PROSPECTUS
MARATHON BANCORP
COMMON STOCK, NO PAR VALUE
UP TO 2,222,223 SHARES
Marathon Bancorp (the "Company") is offering for sale up to
2,222,223 shares of common stock, no par value (the "Common
Stock") for a cash price of $2.25 per share (the "Offering
Price") subject to the terms and conditions of this offering
(the "Offering"). Shareholders of record as of June 16, 1997
("Record Holders") will be given a preference to subscribe for
shares of Common Stock in the Offering until July 31, 1997,
unless extended by the Company ("Expiration Time"). To the
extent that shares of Common Stock are not fully subscribed for
by Record Holders pursuant to their preference to subscribe for
Common Stock in this Offering, the remaining shares of Common
Stock in this offering will be offered to the public (the
"Public Offering"). The minimum number of shares for which a
member of the public may subscribe is 500 shares. The Offering
shall terminate at the Expiration Time. The Company reserves
the right to limit the number of shares that may be purchased by
any person or entity, including Record Holders, under certain
circumstances. There is no aggregate minimum size of the
Offering, and there are no assurances that all or any shares
of Common Stock will be sold in the Offering. See "THE
OFFERING--General."
All of the proceeds of the Offering will be contributed by the
Company to its wholly-owned subsidiary Marathon National Bank
(the "Bank") in order to enable the Bank to (i) satisfy certain
capital ratios, including a Tier 1 capital to risk weighted
assets capital ratio ("Tier 1 risk-based capital ratio") of at
least 8.5% and Tier 1 capital to actual adjusted total assets
capital ratio ("leverage capital ratio") of at least 6% as
provided in the Bank's strategic plan as submitted to the Office
of the Comptroller of the Currency (the "OCC") under a Formal
Agreement entered into between the Bank and the OCC and (ii)
maintain an adequate capital position as set forth in a capital
plan submitted to the Federal Reserve Bank of San Francisco
("FRBSF") pursuant to a Memorandum of Understanding ("MOU")
entered into between the Company and the FRBSF.
The Common Stock is traded in the over-the-counter market and is
not listed on any exchange or quoted by NASDAQ. There is no
established trading market for the Common Stock, and no
assurances can be given that an active public market will exist
as a result of this Offering.
THESE ARE SPECULATIVE SECURITIES. THE PURCHASE OF
COMMON STOCK IN THE OFFERING INVOLVES A HIGH DEGREE OF
INVESTMENT RISK. SHAREHOLDERS AND PROSPECTIVE PURCHASERS ARE
URGED TO READ AND CAREFULLY CONSIDER THE MATTERS SET FORTH UNDER
THE HEADING "RISK FACTORS." (BEGINNING ON PAGE 5 HEREIN).
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT
ACCOUNTS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") OR ANY
STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Subscription Underwriting Proceeds to
Price Discounts and Company (2)
Commissions (1)
Per Share $2.25 $0.1125 $2.1375
Total (3) $5,000,001.80 $250,000.09 $4,750,001.70
(1) The Company is offering the shares on a "best efforts" basis through
its officers and directors and participating licensed brokers and dealers
that are members of the NASD acting as selling agents for the
Company. The officers and directors of the Company will not
receive compensation for selling such shares, but will be
reimbursed by the Company for any reasonable out-of-pocket
expenses. Participating licensed brokers and dealers acting as
selling agents for the Company will receive commissions of
5% of the gross proceeds received for shares sold by such
selling agents in the Public Offering. The total
commissions assumes that all 2,222,223 shares offered will be
sold by such selling agents. The Company expects to agree
to indemnify the participating selling agents against certain
liabilities under the Securities Act of 1933, as amended.
See "THE OFFERING--General."
(2) Before deducting expenses payable by the Company estimated
at an aggregate of $80,000.
(3) The total amounts and proceeds to the Company assume the
purchase of 2,222,223 shares.
The date of this Prospectus is June 23, 1997
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH ANY OFFERING
MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED IN THIS PROSPECTUS, AND
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY TO
ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL
UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports, proxy
statements and other information with the Commission. Such
reports, proxy statements and other information filed by the
Company can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; and at
the Commission's Regional Offices located on the 13th Floor, 7
World Trade Center, New York, New York 10048 and Suite 1400, 500
West Madison Street, Chicago, Illinois 60661. Copies of such
material also may be obtained at prescribed rates from the
Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549.
The Company has filed with the Commission a Registration
Statement on Form SB-2 (as it may be amended, the "Registration
Statement") pursuant to the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the securities offered
hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits and
schedules relating thereto as permitted by the rules and
regulations of the Commission. For further information
pertaining to the Company and the securities offered hereby,
reference is made to the Registration Statement and the exhibits
thereto. Items of information omitted from this Prospectus, but
contained in the Registration Statement, may be obtained at
prescribed rates or inspected without charge at the Commission,
Washington, D.C. The Commission also maintains a site on the
World Wide Web that contains reports, proxy and information
statements and other information regarding the Company. The
address for such site is http://www.sec.gov.
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . .. . .1
The Company . . . . . . . . . . . . . . . . . . . . .. .1
Use of Proceeds . . . . . . . . . . . . . . . .. . . . .1
Risk Factors. . . . . . . . . . . . . . .. . . . . . . .1
The Offering. . . . . . . . . . . .. . . . . . . . . . .2
Summary Selected Consolidated Financial Data . . . . . .4
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . .5
Risk of Continued Losses. . . . . . . . . . . . . . .. .5
Dependence on Real Estate . . . . . . . . . . . . . . . 5
Asset Quality; Impact of Recessionary
Environment in the Company's Market Area. . . . . . . 6
Interest Rate Risk. . .. . . . . . . . . . . . . . . . .6
Noncompliance with Capital Requirements at
Year End 1996 and Risk of Future Noncompliance. .. . . 7
Existing and Potential Regulatory Enforcement Actions .7
Restrictions on Ability to Pay Dividends. .. . . . . . .8
Market Considerations . . .. . . . . . . . . . . . . . .8
Offering Price. . . . . . . . . . . . . . . . . . . . ..9
Dilution. . . . . . . . . . . . . . . . . . . . . . . .9
Potential Loss of Certain Tax Attributes. . . . . .. . .9
Regulatory Change . . . . . . . . . . . . . .. . . . . .9
Substantial Competition in the Banking Industry .. . . 10
THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . .10
THE OFFERING . . . . . . . . . . . . . . . . . . . . . . . .11
General . . . . . . . . . . . . . . . . . . . . . . .. 11
Method of Subscription by Record Holders. . . .. . . . 11
Method of Subscription by those other
than Record Holders . . . . . . . . . . . . . . . . . 13
Method of Subscription-General. . . . . . . . . . . . .13
Foreign and Certain Other Shareholders. . . . . . . . .14
Percentage Limitation and Effect on Tax Attributes. . .14
Regulatory Limitation . . . . . . . . . . . . . . . . .15
Determination of Offering Price . . . . . . . . . . . .16
Commitments of Certain Directors and Officers . . . . .17
USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . .17
Capital Ratios. . . . . . . . . . . . . . . . . . . . .17
COMMON STOCK PRICE RANGE AND DIVIDENDS . . . . . . . . . . .18
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . .19
STATISTICAL DISCLOSURE . . . . . . . . . . . . . . . . . . .20
TABLE OF CONTENTS
Page
MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . .36
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . .54
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . .64
BENEFICIAL OWNERSHIP OF COMMON STOCK . . . . . . . . . . . .70
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . .70
DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . . . .71
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . .72
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . .73
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . .73
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . .F-1
PROSPECTUS SUMMARY
The following information is qualified in its entirety by
reference to, and should be read in conjunction with, the
detailed information and consolidated financial statements and
notes thereto set forth elsewhere in this Prospectus.
References to the "Company" are to Marathon Bancorp and Marathon
National Bank on a consolidated basis. References to "Marathon
Bancorp" are to Marathon Bancorp on an unconsolidated basis, and
references to the "Bank" are to Marathon National Bank.
The Company
Marathon Bancorp is a registered bank holding company conducting
operations through its sole subsidiary, Marathon National Bank,
a national banking association. The Bank is a member of the
Federal Reserve System, and its deposits are insured by the
Federal Deposit Insurance Corporation (the "FDIC") to the
applicable limits. The Bank currently operates through its head
offices at 11150 West Olympic Boulevard, Los Angeles, California
and serves mainly the commercial and wholesale businesses, and
professionals in the West Los Angeles area. As of March 31,
1997, the Company had total assets, deposits and shareholders'
equity of $80.3 million, $76.1 million and $3.5 million, respectively.
Marathon Bancorp's principal executive offices are also located at 11150 West
Olympic Boulevard, Los Angeles, California 90064, and its telephone number is
(310) 996-9100.
Use of Proceeds
The net proceeds to Marathon Bancorp from the Offering will
depend upon the number of shares purchased by Record Holders and
members of the public. Assuming the Offering results in the
sale of 2,222,223 shares, the maximum number of shares offered,
the net proceeds are estimated to be $4.67 million. Marathon
Bancorp intends to contribute all of the net proceeds to the
Bank to increase the Bank's capital and allow the Bank to (i)
satisfy certain capital ratios, including a Tier 1 risk-based
capital ratio of at least 8.5% and leverage capital ratio of at
least to 6% as provided in the Bank's strategic plan as
submitted to the Office of the Comptroller of the Currency (the
"OCC") under a formal agreement ("Formal Agreement") entered
into between the Bank and the OCC, and (ii) maintain an adequate
capital position as set forth in a capital plan submitted to the
Federal Reserve Bank of San Francisco ("FRBSF") pursuant to a
Memorandum of Understanding ("MOU") entered into between the
Company and the FRBSF. The Bank's Tier 1 risk-based capital
ratio and leverage capital ratio as of March 31, 1997 were 7.0%
and 5.2% and as of March 31, 1997 as adjusted for the Offering
would have been 16.0% and 10.6% assuming the sale of
2,222,223 shares of Common Stock in the Offering with net
proceeds of approximately $4.67 million.
Risk Factors
A purchase of Marathon Bancorp's securities involves a high
degree of investment risk. Potential purchasers of Common Stock
should carefully consider the information set forth under the
heading "RISK FACTORS" which follows this summary.
The Offering
Securities Offered A maximum of 2,222,223 shares of Common
Stock. Record Date Holders will be
given a preference to subscribe for
shares of Common Stock in the Offering
until the Expiration Time. To the extent
that shares of Common Stock are not fully
subscribed by Record Holders pursuant
to their preference to subscribe for
Common Stock in the Offering, the
remaining shares of Common Stock will be
offered to the public. The minimum number
of shares which a member of the public may
subscribe is 500 shares. See "THE
OFFERING--Method of Subscription by Record
Holders" and "--Method of Subscription by
those other than Record Holders."
Offering Price $2.25 per share of Common Stock, payable
in cash. See "THE OFFERING--
Determination of Offering Price."
Shares of Common Stock
Outstanding and Shares
Outstanding after
Offering As of the Record Date, there were
1,589,596 shares of Common Stock
outstanding and 3,811,819 outstanding
after the Offering assuming that 2,222,223
shares in this Offering are sold.
Record Date June 16, 1997.
Expiration Time The preference for subscriptions by Record
Holders expire at 5:00 p.m., California
time, July 31, 1997, unless extended
in the discretion of Marathon Bancorp
("Expiration Time"). The Offering also
expires at the Expiration Time.
Issuance of Common Stock
Certificates representing shares of
Common Stock purchased pursuant to
Offering will be delivered as soon as
practicable after completion of the Offering.
Selling Agents Marathon Bancorp will pay participating
licensed brokers and dealers that are
members of the NASD ("Selling Agents") a
commission equal to 5% of the gross
proceeds received for shares sold by such
selling agents in the Public Offering.
See "THE OFFERING--General."
Private Placement
Offering Marathon Bancorp completed a private
placement offering on March 24, 1997
whereby 340,832 shares of Common Stock were
sold at the cash price of $2.25 per share
for an aggregate amount of $766,872.
All of the net proceeds of such offering
was contributed to the Bank to increase its
capital levels.
Intentions of Directors
and Officers The directors and executive officers of
Marathon Bancorp as a group have indicated
their intention to purchase, in the aggregate,
31,111 shares of Common Stock or 1.4% if the
total number of shares of Common Stock offered
hereby. These indications of interest are
based upon each director's and officer's
evaluation of his or her own financial and
other circumstances. Upon their acquisition
of such shares in the Offering, the directors
and executive officers, as a group, will own
beneficially 468,546 shares or approximately
12.3% of the outstanding stock after
completion of the Offering, assuming the
sale of 2,222,223 shares in the Offering.
Summary Selected Consolidated Financial Data
(Dollars in
thousands,
except per
share data) As of or for the Year Ended December 31,
1996 1995 1994 1993 1992
Statement of
Operations Data:
Interest income $ 5,180 $ 6,075 $ 6,158 $ 7,283 $10,248
Interest expense 1,177 1,322 1,427 2,107 3,562
Net interest
income 4,003 4,753 4,731 5,176 6,686
Provision for
loan losses 601 561 0 2,240 3,597
Net gain (loss)
on sale of
securities -- -- -- 172 (502)
Other noninterest
income 220 259 430 590 292
Noninterest expense 4,561 5,854 5,920 7,940 7,810
Loss before income
taxes and
extraordinary item (939) (1,403) (759) (4,242) (4,931)
Net loss (939) (1,403) (647) (3,905) (2,976)
Per Share Data:
Net loss (0.75) (1.12) (0.52) (3.13) (2.38)
Cash dividends declared 0 0 0 0 0
Book value (1) 2.44 3.18 4.30 4.82 7.95
Period End Balance
Sheet Data:
Loans, net of
deferred fees 47,696 50,235 56,575 63,018 76,132
Assets 66,393 86,755 97,181 102,283 143,081
Deposits 62,881 82,530 91,300 94,994 130,997
Shareholders'
equity 3,043 3,976 5,367 6,024 9,930
Asset Quality:
Nonperforming
loans (2) 612 820 2,105 2,866 3,106
Other real estate
owned (OREO) (3) 3,085 2,654 6,138 7,278 10,226
Total nonperforming
loans and OREO 3,697 3,474 8,243 10,144 13,332
Asset Quality Ratios:
Net charge-offs to
average loans 0.5% 1.2% 1.2% 3.7% 3.9%
Nonperforming loans
to total period-end
loans 1.3% 1.6% 3.7% 4.6% 4.1%
Nonperforming loans
and OREO to
period-end assets 5.6% 4.0% 8.5% 9.9% 9.3%
Allowance for loan
losses to period-end
nonperforming loans 1.8 0.9 0.4 0.5 0.6
Selected Performance
Ratios:
Return on average
assets (4) (1.2)% (1.6)% (0.7)% (3.1)% (2.0)%
Return on average
shareholders' equity(22.8)% (26.8)% (10.7)% (47.4)% (23.9)%
Average shareholders'
equity to average
assets 5.2% 6.1% 6.3% 6.5% 8.3%
Noninterest expense
to average assets 5.8% 6.8% 6.2% 6.3% 5.2%
Net interest
margin (4) 4.7% 5.4% 4.9% 3.8% 3.7%
Company Capital Ratios:
Tier 1 risk-based 6.1% 7.3% 8.3% 7.9% 10.9%
Total risk-based 7.4% 8.6% 9.6% 9.1% 12.1%
Leverage 4.1% 4.8% 5.6% 5.9% 6.6%
Bank Capital Ratios:
Tier 1 risk-based 6.1% 7.3% 8.4% 7.9% 10.9%
Total risk-based 7.4% 8.6% 9.6% 9.1% 12.1%
Leverage 4.1% 4.9% 5.6% 5.9% 6.6%
_________
(Dollars in As of or for the
Thousands, except per Three months Ended
share data) March 31,
1997 1996
Statement of
Operations Data:
Interest income $1,051 $1,376
Interest expense 257 296
Net interest income 794 1,081
Provision for loan losses 150 0
Net gain (loss) on sale of
securities 0 0
Other non-interest income 68 67
Non-interest expense 1,002 1,169
Loss before income taxes
and extraordinary item 290 22
Net Loss 290 22
Per Share Data:
Net loss (0.23) (0.02)
Cash dividends declared 0 0
Book value (1) 2.21 2.44
Period End Balnce
Sheet Data:
Loans, net of
deferred fees 46,021 49,771
Assets 80,344 89,704
Deposits 76,142 85,382
Shareholder's equity 3,517 3,043
Asset Quality:
Non-performing loans (2) 2,118 1,175
Other real estate owned
(OREO) (3) 2,841 2,255
Total non-performing loans
and OREO 5,959 3,430
Asset Quality Ratios:
Net charge-offs to
average loans (5) 1.1% 0.3%
Non-performing loans
to total
period-end loans 4.6% 2.4%
Non-performing loans
and OREO to
period-end assets 10.8% 8.6%
Allowance for loan
losses to period-end
non-performing loans 0.52 0.59
Selected Performance Ratios:
Return on average
assets (4) (5) (1.7)% (0.1)%
Return on average
shareholders'
equity (5) (9.0)% (2.1)%
Average shareholders'
equity to average
assets 4.74% 5.0%
Non-interest expense
to average assets (5) 5.9% 5.8%
Net-interest
margin (4) (5) 4.5% 5.0%
Company Capital Ratios:
Tier 1 risk-based 7.0% 7.0%
Total risk-based 8.3% 8.2%
Leverage 5.2% 4.9%
Bank Capital Ratios:
Tier 1 risk-based 7.0% 7.0%
Total risk-based 8.3% 8.2%
Leverage 5.2% 5.0%
___________
(1) All book value per share numbers are based on the number
of shares outstanding at period end.
(2) Includes nonaccrual loans, of $2,074,700,at March 31,
1997, $843,000 at March 31, 1996, $568,000 at year-end
1996, $523,000 at year-end 1995, $564,000 at year-end 1994,
$1,149,000 at year-end 1993 and $644,000 at year-end 1992.
(3) Includes other real estate acquired through legal
foreclosure or deed-in-lieu of foreclosure and loans classified
as in substance foreclosures.
(4) Computed on a tax equivalent basis.
(5) Shown on an annual basis for the three months ended
March 31, 1997 and 1996.
RISK FACTORS
Risk of Continued Losses
The Company reported net losses of $209 thousand for the
first three months of 1997, $0.9 million for 1996,
$1.4 million for 1995, $0.6 million for 1994, $3.9
million for 1993 and $3.0 million for 1992. These
results included provisions for loan losses of $150
thousand for the first three months of 1997, $0.6
million for 1996, $0.6 million for 1995, $0
for 1994, $2.2 million for 1993 and $3.6 million for 1992
reflecting the prolonged economic recession in Southern
California. The Company's recent results have also been
adversely affected by other real estate owned (OREO)
expense, which consists of holding expenses and writedowns, of
$1,700 for the first three months of 1997, $0.4 million in 1996
and $1.4 million in 1995. Nonaccrual loans have grown to $2,074,700
at March 31, 1997 from $568,400 at December 31, 1996.
The ability of the Company's management to reverse the trend of
its net losses is largely dependent on the quality and level of
its earning and nonperforming assets, the interest rate
environment and the adequacy of its allowance for loan losses.
The real estate market in Southern California and the overall
economy in the area could continue to have a significant effect
on the quality and level of the Company's assets in the future.
At March 31, 1997, the Company's allowance for loan
losses was $1.1 million, which represented 2.4% of
gross loans and 52% of nonperforming loans. Although
this allowance is intended to cover known and inherent risks in
the loan portfolio, the allowance is an estimate which is
inherently uncertain and depends on the outcome of future events.
Provisions for loan losses will be made in the future, as
necessary, to reflect risks in the loan portfolio. There can be
no assurance that such additional provisions for loan losses
will not be substantial, or that such provisions will not
adversely impact the Company's results of operations in any given
reporting period or over a longer period of time. Moreover,
there can be no assurance that the Company will not continue to
make OREO writedowns in the future. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Operating Performance-Provision for Loan
Losses,"-Financial Condition--Allowance For Loan Losses" and
"BUSINESS--Principal Market Area."
Management of the Company is continuing its efforts to improve
the quality of the Company's assets. No assurances can be
given, however, that management will be successful in reducing
the Company's nonperforming assets or that the Company will have
profitable operations in the future.
Dependence on Real Estate
The Company's primary lending focus historically has been real
estate mortgage and commercial lending, and, to a lesser extent,
construction lending. At March 31, 1997, 1996, real
estate mortgage loans, commercial loans secured by real estate,
construction loans and consumer loans secured by real estate
comprised approximately 69% of the Company's loan portfolio.
In light of the ongoing economic recession in
Southern California and the impact it has had and may have on
the Southern California real estate market, this real estate
dependence increases the risk of loss in both the Company's loan
portfolio and its holdings of OREO. For a more detailed
discussion of the specific characteristics of the Company's real
estate mortgage loan portfolio, nonperforming loans, OREO and
allowance for loan losses, see "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--
Financial Condition--Loans;" --Financial Condition--Allowance
for Loan Losses;" and --Operating Performance--Provisions for
Loan Losses."
Asset Quality; Impact of Recessionary Environment in the
Company's Market Area
The Company concentrates on marketing to, and servicing the
needs of, individuals and small- to medium-sized businesses in
Los Angeles and Orange County. The economy in general and the
real estate market in particular in these market areas are
suffering from the effects of a prolonged recession that have
negatively impacted the ability of certain borrowers of the
Company to perform under the original terms of their obligations
to the Company and eroded the value of the Company's real estate
collateral. See "BUSINESS--Principal Market Area."
The effects of the recession have resulted in an increase in the
level of nonperforming loans and charge-offs against the
allowance for loan losses and an erosion in the value of the
Company's real estate collateral and OREO. At March 31,
1997, the Company had nonperforming loans of $2.1
million and $2.8 million in OREO. At December 31,
1996, 1995 and 1994 the Company had nonperforming loans of $0.6
million, $0.5 million, and $0.6 million respectively, and $3.1
milliion, $2.7 million, and $6.1 million respectively in OREO.
There were no loans with modified terms at March 31,
1997. Management has identified no loans
where known information about possible credit problems
of the borrowers caused management, at March 31, 1997,
to have serious doubts as to the ability of such borrowers to
comply with their present loan repayment terms and which may
result in such loans becoming nonperforming loans or loans with
modified terms at some future date. However, management
subsequent to March 31, 1997 has become aware of one loan in the
amount of $559,000 where management has serious doubts about the
ability of the borrowers to comply with the terms of such loan.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--Financial Condition--
Allowance for Loan Losses;" and "--Operating Performance--
Provision for Loan Losses."
The continuation or worsening of current economic conditions is
likely to have an adverse effect on the Company's business,
including the level of nonperforming assets and potential
problem credits, the cash flow of borrowers and their ability to
repay outstanding loans, the value of the Company's real estate
collateral and OREO, the level of noninterest-bearing deposits
and the demand for new loan originations. Although the Company
has taken actions to reduce its dependence on real estate, such
as curtailing lending on income producing investment properties
and construction projects, seeking new non real estate related
loan customers and otherwise taking steps to diversify its
business, the Company faces substantial competition in its
market area. There can be no assurance that such actions will
be successful. See "BUSINESS--Competition."
Interest Rate Risk
The operations of the Company are significantly influenced by
general economic conditions and by the related monetary and
fiscal policies of the federal government. Deposit flows and
the cost of funds are influenced by interest rates of competing
investments and general market rates of interest. Lending
activities are affected by the demand for loans, which in turn
is affected by the interest rates at which such financing may be
offered and by other factors affecting the availability of funds.
The operations of the Company are substantially dependent on its
net interest income, which is the difference between the
interest income received from its interest-earning assets and
the interest expense incurred in connection with its
interest-bearing liabilities. To reduce exposure to interest
rate fluctuations, the Company seeks to manage the balances of
its interest sensitive assets and liabilities, and maintain the
maturity and repricing of these assets and liabilities at
appropriate levels. A mismatch between the amount of rate
sensitive assets and rate sensitive liabilities in any time
period is referred to as a "gap". Generally, if rate sensitive
assets exceed rate sensitive liabilities, the net interest
margin will be positively impacted during a rising rate
environment and negatively impacted during a declining rate
environment. When rate sensitive liabilities exceed rate
sensitive assets, the net interest margin will generally be
positively impacted during a declining rate environment and
negatively impacted during a rising rate environment. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Liquidity and Interest Rate Sensitivity."
Increases in the level of interest rates may reduce the amount
of loans originated by the Company, and, thus, the amount of
loan and commitment fees, as well as the value of the Company's
investment securities and other interest-earning assets.
Moreover, fluctuations in interest rates also can result in
disintermediation, which is the flow of funds away from
depository institutions into direct investments, such as
corporate securities and other investment vehicles which,
because of the absence of federal deposit insurance, generally
pay higher rates of return than depository institutions.
Noncompliance with Capital Requirements at Year End 1996 and
Risk of Future Noncompliance
In that the Bank was in the "undercapitalized" category under
the prompt corrective action provisions of the Federal Deposit
Insurance Act and the prompt corrective action regulations of
the OCC promulgated thereunder (collectively referred to as the
"PCA Provisions") as of December 31, 1996, the Bank would have
been required to file a capital restoration plan and would have
been automatically subject to among other things, restrictions
on dividends, management fees, and asset growth, and prohibited
from opening new branches, making acquisitions or engaging in
new lines of business without the approval of the OCC. However,
the Bank on March 24, 1997 received a capital infusion of
$766,872 from Marathon Bancorp and thereafter received a letter
from the OCC on April 3, 1997 that the Bank was "adequately
capitalized". As such the Bank did not have to submit a capital
restoration plan or become subject to the other aspects of the
PCA Provisions for being "undercapitalized". The Bank's capital
infusion was the result of Marathon Bancorp raising $766,872
through the sale of 340,832 shares of Common Stock at $2.25 per
share in a private placement offering in March 1997. Although
the Bank is currently "adequately capitalized" under the PCA
Provisions, there can be no assurances that the Company or the
Bank will have capital in excess of all minimum regulatory
requirements that are applicable to them.
Although the Offering is designed to increase the Company's and
the Bank's capital by an amount that will ensure that the
Company and the Bank will have capital in excess of all minimum
regulatory requirements that are applicable to them (see "USE OF
PROCEEDS--Capital Ratios"), there can be no assurance that the
Company or the Bank will continue to comply with all of these
minimum capital requirements. In the event that the Company or
the Bank fails to satisfy any minimum capital requirements, they
could each be subject to enforcement actions by the bank
regulatory authorities. See "BUSINESS--Supervision and
Regulation--Existing and Potential Enforcement Actions."
Existing and Potential Regulatory Enforcement Actions
Following a supervisory examination of the Bank dated July 5,
1995, the Bank entered into a Formal Agreement with the OCC.
The Formal Agreement requires the Bank to develop on an annual
basis a strategic plan covering a period of three years. The
strategic plan is required to include among other things (i) the
achievement and maintenance by the Bank of a Tier 1 risk-based
capital ratio of at least 8.5% and a leverage capital ratio of
at least 6%, (ii) attainment of satisfactory profitability, and
(iii) reduction of OREO assets based on an individual parcel
cost/benefit analysis that identifies the breakeven price and a
marketing program designed to achieve each parcel's timely sale.
On December 16, 1996, Marathon Bancorp entered into the MOU with
the FRBSF under which Marathon Bancorp agreed, among other
things, to (i) refrain from paying cash dividends, except with
the prior approval of the FRBSF, (ii) submit to the FRBSF an
acceptable plan to increase and maintain an adequate capital
position for the Bank, (iii) not incur any debt without the
prior approval of the FRBSF, (iv) not repurchase its stock
without the prior approval of the FRBSF, (v) comply with Section
32 of the Federal Deposit Insurance Act which requires Marathon
Bancorp to notify the Federal Reserve Board of Governors ('FRB")
prior to the addition of any director or senior executive
officer and prohibits Marathon Bancorp from adding any such
person if the FRB issues a notice of disapproval of such
addition, (vi) employ a permanent full-time president and chief
executive officer at Marathon Bancorp and the Bank with
demonstrated experience in lending and the management and
operations of a bank and (vii) submit progress reports detailing
the form and manner of all actions taken to comply with the MOU.
The MOU supersedes an earlier memorandum of understanding dated
September 24, 1992 and a supervisory letter dated November 30,
1995. See "BUSINESS--Supervision and Regulation--Existing and
Potential Enforcement Actions."
While the Bank is currently not in compliance
with the terms of the Formal Agreement with repect to meeting
the capital ratios required in the Formal Agreement, management
of the Bank believes that upon the sale of all of the 2,222,223
shares of Common Stock in the Offering, the Bank will have
capital ratios in excess of those required in the Formal
Agreement and the Bank will be in substantial compliance with the
terms of the Formal Agreement and the MOU that are required
to be met as of the date of this Prospectus. However, compliance
is determined by the OCC with respect to the Formal Agreement and
the FRBSF with respect to the MOU. In the event a determination
is made that the Bank is not in compliance with any of the terms
of the Formal Agreement or Marathon Bancorp is not in compliance
with any of the terms of the MOU, the OCC and FRBSF, respectively
would have available various enforcement measures available,
including the imposition of a conservator or receiver (which would
likely result in a substantial diminution or a total loss of the
shareholders' investment in the Company), the issuance of a cease
and desist order that can be judicially enforced, the termination
of insurance of deposits, the imposition of civil money penalties,
the issuance of directives to increase capital, the issuance of
formal and informal agreements, the issuance of removal and
prohibition orders against institution-affiliated parties and
the imposition of restrictions and sanctions under the PCA
Provisions.
Restrictions on Ability to Pay Dividends
As stated above, the MOU requires Marathon Bancorp to refrain
from paying cash dividends, except with the prior approval of
the FRBSF. Marathon Bancorp will not be able to pay cash
dividends on the Common Stock without the prior approval of the
FRBSF or unless the MOU is modified by the FRBSF to allow the
payment of cash dividends or the MOU is terminated by the FRBSF.
There are no assurances that the Company will generate earnings
in the future which would permit the declaration of dividends.
Furthermore, it is anticipated that for the foreseeable future
any earnings which may be generated will be retained for the
purpose of increasing the Company's and the Bank's capital and
reserves in order to facilitate growth.
Market Considerations
There can be no assurance that the market price of the Common
Stock will not decline during or after the subscription period
to a level equal to or below the Offering Price, or that,
following the sale of the shares of Common Stock , a purchaser
of Common Stock in this Offering will be able to sell shares
purchased in the Offering at a price equal to or greater than
the Offering Price. Moreover, until stock certificates are
delivered, subscribers in this Offering may not be able to sell
the shares of Common Stock that they have purchased in the
Offering. Certificates representing shares of Common Stock
purchased pursuant to the Offering will be delivered as soon as
practicable after the completion of the Offering. There can be
no assurance that the market price of the Common Stock purchased
in the Offering will not decline below the Offering Price before
such shares of Common Stock are delivered. No interest will be
paid to any subscriber in the Offering.
There is no established trading market for the Common Stock, and
no assurance can be given that an active trading market will
develop after the Offering or that Common Stock holders, including
investors in this Offering will be able to sell their shares of
Common Stock without considerable delay.
Offering Price
The Offering Price for the Common Stock was set by the Board of
Directors (the "Board") in consultation with The Findley Group,
taking into consideration factors which the Board believes
relevant to a determination of the value of the Common Stock.
Among the factors considered by the Board in determining the
Offering Price were (i) the market value of the Common Stock;
(ii) the present and projected operating results and financial
condition of the Company; and (iii) an assessment of the
Company's management and management's analysis of the growth
potential of the Company and of the Company's market area and
(iv) future economic and real estate conditions of Southern
California. There are no assurances that the factors considered
by the Board in determining the Offering Price with respect to
the Company's projected operating results, financial condition,
growth potential and market area growth and future economic and
real estate conditions of Southern California will not be
different. The Offering Price may not be indicative of the
future price per share of the Common Stock.
Dilution
Record Holders and other shareholders who do not subscribe for
shares of Common Stock equal to their percentage of equity
ownership interest and voting power in the Company may suffer
substantial dilution in their percentage of equity ownership
interest and voting power in the Company. Moreover, the
issuance of any shares of Common Stock in the Offering at a
price per share that is less than book value per share will
result in a reduction in the book value per share of all
outstanding shares of Common Stock. In addition, it is possible
that additional capital may be necessary or appropriate and
shares of Common Stock and/or preferred stock may be
offered for sale in the future. In that event, the relative
voting power and equity interests of persons purchasing Common
Stock in this Offering could be reduced, as the Common Stock has
no preemptive rights. See "CAPITALIZATION."
Potential Loss of Certain Tax Attributes
The amount of net operating loss and certain tax credit
carryforwards that a corporation may utilize to offset future
taxable income or income tax payable in any taxable year may be
limited under Section 382 ("Section 382") of the Internal
Revenue Code of 1986, as amended (the "Code") if an "ownership
change" occurs with respect to such corporation. As of December
31, 1996, the Company had a net operating loss carryforward of
approximately $3.7 million for federal tax purposes and $5.3
million for state tax purposes. Although the Offering has been
structured to permit the Company to limit the number of shares
issued to certain persons to the extent that the Company
determines that such issuance could reasonably be expected to
have material adverse affect on the Company's ability to utilize
fully its net operating loss carryforward, there can be no
assurance that the issuance of Common Stock in the Offering will
not result in a limitation on the Company's ability to utilize
fully its net operating loss carryforward. See "THE
OFFERING--Percentage Limitation and Effect on Tax Attributes."
Litigation and Potential Litigation
The Bank is currently a party to the following legal proceeding which
involved the Bank's former wholesale mortgage banking division.
Countrywide Home Loans vs. Marathon National Bank, Los Angeles Superior
Court, case nuber GC018232. On December 16, 1996, the Plaintiffs filed suit
against the Bank for breach of contract in connection with the Bank's failure
to repurchase three non-conforming mortgage loans which the Bank had originated
and sold to Plaintiff. The Plaintiff is seeking damages of at least
$760,555 plus interest, attorneys fees and costs. The Bank is trying to settle
the matter, but no settlement has been reached. Management of the Bank
contends that the amount of damages suffered by Plaintiff to be significantly
less than the amount of damages sought. However, there can be no assurance
that an adverse result or settlement with respect to the lawsuit would not have
a material adverse effect on the Company. At December 31, 1996, the Bank
established a reserve for potential losses that may result from this matter.
While other investors have purchased loans from the Bank's former wholesale
mortgage banking division and claims with respect to some of such purchases
have been made against the Bank totaling approximately $1,615,000,
none of these claims to management's knowledge have resulted in either a legal
or a pending legal proceedings, except for one claim which was settled through
arbitration in August 1996 where the Bank agreed to repurchase the loan which
resulted in a loss to the Bank of approximately $68,000. In addition, another
of the claims resulted in a settlement in the amount of $108,000 that was
paid in July 1996. There is no assurance that such claims or any future
claims, if any, will not result in litigation which would have a material
adverse effect on the Company.
Regulatory Change
The financial institutions industry is subject to significant
regulation, which has materially affected the business of the
Company and other financial institutions in the past and is
likely to do so in the future. Regulations now affecting the
Company may be changed at any time, and the interpretation of
these regulations by examining authorities of the Company is
also subject to change. For a description of certain of the
potentially significant changes which have been enacted and
proposals which have been made recently, see "BUSINESS--Effect
of Governmental Policies and Recent Legislation." There can be
no assurance that these or any future changes in the laws or
regulations or in their interpretation will not adversely affect
the business of the Company.
Substantial Competition in the Banking Industry
The Company faces substantial competition for deposits and loans
from major banking and financial institutions, including many
which have substantially greater resources, name recognition and
market presence than the Company. Such competition comes not
only from local institutions but also from out-of-state
financial intermediaries which have opened loan production
offices or which solicit deposits in the Company's market areas.
Many of the financial intermediaries operating in the Company's
market areas offer certain services, such as trust and
international banking services, which the Company does not offer
directly. Additionally, banks with larger capitalization and
financial intermediaries not subject to bank regulatory
restrictions have larger lending limits and are thereby able to
serve the credit needs of larger customers. Competitors of the
Company include commercial banks, savings institutions, credit
unions, thrift and loans, insurance companies, mortgage
companies, money market and mutual funds and other institutions
which offer loan and investment products. See
"BUSINESS--Competition."
THE COMPANY
Marathon Bancorp is a bank holding company conducting operations
through its subsidiary, the Bank. Marathon Bancorp
has one inactive subsidiary, Marathon Bancorp Mortgage Corporation.
Marathon Bancorp was incorporated on October 12, 1982, as the holding
company for the Bank which commenced operations on August 29, 1983.
The Company currently operates through a single head office at 11150 West
Olympic Boulevard, Los Angeles, California.
The Company through the Bank provides general commercial banking
services to individuals, businesses and professional firms
located in its general service area of the counties of Los
Angeles and Orange. 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 U.S. government securities
as investment products to customers.
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, 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.
In January 1997, Craig D. Collette was hired as the President
and Chief Executive Officer of Marathon Bancorp and the Bank.
Mr. Collette has 29 years of banking experience. Prior to
joining the Company he was the president and chief operating
officer of TransWorld Bank, Sherman Oaks, California from June,
1996 to January, 1997 and prior to that he was president and
chief executive officer of Landmark Bank, La Habra, California
from January, 1979 to April, 1996. Mr. Collette and his
management team have taken certain steps to refocus the
Company's direction and to improve its financial condition. The
Company's strategy is to continue its efforts to improve asset
quality, increase fee income, reduce expenses and diversify its
loan portfolio. Actions that have already been taken are the
(i) increase in the loan loss reserves as of March 31, 1997
to 2.4% of gross loans from 2.3% of gross loans as of December
31, 1996 and from 1.4% of gross loans at December 31, 1995,
and (ii) institution of new increased fees and charges that
will bring the Bank's fees and charges for banking services
in line with the fees and charges of peer banks in the market
area. In addition the Bank intends to establish a Small Business
Administration ("SBA") Loan Department to make loans under
certain of the federal government's SBA loan programs, and
expects to have the operation in place by August, 1997.
THE OFFERING
General
Marathon Bancorp is hereby offering for sale up to 2,222,223
shares of its Common Stock, at the Offering Price of $2.25 per
share both to its shareholders and to the public pursuant to the
terms and conditions of this Offering. In addition, Marathon
Bancorp is giving a preference to each Record Date Holder as of
the close of business on the Record Date to subscribe for shares
of Common Stock in this Offering until the Expiration Time.
Record Holders may subscribe for as many shares of Common Stock
as they want subject to the maximum number of shares offered
hereby, the allocation discussed in the next sentence, and
certain other limitations. See "THE OFFERING--Foreign and
Certain Other Shareholders", --Percentage Limitation and Effect
on Tax Attribute" and --Regulatory Limitation". In the event
there is an oversubscription by Record Date Holders, the shares
of Common Stock will be allocated on a pro rata basis so that
each Record Date Holder will be able to maintain his, her or its
percentage of equity ownership interest and voting power of
Marathon Bancorp, and shares of Common Stock remaining after
such allocation will be allocated on a "first come first serve"
basis subject to certain limitations. See "THE
OFFERING--Percentage Limitation and Effect on Tax Attribute"
and-Regulatory Limitation".
To the extent that shares of Common Stock remain available after
sale to Record Holders pursuant to the shareholder preferential
described above, the remaining shares of Common Stock will be
sold to members of the public at a price per share price equal
to the Offering Price. However, members of the public must
purchase a minimum of 500 shares. The Public Offering expires
at the Expiration Time. Marathon Bancorp reserves the right to
limit the number of shares that may be purchased by any person
or entity, including, under certain circumstances, a Record
Holder. See "THE OFFERING--Foreign and Certain Other
Shareholders", --Percentage Limitation and Effect on Tax
Attributes" and "--Regulatory Limitation." Notwithstanding the
preference given to Record Holders, shares of Common Stock will
be offered to Record Holders and members of the public
simultaneously. NO SUBSCRIBER WILL BE PROVIDED WITH INFORMATION
REGARDING AMOUNTS PURCHASED BY SUCH SUBSCRIBER PRIOR TO
CONSUMMATION OF THE SALE, AND NO PURCHASE MAY BE WITHDRAWN ON
THE BASIS OF ANY ALLOCATION OF A LESSER AMOUNT OF SHARES OR
OTHERWISE. THE COMPANY MAY CANCEL THE OFFERING IN THE ENTIRETY
AT ANY TIME WITHOUT NOTICE.
Method of Subscription by Record Holders
Record Holders may subscribe for shares of Common Stock pursuant
to their preference in the Offering by delivering to Marathon
Bancorp at the addresses specified below, at or prior to the
Expiration Time, the properly completed and executed
Subscription Application evidencing the number of shares of
Common Stock subscribed for with any signatures guaranteed as
required, together with payment in full of the Offering Price
for each share subscribed. Payment may be made only by (i)
check or bank draft drawn upon a U.S. bank, or postal,
telegraphic or express money order, payable to Marathon
Bancorp-Stock Subscription Account, or (ii) wire transfer of
funds to the account maintained by Marathon Bancorp for the
stock subscription account, ABA #122240308,
Attention: Mr. Howard Stanke, Credit to (Subscriber's name,
for further credit to Marathon Bancorp-Stock Subscription
Account #107127).
The Subscription Application and payment of the Offering Price
must be delivered to Marathon Bancorp, Attention: Mr. Howard
Stanke, 11150 West Olympic Boulevard, Los Angeles, California
90064
Mr. Stanke may be reached at Marathon Bancorp, at (310)
996-9100 and the fax number for Marathon Bancorp is (310)
996-9113.
The Offering Price will be deemed to have been received by
Marathon Bancorp only upon (i) clearance of any uncertified
check, (ii) receipt by Marathon Bancorp of any certified check
or bank draft drawn upon a U.S. bank or any postal, telegraphic
or express money order, or (iii) receipt of collected funds in
the Marathon Bancorp-Stock Subscription Account designated
above. Funds paid by uncertified personal check may take at
least five business days to clear. Accordingly, Record Holders
who wish to pay the Offering Price by means of uncertified
personal check are urged to make payment sufficiently in advance
of the Expiration Time to ensure that such payment is received
and clears by such time and are urged to consider in the
alternative payment by means of certified check, bank draft,
money order or wire transfer of funds. All funds received in
payment of the Offering Price shall be held by the Bank and
invested at the direction of Marathon Bancorp in short-term
certificates of deposit, short-term obligations of the United
States or any state or any agency thereof or money market mutual
funds investing in the foregoing instruments. The account in
which such funds will be held may not be insured by the FDIC.
Any interest earned on such funds will be retained by Marathon
Bancorp.
Marathon Bancorp reserves the right to limit the number of
shares to be purchased by any Record Holder (see "THE
OFFERING--General", --Foreign and Certain Other
Shareholders",-Percentage Limitation and Effect on Tax
Attributes" and "-Regulatory Limitation"), and will determine
whether it intends to do so within 10 business days of the
Expiration Time. In the event that Marathon Bancorp limits the
number of shares that any Record Holder may purchase Marathon
Bancorp will return to the shareholders the appropriate portion
of the amount that was remitted with the Subscription
Application within 14 days of the Expiration Time. THEREFORE,
RECORD HOLDERS WHO PLACE ORDERS PURSUANT TO THEIR SHAREHOLDER
PREFERENCE WILL LOSE ACCESS TO THE FUNDS TENDERED FOR THE PERIOD
OF TIME FROM THE DATE SUCH FUNDS ARE TENDERED UP TO 14 DAYS
AFTER THE EXPIRATION TIME AND MAY NOT ACQUIRE ANY OF THE SHARES
FOR WHICH THEY HAVE SUBSCRIBED.
Record Holders who hold shares of Common Stock for the
account of others, such as brokers, trustees or depositories for
securities, should contact the respective beneficial owners of
such shares as soon as possible to ascertain these beneficial
owners' intentions and to obtain instructions with respect to
their subscribing in the Offering pursuant to the preference
given to Record Holders. If a beneficial owner so instructs,
the Record Date Holder of that beneficial owners' interest
should complete the appropriate Subscription Application and
submit it to Marathon Bancorp with the proper payment. In
addition, beneficial owners of shares of Common Stock as of the
Record Date through such a nominee holder should contact the
nominee holder and request the nominee holder to effect
transactions in accordance with the beneficial owners'
instructions. If a beneficial owner wishes to obtain a separate
Subscription Application, such beneficial owner should contact
the nominee as soon as possible and request that a separate
Subscription Application be issued. Such Subscription
Application should be completed by the nominee and returned to
Marathon Bancorp with the proper payment. A nominee may request
any Subscription Application held by it to be split into such
smaller denominations as it wishes, provided that the
Subscription Application is received by Marathon Bancorp,
properly endorsed, no later than 5:00 p.m., California time, on
July 31, 1997.
If Marathon Bancorp has received prior to the Expiration Time
full payment as specified above for the total number of shares
of Common Stock for which a Rights Holder has subscribed,
together with a letter or telegram from a bank or trust company
or a member of a recognized securities exchange in the United
States stating the name of the subscriber, the number of shares
of Common Stock for which a Rights Holder has subscribed and
guaranteeing that the Subscription Application will be delivered
promptly to Marathon Bancorp, such subscription will be deemed
to be received prior to the Expiration Time.
Method of Subscription by those other than Record Holders
Those, other than Record Holders, may subscribe for the shares
offered on a nonpreferential basis by completing, signing and
delivering or mailing a Subscription Application together with
payment in full of the Offering Price to Marathon Bancorp,
Attention: Mr. Howard Stanke, 11150 West Olympic Boulevard,
Los Angeles, California 90064.
Subscriptions from the members of the public who are not Record
Holders must be for at least 500 shares. Except as described
under "THE OFFERING--Method of Subscription-General,"
Subscription Applications must be received by Marathon Bancorp
prior to the Expiration Time. Payment may be made only by (i)
check or bank draft drawn upon a U.S. bank, or postal,
telegraphic or express money order, payable to Marathon
Bancorp-Stock Subscription Account, or (ii) wire transfer of
funds to the account maintained by Marathon Bancorp for the
stock subscription account, ABA #122240308,
Attention: Mr. Howard Stanke, Credit to (Subscriber's
name, for further credit to Marathon Bancorp Stock Subscription
Account #107127).
Subscriptions are not binding until accepted by Marathon
Bancorp, and Marathon Bancorp reserves the right to reject, in
whole or in part, in its sole discretion, any subscription.
Marathon Bancorp will decide whether to accept any subscription
within 10 business days of the Expiration Time, and for
subscriptions which are rejected or partially accepted, Marathon
Bancorp will return to the subscriber the amount remitted with
respect to rejected subscriptions or the difference between the
amount remitted and teh subscription amount for the shares of
Common Stock accepted with respect to partially accepted
subscriptions, by mail within 14 days of the Expiration Time.
THEREFORE, THOSE OTHER THAN RECORD HOLDERS WHO
SUBSCRIBE FOR SHARES OF COMMON STOCK WILL LOSE ACCESS TO THE
FUNDS TENDERED FOR THE PERIOD OF TIME FROM THE DATE SUCH FUNDS
ARE TENDERED UP TO 14 DAYS AFTER THE EXPIRATION TIME AND MAY NOT
ACQUIRE ANY OF THE SHARES FOR WHICH THEY HAVE SUBSCRIBED.
Method of Subscription-General
The Instructions accompanying the Subscription Application
should be read carefully and followed in detail.
THE METHOD OF DELIVERY OF SUBSCRIPTION APPLICATIONS AND PAYMENT
OF THE OFFERING PRICE WILL BE AT THE ELECTION AND RISK OF THE
SUBSCRIBERS. IF SUBSCRIPTION APPLICATIONS AND PAYMENTS ARE SENT
BY MAIL, SUBSCRIBERS ARE URGED TO SEND SUCH MATERIALS BY
REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, AND ARE URGED TO ALLOW A SUFFICIENT NUMBER OF DAYS TO
ENSURE DELIVERY TO MARATHON BANCORP AND CLEARANCE OF PAYMENT
PRIOR TO THE EXPIRATION TIME. BECAUSE UNCERTIFIED CHECKS MAY
TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, SUBSCRIBERS ARE
STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF
CERTIFIED CHECK, BANK DRAFT, MONEY ORDER OR WIRE TRANSFER OF
FUNDS.
All questions concerning the timeliness, validity, form and
eligibility of Record Holder will be determined by Marathon
Bancorp, whose determination will be final and binding.
Marathon Bancorp, in its sole discretion, may waive any defect
or irregularity, or permit a defect or irregularity to be
corrected within such time as it may determine. Subscription
Applications will not be deemed to have been received or
accepted until all irregularities have been waived or cured
within such time as Marathon Bancorp determines, in its sole
discretion. Marathon Bancorp will not be under any duty to give
notification of any defect or irregularity in connection with
the submission of Subscription Applications, or incur any
liability for failure to give such notification. Marathon
Bancorp reserves the right to reject any subscription if such
subscription is not in accordance with the terms of the Offering
or not in proper form or if the acceptance thereof or the
issuance of the Common Stock pursuant thereto could be deemed
unlawful.
All questions or requests for assistance concerning stock
subscriptions or requests for additional copies of this
Prospectus or the Subscription Application should be directed to
Mr. Howard Stanke, Executive Vice President and Chief
Financial Officer of the Bank (telephone (310) 996-9100).
Certificates representing shares of Common Stock subscribed for
will be mailed as soon as practicable after completion of the
Offering.
ONCE THE SUBSCRIPTION APPLICATION HAS BEEN DELIVERED TO THE
COMPANY, SUCH SUBSCRIPTION MAY NOT BE REVOKED BY SUBSCRIBER.
Foreign and Certain Other Shareholders
The Offering will not be made to Record Date Holders who reside
in states or countries where the shares of Common Stock with
respect to this Offering have not been registered or qualified
or where Marathon Bancorp and its officers have not registered
as brokers and/or dealers under such state's brokers-dealer laws
as of the date of this Prospectus unless an exemption is
available from such registration or qualification. It is
anticipated that the shares of Common Stock will be registered
or qualified only in the states of California, Arizona and Nevada
and no other states.
Percentage Limitation and Effect on Tax Attributes
The amount of the net operating loss and certain tax credit
carryforwards that a corporation may utilize to offset future
taxable income or income tax payable in any taxable year may be
limited under Section 382 of the Code if an "ownership change"
occurs with respect to such corporation. If such corporation
has a net built-in loss on the date it undergoes an ownership
change (a "Net Built-In Loss"), any built-in losses it
recognizes in any taxable year that includes any day in the
five-year period beginning on the date of the ownership change
will be subject to limitation under Section 382 until the amount
of such recognized built-in losses exceeds the amount of the Net
Built-In Loss. As of December 31, 1996, the Company had a net
operating loss carryforward of approximately $3.7 million for
federal tax purposes and $5.3 million for state tax purposes.
In addition, the Company believes that, if an ownership change
were deemed to occur, it may have built-in losses that, if
recognized within five years of such ownership change, would be
subject to the limitations of Section 382. (Such "net operating
loss carryforwards" and "Net Built-In Losses" recognized within
five years of an ownership change are collectively referred to
herein as "Tax Attributes").
The determination of whether an "ownership change" has occurred
is made by (i) determining, in the case of any 5% shareholder,
the increase, if any, in the percentage ownership of such 5%
shareholder at the end of any three-year testing period relative
to such shareholder's lowest percentage ownership at any time
during such testing period, and expressing such increase in
terms of percentage points (for example, a shareholder whose
percentage ownership increased from 6% to 20% during the testing
period will be considered to have had an increase of 14
percentage points), and (ii) aggregating such percentage point
increases for all 5% shareholders during the applicable testing
period. For purposes of the preceding sentence, any direct or
indirect holder, taking certain attributing rules into account,
of 5% or more of a corporation's stock is a "5% shareholder,"
and, for this purpose, all holders of less than 5% collectively
are treated as a single 5% shareholder. Such percentage
ownership is determined on the basis of the value of such stock.
An "ownership change" will occur as of the end of any three-year
testing period if the aggregate percentage point increases for
all 5% shareholders for such testing period exceeds 50
percentage points.
If the Company, based on record ownership and/or actual
knowledge, believes that the issuance of Common Stock to any
Record Holder or other prospective purchaser in the Offering
would result in such person or entity owning a percentage of
shares of Common Stock which could reasonably be expected to
have a material adverse effect upon the Company's ability to
utilize its Tax Attributes, then the Company will have the right
to reduce the number of shares issuable to such person or entity
to the extent necessary in the opinion of the Company to avoid
such adverse effect. Specifically, the Company will have the
right to make such reduction if it believes the issuance of
shares of Common Stock could cause any Record Holder or other
prospective purchaser to become a "5% shareholder" (as defined
in the Code and the Treasury regulations issued thereunder).
Such opinion of the Company shall be conclusive and binding.
Regulatory Limitation
The Company will not be required to issue shares of Common Stock
pursuant to the Offering at any person who in the Company's sole
judgment and discretion, is required to obtain prior clearance,
approval or nondisapproval from any state or federal bank
regulatory authority to own or control such shares unless, prior
to the Expiration Time, evidence of such clearance, approval or
nondisapproval has been provided to the Company.
The Change in Bank Control Act of 1978 prohibits a person or
group of persons "acting in concert" from acquiring "control" of
a bank holding company unless the FRB has been given 60 days'
prior written notice of such proposed acquisition and within
that time period the FRB has not issued a notice disapproving
the proposed acquisition or extending for up to another 30 days
the period during which such a disapproval may be issued. An
acquisition may be made prior to the expiration of the
disapproval period if the FRB issues written notice of its
intent not to disapprove the action. Under a rebuttable
presumption established by the FRB, the acquisition of more than
10% of a class of voting stock of a bank holding company with a
class of securities registered under Section 12 of the Exchange
Act (such as the Common Stock) would, under the circumstances
set forth in the presumption, constitute the acquisition of
control.
In addition, any "company" would be required to obtain the
approval of the FRB under the Bank Holding Company Act of 1956,
as amended (the "BHC Act"), before acquiring 25% (5% in the case
of an acquiror that is, or is deemed to be, a bank holding
Company) or more of the outstanding Common Stock of, or such
lesser number of shares as constitute control over, the Company.
Determination of Offering Price
The Offering Price has been determined by Marathon Bancorp with
the assistance of The Findley Group ("TFG"). Marathon Bancorp's
primary objectives in establishing the Offering Price were to
maximize net proceeds obtainable from the Offering and while
providing Record Date Holders with an opportunity to make an
additional investment in Marathon Bancorp and, thus, limit the
dilution of their proportionate ownership position in Marathon
Bancorp.
TFG has been involved in the representation of financial
institutions in California and the Western United States since
the mid-1950s. Since that time, TFG has been actively involved
as a repersentative of either buyers or sellers in mergers,
acquisitions and recapitalizations of financial institutions.
In addition to being investment bankers and management consultants
to financial institutions, principals of TFG publish The Findley
Reports which is an annual financial analysis of all California
commercial banking institutions. TFG began its relationship with
Marathon Bancorp in July, 1996. From July, 1996 to present, TFG
has been paid a total of $10,000, primarily identified with
consulting services regarding the recapitalization of Marathon
Bancorp. TFG will receive no additional compensation in connection
with the Offering and the determination of the Offering Price. TFG
assisted the Board in the determination of the Offering Price,
providing information on recent offerings by other institutions
similar to Marathon Bancorp in California and the Western United
States.
Marathon Bancorp has employed the law firm of Gary Steven
Findley & Associates, an affiliate of TFG, as counsel since July,
1996 to assist in preparation of the Offering and other corporate
regulatory matters effecting Marathon Bancorp and the Bank. Gary
Steven Findley is the principal of the law firm and TFG. The law
firm has been paid a total of fees of $43,655 for its services since
July 1, 1996. Prior to July 1, 1996, Gary Steven Findley &
Associates had no relationship with either Marathon Bancorp or the
Bank.
In approving the Offering Price, the Board considered the oral
advice of TFG and such additional factors as the alternatives
available to Marathon Bancorp for raising capital, the market
price of the Common Stock, the business prospects for the
Company, including the impact of the economic and real estate
conditions in Southern California, the terms of recent offerings
by banks and bank holding companies, the consequences of failing
to raise capital and the general condition of the securities
markets at such time. There are no assurances that the factors
considered by the Board in determining the Offering Price with
respect to the future exonomic and real estate conditions of
Southern California and the Company's projected operating results,
financial condition, growth potential and market area growth will
not be different.
There can be no assurance, however, that the market price of the
Common Stock will not decline during the subscription period to
a level equal to or below the Offering Price, or that, following
the sale of the shares of Common Stock in this Offering a
purchaser in this Offering will be able to sell shares purchased
in the Offering at a price equal to or greater than the Offering
Price.
Commitments of Certain Directors and Officers
The directors and executive officers of the Company as a group
have indicated their intention to purchase, in the aggregate,
31,111 shares of Common Stock or 1.6% of the total number of
shares of Common Stock offered hereby. These indications of
interest are based upon each director's and officer's evaluation
of his or her own financial and other circumstances. Upon their
acquisition of such shares in the Offering, the directors and
executive officers, as a group, will own beneficially 468,546
shares or approximately 12.3% of the outstanding stock after
completion of the Offering, assuming the sale of 2,222,223
shares in the Offering.
USE OF PROCEEDS
The net proceeds to Marathon Bancorp from the Offering will
depend upon the number of shares purchased by Record Holders,
and members of the public. Assuming the Offering results in the
sale of 2,222,223 shares, the maximum number of shares to be
sold in the Offering, the net proceeds are estimated to be $4.67
million. Marathon Bancorp intends to contribute all of net
proceeds to the Bank for the purpose of increasing the Bank's
capital and capital ratios. The Bank will use the proceeds
contributed to it for general corporate purposes.
Capital Ratios
The following table illustrates the capital ratios of the
Company and the Bank as of March 31, 1997 and as adjusted,
assuming: (i) a Offering Price of $2.25 per share; and (ii) the
remaining net proceeds of the Offering are contributed to the
Bank which invests such proceeds in 20% risk-weighted assets
such as investment securities.
Actual At March 31,1997
Company Bank
(Dollars in thousands) Percentage Percentage
Leverage Ratio 5.2 5.2
Minimum regulatory requirement (1) 4.0 4.0
Requirement in the Formal Agreement N/A 6.0
Risk-based ratios:
Tier 1 Capital 7.0 7.0
Tier 1 Capital minimum requirement (1) 4.0 4.0
Requirement in the Formal Agreement N/A 8.5
Total Capital 8.3 8.3
Total Capital minimum requirement (1) 8.0 8.0
As Adjusted at March 31, 1997 (2)
Company Bank
(Dollars in thousands) Percentage Percentage
Leverage Ratio 11.4 11.4
Minimum regulatory requirement (1) 4.0 4.0
Required inthe Formal Agreement N/A N/A
Risk-based ratios:
Tier 1 Captial 16.0 16.0
Tier 1 Captial minimum requirement (1) 4.0 4.0
Required in the Formal Agreement N/A 8.5
Total Capital 17.3 17.3
Total Capital minimum requirement (1) 8.0 8.0
__________________
(1) Minimum capital ratios for bank holding companies and
banks are established by FRB and OCC regulation. See"MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Funding and Capital" and
"BUSINESS--Effect of Governmental Policies and Recent
Legislation."
(2) Assumes that 2,222,223 share, the maximum number
of shares to be sold in the Offering are issued pursuant to the
Offering, with net proceeds of approximately $4.67 million.
COMMON STOCK PRICE RANGE AND DIVIDENDS
The Common Stock is traded in the local over-the-counter market
and is neither listed on any exchange nor quoted by NASDAQ.
There is no established trading market for the shares of Common
Stock. The following table sets forth information on the high
and low sales prices of trades of Common Stock for the periods
reported based on information provided by Smith Barney, Orange,
California. The principal market maker in the Common Stock is
Burford Capital, La Cresenta, California. The quotations reflect
inter-dealer prices, without retail mark-up, mark-down or
commission.
High Low
1997
First Quarter $3.00 $2.50
Second Quarter (through
June 19, 1997) $3.00 $2.25
1996
First Quarter $3.75 $3.13
Second Quarter $3.50 $1.75
Third Quarter $2.63 $1.63
Fourth Quarter $3.00 $1.75
1995
First Quarter $1.88 $1.50
Second Quarter $2.25 $1.50
Third Quarter $2.75 $2.13
Fourth Quarter $4.13 $2.38
On February 28, 1997, Marathon Bancorp had approximately 271
shareholders of record of its Common Stock. The number does not
include beneficial owners whose shares are held by brokers,
banks and other nominees.
As of March 31, 1997 there were options to acquire 110,983
shares of Common Stock and 340,832 shares of Common Stock that
were "restricted stock" as defined in Rule 144. Such 340,832
shares of Common Stock will become eligible for sale pursuant to
Rule 144 in May 1998.
Marathon Bancorp has never paid any cash dividends and has not
paid a stock dividend since 1991. in order to retain all
earnings, if any, to increase the capital of the Company and the
Bank. There can be no assurance that Marathon Bancorp will
generate earnings in the future which would permit the
declaration of dividends. Marathon Bancorp is restricted from
paying any cash dividend pursuant to the MOU entered into with
the FRBSF, except with the prior approval of the FRBSF. In
addition, the source of any cash or stock dividends would likely
be dividends from the Bank which are restricted under national
banking law. See "BUSINESS--Supervision and
Regulation--Restrictions on Transfers of Funds to Marathon
Bancorp by the Bank". It is anticipated that for the
foreseeable future any earnings which may be generated
will be retained for the purpose of increasing the
Company's capital and reserves in order to facilitate growth.
CAPITALIZATION
The following table sets forth the consolidated capitalization
of the Company at March 31, 1997 and the pro forma
consolidated capitalization of the Company at such date, as
adjusted to give effect to the Offering assuming the issuance
of the maximum 2,222,223 shares of Common Stock to be sold in
the Offering. There are no assurances that any or all of the
2,222,223 shares of the Common Stock will be sold in the Offering.
(Dollars in thousands, March 31, 1997
except per share data) Actual As Adjusted (1)
Shareholders' equity:
Preferred stock, no par value,
1,000,000 shares authorized;
no shares issued or outstanding,
actual or as adjusted
Common stock, no par stated value,
9,000,000 shares authorized;
issued and outstanding 1,589,596
shares actual, 3,811,819 shares
as adjusted (2) $8,847 $13,517
Accumulated deficit (5,335) (5,335)
Unrealized gain on securities
available for sale 5 5
Total shareholders' equity $3,517 $8,187
Book value per share $2.21 $2.15
__________________
(1) Assumes that 2,222,223 shares are issued pursuant to the
Offering, with net proceeds of $4,670,000.
(2) Does not include 110,983 shares subject to outstanding
stock options at March 31, 1997, of which options to
purchase 78,358 shares were exercisable.
STATISTICAL DISCLOSURE
The following tables and data set forth, for the respective
dates 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 prinicpal category of assets and liabilities and shareholders'
equity. The tables also present the amounts and average rates of
interest earned and paid on each category of interest-earning assets
and interest-bearing liabilities, along with the net interest
income and net yield on earning assets for the periods indicated.
In addition, the tables set forht changes in the components of net
interest income for the periods indicated. The total change is
segmented into the change attributable to vaiations in vvolume
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, 1996
(Dollar amount
in thousands) YTD Interest Average Change from prior year
Average Income/ Yield/ due to change in:
Balance Expense Rate Volume Rate Total
Loans $49,670 $4,035 8.1% $(309) $(468) $(777)
Other
earning
assets:
Interest
bearing
deposits
with
financial
instit-
utions 832 47 5.7% 10 ( 3 ) 7
Investment
Securities 7,775 476 6.1% (410) 37 (373)
Fed funds
sold 11,206 623 5.6% 262 (14) 248
Other
earning
assets 19,813 1,145 5.8% (138) 20 (118)
Total
interest
earning
assets 69,483 $5,180 7.5% ($447) ($448) ($895)
Non earning
assets:
Cash & due
from
banks 6,247
Other
assets 3,666
Allowance
for loan
loss (602)
$78,794
Interest bearing liabilities:
Deposits:
Demand $6,628 $62 0.9% ($11) ($1) ($12)
Money
market
and
savings 27,566 723 2.6% (82) (11) (93)
Time
certificate
of
deposit 8,463 392 4.6% (53) 22 (31)
Federal
funds
purchased 0 0 0 (5) (5) (10)
Total interest
bearing
liabilities 42,657 $1,177 2.8% $(151) $5 ($146)
Noninterest-
bearing
liabilities
and share-
holders equity:
Non interest
bearing
demand 31,762
Other
liabilities 261
Shareholders'
equity 4,114
$78,794
Net interest income $4,003
Net interest spread 4.7%
Net yield on earning assets 5.8%
<PAGE>
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: in:
Balance Expense Rate Volume Rate Total
Loans $53,237 $4,812 9.0% ($652) $340 ($312)
Other earning
assets:
Interest-
bearing
deposits
with
financial
insti-
tutions 648 40 6.2% 29 1 30
Investment
securities14,497 848 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) $14 5 ($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%
Investment Securities
The following table shows the carrying amount of the portfolio
of investment securities at the end of each of the past two
years:
Total Estimated
Amortized Gross Unrealized Market
Cost Gains Losses Value
(Dollars in thousands)
1996
Securities
available
for sale:
US. Treasury
and agency
securities $1,004 $3 $0 $1,007
Mortgage-
backed
securities 19 5 0 24
Total $1,023 $8 $0 $1,031
Securities held
to maturity:
Federal
Reserve
Bank stock $120 $0 $0 $120
Mortgage-backed
securities 5,969 0 (266) 5,703
Total $6,089 $0 $(266) $5,823
1995
Securities
available
for sale:
US. Treasury
and agency
securities $3,002 $6 $0 $3,008
Mortgage-
backed
securities 300 0 (5) 295
Total $3,302 $6 $(5) $3,303
Securities
held to
maturity:
Federal Reserve
Bank stock $148 $0 $0 $148
Mortgage-
backed
securities 6,463 0 (304) 6,159
Total $6,611 $0 $(304) $6,307
The following table shows the maturities of investment
securities at December 31, 1996 and the weighted average yields
of those securities.
(Dollars in thousands) Over 1 Over 5
Year Years
1 Year through through Over Average
or less 5 Years 10 Years 10 Years Total Yield
Securities
available
for sale:
U.S. Treasury
and agency
securities $1,007 $0 $0 $0 $1,007 5.7%
Mortgage-
backed
securities 0 24 0 0 24 6.5%
Total $1,007 $24 $0 $0 $1,031 5.7%
Securities held
to maturity:
Mortgage-
backed
securities $0 $5,969 $0 $0 $5,969 6.3%
Federal
Reserve
Bank
Stock 0 0 0 120 120 6.0%
Total $0 $5,969 $0 $120 $6,089 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) % of % of
1996 Total 1995 Total
Commercial Loans $14,056 29.6% $15,488 30.9%
Real Estate Loans:
Interim Construction 457 1.0% 0 0.0%
Income Property 27,220 57.4% 24,987 49.8%
Residential 1-4 units 4,819 10.2% 8,517 17.0%
Total real
estate loans 32,496 33,504
Installment loans 895 1.9% 1,179 2.3%
47,447 100.0% 50,171 100.0%
Deferred net loan
origination costs 249 64
Allowance for Loan
Losses (1,088) (720)
Net Loans $46,608 $49,515
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) 1996 1995
COMMERCIAL LOANS
Aggregate maturities of
loan balances due:
In one year or less:
Interest rates are
floating or adjustable $10,039 $13,962
Interest rates are
fixed or predetermined 0 1,035
After one year but
within five years:
Interest rates are
fixed or predetermined 4,012 491
After five years:
Interest rates are
fixed or predetermined 5 0
Total commercial
loans 14,056 15,488
REAL ESTATE CONSTRUCTION LOANS
Aggregate maturities of loan
balances due in one year or less
and interest rates are floating
or adjustable 457 0
Total commercial and
construction loans $14,513 $15,488
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, 1996, loans on nonaccrual totaled $568,400,
compared with $523,000 at year end 1995. The reduction in
interest income associated with nonaccrual loans was
approximately $147,100 during 1996, and $79,900 during 1995. At
December 31, 1996 and 1995, there were no loans past due ninety
days or more and still accruing interest. At December 31, 1996
and 1995, the Bank had classified $68,900 and $60,600,
respectively, of its loans as impaired and recorded the full
amount as specific reserve in the allowance for loan losses. In
addition, the Bank classified $499,500 and $2,354,900,
respectively, of its loans as impaired without a specific
reserve. The average recorded investment of impaired loans
during the year ended December 31, 1996 and 1995 was
approximately $2,433,400 and $2,422,900, respectively. Interest
income of $73,000 and $60,900, respectively, was recognized on
impaired loans during the years ended December 31, 1996 and
1995. There were no restructured loans at December 31, 1996.
However, at December 31, 1995, loans with restructured terms
totaled $1,253,900. The reduction in interest income associated
with restructured loan was approximately $25,000 in 1995. There
were no other loans at December 31, 1996, 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, 1996, 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, 1996 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 the 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)
1996 1995
Balance of allowance for loan losses
at beginning of year $720 $796
Loans charged off:
Commercial (297) (437)
Real estate 0 (233)
Installment (6) (70)
Total loans charged off (303) (740)
Recoveries of loans
previously charged off:
Commercial 69 97
Real estate 0 3
Installment 1 3
Total loan recoveries 70 103
Net loans charged off (233) (637)
Provision charged to operating expense 601 561
Balance of allowance for loan
losses at end of year $1,088 $720
1996 1995
Amount of loans outstanding at
end of the year $47,447 $50,171
Average amount of loans outstanding $49,670 $53,237
Ratio of net charge-offs to
average loans outstanding 0.47% 1.20%
Ratio of allowance for loan
losses at the end of the
year to average loans outstanding 2.19% 1.35%
Ratio of allowance for loan losses
at the end of the year to loans
outstanding at the end of the year 2.29% 1.44%
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,
1996 1995
(Dollars in
thousands) Percent of Percent of
Loans in Loans in
Allowance Each Allowance Each
for Category of for Category of
Loan Losses Total Loans Loan Losses Total Loans
Commercial loans $158 29.6% 147 30.9%
Real estate loans:
Interim
construction 0 1.0% 0 0.0%
Income property 445 57.3% 367 49.8%
Residential 1-4 0 10.2% 0 17.0%
Installment loans 56 1.9% 0 2.3%
Others 0 0.0% 39 0.0%
Unallocated 429 - 167 -
Total allowance
for loan losses $1,088 100.0% $720 100.0%
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, 1996, 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. However, the Bank's capital status may limit
or preclude the Bank from access to borrowings from the Federal
Reserve System through the discount window in the event the Bank is in the
"undercapitalized" category or worse under the PCA Provisions as
discussed in the section entitled "RISK FACTORS - Noncompliance with Capital
Requirements at Year-End 1996 and Risk of Future Noncompliance" herein.
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:
1996 1995
(Dollars in thousands) Average Average Average Average
Balance Rate Balance Rate
Demand, non-interest-
bearing $31,762 $32,229
Demand, interest bearing 6,628 0.90% 7,771 0.90%
Money market and savings 27,566 2.70% 30,669 2.70%
Time certificates of
deposit:
Under $100,000 5,776 4.30% 3,902 4.30%
$100,000 or more 2,687 4.50% 5,721 4.50%
Total Deposits $74,419 $80,292
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) 1996 1995
Three months or less $3,443 $2,156
Over three months through six months 2,360 2,242
Over six months through twelve months 2,298 3,693
Over twelve months 161 989
Total $8,262 $9,080
The Bank had no brokered deposits at December 31, 1996 and 1995.
Selected Financial Ratios
The following table sets forth the ratios of net loss to
average assets and to average shareholders' equity, and the
ratio of average shareholders' equity to average assets.
1996 1995
Return on average assets (1.2)% (1.6)%
Return on average shareholders'
equity (22.8)% (26.8)%
Average shareholders' equity
to average assets 5.2% 6.1%
Shareholders' equity to total
assets at year end 4.6% 4.6%
Changes in Net Interest Income
Three Months Ended March 31, 1997
(Dollar amount
in thousands) YTD Interest Average Change from prior year
Average Income/ Yield/ due to change in:
Balance Expense Rate Volume Rate Total
Loans $46,539 $876 7.6% $(83) $(112) $(195)
Other earning
assets:
Interest
bearing
deposits
with
financial
instit-
utions 988 14 5.7% 7 (1) 6
Investment
Securities 7,465 109 5.9% (37) 10 (27)
Fed funds
sold 4,523 51 4.5% (70) (40) (110)
Other
earning
assets 12,976 174 5.5% (100) (31) (131)
Total interest
earning
assets 59,515 1,050 7.2% $(183) $(143) $(326)
Non earning
assets:
Cash & due
from banks 4,879
Other assets 4,386
Allowance
for loan
loss (1,034)
$67,746
Interest bearing
liabilities:
Deposits:
Demand $6,216 $14 0.9% $(1) $(2) $(3)
Money
market
and
savings 23,735 153 2.6% (13) (7) (20)
Time
certificate
of deposit 8,559 89 4.2% (6) (10) (16)
Total interest
bearing
liabilities 38,510 256 2.7% $(20) $(19 ) $(39)
Noninterest-
bearing
liabilities
and share-
holders
equity:
Non interest
bearing
demand 25,808
Other
liabilities 220
Shareholders'
equity 3,208
$67,746
Net interest income $794
Net interest spread 4.5%
Net yield on earning assets 5.4%
Changes in Net Interest Income
Three Months Ended March 31, 1996
(Dollar amounts in thousands)
YTD Interest Average Change from prior year
Average Income/ Yield/ due to change in:
Balance Expense Rate Volume Rate Total
Loans $50,664 $1,071 8.6% $(106) $(112) $(218)
Other
earning
assets:
Interest-
bearing
deposits
with
financial
instit-
utions 519 8 6.1% (5) 0 (5)
Investment
securities 9,998 137 5.5% (180) (8) (188)
Federal
funds
sold 9,763 161 6.7% 143 3 146
Other
earning
assets 20,280 306 6.1% (42) (5) (47)
Total interest-
earning
assets 70,944 1,377 7.9% $(148) $(117) $(265)
Non-earning
assets:
Cash and due
from banks 6,174
Other
assets 4,334
Allowance
for loan
losses (719)
$80,733
Interest-bearing liabilities:
Deposits:
Demand $6,709 $17 1.0% $(4) $1 $(3)
Money
market
and
savings 25,712 174 2.7% (77) 8 (69)
Time
certificates
of
deposit 9,090 105 4.7% (12) 17 5
Federal
funds
purchased 0 0 0.0% (5) (5) (10)
Total interest-
bearing
liabilities 41,511 296 2.9% $(98) $21 $(77)
Non-interest
bearing
liabilities
and Shareholders'
equity:
Non-interest
bearing
demand
deposits 34,840
Other
liabilities 309
Shareholders'
equity 4,073
$80,733
Net interest income $1,081
Net interest spread 5.0%
Net yield on earning assets 6.2%
Investment Securities
The following table shows the carrying amount of the portfolio
of investment securities as of March 31, 1997 and December 31,
1996:
Total Estimated
Amortized Gross Unrealized Market
Cost Gains Losses Value
(Dollars in thousands)
March 31, 1997
Securities available
for sale:
US. Treasury and
agency
securities $1,999 $0 $(7) $1,992
Mortgage-backed
securities 15 12 0 27
Total $2,014 $12 $(7) $2,019
Securities held to
maturity:
Federal Reserve
Bank stock $120 $0 $0 $120
Mortgage-backed
securities 5,958 0 (437) 5,521
Total $6,078 $0 $(437) $5,641
December 31, 1996
Securities available
for sale:
US. Treasury and
agency
securities $1,004 $3 $0 $1,007
Mortgage-backed
securities 19 5 0 24
Total $1,023 $8 $0 $1,031
Securities held to
maturity:
Federal Reserve
Bank stock $120 $0 $0 $120
Mortgage-backed
securities 5,969 0 (266) 5,703
Total $6,089 $0 $(266) $5,823
The following table shows the maturities of investment
securities at March 31, 1997 and the weighted average yields of
those securities.
Over 1 Over 5
Year Years
1 Year through through Over Average
or less 5 Years 10 Years 10 Years Total Yield
(Dollars in
thousands)
Securities
available
for sale:
U.S.
Treasury
and
agency
securit-
ies $1,992 $0 $0 $0 $1,992 5.9%
Mortgage-
backed
securit-
ies 0 27 0 0 27 6.5%
Total $1,992 $27 $0 $0 $2,019 5.8%
Securities
held
to maturity:
Mortgage-
backed
securit-
ies $0 $5,958 $0 $0 $5,958 6.3%
Federal
Reserve
Bank
Stock 0 0 0 120 120 6.0%
Total $0 $5,958 $0 $120 $6,078 6.3%
Loan Portfolio
The following table sets forth the amount of loans outstanding
as of March 31, 1997 and December 31, 1996:
March 31, 1997 December 31, 1996
(Dollars in Thousands) Amount % of Amount % of
Total Total
Commercial Loans $13,099 28.6% $14,056 29.6%
Real Estate Loans:
Interim Construction 207 0.5% 457 1.0%
Income Property 27,026 59.0% 27,220 57.4%
Residential 1-4
units 4,645 10.2% 4,819 10.2%
Total real
estate loans 31,878 32,496
Installment loans 802 1.8% 895 1.9%
Total gross loans 45,779 100.0% 47,447 100.0%
Deferred net loan
origination costs 242 249
Allowance for Loan
Losses (1,110) (1,088)
Net Loans $44,911 $46,608
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
(Dollars in thousands)
March 31, 1997 December 31, 1996
COMMERCIAL LOANS
Aggregate maturities of
loan balances due:
In one year or less:
Interest rates
are floating or
adjustable $10,450 $10,039
Interest rates are
fixed or predetermined 1,151 0
After one year but within
five years:
Interest rates are
fixed or predetermined 1,498 4,012
After five years:
Interest rates are
fixed or predetermined 0 5
Total commercial
loans 13,099 14,056
REAL ESTATE CONSTRUCTION LOANS
Aggregate maturities of loan
balances due in one year or
less and interest rates
are floating or adjustable 207 457
Total commercial and
construction loans $13,306 $14,513
Risk Elements - Nonaccrual, Past Due and Restructured Loans
At March 31, 1997 and March 31, 1996, loans on nonaccrual totaled
$2,074,700 and $843,000, respectively. The reduction in interest
income associated with nonaccrual loans was approximately
$36.800 and $17,700, respectively, for the three month periods
ended March 31, 1997 and 1996. At March 31, 1997 and 1996, there
were no loans past due ninety days or more and still accruing
interest. At March 31, 1997 and 1996, the Bank had classified
$1,424,200 and $46,800, respectively, of its loans as impaired
and recorded a loss of $173,000 and $46,800, respectively, as
specific reserves in the allowance for loan losses. In addition,
the Bank classified $52,100 and $2,093,200, respectively, 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 reserves have been recorded on these loans. The
average recorded investment of impaired loans during the three
months ended March 31, 1997 and 1996 was approximately
$1,462,200 and $1,957,500, respectively. Interest income of
$1,300 and $19,200, respectively, was recognized on impaired
loans during the three months ended March 31, 1997 and 1996.
There were no other loans at March 31, 1997, 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 March 31,
1997, the Company had no loan concentrations exceeding ten
percent of total gross loans outstanding.
Summary of Loan Loss Experience
Although management believes the level of the allowance as of March 31, 1997
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 reasonable be predicted at this date. Such losses may also cause
unanticipated erosion of the Bank's capital.
The following table summarizes the 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.
Three months
Ended
Loan Charge-offs and Recoveries March 31,
(Dollars in thousands) 1997 1996
Balance of allowance for loan
losses at beginning of period $1,088 $720
Loans charged off:
Commercial (77) (38)
Real estate 0 0
Installment (68) 0
Total loans charged off (145) (38)
Recoveries of loans previously
charged off:
Commercial 17 6
Real estate 0 0
Installment 0 0
Total loan recoveries 17 6
Net loans charged off (128) (32)
Provision charged to operating expense 150 0
Balance of allowance for loan losses
at end of period $1,110 $688
1997 1996
Amount of loans outstanding at
end of the period $45,779 $49,723
Average amount of loans outstanding $46,539 $50,664
Ratio of annualized net charge-offs
to average loans outstanding 1.10% 0.25%
Ratio of allowance for loan losses
at the end of the period to average
loans outstanding 2.39% 1.36%
Ratio of allowance for loan losses
at the end of the period to loans
outstanding at the end of the period 2.42% 1.38%
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 March 31, 1997 December 31, 1996
(Dollars in Percent of Percent of
thousands) Loans in Loans in
Allowance Each Allowance Each
for Category to for Category of
Loan Losses Total Loans Loan Losses Total Loans
Commercial loans $374 28.6% $158 29.6%
Real estate loans:
Interim
construction 0 0.5% 0 1.0%
Income property 518 58.9% 445 57.3%
Residential 1-4 0 10.2% 0 10.2%
Installment loans 34 1.8% 56 1.9%
Others 0 0.0% 0 0.0%
Unallocated 184 - 429 -
Total allowance
for loan losses $1,110 100.0% $1,088 100.0%
Although management believes the level of the allowance for
loan losses as of March 31, 1997, 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.
Deposits
The distribution of average deposits and the average rates paid
thereon is summarized for the periods indicated below:
March 31,1997 December 31,1996
Deposits
(Dollars in
thousands) Average Average Average Average
Balance Rate Balance Rate
Demand, non-
interest-
bearing $25,808 $31,762
Demand,
interest
bearing 6,216 0.90% 6,628 0.90%
Money market
and savings 23,735 2.60% 27,566 2.70%
Time certificates
of deposit:
Under
$100,000 5,842 4.10% 5,776 4.30%
$100,000
or more 2,717 4.30% 2,687 4.50%
Total Deposits $64,318 $74,419
The following is a maturity schedule of time certificates of
deposit of $100,000 or more at March 31. 1997 and December 31,
1996:
Time Certificates of Deposit
(Dollars in thousands) March 31, 1997 December 31, 1996
Three months or less $2,101 1,075
Over three months through
six months 1,154 624
Over six months through
twelve months 346 1,023
Total $3,601 $2,722
The Bank had no brokered deposits at March 31, 1997 or December 31,
1996.
Selected Financial Ratios
The following table sets forth the ratios of net loss to
average assets and to average shareholders' equity, and the
ratio of average shareholders' equity to average assets.
March 31, 1997 December 31, 1996
Return on average assets (1.7)% (1.2)%
Return on average
shareholders' equity (9.0)% (22.8)%
Average shareholders'
equity to average assets 4.7% 5.2%
Shareholders' equity to
total assets at period end 4.4% 4.6%
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years Ended 1996, 1995 and 1994
The following discussion is intended to provide information to
facilitate the understanding and assessment of significant
changes in trends related to the consolidated financial
condition and results of operations of the Company. The
discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and notes thereto
appearing elsewhere in this prospectus.
Summary
The Company recorded a net loss for the year ended December
31,1996 of $939,100, or $0.75 per common share, as compared to a
net loss of $1,402,800 or $1.12 per common share for the year
ended December 31, 1995. The losses in 1996 and 1995 are
primarily attributable to the provision for loan losses and
costs related to real estate acquired through foreclosure.
The provision for loan losses was $601,000 in 1996 and $561,100
in 1995. Net operating costs of holding and disposing other
real estate owned was $389,400 in 1996 and $1,350,300 in 1995 as
the provision for real estate losses included in such costs
decreased to $151,000 from $1,147,500. The costs to acquire and
maintain real estate owned and the provision for loan losses in
1996 and 1995 resulted from the continued general economic slow
down and declining real estate values in Southern California.
The Company's net interest income declined slightly in 1996 as
the interest rate spread declined from 5.4 percent in 1995 to
4.7 percent in 1996. Average earning assets were $69,483,000 in
1996 as compared to $74,887,000 in 1995 or a decrease of 10.8
percent. Average interest-bearing liabilities also declined
during this period to $42,657,000 in 1996 from $48,241,000 in
1995 or 11.6 percent.
At December 31, 1996, the Company had total assets of
$66,393,000, net loans of $46,608,200 and total deposits of
$62,881,000. This compares to total assets of $86,754,600, net
loans of $49,515,100 and total deposits of $82,529,900 as of
December 31, 1995. The Bank experienced a decrease in demand
deposits as one account relationship representing 14 percent of
total deposits left the Bank. In addition, money market
accounts declined as the insurance proceeds received from
property management company customers for damage sustained in
the Northridge earthquake in 1994 were withdrawn to make
repairs. Proceeds from the maturity of federal funds sold were
used to fund these declines.
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, action plans to accomplish the following: a)
achieve and maintain the desired capital ratios of a minimum
8.5% for the Tier 1 risk-based capital ratio and a minimum of 6%
for the leverage capital ratio; b) attain satisfactory
profitability; and c) reduce other real estate owned. The plan
was accepted by the OCC on January 30, 1996. At December 31,
1996, the Bank had a Tier 1 risk-based capital ratio of 6.1
percent and a Tier 1 leverage ratio of 4.1 percent.
On December 16, 1996, the Company entered into a formal
agreement with the FRBSF under which Marathon Bancorp agreed,
among other things, to refrain from paying cash dividends except
with the prior approval of the FRBSF, submit an acceptable plan
to increase and maintain an adequate capital level, submit
annual statements of planned sources and uses of cash, and
submit annual progress reports.
As of December 31, 1996, the Bank was categorized as
"undercapitalized" under the PCA Provisions. As an
"undercapitalized" institution, the Bank may not issue dividends
or make other capital distributions, and may not accept brokered
or high rate deposits, as defined, due to the level of its
risk-based capital. In addition, under the PCA Provisions, the
Bank's capital status may preclude the Bank from access to
borrowings from the Federal Reserve System through the discount
window. However, the Company successfully completed a
private placement offering on March 24, 1997 which resulted in
$766,872 of new capital for the Bank. On April 3, 1997 the Bank
received a letter from the OCC stating that the Bank was
"adequately capitalized" under the PCA Provisions. The Bank at
March 31, 1997 has a Tier 1 risk-based capital ratio of 7.0%
and leverage capital ratio of 5.2%.
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 interest income and fees from earning
assets and interest paid on interest-bearing liabilities. As
shown in Table 1, total interest and fee income amounted to
$5,180,000 in 1996 compared to $6,075,000 in 1995. Total
interest expense was $1,177,000 in 1996 compared to $1,322,000
in 1995. Net interest income decreased to $4,003,000 in 1996
from $4,753,000 in 1995 or 15.8 percent. Nonaccrual loans have
been included in loans in Table 1. The reduction in interest
income associated with non accrual loans was approximately
$174,000 in 1996 and $79,900 in 1995.
Net interest income declined in 1996 as compared to 1995 due to
the decrease in interest earning assets and decrease in interest
rates. Interest earning assets averaged $69,483,000 in 1996 as
compared to $74,887,000 in 1995 or a decrease of 7.2 percent.
The yield on average loans declined to 8.1 percent in 1996 as
compared to 9.0 percent. 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 1996 and 1995. 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 4.7 percent in 1996 as
compared to 5.4% in 1995. The net yield on earning assets was
5.8 percent in 1996, a decrease from 6.3 percent in 1995. The
1996 decrease resulted from a combination of the 7.2 percent
decrease in earning assets mentioned above as well as a decrease
in the weighted average yield on earning assets from 8.1 percent
in 1995 to 7.5 percent in 1996 as the yield on loans decreased.
The Company'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.
Management of the Company believes that they remain the lowest
cost source of funds available in the market place.
TABLE 1 - Net Interest Income Analysis
Interest Weighted Change From
Prior Year
Average Income/ Average Due to Change in:
(Dollars in
thousands) Balance Expense Yield/Cost Volume Rate Total
1996
Loans $49,670 $4,035 8.1% $(309) $(468) $(777)
Other earning
assets:
Interst-bearing deposits
with other financial
institutions 832 47 5.7% 10 (3) 7
Investment
Securities 7,775 476 6.1% (410) 37 (373)
Federal funds
sold 11,206 623 5.6% 262 (14) 248
Total interest
earning assets $69,483 $5,180 7.5% $(446) $(448) $(894)
Interest-bearing liabilities:
Demand
deposits $ 6,628 $ 62 0.9% $ (11)$ (1) $ (12)
Money Market
and savings
deposits 27,566 723 2.6% (82) (11) (93)
Time Certificate
of deposit 8,463 392 4.6% (53) 22 (31)
Federal funds
purchased 0 0 0.0% (5) (5) (10)
Total interest-bearing
liablities 26,826 $4,003 2.8% $(296) $(453) $(749)
Interest rate spread 4.7%
Net yield on earning assets 5.8%
1995
Loans $53,237 $4.812 9.0% $(652) $ 340 $(312)
Other earning
assets 21,650 1,263 5.8% 190 39 229
Interest bearing deposits with other financial
institution 648 40 6.2% 29 1 30
Investment
securities 14,497 848 5.8% 200 54 254
Mortgage securities
held for sale 0 0 0.0% (87) (86) (173)
Federal funds
sold 6,505 375 5.8% 48 70 118
Total interest-
earning
assets 74,887 6,075 8.1% (462) 379 (83)
Interest-bearing liabilities:
Demand
deposit s 7,771 73 0.9% 12 1 13
Money market and savings
deposit 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 $26,646 $4,753 2.7% $(212) $234 $ 22
Interest rate spread 5.4%
Net yield on earning assets 6.3%
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 weaknesses 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
$5,897,500 of loans classified as substandard and $44,300
classified as doubtful at December 31, 1996, a decrease in
substandard loans of $507,000 or 7.9 percent from 1995. In
addition to the classified loans, the Bank was also monitoring
$2,276,600 of loans which it had designated as listed at
December 31, 1996, a decrease of $1,790,300 or 44.0 percent from
1995. At December 31, 1996, nonaccrual loans totaled $568,400,
or 1.2 percent of gross loans, compared with $523,000, or 1.0
percent at December 31, 1995.
With the exception of these classified and listed loans,
management is not aware of any loans as of December 31, 1996
where the known credit problems of the borrower would cause it
to have serious doubts as to the ability of such borrowers to
comply with their present loan repayment terms and which would
result in such loans being considered nonperforming loans at
some future date. Management cannot, however, predict the
extent to which the current economic environment may worsen or
the full impact of 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.
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 abased 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. The allowance for
loan losses was $1,088,200 and $720,000, at December 31, 1996
or 2.3 percent and 1.4 percent, respectively
of the gross outstanding loans. At December 31, 1996, the
allowance was 0.5 times nonperforming loans (past due and
nonaccruals) and 0.1 times classifieid assets (substandard and
doubtful loans and other real estate owned).
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 $601,000
provision for loan losses during 1996. Loans totaling $303,000
were charged off during the period, and $70,100 was recovered.
Loans charged off amounted to $303,000 in 1996 and $740,000 in
1995, while recoveries totaled $70,100 and $102,500,
respectively. As a percent of average gross loans outstanding
during the year, loans charged off net of recoveries were 0.5
percent in 1996 and 1.2 percent in 1995 and 1994. The decrease
in loans charged off during 1996, compared to 1995 and 1994, was
the result of improvement of the overall quality of the loan
portfolio and revised credit policies.
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, 1996 and 1995, the Bank had classified $68,900
and $60,600, respectively, of its loans as impaired and recorded
the full amount as specific reserve in the allowance for loan
losses. In addition, the Bank classified $499,500 and
$2,354,900, respectively, 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 years
ended December 31, 1996 and 1995 was approximately $2,433,400
and $2,422,900, respectively. Interest income of $73,000 and
$60,900, respectively, was recognized on impaired loans during
the years ended December 31, 1996 and 1995.
OREO consisting of properties received in settlement of loans
totaled $3,085,300 at December 31,1996, an increase of $430,900
or 16.2 percent from 1995. The provision for real estate losses
was $151,000 in 1996 and $1,147,500 in 1995.
Because of the current economic environment, it is possible that
nonaccrual loans and OREO could increase in 1997. 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 $219,700 in
1996 compared to $259,300 in 1995. The decline in service
charge income reflects the corresponding decline in demand
deposits.
Other Operating Expenses. Other operating expenses totaled
$4,561,300 in 1996, a decrease of 22.1 percent from $5,853,500
in 1995. The net operating cost of OREO (which included the
write down of properties to fair market value) was $389,400 in
1996 as compared to $1,350,300 in 1995. Legal expenses related to OREO
was $1,898 for the three months ended March 31, 1997, $9,145 and $26,438
for the years ended 1996 and 1995, respectively.
Total other operating expenses were 5.8 percent and 6.8 percent
of average total assets in 1996 and 1995, respectively. The
decrease in this ratio in 1996 is attributable to the decrease
in the cost of holding and disposing of other real estate owned.
In 1994, the Bank was forced to vacate its premises due to
severe earthquake damage and moved into another nearby location. The
bank relocated back to its headquarters in November 1996. Occupancy
expense increased $178,800 or 50.8 percent in 1996 since the monthly
rent increased to $46,500 per month as compared to $17,300 at its temporary
location.
Salary and employee benefits decreased $413,500 or 22.4 percent due to a
lower level of staffing, primarily at the officer level. Professional
services including all legal costs incurred by the Bank decreased $172,400
or 23.7 percent primarily due to a decrease in legal expenses as the Bank
settled two legal matters in early 1996. Litigation expenses includes a
reserve for potential losses related to the former mortgage banking
division.
Income Taxes. The company had no income tax expense or benefit
in 1996 and 1995, except for minimum state taxes (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 $20,361,600 or 23.5 percent
to $66,393,000 at December 31, 1996 from $86,754,600 at December
31, 1995. The Bank experienced a decrease in demand deposits as
one account relationship representing 14 percent of total
deposits left the Bank. In addition, the Bank experienced a
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 70.2
percent as of December 31, 1996, as compared to 57.1 percent in
1995. The loan to deposit ratio was 74.1 percent at December
31, 1996 as compared to 60.0 percent in 1995. 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,
1996 1995
Amount Percentage Amount Percentage
Commercial
loans $14,056,000 30% $15,488,100 31%
Real estate
loans:
Interim
construction 457,000 1% 0 0%
Income property 27,219,700 57% 24,987,000 50%
Residential 1-4
units 4,819,400 10% 8,517,000 17%
Total real
estate loans 32,496,100 68% 33,504,000 67%
Installment
loans 895,100 2% 1,178,900 2%
Total loans 47,447,200 100% 50,170,900 100%
Deferred net
loan origination
costs 249,200 64,300
Allowance for
loan losses (1,088,200) (720,100)
Net loans $46,608,200 $49,515,100
Allowance for Loan Losses. The following table provides a
three-year summary of activity in the allowance for loan losses
by loan type:
TABLE 3 -- Allowance for Loan Losses
1996 1995 1994
Balance, January 1 $720,100 $796,500 $1,500,000
Loans charged off:
Commercial loans (297,300) (437,000) (829,400)
Real estate loans 0 (233,300) (65,300)
Installment loans (5,700) (69,700) (71,300)
Total loans
charged off (303,000) (740,000) (966,000)
Recoveries of
previously
charged-off loans:
Commercial loans 69,100 96,800 261,500
Real estate loans 0 2,600 0
Installment loans 1,000 3,100 1,000
Total recoveries 70,100 102,500 262,500
Net charge-offs (232,900) (637,500) (703,500)
Provision for
loan losses 601,000 561,100 0
Balance,
December 31 $1,088,200 $720,100 $796,500
Ratio of allowance
for loans losses
to loans 2.3% 1.4% 1.4%
Funding and Capital
Deposits. Total deposits averaged $74,419,000 in 1996 as
compared to $80,292,000 in 1995 or a decline of 7.3 percent.
Average noninterest bearing demand deposits were $31,763,000 in
1996 as compared to $32,229,000 in 1995. Average
interest-bearing deposits declined $5,583,000 or 11.6 percent as
the insurance proceeds received by property management company
customers for damage sustained in the Northridge earthquake were
continue to be withdrawn to make repairs.
Capital. Marathon Bancorp and the Bank are subject to various
regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, Marathon
Bancorp and the Bank must meet specific capital guidelines that
involve quantitative measures of Marathon Bancorp and the Bank's
assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Marathon
Bancorp's and the Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Bank to maintain a minimum Tier 1
risk-based capital ratio, total capital risk-based capital
ratio, and leverage capital ratio.
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, action plans to accomplish the following: a)
achieve and maintain the desired capital ratios of a minimum
8.5% for the Tier 1 risk-based capital ratio and a minimum of 6%
for the leverage capital ratio; b) attain satisfactory
profitability; and c) reduce other real estate owned. The plan
was accepted by the OCC on January 30, 1996. At December 31,
1996, the Bank had a Tier 1 risk-based capital ratio of 6.1
percent and a Tier 1 leverage ratio of 4.1 percent.
Subsequently the Company completed a private placement offering
on March 24, 1997 which resulted in $766,872 of new capital for
the Bank. On April 3, 1997 the Bank received a letter from the
OCC stating that the Bank was "adequately capitalized" under the
PCA Provisions. The Bank at March 31, 1997 has a Tier 1
risk-based capital ratio of 7.0%, Total risk-based capital ratio
of 8.3% and leverage capital ratio of 5.0%.
The following table summarizes the capital ratios achieved by
the Bank as of March 31, 1997 and the minimum levels required by
FDIC regulations and the formal agreement with the OCC.
Actual Bank To be
Capital at Categorized OCC
March 31, as Adequately Formal
1997 Capitalized Agreement
Total risk-based 8.3% 8.0% N/A
Tier 1 risk-based 7.0% 4.0% 8.5%
Tier l leverage 5.0% 4.0% 6.0%
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 22.7 percent at December 31, 1996 and 38.6
percent at December 31, 1995. The decrease in this ratio is a
result of liquid assets, primarily federal funds sold,
decreasing at a faster rate, 55.1 percent, than total deposits
which decreased 23.8 percent. Federal funds sold were unusually
high at December 31, 1995 as management elected not to reinvest
the proceeds of matured securities given the uncertainty of
interest rates at that time. Reference is made to the Consolidated
Statement of Cash Flow appearing elsewhere in this prospectus.
In 1994, the net proceeds from the sale of mortgage loans were
invested in securities. The decrease in loans and the proceeds
from the sale of OREO in 1994 and 1995 were offset by a net
decrease in deposits. The decline in deposits in 1996 was
primarily due to one demand deposit account relationship with a
$11,500,000 balance at December 31, 1995 that left the Bank.
The loan to deposit ratio was 75.5 percent and 60.9 percent at
December 31, 1996 and 1995, 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 and money market accounts that represent
insurance proceeds received by property management company customers
for damage sustained in the Northridge earthquake) 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, 84.6 percent of total deposits during
1996 and 83.3 percent in 1995. In addition, the Company's time
deposits were primarily from its local customer base and without
significant concentrations. 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.
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.
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 96 percent of rate sensitive
liabilities at December 31, 1996 as compared to 100 percent at
the end of 1995. In the one year or less category, rate
sensitive assets were 114 percent of rate sensitive liabilities
at the end of 1996 as compared to 114 percent in 1995. The gap
position is but one of several variables that affect net
interest income. Consequently, these amounts are used with care
in forecasting the impact of short term changes in interest
rates on net interest income. In addition, the gap calculation
is a static indicator and is not a net interest income predictor
in a dynamic business environment.
TABLE 4 - Analysis of Rate Sensitive Assets & Liabilities
by Time Period
(Dollars in 90 days 3-12 1-5 Over 5
millions) or less months years years Total
December 31, 1996
Investments,
including
federal funds
sold $ 2.9 $ l.6 $ 6.0 $ 0.1 $10.6
Loans 33.7 3.8 5.2 4.4 47.1
Rate sensitive
assets 36.6 5.4 11.2 4.5 57.7
Time deposits 3.4 4.6 0.2 0.0 8.2
Other deposits 27.6 1.2 0.0 23.0 51.8
Rate sensitive
liabilities 31.0 5.8 0.2 23.0 60.0
Rate sensitive GAP $ 5.6 $(0.4) $11.0 $(18.5) $ (2.3)
Cumulative GAP $ 5.6 $ 5.2 $16.2 $ (2.3) --
Cumulative ratio of
sensitive assets to
liabilities 1.2 1.1 1.4 1.0 1.0
December 31, 1995
Investments,
including
federal
funds sold $16.6 $ 1.7 $ l.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
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.
During 1993 and 1994, the Bank operated a wholesale mortgage
banking division which acquired approximately $44 million of
residential loans. The loans were then sold to various
investors with standard recourse language in the event of fraud.
During 1996, three investors requested the Bank to repurchase
ten of the loans due to alleged documentation deficiencies, the
alleged failure of the Bank to secure mortgage insurance or
disagreements over appraisal values. All of the loans are
secured by residential real estate. The Bank has reviewed the
documentation relative to these loans and, after consultation
with legal counsel, believes that it has appropriate defenses.
At December 31, 1996, the Bank has established a reserve for
potential losses that may result from this operation.
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 teens in excess of one year as of December 31,
1996 are as follows:
TABLE 5
Year Amount
1997 $ 399,500
1998 594,100
1999 594,100
2000 594,100
2001 594,100
2002 396,100
$3,172,000
Rent expense was $265,400, $194,400 and $387,300 for the years
ended December 31, 1996, 1995 and 1994, respectively. Sublease
rental income was $9,500 in 1996 and $34,700 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 notional
amounts. At December 31, 1996 and 1995, undrawn commitments to
extend credit to Bank customers amounted to $8.6 million and
$10.1 million, respectively.
Quarter Ended March 31, 1997
Summary
The Company recorded a net loss for the three-month period
ended March 31, 1997 of $290,200, or $0.23 per share compared to
a net loss of $21,500, or $0.02 per common share, for the same
period in 1996. The primary reasons for the decrease in
earnings were the fact that net interest income for the
three-month period ended March 31, 1997 decreased by $286,800
from the same period in 1996 (see "Net Interest Income") and the
Bank made a $150,000 loan loss provision for the three-month
period ended March 31, 1997 as compared to no provision for the
same period in 1996 (see "Provision for Loan Losses") while
other operating expenses declined by $167,500.
As summarized in Table 1 and discussed more fully below, the
Bank's operations for the first three months of 1997 resulted in
a 26.5 percent decrease in net interest income, a 100.0 percent
increase in the provision for loan losses, a 1.5 percent
increase in other operating income, and a 14.3 percent decrease
in other operating expenses.
Table 1
Summary of Operating
Performance Three-month Period Increase/
Ended March 31, (decrease)
(Dollars in
thousands) 1997 1996 Amount Percent
Net interest income $794 $1,081 $(287) (26.5)%
Provision for
loan losses 150 0 150 N/A
Other operating income 68 67 1 1.5%
Other operating
expenses 1,002 1,169 (167) (14.3)%
Net loss $(290) $(21) $(269) (1,274.4)%
At March, 31, 1997, the Company had total assets of
$80,344,200, total net loans of $44,911,200 and total deposits
of $76,141,500. This compares to total assets of $66,393,000,
total net loans of $46,608,200 and total deposits of $62,881,000
at December 31, 1996. Total deposits and total assets were
unusually high at March 31, 1997 due to a $7,900,000 deposit
which the Bank had for only that day.
At March 31, 1997, the Company and the Bank had a Tier 1 risk
based capital ratio of 7.0 percent, and a Tier 1 capital
leverage ratio of 5.2 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.
Operating Performance
Net Interest Income: Net interest income (the amount by which
interest generated from earning assets exceeds interest expense
on interest-bearing liabilities) is the most significant
component of the Company's earnings. The Company's diverse
portfolio of earning assets is comprised of its core business of
loan underwriting, augmented by liquid overnight federal funds
sold, short term interest-bearing deposits with other financial
institutions and investment securities. These earning assets
are financed through a combination of interest-bearing and
noninterest-bearing sources of funds.
Operating results in the three-month period of 1997 were
impacted by a 26.5 percent decrease in net interest income from
the same period of 1996, to $1,050,500. The reasons for this
decline were decreases in the rate of interest earned on loans,
the increase in the level of nonaccrual loans and a decrease in
the volume of earning assets, partially offset by a decrease in
the rate of interest paid on interest-bearing liabilities and
amount of interest bearing liabilities. The average rate of
interest earned on loans was 7.6 percent in 1997 as compared to
8.6 percent in 1996, as nonaccrual loans increased to $2,074,700
at March 31, 1997 from $843,000 at March 31, 1996. In addition,
average loans outstanding declined $4,125,000 or 8.1 percent
between the three months ended March 31, 1996 and the three
months ended March 31, 1997 while average interest-bearing
liabilities decreased $3,001,000 or 7.2 percent. The amounts of
these increases and reductions may be seen in Table 2.
The Bank analyzes its performance using the concepts of
interest rate spread and net yield on earning assets. The
interest rate spread represents the difference between the yield
on earning assets and the interest rate paid on interest-bearing
liabilities. The net yield on earning assets is the difference
between the yield on earning assets and the effective rate paid
on all funds -- interest-bearing liabilities as well as
interest-free sources.
The Company's interest rate spread for the three-month period
ended March 31, 1997 was 4.5 percent compared to 5.0 percent in
1996. The 1997 decrease was due to a decrease in the yield on
all earning assets. A decrease in the prime rate in early 1996
contributed to the decrease in the rates paid on
interest-bearing liabilities. The net yield on earning assets
was 5.4 percent in the three-month period of 1997 and 6.2
percent during the same period in 1996.
The Bank's net yield on earning assets remains high in
comparison with the Company's interest rate spread due to the
significant volume of noninterest-bearing demand deposits
relative to total funding sources (represented by total deposits
and shareholders' equity). While these deposits are
noninterest- bearing, they are not without cost. However, the
Bank believes that they remain the lowest cost source of funds
available in the marketplace (see "Liquidity and Interest Rate
Sensitivity Management").
Table 2
Net Interest
Income Analysis Interest Weighted Change from prior year
(Dollars in Average Income/ Average due to change in:
thousands) Balance Expense Yield/Cost Volume Rate Total
Three months
ended March 31,
1997
Loans $46,539 $876 7.6% $(83) $(112) $(195)
Other
earning
assets 12,976 175 5.5 (100) (31) (131)
Interest-
earning
assets 59,515 1,051 7.2 (183) (143) (326)
Interest-
bearing
liabilities 38,510 257 2.7 (20) (19) (39)
$21,005 $794 4.5% $(163) $(124) $(287)
Net yield on earning assets 5.4%
Three months
ended March 31,
1996
Loans $50,664 $1,071 8.6% $(106) $(112) $(218)
Other
earning
assets 20,280 306 6.1 (42) (5) (47)
Interest-
earning
assets 70,944 1,377 7.9 (148) (117) (265)
Interest-
bearing
liabilities 41,511 296 2.9 (103) 26 (77)
$29,433 $1,081 5.0% $(45) $(143) $(188)
Net yield on earning assets 6.2%
Other Operating Income : Other operating income increased 1.5
percent in the three-month period ended March 31, 1997 to
$67,700 from $67,100 in the three-month period ended March 31,
1996.
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.
Excluding loans which have been classified loss and charged off
by the Bank, the Bank's classified loans consisted of $5,883,500
of loans classified as substandard at March 31, 1997 as compared
to $5,897,500 of substandard and $44,300 of loans classified as
doubtful at December 31, 1996. In addition to the classified
loans, the Bank was also monitoring $2,504,000 of loans which it
had designated as listed at March 31, 1997 as compared to
$2,276,600 at December 31, 1996.
With the exception of these classified and listed loans,
management is not aware of any other loans as of March 31, 1997
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. However, management subsequent to March 31,
1997 has become aware of one loan with a balance in the amount of
$559,000 where management has serious doubt about the ability of
the borrower to comply with the terms of such loan. Management
cannot, however, predict the extent to which the current economic
environment may persist or worsen or the full impact such
environment may have on the Bank's loan portfolio. Furthermore,
management cannot predict the results of any subsequent
examinations of the Bank's loan portfolio by its primary regulators.
Accordingly, there can be no assurance that other loans will not
become 90 days or more past due, be placed on nonaccrual or become
restructured loans, in-substance foreclosures or other real estate
owned in the future.
The allowance for loan losses, which provides a financial
buffer for the risk of losses inherent in the lending process,
is increased by the provision for loan losses charged against
income, decreased by the amount of loans charged off and
increased by recoveries. There is no precise method of
predicting specific losses which ultimately may be charged off
and the conclusion that a loan may become uncollectible, in
whole or in part, is a matter of judgment. Similarly, the
adequacy of the allowance and accompanying provision for loan
losses can be determined only on a judgmental basis after full
review, including consideration of economic conditions and their
effects on specific borrowers, borrowers' financial data, and
evaluation of underlying collateral for secured lending.
Based upon management's assessment of the overall quality of
the loan portfolio, and of external economic conditions, the
Bank made a $150,000 provision for loan losses in the first
three months of 1997. Loans totaling $145,400 were charged off
during the period, and $17,300 was recovered. Loans charged off
amounted to $38,100 in the three-month period ended March 31,
1996, while recoveries totaled $6,100. The March 31, 1997
allowance for loan losses was $1,110,100, or 2.4 percent of
gross loans outstanding, compared to 2.3 percent at December 31,
1996. As noted below, the level of nonaccural loans increased
during the first quarter of 1997, and the loans representing such
increase have been classified as substandard and taken into consideration
in determining the adequacy of the allowance for loan losses at
both December 31, 1996 and March 31, 1997.
The allowance for loan losses reflects management's
perception of the lending environment in which it operates.
Although management believes that the allowance for possible
loan losses is adequate, there can be no reasonable assurance
that further deterioration will not occur. As a result, future
provisions will be subject to continuing evaluation of inherent
risk in the loan portfolio.
At March 31, 1997 and 1996, the Bank had classified $1,424,200
and $46,800, respectively, of its loans as impaired and recorded
a loss of $173,000 and $46,800, respectively, as a specific
reserve. At March 31, 1997 and 1996, the Bank classified
$52,100 and $2,093,200, respectively, 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
three months ended March 31, 1997 and 1996 was approximately
$1,462,200 and $1,957,500, respectively. Interest income of
$1,300 and $19,200, respectively, was recognized on impaired
loans during the three months ended March 31, 1997 and 1996.
At March 31, 1997, nonaccrual loans totaled $2,074,700, or 4.5
percent of gross loans, compared with $568,400, or 1.2 percent
at December 31, 1996. Other real estate owned (OREO),
consisting of properties received in settlement of loans totaled
$2,840,700 at March 31, 1997, an increase of $244,600 or 7.9%
from December 31, 1996. The increase in nonaccrual loans during the
first quarter of 1997 was primarily due to the placing of two loans
totaling $1,284,600 on nonaccrual status. The first loan with a balance
of $686,100 is fully collateralized and is classified as substandard. The
second loan with a balance of $598,500 is collateralized at approximately
58% and is also classified as substandard. The Company has adequately
reserved for loans in accordance with SFAS No. 114.
Summary of Nonaccrual Loans
March 31, 1997 December 31, 1997
Commercial loans $ 825,580 $ 77,033
Mortgage loans $1,249,153 $499,500
Credit card 0 0
Overdrafts 0 0
Installment 0 0
Construction 0 0
Because of the current economic environment, it is possible
that nonaccrual loans and OREO could increase in 1997. Although
management believes that the allowance for possible loan losses
is adequate and OREO is carried at fair value less estimated
selling costs, there can be no reasonable assurance that
increases in the allowance for loan losses or additional
write-downs of OREO will not be required as a result of the
deterioration in the local economy or increases in interest
rates.
Other Operating Expenses: Other operating expenses totaled
$1,001,900 for the three-month period of 1997, a decrease of
$167,500 or 14.3 percent from $1,169,400 for the three month
period of 1996. Occupancy expense increased due to the Bank's
relocation to its original location in November 1996 which had
been vacated due to earthquake damage. The monthly rent has
increased from $17,400 per month to $46,300 per month.
In other categories of expenses, significant progress has been
made to reduce operating expenses through attrition and expense
control. Total other operating expenses were 5.9 percent and
5.8 percent of average total assets at March 31, 1997 and 1996,
respectively.
Income Taxes: Deferred income taxes are computed using the
liability method based on differences between the financial
reporting and tax basis of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse. A
valuation allowance is established to reduce the deferred tax
asset to the level at which it is "more likely than not" that
the tax asset or benefits will be realized. Realization of tax
benefits of deductible temporary differences and operating loss
carryforwards depends on having sufficient taxable income of an
appropriate character within the carryforward periods
The Company had no income tax expense or benefit for the three
months ended March 31, 1997 or 1996. For federal income tax
purposes, the Company has a net operating loss carryforward of
approximately $3,727,000 which expire in 20080 - 2011. For
state income tax purposes, the Company has incurred a net
operating loss of approximately $5,252,000 which expire in 1997
- - 2001 to offset future taxes payable, adjusted for the fifty
percent reduction, as required by state tax law.
Financial Condition
As set forth in Table 3, the Company recorded average total
assets for the three-month period ended March 31, 1997 of $67.7
million, a 14.1 percent decrease from 1996 annual average total
assets of $78.8 million. The Bank's average fed funds sold
decreased by $6.7 million or 59.6 percent in the three-month
period ended March 31, 1997 due to a similar decline in average
deposits noted below. In addition, the Bank's average loans
decreased 6.4 percent in the three-month period ended March 31,
1997 primarily due to reductions in the commercial segment of
the loan portfolio. This reduction reflects the current level
of loan demand.
Average total deposits of $64.3 million for the three-month
period ended March 31, 1997 declined 13.6 percent from average
total deposits of $74.4 for the year ended December 31, 1996.
Non-interest-bearing deposits representing 40.1 percent of
average total deposits for the three- month period ended March
31, 1997, totaled $25.8 million, down from $31.8 million, or
42.7 percent for year ended December 31, 1996. This decline is
due to one relationship representing approximately 10 percent of
average demand deposits which left the Bank in late 1996.
Table 3
Three-months ended Year ended
March 31, 1997 December 31, 1996 Change
Balance Sheet Average % of Average % of from 1996
Analysis Balance Total Balance Total Amount %
Dollars in
millions)
Loans $46.5 78.2% $49.7 71.5% $(3.2) (6.4)%
Other interest-
earning
assets 13.0 21.8% 19.8 28.5% (6.8) (34.3)%
Total
earning
assets 59.5 100.0% 69.5 100.0% (10.0) (14.4)%
Total
assets $67.7 $78.8 $(11.1) (14.1)%
Deposits:
Interest
bearing
demand $6.2 9.6% $6.6 8.9% $(0.4) (6.1)%
Money
market
and
savings 23.7 36.9% 27.6 37.1% (3.9) (14.1)%
Time
certificates
of deposit 8.6 13.4% 8.4 11.3% 0.2 2.4%
Total interest-
bearing
deposits 38.5 59.9% 42.6 57.3% (4.1) (9.6)%
Non-interest-
bearing demand
deposits 25.8 40.1% 31.8 42.7% (6.0) (18.9)%
Total deposits $64. 3 100.0% $74.4 100.0% $(10.1) (13.6)%
Total earning
assets as a
percent of
total deposits 92.5% 93.4%
Liquidity and Interest Rate-Sensitivity Management
Liquidity: Management monitors its liquidity position
continuously in relation to trends of loans and deposits, and
relates the data to short and long term expectations. In order
to serve 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 Company's liquidity ratio (the sum of liquid assets divided
by total deposits) was 39.7 percent at March 31, 1997 and 22.7
percent at December 31, 1996. Fed funds sold were unuseally high
at March 31, 1997 due to a $7,900,000 deposit which the Bank had
for one day. The average maturity of the Bank's investment
securities portfolio is 1.8 years at March 31, 1997 versus 1.9
years at December 31, 1996. The loan to deposit ratio was 60.1
percent and 75.5 percent at March 31, 1997 and December 31, 1996,
respectively.
On the liability side, the Bank's liquidity position is
enhanced by sizable core deposits. As stable core deposits
(which include all deposits except time certificates of deposit
and money market accounts that represent insurance proceeds
received by property management company customers for damage
sustained in the Northridge earthquake) are generated, the need
for other sources of liquidity diminishes. This derives from the
fact that the Bank's primary liquidity requirement generally
arises from the need to meet maturities of time certificates of
deposit. Absent extraordinary conditions, the bulk of stable
core deposits do not require significant amounts of liquidity to
meet the net short or intermediate term withdrawal demands of
customers.
Marathon has emphasized core deposit growth which represents,
on average, 82.0 percent of total average deposits during the
three-month period ended March 31, 1997 and 84.6 percent during
all of 1996. In addition, the Company's time deposits were
primarily from its local customer base, which is highly
diversified and without significant concentrations.
While the demand deposits are noninterest-bearing, the account
relationships are not without cost as the Bank provides
messenger, courier, accounting and data processing services in
connection with the relationships.
Interest Rate-Sensitivity Management: Interest rate sensitivity
management focuses, as does liquidity management, on the
maturities of earning assets and funding sources. In addition,
interest rate sensitivity management takes into consideration
those assets and liabilities whose interest rates are subject to
change prior to maturity. Net interest income can be vulnerable
to fluctuations arising from a change in the general level of
interest rates to the extent that the average yield on earning
assets responds differently to such a change than does the
average cost of funds. In an effort to maintain consistent
earnings performance, the Bank manages the repricing
characteristics of its assets and liabilities to control net
interest sensitivity.
The Company measures interest rate sensitivity by distributing
the rate maturities of assets and supporting funding liabilities
into interest sensitivity periods, summarizing interest rate
risk in terms of the resulting interest sensitivity gaps. A
positive gap indicates that more interest sensitive assets than
interest sensitive liabilities will be repriced during a
specified period, while a negative gap indicates the opposite
condition.
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 117 percent of rate sensitive
liabilities at March 31, 1997 as compared to 96 percent at the
end of 1996. In the one year or less category, rate sensitive
assets were 111 percent of rate sensitive liabilities at March
31, 1997 and 114 percent at December 31, 1996. The gap position
is but one of several variables that affect net interest income.
Consequently, these amounts are used with care in forecasting
the impact of short term changes in interest rates on net
interest income. In addition, the gap calculation is a static
indicator and is not a net interest income predictor in a
dynamic business environment.
Table 4
Analysis of Rate Sensitive
Assets & Liabilities
by Time Peroid Rate sensitive or maturing in
90 days 3 - 12 1 - 5 Over 5
(Dollars in millions) or less months years years Total
March 31, 1997
Investments $20.2 $1.3 $6.1 $0.0 $27.6
Loans 23.7 10.7 5.2 4.3 43.9
Rate sensitive assets 43.9 12.0 11.3 4.3 71.5
Time deposits 4.6 4.4 0.0 0.0 $9.0
Other deposits 34.0 7.6 10.6 0.0 52.2
Rate sensitive liabilities 38.6 12.0 10.6 0.0 61.2
Rate sensitive GAP $5.3 $0.0 $0.7 $4.3 $10.3
Cumulative GAP $5.3 $5.3 $6.0 $10.3 --
Cumulative ratio of sensitive
assets to liabilities 1.1 1.1 1.1 N/A 1.2
December 31, 1996
Investments $2.9 $1.6 $6.0 $0.1 $10.6
Loans 33.7 3.8 5.2 4.4 47.1
Rate sensitive assets 36.6 5.4 11.2 4.5 57.7
Time deposits 3.4 4.6 0.2 0.0 8.2
Other deposits 27.6 1.2 0.0 23.0 51.8
Rate sensitive
liabilities 31.0 5.8 0.2 23.0 60.0
Rate sensitive GAP $5.6 $(0.4) $11.0 $(18.5) $(2.3)
Cumulative GAP $5.6 $5.2 $16.2 $(2.3) --
Cumulative ratio of
sensitive assets to
liabilities 1.2 1.1 1.4 1.0 1.0
Capital Resources And Dividends
At March 31, 1997, the Bank had a Tier 1 risk based capital
ratio of 7.0 percent, and a Tier 1 capital leverage ratio of 5.2
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 actual capital ratios of the
Company and the Bank (the capital ratios of the Company
approximate those of the Bank) as of March 31, 1997, the minimum
levels required under the regulatory framework for prompt
corrective action and the capital ratios required by the formal
agreement with the OCC.
To Be
Categorized
Actual Bank as OCC
Capital at Adequately Formal
3/31/97 Capitalized Agreement
Total risk-based 8.3% 8.0% N/A
Tier 1 risk-based 7.0% 4.0% 8.5%
Tier 1 leverage 5.2% 4.0% 6.0%
BUSINESS
Marathon Bancorp
Marathon Bancorp is a bank holding company incorporated in
California on October 12, 1982 and registered under the Bank
Holding Company Act of 1956, as amended. Marathon Bancorp
conducts operations through its subsidiary, Marathon
National Bank, a national banking association. Marathon Bancorp
has one inactive subsidiary, Marathon Bancorp Mortgage Corporation.
The Company's executive offices are located at 11150 West Olympic
Boulevard, Los Angeles, California.
The Bank
The Bank was organized in 1982 and commenced operations as a
national bank in 1983. The Bank's deposit accounts are insured
by the FDIC to the extent permitted by law.
The Bank provides general commercial banking services to
individuals, businesses and professional firms located in its
general service area of the counties of Los Angeles and Orange.
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 U.S. government securities as
investment products to customers.
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, 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.
Principal Market Area
The Company concentrates on marketing to and serving the needs
of individuals and businesses in Los Angeles County and Orange
County, California. The general economy in Southern California,
and particularly the real estate market, is suffering from the
effects of a prolonged recession that has negatively impacted
the ability of certain borrowers of the Company to perform under
the original terms of their obligations to the Company.
Competition
The Company faces substantial competition for deposits and loans
throughout its market area. The primary factors in competing
for deposits are interest rates, personalized services, the
quality and range of financial services, convenience of office
locations and office hours. Competition for deposits comes
primarily from other commercial banks, savings institutions,
credit unions, thrift and loans, insurance companies, money
market and mutual funds and other institutions which offer loan
and investment products. The primary factors in competing for
loans are interest rates, lending limits, loan origination fees,
the quality and range of lending services and personalized
services. Competition for loans comes primarily from other
commercial banks, savings institutions, thrift and loans,
mortgage companies, credit unions and other financial
intermediaries. The Company faces competition for deposits and
loans throughout its market areas not only from local
institutions, but also from out-of-state financial
intermediaries which have opened loan production offices or
which solicit deposits in the Company's market areas. Many of
the financial intermediaries operating in the Company's market
areas offer certain services, such as trust and international
banking services, which the Company does not offer directly.
Additionally, banks with larger capitalization and financial
intermediaries not subject to bank regulatory restrictions have
larger lending limits and are thereby able to serve the needs of
larger customers. The Bank's market share of total deposits in
Los Angeles County and Orange County is insignificant.
Employees
At December 31, 1996, the Company had 33 full-time equivalent
employees. Management believes that its relations with its
employees are satisfactory.
Properties
The Company's executive offices currently are located at 11150
West Olympic Boulevard, Los Angeles, California. The Company
leases approximately 21,000 square feet of office space for a
remaining term of approximately six years. Management believes
that its existing facilities are adequate for its present
purposes.
Legal Proceedings
There are no material legal proceedings pending other than
ordinary routine litigation incidental to the business of the
Company to which the Company or its subsidiaries is a party or
of which any of their property is a subject, except as described
below.
Countrywide Home Loans vs. Marathon National Bank, Los Angeles
Superior Court, case number GC 018232. On December 16, 1996,
the Plaintiffs filed suit against the Bank for breach of
contract in connection with the Bank's failure to repurchase
three non-conforming mortgage loans which the Bank had
originated and sold to Plaintiff. The Plaintiff is seeking
damages of at least $760,555 plus interest, attorneys fees and
costs. The Bank is trying to settle the matter, but no
settlement has been reached. Management of the Bank contends
that the amount of damages suffered by Plaintiff to be
significantly less that the amount of damages sought. However,
there can be no assurance that an adverse result or settlement
with respect to the lawsuit would not have a material adverse
effect on the Company. At December 31, 1996, the Bank established
a reserve for potential losses that may result from this operation.
While other investors have purchased loans from the Bank's former
wholesale mortgage banking division and claims with respect to such
purchases have been made against the Bank totaling approximately $1,615,000,
none of these claims to management's knowledge have resulted in either a legal
or a pending legal proceeding, except for one claim which was settled through
arbitation in August 1996 where the Bank agreed to repurchase the loan which
resulted in a loss to the Bank of approximately $68,000. In addition, another
of the claims resulted in a settlement in the amount of $108,000 that was
paid in July 1996. There is no assurance that such claims
or any future claims, if any, will not result in litigation which may
have a material adverse effect on the Company.
Effect of Governmental Policies and Recent Legislation
Banking is a business that depends on rate differentials. In
general, the difference between the interest rate paid by the
Company on its deposits and its other borrowings and the
interest rate received by the Company on loans extended to its
customers and securities held in the Company's portfolio
comprise the major portion of the Company's earnings. These
rates are highly sensitive to many factors that are beyond the
control of the Company. Accordingly, the earnings and growth of
the Company are subject to the influence of local, domestic and
foreign economic conditions, including recession, unemployment
and inflation.
The commercial banking business is not only affected by general
economic conditions, but is also influenced by the monetary and
fiscal policies of the federal government and the policies of
regulatory agencies, particularly the FRB. The FRB implements
national monetary policies (with objectives such as curbing
inflation and combating recession) by its open market operations
in United States Government securities, by adjusting the
required level of reserves for financial intermediaries subject
to its reserve requirements and by varying the discount rates
applicable to borrowings by depository institutions. The
actions of the FRB in these areas influence the growth of bank
loans, investments and deposits and also affect interest rates
charged on loans and paid on deposits. The nature and impact of
any future changes in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect
of increasing the 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 and other financial institutions are
frequently made in Congress, in the California legislature and
before various bank regulatory agencies. The likelihood of any
major changes and the impact such changes might have on the
Company are impossible to predict. Certain of the potentially
significant changes which have been enacted recently by Congress
or various regulatory or professional agencies are discussed
below.
The Economic Growth and Regulatory Paperwork Reduction Act (the
"1996 Act") as part of the Omnibus Appropriations Bill was
enacted on September 30, 1996 and includes many banking related
provisions. The most important banking provision is the
recapitalization of the Savings Association Insurance Fund
("SAIF"). The 1996 Act provides for a one time assessment of
approximately 65 basis points per $100 of deposits of SAIF
insured deposits including Oakar deposits payable on November
30, 1996. For the years 1997 through 1999 the banking industry
will assist in the payment of interest on FICO bonds that were
issued to help pay for the clean up of the savings and loan
industry. Banks will pay approximately 1.3 cents per $100 of
deposits for this special assessment, and after the year 2000,
banks will pay approximately 2.4 cents per $100 of deposits
until the FICO bonds mature in 2017. There is a three year
moratorium on conversions of SAIF deposits to Bank Insurance
Fund ("BIF") deposits. The 1996 Act also has certain regulatory
relief provisions for the banking industry. Lender liability
under the Superfund is eliminated for lenders who foreclose on
property that is contaminated provided that the lenders were not
involved with the management of the entity that contributed to
the contamination. There is a five year sunset provision for
the elimination of civil liability under the Truth in Savings
Act. The FRB and Department of Housing and Urban Development
are to develop a single format for Real Estate Settlement
Procedures Act and Truth in Lending Act ("TILA") disclosures.
TILA disclosures for adjustable mortgage loans are to be
simplified. Significant revisions are made to the Fair Credit
Reporting Act ("FCRA") including requiring that entities which
provide information to credit bureaus conduct an investigation
if a consumer claims the information to be in error. Regulatory
agencies may not examine for FCRA compliance unless there is a
consumer complaint investigation that reveals a violation or
where the agency otherwise finds a violation. In the area of
the Equal Credit Opportunity Act, banks that self-test for
compliance with fair lending laws will be protected from the
results of the test provided that appropriate corrective action
is taken when violations are found.
On September 28, 1995, Governor Pete Wilson signed Assembly Bill
1482 (known as the Caldera, Weggeland, and Killea California
Interstate Banking and Branching Act of 1995 and referred to
herein as the "CIBBA") which allows for early interstate
branching in California. Under the federally enacted
Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 ("IBBEA"), discussed in more detail below, individual
states could "opt-out" of the federal law that would allow banks
on an interstate basis to engage in interstate branching by
merging out-of-state banks with host state banks after June 1,
1997. In addition under IBBEA, individual states could also
"opt-in" and allow out-of-state banks to merge with host state
banks prior to June 1, 1997. The host state is allowed under
IBBEA to impose certain nondiscriminatory conditions on the
resulting depository institution until June 1, 1997. California
in enacting CIBBA authorizes out-of-state banks to enter
California by the acquisition of or merger with a California
bank that has been in existence for at least five years.
Section 3824 of the California Financial Code ("Section 3824")
as added by CIBBA provides for the election of California to
"opt-in" under IBBEA allowing interstate bank merger
transactions prior to July 1, 1997 of an out-of-state bank with
a California bank that has been in existence for at least five
years. The early "opt in" has the reciprocal effect of allowing
California banks to merge with out-of-state banks where the
states of such out-of-state banks have also "opted in" under
IBBEA. The five year age limitation is not required when the
California bank is in danger of failing or in certain other
emergency situations.
Under IBBEA, California may also allow interstate branching
through the acquisition of a branch in California without the
acquisition of an entire California bank. Section 3824 provides
an express prohibition against interstate branching through the
acquisition of a branch in California without the acquisition of
the entire California bank. IBBEA also has a provision allowing
states to "opt-in" with respect to permitting interstate
branching through the establishment of de novo or new branches
by out-of-state banks. Section 3824 provides that California
expressly prohibits interstate branching through the
establishment of de novo branches of out-of-state banks in
California, or in other words, California did not "opt-in" this
aspect of IBBEA. CIBBA also amends the California Financial
Code to include agency provisions to allow California banks to
establish affiliated insured depository institution agencies out
of state as allowed under IBBEA.
Other provisions of CIBBA amend the intrastate branching laws,
govern the use of shared ATM's, and amend intrastate branch
acquisition and bank merger laws. Another banking bill enacted
in California in 1995 was Senate Bill 855 (known as the State
Bank Parity Act and is referred to herein as the "SBPA"). SBPA
went into effect on January 1, 1996, and its purpose is to allow
a California state bank to be on a level playing field with a
national bank by the elimination of certain disparities and
allowing the California Superintendent of Banks
("Superintendent") authority to implement certain changes in
California banking law which are parallel to changes in national
banking law such as closer conformance of California's version
of Regulation O to the FRB's version of Regulation O and certain
other changes including allowing the repurchase of stock with
the prior written consent of the Superintendent.
On September 29, 1994, IBBEA was enacted which has eliminated
many of the current restrictions to interstate banking and
branching. The IBBEA permits full nationwide interstate banking
to adequately capitalized and adequately managed bank holding
companies beginning September 29, 1995 without regard to whether
such transaction is expressly prohibited under the laws of any
state. The IBBEA's branching provisions permit full nationwide
interstate bank merger transactions to adequately capitalized
and adequately managed banks beginning June 1, 1997. However,
states retain the right to completely "opt out" of interstate
bank mergers and to continue to require that out-of-state banks
comply with the states' rules governing entry.
The states that opt out must enact a law after September 29,
1994 and before June 1, 1997 that (i) applies equally to all
out-of-state banks and (ii) expressly prohibits merger
transactions with out-of-state banks. States which opt out of
allowing interstate bank merger transactions will preclude the
mergers of banks in the opting out state with banks located in
other states. In addition, banks located in states that opt out
are not permitted to have interstate branches. States can also
"opt in" which means states can permit interstate branching
earlier than June 1, 1997.
The laws governing interstate banking and interstate bank
mergers provide that transactions, which result in the bank
holding company or bank controlling or holding in excess of ten
percent of the total deposits nationwide or thirty percent of
the total deposits statewide, will not be permitted except under
certain specified conditions. However, any state may waive the
thirty percent provision for such state. In addition, a state
may impose a cap of less than thirty percent of the total amount
of deposits held by a bank holding company or bank provided such
cap is not discriminatory to out-of-state bank holding companies
or banks.
On September 23, 1994, the Riegle Community Development and
Regulatory Improvement Act of 1994 (the "1994 Act") was enacted
which covers a wide range of topics including small business and
commercial real estate loan securitization, money laundering,
flood insurance, consumer home equity loan disclosure and
protection as well as the funding of community development
projects and regulatory relief.
The major items of regulatory relief contained in the 1994 Act
include an examination schedule that has been eased for the top
rated banks and will be every 18 months for CAMEL 1 banks with
less than $250 million in total assets and CAMEL 2 banks with
less than $100 million in total assets (the $100 million amount
was amended to $250 million by the 1996 Act discussed above).
The 1994 Act amends Federal Deposit Insurance Corporation
Improvement Act of 1991 with respect to the Section 124, the
mandate to the federal banking agencies to issue safety and
soundness regulations, including regulations concerning
executive compensation allowing the federal banking regulatory
agencies to issue guidelines instead of regulations.
Further regulatory relief is provided in the 1994 Act, as each
of the federal regulatory banking agencies including the
National Credit Union Administration Board is required to
establish an internal regulatory appeals process for insured
depository institutions within 6 months. In addition, the
Department of Justice 30 day waiting period for mergers and
acquisitions is reduced by the 1994 Act to 15 days for certain
acquisitions and mergers.
In the area of currency transaction reports, the 1994 Act
requires the Secretary of the Treasury to allow financial
institutions to file such reports electronically. The 1994 Act
also requires the Secretary of the Treasury to publish written
rulings concerning the Bank Secrecy Act, and staff commentary on
Bank Secrecy Act regulations must also be published on an annual
basis.
On December 17, 1993, the President signed into law the
Resolution Trust Corporation Completion Act to provide
additional funding for failed savings associations under the
jurisdiction of the Resolution Trust Corporation. In addition
to providing such funding, the legislation, among other things,
makes it more difficult for the federal banking agencies to
obtain prejudgment injunctive relief against depository
institutions and parties affiliated with such institutions,
extends the moratorium on depository institutions converting
from Savings Association Insurance Fund insurance to Bank
Insurance Fund insurance or vice versa, and prohibits the FDIC
from using any deposit insurance funds to benefit the
shareholders of a failed or failing depository institution.
The Omnibus Budget Reconciliation Act of 1993 (the "Budget
Act"), which was signed into law on August 10, 1993, contains
numerous tax and other provisions which may affect financial
institutions and their businesses. The Budget Act contains a
provision that establishes a priority for depositors, or the
FDIC as subrogee thereof, in the event of a liquidation or other
resolution of an insured depository institution for which a
receiver is appointed after August 10, 1993. In addition, under
the existing cross-guarantee provisions of federal banking law,
the FDIC has the power to estimate the cost of the failure of an
insured depository institution and assess a charge against any
financial institution affiliated with the failed institution.
On December 19, 1991, the FDIC Improvement Act of 1991 (the
"1991 Act") was signed into law. The 1991 Act provides for the
recapitalization and funding of the Bank Insurance Fund of the
FDIC. In addition, the 1991 Act includes many changes to
banking law. Supervisory reforms provided under the 1991 Act
include annual on-site full scope examinations of most insured
institutions, additional audit and audit report requirements
imposed on most insured institutions and a new annual report
requirement for most insured institutions. Accounting reforms,
including the prescription of accounting principles no less
stringent than generally accepted accounting principles, and
prescription of standards for the disclosure of off-balance
sheet items, market value information and capital adequacy, are
also provided for in the 1991 Act. In addition, the 1991 Act
provides for a new rating system for insured institutions based
on capital adequacy. Institutions will be categorized as
critically undercapitalized, significantly undercapitalized,
undercapitalized, adequately capitalized and well capitalized.
The federal banking regulators have adopted definitions of how
institutions will be ranked for prompt corrective action
purposes. These definitions are as follows: (i) a well
capitalized institution is one that has a leverage ratio of 5%,
a Tier 1 risk-based capital ratio of 6%, a total risk-based
capital ratio of 10% and is not subject to any written order or
final directive by the federal banking regulators to meet and
maintain a specific capital level; (ii) an adequately
capitalized institution is one that meets the minimum required
capital adequacy levels but not that of a well capitalized
institution; (iii) an undercapitalized institution is one that
fails to meet any one of the minimum required capital adequacy
levels but not as undercapitalized as a significantly
undercapitalized institution; (iv) a significantly
undercapitalized institution is one that has a total risk-based
capital ratio of less than 6% and/or a leverage ratio of less
than 3%; and (v) a critically undercapitalized institution is
one with a leverage ratio of less than 2%.
The banking regulators will have broad powers to regulate
undercapitalized institutions. Undercapitalized institutions
must file capital restoration plans and are automatically
subject to restrictions on dividends, management fees and asset
growth. In addition, the institution is prohibited from opening
new branches, making acquisitions or engaging in new lines of
business without the approval of its appropriate banking
regulator.
Holding companies with undercapitalized institutions will be
prohibited from capital distributions without the prior approval
of the FRB. Definite drop dead dates are mandated under the
1991 Act for when critically undercapitalized insured
institutions must go under receivership or conservatorship.
The 1991 Act also requires the regulators to issue regulations
in many areas of banking including prescribing safety and
soundness standards as to internal controls, asset quality,
earnings, stock valuation and executive compensation. Least
cost resolution is mandated by the 1991 Act which will require
the FDIC to use the least cost method case resolution.
Beginning in 1995, the FDIC generally will not be permitted to
cover uninsured depositors or creditors unless the President,
Secretary of Treasury and the FDIC jointly determine that such
is necessary to avoid systemic risk.
The 1991 Act also contains miscellaneous provisions including
additional regulation of foreign banks, notification of branch
closures, reduced assessments for lifeline account products,
FDIC affordable housing program, Truth in Savings disclosure
provisions, limitations on brokered deposits, restrictions on
state bank nonbanking activities, risk-based assessments and
deposit insurance limitations for certain accounts. The FDIC
also adopted a risk-based assessment system for purposes of
determining the insurance premium to be paid by a bank for FDIC
deposit insurance. In addition, the 1991 Act requires that
federal banking regulators take into account risks other than
credit risks with respect to capital standards. On September 1,
1995, the federal banking regulators (other than the Office of
Thrift Supervision ("OTS")) issued a final rule to take into
account interest rate risk in calculating risk-based capital.
On June 26, 1996, a joint agency policy statement was issued by
all of the federal banking regulators except the OTS to provide
guidance on sound practices for managing interest rate risk.
The agencies did not in the policy statement elect to implement
a standardized measure and quantitative capital charge, though
the matter was left open for future implementation. Rather the
policy statement provided standards for the banking agencies to
evaluate the adequacy and effectiveness of a bank's interest
rate risk management and guidance to bankers for managing
interest rate risk. Specifically, effective interest rate risk
management requires that there be (i) effective board and senior
management oversight of the bank's interest rate risk
activities, (ii) appropriate policies and practices in place to
control and limit risks, (iii) accurate and timely
identification and measurement of interest rate risk, (iv) an
adequate system for monitoring and reporting risk exposures and
(v) appropriate internal controls for effective interest rate
risk management.
It is likely that other bills affecting the business of banks
may be introduced in the future by the United States Congress or
California legislature.
Supervision and Regulation
Bank holding companies and national banks are extensively
regulated under both federal and state law.
Marathon Bancorp
Marathon Bancorp, as a registered bank holding company, is
subject to regulation under the BHC Act. Marathon Bancorp is
required to file with the FRB quarterly and annual reports and
such additional information as the FRB may require pursuant to
the BHC Act. The FRB may conduct examinations of Marathon
Bancorp and the Bank.
The FRB may require that Marathon Bancorp terminate an activity
or terminate control of or liquidate or divest certain
subsidiaries or affiliates when the FRB believes the activity or
the control of the subsidiary or affiliate constitutes a
significant risk to the financial safety, soundness or stability
of any of its banking subsidiaries. The FRB also has the
authority to regulate provisions of certain bank holding company
debt, including authority to impose interest ceilings and
reserve requirements on such debt. Under certain circumstances,
Marathon Bancorp must file written notice and obtain approval
from the FRB prior to purchasing or redeeming its equity
securities.
Under the BHC Act and regulations adopted by the FRB, a bank
holding company and its 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.
Marathon Bancorp is required to obtain the prior approval of the
FRB for the acquisition of 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. Prior approval
of the FRB is also required for the merger or consolidation of
Marathon Bancorp and another bank holding company.
Marathon Bancorp is prohibited by the BHC Act, except in certain
statutorily prescribed instances, from acquiring direct or
indirect ownership or control of more than 5% of the outstanding
voting shares of any company that is not a bank or bank holding
company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks or
furnishing services to its subsidiaries. However, Marathon
Bancorp may, subject to the prior approval of the FRB, engage in
any, or acquire shares of companies engaged in, activities that
are deemed by the FRB to be so closely related to banking or
managing or controlling banks as to be a proper incident
thereto. In making any such determination, the FRB is required
to consider whether the performance of such activities by
Marathon Bancorp or an affiliate can reasonably be expected to
produce benefits to the public, such as greater convenience,
increased competition or gains in efficiency, that outweigh
possible adverse effects, such as undue concentration of
resources, decreased or unfair competition, conflicts of
interest or unsound banking practices. The FRB is also
empowered to differentiate between activities commenced de novo
and activities commenced by acquisition, in whole or in part, of
a going concern and is generally prohibited from approving an
application by a bank holding company to acquire voting shares
of any commercial bank in another state unless such acquisition
is specifically authorized by the laws of such other state.
Under FRB regulations, a bank holding company is required to
serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe
or unsound manner. In addition, it is the FRB's policy that in
serving as a source of strength to its subsidiary banks, a bank
holding company should stand ready to use available resources to
provide adequate capital funds to its subsidiary banks during
periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks. A bank
holding company's failure to meet its obligations to serve as a
source of strength to its subsidiary banks will generally be
considered by the FRB to be an unsafe and unsound banking
practice or a violation of the FRB's regulations or both.
Marathon Bancorp is also a bank holding company within the
meaning of Section 3700 of the California Financial Code. As
such, Marathon Bancorp and its subsidiaries are subject to
examination by, and may be required to file reports with, the
California State Banking Department.
Finally, Marathon Bancorp is subject to the periodic reporting
requirements of the Exchange Act, including but not limited to,
filing annual, quarterly and other current reports with the
Commission.
The Bank
The Bank, as a national banking association, is subject to
primary supervision, periodic examination and regulation by the
OCC.
The deposits of the Bank are insured by the FDIC, up to the
applicable limits. For this protection, the Bank, as is the
case with all insured banks, pays a semi-annual statutory
assessment and is subject to the rules and regulations of the
FDIC. The amount of the assessment depends on the condition of
the Bank.
Various requirements and restrictions under the laws of the
State of California and the United States affect the operations
of the Bank. State and federal statutes and regulations affect
many aspects of the Bank's operations, including reserves
against deposits, interest rates payable on deposits, loans,
investments, mergers and acquisitions, borrowings, dividends and
locations of branch offices. Further, the Bank is required to
maintain certain levels of capital.
Restrictions on Transfers of Funds to Marathon Bancorp by the
Bank
Marathon Bancorp is a legal entity separate and distinct from
the Bank. There are statutory and regulatory limitations on the
amount of dividends which may be paid to Marathon Bancorp by the
Bank. Marathon Bancorp as the sole shareholder of the Bank is
entitled to dividends when and as declared by the Bank's Board
out of funds legally available therefor. The Bank's ability to
pay dividends is governed by the national banking laws and under
certain circumstances is subject to the approval of the OCC.
Pursuant to 12 U.S.C. Section 56, no national bank may pay
dividends from its capital; all dividends must be paid out of
net profits then on hand, after deducting for expenses,
including losses and bad debts. The payment of dividends out of
net profits of a national bank is further limited by 12 U.S.C.
Section 60(a), which prohibits a bank from declaring a dividend
on its shares of common stock until its surplus fund equals the
amount of common capital, or if the surplus fund does not equal
the amount of common capital, until at least one-tenth of the
Bank's net profits for the relevant statutory period are
transferred to the surplus fund each time dividends are declared.
Pursuant to 12 U.S.C. Section 60(b), the approval of the OCC is
required if the total of all dividends declared by a bank in any
calendar year will exceed the total of its net profits of that
year combined with its retained net profits of the two preceding
years, less any required transfers to surplus or to a fund for
the retirement of any preferred stock which may be outstanding.
Moreover, pursuant to 12 U.S.C. Section 1818(b), the Comptroller
may prohibit the payment of dividends which would constitute an
unsafe and unsound banking practice. At December 31, 1996 the
Bank had no amount that was available for dividends.
The OCC also has authority to prohibit the Bank from engaging in
what, in the OCC's opinion, constitutes an unsafe or unsound
practice in conducting its business. It is possible, depending
upon the financial condition of the bank in question and other
factors, that the OCC could assert that the payment of dividends
or other payments might, under some circumstances, be such an
unsafe or unsound practice. Further, the FRB has established
guidelines with respect to the maintenance of appropriate levels
of capital by bank holding companies under its jurisdiction.
Compliance with the standards set forth in such guidelines and
the restrictions that are or may be imposed under the PCA
Provisions could limit the amount of dividends which the Bank or
Marathon Bancorp may pay.
At present, substantially all of Marathon Bancorp's revenues,
including funds available for the payment of dividends and other
operating expenses, is, and will continue to be, primarily
dividends paid by the Bank. However, as a result of losses
experienced, the Bank is prohibited by national banking law
from paying a cash dividend in any amount to Marathon Bancorp
without first obtaining the prior approval of the OCC.
The Bank is subject to certain restrictions imposed by federal
law on any extensions of credit to, or the issuance of a
guarantee or letter of credit on behalf of, Marathon Bancorp or
other affiliates, the purchase of or investments in stock or
other securities thereof, the taking of such securities as
collateral for loans and the purchase of assets of Marathon
Bancorp or other affiliates. Such restrictions prevent Marathon
Bancorp and such other affiliates from borrowing from the Bank
unless the loans are secured by marketable obligations of
designated amounts. Further, such secured loans and investments
by the Bank to or in Marathon Bancorp or to or in any other
affiliate is limited to 10% of the Bank's capital and surplus
(as defined by federal regulations) and such secured loans and
investments are limited, in the aggregate, to 20% of the Bank's
capital and surplus (as defined by federal regulations).
Additional restrictions on transactions with affiliates may be
imposed on the Bank under the PCA Provisions.
Existing and Potential Enforcement Actions
Commercial banking organizations, such as the Bank, and their
institution-affiliated parties, which include Marathon Bancorp,
may be subject to potential enforcement actions by the FRB, the
OCC for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation or any
condition imposed in writing by the agency or any written
agreement with the agency. Enforcement actions may include the
imposition of a conservator or receiver, the issuance of a
cease-and-desist order that can be judicially enforced, the
termination of insurance of deposits (in the case of a bank),
the imposition of civil money penalties, the issuance of
directives to increase capital, the issuance of formal and
informal agreements, the issuance of removal and prohibition
orders against institution-affiliated parties and the imposition
of restrictions and sanctions under the PCA Provisions.
Additionally, a holding company's inability to serve as a source
of strength to its subsidiary banking organizations could serve
as an additional basis for a regulatory action against the
holding company.
Following a supervisory examination of the Bank dated July 5,
1995, the Bank entered into a Formal Agreement with the OCC.
The Formal Agreement requires the Bank to develop on an annual
basis a strategic plan covering a period of three years. The
strategic plan is required to include among other things (i) the
achievement and maintenance by the Bank of a Tier 1 risk-based
capital ratio of at least 8.5% and a leverage capital ratio of
at least 6%, (ii) attainment of satisfactory profitability, and
(iii) reduction of OREO assets based on an individual parcel
cost/benefit analysis that identifies the breakeven price and a
marketing program designed to achieve each parcel's timely sale.
On December 16, 1996, Marathon Bancorp entered into the MOU with
the FRBSF under which Marathon Bancorp agreed, among other
things, to (i) refrain from paying cash dividends, except with
the prior approval of the FRBSF, (ii) submit to the FRBSF an
acceptable plan to increase and maintain an adequate capital
position for the Bank, (iii) not incur any debt without the
prior approval of the FRBSF, (iv) not repurchase its stock
without the prior approval of the FRBSF, (v) comply with Section
32 of the Federal Deposit Insurance Act which requires Marathon
Bancorp to notify the FRB prior to the addition of any director
or senior executive officer and prohibits Marathon Bancorp from
adding any such person if the FRB issues a notice of disapproval
of such addition, (vi) employ a permanent full-time president
and chief executive officer at Marathon Bancorp and the Bank
with demonstrated experience in lending and the management and
operations of a bank and (vii) submit progress reports detailing
the form and manner of all actions taken to comply with the MOU.
The MOU supersedes an earlier memorandum of understanding dated
September 24, 1992 and a supervisory letter dated November 30,
1995. See "BUSINESS--Supervision and Regulation--Existing and
Potential Enforcement Actions."
While the Bank is currently not in compliance with the
terms of the Formal Agreement with respect to meeting the
capital ratios required in the Formal Agreement, management
believes that upon the sale of all of the 2,222,223 shares of
Common Stock in this Offering, the Bank will have capital ratios
in excess of those required in the Formal Agreement and the Bank
will be in substantial compliance with the terms of the Formal
Agreement and the MOU that are required to be met as of the date
of this Prospectus. However, compliance is determined by the OCC
with respect to the Formal Agreement and the FRBSF with respect to
the MOU. In the event a determination is made that the Bank is
not in compliance with any of the terms of the Formal Agreement
or Marathon Bancorp is not in compliance with any of the terms
of the MOU, the OCC and FRBSF, respectively would have available
various enforcement measures available, including the imposition
of a conservator or receiver (which would likely result in a
substantial diminution or a total loss of the shareholders'
investment in the Company), the issuance of a cease and desist
order that can be judicially enforced, the termination of
insurance of deposits, the imposition of civil money penalties,
the issuance of directives to increase capital, the issuance of
formal and informal agreements, the issuance of removal and
prohibition orders against institution-affiliated parties and
the imposition of restrictions and sanctions under the PCA
Provisions.
MANAGEMENT
Directors
The following is a summary of certain information, as of March
1, 1997 regarding the persons who serve as directors of Marathon
Bancorp.
Year First
Name and Title Appointed Principal Occupation
Other than Director Age Director During Past Five Years
Nikolas Patsaouras
Chairman 53 1982 President of Patsaouras
& Associates (consulting
engineers).
Robert J. Abernethy 57 1983 President, American
Standard Development Co.
Craig D. Collette 54 1997 President and Chief
Executive Officer of
Marathon Bancorp and
the Bank. Former President
and Chief Operating Officer
of TransWorld Bank from
June 1996 to January 1997,
and former President and
Chief Executive Officer of
Landmark Bank from January
1979 to April 1996.
Frank W. Jobe, M.D. 71 1985 Orthopedic Surgeon
C. Thomas Mallos
Chief Financial
Officer 60 1982 President, C. Thomas
Mallos, Accountancy Corp.
Robert L. Oltman 59 1982 President, Oltman
Management Company.
General Partner of Space
Bank, Ltd. (self storage
and management company).
Ann Pappas 68 1982 Restauranteur.
Executive Officers
The following table provides certain information as of June 1,
1997 (except as otherwise disclosed) regarding the persons,
other than Messrs. Collette and Mallos, who are currently
serving as executive officers of Marathon Bancorp and/or the Bank.
Name Age Principal Occupation
During Past Five Years
Timothy J. Herles 55 Executive Vice President
/Senior Credit Officer of
the Bank since 1992.
Formerly Chief Administrative
Officer of the Bank from 1989
to 1992.
Adrienne Caldwell 54 Senior Vice President/Chief
Operating Officer and Chief
Administrative Officer of the
Bank since 1992. Formerly
Cashier of the Bank from 1988
to 1992.
Daniel Erickson(1) 51 Senior Vice President/Chief
Financial Officer of the Bank
since 1993. Formerly Senior
Vice President/Chief Financial
Officer of Commercial Center
Bank.
Edward Myska 51 Senior Vice President/Business
Development of the Bank since
1988. Formerly, Vice President
/Administration of Brentwood
Bank of California.
Howard Stanke 48 Executive Vice President/Chief
Financial Officer of the Bank
effective June 2, 1997. Mr.
Stanke was with TransWorld Bancorp
and TransWorld Bank from 1978 to
June 1997, most recently as
Executive Vice President/Chief
Financial Officer.
_____________________________
(1) Mr. Erickson resigned effective June 6, 1997.
Executive Compensation
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Rest- All
Annual ricted Other
Name and Compen- Stock Opt- LTIP Compen-
Principal Salary Bonus sation Awards ions/ Payouts sation
Position Year $ ($) ($)(1) ($) SARs ($) (1)($)
John
Maloney
(2)
President
and Chief
Executive
Officer of
Marathon
Bancorp
and the
Bank 1996 $141,900 $0 $5,750 $0 50,000 $0 $0
1995 $150,000 $0 $6,000 0 0 0 $0
1994 $29,090(3)$0 $629 0 0 0 $0
Timothy
J. Herles
Executive
Vice
President
and Chief
Credit
Officer of
the
Bank 1996 $100,000 $0 $8,400 0 0 0 $0
1995 $100,000 $0 $8,400 0 0 0 $0
1994 $111,037 $0 $8,400 0 0 0 $0
(1) These amounts represent the business expense compensation.
(2) Mr. Maloney passed away in November 1996.
(3) Mr. Maloney was President of the Company and the Bank and
Chief Executive officer of the Bank from October 1994 until the
time of his death.
Option/SAR Grants Table
Option/SAR Grants in Last Fiscal Year
Individual Grants
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options/SARS
Underlying Granted to Exercise or
Options/SARS Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($/Share) Date
John
Maloney 50,000 20% $1.75 11/1998
(1) The stock options are incentive stock options as provided
in Section 422 of the Internal Revenue Code. The vesting of the
stock options is 20% per year from the date of the option.
(2) The exercise price per share was equal to the market price
per share of the Common Stock at the time of the option grant.
Option/SAR Exercises and Year-End Value Table
Aggregated Option/SAR Exercises in Last Fiscal Year and
Year-End Option/SAR Value
(a) (b) (c) (d) (e)
Number of Value of
Unexercised Unexercised
Options/SARS In-the-Money
Shares Value at Year-End(#)Options/SARs
Acquired on Realized Exercisable/ at Year-End($)
Name Exercise(#) ($) Unexercised Exercisable/
Unexercisable
John Maloney 0 N/A 10,000/ $7,500/
40,000(1) 30,000(1)
Timothy J.
Herles 0 N/A 39,696/0(1) $0/0(1)
N/A - means not applicable.
(1) Options only.
Employment Agreement
Marathon Bancorp and the Bank have an employment agreement with
Mr. Craig D. Collette. Pursuant to Mr. Collette's employment
agreement, Mr. Collette is to serve for a term of five years
commencing January 15, 1997 as the President and Chief Executive
Officer of Marathon Bancorp and the Bank. The base annual salary
for Mr. Collette is $170,000 per year, with increases to be
determined at the discretion of the Boards of Directors of the
Bank and Marathon Bancorp. The agreement provides Mr. Collette
with four weeks vacation, health, disability and life insurance
benefits, $700 per month for car allowance, stock options to
acquire 30,000 shares of Common Stock with vesting at 20% per
year, salary continuation benefits as described below, and
indemnification for matters incurred in connection with any
action against the executive which arose out of and was within
the scope of his employment, provided that the executive acted
in good faith and in a manner the executive reasonably believed
to be in the best interests of Marathon Bancorp and the Bank and
with respect to a criminal matter if the executive also had no
reasonable cause to believe his conduct was unlawful. If
Marathon Bancorp and the Bank terminate Mr. Collette without
cause, Mr. Collette shall be entitled to (i) two years then base
salary in a lump sum at the time of termination, and (ii)
continuation of insurance benefits for 24 months.
Upon any merger or consolidation where the Marathon Bancorp and
the Bank are not the surviving or resulting corporations, or
upon any transfer of all or substantially all of the assets of
Marathon Bancorp and the Bank, and Mr. Collette not be retained
for the remaining term of the agreement in a comparable position
of the resulting corporation, Mr. Collette shall be paid two
years of his then base salary in a lump sum within ten days of
such termination.
Director Compensation
No director fees are paid by Marathon Bancorp. Each nonemployee
director of the Bank receives $250 per meeting for his
or her attendance at all regular or special meetings of
the Bank, and $25 per committee meeting of the Bank. The maximum a Bank
director (other than the Chairman) may receive for attendance at the Bank's
board and committee meetings is $500 per month. The Chairman receives
additional directors fees of $1,500 per month from the Bank with a
maximum of directors fees of $2,000 per month.
Beginning in July 1998, Mr. Collette pursuant to his employment
agreement will be entitled to receive directors fees for regular
and special meetings of Marathon Bancorp and the Bank to the extent
that directors fees are paid, but will not be entitled to receive
director fees for committee meetings.
Limitation of Liability and Indemnification
The Articles of Incorporation and Bylaws of Marathon Bancorp
provide for indemnification of agents including directors,
officers and employees to the maximum extent allowed by
California law including the use of an indemnity agreement.
Marathon Bancorp's Articles further provide for the elimination
of director liability for monetary damages to the maximum extent
allowed by California law. The indemnification law of the State
of California generally allows indemnification in matters not
involving the right of the corporation, to an agent of the
corporation if such person acted in good faith and in a manner
such person reasonably believed to be in the best interests of
the corporation, and in the case of a criminal matter, had no
reasonable cause to believe the conduct of such person was
unlawful. California law, with respect to matters involving the
right of a corporation, allows indemnification of an agent of
the corporation, if such person acted in good faith, in a manner
such person believed to be in the best interests of the
corporation and its shareholders; provided that there shall be
no indemnification for: (i) amounts paid in settling or
otherwise disposing of a pending action without court approval;
(ii) expenses incurred in defending a pending action which is
settled or otherwise disposed of without court approval; (iii)
matters in which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the
court in which the proceeding is or was pending shall determine
that such person is entitled to be indemnified; or (iv) other
matters specified in the California General Corporation Law.
Marathon Bancorp's Bylaws provide that Marathon Bancorp shall to
the maximum extent permitted by law have the power to indemnify
its directors, officers and employees. Marathon Bancorp's
Bylaws also provide that Marathon Bancorp shall have the power
to purchase and maintain insurance covering its directors,
officers and employees against any liability asserted against
any of them and incurred by any of them, whether or not Marathon
Bancorp would have the power to indemnify them against such
liability under the provisions of applicable law or the
provisions of Marathon Bancorp's Bylaws. Each of the directors
and executive officers of Marathon Bancorp has an
indemnification agreement with Marathon Bancorp that provides
that Marathon Bancorp shall indemnify such person to the full
extent authorized by the applicable provisions of California law
and further provide advances to pay for any expenses which would
be subject to reimbursement.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act") may be
permitted to directors, officers or persons controlling Marathon
Bancorp pursuant to the foregoing, Marathon Bancorp has been
informed that in the opinion of the Commission, such
indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding the
beneficial ownership of Marathon Bancorp's Common Stock by each
person who is currently serving as a director or named executive
officer of Marathon Bancorp or the Bank and by all directors and
officers of Marathon Bancorp and the Bank as a group. Unless
otherwise indicated, the persons listed below have shared voting
and investment powers of the shares beneficially owned. As of
April 1, 1997, Marathon Bancorp is not aware of any person who
was the beneficial owner of 5% or more of Marathon Bancorp's
outstanding Common Stock except as set forth below.
Common Stock Beneficially
Owned as of
March 31, 1997
Number of Percent of
Name of Beneficial Owner Shares Class
Directors and Named
Executive Officers:
Nikolas Patsaouras 37,536 2.4
Robert J. Abernethy 107,299(1) 6.8
Craig D. Collette 22,223 1.4
Frank W. Jobe, M.D. 51,566 3.2
C. Thomas Mallos 47,878 3.0
Robert L. Oltman 110,922(1) 7.0
Ann Pappas 60,011 3.8
Timothy J. Herles 40,880(2) 2.5
Total for all directors,
named executive officers
and all executive officers
(numbering 8) 478,315(2) 29.4
Principal Shareholder:
Oppenheimer-Spencer Financial
Services Partnership, L.L. 93,361(3) 5.9
__________________
(1) The address of these directors is c/o Marathon Bancorp,
11150 West Olympic Boulevard, Los Angeles, California 90064.
(2) This amount includes 39,696 shares acquirable by exercise
of stock options within 60 days of March 31, 1997.
(3) The Schedule 13D filing by the partnership indicates that
it has sole voting power and sole dispositive power of all of these
shares. The business address of the partnership is 119 West 57th
Street, New York, New York 10019.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of Marathon Bancorp's directors and executive officers and
their immediate families as well as the companies with which
they are associated are customers of, or have had banking
transactions with, the Bank in the ordinary course of the Bank's
business, and the Bank expects to have banking transactions with
such persons in the future. The Bank's policy is not to make
any loans to its or Marathon Bancorp's directors and executive
officers, and therefore these are no loans to its or Marathon
Bancorp's directors and officers.
Any transaction between Marathon Bancorp and one or more directors of Marathon
Bancorp in which such director has or directors have a material financial
interest in such transaction is subject to the provisions of Section 310
("Section 310") of the California Corporations code. Under Section 310 such
transaction would not be void or voidable if certain conditions were met,
including approval by either the board of directors or the shareholders after
proper disclosure was made. The approval of such transaction requiress that the
interested director(s) not be entitled to vote in the event of shareholder
approval or that the vote of the interested director(s) not be
counted in the event of board approval.
DESCRIPTION OF CAPITAL STOCK
Marathon Bancorp's Articles of Incorporation, as amended,
authorize the issuance of 9,000,000 shares of no par value
Common Stock and 1,000,000 shares of no par value Preferred
Stock. As of April 1, 1997, there were 1,589,596 shares of the
Common Stock and no shares of the Preferred Stock issued and
outstanding.
The Preferred Stock may be issued from time to time in one or
more series. The Board is authorized to fix the number of
shares of any series of Preferred Stock and to determine the
designation of any such shares. The Board is also authorized to
determine or alter the rights, preferences, privileges and
restrictions granted to or imposed upon any wholly unissued
series of Preferred Stock and, within the limits and
restrictions stated in any resolution or resolutions of the
Board originally fixing the number of shares constituting any
series, to increase or decrease (but not below the number of
shares of such series then outstanding) the number of shares of
any series subsequent to the issue of shares of that series.
The Board does not presently intend to issue any Preferred
Stock. Although it is not possible to state the actual effects
of any issuance of Preferred Stock upon the rights of holders of
other securities of Marathon Bancorp, such effects might include
(i) restrictions on Common Stock dividends if Preferred Stock
dividends have not been paid or (ii) the inability of current
holders of Common Stock to share in Marathon Bancorp's assets
upon liquidation until satisfaction of any liquidation
preferences granted to the holders of the Preferred Stock. In
addition, the issuance of Preferred Stock under certain
circumstances may have the effect of discouraging an attempt to
change control of Marathon Bancorp by, for example, creating
voting impediments to the approval of mergers or other similar
transactions involving Marathon Bancorp.
Subject to such preferential rights as may be determined by the
Board in the future in connection with the issuance, if any, of
shares of Preferred Stock, holders of Common Stock are entitled
to cast one vote for each share held of record, to receive such
dividends as may be declared by the Board out of legally
available funds and to share ratably in any distribution of
Marathon Bancorp's assets after payment of all debts and other
liabilities, upon liquidation, dissolution or winding up of
Marathon Bancorp. Shareholders do have preemptive rights to
subscribe to any and all issuances of the Common Stock. The
outstanding shares of Common Stock are, and the shares of Common
Stock to be issued in the Offering, will be, upon delivery and
payment therefor in accordance with the terms of the Offering,
fully paid and nonassessable.
The Articles of Incorporation of Marathon Bancorp requires the
affirmative vote of not less than two-thirds (2/3) of the total
voting power of all outstanding shares of voting stock of
Marathon Bancorp for the approval of any proposal (i) that
Marathon Bancorp merger or consolidate with any other
corporation if such other corporation and its affiliates are the
beneficial owners of 20% or more of the total voting power of
all outstanding shares of the voting stock of Marathon Bancorp
(such other corporation being herein referred to as a "Related
Corporation"), (ii) that Marathon Bancorp sell or exchange all
or substantially all of its assets or business to or with such
Related Corporation, or (iii) that Marathon Bancorp issue or
deliver any stock or other securities of its issue in
consideration for any properties or assets of such Related
Corporation or any of its affiliates, if to effect such
transaction the approval of shareholders of Marathon Bancorp, if
to effect such transaction is required by law; provided, however
that the such two-thirds approval shall not be required as to
any merger, consolidation, sale or exchange, or issuance or
delivery of stock or other securities which was (i) approved by
resolution of at least two-thirds of the then authorized members
of the Board, (ii) approved by resolution of the Board prior to
the Related Corporation and its affiliates acquiring beneficial
ownership of more than 20% of the total voting power of all
outstanding shares of the voting stock of Marathon Bancorp, or
(iii) solely between Marathon Bancorp and another corporation of
which 50% or more of the voting stock of which is owned by
Marathon Bancorp. In addition, the Articles of Incorporation of
Marathon Bancorp provides that in the event Marathon Bancorp has
a variable Board, then the exact number of directors may not be
changed by the shareholders unless by the vote of the holders of
not less than two-thirds of the total voting power of the all
outstanding shares of voting stock of Marathon Bancorp. In
addition, a bylaw specifying or changing the fixed number of
directors or changing from a fixed to a variable board or vice
versa shall not be made, repealed, altered amended or rescinded
except by the vote of the holders of not less than two-thirds of
the total voting power of all outstanding shares of voting stock
of Marathon Bancorp. Marathon Bancorp currently has a variable
Board with a range of 7 to 12 directors with the exact number of
directors set at 7. The effect of the Article provisions
discussed above have the general effect of preventing certain
merger, consolidation, sale or exchange, or issuance or delivery
of stock or other securities transactions with a Related
Corporation unless a supermajority vote of two-thirds of the
total voting power of all outstanding shares of voting stock of
Marathon Bancorp is obtained.
PLAN OF DISTRIBUTION
The Common Stock is offered on a "best efforts" basis by
Marathon Bancorp. The Common Stock is offered directly to Record
Holders and to members of the public where permitted and to the extent
that shares of Common Stock are not fully subscribed for by Record Holders
pursuant to their preference to subscribe for Common Stock in this Offering.
Marathon Bancorp will not employ any brokers, dealers or underwriters to
solicit subscriptions from Record Holders in connection with their
preference to subscribe for Common Stock in the Offering but will use
brokers and dealers to solicit in the Public Offering. Marathon Bancorp
has agreed with Hoefer & Arnett, Incorporated, GBS Financial Corp.
Horowitz & Associates, Inc.,
Torrey Pines Securities and Stonestreet
Securities,
brokers and dealers for such brokers and dealers
to act as selling agents for Marathon Bancorp to solicit subscriptions for
the Public Offering and for Marathon Bancorp to pay them commissions as
provided below. Certain executive officers of Marathon Bancorp and the
Bank may solicit responses from shareholders and Record Holders,
but such employees will not receive any commissions or
compensation for such services other than their normal
employment compensation. The assistance to be provided by
such executive officers in connection with the Offering may
consist of (i) assisting in the preparation and mailing of
the Prospectus and other subscription materials, (ii)
responding to inquiries of potential purchasers and (iii)
maintaining records of subscriptions.
Marathon Bancorp has entered into agreements with the
aforementioned brokers and dealers that are members of
the NASD ("Selling Agents") to act as selling agents for Marathon
Bancorp in connection with the sale of shares of Common Stock in
the Public Offering. The Selling Agents will be paid a commission
of 5% of the gross proceeds of shares of Common Stock sold
through their direct efforts in the Public Offering.
The aggregate volume limitation on sales by the Selling Agents will
be limited by the number of shares available in the Public Offering which
amount can not be determined until the Expiration Time. In the
agreement with Hoefer & Arnett, Incorporated, Marathon Bancorp has agreed
to a volume limitation on sales of a minimum of a 444,444 shares by Hoefer
& Arnett, Incorporated, to the extent that such amount is available
in the Public Offering. Marathon Bancorp has not agreed to any
specific volume limitation on sales by GBS Financial Corp.
Horowitz
& Associates, Torrey Pines Securities, or Stonestreet Securities.
In the agreements with the selling Agents, Marathon
Bancorp and each of the Selling Agents have made covenants, representations
and warranties as are usual and customary in such agreements. The
agreements with the Selling Agents may be terminated by (i) mutual consent
of the parties, (ii) Marathon Bancorp for failure of the Selling Agent
to perform its duties under the agreement or for the breach of any
representation or warranty made by the Selling Agent after a reasonable
opportunity to cure, or (iii) the selling Agent for breach of any
representation or warranty made by Marathon Bancorp after a reasonable
opporuntity to cure.
Marathon Bancorp will pay no out-of-pocket or other expenses
of the aforementioned brokers and dealers in connection with their
acting as selling agents in the Offering. The Selling Agents
may be deemed to be underwriters under the Securities Act and,
therefore, the fees and commissions to be paid to them may be
deemed to be underwriting fees and commissions. Marathon Bancorp
expects to agree to indemnify the Selling Agents against certain
liabilities, including civil liabilities under the Securities Act,
or contribute to payments which the Selling Agents may be required
to make in respect thereof.
LEGAL MATTERS
The validity of the securities offered hereby will be passed
upon for Marathon Bancorp by Gary Steven Findley & Associates,
Anaheim, California. Gary Steven Findley, the principal of Gary
Steven Findley & Associates beneficially owns 31,111 shares of
the Company's Common Stock.
EXPERTS
The consolidated financial statements of the Company as of
December 31, 1996 and 1995 and for each of the years in the
three-year period ended December 31, 1996 included herein and
elsewhere in the Registration Statement have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein and in the Registration Statement (which
report expresses an unqualified opinion and includes an
explanatory paragraph referring to certain regulatory matters),
and have been so included in reliance upon the report of such
firm given upon their authority as experts in accounting and
auditing.
MARATHON BANCORP
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report........................... F-2
Consolidated Statements of Financial Condition,
December 31, 1995 and 1996............................ F-3
Consolidated Statements of Operations,
years ended December 31, 1994, 1995 and 1996.......... F-4
Consolidated Statements of Cash Flows, years
ended December 31, 1994, 1995 and 1996............... F-5
Consolidated Statements of Changes in
Shareholders' Equity, years ended December 31,
1994, 1995 and 1996................................... F-6
Notes to Consolidated Financial Statements............. F-7
INTERIM FINANCIAL STATEMENTS
Consolidated Statements of Financial Conition,
March 31, 1997 (unaudited) and December 31, 1996...... F-19
Consolidated Statements of Operations,
three months ended March 31, 1997 and 1996 (unaudited). F-20
Consoldated Statements of Cash Flows, three months
ended March 31, 1997 and 1996 (unaudited)............. F-21
Notes to Unaudited Consolidated Financial Statements... F-23
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, 1996 and 1995, 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, 1996. 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, 1996 and
1995, and the results of their operations and their cash flows
for each of the three years in the period ended December 31,
1996, 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 formal
regulatory agreements with the Federal Reserve Bank of San
Francisco and the Office of the Comptroller of the Currency,
respectively. At December 31, 1996, the Bank did not meet the
minimum capital requirements prescribed by the formal agreement
and the capital adequacy guidelines under the regulatory
framework for prompt corrective action . Failure on the part of
Marathon Bancorp or the Bank to meet the terms of the respective
agreements may subject the Bank to significant regulatory
sanctions, including restrictions as to the source of deposits
and the appointment of a conservator or receiver.
/s/ Deloitte & Touche
Los Angeles, California
February 28, 1997
(March 24, 1997 as to Notes 11 and 13)
F-2
December 31,
1996 1995
Assets
Cash and due from banks $4,788,900 $8,450,300
Federal funds sold 2,500,000 14,400,000
Cash and cash equivalents 7,288,900 22,850,300
Interest-bearing deposits with
financial institutions 996,000 497,000
Securities available for sale 1,030,700 3,302,900
Securities held to maturity (aggregate
market value of $5,823,000 in 1996
and $6,306,700 in 1995) 6,089,000 6,610,700
Loans receivable, net (allowance for
loan losses of $1,088,200in 1996 and
$720,100 in 1995) 46,608,200 49,515,100
Other real estate owned, net 3,085,300 2,654,400
Premises and equipment, net 453,100 420,900
Accrued interest receivable 432,000 582,200
Other assets 409,800 321,100
Total $66,393,000 $86,754,600
Liabilities and Shareholders' Equity
Deposits:
Demand, noninterest-bearing $25,839,900 $38,415,000
Demand, interest-bearing 5,809,600 7,868,100
Money market and savings 22,969,200 27,167,000
Time certificates of deposit:
Under $100,000 5,540,100 5,779,400
$100,000 and over 2,722,200 3,300,400
Total deposits 62,881,000 82,529,900
Accrued interest payable 113,700 93,600
Other liabilities 355,500 155,600
Total liabilities 63,350,200 82,779,100
Commitments and contingencies
Shareholders' equity:
Preferred shares - no par value,
1,000,000 shares authorized,
no shares issued and outstanding
Common shares - no par value,
9,000,000 shares authorized,
1,248,764 shares issued and
outstanding in 1996 and
1995 8,080,000 8,080,000
Net unrealized gain on securities
available for sale 7,500 1,100
Accumulated deficit (5,044,700) (4,105,600)
Total shareholders' equity 3,042,800 3,975,500
Total $66,393,000 $86,754,600
See accompanying notes to consolidated financial statements.
F-3
Year ended December 31,
1996 1995 1994
Interest income:
Loans, including fees $4,034,900 $4,811,900 $5,124,300
Investment securities -
taxable 475,500 848,000 902,600
Federal funds sold 622,500 374,600 121,400
Deposits with financial
institutions 47,200 40,000 10,000
Total interest income 5,180,100 6,074,500 6,158,300
Interest expense:
Deposits 1,176,600 1,312,500 1,405,300
Federal funds purchased 0 9,500 21,600
Total interest expense 1,176,600 1,322,000 1,426,900
Net interest income before
provision for loan losses 4,003,500 4,752,500 4,731,400
Provision for loan losses 601,000 561,100 0
Net interest income after
provision for loan losses 3,402,500 4,191,400 4,731,400
Other operating income:
Service charges on deposit
accounts 197,000 206,800 246,100
Gain on mortgage loan sale 0 0 111,200
Other service charges and fees 22,700 52,500 72,400
Total other operating income 219,700 259,300 429,700
Other operating expenses:
Salaries and employee benefits 1,435,400 1,848,900 2,169,000
Provision for OREO losses 151,000 1,147,500 234,400
Net operating cost of other
real estate owned 238,400 202,800 202,500
Occupancy 530,900 352,100 565,600
Furniture and equipment 146,200 104,600 123,200
Professional services 554,700 727,100 874,200
Business promotion 60,500 68,300 78,400
Stationery and supplies 71,100 77,900 70,200
Data processing services 471,400 586,600 558,100
Messenger and courier services 268,600 256,900 406,000
Insurance and assessments 321,200 328,200 429,900
Litigation 188,900 0 0
Customer checks 60,900 64,000 38,600
Other expenses 62,100 88,600 170,000
Total other operating
expenses 4,561,300 5,853,500 5,920,100
Loss before extraordinary item (939,100) (1,402,800) (759,000)
Extraordinary gain on early
extinguishment of debt, net 0 0 111,800
Net loss $(939,100) $(1,402,800) $(647,200)
Net loss per share:
Loss before extraordinary item $(0.75) $(1.12) $(0.61)
Extraordinary item 0.00 0.00 0.09
Net loss $(0.75) $(1.12) $(0.52)
See accompanying notes to consolidated financial statements.
F-4
Year ended December 31,
(Decrease) increase in cash
and cash equivalents 1996 1995 1994
Cash flows from operating
activities:
Interest received $5,168,600 $6,105,100 $6,088,300
Service charges on deposit
accounts and other fees
received 219,700 259,300 318,500
Proceeds from sale of
mortgage loans held for sale 0 0 17,851,000
Funding of mortgage loans
held for sale 0 0 (9,150,200)
Interest paid (1,156,500) (1,312,500) (1,421,400)
Cash paid to employees
and suppliers (4,087,200) (4,692,800) (5,845,200)
Income taxes (paid)
refunded, net (2,400) 88,000 1,389,800
Net cash provided by
operating activities 142,200 447,100 9,230,800
Cash flows from investing
activities:
Net increase in interest-
bearing deposits with
financial institutions (499,000) (101,000) (396,000)
Purchases of securities
available for sale (1,007,500) 0 (10,865,600)
Purchases of securities
held to maturity 0 0 (5,965,900)
Proceeds from maturities
of securities available
for sale 3,280,600 10,905,000 0
Proceeds from maturities of
securities held to maturity 503,900 5,137,400 6,196,300
Net decrease in loans
made to customers 758,200 7,310,100 4,829,200
Proceeds from sale of
other real estate owned 1,082,200 728,200 3,157,100
Purchases of furniture,
fixtures and equipment (173,100) (2,900) (63,200)
Net cash provided
(used) by investing
activities 3,945,300 23,976,800 (3,108,100)
Cash flows from financing
activities:
Net (decrease) increase
in noninterest-bearing and
interest-bearing demand
deposits and money market
and savings accounts (18,831,400) (7,454,200) 7,144,600
Net decrease in time
certificates of deposits (817,500) (1,315,800) (10,838,800)
Repayment of long term debt 0 0 (560,000)
Net cash used by financing
activities (19,648,900) (8,770,000) (4,254,200)
Net (decrease) increase
in cash and cash
equivalents (15,561,400) 15,653,900 1,868,500
Cash and cash equivalents
at beginning of year 22,850,300 7,196,400 5,327,900
Cash and cash equivalents
at end of year $7,288,900 $22,850,300 $7,196,400
Year ended December 31,
1996 1995 1994
Reconciliation of net loss to net
cash provided by operating activities
Net loss $(939,100) $(1,402,800) $(647,200)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and
amortization expense 140,900 90,700 113,800
Provision for loan losses 601,000 561,100 0
Provision for OREO losses 151,000 1,147,500 234,400
Loss (gain) on sale of real
estate owned 68,500 42,900 (85,300)
Gain on mortgage loans
held for sale 0 0 (111,200)
Gain on early extinguishment
of debt 0 0 (111,800)
Amortization of premiums and
discounts on securities, net 23,300 (26,300) 66,200
Change in mortgage loans
held for sale 0 8,700,800
Change in deferred loan
origination fees,net (184,900) (43,700) (43,200)
Change in income tax
refunds receivable 0 88,000 1,389,800
Change in other assets
and accrued interest
receivable 61,500 254,700 (85,400)
Change in other liabilities
and accrued interest
payable 220,000 (265,000) (190,100)
Total adjustments 1,081,300 1,849,900 9,878,000
Net cash provided by operating
activities $142,200 $447,100 $9,230,800
Supplemental cash flow information:
Transfer from mortgage
loans held for sale
to loans receivable $0 $0 $1,100,000
Transfer from loans
to other real estate
owned 2,436,400 347,700 2,165,700
Loans made to facilitate
the sale of other real
estate owned 703,800 1,912,200 3,029,000
Transfer of securities
from held-to-maturity to
available for sale 0 3,301,800 0
F-5
Consolidated Statements of Changes in Shareholders' Equity
Marathon Bancorp and Subsidiary
Net
Unrealized
Gain (loss)
on Securities
Preferred Common shares Accumulated Available
Shares Shares Amount Deficit for Sale Total
Balance,
January 1,
1994 -- 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 (1,402,800) (1,402,800)
Net change in
unrealized gain
on securities
available for sale 11,400 11,400
Balance,
December 31,
1995 -- 1,248,764 8,080,000 (4,105,600) 1,100 3,975,500
Net Loss (939,100) (939,100)
Net change in
unrealized gain
on securities
ailable for sale 6,400 6,400
Balance,
December 31,
1996 -- 1,248,764 $8,080,000 $(5,044,700) $7,500 $3,042,800
See accompanying notes to consolidated financial statements.
F-6
Notes to Consolidated Financial Statements
Marathon Bancorp and Subsidiary
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.
Net 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 that the
Company has the intent and ability to hold to maturity 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. Net 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, 1996 and 1995 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.
F-7
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. The amount of impairment and any subsequent changes
are recorded through the provision for loan losses as an
adjustment to the allowance for loan losses. Impairment is
measured either based on the present value of the loan's
expected future cash flows or the estimated fair value of the
collateral.
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 effect 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 1996,
1995 and 1994.
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.
Stock-Based Compensation: Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," encourages, but does not require, companies to
record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to
account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
Interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock. The pro forma
effects of adoption are disclosed in Note 8.
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.
Recent Accounting Pronouncements: In June 1996, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," as amended in December 1996, by
SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of SFAS No. 125." This Statement provides accounting
and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities. SFAS No 125 applies
prospectively to financial statements for fiscal years beginning
after December 31, 1996. However, SFAS No. 127 defers for one
year the effective date of certain provisions within SFAS No.
125. SFAS No. 125 does not permit earlier or retroactive
application. As of December 31, 1996, the Bank has not adopted
SFAS No. 125, as amended by SFAS No. 127, and does not believe
the impact on its operations and financial position will be
material upon adoption.
Note 2:
Securities
The following is a summary of data for the major categories of
securities as of December 31, 1996 and 1995:
Total Estimated
amortized Gross unrealized market
cost Gains Losses value
1996
Securities
available for sale:
U.S. Treasury
securities -
Due within one
year $1,004,200 $2,700 $0 $1,006,900
Mortgage-backed
securities -
Due after one but
within five years 19,000 4,800 0 23,800
$1,023,200 $7,500 $0 $1,030,700
Securities held
to maturity:
Mortgage-backed
securities -
Due after one but
within five
years $5,969,300 $0 $(266,000) $5,703,300
Federal Reserve
Bank stock 119,700 0 0 119,700
$6,089,000 $0 $(266,000) $5,823,000
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 -27,000 207,300
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
Note 2:
Securities (Continued)
U.S. Treasury securities with a carrying value of $100,000 and
$300,000 at December 31, 1996 and 1995, respectively, were
pledged to secure bankruptcy trust deposits. U.S. Treasury
securities with a carrying value of $706,900 and $1,002,800 were
pledged to facilitate the issuance of letters of credit at
December 31, 1996 and 1995, 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.
There were no sales of securities in 1996, 1995 or 1994. Net
unrealized gain of $7,500 and $1,100 on securities available for
sale were credited to shareholders' equity in 1996 and 1995,
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-to-maturity 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, 1996,
required reserve balances averaged approximately $875,000.
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:
1996 1995
Commercial loans $14,056,000 $15,488,100
Real estate loans:
Interim construction 457,000 0
Income property 27,219,700 24,987,000
Residential 1-4 units 4,819,400 8,517,000
Total real estate loans 32,496,100 33,504,000
Installment loans 895,100 1,178,800
47,447,200 50,170,900
Deferred net loan
origination costs 249,200 64,300
Allowance for loan losses , -1,088,200 -720,100
Loans receivable, net $46,608,200 $49,515,100
At December 31, 1996, nonaccrual loans totaled $568,400
(included as impaired loans below), compared with $523,000 at
December 31, 1995. There were no loans past due ninety days or
more and still accruing interest at December 31, 1996 and 1995.
The reduction in interest income associated with nonaccrual
loans was approximately $147,100 in 1996, $79,900 in 1995 and
$47,000 in 1994.
At December 31, 1996 and 1995, the Bank had classified $68,900
and $60,600, respectively, of its loans as impaired and recorded
the full amount as specific reserve in the allowance for loan
losses. In addition, the Bank classified $499,500 and
$2,354,900, respectively, 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 years
ended December 31, 1996 and 1995 was approximately $2,433,400
and $2,422,900, respectively. Interest income of $73,000 and
$60,900, respectively, was recognized on impaired loans during
the years ended December 31, 1996 and 1995.
Due to financial difficulties encountered by certain borrowers,
the Bank has restructured the terms of some of its loans to
facilitate loan payments. There were no restructured loans at
December 31, 1996. However, at December 31, 1995, loans with
restructured terms totaled $1,253,900. The reduction in
interest income associated with restructured loans was
approximately $25,000 in 1995.
The following is a summary of changes in the allowance for loan
losses for the years ended December 31, 1996, 1995 and 1994:
1996 1995 1994
Balance, January 1 $720,100 $796,500 $1,500,000
Provision for loan losses 601,000 561,100 0
Loans charged off -303,000 -740,000 -966,000
Recoveries 70,100 102,500 262,500
Balance, December 31 $1,088,200 $720,100 $796,500
The following is a summary of changes in the valuation allowance
of other real estate owned for the years ended December 31,
1996, 1995 and 1994:
1996 1995 1994
Balance, January 1 $1,367,100 $730,600 $1,173,300
Provision for OREO losses 151,000 1,147,500 234,400
Charged off -687,800 -511,000 -677,100
Balance, December 31 $830,300 $1,367,100 $730,600
Note 5: Premises and Equipment
The following is a summary of the major components of premises
and equipment at December 31, 1996 and 1995:
1996 1995
Furniture, fixtures and equipment $1,184,300 $1,109,200
Leasehold improvements 465,600 506,500
Premises and equipment, at cost 1,649,900 1,615,700
Less accumulated depreciation
and amortization -1,196,800 -1,194,800
Premises and equipment, net $453,100 $420,900
Note 6: Deposits
Interest expense for the years ended December 31, 1996, 1995 and
1994 relating to interest-bearing deposits is set forth as
follows:
1996 1995 1994
Demand, interest-bearing $61,600 $73,300 $60,400
Money market and savings 722,900 815,800 810,100
Time certificates of deposit:
Under $100,000 265,300 256,000 330,800
$100,000 and over 126,800 167,400 204,000
Interest expense on deposits $1,176,600 $1,312,500 $1,405,300
At December 31, 1996, the scheduled maturities of certificates
of deposit are as follows:
1997 $8,100,800
1998 46,800
1999 5,100
2000 9,800
2001 99,800
$8,262,300
Note 7: Income Taxes
The income tax provision (benefit) for the years ended December
31, 1996, 1995 and 1994 is comprised of the following:
1996 1995 1994
Current taxes:
Federal $0 $0 $0
State 2400 1600 1600
2400 1600 1600
Deferred taxes:
Federal -233200 -467900 -452800
State -11800 -316400 63000
-245000 -784300 -389800
Total:
Federal -233200 -467900 -452800
State -9400 -314800 64600
$(242,600) $(782,700) $(388,200)
Net change in
valuation allowance 245000 784300 389800
Total $2,400 $1,600 $1,600
For federal income tax purposes, the Company has net operating
loss carryforwards of approximately $3,727,000 which expire in
2008 - 2011. For state income tax purposes, the Company has
incurred net operating loss carryforwards of approximately
$5,252,000, which expire in 1997 - 2001, to offset future taxes
payable, adjusted for the fifty percent reduction, as required
by state tax law.
At December 31, 1996 and 1995, the components of the net
deferred tax asset are comprised of the following:
1996 1995
Deferred tax liabilities:
Federal:
State income tax $272,900 $261,000
Tax reserve recapture 96700 141000
Reserve - other 98600 34100
468200 436100
State:
Reserve - other 31800 11300
31800 11300
500000 447400
Deferred tax assets:
Federal:
AMT credit carryforward -137700 -137800
Federal NOL carryforward -1304800 -976200
Provision for loan
losses -380900 -244800
Premises and equipment -34100 -52800
Provision for REO losses -290800 -464800
Other -3700 -10300
-2152000 -1886700
State:
Provision for
loan losses -123000 -81400
State NOL carryforward -593400 -541200
Provision for REO losses -93900 -154400
Other -1000 -2000
-811300 -779000
-2963300 -2665700
Net deferred tax (asset) -2463300 -2218300
Less valuation allowance 2463300 2218300
$0 $0
The Company has no current tax asset or liability at December
31, 1996 and 1995.
The principal reasons for the difference between the federal
statutory income tax rate of 35% in 1996, 1995 and 1994, and
income tax expense (benefit) for the years ended December 31,
1996, 1995 and 1994 are as follows:
1996 1995 1994
Tax benefit at
statutory rate $(328,700) $(491,000) $(265,700)
State franchise tax
net of valuation
allowance 1600 1100 1100
Federal valuation allowance 322900 467900 388100
Loss of state NOL carryforward 0 40000 41800
Surtax exemption 0 14000 7600
AMT credit carryforward 0 0 -137800
Other, net 6600 -30400 -33500
Tax benefit $2,400 $1,600 $1,600
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
1996 1995 1994
Options outstanding, January 1 330811 353219 359646
Granted at option prices of:
$2.75 in 1996 1500 0 0
$1.75 in 1995 0 50000 0
$1.56 in 1994 0 0 1500
Canceled -38166 -72408 -7927
Options outstanding, December 31 294145 330811 353219
Shares available for future grant
at December 31 142677 106011 83603
Shares available under stock
option plans 436822 436822 436822
At December 31, 1996, 251,520 shares were exercisable at prices
of $1.75 to $7.81 per share. The remaining shares under option
become exercisable as follows: 1997 - 11,325; 1998 - 10,400;
1999 - 10,300; 2000 - 10,300; and 2001 - 300.
The estimated fair value of options granted during 1996 and
1995 were $2.07 and $1.22 per share, respectively. The Company
applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock options.
Accordingly, no compensation cost has been recognized for its
stock option plan. Had compensation cost for the Company's
stock option plan been determined based on the fair value at the
grant dates for awards under the plan consistent with the method
of SFAS No. 123, the Company's net loss and loss per share for
the year ended December 31, 1996 and 1995 would have been
changed to the pro forma amounts indicated below:
1996 1995
Net loss to common shareholders:
As reported $(939,100) $(1,402,800)
Pro forma $(957,300) $(1,415,000)
Net loss per common share:
As reported $(0.75) $(1.12)
Pro forma $(0.76) $(1.13)
The fair value of options granted under the Company's fixed
stock option plan during 1996 and 1995 were estimated on the
date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used: no dividend
yield, expected volatility of approximately 55%, risk free rate
of 6.5%, and expected lives of ten years.
Note 9: Parent Company Financial Statements
The following financial information presents the statements of
financial condition of the Company (parent company only) as of
December 31, 1996 and 1995 and the related statements of
operations and cash flows for the years ended December 31, 1996,
1995 and 1994.
December 31,
Statements of Financial Condition 1996 1995
Assets
Cash in Marathon National Bank $600 $600
Investment in Marathon National Bank 3080100 4012800
$3,080,700 $4,013,400
Liabilities and Shareholders' Equity
Accrued expenses $37,900 $37,900
Shareholders' equity:
Preferred shares 0 0
Common shares 8080000 8080000
Accumulated deficit -5044700 -4105600
Unrealized gain on securities
available for sale 7500 1100
Total shareholders' equity 3042800 3975500
$3,080,700 $4,013,400
Year ended December 31,
Statements of Operations
1996 1995 1994
Operating expenses $0 $(9,000) $(12,000)
Equity in undistributed net loss
of Marathon National Bank -939100 -1393800 -635200
Net loss $(939,100) $(1,402,800) $(647,200)
Year ended December 31,
Statements of Cash Flows 1996 1995 1994
Decrease in cash and cash
equivalents
Cash flows from operating
activities:
Cash paid to suppliers
and employees $0 $(9,000) $(12,000)
Net cash used by
operating activities 0 -9000 -12000
Net decrease in cash
and cash equivalents 0 -9000 -12000
Cash at beginning of year 600 9600 21600
Cash at end of year $600 $600 $9,600
Reconciliation of net loss
to net cash used by
operating activities
Net loss $(939,100) $(1,402,800) $(647,200)
Adjustments to reconcile
net loss to net cash
used by operating
activities -
Equity in undistributed
net loss of Marathon
National Bank 939100 1393800 635200
Total adjustments 939100 1393800 635200
Net cash used by
operating activities $0 $(9,000) $(12,000)
Note 10: Commitments and Contingent Liabilities
The Bank has an operating 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, 1996 are as
follows:
Year Amount
1997 $399,500
1998 594100
1999 594100
2000 594100
2,001 594100
2002 and thereafter 396100
$3,172,000
Rent expense was $265,400, $194,700 and $387,300 for the years
ended December 31, 1996, 1995 and 1994, respectively. Sublease
rental income was $9,500 in 1996 and $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.
During 1993 and 1994, the Bank operated a wholesale mortgage
banking division which acquired approximately $44 million of
residential loans. The loans were then sold to various
investors with standard recourse language in the event of fraud.
During 1996, three investors requested the Bank to repurchase
ten of the loans due to alleged documentation deficiencies, the
alleged failure of the Bank to secure mortgage insurance or
disagreements over appraisal values. All of the loans are
secured by residential real estate. The Bank has reviewed the
documentation relative to these loans and, after consultation
with legal counsel, believes that it has appropriate defenses.
At December 31, 1996, the Bank has established a reserve for
potential losses that may result from this operation.
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 statements.
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 notional amounts
of financial instruments with off balance sheet risk as of
December 31, 1996 and 1995.
1996 1995
Commitments to extend credit $8,219,200 $10,046,000
Other letters of credit 338700 84000
$8,557,900 $10,130,000
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 Company and Bank are subject to various regulatory capital
requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions
by regulators that, if undertaken, could have a direct material
effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and Bank must meet specific
capital guidelines that involve quantitative measures of the
asset, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. The capital
amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings
and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Company and Bank to maintain
minimum amounts and ratios (set forth in the table below) of
total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined).
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 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 4.0 percent. At
December 31, 1996, the Company and the Bank had a Tier 1 capital
ratio of 6.1 percent and a Tier 1 leverage ratio of 4.1 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.
On December 16, 1996, the Company entered into a formal
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, submit an
acceptable plan to increase and maintain an adequate capital
level, submit annual statements of planned sources and uses of
cash, and submit annual progress reports.
The following table summarizes the actual capital ratios of the
Company and the Bank (the capital ratios of the Company
approximate those of the Bank) and the minimum levels required
under the regulatory framework for prompt corrective action and
the formal agreement with the OCC:
To Be Categorized as OCC Formal
Actual adequately Capitalized Agreement
Amount Percentage Amount Percentage Amount Percentage
1996
Total
risk-
based $3,705,000 7.4% >$4,008,000 >8.0% N.A N.A
Tier 1
risk-
based $3,073,000 6.1% >$2,003,000 >4.0% >$4,259,000 >8.5%
Tier 1
lever-
age $3,073,000 4.1% >$2,969,000 >4.0% >$4,455,000 >6.0%
1995
Total
risk-
based $4,698,000 8.6% >$4,388,000 >8.0% N.A N.A
Tier 1
risk-
based $4,012,000 7.3% >$2,197,000 >4.0% >$4,661,000 >8.5%
Tier 1
lever-
age $4,012,000 4.9% >$3,302,000 >4.0% >$4,952,000 >6.0%
As of December 31, 1996, the Bank is categorized as
undercapitalized under the regulatory framework for prompt
corrective action. As of December 31, 1995, the Bank is
categorized as adequately capitalized under the regulatory
framework for prompt corrective action. As such, the Bank may
not issue dividends or make other capital distributions, and may
not accept brokered or high rate deposits, as defined, due to
the level of its risk-based capital. In addition, under prompt
corrective action, the Bank's capital status may preclude the
Bank from access to borrowings from the Federal Reserve System
through the discount window. However, as further described in
Note 13, the Company completed a successful private placement
offering on March 24, 1997 which resulted in $766,900 of new
capital for the Bank. Had the Bank received the additional
capital at December 31, 1996, management believes that the Bank
would have met the capital requirements for an adequately
capitalized bank under the regulatory framework for prompt
corrective action.
Note 12: Fair Value Information
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 the reporting date. The use of different market
assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.
1996 Carrying Amount Estimated Fair Value
Assets
Cash and due from banks $4,788,900 $4,788,900
Federal funds sold 2500000 2500000
Interest-bearing deposits with
financial institutions 996000 996000
Investment securities:
Available for sale 1030700 1030700
Held to maturity 6089000 5823000
Loans receivable, net 46608200 46809100
Accrued interest receivable 432000 432000
Liabilities
Deposits:
Noninterest-bearing 25839900 25839900
Interest bearing 37041100 37610400
Accrued interest payable 113700 113700
1995 Carrying Amount Estimated Fair Value
Assets
Cash and due from banks $8,450,300 $8,450,300
Federal funds sold 14400000 14400000
Interest-bearing deposits with
financial institutions 497000 497000
Investment securities:
Available for sale 3302900 3302900
Held to maturity 6610700 6306700
Loans receivable, net 49515100 48817800
Accrued interest receivable 582200 582200
Liabilities
Deposits:
Noninterest-bearing 38415000 38415000
Interest bearing 44114900 44321000
Accrued interest payable 93600 93600
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,
interest-bearing deposits with financial institutions, 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, 1996 and 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
counterparties credit standing. The fair values of these
instruments are not material at December 31, 1996 and 1995.
Note 13: Subsequent Events
On March 24, 1997, the Company successfully completed a private
capital offering in the amount of $766,900 through the sale of
333,422 shares of common stock. Had the Bank received the
additional capital at December 31, 1996, management believes
that the Bank would have met the capital requirements for an
adequately capitalized bank under the regulatory framework for
prompt corrective action.
On March 3, 1997, the Board of Directors of the Company
unanimously approved to cancel all director stock options
described in Note 8 totaling 182,611 shares.
Consolidated Statements of Financial Condition
Marathon
Bancorp and Subsidiary
March 31, December 31,
(Unaudited) 1997 1996
Assets
Cash and due from banks $3,660,900 $4,788,900
Federal funds sold 18,600,000 2,500,000
Cash and cash equivalents 22,260,900 7,288,900
Interest-bearing deposits with
financial institutions 896,000 996,000
Securities available for sale 2,018,900 1,030,700
Securities held to maturity
(aggregate market value of
$5,640,700 and $5,823,000 at
March 31, 1997 and December
31, 1996, respectively) 6,078,400 6,089,000
Loans receivable, net
(allowance for loan losses
of $1,110,100 and $1,088,200
at March 31, 1997 and
December 31, 1996 respectively)44,911,200 46,608,200
Other real estate owned, net 2,840,700 3,085,300
Premises and equipment, net 436,500 453,100
Accrued interest receivable 397,400 432,000
Other assets 504,200 409,800
Total $80,344,200 $66,393,000
Liabilities and Shareholders' Equity
Deposits:
Demand, noninterest-
bearing $36,135,600 $25,839,900
Demand, interest-bearing 5,943,100 5,809,600
Money market and savings 25,111,600 22,969,200
Time certificates of deposit:
Under $100,000 5,350,400 5,540,100
$100,000 and over 3,600,800 2,722,200
Total deposits 76,141,500 62,881,000
Accrued interest payable 76,500 113,700
Other liabilities 608,800 355,500
Total liabilities 76,826,800 63,350,200
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,
1,589,596 and 1,248,764 shares
issued and outstanding at
March 31, 1997 and December 31,
1996, respectively 8,846,900 8,080,000
Net unrealized gain on
securities available for sale 5,400 7,500
Accumulated deficit (5,334,900) (5,044,700)
Total shareholders'
equity 3,517,400 3,042,800
Total $80,344,200 $66,393,000
See accompanying notes to unaudited consolidated financial
statements.<PAGE>
Consolidated Statements of Operations
Marathon Bancorp and Subsidiary
Three months ended
March 31
(Unaudited) 1997 1996
Interest income:
Loans, including fees $875,900 $1,071,200
Investment securities - taxable 109,300 136,300
Federal funds sold 51,500 161,100
Deposits with financial institutions 13,800 7,800
Total interest income 1,050,500 1,376,400
Interest expense:
Deposits 256,500 295,600
Net interest income before
provisions for loan losses 794,000 1,080,800
Provision for loan losses 150,000 0
Net interest income after
provisions for loan losses 644,000 1,080,800
Other operating income:
Service charges on deposit accounts 59,500 63,900
Other service charges and fees 8,200 3,200
Total other operating income 67,700 67,100
Other operating expenses:
Salaries and employee benefits 372,000 458,600
Net operating cost of other real
estate owned 1,700 39,600
Occupancy 156,100 83,100
Furniture and equipment 36,700 30,800
Professional services 93,700 197,500
Business promotion 7,400 15,000
Stationery and supplies 28,200 13,600
Data processing services 114,500 133,100
Messenger and courier services 36,700 68,200
Insurance and assessments 96,400 98,900
Litigation 25,000 0
Other expenses 33,500 31,000
Total other operating expenses 1,001,900 1,169,400
Net loss $(290,200) $(21,500)
Net loss per share $(0.23) $(0.02)
See accompanying notes to unaudited consolidated financial
statements.<PAGE>
Consolidated Statements of Cash Flows
Marathon Bancorp and Subsidiary
(Unaudited) Three months ended
March 31,
Increase in cash and cash equivalents 1997 1996
Cash flows from operating activities:
Interest received $1,099,600 $1,561,500
Service charges on deposit accounts
and other fees received 67,700 67,100
Interest paid (293,700) (271,700)
Cash paid to suppliers and employees (813,200) (1,171,900)
Net cash provided by operating
activities 60,400 185,000
Cash flows from investing activities:
Net (increase) decrease in interest-
bearing deposits with other
financial institutions 100,000 (198,000)
Purchase of securities available for sale(997,200) 0
Proceeds from maturities of securities
available for sale 4,400 2,111,500
Proceeds from maturities of securities
held to maturity 6,000 34,600
Net decrease in loans made to customers 1,539,600 503,400
Proceeds from sale of other real estate
owned 247,900 307,200
Purchases of furniture, fixtures and
equipment (16,500) (80,900)
Net cash provided by investing
activities 884,200 2,677,800
Cash flows from financing activities:
Increase in noninterest-bearing and
interest-bearing demand
deposits and money market and
savings accounts 12,571,600 3,247,400
Net increase (decrease) in time
certificates of deposits 688,900 (395,200)
Proceeds from the sale of common stock 766,900 0
Net cash provided by financing
activities 14,027,400 2,852,200
Net increase in cash and cash
equivalents 14,972,000 5,715,000
Cash and cash equivalents at
beginning of period 7,288,900 22,850,300
Cash and cash equivalents at
end of period $22,260,900 $28,565,300
See accompanying notes to unaudited consolidated financial
statements.
(Continued)
<PAGE>
Consolidated Statements of Cash Flows (Continued)
Marathon Bancorp and Subsidiary
(Unaudited) Three months ended
March 31,
Reconciliation of net loss to
net cash provided operating
activities 1997 1996
Net loss $(290,200) $(21,500)
Adjustments to reconcile net
loss to net cash provided
by operating activities:
Depreciation and
amortization expense 33,100 26,300
(Gain) loss on sale of
other real estate owned (3,300) 5,100
Provision for loan losses 150,000 0
Amortization of premiums
and discounts on securities, net 7,100 5,100
Change in deferred loan
origination fees, net 7,400 16,600
Change in accrued
interest receivable 34,600 163,400
Change in accrued
interest payable (37,200) 23,900
Change in other assets (94,400) (132,000)
Change in other liabilities 253,300 98,100
Total adjustments 350,600 206,500
Net cash provided by operating
activities $60,400 $185,000
Supplemental cash flow information:
Loans made to facilitate
the sale of other real
estate owned $0 $87,500
Consolidated Statements of Changes in Shareholders' Equity
Marathon Bancorp and Subsidiary
Net
Unrealized
Gain (loss)
on Securities
Preferred Common shares Accumulated Available
Shares Shares Amount Deficit for Sale Total
Balance,
December
31, 1996 - 1,248,764 $8,080,000 $(5,044,700) $7,500 $3,042,800
Net Loss (290,200) (290,200)
Net change
in unrealized
gain on
securities
available for sale (2,100) (2,100)
Proceeds from
the sale of
common stock 340,832 766,900 766,900
Balance,
March 31,
1997 - 1,589,596 $8,846,900 $(5,334,900) $5,400 $3,517,400
See accompanying notes to unaudited consolidated financial
statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation and Management Representations
The unaudited consolidated financial statements of Marathon
Bancorp (the "Company") have been prepared in accordance with
the instructions to Form 10-QSB and, therefore, do not include
all footnotes normally required for complete financial
disclosure. While the Company believes that the disclosures
presented are sufficient to make the information not misleading,
reference may be made to the consolidated financial statements
and notes thereto included in the Company's 1996 Annual Report
on Form 10-KSB.
The accompanying consolidated statements of financial condition
and the related consolidated statements of operations and cash
flows reflect, in the opinion of management, all material
adjustments necessary for fair presentation of the Company's
financial position as of March 31, 1997 and December 31, 1996,
results of operations and changes in cash flows for the
three-month periods ended March 31, 1997 and 1996. The results
of operations for the three-month period ended March 31, 1997
are not necessarily indicative of what the results of operations
will be for the full year ending December 31, 1997.
(2) Loss per Share
Loss per share is computed using the weighted average number of
common shares outstanding during the period. Loss per share
calculations exclude common share equivalents (stock options)
since their effect would be to reduce the loss per share.
Accordingly, the weighted average number of shares used to
compute the loss per share was 1,275,273 and 1,248,764 for the
three-month periods ended March 31, 1997 and 1996, respectively.
(3) Sale of Common Stock
During the first quarter of 1997, the Company successfully
completed a private placement offering and issued 340,832 shares
of common stock at $2.25 per share and contributed the net
proceeds of $766,900 to the Company's wholly-owned subsidiary,
Marathon National Bank (the "Bank") as equity capital.
