UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-KSB 1
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee required) 1
For the fiscal year ended December 31,
1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No fee required)
For the transition period from _______ to _________
Commission file number 0-12510
MARATHON BANCORP
(Name of small business issuer in its charter)
California
95-3770539
(State or other jurisdiction of incorporation or origination)
(I.R.S. Employer
Identification No.)
11444 West Olympic Boulevard, Los Angeles,
California 90064
(Address of principal executive offices)
(Zip Code)
Issuer's telephone number: (310) 996-9100
Securities registered pursuant to Section 12(b) of the Exchange
Act: None
Securities registered pursuant to Section 12(g) of the Exchange
Act: 1 Common
Stock, no par value
(Title of Class) Check whether the issuer (1)
has filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 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
Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B is not contained herein,
and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year.
$6,074,500
State the aggregate market value of the voting stock held
by non-affiliates computed by reference to the price at which
the stock was sold, or the average bid and asked prices of such
stock, as of March 1, 1996. $4,058,500 . Solely for the
purpose of this calculation, all directors and officers are
regarded as affiliates.
As of March 1, 1996, there were 1,248,764 shares of no par
Common Stock issued and outstanding. , Documents
incorporated by reference include: (1) portions of the
registrant's 1995 Annual Report to Shareholders, incorporated
herein by reference to Parts II and III; and, (2) portions of
the registrant's Proxy Statement for the Annual Meeting of
Shareholders, to be held on June 17, 1996, are incorporated
herein by reference to Parts II and III.
PART I
ITEM 1. BUSINESS
General
Marathon Bancorp (the Company) is a California corporation
organized on October 12, 1982, and, as a bank holding company,
is subject to the Bank Holding Company Act of 1956, as amended
(the BHC Act). The Company commenced business on August 29,
1983 when the Company acquired all of the issued and outstanding
shares of Marathon National Bank (the Bank), which is the sole
active subsidiary of the Company and its principal asset. The
Company has not engaged in any other activities to the date of
this filing. All references herein to the Company include the
Bank, unless the context requires otherwise.
The Bank
The Bank was organized on November 8, 1982 as a national
banking association. The application to organize the Bank was
accepted for filing by the Office of the Comptroller of the
Currency (the Comptroller) on March 11, 1982, and preliminary
approval was granted on September 8, 1982. On August 29, 1983,
the Bank received from the Comptroller a Certificate of
Authority to Commence the Business of Banking. The Bank is a
member of the Federal Reserve System, and its deposits are
insured under the Federal Deposit Insurance Act to the extent of
applicable limits.
The Bank is located at 11444 West Olympic Boulevard, Los
Angeles, California. The Bank's primary marketing area rests
principally within the counties of Los Angeles (including the
San Fernando Valley and South Bay areas) and Orange. The Bank
markets its services mainly to commercial and wholesale
businesses, professionals and discerning individuals living or
working in the west Los Angeles area.
Bank Services
The Bank offers a wide range of commercial banking services to
individuals, businesses and professional firms located in its
primary marketing area. These services include personal and
business checking, interest-bearing money market and savings
accounts (including interest-bearing negotiable order of
withdrawal accounts) and both time certificates of deposit and
open account time deposits. The Bank also offers night
depository and bank by mail services, as well as traveler's
checks (issued by an independent entity) and cashier's checks.
The Bank acts as an authorized depository for deposits of the
U.S. Bankruptcy Court for the Southern, Central and Northern
districts of California. The Bank also acts as a merchant
depository for cardholder drafts under both VISA and MasterCard.
In addition, the Bank provides note and collection services and
direct deposit of social security and other government checks.
In 1995, the Bank also began offering investment products to
customers primarily in the form of government securities.
The Bank engages in a full complement of lending activities,
including revolving lines of credit, working capital and
accounts receivable financing, short term real estate
construction financing, mortgage loans, home equity lines of
credit and consumer installment loans, with particular emphasis
on short and medium term obligations. In addition, in 1995, the
Bank began offering overdraft lines of credit to businesses and
individuals as well as loans to homeowners associations. The
Bank's commercial lending activities are directed principally
toward businesses whose demand for funds falls within the Bank's
lending limit of $807,100, such as small to medium sized retail
and wholesale outlets, light manufacturing concerns and
professional firms. The Bank's consumer lending activities
include loans for automobiles, recreational vehicles, home
improvements and other personal needs. The Bank issues VISA
credit cards primarily to those customers with other borrowing
and deposit relationships with the Bank.Competition
The banking business in California generally, and in the Bank's
market areas specifically, is highly competitive with respect to
both making loans and attracting deposits. The Bank competes
for loans and deposits with other commercial banks, savings and
loan associations, industrial loan companies, finance companies,
money market funds, credit unions and other financial
institutions, including a number of institutions that are much
larger than the Bank. There has been increased competition for
loan and deposit business over the past several years as a
result of changes in the financial services industry. Recent
years have seen an unprecedented consolidation in the financial
institutions industry as large numbers of banks have merged and
combined, resulting in greater concentration of assets and
lending ability, a trend which is expected to continue. In
addition, the enactment of interstate banking legislation in
California makes it easier for bank holding companies with
headquarters outside of California to enter the California
market, presenting an additional source of competition for the
Bank. In addition, the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 may impact the competitiveness
of the Bank. See "Item I. Business Effect of Governmental
Policies and Recent Legislation Interstate Banking." Many of
the major commercial banks operating in the Bank's market areas
offer certain services that the Bank does not offer directly.
In addition, banks with greater capitalization have larger
lending limits and are thereby able to serve larger borrowing
customers. The Company competes for loan and deposit business
by providing innovative and responsive service to its customers.
Yields Earned and Rates Paid
Banking is a business that depends to a large part on rate
differentials. The difference between the interest rate
received by the Bank on its earning assets and the interest rate
it pays on its deposits and other borrowings comprises the most
significant component of the Bank's earnings. These interest
rates are sensitive to many factors beyond the Bank's control.
Accordingly, the earnings and growth of the Company are affected
by economic conditions, including inflation, recession and
unemployment.
Effect of Governmental Policies and Recent Legislation
The earnings and growth of the Company are influenced by the
monetary and fiscal policies of the Federal government and the
policies of regulatory agencies, particularly the Federal
Reserve Board (the FRB). The FRB implements national monetary
policies by its open market operations in United States
government securities, by adjusting required reserve levels for
financial institutions subject to its reserve requirements, and
by varying the discount rate applicable to depository
institutions' borrowings. The actions of the FRB in these areas
affect the growth of bank loans and deposits, as well as the
interest rates received on loans and paid on deposits. The
nature and impact of any future changes in monetary policies
cannot be predicted.
Periodically, legislation has been and may be enacted that has
the effect of increasing the Company's cost of doing business,
limiting or expanding permissible activities or affecting the
competitive balance between banks and other financial
institutions. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding
companies and other financial institutions are frequently made
in the United States Congress, in the California legislature and
before various bank regulatory agencies. Legislation has been
proposed in both federal and state legislatures to significantly
alter the regulation of financial institutions. However, the
likelihood of any major changes and their impact on the Company
cannot be predicted. Certain of the significant changes enacted
by the State of California, Congress or various regulatory
agencies are discussed below.
Recent and Proposed Legislation
Federal and state laws applicable to financial institutions
have undergone significant changes in recent years. The most
significant recent federal legislative enactments are the
Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 ("Riegle-Neal") and the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA").
Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994: In September 1994, President Clinton signed Riegle-Neal,
which amends the BHC Act and the Federal Deposit Insurance Act
("FDIA") to provide for interstate banking, branching and
mergers. Subject to the provisions of certain state laws and
other requirements, on September 29, 1995, one year after the
date of its enactment, Riegle-Neal allows a bank holding company
that is adequately capitalized and adequately managed to acquire
a bank located in a state other than the holding company's home
state regardless of whether or not the acquisition is expressly
authorized by state law. Similarly, beginning on June 1, 1997,
the federal banking agencies may approve interstate merger
transactions, subject to applicable restrictions and state laws.
Further, a state may elect to allow out of state banks to open
de novo branches in that state. Riegle-Neal includes several
other provisions which may have an impact on the Company's and
the Bank's business. The provisions include, among other
things, a mandate for review of regulations to equalize
competitive opportunities between U.S. and foreign banks,
evaluation on a bank-wide, state-wide and, in applicable,
metropolitan areas basis of the Community Reinvestment Act
compliance of banks with interstate branches, and, in the event
the FDIC is appointed as conservator or receiver of a financial
institution, the revival of otherwise expired causes of action
for fraud and intentional misconduct resulting in unjust
enrichment or substantial loss to an institution.
Many of the nation's state bank regulators, including the
California Superintendent of Banks, have adopted uniform
guidelines for the supervision of state chartered banks which
operate across state lines. Under the guidelines, the "home
state" regulator of a multi-state bank will assume the primary
responsibility over such banks,. including determining the
safety and soundness of the institution. It will also handle
applications for new facilities, mergers, new powers and
corporate matters, and will consult with "host state" regulators
on these matters, as well as coordinating the bank's supervision
with the host state and the bank's federal regulator.
The changes effected by Riegle-Neal may increase the competitive
environment in which the Company and the Bank operate in the
event that out of state financial institutions directly or
indirectly enter the Bank's market area. It is expected that
Riegle-Neal will accelerate the consolidation of the banking
industry as a number of the largest bank holding companies
attempt to expand into different parts of the country that were
previously restricted. However, at this time, it is not
possible to predict what specific impact, if any, Riegle-Neal
will have on the Company and the Bank, the competitive
environment in which the Company and the Bank operate, or the
impact on the Company and the Bank of any regulations to be
proposed under Riegle-Neal.
FDIC Improvement Act of 1991
On December 19, 1991, President Bush signed into law the FDIC
Improvement Act of 1991 (the "FDICIA"). FDICIA is designed to
recapitalize the deposit insurance funds and to enhance the
supervisory functions of federal banking regulators.
With respect to recapitalization of the FDIC's Bank Insurance
Fund, FDICIA increased the FDIC's line of credit with the United
States Treasury from $5 billion to $30 billion. It also allows
the FDIC to borrow from Bank Insurance Fund members in order to
carry out the FDIC's functions; however, any amount borrowed
from members will be considered as if it were part of the
general borrowing authority from the Treasury.
FDICIA also revised and expanded the limit on the amount the
FDIC may borrow from other sources through the issuance of
notes, guarantees and other obligations.
FDICIA also enhanced the supervisory authority of federal
banking regulators by mandating, with certain exceptions,
annual, "full-scope" examinations of each federally-insured
financial institutions; by requiring all insured depository
institutions with $150 million or more in assets to submit an
annual report to the FDIC; and by revising the method by which
institutions are assessed for costs associated with
examinations. FDICIA also requires uniform accounting
principles to be applicable to financial institutions and
requires federal banking agencies to review and, if necessary,
modify existing accounting principles and develop supplemental
disclosure requirements of the estimated fair market value of
assets and liabilities, to the extent feasible and practicable.
Significant provisions of FDICIA enable federal banking agencies
to resolve the capital problems of insured depository
institutions on a more prompt basis. The Act established five
capital categories:
1. Well Capitalized means a financial institution with a total
risk-based ratio of 10% or more, a Tier 1 risk-based ratio of
6% or more and a leverage ratio of 5% or more, so long as the
institution is not subject to any written agreement or order
issued by the FDIC.
2. Adequately Capitalized means a total risk-based ratio of 8%
or more, a Tier 1 risk-based ratio of 4% or more and a leverage
ratio of 4% or more (3% or more if the institution has received
the highest composite rating in its most recent report of
examination) and does not meet the definition of a Well
Capitalized institution.
3. Undercapitalized means a total risk-based capital ratio of
less than 8%, a Tier 1 risk-based capital ratio of less than 4%
or a leverage ratio of less than 4%.
4. Significantly Undercapitalized means a financial
institution with a total risk-based ratio of less than 6%, a
Tier 1 risk-based ratio of less than 3% or a leverage ratio of
less than 3%.
5. Critically Undercapitalized means a financial institution
with a ratio of tangible equity to total assets that is equal
to or less than 2%.
FDICIA limits the ability of all institutions to make
distributions that would leave them undercapitalized, and
imposes additional limitations and supervisory requirements on
undercapitalized institutions. In addition, undercapitalized
institutions are restricted as to asset growth and may not
engage in any acquisitions, branching or new lines of business.
FDICIA expanded the authority of federal banking agencies to
take actions with respect to significantly undercapitalized
institutions that fail to submit or comply with an acceptable
capital restoration plan, including requiring the institution to
be acquired, restricting interest rates that may be paid on
deposits, ordering a new election for the institution's board of
directors, dismissing any director or senior executive officer,
and other significant actions.
In other areas, FDICIA enhanced the powers of conservators and
receivers of failed financial institutions and mandates, when
possible, early resolution of troubled financial institutions.
FDICIA also legislated provisions dealing with foreign banking
operations, consumer banking issues, and depository institutions
lacking federal deposit insurance.
Sanctions: FDICIA requires the FDIC to implement a system
requiring regulatory sanctions against state nonmember banks
that are undercapitalized, with the sanctions growing more
severe the lower the bank's capital. Under FDICIA, a state
nonmember bank may not pay a dividend or make any other form of
capital distribution (other than repurchases of shares in
connection with a recapitalization of the bank), and may not pay
a management fee to any person that controls the bank, if after
making the distribution or payment the bank would be
undercapitalized. A nonmember bank that is undercapitalized
will have to submit a capital restoration plan to the FDIC,
generally within 45 days of becoming undercapitalized. A
nonmember bank's capital plan can be approved only if the bank's
performance under the plan is guaranteed by any company that
controls the bank, up to a maximum of 5% of the bank's assets.
Such guarantee must remain in effect until the bank has attained
capital compliance for four consecutive quarters, and the
controlling company must provide the FDIC with appropriate
assurances of its ability to perform the guarantee.
An undercapitalized nonmember bank may not acquire an interest
in any company, open a new branch office, or engage in a new
line of business unless the FDIC determines that such action
would further the implementation of the bank's capital plan or
otherwise approves the action. An undercapitalized nonmember
bank will also not be able to increase its assets, except in
connection with an FDIC approved capital plan. If a state
nonmember bank is undercapitalized, the FDIC will, if it deems
such actions necessary to protect the insurance fund, have the
explicit authority (a) to order the bank to recapitalize by
selling shares, (b) to restrict transactions with affiliates,
(c) to restrict the interest rates paid by the bank on new
deposits, (d) to require reduction of the bank's assets, (e) to
restrict the bank's activities, (f) to order changes in
management, (g) to prohibit the acceptance of deposits from
correspondent depository institutions, (h) to require the bank
to divest any subsidiary or the bank's holding company to divest
the bank or any other subsidiary, or (i) to take any other
action deemed appropriate by the FDIC to minimize potential
losses to the deposit insurance fund.
If a nonmember bank is significantly undercapitalized, or if its
capital plan is not approved or implemented within the required
time periods, the FDIC must take one or more of the above
actions, must restrict the compensation of senior officers, and
may prohibit the bank from entering into any material
transaction outside the ordinary course of business without the
FDIC's prior approval. If a bank's capital is below the level
at which the bank is deemed to be "critically undercapitalized,"
the FDIC must also require prior approval for all material
transactions outside the ordinary course of business and must,
with limited exceptions, restrict payments by the bank on
subordinated debt. Banks that are critically undercapitalized
must be placed in receivership or conservatorship unless the
FDIC makes certain affirmative findings regarding the viability
of the bank, which findings must be reviewed every 90 days.
Receivership or Conservatorship: Under FDICIA, the grounds for
appointment of a conservator or receiver for a bank will include
the failure to meet capital standards set by the FDIC, if the
bank (i) has no reasonable prospect of meeting such standards,
(ii) fails to submit a capital plan within the required time
period, or (iii) materially fails to implement its capital plan.
In addition, banks that are critically undercapitalized must be
placed in receivership or conservatorship unless the FDIC makes
certain affirmative findings regarding the viability of the
bank, which findings must be reviewed every 90 days.
Brokered Deposits and Benefit Plan Deposits: Under the
Financial Institutions Reform, Recovery and Enforcement Act of
1989, discussed before, state nonmember banks that fail to meet
minimum capital requirements may not, absent a waiver, accept or
renew funds obtained through any deposit broker and may not
solicit deposits by offering rates of interest that are
significantly higher than the prevailing rates of interest on
deposits offered by other insured financial institutions of the
same type in the bank's normal market area.
Under FDICIA, effective no more than 180 days after enactment, a
state nonmember bank that is undercapitalized will not be able
to accept, renew, or rollover deposits obtained through a
deposit broker, regardless of whether the FDIC would be willing
to provide a waiver, and may not solicit deposits by offering
interest rates that are significantly higher than market rates.
Banks that are adequately capitalized but not well capitalized
will be required to obtain a waiver from the FDIC in order to
accept, renew, or rollover brokered deposits, and may not pay
interest on brokered deposits that significantly exceed market
rates for deposits of similar maturity.
In addition, banks that are ineligible to accept brokered
deposits can offer FDIC insurance coverage for employee benefit
plan deposits only up to $100,000 per plan, rather than $100,000
per plan participant, unless, at the time such deposits are
accepted, the bank meets all applicable capital standards and
certifies to the benefit plan depositor that its deposits are
eligible for coverage on a per participant basis.
Expanded Regulatory Authority Under FDICIA: In addition to the
provisions discussed above, FDICIA contains a number of measures
intended to promote early identification of management problems
at depository institutions and to ensure that regulators
intervene promptly to require corrective action by institutions
with inadequate operational and managerial standards. While
these provisions generally apply only to institutions with
assets in excess of $150 million, the effect of these changes
will generally have an impact on bank operations.
For example, each depository institution must prepare an annual
report, signed by the chief executive officer and chief
financial officer, on the effectiveness of the institution's
internal control structures and procedures for financial
reporting, and on the institution's compliance with laws and
regulations relating to safety and soundness. The institution's
independent public accountant must attest to, and report
separately on, management's assertions in the annual report.
The report and the attestation, along with financial statements
and such other disclosure requirements as the FDIC may
prescribe, must be submitted to the FDIC and will be available
to the public.
FDICIA also requires regulatory agencies (in the Bank's case,
the OCC) to prescribe minimum acceptable operational and
managerial standards and standards for asset quality, earnings,
and valuation of publicly traded shares of depository
institutions and their holding companies. The operational
standards must cover internal controls, loan documentation,
credit underwriting, interest rate exposure, asset growth, and
employee compensation. The asset quality and earnings standards
must specify a maximum ratio of classified assets to capital,
minimum earnings sufficient to absorb losses, and minimum ratio
of market value to book value for publicly traded shares. Any
bank or holding company that fails to meet such standards must
submit a plan for corrective action within 30 days, and will be
subject to a host of restrictive sanctions if it fails to
implement the plan. The agencies have adopted uniform
guidelines which are used primarily in examinations to identify
and address problems at the insured depository institution
before capital becomes impaired.
As described above, FDICIA requires the regulatory agencies to
implement a system requiring regulatory sanctions against banks
that are not adequately capitalized. Although in general banks
that are adequately capitalized are not subject to such
sanctions, the FDIC can treat an adequately capitalized bank as
if it were undercapitalized if (a) the FDIC determines, after
notice and opportunity for a hearing, that the bank is in an
unsafe and unsound condition, or (b) the bank received, in its
most recent report of examination, a less than satisfactory
rating for asset quality, management, earnings, or liquidity,
and the deficiency has not been corrected. In such a case, the
FDIC would be authorized to restrict the bank's asset growth,
capital distributions, and payment of management fees to a
controlling shareholder, and to require prior FDIC approval for
any new line of business.
Finally, FDICIA contains provisions prohibiting a state bank or
its subsidiaries from engaging as principals after December 18,
1992 in activities which national banks are not entitled to
engage in unless the FDIC determines that such activities would
not pose significant risks to the appropriate deposit insurance
fund and the state bank continues to be in compliance with
applicable capital standards. In addition, FDICIA prohibits an
insured state bank and its subsidiaries from acquiring or
retaining, directly or indirectly, subject to a five year
divestiture period for existing investments (six years for
subsidiaries), any equity investment of a type that is not
permissible for national banks, with limited exceptions.
Appraisals: Pursuant to the requirements of FIRREA, effective
September 19, 1990, the FDIC has required all institutions
regulated by the FDIC to obtain appraisals of real estate values
in connection with most real estate transactions, including
sales, lease purchases, investments in or exchanges of real
property or real property interests, the financing or
refinancing thereof, or the use of any such real property or
real property interest as security for a loan or investment,
including mortgage-backed securities. Under the FDICIA,
institutions must use state certified or licensed appraisers in
connection with most such real estate transactions.
Community Reinvestment Act Amendment: Effective July 11, 1991,
the Federal Reserve Board amended its regulations under the
Community Reinvestment Act of 1977 (the "CRA") to implement
changes set forth in FIRREA. The amended regulations require
state member banks to place their Performance Evaluations and
ratings under the CRA in their public comment files within 30
days of receipt, make such Performance Evaluations and ratings
available for public inspection and provide copies of such
Performance Evaluations and ratings to members of the public
upon request.
Golden Parachute Limitations: On September 24, 1991, the FDIC
proposed a rule which, if adopted, would prevent insured
institutions and their holding companies from making or agreeing
to make so called "golden parachute" payments. With limited
exceptions, institutions that are insolvent, in conservatorship
or receivership, rated "4" or "5" on the interagency five point
rating scale for financial soundness, determined to be in
troubled condition or subject to a proceeding to terminate
deposit insurance would be prohibited from making severance
payments to employees. In addition, with certain exceptions,
indemnification payments made by such an institution to an
employee in connection with a regulatory enforcement action
would be prohibited until and unless that employee had been
cleared of all charges raised in such enforcement action. The
Bank has no arrangements which would be considered a "golden
Parachute" under the proposed regulations.
Real Estate Lending: In December 1992, the Federal Banking
Agencies issued final regulations prescribing uniform guidelines
for real estate lending. The regulations, which became
effective March 19, 1993, require insured depository
institutions to adopt written policies establishing standards,
consistent with such guidelines, for extensions of credit
secured by real estate. The policies must address loan
portfolio management, underwriting standards and loan to value
limits that do not exceed the supervisory limits prescribed by
the regulations.
Pending Legislation and Regulation: Numerous bills and other
legislation have been introduced in Congress which, if adopted
as low, could have a significant impact on the Company's and the
Bank's business. The proposal currently pending before Congress
include laws which would provide for free interstate branching,
a consolidation of existing banking regulators and other
actions. Neither the Company nor the Bank can predict as to
which proposals, if any, will become law, and the impact such
laws would have on the business of the Company and the Bank.
Federal Income Taxation
The Tax Reform Act of 1986 and the Technical and Miscellaneous
Revenue Act of 1988 (collectively, the Reform Acts) may
adversely affect the taxation of financial institutions in the
future. In particular, the Reform Acts disallow the deduction,
otherwise available to the Company, of 100 percent of interest
expense, to the extent allocable to the ownership of certain
tax-exempt obligations acquired after August 7, 1986 (based upon
the proportion of the Company's average total assets represented
by its holdings of such tax-exempt obligations). A twenty
percent disallowance rule applies to tax-exempt obligations
acquired prior to August 7, 1986 and to certain "small-issue"
tax-exempt obligations acquired after August 6, 1986.
Management believes that the rule will not have a materially
adverse impact on the Company's operating results or financial
position.
The Reform Acts repealed the special rule permitting financial
institutions to carry net operating losses back to the prior ten
taxable years and forward to the succeeding five taxable years.
For losses incurred in taxable years beginning after December
31, 1986, the net operating loss carryover and carryback rules
for financial institutions now conform generally to such rules
for other corporations (that is, a three-year carryback and a
fifteen-year carryforward). A special rule permits commercial
banks to carryback to the prior ten taxable years and
carryforward to the succeeding five taxable years that portion
of net operating losses incurred in taxable years beginning
after December 31, 1986 and before January 1, 1994, which is
attributable to deductions for losses on bad debts. The portion
of the net operating loss of a commercial bank that is
attributable to deductions for losses on bad debts is equal to
the excess of the net operating loss for the taxable year over
the net operating loss for that taxable year computed without
regard to deductions for losses on bad debts. In 1993, the
Company applied to the Internal Revenue Service (IRS) for a
change in accounting method for tax purposes from the reserve
method for bad debt expense to the specific charge-off method.
The approval for this change in accounting method was received
in 1994.
The Reform Acts replaced the corporate minimum tax with an
alternative minimum tax (AMT). The AMT rate is twenty percent
of alternative minimum taxable income (AMTI), which is the
Company's regular income determined with special adjustments and
increased by certain preference items. Corporate preference
items now include one-half of the excess, if any, of a
taxpayer's pretax book income for financial reporting purposes
over its AMTI (determined without regard to this preference and
prior to reduction by net operating losses). For taxable years
beginning after December 31, 1989, instead of the foregoing,
AMTI was increased (or decreased) by 75 percent of the amount by
which adjusted current earnings exceed (or are less than) AMTI.
This adjustment to AMTI could thus be either positive or
negative in such years. Interest income from tax-exempt
obligations is also a preference item for purposes of computing
the corporate AMT. This provision may affect the amount of any
AMT payable by the Company. The Reform Acts enacted significant
restrictions regarding the way "large banks" charge off bad
debts. However, because a "large bank" is defined as a bank
that, for the taxable years beginning after December 31, 1986,
had assets with an aggregate average adjusted basis in excess of
$500 million or was a member of a parent-subsidiary controlled
group that met this $500 million test, such restrictions will
not initially apply to the Company. The effect of these
restrictions may have on the Company in the future cannot be
determined. Risk-Based Capital Adequacy Guidelines
Existing Federal Reserve Board and FDIC risk based capital
requirements are intended to make regulatory capital
requirements more sensitive to differences in risk profiles
among banking organizations, take off balance sheet items into
account in assuring capital adequacy, and minimize disincentives
to holding liquid, low risk assets. Under these guidelines,
assets and credit equivalent amounts of off balance sheet items,
such as letters of credit and outstanding loan commitments, are
assigned to one of several risk categories, which range from 0
percent for risk free assets, such as cash and certain
government securities, to 100 percent for relatively high risk
assets, such as loans and investments in other real estate
owned. The aggregate dollar amount of each category is then
multiplied by the risk weight associated with that category.
The resulting weighted values from each of the risk categories
are then added together to determine the total risk weighted
assets, against which capital is measured to determine adequacy.
The risk based capital guidelines require a minimum ratio of
qualifying total capital to risk weighted assets of 8.00 percent
(of which at least 4.00 percent must consist of Tier 1 Capital).
Tier 1 Capital consists primarily of common stock, related
surplus, retained earnings and certain perpetual preferred
stocks, less goodwill. Certain elements, and varying amounts,
of supplementary (or Tier 2) capital, including all allowances
for loan losses and subordinated and other forms of debt, may be
included in Tier 1 Capital. Allowances for loan losses qualify
only as supplementary capital and then only to the extent of
1.25 percent of total risk weighted assets. Other elements of
supplementary capital, which is limited overall to 100 percent
of Tier 1 Capital, include qualifying perpetual preferred stock,
hybrid capital instruments and mandatory convertible debt
securities, and subordinated debt and intermediate-term
preferred stock.
The Federal Reserve Board and the FDIC also requires banks to
maintain a minimum leverage ratio of Tier 1 capital to total
assets of 3.0 percent. As in the case of the risk based capital
standard, the leverage ratio constitutes only a supervisory
minimum and those institutions experiencing or anticipating
significant growth or those with high or inordinate levels of
risk will be expected to maintain capital well above the minimum
level. The leverage ratio operates in conjunction with the risk
based capital standard.
The Bank entered into a formal agreement with the Office of the
Comptroller of the Currency (OCC) under which the Bank agreed to
submit a three year strategic plan which, among other things,
contains action plans to achieve and maintain the desired
capital ratios, as set forth below. 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 December 31, 1995, the Bank had a total
capital to risk weighted assets of 8.6 percent, Tier 1 capital
ratio of 7.3 percent and a Tier 1 leverage ratio of 4.9 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 a receiver.
Financial Institutions Reform, Recovery and Enforcement Act of
1989
The Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA") contains provisions which, among other
things: (1) established two separate financial industry
insurance funds, both under the supervision of the FDIC-- a Bank
Insurance Fund and a Savings Association Insurance Fund; (2)
abolished the Federal Home Loan Bank Board and establish the
Office of Thrift Supervision as an office in the Treasury
Department, with responsibility for examination and supervision
of all savings and loan associations; (3) increased the
insurance premiums paid by FDIC insured institutions; (4)
permitted bank holding companies to acquire healthy savings and
loan associations; (5) enhanced federal banking agencies'
enforcement authority over the operations of all insured
depository institutions and increase the civil and criminal
penalties that may be imposed in connection with violations of
laws and regulations; (6) curtailed investments and certain
other activities of state chartered savings and loan
associations; and, (7) increased the capital requirements of
savings and loan associations.
Although the continuing impact of FIRREA cannot be accurately
predicted at this time, in large part because of continuing
interpretations of FIRREA, management of the Company does not
believe that any of the provisions of FIRREA will have a direct,
material adverse impact on the Company's consolidated financial
position or results of operations. The changes mandated by
FIRREA, however, have a broad impact on the financial services
industry as a whole.
Accounting Changes
In 1995, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123, "Accounting for Stock-Based Compensation,"
which is effective for fiscal years beginning after December 15,
1995 and encourages companies to account for stock compensation
awards based on their fair value at the date the awards are
granted. This statement does not require the application of the
fair value method and allows the continuance of the current
accounting method, which requires accounting for stock
compensation awards based on their intrinsic value as of the
grant date. The Company has chosen not to adopt the fair value
provisions of SFAS No. 123 and will continue accounting for
stock compensation awards at their intrinsic value at the date
of grant.
Supervision and Regulation
Bank holding companies and banks are extensively regulated
under both federal and state law.
Marathon Bancorp: Marathon Bancorp is a registered bank
holding company and is subject to regulation under the BHC Act.
The Company files quarterly and annual reports with the FRB, as
well as other information which the FRB may required under the
BHC Act. The FRB is empowered to conduct examinations of the
Company and its subsidiaries.
The FRB has the power to require the Company to terminate
activities, and to terminate control of or liquidate or divest
certain subsidiaries or affiliates when it believes that the
activity or subsidiary or affiliate constitutes a risk to the
financial safety, soundness or stability of the Company's
banking subsidiaries. The FRB also has the authority to
regulate provisions of certain holding company debt, such as the
authority to impose interest rate ceilings and reserve
requirements on such debt. The Company may, under certain
circumstances, be required to file written notice with and
obtain approval from the FRB prior to purchasing or redeeming
its equity securities.
Under the BHC Act and regulations adopted by the FRB, bank
holding companies and their nonbanking subsidiaries are
prohibited from requiring certain tie-in arrangements in
connection with any extension of credit, lease or sale of
property or furnishing of services. Further, the Company is
required by the FRB to maintain certain levels of capital.
The Company must obtain approval from the FRB prior to
acquiring more than 5% of the outstanding shares of any class of
voting securities or substantially all of the assets of any bank
or bank holding company. The Company must also obtain FRB
approval prior to any merger or consolidation of the Company
with another bank holding Company.
The BHC Act prohibits the Company, except in particular
circumstances, from acquiring direct or indirect control of more
than 5% of the outstanding voting shares of any company that is
not a bank or a bank holding company. The BHC Act also
generally prohibits the Company from engaging, either directly
or indirectly, in activities other than those of banking,
managing or controlling banks or furnishing related services.
The Company may, however, subject to obtaining prior approval
from the FRB, engage in activities or acquire interests in
companies which engage in activities which are deemed by the
Federal Reserve Board to be so closely related to banking.
Under FRB regulations, a bank holding company is required to
serve as a source of strength to its subsidiary banks and must
conduct its operations in an safe and sound manner. It is the
FRB's policy that a bank holding company must stand ready to use
available resources to assist its subsidiary banks during times
of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain
additional resources to assist its subsidiary banks. The FRB
generally considers the failure by a bank holding company to
meet its obligations to serve as a source of strength to be an
unsafe and unsound banking practice, or a violation of the FRB's
regulations, or both. Although this policy, known as the
"source of strength" doctrine, was declared invalid by the
United States Court of Appeals in 1990, that decision was
recently reversed by the United States Supreme Court on
procedural grounds. The FRB has continued to assert the
validity of this doctrine, and it is likely to be the subject of
continued controversy until definitively resolved by the courts
or by Congress.
In addition to regulation and supervision by the FRB, the
Company is subject to the periodic reporting requirements with
the Securities and Exchange Commission under the Exchange Act,
including but not limited to filing annual, quarterly and other
current reports with the Commission, and related substantive and
procedural requirements.
The Bank: The Bank, as a national banking association chartered
by the Comptroller, is subject to primary supervision,
examination and regulation by the Comptroller. It is also a
member of the Federal Reserve System and, as such, is subject to
applicable provisions of the Federal Reserve Act and regulation
by the FRB. The Bank is also subject to applicable provisions
of California law, insofar as they do not conflict with or are
not preempted by Federal banking law.
Deposits in the Bank are insured by the FDIC, which currently
insures deposits of each member bank to a maximum of $100,000
per depositor. For this protection, the Bank and all other
insured banks pays statutory assessments and is subject to the
rules and regulations of the FDIC.
Various requirements and restrictions affect the operations of
the Bank, including reserves against deposits, interest rates
payable on deposits, loans, investments, mergers and
acquisitions, borrowings, dividends and locations of branch
offices. In addition, the Bank is required to maintain certain
levels of capital. Management seeks to maintain adequate
capital to support its size and credit risks, and to ensure that
the Company and the Bank are within established regulatory and
industry standards.
Formal Agreement; Restrictions on Transfers of Funds to the
Company by the Bank
On September 30, 1995, the Bank entered into a formal
agreement with the Office of the Comptroller of the Currency
(OCC) under which the Bank agreed to submit to the OCC 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 submitted in a timely manner and
was accepted be the OCC on January 30, 1996. The agreement
increased the Bank's 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 December 31, 1995,
the Bank had a Tier 1 capital ratio of 7.3 percent and a Tier 1
leverage ratio of 4.9 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 receivor.
Under California and federal banking law, dividends paid by the
Bank in any calendar year may not, without the approval of the
OCC, exceed its net income, as defined, for that year combined
with its retained net income for the preceding two years. At
December 31, 1995, the Bank could only have declared and paid
dividends with the prior regulatory approval.
Federal banking law also restricts the Bank from extending
credit to the Company in excess of twenty percent of the Bank's
capital stock and surplus, as defined. Any such extensions of
credit are subject to strict collateral requirements. At
December 31, 1995, the net assets of the Bank were $4,619,500,
none of which could be lent or paid as dividends to the Company
without regulatory approval.
The Comptroller has the authority, under the Financial
Institutions Supervisory Act, to prohibit the Bank from engaging
in activities which the Comptroller regards as unsafe or unsound
in conducting its business. It is possible that, depending on
the financial condition of the Bank and other factors, the
Comptroller could assert that payment of dividends or other
payments is, under some circumstances, an unsafe and unsound
practice.
Employees
At December 31, 1995, the Company employed 37 personnel.
STATISTICAL DISCLOSURE
The following tables and data set forth, for the respective
years indicated, selected statistical information relating to
the Company.
The Company's operating results depend primarily on the level of
the Bank's net interest income, which is the difference between
interest income on interest earning assets and interest expense
on interest bearing liabilities. The Bank's net interest income
is determined by the average outstanding balances of loans,
investments, deposits and borrowings, and the respective average
yields on interest-earning assets and the average costs on
interest bearing liabilities, and the relative amount of loans
and investments compared to deposits and borrowings. The Bank's
volumes and rates on interest earning assets and interest
bearing liabilities are affected by market interest rates,
competition, the demand for bank financing, the availability of
funds, and by management's responses to these factors.
The following tables set forth the Company's daily average
balances for each principal category of asset and liability and
shareholders' equity. The tables also present the amounts and
average rates of interest earned and paid on each category of
interest earning asset and interest bearing liability, along
with the net interest income and net yield on earning assets for
the periods indicated.
In addition, the tables set forth changes in the components of
net interest income for the periods indicated. The total change
is segmented into the change attributable to variations in
volume and the change attributable to variations in interest
rates. The changes in interest due to both rate and volume have
been allocated to the changes due to volume and rate in
proportion to the relationship of the absolute dollar amounts of
the change in both. Interest foregone on loans in nonaccrual
status is not included in the tables, while the average balance
of loans in nonaccrual status is included.
Changes in Net Interest Income
Year Ended December 31, 1995
(Dollar amounts in thousands)
YTD Interest Average Change from prior year
Average Income/ Yield/ due to change in:
Net Interest Income Analysis Balance Expense Rate Volume
Rate Total
Loans $53,237 $4,812 9.0% ($652) $340 ($312)
Other earning assets:
Interest-bearing deposits
with financial institutions 648 40 6.2%
29 1 30
Investment securities 14,497 848 5.8% 48
70 118
Mortgage securities held for sale 0 0 0.0% (87)
(86) (173)
Federal funds sold 6,505 375 5.8% 200
54 254
Other earning assets 21,650 1,263 5.8% 190
39 229
Total interest-earning assets 74,887 $6,075 8.1% ($462)
$379 ($83)
Non-earning assets:
Cash and due from banks 5,065
Other assets 6,871
Allowance for loan losses (711)
$86,112
Interest-bearing liabilities:
Deposits:
Demand $7,771 $73 0.9% $12
$1 $13
Money market and savings 30,669 816 2.7% (52) 58
6
Time certificates of deposit 9,623 423
4.4% (194) 82 (112)
Federal funds purchased 178 10 5.3% (16)
4 (12)
Total interest-bearing liabilities 48,241 $1,322
2.7% ($250) $145 ($105)
Non-interest bearing liabilities
and Shareholders' equity:
Non-interest bearing
demand deposits 32,229
Other liabilities 398
Shareholders' equity 5,244
$86,112
Net interest income $4,753
Net interest spread 5.4%
Net yield on earning assets 6.3% >Changes in Net Interest
Income
Year Ended December 31, 1994
(Dollar amounts in thousands)
YTD Interest Average Change from prior year
Average Income/ Yield/ due to change in:
Net Interest Income Analysis Balance Expense Rate Volume
Rate Total
Loans $60,634 $5,124 8.5% ($757)
($221)($978)
Other earning assets:
Interest-bearing deposits
with financial institutions 182 10 5.5%
(40) 13 (27) Investment Securities:
Taxable 13,647 730 5.3% (455) 365
(90) Tax-exempt 0 0 0.0% (74)
(73) (147)
Mortgage loans held for sale 1,918 00.0%
0 0 0
Securities Available for Sale 3,319 1735.2% 173
0 173
Federal funds sold 2,835 121 4.3% (119)
64 (55)
Other earning assets 21,901 1,034 4.7% (515)
369 (146)
Total interest-earning assets 82,535 $6,158 7.5%
($1,272) $148 ($1,124) Non-earning assets:
Cash and due from banks 6,071
Other assets 8,481
Allowance for loan losses (1,087)
$96,000
Interest-bearing liabilities:
Deposits:
Demand $6,508 $60 0.9% $15 ($15)
$0 Money market and savings 32,706 810 2.5%
(122) (66) (188) Time certificates of deposit
14,378 535 3.7% (467) (28) (495)
Federal funds purchased 490 22 4.5% (1)
4 3
Total interest-bearing liabilities 4,081 $1,427 2.6%
($575) ($105) ($680) Non-interest bearing liabilities and
Shareholders' equity: Non-interest bearing
demand deposits 34,969
Other liabilities 933
Shareholders' equity 6,017
$96,000
Net interest income $4,731
Net interest spread 4.9%
Net yield on earning assets 5.7%
Investment Securities
The following table shows the maturities of investment
securities at December 31, 1995 and the weighted average yields
of those securities.
Over
1 yr Over 5 yr
(Dollars in thousands) 1 Year through
through Over Average
or less
5 years 10 years 10 yr Total Yield
Securities available for sale:
U.S. Treasury and agency securities $3,008 $0 $0
$0 $3,008 5.6%
Mortgage-backed securities 207 88
0 0 295 6.1%
Total $3,215
$88 $0 $0 $3,303 5.6%
Securities held to maturity:
Mortgage-backed securities $500 $1,368 $4,595
$0 $6,463 6.4%
Federal Reserve Bank Stock 0 0 0
148 148 6.0%
Total $500
$1,368 $4,595 $148 $6,611 6.3%
Loan Portfolio
The following table sets forth the amount of loans outstanding
at the end of the past two years:
(Dollars in Thousands) 1995 %
of Total 1994 % of Total
Commercial Loans $15,488 30.9%
$18,627 32.9%
Real Estate Loans:
Interim Construction 0
0.0% 1,022 1.8%
Income Property 24,987
49.8% 24,880 44.0%
Residential 1-4 units 8,517
17.0% 10,262 18.2%
Total real estate loans 33,504
36,164
Installment loans 1,179
2.3% 1,763 3.1%
50,171
100.0% 56,554 100.0%
Deferred net loan origination (fees) costs 64
20
Allowance for Loan Losses (720)
(796)
Net Loans $49,515
$55,778
The following table shows the amounts of commercial and real
estate construction loans outstanding at the end of the past
two years which, based on remaining scheduled repayments of
principal, are due in one year or less, more than one year but
less than five years, and more than five years. The amounts are
classified according to the sensitivity to changes in interest
rates.
Commercial and Construction Loans
December 31, (Dollars in thousands)
1995 1994
COMMERCIAL LOANS
Aggregate maturities of loan balances due:
In one year or less:
Interest rates are floating or adjustable
$13,962 $16,627
Interest rates are fixed or predetermined
1,035 1,083
After one year but within five years:
Interest rates are fixed or predetermined
491 566
After five years:
Interest rates are fixed or predetermined
0 351
Total commercial loans
15,488 18,627
REAL ESTATE CONSTRUCTION LOANS
Aggregate maturities of loan balances due
in one year or less and interest rates
are floating or adjustable
0 1,022
Total commercial and construction loans
$15,488 $19,649
Risk Elements - Nonaccrual, Past Due and Restructured Loans
Nonaccrual loans are those for which the Bank has discontinued
accrual of interest because there exists reasonable doubt as to
the full and timely collection of either principal or interest
or such loans have become contractually past due ninety days
with respect to principal or interest. Under certain
circumstances, interest accruals are continued on loans past due
ninety days which, in management's judgment, are considered to
be well secured and fully collectible as to both principal and
interest. When a loan is placed in nonaccrual status, all
interest previously accrued but uncollected is reversed against
current period income. Income on such loans is then recognized
only to the extent that cash is received and where the future
collection of principal is probable. Accrual of interest is
resumed only when principal and interest are brought fully
current and when, in management's judgment, such loans are
estimated to be collectible as to both principal and interest.
Restructured commercial loans are those for which the Bank has,
for reasons related to borrowers' financial difficulties,
granted concessions to borrowers (including reductions of either
interest or principal) that it would not otherwise consider,
whether or not such loans are secured or guaranteed by others.
Loan restructurings involving only a modification of terms are
accounted for prospectively from the time of restructuring.
Accordingly, no gain or loss is recorded at the time of such
restructurings unless the recorded investment in such loans
exceeds the total future cash receipts specified by the new loan
terms.
At December 31, 1995, loans on nonaccrual totaled $523,000,
compared with $564,100 at year end 1994. The reduction in
interest income associated with nonaccrual loans was
approximately $79,900 during 1995, and $47,000 during 1994.
Loans past due ninety days or more and still accruing interest
at December 31, 1994 totaled $1,149,300 as compared to none at
the end of 1995. At December 31, 1995, the Bank had classified
$60,600 of its loans as impaired and recorded the full amount as
specific reserve in the allowance for loan losses. In addition,
the Bank classified $2,354,900 of its loans as impaired without
a specific reserve. The average recorded investment of impaired
loans during the year ended December 31, 1995 was approximately
$2,422,900. Interest income of $60,900 was recognized on
impaired loans during the year ended December 31, 1995. As of
December 31, 1995 and 1994, loans with restructured terms
totaled $1,253,900 and $932,000, respectively. The reduction in
interest income associated with restructured loan was
approximately $25,000 and $11,000, respectively, in 1995 and
1994. There were no other loans at December 31, 1995, where the
known credit problems of a borrower caused the Bank to have
serious doubts as to the ability of such borrower to comply with
the then present loan repayment terms, and which would result in
such loan being included as a nonaccrual, past due or
restructured loan at some future date. The Bank has not made
loans to borrowers outside the United States. At December 31,
1995, the Company had no loan concentrations exceeding ten
percent of total gross loans outstanding.Summary of Loan Loss
Experience
The allowance for loan losses is established by a provision for
loan losses charged against current period income. Losses are
charged against the allowance when, in management's judgment,
the collectability of a loan's principal is doubtful. The
accompanying financial statements require the use of management
estimates to calculate the allowance for loan losses. These
estimates are inherently uncertain and depend on the outcome of
future events. Management's estimates are based upon previous
loan loss experience, current economic conditions, volume,
growth, and 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 borrowers' ability to repay loans. Although management
believes the level of the allowance as of December 31, 1995 is
adequate to absorb losses inherent in the loan portfolio,
additional decline in the local economy and increases in
interest rates may result in losses that cannot reasonably be
predicted at this date. Such losses may also cause
unanticipated erosion of the Bank's capital.
The following table summarizes loan balances, net of deferred
net loan origination costs, at the end of each of the past two
years and changes in the allowance for loan losses arising from
loan losses, recoveries on loans previously charged off and
provisions for loan losses charged to operating expense.
Loan Charge-offs and Recoveries(Dollars in thousands)
1995 1994
Balance of allowance for loan losses at beginning of period
$796 $1,500
Loans charged off:
Commercial
(437) (830)
Real estate
(233) (65)
Installment
(70) (71)
Total loans charged off
(740) (966)
Recoveries of loans previously charged off:
Commercial
97 261
Real estate
3 0
Installment
3 1
Total loan recoveries
103 262
Net loans charged off
(637) (704)
Provision charged to operating expense
561 0
Balance of allowance for loan losses at end of period
$720 $796
Amount of loans outstanding at end of the year
$50,235 $56,574
Average amount of loans outstanding
$53,237 $60,634
Ratio of net charge-offs to average loans outstanding
1.20% 1.16%
Ratio of allowance for loan losses at the end of the
year to average loans outstanding
1.35% 1.31%
Ratio of allowance for loan losses at the end of the
year to loans outstanding at the end of the year
1.43% 1.41%
The following table sets forth the Company's allocation of the
allowance for loan losses to specific loan categories at the end
of the past two years. The allocations are based upon the same
factors as considered by management in determining the amount of
additional provisions to the allowance for loan losses and the
aggregate level of the allowance.
Allowance for Loan Losses ____________ December
31, __________ (Dollars in thousands) 1995
Percent of Loans in Each Category to Total Loans
1994 Percent of Loans in
Each Category to Total Loans
Commercial loans $147 20.4% $174 21.9%
Real estate loans:
Interim construction 0 0.0% 0 0.0%
Income property 367 51.0% 102 12.8%
Residential 1-4 0 0.0% 0
0.0%
Installment loans 0 0.0% 38
4.8%
Others 39 5.4%
40 5.0%
Unallocated 167 23.2% 442
55.5%
Total allowance for loan losses $720 100.0% $796 100.0%
The allowance for loan losses should not be interpreted as an
indication that future charge-offs will occur in these amounts
or proportions, or that the allocation indicates future
charge-off trends. Furthermore, the portion allocated to each
loan category is not the total amount available for future
losses that might occur within such categories, since even on
the above basis there is an unallocated portion of the allowance
and the total allowance is a general reserve applicable to the
entire portfolio.
Although management believes the level of the allowance for loan
losses as of December 31, 1995, is adequate to absorb losses
inherent in the loan portfolio, currently unanticipated
conditions and events, such as additional declines in the local
economy and increases in interest rates, may result in losses
that cannot reasonably be predicted at this date.
Sources of Funds
Deposits traditionally have been the primary source of the
Bank's funds for use in lending and other investments. The Bank
also derives funds from net earnings, receipt of interest and
principal on outstanding loans and other sources, including the
sale of investment securities. The Bank is a member of the
Federal Reserve System and may borrow through that system under
certain conditions.
Deposits
The Bank's deposit products include noninterest-bearing demand
deposits, interest-bearing demand deposits, money market and
savings accounts, and time certificates of deposit. The
majority of the Bank's deposits are obtained from its primary
marketing area.
The distribution of average deposits and the average rates paid
thereon is summarized for the periods indicated below:
1995 1994
Deposits (Dollars in thousands) Average Balance
Average Rate Average Balance Average Rate
Demand, non-interest-bearing $32,229
$34,969
Demand, interest bearing 7,771 0.90%
6,508 0.90%
Money market and savings 30,669 2.70%
32,705 2.50%
Time certificates of deposit:
Under $100,000 3,902 4.30%
9,009 3.80%
$100,000 or more 5,721 4.50%
5,369 3.67%
Total Deposits $80,292
$88,560
The following is a maturity schedule of time certificates of
deposit of $100,000 or more at the end of the past two years:
Time Certificates of Deposit
December 31,
(Dollars in thousands) 1995
1994
Three months or less $2,156 $3,684
Over three months through six months 2,242 2,371
Over six months through twelve months 3,693
3,333
Over twelve months 989 1,008
Total $9,080 $10,396
The Bank had no brokered deposits at December 31, 1995 and 1994.
Selected Financial Ratios
The following table sets forth the ratios of net income to
average assets and to average shareholders' equity, and the
ratio of average shareholders' equity to average assets.
1995 1994
Return on average assets (15.9)% (0.7)%
Return on average shareholders' equity (26.1)%
(10.7)%
Average shareholders' equity to average assets 6.1%
6.3%
Shareholders' equity to total assets at year end
4.6% 5.5%
ITEM 2. PROPERTIES
The Bank leases 14,900 square feet of office space and 5,600
square feet of retail banking space at 11150 West Olympic
Boulevard, Los Angeles, California under a noncancelable
operating lease, which expires on August 31, 2002. The lease
provides for annual rental payments of approximately $483,600
during the next year, $399,500 in the following year, $594,100
during the next four years and $396,100 in the final year. In
addition, the Bank pays its proportionate share of increases in
common operating expenses.
On November 14, 1994, the Bank vacated the above banking
premises due to severe earthquake damages and moved into a
nearby location. Under the terms of the old lease agreement,
the Bank has suspended all lease payments until the building is
repaired. At this time, the building is in the process of being
repaired and is scheduled for occupancy before the end of 1996.
The Bank has leased temporary office space under a lease
agreement which provides for lease payments of $17,400 per month
for six months with nine consecutive one month options to extend
the lease. The agreement was amended in 1996 to extend the
lease term for an additional ten months, expiring on March 16,
1996, with three consecutive four month options, exercisable at
the Company's discretion. The Company's total occupancy
expense, excluding furniture and equipment expense, for the year
ended December 31, 1995, was approximately $352,100.
ITEM 3. LEGAL PROCEEDINGS
Information concerning legal proceedings is incorporated herein
by reference from Note (10) in "NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS" at page 27 of the Company's 1995 Annual Report to
Shareholders, which is attached as Exhibit No. 13.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders during the fourth
quarter of 1995.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED
SHAREHOLDER MATTERS
Information concerning the market for the Company's common
shares and related shareholder matters is incorporated herein by
reference from the section entitled "MARKET PRICES FOR COMMON
SHARES" at page 31 of the Company's 1995 Annual Report to
Shareholders, which is attached as Exhibit No. 13.
Information concerning restrictions on the Bank's ability to
transfer funds to the Company in the form of cash dividends,
loans or advances is incorporated herein by reference from Note
(11) in "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" at page 28
of the Company's 1995 Annual Report to Shareholders, which is
attached as Exhibit No. 13 and from "Item 1.
Business-Restrictions on Transfers of Funds to the Company by
the Bank."
At March 1, 1996, there were approximately 297 holders of record
of the Company's common shares. The average of the bid and asked
prices of the Company's common shares at that date was $3.25, as
reported by principal market makers in the Company's common
shares.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and
results of operations is incorporated herein by reference from
the section entitled "MANAGEMENT'S DISCUSSION AND ANALYSIS" at
Pages 5 through 13 of the Company's 1995 Annual Report to
Shareholders, which is attached as Exhibit No. 13. See also
"Financial Highlights" incorporated herein by reference from
page 1 of the Company's 1995 Annual Report to Shareholders,
which is attached as Exhibit No. 13.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements of the Company and the "INDEPENDENT
AUDITORS' REPORT" are incorporated herein by reference from the
Company's 1995 Annual Report to Shareholders, which is attached
as Exhibit No. 13. See "Item 14. Exhibits, Financial
Statement Schedules and Reports on Form 8-K" below for financial
statements filed as a part of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
No information is required in response to this item.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and executive officers of the
Company is incorporated herein by reference from the section
entitled "DIRECTORS AND EXECUTIVE OFFICERS -Election of
Directors" of the Company's Proxy Statement, which is attached
as Exhibit No. 99.1.
As of March 31, 1996, the executive officers of the Company and
the Bank were: Name Position Age John Maloney
President of the Company and the Bank and Chief Executive
Officer of the Bank 51 Timothy J. Herles
Executive Vice President and Senior Credit Officer of the Bank
54 Daniel L. Erickson Senior Vice President and Chief
Financial Officer of the Bank 51 Adrienne Caldwell
Senior Vice President, Cashier, Chief Operating Officer and
Chief Administrative Officer of the Bank 53
JOHN MALONEY has been the President of the Company and the Bank
and Chief Executive Officer of the Bank since October 1994. Mr.
Maloney has been a banker for twenty-two years in the Southern
California banking community. During his employment with Bank
of America (1973 to 1994) he held a variety of positions
including Manager of the Beverly Hills main office, Regional
Marketing Manager for Los Angeles, Ventura, Santa Barbara and
San Luis Obispo counties, Area Credit Administrator, District
Business and Personal Banking Manager and Director of Marketing
for Statewide Trust Services. Mr. Maloney holds degrees from
Western State University College of Law and a Graduate
Certificate from Pacific Coast Banking School at the University
of Washington.
TIMOTHY J. HERLES has been Executive Vice President of the Bank
since April 1983, and has served in various positions including
Cashier, Chief Administrative Officer, Compliance Officer and
Senior Credit Officer, which position he currently holds. Prior
to joining the Bank, Mr. Herles was Vice President and Manager
of the Bank of Orange County, Los Angeles Regional Office (1982
to 1983) and Vice President and Manager of Century Bank, Los
Angeles, California (1979 to 1982). Mr. Herles received an
Associate of Arts degree from Los Angeles Valley College, an
Advanced Certificate from National Credit Manager's Association,
a Standard Certificate from the American Institute of Banking
and a Graduate Certificate from the Southwestern Graduate School
of Banking at Southern Methodist University.
DANIEL L. ERICKSON has been Senior Vice President and Chief
Financial Officer of the Bank since July 1993. Prior to joining
the Bank, Mr. Erickson was Senior Vice President and Chief
Financial Officer of Commercial Center Bank (1987 to 1992), and
Vice President and Controller of Central Bancorporation, Inc.
(1980 to 1987). Mr. Erickson is a Certified Public Accountant,
holds a Bachelor of Science degree in Accounting from the
University of South Dakota and Graduate Certificate from the
Stonier Graduate School of Banking at Rutgers University.
ADRIENNE CALDWELL has been Senior Vice President and Cashier of
the Bank since March 1986, in 1990 was appointed Chief Operating
Officer, and in 1992 was appointed Chief Administrative Officer.
Prior to joining the Bank, Mrs. Caldwell was Assistant Vice
President and Operations Administrator of South Bay Bank (1982
to 1986), Vice President and Operations Manager of American City
Bank (1974 to 1982), and held various positions with Barclays
Bank of California (1972 to 1974). Mrs. Caldwell is a member of
the Bankers Compliance Group and received a Standard Certificate
from the American Institute of Banking.
ITEM 10. EXECUTIVE COMPENSATION
Information concerning management compensation and transactions
is incorporated herein by reference from the section entitled
"DIRECTORS AND EXECUTIVE OFFICERS -Compensation of Executive
Officers and Directors" of the Company's Proxy Statement, which
is attached as Exhibit No. 99.1.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information concerning security ownership of certain beneficial
owners and management is incorporated herein by reference from
the sections entitled "Principal Shareholders" and "DIRECTORS
AND EXECUTIVE OFFICERS -- Election of Directors," of the
Company's Proxy Statement, which is attached as Exhibit No. 99.1.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
It is against Bank policy to make loans to directors, officers
or employees. Information concerning certain relationships and
related transactions with management and others is incorporated
herein by reference from the section entitled "DIRECTORS AND
EXECUTIVE OFFICERS -- Election of Directors" of the Company's
Proxy Statement, which is attached as Exhibit No. 99.1.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) Financial Statements and Schedules
The following financial statements included in the Company's
1995 Annual Report to Shareholders are incorporated herein by
reference (page number references are to the 1995 Annual Report
to Shareholders).
Marathon Bancorp and Subsidiary
Page
Consolidated Statements of Financial Condition
as of December 31, 1995 and 1994
14
Consolidated Statements of Operations
for the years ended December 31, 1995, 1994 and 1993
15
Consolidated Statements of Cash Flows
for the years ended December 31, 1995, 1994 and 1993
16 - 17
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1995, 1994 and 1993
17
Notes to Consolidated Financial Statements
18 -7
Independent Auditors' Report
28
All schedules are omitted because they are not applicable, not
material or because the information is included in the financial
statements or the notes thereto.
(b) Reports on Form 8-K
The Company filed no Reports on Form 8-K during the fourth
quarter of 1995.
(c) Exhibits
See Exhibit Index at Page 24 this Form 10-KSB.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 15th day of April 1996.
MARATHON BANCORP (Registrant)
Nikolas Patsaouras
Chairman of the Board
`Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
Signature
Title
Date
Chairman
of the Board April 15, 1996
Nikolas Patsaouras
Director, Chief Financial April 15, 1996
Officer and Principal C. Thomas
Mallos
Accounting Officer
Director April 15, 1996
Robert J. Abernethy
Director April 15, 1996
Frank W. Jobe, M.D.
Director and President April 15, 1996
John Maloney
Director
and Secretary April 15, 1996
Robert L. Oltman
Director
and Assistant April 15, 1996 Ann Pappas
Chief Financial Officer
Director April 15, 1996
Michael V. Reyes
EXHIBIT
INDEX
Exhibit No. Description
Page
3.1 Articles of Incorporation (4) *
3.2 Bylaws (4) *
10.1 Company Office Lease - Suite 280 (3) *
10.2 Bank Office Lease - Suite 180 (3) *
10.3 Bank Office Lease - Suite 110 (5) *
10.4 Company and Bank Office Lease
commencing September 1, 1992 (6) *
10.5 Employment Agreement of J F. Morrow II (4) *
10.6 1983 Stock Incentive Plan (1) *
10.7 Form of Non-Qualified Stock Option Agreement
(1983 Stock Incentive Plan) (1) *
10.8 Amendments to the Marathon Bancorp 1983 Stock
Incentive Plan (5) *
10.9 Form of Incentive Stock Option Agreement (1) *
10.10 1986 Non-Qualified Stock Option Plan, as amended (2) *
10.11 Form of Non-Qualified Stock Option Agreement
(1986 Non-Qualified Stock Option Plan) (2) *
10.12 Form of 1990 Stock Option Plan (5) *
10.13 Form of Non-Qualified Stock Option Agreement -
Director Option (1990 Stock Option Plan) (5) *
10.14 Form of Non-Qualified Stock Option Agreement
(1990 Stock Option Plan) (5) *
10.15 Form of Incentive Stock Option Agreement
(1990 Stock Option Plan) (5) *
13. Annual Report to Shareholders for the year ended
December 31, 1994 (parts not incorporated by reference
are furnished for informational purposes and are not
filed herewith) 26
EXHIBIT INDEX (Continued)
Exhibit No. Description
Page
21. Subsidiaries of Company 27
23. Accountants' Consent 29
99.1 Proxy Statement for Annual Meeting of Shareholders
to be held on June 19, 1996 30
___________________ * Not Applicable
(1) These exhibits are contained in the registrants'
Registration Statement on Form S-1 (Registration No.
2-83674), declared effective by the Commission on July 12, 1983,
and are incorporated herein by reference.
(2) These exhibits are contained in the registrants' Annual
Report on Form 10-K for the fiscal year ended December
31, 1986 (Commission File No. 2-83191), filed with the
Commission on March 27, 1987, and are incorporated herein
by reference.
(3) These exhibits are contained in the registrants' Annual
Report on Form 10-K for the fiscal year ended December
31, 1987 (Commission File No. 2-83191), filed with the
Commission on March 28, 1988, and are incorporated herein
by reference.
(4) These exhibits are contained in the registrants' Annual
Report on Form 10-K for the fiscal year ended December
31, 1988 (Commission File No. 0-012510), filed with the
Commission on March 20, 1989, and are incorporated herein
by reference.
(5) These exhibits are contained in the registrants' Annual
Report on Form 10-K for the fiscal year ended December
31, 1989 (Commission File No. 0-012510), filed with the
Commission on March 19, 1990, and are incorporated herein
by reference.
(6) These exhibits are contained in the registrants' Annual
Report on Form 10-K for the fiscal year ended December
31, 1991 (Commission File No. 0-012510), filed with the
Commission on March 19, 1992, and are incorporated herein
by reference.
EXHIBIT
13.
Table of Contents
To Our
Shareholders.....................................................
................................................2
Financial
Highlights.......................................................
.................................................4
Mission
Statements.......................................................
..................................................5
Management's Discussion and
Analysis.........................................................
...................6
Consolidated Statements of Financial
Condition........................................................
.......14
Consolidated Statements of
Operations.......................................................
.....................15
Consolidated Statements of Cash
Flows............................................................
................16
Consolidated Statements of Changes in Shareholders'
Equity ..................................17
Notes to Consolidated Financial
Statements.......................................................
................18
Independent Auditors'
Report...........................................................
..................................28
Market Prices for Common
Shares...........................................................
...........................29
Corporate
Information......................................................
..................................................30
<Body
Text>Notes.......................................................
.
.................................................................
.........31
Our strategic goals for 1995 focused on restructuring the Bank's
balance sheet and reducing expenses while providing our
traditionally high level of personalized banking service.
Although the Bank experienced a $1.4 million loss in 1995,
considerable progress has been made in achieving these goals.
The total cost of real estate owned totaled $1.4 million in
1995, an amount equal to our net loss for the year. Real estate
acquired through foreclosure has been a significant drain on
earnings for the past four years after reaching a high of $10.2
million at the end of 1992 and declining to $2.7 million at the
end of 1995. Because of the lingering effects of the recession
and its impact on commercial real estate values, the Bank
prudently reduced the carrying value of real estate owned by
$1.1 million during the year.
Excluding the cost of real estate owned, operating expenses
were reduced 18% during 1995 in most categories of expense.
Efforts have continued into 1996 to downsize the operations of
the Bank through attrition and expense control. The conversion
to a state-of-the-art computer system in March will reduce our
costs and provide the opportunity to offer new or enhanced
technology-based products and services to our customers.
Several new important products were added during the year
tailored to meet the needs of our customer base. The Bank began
offering overdraft lines of credit to businesses and individuals
as well as loans to homeowners associations. The Bank also
began offering investment products to customers primarily in the
form of government securities.
Improved earnings and balance sheet strength will be our
primary goals for 1996. We appreciate the patience and support
of our customers while in our temporary location and expect to
return to our previous location at Olympic Center by the end of
the year. We are grateful to our shareholders, directors and
employees who have referred friends and associates to us for
banking services. The dedication, hard work and commitment of
our directors and employees have contributed greatly to our
improvement. We look forward to the continued council and
support of directors, shareholders and employees as we meet the
challenges of 1996.
Nick Patsaouras John Maloney
Chairman of the Board President and
Chief Executive Officer
Financial Highlights
Selected consolidated financial data for the Company, as of the
dates and for the periods indicated, are presented below.
Amounts are in thousands, except per share amounts.
At or for the years ended December 31, 1995 1994
1993 1992 1991
Interest income $6,075
$6,158 $7,283 $10,248 $13,898
Interest expense 1,322
1,427 2,107 3,562 6,164
Net interest income 4,753
4,731 5,176 6,686 7,735
Provision for loan and real estate losses 561
0 2,240 3,597 1,619
Other operating income (expense) 259
430 762 (210) 1,389
Other operating expenses 5,854
5,920 7,940 7,810 6,030
Net income (loss) before extraordinary item (1,403) (759)
(3,905) (2,976) 942
Extraordinary gain on early
extinguishment of debt 0
112 0 0 0
Net income (loss) (1,403)
(647) (3,905) (2,976) 942
Net income (loss) per share * (1.12)
(0.52) (3.13) (2.38) 0.70
Interest rate spread 5.4% 4.9%
3.8% 3.7% 4.3%
Average total assets 86,112
96,000 126,890 151,076 153,022
Average loans 53,237
60,634 69,513 88,429 106,503
Average earning assets 74,887
82,535 107,651 135,359 139,307
Average deposits 80,291
88,560 116,933 137,212 139,761
Total shareholders' equity 3,976
5,367 6,024 9,930 12,906
Book value per share * $3.18
$4.30 $4.82 $7.95 $10.33
Return on average assets (1.6)%
(0.7)% (3.1)% (2.0)% 0.6%
Return on average equity (26.8)%
(10.7)% (47.4)% (23.9)% 7.4%
* Net income (loss) and book value per share amounts give
appropriate retroactive effect to stock dividends declared in
1991.
Mission Statements
1 Marathon National Bank, a wholly owned subsidiary of
Marathon Bancorp, is an independent commercial bank which
develops and maintains strong customer relationships through
personalized service.
2 The Bank focuses on businesses and professionals offering
innovative products tailored to the client's needs.
3. The staff, officers, and directors are dedicated to
assisting our customers achieve their financial objectives.
4. Committed to the community and our customers, our banking
professionals will ensure Marathon's financial stability, growth
and profitability.
Management Discussions 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 included in
this annual report. Since its wholly-owned subsidiary, 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 operating results of
the Bank. It should be read in conjunction with the
consolidated financial statements of the Company and notes
thereto appearing elsewhere in this report. Averages presented
are daily average balances.
Summary
The Company recorded a net loss for the year ended December 31,
1995 of $1,402,800, or $1.12 per common share, as compared to a
net loss of $647,200 for 1994, or $.52 per common share. The
loss in 1995 is primarily attributable to the provision for loan
losses (see "Provision for Loan Losses") and costs related to
real estate acquired through foreclosure (see "Other Operating
Expenses"). The 1994 loss is primarily due to costs related to
real estate acquired through foreclosure and professional
services (see "Other Operating Expenses").
The provision for loan losses was $561,100 in 1995. The Bank
did not make a provision for loan losses in 1994. Net operating
costs of holding and disposing other real estate owned was
$1,350,300 in 1995 and $436,900 in 1994 as the provision for
real estate losses increased from $234,400 to $1,147,500 . The
costs to acquire and maintain real estate owned in 1995 and 1994
and the provision for loan losses in 1995 resulted from the
general economic slow down and declining real estate values in
Southern California.
The Company's net interest income remained flat in 1995 despite
a reduction in the level of average earning assets and a
declining rate environment. Average earning assets were
$74,887,000 in 1995 as compared to $82,535,000 in 1994 or a
decrease of 9.3 percent. Average interest-bearing liabilities
also declined during this period to $48,241,000 in 1995 from
$54,081,000 in 1994 or 10.8 percent.
At December 31, 1995, the Company had total assets of
$86,754,600, total securities of $9,913,600 and total deposits
of $82,529,900. This compares to total assets of $97,181,000,
total securities of $25,918,300 and total deposits of
$91,299,900 as of December 31, 1994. The Bank experienced a
decrease in money markets as deposit clients expended earthquake
insurance monies to repair damage from the 1994 Northridge
earthquake. Proceeds from the maturity of investment securities
were used to fund this decline.
On September 30, 1995, the Bank entered into a formal agreement
with the Office of the Comptroller of the 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 30, 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 December 31,
1995, the Bank had a Tier 1 risk based capital ratio of 7.3
percent and a Tier 1 leverage ratio of 4.9 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.
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 consolidated financial statements and notes thereto.
Operating Performance Net Interest Income: Net interest income
is the major source of operating income of the Bank. Net
interest income represents the difference between the interest
income and fees from earning assets and the interest paid on
interest-bearing liabilities. As shown in Table 1, total
interest and fee income amounted to $6,075,000 in 1995 compared
to $6,158,000 in 1994. Total interest expense was $1,322,000 in
1995 compared to $1,427,000 in 1994. Net interest income
increased to $4,753,000 in 1995 from $4,731,000 in 1994 or 0.4
percent.
Net interest income remained relatively flat in 1995 as compared
to 1994. Interest earning assets averaged $74,887,000 in 1995
as compared to $82,535,000 in 1994 or a decrease of 9.3 percent.
However, the average yield on interest earning assets increased
to Management's Discussion and Analysis 8.1 percent in 1995 from
7.5 percent in 1994, or an increase of 8.0 percent. The 8.0
percent increase in the yield on earning assets basically offset
the 9.3 percent decline in average earning assets as the cost of
interest-bearing liabilities remained approximately the same.
Table 1 summarizes the Bank's interest rate spreads and net
yield on earning assets for 1995 and 1994. 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 Bank's interest rate spread was 5.4 percent in 1995 as
compared to 4.9% in 1994. The net yield on earning assets was
6.3 percent in 1995, an increase from 5.7 percent in 1994. The
1995 increase resulted primarily from the increase in the
weighted average yield on earning assets from 7.5 percent in
1994 to 8.1 percent in 1995 as the yield on both loans and other
earning assets increased.
Marathon'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. The costs of
all third party payments made to support these
noninterest-bearing deposits averaged approximately 2.0 percent.
The Bank believes that they remain the lowest cost source of
funds available in the marketplace. Noninterest- bearing demand
deposits included one account relationship which aggregated 14%
and 11% of total deposits at December 31, 1995 and 1994,
respectively. The account's average balance was 7% and 11% of
average total deposits during 1995 and 1994, respectively (see
"Liquidity and Interest Rate Sensitivity").
Table 1
Interest Weighted Change from prior year
Net Interest Income Analysis Average income/ average
due to change in:
(Dollars in thousands) balance expense
yield/cost Volume Rate Total
1995
Loans $53,237
$4,812 9.0% $(652) $340 $(312)
Other earning assets 21,650 1,263
5.8% 190 39 229
Interest-earning assets 74,887 6,075
8.1% (462) 379 (83)
Interest-bearing liabilities 48,241 1,322
2.7% (250) 145 (105)
$26,646
$4,753 $(212) $234 $22
Interest rate spread 5.4%
Net yield on earning assets 6.3%
1994
Loans $60,634 $5,124
8.2% $(757) $(221) $(978)
Other earning assets 21,901 1,034
5.3% (515) 369 (146)
Interest-earning assets 82,535 6,158
7.5% (1,272) 148 (1,124)
Interest-bearing liabilities 54,081 1,427
2.6% (575) (105) (680)
$28,454
$4,731 $(697) $253 $(444)
Interest rate spread 4.9%
Net yield on earning assets 5.7%
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,
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 as loss and charged
off by the Bank, the Bank's classified loans consisted of
$6,404,500 of loans classified as substandard and $37,100
classified as doubtful at December 31, 1995, an increase of
$322,200 or 5.3 percent from 1994. In addition to the
classified loans, the Bank was also monitoring $4,066,900 of
loans which it had designated as listed at December 31, 1995, an
increase of $44,000 or 1.1 percent from 1994. At December 31,
1995, nonaccrual loans totaled $523,000, or 1.0 percent of gross
loans, compared with $564,100, or 1.0 percent at December 31,
1994.
With the exception of these classified and listed loans,
management is not aware of any loans as of December 31, 1995
where the known credit problems of the borrower would cause it
to have serious doubts as to the ability of such borrowers to
comply with their present loan repayment terms and which would
result in such loans being considered nonperforming loans at
some future date. Management cannot, however, predict the
extent to which the current economic environment may 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 ninety days or more past due,
be placed on nonaccrual or become classified loans, 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
or 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, the balance in the allowance for loan losses and
the external economic conditions, the Bank made a $561,100
provision for loan losses during 1995. Loans totaling $740,000
were charged off during the period, and $102,500 was recovered.
The allowance for loan losses was $720,100, or 1.4 percent of
gross loans outstanding for period ending December 31, 1995.
Loans charged off amounted to $966,000 in 1994 and $2,827,200
in 1993, while recoveries totaled $262,500 and $287,300,
respectively. As a percent of average gross loans outstanding
during the year, loans charged off net of recoveries were 1.2
percent in 1995 and 1994 and 3.7 percent in 1993. The decrease
in loans charged off during 1995 and 1994, compared to 1993 was
the result of improvement of the overall quality of the loan
portfolio and revised credit policies instituted.
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 December 31, 1995, the Bank had classified $60,600 of its
loans as impaired and recorded the full amount as specific
reserve in the allowance for loan losses. In addition, the Bank
classified $2,354,900 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 year
ended December 31, 1995 was approximately $2,422,900. Interest
income of $60,900 was recognized on impaired loans during the
year ended December 31, 1995. Other real estate owned (OREO),
consisting of properties received in settlement of loans totaled
$2,654,400 at December 31, 1995, a decrease of $3,483,100 or
56.8 percent from 1994. The provision for real estate losses
was $1,147,500 in 1995 and $234,400 in 1994.
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 Income: Other operating income was $259,300 in
1995 compared to $429,700 in 1994. Gains on the sale of
mortgage loans of $111,200 were reported in 1994. The mortgage
department was discontinued on June 30, 1994.
Other Operating Expenses: Other operating expenses totaled
$5,853,500 in 1995, a decrease of 1.1 percent from $5,920,100 in
1994. The net operating cost of OREO (which included the write
down of properties to fair market value) was $1,350,300 in 1995
as compared to $436,900 in 1994. Excluding OREO costs, other
operating expenses decreased 17.9 percent in 1995 in almost all
categories of expense.
Total other operating expenses were 6.8 percent and 6.2 percent
of average total assets in 1995 and 1994, respectively. The
increase in this ratio in 1995 is attributable to the increase
in the cost of holding and disposing of other real estate owned.
Income Taxes: The company had no income tax expense or benefit
in 1995 and 1994 (see Note 7 to the consolidated financial
statements).
Deferred income taxes are computed using the liability method
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. Financial Condition Total consolidated
assets decreased $10,426,400 or 10.7 percent to $86,754,600 at
December 31, 1995 from $97,181,000 at December 31,1994. The
decrease in the Company's size is largely attributable to the
decline in money market deposits as insurance proceeds received
by property management company customers for damage sustained in
the Northridge earthquake were withdrawn to make repairs.
Loans: Net loans as a percentage of total assets were 57.1
percent as of December 31, 1995, as compared to 57.4 percent in
1994. The loan to deposit ratio was 60.0 percent at December
31, 1995 as compared to 61.1 percent in 1994. The following
table sets forth the amount of loans in each category, the
percentage of total loans outstanding for each category and the
adjustments for deferred loan origination costs and the
allowance for loan losses as of the dates indicated:
Table 2
December 31,
1995
1994
Amount
Percentage Amount Percentage
Commercial loans $15,488,100 31%
$18,627,300 33%
Real estate loans:
Interim construction 0 0%
1,022,000 2%
Income property 24,987,000 50%
24,879,400 44%
Residential 1-4 units 8,517,000 17%
10,262,000 18%
Total real estate loans 33,504,000 67%
36,163,400 64%
Installment loans 1,178,800 2%
1,763,300 3%
Total loans 50,170,900 100%
56,554,000 100%
Deferred net loan origination costs 64,300
20,600
Allowance for loan losses (720,100)
(796,500)
Net loans $49,515,100
$55,778,100
The demand for quality commercial loans has declined as a result
of the continuing general economic slowdown and uncertainties
that have affected most of Southern California.
Allowance for Loan Losses: The following table provides a
three-year summary of activity in the allowance for loan losses
by loan type (also see "Provision for Loan Losses"):
Table 3
Allowance for Loan Losses 1995
1994 1993
Balance, January 1 $796,500
$1,500,000 $1,800,000
Loans charged off:
Commercial loans (437,000)
(829,400) (1,879,900)
Real estate loans (233,300)
(65,300) (825,300)
Installment loans (69,700)
(71,300) (122,000)
Total loans charged off (740,000)
(966,000) (2,827,200)
Recoveries of previously charged off loans:
Commercial loans 96,800
261,500 277,900
Real estate loans 2,600
0 9,400
Installment loans 3,100
1,000 0
Total recoveries 102,500
262,500 287,300
Net charge-offs. (637,500)
(703,500) (2,539,900)
Provision for loan losses 561,100
0 2,239,900
Balance, December 31 $720,100
$796,500 $1,500,000
Ratio of allowance for loan losses to loans 1.4%
1..4% 2.4%
Funding and Capital Deposits: Total deposits averaged
$80,292,000 in 1995 as compared to $88,560,000 in 1994 or a
decline of 9.3 percent. Average noninterest bearing demand
deposits were $32,229,000 in 1995 as compared to $34,969,000 in
1994. Average interest-bearing deposits declined $5,840,000 or
10.8 percent as the insurance proceeds received by property
management company customers for damage sustained in the
Northridge earthquake were withdrawn to make repairs.
Capital: The Bank is required to meet certain 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 30, 1995, the Bank entered into a formal agreement
with the OCC under which the Bank agreed to submit a three year
strategic plan by November 1, 1995. The plan included, 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. The plan was accepted by the OCC on January
30, 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 to 6.0 percent from 3.0 percent. At
December 31, 1995, the Bank had a Tier 1 risk based capital
ratio of 7.3 percent, and a Tier 1 capital leverage ratio of 4.9
percent. Failure on the part of the Bank to meet 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 a receiver.
The following table summarizes the ratios achieved by the Bank
as of December 31, 1995 and the minimum levels required by FDIC
regulations and the formal agreement with the OCC.
Actual Bank Capital at 12/31/95
OCC Formal Agreement
Capital
FDIC
Regulatory Capital
Tier 1 risk-based 7.3% 8.5% 4.0%
Total risk-based 8.6 N.A. 8.0
Tier 1 leverage 4.9 6.0 3.0
Liquidity and Interest Rate Sensitivity The primary function of
asset liability management is to insure 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: In order to serve the Bank'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 Bank's liquidity ratio (the sum of liquid assets divided by
total deposits) was 38.6 percent at December 31, 1995 and 33.8
percent at December 31, 1994. The increase in this ratio is a
result of an decrease in total deposits while liquid assets
remained constant. The loan to deposit ratio was 60.9 percent
and 62.0 percent at December 31, 1995 and 1994, respectively.
On the liability side, the Bank's liquidity position is enhanced
by sizable core deposits. As stable core deposits (which are
defined as 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
short term time certificates of deposit.
Core deposits continued to be a significant funding source
representing, on average, 88.0 percent of total deposits during
1995 and 83.8 percent in 1994. In addition, the Company's time
deposits were primarily from its local customer base and without
significant concentrations. Noninterest-bearing demand deposits
included one account relationship which aggregated 14% and 11%
of total deposits at December 31, 1995 and 1994, respectively.
The account's average balance was 7% and 11% of average total
deposits during 1995 and 1994, respectively. While demand
deposits are noninterest-bearing, the account relationships are
not without cost as the Bank provides messenger and courier,
accounting and data processing services in connection with the
relationships.
Table 4
Analysis of Rate Sensitive Assets & Liabilities
by Time Period (Dollars in millions) 90 days
3-12 1 - 5 Over 5
or
less months years years Total
December 31, 1995
Investments, including federal funds sold $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 1.2
1.1 1.2 1.0 1.0
December 31, 1994
Investments, including federal funds sold $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 1.1
1.2 1.2 0.9 0.9
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 100 percent of rate sensitive
liabilities at December 31, 1995 as compared to 92 percent at
the end of 1994. In the one year or less category, rate
sensitive assets were 113 percent of rate sensitive liabilities
at the end of 1995 as compared to 118 percent in 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.
Interest Rate Sensitivity Management: Similar to liquidity
management, interest rate sensitivity management focuses 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, the Bank manages the repricing
characteristics of its assets and liabilities to stabilize net
interest income. The Bank 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.
Commitments And Contingent Liabilities
The Company and the Bank are subject to various pending or
threatened legal actions which arise in the normal course of
business. Based upon present knowledge, management is of the
opinion that the disposition of all suits will not have a
material effect on the Company's consolidated financial
statements.
The Bank has a noncapitalized lease commitment covering its
banking premises. Minimum rental commitments under this and all
other operating leases that have initial or remaining
noncancelable terms in excess of one year as of December 31,
1995 are as follows:
Table 5
Year Amount
1996 $208,800
1997 399,500
1998 594,100
1999 594,100
2000 594,100
2001 and thereafter 990,200
Total $3,380,800
On November 14, 1994, the Bank vacated its banking premises
due to severe earthquake damages and moved into another nearby
location. Under the terms of the old lease agreement, the Bank
has suspended all lease payments until the building is repaired.
At this time, the building is in the process of being repaired
and is scheduled for occupancy before the end of 1996. The Bank
has leased temporary office space under a lease agreement which
provides for lease payments of $17,400 per month for six months
with nine consecutive one month options to extend the lease.
The agreement was amended to extend the lease term for an
additional ten months, expiring on March 16, 1996; and three
consecutive four month options for extension, if necessary.
Rent expense was $194,700, $387,300 and $452,200 for the years
ended December 31, 1995, 1994 and 1993, respectively. Sublease
rental income of $34,700 was received in 1994.
Commitments and contingent liabilities include, among other
items, off balance sheet commitments to extend credit, standby
letters of credit and other letters of credit. The Company
utilizes the same credit policies in making off balance sheet
commitments as it does in other lending activities. Commitments
to extend credit are legally binding agreements and have fixed
expiration dates. The Company minimizes its exposure to credit
risk under these commitments by requiring that customers meet
certain conditions prior to disbursing funds. The credit and
interest rate risk elements of these financial instruments
exceed the amounts recognized in the consolidated financial
statements, but is represented by their contractual or
notational amounts. At December 31, 1995 and 1994, undrawn
commitments to extend credit to Bank customers amounted to $10.0
million.
Cash and due from banks
$8,450,300 $5,196,400
Federal funds sold
14,400,000 2,000,000
Cash and cash equivalents
22,850,300 7,196,400
Interest-bearing deposits with financial institutions 497,000
396,000
Securities available for sale
3,302,900 10,835,800
Securities held to maturity (aggregate market value
of $6,306,700 in 1995 and $13,796,300 in 1994) 6,610,700
15,082,500
Loans receivable, net
49,515,100 55,778,100
Other real estate owned, net
2,654,400 6,137,500
Premises and equipment, net
420,900 508,700
Accrued interest receivable
582,200 682,800
Other assets
321,100 563,200
Total
$86,754,600 $97,181,000
Liabilities and Shareholders' Equity
Deposits:
Demand, noninterest-bearing
$38,415,000 $36,245,400
Demand, interest-bearing
7,868,100 8,232,200
Money market and savings
27,167,000 36,426,700
Time certificates of deposit:
Under $100,000
5,779,400 5,825,400
$100,000 and over
3,300,400 4,570,200
Total deposits
82,529,900 91,299,900
Accrued interest payable
93,600 84,100
Other liabilities
155,600 430,100
Total liabilities
82,779,100 91,814,100
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 in 1995 and 1994
8,080,000 8,080,000
Net unrealized gain (loss) on securities available for sale
1,100 (10,300)
Deficit
(4,105,600) (2,702,800)
Total shareholders' equity
3,975,500 5,366,900
Total
$86,754,600 $97,181,000
See accompanying notes to consolidated financial statements.
Year ended December 31, 1995
1994 1993
Interest income:
Loans, including fees
$4,811,900 $5,124,300 $6,102,700
Investment securities:
Taxable
848,000 902,600 819,900
Tax advantaged
0 0 146,900
Federal funds sold
374,600 121,400 176,400
Deposits with financial institutions
40,000 10,000 37,500
Total interest income
6,074,500 6,158,300 7,283,400
Interest expense:
Deposits
1,312,500 1,405,300 1,087,900
Federal funds purchased
9,500 21,600 19,300
Total interest expense
1,322,000 1,426,900 2,107,200
Net interest income before provision for loan losses 4,752,500
4,731,400 5,176,200
Provision for loan losses
561,100 0 2,239,900
Net interest income after provision for loan losses
4,191,400 4,731,400 2,936,300
Other operating income:
Service charges on deposit accounts
206,800 246,100 306,000
Gain on mortgage loan sale
0 111,200 156,800
Net gain on sale of investment securities
0 0 171,900
Other service charges and fees
52,500 72,400 127,100
Total other operating income
259,300 429,700 761,800
Other operating expenses:
Salaries and employee benefits
1,848,900 2,169,000 2,432,900
Provision for OREO losses
1,147,500 234,400 573,400
Net operating cost of other real estate owned 202,800
202,500 1,179,200
Occupancy
352,100 565,600 642,100
Furniture and equipment
104,600 123,200 150,000
Professional services
727,100 874,200 738,300
Business promotion
68,300 78,400 79,000
Stationery and supplies
77,900 70,200 96,400
Data processing services
586,600 558,100 600,900
Messenger and courier services
256,900 406,000 497,300
Insurance and assessments
328,200 429,900 576,400
Other expenses
152,600 208,600 373,700
Total other operating expenses
5,853,500 5,920,100 7,939,600
Loss before income tax (benefit) and extraordinary item
(1,402,800) (759,000) (4,241,500)
Income tax benefit
0 0 (336,400)
Loss before extraordinary item
(1,402,800) (759,000) (3,905,100)
Extraordinary gain on early extinguishment of debt, net
0 111,800 0
Net loss
$(1,402,800)$(647,200)$(3,905,100)
Net loss per share:
Loss before extraordinary item
$(1.12) $(0.61) $(3.13)
Extraordinary item
0.00 0.09 0.00
Net loss
$(1.12) $(0.52) $(3.13)
See accompanying notes to consolidated financial statements.
Year ended December 31,
Increase (decrease) in cash and cash equivalents 1995
1994 1993
Cash flows from operating activities:
Interest received
$6,105,100 $6,088,300 $7,967,200
Service charges on deposit accounts and
other fees received
259,300 318,500 433,100
Proceeds from sale of mortgage loans held for sale 0
17,851,000 33,742,200
Funding of mortgage loans held for sale 0
(9,150,200) (43,275,000)
Interest paid
(1,312,500) (1,421,400) (2,141,800)
Cash paid to employees and suppliers
(4,692,800) (5,845,200) (7,530,400)
Income taxes refunded
88,000 1,389,800 1,387,100
Net cash provided (used) by operating activities 447,100
9,230,800 (9,417,600)
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits with
financial institutions
(101,000) (396,000) 2,074,000
Purchases of securities available for sale
0 (10,865,600) 0
Purchases of securities held to maturity
0 (5,965,900) 0
Purchases of investment securities
0 0 (32,911,000)
Purchases of securities held for sale
0 0 (25,932,500)
Proceeds from maturities of securities available for sale
10,905,000 0 0
Proceeds from maturities of securities held to maturity
5,137,400 6,196,300 0
Proceeds from sale of investment securities 0
0 13,159,200
Proceeds from maturities of investment securities 0
0 17,882,900
Proceeds from sale of securities held for sale 0
0 49,508,900
Net decrease in loans made to customers 7,310,100
4,829,200 11,537,800
Proceeds from sale of other real estate owned 728,200
3,157,100 2,078,200
Payoff senior lien holder and loan participant on OREO 0
0 (1,200,000)
Purchases of furniture, fixtures and equipment (2,900)
(63,20 (90,100)
Net cash provided (used) by investing activities
23,976,800 (3,108,100) 36,107,400
Cash flows from financing activities:
Net (decrease) increase in noninterest-bearing and
interest-bearing demand deposits and money market
and savings accounts
(7,454,200) 7,144,600 (31,722,100)
Net decrease in time certificates of deposits
(1,315,800) (10,838,800) (4,280,500)
Repayment of long term debt
0 (560,000) 0
Net cash used by financing activities
(8,770,000) (4,254,200) (36,002,600)
Net increase (decrease) in cash and cash equivalents15,653,900
1,868,500 (9,312,800)
Cash and cash equivalents at beginning of year 7,196,400
5,327,900 14,640,700
Cash and cash equivalents at end of year
$22,850,300 $7,196,400 $5,327,900
See accompanying notes to consolidated financial statements.
(Continued)
Reconciliation of net loss to net cash provided (used)
Year ended December 31,
by operating activities
1995 1994 1993
Net loss
$(1,367,800) $(647,200) $(3,905,100)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization expense
90,700 113,800 136,100
Provision for loan losses
561,100 0 2,239,900
Provision for OREO losses 1,112,500
234,400 573,400
Loss (gain) on sale of real estate owned
42,900 (85,300) 47,900
Net gains on investment securities
0 0 (171,900)
Gain on mortgage loans held for sale
0 (111,200) (156,800)
Gain on early extinguishment of debt
0 (111,800) 0
Amortization of premiums and discounts
on securities, net
(26,300) 66,200 657,900
Change in mortgage loans held for sale
0 8,700,800 (9,532,800)
Change in deferred loan origination fees, net
(43,700) (43,200) (40,500)
Change in deferred taxes
0 0 587,700
Change in income tax refunds receivable 88,000
1,389,800 61,200
Change in other assets
254,700 (85,400) 450,700
Change in other liabilities
(265,000) (190,100) (365,300)
Total adjustments
1,205,900 9,878,000 (5,512,500)
Net cash provided (used) by operating activities $447,100
$9,230,800 $(9,417,600)
Supplemental cash flow information:
Transfer from mortgage loans held for sale to loans receivable 0
$1,100,000 $0
Transfer from loans to other real estate owned (347,700)
(2,165,700) (340,300)
Loans made to facilitate the sale of
other real estate owned
1,912,200 3,029,000 475,000
Transfer of securities from
held-to-maturity to available for sale
3,301,800 0 0
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity
Marathon Bancorp and Subsidiary
Retained Net
Preferred Common
shares Earnings Unrealized
Shares shares
Amount (Deficit) Gain(Loss) Total
Balance, January 1, 1993 --- 1,248,764 $8,080,000
$1,849,500 $0 $9,929,500
Net Loss
(3,905,100) (3,905,100)
Balance, December 31, 1993 --- 1,248,764 8,080,000
(2,055,600) 0 6,024,400
Net Loss
(647,200) (647,200)
Unrealized loss on securities available for sale
(10,300) (10,300)
Balance, December 31, 1994 --- 1,248,764 8,080,000
(2,702,800) (10,300) 5,366,900
Net Loss
(1,367,800) (1,367,800)
Net change in unrealized gain on securities
on securities available for sale
11,400 11,400
Balance, December 31, 1995 --- 1,248,764 $8,080,000
$(4,070,600) $1,100 $4,010,500
See accompanying notes to consolidated financial statements.
Note 1:
Summary of Significant Accounting Policies Basis of
Presentation:
The accounting and reporting policies of Marathon Bancorp (the
Company) and its wholly owned subsidiary, Marathon National Bank
(the Bank), are in accordance with generally accepted accounting
principles and conform to practices within the banking industry.
Nature of Operation: The Bank maintains a single branch office
and corporate headquarters located in the west side of Los
Angeles city. The Bank offers a wide range of commercial
banking services primarily to professionals and small to medium
size companies located throughout the greater Los Angeles area.
Principles of Consolidation: The consolidated financial
statements include the accounts of the Company and the Bank,
after elimination of all material intercompany transactions and
balances. Securities Available for Sale: Securities that are
to be held for indefinite periods of time and not intended to be
held to maturity are classified as available for sale and are
carried at fair value, with unrealized gains or losses excluded
from earnings and reported as a separate component of
shareholders' equity, net of income tax effect. Securities held
for indefinite periods of time include assets that the Bank
intends to use as part of its asset/liability management
strategy and that may be sold for liquidity purposes or in
response to changes in interest rates, prepayment risks or other
factors. Realized gains and losses from the sale of securities
available for sale are included in other operating income using
the specific identification method. Securities Held to Maturity:
Investment securities, excluding those held or available for
sale, are classified as held to maturity and are carried at
cost, adjusted for accretion of discounts and amortization of
premiums over the period to maturity using the interest method.
Accreted discounts and amortized premiums are included in
interest income. At the time of acquisition, the Bank
identifies those securities which it does have the positive
intent and ability to hold to maturity.
Loans Receivable: Loans are stated at the principal amounts
advanced less payments collected, net of unearned income,
unamortized deferred loan costs and origination fees, and the
allowance for loan losses. Interest on loans is computed by
methods which generally result in level rates of return on
principal amounts outstanding. Direct loan origination costs,
net of related loan origination fees, are deferred and
recognized as interest income over the term of the loans.
Loans are placed on nonaccrual status when there exists
reasonable doubt as to the full and timely collection of either
principal or interest or such loans have become contractually
past due ninety days with respect to principal or interest.
Generally, a loan may be returned to accrual status when
principal and interest are brought fully current and when, in
management's judgment, such loans are estimated to be
collectible as to both principal and interest.
Loans are restructured when the Bank has, for reasons related to
borrowers' financial difficulties, granted concessions to
borrowers (including reductions of either interest or principal)
that it would not otherwise consider, whether or not such loans
are secured or guaranteed by others. Allowance for Loan Losses:
The allowance for loan losses is based on an analysis of the
loan portfolio and reflects an amount which, in management's
judgment, is adequate to provide for potential losses.
Management's estimates are based on previous and expected loan
loss experience, current and projected economic conditions, the
composition of the loan portfolio, the value of collateral and
other relevant factors. Although management believes the level
of the allowance as of December 31, 1995 and 1994 is adequate to
absorb losses inherent in the loan portfolio, additional decline
in the local economy and rising interest rates may result in
increasing losses that cannot reasonably be predicted at this
date. The allowance is increased by provisions for loan losses
charged against income and recoveries of previously charged-off
loans. Loan losses are charged against the allowance when, in
management's judgment, the collectability of the loan is
doubtful.Allowance for Loan Losses (Continued): 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. Other Real
Estate Owned: Other real estate owned (OREO), which represents
real estate acquired through foreclosure in satisfaction of
commercial and real estate loans, is carried at the lower of
cost or estimated fair value less selling costs. Any loan
balance in excess of the fair value of the real estate acquired
at the date of foreclosure is charged to the allowance for loan
losses. Any subsequent valuation adjustments are charged to
provision for other real estate loan losses. Operating income
or expenses and gains or losses on disposition of such
properties are recorded in current operations under net
operating costs of other real estate owned. Premises and
Equipment: Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation on
furniture, fixtures and equipment is computed on the
straight-line method over the estimated useful lives of the
related assets, which range from three to seven years.
Leasehold improvements are capitalized and amortized over the
term of the lease or the estimated useful lives of the
improvements, whichever is shorter, using the straight-line
method. Income Taxes: Deferred income taxes are computed using
the asset and liability method, which recognizes a liability or
asset representing the tax effects, based on current tax law, of
future deductible or taxable amounts attributable to events that
have been recognized in the consolidated financial statements.
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. Loss per
Share: Loss per share is computed using the weighted average
number of common shares outstanding during the year. Loss per
share calculations exclude common share equivalents (stock
options), since their affect would be to reduce the loss per
share. Accordingly, the weighted average number of shares used
to compute the net loss per share was 1,248,764 in 1995, 1994
and 1993. Cash and Cash Equivalents: Cash and cash equivalents,
as reported in the Consolidated Statements of Cash Flows,
include cash and due from banks and federal funds sold. Recent
Accounting Pronouncements: In 1995, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which is effective for fiscal years
beginning after December 15, 1995 and encourages companies to
account for stock compensation awards based on their fair value
at the date the awards are granted. This statement does not
require the application of the fair value method and allows the
continuance of the current accounting method, which requires
accounting for stock compensation awards based on their
intrinsic value as of the grant date. The Company has chosen
not to adopt the fair value provisions of SFAS No. 123 and will
continue accounting for stock compensation awards at their
intrinsic value at the date of grant. Use of Estimates in the
Preparation of Financial Statements: The preparation of
financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, the disclosures of contingent assets and
liabilities at the date of the financial statements , and the
reported amounts of revenues and expenses during the reporting
period. The actual results could differ from those estimates.
Note 2:
Securities
The following is a summary of data for the major categories of
securities as of December 31, 1995 and 1994:
Total
Estimated
amortized
Gross unrealized market
cost
Gains Losses value
1995
Securities available for sale:
U.S. Treasury securities -
Due within one year $3,002,100
$5,400 $0 $3,007,500
Mortgage-backed securities:
Due within one year 210,000
0 (2,700) 207,300
After one but within five years 89,700
0 (1,600) 88,100
299,700 0 (4,300) 295,400
$3,301,800
$5,400 $(4,300) $3,302,900
Securities held to maturity:
Mortgage-backed securities:
Due within one year $500,200
$0 $(7,200) $493,000
After one but within five years 1,367,400
0 (66,500) 1,300,900
Over five years 4,595,100
0 (230,300) 4,364,800
6,462,700
0 (304,000) 6,158,700
Federal Reserve Bank stock 148,000
0 0 148,000
$6,610,700
$0 $(304,000) $6,306,700
1994
Securities available for sale:
U.S. Treasury securities -
Due within one year $10,846,100
$0 $(10,300) $10,835,800
Securities held to maturity:
U.S. Treasury securities:
Due within one year $4,595,300
$0 (33,800) $4,561,500
After one but within five years 3,014,000 0
(69,200) 2,944,800
7,609,300
0 (103,000) 7,506,300
Mortgage-backed securities:
Due within one year 708,000
0 (24,500) 683,500
After one but within five years 1,129,900 0
(8,000) 1,121,900
Over five years 5,455,300
0 (1,150,700) 4,304,600
7,293,200
0 (1,183,200) 6,110,000
Federal Reserve Bank stock 180,000 0
0 180,000
$15,082,500
$0 $(1,286,200) $13,796,300
U.S. Treasury securities with a carrying value of $300,000 and
$1,602,700 at December 31, 1995 and 1994, respectively, were
pledged to secure bankruptcy trust deposits. U.S. Treasury
securities with a carrying value of $1,002,800 and $1,019,700
were pledged to facilitate the issuance of letters of credit at
December 31, 1995 and 1994, respectively.
The actual maturity of mortgage-backed securities may differ
from contractual maturities because borrowers may have the right
to prepay such obligations without penalty.
For the year ended December 31, 1993, gross securities gains
were $325,400, and gross losses were $153,500. There were no
sales of securities in 1995 or 1994. Net unrealized gain of
$1,100 and net unrealized loss of $10,300 on securities
available for sale were credited or charged to shareholders'
equity in 1995 and 1994, respectively.
In 1995, the FASB issued a Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities." The Special Report
includes a provision that became effective November 15, 1995 and
allows companies to transfer securities from the held-tomaturity
portfolio to another classification before December 31, 1995
without calling into question their intent to hold other
securities to maturity. On December 31, 1995, the Bank
transferred U.S. Treasury securities and mortgage- backed
securities with fair market values of $3,007,500 and $295,400,
respectively, from the held-to-maturity portfolio to the
available-for-sale portfolio in accordance with this
pronouncement. Net unrealized gain of $1,100 as a result of the
transfer was credited to shareholders' equity.
Note 3:
Restrictions on Cash Balances
Federal Reserve Board regulations require that the Bank maintain
certain minimum reserve balances. Cash balances maintained to
meet reserve requirements are not available for use by the Bank
or the Company. During the year ended December 31, 1995,
required reserve balances averaged approximately $880,000.
Note 4:
Loans and the Related Allowances for Loan and Real Estate Losses
The following is a summary of the components of loans
receivable, net:
1995 1994
Commercial loans
$15,488,100 $18,627,300
Real estate loans:
Interim construction
0 1,022,000
Income property
24,987,000 24,879,400
Residential 1-4 units
8,517,000 10,262,000
Total real estate loans
33,504,000 36,163,400
Installment loans
1,178,800 1,763,300
50,170,900 56,554,000
Deferred net loan
origination costs
64,300 20,600
Allowance for loan losses
(720,100) (796,500)
Loans receivable, net
$49,515,100 $55,778,100
Excluding loans which have been classified loss and charged off
by the Bank, the Bank's classified loans consisted of $6,404,500
of loans classified as substandard and $37,100 of loans
classified as doubtful at December 31, 1995. In addition to the
classified loans, the Bank was also monitoring $4,066,900 of
loans which it had designated as listed (special mention) at
December 31, 1995.
At December 31, 1995, nonaccrual loans totaled $523,000
(included as impaired loans below), compared with $564,100 at
December 31, 1994. Loans past due ninety days or more and still
accruing interest were $1,149,300 at December 31, 1994 and none
at December 31, 1995. The reduction in interest income
associated with nonaccrual loans was approximately $79,900 in
1995, $47,000 in 1994 and $181,400 in 1993.
At December 31, 1995, the Bank had classified $60,600 of its
loans as impaired and recorded the full amount as specific
reserve in the allowance for loan losses. In addition, the Bank
classified $2,354,900 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 year
ended December 31, 1995 was approximately $2,422,900. Interest
income of $60,900 was recognized on impaired loans during the
year ended December 31, 1995.
Due to financial difficulties encountered by certain borrowers,
the Bank has restructured the terms of certain loans to
facilitate loan payments. As of December 31, 1995 and 1994,
loans with restructured terms totaled $1,253,900 and $932,000,
respectively. The reduction in interest income associated with
restructured loan was approximately $25,000 and $11,000,
respectively, in 1995 and 1994.
1995
1994 1993
The following is a summary of changes in the allowance for loan
losses for the years ended December 31, 1995, 1994 and 1993:
Balance, January 1 $796,500
$1,500,000 $1,800,000
Provision for loan
losses
561,100 0 2,239,900
Loans charged off (740,000)
(966,000) (2,827,200)
Recoveries
102,500 262,500 287,300
Balance, December 31 $720,100
$796,500 $1,500,000
The following is a summary of changes in the valuation
allowance of other real estate owned for the years ended
December 31, 1995, 1994 and 1993:
1995 1994 1993
Balance, January 1
$730,600 $1,173,300 $549,900
Provision for OREO losses 1,147,500
234,400 573,400
Charged off
(511,000) (677,100) 0
Other, net
0 0 50,000
Balance, December 31 $1,367,100
$730,600 $1,173,300
Note 5:
Premises and Equipment
The following is a summary of the major components of premises
and equipment at December 31, 1995 and 1994:
1995 1994
Furniture, fixtures and
equipment
$1,109,200 $1,114,100
Leasehold improvements
506,500 506,500
Premises and equipment, at cost 1,615,700
1,620,600
Less accumulated depreciation and amortization (1,194,800)
(1,111,900)
Premises and equipment, net $420,900
$508,700
Depreciation and amortization expense was $104,600, $113,800,
and $136,100 for the years ended December 31, 1995, 1994, and
1993, respectively.
Note 6
Deposits
Interest expense for the years ended December 31, 1995, 1994 and
1993 relating to interest-bearing deposits is set forth as
follows:
1995 1994 1993
Demand,
interest-bearing
$73,300 $60,400 $59,000
Money market and
savings
815,800 810,100 997,600
Time certificates of deposit:
Under $100,000
256,000 330,800 629,500
$100,000 and over
167,400 204,000 401,800
Interest expense on deposits $1,312,500
$1,405,300 $2,087,900
Noninterest-bearing demand deposits included one account
relationship which aggregated 14% and 11% of total deposits at
December 31, 1995 and 1994, respectively. The account's average
balance was 7% and 11% of average total deposits during the
years ended December 31, 1995 and 1994, respectively.
Note 7:
Income Taxes
The income taxes provision (benefit) for the years ended
December 31, 1995, 1994 and 1993 is comprised of the following:
1995 1994 1993
Current taxes:
Federal $0
$0 $(925,700)
State
1,600 1,600 1,600
1,600 1,600 (924,100)
Deferred taxes:
Federal
(467,900) (452,800) 456,900
State
(316,400) 63,000 130,800
(784,300) (389,800) 587,700
Total:
Federal
(467,900) (452,800) (468,800)
State
(314,800) 64,600 132,400
$(782,700) $(388,200) $(336,400)
Net change in
valuation allowance 782,700
388,200 0
Total
$0 $0 $(336,400)
For 1995 and 1994, the deferred tax provisions include
valuation reserve of $2,218,300 and $1,433,900, respectively, to
offset deferred tax assets as realization of these assets are
not fully assured.
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.
At December 31, 1995 and 1994, the components of the net
deferred tax asset are comprised of the following:
1995 1994
Deferred tax liabilities:
Federal:
State income tax
$261,000 153,400
Tax reserve recapture
141,000 0
Other
34,100 123,700
436,100 277,100
State:
OREO losses
0 11,500
Provision for loan losses
0 0
Other
11,300 64,800
11,300 76,300
447,400 353,400
Deferred tax assets:
Federal:
AMT credit carryforward
(137,800) (137,800)
Federal NOL carryforward
(976,200) (738,800)
Provision for loan losses
(244,800) (183,900)
OREO losses
0 (42,800)
Provision for REO losses
(464,800) 0
Other
(63,100) (156,600)
(1,886,700) (1,259,900)
State:
Provision for loan losses
(81,400) (109,400)
State NOL carryforward
(541,200) (365,600)
Provision for REO losses
(154,400) 0
Other
(2,000) (52,400)
(779,000) (527,400)
(2,665,700) (1,787,300)
Net deferred tax (asset)
(2,218,300) (1,433,900)
Less valuation allowance
2,218,300 1,433,900
$0 $0
The income tax liability (asset) at December 31, 1995 and 1994
is comprised of the following:
1995 1994
Current liability (asset):
State
$0 $(88,000)
Deferred liability (asset):
Federal
(1,450,600) (982,700)
State
(767,700) (451,200)
(2,218,300) (1,433,900)
Less valuation allowance 2,218,300
1,433,900
0 0
$0 $(88,000)
The principal reasons for the difference between the federal
statutory income tax rate of 35% in 1995, 1994 and 1993, and
income tax expense (benefit) for the years ended December 31,
1995, 1994 and 1993 are as follows:
1995 1994 1993
Tax benefit at
statutory rate
$(491,000) $(265,700) $(1,484,500)
Reduction in taxes resulting from:
Tax-exempt
income
0 0 (63,200)
State franchise
tax net of
valuation
allowance
1,100 1,100 1,100
Federal valuation allowance 467,900
388,100 1,044,200
Loss of state NOL
carryforward 40,000
41,800 129,900
Surtax exemption 14,000
7,600 42,000
AMT credit carryforward 0
(137,800) 0
Other, net
(32,000) (35,100) (5,900)
Provision for tax benefit $0
$0 $(336,400)
Note 8:
Preferred and Common Shares and Stock Options
Preferred shares may be issued in one or more series as
determined by the Company's Board of Directors, which shall also
determine the rights, preferences and restrictions related to
any series and increase or decrease the number of shares of any
series subsequent to the issuance of shares.
The Company has stock option plans which authorize the issuance
of up to 436,822 shares of the Company's unissued common shares
to officers, directors and other key personnel. Option prices
shall be equal to the fair market value at the date of grant.
Options granted under the stock option plan expire not more than
ten years after the date of grant and must be fully paid when
exercised. Set forth below is the status of options granted,
giving retroactive effect to stock dividends declared, if any:
Number of Shares
1995 1994 1993
Options outstanding, January 1 353,219
359,646 364,920
Granted at option prices of:
$1.75 in 1995
50,000 0 0
$1.56 in 1994
0 1,500 0
$2.25 to $2.60 in 1993 0
0 4,500
Canceled
(72,408) (7,927) (9,774)
Options outstanding, December 31 330,811
353,219 359,646
Shares available for future grant at December 31 106,011
83,603 77,176
Shares available under stock option plans 436,822
436,822 436,822
At December 31, 1995, 274,648 shares were exercisable at prices
of $2.00 to $7.81 per share. The remaining shares under option
become exercisable as follows: 1996 - 13,148; 1997 - 11,715;
1998 - 11,000; 1999 - 10,300; and 2000 - 10,000. The following
financial information presents the statements of financial
condition of the Company (parent company only) as of December
31, 1995 and 1994 and the related statements of operations and
cash flows for the years ended December 31, 1995, 1994 and 1993.
Note 9:
Parent Company Financial Statements
December 31, Statements of Financial Condition 1995
1994
Assets
Cash in Marathon National Bank
$600 $9,600
Investment in Marathon National Bank 4,012,800
5,395,200
Other assets
0 43,300
$4,013,400 $5,448,100
Liabilities and Shareholders' Equity
Accrued expenses
$37,900 $81,200
Shareholders' equity:
Preferred shares
0 0
Common shares
8,080,000 8,080,000
Unrealized gain (loss) on securities available for sale
1,100 (10,300)
Deficit
(4,105,600) (2,702,800)
Total shareholders' equity
3,975,500 5,366,900
$4,013,400 $5,448,100
Note 9: Parent Company Financial Statements (Continued)
Year ended December 31,
Statements of Operations 1995
1994 1993
Operating expenses
$(9,000) $(12,000) $(12,800)
Equity in undistributed net loss
of Marathon National Bank
(1,393,800) (635,200) (3,892,300)
Net loss
$(1,402,800) $(647,200) $(3,905,100)
Year ended December 31,
Statements of Cash Flows 1995
1994 1993
Decrease in cash and cash equivalents
Cash flows from operating activities:
Cash paid to suppliers and employees $(9,000)
$(12,000) $(13,500)
Other
0 0 11,200
Net cash used by operating activities
(9,000) (12,000) (2,300)
Net decrease in cash and cash equivalents (9,000)
(12,000) (2,300)
Cash at beginning of year
9,600 21,600 23,900
Cash at end of year
$600 $9,600 $21,600
Reconciliation of net loss to net cash
used by operating activities
Net loss
$(1,402,800) $(647,200) $(3,905,100)
Adjustments to reconcile net loss to net
cash used by operating activities:
Equity in undistributed net loss
of Marathon National Bank 1,393,800
635,200 3,892,300
Change in other assets
0 0 3,800
Change in accrued expenses
0 0 6,700
Total adjustments
1,396,800 635,200 3,902,800
Net cash used by
operating activities
$(9,000) $(12,000) $(2,300)
Note 10:
Commitments and Contingent Liabilities
The Bank has a noncapitalized lease commitment covering its
banking premises. Minimum rental commitments under this and all
other operating leases that have initial or remaining
noncancelable terms in excess of one year as of December 31,
1995 are as follows:
Year
Amount
1996
$208,800
1997
399,500
1998
594,100
1999
594,100
2000
594,100
2001 and thereafter 990,200
$3,380,800
On November 14, 1994, the Bank vacated the above banking
premises due to severe earthquake damages and moved into another
nearby location. Under the terms of the old lease agreement,
the Bank has suspended all lease payments until the building is
repaired. At this time, the building is in the process of being
repaired and is scheduled for occupancy before the end of 1996.
The Bank has leased temporary office space under a lease
agreement which provides for lease payments of $17,400 per month
for six months with nine consecutive one month options to extend
the lease. The agreement was amended to extend the lease term
for an additional ten months, expiring on March 16, 1996; and
three consecutive four month options for extension, if
necessary.
Rent expense was $194,700, $387,300 and $452,200 for the years
ended December 31, 1995, 1994 and 1993, respectively. Sublease
rental income was $34,700 in 1994.
The Company and the Bank are subject to pending or threatened
legal actions which arise in the normal course of business.
Based on current information, management is of the opinion that
the disposition of all suits will not have a material effect on
the Company's consolidated financial statements.
In the normal course of business, the Bank is a party to
financial instruments with off balance sheet risk which are
intended to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and
letters of credit, which are not reflected in the consolidated
financial statements. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of
the amounts recognized in the consolidated financial statement.
The Bank's exposure to credit loss in the event of
nonperformance by the other party to commitments to extend
credit and letters of credit is represented by the contractual
or notional amount of those instruments.
The following is a summary of contractual or notational amounts
of financial instruments with off balance sheet risk as of
December 31, 1995 and 1994.
1995
1994
Commitments to extend credit $10,046,000 $9,429,000
Other letters of credit 84,000
562,000
$10,130,000
$9,991,000
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements.
The Bank uses the same credit policies in making off balance
sheet commitments and conditional obligations as it does for
balance sheet instruments. The Bank evaluates each customer's
creditworthiness on a case by case basis. The amount of
collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on management's credit evaluation.
The collateral held varies, but may include accounts receivable,
inventory, property, plant and equipment, and income producing
commercial and residential properties.
Note 11:
Regulatory Matters
The Bank is required to meet certain 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 (common shareholders'
equity capital less goodwill and other disallowed intangible
assets) divided by average total assets.
On September 30, 1995, the Bank entered into a formal agreement
with the Office of the Comptroller of the Currency (OCC) under
which the Bank agreed to submit a three year strategic plan by
November 1, 1995. The plan included, 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. The plan was accepted be the OCC on January 30,
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
December 31, 1995, the Company and the Bank had a Tier 1 capital
ratio of 7.3 percent and a Tier 1 leverage ratio of 4.9 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 a 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. The
agreement remains in effect after an audit concluded on February
1, 1995.
Under California and federal banking law, dividends paid by the
Bank in any calendar year may not, without the approval of the
OCC, exceed its net income, as defined, for that year combined
with its retained net income for the preceding two years. At
December 31, 1995, the Bank could not have declared and paid
dividends without the prior approval of the OCC.
Note 12:
Fair Value Information
The following discussion of the estimated fair value of
financial instruments is made in accordance with the
requirements of SFAS No. 107, "Disclosures about Fair Value
Financial Instruments." The estimated fair value amounts have
been determined by the Company using available market
information and appropriate valuation methodologies. However,
considerable judgment is required to develop the estimates of
fair value. Accordingly, the estimates presented below are not
necessarily indicative of the amounts the Company could have
realized in a current market exchange as of December 31, 1995
The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair
value amounts.
Assets Carrying Amount
Estimated Fair Value
Cash and due from banks $8,450,300
8,450,300
Federal funds sold 14,400,000
14,400,000
Investment securities:
Available for sale 3,302,900
3,302,900
Held to maturity 6,610,700
6,306,700
Loans receivable, net 49,515,100
48,817,800
Accrued interest receivable 582,200
582,200
Liabilities
Deposits:
Noninterest-bearing 38,415,000
38,415,000
Interest bearing 44,114,900
44,321,000
Accrued interest payable 155,600
155,600
The methods and assumptions used to estimate the fair value of
each class of financial instruments for which it is practicable
to estimate that value are explained below:
For cash and due from banks, federal funds sold, and accrued
interest receivable and payable, the carrying amount is
considered to be a reasonable estimate of fair value due to the
short term nature of these investments.
For investment securities, fair values are based on quoted
market prices, dealer quotes and prices obtained from an
independent pricing service.
The carrying amount of loans receivable is their contractual
amounts outstanding, reduced by deferred net loan origination
costs, and the allowance for loan losses. Variable rate loans
are composed primarily of loans whose interest rates float with
changes in the prime rate or other commonly used indexes. As
such, the carrying amount of variable rate loans, other than
such loans in nonaccrual status, is considered to be their fair
value.
The fair value of fixed rate loans, other than such loans in
nonaccrual status, was estimated by discounting the remaining
contractual cash flows using the estimated current rate at which
similar loans would be made to borrowers with similar credit
risks characteristics and for the same remaining maturities,
reduced by deferred net loan origination costs and the allocable
portion of the allowance for loan losses.
Accordingly, in determining the estimated current rate for
discounting purposes, no adjustment has been made for any
changes in borrowers' credit risks since the origination of such
loans. Rather, the allowance for loan losses is considered to
provide for such changes in estimating fair value.
The fair value of loans on nonaccrual status has not been
specifically estimated because it is not practical to reasonably
assess the credit risk adjustment that would be applied in the
market place for such loans. As such, the estimated fair value
of total loans at December 31, 1995 includes the carrying amount
of nonaccrual loans.
The amounts payable to depositors for demand, savings, and money
market accounts are considered to be stated at fair value. The
fair value of fixed-rate certificates of deposit is estimated
using the rates currently offered for deposits of similar
remaining maturities.
Fair values for commitments to extend credit are based on fees
currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the counter
parties credit standing. The fair values of these instruments
are not material at December 31, 1995.
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1995.
Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such
amounts have not been comprehensively revalued for purposes of
these financial statements since that date, and, therefore,
current estimates of fair value may differ significantly from
the amounts presented above.
Independent Auditors' Report
The Board of Directors and Shareholders, Marathon Bancorp
We have audited the accompanying consolidated statements of
financial condition of Marathon Bancorp and subsidiary as of
December 31, 1995 and 1994, and the related consolidated
statements of operations, changes in shareholders' equity and
cash flows for each of the three years in the period ended
December 31, 1995. These consolidated financial statements are
the responsibility of Marathon Bancorp's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted our
audits in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion. In
our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Marathon Bancorp and subsidiary as of December 31, 1995 and
1994, and the results of their operations and their cash flows
for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting
principles. As discussed in Note 11 to the consolidated
financial statements, Marathon Bancorp and its wholly owned
subsidiary, Marathon National Bank (the "Bank"), entered into an
informal regulatory agreement with the Federal Reserve Bank of
San Francisco and a formal agreement with the Office of the
Comptroller of the Currency (the "OCC"), respectively, that
require them to meet certain requirements. At December 31,
1995, the Bank did not meet the minimum capital requirements
prescribed by the formal agreement with the OCC. 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 a receiver. The
financial statement impact, if any, that might result from the
failure of Marathon Bancorp or the Bank to comply with the
agreements cannot presently be determined. Accordingly, no
adjustments that may result from the ultimate resolution of this
uncertainty have been made in the accompany consolidated
financial statements.
Los Angeles, California February 23, 1996
Market Prices for Common Shares
Marathon Bancorp's common shares are traded
over-the-counter. Set forth below are the high and low market
prices for each quarterly period during the two years ended
December 31, 1995 and 1994, as provided by the principal market
maker in the Company's common shares, GBS Financial (Burford
Capital).
Market prices for the Company's common shares High Low
1995
Fourth quarter $4.13 $2.13
Third quarter 2.75 2.13
Second quarter 2.19 1.50
First quarter 1.88 1.50
1994
Fourth quarter $2.06 $1.13
Third quarter 1.75 1.00
Second quarter 2.25 1.25
First quarter 2.00 1.50
Officers and Directors - Marathon Bancorp
Nick Patsaouras Consulting Electrical Engineer Chairman
Robert J. Abernethy President, American Standard Development
Co.
Frank W. Jobe, M.D. Physician, Orthopedic Surgeon
C. Thomas Mallos President, C. Thomas Mallos Accountancy
Corp. Chief Financial Officer
John Maloney President & Chief Executive Officer,
President and Chief Executive Officer Marathon Bancorp and
Marathon National Bank
Robert L. Oltman
Secretary President, Oltman Management Company Ann
Pappas Restaurateur
Michael V. Reyes President, Urban Pacific Group
Officers - Marathon National Bank
John Maloney President and Chief
Executive Officer
T. J. Herles Executive Vice President
and Senior Credit Officer Adrienne Caldwell
Senior Vice President and Chief Oper. & Admin.
Officer
Daniel L. Erickson Senior Vice President
and Chief Financial Officer David Ross
Senior Vice President
Edward Myska Senior Vice
President
Certified Public Accountants Deloitte & Touche
Corporate Counsel Jeffer, Mangels, Butler
& Marmaro
Stock Transfer Agent First Interstate Bank
of California
Principal Market Maker GBS Financial (Burford Capital)
Scott Burford or Randall Kinoshita
(800) 765-5558
Investor Information
Additional information about the Company, Daniel L. Erickson -
Investor Relations including a copy of the Company's Form
10-K, Marathon National Bank as filed with the Securities and
Exchange 11444 West Olympic Boulevard Commission, may be
obtained by contacting: Los Angeles, California 90064 (310)
996-9100
Notice of Annual Meeting The Annual Meeting of
shareholders will be The lobby of Marathon National Bank held on
Monday, June 17, 1996 at 4:00 p.m.: 11444 West Olympic Boulevard
Los Angeles, California 90064
NOTES
EXHIBIT 21.EXHIBIT 21.
SUBSIDIARIES OF MARATHON BANCORP
Marathon National Bank, incorporated under the laws of the
United States.
Marathon Bancorp Mortgage Corporation, (an inactive
subsidiary), incorporated under the laws of California.
EXHIBIT 23.
INDEPENDENT AUDITOR'S CONSENT
Board of Directors and Shareholders
Marathon Bancorp.
Los Angeles, California
We consent to the incorporation by reference in Registration
Statement Nos. 2-90321 and 33-40408 on Form S-8 of Marathon
Bancorp. and subsidiary of our report dated February 23, 1996,
which report includes an explanatory paragraph relating to
certain regulatory matters discussed in footmote 11, appearing
in and incorporated by reference in the Annual Report on Form
10-KSB for the year ended December 31, 1995.
DELOITTE & TOUCHE, LLP
Los Angeles, California
\pril 15, 1996
EXHIBIT 99.1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
(Amendment No................................)
Filed by the Registrant
Filed by a Party other than the Registrant
Check the appropriate box:
Preliminary Proxy Statement Confidential, for Use of the
Commission Only (as permitted by Rule 14a-6(c)(2) Definitive
Proxy Statement Definitive Additional Materials Soliciting
Material Pursuant to 240.1a-11(c) or 240.(4a-12)
<Body
Text>............................................................
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Specified in Its Charter)
<Body
Text>...........................................................
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. ............................... (Name of Person(s) Filing
Proxy Statement)
Payment of Filing Fee (check the appropriate box):
$125 per Exchange Act Rules O-11(c)(1)(ii), 14a-6(i)(2) or Item
22(a)(2) of Schedule 14A. $500 per each party to the controversy
pursuant to Exchange Act Rule 14a-6(i)(3) Fee computed on Table
below per Exchange Act Rules 14a-6(i)(4) and )-11.
1) Title of each class of securities to which transaction
applies:
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Text>............................................................
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. ...................
2) Aggregate number of securities to which transaction applies:
<Body
Text>............................................................
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3) Per unit price or other underlying value of transaction
computed pursuant to Exchange
Act Rule O-11 (Set forth the amount on which the filing fee
is calculated and state how
it was determined):
<Body
Text>............................................................
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. ....................
4) Proposed maximum aggregate value of transaction:
<Body
Text>............................................................
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. ....................
5) Total fee paid:
<Body
Text>............................................................
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. .................... Check box if any part of the fee is
offset as provided by Exchange Act Rule 0-11(a)(2) and identify
the filing for which the offsetting fee was paid previously.
Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously
Paid:............................................................
..............................................
2) Form Schedule or Registration Statement
No:..............................................................
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3) Filing
Party:...........................................................
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. ...
4) Date
Filed:...........................................................
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. ....
MARATHON BANCORP 11444 West Olympic Boulevard Los Angeles,
California 90064 (310) 996-9100
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS To Be Held June 17,
1996
TO THE SHAREHOLDERS OF MARATHON BANCORP:
NOTICE IS HEREBY GIVEN that, pursuant to its Bylaws and the
call of its Board of Directors, the Annual Meeting of
Shareholders (the "Meeting") of Marathon Bancorp (the "Company")
will be held on Monday, June 17, 1996, at 4:00 p.m., at the
Company's executive offices, 11444 West Olympic Boulevard, 9th
Floor, Los Angeles, California 90064, for the following
purposes, as set forth in the attached Proxy Statement:
1. Election of Directors. To elect seven persons to the Board
of Directors to serve until the next Annual Meeting of
Shareholders or until their successors are elected and have
qualified. The Board of Directors has nominated the following
persons to serve as directors:
Robert J. Abernethy Robert L. Oltman
Frank W. Jobe, M.D. Ann Pappas
John J. Maloney Nick Patsaouras
C. Thomas Mallos
2. Other Business. To transact such other business as may
properly come before the Meeting and at any and all adjournments
thereof.
Only those shareholders of record at the close of business on
May 3, 1996, are entitled to notice of, and to vote at the
Meeting or any adjournments thereof.
By Order of the Board of Directors
Robert L. Oltman,
Secretary
Los Angeles, California May 15, 1996
IT IS IMPORTANT THAT ALL SHAREHOLDERS VOTE. WE URGE YOU TO SIGN
AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE,
REGARDLESS OF WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN
PERSON. THE GIVING OF THIS PROXY WILL NOT AFFECT YOUR RIGHT TO
VOTE IN PERSON IN THE EVENT YOU FIND IT CONVENIENT TO ATTEND.
IN ORDER TO FACILITATE THE PROVIDING OF ADEQUATE ACCOMMODATIONS,
PLEASE INDICATE ON THE PROXY WHETHER OR NOT YOU PLAN TO ATTEND
THE MEETING. MARATHON BANCORP 11444 West Olympic Boulevard Los
Angeles, California 90064 (310) 996-9100
PROXY STATEMENT ANNUAL MEETING OF SHAREHOLDERS
June 17, 1996
This Proxy Statement is furnished in connection with the
solicitation of proxies for use at the Annual Meeting of
Shareholders (the "Meeting") by the Board of Directors of
Marathon Bancorp (the "Company"), to be held on Monday, June 17,
1996, at 4:00 p.m., at the Company's executive offices, 11444
West Olympic Boulevard, 9th Floor, Los Angeles, California
90064, and at any and all adjournments thereof.
This Proxy Statement and the accompanying Notice and Proxy were
mailed to shareholders on or about May 15, 1996. The Company's
Annual Report to Shareholders, including financial statements
for its fiscal year ended December 31, 1995, is included with
this Proxy Statement. The Annual Report is not part of the
proxy materials.
Matters to be Considered
The matters to be considered and voted upon at the Meeting
will be:
1. Election of Directors. To elect seven persons to the Board
of Directors to serve until the next Annual Meeting of
Shareholders or until their successors are elected and have
qualified.
2. Other Business. To transact such other business as may
properly come before the Meeting and at any and all
adjournments thereof.
Revocability of Proxies
A Proxy is enclosed for use at the Meeting. Any Proxy given
may be revoked by a shareholder at any time before it is
exercised by filing with the Secretary of the Company a notice
in writing revoking it or by duly executing a Proxy bearing a
later date. It may also be revoked by attendance at the Meeting
and election to vote thereat. Subject to such revocation, all
Proxies duly executed and received prior to or at the time of
the Meeting will be voted by the Proxy Holders in accordance
with the instructions on the Proxy. If no instruction is
specified with respect to a matter to be acted upon, the shares
represented by the Proxy will be voted "FOR" the election of the
nominees for directors set forth herein. It is not anticipated
that any matters will be presented at the Meeting other than as
set forth in the accompanying Notice of the Meeting. If,
however, any other matters are properly presented at the
Meeting, the Proxy will be voted in accordance with the best
judgment and in the discretion of the Proxy Holders.
Solicitation of Proxies
This solicitation is being made by management of the Company
and the Company will bear the costs of this solicitation,
including the expense of preparing, assembling, printing and
mailing this Proxy Statement and the material used in this
solicitation of Proxies. It is contemplated that Proxies will
be solicited principally through the mails, but directors,
officers and regular employees of the Company may solicit
Proxies personally or by telephone, for which they will receive
no additional compensation. Although there is no formal
agreement to do so, the Company may reimburse banks, brokerage
houses and other custodians, nominees and fiduciaries for their
reasonable out-of-pocket expenses in connection with forwarding
these proxy materials to their principals. In addition, the
Company may pay for and utilize the services of individuals or
companies not regularly employed by the Company in connection
with the solicitation of Proxies if the Board of Directors of
the Company determines that this is advisable.
Outstanding Securities and Voting Rights
Holders of the Company's common stock, no par value (the
"Common Stock"), of record at the close of business on April 22,
1996, will be entitled to vote at the Meeting. There were
issued and outstanding 1,248,764 shares of Common Stock on May
3, 1996. The Company's Articles of Incorporation also
authorize the issuance of up to 1,000,000 shares of Preferred
Stock, of which no shares are presently issued and outstanding.
A majority of the shares of Common Stock outstanding is
necessary to constitute a quorum for the Meeting. Each holder
of Common Stock will be entitled to one vote, in person or by
proxy, for each share of Common Stock standing in his or her
name on the books of the Company as of the record date for the
Meeting on any matter submitted to the vote of the shareholders,
except that in connection with the election of directors, the
shares are entitled to be voted cumulatively if a shareholder
present at the Meeting has given notice at the Meeting prior to
the voting of his or her intention to vote his or her shares
cumulatively. If any shareholder has given such notice, all
shareholders may then cumulate their votes for candidates placed
in nomination prior to the voting. If cumulative voting
procedures are used at the meeting for election of the
directors, the Proxy Holders will exercise their authority to
cumulate votes represented by proxies held by them. Cumulative
voting entitles a shareholder to cast as many votes for one
nominee as is equal to the number of directors to be elected,
multiplied by the number of shares owned by such shareholder, or
to distribute his or her total votes on the same principle
between two or more nominees as he or she sees fit. In the
election of directors, the seven candidates receiving the
highest number of votes will be elected.
Principal Shareholders
The following table sets forth certain information as of May
3, 1996, concerning the ownership of the Company's Common Stock
by (i) each person known by the Company to be the beneficial
owner of more than five percent of the outstanding shares of
Common Stock; (ii) each of the Directors of the Company; and
(iii) the officers and Directors of the Company as a group:
Name of
Beneficial Owner Amount and Nature of Beneficial Ownership
Percent of Class
Shareholders other than Directors:
Carl Edward Lindros (1) 7.73%
Directors (2):
Robert J. Abernethy 136,975 (3) (4) 10.71%
Frank W. Jobe, M.D. (5) 5.63%
C. Thomas Mallos 77,610 (3) 6.07%
John Maloney 4,000 (6) .32%
Robert L. Oltman (3) (7) 11.01%
Ann Pappas 90,252 (3) (8) 7.06%
Nick Patsaouras 81,827 (9) (10) 6.48%
Michael V. Reyes 67,845 (3) (11) 5.31%
Executive Officers:
Adrienne Caldwell 7,842 (12) .62%
Daniel L. Erickson 1,000 (13) .04%
T. J. Herles 40,880 (14) 3.18%
All Officers and Directors as a group (11 persons)
721,973 (15) 47.84%
(1) The address of Mr. Lindros is in care of Santa Barbara
Securities, 200 Carrtilo Street, Santa Barbara, CA 93101. Mr.
Lindros indicated in filings with the Securities and
Exchange Commission that he is the sole beneficial owner and
holds sole voting power with respect to the shares listed
above.
(2) The address of each of these directors is in care of the
Company, 11444 West Olympic Boulevard, Los Angeles, California
90064.
Except as otherwise noted below, each nominee directly or
indirectly has sole or shared voting and investment power with
respect to the shares listed above.
(3) For each person indicated above, includes 29,676 shares of
Common Stock which each of these persons has the right to
acquire within 60 days of April 24, 1995, by the exercise of
stock options vested pursuant to the Company's 1983 Stock
Option Plan and the 1990 Non-Qualified Stock Option Plan. See
"DIRECTORS AND EXECUTIVE OFFICERS -- Stock Option Plans."
The exercise price of the options granted under the 1983 Stock
Option Plan are $5.78 per share and the exercise price of the
options granted under the 1990 Non-Qualified Stock Option Plan
are $5.36 per share. No options under either plan have been
exercised.
(4) Includes 2,276 shares owned by American Standard Development
Corporation, of which Mr. Abernethy is President.
(5) Includes 19,990 shares of Common Stock which Dr. Jobe has
the right to acquire within 60 days of April 24, 1995, by the
exercise of stock options vested pursuant to the Company's
1986 Non-Qualified Stock Option Plan and the 1990 Non-Qualified
Stock Option Plan. See "DIRECTORS AND EXECUTIVE OFFICERSStock
Option Plans."
(6) Does not Include 50,000 shares of Common Stock which were
issued to Mr. Maloney on January 18, 1995, pursuant to the
Company's 1990 Non-Qualified Stock Option Plan. See "DIRECTORS
AND EXECUTIVE OFFICERS -- Stock Option Plans." Mr. Maloney will
not be eligible to exercise his right to acquire any portion of
the stock until January 18, 1996.
(7) Includes 140 shares owned by the Oltman Management
Corporation, of which Mr. Oltman is President.
(8) Includes 1,898 shares owned by the Parasol Restaurant, Inc.
(9) Includes 374 shares held by Mr. Patsaouras as custodian for
his minor children.
(10) Includes an additional 43,917 shares which Mr. Patsaouras
has the right to acquire within 60 days after April 24, 1995,
by the exercise of stock options vested pursuant to the
Company's 1983 Stock Option Plan and the 1990 Non-Qualified
Stock Option Plan. See "DIRECTORS AND EXECUTIVE OFFICERSStock
Option Plans."
(11) Includes 9,494 shares held by Mr. Reyes in joint tenancy
with Margarita Lopez.
(12) Includes 7,842 shares which Mrs. Caldwell has the right to
acquire within 60 days of April 24, 1995, by the exercise of
stock options vested pursuant to the Company's 1983 Stock Option
Plan and the 1990 Non-Qualified Stock Option Plan. See
"DIRECTORS AND EXECUTIVE OFFICERS -- Stock Option Plans."
(13) Includes 500 shares which Mr. Erickson has the right to
acquire within 60 days of April 24, 1995, by the exercise of
stock options vested pursuant to the Company's 1990
Non-Qualified Stock Option Plan. See "DIRECTORS AND EXECUTIVE
OFFICERS -- Stock Option Plans."
(14) Includes 39,776 shares which Mr. Herles has the right to
acquire within 60 days of April 24, 1995, by the exercise of
stock options vested pursuant to the Company's 1983 Stock Option
Plan and the 1990 Non-Qualified Stock Option Plan. See
"DIRECTORS AND EXECUTIVE OFFICERS -- Stock Option Plans."
(15) Includes an aggregate of 260,405 shares of Common Stock
which the officers and Directors have the right to acquire
within 60 days of April 24, 1995, by the exercise of stock
options vested pursuant to the Company's 1983 Stock Option
Plan, 1986 Non-Qualified Stock Option Plan and 1990
Non-Qualified Stock Option Plan, as approved by the shareholders
of the Company on April 23, 1990. See "DIRECTORS AND EXECUTIVE
OFFICERS -- Stock Option Plans." DIRECTORS AND EXECUTIVE OFFICERS
Election of Directors
The Company's Directors are elected annually to serve until the
next Annual Meeting of Shareholders or until their successors
are elected and have qualified. The Bylaws of the Company
provide that the number of Directors shall be not less than
seven, nor more than twelve, until changed by a bylaw amending
Section 3.02 of the Company's Bylaws, duly adopted by the vote
or written consent of the Company's shareholders. The Bylaws
further provide that the exact number of Directors shall be
fixed from time to time, within the foregoing range, by a bylaw
or amendment thereof duly adopted by the vote or written consent
of the Company's Board of Directors. The number of Directors
currently is fixed at eight.
The persons named below, all of whom are present members of the
Board of Directors of the Company, will be nominated for
election to serve until the next Annual Meeting of Shareholders
or until their successors are elected and have qualified. Each
of these persons is also a member of the Board of Directors of
the Company's wholly-owned subsidiary, Marathon National Bank
(the "Bank"). Unless otherwise directed by Shareholders, the
Proxy Holders will vote all shares represented by Proxies held
by them for the election of the maximum number of the following
nominees. In the event that any of the nominees should be
unable or unwilling to accept nomination for election as a
director, it is intended that the Proxy Holders will vote for
the election of such substitute nominees, if any, as shall be
designated by the Board of Directors. The Board of Directors
has no reason to believe that any nominee will be unable or
unwilling to serve if elected to office.
The following table sets forth certain information as of May 3,
1996, with respect to those persons nominated by the Board of
Directors for election as Directors based on data furnished by
such nominees:
Year First
Elected or Principal Occupation
Appointed Name and Title Age For Past Five
Years As Director
Robert Abernethy 56 President, American 1983
Director Standard Development
Company
Frank W. Jobe, M.D. 70 Orthopedic Surgeon 1985
Director
C. Thomas Mallos 59 President, C. Thomas 1982
Chief Financial Mallos Accountancy
Officer and Corporation Director
John J. Maloney 51 President and Chief 1995
President Executive Officer,
and Director Marathon Bancorp,
Marathon National Bank
Robert L. Oltman 58 President, Oltman 1982
Secretary and Management
Director Corporation
Ann Pappas 67 Restaurateur 1982
Director
Nick Patsaouras 52 President, Nick 1982
Chairman of the Patsaouras & Assoc.
Board Chairman of the Board
Marathon Bancorp,
Marathon National Bank
Michael V. Reyes 39 President, Urban 1983
Director Pacific Development
Corporation
Committees and Attendance at Board Meetings
Each nominee is also a Director of the Bank. The Company has
no standing compensation, audit and nominating committee.
During the fiscal year ended December 31, 1995, the Board of
Directors of the Company and the Board of Directors of the Bank
held 12 meetings each. Each of the persons who is a nominee and
was a Director of the Company during 1995 attended at least 75%
of the total number of such Board meetings.
Compensation of Executive Officers and Directors
Executive Compensation
The following table sets forth the aggregate cash compensation
for services in all capacities during the fiscal year ended
December 31, 1995: (a) to the Company's Chief Executive Officer
and to each executive officer whose aggregate compensation
exceeded $60,000, and (b) to all executive officers of the
Company as a group:
Summary Compensation Table
____ Annual Compensation _
Name and Principal Position
All Executive Officers as a
Other Annual
group (4 persons) Age Year
Salary Bonus (1) Compensation (2)
John Maloney (3)
President & Chief Executive Officer 51 1995 $150,000
0 $6,000
1994 $29,090 0 $629
Timothy J. Herles Executive Vice
President & Chief Credit Officer 54 1995 $100,000
0 $8,400
1994 91,622 0 8,400
1993 111,037 0 8,400
Daniel L. Erickson (4) Senior
Vice President &
Chief Financial Officer 51 1995 $80,000 0
4,200
1994 80,000 0 4,200
1993 36,140 0 1,547
Adrienne Caldwell Senior Vice
President & Chief Operating Officer
& Chief Administrative Officer 53 1995 $75,320
0 $4,200
1994 73,236 0 4,200
1993 70,320 0 4,200
(1) Effective February 3, 1993, the Board of Directors approved
a new Bonus program. See "1993 Bonus Program." No bonuses were
granted in 1994 or 1995.
(2) Business expense compensation.
(3) John Maloney has been the President of the Company and the
Bank, and Chief Executive Officer of the Bank since October
1994. Mr. Maloney's compensation agreement provides for an
annual base salary of $150,000 and annual business expense
compensation of $6,000. (4) Daniel Erickson has been the Senior
Vice President and Chief Financial Officer of the Bank since
July 1993. Mr. Erickson's compensation agreement provides for
an annual salary of $80,000, and annual business
expense compensation of $4,200.
There has been no issuance of long term compensation granted in
the last three years to the above stated officers.
Director Compensation
During 1995, each non-employee director received $200 per
meeting for his or her attendance at all special or committee
meetings of the Bank, and $1,000 per Board meeting. The maximum
a Director can receive for attendance at Board and/or Committee
meetings is $2,000 per month.
Certain Transactions
Some of the directors and executive officers of the Company and
its subsidiaries, and the companies with which they are
associated were customers of, and had banking transactions with,
the Bank in the ordinary course of their businesses during 1995
and the Bank expects to have such banking transactions in the
future. No loans and commitments to lend were included in such
transactions.
Bonus Program
On February 3, 1993, Marathon's Board of Directors adopted a
new bonus program to replace the bonus program in existence
through 1992. The Board of Director's determined that adopting
such a program was a necessary element in achieving Marathon's
goals of increasing profitability, reducing problem assets and
laying a founding for future profitability and stability.
The 1993 Bonus Plan establishes bonuses for the six most senior
executive officers of the Bank based on whether the Bank
achieves specific goals in increases in pre-tax income,
increases in outstanding loans and reduction of criticized
assets. The Plan sets a target level for each component and
weighs each component of the Plan toward the determination of
the available bonuses. The Plan also sets minimum targets which
must be met for any bonuses, and sets maximum bonuses that can
be earned in any one year.
The Plan provides that 75% of the bonus to each individual will
be paid in January upon the receipt of preliminary statements,
with the balance due upon approval by the Board of Directors
subsequent to receipt of audited financial statements. The
Board also anticipates reviewing salaries and setting new
targets for the Bonus Plan at that time.
Stock Option Plans
1983 Stock Option Plan
The Company's 1983 Stock Option Plan (the "1983 Option
Plan") was adopted by the Company's Board of Directors on May 9,
1983, and approved by the shareholders of the Company at the
Annual Meeting of Shareholders on April 9, 1984. The 1983
Option Plan provides for the issuance of shares of the Company's
Common Stock pursuant to the exercise of stock options to
purchase up to 361,762 shares of the Company's Common Stock.
The purpose of the 1983 Option Plan is to give directors,
officers and key employees of the Company and its subsidiaries a
greater personal interest in the success of the Company and an
added incentive to continue to advance in their employment or
other service to the Company and its subsidiaries. The 1983
Option Plan authorizes the granting to such persons of both
incentive stock options, within the meaning of Section 422A of
the Internal Revenue Code of 1986, as amended, (the "Code") and
non-qualified options, described in Treasury Regulation 1.83-7
to which Section 421 of the Code does not apply to purchase
authorized but unissued shares of the Company's Common Stock.
The 1983 Option Plan is administered by the Board of
Directors, which determines to whom Options are granted and the
terms of each Option. Options are exercisable in such
installments and upon such conditions as the Board of Directors
shall determine, but in no event before one year of continuous
service as a director or employee of the Company or subsidiary
has elapsed. Options granted under the Option Plan expire not
more than ten years from the date of grant. The purchase price
of any shares must be paid in full at the time of purchase, in
cash or in the Common Stock of the Company having an aggregate
fair market value equal to the purchase price. As of April 22,
1996, there were Options outstanding to purchase 145,958 shares
under the 1983 Stock Option Plan. At December 31, 1995,
approximately 13 persons participated in the 1983 Stock Option
Plan.
At the 1990 Annual Meeting of Shareholders, the shareholders
approved certain amendments to the 1983 Stock Option Plan,
providing for the exercise of options in the event of a change
in control of the Company.
At the 1992 Annual Meeting of Shareholders, the shareholders
approved certain amendments to the 1983 Stock Option Plan,
authorizing the Board of Directors to extend the terms of
options granted under the plan up to five years. As of December
31, 1992, the Board of Directors had taken action to extend the
options of Messrs. Abernethy, Mallos, Oltman, Patsaouras, Reyes,
Herles, and Mrs. Pappas and Caldwell by five years.
During the period January 1, 1995 to December 31, 1995, no
options were granted and no options were exercised pursuant to
the 1983 Stock Option Plan. The Board of Directors has elected
not to issue additional options under the 1983 Stock Option Plan.
1986 Stock Option Plan
The Company's 1986 Non-Qualified Stock Option Plan (the "1986
Option Plan") was adopted by the Board of Directors on March 17,
1986, and amended by the Board of Directors on March 16, 1987.
The 1986 Option Plan provides for the issuance of shares of the
Company's Common Stock pursuant to the exercise of stock options
to purchase up to 54,258 shares of the Company's Common Stock to
non-employee directors of the Company. The 1986 Option Plan is
administered by a committee comprised of Messrs. Abernethy and
Reyes, who are not eligible to receive options or additional
options under either the 1983 or 1986 Option Plans. The maximum
number of shares of Common Stock that may be issued under the
1986 Option Plan on account of any one Optionee may not exceed
15,915 shares. Further, the 1986 Option Plan states that a
non-employee director may only receive one grant of options. The
exercise price per share may not be less than 100% of market
value on the date of grant. The 1986 Option Plan will expire on
March 17, 1996, unless terminated earlier by the Company's Board
of Directors. As of April 22, 1996, there were options
outstanding to purchase 4,555 shares of the Company's Common
Stock pursuant to the 1986 Option Plan.
During the period January 1, 1995 to December 31, 1995, no
options were granted and no options were exercised pursuant to
the 1986 Stock Option Plan. The Board of Directors has elected
not to issue additional options under the 1986 Stock Option Plan.
1990 Stock Option Plan
The Company's 1990 Stock Option Plan (the "1990 Option
Plan") was adopted by the Company's Board of Directors on March
19, 1990, and approved by the shareholders of the Company at the
Annual Meeting of Shareholders on April 23, 1990.
The purpose of the 1990 Option Plan is to provide a means
to attract and retain competent personnel and to provide to
participating officers and other key employees ("Eligible
Persons") long-term incentives for high levels of performance
and unusual efforts to improve the financial performance of the
Company.
The officers and other key employees of the Company may be
designated by the Board of Directors of the Company to receive
Incentive Stock Options or Non-Qualified Stock Options
("Options"). The 1990 Option Plan does not specify the number
of Options which may be granted to a particular participant or
group of participants. On the date of adoption of the 1990
Option Plan, the maximum aggregate number of shares issuable
pursuant to Options was 416,021. It is the intent of the Board
of Directors, however, to reduce the number of shares issuable
pursuant to Options by the number of shares issued pursuant to
the exercise of Options granted under the Company's 1983 Stock
Option Plan and 1986 Stock Option Plan, so that the maximum
number of shares which may be granted under all of the Company's
Stock Option Plans does not exceed 436,822 shares.
The 1990 Option Plan will terminate on March 19, 2000, and
no Options may be granted after that date. The Board of
Directors or the Committee may at any time amend, suspend, or
terminate the 1990 Option Plan; provided, however, that neither
the Board nor the Committee may without stockholder approval,
change the class of persons eligible to receive Options,
materially increase the benefits accruing to participants, or
increase the number of shares of Common Stock subject to the
1990 Option Plan. The 1990 Option Plan specifically provides
that the Board may amend the 1990 Option Plan in any manner
consistent with the Securities Act of 1933, the Securities
Exchange Act of 1934, the Internal Revenue Code of 1986, or any
rules or regulations promulgated thereunder. Neither the Board
of Directors nor the Committee may amend, suspend or terminate
the 1990 Option Plan without the consent of the affected
participants if such action would adversely affect outstanding
Options. Upon the occurrence of an event constituting a change
in control for purposes of the 1990 Option Plan, all Options
shall become immediately exercisable.
During the period January 1, 1995 to December 31, 1995, no
options were granted.
FILINGS BY AFFILIATES
Mr. Robert L. Oltman filed a Form 5 with the Securities
Exchange Commission in respect to ownership or transfer of stock
in the Company.
INDEPENDENT PUBLIC ACCOUNTANTS
The Company has selected Deloitte & Touche, as its independent
public accountants for the fiscal year ending December 31, 1996.
Deloitte & Touche audited the Company's financial statements for
the year ended December 31, 1995. All professional services
rendered by Deloitte & Touche during 1995 were furnished at
customary rates and terms. Representatives of Deloitte & Touche
will be present at the Meeting and will be available to respond
to appropriate questions from shareholders and, if they so
desire, to make a statement.
ANNUAL REPORT
Marathon Bancorp's Annual Report accompanies this Proxy
Statement. The Annual Report contains consolidated financial
statements of the Company and its subsidiary and the report
thereon of Deloitte & Touche, independent certified public
accountants.
UPON WRITTEN REQUEST OF ANY PERSON ENTITLED TO VOTE AT THE
MEETING, ADDRESSED TO JOHN MALONEY, IN CARE OF THE COMPANY AT
11444 WEST OLYMPIC BOULEVARD, LOS ANGELES, CALIFORNIA 90064, THE
COMPANY WILL PROVIDE WITHOUT CHARGE A COPY OF ITS ANNUAL REPORT
ON FORM 10-K FOR FISCAL YEAR 1995 INCLUDING THE FINANCIAL
STATEMENTS AND THE SCHEDULES THERETO, FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO THE SECURITIES EXCHANGE ACT
OF 1934.
PROPOSALS OF SHAREHOLDERS
Under certain circumstances, shareholders are entitled to
present proposals or nominate Directors for election at
shareholders' meetings. Any such proposal for nomination of
Directors to be included in the Proxy Statement for the
Company's 1997 Annual Meeting of Shareholders must be submitted
by a shareholder to the Company's executive offices prior to
February 17, 1997, in a form that complies with applicable
regulations. OTHER BUSINESS
The Board of Directors knows of no other business to be
presented for consideration at the Meeting other than as stated
in the Notice of the Meeting. If, however, other matters are
properly brought before the Meeting, it is the intention of the
persons named in the accompanying form of Proxy to vote the
shares represented thereby in accordance with their best
judgment and in their discretion, and authority to do so is
included in the Proxy.
DATED: May 15, 1996
MARATHON BANCORP
John Maloney
