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
September 30, 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 November 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
September 30, December 31,
(Unaudited) 1995 1994
----------------------------------
Assets
Cash and due from banks $7,351,300 $4,061,600
Federal funds sold 15,500,000 9,000,000
Cash and cash equivalents 22,851,300 13,061,600
Interest-bearing deposits with financial institutions
388,000 495,000
Securities available for sale 0 5,962,500
Securities held to maturity (aggregate market value of
$9,801,400 in 1995
and $14,374,100 in 1994) 10,054,900 15,363,300
Loans receivable, net 50,269,400 56,271,100
Other real estate owned, net 3,976,800 6,157,500
Premises and equipment, net 436,400 530,100
Accrued interest receivable 502,500 630,700
Other assets 318,500 531,800
-----------------------------
$88,797,800 $99,003,600
=============================
Liabilities and Shareholders' Equity
Deposits:
Demand, noninterest-bearing $41,314,100 $32,719,100
Demand, interest-bearing 7,744,900 6,792,900
Money market and savings 25,698,900 41,680,100
Time certificates of deposit:
Under $100,000 5,461,400 6,104,800
$100,000 and over 3,481,700 5,403,800
Total deposits 83,701,000 92,700,700
Accrued interest payable 192,900 282,200
Other liabilities 9,400 0
------------------------------
Total liabilities 83,903,300 92,982,900
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
Deficit (3,185,500) (2,059,300)
-----------------------------
Total shareholders' equity 4,894,500 6,020,700
$88,797,800 $99,003,600
============================
See accompanying notes to unaudited consolidated financial
statements.<PAGE>
Consolidated Statements of Operations
Marathon Bancorp and Subsidiary
Three months ended Nine months ended
September 30, September 30,
(Unaudited) 1995 1994 1995 1994
------------------------------------------------
Interest income:
Loans, including fees $1,179,000 $1,243,400 $3,690,100 $3,803,400
Mortgage loans held for sale 0 3,100 0 122,200
Investment securities -taxable 163,500 223,900 692,800 552,100
Federal funds sold 135,000 63,900 234,300 91,000
Deposits with financial institutions5,200 3,600 32,200 3,600
-----------------------------------------------
Total interest income 1,482,700 1,537,900 4,649,400 4,572,300
Interest expense:
Deposits 307,100 358,100 1,010,700 1,040,000
Federal funds purchased 0 0 9,500 15,200
----------------------------------------------
Total interest expense 307,100 358,100 1,020,200 1,055,200
Net interest income before
provisions for loan losses 1,175,600 1,179,800 3,629,200 3,517,100
Provision for loan losses 0 0 441,100 0
------------------------------------------------
Net interest income after provisions for loan losses
1,175,600 1,179,800 3,188,100 3,517,100
Other operating income:
Service charges on deposit
accounts 39,700 54,900 164,700 195,100
Gain on mortgage loan sales 0 4,200 0 146,600
Other service charges and fees 7,700 18,000 26,800 63,400
Total other operating income 47,400 77,100 191,500 405,100
Other operating expenses:
Salaries and employee benefits 438,600 456,300 1,434,800 1,564,300
Net operating cost of other
real estate owned 167,500 45,000 419,000 149,700
Occupancy 87,800 150,200 265,000 464,500
Furniture and equipment 23,600 32,600 78,000 95,900
Professional services 163,900 143,700 558,900 413,700
Business promotion 15,200 16,300 49,000 56,100
Stationery and supplies 22,600 17,000 59,600 52,400
Data processing services 141,100 134,200 451,600 409,400
Messenger and courier services 64,800 96,200 186,400 332,300
Insurance and assessments 55,300 102,500 248,000 325,500
Other expenses 50,500 49,800 112,000 169,100
------------------------------------------------
Total other operating expenses 1,230,900 1,243,800 3,862,300 4,032,900
Net loss before extraordinary item (7,900) 13,100 (482,700) (110,700)
Extraordinary gain on early debt
extinguishment 0 0 0 111,800
-----------------------------------------------
Net income (loss) $(7,900) $13,100 $(482,700) $1,100
================================================
Net income (loss) per share:
Net loss before extraordinary item $0.00 $0.01 $(0.39) $(0.09)
Extraordinary item 0.00 0.00 0.00 0.09
----------------------------------------------
Net income (loss) $0.00 $0.01 $(0.39) $0.00
===========================================
See accompanying notes to unaudited consolidated financial
statements.
Consolidated Statements of Cash Flows
Marathon Bancorp and Subsidiary
Nine months ended September 30,
Increase (decrease) in cash and cash equivalents 1995 1994
--------------------------------
Cash flows from operating activities:
Interest received $4,777,000 $4,578,900
Service charges on deposit accounts and other fees received
191,500 258,500
Proceeds of mortgage loans held for sale 0 17,065,400
Funding of mortgage loans held for sale 0 (9,150,200)
Interest paid (911,400) (1,054,600)
Cash paid to suppliers and employees (3,710,900) (4,303,100)
Income taxes refunded 34,400 1,389,800
-----------------------------
Net cash provided by operating activities 380,600 8,784,700
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits with other
financial institutions 8,000 (495,000)
Purchases of securities held to maturity 0 (6,043,600)
Proceeds from maturities of securities available for sale
10,905,000 (5,962,500)
Proceeds from maturities of securities held to maturity
5,001,000 5,946,100
Net decrease in loans made to customers 6,659,300 7,209,300
Proceeds from sale of other real estate owned 295,500 1,205,800
Purchases (sales) of furniture, fixtures and equipment 4,400 (57,600)
-----------------------------
Net cash provided by investing activities 22,873,200 1,802,500
Cash flows from financing activities:
Increase (decrease) in noninterest-bearing and
interest-bearing demand deposits and money market
and savings accounts (6,146,400) 7,432,300
Repayment of long term debt 0 (560,000)
Net decrease in time certificates of deposits (1,452,500) (9,725,800)
-----------------------------
Net cash used by financing activities (7,598,900) (2,853,500)
Net increase in cash and cash equivalents 15,654,900 7,733,700
---------------------------
Cash and cash equivalents at beginning of year 7,196,400 5,327,900
Cash and cash equivalents at end of year $22,851,300 $13,061,600
===========================
See accompanying notes to unaudited consolidated financial
statements.
Consolidated Statements of Cash Flows (Continued)
Marathon Bancorp and Subsidiary
Nine Months ended September 30,
Reconciliation of net income (loss) to net cash provided (used)
by operating activities 1995 1994
-------------------------
Net income (loss) $(482,700) $1,100
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization expense 67,900 86,800
(Gain) loss on sale of other real estate owned 10,400 (85,300)
Provision for REO losses 283,500 0
Provision for loan losses 441,100 0
Extraordinary gain on early
debt extinguishment 0 (111,800)
Gain on mortgage loans held for sale 0 (146,600)
Amortization of premiums
and discounts on securities,net (32,300) 89,000
Net decrease in mortgage loans
held for sale 0 7,915,200
Change in deferred loan origination
fees, net (20,400) (41,500)
Change in accrued interest receivable 180,300 (40,900)
Change in accrued interest payable 108,800 700
Change in income tax receivable 34,400 1,389,800
Change in other assets 210,300 (310,900)
Change in other liabilities (420,700) 39,100
-------------------------
Total adjustments 863,300 8,783,600
Net cash provided by operating activities $380,600 $8,784,700
========================
Supplemental cash flow information:
Transfer from loans to other real estate owned
$243,400 $2,058,800
Loans made to facilitate the sale of other real
estate owned $1,814,700 $3,029,000
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 September 30, 1995 and
December 31, 1994, results of operations and changes in cash
flows for the nine-month and three-month periods ended September
30, 1995 and 1994. The results of operations for the nine-month
period ended September 30, 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 and nine-month
periods ended September 30, 1995 and 1994.
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 loss for the nine-month period
ended September 30, 1995 of $482,700, or $.39 per common share,
compared with net income of $1,100, for the same period in 1994.
The primary reason for the increase in the loss was a $441,100
provision for loan losses (see "Provision for Loan Losses") for
the nine-month period ended September 30, 1995.
As summarized in Table 1 and discussed more fully below, the
Bank's first nine months 1995 operations resulted in a 3.2
percent increase in net interest income, a 100% increase in the
provision for loan losses, a 52.6 percent decrease in other
operating income, and a 4.2 percent decrease in other operating
expenses. The decrease in other operating income resulted
primarily from the discontinuation of the mortgage banking
operation in June 1994, and the $283,500 provision for REO
losses (see "Other Operating Expense").
Table 1 Summary of Operating Performance Nine-month
Period Increase/ (decrease)
(Dollars in thousands) 1995 1994 Amount Percent
------------------------------------
Net interest income $3,629 $3,517 $112 3.2%
Provision for loan losses 441 0 441 100.0
Other operating income 192 405 (213) (52.6)
Other operating expenses 3,863 4,033 (170) (4.2)
-------------------------------
Net loss before extraordinary item (483) (111) (372) 335
Extraordinary item 0 112 (112) (100.0)
-----------------------------------
Net loss $(483) $1 $(484) (48,400.0)%
At September 30, 1995, the Company had total assets of
$88,797,800, total net loans of $50,269,400 and total deposits
of $83,701,000. This compares to total assets of $97,181,000,
total net loans of $55,778,100 and total deposits of $91,299,900
at December 31, 1994.
On September 20, 1995, the Bank entered into a formal agreement
with the Office of the Comptroller of Currency (OCC) under which
the Bank agreed to submit a three year strategic plan, which the
Bank did comply, by November 1, 1995. The plan shall include,
among other things, the action plans to accomplish the
following: a) achieve and maintain the desired capital ratios,
as set forth below; b) attain satisfactory profitability; and
c) reduce other real estate owned. Also under the terms of the
agreement, the Bank is required to continue to adhere to
certain minimum capital ratios in excess of the minimum
regulatory capital requirements, as follow: a) Tier 1 capital
at least equal to 8.5 percent of risk-weighted assets; and b)
Tier 1 capital at least equal to 6.0 percent of actual adjusted
total assets. At September 30, 1995, the Company and the Bank
had a Tier 1 risk based capital ratio of 8.5 percent, and a
Tier 1 capital leverage ratio of 5.9 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 nine-month period of 1995 were
enhanced by a 3.2 percent increase in net interest income from
the same period of 1994, to $3,629,200. The reasons for this
increase were increases in the rate of interest earned on those
assets, offset by a change in mix to lower interest-earning
assets. Average loans, which earned at an average rate of 9.1
percent in 1995, decreased $7,708,000 while other earning
assets, which earned at an average rate of 5.8 percent in 1995,
increased only $2,418,000. The amounts of these increases and
reductions may be seen in Table 2. Interest income from earning
assets rose $77,000 or 1.7 percent. The average volume of loans
and investments outstanding decreased 6.5 percent, while the
weighted average yield on interest-earning assets increased to
8.2 percent in 1995 from 7.5 percent in previous year.
Higher interest income in 1995 was coupled with a 3.3 percent
reduction in interest expense, which resulted primarily from a
4.8 percent decrease in the amount of interest-bearing
liabilities. The weighted average cost of interest-bearing
liabilities 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 nine-month period of
1995 was 5.5 percent compared to 4.8 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 NOW and money
market accounts. The net yield on earning assets was 6.4
percent in the nine-month period of 1995 and 5.8 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
Nine months ended 9/30/95
------------------------------------------------
Loans $54,105 $3,690 9.1% $(502) $389 $(113)
Other earning assets 22,112 959 5.8 103 87 190
Interest-earning assets 76,217 4,649 8.2 (399) 476 77
Interest-bearing liabilities50,509 1,020 2.7 (140) 105 (35)
-----------------------------------------------
$25,708 $3,629 5.5% $(259) $371 $112
Net yield on earning assets 6.4%
Nine months ended 9/30/94
Loans $61,813 $3,803 8.2% $(569) $(254) $(823)
Other earning assets 19,694 769 4.9 (625) 131 (494)
Interest-earning assets 81,507 4,572 7.5 (1,194) (123) (1,317)
Interest-bearing liabilities53,045 1,055 2.7 (519) (104) (623)
-------------------------------------------------
$28,462 $3,517 4.8% $(675) $(19) $(694)
Net yield on earning assets 5.8%
Other Operating Income : Other operating income decreased 52.6
percent in the nine-month period of 1995 to $191,500, from
$405,100 in the nine-month period of 1994. The decrease in the
gain on mortgage loan sales resulted from the discontinuation of
the mortgage banking operation in September 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 $7,433,400
of loans classified as substandard and $37,200 of loans
classified as doubtful at September 30, 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 $2,815,900 of loans which it
had designated as listed at September 30, 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 September 30, 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 nine-month period of 1995
totaled $441,100, loans totaling $666,100 were charged off
during the period, and $87,900 was recovered. Loans charged off
amounted to $644,700 in the nine-month period of 1994, while
recoveries totaled $82,800. The September 30, 1995 allowance
for loan losses was $659,000, or 1.3 percent of gross loans
outstanding, compared with 1.4 percent at December 31, 1994.
The allowance for loan losses reflects management's perception
of the lending environment in which it operates. Based on the
increase in the level of substandard loans, the Bank increased
its provision for loan losses during the nine months ended
September 30, 1995. 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.
At September 30, 1995, loans past due 90 days or more or on
nonaccrual totaled $596,500, or 1.2 percent of gross loans,
compared with $843,800, or 1.5 percent at September 30, 1994.
Other real estate owned (OREO), consisting of properties
received in settlement of loans totaled $3,976,800 at September
30, 1995, a decrease of $2,160,700 or 35.2% from December 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 $3,862,400 for
the nine-month period of 1995, a decrease of 4.2 percent from
$4,032,900 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 42.9 percent in the
nine-month period of 1995 compared to 1994. The net operating
cost of real estate owned through foreclosure totaled $419,000
for 1995, compared with $149,700 in 1994, reflecting a $283,500
provision for REO losses. Professional fees increased 35.1
percent due to the settlement of a lawsuit. Messenger and
courier services decreased 43.9 percent due to a corresponding
decline in noninterest-bearing deposit relationships (see
"Liquidity"). Other expenses declined 33.8 percent primarily
due to the discontinuation of the mortgage banking operation.
Total other operating expenses were 4.4 percent and 4.2 percent
of average total assets at September 30, 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 September 30,
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 nine-month period of 1995 of $87.9 million, an
8.4 percent decrease from 1994 average total assets of $96.0
million. The Bank's loan portfolio decreased 10.7 percent in
the nine-month period 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.
Average total deposits declined 7.7 percent to $81.8 million in
the nine-month period of 1995. Interest-bearing deposits
representing 61.4 percent of average total deposits at September
30, 1995, totaled $50.2 million, down from $53.6 million, or
60.5 percent in 1994. In addition, the Bank shifted from higher
cost certificates of deposits to money market, NOW and savings
accounts.
Table 4 Nine months ended September 30, 1995
Yearended December 31, 1994 Change
Balance Sheet Analysis
Average % of Average % of from 1994
(Dollars in millions) balance Total balance Total Amount %
-------------------------------------------------
Loans $54.1 71.0% $60.6 73.5% $(6.5) (10.7)%
Other interest-earning
assets 22.1 29.0% 21.9 26.5% 0.2 0.9%
Total earning assets 76.2 100.0% 82.5 100.0% (6.3) (7.6)%
------------------------------------------------
Total assets $87.9 $96.0 $(8.1) (8.4)%
Deposits:
Interest bearing demand $8.1 9.9% $6.5 7.3% $1.6 24.6%
Money market and savings 32.3 39.5% 32.7 36.9% (0.4) (1.2)%
Time certificates of deposit 9.8 12.0% 14.4 16.3% (4.6) (31.9)%
Total interest-bearing deposits 50.2 61.4% 53.6 60.5% (3.4) (6.3)%
Non-interest-bearing demand
deposits 31.6 38.6% 35.0 39.5% (3.4) (9.7)%
------------------------------------------------
Total deposits $81.8 100.0% $88.6 100.0% $(6.8) (7.7)%
Total earning assets as a percent of
total deposits 93.2% 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 38.2 percent at September 30, 1995 and
33.8 percent at December 31, 1994. The average maturity of the
Bank's investment securities portfolio is 4.0 years at September
30, 1995 versus 3.2 years at December 31, 1994. The loan to
deposit ratio was 60.8 percent and 62.0 percent for September
30, 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,
on average, 88.0 percent of total average deposits during the
nine-month period 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 portion of Marathon's noninterest-bearing demand deposits is
attributable to a single demand account relationship. During
the nine-month period of 1995 and all of 1994, this relationship
represented 6.6 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 September 30, 1995 was 71.8 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 105 percent of rate sensitive
liabilities at September 30, 1995 as compared to 91 percent at
the end of 1994. In the one year or less category, rate
sensitive assets were 123 percent of rate sensitive liabilities
at September 30, 1995 and 118 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
September 30, 1995
-------------------------------------------
Investments $15.9 $4.3 $2.9 $2.9 $26.0
Loans 37.5 3.3 3.9 5.6 50.3
------------------------------------------
Rate sensitive assets 53.4 7.6 6.8 8.5 76.3
Time deposits $2.0 $6.0 $1.0 $0.0 $9.0
Other deposits 42.1 0.0 1.8 19.6 63.5
------------------------------------------
Rate sensitive liabilities 44.2 5.6 3.1 19.6 72.5
Rate sensitive GAP $9.2 $2.0 $3.7 $(11.1) $3.8
Cumulative GAP $9.2 $11.2 $14.9 $3.8 --
Cumulative ratio of sensitive
assets to liabilities 1.2 1.2 1.3 1.1 1.1
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
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 8.5 percent from 4.0 percent,
and the Tier 1 capital leverage ratio to 6.0 percent from 3.0
percent. At September 30, 1995, the Bank had a Tier 1
risk-based capital ratio of 8.5 percent, and a Tier 1 capital
leverage ratio of 5.9 percent. At year-end 1994, these ratios
were 8.4 percent, and 5.6 percent, respectively.
<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
A current report on Form 8-K was filed on September 20,
1995 regarding the formal agreement with the Office of the
Comptroller of Currency. Details of the agreement are described
hereto on page 7 of this report.
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.
Date: November 14, 1995
Marathon Bancorp
C. Thomas Mallos
Director and Chief
Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 7351300
<INT-BEARING-DEPOSITS> 388000
<FED-FUNDS-SOLD> 15500000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 10054900
<INVESTMENTS-MARKET> 0
<LOANS> 50928400
<ALLOWANCE> 659000
<TOTAL-ASSETS> 88797800
<DEPOSITS> 83701000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 202300
<LONG-TERM> 0
<COMMON> 8080000
0
0
<OTHER-SE> (3185500)
<TOTAL-LIABILITIES-AND-EQUITY> 4894500
<INTEREST-LOAN> 3690100
<INTEREST-INVEST> 692800
<INTEREST-OTHER> 266500
<INTEREST-TOTAL> 4649400
<INTEREST-DEPOSIT> 1010700
<INTEREST-EXPENSE> 9500
<INTEREST-INCOME-NET> 3629200
<LOAN-LOSSES> 441100
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3862400
<INCOME-PRETAX> (482700)
<INCOME-PRE-EXTRAORDINARY> (482700)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (482700)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> (0.39)
<YIELD-ACTUAL> 6.40
<LOANS-NON> 596000
<LOANS-PAST> 387000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 796500
<CHARGE-OFFS> 666000
<RECOVERIES> 87000
<ALLOWANCE-CLOSE> 659000
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
