UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10- QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _________
Commission file number 0-12510
MARATHON BANCORP
(Exact name of registrant as specified in its charter)
California 95-3770539
(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification No.)
11444 West Olympic Boulevard, Los Angeles, California 90064
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310)
996-9100
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of March 1, 1995, there were 1,248,764 shares of no par
Common Stock issued and outstanding.
Consolidated Statements of Financial Condition
Marathon
Bancorp and Subsidiary
(Unaudited) March 31, December 31,
1995 1994
----------- ------------
Assets
Cash and due from banks $3,451,700 $5,196,400
Federal funds sold 4,500,000 2,000,000
------------ ------------
Cash and cash equivalents 7,951,700 7,196,400
Interest-bearing deposits with
financial institutions 1,179,000 1,096,000
Securities available for sale 2,994,400 10,835,800
Securities held to maturity (aggregate
market value of $12,893,300 in 1995
and $13,786,000 in 1994) 13,942,200 15,082,500
Loans receivable, net 54,521,100 55,778,100
Other real estate owned, net 6,660,600 6,137,500
Premises and equipment, net 479,300 508,700
Accrued interest receivable 593,700 682,800
Other assets 756,300 563,200
----------- ----------
$89,078,300 99,181,000
============ ============
Liabilities and Shareholders' Equity
Deposits:
Demand, noninterest-bearing $30,239,100 $36,245,400
Demand, interest-bearing 8,389,600 8,232,200
Money market and savings 34,642,800 36,426,700
Time certificates of deposit:
Under $100,000 5,757,300 5,825,400
$100,000 and over 4,173,400 4,570,200
----------- ------------
Total deposits 83,202,200 91,299,900
Accrued interest payable 102,300 84,100
Other liabilities 386,600 430,100
----------- -----------
Total liabilities 83,691,100 91,814,100
Commitments and contingencies
Shareholders' equity:
Preferred shares - no par value,
1,000,000 shares authorized,
no shares issued and outstanding 0 0
Common shares - no par value, 9,000,000
shares authorized, 1,248,764 shares issued
and outstanding 8,080,000 8,080,000
Unrecognized loss on securities
available for sale (2,000) (10,300)
Deficit (2,690,800) (2,702,800)
----------- ------------
Total shareholders' equity 5,387,200 5,366,900
$89,078,300 97,181,000
============ ===========
See accompanying notes to unaudited consolidated financial
statements
Consolidated Statements of Operations
Marathon Bancorp and Subsidiary
Three months ended March 31,
(Unaudited) 1995 1994
----------- ----------
Interest income:
Loans, including fees $1,289,200 $1,264,600
Mortgage loans held for sale 0 72,400
Investment securities:
Taxable 324,100 167,600
Federal funds sold 15,400 13,300
Deposits with financial institutions 12,700 0
----------- ----------
Total interest income 1,641,400 1,517,900
Interest expense:
Deposits 363,700 354,200
Federal funds purchased 9,500 7,100
----------- ---------
Total interest expense 373,200 361,300
Net interest income before provisions
for loan losses 1,268,200 1,156,600
Provision for loan losses 90,000 0
--------- ----------
Net interest income after
provisions for loan losses 1,178,200 1,156,600
Other operating income:
Service charges on deposit accounts 64,200 70,900
Gain on mortgage loan sales 0 116,700
Other service charges and fees 7,500 25,300
--------- ----------
Total other operating income 71,700 212,900
Other operating expenses:
Salaries and employee benefits 527,000 594,200
Net operating cost of other REO 37,200 54,900
Occupancy 88,800 154,000
Furniture and equipment 22,700 31,500
Professional services 173,000 135,900
Business promotion 16,400 19,900
Stationery and supplies 18,700 12,000
Data processing services 160,700 134,000
Messenger and courier services 60,000 120,100
Insurance and assessments 98,600 105,000
Other expenses 34,700 64,300
--------- ---------
Total other operating expenses 1,237,800 1,425,800
Income (loss) before income taxes 12,100 (56,300)
Provision for income taxes 0 0
---------- ----------
Net income (loss) $12,100 $(56,300)
========== ==========
Net income (loss) per share $0.01 $(0.05)
See accompanying notes to unaudited consolidated financial
statements
Consolidated Statements of Cash Flows
Marathon Bancorp and Subsidiary
Three months ended March 31,
1995 1994
------------ ------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Interest received $1,686,200 $1,593,100
Service charges on deposit accounts
and other fees received 71,700 96,200
Proceeds of mortgage loans held for sale 0 11,882,800
Funding of mortgage loans held for sale 0 (6,053,200)
Interest paid (355,000) (343,600)
Cash paid to suppliers and employees (1,487,600) (1,415,100)
Income taxes refunded 36,000 0
----------- -----------
Net cash provided (used) by operating
activities (48,700) 5,760,200
Cash flows from investing activities:
Net increase in interest-bearing deposits
with other financial institutions (783,000) 0
Purchases of securities held to maturity 0 (989,500)
Proceeds from maturities of securities
held to maturity 1,187,200 3,497,200
Proceeds from maturities of securities
available for sale 7,850,900 0
Net (increase) decrease in loans made
to customers 640,100 (2,248,000)
Proceeds from sale of other real estate owned 0 2,504,000
Purchases (sales) of furniture, fixtures and
equipment 6,500 (1,200)
Net cash provided (used) by investing ------------ ----------
activities 8,901,700 2,762,500
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing and
interest-bearing demand deposits and money market
and savings accounts (7,632,800) 1,779,400
Net decrease in time certificates of
deposits (464,900) (4,560,200)
------------ -------------
Net cash used by financing activities (8,097,700) (2,780,800)
Net increase in cash and cash equivalents 755,300 5,741,900
Cash and cash equivalents at beginning
of year 7,196,400 5,327,900
------------- -----------
Cash and cash equivalents at end of year $7,951,700 $11,069,800
See accompanying notes to unaudited consolidated financial
statements.
(Continued)
Consolidated Statements of Cash Flows (Continued)
Marathon Bancorp and Subsidiary
Three months ended March 31,
Reconciliation of net income (loss) to net cash provided (used)
by operating activities 1995 1994
---------- ----------
Net income (loss) $12,100 $(56,300)
Adjustments to reconcile net income
(loss) to net cash provided
(used) by operating activities:
Depreciation and amortization expense 22,900 30,600
Provision for loan losses 90,000 0
Gain on mortgage loans held for sale 0 (116,700)
Amortization of premiums and discounts
on securities, net (48,100) 41,200
Net decrease in mortgage loans held for sale 0 5,829,600
Change in deferred loan origination fees,net3,800 4,400
Change in accrued interest receivable 89,100 29,600
Change in accrued interest payable 18,200 17,700
Change in income tax receivable 36,000 0
Change in other assets (229,200) (92,200)
Change in other liabilities (43,500) 72,300
---------- -----------
Total adjustments (60,800) 5,816,500
Net cash provided (used) by
operating activities $(48,700) $5,760,200
========== ===========
Supplemental cash flow information:
Transfer from loans to other
real estate owned $523,100 $1,113,600
Loans made to facilitate the sale
of other real estate owned $0 $1,850,000
See accompanying notes to unaudited consolidated financial
statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of presentation and Management Representations
The unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and,
therefore, do not include all footnotes normally required for
complete financial disclosure. While the Company believes that
the disclosures presented are sufficient to make the information
not misleading, reference may be made to the consolidated
financial statements and notes thereto included in the Company's
1994 Annual Report on Form 10-KSB.
The accompanying consolidated statements of financial
condition and the related consolidated statements of operations
and cash flows reflect, in the opinion of management, all
material adjustments necessary for fair presentation of the
Company's financial position as of March 31, 1995 and December
31, 1994, results of operations and changes in cash flows for
the three-month periods ended March 31, 1995 and 1994. The
results of operations for the three-month period ended March 31,
1995 are not necessarily indicative of what the results of
operations will be for the full year ending December 31, 1995.
(2) Income or loss per Share
Income or loss per share is computed using the weighted average
number of common shares outstanding during the period. Loss per
share calculations exclude common share equivalents (stock
options) since their effect would be to increase the income per
share and reduce the loss per share. Accordingly, the weighted
average number of shares used to compute the net income or loss
per share was 1,248,764 for both the three-month periods ended
March 31, 1995 and 1994.<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion is intended to provide additional
information about Marathon Bancorp (the Company), its financial
condition and results of operations which is not otherwise
apparent from the consolidated financial statements. Since
Marathon National Bank (the Bank) represents a substantial
portion of the Company's activities and investments, the
following relates primarily to the financial condition and
operations of the Bank. It should be read in conjunction with
the Company's 1994 Annual Report. Averages presented are daily
average balances.
Summary
Marathon Bancorp recorded a net income for the three-month
period ended March 31, 1995 of $12,100, or $.01 per common
share, compared with net loss of $56,400, or $.05 per common
share, for the same period in 1994.
As summarized in Table 1 and discussed more fully below, the
Bank's first quarter 1995 operations resulted in a 9.6 percent
increase in net interest income, a 100% increase in the
provision for loan losses, a 66.2 percent decrease in other
operating income, and a 13.2 percent decrease in other operating
expenses. The decrease in other operating income resulted from
the discontinuation of the mortgage banking operation in June
1994.
Table 1 Summary of Operating Performance
First
Quarter Increase/ (decrease)
(Dollars in thousands) 1995 1994 Amount Percent
Net interest income $1,268 $1,157 111 9.6%
Provision for loan losses 90 0 90 100.0%
Other operating income 72 213 (141) (66.2)
Other operating expenses 1,238 1,426 (188) (13.2)
----------------------------------
Net income (loss) before taxes 12 (56) 68 (121.4)
Provision for income taxes (benefit)0 0 0 0.0
------------------------------------
Net income (loss) $12 $(56) $68 (121.4)%
At March 31, 1995, the Company had total assets of $89,078,300,
total net loans of $54,521,100 and total deposits of
$83,202,200. This compares to total assets of $99,181,000,
total net loans of $55,778,100 and total deposits of $91,299,900
at December 31, 1994.
On August 10, 1992, the Bank entered into a formal agreement
with the Office of the Comptroller of Currency (OCC) under which
the Bank agreed, among other things, to continue to adhere to
certain minimum capital ratios in excess of the minimum
regulatory capital requirements, as set forth in the agreement,
to refrain from paying cash dividends to the holding company
except with the prior approval of the OCC, and to strengthen
certain programs and policies. On October 24, 1994, the OCC
terminated the formal agreement. However, at the request of the
OCC, the Bank agreed to maintain certain minimum capital ratios
in excess of the regulatory requirements. At March 31, 1995,
the Company and the Bank had a Tier 1 capital ratio of 8.6
percent, a total capital to risk-weighted assets ratio of 9.8
percent, and a Tier 1 leverage ratio of 6.0 percent.
On September 21, 1992, the Company entered into an informal
agreement with the Federal Reserve Bank (FRB) under which the
Company agreed, among other things, to refrain from paying cash
dividends except with the prior approval of the FRB and to
strengthen certain programs and policies of the Company.
Operating Performance
The following discussion explains in greater detail the
consolidated financial condition and results of operations of
the Company. This discussion should be read in conjunction with
the accompanying consolidated financial statements and notes
thereto as well as the Company's 1994 Annual Report on Form
10-KSB .
Net Interest Income: Net interest income (the amount by which
interest generated from earning assets exceeds interest expense
on interest-bearing liabilities) is the most significant
component of Marathon's earnings. The Company's diverse
portfolio of earning assets is comprised of its core business of
loan underwriting, augmented by liquid overnight federal funds
sold, short term interest-bearing deposits with other financial
institutions and investment securities. These earning assets
are financed through a combination of interest-bearing and
noninterest-bearing sources of funds.
Operating results in the first quarter of 1995 were enhanced by
a 9.6 percent increase in net interest income from the first
quarter of 1994, to $1,268,200. The reasons for this increase
were increases in the rate of interest earned on those
investments, offset by a change in mix to lower interest-earning
assets. Average loans, which earned at an average rate of 9.4
percent in 1995, decreased $8,863,000 while other earning
assets, which earned at an average rate of 5.7 percent in 1995,
increased only $4,576,000. The amounts of these increases and
reductions may be seen in Table 2. Interest income from earning
assets rose $123,000 or 8.1 percent. The average volume of
loans and investments outstanding increased 5.1 percent, while
the weighted average yield on interest-earning assets increased
to 8.3 percent in 1995 from 7.3 percent in previous year.
Higher interest income in 1995 was partially offset by a 3.3
percent increase in interest expense, which resulted primarily
from a 6.6 percent increase in the amount of interest-bearing
liabilities. The weighted average cost for the two comparable
periods remained at 2.7 percent.
The Bank analyzes its performance using the concepts of
interest rate spread and net yield on earning assets. The
interest rate spread represents the difference between the yield
on earning assets and the interest rate paid on interest-bearing
liabilities. The net yield on earning assets is the difference
between the yield on earning assets and the effective rate paid
on all funds -- interest-bearing liabilities as well as
interest-free sources.
The Company's interest rate spread for the first quarter of
1995 was 5.6 percent compared to 4.6 percent in 1994. The 1995
increase was due to an increase in the yield on interest-earning
assets while the cost of interest-bearing liabilities remained
unchanged. The Bank has continued to reduce the level of higher
cost certificate of deposit while emphasizing money NOW and
market accounts. The net yield on earning assets was 6.4
percent in the first quarter of 1995 and 5.5 percent in 1994.
The Bank's net yield on earning assets remains high in
comparison with the Company's interest rate spread due to the
significant volume of noninterest-bearing demand deposits
relative to total funding sources (represented by total deposits
and shareholders' equity). While these deposits are
noninterest- bearing, they are not without cost. However, the
Bank believes that they remain the lowest cost source of funds
available in the marketplace (see Liquidity and Interest Rate
Sensitivity Management).
Table 2 Net Interest Income Analysis
Average Interest
income/ Weighted average
Change from prior year due to
change in:
(Dollars in thousands) balance expense yield/cost
Volume Rate Total
First Quarter 1995
Loans $55,420 $1,289 9.4% $(188) $212 $24
Other earning assets 25,065 352 5.7 61 38 99
Interest-earning assets 80,485 1,641 8.3 (127) 250 123
Interest-bearing liabilities56,937 373 2.7 (19) 31 12
-------------------------------------------
$23,548 $1,268 5.6% $(108) $219 $111
Net yield on earning assets 6.4%
First Quarter 1994
Loans $64,283 $1,265 8.0% $(173) $(135) $(308)
Other earning assets 20,489 253 3.7 (114) (39) (143)
Interest-earning assets 84,772 1,518 7.3 (277) (174) (451)
Interest-bearing liabilities53,408 361 2.7 (152) (55) (207)
----------------------------------------------
$31,364 $1,157 4.6% $(125) $(119) $(244)
Net yield on earning assets 5.5%
Other Operating Income : Other operating income decreased 66.2
percent in the first quarter of 1995 to $71,700, from $212,900
in the first quarter of 1994. The decrease in the gain on
mortgage loan sales resulted from the discontinuation of the
mortgage banking operation in June 1994.
Provision for Loan Losses: Implicit in lending activities is
the fact that losses will be experienced and that the amount of
such losses will vary from time to time, depending upon the risk
characteristics of the portfolio as affected by economic
conditions and the financial experience of borrowers.
Management of the Bank has instituted stringent credit policies
designed to minimize the level of losses and nonaccrual loans.
These policies require extensive evaluation of new credit
requests and continuing review of existing credits in order to
identify, monitor and quantify evidence of deterioration of
quality or potential loss in a timely manner. Management's
reviews are based upon previous loan loss experience, current
economic conditions, composition of the loan portfolio, the
value of collateral and other relative factors. The Bank's
lending is concentrated in Los Angeles County and surrounding
areas, which have recently experienced adverse economic
conditions, including declining real estate values. These
factors have adversely affected some borrowers' ability to repay
loans.
The policy of the Bank is to review each loan over $150,000 in
the portfolio to identify and classify problem credits as
"substandard", "doubtful" and "loss". Substandard loans have
one or more defined weaknesses. Doubtful loans have the
weaknesses of substandard loans with the additional
characteristic that the weaknesses make collection or
liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high
possibility of loss. A loan classified loss is considered
uncollectible and of such little value that the continuance as
an asset of the Bank is not warranted. Another category
designated "listed" is maintained for loans which do not
currently expose the Bank to a sufficient degree of risk to
warrant classification as substandard, doubtful or loss but do
possess credit deficiencies or potential weakness deserving
management's close attention.
Excluding loans which have been classified loss and charged off
by the Bank, the Bank's classified loans consisted of $5,336,600
of loans classified as substandard and $187,400 of loans
classified as doubtful at March 31, 1995 as compared to
$6,010,100 of substandard and $109,300 of loans classified as
doubtful at December 31, 1994. In addition to the classified
loans, the Bank was also monitoring $4,734,600 of loans which it
had designated as listed at March 31, 1995 as compared to
$4,022,900 at December 31, 1994.
With the exception of these classified and listed loans,
management is not aware of any loans as of March 31, 1995 where
the known credit problems of the borrower would cause it to have
serious doubts as to the ability of such borrowers to comply
with their present loan repayment terms and which would result
in such loans being considered nonperforming loans at some
future date. Management cannot, however, predict the extent to
which the current economic environment may persist or worsen or
the full impact such environment may have on the Bank's loan
portfolio. Furthermore, management cannot predict the results
of any subsequent examinations of the Bank's loan portfolio by
its primary regulators. Accordingly, there can be no assurance
that other loans will not become 90 days or more past due, be
placed on nonaccrual or become restructured loans, in-substance
foreclosures or other real estate owned in the future.
The allowance for loan losses, which provides a financial
buffer for the risk of losses inherent in the lending process,
is increased by the provision for loan losses charged against
income, decreased by the amount of loans charged off and
increased by recoveries. There is no precise method of
predicting specific losses which ultimately may be charged off
and the conclusion that a loan may become uncollectible, in
whole or in part, is a matter of judgment. Similarly, the
adequacy of the allowance and accompanying provision for loan
losses can be determined only on a judgmental basis after full
review, including consideration of economic conditions and their
effects on specific borrowers, borrowers' financial data, and
evaluation of underlying collateral for secured lending.
Based upon management's assessment of the overall quality of
the loan portfolio, and of external economic conditions, the
provision for loan losses during the first quarter of 1995
totaled $90,000, loans totaling $31,500 were charged off during
the period, and $64,700 was recovered. The March 31, 1995
allowance for loan losses was $919,800, or 1.7 percent of gross
loans outstanding, compared with 1.4 percent at December 31,
1994. The increase in the allowance for loan losses reflects
management's perception of the lending environment in which it
operates. Although management believes that the allowance for
possible loan losses is adequate, there can be no reasonable
assurance that further deterioration will not occur. As a
result, future provisions will be subject to continuing
evaluation of inherent risk in the loan portfolio.
Loans charged off amounted to $205,800 in the first quarter of
1994, while recoveries totaled $20,100. As a percent of average
gross loans outstanding during the year, the allowance for loan
losses was 1.7 percent in the first quarter of 1995.
At March 31, 1995, loans past due 90 days or more or on
nonaccrual totaled $2,816,000, or 5.1 percent of gross loans,
compared with $1,615,500, or 2.5 percent at March 31, 1994.
Other real estate owned (OREO), consisting of properties
received in settlement of loans totaled $6,660,600 at March 31,
1995, an increase of $116,900 from March 31, 1994.
Other Operating Expenses: Other operating expenses, which
include salaries, employee benefits and the net operating cost
of real estate owned through foreclosure, totaled $1,237,800 for
the first quarter of 1995, a decrease of 13.2 percent from
$1,425,800 in 1994. Due to earthquake damage to its banking
facility, the Bank has temporarily relocated to another
location. Under the terms of the new lease agreement, the Bank
has reduced its monthly lease payments from $40,300 to $17,400.
Therefore, occupancy expense declined 64.4 percent in the first
quarter of 1995 compared to 1994. The net operating cost of
real estate owned through foreclosure totaled $37,200 for 1995,
compared with $54,900 in 1994, a 32.2 percent decline.
Professional fees increased 27.3 percent due to the settlement
of a lawsuit. Messenger and courier services decreased 50.0
percent due to a corresponding decline in noninterest-bearing
deposit relationships (see "Liquidity"). Other expenses
declined 46.0 percent due to the discontinuation of the mortgage
banking operation. Total other operating expenses were 1.3 and
1.5 percent of average total assets at March 31, 1995 and 1994,
respectively.
Income Taxes: In February 1992, the Financial Accounting
Standards Bank has issued Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." The
Company adopted the provisions of the new standard in its
financial statements for the year ended December 31, 1994. SFAS
No. 109 employs the liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities
are determined based on differences between financial reporting
and tax basis of assets and liabilities, and are measured using
the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The impact on the Bank's
financial position due to the adoption of this standard was not
material.
The Company did not record a tax provision at March 31, 1995
pertaining to its net loss since the Bank has a federal net
operating loss carryforward of approximately $2,172,900 at
December 31, 1994 which begins to expire in 2008. For state
income tax purposes, the Company has incurred a net operating
loss of approximately $3,207,200 which is available as a
carryforward through 1999 to offset future taxes payable,
subject to fifty percent reduction, as allowed by state tax law.
Financial Condition
As set forth in Table 4, the Company recorded average total
assets for the first quarter of 1995 of $93.2 million, a 2.9
percent decrease from 1994 average total assets of $96.0
million. The Bank's loan portfolio decreased 8.6 percent in the
first three months of 1995 primarily due to reductions in the
commercial segment of the loan portfolio. This reduction
reflects the current level of loan demand and the Bank's
continuing efforts to improve the quality of the loan portfolio.
As compared to the 1994 average, other interest-earning assets
increased 14.6 percent to $25.1 million. Proceeds from the
reduction of the loan portfolio described above were invested in
other earning assets, primarily the investment portfolio.
Average total deposits declined 2.7 percent to $86.2 million in
the first quarter of 1995. The deposit mix continued to
emphasize noninterest-bearing funding sources, with
interest-bearing deposits representing 65.2 percent of average
total deposits at March 31, 1995, up from 60.5 percent in 1994.
In addition, the Bank shifted the level of higher cost
certificates of deposits to money market, NOW and savings
accounts.
Table 4 Three months ended Year ended Change
March 31, 1995 December 31, 1994 from 1994
Balance Sheet Analysis Average % of Average % of Amount %
(Dollars in millions) balance Total balance Total
-------------------------------------------------
Loans $55.4 68.8% $60.6 73.5% $(5.2) (8.6)%
Other interest-earning assets 25.1 31.2% 21.9 26.5% 3.2 14.6%
Total earning assets 80.5 100.0% 82.5 100.0% (2.0) (2.4)%
Total assets $93.2 $96.0 (2.8) (2.9)%
Deposits:
Interest bearing demand $8.6 10.0% $6.5 7.3% 2.1 32.3%
Money market and savings 37.3 43.3% 32.7 36.9% 4.6 14.1%
Time certificates of deposit 10.3 11.9% 14.4 16.3% (4.1)(28.5)%
Total interest-bearing deposits56.2 65.2% 53.6 60.5% 2.6 4.9%
Non-interest-bearing
demand deposits 30.0 34.8% 35.0 39.5% (5.0) (14.3)%
Total deposits $86.2 100.0% 88.6 100.0% $(2.4) (2.7)%
Total earning assets as a percent of
total deposits 93.4% 93.1%
Liquidity and Interest Rate-Sensitivity Management
The primary function of asset liability management is to ensure
adequate liquidity and to maintain an appropriate balance
between rate sensitive assets and rate sensitive liabilities.
Liquidity management involves matching sources and uses of the
Company's funds in order to effectively meet the cash flow needs
of our customers, as well as the cash flow requirements of the
Company itself. Interest rate sensitivity management seeks to
stabilize net interest income during periods of changing
interest rates.
Liquidity: Management monitors its liquidity position
continuously in relation to trends of loans and deposits, and
relates the data to short and long term expectations. In order
to serve Marathon's customers effectively, funds must be
available to meet their credit needs as well as their
withdrawals of deposited funds. Liquidity from assets is
provided by the receipt of loan payments and by the maturity of
other earning assets as further described below. Liquidity from
liabilities is attained primarily by obtaining new deposits.
Liquid assets are defined to include federal funds sold,
interest-bearing deposits with other financial institutions,
unpledged investment securities and cash and due from banks.
The Company's liquidity ratio (the sum of liquid assets divided
by total deposits) was 28.2 percent at March 31, 1995 and 33.8
percent at December 31, 1994. The average maturity of the
Bank's investment securities portfolio is 3.3 years at March 31,
1995 versus 3.2 years at December 31, 1994. The loan to deposit
ratio was 66.6 percent and 62.0 percent for March 31, 1995 and
December 31, 1994, respectively.
On the liability side, Marathon's liquidity position is
enhanced by sizable core deposits. As stable core deposits
(which include all deposits except time certificates of deposit)
are generated, the need for other sources of liquidity
diminishes. This derives from the fact that the Bank's primary
liquidity requirement generally arises from the need to meet
maturities of time certificates of deposit. Absent
extraordinary conditions, the bulk of stable core deposits do
not require significant amounts of liquidity to meet the net
short or intermediate term withdrawal demands of customers.
Marathon has emphasized core deposit growth which represents
88.1 percent of total average deposits during the first quarter
of 1995 and 83.8 percent during 1994. In addition, the
Company's time deposits were primarily from its local customer
base, which is highly diversified and without significant
concentrations.
A significant portion of Marathon's noninterest-bearing demand
deposits is attributable to a single demand account
relationship. During the first quarter of 1995 and all of 1994,
this relationship represented 4.7 percent and 10.7 percent,
respectively, of average total deposits. While the deposits are
noninterest-bearing, the account relationship is not without
cost as the Bank provides messenger, courier, accounting and
data processing services in connection with the relationship.
Recognizing the importance of this account relationship to the
Company's liquidity, management maintains an amount equal to the
total account relationship in demand balances due from
correspondent banks and liquid earning assets, including
overnight federal funds sold, investment securities and
interest-bearing balances in other financial institutions. In
addition, the loan-to-deposit ratio, an important measure of
asset liquidity, is monitored with the account relationship
excluded from total deposits. On that basis, the
loan-to-deposit ratio at March 31, 1995 was 70.3 percent,
compared with 79.3 percent at December 31, 1994.
Interest Rate-Sensitivity Management: Interest rate sensitivity
management focuses, as does liquidity management, on the
maturities of earning assets and funding sources. In addition,
interest rate sensitivity management takes into consideration
those assets and liabilities whose interest rates are subject to
change prior to maturity. Net interest income can be vulnerable
to fluctuations arising from a change in the general level of
interest rates to the extent that the average yield on earning
assets responds differently to such a change than does the
average cost of funds. In an effort to maintain consistent
earnings performance, Marathon manages the repricing
characteristics of its assets and liabilities to control net
interest sensitivity.
The Company measures interest rate sensitivity by distributing
the rate maturities of assets and supporting funding liabilities
into interest sensitivity periods, summarizing interest rate
risk in terms of the resulting interest sensitivity gaps. A
positive gap indicates that more interest sensitive assets than
interest sensitive liabilities will be repriced during a
specified period, while a negative gap indicates the opposite
condition.
Balance sheet items are categorized according to contractual
maturity or repricing dates, as appropriate. Reference rate
indexed loans, federal funds sold and money market deposits
constitute the bulk of the floating rate category. Determining
the interest rate sensitivity of noncontractual items is arrived
at in a more qualitative manner. Demand deposits are considered
to be a mix of short and long term funds, based upon historical
behavior. Savings deposits are viewed as susceptible to
competitive factors brought on by deregulation and, therefore,
classified as intermediate funds.
It is the Bank's policy to maintain an adequate balance of rate
sensitive assets as compared to rate sensitive liabilities.
Rate sensitive assets were 99.1 percent of rate sensitive
liabilities at March 31, 1995 as compared to 91.2 percent at the
end of 1994. In the one year or less category, rate sensitive
assets were 118.3 percent of rate sensitive liabilities at March
31, 1995 and 117.7 percent at December 31, 1994. The gap
position is but one of several variables that affect net
interest income. Consequently, these amounts are used with care
in forecasting the impact of short term changes in interest
rates on net interest income. In addition, the gap calculation
is a static indicator and is not a net interest income predictor
in a dynamic business environment.
Table 5
Analysis of Rate Sensitive
Assets & Liabilities
Rate sensitive or maturing in
by Time Period
90 days 3 - 12 1 - 5 Over 5
(Dollars in millions)
or less months years years Total
March 31, 1995
Investments $10.8 $4.2 $2.1 $5.6 $22.7
Loans 44.3 2.1 3.4 4.7 $54.5
Rate sensitive assets 55.1 6.3 5.5 10.3 77.2
Time deposits $3.1 $5.8 $1.0 $0.0 $9.9
Other deposits 43.0 0.0 2.0 23.0 $68.0
Rate sensitive liabilities 46.1 5.8 3.0 23.0 77.9
Rate sensitive GAP $9.0 $0.5 $2.5 $(12.7) $(0.7)
Cumulative GAP $9.0 $9.5 $12.0 $(0.7) --
Cumulative ratio of sensitive
assets to liabilities 1.2 1.2 1.2 1.0 1.0
December 31, 1994
Investments $11.4 $7.1 $4.3 $5.5 $28.3
Loans 44.5 2.3 3.6 5.2 55.6
Rate sensitive assets 55.9 9.4 7.9 10.7 83.9
Time deposits 3.7 5.7 1.0 0.0 10.4
Other deposits 46.1 0.0 2.5 32.3 80.9
Rate sensitive liabilities 49.8 5.7 3.5 32.3 91.3
Rate sensitive GAP $6.1 $3.7 $4.4 $(21.6) $(7.4)
Cumulative GAP $6.1 $9.8 $14.2 $(7.4) --
Cumulative ratio of sensitive assets to liabilities
assets to liabilities 1.1 1.2 1.2 0.9 0.9
<PAGE>
Capital Resources And Dividends
The Bank is required to meet certain minimum risk-based capital
guidelines and leverage ratios promulgated by the bank
regulatory authorities. The risk based capital standards
establish capital requirements that are more sensitive to risk
differences between various assets, consider off balance sheet
activities in assessing capital adequacy, and minimize the
disincentives to holding liquid, low risk assets. The leverage
ratio consists of tangible Tier 1 capital divided by average
total assets.
In addition, at the request of the OCC, the Bank agreed to
maintain certain minimum capital ratios in excess of the
regulatory requirements. The agreement increased the minimum
Tier 1 risk based capital ratio to 8.0 percent from 4.0 percent,
the total risk based capital ratio to 10.0 percent from 8.0
percent, and the Tier 1 capital leverage ratio to 6.0 percent
from 3.0 percent. At March 31, 1995, the Bank had a Tier 1
risk-based capital ratio of 8.6 percent, a total capital to
risk-weighted assets ratio of 9.8 percent, and a Tier 1 capital
leverage ratio of 6.0 percent. At year-end 1994, these ratios
were 8.4 percent, 9.6 percent, and 5.6 percent, respectively.
The Bank has projected that all of the above ratios will be met
by the end on 1995.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
MARATHON
BANCORP
Date: May 15, 1995
C. Thomas Mallos
Director and
Chief Financial Officer
