FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED COMMISSION FILE NUMBER
MARCH 31, 2002 0-24630
MAHASKA INVESTMENT COMPANY
(Exact Name of Registrant as Specified in its Charter)
IOWA 42-1003699
(State of Incorporation) (I.R.S. Employer Identification No.)
222 First Avenue East, Oskaloosa, Iowa 52577
Telephone Number (641) 673-8448
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No______
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As of April 30, 2002, there were 3,874,068 shares of common stock $5 par value
outstanding.
PART I -- Item 1. Financial Statements
MAHASKA INVESTMENT COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(unaudited)
(dollars in thousands, except for share amounts) March 31, December 31,
2002 2001
------------ ------------
ASSETS
Cash and due from banks ........................................................ $ 9,887 $ 12,872
Interest-bearing deposits in banks ............................................ 2,615 2,965
Federal funds sold ............................................................ 7,245 -
------------ ------------
Cash and cash equivalents .................................................. 19,747 15,837
------------ ------------
Investment securities:
Available for sale ......................................................... 60,723 50,206
Held to maturity (fair value of $21,124 as of March 31, 2002
and $22,034 as of December 31, 2001) ..................................... 20,535 21,332
Loans .......................................................................... 314,309 322,681
Allowance for loan losses ...................................................... (3,600) (3,381)
------------ ------------
Net loans .................................................................. 310,709 319,300
------------ ------------
Loan pool participations ....................................................... 108,530 110,393
Premises and equipment, net .................................................... 8,274 8,355
Accrued interest receivable .................................................... 4,182 4,540
Goodwill ....................................................................... 5,667 5,667
Other intangible assets ........................................................ 4,824 5,008
Other assets ................................................................... 5,690 5,157
------------ ------------
Total assets ............................................................. $ 548,881 $ 545,795
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand ..................................................................... $ 26,316 $ 26,961
NOW and Super NOW .......................................................... 48,150 45,372
Savings .................................................................... 102,644 97,989
Certificates of deposit .................................................... 210,815 208,323
------------ ------------
Total deposits ........................................................... 387,925 378,645
Federal funds purchased ........................................................ - 10,650
Federal Home Loan Bank advances ................................................ 92,204 91,174
Notes payable .................................................................. 12,200 9,200
Other liabilities .............................................................. 5,395 5,299
------------ ------------
Total liabilities ........................................................ 497,724 494,968
------------ ------------
Shareholders' equity:
Common stock, $5 par value; authorized 20,000,000 shares; issued
4,912,849 shares as of March 31, 2002 and December 31, 2001............... 24,564 24,564
Capital surplus ............................................................ 13,033 13,033
Treasury stock at cost, 1,045,255 shares as of March 31, 2002,
and 1,040,255 shares as of December 31, 2001 ............................. (12,658) (12,595)
Retained earnings .......................................................... 25,880 25,082
Accumulated other comprehensive income ..................................... 338 743
------------ ------------
Total shareholders' equity ............................................... 51,157 50,827
------------ ------------
Total liabilities and shareholders' equity ............................... $ 548,881 $ 545,795
============ ============
See accompanying notes to consolidated financial statements.
PART I -- Item 1. Financial Statements, Continued
MAHASKA INVESTMENT COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited) Three Months Ended
(dollars in thousands, except per share amounts) March 31,
-------------------------------
2002 2001
------------- ---------------
Interest income:
Interest and fees on loans ................................................. $ 5,856 $ 6,467
Interest and discount on loan pool participations .......................... 2,697 1,991
Interest on bank deposits .................................................. 6 11
Interest on federal funds sold ............................................. 17 75
Interest on investment securities:
Available for sale ....................................................... 699 1,014
Held to maturity ......................................................... 319 405
------------- --------------
Total interest income .................................................. 9,594 9,963
------------- --------------
Interest expense:
Interest on deposits:
NOW and Super NOW ........................................................ 74 168
Savings .................................................................. 477 867
Certificates of deposit .................................................. 2,440 3,122
Interest on federal funds purchased ........................................ 14 9
Interest on Federal Home Loan Bank advances ................................ 1,319 1,207
Interest on notes payable .................................................. 100 273
------------- --------------
Total interest expense ................................................. 4,424 5,646
------------- --------------
Net interest income .................................................... 5,170 4,317
Provision for loan losses ...................................................... 260 147
------------- --------------
Net interest income after provision for loan losses 4,910 4,170
------------- --------------
Noninterest income:
Service charges ............................................................ 511 473
Data processing income ..................................................... 57 53
Other operating income ..................................................... 312 226
Losses on sale of available for sale securities ............................. - (2)
------------- --------------
Total noninterest income ............................................... 880 750
------------- --------------
Noninterest expense:
Salaries and employee benefits ............................................. 1,711 1,635
Net occupancy .............................................................. 532 527
Professional fees .......................................................... 172 194
Goodwill amortization ...................................................... - 63
Other intangilbe asset amortization ........................................ 184 200
Other operating expense .................................................... 967 798
------------- --------------
Total noninterest expense .............................................. 3,566 3,417
------------- --------------
Income before income tax expense ....................................... 2,224 1,503
Income tax expense ............................................................. 807 511
------------- --------------
Net income ............................................................. $ 1,417 $ 992
============= ==============
Earnings per common share - basic .............................................. $ 0.37 $ 0.25
Earnings per common share - diluted ............................................ $ 0.36 $ 0.25
Dividends per common share ..................................................... $ 0.16 $ 0.15
See accompanying notes to consolidated financial statements.
PART I -- Item 1. Financial Statements, Continued
MAHASKA INVESTMENT COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited) Three Months Ended
(in thousands) March 31,
-----------------------------
2002 2001
------------- -------------
Net income ..................................................................... $1,417 $992
Other Comprehensive Income:
Unrealized (losses) gains on securities available for sale:
Unrealized holding (losses) gains arising during
the period, net of tax ................................................... (405) 747
Less: reclassification adjustment for net losses included
in net income, net of tax ................................................ - 1
---------- ----------
Other comprehensive (loss) income, net of tax .................................. (405) 748
---------- ----------
Comprehensive income ........................................................... $1,012 $1,740
========== =============
See accompanying notes to consolidated financial statements.
PART I -- Item 1. Financial Statements, Continued
MAHASKA INVESTMENT COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) Three Months Ended
(dollars in thousands) March 31,
----------------------------------
2002 2001
--------------- -----------------
Cash flows from operating activities:
Net income ................................................................. $ 1,417 $ 992
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................................ 481 454
Provision for loan losses ................................................ 260 147
Loss on sale of available for sale securities ............................ - 2
Amortization of investment securities and loans premiums ................. 94 51
Accretion of investment securities and loan discounts .................... (62) (64)
(Increase) decrease in other assets ...................................... (175) 430
Increase in other liabilities ............................................ 338 40
--------------- -----------------
Net cash provided by operating activities .............................. 2,353 2,052
--------------- -----------------
Cash flows from investing activities:
Investment securities available for sale:
Proceeds from sales ...................................................... - 4,098
Proceeds from maturities ................................................. 3,529 1,518
Purchases ................................................................ (14,747) (13,505)
Investment securities held to maturity:
Proceeds from maturities ................................................. 1,064 1,133
Purchases ................................................................ (244) -
Net decrease (increase) in loans ........................................... 8,335 (628)
Purchases of loan pool participations ...................................... (8,397) (601)
Principal recovery on loan pool participations ............................. 10,260 6,164
Purchases of premises and equipment ........................................ (194) (717)
Proceeds from sale of premises and equipment ............................... 21 -
--------------- -----------------
Net cash used in investing activities .................................. (373) (2,538)
--------------- -----------------
Cash flows from financing activities:
Net increase in deposits ................................................... 9,280 9,752
Net decrease in federal funds purchased .................................... (10,650) (2,345)
Federal Home Loan Bank advances ............................................ 1,000 2,500
Repayment of Federal Home Loan Bank advances ............................... (18) (3,517)
Advances on notes payable .................................................. 3,000 -
Principal payments on notes payable ........................................ - (500)
Dividends paid ............................................................. (619) (595)
Purchases of treasury stock ................................................ (63) -
Proceeds from exercise of stock options .................................... - 301
--------------- -----------------
Net cash provided by financing activities .............................. 1,930 5,596
--------------- -----------------
Net increase in cash and cash equivalents .............................. 3,910 5,110
Cash and cash equivalents at beginning of period ............................... 15,837 15,517
--------------- -----------------
Cash and cash equivalents at end of period ..................................... $ 19,747 $ 20,627
=============== =================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ................................................................. $ 1,463 $ 5,540
=============== =================
Income taxes ............................................................. $ 219 $ 133
=============== =================
See accompanying notes to consolidated financial statements.
1. Basis of Presentation
The accompanying consolidated statements of income, the consolidated
statements of comprehensive income, and the consolidated statements of
cash flow for the three months ended March 31, 2002 and 2001 and the
consolidated statements of condition as of December 31, 2001 and March
31, 2002 include the accounts and transactions of the Company and its
five wholly-owned subsidiaries, Mahaska State Bank, Central Valley
Bank, Pella State Bank, Midwest Federal Savings and Loan, and MIC
Financial, Inc. All material intercompany balances and transactions
have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared
by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. Although management believes
that the disclosures are adequate to make the information presented not
misleading, it is suggested that these interim consolidated financial
statements be read in conjunction with the Company's most recent
audited financial statements and notes thereto. In the opinion of
management, the accompanying consolidated financial statements contain
all adjustments (consisting of only normal recurring accruals)
necessary to present fairly the financial position as of March 31,
2002, and the results of operations for the three months ended March
31, 2002 and 2001, and cash flows for the three months ended March 31,
2002 and 2001.
The results for the three months ended March 31, 2002 may not be
indicative of results for the year ending December 31, 2002, or for any
other period.
2. Consolidated Statements of Cash Flows
In the consolidated statements of cash flows, cash and cash equivalents
include cash and due from banks, interest-bearing deposits with banks,
and federal funds sold.
3. Income Taxes
Federal income tax expense for the three months ended March 31, 2002
and 2001 was computed using the consolidated effective federal tax
rate. The Company also recognized income tax expense pertaining to
state franchise taxes payable individually by the subsidiary banks.
4. Earnings Per Common Share
Basic earnings per common share computations are based on the weighted
average number of shares of common stock actually outstanding during
the period. The weighted average number of shares for the three-month
periods ended March 31, 2002 and 2001 was 3,871,038 and 3,953,471,
respectively. Diluted earnings per share amounts are computed by
dividing net income by the weighted average number of shares and all
dilutive potential shares outstanding during the period. The
computation of diluted earnings per share used a weighted average
number of shares outstanding of 3,937,121 and 3,980,934 for the three
months ended March 31, 2002 and 2001, respectively.
5. 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 beginning 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
Assets and Extinguishment of Liabilities (a replacement of FASB
Statement No. 125)," was issued in September 2000. The statement
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 the provisions of Statement
No. 125 without reconsideration. The statement is effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. The adoption of the SFAS
No. 140 did not have a material impact on the financial condition or
results of operation of the Company.
SFAS No. 141, "Business Combinations," was adopted by the Company on
July 1, 2001. The statement requires that the purchase method of
accounting be used for all business combinations completed after June
30, 2001. The adoption of this statement did not have a material effect
on the Company's financial statements.
SFAS No. 142, "Goodwill and Other Intangible Assets," was adopted by
the Company on January 1, 2002. Statement 142 requires that goodwill
and intangible assets with indefinite useful lives no longer be
amortized, but instead be 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
adoption of SFAS No. 142 reduced the Company's goodwill amortization
expense $63,000 beginning in the first quarter of 2002 since the
goodwill attributable to the acquisition of Midwest Federal Savings is
no longer being amortized. As of January 1, 2002, the goodwill
attributable to the Midwest Federal Savings acquisition totaled
$5,667,000. Goodwill in the amount of $3,684,000 as of January 1, 2002
continues to be amortized under SFAS Statement No. 72, "Accounting for
Certain Acquisitions of Banking or Thrift Institutions." Under the
provisions of this statement, the goodwill relating to the acquisitions
of the United Federal Savings branches in 1994 and the acquisition of
the Boatmen's Bank branch in 1996 is defined as "unidentifiable
intangible assets" and must continue to be amortized.
The table below reconciles the reported earnings for the three months
ended March 31, 2001 to "adjusted earnings," which exclude goodwill
amortization.
(unaudited) Three Months Ended
(dollars in thousands, except per share amounts) March 31,
--------------------------------------------
2002 2001
------- -----------------------------------
Reported Reported Goodwill Adjusted
Earnings Earnings Amortization Earnings
--------------------------------------------
Net income ............................................. $1,417 $ 992 $ 63 $ 1,055
Earnings per share:
Basic ................................................ $ 0.37 $ 0.25 $ 0.02 $ 0.27
Diluted .............................................. $ 0.36 $ 0.25 $ 0.02 $ 0.27
The gross carrying amount of intangible assets and the associated
accumulated amortizaion at March 31, 2002, is presented in the table
below. Amortization expense for intangilble assets was $184 thousand
for the quarter ended March 31, 2002.
(unaudited) March 31, 2002
---------------------------
(in thousands) Gross
Carrying Accumulated
Amount Amortization
------------ ------------
Intangible assets:
Core deposit premium ................................................. $ 2,727 $ 1,475
Other intangible assets .............................................. 6,702 3,130
------------ ------------
Total .............................................................. $ 9,429 $ 4,605
------------ ------------
Unamortized intangible assets ............................................ $ 4,824
============
Core deposit intangibles are amortized using the effective-yield method
based on a useful life of 10 years. Other unidentifiable intangible
assets are being amortized using the straight-line method based on a
useful life of 15 years. Amortization expense related to core deposit
intangibles was $72,000 for the three months ended March 31, 2002 and
$88,000 for the three months ended March 31, 2001. Amortization expense
related to other unidentifiable intangible assets was $112,000 for the
three months ended March 31, 2002 and 2001.
Projections of amortization expense are based on existing asset
balances and the remaining useful lives. The following table shows the
estimated future amortization expense for amortized intangible assets:
(unaudited) Core
(dollars in thousands) Deposit
Premium Other Total
------------ ------------- ------------
Nine months ended December 31, 2002 ................ $ 218 $ 334 $552
Year ended December 31,
2003 .............................................. 245 447 692
2004 .............................................. 189 447 636
2005 .............................................. 153 447 600
2006 .............................................. 132 447 579
2007 .............................................. 115 446 561
Effective January 1, 2002 goodwill will be assessed at least annually
for impairment by applying a fair-value-based test using discounted
cash flows. The Company will complete its initial goodwill impairment
assessment in the second quarter and does not anticipate any
transitional impairment charge.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," was issued in August 2001 and was adopted by the Company on
January 1, 2002. SFAS No. 72 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The
adoption of SFAS 144 did not have a material effect on the results of
operations or financial condition of the Company.
6. Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reported period. Actual results could differ
from those estimates. A significant estimate that is particularly
sensitive to change is the allowance for loan losses.
7. Sale of 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. As of March 31, 2002, MIC Financial's loan
and lease portfolio totaled $968,000, less than 1 percent of the
Company's total loans as of that date. Management continues to evaluate
options on the remaining assets of MIC Financial.
PART I -- Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
QUARTER ENDED MARCH 31, 2002
The Company recorded net income of $1,417,000 for the quarter ended March 31,
2002, compared with net income of $992,000 for the quarter ended March 31, 2001,
an increase of $425,000 or 43 percent. The increase in net income was primarily
due to improved net interest income. Basic earnings per share for the first
quarter of 2002 were $.37 versus $.25 for the first quarter of 2001. Diluted
earnings per share were $.36 in 2002 and $.25 for the first quarter of 2001.
Actual weighted average shares outstanding were 3,871,038 and 3,953,471 for the
first quarter of 2002 and 2001, respectively. The Company's return on average
assets for the quarter ended March 31, 2002 was 1.07 percent compared with a
return of .78 percent for the quarter ended March 31, 2001. The Company's return
on average equity was 11.21 percent for the three months ended March 31, 2002
versus 8.06 percent for the three months ended March 31, 2001.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is computed by subtracting total interest expense from total
interest income. Fluctuations in net interest income can result from the changes
in the volumes of assets and liabilities as well as changes in interest rates.
Market interest rates on a national and local level moved downward throughout
the year 2001. Interest rates remained relatively constant during the first
quarter of 2002. The Company's net interest income for the quarter ended March
31, 2002 increased $853,000 or 20 percent to $5,170,000 from $4,317,000 for the
three months ended March 31, 2001. Total interest income was $369,000 or 4
percent lower in the first quarter of 2002 compared with the same period in 2001
primarily due to reduction in interest rates. The Company's total interest
expense for the first quarter of 2002 decreased $1,222,000 or 22 percent
compared with the same period in 2001 due to the lower interest rate
environment. The Company's net interest margin on a federal tax-equivalent basis
for the first quarter of 2002 increased to 4.21 percent from 3.73 percent in the
first quarter of 2001. Net interest margin is a measure of the net return on
interest-earning assets and is computed by dividing annualized net interest
income by the average of total interest-earning assets for the period. The
Company's overall yield on earning assets was 7.76 percent for the first quarter
of 2002 compared with 8.51 percent for the first quarter of 2001. The rate on
interest-bearing liabilities decreased in the first quarter of 2002 to 3.91
percent compared to 5.25 percent for the first quarter of 2001.
Interest income and fees on loans decreased $611,000 or 9 percent in the first
- ---------------------------------
quarter of 2002 compared to the same period in 2001, mainly due to lower
interest rates. The average yield on loans decreased to 7.50 percent for the
first quarter of 2002, compared to 8.42 percent in the first quarter of 2001.
The yield on the Company's loan portfolio is affected by the amount of
nonaccrual loans (which do not earn interest income), the mix of the portfolio
(real estate loans generally have a lower overall yield than commercial and
agricultural loans), the effects of competition and the interest rate
environment on the
amounts and volumes of new loan originations, and the mix of variable rate
versus fixed rate loans in the Company's portfolio. The lower interest rates
were not beneficial to the Company as variable rate loans tied to prime were
adjusted downward and produced less interest income. Renewing fixed-rate loans
have been rewritten at lower rates reflecting the market interest rate
environment. Loan demand by customers in the market areas served by the Company
has become "soft" as general economic conditions have weakened and potential
borrowers are less willing to increase their debt load. Average loans
outstanding were $316,549,000 in 2002 compared with $311,553,000 for the first
quarter of 2001, an increase of $4,996,000 or 2 percent.
Interest and discount income on loan pool participations increased $706,000 or
- --------------------------------------------------------
35 percent in the first quarter of 2002 compared with 2001, as a result of the
greater volume of loan pool participations. Interest income and discount
collected on the loan pool participations for the three months ended March 31,
2002 was $2,697,000 compared with $1,991,000 collected in the first quarter of
2001. The yield on loan pool participations was 10.3 percent for the first
quarter of 2002 compared with 11.4 percent for the quarter ended March 31, 2001.
The average loan pool participation investment balance was $35,274,000 or 50
percent higher in the first quarter of 2002 than in 2001 as a result of pool
purchases in the second, third, and fourth quarters of 2001. Newly purchased
loan pools typically do not produce income for a period of up to 120 days from
date of purchase, which significantly impacts the overall yield on pools. These
loan pool participations are pools of performing and distressed and
nonperforming loans that the Company has purchased at a discount from the
aggregate outstanding principal amount of the underlying loans. Income is
derived from this investment in the form of interest collected and the repayment
of the principal in excess of the purchase cost which is herein referred to as
"discount recovery." The Company recognizes interest income and discount
recovery on its loan pool participations on a cash basis. The loan pool
participations have traditionally been a high-yield activity for the Company,
but this yield has fluctuated from period to period based on the amount of cash
collection, discount recovery, and net collection expenses of the servicer in
any given period. The income and yield on loan pool participations may vary in
future periods due to the volume and discount rate on loan pools purchased.
Interest income on investment securities decreased $401,000 or 28 percent in the
- ----------------------------------------
quarter ended March 31, 2002, compared with the quarter ended March 31, 2001 due
to decreased volume in the portfolio and also due to the decreased interest
rates. Interest income on investment securities totaled $1,018,000 for the first
quarter of 2002 compared with $1,419,000 in 2001. The average balance of
investments in 2002 was $75,247,000, down from $88,492,000 in the first quarter
of 2001. The yield on the Company's investment portfolio in the first quarter of
2002 decreased to 5.89 percent from 6.94 percent in the comparable period of
2001.
Interest expense on deposits decreased $1,166,000 in the first quarter of 2002
- ----------------------------
compared with 2001 mainly due to the lowered national and local market interest
rate environment. Average interest-bearing deposits for the first quarter of
2002 increased $7,075,000 or 2 percent from the same period in 2001.
Interest-bearing demand deposits and savings accounts increased in 2002 while
average certificates of deposit decreased. The weighted average rate paid on
interest-bearing deposits was 3.42 percent in the first quarter of 2002 compared
with 4.85 percent in the
first quarter of 2001. The full benefit of lower market deposit rates may not be
realized if the competitive environment forces the Company to pay above-market
rates to attract or retain deposits in future periods.
Interest expense on borrowed funds decreased $56,000 in the first quarter of
- ----------------------------------
2002 compared with 2001. Interest expense on Federal Home Loan Bank advances was
$112,000 higher in the first quarter of 2002 reflecting the Company's greater
utilization of this alternative funding method. Interest expense on notes
payable decreased $173,000 in the first quarter of 2002 compared with 2001
reflecting lower average borrowings on the Company's commercial bank line of
credit and decreased interest rates. The Company's notes payable line is
variable with the national prime rate and any changes in this rate will affect
the amount of interest expense incurred in future periods.
Provision for Loan Losses
The Company recorded a provision for loan losses of $260,000 in the first
quarter of 2002 compared with $147,000 in the first quarter of 2001. Management
determines an appropriate provision based on its evaluation of the adequacy of
the allowance for loan losses in relationship to a continuing review of problem
loans, the current economic conditions, actual loss experience and industry
trends. Management believes that the allowance for loan losses is adequate based
on the inherent risk in the portfolio as of March 31, 2002, however, growth in
the loan portfolio and the uncertainty of the general economy require that
management continue to evaluate the adequacy of the allowance for loan losses
and make additional provisions in future periods as deemed necessary.
Other Income
Other income results from the charges and fees collected by the Company from its
customers for various services performed, data processing income received from
nonaffiliated banks, miscellaneous other income and gains (or losses) from the
sale of investment securities held in the available for sale category. Total
other income was $130,000 or 17 percent greater in the first quarter of 2002
compared with 2001. Most of the increase was due to higher service charge income
and origination fees for loans sold on the secondary market.
Other Expense
Total other noninterest expense for the quarter ended March 31, 2002 increased
$149,000 compared to noninterest expense for the first quarter of 2001. Other
expense includes all the costs incurred to operate the Company except for
interest expense, the loan loss provision and income taxes. Salaries and
benefits expense for the first quarter of 2002 increased $76,000 or 5 percent
from 2001 as a result of increased salary levels and health insurance costs.
Other operating expense increased by $169,000 in the first quarter of 2002
compared with the three months ended March 31, 2001 due to the write-down to
market value of a commercial property held in other real estate. Goodwill and
other intangible asset amortization decreased $79,000 in the first quarter of
2002 as a result of the adoption of FASB Statement No. 142, which permitted the
discontinuation of amortization of goodwill effective January 1, 2002. The
Company does continue to
amortize core deposit intangibles and Statement 72 unidentifiable intangible
assets.
Income Tax Expense
The Company incurred income tax expense of $807,000 for the three months ended
March 31, 2002 compared with $511,000 for the three months ended March 31, 2001.
The increased tax expense for the March 2002 quarter was mainly due to higher
overall taxable income compared to the same period in the prior year. The
effective income tax rate as a percent of income before taxes for the three
months ended March 31, 2002 and 2001 was 36.3 percent and 34.0 percent,
respectively.
FINANCIAL CONDITION
Total assets as of March 31, 2002 were $548,881,000, an increase of $3,086,000
or less than 1 percent from December 31, 2001. As of March 31, 2002, the Company
had $7,245,000 in federal funds sold and no federal funds purchased compared
with $10,650,000 purchased as of December 31, 2001. The Company's liquidity
needs are usually highest in the second and third quarters of each year due to
seasonal loan demand and minimal deposit growth in the first nine months of the
year. Federal funds are purchased on a short-term basis to meet this liquidity
need.
Investment Securities
Investment securities available for sale totaled $60,723,000 as of March 31,
2002. This is an increase of $10,517,000 from December 31, 2001 as securities
were purchased for the portfolio. Investment securities classified as held to
maturity declined to $20,535,000 as of March 31, 2002, compared with $21,332,000
on December 31, 2001, as the proceeds from maturities were reinvested in
available for sale securities.
Loans
Loan volumes declined in the first quarter of 2002 to $314,309,000 on March 31,
2002. The $8,372,000 decrease from December 31, 2001 was, in part, due to the
payoff of a large commercial real estate line, continued refinancing of
residential real estate loans into long-term fixed rate secondary market loans,
and a general weakening in economic conditions in the markets served by the
Company. As of March 31, 2002, the Company's loan to deposit ratio (excluding
loan pool investments) was 81.0 percent compared with a year-end 2001 loan to
deposit ratio of 85.2 percent. The decrease in the loan to deposit ratio is
attributable to the decline in loan volume and the increase in deposits since
December 31, 2001. As of March 31, 2002, loans secured by real estate (including
1 to 4 family, multi-family, commercial and agricultural) comprised the largest
category in the portfolio at approximately 72 percent of total loans.
Agricultural loans and commercial loans were each approximately 12 percent of
total loans. Loans to individuals and other loans constituted approximately 4
percent.
Loan Pool Participations
As of March 31, 2002, the Company had loan pool participations of $108,530,000,
a decrease of $1,863,000 or 2 percent from the December 31, 2001 balance of
$110,393,000. The reduction in the loan pool participations is primarily due to
collections made in the normal course of business. The loan pool investment
balance shown as an asset on the Company's Statement of Condition represents the
discounted purchase cost of the loan pool participations. The Company was the
winning bidder on three loan pool packages during the first quarter of 2002
totaling $8,397,000. The average loan pool participation balance of $106,412,000
for the first three months of 2002 was $35,274,000 or 50 percent higher than the
average balance of $71,138,000 for the first quarter of 2001.
Deposits
Total deposits as of March 31, 2002 were $387,295,000 compared with $378,645,000
as of December 31, 2001. Certificates of deposit remain the largest category of
deposits at March 31, 2002 representing approximately 54 percent of total
deposits. Deposits grew 2 percent during the first quarter of 2002.
Borrowed Funds/Notes Payable
The Company had no Federal Funds purchased on March 31, 2002. There was
$10,650,000 in Federal Funds purchased on December 31, 2001. During the first
quarter of 2002, the Company had an average balance of Federal Funds purchased
of $2,581,000. Advances from the Federal Home Loan Bank totaled $92,204,000 as
of March 31, 2002 compared with $91,174,000 as of December 31, 2001. Notes
payable increased to $12,200,000 on March 31, 2002 from $9,200,000 on December
31, 2001 as the Company utilized this funding mechanism to acquire loan pool
participations.
Nonperforming Assets
The Company's nonperforming assets totaled $4,439,000 (1.39 percent of total
loans) as of March 31, 2002, compared to $3,670,000 (1.08 percent of total
loans) as of December 31, 2001. All nonperforming asset totals and related
ratios exclude the loan pool participations. The following table presents the
categories of nonperforming assets as of March 31, 2002 compared with December
31, 2001:
Nonperforming Assets
(dollars in thousands)
March 31, December 31,
2002 2001
---- ----
Nonaccrual $2,910 $2,559
Loans 90 days past due 1,469 926
Other real estate owned 60 185
------ ------
$4,439 $3,670
====== ======
From December 31, 2001 to March 31, 2002, nonaccrual loans increased $351,000 as
the result of concerns with the quality of an agricultural line of credit. Loans
ninety days past due increased $543,000. The increase in loans ninety days past
due was attributable to one large agricultural construction credit that is
expected to be rolled into permanent financing when the construction is
complete. Other real estate owned decreased by $125,000 as property held in this
category was reduced to its current market value. The Company's allowance for
loan losses as of March 31, 2002 was $3,600,000, which was 1.15 percent of total
loans as of that date. This compares with an allowance for loan losses of
$3,381,000 as of December 31, 2001, which was 1.05 percent of total loans. As of
March 31, 2002, the allowance for loan losses was 82.21 percent of nonperforming
loans compared with 96.99 percent as of December 31, 2001. Based on the inherent
risk in the loan portfolio, management believes that as of March 31, 2002, the
allowance for loan losses is adequate. For the three months ended March 31,
2002, the Company's net loan charge-offs were $41,000 compared with net
charge-offs of $18,000 during the quarter ended March 31, 2001.
Capital Resources
Total shareholders' equity was 9.3 percent of total assets as of March 31, 2002
and as of December 31, 2001. The Company's Tier 1 Capital Ratio was 10.2 percent
of risk-weighted assets as of March 31, 2002 and was 10.0 percent as of December
31, 2001, compared to a 4.0 percent regulatory requirement. Risk-based capital
guidelines require the classification of assets and some off-balance-sheet items
in terms of credit-risk exposure and the measuring of capital as percentage of
the risk-adjusted asset totals. Tier 1 Capital is the Company's total common
shareholders' equity reduced by goodwill. Management believes that, as of March
31, 2002, the Company and its subsidiary banks meet all capital adequacy
requirements to which they are subject. As of that date, all the bank
subsidiaries were "well capitalized" under regulatory prompt corrective action
provisions. During the first quarter of 2002, the Company repurchased 5,000
shares of common stock on the open market in accordance with the terms of its'
previously-approved stock repurchase authorization.
Liquidity
Liquidity management involves meeting the cash flow requirements of depositors
and borrowers. The Company conducts liquidity management on both a daily and
long-term basis; and it adjusts its investments in liquid assets based on
expected loan demand, projected loan maturities and payments, estimated cash
flows from the loan pool participations, expected deposit flows, yields
available on interest-bearing deposits, and the objectives of its
asset/liability management program. The Company had liquid assets (cash and cash
equivalents) of $19,747,000 as of March 31, 2002, compared with $15,837,000 as
of December 31, 2001. Most of the increase during the quarter was in federal
funds sold. Investment securities classified as available for sale could be sold
to meet liquidity needs if necessary. Additionally, the bank subsidiaries
maintain lines of credit with correspondent banks and the Federal Home Loan Bank
that would allow them to borrow federal funds on a short-term basis if
necessary. The Company also maintains a line of credit with a major commercial
bank that provides liquidity for the purchase of loan pool participations and
other corporate needs. Management believes that the Company has sufficient
liquidity as of March 31, 2002 to meet the needs of borrowers and depositors.
Market Risk Management
Market risk is the risk of earnings volatility that results from adverse changes
in interest rates and market prices. The Company's market risk is primarily
comprised of interest rate risk arising from its core banking activities of
lending and deposit taking. Interest rate risk is the risk that changes in
market interest rates may adversely affect the Company's net interest income.
Management continually develops and applies strategies to mitigate this risk.
The Company has not experienced any material changes to its market risk position
since December 31, 2001, from that disclosed in the Company's 2001 Form 10-K
Annual Report. Management does not believe that the Company's primary market
risk exposures and how those exposures were managed in the first three months of
2002 changed when compared to 2001.
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. This analysis of the Company's interest
rate risk was presented in the Form 10-K filed by the Company for the year ended
December 31, 2001.
Commitments and Contingencies
In the ordinary course of business, the Company is engaged in various issues
involving litigation. Management believes that none of this litigation is
material to the Company's results of operations.
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 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.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
With the exception of the historical information contained in this report, the
matters described herein contain forward-looking statements that involve risk
and uncertainties that individually or mutually impact the matters herein
described, including but not limited to financial projections, product demand
and market acceptance, the effect of economic conditions, the impact of
competitive products and pricing, governmental regulations, results of
litigation, technological difficulties and/or other factors outside the control
of the Company, which are detailed from time to time in the Company's SEC
reports. The Company disclaims any intent or obligation to update these
forward-looking statements.
Part II - Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits and financial statement schedules are filed as
part of this report:
Exhibits
--------
3.1 Articles of Incorporation, as amended through April
30, 1998, of Mahaska Investment Company. The Articles
of Incorporation, as amended, of Mahaska Investment
Company are incorporated by reference to the
Company's quarterly report on Form 10-Q for the
quarter ended September 30, 1998.
3.2 Bylaws of Mahaska Investment Company. The Amended and
Restated Bylaws of Mahaska Investment Company dated
July 23, 1998, are incorporated by reference to the
Company's quarterly report on Form 10-Q for the
Quarter ended September 30, 1998.
10.1 Mahaska Investment Company Employee Stock Ownership
Plan & Trust as restated and amended. This Plan &
Trust is incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1994.
10.2.1 1993 Stock Incentive Plan. This 1993 Stock Incentive
Plan is incorporated by reference to Form S-1
Registration Number 33-81922 of Mahaska Investment
Company.
10.2.2 1996 Stock Incentive Plan. This 1996 Stock Incentive
Plan is incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1996.
10.2.3 1998 Stock Incentive Plan. This 1998 Stock Incentive
Plan is incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1997.
10.3 States Resources Corp. Loan Participation and
Servicing Agreement dated February 5, 1999 between
States Resources Corp. and Mahaska Investment
Company. This agreement is incorporated herein by
reference to the Form 10-K report filed by Mahaska
Investment Company for the Year ended December 31,
1999.
10.5 Amended and Restated Credit Agreement dated June 30,
2000 between Mahaska Investment Company and Harris
Trust and Savings Bank. This Amended and Restated
Credit Agreement is incorporated herein by reference
to the Form 10-Q report filed by Mahaska Investment
Company for the Quarter ended September 30, 2000.
10.5.1 First Amendment to Amended and Restated Credit
agreement dated June 30, 2001. This amendment is
incorporated herein by reference to the Form 10-Q
report filed by Mahaska Investment Company for the
Quarter ended September 30, 2001.
11 Computation of Per Share Earnings.
(b) Reports on Form 8-K: No reports on Form 8-K were required to be filed during
the three months ended March 31, 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Mahaska Investment Company
--------------------------
(Registrant)
By: /s/ Charles S. Howard
----------------------
Charles S. Howard
Chairman, President, Chief Executive Officer
May 10, 2002
------------
Dated
By: /s/ David A. Meinert
--------------------
David A. Meinert
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
May 10, 2002
------------
Dated