-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ql/ut9p/z+dVCQ7D3uPSE7POtuEiocDALL9QM925savXe0js7y0LV26L56hOXSI5 MUpOTs5JuYUYh1T48JuZQw== 0000718446-97-000017.txt : 19970520 0000718446-97-000017.hdr.sgml : 19970520 ACCESSION NUMBER: 0000718446-97-000017 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARATHON BANCORP CENTRAL INDEX KEY: 0000718446 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 953770539 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-12510 FILM NUMBER: 97608567 BUSINESS ADDRESS: STREET 1: 11444 W OLYMPIC BL STREET 2: STE 900 CITY: LOS ANGELES STATE: CA ZIP: 90064 BUSINESS PHONE: 3109969100 MAIL ADDRESS: STREET 1: 11444 W OLYMPIC BL. STREET 2: STE 900 CITY: LOS ANGELES STATE: CA ZIP: 90064 10QSB 1 10QSB AND FDS UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10- QSB 1 [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 1 For the quarterly period ended March 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _________ Commission file number 0-12510 MARATHON BANCORP (Exact name of registrant as specified in its charter) California 95-3770539 State or other jurisdiction of incorporation) I.R.S. Employer Identification No.) 11150 West Olympic Boulevard, Los Angeles, California 90064 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 996-9100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of May 1, 1997, there were 1,589,596 shares of no par Common Stock issued and outstanding. Consolidated Statements of Financial Condition Marathon Bancorp and Subsidiary March 31, December 31, (Unaudited) 1997 1996 Assets Cash and due from banks $3,660,900 $4,788,900 Federal funds sold 18,600,000 2,500,000 Cash and cash equivalents 22,260,900 7,288,900 Interest-bearing deposits with financial institutions 896,000 996,000 Securities available for sale 2,018,900 1,030,700 Securities held to maturity (aggregate market value of $5,640,700 and $5,823,000 at March 31, 1997 and December 31, 1996, respectively) 6,078,400 6,089,000 Loans receivable, net (allowance for loan losses of $1,110,100 and $1,088,200 at March 31, 1997 and December 31, 1996 respectively) 44,911,200 46,608,200 Other real estate owned, net 2,840,700 3,085,300 Premises and equipment, net 436,500 453,100 Accrued interest receivable 397,400 432,000 Other assets 504,200 409,800 Total $80,344,200 $66,393,000 Liabilities and Shareholders' Equity Deposits: Demand, noninterest- bearing $36,135,600 $25,839,900 Demand, interest-bearing 5,943,100 5,809,600 Money market and savings 25,111,600 22,969,200 Time certificates of deposit: Under $100,000 5,350,400 5,540,100 $100,000 and over 3,600,800 2,722,200 Total deposits 76,141,500 62,881,000 Accrued interest payable 76,500 113,700 Other liabilities 608,800 355,500 Total liabilities 76,826,800 63,350,200 Commitments and contingencies 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, 1,589,596 and 1,248,764 shares issued and outstanding at March 31, 1997 and December 31, 1996 , respectively 8,846,900 8,080,000 Net unrealized gain on securities available for sale 5,400 7,500 Accumulated deficit (5,334,900) (5,044,700) Total shareholders' equity 3,517,400 3,042,800 Total $80,344,200 $66,393,000 See accompanying notes to unaudited consolidated financial statements. Consolidated Statements of Operations Marathon Bancorp and Subsidiary Three months ended March 31 (Unaudited) 1997 1996 Interest income: Loans, including fees $875,900 $1,071,200 Investment securities - taxable 109,300 136,300 Federal funds sold 51,500 161,100 Deposits with financial institutions 13,800 7,800 Total interest income 1,050,500 1,376,400 Interest expense: Deposits 256,500 295,600 Net interest income before provisions for loan losses 794,000 1,080,800 Provision for loan losses 150,000 0 Net interest income after provisions for loan losses 644,000 1,080,800 Other operating income: Service charges on deposit accounts 59,500 63,900 Other service charges and fees 8,200 3,200 Total other operating income 67,700 67,100 Other operating expenses: Salaries and employee benefits 372,000 458,600 Net operating cost of other real estate owned 1,700 39,600 Occupancy 156,100 83,100 Furniture and equipment 36,700 30,800 Professional services 93,700 197,500 Business promotion 7,400 15,000 Stationery and supplies 28,200 13,600 Data processing services 114,500 133,100 Messenger and courier services 36,700 68,200 Insurance and assessments 96,400 98,900 Litigation 25,000 0 Other expenses 33,500 31,000 Total other operating expenses 1,001,900 1,169,400 Net loss $(290,200) $(21,500) Net loss per share $(0.23) $(0.02) See accompanying notes to unaudited consolidated financial statements. Consolidated Statements of Cash Flows Marathon Bancorp and Subsidiary (Unaudited) Three months ended March 31, Increase in cash and cash equivalents 1997 1996 Cash flows from operating activities: Interest received $1,099,600 $1,561,500 Service charges on deposit accounts and other fees received 67,700 67,100 Interest paid (293,700) (271,700) Cash paid to suppliers and employees (813,200) (1,171,900) Net cash provided by operating activities 60,400 185,000 Cash flows from investing activities: Net (increase) decrease in interest- bearing deposits with other financial institutions 100,000 (198,000) Purchase of securities available for sale(997,200) 0 Proceeds from maturities of securities available for sale 4,400 2,111,500 Proceeds from maturities of securities held to maturity 6,000 34,600 Net decrease in loans made to customers 1,539,600 503,400 Proceeds from sale of other real estate owned 247,900 307,200 Purchases of furniture, fixtures and equipment (16,500) (80,900) Net cash provided by investing activities 884,200 2,677,800 Cash flows from financing activities: Increase in noninterest-bearing and interest-bearing demand deposits and money market and savings accounts 12,571,600 3,247,400 Net increase (decrease) in time certificates of deposits 688,900 (395,200) Proceeds from the sale of common stock 766,900 0 Net cash provided by financing activities 14,027,400 2,852,200 Net increase in cash and cash equivalents 14,972,000 5,715,000 Cash and cash equivalents at beginning of period 7,288,900 22,850,300 Cash and cash equivalents at end of period $22,260,900 $28,565,300 See accompanying notes to unaudited consolidated financial statements. (Continued) Consolidated Statements of Cash Flows (Continued) Marathon Bancorp and Subsidiary (Unaudited) Three months ended March 31, Reconciliation of net loss to net cash provided operating activities 1997 1996 Net loss $(290,200) $(21,500) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization expense 33,100 26,300 (Gain) loss on sale of other real estate owned (3,300) 5,100 Provision for loan losses 150,000 0 Amortization of premiums and discounts on securities, net 7,100 5,100 Change in deferred loan origination fees, net 7,400 16,600 Change in accrued interest receivable 34,600 163,400 Change in accrued interest payable (37,200) 23,900 Change in other assets (94,400) (132,000) Change in other liabilities 253,300 98,100 Total adjustments 350,600 206,500 Net cash provided by operating activities $60,400 $185,000 Supplemental cash flow information: Loans made to facilitate the sale of other real estate owned $0 $87,500 Consolidated Statements of Changes in Shareholders' Equity Marathon Bancorp and Subsidiary Net Unrealized Gain (loss) on Securities Preferred Common shares Accumulated Available Shares Shares Amount Deficit for Sale Total Balance, December 31, 1996 --- 1,248,764 $8,080,000 $(5,044,700) $7,500 $3,042,800 Net Loss (290,200) (290,200) Net change in unrealized gain on securities available for sale (2,100) (2,100) Proceeds from the sale o common stock 340,832 766,900 766,900 Balance, March 31, 1997 --- 1,589,596 $8,846,900 $(5,334,900) $5,400 $3,517,400 See accompanying notes to unaudited consolidated financial statements. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (1) Basis of Presentation and Management Representations The unaudited consolidated financial statements of Marathon Bancorp (the "Company") have been prepared in accordance with the instructions to Form 10-QSB and, therefore, do not include all footnotes normally required for complete financial disclosure. While the Company believes that the disclosures presented are sufficient to make the information not misleading, reference may be made to the consolidated financial statements and notes thereto included in the Company's 1996 Annual Report on Form 10-KSB. The accompanying consolidated statements of financial condition and the related consolidated statements of operations and cash flows reflect, in the opinion of management, all material adjustments necessary for fair presentation of the Company's financial position as of March 31, 1997 and December 31, 1996, results of operations and changes in cash flows for the three-month periods ended March 31, 1997 and 1996. The results of operations for the three-month period ended March 31, 1997 are not necessarily indicative of what the results of operations will be for the full year ending December 31, 1997. (2) Loss per Share Loss per share is computed using the weighted average number of common shares outstanding during the period. Loss per share calculations exclude common share equivalents (stock options) since their effect would be to reduce the loss per share. Accordingly, the weighted average number of shares used to compute the loss per share was 1,275,273 and 1,248,764 for the three-month periods ended March 31, 1997 and 1996, respectively. (3) Sale of Common Stock During the first quarter of 1997, the Company successfully completed a private placement offering and issued 340,832 shares of common stock at $2.25 per share and contributed the net proceeds of $766,900 to the Company's wholly-owned subsidiary, Marathon National Bank (the "Bank") as equity capital. MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion is intended to provide additional information about the Company, its financial condition and results of operations which is not otherwise apparent from the consolidated financial statements. Since the Bank represents a substantial portion of the Company's activities and investments, the following relates primarily to the financial condition and operations of the Bank. It should be read in conjunction with the Company's 1996 Annual Report on Form 10-KSB. Averages presented are daily average balances. Summary Marathon Bancorp recorded a net loss for the three-month period ended March 31, 1997 of $290,200, or $0.23 per share compared to a net loss of $21,500, or $0.02 per common share, for the same period in 1996. The primary reasons for the decrease in earnings were the fact that net interest income for the three-month period ended March 31, 1997 decreased by $286,800 from the same period in 1996 (see "Net Interest Income") and the Bank made a $150,000 loan loss provision for the three-month period ended March 31, 1997 as compared to no provision for the same period in 1996 (see "Provision for Loan Losses") while other operating expenses declined by $167,500. As summarized in Table 1 and discussed more fully below, the Bank's operations for the first three months of 1997 resulted in a 26.5 percent decrease in net interest income, a 100.0 percent increase in the provision for loan losses, a 1.5 percent increase in other operating income, and a 14.3 percent decrease in other operating expenses. Table 1 Summary of Operating Performance Three-month Period Increase/ Ended March 31, Decrease (Dollars in thousands) 1997 1996 Amount Percent Net interest income $794 $1,081 $(287) (26.5)% Provision for loan losses 150 0 150 N/A Other operating income 68 67 1 1.5% Other operating expenses 1,002 1,169 (167) (14.3)% Net loss $(290) $(21) $(269) (1,274.4)% At March, 31, 1997, the Company had total assets of $80,344,200, total net loans of $44,911,200 and total deposits of $76,141,500. This compares to total assets of $66,393,000, total net loans of $46,608,200 and total deposits of $62,881,000 at December 31, 1996. Total deposits and total assets were unusually high at March 31, 1997 due to a $7,900,000 deposit which the Bank had for only that day. On September 20, 1995, the Bank entered into a formal agreement with the Office of the Comptroller of Currency (OCC) under which the Bank agreed to submit a six year strategic plan by November 1, 1995. The plan included, among other things, action plans to accomplish the following: a) achieve and maintain the desired capital ratios, as set forth below; b) attain satisfactory profitability; and c) reduce other real estate owned. The Plan was accepted by the OCC on January 30, 1996. The agreement increased the minimum Tier 1 risk based capital ratio to 8.5 percent from 4.0 percent and the Tier 1 capital leverage ratio to 6.0 percent from 4.0 percent. At March 31, 1997, the Company and the Bank had a Tier 1 risk based capital ratio of 7.0 percent, and a Tier 1 capital leverage ratio of 5.2 percent. Failure on the part of the Bank to meet all of the terms of the formal agreement may subject the Bank to significant regulatory sanctions, including restrictions as to the source of deposits and the appointment of a conservator or receiver. On December 16, 1996, the Company entered into a formal agreement with the Federal Reserve Bank (FRB) under which the Company agreed, among other things, to refrain from paying cash dividends except with the prior approval of the FRB, submit an acceptable plan to increase and maintain an adequate capital level, submit annual statements of planned sources and uses of cash, and submit annual progress reports. Operating Performance The following discussion explains in greater detail the consolidated financial condition and results of operations of the Company. This discussion should be read in conjunction with the accompanying consolidated financial statements and noted thereto as well as the Company's 1996 Annual Report on Form 10-KSB . Net Interest Income: Net interest income (the amount by which interest generated from earning assets exceeds interest expense on interest-bearing liabilities) is the most significant component of Marathon's earnings. The Company's diverse portfolio of earning assets is comprised of its core business of loan underwriting, augmented by liquid overnight federal funds sold, short term interest-bearing deposits with other financial institutions and investment securities. These earning assets are financed through a combination of interest-bearing and noninterest-bearing sources of funds. Operating results in the three-month period of 1997 were impacted by a 26.5 percent decrease in net interest income from the same period of 1996, to $1,050,500. The reasons for this decline were decreases in the rate of interest earned on loans, the increase in the level of nonaccrual loans and a decrease in the volume of earning assets, partially offset by a decrease in the rate of interest paid on interest-bearing liabilities and amount of interest bearing liabilities. The average rate of interest earned on loans was 7.6 percent in 1997 as compared to 8.6% in 1996, as nonaccrual loans increased to $2,074,700 at March 31, 1997 from $843,000 at March 31, 1996. In addition, average loans outstanding declined $4,125,000 or 8.1 percent between the three months ended March 31, 1996 and the three months ended March 31, 1997 while average interest-bearing liabilities decreased $3,001,000 or 7.2 percent. The amounts of these increases and reductions may be seen in Table 2. The Bank analyzes its performance using the concepts of interest rate spread and net yield on earning assets. The interest rate spread represents the difference between the yield on earning assets and the interest rate paid on interest-bearing liabilities. The net yield on earning assets is the difference between the yield on earning assets and the effective rate paid on all funds -- interest-bearing liabilities as well as interest-free sources. The Company's interest rate spread for the three-month period ended March 31, 1997 was 4.5 percent compared to 5.0 percent in 1996. The 1997 decrease was due to a decrease in the yield on all earning assets. A decrease in the prime rate in early 1996 contributed to the decrease in the rates paid on interest-bearing liabilities. The net yield on earning assets was 5.4 percent in the three-month period of 1997 and 6.2 percent during the same period in 1996. The Bank's net yield on earning assets remains high in comparison with the Company's interest rate spread due to the significant volume of noninterest-bearing demand deposits relative to total funding sources (represented by total deposits and shareholders' equity). While these deposits are noninterest- bearing, they are not without cost. However, the Bank believes that they remain the lowest cost source of funds available in the marketplace (see "Liquidity and Interest Rate Sensitivity Management"). Table 2 Net Interest Income Analysis Interest Weighted Change from proir year (Dollars in Average income/ Average due to change in: (thousands) balance expense yield/cost Volume Rate Total Three months ended March 31, 1997 Loans $46,539 $876 7.6% $(83) $(112) $(195) Other earning assets 12,976 175 5.5 (100) (31) (131) Interest- earning assets 59,515 1,051 7.2 (183) (143) (326) Interest- bearing liabil- ities 38,510 257 2.7 (20) (19) (39) $21,005 $794 4.5% $(163) $(124) $(287) Net yield on earning assets 5.4% Three months ended March 31, 1996 Loans $50,664 $1,071 8.6% $(106) $(112) $(218) Other earning assets 20,280 306 6.1 (42) (5) (47) Interest- earning assets 70,944 1,377 7.9 (148) (117) (265) Interest- bearing liabil- ities 41,511 296 2.9 (103) 26 (77) $29,433 $1,081 5.0% $(45) $(143) $(188) Net yield on earning assets 6.2% Other Operating Income : Other operating income increased 1.5 percent in the three-month period ended March 31, 1997 to $67,700 from $67,100 in the three-month period ended March 31, 1996. Provision for Loan Losses: Implicit in lending activities is the fact that losses will be experienced and that the amount of such losses will vary from time to time, depending upon the risk characteristics of the portfolio as affected by economic conditions and the financial experience of borrowers. Management of the Bank has instituted stringent credit policies designed to minimize the level of losses. These policies require extensive evaluation of new credit requests and continuing review of existing credits in order to identify, monitor and quantify evidence of deterioration of quality or potential loss in a timely manner. Management's reviews are based upon previous loan loss experience, current economic conditions, composition of the loan portfolio, the value of collateral and other relative factors. The Bank's lending is concentrated in Los Angeles County and surrounding areas, which have experienced adverse economic conditions over the last several years, including declining real estate values. These factors have adversely affected some borrowers' ability to repay loans. The policy of the Bank is to review each loan over $150,000 in the portfolio to identify and classify problem credits as "substandard", "doubtful" and "loss". Substandard loans have one or more defined weaknesses. Doubtful loans have the weaknesses of substandard loans with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. A loan classified loss is considered uncollectible and of such little value that the continuance as an asset of the Bank is not warranted. Another category designated "listed" is maintained for loans which do not currently expose the Bank to a sufficient degree of risk to warrant classification as substandard, doubtful or loss but do possess credit deficiencies or potential weakness deserving management's close attention. Excluding loans which have been classified loss and charged off by the Bank, the Bank's classified loans consisted of $5,883,500 of loans classified as substandard at March 31, 1997 as compared to $5,897,500 of substandard and $44,300 of loans classified as doubtful at December 31, 1996. In addition to the classified loans, the Bank was also monitoring $2,504,000 of loans which it had designated as listed at March 31, 1997 as compared to $2,276,600 at December 31, 1996. With the exception of these classified and listed loans, management is not aware of any other loans as of March 31, 1997 where the known credit problems of the borrower would cause it to have serious doubts as to the ability of such borrowers to comply with their present loan repayment terms and which would result in such loans being considered nonperforming loans at some future date. Management cannot, however, predict the extent to which the current economic environment may persist or worsen or the full impact such environment may have on the Bank's loan portfolio. Furthermore, management cannot predict the results of any subsequent examinations of the Bank's loan portfolio by its primary regulators. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual or become restructured loans, in-substance foreclosures or other real estate owned in the future. The allowance for loan losses, which provides a financial buffer for the risk of losses inherent in the lending process, is increased by the provision for loan losses charged against income, decreased by the amount of loans charged off and increased by recoveries. There is no precise method of predicting specific losses which ultimately may be charged off and the conclusion that a loan may become uncollectible, in whole or in part, is a matter of judgment. Similarly, the adequacy of the allowance and accompanying provision for loan losses can be determined only on a judgmental basis after full review, including consideration of economic conditions and their effects on specific borrowers, borrowers' financial data, and evaluation of underlying collateral for secured lending. Based upon management's assessment of the overall quality of the loan portfolio, and of external economic conditions, the Bank made a $150,000 provision for loan losses in the first three months of 1997. Loans totaling $145,400 were charged off during the period, and $17,300 was recovered. Loans charged off amounted to $38,100 in the three-month period ended March 31, 1996, while recoveries totaled $6,100. The March 31, 1997 allowance for loan losses was $1,110,100, or 2.4 percent of gross loans outstanding, compared to 2.3 percent at December 31, 1996. The allowance for loan losses reflects management's perception of the lending environment in which it operates. Although management believes that the allowance for possible loan losses is adequate, there can be no reasonable assurance that further deterioration will not occur. As a result, future provisions will be subject to continuing evaluation of inherent risk in the loan portfolio. At March 31, 1997 and 1996, the Bank had classified $1,424,200 and $46,800, respectively, of its loans as impaired and recorded a loss of $173,000 and $46,800, respectively, as a specific reserve. At March 31, 1997 and 1996, the Bank classified $52,100 and $2,093,200, respectively, of its loans as impaired without a specific reserve. Since these loans are collateral dependent and the estimated fair value of the collateral exceeds the book value of the related loans, no specific loss reserve was recorded on these loans in accordance with SFAS No. 114. The average recorded investment of impaired loans during the three months ended March 31, 1997 and 1996 was approximately $1,462,200 and $1,957,500, respectively. Interest income of $1,300 and $19,200, respectively, was recognized on impaired loans during the three months ended March 31, 1997 and 1996. At March 31, 1997, nonaccrual loans totaled $2,074,700, or 4.5 percent of gross loans, compared with $568,400, or 1.2 percent at December 31, 1996. Other real estate owned (OREO), consisting of properties received in settlement of loans totaled $2,840,700 at March 31, 1997, an increase of $244,600 or 7.9% from December 31, 1996. Because of the current economic environment, it is possible that nonaccrual loans and OREO could increase in 1997. Although management believes that the allowance for possible loan losses is adequate and OREO is carried at fair value less estimated selling costs, there can be no reasonable assurance that increases in the allowance for loan losses or additional write-downs of OREO will not be required as a result of the deterioration in the local economy or increases in interest rates. Other Operating Expenses: Other operating expenses totaled $1,001,900 for the three-month period of 1997, a decrease of $167,500 or 14.3 percent from $1,169,400 for the three month period of 1996. Occupancy expense increased due to the Bank's relocation to its original location in November 1996 which had been vacated due to earthquake damage. The monthly rent has increased from $17,400 per month to $46,300 per month. Significant progress has been made to reduce operating expenses through attrition and expense control. Total other operating expenses were 5.9 percent and 5.8 percent of average total assets at March 31, 1997 and 1996, respectively. Income Taxes: Deferred income taxes are computed using the liability method based on differences between the financial reporting and tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. 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 The Company had no income tax expense or benefit for the three months ended March 31, 1997 or 1996. For federal income tax purposes, the Company has a net operating loss carryforward of approximately $3,727,000 which expire in 20080 - 2011. For state income tax purposes, the Company has incurred a net operating loss of approximately $5,252,000 which expire in 1997 - - 2001 to offset future taxes payable, adjusted for the fifty percent reduction, as required by state tax law. Financial Condition As set forth in Table 3, the Company recorded average total assets for the three-month period ended March 31, 1997 of $67.7 million, a 14.1 percent decrease from 1996 annual average total assets of $78.8 million. The Bank's average fed funds sold decreased by $6.7 million or 59.6 percent in the three-month period ended March 31, 1997 due to a similar decline in average deposits noted below. In addition, the Bank's average loans decreased 6.4 percent in the three-month period ended March 31, 1997 primarily due to reductions in the commercial segment of the loan portfolio. This reduction reflects the current level of loan demand. Average total deposits of $64.3 million for the three-month period ended March 31, 1997 declined 13.6 percent from average total deposits of $74.4 for the year ended December 31, 1996. Non-interest-bearing deposits representing 40.1 percent of average total deposits for the three- month period ended March 31, 1997, totaled $25.8 million, down from $31.8 million, or 42.7 percent for year ended December 31, 1996. This decline is due to one relationship representing approximately 10 percent of average demand deposits which left the Bank in late 1996. Table 3 Three months ended Year ended March 31, 1997 December 31, 1996 Change Balance Sheet Average % of Average % of from 1996 analysis balance Total balance Total Amount % (Dollars in Millions) Loans $46.5 78.2% $49.7 71.5% $(3.2) (6.4)% Other interest- earning assets 13.0 21.8% 19.8 28.5% (6.8 (34.3)% Total earning assets 59.5 100.0% 69.5 100.0% (10.0)(14.4)% Total assets $67.7 $78.8 $(11.1)(14.1)% Deposits: Interest bearing demand $6.2 9.6% $6.6 8.9% $(0.4) (6.1)% Money market and savings 23.7 36.9% 27.6 37.1% (3.9)(14.1)% Time certif- icates of deposit 8.6 13.4% 8.4 11.3% 0.2 2.4% Total interest- bearing deposits 38.5 59.9% 42.6 57.3% (4.1) (9.6)% Non-interest- bearing demand deposits 25.8 40.1% 31.8 42.7% (6.0)(18.9)% Total deposits $64.3 100.0% $74.4 100.0% $(10.1)(13.6)% Total earning assets as a percent of total deposits 92.5% 93.4% Liquidity and Interest Rate-Sensitivity Management The primary function of asset liability management is to ensure adequate liquidity and to maintain an appropriate balance between rate sensitive assets and rate sensitive liabilities. Liquidity management involves matching sources and uses of the Company's funds in order to effectively meet the cash flow needs of our customers, as well as the cash flow requirements of the Company itself. Interest rate sensitivity management seeks to stabilize net interest income during periods of changing interest rates. Liquidity: Management monitors its liquidity position continuously in relation to trends of loans and deposits, and relates the data to short and long term expectations. In order to serve the Bank's customers effectively, funds must be available to meet their credit needs as well as their withdrawals of deposited funds. Liquidity from assets is provided by the receipt of loan payments and by the maturity of other earning assets as further described below. Liquidity from liabilities is attained primarily by obtaining new deposits. Liquid assets are defined to include federal funds sold, interest-bearing deposits with other financial institutions, unpledged investment securities and cash and due from banks. The Company's liquidity ratio (the sum of liquid assets divided by total deposits) was 39.7 percent at March 31, 1997 and 22.7 percent at December 31, 1996. The average maturity of the Bank's investment securities portfolio is 1.8 years at March 31, 1997 versus 1.9 years at December 31, 1996. The loan to deposit ratio was 60.1 percent and 75.5 percent at March 31, 1997 and December 31, 1996, respectively. On the liability side, the Bank's liquidity position is enhanced by sizable core deposits. As stable core deposits (which include all deposits except time certificates of deposit) are generated, the need for other sources of liquidity diminishes. This derives from the fact that the Bank's primary liquidity requirement generally arises from the need to meet maturities of time certificates of deposit. Absent extraordinary conditions, the bulk of stable core deposits do not require significant amounts of liquidity to meet the net short or intermediate term withdrawal demands of customers. Marathon has emphasized core deposit growth which represents, on average, 86.7 percent of total average deposits during the three-month period ended March 31, 1997 and 88.6 percent during all of 1996. In addition, the Company's time deposits were primarily from its local customer base, which is highly diversified and without significant concentrations. While the demand deposits are noninterest-bearing, the account relationships are not without cost as the Bank provides messenger, courier, accounting and data processing services in connection with the relationships. Interest Rate-Sensitivity Management: Interest rate sensitivity management focuses, as does liquidity management, on the maturities of earning assets and funding sources. In addition, interest rate sensitivity management takes into consideration those assets and liabilities whose interest rates are subject to change prior to maturity. Net interest income can be vulnerable to fluctuations arising from a change in the general level of interest rates to the extent that the average yield on earning assets responds differently to such a change than does the average cost of funds. In an effort to maintain consistent earnings performance, the Bank manages the repricing characteristics of its assets and liabilities to control net interest sensitivity. The Company measures interest rate sensitivity by distributing the rate maturities of assets and supporting funding liabilities into interest sensitivity periods, summarizing interest rate risk in terms of the resulting interest sensitivity gaps. A positive gap indicates that more interest sensitive assets than interest sensitive liabilities will be repriced during a specified period, while a negative gap indicates the opposite condition. Balance sheet items are categorized according to contractual maturity or repricing dates, as appropriate. Reference rate indexed loans, federal funds sold and money market deposits constitute the bulk of the floating rate category. Determining the interest rate sensitivity of noncontractual items is arrived at in a more qualitative manner. Demand deposits are considered to be a mix of short and long term funds, based upon historical behavior. Savings deposits are viewed as susceptible to competitive factors brought on by deregulation and, therefore, classified as intermediate funds. It is the Bank's policy to maintain an adequate balance of rate sensitive assets as compared to rate sensitive liabilities. Rate sensitive assets were 117 percent of rate sensitive liabilities at March 31, 1997 as compared to 96 percent at the end of 1996. In the one year or less category, rate sensitive assets were 111 percent of rate sensitive liabilities at March 31, 1997 and 114 percent at December 31, 1996. The gap position is but one of several variables that affect net interest income. Consequently, these amounts are used with care in forecasting the impact of short term changes in interest rates on net interest income. In addition, the gap calculation is a static indicator and is not a net interest income predictor in a dynamic business environment. Table 4 Analysis of Rate Sensitive Assets & Liabilities Rate sensitive or maturing in by Time Period 90 days 3 - 12 1 - 5 Over 5 (Dollars in millions) or less months years years Total March 31, 1997 Investments $20.2 $1.3 $6.1 $0.0 $27.6 Loans 23.7 10.7 5.2 4.3 43.9 Rate sensitive assets 43.9 12.0 11.3 4.3 71.5 Time deposits 4.6 4.4 0.0 0.0 $9.0 Other deposits 34.0 7.6 10.6 52.2 Rate sensitive liabilities 38.6 12.0 10.6 0.0 61.2 Rate sensitive GAP $5.3 $0.0 $0.7 $4.3 $10.3 Cumulative GAP $5.3 $5.3 $6.0 $10.3 -- Cumulative ratio of sensitive assets to liabilities 1.1 1.1 1.1 N/A 1.2 December 31, 1996 Investments $2.9 $1.6 $6.0 $0.1 $10.6 Loans 33.7 3.8 5.2 4.4 47.1 Rate sensitive assets 36.6 5.4 11.2 4.5 57.7 Time deposits 3.4 4.6 0.2 0.0 8.2 Other deposits 27.6 1.2 0.0 23.0 51.8 Rate sensitive liabilities 31.0 5.8 0.2 23.0 60.0 Rate sensitive GAP $5.6 $(0.4) $11.0 $(18.5) $(2.3) Cumulative GAP $5.6 $5.2 $16.2 $(2.3) -- Cumulative ratio of sensitive assets to liabilities assets to liabilities 1.2 1.1 1.4 1.0 1.0 Capital Resources And Dividends 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 possibly 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 the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's asset, 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 the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). On September 30, 1995, the Bank entered into a formal agreement with the OCC under which the Bank agreed to submit a three year strategic plan by November 1, 1995. The plan included, among other things, the action plans to accomplish the following: a) achieve and maintain the desired capital ratios, as set forth below; b) attain satisfactory profitability; and c) reduce other real estate owned. The plan was accepted by the OCC on January 30, 1996. The agreement increased the minimum Tier 1 risk based capital ratio to 8.5 percent from 4.0 percent, and the Tier 1 capital leverage to 6.0 percent from 4.0 percent. At March 31, 1997, the Bank had a Tier 1 risk based capital ratio of 7.0 percent, and a Tier 1 capital leverage ratio of 5.2 percent. Failure on the part of the Bank to meet the terms of the formal agreement may subject the Bank to significant regulatory sanctions, including restrictions as to the source of deposits and the appointment of a conservator or a receiver. On December 16, 1996, the Company entered into a formal agreement with the Federal Reserve Bank (FRB) under which the Company agreed, among other things, to refrain from paying cash dividends except with the prior approval of the FRB, submit an acceptable plan to increase and maintain an adequate capital level, submit annual statements of planned sources and uses of cash, and submit annual progress reports. The following table summarizes the actual capital ratios of the Company and the Bank (the capital ratios of the Company approximate those of the Bank) as of March 31, 1997, the minimum levels required under the regulatory framework for prompt corrective action and the capital ratios required by the formal agreement with the OCC. Actual Bank To be OCC Capital at Categorized Formal 3/31/97 as Adequately Agreement Capitalized Total risk-based 8.3% 8.0% N/A Tier 1 risk-based 7.0% 4.0% 8.5% Tier 1 leverage 5.2% 4.0% 6.0% PART II. OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K None. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MARATHON BANCORP Date: May 15, 1997 C. Thomas Mallos Director and Chief Financial Officer EX-27 2
9 3-MOS DEC-31-1997 MAR-31-1997 3660900 896000 18600000 0 2018900 6078400 0 47751900 (1110100) 80344200 76141500 0 685300 0 0 0 8846900 (5329500) 80344200 875900 109300 65300 1050500 256500 0 794000 150000 0 1001900 (290200) 0 0 0 (290200) (0.23) (0.23) 5.4 2074700 2636000 5883500 0 1088200 145400 17300 1110100 1110100 0 429000
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