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, 1999
-------------------
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
-------
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 $5,763,000.
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 17, 2000. THE AMOUNT
IS $7,846,858. SOLELY FOR THE PURPOSE OF THIS CALCULATION, ALL DIRECTORS
AND OFFICERS ARE REGARDED AS AFFILIATES.
AS OF MARCH 17, 2000, THERE WERE 3,837,019 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.
COMMUNITY REINVESTMENT ACT
- ----------------------------
The Community Reinvestment Act of 1977 ("CRA") was enacted to encourage
every financial institution to help meet the credit needs of its entire
community, including low- and moderate-income neighborhoods, consistent with its
safe and sound operation. Under the CRA, the state and federal regulators are
required, in examining financial institutions and when considering applications
for approval of certain merger, acquisition and other transactions, to take into
account the institution's record in helping to meet the credit needs of its
entire community, including low- and moderate-income neighborhoods. In
reviewing an institution's CRA record for this purpose, state and federal
regulators will consider reports of regulatory examination, comments received
from interested members of the public, and the publicly available CRA statement.
The Bank has received a rating of satisfactory on its last regulatory
examination June 22, 1998.
INTERSTATE BANKING AND BRANCHING
Subject to reciprocal legislation and Superintendent approval, out-of-state
bank holding companies (since 1987) and banks (since 1991) have been able to
purchase or merge with California banks and bank holding companies. The
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 amends the
Bank Holding Company Act to authorize the Federal Reserve Board to approve,
subject to the financial condition of the acquiring bank holding company, a bank
holding company's acquisition of wither control, or the substantial assets, of a
bank located outside the home state of the bank holding company, regardless of
whether the acquisition would be prohibited by the law of the state in which the
target is located. Beginning June 1, 1997, responsible agencies may approve
mergers between insured banks with different home states regardless of whether
the transaction is whose home state has enacted a law expressly prohibiting
merger transactions with out-of-state banks. Additionally, banks may establish
and operate a de novo branch in any state that specifically opts to allow de
novo branching. As a result of the foregoing, the Bank faces increased
competition from larger institutions based outside of California.
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, 1999, that the Bank meets all capital
adequacy requirements to which it is subject. See Part II, Item 7, Note L for
the Bank's capital ratio requirements and current ratios.
MARATHON BANCORP: Marathon Bancorp is a registered bank holding company and
is subject to regulation under the BHC Act. The Company files quarterly and
annual reports with the FRB, as well as other information which the FRB may
require under the BHC Act. The FRB is empowered to conduct examinations of the
Company and its subsidiaries.
The FRB has the power to require the Company to terminate activities, and
to terminate control of or liquidate or divest certain subsidiaries or
affiliates when it believes that the activity or subsidiary or affiliate
constitutes a risk to the financial safety, soundness or stability of the
Company's banking subsidiaries. The FRB also has the authority to regulate
provisions of certain holding company debt, such as the authority to impose
interest rate ceilings and reserve requirements on such debt. The Company may,
under certain circumstances, be required to file written notice with and obtain
approval from the FRB prior to purchasing or redeeming its equity securities.
Under the BHC Act and regulations adopted by the FRB, bank holding
companies and their non-banking subsidiaries are prohibited from requiring
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services. Further, the Company is required by
the FRB to maintain certain levels of capital.
The Company must obtain approval from the FRB prior to acquiring more than
5% of the outstanding shares of any class of voting securities or substantially
all of the assets of any bank or bank holding company. The Company must also
obtain FRB approval prior to any merger or consolidation of the Company with
another bank holding Company.
The BHC Act prohibits the Company, except in particular circumstances, from
acquiring direct or indirect control of more than 5% of the outstanding voting
shares of any company that is not a bank or a bank holding company. The BHC Act
also generally prohibits the Company from engaging, either directly or
indirectly, in activities other than those of banking, managing or controlling
banks or furnishing related services. The Company may, however, subject to
obtaining prior approval from the FRB, engage in activities or acquire interests
in companies which engage in activities which are deemed by the Federal Reserve
Board to be so closely related to banking.
In addition to regulation and supervision by the FRB, the Company is
subject to the periodic reporting requirements with the Securities and Exchange
Commission under the Exchange Act, including but not limited to filing annual,
quarterly and other current reports with the Commission, and related substantive
and procedural requirements.
THE BANK: The Bank, as a national banking association chartered by the
Comptroller, is subject to primary supervision, examination and regulation by
the Comptroller. It is also a member of the Federal Reserve System and, as
such, is subject to applicable provisions of the Federal Reserve Act and
regulation by the FRB. The Bank is also subject to applicable provisions of
California law, insofar as they do not conflict with or are not preempted by
Federal banking law.
Deposits in the Bank are insured by the FDIC, which currently insures
deposits of each member bank to a maximum of $100,000 per depositor. For this
protection, the Bank and all other insured banks pays statutory assessments and
is subject to the rules and regulations of the FDIC.
Various requirements and restrictions affect the operations of the Bank,
including reserves against deposits, interest rates payable on deposits, loans,
investments, mergers and acquisitions, borrowings, dividends and locations of
branch offices. In addition, the Bank is required to maintain certain levels of
capital. Management seeks to maintain adequate capital to support its size and
credit risks, and to ensure that the Company and the Bank are within established
regulatory and industry standards.
As of December 31, 1999, 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, 1999, required reserves were approximately $466,000.
EMPLOYEES
- ---------
At December 31, 1999, the Company employed 35 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, 1999
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
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 $ 46,006 $ 3,882 8.4% $ 96 $ 57 $ 153
Other earning assets:
Interest bearing deposits with
financial institutions 0 0 0.0% 0 0 0
Investment Securities 19,324 1,104 5.7% 272 (7) 265
Fed funds sold & Securities
purchased under resale
agreements 5,574 280 5.0% (153) (21) (174)
--------- --------- -------- -------------------- ------ -------
Total interest earning assets $ 70,904 $ 5,266 7.4% $ 215 $ 29 $ 244
Non earning assets:
4,623
Cash & due from banks
Other assets 3,462
Allowance for loan loss (672)
---------
$ 78,317
Interest-bearing liabilities:
Deposits:
Demand $ 3,521 $ 33 0.9% $ (7) $ 0 $ (7)
Money market and savings 25,639 852 3.3% 106 72 178
Time certificate of deposit 12,292 590 4.8% (58) (44) (102)
Federal funds purchased - - - 0 1 1
Other interest bearing liabilities:
Mortgage indebtedness 20 1 5.0% - (1) (1)
--------- --------- -------- -------------------- ------ -------
Total interest-bearing liabilities $ 41,472 $ 1,476 3.6% $ 41 $ 28 $ 69
Noninterest-bearing liabilities
And shareholders equity
Noninterest-bearing demand 27,623
Other liabilities 343
Shareholders' equity 8,879
---------
$ 78,317
Net interest income $ 3,790
Net interest spread 3.8%
Net yield on earning assets 4.7%
</TABLE>
<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
financial institutions 0 0 0.0% (27) 0 (27)
Investment Securities 14,587 839 5.8% 337 (62) 275
Fed funds sold & Securities
purchased under resale
agreements 8,394 454 5.4% 31 (2) 29
--------- --------- -------- ------------------------ ------ -------
Total interest earning assets $ 67,830 $ 5,022 7.4% $ 202 $ 90 $ 292
Non earning assets:
4,118
Cash & due from banks
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>
INVESTMENT SECURITIES
- ----------------------
The following table shows the carrying amount of the portfolio of investment securities
at the end of each of the past two years:
<S> <C> <C> <C> <C>
Total Estimated
Amortized Gross Unrealized Market
YEAR END 1999 Cost Gains Losses Value
- -------------------------------------------
( in thousands)
Securities available for sale:
U.S. Government and Agency Securities $ 4,000 $ - $ (159) $ 3,841
Other 4,789 - (40) 4,749
---------- ----------------- -------- -------
Total $ 8,789 $ - $ (199) $ 8,590
Securities held to maturity:
U.S. Treasury Securities $ 503 $ - $ (4) $ 499
U.S. Government and Agency Securities 5,500 - (10) 4,488
Municipal Securities 4,965 - (167) 4,798
Mortgage-Backed Securities 1,910 - (43) 1,867
---------- ----------------- -------- -------
Total $ 12,878 $ - $ (339) $12,539
YEAR END 1998
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
Other 264 - (1) 263
---------- ----------------- -------- -------
Total $ 5,761 $ 3 $ (11) $ 5,763
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
</TABLE>
<TABLE>
<CAPTION>
<PAGE>
INVESTMENT SECURITIES - CONTINUED
- ------------------------------------
The following table shows the maturities of investment securities at December 31, 1999 and the weighted
average yields of those securities.
<S> <C> <C> <C> <C> <C> <C>
OVER 1
YEAR OVER 5 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. Government Agency
Securities $ - $ 3,841 $ - - $ 3,841 4.9%
Other 3,995 754 - - 4,749 6.1%
-------- -------- ------------- --------- ------------- --------
Total $ 3,995 $ 1,284 $ 3,551 $ - $ 8,590 5.6%
Securities held to maturity:
U.S. Treasury Securities $ 503 $ - $ - $ - $ 503 4.9%
U.S. Government Agency
Securities - 5,500 - - 5,500 - 5.8%
Mortgage-Backed Securities - 532 1,114 264 1,910 6.6%
Municipal Securities 653 4,312 - - 4,965 5.6%
-------- -------- ------------- --------- ------------- --------
Total $ 1,105 $ 10,344 $ 1,114 $ 264 $ 12,878 5.8%
</TABLE>
<TABLE>
<CAPTION>
LOAN PORTFOLIO
- ---------------
The following table sets forth the amount of loans outstanding at the end
of the past two years:
<S> <C> <C> <C> <C>
% OF % OF
(in Thousands) 1999 TOTAL 1998 TOTAL
-------- ------ -------- ------
Commercial Loans $18,922 38% $16,640 34%
Real Estate Loans:
Construction 6,395 13% 1,215 -
Real Estate Mortgage 24,132 48% 24,246 64%
-------- --------
Total real estate loans 30,527 25,461
Installment loans 591 1% 677 2%
-------- ------ -------- ------
50,040 100% 42,778 100%
Deferred net loan origination costs 62 214
Allowance for Loan Losses (853) (733)
-------- --------
Net Loans $49,249 $42,259
</TABLE>
The following table shows the amounts of commercial and real estate
construction loans outstanding at the end of the year 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>
( in thousands) 1999
-------
COMMERCIAL LOANS
Aggregate maturities of loan balances due:
In one year or less:
Interest rates are floating or adjustable $ 8,975
Interest rates are fixed or predetermined 931
After one year but within five years:
Interest rates are floating or adjustable 5,060
Interest rates are fixed or predetermined 2,074
After five years:
Interest rates are floating or adjustable 1,572
Interest rates are fixed or predetermined 310
-------
Total commercial loans $18,922
REAL ESTATE CONSTRUCTION LOANS
Aggregate maturities of loan balances due
In one year or less:
Interest rates are floating or adjustable $ 5,036
Interest rates are fixed or predetermined 380
After one year but within five years:
Interest rates are floating or adjustable 979
-------
Total commercial and construction loans $25,317
</TABLE>
RISK ELEMENTS - NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
- -------------------------------------------------------------------
Nonaccrual loans are those for which the Bank has discontinued accrual of
interest because there exists reasonable doubt as to the full and timely
collection of either principal or interest or such loans have become
contractually past due ninety days with respect to principal or interest. Under
certain circumstances, interest accruals are continued on loans past due ninety
days which, in management's judgment, are considered to be well secured and
fully collectible as to both principal and interest. When a loan is placed in
nonaccrual status, all interest previously accrued but uncollected is reversed
against current period income. Income on such loans is then recognized only to
the extent that cash is received and where the future collection of principal is
probable. Accrual of interest is resumed only when principal and interest are
brought fully current and when, in management's judgment, such loans are
estimated to be collectible as to both principal and interest.
Restructured commercial loans are those for which the Bank has, for reasons
related to borrowers' financial difficulties, granted concessions to borrowers
(including reductions of either interest or principal) that it would not
otherwise consider, whether or not such loans are secured or guaranteed by
others. Loan restructurings involving only a modification of terms are
accounted for prospectively from the time of restructuring. Accordingly, no
gain or loss is recorded at the time of such restructurings unless the recorded
investment in such loans exceeds the total future cash receipts specified by the
new loan terms.
At December 31, 1999, loans on nonaccrual totaled $3,000, compared with
$258,000 at year-end 1998. The reduction in interest income associated with
nonaccrual loans was approximately $3,000 during 1999, and $15,000 during 1998.
At December 31, 1999 no loans were past due 90 days or more and still accruing
interest compared to $1,000 at year-end 1998. At December 31, 1998, the Bank
had recorded as specific reserves for its impaired loans $84,000, in the
allowance for loan losses and had no specific reserves in 1999. In addition,
the Bank classified $2,318,000 and $1,990,000, respectively, of its loans
without a specific reserve. The average recorded investment of impaired loans
during the year ended December 31, 1999 and 1998 was approximately $39,000 and
$242,000 respectively. Interest income of $12,000 was recognized on impaired
loans during the year ended December 31, 1998 and no interest income was
recognized on impaired loans in 1999. There were no restructured loans at
December 31, 1998 or 1999. There were no loans at December 31, 1999 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, 1999, 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, 1999 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>
The following table summarizes the changes in the allowance for loan losses
arising from loan losses, recoveries on loans previously charged off and
provisions for loan losses charged to operating expense.
<TABLE>
<CAPTION>
<S> <C> <C>
LOAN CHARGE-OFFS AND RECOVERIES
(in thousands) 1999 1998
-------- --------
Balance of allowance for loan losses at beginning of year $ 733 $ 747
Loans charged off:
Commercial (169) (113)
Real estate - ( 54)
Installment ( 20) ( 27)
-------- --------
Total loans charged off (189) (194)
Recoveries of loans previously charged off:
Commercial 307 115
Real estate - -
Installment 2 9
-------- --------
Total loan recoveries 309 124
-------- --------
Net loans charged off 120 ( 70)
Provision charged to operating expense - 56
-------- --------
Balance of allowance for loan losses at end of year $ 853 $ 733
1999 1998
-------- --------
Amount of loans outstanding at end of the year $50,102 $42,992
Average amount of loans outstanding $46,006 $44,849
Ratio of net charge-offs to average loans outstanding -0.26% 0.16%
Ratio of allowance for loan losses at the end of the
year to average loans outstanding 1.85% 1.63%
Ratio of allowance for loan losses at the end of the
year to loans outstanding at the end of the year 1.70% 1.70%
</TABLE>
The following table sets forth the Company's allocation of the allowance
for loan losses to specific loan categories at the end of the past two years.
The allocations are based upon the same factors as considered by management in
determining the amount of additional provisions to the allowance for loan losses
and the aggregate level of the allowance.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES December 31,
--------------------------------------------------------------------
1999 1998
-------------------------------- ----------------------------------
PERCENT OF LOANS PERCENT OF LOANS
ALLOWANCE FOR IN EACH CATEGORY ALLOWANCE FOR IN EACH CATEGORY
( in thousands) LOAN LOSSES TO TOTAL LOANS LOAN LOSSES TO TOTAL LOANS
-------------- ----------------- -------------- -----------------
Commercial loans $ 349 38% $ 552 39%
Real estate loans:
Construction 99 13% - 3%
Mortgage 369 48% 127 57%
Installment/Consumer loans 36 1% 54 1%
-------------- ----------------- -------------- -----------------
Total allowance for loan losses $ 853 100% $ 733 100%
</TABLE>
The allowance for loan losses should not be interpreted as an indication
that future charge-offs will occur in these amounts or proportions, or that the
allocation indicates future charge-off trends. Furthermore, the portion
allocated to each loan category is not the total amount available for future
losses that might occur within such categories, since even on the above basis
there is an unallocated portion of the allowance and the total allowance is a
general reserve applicable to the entire portfolio.
<PAGE>
Although management believes the level of the allowance for loan losses as
of December 31, 1999, 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>
<S> <C> <C> <C> <C>
1999 1998
-------------------------- -------------------------
DEPOSITS AVERAGE AVERAGE AVERAGE AVERAGE
(in thousands) BALANCE RATE BALANCE RATE
---------------- -------- ---------------- --------
Demand, non-interest-bearing $ 27,623 $ 25,629
Demand, interest bearing 3,521 0.9% 4,209 1.0%
Money market and savings 25,639 3.3% 22,163 3.0%
Time certificates of deposit 12,292 4.8% 13,419 5.2%
---------------- ----------------
Total Deposits $ 69,075 $ 65,420
</TABLE>
The following is a maturity schedule of time certificates of deposit of
$100,000 or more at the end of the past two years:
<TABLE>
<CAPTION>
TIME CERTIFICATES OF DEPOSIT
December 31,
<S> <C> <C>
(in thousands) 1999 1998
------- ------
Three months or less $ 7,046 $5,464
Over three months through six months 1,904 813
Over six months through twelve months 1,124 1,116
Over twelve months 509 990
------- ------
Total $10,583 $8,383
</TABLE>
The Bank had no brokered deposits at December 31, 1999 and 1998.
<PAGE>
SELECTED FINANCIAL RATIOS
- ---------------------------
The following table sets forth the ratios of net loss to average assets and to
average shareholders' equity, and the ratio of average shareholders' equity to
average assets.
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
Return on average assets 0.82% 0.60%
Return on average shareholders' equity 7.3% 5.3%
Average shareholders' equity to average assets 11.3% 11.2%
Shareholders' equity to total assets at year end 10.7% 11.6%
</TABLE>
ITEM 2. PROPERTIES
- --------------------
The Bank leases 14,900 square feet of office space and 5,600 square feet of
retail banking space at 11150 West Olympic Boulevard, Los Angeles, California
under a noncancelable operating lease, which expires on August 31, 2002. The
lease provides for annual rental payments of approximately $610,000 during 2000
- - 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
1999.
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, 1999 and 1998 ranged
as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
By Quarter 1st 2nd 3rd 4th-1999 1st 2nd 3rd 4th-1998
- ---------- --- ----- ----- -------- ----- ------ ----- --------
Price
High 3 3 3 3 1/8 4 7/8 4 7/64 3 55/64 3 7/64
Low 2 5/8 2 7/8 2 5/8 2 7/8 3 5/8 3 1/2 2 43/64 2 1/2
</TABLE>
Principal market makers at December 31, 1999:
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, 1999 there were approximately 283 holders of record of the
Company's common shares.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ---------------------------------------------------------------------------
AND RESULTS OF OPERATIONS
- ----------------------------
Forward-looking statements (defined in the Private Securities Litigation
Reform Act of 1995) are contained in the discussion that follows. These
forward-looking statements may involve significant risks and
uncertainties. Although management believes that the expectations reflected in
such forward-looking statements are reasonable, actual results may differ
materially from the results discussed in these forward-looking statements.
The following financial discussion should be read with the accompanying
consolidated financial statements and notes thereto.
FINANCIAL HIGHLIGHTS OVERVIEW
The Company continued to grow and improve performance throughout 1999. We
ended the year with net income of $645,000 up 45% from 1998 with the per share
earnings improving to $0.17 versus $0.12 in 1998. Deposits increased $6,337,000
or 10% from yearend 1998 while loans increased $7,110,000 or 17%. Total assets
continued to grow to $83,119,000 a 12% increase.
As we continue to focus on our goals we are maintaining our quality in both
the loan and investment portfolios. At year end, the Company had no other real
estate owned, one loan of $3,000 on nonaccrual and loans past-due over 30 days
of only $225,000. Our regulatory capital ratios remain excellent and the rating
agencies Veribanc and Bauer Financial have given us their highest quality
ratings.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income has been and continues to be the main component of
total earnings. Interest rates after declining throughout 1998 and hitting
their lows in January of 1999 started to rise slowly in the first half of 1999
and continued to increase at a faster pace in the second half of the year. This
rise in rates was dictated by the Federal Reserve Board, which moved the target
rate for fed funds up .75%. Our interest rate margin for the year averaged 5.3%
equal to the 5.3% recorded in 1998. The majority of our investment portfolio
was purchased during the fourth quarter of 1998 and the first quarter of 1999
when loan growth was weak, and this accounted for the investment yields not
increasing while the overall bond market yields increased. Loan volume
increased during the later part of 1999. This was funded by a decrease in
short-term assets and an increase in deposits, which improved our margin. Net
interest income for the first quarter of 1999 was $850,000 and increased to
$1,106,000 for the fourth quarter of the year while in 1998 net interest income
was approximately $885,000 per quarter.
Rates have continued to increase in the beginning of 2000 and it currently
is the market consensus that the Federal Reserve Board will increase rates
further in the second quarter to slow the economy. This Federal Reserve Board
action should help us increase the net interest income if we are able to keep
our noninterest bearing deposits growing. This strategy has been difficult with
the disintermediation of deposits into the non-deposit mutual fund market. If
we are not able to continue the growth of noninterest bearing deposits, then
higher funding costs will occur effecting the margin.
NONINTEREST INCOME
Noninterest income increased by 13%, or $56,000 during 1999 after a
decrease in 1998. An increase in service charges on deposit accounts accounted
for most of the gain. Business account service charges were up
17%, overdraft charges 8% and cash management fees increased 40%. With the
focus as a wholesale commercial bank we do not generate the fee income that a
consumer based institution does but we continue to look for ways to increase
noninterest income.
Other noninterest income was generated from noninterest related loan
charges, service charges for legal research, merchant bankcard discount and
other miscellaneous charges and income. Noninterest related loan charges come
from bankcard interchange fees, construction loan funds control fees and letter
of credit fees.
NONINTEREST EXPENSE
Noninterest related expenses increased in 1999 after two years of declines.
Now that the Company is growing again additional staff expenses and other
expenses have been generated to support our plan to increase assets. Employee
related expenses grew from the addition of a loan production office and a
construction loan department. Also, the bank reassessed and lowered the salary
costs associated to loan production, per FASB 91 (Financial Accounting Standards
Board) accounting rules, which reduced the credits applied to employee costs by
$93,000 in 1999.
Insurance and regulatory assessments were reduced by $133,000 a 51%
decrease from 1998 and a 67% decrease from the fees paid in 1997. Legal fees
declined $88,000 or 44% from 1998 and $200,000 or 64% from 1997. Losses and
costs from the expenses associated with holding and maintaining other real
estate were eliminated during 1999 with the bank holding none on its books at
any time during the year. There were approximately $20,000 in directly related
Y2K expenses incurred in 1999 and additional costs in depreciation for the
additional computer upgrades caused by Y2K.
There were no problems found during century date change and we do not
anticipate any expenses relating to Y2K in 2000.
CREDIT RISK MANAGEMENT
Credit risk is an intrinsic part of commercial banking and losses will be
experienced and that the amount of such losses will vary from time to time, and
will be affected by economic conditions and the financial management abilities
of borrowers. The Company has credit policies designed to manage and regulate
credit risk and to minimize the level of losses incurred.
These credit 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 $3,000 at December 31, 1999 versus $259,000 at
year-end 1998. Loans classified by the Bank as doubtful or substandard at
year-end 1999 equaled $2,318,000 versus $1,990,000 at year-end 1998.
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.
For 1999 the Company also took into consideration the effect of the year 2000 on
our borrowers.
Based on our assessment of the quality of the loan portfolio, taking into
consideration the other factors previously discussed and the fact that the
reserve for credit losses had increased from recoveries there was no provision
to the loan loss reserve. This compares to a $56,000 provision in 1998 and
$301,000 provided during 1997. Loans totaling $189,000 were charged off during
the year, and $309,000 was recovered increasing the reserve for credit losses to
$853,000. The reserve at December 31, 1999 was 1.7% of gross loans compared to
1.6% of gross loans outstanding at December 31, 1998.
ASSETS AND LIABILITIES
This was a year of asset and deposit growth for our Company. Assets
increased to $83,119,000 12% higher than yearend 1998. The largest component of
this increase was the increase in total loans that grew 17% to $50,102,000.
Loan demand improved in the second half of the year with the opening of a real
estate construction lending department in May and the opening of our loan
production office in Woodland Hills, California in October. Cash and due from
banks was high on the last day of the year because we kept additional funds at
our correspondents for any Y2K needs. Cash and due from banks averaged
$4,623,000 for the year. We joined the Federal Home Loan Bank during 1999 in
order to give ourselves an additional source of liquidity both ongoing and for
Y2K purposes. The investment portfolio was increased early in the year but few
investments were made during the second half of the year when loan demand
increased.
The increase in assets was funded through deposit growth and an advance at
yearend from the Federal Home Loan Bank. The advance was used for short-term
liquidity and was paid back in mid January 2000. Total deposits increased
$6,337,000 or 10% over December 31, 1998. The deposit increase was split fairly
evenly between noninterest bearing and interest bearing deposits.
Our goal in 2000 is to keep trying to generate noninterest-bearing deposits
but with the equity markets and bond markets strong it is hard to increase
demand deposits. We will probably have to increase our dependence on time
certificates of deposit that could increase our overall cost of funds.
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 $23
million or 31% 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 2000, 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.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY
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 $ - $ 7,075 $ 180 $ 1,816 $12,349 $ 346
Fed funds sold 1,000 - - - - -
Cash value life insurance - 1,559 - - - -
Loans 21,162 7,575 3,851 10,781 7,112 624
- ------------------------- ------- ------- ------- ------- ------- -------
TOTAL EARNING ASSETS $22,162 $16,209 $ 4,031 $12,597 $19,461 $ 970
Sources:
Savings - 265 - - 529 265
Checking with interest - 625 - - 2,500 -
Money market - 16,895 - - 5,263 2,732
Time CD's - 8,589 3,236 2,410 712 -
Demand deposits - - - - - 27,529
- ------------------------- ------- ------- ------- ------- ------- -------
TOTAL SOURCES $ - $26,374 $ 3,236 $ 2,410 $ 9,004 $30,526
Cumulative Gap $22,162 $11,997 $12,792 $22,979 $33,436 $ 3,880
Gap as a percent of total
earning assets 29.4 15.9 16.7 30.5 44.3 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.
The statement of cash flows shows the Company generated cash from operating
activities of $848,000 and $8,236,000 was from financing activities. The cash
generated was used mainly to fund the increased loan portfolio and the net
change in cash and cash equivalents was ($358,000) for the year. Liquidity
remains adequate for the Company's needs and gives the Company the ability
to deal with any deposit
fluctuations as well as providing funds for increasing the loan portfolio. The
Bank has available lines of credit to purchase fed funds with two correspondent
banks, the ability to borrow at both the Federal Reserve Bank and Federal Home
Loan Bank and a reverse repurchase agreement with a major investment bank has
been arranged to supplement liquidity if needed.
CAPITAL
The federal banking agencies require a minimum ratio of qualifying total
capital to risk-adjusted assets of 8% and minimum ratio of Tier I capital to
risk-adjusted assets of 4%. In addition to the risk based guidelines, federal
banking regulators require banking organizations to maintain a minimum amount of
Tier I capital to total assets, referred to as the leverage ratio. The Company
and bank meet all regulatory guidelines and the bank is considered "well
capitalized" under the regulations.
The Company increased capital to $9,136,000 at yearend 1999. The capital
was increased from the retained earnings generated and no dividends were paid.
The bank 's total capital risk-based capital to asset ratio at yearend was 15.3%
and the Tier I leverage ratio was 10.9%. A further analysis of the capital
position is covered in Note L.
YEAR 2000
The Bank finished the renovation, validation, implementation and testing
phases of its Y2K plan prior to year-end 1999. Testing was also done for the
significant dates both before and after January 1, 2000, not just for the
millennium date change. The Company spent approximately $115,000 towards the
Y2K project and we had no Y2K related problems at the turn of the century. We
have also checked with our major customers and have not been told of any
significant problems that would put the Company at risk. We will continue to
monitor the critical dates in 2000 to insure that there are systems are working
correctly.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
December 31,
<S> <C>
ASSETS 1999
------------------
Cash and Due From Banks $ 7,891,000
Federal Funds Sold 1,000,000
------------------
TOTAL CASH AND CASH EQUIVALENTS 8,991,000
Interest-Bearing Deposits With Financial Institutions 100,000
Investment Securities:
Securities Available for Sale 8,590,000
Securities Held to Maturity 12,878,000
------------------
TOTAL INVESTMENT SECURITIES 21,468,000
Federal Home Loan and Federal Reserve Bank stock, at cost 482,000
Loans 50,102,000
Less Allowance for Credit Losses ( 853,000)
------------------
NET LOANS 49,249,000
Premises and Equipment 325,000
Cash Surrender Value of Life Insurance 1,559,000
Accrued Interest and Other Assets 1,045,000
------------------
TOTAL ASSETS $ 83,119,000
==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-Bearing Demand $ 27,529,000
Interest-Bearing Demand 3,130,000
Money Market and Savings 25,848,000
Time Deposits Under $100,000 4,465,000
Time Deposits $100,000 and Over 10,583,000
------------------
TOTAL DEPOSITS 71,555,000
Accrued Interest and Other Liabilities 553,000
Federal Home Loan Bank Advance 1,875,000
------------------
TOTAL LIABILITIES 73,983,000
Commitments and Contingencies - Note I
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,
3,830,019 Shares Issued and Outstanding at December 1999 13,654,000
Accumulated Deficit ( 4,319,000)
Accumulated Other Comprehensive Income - Net Unrealized
Gains (Losses) on Available-for-Sale Securities ( 199,000)
------------------
TOTAL SHAREHOLDERS' EQUITY 9,136,000
------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 83,119,000
==================
</TABLE>
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C>
1999 1998
-------------- --------------
INTEREST INCOME
Interest and Fees on Loans $ 3,882,000 $ 3,729,000
Interest on Investment Securities - Taxable 1,104,000 839,000
Other Interest Income 280,000 454,000
-------------- --------------
TOTAL INTEREST INCOME 5,266,000 5,022,000
INTEREST EXPENSE
Interest on Demand Deposits 33,000 40,000
Interest on Money Market and Savings 852,000 674,000
Interest on Time Deposits 590,000 692,000
Other Interest Expense 1,000 1,000
-------------- --------------
TOTAL INTEREST EXPENSE 1,476,000 1,407,000
-------------- --------------
NET INTEREST INCOME 3,790,000 3,615,000
Provision for Credit Losses - 56,000
-------------- --------------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 3,790,000 3,559,000
-------------- --------------
NONINTEREST INCOME
Service Charges and Fees on Deposits 278,000 236,000
Gain on Sale of Other Real Estate Owned - -
Dividends on Cash Surrender Value of Life Insurance 75,000 67,000
Other Noninterest Income 144,000 138,000
-------------- --------------
TOTAL NONINTEREST INCOME 497,000 441,000
-------------- --------------
NONINTEREST EXPENSE
Salaries and Employee Benefits 1,810,000 1,556,000
Occupancy Expenses 539,000 537,000
Furniture and Equipment 114,000 120,000
Professional Services 139,000 105,000
Business Promotion 66,000 70,000
Stationery and Supplies 57,000 65,000
Data Processing Services 477,000 435,000
Messenger and Courier Services 72,000 86,000
Insurance and Assessments 126,000 259,000
Legal Fees and Costs 112,000 200,000
Provision for OREO Losses - -
Loss on Sale of Other Real Estate Owned - 30,000
Net Operating Cost of Other Real Estate Owned - 22,000
Other Expenses 291,000 267,000
-------------- --------------
TOTAL NONINTEREST EXPENSE 3,803,000 3,752,000
-------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES 484,000 248,000
Income Taxes (Benefit) ( 161,000) ( 197,000)
-------------- --------------
NET INCOME (LOSS) $ 645,000 $ 445,000
============== ==============
Per Share Data:
Net Income (Loss) - Basic $ 0.17 $ 0.12
Net Income (Loss) - Diluted $ 0.17 $ 0.12
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-------------------------
<S> <C> <C>
1999 1998
-------------- ---------------
OPERATING ACTIVITIES
Net Income (Loss) $ 645,000 $ 445,000
Adjustments to Reconcile Net Loss to Net Cash Provided
(Used) by Operating Activities:
Depreciation and Amortization 136,000 144,000
Provision for Credit Losses - 56,000
Provision for OREO Losses - -
Loss (Gain) on Sale of Other Real Estate Owned - 30,000
Net Amortization of Premiums and Discounts
on Investment Securities 12,000 ( 24,000)
Net Change in Deferred Loan Origination Fees 152,000 ( 3,000)
Net Increase in Cash Surrender Value of Life Insurance ( 64,000) ( 58,000)
Net Change in Accrued Interest, Other Assets
and Other Liabilities ( 33,000) 84,000
-------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 848,000 674,000
INVESTING ACTIVITIES
Net Change in Interest-Bearing Deposits with Financial Institutions ( 100,000) -
Purchases of Available-for-Sale Securities ( 8,464,000) ( 9,217,000)
Purchases of Held-to-Maturity Securities ( 3,801,000) (15,135,000)
Proceeds from Maturities of Available-for-Sale Securities 4,500,000 8,508,000
Proceeds from Maturities of Held-to-Maturity Securities 5,138,000 9,961,000
Proceeds from Sale of Available-for-Sale Securities 991,000 -
Purchase of Federal Home Loan & Federal Reserve Bank Stock ( 234,000) -
Net Change in Loans ( 7,142,000) 4,172,000
Proceeds from Sale of Other Real Estate Owned - 762,000
Purchase of Life Insurance ( 215,000) ( 1,222,000)
Purchases of Premises and Equipment ( 115,000) ( 74,000)
-------------- ---------------
NET CASH USED BY INVESTING ACTIVITIES (9,442,000) ( 2,245,000)
FINANCING ACTIVITIES
Net Change in Demand Deposits, Money Market and Savings 4,617,000 ( 7,854,000)
Net Change in Time Deposits 1,720,000 2,624,000
Federal Home Loan Bank Advance 1,875,000 -
Proceeds from Exercise of Stock Options 24,000 23,000
Proceeds from Issuance of Common shares - -
-------------- ---------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 8,236,000 ( 5,207,000)
-------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ( 358,000) ( 6,778,000)
Cash and Cash Equivalents at Beginning of Year 9,249,000 16,027,000
-------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,891,000 $ 9,249,000
============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest Paid $ 1,483,000 $ 1,386,000
Income Taxes Paid $ 2,000 $ 3,000
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
<S> <C> <C> <C> <C> <C> <C>
Accumulated
Other
Common Shares Comprehensive Accumulated Comprehensive
Shares Amount Income Deficit Income Total
------------- ----------- ---------------- -------------- --------------- -------------
BALANCE, JANUARY 1, 1998 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
Exercise of Stock Options 9,200 24,000 24,000
COMPREHENSIVE INCOME:
Net Income $ 645,000 645,000 645,000
Net Change in Unrealized
Gain (Loss) on Available-
for-Sale Securities ( 191,000) ( 191,000) ( 191,000)
----------------
TOTAL COMPREHENSIVE INCOME $ 454,000
================
BALANCE, DECEMBER 31, 1999 3,830,019 $13,654,000 $( 4,319,000) $ ( 199,000) $ 9,136,000
============= =========== ============== =============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- -----------------------
The accounting and reporting policies of Marathon Bancorp (the Company) and its
wholly owned subsidiary, Marathon National Bank (the Bank), are in accordance
with generally accepted accounting principles and conform to practices within
the banking industry.
Principles of Consolidation
- -----------------------------
The consolidated financial statements include the accounts of the Company and
the Bank, after elimination of all material intercompany transactions and
balances.
Nature of Operations
- ----------------------
The Bank has been organized as a single reporting segment and operates a branch
office and corporate headquarters located in the west side of the City of Los
Angeles. 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 Cash Equivalents
- ----------------------------
For purposes of reporting cash flows, cash and cash equivalents include cash,
due from banks and federal funds sold. Generally, federal funds are sold for
one day periods.
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
Bank complied with the reserve requirements as of December 31, 1999.
The Bank 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>
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 (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 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.
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Premises and Equipment
- ------------------------
Premises and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives, which range from three to ten years for furniture and
fixtures. Leasehold improvements are amortized using the straight-line method
over the estimated useful lives of the improvements or the remaining lease term,
whichever is shorter. Expenditures for betterment or major repairs are
capitalized and those for ordinary repairs and maintenance are charged to
operations as incurred.
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.
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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
- -------------------------
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 ("APB") 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 J.
Comprehensive Income
- ---------------------
Beginning in 1998, the Bank adopted SFAS No. 130, "Reporting Comprehensive
Income", which requires the disclosure of comprehensive income and its
components. Changes in unrealized gains (losses) on available-for-sale
securities net of income taxes is the only component of accumulated other
comprehensive income for the Bank.
Current Accounting Pronouncements
- -----------------------------------
In June 1998, the FASB issued SFAS No. 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 was originally effective for 2000. In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133". This statement
establishes the effective date of SFAS No. 133 for 2001 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>
NOTE B - INVESTMENT SECURITIES
<TABLE>
<CAPTION>
The following is a summary of data for the major categories of securities as of December 31, 1999:
<S> <C> <C> <C> <C>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ---------------- -----------
AVAILABLE-FOR-SALE SECURITIES:
DECEMBER 31, 1999:
U.S. Government and Agency Securities $ 4,000,000 $ - $ ( 159,000) $ 3,841,000
Other 4,789,000 - ( 40,000) 4,749,000
----------- ----------- ---------------- -----------
$ 8,789,000 $ - $ ( 199,000) $ 8,590,000
=========== =========== ================ ===========
HELD-TO-MATURITY SECURITIES:
DECEMBER 31, 1999:
U. S. Treasury Securities $ 503,000 $ - $( 4,000) $ 499,000
U.S. Government and Agency Securities 5,500,000 - ( 125,000) 5,375,000
Municipal Securities 4,965,000 - ( 167,000) 4,798,000
Mortgage-Backed Securities 1,910,000 - ( 43,000) 1,867,000
----------- ----------- ---------------- -----------
$12,878,000 $ - $ ( 339,000) $12,539,000
=========== =========== ================ ===========
</TABLE>
NOTE B - INVESTMENT SECURITIES - CONTINUED
Investment securities carried at approximately $2,900,000 at December 31, 1999
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.
Gross realized loss on sale of available-for-sale securities was $9,000 during
1999. There were no sales of securities in 1998.
<TABLE>
<CAPTION>
The scheduled maturities of securities held to maturity and securities available
for sale at December 31, 1999, were as follows:
Available-for-Sale Securities: Held-to-Maturity Securities:
------------------------------ ----------------------------
<S> <C> <C> <C> <C>
Amortized Amortized
Cost Fair Value Cost Fair Value
---------- ----------- ----------- -----------
Due in One Year or Less $3,995,000 $ 3,995,000 $ 1,156,000 $ 1,149,000
Due From One Year to Five Years 4,794,000 4,595,000 9,812,000 9,523,000
Mortgage-Backed Securities - - 1,910,000 1,867,000
---------- ----------- ----------- -----------
$8,789,000 $ 8,590,000 $12,878,000 $12,539,000
========== =========== =========== ===========
</TABLE>
NOTE C - LOANS
The Bank's loan portfolio consists primarily of loans to borrowers within the
Los Angeles Area of Southern California. Although the Bank seeks to avoid
concentrations of loans to a single industry or based upon a single class of
collateral, real estate and real estate associated businesses are among the
principal industries in the Bank's market area and, as a result, the Bank's loan
and collateral portfolios are to some degree concentrated in those industries.
<PAGE>
NOTE C - LOANS - CONTINUED
<TABLE>
<CAPTION>
The following is a summary of the components of loans at December 31, 1999:
<S> <C>
1999
-----------
Commercial Loans $18,922,000
Real Estate - Construction 6,395,000
Real Estate - Other 24,132,000
Consumer 591,000
-----------
50,040,000
Net Deferred Loan Costs 62,000
-----------
$50,102,000
===========
</TABLE>
<TABLE>
<CAPTION>
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:
<S> <C> <C>
1998 1999
-------- -------
Recorded Investment in Impaired Loans $258,000 $ -
======== =======
Related Allowance for Credit Losses $ 84,000 $ -
======== =======
Average Recorded Investment in Impaired Loans $242,000 $39,000
======== =======
Interest Income Recognized from Cash Payments $ 12,000 $ -
======== =======
</TABLE>
Loans having carrying value of $977,000 were transferred to other real estate
owned in 1998. During 1998 loans totaling $1,434,000 were made to facilitate
the sale of other real estate owned. During 1999, no loans were transferred to
other real estate owned.
<TABLE>
<CAPTION>
A summary of changes in the allowance for credit losses follows:
<S> <C> <C>
1999 1998
---------- ----------
Balance, January 1 $ 733,000 $ 747,000
Provision for Loan Losses - 56,000
Loans Charged Off (189,000) (194,000)
Recoveries 309,000 124,000
---------- ----------
Balance, December 31 $ 853,000 $ 733,000
========== ==========
</TABLE>
NOTE D - PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
The following is a summary of the major components of premises and equipment at
December 31, 1999:
<S> <C>
1999
-------------
Furniture, Fixtures and Equipment $ 1,435,000
Leasehold Improvements 480,000
-------------
1,915,000
Less Accumulated Depreciation and Amortization ( 1,590,000)
-------------
$ 325,000
=============
</TABLE>
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, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 613,000
2001 608,000
2002 396,000
----------
$1,617,000
==========
</TABLE>
Rent expense was $528,000 and $523,000, for the years ended December 31, 1999
and 1998, respectively. Sublease rental income was $99,000 and $92,000 in 1999
and 1998, respectively.
NOTE E - DEPOSITS
<TABLE>
<CAPTION>
At December 31, 1999, the scheduled maturities of certificates of deposit are as
follows:
<S> <C>
2000 $14,336,000
2001 through 2002 712,000
-----------
$15,048,000
===========
</TABLE>
NOTE F - FEDERAL HOME LOAN BANK ADVANCE
At December 31, 1999, the Bank had a $1,875,000 advance from the Federal Home
Loan Bank with no stated maturity and a current interest rate of 4.96%. The
advance is secured by investment securities.
NOTE G - INCOME TAXES
The income tax provision (benefit) for the years ended December 31, 1999 and
1998 is comprised of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
----------- -----------
Current Taxes:
Federal $ 9,000 $ -
State 3,000 3,000
----------- -----------
12,000 3,000
Deferred 175,000 239,000
Net Change in Valuation Allowance (348,000) (439,000)
----------- -----------
$( 161,000) $( 197,000)
=========== ===========
</TABLE>
For federal income tax purposes, the Company has net operating loss
carryforwards of approximately $3,672,000 which expire in 2008 - 2018. For
state income tax purposes, the Company has incurred net operating loss
carryforwards of approximately $1,508,000, which expire in 2000 - 2003, to
offset future taxes payable, adjusted for the fifty percent reduction, as
required by state tax law. During 1999 and 1998, state net operating loss
carryforwards of approximately $109,000 and $1,967,000 expired, respectively.
<TABLE>
<CAPTION>
At December 31, 1999, the components of the net deferred tax asset are comprised
of the following:
<S> <C>
1999
----------------
Deferred Tax Assets:
Allowance for Credit Losses Due to Tax Limitations $ 343,000
Net Operating Loss and Tax Credit Carryforwards 1,503,000
Premises and Equipment Due to Depreciation Difference 90,000
Other Assets/Liabilities 60,000
----------------
1,996,000
Valuation Allowance ( 1,598,000)
Deferred Tax Liabilities:
Other Assets/Liabilities ( 25,000)
----------------
( 25,000)
----------------
Net Deferred Assets $ 373,000
================
</TABLE>
<PAGE>
NOTE G - INCOME TAXES - CONTINUED
The principal reasons for the difference between the federal statutory income
tax rate of 34% in 1999 and 1998 and income tax expense (benefit) for the years
ended December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
-------------- --------------
Tax Expense (Benefit) at Statutory Rate $ 164,000 $ 84,000
State Franchise Tax Net of Federal Tax Benefit 31,000 14,000
Reduction of Valuation Allowance ( 348,000) ( 439,000)
Expired State Net Operating Losses 4,000 141,000
Other, Net ( 12,000) 3,000
-------------- --------------
Tax Expense (Benefit) $ ( 161,000) $( 197,000)
============== ==============
</TABLE>
NOTE H - EARNINGS PER SHARE (EPS)
The following is a reconciliation of net income (loss) and shares outstanding to
the income (loss) and number of share used to compute EPS:
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
<S> <C> <C> <C> <C>
Income Shares Income Shares
-------- --------- -------- ---------
Net Income (Loss) as Reported $645,000 $445,000
Weighted Average Shares
Outstanding During the Year 3,826,668 3,817,498
--------- ---------
USED IN BASIC EPS 645,000 3,826,668 445,000 3,817,498
Dilutive Effect of Outstanding
Stock Options - - - -
-------- --------- -------- ---------
USED IN DILUTIVE EPS $645,000 3,826,668 $445,000 3,817,498
======== ========= ======== =========
</TABLE>
The impact of stock options has been excluded from the computation of diluted
EPS since their effect would be anti-dilutive.
<PAGE>
NOTE I - COMMITMENTS AND CONTINGENCIES
The Company and the Bank are subject to pending or threatened legal actions that
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, 1999.
<TABLE>
<CAPTION>
<S> <C>
1999
-----------
Commitments to Extend Credit $17,161,000
Letters of Credit 451,000
-----------
$17,612,000
===========
</TABLE>
Commitments to extend credit are agreements to lend a customer as long as there
is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
The Bank uses the same credit policies in making off balance sheet commitments
and conditional obligations as it does for balance sheet instruments. The Bank
evaluated each customer's creditworthiness on a case by case basis. The amount
of collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation. The collateral held varies,
but may include accounts receivable, inventory, property, plant and equipment,
and income producing commercial and residential properties.
<PAGE>
NOTE J - 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
-----------------
1999 1998
----------- -----------------
Options Outstanding, January 1 408,956 128,030
Granted at Option Prices of:
$3.75 in 1999 83,500 -
$3.75 in 1998 - 325,610
$3.09 in 1997 - -
Exercised ( 9,200) ( 9,000)
Canceled ( 6,360) ( 35,684)
----------- -----------------
Options Outstanding, December 31 476,896 408,956
=========== =================
</TABLE>
At December 31, 1999 the weighted average exercise price was $3.63, the weighted
average remaining contractual life was 8.3 years, and 108,235 options were
exercisable at a weighted average price of $4.05.
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used: no dividend yield; risk-free rates of 5.00% for 1999 and 4.5%
for 1998; volatility of 31% for 1999 and 37% for 1998; and expected lives of
ten years. The estimated fair value of options granted during 1999 and 1998
were $1.78 and $2.12 per share, respectively.
<PAGE>
NOTE J - 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, 1999 and 1998 would have been changed to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
-------- --------
Net Income (Loss) to Common Shareholders:
As Reported $645,000 $445,000
Pro Forma $499,000 $322,000
Per Share Data:
Net Income (Loss) - Basic
As Reported $ 0.17 $ 0.12
Pro Forma $ 0.13 $ 0.08
Net Income (Loss) - Diluted
As Reported $ 0.17 $ 0.12
Pro Forma $ 0.13 $ 0.08
</TABLE>
NOTE K - 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>
NOTE K - 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>
1999
-------------------------
Carry Value Fair Value
------------ -----------
Financial Assets:
Cash and Due From Banks $ 7,991 $ 7,991
Federal Funds Sold $ 1,000 $ 1,000
Investment Securities $ 21,468 $ 21,129
Federal Home Loan and Federal
Reserve Bank Stock $ 482 $ 482
Loans, Net $ 49,249 $ 49,096
Cash Value of Life Insurance $ 1,559 $ 1,559
Financial Liabilities:
Deposits $ 71,555 $ 71,518
Federal Home Loan Bank Advance $ 1,875 $ 1,875
</TABLE>
<PAGE>
NOTE L - 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, 1999, that
the Company and Bank meet all capital adequacy requirements to which they are
subject.
As of December 31, 1999, 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>
<S> <C> <C> <C> <C> <C> <C>
Amount of Capital Required
------------------------------------------------
To Be Categorized as To Be
Actual Adequately Capitalized Well-Capitalized
------- ---------------------- ----------------------
Amount Percentage Amount Percentage Amount Percentage
------- ----------- ---------- ----------- --------- -----------
AS OF DECEMBER 31, 1999
Total Risk-Based $10,157 15.3% $ 5,312 8.0% $ 6,639 10.0%
Tier 1 Risk-Based $ 9,327 14.1% $ 2,656 4.0% $ 3,984 6.0%
Tier 1 Leverage $ 9,327 10.9% $ 3,434 4.0% $ 4,293 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 15.3%, 14.1%,
and 10.9%, respectively, at December 31, 1999.
<PAGE>
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 15.3%, 14.1%,
and 10.9%, respectively, at December 31, 1999.
<PAGE>
NOTE M - 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>
December, 31
<S> <C>
CONDENSED BALANCE SHEETS 1999
-------------
ASSETS
Cash in Marathon National Bank $ 17,000
Investment in Marathon National Bank 9,128,000
Other Assets 2,000
-------------
TOTAL ASSETS $ 9,147,000
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued Expenses $ 11,000
Shareholders' Equity
Common Shares 13,654,000
Accumulated Deficit ( 4,319,000)
Accumulated Other Comprehensive Income ( 199,000)
-------------
TOTAL SHAREHOLDERS' EQUITY 9,136,000
-------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,147,000
=============
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Year Ended December 31,
CONDENSED STATEMENTS OF OPERATIONS 1999 1998
------------- --------------
Dividend from Marathon National Bank $ 20,000 $ -
Operating Expenses ( 21,000) ( 21,000)
Equity in Undistributed Net Income (Loss) of Marathon National Bk 646,000 466,000
------------- --------------
NET INCOME (LOSS) $ 645,000 $ 445,000
============= ==============
Year ended December 31,
CONDENSED STATEMENTS OF CASH FLOWS 1999 1998
------------- --------------
OPERATING ACTIVITIES
Net Income (Loss) $ 645,000 $ 445,000
Adjustments to Reconcile Net Income (Loss) to Net Cash Used by
Operating Activities - Equity in Net Income (Loss)
of Marathon National Bank ( 666,000) ( 466,000)
Net Change in Other Assets and Other Liabilities ( 10,000) ( 18,000)
------------- --------------
NET CASH USED BY OPERATING ACTIVITIES ( 31,000) ( 39,000)
INVESTING ACTIVITIES
Dividend from Marathon National Bank 20,000 -
Investment in Marathon National Bank -
------------- -------------
NET CASH USED BY INVESTING ACTIVITIES 20,000 -
FINANCING ACTIVITIES
Proceeds from Exercise of Stock Options 24,000 23,000
Proceeds from Issuance of Common Shares - -
------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 24,000 23,000
------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 13,000 ( 16,000)
Cash and Cash Equivalents at Beginning of Year 4,000 20,000
------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 17,000 $ 4,000
============= ==============
</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, 1999 and the related consolidated statements
of operations, changes in shareholder's equity and cash flows for the two years
ended December 31, 1999. 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, 1999, and the results of its operations and its
cash flows for each of the two years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles.
/s/ VAVRINEK, TRINE, DAY & CO. LLP
Laguna Hills, California
January 18, 2000
<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>
DIRECTOR
NAME POSITION WITH COMPANY SINCE
- ------------------------------ ------------------------------------------------------------- --------
Nikolas Patsaouras (1) (2) (3) Chairman of the Board of the Company and Bank 1982
Robert Abernethy (2) Director 1983
Craig D. Collette(3) President and Chief Executive Officer of the Company and Bank 1997
Frank W. Jobe, M.D. Director 1985
C. Thomas Mallos (1) (2) (3) Director 1982
Robert l. Oltman (1) (2) (3) Director 1982
Ann Pappas (1) (2) (3) Director 1982
<FN>
(1) Member of the Audit Committee
(2) Member of the Executive and Compensation Committee.
(3) Member of the Loan 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 57
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 51
Adrienne Caldwell Executive Vice President, Operations Administration of the Bank 57
</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
for approximately 19 years.
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 $100,000 during
the fiscal year ended December 31, 1999. Comparative data is also provided for
the previous three fiscal years.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(a) (b) (c) (d) (e) (f) (g) (h) (I)
Other
Annual Restricted All Other
Name and Compen- Stock LTIP Compen
Principal Salary Bonus sation Award(s) Options/ Payouts sation
Position Year ($) ($) ($)(1) ($) SARs ($) ($)
- --------------------------------- ---- -------- ------ ------ --------- ------ ------- ---------
Craig D. Collette (3) 1999 $173,102 $ 0 $8,400 0 11,000 0 $ 72,069(2)
President and 1998 $171,602 $ 0 $8,400 0 5,000 0 $ 5,199
Chief Executive Officer 1997 $160,714 $ 0 $7,700 0 30,000 0 $ 1,238
Of the Company and the Bank
Timothy J. Herles 1999 $104,304 $4,000 $8,400 0 8,000 0 $ 4,539
Executive Vice President and 1998 $101,089 $ 0 $8,400 0 34,184 0 $ 4,177
Chief Credit Officer of the Bank 1997 $ 96,372 $ 0 $8,400 0 15,000 0 $ 2,525
Howard J. Stanke (4) 1999 $ 94,682 $4,000 $7,200 0 8,000 0 $ 3,168
Executive Vice President and 1998 $ 88,409 $ 0 $7,200 0 0 0 $ 2,852
Chief Financial Officer of the 1997 $ 49,803 $ 0 $4,200 0 15,000 0 $ 304
Company and Bank
<FN>
(1) These amounts represent the automobile allowance
(2) This amount includes $66,870 of vested benefits in Mr. Collette's salary continuation plan.
(3) Mr. Collette commenced employment on January 22, 1997.
(4) Mr. Stanke commenced employment on June 1, 1997.
</TABLE>
<PAGE>
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 March 6, 2000, 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>
Common Stock Beneficially Owned as of
March 6, 2000
<S> <C> <C>
Number of Percent Of
Name of Beneficial Owner Shares Class
- ---------------------------------------- --------- ----------
Directors and Named Executive Officers:
- ----------------------------------------
Nikolas Patsaouras 50,693 (1) 1.3
Robert J. Abernethy 115,234 (2) 2.9
Craig D. Collette 73,723 (3) 1.9
Frank W. Jobe, M.D. 80,188 (4) 2.0
C. Thomas Mallos 57,813 (5) 1.5
Robert L. Oltman 200,857 (6) 5.1
Ann Pappas 69,946 (7) 1.8
Timothy J. Herles 19,533 (8) 0.5
Howard J. Stanke 18,500 (9) 0.5
Adrienne Caldwell 11,789 (10) 0.3
Total for all directors, named
executive officers and all
executive officers (numbering 10) 698,276 (11) 17.8
Principal Shareholder:
- ----------------------------------------
Oppenheimer-Spence Financial
Services Partnership L.P. 224,897 (12) 5.9
<FN>
(1) Mr. Patsaouras has shared voting and investment powers as to 37,500 of
these shares. The amount includes 12, 783 shares acquirable by the exercise of
stock options.
(2) The amount includes 7,935 shares acquirable by exercise of stock
options.
(3) Mr. Collette has shared voting and investment powers as to 72,723
shares. The amount includes 1,000 shares acquirable by exercise of stock
options.
(4) The amount includes 5,998 shares acquirable by exercise of stock
options.
(5) Mr. Mallos has shared voting and investment powers as of 45,108 of these
shares. The amount includes 9,935 shares acquirable by exercise of stock
options.
(6) Mr. Oltman has shared voting and investment powers as to 179,424 of
these shares. The amount includes 9,935 shares acquirable by exercise of stock
options. His address is c/o Marathon Bancorp, 11150 West Olympic Boulevard, Los
Angeles, California 90064.
(7) Ms. Pappas has shared voting and investment powers as to 59,896 of these
shares. The amount includes 9,935 shares acquirable by exercise of stock
options.
(8) Mr. Herles has shared voting and investment powers as to 1,184 of these
shares. The amount includes 18,349 shares acquirable by exercise of stock
options.
(9) Mr. Stanke has shared voting and investment powers as to 18,500 shares.
(10) These shares are acquirable by exercise of stock options.
(11) This amount includes 93,659 shares acquirable by exercise of stock
options within 60 days of March 6, 2000.
(12) 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 20th day of
March 2000.
MARATHON BANCORP (Registrant)
Howard J. Stanke
------------------
Howard J. Stanke
Chief Financial Officer
`Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
SIGNATURE TITLE DATE
- ------------------- --------------------- -----
Nikolas Patsaouras Chairman of the Board March 20, 2000
- -------------------
Nikolas Patsaouras
Craig D. Collette Director and President March 20, 2000
- ------------------- and CEO
Craig D. Collette
C. Thomas Mallos Director March 20, 2000
- -------------------
C. Thomas Mallos
Robert J. Abernethy Director March 20, 2000
- -------------------
Robert J. Abernethy
Director March 20, 2000
- -------------------
Frank W. Jobe, M.D.
Robert L. Oltman Director and Secretary March 20, 2000
- -------------------
Robert L. Oltman
Ann Pappas Director March 20, 2000
- -------------------
Ann Pappas
</TABLE>
<PAGE>
EXHIBIT INDEX
--------------
<TABLE>
<CAPTION>
<S> <C> <C>
EXHIBIT NO. DESCRIPTION PAGE
- --------------- ------------------------------------------- --------
10. Salary Continuation Plan 46
21. Subsidiaries of Company 56
23. Consent of Vavrinek, Trine, Day & Co LLP 57
27. Financial Data Schedule
</TABLE>
<PAGE>
MARATHON NATIONAL BANK
INCENTIVE SALARY CONTINUATION AGREEMENT
THIS AGREEMENT is made this __ day of _____________, by and between MARATHON
NATIONAL BANK, a national banking association located in Los Angeles, California
(the "Company") and _________________(the "Executive").
INTRODUCTION
To encourage the Executive to remain an employee of the Company, the
Company is willing to provide salary continuation benefits with an incentive
deferral opportunity to the Executive. The Company will pay the benefits from
its general assets.
AGREEMENT
The Executive and the Company agree as follows:
ARTICLE 1
DEFINITIONS
Whenever used in this Agreement, the following words and phrases shall have
the meanings specified:
1.1 "Change of Control" means the transfer of shares of the Company's
voting common stock such that one entity or one person (or persons considered to
be one person or one entity under Section 318 of the Code) acquires more than 50
percent of the Company's outstanding voting common stock; or, if there is
replacement, at any one time, of fifty percent (50%) or more of the members of
the Company's Board of Directors.
1.2 "Code" means the Internal Revenue Code of 1986, as amended.
1.3 "Company" means Marathon National Bank, its holding company Marathon
Bancorp, and any direct or indirect subsidiary of either of them.
1.4 "Disability" means, if the Executive is covered by a Company
sponsored disability policy, total disability as defined in such policy without
regard to any waiting period. If the Executive is not covered by such a policy,
Disability means the Executive suffering a sickness, accident or injury which,
in the judgement of a physician satisfactory to the Company, prevents the
Executive from performing substantially all of the Executive's normal duties for
the Company. As a condition to receive any Disability benefits, the Company may
require the Executive to submit to such physical or mental evaluations and tests
as the Company's Board of Directors deems appropriate.
1.5 "Early Termination" means the Termination of Employment before Normal
Retirement Age for reasons other than death, Disability, Termination for Cause
or following a Change of Control.
1.6"Vesting" means annual benefit accrual per year contingent in meeting
ROA and ROE goals.
1.7 "Early Termination Date" means the month, day and year in which Early
Termination occurs.
1.8 "Effective Date" means _______________.
1.9 "Extraordinary Items" means those items of income and expenses
that are recognized by Generally Accepted Accounting Principles as
extraordinary. Examples of such items are income and expense items arising from
stock redemptions, mergers, acquisitions, stock splits and other similar events.
The Company's Board of Directors, in its sole discretion, may designate other
items of income or expense as extraordinary.
1.10 "Normal Retirement Age" means the Executive's 65th birthday.
1.11 "Normal Retirement Date" means the later of the Normal Retirement Age
or Termination of Employment.
1.12 "Plan Year" means a twelve-month period commencing on January 1st and
ending on December 31st of each year. The initial Plan Year shall commence on
the effective date of this Agreement.
1.13 "Return On Assets" means the Company's after tax income at the end of
the most recent fiscal year, adjusted for Extraordinary Items, divided by the
Company's average assets for the fiscal year, as determined by the Company's
independent auditor based upon certified financial statements for the pertinent
year.
1.14 "Return on Equity" means the Company's after-tax net income at the end
of the most recent fiscal year, adjusted for Extraordinary Items, divided by the
prior year-end capital or equity position.
1.15 "Termination for Cause" See Section 6.1.
1.16 "Termination of Employment" means that the Executive ceases to be
employed by the Company for any reason whatsoever. The Executive shall not be
considered to have a Termination of Employment during the term of a leave of
absence approved by the Company. For purposes of this Agreement, if there is a
dispute over the employment status of the Executive or the date of the
Executive's Termination of Employment, the Company's Board of Directors shall
have the sole and absolute right to resolve the dispute.
ARTICLE 2
INCENTIVE
The Return On Assets (the "ROA") and the Return On Equity (the "ROE") determined
as of December 31 of each Plan Year shall determine whether the Executive
receives an Annual Vested Benefit for the Plan Year, which determines the
increase, if any, for the Plan Year to the Executive's Total Vested Benefit
(defined as the total of the Annual Vested Benefit for all Plan Years). In
order for the Executive to vest in the Annual Accrued Benefit Amount set forth
on Schedule A attached hereto, the Company must achieve at least a one percent
(1%) ROA and at least a ten percent (10%) ROE in that Plan Year. Therefore, if
in a Plan Year, the Company's ROA is 1% and if the Company's ROE is 10%, the
Executive will vest in the Annual Accrued Benefit Amount for the Plan Year,
which amount becomes the Annual Vested Benefit and increases the Total Vested
Benefit. If in a Plan Year, the Company's ROA is less that 1% or the Company's
ROE is less than 10%, there will be neither an Annual Vested Benefit nor an
increase in the Total Vested Benefit: however, the Annual Accrued Benefit
Amount becomes the Annual Unvested Benefit for the Plan Year.
ARTICLE 3
LIFETIME BENEFIT
3.1 Normal Retirement Benefit. Upon Termination of Employment on or after
Normal Retirement Age for reasons other than death, the Company shall pay to the
Executive the benefit described in this Section 3.1 in lieu of any other benefit
under this Agreement.
3.1.1 Amount of Benefit. The benefit under this Section 3.1 is the
Executive's Total Vested Benefit at the Executive's Normal Retirement Date. The
lump-sum amount of such Total Vested Benefit shall be converted to an
annual benefit amount (up to $_______per year) in the form of a 10-year fixed
annuity, crediting interest on the unpaid balance of the Total Vested Benefit at
an annual rate of __ percent, compounded monthly.
3.1.2 Payment of Benefit. The Company shall pay the annual benefit amount
to Executive each year for a period of 10 years in 12 equal monthly installments
on the first day of each month commencing with the month following the
Executive's Normal Retirement Date.
3.1.3 Benefit Increases. On the first anniversary of the first benefit
payment, and on each subsequent anniversary thereof, the Company's Board of
Directors, in its sole discretion, may increase the amount (but not the term) of
future benefit payments.
3.2 Early Termination Benefit. Upon Early Termination, the Company shall
pay to the Executive the benefit described in this Section 3.2 in lieu of any
other benefit under this Agreement.
3.2.1 Amount of Benefit. The benefit under this Section 3.2 is the
Executive's Total Vested Benefit at the Executive's Early Termination Date. The
lump-sum amount of such Total Vested Benefit shall be converted to an
annual benefit amount (less than $_______per year) in the form of a 10-year
fixed annuity commencing at the Executive's Normal Retirement Age, crediting
interest on the unpaid balance of the Total Vested Benefit at an annual rate of
__ percent, compounded monthly.
3.2.2 Payment of Benefits. The Company shall pay the Early Termination
annual benefit to the Executive in 12 equal monthly installments payable on the
first day of each month commencing with the month following the Executive's
Normal Retirement Age. The annual benefit shall be paid to the Executive for 10
years.
3.2.3 Benefit Increases. Benefit payments may be increased as provided
in Section 3.1.3.
3.3 Disability Benefit. If the Executive terminates employment due to
Disability prior to Normal Retirement Age, the Company shall pay to the
Executive the benefit described in this Section 3.3 in lieu of any other benefit
under this Agreement.
3.3.1 Amount of Benefit. The benefit under this Section 3.3 is the
Executive's Total Vested Benefit at the time of Termination of Employment plus
the total of the Annual Unvested Benefit, if any, from prior years. The
lump-sum amount of such Total Vested Benefit plus Annual Unvested Benefit, if
any, shall be converted to an annual benefit amount (less than $______ per year)
in the form of an immediate 10-year fixed annuity, crediting interest on
the unpaid balance of the Total Vested Benefit at an annual rate of __ percent,
compounded monthly.
3.3.2 Payment of Benefit. The Company shall pay the Disability annual
benefit to the Executive in 12 equal monthly installments payable on the first
day of each month commencing with the month following Termination of Employment.
The annual benefit shall be paid to the Executive for 10 years.
3.3.3 Benefit Increases. Benefit payments may be increased as provided
in Section 3.1.3.
3.4 Change of Control Benefit. Upon a Change of Control, the Company shall
pay to the Executive the benefit described in this Section 3.4 in lieu of any
other benefit under this Agreement.
3.4.1 Amount of Benefit. The benefit under this Section 3.4 is the annual
amount of ______________Dollars ($______) payable for 10 years.
3.4.2 Payment of Benefits. The Company shall pay the Change of Control
annual benefit to the Executive in 12 equal monthly installments payable on the
first day of each month commencing with the month following Termination of
Employment. The annual benefit shall be paid to the Executive for 10 years.
3.4.3 Benefit Increases. Benefit payments may be increased as provided
in Section 3.1.3.
3.5 Excess Parachute Payment. Notwithstanding anything herein to the
contrary, the Executive can opt to have the Company not make some benefit
payments hereunder to the extent such benefit payments would constitute an
excess parachute payment under the provisions of Section 280G of the Code.
ARTICLE 4
DEATH BENEFITS
4.1 Death During Active Service. If the Executive dies while in the active
service of the Company, the Company shall pay to the Executive's beneficiary the
benefit described in this Section 4.1. This benefit shall be paid in lieu of
the benefits under Article 3.
4.1.1 Amount of Benefit. The annual benefit under this Section 4.1 is the
annual amount of _______________Dollars ($______) payable for 10 years.
4.1.2 Payment of Benefits. The Company shall pay the annual benefit to the
Executive's beneficiary in 12 equal monthly installments payable on the first
day of each month commencing with the month following Termination of Employment.
The annual benefit shall be paid for 10 years.
4.1.3 Benefit Increase. Benefit payments may be increased as provided in
Section 3.1.3.
4.2 Death During Benefit Period. If the Executive dies after the benefit
payments have commenced under Article 3 of this Agreement but before receiving
all such payments, the Company shall pay the remaining benefits to the
Executive's beneficiary at the same time and in the same amounts they would have
been paid to the Executive had the Executive survived.
4.3 Death After Termination of Employment But Before Benefit Payments
Commence. If the Executive is entitled to benefits payments under this
Agreement, but dies after Termination of Employment and prior to the
commencement of said benefit payments, the Company shall pay the benefit
payments to the Executive's beneficiary that the Executive was entitled to prior
to death, except that the benefit payments shall commence on the first day of
the month following the date of the Executive's death.
ARTICLE 5
BENEFICIARIES
5.1 Beneficiary Designations. The Executive shall designate a beneficiary
by filing a written designation with the Company. The Executive may revoke or
modify the designation at any time by filing a new designation. However,
designations will only be effective if signed by the Executive and accepted by
the Company during the Executive's lifetime. If the Executive is married at the
time any benefit accrues under this Agreement, the designation of anyone other
than the Executive's spouse as beneficiary with respect to such benefit shall
not be effective without the spouse's written consent. The Executive's
beneficiary designation shall be deemed automatically revoked if the beneficiary
predeceases the Executive, or if the Executive names a spouse as beneficiary and
the marriage is subsequently dissolved prior to the commencement of benefits to
the beneficiary. If the Executive dies without a valid beneficiary designation,
all payments shall be made to the Executive's estate.
5.2 Facility of Payment. If a benefit is payable to a minor, to a person
declared incapacitated, or to a person incapable of handling the disposition of
his or her property, the Company may pay such benefit to the guardian, legal
representative or person having the care or custody of such minor, incapacitated
person or incapable person. The Company may require proof of incapacity,
minority or guardianship as it may deem appropriate prior to distribution of the
benefit. Such distribution shall completely discharge the Company from all
liability with respect to such benefit.
ARTICLE 6
GENERAL LIMITATIONS
6.1 Termination for Cause. Notwithstanding any provision of this
Agreement to the contrary, the Company shall not pay any benefit under this
Agreement if the Company terminates the Executive's employment for:
(a) Gross negligence or gross neglect of duties;
(b) Commission of a felony or of a gross misdemeanor involving moral
turpitude; or
(c) Fraud, disloyalty, dishonesty or willful violation of any law or
significant Company policy committed in connection with the Executive's
employment and resulting in an adverse effect on the Company.
6.2 Suicide or Misstatement. The Company shall not pay any benefit
under this Agreement if the Executive commits suicide within two years after the
date of this Agreement, or if the Executive has made any material misstatement
of fact on any application for life insurance on the life of Executive purchased
by the Company that results in the policy proceeds not being paid to the
Company.
ARTICLE 7
CLAIMS AND REVIEW PROCEDURES
7.1 Claims Procedure. The Company shall notify any person or entity that
makes a claim under this Agreement (the "Claimant") in writing, within 90 days
of Claimant's written application for benefits, of his or her eligibility or
noneligibility for benefits under the Agreement. If the Company determines that
the Claimant is not eligible for benefits or full benefits, the notice shall set
forth (1) the specific reasons for such denial, (2) a specific reference to the
provisions of the Agreement on which the denial is based, (3) a description of
any additional information or material necessary for the Claimant to perfect his
or her claim, and a description of why it is needed, and (4) an explanation of
this Agreement's claim review procedure and other appropriate information as to
the steps to be taken if the Claimant wishes to have the claim reviewed. If the
Company determines that there are special circumstances requiring additional
time to make a decision, the Company shall notify the Claimant of the special
circumstances and the date by which a decision is expected to be made, and may
extend the time for up to an additional 90 days.
7.2 Review Procedure. If the Claimant is determined by the Company not to
be eligible for benefits, or if the Claimant believes that he or she is entitled
to greater or different benefits, the Claimant shall have the opportunity to
have such claim reviewed by the Company by filing a petition for review with the
Company within 60 days after receipt of the notice issued by the Company. Said
petition shall state the specific reasons which the Claimant believes entitle
him or her to benefits or to greater or different benefits. Within 60 days
after receipt by the Company of the petition, the Company shall afford the
Claimant (and counsel, if any) an opportunity to present his or her position to
the Company verbally or in writing, and the Claimant (or counsel) shall have the
right to review the pertinent documents. The Company shall notify the Claimant
of its decision in writing within the 60-day period, stating specifically the
basis of its decision, written in a manner calculated to be understood by the
Claimant and the specific provisions of the Agreement on which the decision is
based. If, because of the need for a hearing, the 60-day period is not
sufficient, the decision may be deferred for up to another 60 days at the
election of the Company, but notice of this deferral shall be given to the
Claimant. The Company shall have sole authority to decide all such matters, and
the Company's final decision on any and all such matters shall be binding on all
persons.
ARTICLE 8
AMENDMENTS AND TERMINATION
This Agreement may be amended or terminated only by a written agreement
signed by the Company and the Executive.
Notwithstanding the previous paragraph in this Article 8, the Company may amend
or terminate this Agreement at any time if, pursuant to legislative, judicial or
regulatory action, continuation of the Agreement would (i) cause benefits to be
taxable to the Executive prior to actual receipt, or (ii) result in significant
financial penalties or other significantly detrimental ramifications to the
Company (other than the financial impact of paying the benefits), to the extent
necessary to prevent such consequences.
ARTICLE 9
MISCELLANEOUS
9.1 Binding Effect. This Agreement shall bind the Executive and
the Company, and their beneficiaries, survivors, executors, successors,
administrators and transferees.
9.2 No Guarantee of Employment. This Agreement is not an employment
policy or contract. It does not give the Executive the right to remain an
employee of the Company, nor does it interfere with the Company's right to
discharge the Executive. It also does not require the Executive to remain an
employee nor interfere with the Executive's right to terminate employment at any
time.
9.3 Non-Transferability. Benefits under this Agreement cannot be
sold, transferred, assigned, pledged, attached or encumbered in any manner.
9.4 Reorganization. The Company shall not merge or consolidate into or
with another company, or reorganize , or sell substantially all of its assets to
another company, firm, or person unless such succeeding or continuing company,
firm, or person agrees to assume and discharge the obligations of the Company
under this Agreement. Upon the occurrence of such event, the term "Company" as
used in this Agreement shall be deemed to refer to the successor or survivor
company.
9.5 Tax Withholding. The Company shall withhold any taxes that are required to
be withheld from the benefits provided under this Agreement.
9.6 Applicable Law. The Agreement and all rights hereunder shall be governed by
the laws of the State of California, except to the extent preempted by the laws
of the United States of America.
9.7 Unfunded Arrangement. The Executive and beneficiary are general
unsecured creditors of the Company for the payment of benefits under this
Agreement. The benefits represent the mere promise by the Company to pay such
benefits. The rights to benefits are not subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or
garnishment by creditors. Any insurance on the Executive's life is a general
asset of the Company to which the Executive and beneficiary have no preferred or
secured claim.
9.8 Entire Agreement. This Agreement constitutes the entire agreement between
the Company and the Executive as to the subject matter hereof. No rights are
granted to the Executive by virtue of this Agreement other than those
specifically set forth herein.
9.9 Administration. The Company shall have the exclusive right to exercise all
powers that are necessary or appropriate to administer this Agreement, including
but not limited to:
(a) Interpreting the provisions of the Agreement;
(b) Establishing and revising the method of accounting for the Agreement;
(c) Maintaining a record of benefit payments; and
(d) Establishing rules and prescribing any forms necessary or desirable to
administer the Agreement.
9.10 Named Fiduciary. The Company shall be the named fiduciary and plan
administrator under this Agreement. It may delegate to others certain aspects
of the management and operational responsibilities including the employment of
advisors and the delegation of ministerial duties to qualified individuals.
IN WITNESS WHEREOF, the Executive and the Company have signed this
Agreement.
EXECUTIVE: COMPANY:
MARATHON NATIONAL BANK
___________________________________ By_____________________________
Title ____________________________
BENEFICIARY DESIGNATION
MARATHON NATIONAL BANK
INCENTIVE SALARY CONTRIBUTION AGREEMENT
I designate the following as beneficiary of any death benefits under this
Agreement:
Primary:________________________________________________________________________
________________________________________________________________________________
Contingent:_____________________________________________________________________
________________________________________________________________________________
NOTE: TO NAME A TRUST AS BENEFICIARY, PLEASE PROVIDE THE NAME OF THE TRUSTEE(S)
AND THE EXACT NAME AND DATE OF THE TRUST AGREEMENT.
-----
I understand that I may change these beneficiary designations by filing a new
written designation with the Company. I further understand that the
designations will be automatically revoked if the beneficiary predeceases me,
or, if I have named my spouse as beneficiary and our marriage is subsequently
dissolved.
I certify that I presently am married/not married [STRIKE ONE].
Signature __________________________________________
Date _______________________________________________
Consent of Spouse:
I consent to the payment of death benefits in accordance with the above
beneficiary designation.
Spouse's Signature __________________________________
Date ________________________________________________
Accepted by the Company this _____________ day of ___________________, 2000.
By ________________________________________
Title ______________________________________
Acknowledgement of Spouse's Signature
STATE OF CALIFORNIA )
) SS.
COUNTY OF __________________ )
On ___________________, 2000 before me, _____________________ Notary
Public, personally appeared ___________________________________, personally
known to me (or proved to me on the basis of satisfactory evidence) to be the
person whose name is subscribed to the within instrument and acknowledged to me
that she/he executed the same in her/his authorized capacity, and that by
her/his signature on the instrument the person, or the entity upon behalf of
which the person acted, executed the instrument.
Witness my hand and official seal.
_______________________________________________
Notary Public
<PAGE>
SCHEDULE A
MARATHON NATIONAL BANK
INCENTIVE SALARY CONTRIBUTION AGREEMENT
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
CUMULATIVE ANNUAL
---------- -------
ACCRUED ACCRUED ANNUAL TOTAL ANNUAL
---------- ------- ------- ------- --------
PLAN BENEFIT BENEFIT VESTED VESTED UNVESTED
---------- ------- ------- ------- --------
YEAR AMOUNT AMOUNT ROA BENEFIT BENEFIT BENEFIT
- ----- ---------- ------- ------ ------- ------- --------
1 0 0
---------- -------
2 0 0
---------- -------
3 0 0
---------- -------
4 0 0
---------- -------
5 0 0
---------- -------
6 0 0
---------- -------
7 0 0
---------- -------
8 0 0
---------- -------
9 0 0
---------- -------
10 0 0
---------- -------
TOTAL ---------- ------- ------ -------- ------- --------
<FN>
The Total Vested Benefit is a cumulative total of the Annual Vested Benefit and
the Annual Deferred Bonus
The blanks in this schedule are for the Company's use in tracking the benefit
for each Plan Year
</TABLE>
<PAGE>
EXHIBIT 21.
SUBSIDIARIES OF MARATHON BANCORP
--------------------------------
MARATHON NATIONAL BANK, incorporated under the laws of the United States.
<PAGE>
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 18, 2000, on our audit
of the consolidated balance sheet of Marathon Bancorp as of December 31, 1999,
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,
1999, which report is incorporated by reference in the 1999 Annual Report on
Form 10-KSB.
/s/ Vavrinek, Trine, Day & Co., LLP
March 22, 2000
Laguna Hills, California
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0
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