1
MANAGEMENT'S DISCUSSION AND ANALYSIS
MAHASKA INVESTMENT COMPANY (THE "COMPANY") RECORDED NET INCOME OF $4,494,000,
OR $2.00 PER SHARE, FOR THE YEAR ENDED DECEMBER 31, 1996, which is an increase
of 14.6 percent compared with the net income of $3,923,000, or $1.72 per share,
earned in 1995. The net income for 1995 increased 41.1 percent from the
$2,780,000, or $1.65 per share, earned in 1994.
The Company's total assets increased 22.8 percent in 1996 compared to 1995.
Much of this growth was attributable to Central Valley Bank's ("CVB")
acquisition of a bank office in June 1996. Through this acquisition the Company
acquired approximately $14,645,000 in loans and approximately $32,083,000 in
deposits. Both Mahaska State Bank ("MSB") and CVB experienced loan and deposit
growth in 1996. Exclusive of the bank office acquisition, the Company's total
assets as of December 31, 1996, had increased approximately $9.4 million, or 4.6
percent, from the year-end 1995 total. Deposit growth in 1996 was approximately
8.3 percent without the bank office acquisition. During 1995, the Company's
total assets grew 9.8 percent from 1994 while deposits increased 10.3 percent.
Return on average assets was 1.93 percent in 1996, 2.04 percent in 1995,
and 1.68 percent in 1994. The Company's return on average equity has shown an
increase during each of the last three years and was 13.52 percent in 1996,
12.67 percent in 1995, and 12.45 percent in 1994.
INTEREST AND DISCOUNT ON
LOAN POOL PARTICIPATION
(In thousands)
[BAR CHART]
93 94 95 96
$3,930 4,479 7,864 9,097
INVESTMENT IN LOAN POOLS The Company continued to experience increasing returns
on its investment in loan pool participations. Interest income and discount on
the loan pool participations increased 15.7 percent in 1996 to $9,097,000. For
the year 1995, interest income and discount from loan pool participations
increased 75.6 percent to $7,864,000 compared to $4,479,000 for the year ended
December 31, 1994.
The average loan pool participation investment by the Company for 1996
was $50,105,000 compared with an average for 1995 of $45,582,000. During 1996
the Company invested $29,827,000 in loan pool participations with most of this
growth occurring in the second and third quarters of the year. New loan pool
investments made during 1995 totaled $12,468,000. Throughout 1996, loan pool
participation investments averaged 23.7 percent of earning assets while in 1995
they were 25.7 percent of average earning assets. The yield on loan pool
participation investments rose to 18.2 percent for 1996, compared with 17.3
percent in 1995.
NET INTEREST INCOME Net interest income for the year ended December 31, 1996,
increased 25.6 percent to $14,098,000. Net interest income for 1995 was
$11,227,000, an increase of 35.2 percent from $8,303,000 in 1994.
Net interest income for 1996 increased $2,871,000 compared with 1995.
Total interest income increased by $4,302,000 in 1996, partially offset by a
$1,431,000 increase in total interest expense. Interest income on loans
increased by $2,428,000, and interest income and discount
collected on loan pool participations rose by $1,233,000 in 1996. Interest
income on taxable investment securities held as available for sale increased
by $690,000 in 1996 compared with 1995. Most of the increases in interest
income on earning
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TOTAL ASSETS
(In thousands)
[BAR CHART]
93 94 95 96
$143,752 186,818 205,162 251,851
assets were attributable to higher volumes of these assets during 1996 compared
to 1995. For 1996, interest expense on deposits increased by $1,108,000 and the
interest expense on borrowed funds grew by $323,000 reflecting increased levels
of deposits and borrowed funds over 1995. The Company's net interest margin
rose to 6.69 percent on a fully tax equivalent basis for 1996, up from 6.48
percent for 1995.
The $2,924,000 increase in net interest income in 1995 was primarily
attributable to the increase in interest income and discount collected on loan
pool participations and to an increase in interest income on loans. An increase
of $2,424,000 in interest expense on deposits and borrowed funds partially
offset the additional interest income. Interest income and discount recovery on
loan pool participations increased $3,385,000 in 1995 as the pools acquired in
the latter part of 1994 began to show recoveries. Interest income on loans
increased $1,905,000 over 1994 as loan volumes grew in 1995. Interest expense on
deposits rose in 1995 compared to 1994 as the deposits acquired in the formation
of CVB were on the Company's books for the entire year. Additionally, the
Company's total deposits rose $15,028,000 from year-end 1994 to 1995 resulting
in higher interest expense. The Company's net interest margin increased to 6.48
percent for 1995 compared with 5.58 percent in 1994.
PROVISION FOR LOAN LOSSES The Company recorded a provision for loan loss
expense of $987,000 for 1996 compared to a 1995 provision of $168,000 and a
1994 provision of $183,000. The increase in 1996 provision was primarily
attributable to problems in a line of credit managed by our commercial finance
subsidiary, MIC Leasing Co. ("Leasing"). This line was charged off prior to
year-end 1996. The decrease in the provision for 1995 compared to 1994
reflects a reduction in the net charge-offs in 1995.
OTHER INCOME Noninterest income increased $205,000 in 1996 compared with 1995.
An increase in service charge and fee income related to the bank office
acquisition contributed to the growth in noninterest income. Higher trust
income in 1996 also added to total noninterest income. The Company did
recognize a loss on the sale of some of its investment securities held as
available for sale during the year. These securities were sold to meet
liquidity needs.
The Company's total other income decreased $156,000 in 1995 to $1,301,000
from the $1,457,000 recorded in 1994. The $199,000 decrease in data processing
income in 1995 was the primary reason for the decline in total other income.
This was caused by a reduction in the number of non-affiliated banks that
Mahaska State Bank provided data processing for in 1995. Service charge income
grew $76,000 in 1995 reflecting the additional accounts acquired in the
formation of CVB.
OTHER EXPENSE Noninterest expense increased 20 percent for the year 1996
compared to 1995. The additional operating expenses associated with the
operation of CVB's Fairfield grocery store branch and the expanded Sigourney
branch contributed significantly to the increase in noninterest expense. The
Savings Association Insurance Fund (SAIF) one-time assessment which occurred on
September 30, 1996, resulted in a net increase in the Company's FDIC assessment
expense of approximately $69,000. The one-time assessment was offset by reduced
overall FDIC insurance costs for
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MSB and CVB. The Company incurred additional amortization expense on the
deposit premium paid for the acquisition of the bank branch.
The formation of CVB was the primary factor in the 1995 operating expense
increase of $998,000 compared to 1994. Central Valley operations produced
increases in salary and benefits expense, occupancy expense, other operating
expense, and goodwill amortization expense. One area of significant expense
reduction in 1995 was in the FDIC assessment expense incurred by MSB. Mahaska
State Bank's premium cost decreased by $115,000 due to the overall reduction in
the assessment rate.
INCOME TAX EXPENSE The Company's income tax expense for the year 1996 increased
$398,000 (20 percent) compared with 1995 mainly due to the increase in before
tax earnings. Income tax expense for 1995 increased $642,000 when compared to
1994 primarily as a result of the overall increase in earnings. The Company's
consolidated income tax rate varies from the statutory rate
principally due to interest income from tax-exempt securities and loans. The
effective income tax rate as a percent of income before taxes was 34.7 percent
in 1996, 33.6 percent for 1995, and 32.6 percent for 1994.
CAPITAL RESOURCES Total shareholders' equity as of December 31, 1996, was
$34,243,000, which is an increase of $2,137,000 due to the retention of
earnings from the December 31, 1995, total of
CENTRAL VALLEY
DOUBLES IN ASSET SIZE
The June 1996 acquisition of the Boatmen's Bank office effectively doubled the
size of CVB. Total assets of CVB rose by $37.3 million on the date
it acquired the bank office in Sigourney. The acquisition produced an increase
in all interest income, interest expense, noninterest income,
and noninterest expense categories for the year 1996 in comparison with 1995.
The bank office acquisition provides CVB with a significantly expanded market
presence in Keokuk County.
BOOK VALUE PER SHARE
[BAR CHART]
93 94 95 96
$11.74 13.04 14.15 15.36
$32,106,000. Shareholders' equity as a percentage of total assets was 13.6
percent on December 31, 1996, versus 15.6 percent on December 31, 1995. The
decrease in the percentage of shareholders' equity to total assets reflects
the increase in total assets in 1996. During 1996 the Company repurchased
40,000 shares of its common stock, leaving 2,229,506 shares outstanding as of
year-end 1996.
Effective January 1, 1994, the Company adopted the Statement of Financial
Accounting Standards No. 115. This accounting standard requires the
classification of investment securities based on the Company's intended holding
period. Accordingly, securities which the Company may sell at its discretion
prior to maturity are recorded at their fair market value. Additionally, the
aggregate unrealized net gains or losses, including the effects of income tax,
are recorded as a component of shareholders' equity. As of December 31, 1996,
aggregate unrealized losses totaled $40,000, while on December 31, 1995,
aggregate unrealized gains totaled $57,000.
The Company's risk-based Tier 1 capital ratio was 15.4 percent as of
December 31, 1996, and the Total capital ratio was 16.2 percent. As of December
31, 1995, the Company's Tier 1 capital ratio was 19.8 percent, and the Total
capital ratio was 21.2 percent. Although these ratios declined in 1996 from
1995 due to the increased asset level,
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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 capital excluding intangible assets, was 11.1
percent as of December 31, 1996, and 13.7 percent at December 31, 1995,
exceeding the regulatory minimum requirement range of 3.0 percent to 5.0
percent. Each of these capital calculations excludes unrealized gains or losses
on assets available for sale in accordance with Federal regulations.
The debt-to-equity ratio of the Company was 24.8 percent at December 31,
1996, compared to 31.2 percent at the end of 1995. As of December 31, 1996, the
Company had borrowed $8,500,000 on a revolving line of credit from a major
commercial bank to fund loan pool participation investments and to provide
additional capital to CVB and Leasing. The Company entered into this
revolving line of credit agreement on January 31, 1996, with an amendment
to the agreement as of June 19, 1996. The agreement provides for a maximum
line of $17,000,000 and matures on June 19, 1997. The Company had no material
commitments for capital expenditures as of December 31, 1996.
Mahaska Investment Company common stock closed on December 31, 1996 at a
bid price of $18.50 per share, representing 1.2 times the book value per share
of $15.36 on December 31, 1996. The year-end stock price represented a
price-to-1996-earnings multiple of 9.3 times.
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 (including cash and federal funds sold) are maintained to
meet customer needs. The Company had liquid assets of $16,484,000 as of
December 31, 1996, compared with $20,821,000 as of December 31, 1995.
Investment securities classified as available for sale and securities and loans
maturing within one year totaled $93,316,000 and $78,265,000 as of December 31,
1996 and 1995, respectively. Assets maturing within one year, combined with
liquid assets, on December 31, 1996, were 45.7 percent and on December 31,
1995, were 61.9 percent of total deposits as of the same dates.
The Company's principal sources of funds are deposits, principal
repayments on loans, proceeds from the maturities and sales of investment
securities, principal recoveries on loan pool participations, 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. The Company
DIVIDENDS PER SHARE
[BAR CHART]
93 94 95 96
.44 .60 .66 $.73
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generally manages the pricing of its deposits to maintain a steady deposit
base.
Net cash provided by operations is another major source of liquidity. The
net cash provided by operating activities was $7,137,000 in 1996, $5,086,000 in
1995, and $3,248,0000 in 1994. 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, 1996, the Company had outstanding
commitments to originate loans of $13,976,000 and had no commitments to sell
loans. Certificates of deposit which are scheduled to mature in one year or
less as of December 31, 1996, totaled $64,480,000. 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 MSB's and CVB's asset-liability committees which take action
based upon their analysis of expected changes in the balance sheet. A gap ratio
of 1.0 indicates a matched position, in which case interest rate movements will
not materially affect net interest income.
As of December 31, 1996, the Company's gap ratio for assets and
liabilities maturing within three months and within one year were .90 and .69
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 short-term repriceable and the classification of loan pool
participations as having a three-year average life based on the historical
average for return of pool investment.
LOAN QUALITY Total loans increased 36.7 percent during 1996 to a year-end
total of $118,045,000. Loans acquired with the bank office on June 24, 1996,
totaled $14,645,000. The remaining increase in loans from 1995 of $16,924,000
was mainly in the commercial and consumer categories. Exclusive of the bank
office acquisition, loans increased 19.6 percent in 1996 over the December 31,
1995 total of $86,476,000.
Non-performing assets (including $12,000 in Other Real Estate) as of
December 31, 1996, totaled $2,102,000. As of December 31, 1995, non-performing
loans totaled $694,000. The ratio of non-performing loans to total loans was
1.79 percent for year-end 1996 compared to .81 percent in 1995. The increase in
non-performing loans was mainly due to timing situations that management
anticipates will be resolved in the near future with minimal or no loss to the
Company. Approximately one-half of the Company's nonaccrual loans are 90
percent government guaranteed against loss.
The allowance for loan losses was $1,491,000 as of December 31, 1996, and
$1,001,000 as of year-end 1995. The allowance represented 1.27 percent of total
loans at December 31, 1996, and 1.17 percent of loans on December 31, 1995. The
allowance as a percentage of non-performing assets was 70.9 percent on December
31, 1996, and was 144.2 percent as of year-end 1995. Net loan charge-offs for
1996 totaled $668,000, or .63 percent of average loans, compared with 1995 net
charge-offs of $48,000, or .06 percent of average loans. As part of the
purchase transaction for Boatmen's, an additional $170,000 was added to the
allowance. The allowance for loan losses is maintained at a level considered by
management to be adequate to provide for estimated loan losses.
Statement of Financial Accounting Standards No. 114 requires that the
value of impaired loans be established by discounting the expected future cash
flows at the loan's effective interest rate or
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by the current observable price. For foreclosed assets and collateral
dependent loans, the value may be based on the fair value of the collateral.
The Company implemented this Statement as of its effective date, January 1,
1995, and it did not have a material impact on the Company's financial position
or results of operation.
FUTURE PROSPECTS Inflation can have a significant effect on the operating
results of all industries. Management believes that inflation does not affect
the banking industry as much as it does other industries with a high proportion
of fixed assets and inventory. Inflation does, however, have an impact on the
growth of total assets and the need to maintain a proper level of equity
capital.
Interest rates are significantly affected by inflation, but it is
difficult to assess the impact 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.
RETURN ON ASSETS
[BAR CHART]
93 94 95 96
2.26% 1.68 2.04 1.93
During 1996, the national inflation rate was very low at approximately
three percent. Interest rates remained relatively constant throughout the year.
Management of the Company believes that the 1997 rate of inflation will remain
consistent with 1996 and that interest rates in 1997 will hold relatively
stable or increase slightly. Given the Company's negative gap position (greater
amount of interest-bearing liabilities repricing than interest-earning assets),
an increase in interest rates may reduce the Company's net interest margin
through the year 1997. Management continues to focus on improving the net
interest margin as one of its major goals for 1997.
Much of the increases in interest income, interest expense, noninterest
income, and operating expenses experienced during 1996 were a result of the
acquisition of the bank office by Central Valley. In 1997, there will be
additional increases in income and expense attributable to the Sigourney branch
of Central Valley since the acquisition occurred in mid-year. Management
believes that there will be a substantial reduction in the amount of loan loss
provision expense in 1997 and that the one-time SAIF assessment will cause the
future FDIC insurance assessment to be significantly lower. The overall effect
to the Company on 1997 income is expected to be positive.
Management will continue to explore opportunities to acquire additional
loan pool participation investments in 1997. 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. Management may elect to sell small blocks of pool
loans in order to maximize the anticipated return on these loans.
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CONSOLIDATED BALANCE SHEETS
DECEMBER 31 (In thousands) 1996 1995
- ----------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks .......................................... $9,896 6,700
Interest-bearing deposits in banks ............................... 3,603 3,439
Federal funds sold ............................................... 2,985 10,682
--------- --------
Cash and cash equivalents ...................................... 16,484 20,821
--------- --------
Investment securities (note 2):
Available for sale ............................................. 26,483 11,787
Held to maturity (fair value of $27,595 in 1996
and $30,831 in 1995) .......................................... 27,705 30,833
Loans (notes 3 and 5) ............................................ 118,045 86,475
Less:
Unearned discount .............................................. (629) (606)
Allowance for loan losses (note 4) ............................. (1,491) (1,001)
--------- --------
Net loans ..................................................... 115,925 84,868
--------- --------
Loan pool participations ......................................... 50,687 45,318
Premises and equipment, net (note 6) ............................. 3,102 2,495
Accrued interest receivable ...................................... 2,518 2,203
Other assets ..................................................... 8,947 6,837
--------- --------
Total assets .................................................. $ 251,851 205,162
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits (notes 2 and 7):
Demand ......................................................... $19,353 15,480
NOW and Super NOW............................................... 33,124 26,188
Savings ........................................................ 57,831 46,556
Certificates of deposit ........................................ 96,644 73,280
--------- --------
Total deposits ................................................ 206,952 161,504
Note payable (note 8) ............................................ 8,500 10,000
Other liabilities ................................................ 2,156 1,552
--------- --------
Total liabilities ............................................. 217,608 173,056
--------- --------
Shareholders' equity:
Common stock, $5 par value; authorized 4,000,000
shares; issued and outstanding 2,229,506
as of December 31, 1996, and 2,269,506 shares
as of December 31, 1995 ...................................... 11,423 11,423
Capital surplus ................................................ 7,787 7,787
Treasury stock at cost, 55,000, and 15,000 shares
as of December 31, 1996, and 1995 ............................ (853) (231)
Retained earnings (note 14) .................................... 15,926 13,070
Unrealized (loss) gain on investments available for sale ....... (40) 57
--------- --------
Total shareholders' equity .................................... 34,243 32,106
--------- --------
Commitments and contingencies (note 15) .......................... -- --
Total liabilities and shareholders' equity .................... $ 251,851 205,162
========= ========
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 (In thousands, except per share amounts) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $10,203 7,775 5,870
Interest income and discount on loan pool participations ...... 9,097 7,864 4,479
Interest on bank deposits ..................................... 266 175 187
Interest on federal funds sold ................................ 92 202 107
Interest on investment securities:
Available for sale .......................................... 1,348 668 496
Held to maturity ............................................ 1,623 1,643 1,840
------- ------ ------
Total interest income ...................................... 22,629 18,327 12,979
------- ------ ------
INTEREST EXPENSE:
Interest on deposits (note 7):
NOW and Super NOW ........................................... 612 632 555
Savings ..................................................... 2,058 1,816 1,294
Certificates of deposit ..................................... 4,845 3,959 2,472
Interest on federal funds purchased and other borrowings ...... 48 42 23
Interest on note payable ...................................... 968 651 332
------- ------ ------
Total interest expense ...................................... 8,531 7,100 4,676
------- ------ ------
Net interest income ......................................... 14,098 11,227 8,303
Provision for loan losses (note 4) ............................ 987 168 183
------- ------ ------
Net interest income after provision for loan losses ........ 13,311 11,059 8,120
------- ------ ------
OTHER INCOME:
Service charges ............................................... 922 746 670
Data processing income ........................................ 221 253 452
Other operating income ........................................ 437 314 338
Investment securities losses, net (note 2) .................... (74) (12) (3)
------- ------ ------
Total other income ......................................... 1,506 1,301 1,457
------- ------ ------
OTHER EXPENSE:
Salaries and employee benefits expense (note 12) .............. 3,774 3,251 2,671
Net occupancy expense ......................................... 1,044 863 720
Federal Deposit Insurance Corporation assessment .............. 282 213 311
Professional fees ............................................. 459 270 346
Other operating expense ....................................... 1,650 1,410 1,186
Goodwill amortization ......................................... 529 443 218
------- ------ ------
Total other expense ........................................ 7,738 6,450 5,452
------- ------ ------
Income before income tax expense ........................... 6,879 5,910 4,125
Income tax expense (note 10) .................................. 2,385 1,987 1,345
------- ------ ------
Net income $ 4,494 3,923 2,780
======= ====== ======
Net income per share $ 2.00 1.72 1.65
======= ====== ======
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY #
UNREALIZED
(LOSS) GAIN ON
SECURITIES
COMMON CAPITAL TREASURY REDUCTION FOR RETAINED AVAILABLE
(In thousands) STOCK SURPLUS STOCK ESOP LOAN EARNINGS FOR SALE TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 ................ $ 7,398 1,195 -- (100) 8,878 -- 17,371
Net income .................................. -- -- -- -- 2,780 -- 2,780
Dividends paid .............................. -- -- -- -- (1,008) -- (1,008)
Stock issued (805,000 shares) ............... 4,025 6,592 -- -- -- -- 10,617
Reduction in ESOP loan ...................... -- -- -- 100 -- -- 100
Unrealized loss on securities
available for sale ........................ -- -- -- -- -- (80) (80)
-------- ------- -------- ------- ------- ------ -------
Balance at December 31, 1994 ................ 11,423 7,787 -- -- 10,650 (80) 29,780
Net income .................................. -- -- -- -- 3,923 -- 3,923
Dividends paid .............................. -- -- -- -- (1,503) -- (1,503)
Treasury stock purchased (15,000 shares)..... -- -- (231) -- -- -- (231)
Unrealized gain on securities
available for sale ........................ -- -- -- -- -- 137 137
-------- ------- -------- ------- ------- ----- -------
Balance at December 31, 1995 ................ 11,423 7,787 (231) -- 13,070 57 32,106
Net income .................................. -- -- -- -- 4,494 -- 4,494
Dividends paid .............................. -- -- -- -- (1,638) -- (1,638)
Treasury stock purchased (40,000 shares)..... -- -- (622) -- -- -- (622)
Unrealized loss on securities
available for sale ........................ -- -- -- -- -- (97) (97)
-------- ------- -------- ------- ------- ----- -------
Balance at December 31, 1996 ................ $ 11,423 7,787 (853) -- 15,926 (40) 34,243
======== ======= ======== ======= ======= ===== =======
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 (In thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................................... $ 4,494 3,923 2,780
------- ------- -------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization .................................................. 930 764 497
Federal Home Loan Bank stock dividend .......................................... -- (11) --
Provision for loan losses ...................................................... 987 168 183
Investment securities losses, net .............................................. 74 12 3
Loss (gain) on sale of bank premises and equipment ............................. 7 -- (3)
Amortization of premiums on investment securities .............................. 301 297 370
Accretion of investment securities and loan discounts .......................... (353) (226) (192)
Decrease (increase) in other assets ............................................ 256 (450) (210)
Increase (decrease)in other liabilities ........................................ 441 609 (180)
------- ------- -------
Total adjustments ............................................................ 2,643 1,163 468
------- ------- -------
------- ------- -------
Net cash provided by operating activities .................................... 7,137 5,086 3,248
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment securities available for sale:
Proceeds from sales ............................................................ 6,022 4,993 961
Proceeds from maturities ....................................................... 3,285 1,000 --
Purchases ...................................................................... (24,310) (5,159) --
Investment securities held to maturity:
Proceeds from maturities ....................................................... 8,611 12,073 7,695
Purchases ...................................................................... (5,698) (7,834) (16,373)
Purchases of loan pool participations ........................................... (29,827) (12,468) (36,702)
Principal recovery on loan pool participations .................................. 24,458 14,002 10,467
Net increase in loans ........................................................... (17,227) (11,733) (9,381)
Purchase of bank premises and equipment ......................................... (650) (426) (925)
Proceeds from sale of bank premises and equipment ............................... 12 1 22
Proceeds from assumption of deposits ............................................ -- -- 38,178
Proceeds from branch acquisition, net ........................................... 14,246 -- --
------- ------- -------
Net cash used in investing activities ........................................ (21,078) (5,551) (6,058)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits ............................................. 13,364 15,029 (17,564)
Net (decrease) increase in federal funds purchased .............................. -- (4,700) 4,700
Advances on note payable ........................................................ 6,400 7,500 10,625
Principal payments on note payable .............................................. (7,900) (2,500) (9,625)
Dividends paid .................................................................. (1,638) (1,503) (1,008)
Purchases of treasury stock ..................................................... (622) (231) --
Proceeds from issuance of common stock .......................................... -- -- 10,617
------- ------- -------
Net cash provided by (used in) financing activities .......................... 9,604 13,595 (2,255)
------- ------- -------
Net (decrease) increase in cash and cash equivalents ......................... (4,337) 13,130 (5,065)
------- ------- -------
Cash and cash equivalents at beginning of year .................................. 20,821 7,691 12,756
------- ------- -------
Cash and cash equivalents at end of year ........................................ $16,484 20,821 7,691
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ....................................................................... $ 8,299 6,689 4,443
======= ======= =======
Income taxes ................................................................... $ 2,239 1,973 1,462
======= ======= =======
See accompanying notes to consolidated financial statements.
21
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Mahaska Investment Company and
subsidiaries (the "Company") conform to generally accepted accounting
principles and to general practices within the banking industry. The
consolidated financial statements of the Company include the accounts of its
100 percent owned subsidiaries, Mahaska State Bank (the "Bank"), Central Valley
Bank (the "Thrift"), and MIC Leasing Co. ("Leasing"). All material intercompany
transactions have been eliminated in consolidation.
BANK OFFICE ACQUISITION On June 21, 1996, the Thrift acquired the Sigourney,
Iowa bank office of Boatmen's Bank Iowa, N.A. (Boatmen's) and assumed
approximately $32.1 million in deposits and purchased certain loans totaling
approximately $14.6 million. Central Valley's existing branch facility in
Sigourney was consolidated into the newly acquired facility. A premium of
approximately $3.0 million was paid by Central Valley to acquire the deposits.
The acquisition was accounted for as a purchase transaction and, as such, did
not require any restatement of prior period financial statements.
NATURE OF OPERATIONS The Bank and the Thrift 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. The Bank also provides data processing services to affiliated
and non-affiliated banks. Leasing provides equipment leasing and accounts
receivable financing.
Since 1988, the Company, either directly or through the Bank or the
Thrift, 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 varying discounts from the aggregate outstanding
principal amount of the underlying loans depending on the credit quality of the
portfolio. The Servicer then proceeds to collect these loans from the borrowers.
EARNINGS PER SHARE Earnings per share computations are based on the weighted
average number of shares outstanding. The Company adopted a Stock Repurchase
Plan in April 1995. In accordance with this plan, 40,000, and 15,000 shares of
common stock were repurchased by the Company during 1996 and 1995,
respectively. In September 1994, the Company issued 805,000 shares of common
stock in an initial public offering. The average number of shares outstanding,
after considering the stock repurchase and the initial public offering, was
2,246,651, 2,277,944, and 1,686,821 for 1996, 1995 and 1994, respectively.
FAIR VALUE OF 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 data, 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 balance maintained in accordance with such regulations for the
years ended December 31, 1996, 1995 and 1994 was $835,000, $778,000 and
$783,000, respectively.
22
12
INVESTMENT SECURITIES The Company classifies its 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 or losses, net of the income tax effect, are
recorded as a component of shareholders' equity. Trading securities are
recorded at fair value with gains and losses, both realized and unrealized,
included in operations. 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 statements
of operations using the specific identification method.
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 timely 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.
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 loan 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.
The allowance for loan losses is maintained at a level believed adequate
by management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio, past loan experience, current economic conditions, and other
relevant factors.
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 its 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 nonaccrual basis. For
loans receiving regular payments, cash is applied first to interest income for
interest due at the contract rate. Additional payment is then applied to
principal in a ratio of cost basis to loan face amount and to discount income
for the remainder.
For loans where payments are received on an irregular basis, the Servicer
evaluates the collateral position of the loan and where well-secured, the
payments are applied as described above. When the loan is judged to be other
than well-secured, the payment is applied to principal and discount income with
no recognition of interest due.
For loans where the 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.
23
13
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.
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 respective assets, which
range from 10 to 30 years for building and improvements and 3 to 10 years for
furniture and equipment.
EXCESS OF COST OVER UNDERLYING NET ASSETS The excess of cost over underlying
net assets of $6,795,000, $4,342,000 and $4,785,000 at December 31, 1996, 1995
and 1994, respectively, is being amortized primarily using the straight-line
method over 15 years. Amortization expenses for 1996, 1995 and 1994 were
$529,000, $443,000 and $218,000, respectively.
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 the asset's fair market 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.
Other real estate owned of $12,000 and $27,000 at December 31, 1996 and
1995, respectively, was included in other assets and is valued at the lower
of cost or estimated fair market value as determined by management.
TRUST DEPARTMENT ASSETS Property held for customers in fiduciary or agency
capacities is not included in the accompanying consolidated statements of
condition, as such items are not assets of the Bank.
INCOME TAXES The Company files a consolidated federal income tax return. Federal
income taxes are allocated based on each entity computing its taxes on a
separate company basis. For state purposes, the Bank and the Thrift each file
a franchise return and the remaining entities file a consolidated income tax
return.
STATEMENTS OF CASH FLOWS For purposes of reporting cash flows, cash and cash
equivalents include cash and due from banks and federal funds sold.
RECLASSIFICATIONS Certain reclassifications have been made to prior year
consolidated financial statements in order to conform to current year
presentation.
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 reporting period. Actual results
could differ from those estimates. A significant estimate that is particularly
sensitive to change relates to the allowance for loan losses.
EFFECT OF NEW FINANCIAL ACCOUNTING STANDARDS SFAS 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," will be effective for the Company transactions occurring after
December 31, 1996, and provides standards for accounting recognition or
derecognition of assets and liabilities. The Company expects to adopt SFAS 125
when required, and management believes adoption will not have a material effect
on the financial position and results of operation, nor will adoption require
additional capital resources.
24
14
2 INVESTMENT SECURITIES
A summary of investment securities by type as of December 31, 1996 and 1995
follows:
GROSS GROSS APPROX.
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1996 (In thousands) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------
INVESTMENT SECURITIES AVAILABLE FOR SALE:
U.S. government securities ........................ $ 5,020 8 9 5,019
U.S. government agency securities ................. 18,721 43 85 18,679
Other investment securities ....................... 2,810 -- 25 2,785
-------- ------- ------- ------
Total ........................................... $ 26,551 51 119 26,483
======== ======= ======= ======
INVESTMENT SECURITIES HELD TO MATURITY:
U.S. government securities ........................ $8,135 4 63 8,076
U.S. government agency securities ................. 5,445 39 23 5,461
Obligations of states and political subdivisions .. 8,904 30 43 8,891
Other investment securities ....................... 5,221 -- 54 5,167
-------- ------- ------- ------
Total ........................................... $ 27,705 73 183 27,595
======== ======= ======= ======
GROSS GROSS APPROX.
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1995 (In thousands) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------
INVESTMENT SECURITIES AVAILABLE FOR SALE:
U.S. government securities ........................ $ 5,068 33 -- 5,101
U.S. government agency securities ................. 5,007 55 3 5,059
Other investment securities ....................... 1,623 4 -- 1,627
-------- ------- ------- ------
Total ........................................... $ 11,698 92 3 11,787
======== ======= ======= ======
INVESTMENT SECURITIES HELD TO MATURITY:
U.S. government securities ........................ $ 12,247 17 79 12,185
U.S. government agency securities ................. 6,810 48 26 6,832
Obligations of states and political subdivisions .. 9,574 45 15 9,604
Other investment securities ....................... 2,202 11 3 2,210
-------- ------- ------- ------
Total ........................................... $ 30,833 121 123 30,831
======== ======= ======= ======
Proceeds from the sale of investment securities available for sale during
1996, 1995 and 1994 were $6,022,000, $4,993,000 and $961,000, respectively.
Gross gains and losses realized on the sale of investment securities available
for sale for each of the following years ended December 31 were as follows:
(In thousands) 1996 1995 1994
- -------------------------------------------------
Realized gains ... $ 6 8 --
Realized losses .. (80) (20) (3)
----- ----- ----
Total .......... $ (74) (12) (3)
===== ===== ====
As of December 31, 1996 and 1995, investment securities of approximately
$15,297,000 and $10,224,000 respectively, which were included in the
consolidated balance sheets, were pledged as collateral to secure public fund
deposits, and for other purposes required or permitted by law. Public funds
approximated $19,478,000 and $14,942,000 at December 31, 1996 and 1995,
respectively.
25
15
The amortized cost and approximate market value of investment securities
as of December 31, 1996, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
AMORTIZED APPROXIMATE
(In thousands) COST MARKET VALUE
- ----------------------------------------------------------------------------
INVESTMENT SECURITIES
AVAILABLE FOR SALE:
Due in 1 year or less ................................ $ 4,189 4,193
Due after 1 year through 5 years ..................... 15,016 14,994
Due after 5 years through 10 years ................... 1,000 1,000
Due after 10 years ................................... 6,346 6,296
------- ------
Total .............................................. $26,551 26,483
======= ======
INVESTMENT SECURITIES
HELD TO MATURITY:
Due in 1 year or less ................................ $ 7,894 7,895
Due after 1 year through 5 years ..................... 17,151 17,013
Due after 5 years through 10 years ................... 118 118
Due after 10 years ................................... 2,542 2,569
------- ------
Total .............................................. $27,705 27,595
======= ======
3 LOANS
A summary of the respective loan categories as of December 31, 1996 and 1995
follows:
(In thousands) 1996 1995
- ----------------------------------------------------------------------------
Real estate loans .................................... $60,399 38,219
Commercial and agricultural loans .................... 43,553 38,554
Loans to individuals ................................. 11,522 7,637
Other loans .......................................... 2,571 2,065
------- ------
Total .............................................. 118,045 86,475
======= ======
Total non-performing loans and assets at December 31, 1996 and 1995 were:
(In thousands) 1996 1995
- ----------------------------------------------------------------------------
Impaired loans and leases
Non-accrual ........................................ $ 1,085 124
Restructured ....................................... 380 409
------- ------
Total impaired loans and losses ................... 1,465 533
Loans and leases past due
90 days or more .................................... 625 134
------- ------
Total non-performing loans ........................... 2,090 667
Other real estate owned .............................. 12 27
------- ------
Total non-performing assets .......................... $ 2,102 693
======= ======
The average balances of impaired loans for the years ended December 31, 1996 and
1995 were $1,349,000 and $833,000, respectively. The allowance for credit losses
related to impaired loans at December 31, 1996 and 1995 was $206,000 and $10,000
respectively. Impaired loans of $1,533,000 and $671,000 were not subject to a
related allowance for credit losses at December 31, 1996 and 1995, respectively,
because of the net realizable value of loan collateral, guarantees and other
factors.
The effect of non-accrual and restructured loans on interest income for each
of the three years ended December 31, 1996, 1995 and 1994 was:
(In thousands) 1996 1995 1994
- --------------------------------------------------------------------------
Interest Income
As originally contracted ................... $131 62 62
As recognized .............................. 41 47 35
----- ----- -----
Reduction of
interest income ......................... 90 15 27
===== ===== =====
4 ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31, 1996,
1995 and 1994 were as follows:
(In thousands) 1996 1995 1994
- -------------------------------------------------------------------------
Balance at
beginning of year .......................... $ 1,001 881 833
Provision for loan losses ...................... 987 168 183
Recoveries on loans
previously charged off ..................... 38 43 54
Loans charged off .............................. (705) (91) (189)
Acquisition allowance .......................... 170 -- --
------- ------ ------
Balance at end of year ......................... $ 1,491 1,001 881
======= ====== ======
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 aggregate
indebtedness of this group included in loans as of December 31, 1996 and 1995
was as follows:
26
16
(In thousands) 1996 1995
- -----------------------------------------------------
Aggregate balance at
beginning of year ............... $ 6,420 6,246
Advances .......................... 8,790 5,822
Payments .......................... 8,485 5,648
------- -------
Aggregate balance at end of year... $ 6,725 6,420
======= =======
6 PREMISES AND EQUIPMENT
A summary of premises and equipment as of December 31, 1996 and 1995 was as
follows:
(In thousands) 1996 1995
- -----------------------------------------------------
Land and improvements ............. $ 466 431
Building and improvements ......... 3,130 2,706
Furniture and equipment ........... 3,774 3,312
------- -------
Total office properties and
equipment at cost ............. 7,370 6,449
Less accumulated depreciation ..... 4,268 3,954
------- -------
Total ........................... $ 3,102 2,495
======= =======
7 DEPOSITS
The scheduled maturities of certificate accounts are as follows as of December
31, 1996
(In thousands)
- ------------------------
1997 ......... $ 64,480
1998 ......... 17,557
1999 ......... 10,945
2000 ......... 2,405
2001 ......... 1,252
Thereafter ... 5
--------
Total........ $ 96,644
========
Time deposits in excess of $100,000 approximated $13,547,000, $9,170,000 and
$6,340,000 as of December 31, 1996, 1995 and 1994, respectively. Interest
expense on such deposits for the years ended December 31, 1996, 1995 and 1994
was approximately $663,000, $512,000 and $214,000, respectively.
8 NOTE PAYABLE
The note payable balance at December 31, 1996 consists of advances on a
$17,000,000 line of credit. The line has a variable interest rate and is due
June 19, 1997. The note is secured by all of the common stock of the Bank, the
Thrift, and Leasing. Interest is payable quarterly at the lender's prime rate,
which ranged from 8.00 percent to 8.50 percent in 1996.
9 FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments as of December
31, 1996 and 1995 were as follows:
RECORDED FAIR
1996 (In thousands) AMOUNT VALUE
- ---------------------------------------------------
FINANCIAL ASSETS:
Cash and due from banks ....... $ 9,896 9,896
Interest-bearing deposits
with banks ................... 3,603 3,603
Federal funds sold ............ 2,985 2,985
Investment securities ......... 54,188 54,078
Loans, net .................... 115,925 115,905
Loan pools .................... 50,687 50,687
FINANCIAL LIABILITIES:
Deposits ...................... $206,952 208,214
Note payable .................. 8,500 8,500
OFF-BALANCE SHEET ITEMS:
Commitments to extend credit .. $ -- --
Letters of credit ............. -- --
Recorded Fair
1995 (In thousands) Amount Value
- ---------------------------------------------------
FINANCIAL ASSETS:
Cash and due from banks ....... $ 6,700 6,700
Interest-bearing deposits
with banks ................... 3,439 3,439
Federal funds sold ............ 10,682 10,682
Investment securities ......... 42,620 42,618
Loans, net .................... 84,868 85,565
Loan pools .................... 45,318 45,318
FINANCIAL LIABILITIES:
Deposits ...................... $161,504 162,460
Note payable .................. 10,000 10,000
OFF-BALANCE SHEET ITEMS:
Commitments to extend credit .. $ -- --
Letters of credit ............. -- --
The recorded amount of cash due from banks and interest-bearing deposits with
banks approximates fair value.
The estimated fair value of investment securities has been determined
using available quoted market prices.
The estimated fair value of loans is net of an adjustment for credit risk.
For loans with floating interest rates, it is presumed that estimated fair
values generally approximate the recorded book
27
17
balances. Fixed rate loans were valued using a present value discounted
cash flow with a discount rate approximating the market rate for similar
assets.
The recorded amount of the loan pools approximates fair value due to
the characteristics of the loan pools. Any additional value attained in the
loan pools over purchase cost is directly attributable to the expertise of
the Servicer to collect a higher percentage of the book value of loans in
the pools over the percentage paid.
Deposit liabilities with no stated maturities have an estimated fair
value equal to the recorded balance. Deposits with stated maturities have been
valued using a present value discounted cash flow with a discount rate
approximating the current market 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 the federal funds purchased and short-term
borrowings approximates fair value as a result of the short-term nature of
these instruments.
The fair value of commitments to extend credit and standby letters of
credit are estimated using the fees currently charged to enter into similar
agreements.
10 INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1996, 1995 and
1994 is as follows:
1996 (In thousands) FEDERAL STATE TOTAL
- ---------------------------------------------
Current ........... $ 2,198 276 2,474
Deferred .......... (89) 0 (89)
------- ----- ------
$ 2,109 276 2,385
======= ===== ======
1995 (In thousands) Federal State Total
- ---------------------------------------------
Current ........... $ 1,856 165 2,021
Deferred .......... (30) (4) (34)
------- ----- ------
$ 1,826 161 1,987
======= ===== ======
1994 (In thousands) Federal State Total
- ---------------------------------------------
Current ........... $ 1,132 195 1,327
Deferred .......... 16 2 18
------- ----- ------
$ 1,148 197 1,345
======= ===== ======
Income tax expense differs from the amount computed by applying the United
States federal income tax rate of 34 percent in 1996, 1995 and 1994 to income
before income tax expense. The reasons for these differences are as follows:
(In thousands) 1996 1995 1994
- -----------------------------------------------------------
Provision at statutory rate.... $ 2,339 2,009 1,403
State franchise tax (net of
federal tax benefit) ......... 182 106 130
Nontaxable interest income .... (145) (138) (120)
Nondeductible goodwill
amortization ................. 21 21 21
Unrealized loss amortization .. -- -- (9)
Life insurance cash
value increase ............... (31) (32) (35)
Employee Stock Ownership Plan
dividend deduction ........... -- -- (37)
Other, net .................... (19) (21) (8)
------ ------ ------
Total ........................ $2,385 1,987 1,345
====== ====== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1996 and
1995 are as follows:
(In thousands) 1996 1995
- --------------------------------------------------
DEFERRED TAX ASSETS:
Allowance for losses on loans ... $ 326 151
Deferred compensation ........... 64 46
Premium amortization ............ 35 26
Unrealized loss on available
for sale securities............. 28 --
------ ------
Gross deferred tax assets....... 453 220
------ ------
DEFERRED TAX LIABILITIES:
Depreciation and amortization ... (87) (3)
Leases .......................... (6) (5)
Federal Home Loan Bank stock .... (17) (17)
Deferred loan fees .............. (58) (29)
Professional fees ............... (11) (13)
Unrealized gain on available
for sale securities............. -- (33)
Other ........................... (12) (11)
------ ------
Gross deferred tax liabilities.. (191) (108)
------ ------
Net deferred tax asset.......... $ 262 112
====== ======
No valuation allowance was required for the deferred tax asset at
December 31, 1996 or 1995.
28
18
11 STOCK INCENTIVE PLAN
The Company has a stock incentive plan under which up to 450,000 shares of
common stock are reserved for issuance pursuant to options or other awards
which may be granted to officers, key employees, and certain non-affiliated
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 at the
one-year anniversary of date of grant, sixty-six percent vesting on the
two-year anniversary, and one hundred percent vesting on the three-year
anniversary of date of grant.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its 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 FASB
Statement No. 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
1996 1995
- ----------------------------------
NET INCOME:
As Reported ....... $4,494 3,923
Pro forma ......... 4,392 3,861
EARNINGS PER SHARE:
As Reported ....... $ 2.00 1.72
Pro forma ......... 1.95 1.69
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 1996 and 1995, respectively: dividend yield of 3.89 percent for both
years; expected volatility of 25 percent for both years; risk free interest
rates of 6.17 percent for 1996 and 5.47 percent for 1995; and expected lives of
7.5 years for both years.
A summary of the status of the Company's stock incentive plan as of December
31, 1996 and 1995 and the activity during the years ended on those dates is
presented below:
1996 1995
------------------ -------------------
WEIGHTED- Weighted-
AVERAGE Average
EXERCISE Exercise
SHARES PRICE Shares Price
- --------------------------------------------------------------
Balance at
beginning of year... 199,983 $ 14.39 57,359 $12.87
Granted ............. 65,221 18.50 142,624 15.00
Exercised ........... 0 -- 0 --
Forfeited ........... 3,800 14.19 0 0
------- -------- ------- ------
Outstanding at
end of year ......... 261,404 $ 15.42 199,983 $14.39
======= ======== ======= ======
Options exercisable
at year-end ......... 95,304 $ 13.86 30,793 $12.73
Weighted-average
fair value of options
granted during
the year ............ $ 4.57 $ 2.62
12 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 $114,000, $104,000 and $86,000 for
1996, 1995 and 1994, respectively. As of December 31, 1996 and 1995, the ESOP
owned 252,610 and 348,838 shares of the Company's Common Stock, respectively.
A 401(k) plan was adopted by the Company in 1994. The Company does not
make any contributions to this plan.
The Company has also provided deferred compensation plans to certain
executive officers, which provide for a series of payments to be made after
retirement. The present value of the future payments is being accrued over
the respective employees' remaining active service periods. The total expense
related to these plans was $33,000, $24,000 and $36,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
The Company provides no material post-retirement benefits.
29
19
13 REGULATORY CAPITAL REQUIREMENTS
The Company is subject to various capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory -- and possible additional discretionary -- actions
by regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total capital and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December
31, 1996, that the Company meets all capital adequacy requirements to which
it is subject.
The Company's actual capital amounts and ratios are also presented in the
table.
TO BE WELL CAPITALIZED
MINIMUM FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------------------------------------------------------------
(in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ---------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1996:
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS):
Consolidated ............................ $28,939 16.2% $14,267 8.0% 17,834 10.0%
Bank .................................... 14,644 12.8 9,128 8.0 11,409 10.0
Thrift .................................. 5,625 11.8 3,811 8.0 4,764 10.0
TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS):
Consolidated ............................ $27,448 15.4% $ 7,134 4.0% 10,700 6.0%
Bank .................................... 13,688 12.0 4,563 4.0 6,846 6.0
Thrift .................................. 5,376 11.3 1,906 4.0 2,858 6.0
TIER 1 CAPITAL (TO AVERAGE ASSETS):
Consolidated ............................ $27,448 12.1% $ 6,800 3.0% 11,333 5.0%
Bank .................................... 13,688 9.0 4,552 3.0 7,587 5.0
Thrift .................................. 5,376 10.1 1,603 3.0 2,672 5.0
AS OF DECEMBER 31, 1995:
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS):
Consolidated ............................ $28,765 21.2% $10,856 8.0% 13,570 10.0%
Bank .................................... 13,268 13.6 7,781 8.0 9,726 10.0
Thrift .................................. 2,515 15.8 1,277 8.0 1,596 10.0
TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS):
Consolidated ............................ $27,764 19.8% $ 5,598 4.0% 8,397 6.0%
Bank .................................... 12,338 12.7 3,877 4.0 5,815 6.0
Thrift .................................. 2,490 12.2 817 4.0 1,226 6.0
TIER 1 CAPITAL (TO AVERAGE ASSETS):
Consolidated ............................ $27,764 14.8% $ 5,634 3.0% 9,390 5.0%
Bank .................................... 12,338 8.7 4,237 3.0 7,061 5.0
Thrift .................................. 2,490 8.9 839 3.0 1,399 5.0
30
20
14 DIVIDEND RESTRICTIONS
The Company derives a substantial portion of its cash flow, including that
available for dividend payments to shareholders, from its bank subsidiary in
the form of dividends received. The Bank and Thrift 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 to the Company at December 31, 1996
approximated $3,200,000.
15 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, 1996,
outstanding commitments to extend credit totaled approximately $13,976,000.
Commitments under standby letters of credit outstanding aggregated
$809,000 and $198,000 as of December 31, 1996 and 1995, 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 on 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.
31
21
16 MAHASKA INVESTMENT COMPANY (PARENT COMPANY ONLY)
BALANCE SHEETS
DECEMBER 31 (In thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------
ASSETS:
Cash on deposit at bank subsidiary .............................................. $ 465 517
Cash at other institutions ...................................................... 29 61
--------- --------
Cash and cash equivalents ...................................................... 494 578
Investment securities ........................................................... 299 150
Loans ........................................................................... 204 2,859
Loan pool participations ........................................................ 11,308 17,865
Investments in:
Bank subsidiary ................................................................ 14,800 13,572
Thrift subsidiary .............................................................. 10,913 5,390
Bank-related subsidiary ........................................................ 4,945 265
Excess cost over net assets ..................................................... 146 209
Premises and equipment .......................................................... 640 627
Other assets .................................................................... 678 637
--------- --------
Total assets ................................................................... $ 44,427 42,152
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Note payable .................................................................... $9,900 10,000
Accrued expenses payable and other liabilities .................................. 284 46
--------- --------
Total liabilities .............................................................. 10,184 10,046
--------- --------
Shareholders' equity:
Common stock .................................................................... 11,423 11,423
Capital surplus ................................................................. 7,787 7,787
Treasury stock at cost, 55,000 and 15,000 shares
as of December 31, 1996 and 1995, respectively ................................. (853) (231)
Retained earnings ............................................................... 15,926 13,070
Unrealized (loss) gain on investments available for sale ........................ (40) 57
--------- --------
Total shareholders' equity ..................................................... 34,243 32,106
--------- --------
Total liabilities and shareholders' equity ..................................... $ 44,427 42,152
========= ========
32
22
16 MAHASKA INVESTMENT COMPANY (PARENT COMPANY ONLY) CONTINUED
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 (In thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
INCOME:
Dividends from subsidiaries ..................................................... $ 2,000 2,500 1,850
Interest income and discount on loan pool participations ........................ 3,498 3,038 1,485
Management, audit, and loan review fees ......................................... 285 133 108
Other operating income .......................................................... 247 231 120
--------- -------- ---------
Total income ................................................................... 6,030 5,902 3,563
--------- -------- ---------
EXPENSE:
Salaries and benefits expense ................................................... 925 922 625
Interest on short-term borrowings ............................................... 968 651 332
Other operating expense ......................................................... 642 415 340
--------- -------- ---------
Total expense .................................................................. 2,535 1,988 1,297
--------- -------- ---------
Income before income tax expense and equity in
undistributed earnings of subsidiaries ........................................ 3,495 3,914 2,266
Income tax expense .............................................................. 529 498 118
--------- -------- ---------
Income before equity in undistributed earnings of subsidiaries ................. 2,966 3,416 2,148
Equity in undistributed earnings of subsidiaries ................................ 1,528 507 632
--------- -------- ---------
Net income ..................................................................... $ 4,494 3,923 2,780
========= ======== =========
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 (In thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................................... $ 4,494 3,923 2,780
--------- -------- ---------
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries ............................... (1,528) (507) (632)
Depreciation and amortization .................................................. 105 96 93
(Increase) decrease in other assets ............................................ (41) (133) 68
Increase (decrease)in other liabilities ........................................ 238 (52) (12)
--------- -------- ---------
Total adjustments ............................................................ (1,226) (596) (483)
--------- -------- ---------
Net cash provided by operating activities .................................... 3,268 3,327 2,297
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities .............................................. (149) -- --
Purchases of loan pool participations ........................................... (1,033) (9,866) (10,370)
Principal recovery on loan pool participations .................................. 7,590 5,942 2,941
Net decrease (increase) in loans ................................................ 2,655 (2,321) (538)
Purchases of premises and equipment ............................................. (55) (34) (27)
Investments in subsidiaries ..................................................... (10,000) -- (5,355)
--------- -------- ---------
Net cash used in investing activities ........................................ (992) (6,279) (13,349)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances on note payable ........................................................ 7,800 7,500 10,625
Principal payments on note payable .............................................. (7,900) (2,500) (9,625)
Dividends paid .................................................................. (1,638) (1,503) (1,008)
Purchases of treasury stock ..................................................... (622) (231) --
Proceeds from stock issued ...................................................... -- -- 10,617
--------- -------- ---------
Net cash (used in) provided by financing activities .......................... (2,360) 3,266 10,609
--------- -------- ---------
Net (decrease) increase in cash and cash equivalents ......................... (84) 314 (443)
Cash and cash equivalents at beginning of year .................................. 578 264 707
--------- -------- ---------
Cash and cash equivalents at end of year ........................................ $ 494 578 264
========= ======== =========
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23
INDEPENDENT AUDITORS' REPORT
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, 1996 and 1995 and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996. 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 generally accepted auditing
standards. 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, 1996 and 1995 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
January 31, 1997
Des Moines, Iowa
34
24
STOCK INFORMATION
Mahaska Investment Company's Common Stock trades on The Nasdaq National Market
and the quotations are furnished by the Nasdaq system. There were 232
shareholders of record on December 31, 1996 and an estimated 700 additional
beneficial holders whose stock was held in street name by brokerage houses.
The following table sets forth the quarterly high and low sales per share
for the Company's stock during 1996 and 1995.
1996 QUARTER ENDED HIGH LOW
---------------------------------------------
MARCH 31 ............ $15.75 14.75
JUNE 30 ............. 15.75 14.75
SEPTEMBER 30......... 19.75 15.00
DECEMBER 31.......... 19.75 18.50
1995 Quarter Ended High Low
---------------------------------------------
March 31 ........... $14.375 13.50
June 30 ............ 16.00 13.75
September 30........ 16.75 15.25
December 31......... 16.75 15.00
- -------------------------------------------------------------------------------
The Company has declared per share cash dividends with respect to its Common
Stock as follows:
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
-----------------------------------------------------------------------
1996 ....... $.1825 $.1825 $.1825 $.1825
1995 ....... .165 .165 .165 .165
1994 ....... .15 .15 .15 .15
- ------------------------------------------------------------------------------
NASDAQ SYMBOL: OSKY
WALL STREET JOURNAL
AND OTHER NEWSPAPERS: Mahaskainv
MARKET MAKERS:
Howe, Barnes Investments, Inc.
David A. Noyes & Company
Herzog, Heine, Geduld, Inc.
Fahnestock & Co., Inc.
FORM 10-K
Copies of Mahaska Investment Company's Annual Report to the Securities and
Exchange Commission Form 10-K will be mailed when available without charge to
shareholders upon written request to Karen K. Baack, Secretary/
Treasurer, at the corporate headquarters.
- ------------------------------------------------------------------------------
SHAREHOLDER INFORMATION
CORPORATE HEADQUARTERS
222 First Avenue East
P.O. Box 1104
Oskaloosa, IA 52577
515-673-8448
ANNUAL SHAREHOLDERS' MEETING
April 30, 1997, 10:30 a.m.
Elmhurst Country Club
2214 South 11th Street
Oskaloosa, IA 52577
INTERNET
www.mahaskainv.com
TRANSFER AGENT/REGISTRAR/DIVIDEND DISBURSING AGENT
Illinois Stock Transfer Company
223 West Jackson Boulevard, Suite 1210
Chicago, IL 60606
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
2500 Ruan Center
Des Moines, IA 50309
ANNUAL REPORT DESIGN
Designgroup, Inc., Des Moines, IA
Photography: Scott Sinklier
35
25
Directors and Officers
Board of Directors
R.S. Howard
Chairman
Martin L. Bernstein
Owner, Bernstein Realty
Robert K. Clements
Attorney, Clements Law Firm
John A. Fallon III
President, William Penn College
Charles S. Howard
President & CEO
R. Spencer Howard
Vice President Corporate Planning
William E. Masterson (died Sept. 2, 1996)
Farmer, Mahaska County
James F. Mathew
President, Mathew Lumber Company
David A. Meinert
Executive Vice President & CFO
John P. Pothoven
President, Mahaska State Bank
John W.N. Steddom
Civil Engineer, Retired
Corporate Officers
R.S. Howard
Chairman
Charles S. Howard
President & CEO
David A. Meinert
Executive Vice President & CFO
R. Spencer Howard
Vice President Corporate Planning
Karen K. Baack
Secretary/Treasurer & Administrative Assistant
Jeffrey L. Rhoads
Controller
Mark T. Gibbons
Loan Review Officer
Lori J. Seubert
Auditor
Bank Subsidiary Highlights
December 31 (In thousands) 1996 1995
- -----------------------------------------------------------------------
Mahaska State Bank
Total assets $156,855 148,820
Total loans, net of unearned discount 83,995 78,205
Total loan pool participations 22,618 12,836
Allowance for loan losses (956) (929)
Total deposits 140,828 134,103
Total shareholders' equity 14,800 13,572
Central Valley Bank
Total assets $ 78,671 33,763
Total loans, net of unearned discount 29,707 4,332
Total loan pool participations 16,760 14,616
Allowance for loan losses (249) (25)
Total deposits 66,980 28,057
Total shareholders' equity 10,914 5,390
36