An Iowa community banking company that has posted weak earnings this year boosted its loan-loss reserves by almost 80%, primarily to cover chargeoffs relating to its struggling commercial credit subsidiary.

Mahaska Investment Co. of Oskaloosa said it hopes to sell the assets of its unit, On-Site Credit Services Inc., by Thanksgiving. In the meantime, the $488 million-asset company raised its loan-loss reserves to $3.3 million in the third quarter, from $1.9 million a year earlier.

Mahaska has been trying to sell On-Site since April. It signed a letter of intent with a buyer in the third quarter after several months of negotiations, but the deal fell through.

"We were pursuing one buyer for virtually the entire business," said Charles S. Howard, Mahaska's chairman and president. "Since we couldn't come to terms with them, we started looking for other buyers." The business now will probably sold segment by segment to multiple buyers, he said.

Mahaska earned $1.1 million in the quarter that ended Sept. 30, up only 11.3% from a year earlier, even though its numbers now include $188 million of assets from Midwest Bancshares, which Mahaska acquired during the quarter.

David Mudd, an analyst with Howe Barnes Investments Inc. in Chicago, said the company is wise to unload On-Site. He recently downgraded his Mahaska rating to "hold" from "long-term buy," and lowered his 1999 earnings-per-share estimate to $1.03 from $1.06.

"It will be very helpful for them to basically put this business behind them and move forward," he said.

The weak farm economy, which has bankers worried about farmers' ability to repay loans, also factored into Mahaska's decision to boost reserves.

Prior to the Midwest Bancshares acquisition, about one-fifth of Mahaska's loan portfolio was in agriculture. It has declined somewhat since, due to Midwest's focus on residential lending, but remains a significant portion of the bank's business, Mr. Howard said.

"It's very hard to predict the agricultural economy," he said. "Most experts believe the year 2000 will be another difficult one for farmers. But to what degree, that remains to be seen."

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