UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10- QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1999
-----------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-12510
---------------------
MARATHON BANCORP
- ------------------------------------------------------
(Exact name of registrant as specified in its charter)
California
- --------------------------------
95-3770539
- ----------
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification
No.)
11150 West Olympic Boulevard, Los Angeles, CA 90064
- ------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 996-9100
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
---
As of August 3, 1999, there were 3,827,019 shares of no par Common Stock
issued and outstanding.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Financial Condition
Marathon Bancorp and Subsidiary
<S> <C> <C>
June 30, December 31,
ASSETS 1999 1998
------------ --------------
Cash and Due From Banks $ 5,997,000 $ 5,074,000
Federal Funds Sold 1,735,000 4,175,000
Investment Securities
Securities Available for Sale 6,416,000 6,001,000
Securities Held to Maturity 12,244,000 14,291,000
------------ --------------
TOTAL INVESTMENT SECURITIES 18,660,000 20,292,000
Loans 46,997,000 42,992,000
Less Allowance for Credit Losses (615,000) (733,000)
------------ --------------
NET LOANS 46,382,000 42,259,000
Premises and Equipment 360,000 346,000
Other Real Estate Owned 0 0
Cash Surrender Value of Life Insurance 1,313,000 1,280,000
Accrued Interest and Other Assets 894,000 974,000
------------ --------------
TOTAL ASSETS 75,341,000 74,400,000
============ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-Bearing 28,002,000 24,478,000
Interest-Bearing 38,176,000 40,740,000
------------ --------------
TOTAL DEPOSITS 66,178,000 65,218,000
Accrued Interest and Other Liabilities 472,000 524,000
------------ --------------
TOTAL LIABILITIES 66,650,000 65,742,000
Shareholders' Equity
Preferred Shares - No Par Value, 1,000,000 Shares Authorized,
No Shares Issued and Outstanding 0 0
Common Shares - No Par Value, 9,000,000 Shares Authorized,
Issued and Outstanding: 3,827,019 in 1999 and 3,820,819 in 1998 13,646,000 13,630,000
Net Unrealized Gain on Securities Available for Sale (143,000) (8,000)
Accumulated Deficit (4,812,000) (4,964,000)
------------ --------------
TOTAL SHAREHOLDERS' EQUITY 8,691,000 8,658,000
------------ --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $75,341,000 $ 74,400,000
============ ==============
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
Marathon Bancorp and Subsidiary
Three Months Ended Six Months Ended
June 30, June 30,
<S> <C> <C> <C> <C>
1999 1998 1999 1998
-------------------- ---------- --------------- ----------
INTEREST INCOME
Interest and Fees on Loans $ 891,000 $ 936,000 $ 1,762,000 $1,852,000
Interest on Investment Sec. - Taxable 255,000 175,000 506,000 344,000
Other Interest Income 75,000 113,000 141,000 229,000
-------------------- ---------- --------------- ----------
TOTAL INTEREST INCOME 1,221,000 1,224,000 2,409,000 2,425,000
INTEREST EXPENSE
Interest on Demand Deposits 9,000 9,000 17,000 21,000
Interest on Money Market and Savings 206,000 156,000 388,000 307,000
Interest on Time Deposits 127,000 176,000 275,000 325,000
Other Interest Expense - - - 1,000
-------------------- ---------- --------------- ----------
TOTAL INTEREST EXPENSE 342,000 341,000 680,000 654,000
-------------------- ---------- --------------- ----------
NET INTEREST INCOME 879,000 883,000 1,729,000 1,771,000
Provision for Credit Losses - - - -
-------------------- ---------- --------------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 879,000 883,000 1,729,000 1,771,000
-------------------- --------- --------------- ----------
NONINTEREST INCOME
Service Charges and Fees on Deposits 68,000 55,000 144,000 116,000
Other Noninterest Income 36,000 50,000 78,000 90,000
-------------------- ---------- --------------- ----------
TOTAL NONINTEREST INCOME 104,000 105,000 222,000 206,000
-------------------- ---------- --------------- ----------
NONINTEREST EXPENSE
Salaries and Employee Benefits 438,000 393,000 858,000 785,000
Occupancy Expenses 134,000 135,000 266,000 270,000
Furniture and Equipment 29,000 35,000 58,000 58,000
Professional Services 28,000 31,000 54,000 43,000
Business Promotion 16,000 13,000 37,000 40,000
Stationery and Supplies 14,000 7,000 28,000 36,000
Data Processing Services 114,000 103,000 229,000 218,000
Messenger and Courier Services 17,000 24,000 36,000 46,000
Insurance and Assessments 30,000 92,000 63,000 173,000
Legal Fees and Costs 16,000 49,000 61,000 92,000
Net Loss on Sale of OREO - 11,000 - 43,000
Net Operating Cost of OREO 1,000 4,000 1,000 16,000
Other Expenses 59,000 70,000 116,000 125,000
-------------------- ---------- --------------- ----------
TOTAL NONINTEREST EXPENSE 896,000 967,000 1,807,000 1,945,000
-------------------- ---------- --------------- ----------
INCOME BEFORE INCOME TAXES 87,000 21,000 144,000 32,000
Income Tax (benefit) ( 3,000) 1,000 ( 8,000) 1,000
-------------------- ---------- --------------- ----------
NET INCOME $ 90,000 $ 20,000 $ 152,000 $ 31,000
==================== ========== =============== ==========
Per Share Data:
Net Income - Basic $ 0.02 $ 0.01 $ 0.04 $ 0.01
Net Income - Diluted $ 0.02 $ 0.01 $ 0.04 $ 0.01
Book Value $ 2.27 $ 2.16
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Marathon Bancorp and Subsidiary
<S> <C> <C>
Three Months Ended June 30,
----------------------------
1999 1998
----------------------------- --------------------
OPERATING ACTIVITIES
Net Income $ 152,000 $ 31,000
Adjustments to Reconcile Net Gain to Net Cash Provided (Used)
by Operating Activities:
Depreciation and Amortization 66,000 73,000
Provision for Credit Losses -
Provision for OREO Losses -
Loss on Sale of Other Real Estate Owned - 46,000
Net Amortization of Premiums and Discounts
on Investment Securities 23,000 ( 3,000)
Net Change in Deferred Loan Origination Fees 43,000 11,000
Net Change in Accrued Interest, Other Assets
and Other Liabilities ( 5,000) ( 752,000)
----------------------------- --------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 279,000 ( 594,000)
INVESTING ACTIVITIES
Net Decrease (Increase) in Interest-Bearing Deposits with
Financial Institutions - -
Purchases of Available for Sale Securities ( 3,537,000) ( 2,476,000)
Purchases of Held to Maturity Securities ( 2,313,000) ( 5,986,000)
Proceeds from Maturities of Available for Sale Securities 2,000,000 6,016,000
Proceeds from Maturities of Held to Maturity Securities 5,324,000 5,000,000
Net (Increase) Decrease in Loans ( 4,166,000) 680,000
Proceeds from Sale of Other Real Estate Owned - 1,202,000
Purchases of Furniture, Fixtures and Equipment ( 80,000) ( 57,000)
----------------------------- --------------------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES ( 2,772,000) 4,379,000
FINANCING ACTIVITIES
Net Change in Demand Deposits, Money Market and Savings 3,677,000 ( 8,010,000)
Net Change in Time Deposits ( 2,717,000) 3,363,000
Proceeds from Issuance of Common shares 16,000 16,000
----------------------------- --------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 976,000 ( 4,631,000)
----------------------------- --------------------
DECREASE IN CASH AND CASH EQUIVALENTS ( 1,517,000) ( 846,000)
Cash and Cash Equivalents at Beginning of Year 9,249,000 16,027,000
----------------------------- --------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,732,000 $ 15,181,000
============================= ====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest Paid $ 412,000 $ 595,000
Income Taxes Paid (Refunded) $ ( 8,000) $ 2,400
Loans Made to Facilitate the Sale of Other Real Estate Owned $ - $ 600,000
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Equity
Marathon Bancorp and Subsidiary
<S> <C> <C> <C> <C> <C> <C>
Accumulated
Other
Common Shares Comprehensive Accumulated Comprehensive
-------------
Shares Amount Income Deficit Income Total
BALANCE, JANUARY 1, 1999 3,820,819 $13,630,000 $( 4,964,000) $( 8,000) $8,658,000
Exercise of Stock Options 6,200 16,000 16,000
COMPREHENSIVE INCOME:
Net Income $ 152,000 152,000 152,000
Net Change in Unrealized
Gain (Loss) on Available
for-Sale Securities ( 135,000) ( 135,000) ( 135,000)
-------------------
TOTAL COMPREHENSIVE INCOME $ 17,000
BALANCE, JUNE 30, 1999 3,827,019 $13,646,000 $( 4,812,000) $ ( 143,000) $8,691,000
============= =========== =============== =================== ==========
</TABLE>
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATIONS
The unaudited consolidated financial statements have been prepared in accordance
with the instructions to Form 10-QSB and, therefore, do not include all
footnotes normally required for complete financial disclosure. While the
Company believes that the disclosures presented are sufficient to make the
information not misleading, reference may be made to the consolidated financial
statements and notes thereto included in the Company's 1998 Annual Report on
Form 10-KSB.
The accompanying consolidated statements of financial condition and the related
consolidated statements of operations and cash flows reflect, in the opinion of
management, all material adjustments necessary for fair presentation of the
Company's financial position as of June 30, 1999 and December 31, 1998, results
of operations and changes in cash flows for the six-month period ended June 30,
1999 and 1998. The results of operations for the six-month period ended June
30, 1999 are not necessarily indicative of what the results of operations will
be for the full year ending December 31, 1999.
(2) EARNINGS PER SHARE (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.
Accordingly, the basic weighted average number of shares used to compute the net
income per share for the three-month period ended June 30th were 3,826,964 in
1999 and 3,816,566 in 1998 and for the six-month period ended June 30th were
3,825,301 for 1999 and 3,814,206 for 1998. There was no dilution to change the
basic average number of shares in any period leaving the diluted EPS the same.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion is intended to provide additional information about
Marathon Bancorp (the Company), its financial condition and results of
operations, which is not otherwise apparent from the consolidated financial
statements. Since Marathon National Bank (the Bank) represents a substantial
portion of the Company's activities and investments, the following relates
primarily to the financial condition and operations of the Bank. It should be
read in conjunction with the Company's 1998 Annual Report on Form 10-KSB.
FINANCIAL HIGHLIGHTS OVERVIEW
The Company has now posted eight consecutive profitable quarters. Income for
the second quarter of 1999 was $90,000 or $0.02 per share, compared with $20,000
or $0.01 per share for the second quarter of 1998. Total assets increased from
the December 31, 1998 footings of $74,400,000 to $75,341,000.
Loans outstanding rose from $42,292,000 at year-end 1998 to $46,997,000 at June
30, 1999 an increase of 9.3%. Deposit totals also increased $960,000, or 1.5%
from year-end 1998. The book value per share has improved to $2.26 per share
and the market price of the stock at the close of business on June 30, 1999 was
$2.937.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income generated for the three months ended June 30, 1999 was
$4,000 less than in 1998. A major factor for the decrease was the drop in
interest during the latter part of the fourth quarter of 1998 that carried over
into the first half of 1999. The prime rate, which a large portion of the loan
portfolio is tied to, declined 75 basis points between the two periods and the
average loans outstanding during the second quarter of 1999 were only $320,000
more. Part of the decrease was offset by increased interest income generated
from the investment portfolio due to an increase in volume.
On the liability side of the ledger, the average deposits generated by our
higher yielding Investors Money Market account, which increased $7,327,000 or
133%, increased interest costs which offset the decline in the interest rate
paid on certificates of deposit. The overall interest costs changed by $1,000
between the two periods.
For the six months ended June 30, 1999 most of the same factors were in play,
with the average interest rates during the first and second quarter of 1999
being the same. The increased volume of loans during the second quarter
improving the year-to-date interest income figures for 1999. The higher
balances in the Investors Money Market account increased the interest costs.
The net interest income for 1999 was $42,000 less than the first six months of
1998.
Noninterest Income
Noninterest income for the second quarter of 1999 was down $1,000 from the same
quarter last year, with service charge income increasing and non-interest
related loan income and other income decreasing. For the six months ended June
30, 1999 noninterest income increased $16,000 with service charges on analyzed
business accounts increasing over the first half of 1998.
Noninterest Expense
Noninterest expense is the area the Company has been able to make the most
improvement during the past few quarters. Noninterest expense for the three
months ended June 30, 1999 decreased by $71,000 or 7.3%. The main areas of
improvement have been in the reduction of insurance costs, both FDIC insurance
and bonding costs, and loan related costs. The improved quality in the loan
portfolio has reduced the legal costs and costs related to other real estate
owned (OREO). With no OREO on the books, legal and upkeep costs of these
properties, as well as, any losses on the sale have been removed. Data
processing is higher due partly to Y2K costs and processing volume.
For the six month period noninterest costs have decreased $138,000 or 7.1% when
compared to the first half of 1998. Salaries and benefits have increased with
staff additions in the loan department to increase production, which has
improved. Data processing was higher for the same reasons as for the quarter.
Major decreases in Insurance, legal costs and OREO costs were the reason for the
large decrease in noninterest expenses. We do not see that we will be able to
lower costs further from the current levels and will be concentrating on
increasing income.
Provision for Credit Losses:
The Bank made no provision for credit losses during the first half of 1999 or
1998. During the first half of 1999, the Bank recorded charge-offs of $137,000
(none in the second quarter) and collected $19,000 in loan loss recoveries
($8,000 in the second quarter) compared to charge-offs of $105,000 and
recoveries of $80,000 in 1998.
The Bank's loans internally classified as substandard or doubtful at June 30,
1999 were $2,175,000, or 4.6% of loans compared to $1,990,000 or 4.6% of loans
at December 31, 1998. The classified loans at June 30, 1999 were 25.0% of
equity capital. Additionally loans past due 30 days or more at June 30, 1999
were $684,000, and nonaccrual loans $30,000. All classified loans are
performing as agreed except for the $30,000 nonaccruing car loan.
Based upon these factors and management's assessment of the overall quality of
the loan portfolio, its internal migration analysis and economic conditions
management determined the current level of the reserve for credit losses was
adequate without the need for further provisions.
ASSETS AND LIABILITIES
Assets increased by $941,000 or 1.3% over the year-end 1998 totals and were also
ahead of June 30, 1998 levels. The Company has changed the mix of interest
bearing assets during the first half of 1999. The level of fed funds sold and
investment securities was decreased and the loan portfolio was increased from
57.8% at December 31, 1998 to 62.4% at June 30, 1998. With the average yield on
loans at 8.4% for June 1999 and the combined yield of 5.4% on investments and
fed funds this helped to increase the interest income which had been hurt by the
rate declines in the first half of the year.
The Company is continuing to focus on increasing the interest income through
growth in the loan portfolio. The pickup in interest rates during the end of the
second quarter, which has continued in the third quarter, will also help to
improve the net interest margin.
Deposits increased $960,000 or 1.5% over the year-end 1998. Since year-end the
mix has changed with noninterest bearing demand deposits increasing 14.4% and
interest bearing deposits decreasing 6.3%. The decrease in interest bearing
deposits has been in the time certificates of deposit. To help generate
additional deposits in this area the Bank brought out a new certificate of
deposit product in the third quarter that has a one year maturity and allows for
unlimited deposits during the year at the original fixed rate.
To generate increased loans and deposits the Company is currently exploring
opening a loan production office during the fourth quarter in the San Fernando
valley of Los Angeles, an area contiguous to our current market. This area, of
almost two million people, has seen almost all its independent banks bought and
merged into large regional and national banks.
LIQUIDITY AND CAPITAL
Asset/Liability Management
Managing liquidity and the risks associated with interest rates and their impact
on both income and the present value of equity is the responsibility of the
Bank's Asset/Liability Committee. The committee monitors the liquidity position
to assure that sufficient funds are available for the funding of assets as well
as deposit fluctuations. Assets that are normally considered liquid are federal
funds sold, available for sale investment securities and cash and funds due from
banks. The Bank has backup fed fund lines with its correspondent banks and can
borrow at the Federal Reserve Bank discount window. At the beginning of the
third quarter, the Bank applied for membership in the Federal Home Loan Bank in
order to have an additional source of liquidity if needed for loan growth.
Interest rate risk management focuses on the maturity and repricing of interest
earning assets in relationship to the interest bearing liabilities that fund
them. Net interest income can be vulnerable to fluctuations arising from a
change in the general level of interest rates to the extent that the average
yield on earning assets responds differently to such a change than does the
average cost of funds.
The Company measures interest rate sensitivity by distributing the maturities
and repricing periods of assets and supporting funding liabilities into interest
sensitivity periods, summarizing interest rate risk in terms of the resulting
interest sensitivity gaps. A positive gap indicates that more interest
sensitive assets than interest sensitive liabilities will be repriced during a
specified period, while a negative gap indicates the opposite condition.
It is the Bank's policy to maintain an adequate balance of rate sensitive assets
to rate sensitive liabilities. Due to the fact that the Bank has a large
portfolio of noninterest bearing demand deposits the Company has historically
been asset sensitive with a positive gap. The Company is asset sensitive and
has been able to decrease its asset sensitivity during the last twelve month
period by an increase in the investment portfolio and a lengthening of
maturities. The Company's cumulative gap as a percent of total assets at June
30, 1999 was 38.2%.
Capital
The Bank is required to meet certain minimum risk-based capital guidelines and
leverage ratios promulgated by the bank regulatory authorities. The risk based
capital standards establish capital requirements that are more sensitive to risk
differences between various assets, consider off balance sheet activities in
assessing capital adequacy, and minimize the disincentives to holding liquid,
low risk assets. The leverage ratio consists of tangible Tier 1 capital divided
by average total assets.
The Company's capital position is strong. The adequately capitalized risk-based
capital ratio required by the federal regulators is 8.0 percent and the well
capitalized ratio is 10.0 percent. At June 30, 1999 the Company and the Bank
had a risk based capital ratio of 16.1 percent, and a Tier 1 capital leverage
ratio of 11.7 percent compared with a risk based ratio of 16.2 and a Tier 1
capital leverage ratio of 11.4% at June 30, 1998.
The Company is under no special regulatory restrictions.
YEAR 2000
The Company is well aware of the issues relating to the century date change and
the impact on computer systems and business operations. The Company started its
analysis of the problem in June 1997 when it sent letters to its vendors that
supplied computer services to the Company on the status of their Year 2000 (Y2K)
plans. All the mission critical vendors were well on their way with plans to
make their products Year 2000 compliant. The Company then went on to develop
its own Year 2000 plan. The Company's Year 2000 Plan (the Plan) was submitted to
the Board of Directors for review in January 1998 and approved in February 1998.
The Plan includes the steps necessary for the Company to become year 2000
compliant as well as the steps to be taken to check that the major borrowers and
fund providers of the Company are also working to become compliant. The
Company's main computer processing is supplied by the Fiserv CBS Service Bureau,
who has already modified and installed software that is Y2K compliant. The
Company, and the user group to which it belongs, has finished testing the Fiserv
software for all the critical dates and has had a third party review of the
testing done by an outside audit firm. The Company has received year 2000
compliant software from all its vendors within a time-frame that allowed for
sufficient testing to insure year 2000 compliance. The Company has also tested
its other non-critical software programs that have been modified for year 2000.
A contingency plan to cover Y2K has been put in place and tested and we feel the
Company is now Y2K ready.
The Y2K costs to the Company have been both capital costs for the purchase of
new equipment and the expense for the maintenance and testing of computer
software. These costs have been expensed and others will be ongoing over the
next few months, but they should not have a major impact on future earnings.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARATHON BANCORP
Date: August 12, 1999 Craig D. Collette
-------------------
Craig D. Collette
President and
Chief Executive Officer
Howard J. Stanke
------------------
Howard J. Stanke
Executive Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<CURRENCY> U.S.
<S> <C> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 5,997
<INT-BEARING-DEPOSITS> 38,176
<FED-FUNDS-SOLD> 1,735
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,416
<INVESTMENTS-CARRYING> 12,244
<INVESTMENTS-MARKET> 12,009
<LOANS> 46,997
<ALLOWANCE> 615
<TOTAL-ASSETS> 75,341
<DEPOSITS> 66,178
<SHORT-TERM> 0
<LIABILITIES-OTHER> 472
<LONG-TERM> 0
0
0
<COMMON> 13,646
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<INTEREST-TOTAL> 2,409
<INTEREST-DEPOSIT> 680
<INTEREST-EXPENSE> 680
<INTEREST-INCOME-NET> 1,729
<LOAN-LOSSES> 0
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<EXPENSE-OTHER> 1,807
<INCOME-PRETAX> 144
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<EXTRAORDINARY> 0
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<NET-INCOME> 152
<EPS-BASIC> .04
<EPS-DILUTED> .04
<YIELD-ACTUAL> 7.25
<LOANS-NON> 30
<LOANS-PAST> 682
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 733
<CHARGE-OFFS> 137
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<ALLOWANCE-CLOSE> 615
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</TABLE>
