Mahaska Investment Co. is profiting from the failures of other banks and thrifts.

For six years, the Oskaloosa, Iowa, company has invested in loan pools sold by the government and made up mostly of bad loans from failed institutions. And the income from these investments has helped make Mahaska one of Iowa's most profitable bank companies.

"It's a good solid bank," said Michael Zuk, an analyst with Fahnestock & Co./B.C. Christopher, Kansas City, Mo. "But clearly, the participations have given them superior returns."

The company's-return on assets at June 30 was 2.09%, compared with 2.01% for the first six months of 1993 and 2.26% at year-end 1993.

Despite Mahaska's success, few bank companies are willing to enter this highly specialized arena, because of the extensive due diligence involved and apprehension about buying bad credits.

The risk is that the investor won't recoup more than the value of the initial investment plus servicing fees.

"If it were easy to do, everyone in the world would be doing it," Mr. Zuk said.

Charles S. Howard, Mahaska's president, said bankers by nature don't want to buy distressed loans.

The reason Mahaska, a $182 million-asset institution, entered the niche in 1988 was to try to recoup t980s agricultural-related losses.

"We wrote off several million dollars of ag credits, like every other Midwestern bank did," said Mr. Howard, the fourth generation of his family to run the bank. "We said to ourselves, 'We are not going to be caught not being diversified in our investments.'"

The results prompted Mahaska to continue the investments long term.

Loan pool income accounted for 19.66% of the company's total interest income in 1991 and was up to 33.65% for the first six months of 1994.

At June 30, loan pool participations were 11.95% of the company's total earning assets, up from 5.05% at Dec. 31, 1988. The company has invested about $14 million in new participations since June 30.

When Mahaska invests in these pools, it funds independent servicing companies that actually buy and service the loans. The company currently has participation interests in pools held and serviced by four servicing corporations.

Thus, Mahaska has a 100% participation interest in the pool, and no bad loans go on Mahaska's books.

The Federal Deposit Insurance Corp. or Resolution Trust Corp. . auction off the pools at deep discounts from the aggregate outstanding principal amount of the loans.

Bids are determined after the servicing companies and Mahaska examine the packages.

"The due diligence done on assets prior to the bid for them is crucial," Mr. Howard said.

This way, they determine which assets may or may not be collected and, subsequently, what is a fair price for the package.

Mahaska has paid from 5.5% to 85% of the aggregate outstanding principal amount of the loans in pools in which it has invested.

The independent servicer then collects as much repayment as possible, and Mahaska profits when they surpass the purchase price plus carrying and collection costs.

Mahaska operates Mahaska State Bank of Oskaloosa and Central Valley Savings, Ottumwa, which was formed in June after the company purchased four branches from the RTC.

The company recently began an initial public offering of 700,000 shares of common stock for $15 per share.

The offering is expected to net about $9.2 million. The bulk of the proceeds will retire existing debt, and the rest could be used for additional loan pools or acquisitions.

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