UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10- QSB
1
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
1
For the quarterly period ended
March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _________
Commission file number 0-12510
MARATHON BANCORP
(Exact name of registrant as specified in its charter)
California 95-3770539
State or other jurisdiction
of incorporation) I.R.S. Employer Identification No.)
11150 West Olympic Boulevard, Los Angeles,
California 90064
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(310) 996-9100
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of May 1, 1997, there were 1,589,596 shares of no par
Common Stock issued and outstanding.
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.
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)
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 o 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion is intended to provide additional
information about the Company, its financial condition and
results of operations which is not otherwise apparent from the
consolidated financial statements. Since the Bank represents a
substantial portion of the Company's activities and investments,
the following relates primarily to the financial condition and
operations of the Bank. It should be read in conjunction with
the Company's 1996 Annual Report on Form 10-KSB. Averages
presented are daily average balances.
Summary
Marathon Bancorp 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.
On September 20, 1995, the Bank entered into a formal agreement
with the Office of the Comptroller of Currency (OCC) under which
the Bank agreed to submit a six year strategic plan by November
1, 1995. The plan included, among other things, action plans to
accomplish the following: a) achieve and maintain the
desired capital ratios, as set forth below; b) attain
satisfactory profitability; and c) reduce other real estate
owned. The Plan was accepted by the OCC on January 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 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.
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.
Operating Performance
The following discussion explains in greater detail the
consolidated financial condition and results of operations of
the Company. This discussion should be read in conjunction with
the accompanying consolidated financial statements and noted
thereto as well as the Company's 1996 Annual Report on Form
10-KSB .
Net Interest Income: Net interest income (the amount by which
interest generated from earning assets exceeds interest expense
on interest-bearing liabilities) is the most significant
component of Marathon's earnings. The Company's diverse
portfolio of earning assets is comprised of its core business of
loan underwriting, augmented by liquid overnight federal funds
sold, short term interest-bearing deposits with other financial
institutions and investment securities. These earning assets
are financed through a combination of interest-bearing and
noninterest-bearing sources of funds.
Operating results in the 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% 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 proir 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
liabil-
ities 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
liabil-
ities 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.
Management of the Bank has instituted stringent credit policies
designed to minimize the level of losses.
These policies require extensive evaluation of new credit
requests and continuing review of existing credits in order to
identify, monitor and quantify evidence of deterioration of
quality or potential loss in a timely manner. Management's
reviews are based upon previous loan loss experience, current
economic conditions, composition of the loan portfolio, the
value of collateral and other relative factors. The Bank's
lending is concentrated in Los Angeles County and surrounding
areas, which have experienced adverse economic conditions over
the last several years, including declining real estate values.
These factors have adversely affected some borrowers' ability to
repay loans.
The policy of the Bank is to review each loan over $150,000 in
the portfolio to identify and classify problem credits as
"substandard", "doubtful" and "loss". Substandard loans have
one or more defined weaknesses. Doubtful loans have the
weaknesses of substandard loans with the additional
characteristic that the weaknesses make collection or
liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high
possibility of loss. A loan classified loss is considered
uncollectible and of such little value that the continuance as
an asset of the Bank is not warranted. Another category
designated "listed" is maintained for loans which do not
currently expose the Bank to a sufficient degree of risk to
warrant classification as substandard, doubtful or loss but do
possess credit deficiencies or potential weakness deserving
management's close attention.
Excluding loans which have been classified loss and charged off
by the Bank, the Bank's classified loans consisted of $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. 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. 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.
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.
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 certif-
icates 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
The primary function of asset liability management is to ensure
adequate liquidity and to maintain an appropriate balance
between rate sensitive assets and rate sensitive liabilities.
Liquidity management involves matching sources and uses of the
Company's funds in order to effectively meet the cash flow needs
of our customers, as well as the cash flow requirements of the
Company itself. Interest rate sensitivity management seeks to
stabilize net interest income during periods of changing
interest rates.
Liquidity: Management monitors its liquidity position
continuously in relation to trends of loans and deposits, and
relates the data to short and long term expectations. In order
to serve 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. 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)
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, 86.7 percent of total average deposits during the
three-month period ended March 31, 1997 and 88.6 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.
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 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
Rate sensitive or maturing in
by Time Period 90 days 3 - 12 1 - 5 Over 5
(Dollars in
millions) or less months years years Total
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 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 assets
to liabilities 1.2 1.1 1.4 1.0 1.0
Capital Resources And Dividends
The Company 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, the Company and the Bank must meet
specific capital guidelines that involve quantitative measures
of the Bank's 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 the 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 OCC under which the Bank agreed to submit a three year
strategic plan by November 1, 1995. The plan included, among
other things, the action plans to accomplish the following: a)
achieve and maintain the desired capital ratios, as set forth
below; b) attain satisfactory profitability; and c) reduce other
real estate owned. The plan was accepted by the OCC on January
30, 1996. The agreement increased the minimum Tier 1 risk
based capital ratio to 8.5 percent from 4.0 percent, and the
Tier 1 capital leverage to 6.0 percent from 4.0 percent. 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.
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) 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.
Actual Bank To be OCC
Capital at Categorized Formal
3/31/97 as Adequately Agreement
Capitalized
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%
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
MARATHON
BANCORP
Date: May 15, 1997
C. Thomas Mallos
Director and Chief
Financial Officer
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