bank at year-end 2000
increased $11,629,000 from 1999. Throughout 2000, the Company elected to
utilize advances from the Federal Home Loan Bank as an alternative funding
mechanism to provide liquidity to meet loan demand and to purchase loan pool
participations. The Company had no material commitments for capital
expenditures as of December 31, 2000.
The Company's common stock closed the year 2000 at $8.50 per share,
representing .68 times the December 31, 2000 book value per share of $12.51.
Tangible book value per share was $9.54 on December 31, 2000 compared with
$8.62 in 1999.
Liquidity
Liquidity management involves the ability to meet the cash flow
requirements of depositors and borrowers. Liquidity management is conducted by
the Company on both a daily and long-term basis. The Company adjusts its
investments in liquid assets based upon management's assessment of expected
loan demand, projected loan
A-7
sales, expected deposit flows, yields available on interest-bearing deposits,
and the objectives of its asset/liability management program. Excess liquidity
is invested generally in short-term U.S. Government and agency securities,
short-term state and political subdivision securities, and other investment
securities.
Liquid assets of cash on hand, balances due from other banks, and federal
funds sold are maintained to meet customer needs. The Company had liquid
assets of $15,517,000 as of December 31, 2000, compared with $22,919,000 as of
December 31, 1999. Investment securities classified as available for sale and
securities and loans maturing within one year totaled $179,302,000 and
$157,265,000 as of December 31, 2000 and 1999, respectively. Assets maturing
within one year, combined with liquid assets, were 48.4 percent at December
31, 2000 and 45.1 percent at December 31, 1999 of total deposits as of the
same dates.
The Company's principal sources of funds are deposits, advances from the
Federal Home Loan Bank, principal repayments on loans, proceeds from the sale
of loans, principal recoveries on loan pool participations, proceeds from the
maturity and sale of investment securities, its commercial bank line of
credit, and funds provided by operations. While scheduled loan amortization
and maturing interest-bearing deposits are relatively predictable sources of
funds, deposit flows and loan prepayments are greatly influenced by economic
conditions, the general level of interest rates, and competition. Principal
recoveries on loan pool participations are also influenced by economic
conditions, and to a lesser extent, the interest rate environment. The Company
utilizes particular sources of funds based on comparative costs and
availability. This includes fixed-rate advances from the Federal Home Loan
Bank which were obtained at a more favorable cost than deposits. The Company
generally manages the pricing of its deposits to maintain a steady deposit
base but has from time to time decided not to pay rates on deposits as high as
its competition.
Net cash provided by operations is another major source of liquidity. The
net cash provided by operating activities was $5,685,000 in 2000, $5,120,000
in 1999, and $6,589,000 in 1998. This trend of strong cash from operations is
expected to continue into the foreseeable future.
The Company anticipates that it will have sufficient funds available to
fund its loan commitments. As of December 31, 2000, the Company had
outstanding commitments to extend credit of $32,190,000 and had no commitments
to sell loans. Certificates of deposit maturing in one year or less totaled
$139,640,000 as of December 31, 2000. Management believes that a significant
portion of these deposits will remain with the Company.
The Company continues to seek acquisition opportunities that would
strengthen its presence in current and new market areas. There are currently
no pending acquisitions that would require the Company to secure capital from
public or private markets.
Asset-Liability Management
The Company's strategy with respect to asset-liability management is to
maximize net interest income while limiting exposure to risks associated with
volatile interest rates. This strategy is implemented by the subsidiary banks'
asset-liability committees which take action based upon their analysis of
expected changes in the composition and volumes of the balance sheet and the
fluctuations in market interest rates. One of the measures of interest-rate
sensitivity is the gap ratio. This ratio indicates the amount of interest-
earning assets repricing within a given period in comparison to the amount of
interest-bearing liabilities repricing within the same period of time. A gap
ratio of 1.0 indicates a matched position, in which case the effect on net
interest income due to interest rate movements will be minimal. A gap ratio of
less than 1.0 indicates that more liabilities than assets reprice within the
time period and a ratio greater than 1.0 indicates that more assets reprice
than liabilities.
As of December 31, 2000, the Company's cumulative gap ratios for assets and
liabilities repricing within three months and within one year were .32 and .47
respectively, meaning more liabilities than assets are scheduled to reprice
within these periods. This situation suggests that a decrease in market
interest rates may
A-8
benefit net interest income and that an increase in interest rates may
negatively impact the Company. The gap position is largely the result of
classifying interest-bearing NOW accounts, money market accounts, and savings
accounts as immediately repriceable and the classification of loan pool
participations as repricing over a three-year period based on the historical
average for return of pool investment.
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
comprised primarily 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 2000 changed
when compared to 1999.
The Company uses a third-party computer software simulation modeling
program to measure its exposure to potential interest rate changes. For
various assumed hypothetical changes in market interest rates, numerous other
assumptions are made such as prepayment speeds on loans and securities backed
by mortgages, the slope of the Treasury yield curve, the rates and volumes of
the Company's deposits, and the rates and volumes of the Company's loans. This
analysis measures the estimated change in net interest income in the event of
hypothetical changes in interest rates. The following table presents the
Company's projected changes in net interest income for the various rate shock
levels at December 31, 2000.
$ Change % Change
-------- --------
+200 bp...................................................... (404,000) -2%
+100 bp...................................................... (198,000) -1%
Base......................................................... 0 0%
- -100 bp...................................................... 219,000 1%
- -200 bp...................................................... 406,000 2%
As shown above, at December 31, 2000, the effect of a ramped 200 basis
point increase in interest rates would reduce the Company's net interest
income by 2 percent, or approximately $404,000. The effect of a ramped 200
basis point decrease in rates would increase the Company's net interest income
by 2 percent, or approximately $406,000.
Computations of the prospective effects of hypothetical interest rate
changes are based on numerous assumptions. Actual values may differ from those
projections set forth above. Further, the computations do not contemplate any
actions the Company may undertake in response to changes in interest rates.
Current interest rates on certain liabilities are at a level that does not
allow for significant repricing should market interest rates decline
significantly.
Loan Quality
Total loans increased 11 percent during 2000 to a year-end total of
$312,081,000. Each of the bank subsidiaries experienced growth in their loan
portfolios. Credits held by MIC Financial continued to be reduced through
sales, collection efforts, and charge-offs during the year. As of December 31,
2000, the loans attributable to MIC Financial were $1,540,000, approximately
.5 percent of the Company's total loans outstanding.
Nonperforming assets (including $571,000 in Other Real Estate) as of
December 31, 2000 totaled $3,523,000. The year-end 2000 total of nonperforming
assets decreased $1,442,000 (29 percent) when compared with the December 31,
1999, amount of $4,965,000. Much of the reduction in nonperforming assets was
the
A-9
result of loans charged off. Throughout the year, there were few major
additions of nonperforming loans. Included in the 2000 year-end nonperforming
asset totals was $594,000 related to MIC Financial compared with $1,821,000 at
year-end 1999. The ratio of total nonperforming loans and assets to total
loans was 1.13 percent for year-end 2000 and 1.76 percent for year-end 1999.
Nonaccrual loans decreased $832,000 to a December 31, 2000 total of
$2,042,000, including $583,000 for MIC Financial, consisting mainly of
agricultural and commercial loans. Loans past due 90 days and over as of year-
end 2000 totaled $910,000, including $11,000 for MIC Financial, and consisted
primarily of residential real estate and agricultural loans. Loans past due 90
days and over as of December 31, 2000, decreased $516,000 compared with the
year-end 1999 total. Other real estate consists of real estate acquired by the
Company through foreclosure. Other real estate increased $421,000 from the
December 31, 1999 total of $150,000 primarily due to the foreclosure of a
shopping mall property, a hotel in which the Company has a participation
interest, a small piece of farm real estate, and two single-family residences.
Efforts to further improve asset quality continue.
The allowance for loan losses was $2,933,000 as of December 31, 2000, and
$4,006,000 as of year-end 1999. The allowance represented .94 percent of total
loans at December 31, 2000 and 1.42 percent of loans on December 31, 1999. The
reduction in the amount of the allowance for loan losses as of December 31,
2000 was the result of loan charge-offs during the year and reduced levels of
nonperforming loans. The allowance as a percentage of nonperforming assets was
83.2 percent on December 31, 2000 and 80.7 percent as of year-end 1999. Net
loan charge-offs for 2000 totaled $1,965,000, or .65 percent of average loans,
compared with 1999 net charge-offs of $2,315,000, or 1.14 percent of average
loans. Net charge-offs related to MIC Financial credits for the year 2000
totaled $1,071,000 and in 1999 totaled $1,788,000. Most of the $894,000 in
subsidiary bank loan charge-offs during 2000 were agricultural and real estate
credits. The allowance for loan losses is maintained at a level considered by
management to be adequate to provide for loan losses inherent in the portfolio
on the balance sheet date.
Year 2000 Compliance
A critical issue for the banking industry and for the economy overall was
how existing computer application software programs, operating systems, and
hardware would accommodate the date value for the year 2000. The Company
established Year 2000 Committees and Plans at its bank subsidiaries to
minimize the risk of potential disruption related to computers and other
equipment with date-sensitive software. Based on the Company's assessment of
operations through February 2001, no significant year 2000 issues have been
experienced. The Company surveyed its larger clients, vendors and significant
third parties and believes they have experienced no significant year 2000
issues which could adversely affect the Company.
The Company incurred internal staff costs and other expenses related to the
enhancements necessary to become Year 2000 compliant. The expense related to
Year 2000 compliance was not deemed material to the Company's financial
position or results of operations. The costs incurred by the Company for Year
2000 compliance were approximately $25,000, exclusive of costs associated with
the new mainframe computer acquired in 1998. There were no additional costs
incurred in 2000 related to this issue.
Future Prospects
Inflation can have a significant effect on the operating results of all
industries. Management believes that inflation does not affect the banking
industry as much as it does other industries with a high proportion of fixed
assets and inventory. Inflation does, however, have an impact on the growth of
total assets and the need to maintain a proper level of equity capital.
Interest rates are significantly affected by inflation. It is difficult to
assess the impact rate changes have since neither the timing nor the magnitude
of changes in the various inflation indices coincides with changes in interest
A-10
rates. There is, of course, an impact on longer-term earning assets; however,
this effect continues to diminish as investment maturities are shortened and
interest-earning assets and interest-bearing liabilities shift from fixed-rate
long-term to rate-sensitive short-term.
During 2000 the national inflation rate remained low. Interest rates moved
upward throughout the year but have decreased significantly in the early part
of 2001. Management of the Company believes that the 2001 rate of inflation
will remain consistent with 2000 and that interest rates in 2001 will continue
to move downward in the first half of the year. Given the Company's negative
gap position (greater amount of interest-bearing liabilities repricing than
interest-earning assets), a decrease in interest rates may be beneficial to
the Company's net interest margin through 2001. The full benefit of continued
declines in market interest rates may not be recognized by the Company
depending on the competitive environment for deposits in the individual
subsidiaries' markets. Conversely, if interest rates do increase, the
Company's net interest margin may deteriorate. Management continues to focus
on managing the net interest margin in 2001.
Management anticipates that in 2001 they will continue to explore
opportunities to acquire additional loan pool participation investments. Bids
on pool participations during the year will take into account the availability
of funds to invest, the market for such pools in terms of price and
availability, and the potential return on the pools relative to risk.
Accounting and Financial Reporting Developments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", and SFAS No. 138, an amendment to SFAS
No. 133. SFAS No. 133 and 138 require recognition of all derivative
instruments as either assets or liabilities in the statement of financial
condition and measurement of those instruments at fair value. A derivative may
be designated as a hedge of an exposure to changes in the fair value of a
recognized asset or liability, an exposure to variable cash flows of a
forecasted transaction, or a foreign currency exposure. The accounting for
gains and losses associated with changes in the fair value of a derivative and
the impact on the Company's consolidated financial statements will depend on
its hedge designation and whether the hedge is effective in offsetting changes
in the fair value or cash flows of the underlying hedged item. The statement
was effective for the Company beginning January 1, 2001. The impact of SFAS
No. 133 and 138 on the Company's financial position and results of operations
was not material. There were no transition adjustments required.
The American Institute of Certified Public Accountants has issued a
proposed Statement of Position ("SOP") that addresses the accounting for
differences between contractual and expected future cash flows from an
investor's initial investment in certain loans and debt securities. It
includes such loans acquired in purchase business combinations and would apply
to all enterprises. The proposed SOP would limit the yield that may be
accreted (accretable yield) to the excess of the investor's estimate of
undiscounted expected future principal and interest cash flows (expected
future cash flows) over the investor's initial investment in the loan. The
provisions of this proposed SOP would be effective for financial statements
issued for fiscal years beginning after June 15, 2000. Management of the
Company does not expect the adoption of this SOP to have a material effect on
its financial statements.
SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" was issued in September 2000, and replaces
SFAS 125 of the same title. SFAS 140 revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of SFAS 125's
provisions without reconsideration. SFAS 140 is effective for transfers and
servicing of financial assets and extinguishments of liabilities after March
31, 2001. The adoption of SFAS 140 is not expected to have a material impact
on the results of operations or financial condition of the Company.
A-11
Impact of the Gramm-Leach-Bliley Act.
On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley Act
(the "GLB Act"), which among other things establishes a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
and securities firms. The GLB Act requires financial institutions to disclose
to customers and to non-customers ATM fees and also requires the federal
banking regulatory agencies to develop regulations implementing the privacy
protection provisions of the Act. The Company does not believe that the GLB
Act will have a material adverse effect upon its operations in the near term.
However, to the extent the GLB Act permits banks, securities firms and
insurance companies to affiliate, the financial services industry may
experience further consolidation. This could result in a growing number of
larger financial institutions that offer a wider variety of financial services
than the Company currently offers and that can aggressively compete in the
markets the Company currently serves.
A-12
Consolidated Balance Sheets
December 31
-----------------
2000 1999
-------- -------
(in thousands)
Assets:
Cash and due from banks..................................... $ 10,544 13,354
Interest-bearing deposits in banks ......................... 3,818 1,700
Federal funds sold ......................................... 1,155 7,865
-------- -------
Cash and cash equivalents................................. 15,517 22,919
-------- -------
Investment securities (notes 2 and 8):
Available for sale........................................ 60,758 60,530
Held to maturity (fair value of $26,234 in 2000 and
$29,291 in 1999) ........................................ 25,921 29,445
Loans, net of unearned discount (notes 3, 5, and 8)......... 312,081 282,091
Allowance for loan losses (note 4).......................... (2,933) (4,006)
-------- -------
Net loans................................................. 309,148 278,085
-------- -------
Loan pool participations.................................... 74,755 67,756
Premises and equipment, net (note 6)........................ 6,890 6,795
Accrued interest receivable................................. 5,201 4,719
Goodwill and other intangible assets........................ 11,725 12,850
Other assets................................................ 5,297 3,090
-------- -------
Total assets............................................ $515,212 486,189
======== =======
Liabilities and Shareholders' Equity:
Deposits (notes 2 and 7):
Demand.................................................... $ 26,031 23,197
NOW accounts.............................................. 43,380 42,378
Savings................................................... 88,378 96,377
Certificates of deposit................................... 212,355 186,720
-------- -------
Total deposits.......................................... 370,144 348,672
Federal funds purchased..................................... 2,345 2,965
Federal Home Loan Bank advances (note 8).................... 75,050 63,421
Notes payable (note 9)...................................... 13,200 18,000
Other liabilities........................................... 5,178 2,896
-------- -------
Total liabilities....................................... 465,917 435,954
-------- -------
Shareholders' equity:
Common stock, $5 par value; authorized 20,000,000 shares;
issued 4,912,849 as of December 31, 2000 and 1999........ 24,564 24,564
Capital surplus........................................... 13,127 13,192
Treasury stock at cost, 973,535 and 577,735 shares as of
December 31, 2000 and 1999, respectively................. (11,869) (8,525)
Retained earnings (note 16)............................... 23,102 21,511
Accumulated other comprehensive income (loss)............. 371 (507)
-------- -------
Total shareholders' equity.............................. 49,295 50,235
-------- -------
Total liabilities and shareholders' equity.............. $515,212 486,189
======== =======
See accompanying notes to consolidated financial statements.
A-13
Consolidated Statements of Income
Year ended December
31
----------------------
2000 1999 1998
------- ------ ------
(in thousands, except
per share amounts)
Interest income:
Interest and fees on loans.............................. $25,298 17,577 15,026
Interest income and discount on loan pool
participations......................................... 7,275 7,668 7,970
Interest on bank deposits............................... 116 82 122
Interest on federal funds sold.......................... 164 260 338
Interest on investment securities:
Available for sale.................................... 4,182 2,214 1,617
Held to maturity...................................... 1,791 1,029 893
------- ------ ------
Total interest income............................... 38,826 28,830 25,966
------- ------ ------
Interest expense:
Interest on deposits (note 7):
NOW accounts.......................................... 782 637 656
Savings............................................... 3,779 2,837 2,241
Certificates of deposit............................... 10,788 7,060 6,102
Interest on federal funds purchased..................... 191 94 12
Interest on Federal Home Loan Bank advances............. 4,484 1,287 405
Interest on notes payable............................... 1,403 1,280 1,074
------- ------ ------
Total interest expense.............................. 21,427 13,195 10,490
------- ------ ------
Net interest income................................. 17,399 15,635 15,476
Provision for loan losses (note 4)...................... 892 3,628 1,179
------- ------ ------
Net interest income after provision for loan losses. 16,507 12,007 14,297
------- ------ ------
Other income:
Service charges......................................... 1,821 1,332 1,215
Data processing income.................................. 203 200 195
Other operating income.................................. 502 443 389
Investment security gains (losses), net (note 2)........ 40 (28) 58
------- ------ ------
Total noninterest income............................ 2,566 1,947 1,857
------- ------ ------
Other expense:
Salaries and employee benefits expense (note 13)........ 6,378 5,144 4,796
Net occupancy expense................................... 1,877 1,517 1,349
Professional fees....................................... 658 431 394
Goodwill and other intangible asset amortization........ 1,125 711 612
Other operating expense................................. 3,275 2,659 1,797
------- ------ ------
Total noninterest expense........................... 13,313 10,462 8,948
------- ------ ------
Income before income tax expense.................... 5,760 3,492 7,206
Income tax expense (note 11)............................ 1,759 1,270 2,583
------- ------ ------
Net income.......................................... $ 4,001 2,222 4,623
======= ====== ======
Net income per share--basic............................. $ 0.99 0.58 1.26
======= ====== ======
Net income per share--diluted........................... $ 0.99 0.56 1.20
======= ====== ======
See accompanying notes to consolidated financial statements.
A-14
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive
Income
Accumulated
Other
Common Capital Treasury Retained Comprehensive
Stock Surplus Stock Earnings Income (Loss) Total
------- ------- -------- -------- ------------- ------
(in thousands, except share data)
Balance at December 31,
1997................... $19,038 118 (1,752) 19,231 119 36,754
======= ====== ======= ====== ==== ======
Comprehensive income:
Net income............ -- -- -- 4,623 -- 4,623
Unrealized gains
arising during the
year on securities
available for sale... -- -- -- -- 88 88
Less realized gains on
securities available
for sale, net of tax. -- -- -- -- (37) (37)
------- ------ ------- ------ ---- ------
Total comprehensive
income............. -- -- -- 4,623 51 4,674
------- ------ ------- ------ ---- ------
Dividends paid (.56 per
share)................. -- -- -- (2,048) -- (2,048)
Stock options exercised
(58,219 shares)........ -- (101) 790 -- -- 689
Treasury stock purchased
(87,368 shares)........ -- -- (1,837) -- -- (1,837)
------- ------ ------- ------ ---- ------
Balance at December 31,
1998................... 19,038 17 (2,799) 21,806 170 38,232
======= ====== ======= ====== ==== ======
Comprehensive income:
Net income............ -- -- -- 2,222 -- 2,222
Unrealized losses
arising during the
year on securities
available for sale... -- -- -- -- (695) (695)
Plus realized losses
on securities
available for sale,
net of tax........... -- -- -- -- 18 18
------- ------ ------- ------ ---- ------
Total comprehensive
income............. -- -- -- 2,222 (677) 1,545
------- ------ ------- ------ ---- ------
Dividends paid (.60 per
share)................. -- -- -- (2,310) -- (2,310)
Stock issued for
acquisition of Midwest
Bancshares, Inc.
(1,105,348 shares)..... 5,526 13,281 -- -- -- 18,807
Stock options exercised
(54,821 shares)........ -- (106) 868 (207) -- 555
Treasury stock purchased
(461,400 shares)....... -- -- (6,594) -- -- (6,594)
------- ------ ------- ------ ---- ------
Balance at December 31,
1999................... 24,564 13,192 (8,525) 21,511 (507) 50,235
======= ====== ======= ====== ==== ======
Comprehensive income:
Net income............ -- -- -- 4,001 -- 4,001
Unrealized gains
arising during the
year on securities
available for sale... -- -- -- -- 908 908
Less realized gains on
securities available
for sale, net of tax. -- -- -- -- (30) (30)
------- ------ ------- ------ ---- ------
Total comprehensive
income............. -- -- -- 4,001 878 4,879
------- ------ ------- ------ ---- ------
Dividends paid (.60 per
share)................. -- -- -- (2,410) -- (2,410)
Stock options exercised
(7,300 shares)......... -- (65) 89 -- -- 24
Treasury stock purchased
(403,100 shares)....... -- -- (3,433) -- -- (3,433)
------- ------ ------- ------ ---- ------
Balance at December 31,
2000................... $24,564 13,127 (11,869) 23,102 371 49,295
======= ====== ======= ====== ==== ======
See accompanying notes to consolidated financial statements.
A-15
Consolidated Statements of Cash Flows
Year ended December 31
----------------------------
2000 1999 1998
-------- -------- --------
(in thousands)
Cash flows from operating activities:
Net income...................................... $ 4,001 2,222 4,623
-------- -------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 1,788 1,340 1,247
Provision for loan losses..................... 892 3,628 1,179
Investment securities (gains) losses, net..... (40) 28 (58)
Loss on sale of premises and equipment........ 5 -- --
Amortization of investment securities and loan
premiums..................................... 233 199 155
Accretion of investment securities and loan
discounts.................................... (262) (465) (447)
Increase in other assets...................... (2,689) (705) (152)
Increase (decrease) in other liabilities...... 1,757 (1,127) 42
-------- -------- --------
Total adjustments........................... 1,684 2,898 1,966
-------- -------- --------
Net cash provided by operating activities... 5,685 5,120 6,589
-------- -------- --------
Cash flows from investing activities:
Investment securities available for sale:
Proceeds from sales........................... 13,988 9,465 3,205
Proceeds from maturities...................... 5,265 11,372 5,810
Purchases..................................... (17,956) (16,238) (15,347)
Investment securities held to maturity:
Proceeds from maturities...................... 6,622 5,836 10,390
Purchases..................................... (2,996) (2,221) (4,333)
Purchases of loan pool participations........... (39,546) (41,440) (25,710)
Principal recovery on loan pool participations.. 32,547 32,973 25,526
Net increase in loans........................... (31,868) (18,318) (21,483)
Purchases of premises and equipment............. (953) (437) (495)
Proceeds from sale of premises and equipment.... 44 6 --
Cash received in acquisition of Midwest
Bancshares, Inc. .............................. -- 3,403 --
-------- -------- --------
Net cash used in investing activities......... (34,853) (15,599) (22,437)
-------- -------- --------
Cash flows from financing activities:
Net increase in deposits........................ 21,568 8,775 17,425
Net (decrease) increase in federal funds
purchased...................................... (620) 2,989 --
Federal Home Loan Bank advances................. 53,500 11,900 8,000
Repayment of Federal Home Loan Bank advances.... (42,063) (5,038) (6,405)
Advances on notes payable....................... 1,900 6,910 7,450
Principal payments on notes payable............. (6,700) (5,910) (4,500)
Dividends paid.................................. (2,410) (2,310) (2,048)
Purchases of treasury stock..................... (3,433) (6,594) (1,837)
Proceeds from stock options exercised........... 24 555 689
-------- -------- --------
Net cash provided by financing activities..... 21,766 11,277 18,774
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents.................................. (7,402) 798 2,926
Cash and cash equivalents at beginning of year.. 22,919 22,121 19,195
-------- -------- --------
Cash and cash equivalents at end of year........ $ 15,517 22,919 22,121
======== ======== ========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest...................................... $ 20,912 13,307 10,832
======== ======== ========
Income taxes.................................. $ 1,112 2,251 2,128
======== ======== ========
See accompanying notes to consolidated financial statements.
A-16
December 31, 2000, 1999, and 1998
1. Summary of Significant Accounting Policies
The accounting and reporting policies of Mahaska Investment Company and
subsidiaries (the "Company") conform to accounting principles generally
accepted in the United States of America and to general practices within the
banking industry. The consolidated financial statements of the Company include
its 100 percent owned subsidiaries, Mahaska State Bank, Central Valley Bank,
Pella State Bank, Midwest Federal Savings and Loan Association of Eastern
Iowa, and MIC Financial Services, Inc. All material intercompany transactions
have been eliminated in consolidation.
MIC Financial Services, Inc.
On April 23, 1999, the Company announced that it had elected to seek a
buyer for MIC Financial Services, Inc. ("MIC Financial"), its wholly-owned
commercial finance subsidiary. A satisfactory agreement could not be reached
with any potential buyers, so the decision was made to sell groups of leases
and assets. Sales, collections, and charge-offs have reduced MIC Financial's
total loan and lease portfolio to $1,540,000, or approximately .5 percent of
the Company's total loans as of December 31, 2000. As of December 31, 2000,
the allowance for loan losses related to the remaining MIC Financial loans and
leases was $140,000. The Company's financial results for the year ended
December 31, 1999, included a loan loss provision of $2,439,000 and charges
aggregating $385,000 primarily related to losses on sales of assets and
expenses incurred in collecting loans. Management continues to evaluate
options on the remaining assets of MIC Financial.
Acquisition of Midwest Bancshares, Inc.
The Company acquired all the outstanding shares of Midwest Bancshares, Inc.
("Midwest") of Burlington, Iowa in a tax-free exchange of 1,105,348 shares of
Company common stock on September 30, 1999. Midwest was 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.
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 transaction with Midwest was accounted for using
the purchase method of accounting. The excess of 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 is being amortized over 25 years on a straight-line basis. Midwest's
results of operations for the three months ended December 31, 1999, and for
the year ended December 31, 2000, are included in the Company's consolidated
statements of income.
The following pro forma 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 core
deposit intangibles and related income tax effects. The pro forma 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.
A-17
Pro forma Condensed Statements of Income
Pro forma
Acquisition Pro forma
Mahaska Midwest Adjustments Consolidated
------- ------- ----------- ------------
(in thousands, except per share amounts)
Twelve months ended December 31, 1999
Interest income....................... $28,830 8,531 351 37,712
Interest expense...................... 13,195 5,392 (94) 18,493
------- ------ --- ------
Net interest income................... 15,635 3,139 445 19,219
Provision for loan losses............. 3,628 36 3,664
Noninterest income.................... 1,947 451 2,398
Noninterest expense................... 10,462 2,520 460 13,442
------- ------ --- ------
Income before income tax expense...... 3,492 1,034 (15) 4,511
Income tax expense.................... 1,270 382 1,652
------- ------ --- ------
Net income............................ $ 2,222 652 (15) 2,859
======= ====== === ======
Net income per share--basic........... $ 0.58 0.59 0.58
======= ====== ======
Net income per share--diluted......... $ 0.56 0.59 0.57
======= ====== ======
Twelve months ended December 31, 1998
Interest income....................... $25,966 11,342 580 37,888
Interest expense...................... 10,490 7,227 (69) 17,648
------- ------ --- ------
Net interest income................... 15,476 4,115 649 20,240
Provision for loan losses............. 1,179 48 1,227
Noninterest income.................... 1,857 664 2,521
Noninterest expense................... 8,948 2,810 620 12,378
------- ------ --- ------
Income before income tax expense...... 7,206 1,921 29 9,156
Income tax expense.................... 2,583 549 3,132
------- ------ --- ------
Net income............................ 4,623 1,372 29 6,024
======= ====== === ======
Net income per share--basic........... $ 1.26 1.31 1.28
======= ====== ======
Net income per share--diluted......... $ 1.20 1.25 1.22
======= ====== ======
Nature of Operations
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.
Mahaska State Bank also provides data processing services to affiliated and
non-affiliated banks.
Since 1988, the Company, either directly or through the bank subsidiaries,
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 other sources. These loan pool investments are
comprised of packages of loans previously made by financial institutions,
which often include distressed or nonperforming loans, that have been sold at
prices reflecting various discounts from the aggregate outstanding principal
amount of the underlying loans depending on the credit quality of the
portfolio. The Servicer collects and remits these amounts, less servicing
fees, to the participants.
Effect of New Financial Accounting Standards
Statement of Financial Account Standards (SFAS) 133, "Accounting for
Derivative Instruments and Hedging Activities", and SFAS No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging
A-18
Activities--an Amendment to FASB Statement No. 133," were adopted by the
Company beginning January 1, 2001. The adoption of the standards did not have
a material effect on the Company's consolidated financial statements.
Statement of Financial Accounting Standards (SFAS) 140, "Accounting for
Transfers and Servicing of Financial Asset and Extinguishments of
Liabilities," is effective for transfers and servicing of financial assets and
extinguishments of liabilities after March 31, 2001. Management does not
expect the adoption of this standard to have a material effect on the
Company's consolidated financial statements.
Earnings per Share
Basic earnings per share amounts are computed by dividing net income by the
weighted average number of shares outstanding during the year. Diluted
earnings per share amounts are computed by dividing net income by the weighted
average number of shares and all potentially dilutive shares outstanding
during the year. The Company has had a Stock Repurchase Plan in effect since
April 1995. In accordance with the plan, 403,100, 461,400 and 87,368 shares of
common stock were repurchased by the Company during 2000, 1999 and 1998,
respectively. The following information was used in the computation of
earnings per share on both a basic and diluted basis for the years ended
December 31, 2000, 1999 and 1998:
2000 1999 1998
------ ----- -----
(in thousands,
except
per share amounts)
Basic EPS computation
Numerator:
Net income................................................ $4,001 2,222 4,623
------ ----- -----
Denominator:
Weighted average shares outstanding....................... 4,052 3,864 3,660
------ ----- -----
Basic EPS................................................... $ 0.99 0.58 1.26
====== ===== =====
Diluted EPS computation
Numerator:
Net income................................................ $4,001 2,222 4,623
------ ----- -----
Denominator:
Weighted average shares outstanding....................... 4,052 3,864 3,660
Weighted average dilutive shares outstanding for stock
options.................................................. 5 105 182
------ ----- -----
4,057 3,969 3,842
------ ----- -----
Diluted EPS................................................. $ 0.99 0.56 1.20
====== ===== =====
Fair Value Financial Instruments
Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instrument. These estimates do
not reflect any premium or discount that could result from offering the
Company's entire holdings of a particular financial instrument for sale at one
time. Unless included in assets available for sale, it is the Company's
general practice and intent to hold its financial instruments to maturity and
not to engage in trading or sale activities.
Fair value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
A-19
Estimated fair values have been determined by the Company using the best
available information and an estimation method suitable for each category of
financial instruments.
Cash and Due from Banks
The Company is required to maintain certain daily reserve balances on hand
in accordance with federal banking regulations. The average reserve balances
maintained in accordance with such regulations for the years ended December
31, 2000, 1999 and 1998 were $1,362,000, $834,000, and $1,048,000,
respectively.
Investment Securities
The Company classifies investment securities based on the intended holding
period. Securities which may be sold prior to maturity to meet liquidity
needs, to respond to market changes, or to adjust the Company's asset-
liability position are classified as available for sale. Securities held
principally for the purpose of near-term sales are classified as trading.
Securities which the Company intends to hold until maturity are classified as
held to maturity.
Investment securities available for sale are recorded at fair value. The
aggregate unrealized gains and losses, net of the income tax effect, are
recorded as a component of other comprehensive income until realized.
Securities held to maturity are recorded at cost, adjusted for amortization of
premiums and accretion of discounts.
Net gains or losses on the sales of securities are shown in the
consolidated statements of income using the specific identification method and
are recognized on a trade date basis.
The gross unrealized holding gains on investment securities available for
sale at December 31, 2000 was $1,403,000, the net income tax expense was
$525,000 and therefore, the net gains were $878,000. The gross unrealized
holding losses at December 31, 1999 were $1,079,000, the income tax benefit
was $402,000 and therefore, the net losses were $677,000.
Loans
Loans are stated at the principal amount outstanding, net of unearned
discount and allowance for loan losses. Unearned discount on installment loans
is transferred to income over the term of the loan using the level yield
method. Interest on all other loans is credited to income as earned based on
the principal amount outstanding.
It is the Company's policy to discontinue the accrual of interest income on
any loan when, in the opinion of management, there is reasonable doubt as to
the collectibility of interest or principal. Nonaccrual loans are returned to
an accrual status when, in the opinion of management, the financial position
of the borrower indicates there is no longer any reasonable doubt as to timely
payment of principal or interest.
All impaired loans, including loans that are restructured in a troubled
debt restructuring involving a modification of terms, are measured at the
present value of expected future cash flows discounted at the loan's initial
effective interest rate. The fair value of the collateral of an impaired
collateral-dependent or an observable market price, if one exists, may be used
as an alternative to discounting. If the measure of the impaired loan is less
than the recorded investment in the loan, impairment will be recognized
through the allowance for loan losses. A loan is considered impaired when,
based on current information and events, it is probable that a creditor will
be unable to collect all amounts due according to the contractual terms of the
loan agreement. All portfolio loans are reviewed for impairment on an
individual basis.
A-20
Concentrations of Credit Risk
The Company originates real estate, consumer, and commercial loans
primarily in its southeast Iowa market area and adjacent counties. Although
the Company has a diversified portfolio, a substantial portion of its
borrowers' ability to repay their loans is dependent upon economic conditions
in the Company's market area.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes collectibility of the principal is unlikely.
Management believes the allowance for loan losses is adequate to absorb
losses in the loan portfolio on the balance sheet date. While management uses
available information to recognize loan losses, future additions to the
allowance may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of the examination
process, periodically review the subsidiary banks' allowance for loan losses.
Such agencies may require the subsidiary banks to increase their allowance for
loan losses based on their judgments and interpretations about information
available to them at the time of their examinations.
Loan Pool Participations
The Company has invested in participations in pools of loans acquired from
the FDIC, the RTC, and other sources at substantial discounts. The pools, all
acquired since 1988, consist of loans to borrowers located throughout the
United States.
The Company carries its investment in the loan pools as a separate earning
asset on the balance sheet. Principal or interest restructures, write-downs,
or write-offs within the pools are not included in the Company's disclosures
for its loan portfolio.
The loan pools are managed by the Servicer operating in Omaha, Nebraska,
the sole incentive of which is cash collection without regard to principal or
income allocation of the payment. The investment in loan pools is accounted
for on a cash basis. For loans receiving regular payments, cash is applied
first to interest income for interest due at the contract rate. Payment
amounts in excess of the interest due at the contractual interest rates are
applied to the principal in a ratio of cost basis to loan face amount and to
discount income with no recognition of interest due at the contract rate.
For loans where circumstances or new information lead the Servicer to
believe that collection of the note or recovery through collateral is less
than originally determined, the cost basis assigned to the loan is written
down or off through a charge to discount income.
For loans where the Servicer negotiates a settlement of the obligation for
a lump sum, the payment is applied first to principal, then to discount income
and last to interest due at the contract rate.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line or accelerated method over
the estimated useful lives of the respective assets, which range from 5 to 40
years for buildings and improvements and 3 to 10 years for furniture and
equipment.
Goodwill and Other Intangible Assets
The goodwill and other intangible assets consists of goodwill of
$10,050,000 and $10,749,000 and core deposit premium of $1,675,000 and
$2,101,000 at December 31, 2000 and 1999, respectively. Goodwill is being
amortized using the straight-line method over 15 or 25 years. Core deposit
premium is being amortized using the
A-21
effective-yield method over 10 years. Amortization expenses for 2000, 1999 and
1998 for goodwill were $699,000, $530,000 and $510,000, respectively, and
$426,000, $181,000 and $102,000, respectively, for core deposit premium. As of
December 31, 2000 and 1999, the accumulated amortization of goodwill was
$3,511,000 and $2,812,000, respectively, and $1,052,000, and $626,000,
respectively, for core deposit premium.
Other Real Estate Owned
Other real estate owned represents property acquired through foreclosure or
deeded to the subsidiary banks in lieu of foreclosure on real estate mortgage
loans on which the borrowers have defaulted as to payment of principal and
interest. Other real estate owned is carried at the lower of the cost of
acquisition or fair value, less estimated costs of disposition, and is
included in other assets on the consolidated balance sheets. Reductions in the
balance of other real estate at the date of acquisition are charged to the
allowance for loan losses. Expenses incurred subsequent to the acquisition of
the property and any subsequent write-downs to reflect current fair market
value are charged as noninterest expense as incurred. Gains or losses on the
disposition of other real estate are recognized in other income or expense in
the period in which they are realized.
Trust Department Assets
Property held for customers in fiduciary or agency capacities is not
included in the accompanying consolidated balance sheets, as such items are
not assets of the Company.
Income Taxes
The Company files a consolidated federal income tax return. For state
purposes, the bank subsidiaries each file a franchise return and the remaining
entities file a consolidated income tax return.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts and of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Consolidated Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks, interest-bearing deposits in banks, and federal funds
sold.
Reclassifications
Certain reclassifications have been made to prior years' consolidated
financial statements in order to conform to current year presentation.
Use of Estimates in the Preparation of Financial Statements
The preparation of the consolidated 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
reporting period. Actual results could differ from those estimates.
Significant estimates that are particularly sensitive to change relate to the
allowance for loan losses and the carrying basis of the loan pool
participations.
A-22
2. Investment Securities
A summary of investment securities by type as of December 31, 2000 and 1999,
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2000 Cost Gains Losses Value
- ----------------- --------- ---------- ---------- ------
(in thousands)
Investment Securities Available for
Sale:
U.S. government securities ............. $ 1,000 5 -- 1,005
U.S. government agency securities ...... 35,190 503 37 35,656
Obligations of states and political
subdivisions .......................... 6,515 155 1 6,669
Other investment securities ............ 17,457 95 124 17,428
------- --- --- ------
Total .............................. $60,162 758 162 60,758
======= === === ======
Investment Securities Held to Maturity:
U.S. government agency securities....... $16,263 248 5 16,506
Obligations of states and political
subdivisions .......................... 8,968 107 37 9,038
Other investment securities 690 -- -- 690
------- --- --- ------
Total .............................. $25,921 355 42 26,234
======= === === ======
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1999 Cost Gains Losses Value
- ----------------- --------- ---------- ---------- ------
(in thousands)
Investment Securities Available for
Sale:
U.S. government securities ............. $ 5,078 9 66 5,021
U.S. government agency securities ...... 35,819 -- 517 35,302
Obligations of states and political
subdivisions .......................... 7,872 -- 92 7,780
Other investment securities ............ 12,570 -- 143 12,427
------- --- --- ------
Total .............................. $61,339 9 818 60,530
======= === === ======
Investment Securities Held to Maturity:
U.S. government agency securities ...... $19,685 65 124 19,626
Obligations of states and political
subdivisions .......................... 7,573 17 111 7,479
Other investment securities ............ 2,187 -- 1 2,186
------- --- --- ------
Total .............................. $29,445 82 236 29,291
======= === === ======
Proceeds from the sale of investment securities available for sale during
2000, 1999, and 1998 were $13,988,000, $9,465,000, and $3,205,000,
respectively. Gross gains and losses realized on the sale of investment
securities available for sale for the years ended December 31 were as follows:
2000 1999 1998
---- ---- ----
(in thousands)
Realized gains.................................................. $118 12 58
Realized losses................................................. (78) (40) --
---- --- ---
Total....................................................... $ 40 (28) 58
==== === ===
As of December 31, 2000 and 1999, investment securities of approximately
$1,978,000 and $8,010,000 respectively, were pledged as collateral to secure
public fund deposits and for other purposes required or permitted by law.
Public funds approximated $29,868,000 and $28,397,000 at December 31, 2000 and
1999, respectively.
A-23
The amortized cost and approximate fair value of investment securities as
of December 31, 2000, by contractual maturity, are shown as follows. Expected
maturities will differ from contractual maturities because issuers may have
the right to call or repay obligations with or without call or prepayment
penalties.
Amortized Fair
Cost Value
--------- ------
(in thousands)
Investment Securities Available for Sale:
Due in 1 year or less.......................................... $ 6,545 6,531
Due after 1 year through 5 years............................... 30,722 31,057
Due after 5 years through 10 years............................. 3,964 4,007
Due after 10 years............................................. 18,931 19,163
------- ------
Total...................................................... $60,162 60,758
======= ======
Investment Securities Held to Maturity:
Due in 1 year or less.......................................... $ 1,647 1,646
Due after 1 year through 5 years............................... 8,587 8,592
Due after 5 years through 10 years............................. 1,676 1,720
Due after 10 years............................................. 14,011 14,276
------- ------
Total...................................................... $25,921 26,234
======= ======
3. Loans
A summary of the respective loan categories as of December 31, 2000 and
1999, follows:
2000 1999
-------- -------
(in thousands)
Real estate loans.............................................. $206,874 186,872
Commercial and agricultural loans.............................. 84,485 80,260
Loans to individuals........................................... 20,196 13,866
Other loans.................................................... 526 1,093
-------- -------
Total...................................................... $312,081 282,091
======== =======
Total nonperforming loans and assets at December 31, 2000 and 1999, were:
2000 1999
------ -----
(in
thousands)
Impaired loans and leases:
Nonaccrual....................................................... $2,042 2,874
Restructured..................................................... -- 515
------ -----
Total impaired loans and leases................................ 2,042 3,389
Loans and leases past due 90 days and more......................... 910 1,426
------ -----
Total nonperforming loans...................................... 2,952 4,815
Other real estate owned............................................ 571 150
------ -----
Total nonperforming assets..................................... $3,523 4,965
====== =====
The average balances of nonperforming loans for the years ended December
31, 2000 and 1999, were $4,302,000 and $3,173,000, respectively. The allowance
for credit losses related to nonperforming loans at December 31, 2000 and
1999, was $339,000 and $1,212,000, respectively. Nonperforming loans of
$351,000 and $1,163,000 at December 31, 2000 and 1999, respectively, were not
subject to a related allowance for credit losses because of the net realizable
value of loan collateral, guarantees and other factors. The effect of
nonaccrual and restructured loans on interest income for each of the three
years ended December 31, 2000, 1999, and 1998 was:
A-24
2000 1999 1998
---- ---- ----
(in thousands)
Interest income:
As originally contracted....................................... $430 328 126
As recognized.................................................. 12 70 17
---- --- ---
Reduction of interest income................................. $418 258 109
==== === ===
4. Allowance for Loan Losses
Changes in the allowance for loan losses for the years ended December 31,
2000, 1999, and 1998 were as follows:
2000 1999 1998
------- ------ -----
(in thousands)
Balance at beginning of year............................ $ 4,006 2,177 1,816
Provision for loan losses............................... 892 3,628 1,179
Recoveries on loans previously charged off.............. 221 60 22
Loans charged off....................................... (2,186) (2,375) (840)
Allowance of Midwest at date of acquisition............. -- 516 --
------- ------ -----
Balance at end of year.................................. $ 2,933 4,006 2,177
======= ====== =====
5. Loans to Related Parties
Certain directors and officers of the Company, including their immediate
families and companies in which they are principal owners, were loan customers
of the Company's subsidiaries. All loans to this group were made in the
ordinary course of business at prevailing terms and conditions. The loan
activity of this group, including loans as of December 31, 2000 and 1999, was
as follows:
2000 1999
------- ------
(in thousands)
Aggregate balance at beginning of year........................... $ 9,295 7,624
Advances......................................................... 19,580 13,005
Payments......................................................... 14,614 11,915
Acquisition balances............................................. -- 581
------- ------
Aggregate balance at end of year................................. $14,261 9,295
======= ======
6. Premises and Equipment
A summary of premises and equipment as of December 31, 2000 and 1999 was as
follows:
2000 1999
------- ------
(in thousands)
Land and improvements............................................ $ 997 915
Building and improvements........................................ 6,777 6,770
Furniture and equipment.......................................... 6,696 6,525
------- ------
Total office properties and equipment at cost................ 14,470 14,210
Less accumulated depreciation.................................... 7,580 7,415
------- ------
Total........................................................ $ 6,890 6,795
======= ======
A-25
7. Deposits
The scheduled maturities of certificate accounts are as follows as of
December 31, 2000:
(in thousands)
2001............................................................. $139,640
2002............................................................. 42,859
2003............................................................. 22,004
2004............................................................. 5,391
2005............................................................. 1,724
Thereafter....................................................... 737
--------
Total........................................................ $212,355
========
Time deposits in excess of $100,000 approximated $33,312,000 and
$26,181,000 as of December 31, 2000 and 1999, respectively. Interest expense
on such deposits for the years ended December 31, 2000, 1999, and 1998 was
approximately $1,305,000, $1,233,000, and $1,189,000, respectively.
8. Federal Home Loan Bank Advances
At December 31, 2000 and 1999, Federal Home Loan Bank (FHLB) advances
consisted of the following:
Weighted- Weighted-
Average Average
2000 interest rate 1999 interest rate
------- ------------- ------ -------------
(in thousands)
Maturity in year ending:
2000................................. -- -- 34,808 5.93
2001................................. $28,308 6.66 3,808 6.34
2002................................. 21,308 6.64 5,808 5.51
2003................................. 4,308 5.88 11,808 5.37
2004................................. -- -- -- --
2005................................. -- -- -- --
Thereafter........................... 21,126 5.45 7,189 5.74
------- ------
Total............................ $75,050 6.27 63,421 5.79
======= ======
Advances from the FHLB are secured by stock in the FHLB. In addition, the
bank subsidiaries have agreed to maintain unencumbered additional security in
the form of certain residential mortgage loans aggregating not less than 120
percent or 135 percent of outstanding advances.
Many of the advances listed above have call provisions which allow the FHLB
to request that the advance be paid back or refinanced at the rates then being
offered by the FHLB. Call provisions are not included in the above listed
advances.
9. Notes Payable
The notes payable balance at December 31, 2000, consists of $5,150,000 in
advances on a revolving line of credit and $8,050,000 on a term note, both
with an unaffiliated bank. Both notes have a variable interest rate at 3/8
below the lender's prime rate. Interest is payable quarterly. During the year
2000, the interest rate ranged from 8.125 percent to 9.125 percent. The
weighted average interest paid on the notes payable for the years ended
December 31, 2000, 1999, and 1998 was 9.07%, 7.70%, and 8.05%, respectively.
Both notes are secured by all of the common stock of the subsidiaries. The
revolving line of credit has a maximum limit of $9,000,000 and matures June
30, 2001. The term loan calls for annual payments of $1,350,000 in each of the
years 2001, 2002, and 2003. The balance of the loan matures December 31, 2004.
During 2000, the Company made principal payments of $950,000 on the term loan.
A-26
10. Fair Value of Financial Instruments
The fair value of the Company's financial instruments as of December 31,
2000 and 1999, were as follows:
Carrying Fair
2000 Value Value
- ---- -------- -------
(in thousands)
Financial assets:
Cash and due from banks........................................ $ 10,544 10,544
Interest-bearing deposits with banks........................... 3,818 3,818
Federal funds sold............................................. 1,155 1,155
Investment securities.......................................... 86,679 86,992
Loans, net..................................................... 309,148 304,818
Loan pool participations....................................... 74,755 74,755
Accrued interest receivable.................................... 5,201 5,201
Financial liabilities:
Deposits....................................................... $370,144 373,052
Federal funds purchased........................................ 2,345 2,345
Federal Home Loan Bank advances................................ 75,050 75,902
Notes payable.................................................. 13,200 13,200
Accrued interest payable....................................... 1,901 1,901
Carrying Fair
1999 Value Value
- ---- -------- -------
(in thousands)
Financial assets:
Cash and due from banks........................................ $ 13,354 13,354
Interest-bearing deposits with banks........................... 1,700 1,700
Federal funds sold............................................. 7,865 7,865
Investment securities.......................................... 89,975 89,822
Loans, net..................................................... 278,085 275,123
Loan pool participations....................................... 67,756 67,756
Accrued interest receivable.................................... 4,719 4,719
Financial liabilities:
Deposits....................................................... $348,672 349,236
Federal funds purchased........................................ 2,965 2,965
Federal Home Loan Bank advances................................ 63,421 62,616
Notes payable.................................................. 18,000 18,000
Accrued interest payable....................................... 1,386 1,386
The recorded amount of cash and due from banks, interest-bearing deposits
with banks, and federal funds sold approximates fair value due to the short-
term nature of these instruments.
The estimated fair value of investment securities has been determined using
available quoted market prices.
The recorded amount of the loan pool participation approximates fair value
due to the characteristics of the loan pool participation. Any additional
value attained in the loan pool participation over purchase cost is directly
attributable to the expertise of the Servicer to collect a higher percentage
of the book value of loans in the pools over the percentage paid.
Deposit liabilities with no stated maturities have an estimated fair value
equal to the recorded balance. Deposits with stated maturities have been
valued using a present value discounted cash flow with a discount rate
approximating the current market rate for similar deposits. The fair value
estimate does not include the benefit
A-27
that results from the low-cost funding provided by the deposit liabilities
compared to the cost of borrowing funds in the market. The Company believes
the value of these depositor relationships to be significant.
The recorded amount of federal funds purchased approximates fair value due
to the short-term nature of these instruments.
The estimated fair value of the Federal Home Loan Bank advances was
determined using a present value discounted cash flow with a discount rate
approximating the current market rate for similar borrowings.
The recorded amount of the notes payable approximates fair value as a
result of the variable rate of these instruments.
11. Income Taxes
Income tax expense (benefit) for the years ended December 31, 2000, 1999
and 1998, is as follows:
2000 Federal State Total
- ---- ------- ----- -----
(in thousands)
Current.................................................... $1,225 69 1,294
Deferred................................................... 448 17 465
------ --- -----
$1,673 86 1,759
====== === =====
1999 Federal State Total
- ---- ------- ----- -----
(in thousands)
Current.................................................... $1,322 307 1,629
Deferred................................................... (360) 1 (359)
------ --- -----
$ 962 308 1,270
====== === =====
1998 Federal State Total
- ---- ------- ----- -----
(in thousands)
Current.................................................... $2,297 370 2,667
Deferred................................................... (57) (27) (84)
------ --- -----
$2,240 343 2,583
====== === =====
Income tax expense differs from the amount computed by applying the United
States federal income tax rate of 34 percent in 2000, 1999, and 1998, to
income before income tax expense. The reasons for these differences are as
follows:
2000 1999 1998
------ ----- -----
(in thousands)
Provision at statutory rate............................... $1,958 1,187 2,450
State franchise tax (net of federal tax benefit).......... 57 203 227
Nontaxable interest income................................ (226) (147) (113)
Nondeductible goodwill amortization....................... 86 28 21
Life insurance cash value increase........................ (35) (26) (26)
Other, net................................................ (81) 25 24
------ ----- -----
Total................................................. $1,759 1,270 2,583
====== ===== =====
A-28
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 2000 and
1999, are as follows:
2000 1999
------- ------
(in thousands)
Deferred tax assets:
Allowance for loan losses...................................... $ 570 1,039
Deferred compensation.......................................... 116 83
Premium amortization........................................... 90 83
Unrealized loss on available for sale securities............... -- 302
------- ------
Gross deferred tax assets.................................... 776 1,507
------- ------
Deferred tax liabilities:
Depreciation and amortization.................................. (333) (329)
Federal Home Loan Bank stock................................... (110) (110)
Deferred loan fees............................................. (68) (83)
Purchase accounting adjustments................................ (771) (707)
Unrealized gain on available for sale securities............... (223) --
Other.......................................................... (4) (8)
------- ------
Gross deferred tax liabilities............................... (1,509) (1,237)
------- ------
Net deferred tax (liability) asset........................... $ (733) 270
======= ======
Based upon the Company's level of historical taxable income and anticipated
future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences.
12. Stock Incentive Plan
The Company has a stock incentive plan under which up to 750,000 shares of
common stock are reserved for issuance pursuant to options or other awards
which may be granted to officers, key employees and certain nonaffiliated
directors of the Company. The exercise price of each option equals the market
price of the Company's stock on the date of grant. The option's maximum term
is ten years, with vesting occurring at the rate of thirty-three percent on
the one-year anniversary date of the grant, sixty-six percent vesting on the
two-year anniversary, and one hundred percent vesting on the three-year
anniversary date of the grant. The Company applies APB Opinion No. 25 and
related interpretations in accounting for this plan. Accordingly, no
compensation cost has been recognized for its stock options in the financial
statements. Had compensation cost for the Company's stock incentive plan been
determined consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company's net income and net income per share would have
been reduced to the pro forma amounts indicated below:
2000 1999
------ -----
(in
thousands)
Net income:
As reported........................................................ $4,001 2,222
Pro forma.......................................................... 3,876 1,976
Net income per share:
As reported--basic................................................. $ 0.99 0.58
As reported--diluted............................................... 0.99 0.56
Pro forma--basic................................................... 0.96 0.51
Pro forma--diluted................................................. 0.96 0.50
A-29
The fair value of each option grant has been estimated using the Black-
Scholes option-pricing model with the following weighted-average assumptions
used for grants in 2000 and 1999, respectively: dividend yield of 3.50 percent
for 2000 and 1999; excepted volatility of 26 percent for 2000 and 22 percent
for 1999; risk free interest rates of 5.16 percent for 2000 and 6.23 percent
for 1999; and expected lives of 7.5 years for both years.
A summary of the status of the Company's stock incentive plan as of
December 31, 2000 and 1999, and the activity during the years ended on those
dates is presented below:
2000 1999
------------------- ---------------------
Exercise Exercise
Shares Price Shares Price
------- ----------- ------- -------------
Net income:
Balance at beginning of year......... 420,232 $3.33-22.00 496,297 $ 7.50-22.00
Granted.............................. 69,778 7.75-8.375 36,500 12.00-15.063
Granted from acquisition............. -- -- 14,125 3.33-9.08
Exercised............................ 7,300 3.33 54,821 7.50-11.10
Forfeited............................ 20,608 7.50-22.00 71,869 11.10-22.00
------- -------
Outstanding at end of year........... 462,102 $7.50-22.00 420,232 $ 3.33-22.00
------- -------
Options exercisable at year end...... 336,265 $7.50-22.00 336,265 $ 3.33-22.00
Weighted-average fair value of
options granted during the year .... $ 1.98 $ 4.66
13. Employee Benefit Plans
The Company maintains an employee stock ownership plan ("ESOP") covering
substantially all employees meeting minimum age and service requirements.
Contributions are determined by the board of directors of each subsidiary.
Contributions relating to the plan were $205,000, $183,000, and $161,000 for
2000, 1999, and 1998, respectively. As of December 31, 2000 and 1999 the ESOP
owned 580,170 and 501,184 shares of the Company's common stock, respectively.
A 401(K) plan was adopted by the Company in 1994. The Company does not make
contributions to this Plan. The Company has also provided deferred
compensation plans to certain executive officers, which provide for a series
of payments to be made after retirement. The present value of the future
payments is being accrued over the respective employees remaining active
service periods. The total expense related to these plans was $88,000,
$35,000, and ($19,000), for the years ended December 31, 2000, 1999, and 1998,
respectively.
The Company provides no material post-retirement benefits.
14. Regulatory Capital Requirements
The Company is subject to various capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possible additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the
Company's assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company's capital
amounts and classifications are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors. Quantitative
measures established by regulation to ensure capital adequacy require the
Company to maintain minimum amounts and ratios (set forth in the following
table) of total capital and Tier 1 capital to risk-weighted assets and of Tier
1 capital to average assets. As of December 31,
A-30
2000 and 1999, the Company and its subsidiary banks met all capital adequacy
requirements to which they are subject. The Company and its bank subsidiaries
actual capital amounts and ratios are also presented in the following table.
To Be Well
Capitalized Under
Minimum for Catital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------- --------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ----------- --------- ---------- --------
(in thousands)
As of December 31, 2000:
Total capital (to risk-
weighted assets):
Consolidated............ $40,550 11.4% $ 28,435 8.0% N/A N/A
Mahaska State Bank...... 16,380 10.6 12,313 8.0 $ 15,391 10.0%
Central Valley Bank..... 9,867 12.7 6,201 8.0 7,751 10.0
Pella State Bank........ 5,360 17.8 2,411 8.0 3,014 10.0
Midwest Federal......... 13,107 15.5 6,769 8.0 8,461 10.0
Tier 1 capital (to risk-
weighted assets):
Consolidated............ $37,617 10.6% $ 14,218 4.0% N/A N/A
Mahaska State Bank...... 15,034 9.8 6,156 4.0 $ 9,235 6.0%
Central Valley Bank..... 9,264 12.0 3,101 4.0 4,651 6.0
Pella State Bank........ 5,040 16.7 1,205 4.0 1,808 6.0
Midwest Federal......... 12,582 14.9 3,384 4.0 5,077 6.0
Tier 1 capital (to
average assets):
Consolidated............ $37,617 7.8% $ 14,453 3.0% N/A N/A
Mahaska State Bank...... 15,034 8.9 5,042 3.0 $ 8,404 5.0%
Central Valley Bank..... 9,264 9.7 2,872 3.0 4,787 5.0
Pella State Bank........ 5,040 16.8 901 3.0 1,502 5.0
Midwest Federal......... 12,582 7.1 5,303 3.0 8,838 5.0
As of December 31, 1999:
Total capital (to risk-
weighted assets):
Consolidated............ $41,391 12.7% $ 26,182 8.0% N/A N/A
Mahaska State Bank...... 15,913 11.4 11,217 8.0 $ 14,022 10.0%
Central Valley Bank..... 8,849 13.9 5,108 8.0 6,385 10.0
Pella State Bank........ 5,083 22.9 1,774 8.0 2,217 10.0
Midwest Federal......... 11,953 14.1 6,798 8.0 8,497 10.0
Tier 1 capital (to risk-
weighted assets):
Consolidated............ $37,385 11.4% $ 13,091 4.0% N/A N/A
Mahaska State Bank...... 14,364 10.2 5,609 4.0 $ 8,413 6.0%
Central Valley Bank..... 8,352 13.1 2,554 4.0 3,831 6.0
Pella State Bank........ 4,795 21.6 887 4.0 1,330 6.0
Midwest Federal......... 11,430 13.5 3,399 4.0 5,098 6.0
Tier 1 capital (to
average assets):
Consolidated............ $37,385 7.9% $ 14,276 3.0% N/A N/A
Mahaska State Bank...... 14,364 8.5 5,077 3.0 $ 8,462 5.0%
Central Valley Bank..... 8,352 9.0 2,781 3.0 4,635 5.0
Pella State Bank........ 4,795 19.1 752 3.0 1,253 5.0
Midwest Federal......... 11,430 6.7 5,150 3.0 8,583 5.0
A-31
15. Business Segments
The Company's wholly-owned subsidiaries, Mahaska State Bank ("MSB"),
Central Valley Bank ("CVB"), Pella State Bank ("PSB") and Midwest Federal
Savings and Loan Association of Eastern Iowa ("MFS"), have been identified as
reportable operating segments in accordance with the provisions of SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information."
The Company evaluates performance and allocates resources based on the
segment's net income or loss, total assets, net interest margin (FTE), return
on average assets and return on average equity. The segments follow generally
accepted accounting principles as described in the summary of significant
accounting policies.
Each subsidiary is managed separately with its own president, who reports
directly to the Company's chief operating decision maker, and board of
directors.
The following table sets forth certain information about the reported
profit or loss and assets for each of the Company's reportable segments.
MIC Holding
MSB CVB PSB MFS Financial Co. Elim. Total
------- ------- ------ ------- --------- ------- ------- -------
(in thousands)
At or for the year ended
December 31, 2000:
Total interest income... $14,213 7,671 2,481 13,146 263 1,065 (13) 38,826
Total interest expense.. 6,575 3,752 1,328 8,372 10 1,403 (13) 21,427
Provisions for loan
losses................. 547 180 55 48 62 -- -- 892
Total other income...... 1,510 596 98 550 17 405 (610) 2,566
Goodwill and other
intangible amortization
....................... 101 424 -- 600 -- -- -- 1,125
Total other expense..... 4,413 2,483 823 3,049 359 1,671 (610) 12,188
Income tax expense...... 1,201 458 141 435 (51) (425) -- 1,759
Net income.............. 2,886 970 232 1,192 (100) (1,179) -- 4,001
Total assets............ 179,327 108,344 34,996 183,418 1,912 7,883 (668) 515,212
Net interest margin
(FTE).................. 4.91% 4.35% 4.02% 2.91% 8.46% (4.55)% 3.87%
Return on average
assets................. 1.71 0.97 0.77 0.65 (3.49) (12.11) 0.81
Return on average
equity................. 18.69 7.62 4.72 6.10 (3.81) (2.41) 8.18
At or for the year ended
December 31, 1999:
Total interest income... $14,703 6,737 1,616 3,114 1,574 1,484 (398) 28,830
Total interest expense.. 5,972 3,255 786 1,907 394 1,279 (398) 13,195
Provisions for loan
losses................. 712 335 130 12 2,439 -- -- 3,628
Total other income...... 1,488 518 70 86 2 200 (417) 1,947
Goodwill and other
intangible amortization
....................... 101 433 -- 156 -- 21 -- 711
Total other expense..... 4,114 2,257 729 724 976 1,368 (417) 9,751
Income tax expense...... 1,874 353 17 113 (759) (328) -- 1,270
Net income.............. 3,418 622 24 288 (1,474) (656) -- 2,222
Total assets............ 165,188 97,064 26,182 182,934 4,432 68,353 (57,964) 486,189
Net interest margin
(FTE).................. 5.54% 4.18% 4.24% 3.03% 11.57% 1.48% 4.89%
Return on average
assets................. 2.01 0.67 0.12 0.64 (14.62) (4.11) 0.64
Return on average
equity................. 21.45 4.97 0.51 5.90 (31.04) (1.56) 5.29
At or for the year ended
December 31, 1998:
Total interest income... $14,527 7,136 668 N/A 1,737 2,269 (371) 25,966
Total interest expense.. 6,044 3,144 234 N/A 365 1,074 (371) 10,490
Provisions for loan
losses................. 500 132 145 N/A 402 -- -- 1,179
Total other income...... 1,505 496 19 N/A 48 279 (490) 1,857
Goodwill and other
intangible amortization
....................... 104 445 -- N/A -- 63 -- 612
Total other expense..... 3,856 2,290 551 N/A 694 1,435 (490) 8,336
Income tax expense...... 1,955 595 (90) N/A 110 13 -- 2,583
Net income.............. 3,573 1,026 (153) N/A 214 (37) -- 4,623
Total assets............ 169,524 90,951 15,583 N/A 13,193 55,407 (46,269) 298,389
Net interest margin
(FTE).................. 5.58% 5.11% 5.15% N/A 13.37% 10.10% 6.04%
Return on average
assets................. 2.17 1.18 (1.60) N/A 2.07 (0.26) 1.65
Return on average
equity................. 23.55 8.41 (3.16) N/A 4.14 (0.10) 12.16
A-32
16. Dividend Restrictions
The Company derives a substantial portion of its cash flow, including that
available for dividend payments to shareholders, from its bank subsidiaries in
the form of dividends received. The bank subsidiaries are subject to certain
statutory and regulatory restrictions that affect dividend payments. Based on
minimum regulating guidelines as published by those regulators, the maximum
dividends which could be paid by the bank subsidiaries to the Company at
December 31, 2000, without prior regulatory approval, approximated $6,458,000.
17. Commitments and Contingencies
The Company is a party to financial instruments with off balance sheet risk
in the normal course of business to meet the financing needs of its customers,
which include commitments to extend credit. The Company's exposure to credit
loss in the event of nonperformance by the other party to the commitments to
extend credit is represented by the contractual amount of those instruments.
The Company uses the same credit policies in making commitments as it does for
on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any conditions established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. As of December 31, 2000
and 1999, outstanding commitments to extend credit totaled approximately
$32,190,000 and $24,092,000, respectively.
Commitments under standby letters of credit outstanding aggregated
$3,351,000 and $2,845,000 as of December 31, 2000 and 1999, respectively. The
Company does not anticipate any losses as a result of these transactions.
The Company is involved in various legal actions and proceedings arising
from the normal course of operations. Management believes, based upon known
facts and the advice of legal counsel, that the ultimate liability, if any,
not covered by insurance, arising from all legal actions and proceedings will
not have a material adverse effect upon the consolidated financial position of
the Company.
A-33
18. Mahaska Investment Company (Parent Company Only)
Balance Sheets
December 31
----------------
2000 1999
-------- ------
(in thousands)
Assets:
Cash on deposit at bank subsidiary............................ $ 1 961
Cash at other institutions.................................... 113 38
-------- ------
Cash and cash equivalents................................... 114 999
Investment securities......................................... 622 892
Loans......................................................... 786 996
Loan pool participations...................................... 4,569 8,351
Investments in:
Bank subsidiaries........................................... 53,646 51,792
Bank-related subsidiary..................................... 1,604 3,799
Premises and equipment........................................ 726 690
Other assets.................................................. 1,084 834
-------- ------
Total assets.............................................. $ 63,151 68,353
======== ======
Liabilities and Shareholders' Equity:
Notes payable................................................. $ 13,200 18,000
Accrued expenses payable and other liabilities................ 656 118
-------- ------
Total liabilities......................................... 13,856 18,118
-------- ------
Shareholders' equity:
Common stock................................................ 24,564 24,564
Capital surplus............................................. 13,127 13,192
Treasury stock at cost...................................... (11,869) (8,525)
Retained earnings........................................... 23,102 21,511
Accumulated other comprehensive income (loss)............... 371 (507)
-------- ------
Total shareholders' equity................................ 49,295 50,235
-------- ------
Total liabilities and shareholders' equity................ $ 63,151 68,353
======== ======
A-34
Statements of Income
Year ended
December 31
--------------------
2000 1999 1998
------ ----- -----
(in thousands)
Income:
Dividends from subsidiaries............................... $4,350 3,800 4,600
Interest income and discount on loan pool participations.. 948 1,049 1,878
Management, audit, and loan review fees................... 281 156 236
Other operating income.................................... 241 480 433
------ ----- -----
Total income........................................... 5,820 5,485 7,147
------ ----- -----
Expense:
Salaries and benefits expense............................. 986 767 859
Interest on short-term borrowings......................... 1,403 1,280 1,074
Other operating expense................................... 684 621 638
------ ----- -----
3,073 2,668 2,571
------ ----- -----
Income before income tax (benefit) expense and equity in
undistributed earnings of subsidiaries................... 2,747 2,817 4,576
Income tax (benefit) expense.............................. (425) (327) 13
------ ----- -----
Income before equity in undistributed (dividends in
excess of earnings) earnings of subsidiaries............ 3,172 3,144 4,563
Equity in undistributed (dividends in excess of earnings)
earnings of subsidiaries................................. 829 (922) 60
------ ----- -----
Net income............................................. $4,001 2,222 4,623
====== ===== =====
A-35
Statements of Cash Flows
Year ended December 31
------------------------
2000 1999 1998
-------- ------ ------
(in thousands)
Cash flows from operating activities:
Net income........................................... $ 4,001 2,222 4,623
-------- ------ ------
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed (dividends in excess of
earnings) earnings of subsidiaries................. (829) 922 (60)
Depreciation and amortization....................... 70 86 123
Investment securities gains......................... (84) -- (26)
(Increase) decrease in other assets................. (250) 1,042 259
Increase (decrease) in other liabilities............ 561 (1,009) 24
-------- ------ ------
Total adjustments................................... (532) 1,041 320
-------- ------ ------
Net cash provided by operating activities........... 3,469 3,263 4,943
-------- ------ ------
Cash flows from investing activities:
Purchases of investment securities................... -- (515) (227)
Proceeds from investment securities sales............ 284 -- 175
Net decrease (increase) in loans..................... 210 6,515 (5,064)
Purchases of loan pool participations................ -- (3,972) (4,610)
Principal recovery on loan pool participations....... 3,782 3,228 4,737
Purchases of premises and equipment.................. (128) (70) (13)
Proceeds from sale of premises and equipment......... 22 -- --
Repayment of bank-related subsidiary equity.......... 2,095 -- --
Advances for acquistion costs........................ -- (432) --
-------- ------ ------
Net cash provided by (used in) investing activities. 6,265 4,754 (5,002)
-------- ------ ------
Cash flows from financing activities:
Advances on notes payable............................ 1,900 6,910 7,450
Principal payments on notes payable.................. (6,700) (5,910) (4,500)
Dividends paid....................................... (2,410) (2,310) (2,048)
Purchases of treasury stock.......................... (3,433) (6,594) (1,837)
Proceeds from stock options exercised................ 24 555 689
-------- ------ ------
Net cash used in financing activities............... (10,619) (7,349) (246)
-------- ------ ------
Net (decrease) increase in cash and cash
equivalents........................................ (885) 668 (305)
Cash and cash equivalents at beginning of year....... 999 331 636
-------- ------ ------
Cash and cash equivalents at end of year............. $ 114 999 331
======== ====== ======
A-36
The Board of Directors
Mahaska Investment Company:
We have audited the accompanying consolidated balance sheets of Mahaska
Investment Company and subsidiaries as of December 31, 2000 and 1999, and the
related statements of income, changes in shareholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2000. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on the consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mahaska
Investment Company and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
KPMG LLP
February 9, 2001
Des Moines, Iowa
A-37
THE DIRECTORS AND OFFICERS
OF MAHASKA INVESTMENT COMPANY
CORDIALLY INVITE YOU TO ATTEND THE
ANNUAL MEETING OF SHAREHOLDERS
THURSDAY, APRIL 26, 2001, 10:30 A.M. CDT
ELMHURST COUNTRY CLUB
2214 SOUTH 11TH STREET
OSKALOOSA, IA 52577
- --------------------------------------------------------------------------------
You can vote in one of three ways: 1) By Mail, 2) By Phone, 3) By Internet.
See the reverse side of this sheet for instructions.
IF YOU ARE NOT VOTING BY TELEPHONE OR INTERNET, COMPLETE BOTH SIDES OF
---
PROXY CARD, DETACH AND RETURN IN THE ENCLOSED ENVELOPE TO:
Illinois Stock Transfer Co.
209 West Jackson Boulevard, Suite 903
Chicago, Illinois 60606
- --------------------------------------------------------------------------------
DETACH PROXY CARD HERE
- --------------------------------------------------------------------------------
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR PROPOSALS 1 AND 2.
Dated:_________________________________
Signature:_____________________________
Signature if held jointly:_____________
Please sign exactly as name appears. When signing as an attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other authorized
officer. If a partnership, please sign in partnership name by authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD USING THE ENCLOSED ENVELOPE.
DETACH ATTENDANCE CARD HERE AND MAIL WITH PROXY
- --------------------------------------------------------------------------------
MAHASKA INVESTMENT COMPANY
If you plan to personally attend the Annual Meeting of Shareholders on April 26,
2001, please check the box and list the names of the attendees below.
Return this stub in the enclosed envelope with your completed proxy card.
I/We do plan to attend the Special Meeting. [_]
Names of persons attending:
_________________________________________________________________________
_________________________________________________________________________
- --------------------------------------------------------------------------------
- ------------------------------ TO VOTE BY MAIL -------------------------------
To vote by mail, complete both sides, sign and date the proxy card below. Detach
the card below and return it in the envelope provided.
- --------------------------- TO VOTE BY TELEPHONE -----------------------------
Your telephone vote is quick, confidential and immediate. Just follow these
easy steps:
1. Read the accompanying Proxy Statement.
2. Using a Touch-Tone telephone, call Toll Free 1-800-555-8140 and follow
the instructions.
3. When asked for your Voter Control Number, enter the number printed just
above your name on the front of the proxy card below.
Please note that all votes cast by telephone must be submitted prior to midnight
Central Time, April 24, 2001.
Your Telephone vote authorizes the named proxies to vote your shares to the same
extent as if you marked, signed, dated and returned the proxy card.
If you Vote by Telephone, Please Do Not Return Your Proxy Card By Mail.
- ---------------------------- TO VOTE BY INTERNET -----------------------------
Your Internet vote is quick, confidential and your vote is immediately
submitted. Just follow these easy steps:
1. Read the accompanying Proxy Statement.
2. Visit our Internet voting site at http://www.eproxyvote.com/ist-mhkcm/
and follow the instructions on the screen.
3. When prompted for your Voter Control Number, enter the number printed
just above your name on the front of the proxy card.
Please note that all votes cast by telephone must be submitted prior to midnight
Central Time, April 24, 2001.
Your Internet vote authorizes the named proxies to vote your shares to the same
extent as if you marked, signed, dated and returned the proxy card.
This is a "secured" web page site. Your software and/or Internet provider must
be "enabled" to access this site. Please call your software or Internet provider
for further information.
If You Vote By Internet, Please Do Not Return Your Proxy Card By Mail.
- --------------------------------------------------------------------------------
REVOCABLE PROXY MAHASKA INVESTMENT COMPANY
- --------------------------------------------------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned as a shareholder of record on February 22, 2001 hereby appoints
Charles S. Howard and David A. Meinert as Proxies, each with the power to
appoint substitute and hereby authorizes them to represent and to vote, as
designated below, all the shares of Common Stock of Mahaska Investment Company
which undersigned is entitled to vote at the Annual Meeting of Shareholders to
be held on April 26, 2001, or any adjournment thereof.
- --------------------------------------------------------------------------------
Proposal 1 - Election of Directors
[_] For all the nominees listed below (except as marked to the
contrary below)
[_] Withhold authority to vote all the nominees below
(Instructions: to withhold authority to vote for any
individual nominee, strike through the nominee's name.)
One year term: 01 James G. Wake Two year term: 02 Michael R. Welter Three year term: 04 Richard R. Donahue
03 Edward C Whitham, Jr. 05 John P. Pothoven
06 John W. N. Steddom
Proposal 2 - Ratify the Appointment of KPMG LLP as Independent Auditors for the
Company
[_] For [_] Against [_] Abstain
In their discretion, the proxies are authorized to vote upon such
other business as may properly come before the meeting.
(to be signed on the other side)