UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(Fee required)
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(No fee required)
Commission file number 0-12510
MARATHON BANCORP
(Name of small business issuer in its charter)
California 95-3770539
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or origination)
11150 West Olympic Boulevard, Los Angeles, California 90064
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (310) 996-9100
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, no par value
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $5,295,000
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of March 1, 1997. The amount is
$13,212,425. Solely for the purpose of this calculation, all directors and
officers are regarded as affiliates.
As of March 1, 1998, there were 3,811,819 shares of no par common Stock
issued and outstanding.
PART I
ITEM 1. BUSINESS
General
- -------
Marathon Bancorp (the Company) is a California corporation organized
on October 12, 1982, and, as a bank holding company, is subject to
the Bank Holding Company Act of 1956, as amended (the BHC Act). The
Company commenced business on August 29, 1983 when the Company
acquired all of the issued and outstanding shares of Marathon National Bank
(the Bank), which is the sole active subsidiary of the Company and its
principal asset. The Company has not engaged in any other activities to the
date of this filing. All references herein to the Company include the Bank,
unless the context requires otherwise.
The Bank
- ----------
The Bank was organized on November 8, 1982 as a national banking association.
The application to organize the Bank was accepted for filing by
the Office of the Comptroller of the Currency (the Comptroller) on March 11,
1982, and preliminary approval was granted on September 8, 1982. On
August 29, 1983, the Bank received from the Comptroller a Certificate of
Authority to Commence the Business of Banking. The Bank is a member of
the Federal Reserve System, and its deposits are insured under the Federal
Deposit Insurance Act to the extent of applicable limits.
The Bank is located at 11150 West Olympic Boulevard, Los Angeles,
California. The Bank's primary marketing area rests principally within the
counties of Los Angeles (including the San Fernando Valley and South Bay
areas) and Orange. The Bank markets its services mainly to commercial and
wholesale businesses, professionals and discerning individuals living or
working in the west Los Angeles area.
Bank Services
- -------------
The Bank offers a wide range of commercial banking services to
individuals, businesses and professional firms located in its primary
marketing area. These services include personal and business checking,
interest-bearing money market, savings accounts (including interest-bearing
negotiable order of withdrawal accounts) and time certificates of deposit.
The Bank also offers cash management services, ACH origination, night
depository 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.
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 and
consumer installment loans, with particular emphasis on short and medium
term obligations. The Bank's commercial lending activities are directed
principally toward small to medium sized businesses, wholesalers, 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 also issues VISA credit
cards.
Competition
- -----------
The banking business in California generally, and in the Bank's
market areas specifically, is highly competitive with respect to both making
loans and attracting deposits. The Bank competes for loans and deposits with
other commercial banks, savings and loan associations, industrial loan
companies, finance companies, money market funds, credit unions and other
financial institutions, including a number of institutions that are much larger
than the Bank. There has been increased competition for loan and deposit
business over the past several years as a result of changes in the financial
services industry. Recent years have seen an unprecedented consolidation in
the financial institutions industry as large numbers of banks have merged and
combined, resulting in greater concentration of assets and lending ability, a
trend which is expected to continue. In addition, the enactment of interstate
banking legislation in California makes it easier for bank holding companies
with headquarters outside of California to enter the California market,
presenting an additional source of competition for the Bank. Many of the
major commercial banks operating in the Bank's market areas offer certain
services that the Bank does not offer directly. In addition, banks with greater
capitalization have larger lending limits and are thereby able to serve larger
borrowing customers. The Company competes for loan and deposit business
by providing innovative and responsive service to its customers.
Yields Earned and Rates Paid
- ----------------------------
Banking is a business that depends to a large part on rate differentials.
The difference between the interest rate received by the Bank on its earning
assets and the interest rate it pays on its deposits and other borrowings
comprises the most significant component of the Bank's earnings. These
interest rates are sensitive to many factors beyond the Bank's control.
Accordingly, the earnings and growth of the Company are affected by
economic conditions, including inflation, recession and unemployment.
Recent Legislation and Other Changes
- ------------------------------------
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 Bancorp and Bank are impossible to
predict.
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.
Accounting Changes
- ------------------
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
the adoption of SFAS No. 123 are disclosed in Part II, Item 7, Note I of
"NOTES TO CONSOLIDATED FINANCIAL STATEMENTS".
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income". This statement, which is
effective for the year ending December 31, 1998, establishes
standards of disclosure and financial statement display for reporting
comprehensive income and its components.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures about Segments of an Enterprise and
Related Information." This statement changes current practice under SFAS
14 by establishing a new framework on which to base segment reporting
(referred to as the management approach) and also requires certain related
disclosures about products and services, geographic areas and major
customers. The disclosures are required for the year ending December 31,
1998.
Supervision and Regulation
- --------------------------
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 possible
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 assets, 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 of total and Tier 1 capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, that the
Bank meets all capital adequacy requirements to which it is subject. See Part
II, Item 7, Note K for the Bank's capital ratio requirements and current ratios.
Marathon Bancorp: Marathon Bancorp is a registered bank holding company
and is subject to regulation under the BHC Act. The Company files
quarterly and annual reports with the FRB, as well as other information which
the FRB may require under the BHC Act. The FRB is empowered to conduct
examinations of the Company and its subsidiaries.
The FRB has the power to require the Company to terminate
activities, and to terminate control of or liquidate or divest certain
subsidiaries or affiliates when it believes that the activity or subsidiary
or affiliate constitutes a risk to the financial safety, soundness or stability
of the Company's banking subsidiaries. The FRB also has the authority to
regulate provisions of certain holding company debt, such as the authority to
impose interest rate ceilings and reserve requirements on such debt. The
Company may, under certain circumstances, be required to file written notice
with and obtain approval from the FRB prior to purchasing or redeeming its
equity securities.
Under the BHC Act and regulations adopted by the FRB, bank
holding companies and their non-banking subsidiaries are prohibited from
requiring certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services. Further, the
Company is required by the FRB to maintain certain levels of capital.
The Company must obtain approval from the FRB prior to acquiring
more than 5% of the outstanding shares of any class of voting securities or
substantially all of the assets of any bank or bank holding company. The
Company must also obtain FRB approval prior to any merger or consolidation
of the Company with another bank holding Company.
The BHC Act prohibits the Company, except in particular
circumstances, from acquiring direct or indirect control of more than 5% of
the outstanding voting shares of any company that is not a bank or a bank
holding company. The BHC Act also generally prohibits the Company from
engaging, either directly or indirectly, in activities other than those of
banking, managing or controlling banks or furnishing related services. The
Company may, however, subject to obtaining prior approval from the FRB,
engage in activities or acquire interests in companies which engage in
activities which are deemed by the Federal Reserve Board to be so closely
related to banking.
In addition to regulation and supervision by the FRB, the Company is
subject to the periodic reporting requirements with the Securities and
Exchange Commission under the Exchange Act, including but not limited to
filing annual, quarterly and other current reports with the Commission, and
related substantive and procedural requirements.
On December 16, 1996, the Company entered into a memorandum of
understanding 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 annual statements of
planned sources and uses of cash, and submit annual progress reports.
The Bank: The Bank, as a national banking association chartered by
the Comptroller, is subject to primary supervision, examination and regulation
by the Comptroller. It is also a member of the Federal Reserve System and,
as such, is subject to applicable provisions of the Federal Reserve Act and
regulation by the FRB. The Bank is also subject to applicable provisions of
California law, insofar as they do not conflict with or are not preempted by
Federal banking law.
Deposits in the Bank are insured by the FDIC, which currently
insures deposits of each member bank to a maximum of $100,000 per
depositor. For this protection, the Bank and all other insured banks pays
statutory assessments and is subject to the rules and regulations of the FDIC.
Various requirements and restrictions affect the operations of the
Bank, including reserves against deposits, interest rates payable on deposits,
loans, investments, mergers and acquisitions, borrowings, dividends and
locations of branch offices. In addition, the Bank is required to maintain
certain levels of capital. Management seeks to maintain adequate capital to
support its size and credit risks, and to ensure that the Company and the Bank
are within established regulatory and industry standards.
As of December 31, 1997, the most recent notification from the
Federal Deposit Insurance Corporation categorized the Bank as well-
capitalized under the regulatory framework for prompt corrective action (there
are no conditions or events since that notification that management believes
have changed the Bank's category).
Banking regulations require that all banks maintain a percentage of
Their deposits as reserves in cash or on deposit with the Federal Reserve Bank.
At December 31, 1997, required reserves were approximately $890,000.
Employees
- ---------
At December 31, 1997, the Company employed 34 personnel.
STATISTICAL DISCLOSURE
The following tables and data set forth, for the respective years
indicated, selected statistical information relating to the Company.
The Company's operating results depend primarily on the level of the
Bank's net interest income, which is the difference between interest income on
interest earning assets and interest expense on interest bearing liabilities.
The Bank's net interest income is determined by the average outstanding
balances of loans, investments, deposits and borrowings, and the respective
average yields on interest-earning assets and the average costs on interest
bearing liabilities, and the relative amount of loans and investments compared
to deposits and borrowings. The Bank's volumes and rates on interest earning
assets and interest bearing liabilities are affected by market interest rates,
competition, the demand for bank financing, the availability of funds, and by
management's responses to these factors.
The following tables set forth the Company's daily average balances
for each principal category of asset and liability and shareholders' equity. The
tables also present the amounts and average rates of interest earned and paid
on each category of interest earning asset and interest bearing liability, along
with the net interest income and net yield on earning assets for the periods
indicated.
In addition, the tables set forth changes in the components of net
interest income for the periods indicated. The total change is segmented into
the change attributable to variations in volume and the change attributable to
variations in interest rates. The changes in interest due to both rate and
volume have been allocated to the changes due to volume and rate in
proportion to the relationship of the absolute dollar amounts of the change in
both. Interest foregone on loans in nonaccrual status is not included in the
tables, while the average balance of loans in nonaccrual status is included.
<TABLE>
Changes in Net Interest Income
Year Ended December 31, 1997
( in thousands) YTD Interest Average Change from prior year
Average Income/ Yield/ Due to change in:
Net Interest Income Analysis Balance Expense Rate Volume Rate Total
-------- ------- ------- ------- ---- ------
<C> <C> <C> <C> <C> <C>
Loans $46,590 $3,714 8.0% $(250) $(71) $(321)
Other earning assets:
Interest bearing deposits with
financial institutions 511 27 5.3% (18) (2) (20)
Investment Securities 9,128 564 6.2% 83 6 89
Fed funds sold & Securities
purchased under resale
agreements 7,819 425 5.4% (188) (10) 198
------- ------ ---- ------ ------ ------
Tot interest earning assets $64,048 $4,730 7.4% $(373) $ (77) $(450)
Non earning assets:
Cash & due from banks 4,423
Other assets 3,107
Allowance for loan loss (1,009)
-------
$70,569
Interest-bearing liabilities:
Deposits:
Demand $ 5,975 $ 56 0.9% $ (6) $ 0 $ (6)
Money market and savings 22,926 621 2.7% (122) 20 (102)
Time certificate of deposit 9,049 467 5.2% 27 48 75
Federal funds purchased - - - - - -
------ ------ ---- ---- ---- -----
Total interest-bearing
liabilities $37,950 $1,144 3.0% $(101) $ 68 $ (33)
Noninterest-bearing liabilities
and shareholders equity:
Noninterest-bearing demand 26,929
Other liabilities 201
Shareholders' equity 5,489
------
$70,569
Net interest income $3,586
Net interest spread 4.4%
Net yield on earning assets 5.6%
</TABLE>
<TABLE>
Changes in Net Interest Income
<C> <C> <C> <C> <C> <C>
Year Ended December 31, 1996
( in thousands) YTD Interest Average Change from prior year
Average Income/ Yield/ Due to change in:
Net Interest Income Analysis Balance Expense Rate Volume Rate Total
------- ------- ----- ------ ---- -------
Loans $49,670 $4,035 8.1% $(309) $(468) $(777)
Other earning assets:
Interest-bearing deposits with
financial institutions 832 47 5.7% 11 ( 4) 7
Investment Securities 7,775 476 6.1% (410) 37 (373)
Fed funds sold & Securities
purchased under resale
agreements 11,206 623 5.6% 262 (14) 248
------ ---- ----- ----- ----- -----
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) $ (0) $ (11)
Money market and savings 27,566 723 2.6% (83) (10) (93)
Time certificate of deposit 8,463 392 4.6% (51) 20 (31)
Federal funds purchased - - - (10) - (10)
------ ----- ---- ------ ------ -----
Total interest-bearing
liabilities 42,657 $1,177 2.8% $(154) $ 9 ($145)
Noninterest-bearing liabilities
and shareholders equity:
Noninterest-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%
</TABLE>
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:
<TABLE>
Total Estimated
Amortized Gross Unrealized Market
YEAR END 1997 Cost Gains Losses Value
( in thousands) --------- ------- ------- ------
<C> <C> <C> <C>
Securities available for sale:
U.S. Treasury Securities $ 998 $ 5 $ - $1,003
U.S. Government and Agency
Securities 3,492 - (1) 3,491
Federal Reserve Stock 256 - - 256
Other 499 - - 499
----- ---- ----- -----
Total $5,245 $ 5 $ (1) $5,249
Securities held to maturity:
U.S. Government and
Agency Securities $4,051 $ - $ (4) $4,047
Mortgage-Backed Securities 4,702 3 (68) 4,637
Municipal Securities 394 1 - 395
------ ---- ----- ------
Total $9,147 $ 4 $ (72) $9,079
YEAR END 1996
Securities available for sale:
US. Treasury Securities $1,004 $ 3 $ - $1,007
Mortgage-backed securities 19 5 - 24
Federal Reserve Bank 120 - - 120
------ ----- ----- -----
Total $1,143 $ 8 $ - $1,151
Securities held to maturity:
Mortgage-backed securities $5,969 $ - $ (266) $5,703
------ ---- ----- -----
Total $5,969 $ - $ (266) $5,703
</TABLE>
Investment Securities - continued
The following table shows the maturities of investment securities at
December 31, 1997 and the weighted average yields of those securities.
<TABLE>
Over 1 Over 5
Year Years
1 Year Through Through Over Average
(in thousands) or less 5 Years 10 Years 10 Years Total Yield
<C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury Securities $ - $ 998 $ - $ - $ 998 6.0%
U.S. Government Agency
Securities 3,492 - - - 3,492 5.6%
Federal Reserve Stock - - - 256 256 5.8%
Other 499 - - - 499 6.1%
------ ------ ------ ------ ------- -----
Total $3,991 $ 998 $ - $ 256 $ 5,245 5.7%
Securities held to maturity:
U.S. Government Agency
Securities $ 500 $ 3,001 $ - $ - $ 4,051 6.0%
Mortgage-Backed Securities - - - 4,702 4,702 6.5%
Municipal Securities 100 294 - - 394 6.0%
---- ------ ------ ------ ------- -----
Total $ 600 $3,845 $ - $4,702 $ 9,147 6.3%
</TABLE>
Loan Portfolio
The following table sets forth the amount of loans outstanding at
the end of the past two years:
<TABLE>
% of % of
(in Thousands) 1997 Total 1996 Total
----- ------ ----- ------
<C> <C> <C> <C>
Commercial Loans 15,925 34% 14,056 30%
Real Estate Loans:
Construction - - 457 1%
Real Estate Mortgage 29,630 64% 32,039 67%
Installment loans 1,009 2% 895 2%
------ ---- ------ ----
46,696 100% 47,447 100%
Deferred net loan
origination costs 211 249
Allowance for Loan Losses (747) (1,088)
------ ------
Net Loans 46,028 46,608
</TABLE>
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.
<TABLE>
Commercial and Construction Loans December 31,
( in thousands) 1997 1996
----- ------
COMMERCIAL LOANS <C> <C>
Aggregate maturities of loan balances due:
In one year or less:
Interest rates are floating or adjustable $ 14,558 $ 10,039
Interest rates are fixed or predetermined 1,357 -
After one year but within five years:
Interest rates are fixed or predetermined - 4,012
After five years:
Interest rates are fixed or predetermined - 5
Total commercial loans 15,925 14,056
REAL ESTATE CONSTRUCTION LOANS
Aggregate maturities of loan balances due
in one year or less and interest rates
are floating or adjustable - 457
------ ------
Total commercial and construction loans 15,925 14,513
</TABLE>
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, 1997, loans on nonaccrual totaled $965,000,
compared with $568,000 at year end 1996. The reduction in interest
income associated with nonaccrual loans was approximately $119,000
during 1997, and $147,000 during 1996. At December 31, 1997 loans
past due 90 days or more and still accruing interest totaled $1,155,000
and there were no loans past due ninety days or more and still accruing
interest at December 31, 1996. At December 31, 1997 and 1996, the
Bank had classified $115,000 and $69,000, 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, 1997 and 1996 was approximately $1,985,000
and $2,433,000 respectively. Interest income of $90,000 and $73,000,
respectively, was recognized on impaired loans during the years ended
December 31, 1997 and 1996. There were no restructured loans at
December 31, 1997. There were no loans at December 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 December 31, 1997, 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, 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 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.
<TABLE>
<C> <C>
Loan Charge-offs and Recoveries
(in thousands) 1997 1996
Balance of allowance for loan losses at beginning of year 1,088 720
Loans charged off:
Commercial (392) (297)
Real estate (396) -
Installment (152) (6)
---- -----
Total loans charged off (940) (303)
Recoveries of loans previously charged off:
Commercial 288 69
Real estate - -
Installment 10 1
---- ----
Total loan recoveries 298 70
Net loans charged off (642) (233)
Provision charged to operating expense 301 601
---- -----
Balance of allowance for loan losses at end of year 747 1,088
Amount of loans outstanding at end of the year 46,775 47,696
Average amount of loans outstanding 46,590 49,670
Ratio of net charge-offs to average loans outstanding 1.38% 0.47%
Ratio of allowance for loan losses at the end of the
year to average loans outstanding 1.60% 2.19%
Ratio of allowance for loan losses at the end of the
year to loans outstanding at the end of the year 1.60% 2.29%
</TABLE>
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.
<TABLE>
Allowance for Loan Losses
December 31, 1997 1996
( in thousands) Percent of Percent of
Allowance Loans in Each Allowance Loans in Each
for Loan Category to for Loan Category to
Losses Total Loans Losses Total Loans
--------- ---------- ------- ------------
<C> <C> <C> <C>
Commercial loans 294 34% 372 30%
Real estate loans:
Construction - - - 1%
Mortgage 353 64% 660 67%
Installment/Consumer loans 100 2% 56 2%
---- --- --- ---
Total allowance for
loan losses 747 100% 1,088 100%
</TABLE>
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, 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.
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, as described in
section entitled "Formal Agreement; Restrictions on Transfers of Funds
to the Company by the Bank," the Bank's capital status may preclude the
Bank from access to borrowings from the Federal Reserve System
through the discount window.
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:
<TABLE>
1997 1996
Average Average Average Average
Deposits Balance Rate Balance Rate
(in thousands)
<C> <C> <C> <C>
Demand, non-interest-bearing 26,929 31,762
Demand, interest bearing 5,975 0.9% 6,628 0.9%
Money market and savings 22,926 2.7% 27,566 2.7%
Time certificates of deposit 9,049 5.2% 8,463 4.6%
-------- ---- ------ ----
Total Deposits 64,879 74,419
</TABLE>
The following is a maturity schedule of time certificates of
deposit of $100,000 or more at the end of the past two years:
<TABLE>
Time Certificates of Deposit
<C> <C>
December 31, 1997 1996
Three months or less 1,859 3,443
Over three months through six months 1,305 2,360
Over six months through twelve months 1,823 2,298
Over twelve months 100 161
---- -----
Total 5,087 8,262
</TABLE>
The Bank had no brokered deposits at December 31, 1997 and 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.
<TABLE>
<C> <C>
1997 1996
Return on average assets (0.5)% (1.2)%
Return on average shareholders' equity (6.6)% (22.8)%
Average shareholders' equity to average assets 7.8% 5.2%
Shareholders' equity to total assets at year end 6.9% 4.6%
</TABLE>
ITEM 2. PROPERTIES
- -------------------
The Bank leases 14,900 square feet of office space and 5,600
square feet of retail banking space at 11150 West Olympic Boulevard,
Los Angeles, California under a noncancelable operating lease, which
expires on August 31, 2002. The lease provides for annual rental
payments of approximately $545,000 during 1998, $594,000 during 1999
- - 2001 and $396,000 in 2002. In addition, the Bank pays its
proportionate share of increases in common operating expenses.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
No matters were submitted to shareholders during the fourth
quarter of 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER
MATTERS
- -------
The Bancorp's common shares are traded over-the-counter. The
high and low market prices for each quarterly period ended December
31, 1997 and 1996 ranged as follows:
By 1997 1996
Quarter 1st 2nd 3rd 4th 1st 2nd 3rd 4th
Price
High 3 3 1/2 4 5 1/4 3 7/8 3 9/16 2 37/64 3
Low 2 1/2 2 1/4 2 1/4 3 3/4 2 61/64 1 19/32 1 19/32 1 19/32
Principal market makers at December 31, 1997:
Buford Capital Sutro & Co., Inc
Hoefer & Arnett, Inc Torrey Pines Securities
The Transfer Agent and Registrar is ChaseMellon Shareholder Services,
Los Angeles, California
At December 31, 1997 there were approximately 319 holders of record
of the Company's common shares.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- -------------------------
Financial Highlights Overview
1997 was a year of rebuilding for Marathon Bancorp. Management
was restructured and the Company was recapitalized and returned to
profitability. The Company recorded a net loss for the year of $364,000
but recorded a profit in both the third and fourth quarters. This result
compared to a loss of $939,000 for the year ended 1996. Basic per share
earnings were $0.02 for the fourth quarter and $(0.15) for the year 1997
and $(0.75) for the fourth quarter and $(0.75) for the year 1996.
Both assets and deposits increased during 1997. Deposits grew
$7,564,000, or 12.0% while assets increased $12,676,000, or 19.1%.
Shareholders' equity was increased by a private offering of common
stock in March and a public offering in June that raised a total of
$5,527,000, net of expenses. The Company was also released from its
formal agreement with the Office of the Comptroller of the Currency.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the Company's largest source of earnings. Net
interest income represents the difference between interest income and
fees from earnings assets and interest paid on interest-bearing liabilities.
Net interest income for 1997 decreased $417,000 from 1996 and was
$1,167,000 less than 1995. The reason for the decrease from 1996 to
1997 was a reduction in the interest earned on federal funds sold due to a
lower base of investible funds in 1997 and loss of interest on loans
placed on nonaccrual. Average assets in 1997 were $70,568,000
compared to $78,668,000 in 1996. The reason for the decrease from
1995 was based on a smaller loan portfolio in 1997 versus 1995.
The interest income earned on the loan portfolio was the main
contributing factor to the decrease in interest income. In 1997 a
combination of loans on nonaccrual, loans put in other real estate owned
and a restructuring of the loan portfolio reduced the outstanding volume
of loans. The nonearning loans plus the decline in the portfolio were
both instrumental in the reduction in interest income. The decline in the
average balance in fed funds sold of approximately $3.4 million along
with a small decline in the average rate earned caused a drop of
$218,000 in interest earned on fed funds sold. Interest earned on
investment securities increased by $89,000 due to an increase in volume
that was partially offset by a drop in overall investment yield due to
lower market rates.
Interest expense was down 3%, or $33,000 from 1996 and 14%, or
$178,000 from 1995. This decrease was due to a decline in the volume
of interest bearing deposits. Although interest bearing deposits increased
in the fourth quarter, the average balance outstanding for 1997 was less
than 1996 or 1995. The average rate paid did
increase from 2.75% in 1995 to 2.8% in 1996 to 3.6% in 1997. The net
interest margin, which is net interest income divided by earning assets,
decreased from 5.8% in 1996 to 5.5% in 1997.
Provision for Credit Losses
Part of the risk in lending 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 Company 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
Company's lending is concentrated in Los Angeles County and
surrounding areas, which have experienced adverse economic conditions
and declining real estate values. These factors adversely affected our
customers in recent years but conditions started to improve during 1997.
Nonperforming loans, consisting of loans past due over 90 days plus
loans on nonaccrual, totaled $2,120,000 at December 31, 1997 versus
$568,000 at year end 1996. Loans classified by the Bank as doubtful or
substandard at year end 1997 equaled $2,983,000 versus $5,942,000 at
year end 1996.
The allowance for credit 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 judgement. Similarly, the adequacy of the
allowance and accompanying provision for loan losses can be
determined only on a judgmental basis after full review, including
consideration of economic conditions and their effects on specific
borrowers, borrowers' financial data, and evaluation of underlying
collateral for secured lending.
Based upon management's assessment of the overall quality of the
loan portfolio, the balance in the allowance for loan losses and the
external economic conditions, the Bank made a $301,000 provision for
loan losses occurring 1997 versus $601,000 in 1996 and $561,000 in
1995. Loans totaling $940,000 were charged off during the year, and
$298,000 was recovered leaving the allowance for loan losses at 1.6% of
gross loans outstanding at December 31, 1997.
Noninterest Income
Noninterest income increased $345,000, or 156.8% from 1996 to
1997. The Company has made a concerted effort to increase service
charges as a means to increase overall revenue and improved the service
charge income from $197,000 in 1996 to $285,000 in 1997. Over the
past few years the Company has lagged behind the industry in
noninterest income generation. This will continue to be an item that
management will focus on in 1998. Two new fee based products will be
introduced in the first quarter; cash management and ACH origination.
Gain on the sale of other real owned (OREO) realized in 1997 came
from a gain of $107,000 on the sale of one property and $5,000 from the
sale of two other properties. Other noninterest income increased over
1996 and 1995. The primary reason is a net settlement of $123,000 paid
to the Company for costs associated with the relocation of the
Company's offices due to the 1994 Northridge earthquake.
Noninterest Expense
The Company continued to decrease its noninterest expenses, which
declined $347,000, or 7.6% from 1996 and $1,641,000, or 28% from
1995. Major reduction in costs associated with the carrying values and
expenses from OREO was the most apparent item. Net operating costs
of carrying OREO were only $34,000 down from $238,000 in 1996 and
$203,000 in 1995. Provision for OREO losses was only $35,000 in 1997
compared to $151,000 in 1996 and $1,148,000 in 1995. There were also
reductions in legal fees and litigation settlements.
The lawsuit with Countrywide Mortgage that was discussed in the
offering circular was settled for $150,000.
Occupancy expenses increased over both 1995 and 1996 due to the
move back into the offices that had been repaired from the earthquake
damage of 1994. The Company's move in the fourth quarter of 1996 has
increased rental expense for premises. The lease was renegotiated with
our lessor in the third quarter of 1997 and the Company was able to
negotiate a lower rental rate, new signage and the payment of relocation
costs.
The Company's major insurance policies were also renegotiated and
the renewals were less expensive but overall costs of insurance and
assessments arose from an increase in the FDIC insurance costs. The
rate the Company paid in both 1996 and 1997 was $0.27 per $100 of
deposits due to the low capital base and the Bank's regulatory rating.
The new capital raised in 1997 will lower the cost of insurance in the
second half of 1998 to a rate of approximately $0.17 per $100 of
deposits. Further rate reductions should come in the beginning of 1999
as the Bank's regulatory rating improves.
Assets and Liabilities
Assets grew $12,676,000, or 19.1% between year-end 1996 and
December 31, 1997. The fourth quarter of the year showed the most
growth increasing $10,048,000 over September 30, 1997. The average
assets for the year were $70,568,000. The Company usually increases in
deposits during the fourth quarter and has some decrease during the first
quarter causing a spike in assets at year-end. Due to the need for
liquidity, cash and fed funds sold were at a higher than normal level at
December 31, 1997. During the year the investment portfolio was
increased by $7,276,000 making better use of excess funds not in the
loan portfolio. Most of the investments were made in U.S. agency
securities, with one to three year maturities. The Company has a large
net operating loss carryforward for taxes and therefore does not make
any tax-free investments. The loan portfolio declined $921,000 as the
loan department's major focus has been on retention and cleanup of
problem loans. New loan production will be the focus for 1998.
Other real estate owned declined $1,837,000, or 147% since
December 31, 1996. During 1997 three new properties totaling
approximately $1,418,000 were added to OREO and four properties were
sold totaling $3,363,000. The properties were sold at a net profit of
$112,000 to the Company. At year end there were three properties in
OREO with one property in the amount of $709,000 placed in escrow in
January 1998.
Deposits increased from $62,881,000 at December 31, 1996 to
$70,445,000 at year-end 1997 funding the increase in assets. Demand
deposits had the largest growth increasing $6,092,000, or 23.6%. Time
deposits over $100,000 also increased by $2,388,000 to $5,087,000,
which is 7.2% of total deposits. Money market, savings and interest
bearing demand deposits were stable and approximately the same as the
prior year.
As discussed earlier there was both a private common stock offering
of $767,000 in March of 1997 and a public offering that raised a net
amount of $4,760,000. This helped to increase equity from $3,043,000
to $8,201,000 at December 31, 1997 and bring the Company to a well
capitalized position , as defined by the regulatory agencies.
LIQUIDITY AND CAPITAL
Asset/Liability Management
The Company's Asset/Liability Committee is responsible for
managing the risks associated with changing interest rates and their
impact on earnings. Gap analysis measures interest rate risk in terms of
the mismatch between the stated repricing and maturities of the
Company's earning assets and liabilities within defined time frames.
The Company's cumulative one-year gap position at December 31,
1997 was $5.4 million or 7.7% of earning assets as shown in the
following interest rate sensitivity table. This means that the Company is
asset sensitive and that an increase in interest rates would likely cause
earnings to increase, as a larger portion of assets than liabilities would
reprice in 1998.
Immediately adjustable loans are defined as loans that are tied to the
prime rate other indexes which can change at any time. Immediately
adjustable deposits are those deposits on which the Company can adjust
the rate without notice. The Company uses adjustable deposits and
demand deposits to fund adjustable rate loans. The remaining assets and
liabilities are categorized by either the next time the asset or liability may
be repriced or the maturity date, whichever is sooner. The Company
does not use off-balance sheet interest rate instruments to hedge interest
rate risk, but does employ interest rate floors an adjustable rate loans.
<TABLE>
INTEREST RATE SENSITIVITY
<C> <C> <C> <C> <C> <C>
Immediately >0-3 >3-6 >6-12 >1-5 >5
(in thousands) Adjustable Months Months Months Years Years
Assets
Securities $ 500 $ 6,016 $ 124 $ 1,050 $ 2,299 $ 4,407
Fed funds sold 8,700 - - - - -
Loans 14,815 5,705 2,508 4,022 18,353 1,372
Total Earning Assets 24,015 11,721 2,632 5,072 $20,652 $ 5,779
Sources
Interest bearing
deposits 27,808 4,299 2,735 3,230 441 -
Demand deposits - - - - - 31,932
Total Sources $27,808 $ 4,299 $ 2,735 $ 3,230 $ 441 $31,932
Cumulative Gap $(3,793) $ 3,629 $ 3,526 $ 5,368 $25,579 $ (574)
Percent of earning assets (5.4) 5.2 5.0 7.7 36.6 (0.8)
</TABLE>
Liquidity Management
Liquidity refers to the Company's ability to maintain cash flow
sufficient to meet the needs of depositors and borrowers and to fund its
operations. The Company continues to have a stable base of core
deposits that provide a low-cost source of stable funds. These deposits
do fluctuate but management maintains a weekly report of the balances
of its largest volume customers to correctly gauge balance fluctuations.
As the statement of cash flows indicates operating activities and
investing activities used $4,353,000 in cash during the year while
financing activities raised $13,091,000 increasing the cash and cash
equivalents to $16,027,00 at December 31, 1997. The additional cash
equivalents were mainly invested in fed funds sold. Liquidity is high at
year-end and gives the Company the ability to deal with any deposit
fluctuations during the first quarter of 1998 and provides funds for
increasing the loan portfolio.
Capital
The Company's capital position is a strong. Risk-based capital at the
end of 1997 was 16.5% up from 7.4% at December 31, 1996. The
adequately capitalized risk-based ratio required by the federal regulators
is 8.0% and the well capitalized required ratio is 10.0%. Tier I risk-
based capital ratio for the Company is 15.2% and the Tier I leverage ratio
is 10.8%. The Company is categorized as well capitalized. Note K to
the financial statements goes into greater detail.
The Bank was released from its formal agreement with the Office of
the Controller of the Currency in the fourth quarter. The Company is
still under a memorandum of understanding with the Federal Reserve
Bank. For 1998 the Company will look to earnings as a source of
additional capital and at this juncture foresees no problems in
maintaining proper capital ratios.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MARATHON BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<S> <C>
December 31, 1997
---------
ASSETS
Cash and due from banks $ 7,327,000
Federal funds sold 8,700,000
Investment securities - Note B:
Securities available for sale 5,249,000
Securities held to maturity 9,147,000
------------
TOTAL INVESTMENT SECURITIES 14,396,000
Loans - Note C 46,775,000
Less allowance for credit losses ( 747,000)
------------
NET LOANS 46,028,000
Premises and Equipment- Note D 416,000
Other real estate owned 1,248,000
Accrued interest and other assets 954,000
------------
TOTAL ASSETS $ 79,069,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits - Note E
Noninterest-bearing demand $ 31,932,000
Interest-bearing demand 5,871,000
Money market and savings 21,938,000
Time deposits under $100,000 5,617,000
Time deposits 100,000 and over 5,087,000
------------
TOTAL DEPOSITS 70,445,000
Accrued interest and other liabilities 423,000
-----------
TOTAL LIABILITIES 70,868,000
Commitments and Contingencies - Note H
Shareholders' Equity - Note I
Preferred shares - No par value, 1,000,000 share authorized,
no shares issued and outstanding
Common shares - No par value, 9,000,000 shares authorized,
issued and outstanding: 3,811,819 in 1997 13,607,000
Net unrealized gain on securities available for sale 3,000
Accumulated deficit ( 5,409,000)
------------
TOTAL SHAREHOLDERS' EQUITY 8,201,000
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 79,069,000
</TABLE>
See accompanying notes to consolidated financial statements.
MARATHON BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<C> <C>
Year Ended December 31,
1997 1996
---------- ---------
INTEREST INCOME
Interest and fees on loans $ 3,714,000 $ 4,035,000
Interest on investment securities - taxable 564,000 475,000
Other interest income 452,000 670,000
--------- ----------
TOTAL INTEREST INCOME 4,730,000 5,180,000
INTEREST EXPENSE
Interest on demand deposits 56,000 62,000
Interest on money market and savings 621,000 723,000
Interest on time deposits 467,000 392,000
Other interest expense - -
--------- ---------
TOTAL INTEREST EXPENSE 1,144,000 1,177,000
--------- ---------
NET INTEREST INCOME 3,586,000 4,003,000
Provision for credit losses 301,000 601,000
-------- ---------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 3,285,000 3,402,000
NONINTEREST INCOME
Service charges and fees on deposit accounts 285,000 197,000
Gain on sale of OREO 112,000 -
Other noninterest income 168,000 23,000
--------- ---------
TOTAL NONINTEREST INCOME 565,000 220,000
NONINTEREST EXPENSE
Salaries and employee benefits 1,552,000 1,435,000
Occupancy expenses 616,000 531,000
Furniture and equipment 99,000 146,000
Professional services 501,000 555,000
Business Promotion 71,000 61,000
Stationary and supplies 92,000 71,000
Data processing services 512,000 471,000
Messenger and courier services 154,000 269,000
Insurance and assessments 385,000 321,000
Litigation 25,000 189,000
Customer checks 31,000 61,000
Provision for OREO losses 35,000 151,000
Net operating cost of OREO 34,000 238,000
Other expenses 105,000 60,000
--------- ---------
TOTAL NONINTEREST EXPENSE 4,212,000 4,559,000
--------- ---------
LOSS BEFORE INCOME TAXES ( 362,000) ( 937,000)
Income taxes - Note F 2,000 2,000
--------- ---------
NET LOSS $( 364,000) $( 939,000)
---------- ----------
Per Share Data - Note G:
Net Loss - Basic $( 0.15) $( 0.75)
Net Loss - Diluted $( 0.15) $( 0.75)
</TABLE>
See accompanying notes to consolidated financial statements.
MARATHON BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C>
Year Ended December 31,
1997 1996
OPERATING ACTIVITIES
Net loss $( 364,000) $( 939,000)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and Amortization 131,000 141,000
Provision for credit losses 301,000 601,000
Provision for OREO losses 35,000 151,000
Loss (gain) on sale of OREO ( 112,000) 69,000
Net amortization of premiums and discounts
on investment securities ( 22,000) 23,000
Net change in deferred loan origination fees 38,000 ( 185,000)
Decrease in income tax refunds receivable - -
Net change in accrued interest, other assets
and other liabilities ( 158,000) 282,000
------------- ----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES ( 151,000) 143,000
INVESTING ACTIVITITES
Net decrease (increase in interest-bearing deposits
with financial institutions 996,000 ( 499,000)
Purchases of available for sale securities ( 6,088,000) ( 1,088,000)
Purchases of held to maturity securities ( 4,946,000) -
Proceeds from maturities of avaliable for sale
securities 2,018,000 3,281,000
Proceeds from maturities of held for sale
securities 1,757,000 504,000
Net decrease in loans 518,000 758,000
Proceeds from sale of OREO 1,632,000 1,082,000
Purchases of furniture, fixtures and equipment ( 89,000) ( 173,000)
----------- -----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES ( 4,202,0000 3,945,000
FINANCING ACTIVITIES
Net change in demand deposits, money market
and savings 5,122,000 (18,831,000)
Net change in time deposits 2,442,000 ( 818,000)
Proceeds from issuance of common shares 5,527,000 -
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 13,091,000 (19,649,000)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,738,000 (15,561,000)
Cash and cash equivalents at beginning of year 7,289,000 22,850,000
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 16,027,000 $ 7,289,000
----------- -----------
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 1,140,000 $ 1,157,000
Income taxes paid (refunded) $ 2,000 $ 2,000
</TABLE>
See accompanying notes to consolidated financial statements.
MARATHON BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
<TABLE>
Net
Unrealized
Appreciation
(Depreciation)
on Available
Common Shares Accumulated for Sale
Shares Amount Deficit Securities Total
------- --------- ----------- --------- ----------
<C> <C> <C> <C> <C>
Balance,
January 1, 1996 1,248,764 $ 8,080,000 $(4,106,000) $1,000 $3,975,000
Net loss ( 939,000) ( 939,000)
Net changes in unrealized
appreciation on available
for sale securities 7,000 7,000
--------- ---------- ----------- ----- ---------
Balance,
December 31, 1996 1,248,764 8,080,000 (5,045,000) 8,000 3,043,000
Net loss ( 364,000) ( 364,000)
Issuance of common
stock net of expenses
of $240,000 2,563,055 5,527,000 5,527,000
Net changes in unrealized
appreciation on available
for sale securities (5,000) ( 5,000)
--------- --------- ----------- ----- ---------
Balance,
December 31, 1997 3,811,819 $13,607,000 $(5,409,000) $3,000 $8,201,000
--------- ---------- ---------- ----- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - 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.
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.
Nature of Operations
- --------------------
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.
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
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and Due from Banks and Federal Funds Sold
- ----------------------------------------------
For the purposes of reporting cash flows, cash and due from banks
includes cash on hand and amounts due from banks. Cash flows from
loans originated by the Bank, deposits and federal funds sold are reported
net.
The Bank maintains amounts due from banks which exceed federally
insured limits. In addition, federal funds sold were placed with three
institutions. The Bank has not experienced any losses in such accounts.
Cash Equivalents
- ----------------
For the purpose of presentation in the statements of cash flows, cash and
cash equivalents are defined as those amounts included in the statements
of financial condition captions "Cash and Due from Banks" and "Federal
Funds Sold."
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
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
- -----
Loans receivable that management has the intent and ability to hold for
the foreseeable future or until maturity or payoff are reported at their
outstanding unpaid principal balances reduced by any charge-offs or
specific valuation accounts and net of any deferred fees or costs on
originated loans, or unamortized premiums or discounts on purchased
loans.
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield of the related loan.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as
they become due. When interest accrual is discontinued, all unpaid
accrued interest is reversed. Interest income is subsequently recognized
only to the extent cash payments are received.
For impairment recognized in accordance with Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards
No. 114, Accounting by Creditors for Impairment of a Loan (SFAS No.
114), as amended by SFAS 118, the entire change in the present value of
expected cash flows is reported as either provision for loan losses in the
same manner in which impairment initially was recognized, or as a
reduction in the amount of provision for loan losses that otherwise would
be reported.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
Allowance for Credit Losses
- ---------------------------
The allowance for credit 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, 1997 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.
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.
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.
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.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
Disclosure About Fair Value of Financial Instruments
- -----------------------------------------------------
SFAS No. 107 specifies the disclosure of the estimated fair value of
financial instruments. The Bank's estimated fair value amounts have
been determined by the Bank using available market information and
appropriate valuation methodologies.
However, considerable judgment is required to develop the estimates of
fair value. Accordingly, the estimates are not necessarily indicative of
the amounts the Company could have realized in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts.
Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have
not been comprehensively revalued for purposes of these financial
statements since the balance sheet date and, therefore, current estimates
of fair value may differ significantly from the amounts presented in the
accompanying Notes.
Earnings Per Shares (EPS)
- -------------------------
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings
of the entity.
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 I.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
Current Accounting Pronouncements
- ---------------------------------
In June 1997, the Financial Accounting Standards Board issued
Statement No. 130, "Reporting Comprehensive Income". This
statement, which is effective for the year ending December 31, 1998,
establishes standards of disclosure and financial statement display for
reporting comprehensive income and its components.
In June 1997, the Financial Accounting Standards Board issued
Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information." This statement changes current practice under
SFAS 14 by establishing a new framework on which to base segment
reporting (referred to as the management approach) and also requires
certain related disclosures about products and services, geographic areas
and major customers. The disclosures are required for the year ending
December 31, 1998.
Reclassifications
- -----------------
Certain reclassifications were made to prior years' presentations to
conform to the current year. These reclassifications are of a normal
recurring nature.
NOTE B - INVESTMENT SECURITIES
The following is a summary of data for the major categories of securities
as of December 31:
<TABLE>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for Sale Securities <C> <C> <C> <C>
December 31, 1997
U.S. Treasury Securities $ 998,000 $ 5,000 $ - $1,003,000
U.S. government and
Agency Securities 3,492,000 - (1,000) 3,491,000
Federal Reserve Stock 256,000 - - 256,000
Other 499,000 - - 499,000
--------- ----- ------ ---------
$5,245,000 $ 5,000 $( 1,000) $5,249,000
Held to Maturity Securities:
December 31, 1997:
U.S. Government and
Agency Securities $4,051,000 $ - $( 4,000) $4,047,000
Municipal Securities 394,000 1,000 - 395,000
Mortgage-Backed Securities 4,702,000 3,000 (68,000) 4,637,000
--------- ------ -------- ---------
$9,147,000 $ 4,000 $(72,000) $9,079,000
</TABLE>
Investment securities carried at approximately $300,000 at December 31,
1997, were pledged to secure public deposits and other purposes as
required by law.
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 1997 or 1996. Net unrealized gain of
$3,000 and $8,000 on securities available for sale were credited to
shareholders' equity in 1997 and 1996, respectively.
The scheduled maturities of securities held to maturity and securities
available for sale at December 31, 1997, were as follows:
<TABLE>
Available For Sale Securities Held to Maturity Securities
----------------------------- ---------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Due in One Year or
Less $3,991,000 $ 3,990,000 $ 600,000 $ 600,000
Due from One Year
to Five Years 998,000 1,003,000 3,845,000 3,842,000
Mortgage-Backed
Securities - - 4,702,000 4,637,000
Federal Reserve Stock 256,000 256,000 - -
--------- -------- --------- ---------
$5,245,000 $ 5,249,000 $ 9,147,000 $ 9,079,000
--------- --------- --------- ---------
</TABLE>
NOTE C - LOANS
The following is a summary of the components of loans at December 31,
1997:
<TABLE>
<S> <C>
1997
----------
Commercial Loans $ 15,925,000
Real Estate-Construction -
Real Estate-Other 29,630,000
Consumer 1,009,000
----------
46,564,000
Net Deferred Loan Costs 211,000
----------
$ 46,775,000
</TABLE>
NOTE C - LOANS - Continued
The following is a summary of the investment in impaired loans, the
related allowance for credit losses, and income recognized thereon as of
December 31:
<TABLE>
<S> <C> <C>
1997 1996
----------- ----------
Recored Investment in Impaired Loans $ 965,000 $ 568,000
Related Allowance for credit Losses $ 115,000 $ 69,000
Average Recorded Investment in Impaired Loans $ 1,985,000 $ 2,433,000
Interest Income Recognized from Cash Payments $ 9,000 $ 73,000
</TABLE>
Loans having carrying value of $1,419,000 and $2,436,000 were
transferred to other real estate owned in 1997 and 1996, respectively.
During 1997 and 1996, loans totaling $1,695,000 and $704,000,
respectively, were made to facilitate the sale of other real estate owned.
A summary of changes in the allowance for credit losses follows:
<TABLE>
<S> <C> <C>
1997 1996
--------- ---------
Balance, January 1 $ 1,088,000 $ 720,000
Provision for Loan Losses 301,000 601,000
Loans Charged Off ( 940,000) ( 303,000)
Recoveries 298,000 70,000
---------- ----------
Balance, December 31 $ 747,000 $ 1,088,000
---------- ----------
</TABLE>
NOTE D - PREMISES AND EQUIPMENT
The following is a summary of the major components of premises and
equipment at December 31, 1997:
<TABLE>
<S> <C>
1997
---------
Furniture, fixtures and Equipment $ 1,246,000
Leasehold Improvements 480,000
---------
1,726,000
Less Accumulated Depreciation and Amortization (1,310,000)
---------
$ 416,000
---------
</TABLE>
NOTE E - DEPOSITS
At December 31, 1997, the scheduled maturities of certificates of deposit
are as follows:
<TABLE>
<S> <C>
1998 $10,265,000
1999 through 2002 439,000
----------
$10,704,000
----------
</TABLE>
NOTE F - INCOME TAXES
The income tax provision (benefit) for the years ended December 31,
1997 and 1996 is comprised of the following:
<TABLE>
<S> <C> <C>
1997 1996
----------- -----------
Current Taxes:
Federal $ - $ -
State 2,000 2,000
--------- ---------
2,000 2,000
Deferred 79,000 ( 245,000)
Net Change in Valuation Allowance ( 79,000) 245,000
--------- ---------
$ 2,000 $ 2,000
</TABLE>
NOTE F - INCOME TAXES - Continued
For federal income tax purposes, the Company has net operating loss
carryforwards of approximately $4,145,000 which expire in 2008 - 2012.
For state income tax purposes, the Company has incurred net operating
loss carryforwards of approximately $4,045,000, which expire in 1998 -
2002, to offset future taxes payable, adjusted for the fifty percent
reduction, as required by state tax law. During 1997, state net operating
loss carryforwards of approximately $1,392,000 expired.
At December 31, 1997, the components of the net deferred tax asset are
comprised of the following:
<TABLE>
<S> <C>
1997
--------
Deferred Tax Assets:
Allowance for Credit Losses Due to Tax Limitations $ 307,000
Other Real Estate Owned 317,000
Net Operating Loss and Tax Credit Carryforwards 1,837,000
Premises and Equipment Due to Depreciation Difference 52,000
Other Assets/Liabilities 8,000
----------
2,521,000
Valuation Allowance (2,385,000)
Deferred Tax Liabilities:
Recapture of Federal Credit Reserve ( 47,000)
Other Assets/Liabilities ( 89,000)
----------
( 136,l00)
Net deferred Taxes $ -
----------
</TABLE>
The Company has no current tax asset or liability at December 31, 1997.
NOTE F - INCOME TAXES - Continued
The principal reasons for the difference between the federal statutory
income tax rate of 35% in 1997 and 1996, and income tax expense for
the years ended December 31, 1997 and 1996 are as follows:
<TABLE>
<S> <C> <C>
1997 1996
----------- ----------
Tax Benefit at Statutory Rate $( 127,000) $( 329,000)
State Franchise Tax Net of Valuation
Allowance 2,000 2,000
Federal Valuation Allownance 139,000 323,000
Loss of State NOL Carryforward - -
Surtax Exemption - -
Other, Net ( 12,000) 6,000
---------- ---------
Tax Expense $ 2,000 $ 2,000
---------- ---------
</TABLE>
NOTE G - EARNINGS PER SHARE (EPS)
The following is a reconciliation of net income and shares outstanding to
the loss and number of share used to compute EPS:
<TABLE>
<S> <C> <C> <C> <C>
1997 1996
Loss Shares Loss Shares
------ ------ ---- ------
Net Loss as Reported $(364,000) - $(939,000) -
Weighted Average Shares
Outstanding During the Year - 2,465,127 - 1,248,764
--------- --------- -------- ---------
Used in Basic EPS $(364,000) 2,465,127 $(939,000) 1,248,764
Dilutive Effective of Outstanding
Stock Options - - - -
-------- --------- --------- ---------
Used in Dilutive EPS $(364,000) 2,465,127 $(939,000) 1,248,764
-------- --------- -------- ---------
</TABLE>
The impact of stock options have been excluded from the computation of
diluted EPS since their effect would be to reduce the loss per share.
NOTE H - COMMITMENTS AND CONTINGENCIES
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 noncancellable terms in
excess of one year as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $ 545,000
1999 594,000
2000 594,000
2001 594,000
2002 396,000
--------
$2,723,000
---------
</TABLE>
Rent expense was $563,000 and $265,000 for the years ended December
31, 1997 and 1996, respectively. Sublease rental income was $85,000 in
1997 and $10,000 in 1996.
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 pinion that the disposition of all suits
will not have a material effect on the Company's consolidated financial
statements.
In the normal course of business, the Bank is a party to financial
instruments with off balance sheet risk which are intended to meet the
financing needs of its customers. These financial instruments include
commitments to extend credit and letters of credit, which are not
reflected in the consolidated financial statements. These instruments
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amounts recognized in the consolidated financial
statements. The Bank's exposure to credit loss 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,
1997.
<TABLE>
<S> <C>
1997
----------
Commitments to Extend Credit $ 7,225,000
Other Letters of Credit 188,000
----------
$ 7,413,000
----------
</TABLE>
Commitments to extend credit are agreements to lend 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 evaluated 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 I - STOCK OPTION PLAN
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:
<TABLE>
<S> <C> <C>
Number of Shares
1997 1996
--------- --------
Options Outstanding, January 1 294,145 330,811
Granted at Option Prices of:
$3.09 in 1997 76,888 -
$2.75 in 1996 - 1,500
$1.75 in 1995 - -
Cancelled ( 243,003) ( 38,166)
--------- --------
Options outstanding, December 31 128,030 294,145
Shares Available for Future Grant
At December 31 308,792 142,677
--------- --------
Shares Available Under Stock Option Plans 436,822 436,822
</TABLE>
At December 31, 1997 the weighted average exercise price was $4.13,
the weighted average remaining contractual life was 6.2 years, and
50,342 options were exercisable at a weighted average price of $5.74.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions used: no dividend yield; risk-free rates of
5.8% for 1997 and 6.5% for 1996; volatility of 51% for 1997 and 55%
for 1996; and expected lives of ten years. The estimated fair value of
options granted during 1997 and 1996 were $2.15 and $2.07 per share,
respectively.
NOTE I - STOCK OPTION PLAN - Continued
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, 1997 and 1996 would
have been changed to the pro forma amounts indicated below:
<TABLE>
<S> <C> <C>
1997 1996
---------- -----------
Net Loss to Common Shareholders:
As Reported $( 364,000) $( 939,000)
Pro Forma $( 381,000) $( 957,000)
Per Share Data:
Net Loss - Basic
As Reported $( 0.15) $( 0.75)
Pro Forma $( 0.15) $( 0.75)
Net Loss - Diluted
As Reported $( 0.15) $( 0.75)
Pro Forma $( 0.15) $( 0.76)
</TABLE>
NOTE J - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the asset
or obligation could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. Fair value estimates are
made at a specific point in time based on relevant market information
and information about the financial instrument. These estimates do not
reflect any premium or discount that could result from offering for sale at
one time the entire holdings of a particular financial instrument. Because
no market value exists for a significant portion of the financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature, involve uncertainties and matters of
judgment and, therefore, cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on financial instruments both on and off
the balance sheet without attempting to estimate the value of anticipated
future business, and the value of assets and liabilities that are not
considered financial instruments. Additionally, tax consequences related
to the realization of the unrealized gains and losses can have a potential
effect on fair value estimates and have not been considered in many of
the estimates.
The following methods and assumptions were used to estimate the fair
value of significant financial instruments:
Financial Assets
- ----------------
The carrying amounts of cash, short term investments, due from
customers on acceptances, and bank acceptances outstanding are
considered to approximate fair value. Short term investments include
federal funds sold, securities purchased under agreements to resell, and
interest bearing deposits with banks. The fair values of investment
securities, including available for sale, are generally based on quoted
market prices. The fair value of loans are estimated using a combination
of techniques, including discounting estimated future cash flows and
quoted market prices of similar instruments where available.
Financial Liabilities
- ---------------------
The carrying amounts of deposit liabilities payable on demand,
commercial paper, and other borrowed funds are considered to
approximate fair value. For fixed maturity deposits, fair value is
estimated by discounting estimated future cash flows using currently
offered rates for deposits of similar remaining maturities. The fair value
of long term debt is based on rates currently available to the Bank for
debt with similar terms and remaining maturities.
Off Balance Sheet Financial Instruments
- ---------------------------------------
The fair value of commitments to extend credit and standby letters of
credit is estimated using the fees currently charged to enter into similar
agreements. The fair value of these financial instruments is not material.
The estimated fair value of financial instruments at December 31 is
summarized as follows:
<TABLE>
<S> <C> <C>
(in thousands) 1997
Carry Value Fair Value
----------- ----------
Financial Assets:
Cash and Due From banks $ 7,327 $ 7,327
Federal Funds Sold $ 8,700 $ 8,700
Interest-Bearing Deposits $ - $ -
Investment Securities $ 14,396 $ 14,160
Loans, Net $ 46,028 $ 46,160
Financial Liabilities:
Deposits $ 70,445 $ 70,448
</TABLE>
NOTE K - 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
possible 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
assets, 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 1 capital (as
defined in the regulations) to risk-weighted assets (as defined), and of
Tier 1 capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1997, that the Bank meets all capital
adequacy requirements to which it is subject.
On December 16, 1996, the Company entered into a memorandum of
understanding 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 annual
statements of planned sources and uses of cash, and submit annual
progress reports.
As of December 31, 1997, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well-capitalized
under the regulatory framework for prompt corrective action (there are
no conditions or events since that notification that management believes
have changed the Bank's category). To be categorized as well-
capitalized, the Bank must maintain minimum ratios as set forth in the
table below. The following table also sets forth the Bank's actual capital
amounts and ratios (dollar amounts in thousands):
Banking regulations require that all banks maintain a percentage of their
deposits as reserves in cash or on deposit with the Federal Reserve Bank.
At December 31, 1997, required reserves were approximately $890,000.
<TABLE>
Amount of Capital Required
To Be Categorized
Actual as Adequately To Be
(in thousands) Capitalized Well-Capitalized
---------------- ------------------ -----------------
Amount Percentage Amount Percentage Amount Percentage
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total Risk-based $ 8,891 16.5% $ 4,319 8.0% $ 5,398 10.0%
Tier 1 Risk-Based $ 8,216 15.2% $ 2,159 4.0% $ 3,239 6.0%
Tier 1 Leverage $ 8,216 10.8% $ 3,017 4.0% $ 3,772 5.0%
</TABLE>
NOTE L - CONDENSED FINANCIAL INFORMATION OF PARENT
COMPANY ONLY
Marathon Bancorp operates Marathon National Bank. The earnings of the
subsidiary are recognized on the equity method of accounting. Condensed
financial statements of the parent company only are presented below:
<TABLE>
<S> <C>
1997
Assets
Cash in Marathon National Bank $ 20,000
Investment in Marathon National Bank 8,239,000
---------
Total Assets $8,239,000
Liabilities and Shareholders' Equity
Accrued Expenses $ 38,000
Shareholders' Equity
Common Shares 13,607,000
Accumulated Deficit (5,409,000)
Net Unrealized Gain on Securities Available for Sale 3,000
_________
Total Shareholders' equity 8,201,000
Total Liabilities and Shareholders' Equity $8,239,000
---------
Year Ended December 31,
Condensed Statements of Operations 1997 1996
Operating Expenses $( 7,000) $ -
Equity in Undistributed Ner Loss of Marathon
National Bank ( 357,000) ( 939,000)
----------- ---------
Net Loss $( 364,000) $( 939,000)
Year Ended December 31,
1997 1996
Condensed Statements of Cash Flows
Operating Activities
Net Loss $(363,000) $( 939,000)
Adjustments to Reconcile Net Loss to Net Cash Used
by Operating Activities - Equity in Undistributed
Net Loss of Marathon National Bank 357,000 939,000
-------- --------
Net Cash Used by operating Activities 7,000 -
Investing Activities
Investment in Marathon National Bank (5,501,000) -
---------- ------
Net Cash Used by Investing Activitites (5,501,000) -
Financing Activities
Proceeds from Issuance of Common Shares 5,527,000 -
--------- -------
Net Cash Provided by Financing Activities 5,527,000 -
Increase (Decrease) in Cash & Cash Equivalents 19,000 -
Cash and Cash Equivalents at Beginning of year 1,000 1,000
---------- -------
Cash and Cash Equivalents at End of Year $ 20,000 $ 1,000
</TABLE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Marathon Bancorp
We have audited the accompanying consolidated balance sheet of
Marathon Bancorp and Subsidiary as of December 31, 1997, and the
related consolidated statements of operations, changes in stockholders
equity and cash flows for each of the two years in the period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Marathon Bancorps management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
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 audit provides 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, 1997, and the results of its operations and
their cash flows for each of the two years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.
As discussed in Note K to the consolidated financial statements,
Marathon Bancorp entered into a memorandum of understanding with
the Federal Reserve Bank of San Francisco. Failure on the part of
Marathon Bancorp to meet the terms of the agreement may subject the
Company to significant regulatory sanctions.
/S/ VAVRINEK, TRINE, DAY & CO., LLP
January 27, 1998
Laguna Hills, California
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------
No information is required in response to this item.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
- ----------
Directors:
Name Position with Company Director
Since
Nikolas Patsaouras (1)&(2) Chairman of the Board of the Company & Bank 1982
Robert Abernethy (2) Director 1983
Craig D. Collette President and Chief Executive Officer
of the Company and Bank 1997
Frank W. Jobe, M.D. Director 1985
C. Thomas Mallos (1) & (2) Director 1982
Robert l. Oltman (1) & (2) Director 1982
Ann Pappas (1) & (2) Director 1982
(1) Member of the Audit Committee
(2) Member of the Personnel and Compensation Committee.
Executive officers of the Company and the Bank were:
NamePosition Age
Craig D. Collette President and Chief Executive Officer
of the Company and Bank 55
Timothy J. Herles Executive Vice President and
Senior Credit Officer of the Bank 57
Howard J. Stanke Executive Vice President and Chief Financial
Officer of the Company and Bank 49
Adrienne Caldwell Senior Vice President- Operations
Administration of the Bank 55
CRAIG D. COLLETTE has been the President and Chief Executive
Officer of the Company and Bank since January 1997. Mr. Collette has been a
banker for 29 years in the Southern California banking community. Prior to
joining the Bank, Mr. Collette was President, COO and Director of TransWorld
Bank, Sherman Oaks, CA and, for approximately 18 years, was President, CEO
and Director of Landmark Bank, La Habra, CA
TIMOTHY J. HERLES has been Executive Vice President of the Bank
since April 1983, and has served in various positions including Cashier, Chief
Administrative Officer, Compliance Officer and Senior Credit Officer, which
position he currently holds.
HOWARD J. STANKE has been Executive Vice president /Chief
financial Officer of the Company and Bank Effective June 9, 1997. Mr. Stanke
was previously Executive Vice president/Chief Financial Officer of TransWorld
Bancorp and TransWorld Bank.
ADRIENNE CALDWELL has been Senior Vice President-Operations
Administration of the Bank since March 1986.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth a comprehensive overview of the
compensation of the Banks executive officers with salary and bonus exceeding
$100,000 during the fiscal year ended December 31, 1997. Comparative data is
also provided for the previous two fiscal years.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other
Annual Restricted All Other
Name and Compen- Stock LTIP Compen-
Principal Salary Bonus sation Award Options Payouts sation
Position Year $ $ $(1) $ SARs $ $(2)
- ---------------- ----- --------- -- ------ --- ------- --- ---
Craig D. Colette 1997 $155,833 $0 $7,700 $0 30,000 $0 $0
(3) President &
Chief Executive
Officer of the
Company & Bank
Timothy J. Herles 1997 $102,372 $0 $8,400 $0 0 $0 $1,040
Executive Vice 1996 $100,000 $0 $8,400 $0 0 $0 $1,040
President and 1995 $100,000 $0 $8,400 $0 0 $0 $1,040
Chief Credit Officer
of the Bank
(1) These amounts represent the automobile allowance.
(2) These amounts represent excess life insurance premiums.
(3) Mr. Collette commenced employment on January 22, 1997.
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
- ---------------------
Management of the Company knows of no person who owns,
beneficially or of record, either individually or together with associates, 5
percent or more of the outstanding shares of the Companys common stock,
except as set forth in the table below. The following table sets forth, as of
February 20, 1998, the number and percentage of shares of the Companys
outstanding common stock beneficially owned, directly or indirectly, by each of
the Companys directors and named officers and by the directors and named
officers of the Company as a group. Unless otherwise indicated, the persons
listed below have sole voting and investment powers. Management is not aware
of any arrangements which may, at a subsequent date, result in a change of
control of the Company.
<TABLE>
<S> <C> <C>
Common Stock Beneficially Owned as of
February 20, 1998
Number of Percent Of
Name of Beneficial Owner Shares Class
Directors and Named Executive Officers:
- ---------------------------------------
Nickolas Patsaouras 37,910 (1) 1.0
Robert J. Abernethy 107,299 2.8
Craig D. Collette 39,233 (2) 1.0
Frank W. Jobe, M.D. 74,190 2.0
C. Thomas Mallos 47,878 (3) 1.3
Robert L. Oltman 190,922 (4) 5.0
Ann Pappas 60,011 (5) 1.6
Timothy J. Herles 40,880 (6) 1.1
Total for all directors, named
executive officers and all
executive officers (numbering 9) 608,313 (7) 15.8
Principal Shareholder:
- ---------------------
Oppenheimer-Spence Financial
Services Partnership L.P. 224,897 (8) 5.9
(1) Mr. Patsaouras has shared voting and investment powers as to 37,500 of
these shares.
(2) Mr. Collette has shared voting and investment powers as to 33,233 shares.
The amount includes 6,000 shares acquirable by exercise of stock options.
(3) Mr. Mallos has shared voting and investment powers as of 45,108 of these
shares.
(4) Mr. Oltman has shared voting and investment powers as to 2,942 of these
shares. His addressis c/o Marathon Bancorp, 11150 West Olympic
Boulevard, Los Angeles, California 90064.
(5) Ms. Pappas has shared voting and investment powers as to 59,896 of these
shares.
(6) Mr. Herles has shared voting and investment powers as to 1,065 of these
shares. The amount includes 39,696 shares acquirable by exercise of stock
options.
(7) This amount includes 45,696 shares acquirable by exercise of stock options
within 60 days of February 20, 1998.
(8) 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.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
- -----------
It is against Bank policy to make loans to directors, officers or
employees.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
- -------------------
(a) Financial Statements and Schedules
- ----------------------------------------
All schedules are omitted because they are not applicable, not material
or because the information is included in the financial statements or the notes
thereto.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on October 30, 1997 which
was amended on December 23, 1997.The 8-K reportee on Item 4. Changes in
Registrant's certifying accountants and there were no financial statements
or exhibits.
(c) Exhibits
See Exhibit Index at Page 47 this Form 10-KSB.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 23rd day
of March 1998.
MARATHON BANCORP (Registrant)
Howard J. Stanke
- ----------------
Howard J. Stanke
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- ------------------ ------------------------ ---------------
Nikolas Patsaouras Chairman of the Board March 23, 1998
- ------------------
Nikolas Patsaouras
Craig D. Collette Director and President March 23, 1998
- -----------------
Craig D. Collette and CEO
C. Thomas Mallos Director March 23, 1998
- ----------------
C. Thomas Mallos
- ------------------- Director March 23, 1998
Robert J. Abernethy
- ------------------- Director March 23,1998
Frank W. Jobe, M.D.
Robert L. Oltman Director and Secretary March 23, 1998
- ----------------
Robert L. Oltman
Ann Pappas Director March 23, 1998
- ----------
Ann Pappas
EXHIBIT INDEX
Exhibit No. Description Page
21. Subsidiaries of Company 48
23. Consent of Vavrinek, Trine, Day & Co LLP 49
27. Financial data Schedule
EXHIBIT 21.
SUBSIDIARIES OF MARATHON BANCORP
Marathon National Bank, incorporated under the laws of the United States.
Marathon Bancorp Mortgage Corporation, (an inactive subsidiary),
incorporated under the laws of California.
EXHIBIT 23.
INDEPENDENT AUDITORS' CONSENT
Board of Directors and Shareholders
Marathon Bancorp
Los Angeles, California
We consent to the incorporation by reference in Registration Nos. 2-90321 and
33-40408 on Form S-8 of Marathon Bancorp and subsidiary of our report dated
January 27, 1998 which report includes an explanatory paragraph relating to
certain regulatory matters discussed in footnote K, included in the Annual
Report on Form 10-KSB for the year ended December 31, 1997.
Laguna Hills, California
March 27, 1998
</TABLE>
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