-----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, JbZk4FZKERqeMteb+okO6UHoHm+2snFePNp/5cyRV3iMm6gQYgC9YUmxTTSv3Y2T Y+AhgrRXha5fHEt6jBsm4Q== 0000718446-95-000014.txt : 19951119 0000718446-95-000014.hdr.sgml : 19951119 ACCESSION NUMBER: 0000718446-95-000014 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951113 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: 95590372 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 [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1995 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.) 11444 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 November 1, 1995, there were 1,248,764 shares of no par Common Stock issued and outstanding. Consolidated Statements of Financial Condition Marathon Bancorp and Subsidiary September 30, December 31, (Unaudited) 1995 1994 ---------------------------------- Assets Cash and due from banks $7,351,300 $4,061,600 Federal funds sold 15,500,000 9,000,000 Cash and cash equivalents 22,851,300 13,061,600 Interest-bearing deposits with financial institutions 388,000 495,000 Securities available for sale 0 5,962,500 Securities held to maturity (aggregate market value of $9,801,400 in 1995 and $14,374,100 in 1994) 10,054,900 15,363,300 Loans receivable, net 50,269,400 56,271,100 Other real estate owned, net 3,976,800 6,157,500 Premises and equipment, net 436,400 530,100 Accrued interest receivable 502,500 630,700 Other assets 318,500 531,800 ----------------------------- $88,797,800 $99,003,600 ============================= Liabilities and Shareholders' Equity Deposits: Demand, noninterest-bearing $41,314,100 $32,719,100 Demand, interest-bearing 7,744,900 6,792,900 Money market and savings 25,698,900 41,680,100 Time certificates of deposit: Under $100,000 5,461,400 6,104,800 $100,000 and over 3,481,700 5,403,800 Total deposits 83,701,000 92,700,700 Accrued interest payable 192,900 282,200 Other liabilities 9,400 0 ------------------------------ Total liabilities 83,903,300 92,982,900 Commitments and contingencies Shareholders' equity: Preferred shares - no par value, 1,000,000 shares authorized, no shares issued and outstanding 0 0 Common shares - no par value, 9,000,000 shares authorized, 1,248,764 shares issued and outstanding 8,080,000 8,080,000 Deficit (3,185,500) (2,059,300) ----------------------------- Total shareholders' equity 4,894,500 6,020,700 $88,797,800 $99,003,600 ============================ See accompanying notes to unaudited consolidated financial statements. Consolidated Statements of Operations Marathon Bancorp and Subsidiary Three months ended Nine months ended September 30, September 30, (Unaudited) 1995 1994 1995 1994 ------------------------------------------------ Interest income: Loans, including fees $1,179,000 $1,243,400 $3,690,100 $3,803,400 Mortgage loans held for sale 0 3,100 0 122,200 Investment securities -taxable 163,500 223,900 692,800 552,100 Federal funds sold 135,000 63,900 234,300 91,000 Deposits with financial institutions5,200 3,600 32,200 3,600 ----------------------------------------------- Total interest income 1,482,700 1,537,900 4,649,400 4,572,300 Interest expense: Deposits 307,100 358,100 1,010,700 1,040,000 Federal funds purchased 0 0 9,500 15,200 ---------------------------------------------- Total interest expense 307,100 358,100 1,020,200 1,055,200 Net interest income before provisions for loan losses 1,175,600 1,179,800 3,629,200 3,517,100 Provision for loan losses 0 0 441,100 0 ------------------------------------------------ Net interest income after provisions for loan losses 1,175,600 1,179,800 3,188,100 3,517,100 Other operating income: Service charges on deposit accounts 39,700 54,900 164,700 195,100 Gain on mortgage loan sales 0 4,200 0 146,600 Other service charges and fees 7,700 18,000 26,800 63,400 Total other operating income 47,400 77,100 191,500 405,100 Other operating expenses: Salaries and employee benefits 438,600 456,300 1,434,800 1,564,300 Net operating cost of other real estate owned 167,500 45,000 419,000 149,700 Occupancy 87,800 150,200 265,000 464,500 Furniture and equipment 23,600 32,600 78,000 95,900 Professional services 163,900 143,700 558,900 413,700 Business promotion 15,200 16,300 49,000 56,100 Stationery and supplies 22,600 17,000 59,600 52,400 Data processing services 141,100 134,200 451,600 409,400 Messenger and courier services 64,800 96,200 186,400 332,300 Insurance and assessments 55,300 102,500 248,000 325,500 Other expenses 50,500 49,800 112,000 169,100 ------------------------------------------------ Total other operating expenses 1,230,900 1,243,800 3,862,300 4,032,900 Net loss before extraordinary item (7,900) 13,100 (482,700) (110,700) Extraordinary gain on early debt extinguishment 0 0 0 111,800 ----------------------------------------------- Net income (loss) $(7,900) $13,100 $(482,700) $1,100 ================================================ Net income (loss) per share: Net loss before extraordinary item $0.00 $0.01 $(0.39) $(0.09) Extraordinary item 0.00 0.00 0.00 0.09 ---------------------------------------------- Net income (loss) $0.00 $0.01 $(0.39) $0.00 =========================================== See accompanying notes to unaudited consolidated financial statements. Consolidated Statements of Cash Flows Marathon Bancorp and Subsidiary Nine months ended September 30, Increase (decrease) in cash and cash equivalents 1995 1994 -------------------------------- Cash flows from operating activities: Interest received $4,777,000 $4,578,900 Service charges on deposit accounts and other fees received 191,500 258,500 Proceeds of mortgage loans held for sale 0 17,065,400 Funding of mortgage loans held for sale 0 (9,150,200) Interest paid (911,400) (1,054,600) Cash paid to suppliers and employees (3,710,900) (4,303,100) Income taxes refunded 34,400 1,389,800 ----------------------------- Net cash provided by operating activities 380,600 8,784,700 Cash flows from investing activities: Net (increase) decrease in interest-bearing deposits with other financial institutions 8,000 (495,000) Purchases of securities held to maturity 0 (6,043,600) Proceeds from maturities of securities available for sale 10,905,000 (5,962,500) Proceeds from maturities of securities held to maturity 5,001,000 5,946,100 Net decrease in loans made to customers 6,659,300 7,209,300 Proceeds from sale of other real estate owned 295,500 1,205,800 Purchases (sales) of furniture, fixtures and equipment 4,400 (57,600) ----------------------------- Net cash provided by investing activities 22,873,200 1,802,500 Cash flows from financing activities: Increase (decrease) in noninterest-bearing and interest-bearing demand deposits and money market and savings accounts (6,146,400) 7,432,300 Repayment of long term debt 0 (560,000) Net decrease in time certificates of deposits (1,452,500) (9,725,800) ----------------------------- Net cash used by financing activities (7,598,900) (2,853,500) Net increase in cash and cash equivalents 15,654,900 7,733,700 --------------------------- Cash and cash equivalents at beginning of year 7,196,400 5,327,900 Cash and cash equivalents at end of year $22,851,300 $13,061,600 =========================== See accompanying notes to unaudited consolidated financial statements. Consolidated Statements of Cash Flows (Continued) Marathon Bancorp and Subsidiary Nine Months ended September 30, Reconciliation of net income (loss) to net cash provided (used) by operating activities 1995 1994 ------------------------- Net income (loss) $(482,700) $1,100 Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization expense 67,900 86,800 (Gain) loss on sale of other real estate owned 10,400 (85,300) Provision for REO losses 283,500 0 Provision for loan losses 441,100 0 Extraordinary gain on early debt extinguishment 0 (111,800) Gain on mortgage loans held for sale 0 (146,600) Amortization of premiums and discounts on securities,net (32,300) 89,000 Net decrease in mortgage loans held for sale 0 7,915,200 Change in deferred loan origination fees, net (20,400) (41,500) Change in accrued interest receivable 180,300 (40,900) Change in accrued interest payable 108,800 700 Change in income tax receivable 34,400 1,389,800 Change in other assets 210,300 (310,900) Change in other liabilities (420,700) 39,100 ------------------------- Total adjustments 863,300 8,783,600 Net cash provided by operating activities $380,600 $8,784,700 ======================== Supplemental cash flow information: Transfer from loans to other real estate owned $243,400 $2,058,800 Loans made to facilitate the sale of other real estate owned $1,814,700 $3,029,000 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 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 1994 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 September 30, 1995 and December 31, 1994, results of operations and changes in cash flows for the nine-month and three-month periods ended September 30, 1995 and 1994. The results of operations for the nine-month period ended September 30, 1995 are not necessarily indicative of what the results of operations will be for the full year ending December 31, 1995. (2) Income or loss per Share Income or 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 increase the income per share and reduce the loss per share. Accordingly, the weighted average number of shares used to compute the net income or loss per share was 1,248,764 for both the three-month and nine-month periods ended September 30, 1995 and 1994. MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion is intended to provide additional information about Marathon Bancorp (the Company), its financial condition and results of operations which is not otherwise apparent from the consolidated financial statements. Since Marathon National Bank (the Bank) represents a substantial portion of the Company's activities and investments, the following relates primarily to the financial condition and operations of the Bank. It should be read in conjunction with the Company's 1994 Annual Report. Averages presented are daily average balances. Summary Marathon Bancorp recorded a net loss for the nine-month period ended September 30, 1995 of $482,700, or $.39 per common share, compared with net income of $1,100, for the same period in 1994. The primary reason for the increase in the loss was a $441,100 provision for loan losses (see "Provision for Loan Losses") for the nine-month period ended September 30, 1995. As summarized in Table 1 and discussed more fully below, the Bank's first nine months 1995 operations resulted in a 3.2 percent increase in net interest income, a 100% increase in the provision for loan losses, a 52.6 percent decrease in other operating income, and a 4.2 percent decrease in other operating expenses. The decrease in other operating income resulted primarily from the discontinuation of the mortgage banking operation in June 1994, and the $283,500 provision for REO losses (see "Other Operating Expense"). Table 1 Summary of Operating Performance Nine-month Period Increase/ (decrease) (Dollars in thousands) 1995 1994 Amount Percent ------------------------------------ Net interest income $3,629 $3,517 $112 3.2% Provision for loan losses 441 0 441 100.0 Other operating income 192 405 (213) (52.6) Other operating expenses 3,863 4,033 (170) (4.2) ------------------------------- Net loss before extraordinary item (483) (111) (372) 335 Extraordinary item 0 112 (112) (100.0) ----------------------------------- Net loss $(483) $1 $(484) (48,400.0)% At September 30, 1995, the Company had total assets of $88,797,800, total net loans of $50,269,400 and total deposits of $83,701,000. This compares to total assets of $97,181,000, total net loans of $55,778,100 and total deposits of $91,299,900 at December 31, 1994. 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 three year strategic plan, which the Bank did comply, by November 1, 1995. The plan shall include, 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. Also under the terms of the agreement, the Bank is required to continue to adhere to certain minimum capital ratios in excess of the minimum regulatory capital requirements, as follow: a) Tier 1 capital at least equal to 8.5 percent of risk-weighted assets; and b) Tier 1 capital at least equal to 6.0 percent of actual adjusted total assets. At September 30, 1995, the Company and the Bank had a Tier 1 risk based capital ratio of 8.5 percent, and a Tier 1 capital leverage ratio of 5.9 percent. On September 21, 1992, the Company entered into an informal 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 and to strengthen certain programs and policies of the Company. 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 notes thereto as well as the Company's 1994 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 nine-month period of 1995 were enhanced by a 3.2 percent increase in net interest income from the same period of 1994, to $3,629,200. The reasons for this increase were increases in the rate of interest earned on those assets, offset by a change in mix to lower interest-earning assets. Average loans, which earned at an average rate of 9.1 percent in 1995, decreased $7,708,000 while other earning assets, which earned at an average rate of 5.8 percent in 1995, increased only $2,418,000. The amounts of these increases and reductions may be seen in Table 2. Interest income from earning assets rose $77,000 or 1.7 percent. The average volume of loans and investments outstanding decreased 6.5 percent, while the weighted average yield on interest-earning assets increased to 8.2 percent in 1995 from 7.5 percent in previous year. Higher interest income in 1995 was coupled with a 3.3 percent reduction in interest expense, which resulted primarily from a 4.8 percent decrease in the amount of interest-bearing liabilities. The weighted average cost of interest-bearing liabilities for the two comparable periods remained at 2.7 percent. 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 nine-month period of 1995 was 5.5 percent compared to 4.8 percent in 1994. The 1995 increase was due to an increase in the yield on interest-earning assets while the cost of interest-bearing liabilities remained unchanged. The Bank has continued to reduce the level of higher cost certificate of deposit while emphasizing NOW and money market accounts. The net yield on earning assets was 6.4 percent in the nine-month period of 1995 and 5.8 percent in 1994. 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 Average Interest income/ Weighted average Change from prior year due to change in: (Dollars in thousands) balance expense yield/cost Volume Rate Total Nine months ended 9/30/95 ------------------------------------------------ Loans $54,105 $3,690 9.1% $(502) $389 $(113) Other earning assets 22,112 959 5.8 103 87 190 Interest-earning assets 76,217 4,649 8.2 (399) 476 77 Interest-bearing liabilities50,509 1,020 2.7 (140) 105 (35) ----------------------------------------------- $25,708 $3,629 5.5% $(259) $371 $112 Net yield on earning assets 6.4% Nine months ended 9/30/94 Loans $61,813 $3,803 8.2% $(569) $(254) $(823) Other earning assets 19,694 769 4.9 (625) 131 (494) Interest-earning assets 81,507 4,572 7.5 (1,194) (123) (1,317) Interest-bearing liabilities53,045 1,055 2.7 (519) (104) (623) ------------------------------------------------- $28,462 $3,517 4.8% $(675) $(19) $(694) Net yield on earning assets 5.8% Other Operating Income : Other operating income decreased 52.6 percent in the nine-month period of 1995 to $191,500, from $405,100 in the nine-month period of 1994. The decrease in the gain on mortgage loan sales resulted from the discontinuation of the mortgage banking operation in September 1994. 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 and nonaccrual loans. These policies require extensive evaluation of new credit requests and continuing review of existing credits in order to identify, monitor and quantify evidence of deterioration of quality or potential loss in a timely manner. Management'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 recently experienced adverse economic conditions, 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 $7,433,400 of loans classified as substandard and $37,200 of loans classified as doubtful at September 30, 1995 as compared to $6,010,100 of substandard and $109,300 of loans classified as doubtful at December 31, 1994. In addition to the classified loans, the Bank was also monitoring $2,815,900 of loans which it had designated as listed at September 30, 1995 as compared to $4,022,900 at December 31, 1994. With the exception of these classified and listed loans, management is not aware of any loans as of September 30, 1995 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 provision for loan losses during the nine-month period of 1995 totaled $441,100, loans totaling $666,100 were charged off during the period, and $87,900 was recovered. Loans charged off amounted to $644,700 in the nine-month period of 1994, while recoveries totaled $82,800. The September 30, 1995 allowance for loan losses was $659,000, or 1.3 percent of gross loans outstanding, compared with 1.4 percent at December 31, 1994. The allowance for loan losses reflects management's perception of the lending environment in which it operates. Based on the increase in the level of substandard loans, the Bank increased its provision for loan losses during the nine months ended September 30, 1995. 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 September 30, 1995, loans past due 90 days or more or on nonaccrual totaled $596,500, or 1.2 percent of gross loans, compared with $843,800, or 1.5 percent at September 30, 1994. Other real estate owned (OREO), consisting of properties received in settlement of loans totaled $3,976,800 at September 30, 1995, a decrease of $2,160,700 or 35.2% from December 31, 1994. Other Operating Expenses: Other operating expenses, which include salaries, employee benefits and the net operating cost of real estate owned through foreclosure, totaled $3,862,400 for the nine-month period of 1995, a decrease of 4.2 percent from $4,032,900 in 1994. Due to earthquake damage to its banking facility, the Bank has temporarily relocated to another location. Under the terms of the new lease agreement, the Bank has reduced its monthly lease payments from $40,300 to $17,400. Therefore, occupancy expense declined 42.9 percent in the nine-month period of 1995 compared to 1994. The net operating cost of real estate owned through foreclosure totaled $419,000 for 1995, compared with $149,700 in 1994, reflecting a $283,500 provision for REO losses. Professional fees increased 35.1 percent due to the settlement of a lawsuit. Messenger and courier services decreased 43.9 percent due to a corresponding decline in noninterest-bearing deposit relationships (see "Liquidity"). Other expenses declined 33.8 percent primarily due to the discontinuation of the mortgage banking operation. Total other operating expenses were 4.4 percent and 4.2 percent of average total assets at September 30, 1995 and 1994, respectively. Income Taxes: In February 1992, the Financial Accounting Standards Bank has issued Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." The Company adopted the provisions of the new standard in its financial statements for the year ended December 31, 1994. SFAS No. 109 employs the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between 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. The impact on the Bank's financial position due to the adoption of this standard was not material. The Company did not record a tax provision at September 30, 1995 pertaining to its net loss since the Bank has a federal net operating loss carryforward of approximately $2,172,900 at December 31, 1994 which begins to expire in 2008. For state income tax purposes, the Company has incurred a net operating loss of approximately $3,207,200 which is available as a carryforward through 1999 to offset future taxes payable, subject to fifty percent reduction, as allowed by state tax law. Financial Condition As set forth in Table 4, the Company recorded average total assets for the nine-month period of 1995 of $87.9 million, an 8.4 percent decrease from 1994 average total assets of $96.0 million. The Bank's loan portfolio decreased 10.7 percent in the nine-month period of 1995 primarily due to reductions in the commercial segment of the loan portfolio. This reduction reflects the current level of loan demand and the Bank's continuing efforts to improve the quality of the loan portfolio. Average total deposits declined 7.7 percent to $81.8 million in the nine-month period of 1995. Interest-bearing deposits representing 61.4 percent of average total deposits at September 30, 1995, totaled $50.2 million, down from $53.6 million, or 60.5 percent in 1994. In addition, the Bank shifted from higher cost certificates of deposits to money market, NOW and savings accounts. Table 4 Nine months ended September 30, 1995 Yearended December 31, 1994 Change Balance Sheet Analysis Average % of Average % of from 1994 (Dollars in millions) balance Total balance Total Amount % ------------------------------------------------- Loans $54.1 71.0% $60.6 73.5% $(6.5) (10.7)% Other interest-earning assets 22.1 29.0% 21.9 26.5% 0.2 0.9% Total earning assets 76.2 100.0% 82.5 100.0% (6.3) (7.6)% ------------------------------------------------ Total assets $87.9 $96.0 $(8.1) (8.4)% Deposits: Interest bearing demand $8.1 9.9% $6.5 7.3% $1.6 24.6% Money market and savings 32.3 39.5% 32.7 36.9% (0.4) (1.2)% Time certificates of deposit 9.8 12.0% 14.4 16.3% (4.6) (31.9)% Total interest-bearing deposits 50.2 61.4% 53.6 60.5% (3.4) (6.3)% Non-interest-bearing demand deposits 31.6 38.6% 35.0 39.5% (3.4) (9.7)% ------------------------------------------------ Total deposits $81.8 100.0% $88.6 100.0% $(6.8) (7.7)% Total earning assets as a percent of total deposits 93.2% 93.1% 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 Marathon'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 38.2 percent at September 30, 1995 and 33.8 percent at December 31, 1994. The average maturity of the Bank's investment securities portfolio is 4.0 years at September 30, 1995 versus 3.2 years at December 31, 1994. The loan to deposit ratio was 60.8 percent and 62.0 percent for September 30, 1995 and December 31, 1994, respectively. On the liability side, Marathon'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, 88.0 percent of total average deposits during the nine-month period of 1995 and 83.8 percent during 1994. In addition, the Company's time deposits were primarily from its local customer base, which is highly diversified and without significant concentrations. A portion of Marathon's noninterest-bearing demand deposits is attributable to a single demand account relationship. During the nine-month period of 1995 and all of 1994, this relationship represented 6.6 percent and 10.7 percent, respectively, of average total deposits. While the deposits are noninterest-bearing, the account relationship is not without cost as the Bank provides messenger, courier, accounting and data processing services in connection with the relationship. Recognizing the importance of this account relationship to the Company's liquidity, management maintains an amount equal to the total account relationship in demand balances due from correspondent banks and liquid earning assets, including overnight federal funds sold, investment securities and interest-bearing balances in other financial institutions. In addition, the loan-to-deposit ratio, an important measure of asset liquidity, is monitored with the account relationship excluded from total deposits. On that basis, the loan-to-deposit ratio at September 30, 1995 was 71.8 percent, compared with 79.3 percent at December 31, 1994. 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, Marathon 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 105 percent of rate sensitive liabilities at September 30, 1995 as compared to 91 percent at the end of 1994. In the one year or less category, rate sensitive assets were 123 percent of rate sensitive liabilities at September 30, 1995 and 118 percent at December 31, 1994. 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 5 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 September 30, 1995 ------------------------------------------- Investments $15.9 $4.3 $2.9 $2.9 $26.0 Loans 37.5 3.3 3.9 5.6 50.3 ------------------------------------------ Rate sensitive assets 53.4 7.6 6.8 8.5 76.3 Time deposits $2.0 $6.0 $1.0 $0.0 $9.0 Other deposits 42.1 0.0 1.8 19.6 63.5 ------------------------------------------ Rate sensitive liabilities 44.2 5.6 3.1 19.6 72.5 Rate sensitive GAP $9.2 $2.0 $3.7 $(11.1) $3.8 Cumulative GAP $9.2 $11.2 $14.9 $3.8 -- Cumulative ratio of sensitive assets to liabilities 1.2 1.2 1.3 1.1 1.1 December 31, 1994 Investments $11.4 $7.1 $4.3 $5.5 $28.3 Loans 44.5 2.3 3.6 5.2 55.6 ------------------------------------------- Rate sensitive assets 55.9 9.4 7.9 10.7 83.9 Time deposits 3.7 5.7 1.0 0.0 10.4 Other deposits 46.1 0.0 2.5 32.3 80.9 ------------------------------------------- Rate sensitive liabilities 49.8 5.7 3.5 32.3 91.3 Rate sensitive GAP $6.1 $3.7 $4.4 $(21.6) $(7.4) Cumulative GAP $6.1 $9.8 $14.2 $(7.4) -- Cumulative ratio of sensitive assets to liabilities assets to liabilities 1.1 1.2 1.2 0.9 0.9 Capital Resources And Dividends The Bank is required to meet certain minimum risk-based capital guidelines and leverage ratios promulgated by the bank regulatory authorities. The risk based capital standards establish capital requirements that are more sensitive to risk differences between various assets, consider off balance sheet activities in assessing capital adequacy, and minimize the disincentives to holding liquid, low risk assets. The leverage ratio consists of tangible Tier 1 capital divided by average total assets. In addition, at the request of the OCC, the Bank agreed to maintain certain minimum capital ratios in excess of the regulatory requirements. 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 3.0 percent. At September 30, 1995, the Bank had a Tier 1 risk-based capital ratio of 8.5 percent, and a Tier 1 capital leverage ratio of 5.9 percent. At year-end 1994, these ratios were 8.4 percent, and 5.6 percent, respectively. 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 A current report on Form 8-K was filed on September 20, 1995 regarding the formal agreement with the Office of the Comptroller of Currency. Details of the agreement are described hereto on page 7 of this report. 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. Date: November 14, 1995 Marathon Bancorp C. Thomas Mallos Director and Chief Financial Officer EX-27 2
9 9-MOS DEC-31-1995 SEP-30-1995 7351300 388000 15500000 0 0 10054900 0 50928400 659000 88797800 83701000 0 202300 0 8080000 0 0 (3185500) 4894500 3690100 692800 266500 4649400 1010700 9500 3629200 441100 0 3862400 (482700) (482700) 0 0 (482700) (0.39) (0.39) 6.40 596000 387000 0 0 796500 666000 87000 659000 0 0 0
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