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, 1996 	 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 (515) 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 		 As of April 25, 1996, 2,259,506 shares of common stock $5 par value were outstanding. PART 1 -- Item 1. Financial Statements				 				 MAHASKA INVESTMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION 				 (unaudited)				 (dollars in thousands)	 March 31, 	December 31, 	 1996	 1995 	---------	 ------------ ASSETS Cash and due from banks .........	 $ 6,478	 6,700 Interest-bearing deposits in banks 2,974	 3,439 Federal funds sold ..............	 1,395	 10,682 	-------- 	------- Cash and cash equivalents ....	 10,847 	 20,821 	-------- 	------- Investment securities: Available for sale ...........	 20,249	 11,169 Held to maturity .............	 32,618	 31,451 Loans ...........................	 95,215	 86,475 Less:	 Unearned discount ............	 (734) 	 (606) Allowance for loan losses ....	 (1,038)	 (1,001) 	-------- 	------- Net loans ....................	 93,443	 84,868 	-------- 	------- Loan pool participations ........	 42,327	 45,318 Premises and equipment, net .....	 2,650	 2,495 Accrued interest receivable .....	 2,195	 2,203 Other assets ....................	 2,803	 2,495 Goodwill ........................	 4,241	 4,342 	-------- 	------- Total assets .................	 211,373 	205,162 	 			 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand .........................	 16,251 	 15,480 NOW and Super NOW ..............	 26,004 	 26,188 Savings ........................	 48,245	 46,556 Certificates of deposit ........	 76,503	 73,280 	------- 	------- Total deposits .............. 	167,003 	161,504 Note payable ......................	 9,750 	 10,000 Other liabilities .................	 2,211	 1,552 	------- 	------- Total liabilities ...........	 178,964 	173,056 Shareholders' equity:	 Common stock, $5 par value; authorized 4,000,000 shares; issued 2,284,506 shares ......	 11,423 	 11,423 Capital surplus ................	 7,787 	 7,787 Treasury stock at cost, 25,000 shares as of March 31, 1996, and 15,000 shares as of December 31, 1995 ............	 (383) 	 (231) Retained earnings ..............	 13,663 	 13,070 Unrealized (loss) gain on investments available for sale	 (81) 	 57 	--------	 ------- Total shareholders' equity 	 32,409 32,106 	--------	 ------- Total liabilities and shareholders' equity ...... 	211,373 	205,162 	--------	 ------- See accompanying notes to consolidated financial statements. PART 1 -- Item 1. Financial Statements, Continued MAHASKA INVESTMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited) 	 Three Months Ended (dollars in thousands	 March 31, except per share) 	------------------------ 	 1996	 1995 	----------	 ----------- Interest income: Interest and fees on loans ......	 2,174	 1,742 Interest and discount on loan pools	 1,938	 1,801 Interest on bank deposits .......	 71 25 Interest on federal funds sold	 57	 0 Interest on investment securities:			 Available for sale ...........	 228 	 155 Held to maturity .............	 427	 433 	--------	 -------- Total interest income .....	 4,895	 4,156 	--------	 -------- Interest expense: Interest on deposits: NOW and Super NOW ............	 141	 154 Savings ......................	 457 	 419 Certificates of deposit ......	 1,081 	 850 Interest on federal funds purchased	 0	 40 Interest on note payable ........	 205 	 104 	--------	 -------- Total interest expense ....	 1,884	 1,567 	-------- 	 -------- Net interest income .......	 3,011	 2,589 Provision for loan losses ..........	 65	 32 	--------	 -------- Net interest income after provision for loan losses	 2,946	 2,557 	--------	 -------- 			 Noninterest income: Service charges .................	 183	 174 Data processing income ..........	 57	 82 Other operating income ..........	 103	 114 Investment security (losses) gains	 (4)	 2 	--------	 -------- Total noninterest income	 339	 372 	--------	 -------- Noninterest expense: Salaries and employee benefits expense .............	 879 	 849 Net occupancy expense ..........	 243 	 210 FDIC assessment ................	 21 	 83 Professional fees ..............	 147 	 88 Other operating expense ........	 362 	 363 Goodwill amortization ..........	 101 	 94 	--------	 -------- Total noninterest expense	 1,753	 1,687 	--------	 -------- Income before income tax expense ............ 	 1,532	 1,242 			 Income tax expense ................	 526 	 415 	--------	 -------- Net income ...............	 1,006	 827 	-------- 	 -------- 			 Earnings per common share .........	 $0.4400	 0.360 Dividends per common share ........ 	$0.1825	 0.165 			 See accompanying notes to consolidated financial statements. PART 1 -- Item 1. Financial Statements, Continued MAHASKA INVESTMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS 			 (unaudited)	 Three Months Ended (dollars in thousands	 March 31, except per share)	 ------------------------ 	 1996	 1995 ----------	 ----------- Cash flows from operating activities: Net income ......................	 $ 1,006	 827 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization	 202	 176 Provision for loan losses .....	 65	 32 Investment securities losses (gains) 4	 (2) Loss on sale of bank premises and equipment ...............	 1	 0 Amortization of investment securities premiums .........	 88	 91 Accretion of investment securities and loan discounts ..........	 (84)	 (62) Increase in other assets ...... (300)	 (191) Increase in other liabilities	 741	 443 	 ---------	 -------- Total adjustments ..........	 717	 487 	 --------- 	 -------- Net cash provided by operating activities .....	 1,723	 1,314 	 ---------	 -------- Cash flows from investing activities: 			 Investment securities available for sale:		 Proceeds from sales ...........	 0	 3,008 Proceeds from maturities ......	 2,000	 0 Purchases .....................	 (11,328)	 0 Investment securities held to maturity: 		 Proceeds from sales ...........	 2,001	 0 Proceeds from maturities ...... 	 625	 2,206 Purchases ..................... 	 (3,855	 (1,146) Purchases of loan pool participations ................	 (2,709)	 0 Principal recovery on loan pool participations ...........	 5,700	 4,969 Net increase in loans ...........	 (8,557)	 (3,873) Purchases of bank premises and equipment .................	 (257) (45) 	 ---------	 -------- Net cash (used in) provided by investing activities ...	 (16,380)	 5,119 Cash flows from financing activities: Net increase in deposits	 5,498	 5,921 Net decrease in federal funds purchased ...............	 0	 (4,700) Advances on note payable ........	 500	 0 Principal payments on note payable	 (750)	 (1,500) Dividends paid ..................	 (412)	 (377) Purchases of treasury stock .....	 (153)	 0 	 ---------	 -------- Net cash provided by (used in) financing activities .......	 4,683	 (656) 	 ---------	 -------- Net (decrease) increase in cash and cash equivalents .........	 (9,974)	 5,777 Cash and cash equivalents at beginning of period ..........	 20,821	 7,691 	 --------	 -------- Cash and cash equivalents at end of period ................	 10,847	 13,468 	 -------- 	 -------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest ..................... 	 2,006	 1,456 	 ------- 	 ------- Income taxes .................	 0	 0 	 -------	 ------- See accompanying notes to consolidated financial statements. PART I -- Item 1. Financial Statements, continued. MAHASKA INVESTMENT COMPANY Notes to Consolidated Financial Statements (Unaudited) 1.	Adjustments and Reclassifications The accompanying financial statements for the interim periods were prepared without audit. In the opinion of management, all adjustments which were necessary for a fair presentation of financial position and results of operations have been made. These adjustments were of a normal recurring nature. 2.	Statements of Cash Flows In the 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, 1996 and 1995 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 bank and thrift. 4.	Earnings Per Common Share Earnings per common share computations are based on the weighted average number of shares of common stock outstanding during the period. The weighted average number of shares for the three-month periods ended March 31, 1996, and March 31, 1995, was 2,261,154 and 2,284,506, respectively. Part I -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Net income for the Company increased 22% to $1,006,000 for the quarter ended March 31, 1996, compared with $827,000 for the three months ended March 31, 1995. Net income per share for the first quarter of 1996 was $.44 versus net income of $.36 per share for the first quarter of 1995. Weighted average shares outstanding were 2,261,154 and 2,284,506 for the first quarter of 1996 and 1995, respectively. Return on average assets for the quarter ended March 31, 1996 was 1.97% compared with a return of 1.82% for the quarter ended March 31, 1995. The Company had a return on average equity of 12.44% for the three months ended March 31, 1996 versus 11.13% for the three months ended March 31, 1995. RESULTS OF OPERATIONS Net Interest Income Net interest income for the quarter ended March 31, 1996, increased 16.3% to $3,010,000 from $2,589,000 for the three months ended March 31, 1995. This is due to increased interest income earned on loans and an increase in interest income and discount on loan pool participations. The increase in total interest income was offset, in part, by greater interest expense. Total interest income increased $738,000 (18%) in the first quarter of 1996 compared with the same period in 1995. The Company's total interest expense for the quarter increased $317,000 (20.2%) compared with the same period in 1995. The Company's net interest margin for the first quarter of 1996 increased to 6.50% from 6.36% in the first quarter of 1995 as the composite rate earned on interest-earning assets increased more than the overall rate paid on interest-bearing liabilities. The Company's overall yield on earning assets increased to 10.5% for the first quarter of 1996 compared to 10.1% for the first quarter of 1995. The rate on interest-bearing liabilities also increased in the first quarter of 1996 to 4.8% compared with 4.5% for the first quarter of 1995. Interest income and fees on loans increased $432,000 (25%) in the first quarter of 1996 compared to the same period in 1995 due to increased loan volumes and an increase in the overall yield on loans resulting from higher market interest rates. The average yield on loans increased to 9.9% for the first three months of 1996, up from 9.3% for the three months ended March 31, 1995. Average loans outstanding increased to $88,591,000 for the first three months of 1996 compared with $76,116,000 for the first quarter of 1995, an increase of $12,475,000 (16%). The majority of this loan growth has occurred in real estate and commercial loans at Mahaska State Bank and Central Valley Bank. MIC Leasing Co. has experienced increases in accounts receivable financing and leasing volumes. Loan pool investments provided the Company with additional revenue in the first quarter of 1996 compared to the same period in 1995. Interest income and discount earned on the loan pools increased 7% in the first quarter of 1996 to $1,938,000 compared with $1,801,000 earned in the first quarter of 1995. The loan pool earnings may vary from quarter to quarter reflecting fluctuations in the level of collections by the Company's servicer. The fluctuations in the level of collections are due to variations in the amount of loans settled in full or in part versus the total of payments collected on amortizing loans and the amount of interest collected. The interest rate environment and general economic conditions also affect collections. The amount of income ultimately recognized by the Company relative to the total cash collections is also affected by other factors. These factors include the proportion of loan principal collected versus interest collected (interest typically has no cost basis), the underlying basis of the loan principal collected (basis ranges from 13% to 84% of loan face amount), the collection expense incurred to collect the loans (legal fees and operating expenses may vary from month to month), the amount of bonus and service fees earned by the servicer (fees earned by the servicer vary by package relative to the percentage of original purchase cost collected), and the basis write-offs of any uncollectible loans (amounts written off may vary from period to period). The servicer collected a total of $9,900,000 for the first quarter of 1996, compared with collections for the first quarter of 1995 totaling $9,299,000, an increase of $601,000 (6%). Loan pool yield for the first quarter of 1996 was 18.1% compared with a yield 16.2% for the three months ended March 31, 1995. Interest expense for the first quarter of 1996 increased $317,000 (20%) compared with the first quarter of 1995 as a result of an increase in total deposits, an increased level of borrowed funds, and increased rates on time deposits. Average interest-bearing deposits for the first quarter of 1996 increased $13,363,000 (10%) from the same period in 1995 with the greatest increase occurring in the time deposit category. Average short-term borrowings increased during the first quarter of 1996 by $2,599,000 compared with the first quarter of 1995 with a resultant increase in interest expense on these funds. Interest rates paid on interest-bearing demand accounts and on savings accounts declined in the first quarter of 1996 in comparison with the first quarter of 1995, while the average rate on time deposits increased. Provision for Loan Losses The Company's provision for loan loss expense in the first quarter of 1996 was $33,000 greater than in the first quarter of 1995. As loan volumes continue to grow (especially in the accounts receivable financing category), management believes that it is prudent to also increase the level of the allowance for loan losses. Other Income Noninterest income decreased $33,000 in the first quarter of 1996 compared with 1995, mainly due to the reduction in the number of nonaffiliated banks that Mahaska State Bank's data center is processing in 1996 versus 1995. Total data processing income is down $25,000 in the first quarter of 1996 compared with prior year period. Data processing management continues to actively seek new bank clients. Service charge income for the quarter has increased in 1996 compared with 1995 due to additional charges collected at Central Valley Bank. Other Expense Total noninterest expense for the quarter ended March 31, 1996 increased $66,000 (4%) compared to noninterest expense for the first quarter of 1995. Salaries and benefits expense for the first quarter of 1996 increased $30,000 (3%) over the first quarter of 1995, mainly resulting from an increase in the number of employees at Central Valley and at MIC Leasing Co. Net occupancy expenses for the first quarter of 1996 increased $34,000 in comparison to the first quarter of 1995 with most of the increase due to the additional branch of Central Valley Bank. Professional fees were up $58,000 for the first three months of 1996 over the same period in 1995. The FDIC assessment expense incurreed by the Company during the first quarter of 1996 decreased by $63,000 compared with the first quarter of 1995 reflecting the reduced assessment rate paid by Mahaska State Bank. Income Tax Expense Income tax expense for the three months ended March 31, 1996, increased $111,000 compared to the amount for the three months ended March 31, 1995, due to the overall increase in taxable income for the period. FINANCIAL CONDITION The Company's total assets as of March 31, 1996 were $211,373,000, an increase of $6.2 million (3%) from December 31, 1995. Total deposits grew $5.5 million during this time period with the most growth noted in the time certificate of deposit accounts. The Company had federal funds sold of $1,395,000 on March 31, 1996, compared with funds sold of $10,632,000 on December 31, 1995. The note payable balance decreased to $9,750,000 on March 31, 1996. Loan Pool Participations As of March 31, 1996, the Company had investments in loan pool participations of $42,327,000. New loan pool investments during the quarter totaled $2,709,000. The loan pool participation investment as of December 31, 1995 was $45,318,000. Pool pay down for the first three months of 1996 exceeded new loan pool investments by $5,700,000. During the first quarter of 1996, the servicer sold performing single- family real estate loans having a basis of $1,443,000 to Central Valley Bank. This was done to ensure that Central Valley would continue to meet the Qualified Thrift Lender (QTL) test. No gain was recognized by the Company. Average loan pool participation investments decreased to $43,050,000 for the first three months of 1996, a decline from $45,128,000 for the first three months of 1995. Loans Loan volumes continued to increase, with total loans as of March 31, 1996 reflecting growth of $8,612,000 (10.0%) from December 31, 1995. Most of this growth was in the commercial and real estate loans categories, as well as the accounts receivable financing. Nonperforming Loans The Company's nonperforming loans totaled $744,000 (.8% of total loans) as of March 31, 1996, compared to $694,000 (.8% of total loans) as of December 31, 1995. All nonperforming loan totals and related ratios exclude the loan pool investments. The following table presents the categories of nonperforming loans as of March 31, 1996: Nonperforming Loans (dollars in thousands) March 31, 1996 		90 days past due				 $ 222 		Renegotiated					 388 		Nonaccrual					 133 		Other real estate owned			 0 									 ------ 									 $ 744 									------ From December 31, 1995 to March 31, 1996, nonaccrual loans increased $9,000 while restructured loans decreased $21,000, loans ninety days past due increased $87,000, and other real estate owned of $27,000 was sold. The Company's allowance for loan losses as of March 31, 1996 was $1,038,000, which was 1.1% of total loans as of that date. This compares with an allowance for loan losses of $1,001,000 as of December 31, 1995, which was 1.2% of total loans. As of March 31, 1996, the allowance for loan losses to nonperforming loans was 139.6% compared with 144.3% as of December 31, 1995. Management believes that as of March 31, 1996, the allowance for loan losses was adequate. For the three months ended March 31, 1996, the Company recognized a net loan charged-off of $28,000 compared with a net recovery of loans previously charged-off of $5,000 during quarter ended March 31, 1995. Capital Resources As of March 31, 1996, total shareholders' equity as a percentage of total assets was 15.3% compared with 15.7% as of December 31, 1995. The Company held 25,000 shares of treasury stock at a cost of $383,000 as of March 31, 1996. These shares were repurchased following the announcement on April 24, 1995 that the Company would reacquire up to 200,000 shares in order to satisfy options granted under the Company's Stock Incentive Plan. On March 4, 1996, it was announced that the stock repurchase plan would continue through January 31, 1997. Dudring the first quarter of 1996, a total of 10,000 shares were purchased. Under risk-based capital rules, the Company's total capital was 19.3% of risk-weighted assets as of March 31, 1996, and was 20.6% of risk-weighted assets as of December 31, 1995, compared to an 8.0% requirement. Part II -- Item 6. Exhibits and Reports on Form 8-K. (b)	Reports on Form 8-K -- A report on Form 8-K was filed as of February 15, 1996 related to the Company's subsidiary Central Valley Bank entering into an agreement to purchase certain assets and assume certain liabilities of the Sigourney, Iowa office of Boatmen's Bank Iowa, N.A. SIGNATURES Pursuant to the requirements 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) 		/s/ Charles S. Howard Dated: May 13, 1995 						--------------------- 							Charles S. Howard 							President 		/s/ David A. Meinert Dated: May 13, 1995 						-------------------- 							David A. Meinert 							Chief Financial Officer and 							Executive Vice President