Marathon Bancorp, Inc. — Form 10-K Summary
Period clarification: The filing is for the fiscal year ended June 30, 2021, with comparative results for the year ended June 30, 2020. It is not a 2020 Q4 report. Marathon Bancorp was formed in December 2020 and completed its mutual holding company reorganization and public stock offering on April 14, 2021; pre-reorganization comparative financial information is that of Marathon Bank.
Business context
Marathon Bancorp is the holding company for Marathon Bank, a Wisconsin community savings bank headquartered in Wausau. The Bank operates four offices and focuses on residential, commercial real estate, multifamily, commercial and industrial, construction, and consumer lending. Management’s strategy is to expand commercial and multifamily lending in Southeastern Wisconsin while maintaining residential mortgage lending and growing core deposits.
Key financial results and position
| Metric | FY2021 / June 30, 2021 | FY2020 / June 30, 2020 |
|---|---|---|
| Total assets | $213.6 million | $170.7 million |
| Total deposits | $172.0 million | $134.0 million |
| Net loans | $144.2 million | $116.9 million |
| Stockholders’ equity | $29.8 million | $20.8 million |
| Net interest income | $5.39 million | $4.55 million |
| Net income | $1.37 million | $418,000 |
| Operating cash flow | $1.46 million | $1.06 million |
- Profitability and margins: Net interest margin was 3.10%, versus 3.08%; return on average assets was 0.73%, versus 0.27%; and return on average equity was 6.14%, versus 2.08%. The efficiency ratio improved to 74.61% from 88.20%.
- Income and expenses: Interest income was $6.48 million and interest expense was $1.09 million. Non-interest income was $1.90 million, up from $1.01 million, primarily because mortgage banking income rose to $1.53 million from $606,000. Non-interest expense increased to $5.44 million from $4.90 million. The provision for loan losses was zero, compared with $150,000 in FY2020.
- Cash flow and liquidity: Cash and cash equivalents were $46.0 million, with an additional $2.1 million in interest-bearing deposits at other institutions. Cash increased by $21.8 million during the year. Investing activities used $21.3 million, while financing activities provided $41.6 million. Management said it monitors liquidity daily and expects sufficient funds for current commitments.
- Debt and funding: The Bank had $10.4 million of Federal Reserve PPP Liquidity Facility funding, secured by PPP loans; it bore a 0.35% fixed rate. There were no FHLB advances at year-end, although a $75.5 million borrowing capacity was available subject to additional collateral. Deposits included $17.7 million of brokered deposits and $36.3 million of uninsured deposits.
- Credit quality and capital: The allowance for loan losses was $2.19 million, or 1.49% of loans, versus $1.70 million, or 1.43%. Nonperforming assets declined to $178,000 (0.08% of assets) from $319,000 (0.19%). The Bank was classified as well capitalized and elected the community bank leverage ratio framework; its Tier 1 capital-to-average-assets ratio was 12.47%.
- Operating cash conversion: Mortgage loan originations held for sale were $50.6 million and sales were $51.7 million. This activity contributed to higher mortgage banking income and should be considered when assessing recurring earnings.
Material changes versus FY2020
- Net income increased by $955,000, or 228.6%, with higher net interest income and mortgage banking income and no loan-loss provision in FY2021.
- Assets grew 25.2%, deposits 28.3%, and net loans 23.3%. Commercial real estate and multifamily lending expanded; commercial real estate loans were $52.1 million and multifamily loans $17.3 million at year-end.
- Core deposits reached $112.7 million, up from $86.5 million. Certificates of deposit remained about 34.5% of deposits.
- The April 2021 stock offering raised $10.0 million gross and approximately $8.5 million net after expenses. The mutual holding company owns 55% of the shares; 45% were sold to the public. The Company contributed about $4.5 million to the Bank, used $874,000 to fund the ESOP loan, and retained approximately $3.4 million.
- Commercial and industrial loans rated special mention/watch increased to $5.26 million from $1.74 million, while classified loans fell to zero from $2.49 million, following upgrades of previously substandard credits.
Outlook, risks, and unusual items
- Management plans to grow commercial real estate and multifamily lending in Southeastern Wisconsin, continue selling most conforming fixed-rate residential mortgages, and pursue core-deposit growth. It disclosed no specific earnings or financial guidance and no currently planned acquisitions or new branches.
- Management expects higher public-company costs and potentially higher compensation expense from the ESOP and any future stock-based benefit plans approved by shareholders. The Company said it did not currently intend to pay cash dividends; it paid none in FY2021.
- COVID-19 remains a material uncertainty. The Bank granted short-term deferrals on 56 loans totaling approximately $20.0 million; all had returned to normal payment status by June 30, 2021. Management warned that renewed disruption could weaken borrower repayment, collateral values, loan demand, and results. It also identified the Delta variant as a concern.
- Commercial and multifamily real estate lending carries greater risk than residential lending and is a growing portfolio concentration. Management specifically identified commercial real estate as the loan category with the greatest pandemic-related credit risk. Other disclosed risks include interest-rate and margin changes, competition, funding access, cyber and operational risks, and regulatory changes.
- PPP loans totaled approximately $10.4 million at year-end and were matched by PPPLF funding. The PPP ended in May 2021; forgiveness and fee recognition affect the timing of reported income and repayment of the related funding.
- The independent auditor issued an unqualified opinion on the consolidated financial statements. The filing did not include an auditor attestation on internal control over financial reporting, citing the Company’s emerging-growth-company status; management concluded disclosure controls were effective.
Important facts for investors to verify
- Confirm the reporting period and compare FY2021 with FY2020—not with 2020 Q4.
- Review the quality and persistence of earnings, particularly mortgage-sale gains, PPP processing fees, and the zero provision for loan losses despite loan growth.
- Assess commercial real estate exposures, special mention/watch credits, loan participations, and the effects of COVID-19 on borrowers and collateral.
- Monitor deposit mix and stability, including brokered and uninsured deposits, upcoming certificate maturities, and the collateral available for additional borrowing.
- Verify PPP forgiveness, remaining deferred fees, and the timing and repayment terms of the matching PPPLF funding.
- Review the use of offering proceeds, ESOP-related dilution and expense, and the restrictions and stated uncertainty around future dividends.