UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10- QSB
1
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
1
For the quarterly period ended
September 30, 1996
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.)
11150 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, 1996, 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) 1996 1995
Assets
Cash and due from banks $10,340,300 $8,450,300
Federal funds sold 15,000,000 14,400,000
Cash and cash equivalents 25,340,300 22,850,300
Interest-bearing deposits with
financial institutions 994,000 497,000
Securities available for sale 1,040,800 3,302,900
Securities held to maturity (aggregate
market value of $5,857,800 in 1996
and $6,306,700 in 1995) 6,138,700 6,610,700
Loans receivable, net 49,385,300 49,515,100
Other real estate owned, net 1,094,600 2,654,400
Premises and equipment, net 508,400 420,900
Accrued interest receivable 392,800 582,200
Other assets 946,200 321,100
$85,841,100 $86,754,600
Liabilities and Shareholders' Equity
Deposits:
Demand, noninterest-bearing $34,953,700 $38,415,000
Demand, interest-bearing 5,926,700 7,868,100
Money market and savings 32,374,700 27,167,000
Time certificates of deposit:
Under $100,000 5,808,200 5,779,400
$100,000 and over 2,593,500 3,300,400
Total deposits 81,656,800 82,529,900
Accrued interest payable 79,000 93,600
Other liabilities 129,800 155,600
Total liabilities 81,865,600 82,779,100
Commitments and contingencies
Shareholders' equity:
Preferred shares - no par value, 1,000,000 shares
authorized, no shares issued and outstanding
Common shares - no par value, 9,000,000 shares authorized,
248,764 shares issued and outstanding 8,080,000 8,080,000
Deficit (4,102,900) (4,105,600)
Net unrealized gain (loss)
on securities available for sale (1,600) 1,100
Total shareholders' equity 3,975,500 3,975,500
$85,841,100 $86,754,600
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) 1996 1995 1996 1995
Interest income:
Loans, including fees $939,300 $1,179,000 $3,039,400 $3,690,100
Investment securities - taxable 112,700 163,500 367,300 692,800
Federal funds sold 168,200 135,000 496,100 234,300
Deposits with financial
institutions 14,100 5,200 32,700 32,200
Total interest income 1,234,300 1,482,700 3,935,500 4,649,400
Interest expense:
Deposits 308,500 307,100 893,400 1,010,700
Federal funds purchased 0 0 0 9,500
Total interest expense 308,500 307,100 893,400 1,020,200
Net interest income before
provisions for loan losses 925,800 1,175,600 3,042,100 3,629,200
Provision for loan losses 25,000 0 25,000 441,100
Net interest income after
provisions for loan losses 900,800 1,175,600 3,017,100 3,188,100
Other operating income:
Service charges on deposit accts. 43,600 39,700 146,100 164,700
Other service charges and fees 5,600 7,700 11,500 26,800
Total other operating income 49,200 47,400 157,600 191,500
Other operating expenses:
Salaries and employee benefits 243,300 438,600 1,127,200 1,434,800
Net operating cost of OREO 210,800 167,500 271,800 419,000
Occupancy 62,100 87,800 234,900 265,000
Furniture and equipment 29,600 23,600 91,500 78,000
Professional services 117,000 163,900 456,300 558,900
Business promotion 15,000 15,200 44,800 49,000
Stationery and supplies 13,200 22,600 45,100 59,600
Data processing services 122,500 141,100 360,300 451,600
Messenger and courier services 65,100 64,800 215,300 186,400
Insurance and assessments 43,900 55,300 238,600 248,000
Other expenses 25,700 50,500 86,200 112,000
Total other operating expenses 948,200 1,230,900 3,172,000 3,862,300
Net income (loss) $1,800 $(7,900) $2,700 $(482,700)
Net income (loss) per share: $0.00 $0.00 $0.00 $(0.39)
See accompanying notes to unaudited consolidated financial
statements.
Consolidated Statements of Cash Flows
Marathon Bancorp and Subsidiary
(Unaudited) Nine months ended September 30,
Increase (decrease) in cash and cash equivalents 1996 1995
Cash flows from operating activities:
Interest received $4,039,500 $4,777,000
Service charges on deposit
accounts and other fees received 157,600 191,500
Interest paid (908,000) (911,400)
Cash paid to suppliers and employees (3,669,100) (3,710,900)
Income taxes refunded (1,600) 34,400
Net cash provided (used) by
operating activities (381,600) 380,600
Cash flows from investing activities:
Net increase in interest-bearing deposits
with other financial institutions (497,000) 8,000
Proceeds from maturities of securities
available for sale 2,256,600 10,905,000
Proceeds from maturities of securities
held to maturity 458,900 5,001,000
Net (increase) decrease in loans made
to customers 615,200 6,659,300
Proceeds from sale of OREO 1,082,200 295,500
(Purchases) sales of furniture,
fixtures and equipment (171,200) 4,400
Net cash provided by investing acts. 3,744,700 22,873,200
Cash flows from financing activities:
Decrease in noninterest-bearing and
interest-bearing demand deposits and
money market and savings accounts (195,000) (6,146,400)
Net decrease in time certificates
of deposits (678,100) (1,452,500)
Net cash used by financing activities (873,100) (7,598,900)
Net increase (decrease) in cash and
cash equivalents 2,490,000 15,654,900
Cash and cash equivalents at
beginning of year 22,850,300 7,196,400
Cash and cash equivalents at
end of year $25,340,300 $22,851,300
See accompanying notes to unaudited consolidated financial
statements.
(Continued)
Consolidated Statements of Cash Flows (Continued)
Marathon Bancorp and Subsidiary
(Unaudited) Nine months ended
September 30,
Reconciliation of net income (loss) to net cash provided (used)
by operating activities 1996 1995
Net income (loss) $2,700 $(482,700)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization expense 83,700 67,900
(Gain) loss on sale of OREO 68,500 10,400
Provision for REO losses 0 283,500
Provision for loan losses 25,000 441,100
Amortization of premiums and
discounts on securities,net 15,900 (32,300)
Change in deferred loan
origination fees, net (101,300) (20,400)
Change in accrued interest
receivable 189,400 180,300
Change in accrued interest
payable (14,600) 108,800
Change in income tax receivable 0 34,400
Change in other assets (625,100) 210,300
Change in other liabilities (25,800) (420,700)
Total adjustments (384,300) 863,300
Net cash provided
by operating activities $(381,600) $380,600
Supplemental cash flow information:
Transfer from loans to other real estate owned
$294,600 $243,400
Loans made to facilitate the sale of other real
estate owned $703,700 $1,814,700
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
1995 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, 1996 and December 31,
1995, results of operations and changes in cash flows for the
three-month and nine-month periods ended September 30, 1996 and
1995. The results of operations for the nine-month period ended
September 30, 1996 are not necessarily indicative of what the
results of operations will be for the full year ending December
31, 1996.
(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 the three-month and nine-month
periods ended September 30, 1996 and 1995.<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 1995 Annual Report on Form 10-KSB. Averages
presented are daily average balances.
Summary
Marathon Bancorp recorded a net income for the nine-month
period ended September 30, 1996 of $2,700 compared with net loss
of $482,700, or $0.4 per common share, for the same period in
1995. The primary reason for the increase in earnings was the
fact that the Bank made a $25,000 loan loss provision for the
nine-month period ended September 30, 1996 as compared to a
$441,100 provision for the nine month period ended September 30,
1995 (see "Provision for Loan Losses").
As summarized in Table 1 and discussed more fully below, the
Bank's operations for the first nine months of 1996 resulted in
a 16.2 percent decrease in net interest income, a 94.3% decrease
in the provision for loan losses, a 17.7 percent decrease in
other operating income, and a 17.9 percent decrease in other
operating expenses. Table 1 Summary of Operating
Performance Nine-month Period Increase/ (decrease)
(Dollars in thousands) 1996 1995 Amount Percent
Net interest income $3,042 $3,629 $(587) (16.2)%
Provision for loan losses 25 441 (416) (94.3)%
Other operating income 158 192 (34) (17.7)%
Other operating expenses 3,172 3,863 (691) (17.9)%
Net income (loss) $3 $(483) $486 100.6%
At September 30, 1996, the Company had total assets of
$85,841,100, total net loans of $49,385,300 and total deposits
of $81,656,800. This compares to total assets of $86,754,600,
total net loans of $49,515,100 and total deposits of $82,529,900
at December 31, 1995.
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 six year strategic plan by November
1, 1995. The plan included, among other things, 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. The Plan was accepted by the OCC on January 7, 1996.
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, 1996, the Company and the Bank had a Tier 1 risk based
capital ratio of 7.4 percent, and a Tier 1 capital leverage
ratio of 5.0 percent. Failure on the part of the Bank to meet
all of the terms of the formal agreement may subject the Bank to
significant regulatory sanctions, including restrictions as to
the source of deposits and the appointment of a conservator or
receiver.
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 noted
thereto as well as the Company's 1995 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 1996 were
impacted by a 16.2 percent decrease in net interest income from
the same period of 1995, to $3,042,100. The reasons for this
decline were decreases in the rate of interest earned on loans,
a decrease in the volume of earning assets, and an increase in
the rate of interest paid on interest-bearing liabilities,
partially offset by a decrease in the amount of interest-bearing
liabilities. Loans earned at an average rate of 8.1 percent in
1996 as compared to 9.1% in 1995 as we moved to a lower interest
rate environment. In addition, average loans outstanding
declined $3,962,000 or 7.3 percent between 1995 and 1996 while
average interest-bearing liabilities decreased $7,723,000 or
15.3 percent. The average rate of interest paid on certificates
of deposit increased in 1996 as customers elected to extend
their maturities for higher rates. The amounts of these
increases and reductions may be seen in Table 2.
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
1996 was 4.6 percent compared to 5.5 percent in 1995. The 1996
decrease was due to an decrease in the yield on loans while the
cost of interest-bearing liabilities slightly increased. The
average prime rate declined from 8.9 percent for the nine-month
period of 1995 to 8.3 percent for the same period in 1996.
However, longer term certificates of deposit which earn higher
rates of interest caused the average cost of interest-bearing
liabilities to increase from 2.7 percent in 1995 to 2.8 percent
in 1996. Although the prime rate decreased, the rates paid on
most interest-bearing liabilities remained relatively unchanged.
The net yield on earning assets was 5.7 percent in the
nine-month period of 1996 and 6.4 percent in 1995.
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 9/30/96
Loans $50,143 $3,039 8.1% $(259) $(392) $(651)
Other earning assets 20,691 896 5.8 (92) 29 (63)
Interest-earning assets 70,834 3,935 7.4 (351) (363)
(714)
Interest-bearing liabilities 42,786 893 2.8 (151) 24
(127)
$28,048 $3,042 4.6% $(200) $(387) $(587)
Net yield on earning assets 5.7%
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 liabilities 50,509 1,020 2.7 (140)
105 (35)
$25,708 $3,629 5.5% $(259) $371 $112
Net yield on earning assets 6.4%
Other Operating Income : Other operating income decreased 17.7
percent in the nine-month period of 1996 to $157,600 from
$191,500 in the nine-month period of 1995. The decrease is
attributable to a lower level of overdraft fee income as the
Bank has attempted to close accounts that are frequently in an
overdraft status.
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 experienced adverse economic conditions over
the last several years, 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 $7,291,500
of loans classified as substandard at September 30, 1996 as
compared to $6,404,500 of substandard and $37,100 of loans
classified as doubtful at December 31, 1995. In addition to the
classified loans, the Bank was also monitoring $1,834,300 of
loans which it had designated as listed at September 30, 1996 as
compared to $4,066,900 at December 31, 1995.
With the exception of these classified and listed loans,
management is not aware of any loans as of September 30, 1996
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
Bank made a $25,000 provision for loan losses in the first nine
months of 1996. Loans totaling $299,600 were charged off during
the period, and $16,200 was recovered. Loans charged off
amounted to $666,100 in the nine-month period of 1995, while
recoveries totaled $87,900. The September 30, 1996 allowance
for loan losses was $461,700, or 0.9 percent of gross loans
outstanding, compared to 1.4 percent at December 31, 1995. 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.
On January 1, 1995. the Bank adopted Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors
for Impairment of a Loan," as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures." This statement prescribes that a
loan is impaired when it is probable that a creditor will be
unable to collect all amounts due (principal and interest)
according to the contractual terms of the loan agreement. It
also provides guidance concerning the measurement of impairment
on such loans and the recording of the related reserves. The
adoption of this statement did not have a material effect on the
results of operations or the financial position of the Bank.
At September 30, 1996, the Bank classified $3,282,900 of its
loans as impaired without a specific reserve. Since these loans
are collateral dependent and the estimated fair value of the
collateral exceeds the book value of the related loans, no
specific loss reserve was recorded on these loans in accordance
with SFAS No. 114. The average recorded investment of impaired
loans during the nine months ended September 30, 1996 was
approximately $2,752,100. Interest income of $61,300 was
recognized on impaired loans during the nine months ended
September 30, 1996.
At September 30, 1996, nonaccrual totaled $2,289,200, or 4.6
percent of gross loans, compared with $523,000, or 1.0 percent
at December 31, 1995. Other real estate owned (OREO),
consisting of properties received in settlement of loans totaled
$1,094,600 at September 30, 1996, a decrease of $1,559,800 or
58.8% from December 31, 1995.
Because of the current economic environment, it is possible
that nonaccrual loans and OREO could increase in 1996. Although
management believes that the allowance for possible loan losses
is adequate and OREO is carried at fair value less estimated
selling costs, there can be no reasonable assurance that
increases in the allowance for loan losses or additional
write-downs of OREO will not be required as a result of the
deterioration in the local economy or increases in interest
rates.
Other Operating Expenses: Other operating expenses totaled
$3,172,000 for the nine-month period of 1996, a decrease of
$407,700 or 17.9 percent from $3,862,400 in 1995. The net
operating costs of other real estate owned through foreclosure
totaled $271,800 at September 30, 1996 compared to $419,000 at
September 30, 1995 as OREO has declined similarly from
$3,976,800 in 1995 to $1,094,600 in 1996. Total other operating
expenses were 3.9 percent and 4.4 percent of average total
assets at September 30, 1996 and 1995, respectively.
Income Taxes: Deferred income taxes are computed using the
liability method based on differences between the 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. A
valuation allowance is established to reduce the deferred tax
asset to the level at which it is "more likely than not" that
the tax asset or benefits will be realized. Realization of tax
benefits of deductible temporary differences and operating loss
carryforwards depends on having sufficient taxable income of an
appropriate character within the carryforward periods
The Company had no income tax expense or benefit at September
30, 1996 or 1995. For federal income tax purposes, the Company
has net operating loss carryforward of approximately $2,871,300
beginning to expire through 2009. For state income tax
purposes, the Company has incurred a net operating loss of
approximately $4,789,200 which is available as a carryforward
through 2001 to offset future taxes payable, adjusted for the
fifty percent reduction, as required by state tax law.
Financial Condition
As set forth in Table 4, the Company recorded average total
assets for the nine-month period of 1996 of $80.3 million, a 6.7
percent decrease from 1995 average total assets of $86.1
million. The Bank's average loan portfolio decreased 5.8
percent in the nine-month period of 1996 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 4.7 percent to $76.5 million in
the nine-month period of 1996. Interest-bearing deposits
representing 55.9 percent of average total deposits at September
30, 1996, totaled $42.8 million, down from $48.1 million, or
59.9 percent in 1995.
Table 4 Nine months ended September 30, 1996
Year
ended December 31, 1995 Change
Balance Sheet Analysis
Average % of Average % of
from 1995
(Dollars in millions) balance Total balance Total
Amount %
Loans $50.1 70.8% $53.2 71.0% $(3.1) (5.8)%
Other interest-earning assets 20.7 29.2% 21.7 29.0% (1.0)
(4.6)%
Total earning assets 70.8 100.0% 74.9 100.0% (4.1) (5.5)%
Total assets $80.3 $86.1 $(5.8) (6.7)%
Deposits:
Interest bearing demand $6.7 8.8% $7.8 9.7% $(1.1)
(14.1)%
Money market and savings 27.6 36.1% 30.7 38.2% (3.1)
(10.1)%
Time certificates of deposit 8.5 11.1% 9.6 12.0% (1.1)
(11.5)%
Total interest-bearing deposits 42.8 55.9% 48.1 59.9%
(5.3) (11.0)%
Non-interest-bearing demand deposits 33.7 44.1% 32.2
40.1% 1.5 4.7%
Total deposits $76.5 100.0% $80.3 100.0% $(3.8)
(4.7)%
Total earning assets as a percent of
total deposits 92.5% 93.3%
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 39.8 percent at September 30, 1996 and
38.6 percent at December 31, 1995. The average maturity of the
Bank's investment securities portfolio is 3.5 years at September
30, 1996 versus 5.2 years at December 31, 1995. The loan to
deposit ratio was 60.5 percent and 60.9 percent for September
30, 1996 and December 31, 1995, 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, 88.9 percent of total average deposits during the
nine month period of 1996 and 88.0 percent during 1995. 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 1996 and all of 1995, this relationship
represented 9.7 percent and 7.0 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, 1996 was 70.0 percent,
compared with 70.6 percent at December 31, 1995.
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 101 percent of rate sensitive
liabilities at September 30, 1996 as compared to 100 percent at
the end of 1995. In the one year or less category, rate
sensitive assets were 105 percent of rate sensitive liabilities
at September 30, 1996 and 113 percent at December 31, 1995. 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.<PAGE>
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, 1996
Investments $15.6 $1.5 $4.8 $1.4 $23.3
Loans 30.4 7.4 5.0 4.6 47.4
Rate sensitive assets 46.0 8.9 9.8 6.0 70.7
Time deposits 5.7 2.4 0.4 0.0 $8.5
Other deposits 44.3 0.0 2.0 15.2 61.5
Rate sensitive liabilities 50.0 2.4 2.4 15.2 70.0
Rate sensitive GAP $(4.0) $6.5 $7.4 $(9.2) $0.7
Cumulative GAP $(4.0) $2.5 $9.9 $0.7 --
Cumulative ratio of sensitive
assets to liabilities 0.9 1.1 1.2 1.0 1.0
December 31, 1995
Investments $16.6 $1.7 $1.9 $4.6 $24.8
Loans 39.8 1.0 3.6 5.3 49.7
Rate sensitive assets 56.4 2.7 5.5 9.9 74.5
Time deposits 2.2 5.9 1.0 0.0 9.1
Other deposits 44.1 0.0 1.4 19.6 65.1
Rate sensitive liabilities 46.3 5.9 2.4 19.6 74.2
Rate sensitive GAP $10.1 $(3.2) $3.1 $(9.7) $0.3
Cumulative GAP $10.1 $6.9 $10.0 $0.3 --
Cumulative ratio of sensitive assets to liabilities
assets to liabilities 1.2 1.1 1.2 1.0 1.0
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.
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 by
November 1, 1995. The plan included, among other things, 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. The Plan was accepted by the OCC on January 7, 1996.
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, 1996, the Company and the Bank had a Tier 1 risk based
capital ratio of 7.4 percent, and a Tier 1 capital leverage
ratio of 5.0 percent. Failure on the part of the Bank to meet
all of the terms of the formal agreement may subject the Bank to
significant regulatory sanctions, including restrictions as to
the source of deposits and the appointment of a conservator or
receiver.
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.
<PAGE>
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: November 14, 1996
C. Thomas Mallos
Director and Chief
Financial Officer
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