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, 1996 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 May 1, 1996, there were 1,248,764 shares of no par Common Stock issued and outstanding. Consolidated Statements of Financial Condition Marathon Bancorp and Subsidiary 	 March 31, December 31, (Unaudited) 	1996 	1995 Assets 		 Cash and due from banks 	 $8,065,300 	$8,450,300 Federal funds sold 	20,500,000 	14,400,000 Cash and cash equivalents 	28,565,300 	22,850,300 Interest-bearing deposits with financial institutions 	695,000 	497,000 Securities available for sale 	1,186,500 3,302,900 Securities held to maturity (aggregate market value of $5,983,900 in 1996 and $6,306,700 in 1995) 	6,573,000 	6,610,700 Loans receivable, net 	49,082,600 	49,515,100 Other real estate owned, net 	2,254,600 	2,654,400 Premises and equipment, net 	 475,500 	420,900 Accrued interest receivable 	418,800 	582,200 Other assets 	453,100 	321,100 	$89,704,400 	$86,754,600 		 Liabilities and Shareholders' Equity 		 Deposits: 		 Demand, noninterest-bearing 	 $41,778,200 	$38,415,000 Demand, interest-bearing 	6,282,000 	7,868,100 Money market and savings 	28,637,300 	27,167,000 Time certificates of deposit: 		 Under $100,000 	5,897,500 	5,779,400 $100,000 and over 	 2,787,000 	3,300,400 Total deposits 	 85,382,000 	82,529,900 Accrued interest payable 	117,600 	93,600 Other liabilities 	253,700 	155,600 Total liabilities 	 85,753,300 	82,779,100 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 (4,127,100) 	(4,105,600) Net unrealized gain (loss) on securities available for sale (1,800) 	 (1,100) Total shareholders' equity 	3,951,100 	 3,975,500 	$89,704,400 	$86,765,600 See accompanying notes to unaudited consolidated financial statements. Consolidated Statements of Operations Marathon Bancorp and Subsidiary 	 	Three months ended 	March 31, ((Unaudited) 	1996 	1995 Interest income: 		 Loans, including fees 	$1,071,200 	$1,289,200 Investment securities - taxable 	136,300 	324,100 Federal funds sold 	161,100 	15,400 Deposits with financial institutions 	7,800 	12,700 Total interest income 	1,376,400 	1,641,400 Interest expense: 		 Deposits 	295,600 	363,700 Federal funds purchased 	0 	9,500 Total interest expense 	295,600 	373,200 Net interest income before provisions for loan losses 	1,080,800	1,268,200 Provision for loan losses 	0 	90,000 Net interest income after provisions for loan losses 	1,080,800 	1,178,200 Other operating income: 		 Service charges on deposit accounts 	63,900 	64,200 Other service charges and fees 	3,200 	7,500 Total other operating income 	67,100 	71,700 Other operating expenses: 	 	 Salaries and employee benefits 	458,600 	527,000 Net operating cost of other real estate owned 	39,600 	37,200 Occupancy 	83,100 	88,800 Furniture and equipment 	30,800 	22,700 Professional services 	197,500 	173,000 Business promotion 	15,000 	16,400 Stationery and supplies 	13,600 	18,700 Data processing services 	133,100 	160,700 Messenger and courier services 	 68,200 	60,000 Insurance and assessments 	 98,900 	98,600 Other expenses 	31,000 	34,700 Total other operating expenses 	1,169,400 	1,237,800 Net income (loss) 	$(21,500) 	$12,100 Net income (loss) per share: 	$(0.02) 	$0.01 See accompanying notes to unaudited consolidated financial statements. Consolidated Statements of Cash Flows Marathon Bancorp and Subsidiary (Unaudited) 	Three months ended 	March 31, Increase (decrease) in cash and cash equivalents 	1996 	1995 Cash flows from operating activities: 		 Interest received 	$1,561,500 	$1,686,200 Service charges on deposit accounts and other fees received 	67,100 	71,700 Interest paid 	(271,700) 	(355,000) Cash paid to suppliers and employees 	(1,171,900) 	(1,487,600) Income taxes refunded 	0 	36,000 Net cash provided (used) by operating activities 	185,000 	(48,700) Cash flows from investing activities: 	 	 Net (increase) decrease in interest-bearing deposits with other financial institutions 	(198,000) 	(783,000) Proceeds from maturities of securities available for sale 	2,111,500 	7,850,900 Proceeds from maturities of securities held to maturity 	34,600 	1,187,200 Net decrease in loans made to customers 	503,400 	640,100 Proceeds from sale of other real estate owned 	307,200 	0 (Purchases) sales of furniture, fixtures and equipment 	(80,900) 	6,500 Net cash provided by investing activities 	2,677,800 	8,901,700 Cash flows from financing activities: 		 Increase (decrease) in noninterest-bearing and 		 interest-bearing demand deposits and money market 	 	 and savings accounts 	3,247,400 	(7,632,800) Net decrease in time certificates of deposits 	(395,200) 	(464,900) Net cash provided (used) by financing activities 	2,852,200 	(8,097,700) Net increase in cash and cash equivalents 	5,715,000 	755,300 Cash and cash equivalents at beginning of year 	22,850,300 	7,196,400 Cash and cash equivalents at end of year 	$28,565,300 	$7,951,700 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 income (loss) to net cash provided (used) 	 	 by operating activities 	1996 	1995 Net income (loss) 	$21,500 	$12,100 Net income (loss) 	$(21,500) 	$12,100 Adjustments to reconcile net loss to net cash provided 		 by operating activities: 		 Depreciation and amortization expense 	26,300 	22,900 (Gain) loss on sale of other real estate owned 	5,100 	0 Provision for loan losses 	0 	90,000 Amortization of premiums and discounts on securities, net 	5,100 	(48,100) Change in deferred loan origination fees, net 	16,600 	3,800 Change in accrued interest receivable 	163,400 	89,100 Change in accrued interest payable 	23,900 	18,200 Change in income tax receivable 	0 	36,000 Change in other assets 	(132,000) 	(229,200) Change in other liabilities 	98,100 	(43,500) Total adjustments 	206,500 	(60,800) Net cash provided by operating activities 	$185,000 	$(48,700) Transfer from loans to other real estate owned 	0 	$523,100 Loans made to facilitate the sale of other real estate owned 	$87,500 	0 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 1995 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, 1996 and December 31, 1995, results of operations and changes in cash flows for the three-month periods ended March 31, 1996 and 1995. The results of operations for the three-month period ended March 31, 1996 are not necessarily indicative of what the results of operations will be for the full year ending December 31, 1996. (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 the three-month periods ended March 31, 1996 and 1995. 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 1995 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, 1996 of $21,500, or $.02 per common share, compared with net income of $12,100, for the same period in 1995. The primary reason for the decrease in earnings was a lower level of net interest income (see "Net Interest Income") for the three-month period ended March 31, 1996. 	As summarized in Table 1 and discussed more fully below, the Bank's operations for the first three months of 1996 resulted in a 14.7 percent decrease in net interest income, a 100% decrease in the provision for loan losses, a 6.9 percent decrease in other operating income, and a 5.6 percent decrease in other operating expenses. Table 1 Summary of Operating Performance 	 Three-month Period 		 Increase/ (decrease) 	(Dollars in thousands) 	1996 	1995 	Amount 	Percent 	Net interest income 	$1,081 	$1,268 	$(187) 	(14.7)% 	Provision for loan losses 	0 	90 	(90) 	(100.0)% 	Other operating income 	67 	72 	5 	(6.9)% 	Other operating expenses 	1,169 	1,238 	69 	(5.6)% 	Net loss 	$(21) 	$12 	$(33) 	(274.9)% 	At March 31, 1996, the Company had total assets of $89,704,400, total net loans of $49,082,600 and total deposits of $85,382,000. This compares to total assets of $86,854,600, total net loans of $49,515,100 and total deposits of $82,529,900 at December 31, 1995. 	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 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 7, 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 3.0 percent. At March 31, 1996, the Company and the Bank had a Tier 1 risk based capital ratio of 7.2 percent, and a Tier 1 capital leverage ratio of 4.9 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 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 noted thereto as well as the Company's 1995 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 1996 were impacted by a 14.7 percent decrease in net interest income from the same period of 1995, to $1,080,800. The reasons for this decline were decreases in the rate of interest earned on earning assets, a decrease in the volume of earning assets, and an increase in the rate of interest paid on interest-bearing liabilities, partially offset by a decrease in the amount of interest-bearing liabilities. Loans earned at an average rate of 8.6 percent in 1996 as compared to 9.4% in 1995 as we moved to a lower interest rate environment. In addition, average loans outstanding declined $4,756,000 or 8.6 percent between 1995 and 1996 while average interest-bearing liabilities decreased $15,426,000 or 27.1 percent. The average rate of interest paid on certificates of deposit increased in 1996 as customers elected to extend their maturities for higher rates. 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 nine-month period of 1996 was 5.0 percent compared to 5.6 percent in 1995. The 1996 decrease was due to an decrease in the yield on interest-earning assets while the cost of interest-bearing liabilities increased. The average prime rate declined from 8.8 percent for the three-month period of 1995 to 8.3 percent for the same period in 1996. However, longer term certificates of deposit which earn higher rates of interest caused the average cost of interest-bearing liabilities to increase from 2.7 percent in 1995 to 2.9 percent in 1996. Although the prime rate decreased, the rates paid on most interest-bearing liabilities remained relatively unchanged. The net yield on earning assets was 6.1 percent in the three-month period of 1996 and 6.4 percent in 1995. 	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 Three months ended 3/31/96 						 Loans 	$50,664 	$1,072 	8.6% 	$105 	$112 	$217 Other earning assets 	20,280 	305 	6.1 	42 	5 	47 Interest-earning assets 	70,944 	1,377 	7.9 	147 	117 	264 Interest-bearing liabilities 	41,511 	296 	2.9 	103 	26 	77 	$29,433 	$1,081 	5.0% 	$44 	$143 	$187 Net yield on earning assets 	 	 	6.1% 	 	 	 Three months ended 3/31/95 						 Loans 	$55,420 	$1,289 	9.4% 	$188 	$212 	$24 Other earning assets 	25,065 	352 	5.7 	61 	38 	99 Interest-earning assets 	80,485 	1,641 	8.3 	127 	250 	123 Interest-bearing liabilities 	56,937 	373 	2.7 	19 	31 	12 	$23,548 	$1,268 	5.6% 	$108 	$219 	$111 Net yield on earning assets 	 	 	6.4% 	 	 	 Other Operating Income : Other operating income decreased 6.4 percent in the three-month period of 1996 to $67,100 from $71,700 in the three-month period of 1995. The decrease is attributable to a lower level of merchant discount fee income. 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 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 $6,235,800 of loans classified as substandard and $146,900 of loans classified as doubtful at March 31, 1996 as compared to $6,404,500 of substandard and $37,100 of loans classified as doubtful at December 31, 1995. In addition to the classified loans, the Bank was also monitoring $4,816,800 of loans which it had designated as listed at March 31, 1996 as compared to $4,066,900 at December 31, 1995. 	With the exception of these classified and listed loans, management is not aware of any loans as of March 31, 1996 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 did not make a provision for loan losses in the first quarter of 1995. Loans totaling $38,100 were charged off during the period, and $6,100 was recovered. Loans charged off amounted to $31,500 in the three-month period of 1995, while recoveries totaled $64,700. The March 31, 1996 allowance for loan losses was $688,100, or 1.4 percent of gross loans outstanding, which was the same percentage as December 31, 1995. 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. 	On January 1, 1995. the Bank adopted Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." This statement prescribes that a loan is impaired when it is probable that a creditor will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. It also provides guidance concerning the measurement of impairment on such loans and the recording of the related reserves. The adoption of this statement did not have a material effect on the results of operations or the financial position of the Bank. 	At March 31, 1996, the Bank had classified $46,800 of its loans as impaired and recorded the full amount as specific reserve in the allowance for loan losses. In addition, the Bank classified $2,093,200 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, 1996 was approximately $1,957,500. Interest income of $19,200 was recognized on impaired loans during the three months ended March 31, 1996. 	At March 31, 1996, nonaccrual totaled $843,000, or 1.7 percent of gross loans, compared with $523,000, or 1.0 percent at December 31, 1995. Other real estate owned (OREO), consisting of properties received in settlement of loans totaled $2,254,600 at March 31, 1996, a decrease of $399,800 or 15.1% from December 31, 1995. 	Because of the current economic environment, it is possible that nonaccrual loans and OREO could increase in 1996. 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 $1,169,400 for the three-month period of 1996, a decrease of $68,400 or 5.5 percent from $1,237,800 in 1995. Salaries and employee benefits declined by $68,400 or 13.0 percent as the number of full time equivalent employees has declined from thirty-nine at March 31, 1995 to thirty-five at March 31, 1996. Total other operating expenses were 5.8 percent and 5.3 percent of average total assets at March 31, 1996 and 1995, 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 at March 31, 1996 or 1995. For federal income tax purposes, the Company has net operating loss carryforward of approximately $2,871,300 beginning to expire through 2009. For state income tax purposes, the Company has incurred a net operating loss of approximately $4,789,200 which is available as a carryforward through 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 4, the Company recorded average total assets for the three-month period of 1996 of $80.7 million, an 6.3 percent decrease from 1995 average total assets of $86.1 million. The Bank's average loan portfolio decreased 4.9 percent in the three-month period of 1996 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 4.0 percent to $76.3 million in the three-month period of 1996. Interest-bearing deposits representing 54.4 percent of average total deposits at March 31, 1996, totaled $41.5 million, down from $48.1 million, or 59.9 percent in 1995. 	 Table 4 	Three months ended March 31, 1996 	Year ended December 31, 1995 	 Change Balance Sheet Analysis	 Average % of Average % of from 1995 	(Dollars in millions) 	balance 	Total 	balance 	Total 	 Amount 	% 	Loans 	 $50.6 	71.4% 	 $53.2 	71.0% 	 $(2.6) 	(4.9)% 	Other interest-earning assets 	20.3 	28.6% 	21.7 	29.0% 	(1.4) 	(6.5)% 	Total earning assets 	70.9 	100.0% 	74.9 	100.0% 	(4.0) 	(5.3)% 	Total assets 	 $80.7 		 $86.1 	 	 $(5.4) 	(6.3)% 	Deposits: 	 		 	 		 	 Interest bearing demand 	 $6.7 	8.8% 	 $7.8 	9.7% 	 $(1.1) 	(14.1)% 	 Money market and savings 	25.7 	33.7% 	30.7 	38.2% 	(5.0) 	(16.3)% 	 Time certificates of deposit 	9.1 	11.9% 	9.6 	12.0% 	(0.5) 	(5.2)% 	 Total interest-bearing deposits 	41.5 	54.4% 	48.1 	59.9% 	(6.6) 	(13.7)% 	 Non-interest-bearing demand deposits 	34.8 	45.6% 	32.2 	40.1% 	2.6 	8.1% 	 Total deposits 	 $76.3 	100.0% 	 $80.3 	100.0% 	 $(4.0) 	(5.0)% 	Total earning assets as a percent of 						 	 total deposits 		92.9% 		93.3% 		 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 42.2 percent at March 31, 1996 and 38.6 percent at December 31, 1995. The average maturity of the Bank's investment securities portfolio is 6.5 years at March 31, 1996 versus 5.2 years at December 31, 1995. The loan to deposit ratio was 58.2 percent and 60.9 percent for March 31, 1996 and December 31, 1995, 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, 88.1 percent of total average deposits during the three month period of 1996 and 88.0 percent during 1995. 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 three-month period of 1996 and all of 1995, this relationship represented 11.0 percent and 7.4 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 March 31, 1996 was 71.3 percent, compared with 70.6 percent at December 31, 1995. 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 107 percent of rate sensitive liabilities at March 31, 1996 as compared to 100 percent at the end of 1995. In the one year or less category, rate sensitive assets were 110 percent of rate sensitive liabilities at March 31, 1996 and 113 percent at December 31, 1995. 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 					 March 31, 1996 	 	 	 	 	 Investments 	$22.0 	$0.9 	$1.5 	$4.6 	$29.0 Loans 	38.7$ 	1.0$ 	3.7$ 	5.6$ 	49.0$ Rate sensitive assets 	60.7$ 	1.9$ 	5.2$ 	10.2$ 	78.0$ Time deposits 	$2.2 	$5.5 	$1.0 	$0.0 	$8.7 Other deposits 	49.1$ 	0.0$ 	1.4$ 	13.9$ 	64.4$ Rate sensitive liabilities 	51.3$ 	5.5$ 	2.4$ 	13.9$ 	73.1$ Rate sensitive GAP 	9.4$ 	(3.6)$ 	2.8$ 	(3.7)$ 	4.9$ Cumulative GAP 	9.4$ 	5.8$ 	8.6$ 	4.9$ 	-- Cumulative ratio of sensitive 	 	 	 	 	 assets to liabilities 	1.2$ 	1.1$ 	1.1$ 	1.1$ 	1.1$ December 31, 1995 					 Investments 	$16.6 	$1.7 	$1.9 	$4.6 	$24.8 Loans 	39.8$ 	1.0$ 	3.6$ 	5.3$ 	49.7$ Rate sensitive assets 	56.4$ 	2.7$ 	5.5$ 	9.9$ 	74.5$ Time deposits 	2.2$ 	5.9$ 	1.0$ 	0.0$ 	9.1$ Other deposits 	44.1$ 	0.0$ 	1.4$ 	19.6$ 	65.1$ Rate sensitive liabilities 	46.3$ 	5.9$ 	2.4$ 	19.6$ 	74.2$ Rate sensitive GAP 	10.1$ 	(3.2)$ 	3.1$ 	(9.7)$ 	0.3$ Cumulative GAP 	10.1$ 	6.9$ 	10.0$ 	0.3$ 	-- Cumulative ratio of sensitive assets to liabilities 					 assets to liabilities 	1.2$ 	1.1$ 	1.2$ 	1.0$ 	1.0$ 					 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. 	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 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 7, 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 3.0 percent. At March 31, 1996, the Company and the Bank had a Tier 1 risk based capital ratio of 7.2 percent, and a Tier 1 capital leverage ratio of 4.9 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. 	 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 22, 1996 		 	 	 		 		 				 C. Thomas Mallos 	 				 Director and Chief Financial Officer