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 June 30, 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 August 1, 1997, there were 3,811,819 shares of no par Common Stock issued and outstanding. Consolidated Statements of Financial Condition Marathon Bancorp and Subsidiary 	 June 30, December 31, (Unaudited) 	 1997 		1996 Assets 		 Cash and Due from Banks 	 	7,005,000 	4,789,000 Federal funds sold 			6,000,000 	2,500,000 Cash and cash equivalents	 	13,005,000 	7,289,000 Interest-bearing deposits with financial institutions 				 	498,000		996,000 Securities available for sale 	 	1,133,000 	1,031,000 Securities held to maturity (aggregate market value of $5,579,000 and$5,823,000 at June 30, 1997 and December 31, 1996 respectively) 			 	5,949,000 	6,089,000 Loans	 			 	46,469,000 	47,696,000 Reserve for credit losses	 	(785,000) 	(1,088,000) Net Loans		 45,684,000 	46,608,000 Other real estate owned, net 	 	1,281,000 	3,085,000 Premises and equipment, net 		 433,000 	453,000 Accrued interest receivable 		454,000 	432,000 Other assets 		 		467,000 	410,000 Total Assets 	 		68,904,000 	66,393,000 		 Liabilities and Shareholders' Equity 		 Deposits: 		 Noninterest-bearing 	 	$25,184,000	$25,840,000 Interest-bearing 			39,384,000 	37,041,000 Total deposits		 	64,568,000 	62,881,000 Accrued interest payable 		84,000 		114,000 Other liabilities 		 343,000 	355,000 Total liabilities 		 64,995,000 	63,350,000 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, 1,835,151 and 1,284,764 shares issued and outstanding 		 at June 30,1997 and December 31, 1996 respectively 				 					9,399,000 	8,080,000 Deficit 			 	(5,493,000) 	(5,045,000) Net unrealized gain (loss) on securities available for sale 					 3,000 	 8,000 Total shareholders' equity 	3,909,000 	3,043,000 Total Liabilities and Shareholders' Equity 				$68,904,000 	$66,393,000 See accompanying notes to unaudited consolidated financial statements. Consolidated Statements of Operations Marathon Bancorp and Subsidiary 			 	Three months ended 	Six months ended 					June 30 	 June 30 (Unaudited) 		 	1997 	1996 	 1997 	1996 Interest income: 				 Loans, including fees 	$920,000 	1,029,000 	$1,796,000 $2,100,000 Investment securities - taxable 			 115,000 	118,000 	 224,000 254,000 Federal funds sold 	92,000 		167,000 	144,000 328,000 Deposits with financial institutions 	10,000	 	11,000 		 24,000	 19,000 Total interest income 	1,137,000 	1,325,000 	2,188,000 2,701,000 Interest expense: 				 Deposits 		 315,000 	 289,000 572,000 585,000 Federal funds purchased 	 0 		0 		0 	 0 Total interest expense 	315,000 	289,000 	 572,000 585,000 Net interest income before provisions for loan losses 	 	822,000		1,036,000 	1,616,000 2,116,000 Provision for loan losses 0 		0 	150,000 	 0 Net interest income after provisions for loan losses		 822,000 	1,036,000 	1,466,000 2,116,000 Other operating income: 				 Service charges on deposit accounts	 97,000	 	38,000	 	157,000 103,000 Other service charges and fees 	 	4,000 		3,000 		12,000 	 	6,000 Tot other operating income 101,000 	 41,000 	169,000	 109,000 Other operating expenses: 	 		 	 Salaries and employee benefits	 	390,000 	425,000 	762,000 884,000 Net operating cost of other real estate owned	 12,000 	 21,000		14,000 61,000 Occupancy 		160,000 	90,000	 	316,000 173,000 Furniture and equipment 	38,000 		31,000	 	75,000 62,000 Professional services 	162,000 	 142,000 	256,000	 339,000 Business promotion 	 22,000 	 15,000	 	29,000 	 30,000 Stationery and supplies 	26,000 		18,000	 	54,000 	 32,000 Data processing service	 128,000 	 105,000 	243,000	 238,000 Messenger and courier services 	22,000 		 82,000 		59,000 	 150,000 Insurance and assessments 	89,000 		96,000 		185,000 195,000 Other expenses 		30,000	 	30,000	 	88,000 	 60,000 Total other operating expenses 	 1,079,000 	1,055,000	 2,081,000 2,224,000 Income (loss) before income taxes 	$(156,000) 	$22,000		$(446,000) $1,000 Income taxes	 	0 		0 	 2,000 	0 Net Income (loss) 	 $(156,000) 	$22,000 	$(448,000) $1,000 Net income (loss) per share: 	 $ (0.10) $ 0.02	$( 0.31) 	$ 0.00 See accompanying notes to unaudited consolidated financial statements. Consolidated Statements of Cash Flows Marathon Bancorp and Subsidiary (Unaudited) 			 			Six months ended 			 					June 30, Increase (decrease) in cash and cash equivalents 	 1997 	1996 Cash flows from operating activities: 		 Interest received 			 	$2,219,000 	$2,846,000 Service charges on deposit accounts and other fees received	 169,000 	108,000 Interest paid 				 	(602,000) 	(583,000) Cash paid to suppliers and employees 	 	(2,177,000) 	(2,247,000) Net cash (used) provided by operating activities (391,000)	124,000 Cash flows from investing activities: 	 	 Net decrease (increase) in interest-bearing deposits with other financial institutions 		 		498,000 	(497,000) Proceeds from maturities of securities available for sale			 	0 	2,231,000 Purchase of securities available for sale 	(102,000)	 	0 Proceeds from maturities of securities held to maturity		 128,000 	 257,000 Net decrease (increase) in loans made to customers 		 	978,000		(153,000) Proceeds from sale of other real estate owned 	1,645,000	 587,000 Purchases of furniture, fixtures and equipment 	(46,000)	(124,000) Net cash provided by investing activities 	3,101,000	2,301,000 Cash flows from financing activities: 		 Increase (decrease) in noninterest-bearing and interest-bearing demand deposits and money market and savings accounts 		 		1,875,000	(2,594,000) Net decrease in time certificates of deposits 	(188,000)	(748,000) Proceeds from the sale of common stock 		1,319,000 		0 Net cash provided (used) by financing activities 	3,006,000	(3,342,000) Net increase (decrease) in cash and cash equivalents		 	 	5,716,000 	(917,000) Cash and cash equivalents at beginning of year 	7,289,000	22,850,000 Cash and cash equivalents at end of period 	 $13,005,000	$21,933,000 See accompanying notes to unaudited consolidated financial statements. 											 (Continued) Consolidated Statements of Cash Flows (Continued) Marathon Bancorp and Subsidiary (Unaudited) 						 Six months ended 	 							June 30, Reconciliation of net income (loss) to net cash provided (used)by operating activities 	1997 	1996 Net income (loss) 		 		$(448,000) 	$1,000 Adjustments to reconcile net loss to net cash provided 		 by operating activities: 		 Depreciation and amortization expense 	66,000 		55,000 (Gain) loss on sale of other real estate owned		 	(3,000) 	21,000 Provision for REO losses	 	0 		0 Provision for loan losses 	 	150,000 	0 Amortization of premiums and discounts on securities, net 				 	12,000 		9,000 Change in deferred loan origination fees, net 41,000 	(8,000) Change in accrued interest receivable 	(22,000) 	143,000 Change in accrued interest payable 	(30,000) 	2,000 Change in income tax receivable 		0 			0 Change in other assets		 	 (96,000) 	(365,000) Change in other liabilities 	 	(61,000) 	266,000 Total adjustments		 	57,000 		123,000 Net cash (used) provided by operating activities	(391,000) 	$124,000 Supplemental cash flow information: 		 Transfer from loans to other real estate owned	 $185,000 	$243,400 Loans made to facilitate the sale of other real estate owned 	 		 		$1,695,000 	$88,000 See accompanying notes to unaudited consolidated financial statements. Consolidated Statements of Changes in Shareholders' Equity Marathon Bancorp and Subsidiary 								 	 	 				 		 Net	Unrealized 	 Gain (loss) 					 	 on Securities Preferred Common 	 	 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		 		 (448,000) 		 (448,000) Net change in unrealized gain on securities available for sale	 				(4,700) (4,700) Proceeds from the sale of						 common stock 3/25/97 	340,832	 	766,900	 				 766,900 Proceeds from the sale of common stock 6/30/97 	245,555		 552,500	 		 	 552,500 Balance, March 31, 1997	 	--- 	1,835,151	$9,399,400	$(5,492,700) 	$2,800	$3,909,500 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 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 June 30, 1997 and December 31, 1996, results of operations and changes in cash flows for the three-month and six-month periods ended June 30, 1997 and 1996. The results of operations for the six-month period ended June 30, 1997 are not necessarily indicative of what the results of operations will be for the full year ending December 31, 1997. (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 1,592,294 for the three-month and 1,434,660 for the six-month period ended June 30, 1997 and 1,248,764 for the three-month and six-month periods ended June 30, 1996. (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. During the second quarter the Company began a public offering to sell 2,222,223 shares at $2.25 per share to raise $5,000,000 in new capital. The additional capital will bring the Bank and Caompany into compliance with its' regualtory agreements. At June 30, 1997 $552,500 of the offering sales had been added to capital. 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 1996 Annual Report on Form 10-KSB. Averages presented are daily average balances. Summary 	Marathon Bancorp recorded a net loss for the six-month period ended June 30, 1996 of $156,000, or $0.31 per common share, compared with net income of $22,000, or $0.2 per common share, for the same period in 1996. The major reasons for the decrease in earnings were a decrease in net interest income and a provision for loan loss. 	As summarized in Table 1 and discussed more fully below, the Bank's operations for the first six months of 1997 resulted in a 23.6 percent decrease in net interest income, a 100% increase in the provision for loan losses and a 55 percent increase in other operating income. Table 1 Summary of Operating Performance 	 Six-month Period 	 Increase/ 							(decrease) (Dollars in thousands) 		1997 	1996 Amount 	Percent 	Net interest income 		$1,616 	$2,116 	$(500) 	(23.6)% 	Provision for loan losses 	150 	0 	 150 	100.0% 	Other operating income 	169 	 109 	60 	55.0% 	Other operating expenses 	2,081 	2,224 	(143) 	(6.4)% 	Net loss 	 		$(446) 	$1 	$(447) N/A 	At June 30, 1997, the Company had total assets of $68,904,000, total loans of $46,469,000 and total deposits of $64,568,000. This compares to total assets of $66,393,000, total loans of $47,696,000 and total deposits of $62,881,000 at December 31, 1996. 	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 June 30, 1997, the Company and the Bank had a Tier 1 risk based capital ratio of 7.4 percent, and a Tier 1 capital leverage ratio of 5.8 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. 	Interest income for the first six months of 1997 decreased $513,000, or 19% as compared to the first six months of 1996. The reasons for this decline were decreases in the rate of interest earned on loans due to non-accruals and a decrease in the rate of interest earned on earning assets. Interest paid on deposits decreased $13,000 from the same period in 1996, which did not offset the decrease in income. Loans earned at an average rate of 7.8% percent in 1997 as compared to 8.5% in 1996 as we moved to a lower interest rate environment. In addition, average loans outstanding declined $3,483,000 or 6.9 percent between 1996 and 1997. Average interest-bearing liabilities decreased $3,855,000 or 9.2 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 net interest income divided by the earning assets. 	The Company's interest rate spread for the six-month period of 1997 was 4.2 percent compared to 4.9 percent in 1996. The 1997 decrease was due to an decrease in the yield on interest-earning assets while the cost of interest-bearing liabilities slightly increased. The net yield on earning assets was 5.3% percent in the six-month period of 1997 and 6.0 percent in 1996. 	For the second quarter of 1997 net interest income was down $214,000, or 21%. This again was attributable mainly to interest loss on nonaccruing assets and the shrinkage in total earning assets. With the additional $5,000,000 in capital the Company is now raising through its' public offering, the Company will be able to begin increasing the deposits and assets and leveraging the new capital to increase profits. 	The Bank's net yield on earning assets remains high in comparison with the Company's interest rate spread due to the significant volume of noninterest-bearing demand deposits relative to total funding sources (represented by total deposits and shareholders' equity). While these deposits are noninterest- bearing, they are not without cost. However, the Bank believes that they remain the lowest cost source of funds available in the marketplace (see "Liquidity and Interest Rate Sensitivity Management"). Table 2 Net Interest Income Analysis Interest Weighted Change from prior yr 		 Average 	income/ average due to change in: ($ in thousands) balance 	expense yield/cost Volume Rate Total Six months ended 6/30/97 						 Loans 	$46,584 	$1,796 	7.8% 	$(146) 	$(158) $(304) Other earning assets	 	14,390 		392 5.5 	 ( 185) 	 (24) 	(209) Interest-earning assets 	60,974 	2,188 		 7.2 	(331) 	(182)	 (513) Interest-bearing liabilities 38,258 	572 		 3.0 	(57) 	44 	(13) Total 		$22,716 	$1,616	 	4.2% 	 $(274) 	$(226)	(500) Net yield on earning assets 	 	 	5.3% 	 	 	 Six months ended 6/30/96 						 Loans	 	 $50,067 	$2,100 	 	8.5% 	 $(214) 	$(197) $(411) Other earning assets	 	 20,705 		601 	 	5.9 	(89) 	34 	(55) Interest-earning assets 	70,772 		2,701 	 	7.9 	(303) 	(163)	(466) Interest-bearing liabilities 	 42,113 	 	585 		 2.8 	(151) 	23	 (128) Total	 	$28,659 $2,116	 	4.9% 	$(152) 	$(186) $(338) Net yield on earning assets 	 	6.0% 	 	 	 Other Operating Income : Other operating income increased 55 percent in the six-month period of 1997 to $169,000 from $109,000 in the six-month period ended 1996. The increase is the result of higher service charge income generated on deposit accounts. 	For the quarter ended June 30 , 1997 other income increased $60,000, or 146% over the like period of 1996. Service charges on deposit accounts increased with the Bank's emphasis on collection of charges on commercial checking accounts that are under service charge analysis programs. 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. 	Excluding loans which have been classified loss and charged off by the Bank, the Bank's classified loans consisted of $6,356,000 of loans classified as substandard at June 30, 1997 as compared to $5,883,000 of substandard and $44,000 of loans classified as doubtful at December 31, 1996. 	With the exception of these classified loans, management is not aware of any loans as of June 30, 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 in the near future. 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 provision for loan losses of $150,000 in the first half of 1997 and no provision in the second quarter compared to no provision in the first six months of 1996. Loans totaling $492,000 were charged off during the first six months of 1997 and $39,000 was recovered. Loans charged off amounted to $176,000 in the six-month period of 1996, while recoveries totaled $10,000. 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. financial position of the Bank. 	At June 30, 1997, nonaccrual loans totaled $2,431,000, or 5.2 percent of gross loans, compared with $568,000, or 1.2 percent at December 31, 1996. Other real estate owned (OREO), consisting of properties received in settlement of loans totaled $1,281,000 at June 30, 1997, a decrease of $1,804,000 or 58.5% from December 31, 1996. Other Operating Expenses: Other operating expenses totaled $2,081,000 for the six-month period of 1997, a decrease of $143,000 or 6 percent from $2,224,000 in 1996. For the second quarter operating expenses were up $24,000, or 2% over that reported for 1996. Employment compensation, OREO expenses, professional fees, courier services and insurance decreased for the six-months of 1997. The category that showed the largest increase was occupancy expense which increased $143,000, or 83% with the Company's move back to its' permanent quarters after the repairs from the Northridge earthquake. 	Expenses for the second quarter also were reflective of the move back into the Company's offices and the expense related thereto. Employment compensation for both periods of 1997 were decreased from 1996 levels and reflect the reductions in staff made over the last six months to reduce expenses. 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 income tax expense of $2,000 and no benefit at June 30, 1997. At December 31, 1996 for federal income tax purposes, the Company has a net operating loss carryforward of approximately $3,727,000 beginning to expire in 2008 - 2011. For state income tax purposes, the Company has incurred a net operating loss of approximately $5,252,000 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. Assets and Liabilities Assets increased during the first six months of 1997 by $2,511,000, or 4%. This growth was invested mainly in federal funds sold for liquidity purposes. The loan portfolio decreased by $1,227,000 during 1997. The Company was able to make significant progress in the reduction of other real estate owned reducing the outstanding balance to $1,281,000 which represents only two properties. 	The increase in assets was funded by an increase in the interest bearing deposits of $2,343,000, or 6% over the December 31, 1996 balances. Most of the growth was in the money market and now accounts. The noninterest bearing deposits showed a decline of $656,000 from yearend 1996. 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 30 percent at June 30, 1997 and 23 percent at December 31, 1996. The loan to deposit ratio was 72 percent and 75 percent for June 30, 1997 and December 31, 1996, 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. 	 While 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 some of its commercial customers. 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. Due to the fact that the Bank has a large portfolio of noninterest bearing demand deposits the Company has historically been asset sensitive with a positive gap. Currently the Company is still asset sensitive which means the Company will have increased income in a rising rate environment and decreased income in a falling rate scenario. 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 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 June 30, 1997, the Company and the Bank had a Tier 1 risk based capital ratio of 7.4 percent, and a Tier 1 capital leverage ratio of 5.8 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. 	The Company has raised additional capital during the period of June 25, 1997 through July 31, 1997 which it has invested in the Bank. The total capital raised was $5,000,000 of which $552,500 was invested in the Bank prior to June 30, 1997. The remaining capital less expenses of approximately $250,000 will be invested in the Bank during the third quarter.	 PART II. OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders On May 19, 1997, proxy materials for the 1996 Annual Meeting of Shareholders of Marathon Bancorp ("the meeting"), were mailed to all shareholders of record on May 5, 1997. The meeting took place on June 16, 1997. Shareholders were asked to vote on the matter shown below. Of the total 1,589,596 shares outstanding and entitled to vote, 1,589,596 shares were represented either in person or by properly executed proxies. The results of the voting on the matter are shown below: Matter 1. To elect seven persons to the Board of Directors to serve until the next Annual Meeting of Shareholders or until their successors are elected or have qualified. 				 	FOR AGAINST ABSTAIN 	Robert J. Abernethy		 1,415,309 	28,812	 	0	 	Frank W. Jobe 			 1,415,309 	28,812	 	0	 	 		 	C. Thomas Mallos 	 	1,415,309 	28,812	 	0	 	John J. Maloney 			1,415,309 	28,812 		0 Robert L. Oltman 	 	1,415,309 	28,812	 	0 	Ann Pappas 			1,415,309 	28,812 		0 	Nick Patsaouras 			1,415,309 	28,812	 	0 Matter 2. Other Business. There was 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: August 14, 1997 	 	 	 	Craig D. Collette 				 Craig D. Collette 		 										President and Chief 							Executive Officer Howard J. Stanke 							Howard J. Stanke 							Chief Financial	Officer