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, 1998
-------------------
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
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MARATHON BANCORP
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
CALIFORNIA 95-3770539
- ---------------------------------------------- ----------
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORIGINATION) (I.R.S.
EMPLOYER IDENTIFICATION NO.)
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
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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 $5,463,000.
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, 1999. THE AMOUNT
IS$8,917,066. SOLELY FOR THE PURPOSE OF THIS CALCULATION, ALL DIRECTORS AND
OFFICERS ARE REGARDED AS AFFILIATES.
AS OF MARCH 1, 1999, THERE WERE 3,826,819 SHARES OF NO PAR COMMON STOCK ISSUED
AND OUTSTANDING.
<PAGE>
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. Additionally, the Bank has become an active Small business
Administration (SBA) lender. 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.
<PAGE>
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
- -------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities". This
Statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. This new standard is effective for 2000
and is not expected to have a material impact on the Bank' s financial
statements.
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, 1998, 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.
<PAGE>
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.
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.
<PAGE>
As of December 31, 1998, 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, 1998, required reserves were approximately $543,000.
EMPLOYEES
- ---------
At December 31, 1998, 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.
<PAGE>
<TABLE>
<CAPTION>
CHANGES IN NET INTEREST INCOME
Year Ended December 31, 1998
<S> <C> <C> <C> <C> <C> <C>
( 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. . . . . . . . . . . . . . . . $ 44,849 $ 3,729 8.3% $ (139) $ 154 $ 15
Other earning assets:
Interest bearing deposits with. . 0 0 0.0% (27) 0 (27)
financial institutions
Investment Securities . . . . . . 14,587 839 5.8% 337 (62) 275
Fed funds sold & Securities . . . 8,394 454 5.4% 31 (2) 29
--------- --------- -------- -------- ------------ -------
purchased under resale
agreements
Total interest earning assets . . . $ 67,830 $ 5,022 7.4% $ 202 $ 90 $ 292
Non earning assets:
Cash & due from banks . . . . . . 4,118
Other assets. . . . . . . . . . . 3,161
Allowance for loan loss . . . . . (733)
---------
$ 74,376
Interest-bearing liabilities:
Deposits:
Demand. . . . . . . . . . . . . . $ 4,209 $ 40 1.0% $ (17) $ 1 $ (16)
Money market and savings . . . . 22,163 674 3.0% (21) 74 53
Time certificate of deposit . . . 13,419 692 5.2% 226 (1) 225
Federal funds purchased . . . . . - - - - - -
Other interest bearing liabilities:
Mortgage indebtedness . . . . . . 175 1 0.6% - 1 1
--------- --------- -------- -------- ------------ -------
Total interest-bearing liabilities . $ 39,791 $ 1,407 3.5% $ 88 $ 75 $ 263
Noninterest-bearing liabilities
And shareholders equity
Noninterest-bearing demand . . . . . 25,629
Other liabilities. . . . . . . . . . 618
Shareholders' equity . . . . . . . . 8,338
---------
$ 74,376
Net interest income. . . . . . . . . $ 3,615
Net interest spread. . . . . . . . . 3.9%
Net yield on earning assets. . . . . 5.3%
</TABLE>
<TABLE>
<CAPTION>
CHANGES IN NET INTEREST INCOME
<S> <C> <C> <C> <C> <C> <C>
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
--------- --------- -------- -------- ------------ -------
Loans . . . . . . . . . . . . . . . $ 46,590 $ 3,714 8.0% $ (250) $ (71) $ (321)
Other earning assets:
Interest bearing deposits with . 511 27 5.3% (18) (2) (20)
financial institutions
Investment Securities. . . . . . 9,128 564 6.2% 83 6 89
Fed funds sold & Securities. . . 7,819 425 5.4% (188) (10) (198)
--------- --------- -------- -------- ------------ -------
purchased under resale
agreements
Total 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. . . . . (1009)
---------
$ 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>
INVESTMENT SECURITIES
- ----------------------
<TABLE>
<CAPTION>
The following table shows the carrying amount of the portfolio of
investment securities at the end of each of the past two years:
Gross
Total Unrealized Estimated
Amortized ------------- Market
YEAR END 1998 Cost Gains Losses Value
---------- ----- ----- --------
<S> <C> <C> <C> <C>
( in thousands)
Securities available for sale:
U.S. Treasury Securities . . . . . . . $ 1,000 $ 2 $ - $ 1,002
U.S. Government and Agency Securities. 4,497 1 (10) 4,488
Federal Reserve Stock. . . . . . . . . 248 - - 248
Other. . . . . . . . . . . . . . . . . 264 - (1) 263
------- --- ----- -------
Total . . . . . . . . . . . . . . $ 6,009 $ 3 $(11) $ 6,001
Securities held to maturity:
U.S. Government and Agency Securities. $ 8,800 $14 $ (8) $ 8,806
Municipal Securities . . . . . . . . . 3,982 35 (21) 3,996
Mortgage-Backed Securities . . . . . . 1,509 1 (6) 1,504
------- --- ----- -------
Total . . . . . . . . . . . . . . $14,291 $50 $(35) $14,306
YEAR END 1997
Securities available for sale:
US. Treasury Securities. . . . . . . . $ 998 $ 5 $ - $ 1,003
Mortgage-backed 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
</TABLE>
<PAGE>
INVESTMENT SECURITIES - CONTINUED
- ------------------------------------
<TABLE>
<CAPTION>
The following table shows the maturities of investment securities at December 31, 1998 and the
weighted average yields of those securities.
<S> <C> <C> <C> <C> <C> <C>
OVER 1 OVER 5
YEAR YEARS
1 YEAR . . . . THROUGH THROUGH OVER AVERAGE
(in thousands) . . . . . . . . . OR LESS 5 YEARS 10 YEARS 10 YEARS TOTAL YIELD
Securities available for sale:
U.S. Treasury Securities. . $ 1,000 $ - $ - $ - $ 1,000 5.9%
U.S. Government Agency. . . 2,497 1,500 500 - 4,497 5.3%
Securities
Federal Reserve Stock . . . - - - 248 248 6.0%
Other . . . . . . . . . . . - 264 - - 264 5.5%
-------- ------------- --------- -------- ------------- ----
Total. . . . . . . . . $ 3,497 $ 1,764 $ 500 $ 248 $ 6,009 5.4%
Securities held to maturity:
U.S. Government Agency. . . $ - $ 8,800 $ - $ - $8,800 - 5.9%
Securities
Mortgage-Backed Securities. - - - 1,509 1,509 5.9%
Municipal Securities. . . . 292 3,690 - - 3,982 5.5%
-------- ------------- --------- -------- ------------- ----
Total. . . . . . . . . $ 292 $ 12,490 $ - $ 1,509 $ 14,291 5.8%
</TABLE>
LOAN PORTFOLIO
- ---------------
<TABLE>
<CAPTION>
The following table sets forth the amount of loans outstanding at the end
of the past two years:
<S> <C> <C> <C> <C>
(in Thousands). . . . . . . . . . . % OF % OF
1998 TOTAL 1997 TOTAL
-------- -------- ------- ------
Commercial Loans . . . . . . . . . . $16,640 39% $15,925 34%
Real Estate Loans:
Construction. . . . . . . . . . 1,215 3% - -
Real Estate Mortgage. . . . . . 24,246 57% 29,630 64%
-------- -------
Total real estate loans. . 25,461 29,630
Installment loans. . . . . . . . . . 677 1% 1,009 2%
-------- -------- ------- ------
42,778 100% 46,564 100%
Deferred net loan origination costs. 214 211
Allowance for Loan Losses. . . . . . (733) (747)
-------- --------
Net Loans. . . . . . . . . $42,259 $46,028
</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>
<CAPTION>
COMMERCIAL AND CONSTRUCTION LOANS
DECEMBER 31,
<S> <C> <C>
( in thousands) . . . . . . . . . . . . . . . . . . 1998 1997
------- -------
COMMERCIAL LOANS
Aggregate maturities of loan balances due:
In one year or less:
Interest rates are floating or adjustable. $ 8,720 $14,558
Interest rates are fixed or predetermined. 3,544 1,357
After one year but within five years:
Interest rates are fixed or predetermined. 4,251 -
After five years:
Interest rates are fixed or predetermined. 125 -
------- -------
Total commercial loans. . . . . . . . $16,640 $15,925
REAL ESTATE CONSTRUCTION LOANS
Aggregate maturities of loan balances due
in one year or less and interest rates
are floating or adjustable. . . . . . . . . . . $ 1,215 $ -
------- -------
Total commercial and construction loans. . $17,855 $15,925
</TABLE>
<PAGE>
- ------
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, 1998, loans on nonaccrual totaled $258,000, compared with
$965,000 at year end 1997. The reduction in interest income associated with
nonaccrual loans was approximately $15,000 during 1998, and $119,000 during
1997. At December 31, 1998 loans past due 90 days or more and still accruing
interest totaled $1,000 and 1,155,000 at year end 1997. At December 31, 1998 and
1997, the Bank had recorded as specific reserves for its impaired loans $84,000
and $115,000, respectively, in the allowance for loan losses. In addition, the
Bank classified $1,990,000 and $2,983,000, respectively, of its loans without a
specific reserve. The average recorded investment of impaired loans during the
year ended December 31, 1998 and 1997 was approximately $242,000 and $1,985,000
respectively. Interest income of $12,000 and $9,000, respectively, was
recognized on impaired loans during the years ended December 31, 1998 and 1997.
There were no restructured loans at December 31, 1998. There were no loans at
December 31, 1998 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, 1998, 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, 1998 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.
<PAGE>
<TABLE>
<CAPTION>
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.
<S> <C> <C>
LOAN CHARGE-OFFS AND RECOVERIES (in thousands). . . . . . 1998 1997
-------- --------
Balance of allowance for loan losses at beginning of year. $ 747 $ 1,088
Loans charged off:
Commercial. . . . . . . . . . . . . . . . . . . . . . (113) (392)
Real estate . . . . . . . . . . . . . . . . . . . . . ( 54) (396)
Installment . . . . . . . . . . . . . . . . . . . . . ( 27) (152)
-------- --------
Total loans charged off. . . . . . . . . . . . . . (194) (940)
Recoveries of loans previously charged off:
Commercial. . . . . . . . . . . . . . . . . . . . . . 115 288
Real estate . . . . . . . . . . . . . . . . . . . . . - -
Installment . . . . . . . . . . . . . . . . . . . . . 9 10
-------- --------
Total loan recoveries. . . . . . . . . . . . . . . 124 298
-------- --------
Net loans charged off. . . . . . . . . . . . . . . . . . . ( 70) (642)
Provision charged to operating expense . . . . . . . . . . 56 301
-------- --------
Balance of allowance for loan losses at end of year. . . . $ 733 $ 747
1998 1997
-------- --------
Amount of loans outstanding at end of the year . . . . . . $42,992 $46,775
Average amount of loans outstanding. . . . . . . . . . . . $44,849 $46,590
Ratio of net charge-offs to average loans outstanding. . . 0.16% 1.38%
Ratio of allowance for loan losses at the end of the
year to average loans outstanding . . . . . . . . . . 1.63% 1.60%
Ratio of allowance for loan losses at the end of the
year to loans outstanding at the end of the year. . . 1.70% 1.60%
</TABLE>
<TABLE>
<CAPTION>
The following table sets forth the Company's allocation of the allowance for loan losses to specific loan
categories at the end of the past two years. The allocations are based upon the same factors as considered by
management in determining the amount of additional provisions to the allowance for loan losses and the aggregate
level of the allowance.
ALLOWANCE FOR LOAN LOSSES December 31,
-----------------------------------------------------------------------------------
1998 1997
---------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
( in thousands). . . . . . . . . . . PERCENT OF LOANS IN PERCENT OF LOANS IN
ALLOWANCE FOR EACH CATEGORY TO ALLOWANCE FOR EACH CATEGORY TO
LOAN LOSSES TOTAL LOANS LOAN LOSSES TOTAL LOANS
Commercial loans. . . . . . . . . . . $ 552 39% $ 294 34%
Real estate loans:
Construction . . . . . . . . . . - 3% - -
Mortgage . . . . . . . . . . . . 127 57% 353 64%
Installment/Consumer loans. . . . . . 54 1% 100 2%
-------------------- -------------------- -------------- -----------------
Total allowance for loan losses. $ 733 100% $ 747 100%
</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
<PAGE>
Although management believes the level of the allowance for loan losses as
of December 31, 1998, is adequate to absorb losses inherent in the loan
portfolio, currently unanticipated conditions and events, such as additional
declines in the local economy and increases in interest rates, may result in
losses that cannot reasonably be predicted at this date.
SOURCES OF FUNDS
- ------------------
Deposits traditionally have been the primary source of the Bank's funds for
use in lending and other investments. The Bank also derives funds from net
earnings, receipt of interest and principal on outstanding loans and other
sources, including the sale of investment securities. The Bank is a member of
the Federal Reserve System and may borrow through that system under certain
conditions
DEPOSITS
- --------
The Bank's deposit products include noninterest-bearing demand deposits,
interest-bearing demand deposits, money market and savings accounts, and time
certificates of deposit. The majority of the Bank's deposits are obtained from
its primary marketing area.
The distribution of average deposits and the average rates paid thereon is
summarized for the periods indicated below:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C> <C> <C>
DEPOSITS. . . . . . . . . . . AVERAGE AVERAGE AVERAGE AVERAGE
(in thousands). . . . . . . . BALANCE RATE BALANCE RATE
Demand, non-interest-bearing. $ 25,629 $ 26,929
Demand, interest bearing. . . 4,209 1.0% 5,975 0.9%
Money market and savings. . . 22,163 3.0% 22,926 2.7%
Time certificates of deposit. 13,419 5.2% 9,049 5.2%
-------------------- ------------------
Total Deposits . . . $ 65,420 $ 64,879
</TABLE>
<TABLE>
<CAPTION>
The following is a maturity schedule of time certificates of deposit of
$100,000 or more at the end of the past two years:
TIME CERTIFICATES OF DEPOSIT
<S> <C> <C>
(in thousands) DECEMBER 31, . . . . . 1998 1997
------ ------
Three months or less. . . . . . . . . $5,464 $1,859
Over three months through six months. 813 1,305
Over six months through twelve months 1,116 1,823
Over twelve months. . . . . . . . . . 990 100
------ ------
Total . . . . . . . . . . . . $8,383 $5,087
</TABLE>
The Bank had no brokered deposits at December 31, 1998 and 1997.
<PAGE>
SELECTED FINANCIAL RATIOS
- ---------------------------
<TABLE>
<CAPTION>
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.
1998 1997
<S> <C> <C>
Return on average assets . . . . . . . . . . . . 0.60% (0.5)%
Return on average shareholders' equity . . . . . 5.3% (6.6)%
Average shareholders' equity to average assets . 11.2% 7.8%
Shareholders' equity to total assets at year end 11.6% 10.4%
</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 $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
1998.
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, 1998 and 1997 ranged
as follows:
1998 1997
---- ----
By Quarter 1st 2nd 3rd 4th 1st 2nd 3rd 4th
- ----------- --- --- --- --- --- --- --- ----
Price
High 4 7/8 4 7/64 3 55/64 3 7/64 3 3 1/2 4 5 1/4
Low 3 5/8 3 2 43/64 2 2 1/2 2 1/4 2 1/4 3 3/4
Principal market makers at December 31, 1998:
Hoefer & Arnett, Inc. Sutro & Co., Inc
Ryan, Beck & Co. Torrey Pines Securities
The Transfer Agent and Registrar is U.S. Stock Transfer Corporation, Glendale,
California
At December 31, 1998 there were approximately 291 holders of record of the
Company's common shares.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ---------------------------------------------------------------------------
AND RESULTS OF OPERATIONS
- ----------------------------
FINANCIAL HIGHLIGHTS OVERVIEW
1998 was a successful year for Marathon Bancorp. The Company recorded a
profit for the year of $445,000 after six years of losses. The Company also
registered six consecutive profitable quarters. Per share earnings were $0.12
on a book value of $2.27 per share, which compares to a loss last year of $0.15
per share and a book value of $2.15.
The Bancorp and its subsidiary have been released from all regulatory
agreements and has no restrictions placed on them. The current asset quality is
excellent, there is no other real estate owned on the books and nonaccrual loans
totaled only $258,000 at year-end 1998. Regulatory risked based capital ratio
was 18.22% at year-end 1998.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income the Company's largest source of earnings increased to
$3,615,000 compared to $3,586,000 for the year 1997 although less than the
$4,003,000 for 1996. The margins during 1998 were negatively affected by the
reduction in short-term rates initiated by the Federal Reserve Bank. The
Federal Reserve Bank lowered the target rate of overnight fed funds by .75%
during 1998, as well as lowering the Federal Reserve's discount rate a like
amount. With our commercial loans being tied to the floating prime rate, which
also declined .75% during 1998, and a good portion of our mortgage loans tied to
the 11th district cost of funds the decline hurt the Company's net interest
margin. The decline in rates in the bond market throughout 1998 also was a
factor. The net interest margin declined from 5.6% in 1997 to 5.3% in 1998.
This decline was offset by the increase in earning assets the Company was able
to produce by liquidating the OREO, reducing nonaccrual loans and improving cash
management.
The loan portfolio's average balance during the year was down slightly from
1997 averaging $44.9 million compared to an average of $46.6 million in 1997.
The increase in assets was invested in the investment portfolio which rose an
average $5,459,000 over 1997. Cash and due from banks was reduced from an
average $4,423,000 in 1997 to $4,118,00 in 1998.
On the liability side of the ledger the overall cost of funds increased
while rates declined because of a higher percentage of certificates of deposit
in the deposit mix. Certificates of deposit averaged 20.5% during 1998 compared
to 14.0% in 1997. This was a negative element to the net interest margin
causing interest expense to increase from $1,144,000 in 1997 to $1,407,000 in
1998.
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
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 reviews current economic conditions, previous loan loss experience,
composition of the portfolio and many other relative factors in determining the
allowance for credit losses.
Nonperforming loans, which consist of loans past due over 90 days plus
loans on nonaccrual, totaled $259,000 at December 31, 1998 versus $2,120,000 at
year-end 1997. Loans classified by the Bank as doubtful or substandard at
year-end 1998 equaled $1,990,000 versus $2,983,000 at year-end 1997.
The allowance for credit losses, which buffers the risk of losses inherent
in the lending process, is increased by the provision for loan losses charged
against income and by recoveries. It is decreased by the amount of loans charged
off. There is no precise method of predicting specific losses, which ultimately
may be charged off, and the conclusion that a loan may become uncollectable, 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. This year the
Company also took into consideration the effect of the year 2000 ("Y2K") on our
borrowers.
Based upon management's assessment of the overall quality of the loan
portfolio, and the other factors previously discussed the Bank made a $56,000
provision to the loan loss reserve. This compares to $301,000 provided during
1997. Loans totaling $194,000 were charged off during the year, and $124,000 was
recovered leaving the allowance for loan losses at 1.6% of gross loans
outstanding at December 31, 1998.
NONINTEREST INCOME
Noninterest income decreased $124,000, or 22% from 1997 to 1998. Over the
past few years the Company has been underperforming in noninterest income
generation. Service charges decreased due to some of the largest customers
increasing their balances to decrease service charges. This is an item that
management has been working on. A new fee based cash management product
introduced in 1998 generated $10,000. The Company is looking into fee
generating services that it may be able to offer through partnerships with other
banking organizations, such as insurance services and investment products.
Gain on the sale of other real estate 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 would have shown an increase
except for the fact that 1997 included a one-time 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. The net change without the
one-time entry was $93,000. Increases in bankcard merchant discount, research
fees, check printing fees and other non-deposit related fees were the factors in
the increase.
NONINTEREST EXPENSE
Noninterest expenses declined again in 1998. Noninterest expense was down
$460,000, or 12.3% from 1997 and $807,000, or 21.5% less than 1996. Human
resource expense was held to a gain of only $4,000 while most of the expense
categories declined. Occupancy costs declined with the renegotiated lease that
was signed in the third quarter of 1997 reducing rental costs. Furniture and
equipment costs increased due to the purchase of newer personal computer
equipment needed to bring the Company into Y2K compliance. This will further
increase depreciation costs in 1999 by approximately $10,000 as the new
equipment left to be purchased of approximately $50,000, will be put on the
books in 1999.
Professional services decreased in cost due to renegotiation of contracts
with our accountants and other service providers. Chargeable services provided
to customers in the data processing and courier costs declined in 1998, which in
turn was part of the reason for reduced service charge income. With the
reduction in OREO, nonperforming and classified assets the legal costs and OREO
costs were substantially reduced.
As noted in last year's Annual Report the improvement in the Company's
capital position and balance sheet enabled us to receive reduced FDIC insurance
and OCC assessments as well as the ability to negotiate reduced insurance rates
on other Bank and Company insurance policies.
ASSETS AND LIABILITIES
Average assets for 1998 increased by $3,807,000, or 5.4% over 1997
although, year-end total assets declined from 1997 to 1998 by $4,669,000. This
was due to the buildup of deposits of approximately $6 million in two major
account relationships during the last two weeks of 1997, which flowed back out
in the first two weeks of 1998. The increase in assets was invested in the
investment portfolio and diversified over U. S. agency and municipal securities.
The investment portfolio at year-end increased to $20,292,000, an increase of
$5,896,000 or 41.0% over December 31, 1997. The Company was able to maintain the
average yield on earning assets of 7.4% achieved in 1997 in a market of
decreasing rates while maintaining high quality in the assets.
Other real estate owned which consisted of three properties totaling
$1,248,000 at the end of 1997 was brought to zero, with the properties being
sold at a net loss of only $30,000 and net operating costs of $22,000.
Average deposits for 1998 increased by $541,000, or 1%. The mix of
deposits changed somewhat with noninterest-bearing deposits having declined and
certificates of deposit increasing with customers looking for better yields in a
declining rate economy in 1998. We also lost two major deposit customers who
moved their accounts to larger institutions.
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.
In order to appropriately reflect the repricing structure of the Company
balance sheet, management has made certain adjustments to the balances reflected
in the following table to account for the behavioral characteristics of certain
core deposits that do not have specified contractual maturities (i.e., checking
with interest, savings, money markets). In addition, the investment portfolio
is shown as repricing at specified call date, if applicable, and not maturity
date. At year-end the cumulative gap position showed an asset sensitivity of $29
million or 43% 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 1999, and a decrease in
rates would decrease earnings.
Immediately adjustable loans are defined as loans that are tied to the
prime rate or 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 on adjustable rate loans. The floors help to mitigate the
loss of net interest income in a declining rate environment.
<PAGE>
INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
Immediately >0-3 >3-6 >6-12 >1-5 >5
(in thousands) Adjustable Months Months Months Years Years
- --------------- ---------- ------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Assets
Securities. . . . . . . . $ - $ 8,471 $1,934 $ 4,301 $ 5,587 $ -
Fed funds sold. . . . . . 4,175 - - - - -
Cash value life insurance - 1,280 - - - -
Loans . . . . . . . . . . 14,313 5,235 2,494 13,062 6,313 1,575
- --------------------------- ------- ------- ------ ------- ------- ------
Total Earning Assets. . $18,488 $14,986 $4,428 $17,363 $11,900 $1,575
Sources
Savings . . . . . . . . - 259 - - 517 259
Checking with interest. - 663 - - 2,650 -
Money market. . . . . . 12,986 - - - 6,718 3,358
Time CD's . . . . . . . - 7,530 2,425 2,173 1,202 -
Demand deposits . . . . - - - - - 4,478
- ------------------------- ------- ------- ------- ------- ------- ------
Total Sources . . . . $12,986 $ 8,452 2,425 $ 2,173 $11,087 $28,095
Cumulative Gap. . . . . . $ 5,502 $12,036 14,039 $29,229 $30,042 $ 3,522
Gap as a percent of total
earning assets. . . 8.0 17.5 20.4 42.5 43.7 5.1
</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 fluctuate but management maintains a
weekly report of the balances of its largest volume customers to correctly gauge
balance fluctuations.
Using the statement of cash flows to measure changes from year-end 1997 to
1998, it indicates, that operating activities and investing activities used
$1,571,000 in cash during the year while financing activities used $5,207,000
decreasing the cash and cash equivalents to $9,249,00 at December 31, 1998.
Again the main reason for this, as discussed earlier, was the buildup of
deposits the last two weeks of 1997 that was left in cash equivalent fed funds
and which flowed back out the first two weeks of 1998. Liquidity remained strong
at year-end 1998 and gives the Company the ability to deal with any deposit
fluctuations as well as providing funds for increasing the loan portfolio. The
Bank also has lines of credit to purchase fed funds with two correspondent banks
and a reverse repurchase agreement with a major investment bank for additional
liquidity if needed.
<PAGE>
CAPITAL
The Company's capital position is strong. Risk-based capital at the end of
1998 was 18.2% up from 16.5% at December 31, 1997. 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 16.9% and the Tier I leverage ratio is 11.2%. The Company is
categorized as well capitalized. Note K to the financial statements goes into
detail on the Company's and Bank's capital position
The Bank was released from its memorandum of understanding with the Federal
Reserve Bank during the second quarter of 1998. For 1999 the Company will
continue to look to earnings as a source of additional capital and foresees no
problems in maintaining proper capital ratios.
YEAR 2000 READINESS
Back in June of 1997 the Company and Bank started addressing the problem by
performing a search for all equipment and systems that could be affected by the
Year 2000. We then put together a plan to address the impact on our operations
and what we were going to do to correct the problem.
We have inventoried all our equipment and have upgraded or purchased new
equipment to be Y2K compliant. Our software systems are supplied by outside
vendors and the Bank has received new versions that we have been assured are Y2K
compliant. This includes all our mission critical systems. The Banks' main
processing is outsourced to Fiserv Service Bureau and all of its software has
been upgraded to be Year 2000 compliant.
The Bank has finished the renovation and most of the validation and
implementation phases of its Y2K plan. Currently we are finishing the testing
mode for Year 2000 readiness and all mission critical systems have been
implemented. Testing is being done for the significant dates both before and
after January 1, 2000, not just for the millennium date change alone. Testing is
due to be completed by May 31, 1999.The company has spent approximately $105,000
through February 1999 towards the Y2K project and anticipates minimal costs
during the remainder of 1999. We are working with our clients to verify that
they also are prepared for the century date change.
We are confident that we will be well prepared for the date change and are
finishing the contingency plans to be implemented, if needed, to minimize any
interruptions for our customers.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------------
<TABLE>
<CAPTION>
MARATHON BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<S> <C>
December 31,
----------------------------------
ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1998
----------------------------------
Cash and Due From Banks. . . . . . . . . . . . . . . . . . . . . $ 5,074,000
Federal Funds Sold . . . . . . . . . . . . . . . . . . . . . . . 4,175,000
----------------------------------
TOTAL CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . 9,249,000
Investment Securities:
Securities Available for Sale . . . . . . . . . . . . . . . . 6,001,000
Securities Held to Maturity . . . . . . . . . . . . . . . . . 14,291,000
----------------------------------
TOTAL INVESTMENT SECURITIES . . . . . . . . . . . . . . . . 20,292,000
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,992,000
Less Allowance for Credit Losses. . . . . . . . . . . . . . . ( 733,000)
----------------------------------
NET LOANS . . . . . . . . . . . . . . . . . . . . . . . . . 42,259,000
Premises and Equipment . . . . . . . . . . . . . . . . . . . . . 346,000
Other Real Estate Owned. . . . . . . . . . . . . . . . . . . . . -
Cash Surrender Value of Life Insurance . . . . . . . . . . . . . 1,280,000
Accrued Interest and Other Assets. . . . . . . . . . . . . . . . 974,000
----------------------------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . $ 74,400,000
==================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-Bearing Demand. . . . . . . . . . . . . . . . . . $ 24,478,000
Interest-Bearing Demand . . . . . . . . . . . . . . . . . . . 3,314,000
Money Market and Savings. . . . . . . . . . . . . . . . . . . 24,098,000
Time Deposits Under $100,000. . . . . . . . . . . . . . . . . 4,945,000
Time Deposits $100,000 and Over . . . . . . . . . . . . . . . 8,383,000
----------------------------------
TOTAL DEPOSITS. . . . . . . . . . . . . . . . . . . . . . . 65,218,000
Accrued Interest and Other Liabilities . . . . . . . . . . . . . 524,000
----------------------------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . 65,742,000
Commitments and Contingencies - Note H
Shareholders' Equity
Preferred Shares - No Par Value, 1,000,000 Shares Authorized,
No Shares Issued and Outstanding
Common Shares - No Par Value, 9,000,000 Shares Authorized,
Issued and Outstanding: 3,820,819. . . . . . . . . . . . . 13,630,000
Accumulated Deficit . . . . . . . . . . . . . . . . . . . . . ( 4,964,000)
Accumulated Other Comprehensive Income - Net Unrealized
Gains (Losses) on Available-for-Sale Securities. . . . . . ( 8,000)
----------------------------------
TOTAL SHAREHOLDERS' EQUITY. . . . . . . . . . . . . . . . . 8,658,000
----------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY. . . . . . . . . $ 74,400,000
==================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MARATHON BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997
---- ----
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans . . . . . . . . . . . . . $ 3,729,000 $ 3,714,000
Interest on Investment Securities - Taxable. . . . . 839,000 564,000
Other Interest Income. . . . . . . . . . . . . . . . 454,000 452,000
----------------------- --------------------------
TOTAL INTEREST INCOME . . . . . . . . . . . . . . 5,022,000 4,730,000
INTEREST EXPENSE
Interest on Demand Deposits. . . . . . . . . . . . . 40,000 56,000
Interest on Money Market and Savings . . . . . . . . 674,000 621,000
Interest on Time Deposits. . . . . . . . . . . . . . 692,000 467,000
Other Interest Expense . . . . . . . . . . . . . . . 1,000 -
----------------------- --------------------------
TOTAL INTEREST EXPENSE. . . . . . . . . . . . . . 1,407,000 1,144,000
----------------------- --------------------------
NET INTEREST INCOME. . . . . . . . . . . . . . . . . . . 3,615,000 3,586,000
Provision for Credit Losses. . . . . . . . . . . . . . . 56,000 301,000
----------------------- --------------------------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES . . . . . . . . . . . . 3,567,000 3,285,000
----------------------- --------------------------
NONINTEREST INCOME
Service Charges and Fees on Deposits . . . . . . . . 236,000 285,000
Gain on Sale of Other Real Estate Owned. . . . . . . - 112,000
Dividends on Cash Surrender Value of Life Insurance. 67,000 -
Other Noninterest Income . . . . . . . . . . . . . . 138,000 168,000
----------------------- --------------------------
TOTAL NONINTEREST INCOME. . . . . . . . . . . . . 441,000 565,000
----------------------- --------------------------
NONINTEREST EXPENSE
Salaries and Employee Benefits . . . . . . . . . . . 1,556,000 1,552,000
Occupancy Expenses . . . . . . . . . . . . . . . . . 585,000 616,000
Furniture and Equipment. . . . . . . . . . . . . . . 103,000 99,000
Professional Services. . . . . . . . . . . . . . . . 120,000 214,000
Business Promotion . . . . . . . . . . . . . . . . . 75,000 71,000
Stationery and Supplies. . . . . . . . . . . . . . . 64,000 92,000
Data Processing Services . . . . . . . . . . . . . . 452,000 512,000
Messenger and Courier Services . . . . . . . . . . . 121,000 154,000
Insurance and Assessments. . . . . . . . . . . . . . 250,000 385,000
Legal Fees and Costs . . . . . . . . . . . . . . . . 200,000 312,000
Provision for OREO Losses. . . . . . . . . . . . . . - 35,000
Loss on Sale of Other Real Estate Owned. . . . . . . 30,000 -
Net Operating Cost of Other Real Estate Owned. . . . 22,000 34,000
Other Expenses . . . . . . . . . . . . . . . . . . . 174,000 136,000
----------------------- --------------------------
TOTAL NONINTEREST EXPENSE . . . . . . . . . . . . . 3,752,000 4,212,000
----------------------- --------------------------
GAIN (LOSS) BEFORE INCOME TAXES. . . . . . . . . . . . . 248,000 ( 362,000)
Income Taxes (Benefit) . . . . . . . . . . . . . . . . . ( 197,000) 2,000
----------------------- --------------------------
NET INCOME ( LOSS). . . . . . . . . . . . . . . . . $ 445,000 ( 364,000)
======================= ==========================
Per Share Data:
Net Income (Loss) - Basic . . . . . . . . . . . . . $ 0.12 ( 0.15)
Net Income (Loss) - Diluted . . . . . . . . . . . . $ 0.12 ( 0.15)
</TABLE>
See accompanying notes to consolidated financial statements.
MARATHON BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . . $ 445,000 $ ( 364,000)
Adjustments to Reconcile Net Loss to Net Cash Provided
(Used) by Operating Activities:
Depreciation and Amortization . . . . . . . . . . . . . 144,000 131,000
Provision for Credit Losses . . . . . . . . . . . . . . 56,000 301,000
Provision for OREO Losses . . . . . . . . . . . . . . . - 35,000
Loss (Gain) on Sale of Other Real Estate Owned. . . . . 30,000 ( 112,000)
Net Amortization of Premiums and Discounts
on Investment Securities . . . . . . . . . . . . . . ( 24,000) ( 22,000)
Net Change in Deferred Loan Origination Fees. . . . . . ( 3,000) 38,000
Net Increase in Cash Surrender Value of Life Insurance. ( 58,000) -
Net Change in Accrued Interest, Other Assets
and Other Liabilities . . . . . . . . . . . . . . . 84,000 ( 158,000)
---------------------- ---------------------
NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES . . . . . . . . . . . . . . . 674,000 ( 151,000)
INVESTING ACTIVITIES
Net Change in Interest-Bearing Deposits with
Financial Institutions . . . . . . . . . . . . . . . . . . - 996,000
Purchases of Available-for-Sale Securities . . . . . . . . . ( 9,217,000) ( 6,088,000)
Purchases of Held-to-Maturity Securities. . . . . . . . . . . ( 15,135,000) ( 4,946,000)
Proceeds from Maturities of Available-for-Sale Securities . . 8,508,000 2,018,000
Proceeds from Maturities of Held-to-Maturity Securities . . . 9,961,000 1,757,000
Net Decrease in Loans . . . . . . . . . . . . . . . . . . . . 4,172,000 518,000
Proceeds from Sale of Other Real Estate Owned . . . . . . . . 762,000 1,632,000
Purchase of Life Insurance. . . . . . . . . . . . . . . . . . ( 1,222,000) -
Purchases of Furniture, Fixtures and Equipment. . . . . . . . ( 74,000) ( 89,000)
---------------------- ---------------------
NET CASH PROVIDED (USED)
BY INVESTING ACTIVITIES. . . . . . . . . . . . . . . . ( 2,245,000) ( 4,202,000)
FINANCING ACTIVITIES
Net Change in Demand Deposits, Money Market and Savings . . . ( 7,854,000) 5,122,000
Net Change in Time Deposits . . . . . . . . . . . . . . . . . 2,624,000 2,442,000
Proceeds from Exercise of Stock Options . . . . . . . . . . . 23,000 -
Proceeds from Issuance of Common shares . . . . . . . . . . . - 5,527,000
---------------------- ---------------------
NET CASH PROVIDED (USED)
BY FINANCING ACTIVITIES . . . . . . . . . . . . . . . . ( 5,207,000) 13,091,000
---------------------- ---------------------
INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . ( 6,778,000) 8,738,000
Cash and Cash Equivalents at Beginning of Year . . . . . . . . . 16,027,000 7,289,000
---------------------- ---------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR . . . . . . . . . . . . $ 9,249,000 $ 16,027,000
====================== =====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest Paid . . . . . . . . . . . . . . . . . . . . . . . . $ 1,386,000 $ 1,140,000
Income Taxes Paid . . . . . . . . . . . . . . . . . . . . . . $ 3,000 $ 2,000
</TABLE>
See accompanying notes to consolidated financial statements.
MARATHON BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Comprehensive Accumulated Comprehensive
Shares Amount Income Deficit Income Total
------ ------ ------ ------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997. . . 1,248,764 $ 8,080,000 $ (5,045,000) $ 8,000 $3,043,000
Issuance of Common Shares
Net of Expenses of $240,000 2,563,055 5,527,000 5,527,000
COMPREHENSIVE INCOME:
Net Loss. . . . . . . . . . $( 364,000) ( 364,000) ( 364,000)
Net Change in Unrealized
Gain (Loss) on Available-
for-Sale Securities . . . ( 5,000) ( 5,000) ( 5,000)
--------------
TOTAL COMPREHENSIVE INCOME. . $( 369,000)
==============
----------- ---------- ------------ ---------- ----------
BALANCE, DECEMBER 31, 1997. . 3,811,819 13,607,000 (5,409,000) 3,000 8,201,000
Exercise of Stock Options . . 9,000 23,000 23,000
COMPREHENSIVE INCOME:
Net Income. . . . . . . . . $ 445,000 445,000 445,000
Net Change in Unrealized
Gain (Loss) on Available-
for-Sale Securities . . . ( 11,000) ( 11,000) ( 11,000)
--------------
TOTAL COMPREHENSIVE INCOME. . $ 434,000
==============
---------- -------------- ------------ ----------- ----------
BALANCE, DECEMBER 31, 1998. . 3,820,819 $ 13,630,000 $(4,964,000) $( 8,000) $8,658,000
=========== ============== ============ ============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MARATHON BANCORP AND SUBSIDIARY
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
- ---------------------------
Banking regulations require that all banks maintain a percentage of their
deposits as reserves in cash or on deposit with the federal reserve bank.
The Company maintains amounts due from banks which exceed federally insured
limits. The Company has not experienced any losses in such accounts.
Investment Securities
- ----------------------
Bonds, notes, and debentures for which the Bank has the positive intent and
ability to hold to maturity are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest method over
the period to maturity.
<PAGE>
MARATHON BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Investment Securities - Continued
- ------------------------------------
Investments not classified as trading securities nor as held to maturity
securities are classified as available-for-sale securities and recorded at fair
value. Unrealized gains or losses on available-for-sale securities are excluded
from net income and reported as an amount net of taxes as a separate component
of other comprehensive income included in shareholders' equity. Premiums or
discounts on held-to-maturity and available-for-sale securities are amortized or
accreted into income using the interest method. Realized gains or losses on
sales of held-to-maturity or available-for-sale securities are recorded using
the specific identification method.
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.
<PAGE>
MARATHON BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Allowance for Credit Losses
- ------------------------------
The allowance for credit losses is increased by charges to income and decreased
by charge-offs (net of recoveries). Quarterly detailed reviews are performed to
identify the risks inherent in their loan portfolio, assess the overall quality
of their loan portfolio and to determine the adequacy of their allowance for
loan losses and the related provision for loan losses to be charged to expense.
Loans identified as less than "acceptable" are reviewed individually to estimate
the amount of probable losses that need to be included in the allowance. These
reviews include analysis of financial information as well as evaluation of
collateral securing the credit. Additionally, the Bank considers the inherent
risk present in the "acceptable" portion of their loan portfolio taking into
consideration historical losses on pools of similar loans, adjusted for trends,
conditions and other relevant factors that may affect repayment of the loans in
these pools.
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.
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.
<PAGE>
MARATHON BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Disclosure About Fair Value of Financial Instruments - Continued
- ------------------------------------------------------------------------
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.
Current Accounting Pronouncements
- -----------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". This Statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities. This new standard is effective for 2000 and is not
expected to have a material impact on the Bank' s financial statements.
Reclassifications
- -----------------
Certain reclassifications were made to prior years' presentations to conform to
the current year. These reclassifications are of a normal recurring nature.
<PAGE>
MARATHON BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - INVESTMENT SECURITIES
<TABLE>
<CAPTION>
The following is a summary of data for the major categories of securities as of
December 31, 1998:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
DECEMBER 31, 1998:
U.S. Treasury Securities . $ 1,000,000 $ 2,000 $ - $ 1,002,000
U.S. Government and
Agency Securities . . . 4,497,000 1,000 ( 10,000) 4,488,000
Federal Reserve Stock. . . 248,000 - - 248,000
Other. . . . . . . . . . . 264,000 - ( 1,000) 263,000
----------- ------- --------------- -----------
$ 6,009,000 $ 3,000 $ ( 11,000) $ 6,001,000
=========== ======= =============== ===========
HELD-TO-MATURITY SECURITIES:
DECEMBER 31, 1998:
U.S. Government and
Agency Securities . . . $ 8,800,000 $14,000 $( 8,000) $ 8,806,000
Municipal Securities . . . 3,982,000 35,000 ( 21,000) 3,996,000
Mortgage-Backed Securities 1,509,000 1,000 ( 6,000) 1,504,000
----------- ------- --------------- -----------
$14,291,000 $50,000 $( 35,000) $14,306,000
=========== ======= =============== ===========
</TABLE>
<PAGE>
MARATHON BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - INVESTMENT SECURITIES - CONTINUED
Investment securities carried at approximately $1,000,000 at December 31, 1998
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 1998 or 1997. Net unrealized gain (loss)
of $(8,000) and $3,000 on securities available for sale were credited to
shareholders' equity in 1998 and 1997, respectively.
The scheduled maturities of securities held to maturity and securities available
for sale at December 31, 1998, were as follows:
<TABLE>
<CAPTION>
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. . . . . $3,497,000 $3,499,000 $ 292,000 $ 294,000
Due From One Year to Five Years. 1,764,000 1,754,000 12,490,000 12,508,000
Due From Five Years to Ten Years 500,000 500,000 - -
Mortgage-Backed Securities . . . - - 1,509,000 1,504,000
Federal Reserve Stock. . . . . . 248,000 248,000 - -
---------- ---------- ----------- -----------
$6,009,000 $6,001,000 $14,291,000 $14,306,000
========== ========== =========== ===========
</TABLE>
NOTE C - LOANS
The following is a summary of the components of loans at December 31, 1998:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Commercial loans . . . . . $16,640,000
Real Estate - Construction 1,215,000
Real Estate - Other. . . . 24,246,000
Consumer . . . . . . . . . 677,000
-----------
42,778,000
Net Deferred Loan Costs. . 214,000
-----------
$42,992,000
===========
</TABLE>
<PAGE>
MARATHON BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
<CAPTION>
1998
----
<S> <C>
Recorded Investment in Impaired Loans . . . . $258,000
========
Related Allowance for Credit Losses . . . . . $ 84,000
========
Average Recorded Investment in Impaired Loans $242,000
========
Interest Income Recognized from Cash Payments $ 12,000
========
</TABLE>
Loans having carrying value of $977,000 and $1,419,000, were transferred to
other real estate owned in 1998 and 1997, respectively. During 1998 and 1997
loans totaling $1,434,000 and $1,695,000, respectively, were made to facilitate
the sale of other real estate owned.
A summary of changes in the allowance for credit losses follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Balance, January 1. . . . $ 747,000 $ 1,088,000
Provision for Loan Losses 56,000 301,000
Loans Charged Off . . . . ( 194,000) ( 940,000)
Recoveries. . . . . . . . 124,000 298,000
------------- -------------
Balance, December 31. . . $ 733,000 $ 747,000
============= =============
</TABLE>
MARATHON BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - PREMISES AND EQUIPMENT
The following is a summary of the major components of premises and equipment at
December 31, 1998.
<TABLE>
<CAPTION>
<S> <C>
1998
-------------
Furniture, Fixtures and Equipment. . . . . . . $ 1,320,000
Leasehold Improvements . . . . . . . . . . . . 480,000
-------------
1,800,000
Less Accumulated Depreciation and Amortization ( 1,454,000)
-------------
$ 346,000
=============
</TABLE>
NOTE E - DEPOSITS
At December 31, 1998, the scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1999 . . . . . . . $12,126,000
2000 through 2003. 1,202,000
-----------
13,328,000
===========
</TABLE>
NOTE F - INCOME TAXES
The income tax provision (benefit) for the years ended December 31, 1998 and
1997 is comprised of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
------------- --------------
Current Taxes:
Federal. . . . . . . . . . . . $ - $ -
State. . . . . . . . . . . . . 3,000 2,000
------------- --------------
3,000 2,000
Deferred. . . . . . . . . . . . . 239,000 79,000
Net Change in Valuation Allowance ( 439,000) ( 79,000)
------------- --------------
$( 197,000) $ 2,000
============= ==============
</TABLE>
<PAGE>
MARATHON BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F - INCOME TAXES - CONTINUED
For federal income tax purposes, the Company has net operating loss
carryforwards of approximately $4,478,000 which expire in 2008 - 2018. For
state income tax purposes, the Company has incurred net operating loss
carryforwards of approximately $2,312,000, which expire in 1999 - 2003, to
offset future taxes payable, adjusted for the fifty percent reduction, as
required by state tax law. During 1998, state net operating loss carryforwards
of approximately $1,967,000 expired.
At December 31, 1998 the components of the net deferred tax asset are comprised
of the following:
<TABLE>
<CAPTION>
<S> <C>
1998
--------------
Deferred Tax Assets:
Allowance for Credit Losses Due to Tax Limitations. . $ 302,000
Other Real Estate Owned . . . . . . . . . . . . . . . -
Net Operating Loss and Tax Credit Carryforwards . . . 1,826,000
Premises and Equipment Due to Depreciation Difference 74,000
Other Assets/Liabilities. . . . . . . . . . . . . . . 32,000
--------------
2,234,000
Valuation Allowance . . . . . . . . . . . . . . . . . . . ( 1,946,000)
Deferred Tax Liabilities:
Recapture of Federal Credit Reserve . . . . . . . . . -
Other Assets/Liabilities. . . . . . . . . . . . . . . ( 88,000)
--------------
( 88,000)
--------------
Net Deferred Assets . . . . . . . . . . . . . . . . . . . $ 200,000
==============
</TABLE>
<PAGE>
MARATHON BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F - INCOME TAXES - CONTINUED
The principal reasons for the difference between the federal statutory income
tax rate of 35% in 1998 and 1997 and income tax expense (benefit) for the years
ended December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
-------------- --------------
Tax Benefit at Statutory Rate. . . . $ 87,000 $ ( 127,000)
State Franchise Tax Net of Valuation
Allowance . . . . . . . . . . . . 3,000 2,000
Federal Valuation Allowance. . . . . ( 267,000) 139,000
Other, Net . . . . . . . . . . . . . ( 20,000) ( 12,000)
-------------- --------------
Tax Benefit. . . . . . . . . . . . . $( 197,000) $ 2,000
============== ==============
</TABLE>
NOTE G - EARNINGS PER SHARE (EPS)
The following is a reconciliation of net income and shares outstanding to the
income and number of share used to compute EPS:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1998 1997
-------------------- ------------------------
Income Shares Loss Shares
------ -------- ------------- ---------
Net Income (Loss) as Reported. $445,000 $( 364,000) -
Weighted Average Shares
Outstanding During the Year - 3,817,498 - 2,465,127
-------- ------------- ------------- ---------
USED IN BASIC EPS. . . . 445,000 3,817,498 ( 364,000) 2,465,127
Dilutive Effect of Outstanding
Stock Options . . . . . . . - - - -
-------- ------------- ------------- ---------
USED IN DILUTIVE EPS . . $445,000 3,817,498 $( 364,000) 2,465,127
======== ============= ============= =========
</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.
<PAGE>
MARATHON BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 . . . 594,000
2000 . . . 594,000
2001 . . . 594,000
2002 . . . 396,000
-------
2,178,000
==========
</TABLE>
Rent expense was $523,000 and $563,000 for the years ended December 31, 1998 and
1997, respectively. Sublease rental income was $92,000 in 1998 and $85,000 in
1997.
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 litigation 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, 1998.
<TABLE>
<CAPTION>
<S> <C>
1998
----------
Commitments to Extend Credit $8,676,000
Letters of Credit. . . . . . 175,000
----------
$8,851,000
==========
</TABLE>
MARATHON BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - COMMITMENTS AND CONTINGENCIES - CONTINUED
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 700,000
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>
<CAPTION>
<S> <C> <C>
Number of Shares
-------------------------------
1998 1997
----------------- ------------
Options Outstanding, January 1 . 128,030 294,145
Granted at Option Prices of:
$3.75 in 1998 . . . . . . . . 325,610 -
$3.09 in 1997 . . . . . . . . - 76,888
$2.75 in 1996 . . . . . . . . - -
Exercised. . . . . . . . . . . . ( 9,000) -
Canceled . . . . . . . . . . . . ( 35,684) ( 243,003)
----------------- ------------
Options Outstanding, December 31 408,956 128,030
================= ============
</TABLE>
At December 31, 1998 the weighted average exercise price was $3.77, the weighted
average remaining contractual life was 8.9 years, and 22,436 options were
exercisable at a weighted average price of $5.92.
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 4.50% for 1998 and 5.8%
for 1997; volatility of 37% for 1998, and 51% for 1997; and expected lives of
ten years. The estimated fair value of options granted during 1998 and 1997
were $2.12 and $2.15, per share, respectively.
<PAGE>
MARATHON BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 income (loss) and income (loss) per
share for the year ended December 31, 1998 and 1997 would have been changed to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
-------- ---------------
Net Income (Loss) to Common Shareholders:
As Reported. . . . . . . . . . . . . . $445,000 $ ( 364,000)
Pro Forma. . . . . . . . . . . . . . . $322,000 $ ( 381,000)
Per Share Data:
Net Income (Loss) - Basic
As Reported . . . . . . . . . . . . $ 0.12 $( 0.15)
Pro Forma . . . . . . . . . . . . . $ 0.08 $( 0.15)
Net Income (Loss) - Diluted
As Reported . . . . . . . . . . . . $ 0.12 $( 0.15)
Pro Forma . . . . . . . . . . . . . $ 0.08 $( 0.15)
</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.
<PAGE>
MARATHON BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
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 (dollar amounts in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
1998
-----------------------
Carry Value Fair Value
- ------------------------------- ----------- ----------
Financial Assets:
Cash and Due From Banks. . . $ 5,074 $ 5,074
Federal Funds Sold . . . . . $ 4,175 $ 4,175
Investment Securities. . . . $ 20,292 $20,307
Loans, Net . . . . . . . . . $ 42,259 $41,949
Cash Value of Life Insurance $ 1,280 $ 1,280
Financial Liabilities:
Deposits . . . . . . . . . . $ 65,218 $65,256
</TABLE>
<PAGE>
MARATHON BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1998, that
the Company and Bank meet all capital adequacy requirements to which they are
subject.
As of December 31, 1998, 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):
<TABLE>
<CAPTION>
Amount of Capital Required
--------------------------
To Be Categorized as To Be
Actual Adequately Capitalized Well-Capitalized
--------------- ---------------------- ----------------
Amount Percentage Amount Percentage Amount Percentage
----- ---------- ------ --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998
Total Risk-Based . . $9,323 18.2% $4,096 8.0% $5,120 10.0%
Tier 1 Risk-Based. . $8,681 16.9% $2,048 4.0% $3,072 6.0%
Tier 1 Leverage. . . $8,681 11.2% $3,087 4.0% $3,859 5.0%
</TABLE>
The Company is subject to similar requirements administered by its primary
regulator, the Federal Reserve Board. For capital adequacy purposes, the
Company must maintain total capital to risk-weighted assets, Tier 1 capital to
risk-weighted assets and Tier 1 capital to average assets of 8.0%, 4.0% and
4.0%, respectively. Its total capital to risk-weighted assets, Tier 1 capital
to risk-weighted assets and Tier 1 capital to average assets was 18.2%, 16.9%,
and 11.2%, respectively, at December 31, 1998.
<PAGE>
MARATHON BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
<CAPTION>
<S> <C> <C>
December 31,
----------------------
CONDENSED BALANCE SHEETS . . . . . . . . . . . . . . . . . . . . . . 1998
----------------------
ASSETS
Cash in Marathon National Bank . . . . . . . . . . . . . . . . . . . $ 4,000
Investment in Marathon National Bank . . . . . . . . . . . . . . . . 8,674,000
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
----------------------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,683,000
======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,000
Shareholders' Equity
Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . . 13,630,000
Accumulated Deficit . . . . . . . . . . . . . . . . . . . . . . . ( 4,964,000)
Accumulated Other Comprehensive Income. . . . . . . . . . . . . . ( 8,000)
----------------------
TOTAL SHAREHOLDERS' EQUITY. . . . . . . . . . . . . . . . . . . . 8,658,000
----------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY. . . . . . . . . . . . $ 8,683,000
======================
Year ended December 31,
-----------------------
CONDENSED STATEMENTS OF OPERATIONS . . . . . . . . . . . . . . . . . 1998 1997
---------------------- ----------------------
Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . ( 21,000) ( 7,000)
Equity in Undistributed Net Income (Loss) of Marathon National Bank. 466,000 ( 357,000)
---------------------- ----------------------
Net Income (Loss). . . . . . . . . . . . . . . . . . . . . . . . . . $ 445,000 $( 364,000)
====================== ======================
Year Ended December 31,
-------------------------
CONDENSED STATEMENTS OF CASH FLOWS . . . . . . . . . . . . . . . . . 1998 1997
---------------------- ----------------------
OPERATING ACTIVITIES
Net Income (Loss). . . . . . . . . . . . . . . . . . . . . . . . . . $ 445,000 $( 364,000)
Adjustments to Reconcile Net Income (Loss) to Net Cash Used by
Operating Activities - Equity in Undistributed Net Income Loss
of Marathon National Bank . . . . . . . . . . . . . . . . . . . . ( 466,000) 357,000
Net Change in Other Assets and Other Liabilities . . . . . . . . . . ( 18,000) -
---------------------- ----------------------
NET CASH USED BY OPERATING ACTIVITIES . . . . . . . . . . . . . . ( 39,000) ( 7,000)
INVESTING ACTIVITIES
Investment in Marathon National Bank . . . . . . . . . . . . . . . . - ( 5,501,000)
---------------------- ----------------------
NET CASH USED BY INVESTING ACTIVITIES . . . . . . . . . . . . . . - ( 5,501,000)
FINANCING ACTIVITIES
Proceeds from Exercise of Stock Options. . . . . . . . . . . . . . . 23,000
Proceeds from Issuance of Common Shares. . . . . . . . . . . . . . . 5,527,000
---------------------- ---------------------
NET CASH PROVIDED
BY FINANCING ACTIVITIES. . . . . . . . . . . . . . . . . . . . 23,000 5,527,000
---------------------- ---------------------
INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . ( 16,000) 19,000
Cash and Cash Equivalents at Beginning of Year . . . . . . . . . . . 20,000 1,000
---------------------- ----------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR . . . . . . . . . . . . . . $ 4,000 $ 20,000
====================== ======================
</TABLE>
<PAGE>
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, 1998, and the related consolidated statements
of operations, changes in stockholder's equity and cash flows for the two years
ended December 31, 1998. These consolidated financial statements are the
responsibility of the Marathon Bancorp's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Marathon Bancorp and
Subsidiary as of December 31, 1998, and the results of its operations and its
cash flows for each of the two years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Vavrinek, Trine, Day & Co., LLP
Vavrinek, Trine, Day & Co., LLP
January 22, 1999
Laguna Hills, California
<PAGE>
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
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
Directors:
<S> <C> <C>
Name . . . . . . . . . . . . Position with Company Director
Since
Nikolas Patsaouras (1) & (2) Chairman of the Board of the Company and 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
<FN>
(1) Member of the Audit Committee
(2) Member of the Personnel and Compensation Committee.
</TABLE>
<TABLE>
<CAPTION>
Executive officers of the Company and the Bank were:
<S> <C> <C>
Name. . . . . . . Position Age
Craig D. Collette President and Chief Executive Officer of the Company and Bank 56
Timothy J. Herles Executive Vice President and Senior Credit Officer of the Bank 58
Howard J. Stanke. Executive Vice President, Chief Financial Officer of the Company and Bank 50
Adrienne Caldwell Executive Vice President, Operations Administration of the Bank 56
</TABLE>
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 since June 9, 1997. Mr. Stanke was previously Executive
Vice President/Chief Financial Officer of TransWorld Bancorp and TransWorld
Bank.
ADRIENNE CALDWELL has been Executive Vice President-Operations
Administration of the Bank since March 1986.
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
- ----------------------------------
The following table sets forth a comprehensive overview of the compensation
of the Bank's executive officers with salary and bonus exceeding $100,000 during
the fiscal year ended December 31, 1998. Comparative data is also provided for
the previous two fiscal years.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (f) (g) (h) (I)
Other
Annual Restricted All Other
Name and Compen- Stock LTIP Compen
Principal Salary Bonus sation Award(s) Options/ Payouts sation (2)
Position Year ($) ($) ($)(1) ($) SARs ($) ($)
-------- ---- --- --- ------ --- ---- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Craig D. Collette (3) . . . . . . 1998 $170,102 $ 0 $8,400 0 5,000 0 $1,800
President and . . . . . . . . . . 1997 $160,714 $ 0 $8,400 0 30,000 0 $1,238
Chief Executive Officer
Of the Company and the Bank
Timothy J. Herles . . . . . . . . 1998 $101,089 $ 0 $8,400 0 34,184 0 $1,940
Executive Vice President and. . . 1997 $102,372 $ 0 $8,400 0 0 0 $1,490
Chief Credit Officer of the Bank. 1996 $100,000 $ 0 $8,400 0 0 0 $1,210
<FN>
(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 Company's common stock, except as set forth in the
table below. The following table sets forth, as of February 23, 1999, the
number and percentage of shares of the Company's outstanding common stock
beneficially owned, directly or indirectly, by each of the Company's 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>
<CAPTION>
<S> <C> <C> <C>
Common Stock Beneficially Owned as of
February 23, 1999
Number of Percent Of
Name of Beneficial Owner . . . . . . . . Shares Class
- --------------------------------------------------------------------------------------------------
Directors and Named Executive Officers:
- ----------------------------------------
Nikolas Patsaouras. . . . . . . . . . . 37,910 (1) 0.99
Robert J. Abernethy. . . . . . . . . . . 107,793 2.82
Craig D. Collette. . . . . . . . . . . . 47,723 (2) 1.24
Frank W. Jobe, M.D.. . . . . . . . . . . 74,190 1.94
C. Thomas Mallos . . . . . . . . . . . . 47,878 (3) 1.25
Robert L. Oltman . . . . . . . . . . . . 191,032 (4) 4.99
Ann Pappas . . . . . . . . . . . . . . . 60,011 (5) 1.57
Timothy J. Herles . . . . . . . . . . . 9,696 (6) 0.03
Total for all directors, named
executive officers and all
executive officers (numbering 10). . . . 602,679 (7) 15.75
Principal Shareholder:
- ----------------------------------------
Oppenheimer-Spence Financial
Services Partnership L.P.. . . . . . . . 224,897 (8) 5.88
<FN>
(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 47,723
shares.
(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 3,052 of these
shares. His address is 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 1,184 of these
shares. The amount includes 8,512 acquirable by exercise of stock options.
(7) This amount includes 19,458 shares acquirable by exercise of stock
options within 60 days of February 23, 1999.
(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.
</TABLE>
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
----------------------
N/A
(C) EXHIBITS
--------
See Exhibit Index at Page 48 this Form 10-KSB.
<PAGE>
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 22nd day of
March 1999.
MARATHON BANCORP (Registrant)
Howard J. Stanke
------------------
Howard J. Stanke
Executive Vice President &
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.
`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.
<TABLE>
<CAPTION>
<S> <C> <C>
SIGNATURE . . . . . TITLE DATE
- ------------------- --------------------------
Nikolas Patsaouras. Chairman of the Board March 22, 1999
- -------------------
Nikolas Patsaouras
Craig D. Collette . Director,President & March 22, 1999
- ------------------- CEO
Craig D. Collette .
C. Thomas Mallos. . Director March 22, 1999
- -------------------
C. Thomas Mallos
Robert J. Abernethy Director March 22, 1999
- -------------------
Robert J. Abernethy
- ------------------ Director March 22, 1999
Frank W. Jobe, M.D.
Robert L. Oltman. . Director and Secretary March 22, 1999
- -------------------
Robert L. Oltman
Ann Pappas. . . Director March 22, 1999
- -------------------
Ann Pappas
</TABLE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
<S> <C> <C>
EXHIBIT NO. DESCRIPTION PAGE
- ------------------------
21. . . . . . . . . . . . . Subsidiaries of Company 48
23. . . . . . . . . . . . . Consent of Vavrinek, Trine, Day & Co LLP 49
27. . . . . . . . . . . . . Financial Data Schedule
</TABLE>
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 the Registration Statement of
Marathon Bancorp on Form S-8 of our report dated January 22, 1999, on our audit
of the consolidated balance sheet of Marathon Bancorp as of December 31, 1998,
and the related consolidated statements of operations, changes in stockholder''
equity and cash flows for each of the two years in the period ended December 31,
1998, which report is incorporated by reference in the 1998 Annual Report on
Form 10-KSB.
/s/ Vavrinek, Trine, Day & Co., LLP
Vavrinek, Trine, Day & Co., LLP
March 25, 1999
Laguna Hills, California
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 5,074
<INT-BEARING-DEPOSITS> 40,740
<FED-FUNDS-SOLD> 4,175
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,001
<INVESTMENTS-CARRYING> 14,291
<INVESTMENTS-MARKET> 14,306
<LOANS> 42,992
<ALLOWANCE> 733
<TOTAL-ASSETS> 74,400
<DEPOSITS> 65,742
<SHORT-TERM> 0
<LIABILITIES-OTHER> 524
<LONG-TERM> 0
0
0
<COMMON> 13,630
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 74,400
<INTEREST-LOAN> 3,729
<INTEREST-INVEST> 839
<INTEREST-OTHER> 454
<INTEREST-TOTAL> 5,022
<INTEREST-DEPOSIT> 1,406
<INTEREST-EXPENSE> 1,407
<INTEREST-INCOME-NET> 3,615
<LOAN-LOSSES> 56
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,752
<INCOME-PRETAX> 248
<INCOME-PRE-EXTRAORDINARY> 248
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 445
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
<YIELD-ACTUAL> 7.4
<LOANS-NON> 258
<LOANS-PAST> 1
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 747
<CHARGE-OFFS> 194
<RECOVERIES> 124
<ALLOWANCE-CLOSE> 733
<ALLOWANCE-DOMESTIC> 733
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 733
</TABLE>
