UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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.
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pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
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[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
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previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
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Notes:
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 30, 2002
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
Tuesday, April 30, 2002, 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 25, 2002,
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 22, 2002
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 30, 2002, 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 25, 2002, at which time the Company had issued
and outstanding 3,872,594 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 22, 2002.
2
PROPOSAL 1
Election Of Directors
Three 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 Board of Directors set the size for the current
Board of Directors at nine individuals.
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 2002 Annual Meeting of Shareholders are identified in the following table.
The term for which nominees Charles S. Howard, David A. Meinert, and James G.
Wake are nominated will expire at the 2005 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 25, 2002
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
25, 2002, is set forth on pages 13 and 14.
3
Present
Term
First Expires at
Became a Annual
Name and Principal Occupation for the last five years Director Meeting Age
- ----------------------------------------------------- -------- ---------- ---
Nominees:
Charles S. Howard................................................................................... 1988 2002 46
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, Inc. since January 1998
David A. Meinert.................................................................................... 1991 2002 48
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, Inc. since March 2000
James G. Wake....................................................................................... 2000 2002 62
General Manager, Smith-Wake Investments, Inc., Oskaloosa, Iowa. This is an agri business involved
in feed, grain, and livestock production.
Other Directors:
Richard R. Donohue.................................................................................. 1999 2004 52
Managing Partner, Theobald, Donohue & Thompson, Oskaloosa, Iowa. This is a certified public
accounting firm in which he is involved in all phases of the practice.
William D. Hassel................................................................................... 1999 2003 53
President and, since April 2000, Vice Chairman of Midwest Federal Savings and Loan Association
of Eastern Iowa(1)
John P. Pothoven.................................................................................... 1994 2004 59
President and, since January 1998, Chairman of Mahaska State Bank (1)
John W. N. Steddom.................................................................................. 1975 2004 71
Civil Engineer for the County of Keokuk, Iowa from 1988 to February 1995,
Retired
Michael R. Welter................................................................................... 2000 2003 51
President of M&M Enterprises, Sigourney, Iowa, doing general commercial contracting work in
Southeast Iowa, and President of Sigourney Fast Stop, a convenience store located in Sigourney,
Iowa
Edward C. Whitham................................................................................... 2000 2003 62
President, Financial Management Accounting, Inc., Burlington, Iowa. This is an accounting, tax
preparation, and pension administration firm in which he is involved in all phases of the practice.
- --------
(1) Mahaska State Bank, Midwest Federal Savings and Loan Association of Eastern
Iowa, Central Valley Bank, Pella State Bank, and MIC Financial, Inc. are
subsidiaries of the Company (all located in Iowa).
4
MANAGEMENT
Executive Officers
Name Age Position with the Company
---- --- -------------------------
Charles S. Howard 46 Chairman, President and Chief Executive Officer
David A. Meinert. 48 Executive Vice President and Chief Financial Officer
John P. Pothoven. 59 Chairman and President of Mahaska State Bank
William D. Hassel 53 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 2001. 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 2002. 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. 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, Inc. effective March 1, 2000. Mr. Meinert was the
Auditor for Mahaska State Bank from 1978 to 1984.
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 its merger with the Company in September 1999.
5
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 and one special meeting of the Board of
Directors of the Company were held during 2001. Each director attended at least
75 percent of the Board meetings and any meetings of committees on which he
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 1998 Stock Incentive Plan pursuant to a formula
based on the financial performance of the Company for the fiscal year. On April
26, 2001, each non-affiliated director of Mahaska Investment Company and its
subsidiaries was granted a non-qualified stock option for 1,639 shares at an
option price of $9.76 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).
The Company offers the option to the directors to defer receipt of all or a
portion of the cash which would have been paid as directors fees. The deferred
fees are invested by the Company, and the director is an unsecured general
creditor of the Company. At the time the deferral election is made, the
director specifies the amount of the fees to be deferred and the duration of
the deferral. The deferred fees are credited with interest based upon the
return on average tangible equity of the Company based upon an average of the
last three fiscal years.
Executive Compensation
The following table sets forth information concerning the annual and
long-term compensation of those persons who were at December 31, 2001, 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, 2001. No other executive officer was
paid more than $100,000 for any such year.
6
Summary Compensation Table
Annual Compensation
-------------------
Long-Term Compensation
Awards All Other
Name and Principal Position Year Salary(1) Bonus(2) Securities Underlying Options Compensation(3)
- --------------------------- ---- --------- -------- ----------------------------- ---------------
Charles S. Howard, 2001 $207,850 $21,665 4,000 $ 14,675(4)
Chairman, President and 2000 193,800 12,852 4,000 12,512(4)
Chief Executive Officer 1999 185,955 0 2,500 11,804(4)
David A. Meinert, 2001 $145,550 $15,306 4,000 $ 14,039(5)
Executive Vice President and 2000 135,700 9,072 3,750 10,450(5)
Chief Financial Officer 1999 129,580 0 2,000 9,734(5)
John P. Pothoven, 2001 $162,250 $ 0 4,000 $ 35,308(6)
Chairman and President 2000 147,700 7,500 3,750 29,751(6)
Mahaska State Bank 1999 142,025 0 2,000 26,822(6)
William D. Hassel, (9) 2001 $135,550 $13,500 4,000 $ 50,636(7)
Vice Chairman and President, 2000 129,600 5,606 3,750 45,274(7)
Midwest Federal Savings 1999 123,025 25,254 0 129,289(8)
- --------
(1) Amounts include director compensation of $6,150 from Mahaska Investment
Company, $6,175 from Mahaska State Bank, and $3,630 from Pella State Bank
for 1999, $6,100 from Mahaska Investment Company, $5,800 from Mahaska State
Bank, and $3,400 from Pella State Bank for 2000, and $6,150 from Mahaska
Investment Company, $5,800 from Mahaska State Bank, and $3,400 from Pella
State Bank for 2001 to Charles S. Howard; $6,150 from Mahaska Investment
Company and $3,430 from Pella State Bank for 1999, $6,100 from Mahaska
Investment Company and $3,600 from Pella State Bank for 2000, and $6,150
from Mahaska Investment Company and $3,400 from Pella State Bank for 2001
to David A. Meinert; $5,850 from Mahaska Investment Company and $6,175 from
Mahaska State Bank for 1999, $6,100 from Mahaska Investment Company and
$6,100 from Mahaska State Bank for 2000, and $6,150 from Mahaska Investment
Company and $6,100 from Mahaska State Bank to John P. Pothoven for 2001;
and $1,525 from Mahaska Investment Company for 1999, $6,100 from Mahaska
Investment Company for 2000, and $5,550 from Mahaska Investment Company for
2001 to William D. Hassel. For 2001, David A. Meinert elected to defer
$6,150 of directors fees under the Deferred Compensation Plan for directors
and John P. Pothoven elected to defer $6,100 of directors fees under such
Plan.
(2) Executive bonuses for Charles S. Howard, David A. Meinert, John P.
Pothoven, and William D. Hassel for 2001 were determined pursuant to the
"Performance Compensation Plan" described in the "REPORT ON EXECUTIVE
COMPENSATION FOR MAHASKA INVESTMENT COMPANY." 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 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 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; 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; and in 2001 to the accounts of
Charles S. Howard, David A. Meinert, John P. Pothoven, and
7
William D. Hassel in the amounts of $7,786, $5,500, $6,000, and $5,415,
respectively. Amounts include Midwest Federal Savings contributions to its
ESOP based upon a percentage of salary and bonus in 1999 of $9,289 to the
account of William D. Hassel. Amounts also include Company matching
contributions to the 401(k) plan for 2001 to the accounts of Charles S.
Howard, David A. Meinert, John P. Pothoven, and William D. Hassel in the
amounts of $3,519, $4,372, $4,448, and $3,101, respectively. The Company
matches 50 percent of employee contributions up to a maximum employee
contribution of 6 percent of compensation.
(4) Amount includes $2,761 for 1999, $3,051 for 2000, and $3,370 for 2001
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 $3,415 for 1999, $3,772 for 2000, and $4,167 for 2001
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 $20,106 for 1999, $22,601 for 2000, and $24,860 for 2001
contributed by the Company to a salary continuation plan pursuant to which
John P. Pothoven is to receive $85,000 per year for 15 years starting at
age 65.
(7) Amount includes $39,086 for 2000 and $42,120 for 2001 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 $120,000 cash payment in
consideration for the termination of his employment agreement.
(9) William D. Hassel participated in a defined benefit pension plan maintained
by Midwest Federal Savings prior to the merger of Midwest Federal Savings
into the Company on September 30, 1999. The pension plan was frozen upon
completion of the merger and no additional contributions to the plan will
be made by the Company. Mr. Hassel will receive benefits at the time and in
the amount as provided by the plan./ /
Stock Options
The following table sets forth information concerning the grant of stock
options under the Company's 1998 Stock Incentive Plan during the last fiscal
year.
Option Grants in Last Fiscal Year
Individual Grants
-----------------------------------------
Potential Realizable
Value at Assumed
% of Total Annual Rates of
Number of Options Stock Price
Shares Granted to Appreciation for Option
Underlying Employees Exercise Term(1)
- - Options in Fiscal Price Expiration -----------------------
Name Granted Year ($/Sh) Date 5% 10%
- ---- ---------- ---------- -------- ---------- ------- -------
Charles S. Howard 4,000 6.93% $11.25 12/31/11 $28,320 $71,720
David A. Meinert. 4,000 6.93% $11.25 12/31/11 $28,320 $71,720
John P. Pothoven. 4,000 6.93% $11.25 12/31/11 $28,320 $71,720
William D. Hassel 4,000 6.93% $11.25 12/31/11 $28,320 $71,720
- --------
(1) The amounts set forth represent the value that would be received by the
Named Executive Officers upon exercise of the option on the date before the
expiration date of the option based upon assumed annual growth rates in the
market value of the Company's shares of 5 percent and 10 percent, rates
prescribed by applicable SEC rules. Actual gains, if any, on stock option
exercises are dependent on the future performance of the Company's shares
and other factors such as the general condition of the stock market and the
timing of the exercise of the options.
8
Aggregated Option Exercises In Last Fiscal Year
And Fiscal Year-End Option Values
Value of Unexercised
Shares Number of Unexercised In-The-Money
Acquired on Value Options at FY-End(#) Options at FY-End($)
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ----------- -------- ------------------------- -------------------------
Charles S. Howard 0 0 72,420/7,530 $96,509/$10,711
David A. Meinert. 0 0 64,758/7,193 $99,931/$10,156
John P. Pothoven. 0 0 33,402/7,193 $28,745/$10,156
William D. Hassel 0 0 1,237/6,513 $ 4,113/$10,156
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 salary on the date of execution 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 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 Interlocks and Insider 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. At the start of the 2001 fiscal year,
the Compensation Committee consisted of John W. N. Steddom, James G. Wake, and
Michael R. Welter. The Committee as thus comprised held two meetings. All
members of the Committee attended both meetings. During the fiscal year,
Richard R. Donohue and Edward C. Whitham were added to the Committee. As thus
comprised, the Committee held one additional meeting. All members of the
Committee attended the meeting. All members of the Compensation Committee are
outside directors and there are no Compensation Committee interlocks.
9
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 reviewed the compensation of the President and
Executive Vice President and recommended an increase of 4.0 percent in the base
salary of the President and an increase of 7.4 percent in the base salary of
the Executive Vice President. The recommendations for the President and
Executive Vice President were based upon peer review data, levels of
responsibility, breadth of knowledge, prior experience, management
recommendations for other employees, cost of living, and performance.
Annual Incentive Bonus
For the 2001 fiscal year, the Company adopted a new "Performance
Compensation Plan" (the "Plan") for employees of the Company and its
subsidiaries. The Plan is designed to assist the Board of Directors and
management in communicating to the employees the goal of profitable growth.
Each employee participating in the Plan is eligible to be considered to
receive an annual bonus based upon pre-tax profits. At the bank subsidiary
level, the Plan focuses on pre-tax profits at the individual bank plus the
overall profitability of the Company. At the holding company level, the Plan
focuses on consolidated budgeted pre-tax profits for the holding company. For
the employees of the holding company, the Plan provides that a bonus pool will
be created in the amount of 2 percent of the consolidated budgeted pre-tax
profits for the Company. The size of the pool is then adjusted by a formula
upward or downward depending upon how actual profits compared to budget. The
amount of the pool is then allocated among three groups. The President and the
Executive Vice President receive an aggregate of 25 percent of the pool.
Additionally, the Board of Directors retains the discretion to deviate from the
Plan if warranted. The Compensation Committee recommended payment of the annual
incentive bonus to the President and Executive Vice President pursuant to the
Plan formula.
10
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 discretionary grants by the Compensation
Committee. The Compensation Committee takes into consideration the profits of
the Company during the most recent fiscal year, the profit trend line of the
Company, the position of the employee, peer review of similar companies, and
the total compensation package of the eligible employees in determining the
amount of the grants.
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 and helps align the focus
of the executive officers with the interests of the shareholders. 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 2001 were granted at
the bid price of the stock on December 31, 2001. 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, annual bonuses, and long-term incentives, as described in this
report, serves the interests of the Company and the Company's stockholders.
Richard R. Donohue
John W. N. Steddom
James G. Wake
Michael R. Welter
Edward C. Whitham
11
Financial Performance
The following graph illustrates the cumulative total return (assuming the
reinvestment of dividends) experienced by the Company's shareholders since
December 31, 1996, through December 31, 2001, 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
[Performance Graph]
Period Ending
-----------------------------------------------------
Index 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01
- ----- -------- -------- -------- -------- -------- --------
Mahaska Investment Company 100.00 179.85 156.97 121.07 88.56 128.78
NASDAQ--Total US* 100.00 122.48 172.68 320.89 193.01 153.15
SNL Midwest Bank Index 100.00 162.14 172.46 135.50 164.09 167.69
NASDAQ Bank Index* 100.00 167.41 166.33 159.89 182.38 197.44
- --------
* Source CRSP, Center for Research in Security Prices, Graduate School of
Business, the University of Chicago 2002. Used with permission. All rights
reserved. crsp.com
12
Loans to Officers and Directors and Other Transactions With Officers and
Directors
During 2001, 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 25, 2002,
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) 592,361 15.3%
Ames National Corporation(4)......................................... 222,202 5.7%
Richard R. Donohue(5)................................................ 1,635 *
William D. Hassel(6)................................................. 51,548 1.3%
Charles S. Howard(7)................................................. 290,789 7.4%
David A. Meinert(8).................................................. 101,908 2.6%
John P. Pothoven(9).................................................. 109,006 2.8%
John W. N. Steddom(10)............................................... 56,369 1.5%
James G. Wake(11).................................................... 7,709 *
Michael R. Welter(12)................................................ 3,265 *
Edward C. Whitham(13)................................................ 835 *
Executive Officers and Directors as a group (9 persons)(14).......... 623,064 15.3%
- --------
* 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 25, 2002.
(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, Michael T. Patrick, President of Pella State Bank, David
A. Meinert, 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.
13
(3) The address of the ESOP Administrators is 222 First Avenue East, Oskaloosa,
IA 52577.
(4) The address of the shareholder listed is P. O. Box 846, Ames, IA 50010.
Such shares were held as of December 31, 2001.
(5) Such shares include 1,616 shares owned by his spouse and 19 shares held by
a partnership.
(6) 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, 1,237 shares subject to currently exercisable options, and 17,487
shares allocated to his ESOP account.
(7) Such shares include 51,539 shares owned by his spouse, 3,194 shares owned
jointly with his spouse, a total of 2,099 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, 72,420 shares subject to currently
exercisable options, 22,122 shares allocated to his spouse's ESOP account,
and 31,502 shares allocated to his ESOP account.
(8) Such shares include 7,270 shares owned jointly with his spouse, a total of
532 shares owned as custodian for his two minor children, 64,758 shares
subject to currently exercisable options, and 29,348 shares allocated to
his ESOP account. Excludes the remaining 563,013 ESOP shares with respect
to which Mr. Meinert shares dispositive power as an ESOP Administrator.
(9) Such shares include 4,117 shares held in an IRA, 33,402 shares subject to
currently exercisable options, and 46,392 shares allocated to his ESOP
account. Excludes the remaining 545,969 ESOP shares with respect to which
Mr. Pothoven shares dispositive power as an ESOP Administrator.
(10) Such shares include 600 shares held in his spouse's IRA and 10,880 shares
subject to currently exercisable options.
(11) 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 6,749 shares subject to currently exercisable options.
(12) Such shares include 655 shares held in an IRA, 500 shares owned by a
corporation of which Mr. Welter has control, and 2,110 shares subject to
currently exercisable options.
(13) Such shares include 470 shares held in a profit sharing plan, 290 shares
held in his spouse's IRA, and 75 shares held in his spouse's profit
sharing plan.
(14) Such shares include a total of 146,851 ESOP shares allocated to the
accounts of directors and executive officers and a total of 191,556 shares
subject to currently exercisable options.
14
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 to conduct the
audit examination of the Company and its subsidiaries for the 2002 fiscal year.
KPMG LLP was also the principal accountant and performed the audit for the 2001
fiscal year.
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 the 2002 fiscal year. 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.
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 2001 fiscal year and the
reviews of the financial statements included in the Company's Forms 10-Q for
that fiscal year were $93,300.
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 2001 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 2001 fiscal year were
$505,011. Of this amount $58,200 was for tax return preparation and review,
$4,400 was for an audit of the December 31, 2000 Mahaska Investment Company
Employee Stock Ownership Plan and Trust, $4,400 was for an audit of the
December 31, 2000 Mahaska Investment Company 401(k) Plan, and $438,011 was for
professional services in regard to a profit improvement project for Mahaska
Investment Company.
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.
15
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 which was filed
as an attachment to the Proxy for the annual meeting held in April 2001. The
Audit Committee met six times during the 2001 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 accountant's 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, 2001, 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
16
GENERAL MATTERS
Financial Statements
The Company's 2001 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, 2001. 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.
Section 16(a) Beneficial Ownership Reporting Compliance
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 2001 fiscal year.
All the applicable filing requirements were satisfied by the officers,
directors and 10 percent owners during 2001. 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 2003, the proposal must be received at the Company's
principal executive offices no later than November 22, 2002. A shareholder
proposal submitted outside the procedures prescribed in Rule 14a-8 shall be
considered untimely unless received no later than February 5, 2003.
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 22, 2002
17
MAHASKA INVESTMENT COMPANY
APPENDIX TO THE PROXY STATEMENT
FISCAL YEAR 2001
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
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
expenses.
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
For the year ended December 31, 2001, the Company recorded net income of
$4,356,000, or $1.10 per share basic and $1.09 per share diluted. This compares
with $4,001,000, or $.99 per basic and diluted share, for the year ended
December 31, 2000. The $355,000 increase in 2001 net income, or 9 percent, is
due to an increase in net interest income and noninterest income including
realized security gains that were partially offset by a higher loan loss
provision and increased operating expenses in 2001 compared with 2000.
Total assets of the Company increased 6 percent to a year-end 2001 total of
$545,795,000 compared with a 2000 year-end total of $515,212,000 as a result of
growth in deposits and borrowed funds. Deposits increased 2 percent to
$378,645,000 as of December 31, 2001 through competitive pricing of deposit
rates and active marketing programs. The Company's total loans outstanding
increased 3 percent in 2001 to $322,681,000 at December 31, 2001, as loan
demand slowed reflecting local and national economic conditions. Loan pool
participations as of December 31, 2001 totaled $110,393,000, an increase of 48
percent from the year-end 2000 balance of $74,755,000. Throughout 2001, the
Company was able to take advantage of purchase opportunities to grow the
balance of loan pool participations. The increase was funded utilizing the
proceeds from the sale of investment securities and through additional borrowed
funds.
A-1
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 .82 percent for 2001, .81 percent for 2000, and .64 percent for
1999. The increase in 2001 net income did not significantly improve the return
on average assets since the percentage increase in net income was not
proportionately higher than the increase in average assets for the year. The
return on average assets increased in 2000 compared with 1999 due to improved
net income in 2000, which was proportionately higher than the increase in
average assets compared to the previous year. 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 8.59 percent for 2001, 8.18
percent for 2000, and 5.29 percent for 1999. The increased return on average
equity for 2001 compared to 2000 is attributable to the higher earnings. The
increase in 2000 compared to 1999 was due to higher earnings in 2000.
Results of Operations
2001 compared to 2000
Net Interest Income. Net interest income is the total of interest income
less interest expense. The Company's net interest income increased $1,279,000,
or 7 percent, to $18,678,000 in 2001 compared with $17,399,000 in 2000. 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. The net interest margin on a
tax-equivalent basis was 3.84 percent for 2001 compared with 3.87 percent for
2000. The increase of net interest income for 2001 was proportionately less
than the increase in average earning assets, thus reducing the net interest
margin slightly in comparison to 2000.
Total interest income for 2001 was $40,105,000, an increase of $1,279,000,
or 3 percent, over the $38,826,000 recorded in 2000. Interest income and fees
on loans decreased $126,000 to $25,172,000 in 2001 mainly due to the decline in
national and local market interest rates. The Federal Reserve Board reduced
interest rates eleven times during the year 2001. These cuts effectively
reduced the rates the Company could charge its borrowing customers as many
loans are tied to the prime rate and local market interest rates often move
with the national market. The average yield on loans declined to 7.96 percent
in 2001 compared with 8.37 percent in 2000. The average volume of loans was
$13,880,000 greater in 2001 as the Company continued to experience growth in
its loan portfolio. Interest and discount on loan pools increased $2,320,000,
or 32 percent, reflecting a $26,417,000 increase in average loan pools in 2001
compared to 2000. For 2001, the average yield on loan pools was 10.91 percent
compared to 11.82 percent in 2000. The reductions in national interest rates
were reflected in the lower yield on loan pools as newly purchased pools were
acquired at lower discount rates. The overall reduction in market interest
rates caused the $60,000, or 51 percent, lower amount of income on
interest-bearing bank deposits as the average balance was consistent between
years. Interest income on investment securities decreased $943,000, or 16
percent, in 2001 from 2000 as the volume of securities was $9,028,000 lower in
2001 and the yields on newly purchased securities were lower reflecting
national market rates. The yield on the Company's investment portfolio was 6.55
percent in 2001 compared with 6.99 percent in 2000. Interest income on federal
funds sold increased $88,000, or 54 percent, in 2001 due to higher volumes
compared with 2000. Lower market interest rates offset, in part, the increased
volume of federal funds sold. The Company's overall yield on earning assets
declined to 8.17 percent for 2001 compared with 8.53 percent in 2000. Average
earning assets were $35,542,000 greater in 2001.
The 2001 total interest expense of $21,427,000 was equal to the interest
expense incurred for 2000. Lower national and local market interest rates
allowed the Company to reduce the amount of interest expense on its
interest-bearing liabilities, offsetting the additional interest expense
resulting from increased average balances of savings accounts, certificates of
deposit, and Federal Home Loan Bank advances. The overall rate paid on
interest-bearing deposits was 4.36 percent for 2001 compared with 4.64 percent
for 2000 reflecting rate reductions in the immediately repriceable deposit
accounts and the issuance of fixed-rate certificates of deposit at lower rates.
The interest rates paid for federal funds purchased, Federal Home Loan Bank
advances, and notes
A-2
payable all decreased for 2001 following lower market rates. The average rate
on all borrowed funds decreased to 6.28 percent for 2001 compared with 7.02
percent for 2000. The Company's overall rate paid on interest-bearing
liabilities was 4.77 percent for 2001 versus 5.14 percent for 2000.
Provision For Loan Losses. The Company's provision for loan loss expense
was $1,776,000 in 2001, an increase of $884,000 compared with 2000. The amount
the Company provides for loan losses is charged against earnings. 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 largest factor in the increase in
loan loss provision for 2001 was the charge-off of one large agricultural line
of credit totaling $1,000,000 in the third quarter of the year. The remainder
of the provision for loan losses was 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.
Other Income. Noninterest income increased $1,721,000, or 67 percent, in
2001 to $4,287,000. This compares with noninterest income of $2,566,000 in
2000. Approximately $296,000 of the increase was due to additional service
charges and overdraft fees from deposit accounts. An additional $444,000 in
noninterest income was collected from trust fees, brokerage fees, and the
earnings recorded on the cash value of life insurance policies. The Company
realized gains of $1,018,0000 in 2001 on the sale of available for sale
investment securities, which were sold to meet liquidity needs and to purchase
additional loan pool participations. Investment security gains realized in 2000
totaled $40,000.
Other Expense. The Company's noninterest expense totaled $14,467,000 for
2001 compared with $13,313,000 for 2000. The increase of $1,154,000, or 9
percent, for 2001 was mainly due to higher salaries and employee benefit costs,
increased occupancy and equipment expense, and additional professional fees
incurred by the Company. Salary and benefits expense increased $779,000, or 12
percent, in 2001 primarily due to higher salary levels, additional employees,
increased health insurance costs, and greater contributions to ESOP and 401(k)
plans. Occupancy and equipment expense rose $285,000, or 15 percent, in 2001 as
a result of the opening of two new banking facilities early in the year.
Professional fees were $330,000, or 50 percent, higher in 2001 as the Company
utilized the services of an outside consultant to analyze profitability and
suggest methods to improve it. Other operating expenses decreased $165,000, or
5 percent, in 2001 primarily due to lower other real estate expense. Goodwill
amortization declined $75,000 in 2001 compared with 2000.
Income Tax Expense. Income taxes increased $607,000 in 2001 compared with
2000. The amount of income before taxes was higher in 2001, thus increasing
income tax expense. The 2000 tax expense was reduced by $270,000 as a result of
the utilization by the Company of a state franchise tax credit. The Company's
consolidated income tax rate varies from the statutory rate mainly due to
tax-exempt income. The 2001 effective income tax rate as a percent of income
before tax was 35.2 percent compared with 30.5 percent for 2000. Without the
state franchise tax credit for 2000, the effective tax rate for that year would
have been 35.2 percent.
2000 compared to 1999
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.
A-3
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. 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 $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.
A-4
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.
Analysis of Financial Condition
Loans
The Company's loan portfolio totals increased $10,600,000, or 3 percent,
from December 31, 2000 to December 31, 2001. Total loans as of December 31,
2001 were $322,681,000 compared with $312,081,000 in 2000. Overall loan growth
was lower in 2001 than in previous years reflecting a softening in the local
and national economy. As of December 31, 2001, the Company's loan to deposit
ratio was 85.2 percent, compared with 84.3 percent at December 31, 2000. The
loan portfolio largely reflects the economic 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
$223,126,000 as of December 31, 2001 compared with $206,874,000 as of December
31, 2000. Real estate loans of all types are the Company's largest category of
loans comprising 69.2 percent of total loans at year-end 2001 and 66.3 percent
at December 31, 2000. Agricultural loans are the next largest category of loans
totaling approximately $41,084,000 as of December 31, 2001, compared with
$45,404,000 at December 31, 2000. As a percentage of the Company's total loans,
at December 31, 2001 agricultural loans were 12.7 percent compared with 14.5
percent at December 31, 2000. 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 2001 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, which totaled $40,180,000 on
December 31, 2001, remained constant at approximately 12.5 percent of the
Company's loan portfolio on December 31, 2001 and 2000. The remaining 5.6
percent of the portfolio as of December 31, 2001 consists of $18,291,000 in
consumer and other loans.
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 2001, the Company's loan pool participation total was
$110,393,000 compared with $74,755,000 in 2000, an increase of $35,638,000, or
48 percent. The average loan pool participation investment for 2001 was
$87,970,000 compared with an average of $61,553,000 for 2000. During 2001, the
Company's strategy was to improve the overall yield on its earning assets by
reducing the balance of investment securities and utilizing those funds to
increase the amount of loan pool participations. Loan pool participation
purchases made by the Company during 2001 totaled $96,957,000 compared with
$39,546,000 purchased in 2000. Total purchases for 2001 were significantly
greater than the change in year-end balances because a portion of the loan pool
assets acquired in 2001 was subsequently sold to a third party. Most of the
loan pools acquired in 2001 were higher-quality performing assets that were
purchased at a lower discount from the stated principal balance. The reduced
discount will result in a lower discount recovery and a subsequent reduction in
the overall return on the investment in future years. Throughout 2001, loan
pool participations averaged 17.8 percent of average earning assets while in
2000 they represented 13.4 percent of average earning assets. The yield on loan
pool participation investments declined to 10.9 percent for 2001, compared with
11.8 percent in 2000. This was partially due to the decline in the national
interest rate environment and also to the higher quality of assets being
purchased.
Investment Securities
The Company manages its investment portfolio to provide both a source of
liquidity and earnings. The Company sold available for sale investment
securities to provide funds to increase its loan pool participation balances
and to fund loan demand in 2001. Investment securities available for sale
totaled $50,206,000 on December 31, 2001 compared to $60,758,000 at December
31, 2000. The sale of investment securities enhanced the Company's 2001
earnings through a substantial amount of realized gains due to the low market
interest rate environment. Securities classified as held to maturity decreased
by $4,589,000 to a balance of $21,332,000 on December 31, 2001 as proceeds from
maturing investments were utilized to fund loan demand and loan pool purchases.
Goodwill And Other Intangible Assets
The amount of goodwill and other intangible assets decreased to $10,675,000
as of December 31, 2001 as a result of amortization. As of that date, goodwill
and other unidentified intangible assets totaled $9,351,000 and core deposit
intangibles totaled $1,324,000. Goodwill and other intangible assets on
December 31, 2000 totaled $11,725,000.
Deposits
Total deposits were $378,645,000 on December 31, 2001 compared with
$370,144,000 as of December 31, 2000, an increase of $8,501,000, or 2 percent.
This growth was mainly in the more liquid NOW accounts, savings, and money
market accounts. Certificates of deposit decreased $4,032,000, or 2 percent, in
2001. Non-interest bearing demand deposits increased $930,000, or 4 percent, at
year-end 2001 compared to 2000.
Capital Resources
As of December 31, 2001, total shareholders' equity was $50,827,000. Total
equity increased by $1,532,000 in 2001 from $49,295,000 at December 31, 2000
mainly as a result of retained earnings and also due to unrealized gains in the
available for sale portion of the Company's investment portfolio. In September
2001, the Company's Board of Directors authorized a stock repurchase of up to
$4,000,000 and not exceeding 10 percent of the common shares outstanding.
During the period from September 14 through December 31, 2001, the Company
repurchased 101,000 shares of stock on the open market at an average cost of
$11.33 per share. The stock repurchase authorization was subsequently extended
through June 30, 2002. A total of 34,280 shares were reissued upon the exercise
of stock options throughout 2001, resulting in 3,872,594 shares outstanding at
December 31, 2001.
A-6
Shareholders' equity as a percentage of total assets was 9.31 percent on
December 31, 2001, versus 9.57 percent on December 31, 2000. The decrease in
the percentage of shareholders' equity to total assets reflects the overall
increase in total assets in 2001 with the growth in capital proportionately
less than the asset growth. Tangible shareholders' equity was 7.5 percent at
year-end 2001 and in 2000. Tangible equity is the ratio of shareholders' equity
less goodwill and intangible assets in proportion to total assets less goodwill
and intangible assets.
The Company's risk-based Tier 1 core capital ratio was 10.0 percent as of
December 31, 2001, and the Total Capital ratio was 10.9 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, 2000, the Company's Tier 1 capital ratio was 10.6 percent, and the
Total Capital ratio was 11.4 percent. These ratios declined in 2001 from 2000
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 7.6 percent as of December 31, 2001
and 7.8 percent at December 31, 2000, exceeding the regulatory minimum
requirement range of 3.0 percent to 5.0 percent.
As of December 31, 2001, the Company had borrowed $2,500,000 on a revolving
line of credit and $6,700,000 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, 2002. 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, 2001, the Company's subsidiaries had borrowed
$91,174,000 in fixed-rate advances from the Federal Home Loan Bank of Des
Moines. Advances from the Federal Home Loan Bank at year-end 2001 increased
$16,124,000 from 2000. Throughout 2001, 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 on a
long-term fixed-rate basis. The Company had no material commitments for capital
expenditures as of December 31, 2001.
The Company's common stock closed the year 2001 at $11.70 per share,
representing .89 times the December 31, 2001 book value per share of $13.12.
The book value per share was $12.51 on December 31, 2000. Tangible book value
per share was $10.37 on December 31, 2001 compared with $9.54 in 2000.
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 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 $15,837,000 as of December 31, 2001, compared with $15,517,000 as of
December 31, 2000. Investment securities classified as available for sale and
securities and loans maturing within one year totaled $114,362,000 and
$130,683,000 as of December 31, 2001 and 2000, respectively. Assets maturing
within one year, combined with liquid assets, were 34.4 percent at December 31,
2001 and 39.5 percent at December 31, 2000 of total deposits as of the same
dates.
A-7
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
that 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 $7,860,000 in 2001, $5,685,000 in
2000, and $5,120,000 in 1999. 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, 2001, the Company had outstanding
commitments to extend credit of $35,662,000 and had no commitments to sell
loans. Certificates of deposit maturing in one year or less totaled
$129,051,000 as of December 31, 2001. 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 that 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, 2001, the Company's cumulative gap ratios for assets and
liabilities repricing within three months and within one year were .32 and .52
respectively, meaning more liabilities than assets are scheduled to reprice
within these periods. This situation suggests that a decrease in market
interest rates may 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 2001 changed when
compared to 2000.
A-8
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, 2001.
$ Change % Change
-------- --------
+200 bp 10,000 0.04%
+100 bp (1,000) -0.01%
Base... 0 0.00%
-100 bp 10,000 0.04%
-200 bp 15,000 0.07%
As shown above, at December 31, 2001, the effect of a ramped 200 basis point
increase in interest rates would increase the Company's net interest income by
approximately $10,000. The effect of a ramped 200 basis point decrease in rates
would increase the Company's net interest income by approximately $15,000. The
reduction in national market interest rates that occurred in 2001 have allowed
the Company to lower the rates it is paying on many liquid deposit accounts to
a point where they cannot be decreased by another 200 basis points. Interest
rate floors in place on many of the Company's loans have also been reached.
Consequently, additional reductions in market interest rates will have a
minimal impact on the Company's net interest margin. Based on the computer
simulation, a 200 basis point ramped increase in interest rates would not have
a significant effect on the net interest margin as variable rate assets and
liabilities would reprice concurrently.
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.
Loan Quality
Total loans increased 3 percent during 2001 to a year-end total of
$322,681,000. Credits held by MIC Financial continued to be reduced through
collection efforts and charge-offs during the year. As of December 31, 2001,
the loans attributable to MIC Financial were $1,006,000, approximately .3
percent of the Company's total loans outstanding.
Non-performing assets as of December 31, 2001 totaled $3,670,000. The
year-end 2001 total of non-performing assets increased $147,000, or 4 percent,
when compared with the December 31, 2000 amount of $3,523,000. The ratio of
total non-performing loans and assets to total loans was 1.14 percent for
year-end 2001 and 1.13 percent for year-end 2000. Nonaccrual loans increased
$517,000 to a December 31, 2001 total of $2,559,000, consisting mainly of
agricultural and commercial loans. Loans past due 90 days and over as of
year-end 2001 totaled $926,000, and consisted primarily of residential real
estate and agricultural loans. Loans past due 90 days and over as of December
31, 2001 increased $16,000 compared with the year-end 2000 total. Other real
estate consists of real estate acquired by the Company through foreclosure.
Other real estate decreased $386,000 to $185,000 from the December 31, 2000
total of $571,000 primarily due to the sale of foreclosed property during the
year. Efforts to further improve asset quality continue.
The allowance for loan losses was $3,381,000 on December 31, 2001 and
totaled $2,933,000 as of December 31, 2000. The allowance represented 1.05
percent of total loans at December 31, 2001 and .94 percent of loans on
December 31, 2000. The increase in the amount of the allowance for loan losses
as of December 31, 2001 was the result of growth in the loan portfolio during
the year and management's concerns about deterioration in the national and
local economy. The allowance as a percentage of non-performing assets was
A-9
92.1 percent on December 31, 2001 and 83.2 percent on December 31, 2000. Net
loan charge-offs for 2001 were $1,328,000, or .42 percent of average loans,
compared with 2000 charge-offs of $1,965,000, or .65 percent of average loans.
Most of the net charge-offs during 2001 were agricultural credits, with one
charge-off totaling $1,000,000. 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.
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 shareholders' 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
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 2001 the national inflation rate remained low with the economy
determined to be in a mild recession. Interest rates moved downward
dramatically throughout the year as the Federal Reserve Board cut rates eleven
times. Management of the Company believes that the 2002 rate of inflation will
remain consistent with 2001 and that interest rates may not move any lower.
Rates in 2002 may move upward slightly later in the year as the economy is
forecast to begin recovering from a recessionary period. Although the Company
is in a negative gap position (a greater amount of interest-bearing liabilities
are repriceable compared to repriceable interest-earning assets), additional
declines in interest rates may not have a significant effect on the Company's
net interest margin since many rates on interest-paying liabilities cannot be
moved lower. If interest rates do increase, the Company's net interest margin
may not change significantly as many interest-earning assets will reprice with
the interest-paying liabilities. If interest rates remain constant, maturing
fixed-rate deposits will continue to reprice at lower rates, thus reducing the
Company's overall cost of funds and benefiting the net interest margin. The
full benefit of low market interest rates may not be recognized by the Company
depending on the competitive environment for deposits in the individual
subsidiaries' markets. Management continues to focus on managing the net
interest margin in 2002.
Management anticipates that in 2002 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 ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and SFAS No. 137, an amendment
to SFAS No. 133. SFAS No. 133 and 137 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 137 on the Company's financial position and results of operations was
not material. There were no transition adjustments required.
A-10
The American Institute of Certified Public Accountants ("AICPA") 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 implementation of this
proposed SOP has been delayed pending agreement between the FASB and the AICPA.
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 did not have a material impact on the results of
operations or financial condition of the Company.
In June 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS 143 requires the Company to record the fair value of an
asset retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long-lived assets
that result from the acquisition, construction, development, and/or normal use
of the assets. The Company also records a corresponding asset, which is
depreciated over the life of the asset. The Company is required to adopt SFAS
143 on January 1, 2003. Management of the Company does not expect the adoption
of SFAS No. 143 to have a material effect on its financial statements.
In July 2001, the FASB issued Statement No. 141, "Business Combinations,"
and Statement No. 142, "Goodwill and Other Intangible Assets." Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 142 requires
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of Statement 142. Statement 142 also requires that
intangible assets with estimable useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS Statement No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." The Company adopted the provisions of Statement 141 on July 1,
2001, and Statement 142 on January 1, 2002. The adoption of these statements
did not have a material effect on the Company's financial statements. The
Company will realize a reduction in goodwill amortization expense beginning in
2002 since the goodwill in the amount of $5,667,000 attributable to the merger
of Midwest will no longer be amortized. The anticipated reduction in
amortization expense will be approximately $252,000 annually. The remaining
goodwill in the amount of $3,684,000 will continue to be amortized under SFAS
Statement No. 72, "Accounting for Certain Acquisitions of Banking or Thrift
Institutions."
SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
was issued in August 2001. SFAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The Company
adopted SFAS 144 on January 1, 2002. The effects of implementation were
immaterial.
Critical Accounting Policies
The Company has identified two critical accounting policies and practices
relative to the financial condition and results of operation. These two
accounting policies relate to the allowance for loan losses and to loan pool
accounting.
The allowance for loan losses is based on management's opinion, and is
adequate to absorb losses in the existing portfolio. In evaluating the
portfolio, management takes into consideration numerous factors, including
current economic conditions, prior loan loss experience, the composition of the
loan portfolio, and management's estimate of probable credit losses. The
allowance for loan loss is established through a provision for loss based
A-11
on management's evaluation of the risk inherent in the loan portfolio, the
composition of the portfolio, specific impaired loans, and current economic
conditions. Such evaluation, which includes a review of all loans on which full
collectibility may not be reasonably assured, considers among other matters,
the estimated net realizable value or the fair value of the underlying
collateral, economic conditions, historical loss experience, and other factors
that warrant recognition in providing for an adequate allowance for loan loss.
The loan pool accounting practice relates to management's opinion that the
investment amount reflected on the Company's financial statements does not
exceed the estimated net realizable value or the fair value of the underlying
collateral securing the purchased loans. In evaluating the purchased loan
portfolio, management takes into consideration many factors, including the
borrowers' current financial situation, the underlying collateral, current
economic conditions, historical collection experience, and other factors
relative to the collection process.
In the event that management's evaluation of the level of the allowance for
loan losses is inadequate, the Company would need to increase its provision for
loan losses. If the estimated realizable value of the loan pool participations
is understated, the Company's yield on the loan pools would be reduced.
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
-----------------
2001 2000
-------- -------
(in thousands)
Assets:
Cash and due from banks.............................................................. $ 12,872 10,544
Interest-bearing deposits in banks................................................... 2,965 3,818
Federal funds sold................................................................... -- 1,155
-------- -------
Cash and cash equivalents......................................................... 15,837 15,517
-------- -------
Investment securities (notes 2 and 8):
Available for sale, at fair value................................................. 50,206 60,758
Held to maturity (fair value of $22,034 in 2001 and $26,234 in 2000).............. 21,332 25,921
Loans, net of unearned discount (notes 3, 5, and 8).................................. 322,681 312,081
Allowance for loan losses (note 4)................................................... (3,381) (2,933)
-------- -------
Net loans......................................................................... 319,300 309,148
-------- -------
Loan pool participations............................................................. 110,393 74,755
Premises and equipment, net (note 6)................................................. 8,355 6,890
Accrued interest receivable.......................................................... 4,540 5,201
Goodwill and other intangible assets................................................. 10,675 11,725
Other assets......................................................................... 5,157 5,297
-------- -------
Total assets.................................................................. $545,795 515,212
======== =======
Liabilities and Shareholders' Equity:
Deposits (notes 2 and 7):
Demand............................................................................ $ 26,961 26,031
NOW and Super NOW................................................................. 45,372 43,380
Savings........................................................................... 97,989 88,378
Certificates of deposit........................................................... 208,323 212,355
-------- -------
Total deposits................................................................ 378,645 370,144
Federal funds purchased.............................................................. 10,650 2,345
Federal Home Loan Bank advances (note 8)............................................. 91,174 75,050
Notes payable (note 9)............................................................... 9,200 13,200
Other liabilities.................................................................... 5,299 5,178
-------- -------
Total liabilities............................................................. 494,968 465,917
-------- -------
Shareholders' equity:
Common stock, $5 par value; authorized 20,000,000 shares; issued 4,912,849 shares
as of December 31, 2001 and 2000................................................ 24,564 24,564
Capital surplus................................................................... 13,033 13,127
Treasury stock at cost, 1,040,255 and 973,535 shares as of December 31, 2001 and
2000, respectively.............................................................. (12,595) (11,869)
Retained earnings (note 16)....................................................... 25,082 23,102
Accumulated other comprehensive income............................................ 743 371
-------- -------
Total shareholders' equity.................................................... 50,827 49,295
-------- -------
Total liabilities and shareholders' equity.................................... $545,795 515,212
======== =======
See accompanying notes to consolidated financial statements.
A-13
Consolidated Statements of Income
Year ended December 31
---------------------
2001 2000 1999
------- ------ ------
(in thousands, except
per share amounts)
Interest income:
Interest and fees on loans..................................... $25,172 25,298 17,577
Interest income and discount on loan pool participations....... 9,595 7,275 7,668
Interest on bank deposits...................................... 56 116 82
Interest on federal funds sold................................. 252 164 260
Interest on investment securities:
Available for sale.......................................... 3,542 4,182 2,214
Held to maturity............................................ 1,488 1,791 1,029
------- ------ ------
Total interest income................................... 40,105 38,826 28,830
------- ------ ------
Interest expense:
Interest on deposits (note 7):
NOW and Super NOW........................................... 521 782 637
Savings..................................................... 2,961 3,779 2,837
Certificates of deposit..................................... 11,920 10,788 7,060
Interest on federal funds purchased............................ 57 191 94
Interest on Federal Home Loan Bank advances.................... 5,166 4,484 1,287
Interest on notes payable...................................... 802 1,403 1,280
------- ------ ------
Total interest expense.................................. 21,427 21,427 13,195
------- ------ ------
Net interest income..................................... 18,678 17,399 15,635
Provision for loan losses (note 4)............................. 1,776 892 3,628
------- ------ ------
Net interest income after provision for loan losses..... 16,902 16,507 12,007
------- ------ ------
Other income:
Service charges................................................ 2,117 1,821 1,332
Data processing income......................................... 206 203 200
Other operating income......................................... 946 502 443
Investment security gains (losses), net (note 2)............... 1,018 40 (28)
------- ------ ------
Total other income...................................... 4,287 2,566 1,947
------- ------ ------
Other expense:
Salaries and employee benefits expense (note 13)............... 7,157 6,378 5,144
Net occupancy expense.......................................... 2,162 1,877 1,517
Professional fees.............................................. 988 658 431
Goodwill and other intangible asset amortization............... 1,050 1,125 711
Other operating expense........................................ 3,110 3,275 2,659
------- ------ ------
Total other expense..................................... 14,467 13,313 10,462
------- ------ ------
Income before income tax expense........................ 6,722 5,760 3,492
Income tax expense (note 11)................................... 2,366 1,759 1,270
------- ------ ------
Net income.............................................. $ 4,356 4,001 2,222
======= ====== ======
Net income per share--basic.................................... $ 1.10 0.99 0.58
======= ====== ======
Net income per share--diluted.................................. $ 1.09 0.99 0.56
======= ====== ======
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, 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
------- ------ ------- ------ ----- ------
Comprehensive income:
Net income..................................... -- -- -- 4,356 -- 4,356
Unrealized gains arising during the year on
securities available for sale................ -- -- -- -- 1,010 1,010
Less realized gains on securities available for
sale, net of tax............................. -- -- -- -- (638) (638)
------- ------ ------- ------ ----- ------
Total comprehensive income................. -- -- -- 4,356 372 4,728
------- ------ ------- ------ ----- ------
Dividends paid (.60 per share)................. -- -- -- (2,376) -- (2,376)
Stock options exercised (34,280 shares)........ -- (94) 418 -- -- 324
Treasury stock purchased (101,000 shares)...... -- -- (1,144) -- -- (1,144)
------- ------ ------- ------ ----- ------
Balance at December 31, 2001............... $24,564 13,033 (12,595) 25,082 743 50,827
======= ====== ======= ====== ===== ======
See accompanying notes to consolidated financial statements.
A-15
Consolidated Statements of Cash Flows
Year ended December 31
--------------------------
2001 2000 1999
-------- ------- -------
(in thousands)
Cash flows from operating activities:
Net income............................................................ $ 4,356 4,001 2,222
-------- ------- -------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization........................................ 1,991 1,788 1,340
Provision for loan losses............................................ 1,776 892 3,628
Investment securities (gains) losses, net............................ (1,018) (40) 28
Loss on sale of premises and equipment............................... 53 5 -
Amortization of investment securities and loan premiums.............. 251 233 199
Accretion of investment securities and loan discounts................ (253) (262) (465)
Decrease (increase) in other assets.................................. 801 (2,689) (705)
(Decrease) increase in other liabilities............................. (97) 1,757 (1,127)
-------- ------- -------
Total adjustments................................................... 3,504 1,684 2,898
-------- ------- -------
Net cash provided by operating activities........................... 7,860 5,685 5,120
-------- ------- -------
Cash flows from investing activities:
Investment securities available for sale:
Proceeds from sales................................................. 35,281 13,988 9,465
Proceeds from maturities............................................ 9,245 5,265 11,372
Purchases........................................................... (32,390) (17,956) (16,238)
Investment securities held to maturity:
Proceeds from maturities............................................ 5,695 6,622 5,836
Purchases........................................................... (1,000) (2,996) (2,221)
Net increase in loans................................................. (11,862) (31,868) (18,318)
Purchases of loan pool participations................................. (96,957) (39,546) (41,440)
Principal recovery on sale of loan pool participations................ 26,004 - -
Principal recovery on loan pool participations........................ 35,315 32,547 32,973
Purchases of premises and equipment................................... (2,480) (953) (437)
Proceeds from sale of premises and equipment.......................... 3 44 6
Cash received in acquisition of Midwest Bancshares, Inc............... -- -- 3,403
-------- ------- -------
Net cash used in investing activities.............................. (33,146) (34,853) (15,599)
-------- ------- -------
Cash flows from financing activities:
Net increase in deposits.............................................. 8,565 21,568 8,775
Net increase (decrease) in federal funds purchased.................... 8,305 (620) 2,989
Federal Home Loan Bank advances....................................... 41,500 53,500 11,900
Repayment of Federal Home Loan Bank advances.......................... (25,568) (42,063) (5,038)
Advances on notes payable............................................. 3,000 1,900 6,910
Principal payments on notes payable................................... (7,000) (6,700) (5,910)
Dividends paid........................................................ (2,376) (2,410) (2,310)
Purchases of treasury stock........................................... (1,144) (3,433) (6,594)
Proceeds from stock options exercised................................. 324 24 555
-------- ------- -------
Net cash provided by financing activities.......................... 25,606 21,766 11,277
-------- ------- -------
Net increase (decrease) in cash and cash equivalents............... 320 (7,402) 798
Cash and cash equivalents at beginning of year........................ 15,517 22,919 22,121
-------- ------- -------
Cash and cash equivalents at end of year.............................. $ 15,837 15,517 22,919
======== ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest............................................................ $ 21,862 20,912 13,307
======== ======= =======
Income taxes........................................................ $ 2,344 1,112 2,251
======== ======= =======
See accompanying notes to consolidated financial statements.
A-16
December 31, 2001, 2000, and 1999
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, Inc. All material intercompany transactions have been
eliminated in consolidation.
MIC Financial, Inc.
On April 23, 1999, the Company announced that it had elected to seek a buyer
for MIC Financial, 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-off's have reduced MIC Financial's total loan and lease
portfolio to $1,006,000, or approximately .3 percent of the Company's total
loans as of December 31, 2001. As of December 31, 2001, the allowance for loan
losses related to the remaining MIC Financial loans and leases was $65,000. 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 years
ended December 31, 2000 and 2001 are included in the Company's consolidated
statements of income.
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.
A-17
Effect of New Financial Accounting Standards
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and SFAS No. 138, Accounting
for Certain Derivative Instruments and Certain Hedging Activities--an Amendment
to FASB Statement No. 133," were adopted by the Company on January 1, 2001. The
adoption of the standards did not have a material effect on the Company's
consolidated financial statements.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Asset and
Extinguishments of Liabilities", is effective for transfers and servicing of
financial assets and extinguishments of liabilities after March 31, 2001. The
adoption of this standard did not have a material effect on the Company's
consolidated financial statements.
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires the purchase method of accounting be
used for all business combinations. SFAS No. 141 specifies criteria that
intangible assets acquired in a business combination must meet to be recognized
and reported separately from goodwill. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121 and subsequently, SFAS No. 144 after its adoption.
The Company adopted the provisions of SFAS No. 141 as of July 1, 2001, and
SFAS No. 142 on January 1, 2002. Such adoption did not have a material effect
on the financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires the Company to record the fair value of an
asset retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long-lived assets
that result from the acquisition, construction, development and/or normal use
of assets. The Company also records a corresponding asset which is depreciated
over the life of the asset. The Company is required to adopt SFAS No. 143 on
January 1, 2003.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. The Company
adopted SFAS No. 144 on January 1, 2002. Such adoption did not have a material
effect on the financial statements.
A-18
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, 101,000, 403,100 and 461,400 shares of common
stock were repurchased by the Company during 2001, 2000 and 1999, 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, 2001, 2000 and
1999:
2001 2000 1999
---- ---- ----
(in thousands, except
per share amounts)
Basic EPS computation
Numerator:
Net income.................................................... $4,356 4,001 2,222
------ ----- -----
Denominator:
Weighted average shares outstanding........................... 3,951 4,052 3,864
------ ----- -----
Basic EPS...................................................... $ 1.10 0.99 0.58
====== ===== =====
Diluted EPS computation
Numerator:
Net income.................................................... $4,356 4,001 2,222
------ ----- -----
Denominator:
Weighted average shares outstanding........................... 3,951 4,052 3,864
Weighted average dilutive shares outstanding for stock options 35 5 105
------ ----- -----
3,986 4,057 3,969
------ ----- -----
Diluted EPS.................................................... $ 1.09 0.99 0.56
====== ===== =====
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.
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,
2001, 2000 and 1999 were $1,341,000, $1,362,000, and $834,000, respectively.
A-19
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.
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.
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.
A-20
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 $9,351,000
and $10,050,000, and core deposit premium of $1,324,000 and $1,675,000 at
December 31, 2001 and 2000, respectively. Goodwill is being amortized using the
straight-line method over 15 or 25 years. Core deposit premium is being
amortized using the effective-yield method over 10 years. Amortization expenses
for 2001, 2000 and 1999 for goodwill were $699,000, $699,000 and $530,000,
respectively, and $351,000, $426,000 and $181,000, respectively, for core
deposit premium. As of December 31, 2001 and 2000, the accumulated amortization
of goodwill was $4,210,000 and $3,511,000, respectively, and $1,403,000 and
$1,052,000, 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.
A-21
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.
2. Investment Securities
A summary of investment securities by type as of December 31, 2001 and 2000,
follows:
Amortized Unrealized Unrealized Fair
December 31, 2001 Cost Gains Losses Value
- ----------------- --------- ---------- ---------- ------
(in thousands)
Investment Securities Available for Sale:
U.S. government agency securities............... $20,121 502 44 20,579
Obligations of states and political subdivisions 3,360 90 -- 3,450
Other investment securities .................... 25,539 689 51 26,177
------- ----- -- ------
Total ................................... $49,020 1,281 95 50,206
======= ===== == ======
Investment Securities Held to Maturity:
U.S. government agency securities............... $12,047 519 -- 12,566
Obligations of states and political subdivisions 9,098 192 9 9,281
Other investment securities .................... 187 -- -- 187
------- ----- -- ------
Total.................................... $21,332 711 9 22,034
======= ===== == ======
A-22
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
======= === === ======
Proceeds from the sale of investment securities available for sale during
2001, 2000, and 1999 were $35,281,000, $13,988,000, and $9,465,000,
respectively. Gross gains and losses realized on the sale of investment
securities available for sale for the years ended December 31 were as follows:
2001 2000 1999
------ ---- ----
(in thousands)
Realized gains..... $1,027 118 12
Realized losses ... (9) (78) (40)
------ --- ---
Total....... $1,018 40 (28)
====== === ===
As of December 31, 2001 and 2000, investment securities with carrying values
of approximately $12,379,000 and $1,978,000 respectively, were pledged as
collateral to secure public fund deposits and for other purposes required or
permitted by law. Public funds approximated $27,478,000 and $29,868,000 at
December 31, 2001 and 2000, respectively.
The amortized cost and approximate fair value of investment securities as of
December 31, 2001, 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.................... $ 2,284 2,322
Due after 1 year through 5 years......... 33,887 34,896
Due after 5 years through 10 years....... 2,684 2,716
Due after 10 years....................... 10,165 10,272
------- ------
Total............................. $49,020 50,206
======= ======
Investment Securities Held to Maturity:
Due in 1 year or less.................... $ 1,340 1,348
Due after 1 year through 5 years......... 6,786 6,943
Due after 5 years through 10 years....... 2,594 2,663
Due after 10 years....................... 10,612 11,080
------- ------
Total............................. $21,332 22,034
======= ======
A-23
3. Loans
A summary of the respective loan categories as of December 31, 2001 and
2000, follows:
2001 2000
-------- -------
(in thousands)
Real estate loans................ $223,126 206,874
Commercial and agricultural loans 81,264 84,485
Loans to individuals............. 17,854 20,196
Other loans...................... 437 526
-------- -------
Total..................... $322,681 312,081
======== =======
Total nonperforming loans and assets at December 31, 2001 and 2000, were:
2001 2000
------ -----
(in thousands)
Impaired loans and leases:
Nonaccrual.............................. $2,559 2,042
Restructured............................ -- --
------ -----
Total impaired loans and leases..... 2,559 2,042
Loans and leases past due 90 days and more. 926 910
------ -----
Total nonperforming loans............... 3,485 2,952
Other real estate owned.................... 185 571
------ -----
Total nonperforming assets.............. $3,670 3,523
====== =====
The average balances of nonperforming loans for the years ended December 31,
2001 and 2000, were $4,271,000 and $4,302,000, respectively. The allowance for
credit losses related to nonperforming loans at December 31, 2001 and 2000, was
$246,000 and $339,000, respectively. Nonperforming loans of $763,000 and
$351,000 at December 31, 2001 and 2000, 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, 2001, 2000, and 1999 was:
2001 2000 1999
---- ---- ----
(in thousands)
Interest income:
As originally contracted................. $361 430 328
As recognized............................ 5 12 70
---- --- ---
Reduction of interest income ........ $356 418 258
==== === ===
4. Allowance for Loan Losses
Changes in the allowance for loan losses for the years ended December 31,
2001, 2000, and 1999 were as follows:
2001 2000 1999
------- ------ ------
(in thousands)
Balance at beginning of year............... $ 2,933 4,006 2,177
Provision for loan losses.................. 1,776 892 3,628
Recoveries on loans previously charged off. 158 221 60
Loans charged off.......................... (1,486) (2,186) (2,375)
Allowance of Midwest at date of acquisition -- -- 516
------- ------ ------
Balance at end of year..................... $ 3,381 2,933 4,006
======= ====== ======
A-24
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, 2001 and 2000, was
as follows:
2001 2000
------- ------
(in thousands)
Aggregate balance at beginning of year $14,706 9,064
Advances.............................. 16,706 19,580
Payments.............................. 16,993 13,938
------- ------
Aggregate balance at end of year...... $14,419 14,706
======= ======
6. Premises and Equipment
A summary of premises and equipment as of December 31, 2001 and 2000 was as
follows:
2001 2000
------- ------
(in thousands)
Land and improvements.................................... $ 997 997
Building and improvements................................ 8,504 6,777
Furniture and equipment.................................. 6,790 6,696
------- ------
Total office properties and equipment at cost..... 16,291 14,470
Less accumulated depreciation............................ 7,936 7,580
------- ------
Total ............................................ $ 8,355 6,890
======= ======
7. Deposits
The scheduled maturities of certificate accounts are as follows as of
December 31, 2001:
(in thousands)
--------------
2002............. $129,051
2003............. 51,493
2004............. 21,533
2005............. 2,844
2006............. 1,587
Thereafter....... 1,815
--------
Total..... $208,323
========
Time deposits in excess of $100,000 approximated $29,577,000 and $33,312,000
as of December 31, 2001 and 2000, respectively. Interest expense on such
deposits for the years ended December 31, 2001, 2000, and 1999 was
approximately $1,889,000, $1,305,000, and $1,233,000, respectively.
A-25
8. Federal Home Loan Bank Advances
At December 31, 2001 and 2000, Federal Home Loan Bank (FHLB) advances
consisted of the following:
Weighted- Weighted-
average average
2001 interest rate 2000 interest rate
------- ------------- ------ -------------
(in thousands)
Maturity in year ending:
2001.................... -- -- 28,308 6.66
2002.................... $22,808 6.33 21,308 6.64
2003.................... 9,308 5.36 4,308 5.88
2004.................... 2,308 5.24 -- --
2005.................... 11,424 5.49 -- --
2006.................... 8,000 5.35 -- --
Thereafter.............. 37,326 5.22 21,126 5.45
------- ---- ------ ----
Total............ $91,174 5.56 75,050 6.27
======= ==== ====== ====
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, certain commercial real estate
loans, and certain investment securities aggregating from 105 percent to 175
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, 2001, consists of $2,500,000 in
advances on a revolving line of credit and $6,700,000 on a term note, both with
an unaffiliated bank. Both notes have a variable interest rate at 0.80 percent
below the lender's prime rate. Interest is payable quarterly. During the year
2001, the interest rate ranged from 9.125 percent to 3.950 percent. The
weighted average interest paid on the notes payable for the years ended
December 31, 2001, 2000, and 1999 was 6.61%, 9.07%, and 7.70%, 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,
2002. The term loan calls for annual payments of $1,350,000 in each of the
years 2002 and 2003. The balance of the loan matures December 31, 2004. During
2001, the Company made principal payments of $1,350,000 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,
2001 and 2000, were as follows:
Carrying Fair
2001 Value Value
---- -------- -------
(in thousands)
Financial assets:
Cash and due from banks............. $ 12,872 12,872
Interest-bearing deposits with banks 2,965 2,965
Federal funds sold.................. -- --
Investment securities............... 71,538 72,240
Loans, net.......................... 319,300 322,153
Loan pool participations............ 110,393 110,393
Accrued interest receivable......... 4,540 4,540
Financial liabilities:
Deposits............................ $378,645 381,899
Federal funds purchased............. 10,650 10,650
Federal Home Loan Band advances..... 91,174 91,634
Notes payable....................... 9,200 9,200
Accrued interest payable............ 1,467 1,467
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 Band advances..... 75,050 75,902
Notes payable....................... 13,200 13,200
Accrued interest payable............ 1,901 1,901
The recorded amount of cash and due from banks, interest-bearing deposits
with banks, accrued interest receivable and payable, 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.
Loans have been valued using a present value discounted cash flow with a
discount rate approximating the current market rate for similar loans.
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.
A-27
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 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 short-term nature of these instruments.
11. Income Taxes
Income tax expense (benefit) for the years ended December 31, 2001, 2000 and
1999, is as follows:
2001 Federal State Total
---- ------- ----- -----
(in thousands)
Current.......... $ 2,319 424 2,743
Deferred......... (322) (55) (377)
------- --- -----
Total..... $ 1,997 369 2,366
======= === =====
2000 Federal State Total
---- ------- ----- -----
(in thousands)
Current.......... $ 1,225 69 1,294
Deferred......... 448 17 465
------- --- -----
Total..... $ 1,673 86 1,759
======= === =====
1999 Federal State Total
---- ------- ----- -----
(in thousands)
Current.......... $ 1,322 307 1,629
Deferred......... (360) 1 (359)
------- --- -----
Total..... $ 962 308 1,270
======= === =====
Income tax expense differs from the amount computed by applying the United
States federal income tax rate of 34 percent in 2001, 2000, and 1999, to income
before income tax expense. The reasons for these differences are as follows:
2001 2000 1999
------- ----- -----
(in thousands)
Provision at statutory rate..................... $ 2,286 1,958 1,187
State franchise tax (net of federal tax benefit) 244 57 203
Nontaxable interest income...................... (206) (226) (147)
Nondeductible goodwill amortization............. 86 86 28
Life insurance cash value increase.............. (52) (35) (26)
Other, net...................................... 8 (81) 25
------- ----- -----
Total.................................... $ 2,366 1,759 1,270
======= ===== =====
A-28
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 2001 and
2000, are as follows:
2001 2000
------- ------
(in thousands)
Deferred tax assets:
Allowance for loan losses....................... $ 904 570
Deferred compensation........................... 169 116
Premium amortization............................ 95 90
Other........................................... 8 --
------- ------
Gross deferred tax assets.................... 1,176 776
------- ------
Deferred tax liabilities:
Depreciation and amortization................... (325) (333)
Federal Home Loan Bank stock.................... (109) (110)
Deferred loan fees.............................. (48) (68)
Purchase accounting adjustments................. (813) (771)
Unrealized gain on available for sale securities (442) (223)
Other........................................... -- (4)
------- ------
Gross deferred tax liabilities............... (1,737) (1,509)
------- ------
Net deferred tax liability................... $ (561) (733)
======= ======
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:
2001 2000 1999
------ ----- -----
(in thousands)
Net income:
As reported.......... $4,356 4,001 2,222
Pro forma............ 4,219 3,876 1,976
Net income per share:
As reported--basic... $ 1.10 0.99 0.58
As reported--diluted. 1.07 0.99 0.56
Pro forma--basic..... 1.09 0.96 0.51
Pro forma--diluted... 1.07 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 2001, 2000 and 1999, respectively: dividend
yield of 3.00 percent for 2001, 3.50 percent for 2000 and 3.50 percent for
1999; excepted volatility of .292 for 2001, .258 for 2000 and .223 for 1999;
risk free interest rates of 5.06 percent for 2001, 5.16 percent for 2000 and
6.23 percent for 1999; and expected lives of 7.5 years for all years.
A summary of the status of the Company's stock incentive plan as of December
31, 2001 and 2000, and the activity during the years ended on those dates is
presented below:
2001 2000
---------------------- ----------------------
Shares Exercise Price Shares Exercise Price
------- -------------- ------- --------------
Balance at beginning of year.................. 462,102 $ 7.50-22.00 420,232 $3.33-22.00
Granted....................................... 87,252 9.76-11.25 69,778 7.75-8.375
Exercised..................................... 34,280 8.10-9.00 7,300 3.33
Forfeited..................................... 26,325 8.375-19.875 20,608 7.50-22.00
------- -------
Outstanding at end of year.................... 488,749 $ 7.50-22.00 462,102 $7.50-22.00
------- -------
Options exercisable at year end............... 348,359 $ 7.50-22.00 336,265 $7.50-22.00
Weighted-average fair value of options granted
during the year............................. $ 3.08 $ 1.98
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 $188,000, $205,000, and $183,000 for
2001, 2000, and 1999, respectively. As of December 31, 2001 and 2000 the ESOP
owned 592,361 and 580,170 shares of the Company s common stock, respectively.
A 401(k) plan was adopted by the Company in 1994. The Company did not make
contributions to this plan prior to 2001. Beginning in 2001, the Company
matched 50 percent of employee contributions up to a maximum employee
contribution of 6 percent of compensation. Contributions relating to the plan
were $127,000 in 2001. 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 $97,000, $88,000, and $35,000, for the
years ended December 31, 2001, 2000, and 1999, 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 capital amounts and
classifications are also subject to qualitative judgements 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, 2001 and 2000, 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.
A-30
Minimum for
Capital Prompt
Adequacy Corrective Action
Actual Purposes Provisions
------------ ------------ -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------ -----
(dollars in thousands)
As of December 31, 2001:
Total capital (to risk-weighted assets):
Consolidated............................. $43,832 10.9% $32,281 8.0% N/A N/A
Mahaska State Bank....................... 16,749 10.6 12,617 8.0 $15,772 10.0%
Central Valley Bank...................... 10,160 11.6 7,017 8.0 8,772 10.0
Pella State Bank......................... 5,541 14.9 2,975 8.0 3,719 10.0
Midwest Federal.......................... 13,414 11.8 9,131 8.0 11,414 10.0
Tier 1 capital (to risk-weighted assets):
Consolidated............................. $40,153 10.0% $16,140 4.0% N/A N/A
Mahaska State Bank....................... 15,068 9.6 6,309 4.0 $ 9,463 6.0%
Central Valley Bank...................... 9,333 10.6 3,509 4.0 5,263 6.0
Pella State Bank......................... 5,105 13.7 1,488 4.0 2,232 6.0
Midwest Federal.......................... 12,759 11.2 4,566 4.0 6,849 6.0
Tier 1 capital (to average assets):
Consolidated............................. $40,153 7.6% $16,140 3.0% N/A N/A
Mahaska State Bank....................... 15,068 8.0 6,309 3.0 $ 9,463 5.0%
Central Valley Bank...................... 9,333 8.3 3,509 3.0 5,263 5.0
Pella State Bank......................... 5,105 12.1 1,488 3.0 2,232 5.0
Midwest Federal.......................... 12,759 7.0 4,566 3.0 6,849 5.0
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
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.
A-31
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
------- ------- ------ ------- --------- ------- ------- -------
(dollars in thousands)
At or for the year ended December 31, 2001:
Total interest income....................... $14,307 8,515 2,996 13,617 113 609 (52) 40,105
Total interest expense...................... 6,527 4,033 1,801 8,316 -- 802 (52) 21,427
Provisions for loan losses.................. 1,350 210 120 48 48 -- -- 1,776
Total other income.......................... 2,046 734 206 1,758 4 334 (795) 4,287
Goodwill and other intangible amortization.. 101 421 -- 528 -- -- -- 1,050
Total other expense......................... 4,431 2,717 1,229 3,562 63 2,210 (795) 13,417
Income tax expense.......................... 1,333 667 20 1,048 2 (704) -- 2,366
Net income.................................. 2,611 1,201 32 1,873 4 (1,365) -- 4,356
Total assets................................ 186,418 119,730 44,052 189,232 1,056 6,425 (1,118) 545,795
Net interest margin (FTE)................... 4.55% 4.36 % 3.21% 3.11% 9.01% (3.71)% 3.84%
Return on average assets.................... 1.42 1.07 0.08 1.00 0.28 (17.89) 0.82
Return on average equity.................... 16.24 9.08 0.62 9.37 0.29 (2.69) 8.59
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
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, 2001, without prior regulatory approval, approximated $4,996,000.
A-32
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, 2001
and 2000, outstanding commitments to extend credit totaled approximately
$35,662,000 and $32,190,000, respectively.
Commitments under standby letters of credit outstanding aggregated $769,000
and $3,351,000 as of December 31, 2001 and 2000, 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
-----------------
2001 2000
-------- -------
(in thousands)
Assets:
Cash on deposit at bank subsidiary............ $ 534 1
Cash at other institutions.................... 56 113
-------- -------
Cash and cash equivalents.................... 590 114
Investment securities......................... 433 622
Loans......................................... 683 786
Loan pool participations...................... 3,092 4,569
Investments in:
Bank subsidiaries............................ 52,939 53,646
Bank-related subsidiary...................... 1,054 1,604
Premises and equipment........................ 673 726
Other assets.................................. 954 1,084
-------- -------
Total assets............................... $ 60,418 63,151
======== =======
Liabilities and Shareholders' Equity:
Notes payable................................. $ 9,200 13,200
Accrued expenses payable and other liabilities 391 656
-------- -------
Total liabilities.......................... 9,591 13,856
-------- -------
Shareholders' equity:
Common stock................................. 24,564 24,564
Capital surplus.............................. 13,033 13,127
Treasury stock at cost....................... (12,595) (11,869)
Retained earnings............................ 25,082 23,102
Accumulated other comprehensive income....... 743 371
-------- -------
Total shareholders' equity................. 50,827 49,295
-------- -------
Total liabilities and shareholders' equity. $ 60,418 63,151
======== =======
A-34
Statements of Income
2001 2000 1999
------- ----- -----
- - (in thousands)
Income:
Dividends from subsidiaries.......................................................... $ 6,750 4,350 3,800
Interest income and discount on loan pool participations............................. 534 948 1,049
Management, audit, and loan review fees.............................................. 286 281 156
Other operating income............................................................... 126 241 480
------- ----- -----
Total income...................................................................... 7,696 5,820 5,485
------- ----- -----
Expense:
Salaries and benefits expense........................................................ 1,152 986 767
Interest on notes payable............................................................ 802 1,403 1,280
Other operating expense.............................................................. 1,060 684 621
------- ----- -----
Total expense..................................................................... 3,014 3,073 2,668
------- ----- -----
Income before income tax benefit and equity in undistributed earnings of subsidiaries 4,682 2,747 2,817
Income tax benefit................................................................... (703) (425) (327)
------- ----- -----
Income before equity in undistributed (dividends in excess of earnings) earnings
of subsidiaries................................................................. 5,385 3,172 3,144
Equity in undistributed (dividends in excess of earnings) earnings of subsidiaries... (1,029) 829 (922)
------- ----- -----
Net income........................................................................ $ 4,356 4,001 2,222
======= ===== =====
A-35
Statements of Cash Flows
Year ended December 31
------------------------
2001 2000 1999
------- ------- ------
(in thousands)
Cash flows from operating activities:
Net income....................................................................... $ 4,356 4,001 2,222
------- ------- ------
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed (dividends in excess of earnings) earnings of
subsidiaries................................................................ 1,029 (829) 922
Depreciation and amortization................................................. 79 70 86
Investment securities losses (gains).......................................... 1 (84) --
Decrease (increase) in other assets........................................... 130 (250) 1,042
(Decrease) increase in other liabilities...................................... (287) 561 (1,009)
------- ------- ------
Total adjustments......................................................... 952 (532) 1,041
------- ------- ------
Net cash provided by operating activities................................. 5,308 3,469 3,263
------- ------- ------
Cash flows from investing activities:
Purchases of investment securities............................................... (106) -- (515)
Proceeds from investment securities sales........................................ 349 284 --
Proceeds from investment securities maturities................................... 13 -- --
Net decrease in loans............................................................ 103 210 6,515
Purchases of loan pool participations............................................ (3,084) -- (3,972)
Principal recovery on sales of loan pool participations.......................... 1,744 -- --
Principal recovery on loan pool participations................................... 2,817 3,782 3,228
Purchases of premises and equipment.............................................. (26) (128) (70)
Proceeds from sale of premises and equipment..................................... -- 22 --
Payment of bank-related subsidiary equity........................................ 554 2,095 --
Advances for acquisition costs................................................... -- -- (432)
------- ------- ------
Net cash provided by investing activities..................................... 2,364 6,265 4,754
------- ------- ------
Cash flows from financing activities:
Advances on notes payable........................................................ 3,000 1,900 6,910
Principal payments on notes payable.............................................. (7,000) (6,700) (5,910)
Dividends paid................................................................... (2,376) (2,410) (2,310)
Purchases of treasury stock...................................................... (1,144) (3,433) (6,594)
Proceeds from stock options exercised............................................ 324 24 555
------- ------- ------
Net cash used in financing activities......................................... (7,196) (10,619) (7,349)
------- ------- ------
Net increase (decrease) in cash and cash equivalents.......................... 476 (885) 668
Cash and cash equivalents at beginning of year................................... 114 999 331
------- ------- ------
Cash and cash equivalents at end of year......................................... $ 590 114 999
======= ======= ======
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, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America .
/s/ KPMG LLP
KPMG LLP
Des Moines, Iowa
February 6, 2002
A-37
THE DIRECTORS AND OFFICERS
OF MAHASKA INVESTMENT COMPANY
CORDIALLY INVITE YOU TO ATTEND THE
ANNUAL MEETING OF SHAREHOLDERS
TUESDAY, APRIL 30, 2002, 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 BY 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 shares are held by joint tenants, both
should sign. 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 PROMPTLY USING THE ENCLOSED
ENVELOPE.
- -------------------------------------------------------------------------------
DETACH ATTENDANCE CARD HERE AND MAIL WITH PROXY CARD
MAHASKA INVESTMENT COMPANY
If you plan to personally attend the Annual Meeting of Shareholders on April 30,
2002, please check the box and list the names of attendees below.
Return this stub in the enclosed envelope with your completed proxy card.
I/We do plan to attend the Annual 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
Sunday, April 28, 2002 at 11:59 P.M. Central Time.
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 Internet must be submitted prior to
Sunday, April 28, 2002 at 11:59 P.M. Central Time.
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 25, 2002 hereby appoints
Charles S. Howard and David A. Meinert as Proxies, each with the power to
appoint his substitute and hereby authorizes them to represent and to vote, as
designated below, all the shares of Common Stock of Mahaska Investment Company
which the undersigned is entitled to vote at the Annual Meeting of Shareholders
to be held on April 30, 2002, or any adjournment thereof.
- --------------------------------------------------------------------------------
Proposal 1 - Election of Directors for a three year term.
[_] 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.)
01. Charles S. Howard
02. David A. Meinert
03. James G. Wake
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)