Business context and reporting period
Marathon Bancorp, Inc. is the holding company for Marathon Bank, a Wisconsin community bank operating four facilities and serving markets in Wisconsin. This Form 10-Q covers the fiscal second quarter and six months ended December 31, 2023; the comparable periods are the three and six months ended December 31, 2022. The Bank opened a new Brookfield, Wisconsin branch on January 22, 2024.
Financial performance and condition
| Metric | Three months ended Dec. 31, 2023 | Six months ended Dec. 31, 2023 | Comparable prior period |
|---|---|---|---|
| Net interest income | $1.49 million | $3.05 million | $1.69 million and $3.40 million |
| Net income | $272,000 | $358,000 | $301,000 and $813,000 |
| Diluted earnings per share | $0.13 | $0.18 | $0.14 and $0.38 |
| Net interest margin | 2.76% | 2.80% | 3.02% and 3.13% |
| Net cash from operating activities | $990,000 for six months | $962,000 for six months |
- Revenue and costs: Six-month interest income increased 12.5% to $4.81 million, but interest expense rose 102.1% to $1.76 million. Net interest income fell 10.4% to $3.05 million as funding costs rose faster than asset yields.
- Other income and expenses: Six-month non-interest income declined 26.9% to $405,000, largely because the prior-year period included a $173,000 life-insurance death benefit and a $24,000 securities gain. Non-interest expense increased 2.8% to $3.02 million.
- Balance sheet at Dec. 31: Assets were $234.1 million, down 1.9% from June 30, 2023. Net loans were $194.5 million; deposits were $179.3 million; FHLB advances were $20.0 million; and stockholders’ equity was $31.8 million.
- Cash flow and liquidity: Cash and cash equivalents ended at $8.1 million, down $3.7 million from June 30. Six-month investing activities provided $1.3 million, while financing activities used $5.9 million, principally reflecting deposit outflows. The Bank reported an $83 million FHLB line with $20 million drawn, up to $25 million available from the Federal Reserve subject to eligible collateral, and a $5 million unsecured correspondent-bank federal funds limit.
- Asset quality: The allowance for credit losses was $1.89 million, or 0.96% of loans. The Company recorded a $94,000 recovery of credit losses for the six months. It reported no nonaccrual loans, loans 90 or more days past due, or classified loans; $124,000 was 30–59 days past due. Foreclosed property was $2.31 million, representing 0.99% of assets.
- Capital: The Bank elected the community bank leverage ratio framework and reported a 12.35% leverage ratio, above the 9.0% well-capitalized threshold. Management said the Bank met applicable capital requirements.
Material changes versus the prior comparable period
- Net income declined 9.7% for the quarter and 55.9% for the six-month period. Lower net interest income was a key factor; the six-month comparison also reflects the prior-year death-benefit and securities gains.
- Deposit balances fell $17.9 million, or 9.1%, from June 30, 2023. Management attributed outflows to customers seeking higher rates and the Bank’s decision to be less aggressive in matching competitors; a $4.5 million brokered certificate also matured. Brokered deposits declined to $17.7 million from $22.2 million.
- FHLB advances increased $12.0 million to $20.0 million to help fund deposit outflows and a building purchase. Gross loans decreased $3.5 million, with multifamily real estate the exception, increasing $1.4 million.
- Premises and equipment increased $1.8 million, primarily associated with the new branch. The Bank purchased a building for a future branch location.
- The Company adopted CECL on July 1, 2023; the net-of-tax opening retained-earnings increase was $133,000. The allowance declined during the period, including the adoption adjustment and subsequent recovery provision.
Outlook, commentary, risks and unusual items
- No quantified earnings or financial guidance is provided. Management said it expects unemployment and the housing price index in its markets to improve over the next two years, citing demand and limited housing inventory, and expects a substantial portion of maturing time deposits to renew. Deposit runoff could require additional borrowing and increase interest expense.
- Management attributed margin pressure to deposit repricing and higher borrowing costs. It said FHLB funding was more favorable than rates customers were seeking on certificates of deposit. Mortgage activity had recently picked up following a slight decline in mortgage rates.
- Unrealized losses on available-for-sale securities were $1.08 million at Dec. 31; held-to-maturity securities had a $99,856 unrealized loss. Management attributed losses primarily to interest rates and market conditions, stated it did not intend to sell the securities, and reported no securities credit-loss allowance.
- Wisconsin tax-law changes led the Company to eliminate state net deferred tax asset balances because management expected a 0% state tax rate for realization; the change resulted in approximately $112,000 of deferred tax expense for the six months. The quarter included a $29,000 income-tax benefit.
- Control concern: Management disclosed a material weakness in internal control over financial reporting related to tax accounting, stemming from the erroneous maintenance of a deferred tax liability for a reserve not expected to be recaptured. The issue led to correction of material errors and restatement of prior financial statements. Remediation procedures are underway but have not been fully tested; management concluded disclosure controls were not effective as of Dec. 31, 2023.
- Risks identified include interest-rate and funding pressures, deposit competition, loan and real-estate credit risk, changing economic conditions, securities-market conditions, cyber and operational risks, fraud, regulation, and the effectiveness of tax-asset estimates. The filing reports no material legal proceeding.
- The Company authorized a repurchase program for up to 107,875 shares, approximately 5% of outstanding shares, with no expiration date; no shares were repurchased in the quarter.
Important facts for investors to verify
- Progress and independent validation of remediation for the disclosed material weakness, and the effects of the tax accounting correction and prior-period restatement.
- Whether deposit outflows continue, the retention and repricing of $46.7 million in time deposits due within one year, and reliance on FHLB or other borrowings.
- Whether net interest margin stabilizes as deposit and borrowing costs change, and whether deposit competition affects earnings and liquidity.
- Credit quality, CECL assumptions and allowance adequacy, including performance of the $2.31 million foreclosed property and any deterioration in real-estate collateral or borrower conditions.
- Unrealized securities losses, liquidity needs, and whether the Company can avoid selling securities before recovery of amortized cost.
- Costs and performance of the Brookfield branch and any actual activity under the share repurchase program.