UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1999
------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _________
Commission file number 0-12510
---------------------
MARATHON BANCORP
- ------------------------------------------------------
(Exact name of registrant as specified in its charter)
California
- --------------------------------
95-3770539
- ----------
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification
No.)
11150 West Olympic Boulevard, Los Angeles, CA 90064
- ------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 996-9100
-----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
---
As of May 1, 1999, there were 3,827,019 shares of no par Common Stock
issued and outstanding.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Financial Condition
Marathon Bancorp and Subsidiary
<S> <C> <C>
March 31, December 31,
ASSETS 1999 1998
------------ --------------
Cash and Due From Banks $4,581,000 $5,074,000
Federal Funds Sold 3,640,000 4,175,000
Interest-Bearing Deposits with Financial Institutions 0
Investment Securities
Securities Available for Sale 5,477,000 6,001,000
Securities Held to Maturity 11,693,000 14,291,000
------------ --------------
TOTAL INVESTMENT SECURITIES 17,170,000 20,292,000
Loans 46,479,000 42,992,000
Less Allowance for Credit Losses (607,000) (733,000)
------------ --------------
NET LOANS 45,872,000 42,259,000
Premises and Equipment 377,000 346,000
Other Real Estate Owned 0 0
Accrued Interest and Other Assets 931,000 974,000
Cash Surrender Value of Life Insurance 1,298,000 1,280,000
------------ --------------
TOTAL ASSETS 73,869,000 74,400,000
============ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-Bearing 23,523,000 24,478,000
Interest-Bearing 41,168,000 40,740,000
------------ --------------
TOTAL DEPOSITS 64,691,000 65,218,000
Accrued Interest and Other Liabilities 480,000 524,000
------------ --------------
TOTAL LIABILITIES 65,171,000 65,742,000
Shareholders' Equity
Preferred Shares - No Par Value, 1,000,000 Shares Authorized,
No Shares Issued and Outstanding 0 0
Common Shares - No Par Value, 9,000,000 Shares Authorized,
Issued and Outstanding: 3,826,819 in 1999 and 3,811,819 in 1998 13,646,000 13,630,000
Net Unrealized Gain on Securities Available for Sale (46,000) (8,000)
Accumulated Deficit (4,902,000) (4,964,000)
------------ --------------
TOTAL SHAREHOLDERS' EQUITY 8,698,000 8,658,000
------------ --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $73,869,000 $74,400,000
============ ==============
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
Marathon Bancorp and Subsidiary
<S> <C> <C>
March 31,
1999 1998
--------------- ----------
INTEREST INCOME
Interest and Fees on Loans $871,000 $916,000
Interest on Investment Securities - Taxable 251,000 169,000
Other Interest Income 66,000 116,000
--------------- ----------
TOTAL INTEREST INCOME 1,188,000 1,201,000
INTEREST EXPENSE
Interest on Demand Deposits 8,000 12,000
Interest on Money Market and Savings 182,000 150,000
Interest on Time Deposits 148,000 149,000
Other Interest Expense - 1,000
--------------- ----------
TOTAL INTEREST EXPENSE 338,000 312,000
--------------- ----------
NET INTEREST INCOME 850,000 889,000
Provision for Credit Losses - -
--------------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 850,000 889,000
--------------- ----------
NONINTEREST INCOME
Service Charges and Fees on Deposits 76,000 61,000
Gain on Sale of Other Real Estate Owned - -
Other Noninterest Income 42,000 39,000
--------------- ----------
TOTAL NONINTEREST INCOME 118,000 100,000
--------------- ----------
NONINTEREST EXPENSE
Salaries and Employee Benefits 420,000 392,000
Occupancy Expenses 132,000 159,000
Furniture and Equipment 29,000 23,000
Professional Services 26,000 12,000
Business Promotion 21,000 27,000
Stationery and Supplies 14,000 29,000
Data Processing Services 115,000 115,000
Messenger and Courier Services 19,000 22,000
Insurance and Assessments 33,000 81,000
Legal Fees and Costs 45,000 38,000
Net Operating Cost of Other Real Estate Owned ( 1,000) 12,000
Other Expenses 58,000 68,000
--------------- ----------
TOTAL NONINTEREST EXPENSE 911,000 978,000
--------------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 57,000 11,000
Income Tax (benefit) ( 5,000) -
--------------- ----------
NET INCOME (LOSS) $62,000 $11,000
=============== ==========
Per Share Data:
Net Income (Loss) - Basic $0.02 $0.11
Net Income (Loss) - Diluted $0.02 $0.11
</TABLE>
<TABLE>
<CAPTION>
<PAGE>
Consolidated Statements of Cash Flows
Marathon Bancorp and Subsidiary
<S> <C> <C>
Three Months Ended March 31,
------------------------------
1999 1998
------------------------------ -------------------
OPERATING ACTIVITIES
Net Income $62,000 $11,000
Adjustments to Reconcile Net Gain (Loss) to Net Cash Provided
by Operating Activities:
Depreciation and Amortization 32,000 36,000
Provision for Credit Losses - -
Provision for OREO Losses - -
Loss on Sale of Other Real Estate Owned - 34,000
Net Amortization of Premiums and Discounts
on Investment Securities 9,000 7,000
Net Change in Deferred Loan Origination Fees 3,000 4,000
Net Change in Accrued Interest, Other Assets
and Other Liabilities ( 19,000) ( 733,000)
------------------------------ -------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 87,000 ( 641,000)
INVESTING ACTIVITIES
Purchases of Available for Sale Securities ( 2,512,000) ( 998,000)
Purchases of Held to Maturity Securities ( 902,000) ( 4,535,000)
Proceeds from Maturities of Available for Sale Securities 3,000,000 3,500,000
Proceeds from Maturities of Held to Maturity Securities 3,489,000 3,697,000
Net (Increase) Decrease in Loans ( 3,616,000) 1,527,000
Proceeds from Sale of Other Real Estate Owned - 1,035,000
Purchases of Furniture, Fixtures and Equipment ( 63,000) ( 19,000)
------------------------------ -------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES ( 604,000) 4,207,000
FINANCING ACTIVITIES
Net Change in Demand Deposits, Money Market and Savings 1,273,000 ( 10,631,000)
Net Change in Time Deposits ( 1,800,000) 1,508,000
Proceeds from Issuance of Common shares 16,000 -
------------------------------ -------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES ( 511,000) ( 9,123,000)
------------------------------ -------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ( 1,028,000) ( 5,557,000)
Cash and Cash Equivalents at Beginning of Year 9,249,000 16,027,000
------------------------------ -------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $8,221,000 $10,470,000
============================== ===================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest Paid $355,000 $278,000
Income Taxes Paid (Refunded) $- $-
Loans Made to Facilitate the Sale of Other Real Estate Owned $- $600,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Equity
Marathon Bancorp and Subsidiary
<S> <C> <C> <C> <C> <C> <C>
Accumulated
Other
Common Shares Comprehensive Accumulated Comprehensive
Shares Amount Income Deficit Income Total
------------- ----------- ------------------- -------------- -------------------- ---------------
BALANCE, JANUARY 1, 1999 3,820,819 $13,630,000 $( 4,964,000) $( 8,000) $8,658,000
Exercise of Stock Options 6,000 16,000 16,000
COMPREHENSIVE INCOME:
Net Income $62,000 62,000 62,000
Net Change in Unrealized
Gain (Loss) on Available-
for-Sale Securities ( 38,000) ( 38,000) ( 38,000)
-------------------
TOTAL COMPREHENSIVE INCOME $24,000
BALANCE, MARCH 31, 1999 3,826,819 $13,646,000 $( 4,902,000) $( 46,000) $8,698,000
</TABLE>
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATIONS
The unaudited consolidated financial statements have been prepared in accordance
with the instructions to Form 10-QSB and, therefore, do not include all
footnotes normally required for complete financial disclosure. While the
Company believes that the disclosures presented are sufficient to make the
information not misleading, reference may be made to the consolidated financial
statements and notes thereto included in the Company's 1998 Annual Report on
Form 10-KSB.
The accompanying consolidated statements of financial condition and the related
consolidated statements of operations and cash flows reflect, in the opinion of
management, all material adjustments necessary for fair presentation of the
Company's financial position as of March 31, 1999 and December 31, 1998, results
of operations and changes in cash flows for the three-month period ended March
31, 1999 and 1998. The results of operations for the three-month period ended
March 31, 1999 are not necessarily indicative of what the results of operations
will be for the full year ending December 31, 1999.
(2) EARNINGS PER SHARE (EPS)
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
Accordingly, the basic weighted average number of shares used to compute the net
income per share were 3,823,619 and 3,811,819 respectively for the three-month
period ended March 31, 1999 and March 31, 1998. There was no dilution to change
the basic average number of shares so the diluted EPS was the same.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion is intended to provide additional information about
Marathon Bancorp (the Company), its financial condition and results of
operations, which is not otherwise apparent from the consolidated financial
statements. Since Marathon National Bank (the Bank) represents a substantial
portion of the Company's activities and investments, the following relates
primarily to the financial condition and operations of the Bank. It should be
read in conjunction with the Company's 1998 Annual Report on Form 10-KSB.
FINANCIAL HIGHLIGHTS OVERVIEW
Marathon Bancorp recorded a profit for the seventh consecutive quarter of
$62,000 for the period ending March 31, 1999, compared to $11,000 for the same
period of 1998. Per share earnings were $0.02 for 1999 compared to less than
one cent per share in the first quarter of 1998.
At March 31, 1999 total assets were $73,869,000, total loans were $46,479,000
and total deposits $64,691,000. This compares to total assets of $74,400,000,
total loans of $42,922,000 and total deposits of $65,218,000 at December 31,
1998.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income decreased 4% or $39,000 when comparing the first quarter of
1999 with the first quarter of 1998. The decrease came from both a decrease in
interest income and an increase in interest expense. Although the overall
average earning assets increased, the reduction in interest rates over the last
year has decreased the yield on total earning assets by approximately 25 basis
points. This was reflected the most in the interest and fees on the loan
portfolio. Since a large portion of the portfolio is tied to prime rate the
decrease of 75 basis points in the prime rate during the latter half of 1998 was
the main reason for the $45,000 decline in income.
The investment portfolio increased by an average of $6,429,000 which came from
both a increase in deposits and a decrease in fed funds sold. Due to the fact
that the bond market did not decline as much as the fed funds rate did the
overall yield did not perceptibly change. The interest on investment securities
increased by $82,000. The interest on fed funds decreased because of both rate
and average investment.
Interest expense increased in the money market deposits and specifically in the
interest paid on our Investors Money Market account, which pays approximately
200 basis points higher. The average balances increased during 1998 as the
account was first launched in the fourth quarter of 1997. The interest on time
deposits was constant. Overall interest expense increased $27,000 over the
first quarter of last year.
Noninterest Income
Noninterest income increased for the first quarter of 1999 compared to the first
quarter of 1998 by $18,000, or 18%. Service charges on deposit accounts
increased do an increase in the analysis income on commercial business accounts
and selected fee increases. Other noninterest income increased from increased
merchant discount, noninterest income on loans and research fees.
Noninterest Expense
The Company has worked hard to decrease the noninterest expense, which has been
high for the last few years. Noninterest expenses were reduced $67,000, or 7%
compared to the first quarter of 1998. Salaries and employee benefits increased
by 7%. Occupancy and equipment expenses were decreased by renting out to
subtenants some of the Company's office space. Professional services costs
increased with higher audit and tax fees accrued. Business promotion, supplies,
courier services and other expense had reductions in cost. The largest decrease
came in the insurance and assessments where the improvement in the quality of
the bank helped reduce the premiums for FDIC insurance, regulatory examination,
and other insurance.
The ability of the bank to divest itself of all the other real estate owned,
reduced the net operating cost of other real estate owned from $12,000 in 1998
to a recovery of $1,000 in costs in 1999.
Provision for Credit Losses:
Based upon management's assessment of the overall quality of the loan portfolio,
and of external economic conditions the Bank felt that the current level in the
reserve for credit losses was adequate an therefore made no provision to the
credit loss reserve for the quarter. During the first quarter, the Bank
recorded charge-offs of $137,000 while collecting recoveries on loans charged
off of $11,000.
The Bank's internally classified loans decreased from $1,990,000 at December 31,
1998 to $1,832,000 at March 31, 1999. Nonperforming loans decreased from
$259,000 at December 31, 1998 to $182,000 at March 31, 1999 and the Company
continued to have no other real estate owned.
Based upon these factors and management's assessment of the overall quality of
the loan portfolio, its internal migration analysis and economic conditions they
felt the current level of the reserve for credit losses was adequate without the
need for further provisions.
ASSETS AND LIABILITIES
The Company continued to focus on improving the level of earning assets as a
percentage of assets. This ratio improved from 90.8% at March 31, 1998 to 91.5%
at yearend to 92.3% at March 31, 1999. This came from a reduction in OREO,
nonperforming loans and cash. We also decreased the amount of the overnight
federal funds sold and moved the funds into higher yielding securities. Most of
these were put into the available-for-sale portfolio for liquidity purposes.
The loan portfolio also increased with the additions to the commercial loans.
Most of these loans are floating rate loans tied to the Bank's prime rate. As
was noted earlier the Company has sold all the OREO properties it had during
1998.
Deposits for the quarter decreased slightly from the totals at yearend declining
from $65,218,000 to $64,691,000 at March 31, 1999. Noninterest-bearing deposits
declined by $955,000 while the interest-bearing deposits increased by $428,000.
The Company normally has low to no deposit growth during the first quarter when
its customers pay yearend expenses and tax bills.
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, as well
as, the liquidity needs of the Company.
Management monitors its liquidity position continuously in relation to trends in
loans and deposits, and relates the data to short and long term expectations.
In order to serve customers effectively, funds must be available to meet their
credit needs as well as their withdrawals of deposited funds. Assets that are
normally considered liquid are federal funds sold, available for sale investment
securities, cash and due from banks, and securities purchased under agreements
to resell. The ratio of liquid assets to deposits was 21% as of March 31, 1999
and the loan to deposit ratio was 72%.
Interest rate risk management focuses on the maturity and repricing of interest
earning assets in relationship to the interest bearing liabilities that fund
them. Net interest income can be vulnerable to fluctuations arising from a
change in the general level of interest rates to the extent that the average
yield on earning assets responds differently to such a change than does the
average cost of funds.
The Company measures interest rate sensitivity by distributing the maturities
and repricing periods of assets and supporting funding liabilities into interest
sensitivity periods, summarizing interest rate risk in terms of the resulting
interest sensitivity gaps. A positive gap indicates that more interest
sensitive assets than interest sensitive liabilities will be repriced during a
specified period, while a negative gap indicates the opposite condition.
It is the Bank's policy to maintain an adequate balance of rate sensitive assets
to rate sensitive liabilities. Due to the fact that the Bank has a large
portfolio of noninterest bearing demand deposits the Company has historically
been asset sensitive with a positive gap. The Company is asset sensitive and
has been able to decrease its asset sensitivity during the last twelve month
period by an increase in the investment portfolio and a lengthening of
maturities. The Company's cumulative gap as a percent of total assets at March
31, 1999 was 35.7%
Capital
The Bank is required to meet certain minimum risk-based capital guidelines and
leverage ratios promulgated by the bank regulatory authorities. The risk based
capital standards establish capital requirements that are more sensitive to risk
differences between various assets, consider off balance sheet activities in
assessing capital adequacy, and minimize the disincentives to holding liquid,
low risk assets. The leverage ratio consists of tangible Tier 1 capital divided
by average total assets.
The adequately capitalized risk-based capital ratio required by the federal
regulators is 8.0 percent and the well capitalized ratio is 10.0 percent. The
Tier I capital to risk-weighted assets required by the federal regulators is 4.0
percent and 6.0 percent to be well-capitalized. At March 31, 1999 the Company
and the Bank had a risk based capital ratio of 17.0 percent, and a Tier 1
capital leverage ratio of 15.9 percent.
YEAR 2000 READINESS DISCLOSURE
The Company is well aware of the issues relating to the century date change and
the impact on computer systems and business operations. The Company started its
analysis of the problem in June 1997 when it sent letters to its vendors that
supplied computer services to the Company on the status of their Year 2000
plans. All the mission critical vendors were well on their way with plans to
make their products Year 2000 compliant. The Company then went on to develop
its own Year 2000 plan. The Company's Year 2000 Plan (the Plan) was submitted to
the Board of Directors for review in January 1998 and approved in February 1998.
The Plan includes the steps necessary for the Company to become year 2000
compliant, as well as, the steps to be taken to check that the major borrowers
and fund providers of the Company are also working to become compliant. The
Company's main computer processing is supplied by the Fiserv CBS Service Bureau,
who has notified the Company that its software has been modified to be year 2000
compliant and that it has been tested. The software is now fully operational
and had been in use since the fourth quarter of 1998.
The Company has tested its equipment and programs for compliance and has
completed the upgrade of all critical systems. These systems are now year 2000
compliant. The costs to the Company were both capital costs for the purchase of
new equipment and the expense for the maintenance and testing of computer
software. These costs totaled approximately $105,000 through March 31, 1999 and
the Company anticipates minimal costs during the remainder of 1999. The company
has prepared a contingency plan to be implemented, if needed, to minimize any
interruptions for our customers. This plan will be tested during the second
quarter of 1999.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On March 30, 1999, proxy materials for 1999 Annual Meeting of
Shareholders were mailed to all shareholders of record as of March 17, 1999.
The meeting took place on April 26, 1999. Shareholders were asked to vote on the
matters shown below. Of the total 3,826,819 shares outstanding and entitled to
vote 3,220,536 shares were represented either in person or by properly executed
proxies. The results of the voting on the matters are shown below:
Matter 1. Election of Directors. To elect seven (7) persons to the board
of directors to serve until the 2000 annual meeting of Shareholders and until
their successors are elected and have been qualified.
For Withhold Authority for
Robert J. Abernethy 3,208,484 12,052
Craig C. Collette 3,208,484 12,052
Frank Jobe, M.D. 3,195,484 25,052
C. Thomas Mallos 3,208,484 12,052
Robert Oltman 3,208,484 12,052
Ann Pappas 3,195,484 25,052
Nick Patsaouras 3,208,484 12,052
Matter 2. Other Business. There was none.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARATHON BANCORP
Date: May 12, 1999 Craig D. Collette
-------------------
Craig D. Collette
President and Chief Executive
Officer
Howard J. Stanke
------------------
Howard J. Stanke
Executive Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 4,581
<INT-BEARING-DEPOSITS> 41,168
<FED-FUNDS-SOLD> 3,640
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,477
<INVESTMENTS-CARRYING> 11,693
<INVESTMENTS-MARKET> 11,634
<LOANS> 46,479
<ALLOWANCE> 607
<TOTAL-ASSETS> 73,869
<DEPOSITS> 64,691
<SHORT-TERM> 0
<LIABILITIES-OTHER> 480
<LONG-TERM> 0
0
0
<COMMON> 13,646
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 73,869
<INTEREST-LOAN> 871
<INTEREST-INVEST> 251
<INTEREST-OTHER> 66
<INTEREST-TOTAL> 1,188
<INTEREST-DEPOSIT> 338
<INTEREST-EXPENSE> 338
<INTEREST-INCOME-NET> 850
<LOAN-LOSSES> 137
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 911
<INCOME-PRETAX> 57
<INCOME-PRE-EXTRAORDINARY> 57
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<NET-INCOME> 62
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
<YIELD-ACTUAL> 7.09
<LOANS-NON> 121
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<LOANS-TROUBLED> 0
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<ALLOWANCE-OPEN> 733
<CHARGE-OFFS> 137
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</TABLE>
