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
June 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.)
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 August 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
June 30, December 31,
(Unaudited) 1996 1995
Assets
Cash and due from banks $5,433,200 $8,450,300
Federal funds sold 16,500,000 14,400,000
Cash and cash equivalents 21,933,200 22,850,300
Interest-bearing deposits
with financial institutions 994,000 497,000
Securities available for sale 1,067,000 3,302,900
Securities held to maturity (aggregate market value of $5,857,800 in 1996
and $6,306,700 in 1995) 6,347,300 6,610,700
Loans receivable, net 49,763,900 49,515,100
Other real estate owned, net 1,958,600 2,654,400
Premises and equipment, net 489,700 420,900
Accrued interest receivable 438,700 582,200
Other assets 685,600 321,100
$83,678,000 $86,754,600
Liabilities and Shareholders' Equity
Deposits:
Demand, noninterest-bearing $36,716,600 $38,415,000
Demand, interest-bearing 6,129,200 7,868,100
Money market and savings 28,010,100 27,167,000
Time certificates of deposit:
Under $100,000 5,737,800 5,779,400
$100,000 and over 2,593,500 3,300,400
Total deposits 79,187,200 82,529,900
Accrued interest payable 95,300 93,600
Other liabilities 421,300 155,600
Total liabilities 79,703,800 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,
1,248,764 shares issued and outstanding 8,080,000 8,080,000
Deficit (4,104,800) (4,105,600)
Net unrealized gain (loss) on securities available for sale
(1,000) 1,100
Total shareholders' equity 3,974,200 3,975,500
$83,678,000 $86,754,600
See accompanying notes to unaudited consolidated financial
statements.<PAGE>
Consolidated Statements of Operations
Marathon Bancorp and Subsidiary
Three months ended Six months ended
June 30 June 30
(Unaudited) 1996 1995 1996 1995
Interest income:
Loans, including fees $1,028,900 $1,221,900 $2,100,100 $2,511,100
Investment securities - taxable 118,300 205,200 254,600 529,300
Federal funds sold 166,800 83,900 327,900 99,300
Deposits with financial institutions 10,800 14,300 18,600 27,000
Total interest income 1,324,800 1,525,300 2,701,200 3,166,700
Interest expense:
Deposits 289,300 339,900 584,900 703,600
Federal funds purchased 0 0 0 9,500
Total interest expense 289,300 339,900 584,900 713,100
Net interest income before
provisions for loan losses 1,035,500 1,185,400 2,116,300 2,453,600
Provision for loan losses 0 351,100 0 441,100
Net interest income after provisions for loan losses
1,035,500 834,300 2,116,300 2,012,500
Other operating income:
Service charges on deposit accounts 38,600 60,800 102,500 125,000
Other service charges and fees 2,700 11,600 5,900 19,100
Total other operating income 41,300 72,400 108,400 144,100
Other operating expenses:
Salaries and employee benefits 425,300 469,200 883,900 996,200
Net operating cost
of other real estate owned 21,400 214,300 61,000 251,500
Occupancy 89,700 88,400 172,800 177,200
Furniture and equipment 31,100 31,700 61,900 54,400
Professional services 141,800 222,000 339,300 395,000
Business promotion 14,800 17,400 29,800 33,800
Stationery and supplies 18,300 18,300 31,900 37,000
Data processing services 104,700 149,800 237,800 310,500
Messenger and courier services 82,000 61,600 150,200 121,600
Insurance and assessments 95,800 94,200 194,700 192,800
Other expenses 29,500 26,800 60,500 61,500
Total other operating expenses 1,054,400 1,393,700 2,223,800 2,631,500
Net income (loss) $22,400 $(487,000) $900 $(474,900)
Net income (loss) per share: $0.02 $(0.39) $0.00 $(0.38)
See accompanying notes to unaudited consolidated financial
statements.Consolidated Statements of Cash Flows
Marathon Bancorp and Subsidiary
(Unaudited) Six months ended
June 30,
Increase (decrease) in cash and cash equivalents 1996 1995
Cash flows from operating activities:
Interest received $2,846,000 $3,258,600
Service charges on deposit accounts and other fees received
108,400 144,100
Interest paid (583,200) (702,500)
Cash paid to suppliers and employees (2,246,900) (2,544,200)
Income taxes refunded 0 36,000
Net cash provided (used) by operating activities 124,300
192,000
Cash flows from investing activities:
Net increase in interest-bearing deposits with other financial
institutions (497,000) (189,000)
Proceeds from maturities of securities available for sale
2,230,500 10,845,300
Proceeds from maturities of securities held to maturity 257,400
3,311,600
Net (increase) decrease in loans made to customers (153,300)
3,476,800
Proceeds from sale of other real estate owned 587,300 189,900
(Purchases) sales of furniture, fixtures and equipment
(123,600) 25,900
Net cash provided by investing activities 2,301,300
17,660,500
Cash flows from financing activities:
Decrease in noninterest-bearing and interest-bearing demand
deposits and money market and savings accounts (2,594,200)
(4,949,900)
Net decrease in time certificates of deposits (748,500)
(681,600)
Net cash used by financing activities (3,342,700)
(5,631,500)
Net increase (decrease) in cash and cash equivalents (917,100)
12,221,000
Cash and cash equivalents at beginning of year 22,850,300
7,196,400
Cash and cash equivalents at end of year $21,933,200
$19,417,400
See accompanying notes to unaudited consolidated financial
statements.
(Continued)
<PAGE>
Consolidated Statements of Cash Flows (Continued)
Marathon Bancorp and Subsidiary
(Unaudited) Six months ended
June 30,
Reconciliation of net income (loss) to net cash provided (used)
by operating activities 1996 1995
Net income (loss) $900 $(474,900)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization expense 54,800 45,300
(Gain) loss on sale of other real estate owned 21,000
(29,000)
Provision for REO losses 0 183,500
Provision for loan losses 0 441,100
Amortization of premiums and discounts on securities,
net 9,200 (40,600)
Change in deferred loan origination fees, net (8,000)
8,000
Change in accrued interest receivable 143,500 124,500
Change in accrued interest payable 1,700 10,600
Change in income tax receivable 0 36,000
Change in other assets (364,500) 175,000
Change in other liabilities 265,700 (287,500)
Total adjustments 123,400 666,900
Net cash provided by operating activities 124,300 $192,000
Supplemental cash flow information:
Transfer from loans to other real estate owned 0
$243,400
Loans made to facilitate the sale of other real
estate owned $87,500 $284,750
See accompanying notes to unaudited consolidated financial
statements.
<PAGE>
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 June 30, 1996 and December 31, 1995,
results of operations and changes in cash flows for the
three-month and six-month periods ended June 30, 1996 and 1995.
The results of operations for the six-month period ended June
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 six-month
periods ended June 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 six-month period
ended June 30, 1996 of $900, or zero per common share, compared
with net loss of $474,900, 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 did not make a loan loss
provision for the six-month period ended June 30, 1996 as
compared to a $441,100 provision for the six month period ended
June 30, 1995 (see "Provision for Loan Losses").
As summarized in Table 1 and discussed more fully below, the
Bank's operations for the first six months of 1996 resulted in a
13.8 percent decrease in net interest income, a 100% decrease in
the provision for loan losses, a 24.3 percent decrease in other
operating income, and a 15.5 percent decrease in other operating
expenses. Table 1 Summary of Operating Performance
Six-month Period Increase/ (decrease)
(Dollars in thousands) 1996 1995 Amount Percent
Net interest income $2,116 $2,454 $(338) (13.8)%
Provision for loan losses 0 441 (441) (100.0)%
Other operating income 109 144 (35) (24.3)%
Other operating expenses 2,224 2,632 (408) (15.5)%
Net loss $1 $(475) $476 (100.2)%
At June 30, 1996, the Company had total assets of $83,678,000,
total net loans of $49,763,900 and total deposits of
$79,187,200. 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 June 30,
1996, the Company and the Bank had a Tier 1 risk based capital
ratio of 7.1 percent, and a Tier 1 capital leverage ratio of
5.1 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 six-month period of 1996 were impacted
by a 13.8 percent decrease in net interest income from the same
period of 1995, to $2,116,300. The reasons for this decline
were decreases in the rate of interest earned on earning assets,
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 8.5 percent in
1996 as compared to 9.2% in 1995 as we moved to a lower interest
rate environment. In addition, average loans outstanding
declined $4,891,000 or 8.9 percent between 1995 and 1996 while
average interest-bearing liabilities decreased $11,549,000 or
21.5 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 six-month period of
1996 was 4.9 percent compared to 5.5 percent in 1995. The 1996
decrease was due to an decrease in the yield on interest-earning
assets while the cost of interest-bearing liabilities slightly
increased. The average prime rate declined from 8.9 percent for
the six-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 6.0
percent in the six-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
Six months ended 6/30/96
Loans $50,067 $2,100 8.5% $(214) $(197) $(411)
Other earning assets 20,705 601 5.9 (89) 34 (55)
Interest-earning assets 70,772 2,701 7.9 (303) (163)
(466)
Interest-bearing liabilities 42,113 585 2.8 (151) 23
(128)
$28,659 $2,116 4.9% $(152) $(186) $(338)
Net yield on earning assets 6.0%
Six months ended 6/30/95
Loans $54,958 $2,511 9.2% $(349) $300 $(49)
Other earning assets 22,931 656 5.8 112 69 181
Interest-earning assets 77,889 3,167 8.2 (237) 369
132
Interest-bearing liabilities 53,662 713 2.7 (55) 70
15
$24,227 $2,454 5.5% $(182) $299 $117
Net yield on earning assets 6.4%
Other Operating Income : Other operating income decreased 24.3
percent in the six-month period of 1996 to $108,400 from
$144,100 in the six-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 $7,811,600
of loans classified as substandard at June 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 $2,318,500 of loans which it
had designated as listed at June 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 June 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 did not make a provision for loan losses in the first half
of 1996. Loans totaling $176,300 were charged off during the
period, and $10,200 was recovered. Loans charged off amounted
to $393,700 in the six-month period of 1995, while recoveries
totaled $75,400. The June 30, 1996 allowance for loan losses
was $554,000, or 1.1 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 June 30, 1996, the Bank had classified $121,000 of its loans
as impaired and recorded the full amount as specific reserve in
the allowance for loan losses. In addition, the Bank classified
$3,773,500 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 six months ended June
30, 1996 was approximately $3,307,500. Interest income of
$54,900 was recognized on impaired loans during the six months
ended June 30, 1996.
At June 30, 1996, nonaccrual totaled $2,411,000, or 4.8 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 $1,958,600
at June 30, 1996, a decrease of $695,800 or 26.2% 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
$2,223,800 for the six-month period of 1996, a decrease of
$407,700 or 15.5 percent from $2,631,500 in 1995. The net
operating costs of other real estate owned through foreclosure
totaled $61,000 at June 30, 1996 compared to $251,500 at June
30, 1995 as OREO has declined similarly from $6,137,500 in 1995
to $1,958,600 in 1996. Total other operating expenses were 2.8
percent and 2.9 percent of average total assets at June 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 June 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 six-month period of 1996 of $80.3 million, a 5.8
percent decrease from 1995 average total assets of $86.1
million. The Bank's average loan portfolio decreased 3.1
percent in the six-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 5.5 percent to $75.9 million in
the six-month period of 1996. Interest-bearing deposits
representing 55.6 percent of average total deposits at June 30,
1996, totaled $42.2 million, down from $48.1 million, or 5.9
percent in 1995.
Table 4 Six months ended June 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 $7.0 9.2% $7.8 9.7% $(0.8)
(10.3)%
Money market and savings 26.5 34.9% 30.7 38.2% (4.2)
(13.7)%
Time certificates of deposit 8.7 11.5% 9.6 12.0% (0.9)
(9.4)%
Total interest-bearing deposits 42.2 55.6% 48.1 59.9%
(5.9) (12.3)%
Non-interest-bearing demand deposits 33.7 44.4% 32.2
40.1% 1.5 4.7%
Total deposits $75.9 100.0% $80.3 100.0% $(4.4)
(5.5)%
Total earning assets as a percent of
total deposits 93.3% 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 37.1 percent at June 30, 1996 and 38.6
percent at December 31, 1995. The average maturity of the
Bank's investment securities portfolio is 4.4 years at June 30,
1996 versus 5.2 years at December 31, 1995. The loan to deposit
ratio was 63.5 percent and 60.9 percent for June 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, 88.6 percent of total average deposits during the
six 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 six-month period of 1996 and all of 1995, this relationship
represented 10.0 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 June 30, 1996 was 68.5 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 108 percent of rate sensitive
liabilities at June 30, 1996 as compared to 100 percent at the
end of 1995. In the one year or less category, rate sensitive
assets were 118 percent of rate sensitive liabilities at June
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
June 30, 1996
Investments $17.7 $0.9 $4.2 $2.1 $24.9
Loans 32.9 5.6 5.1 4.3 47.9
Rate sensitive assets 50.6 6.5 9.3 6.4 72.8
Time deposits 4.3 3.4 0.6 0.0 $8.3
Other deposits 40.6 0.0 1.5 17.0 59.1
Rate sensitive liabilities 44.9 3.4 2.1 17.0 67.4
Rate sensitive GAP $5.7 $3.1 $7.2 $(10.6) $5.4
Cumulative GAP $5.7 $8.8 $16.0 $5.4 --
Cumulative ratio of sensitive
assets to liabilities 1.1 1.2 1.3 1.1 1.1
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 June 30,
1996, the Company and the Bank had a Tier 1 risk based capital
ratio of 7.1 percent, and a Tier 1 capital leverage ratio of
5.1 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
On May 2l, 1996, proxy materials for the 1995
Annual Meeting of Shareholders of Marathon Bancorp ("the
meeting"), were mailed to all shareholders of record on May 3,
1996. The meeting took place on June 17, 1996. Shareholders
were asked to vote on the matter shown below. Of the total
1,248,764 shares outstanding and entitled to vote, 861,111
shares were represented either in person or by properly executed
proxies. The results of the voting on the matter are shown
below in parenthesis.
Matter 1. To elect seven persons to the Board of Directors to
serve until the next Annual Meeting of Shareholders or until
their successors are elected or have qualified.
Robert J. Abernethy (803,966); Frank W. Jobe (803,966); C.
Thomas Mallos (803,966); John J. Maloney
(803,150); Robert L. Oltman (803,150); Ann Pappas (803,150);
Nick Patsaouras (803,966).
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: August 14, 1996
C. Thomas Mallos
Director and Chief
Financial Officer
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