Marathon Bancorp, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2021. The filing compares quarterly and year-to-date results with the corresponding 2020 periods, and balance-sheet amounts with June 30, 2021. Amounts below are U.S. dollars.
Business context
Marathon Bancorp is a bank holding company for Marathon Bank, a Wisconsin community bank operating four offices. Its lending includes commercial real estate, commercial and industrial, construction, residential real estate, multifamily and consumer loans. The company completed its mutual-to-stock reorganization and public offering in April 2021.
Financial performance and condition
- Quarterly earnings: Net income was $285,000, down 27.1% from $391,000 in the prior-year quarter; basic and diluted earnings per share were $0.13.
- Six-month earnings: Net income was $702,000, down 7.2% from $756,000; earnings per share were $0.33.
- Interest income and margin: Quarterly net interest income rose 12.2% to $1.47 million, while net interest margin declined to 3.00% from 3.26%. Six-month net interest income increased 26.4% to $3.14 million and margin increased to 3.18% from 3.10%. The six-month margin would have been about 2.70% excluding $473,000 of recognized deferred PPP loan fees.
- Other income and expenses: Non-interest income fell 42.8% in the quarter to $290,000 and 47% for six months to $570,000, primarily because lower mortgage refinancing reduced mortgage banking income. Non-interest expenses rose 6.1% for the quarter to $1.38 million and 7.7% for six months to $2.78 million; higher public-company professional fees were a principal factor.
- Assets and lending: Total assets increased 0.7% from June 30 to $215.2 million. Net loans rose 8.4% to $156.3 million, including growth in commercial real estate and multifamily loans. Commercial and industrial loans declined as forgiven PPP loans were repaid.
- Deposits and funding: Deposits increased 6.7% to $183.4 million, with demand, NOW and money-market balances contributing most of the growth. PPPLF funding fell to $150,000 from $10.4 million. The company reported no FHLB borrowings and a $72.4 million FHLB credit line at period-end.
- Liquidity and cash flow: Cash and cash equivalents declined 35.5% from June to $29.7 million, mainly reflecting loan funding and purchases of securities and bank-owned life insurance. For the six months, operating cash flow was $206,000, investing cash outflow was $17.8 million and financing cash inflow was $1.2 million.
- Credit quality and capital: The allowance for loan losses was $2.19 million, or 1.38% of total loans; no loan-loss provision was recorded in the six-month period. Nonperforming assets were $160,000, or 0.07% of assets. Special-mention loans declined to $1.69 million from $5.26 million at June 30, with no classified loans reported. The Bank’s regulatory tier 1 leverage ratio was 12.55%, and management said it remained well capitalized.
- Equity: Stockholders’ equity increased to $30.5 million from $29.8 million at June 30, primarily due to earnings.
Changes versus comparable periods
Net income declined despite stronger net interest income, as reduced mortgage banking revenue and higher operating expenses more than offset interest-income growth and lower funding costs. Loan balances and deposits expanded from June 30, while cash declined. The six-month net interest income increase included a substantial contribution from PPP loan forgiveness fees; ordinary loan yields were lower than in the prior-year period.
Outlook, risks and unusual items
- No quantified earnings or financial guidance was provided. Management said it expected sufficient funds to meet current funding commitments and anticipated retaining a substantial portion of maturing time deposits.
- Management cited commercial real estate as the loan category with the greatest relative credit risk. Allowance estimates are judgmental and could change with credit performance, collateral values, economic conditions or regulatory review.
- COVID-19 effects remain uncertain. The company reported no significant business disruption and said all 56 loans with approximately $20.0 million of COVID-related payment deferrals had returned to normal payment status by December 31, 2021.
- Key risks include economic and real estate conditions, interest-rate and margin changes, loan demand and credit quality, deposit retention and funding costs, mortgage secondary-market conditions, competition, cybersecurity and third-party operational risks.
- Unusual earnings factors included $473,000 of six-month PPP deferred-fee recognition and a $14,000 securities gain. Unrealized available-for-sale securities losses reduced six-month other comprehensive income by $52,000.
- The Bank adopted the community bank leverage ratio framework. Management expected lease accounting changes effective July 1, 2022 to increase reported assets and liabilities, but not materially affect results or cash flows; it was still evaluating the impact of the expected-credit-loss standard planned for July 1, 2023.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. No material legal proceeding was identified.
Important facts for investors to verify
- How much future net interest income depends on PPP fee recognition versus recurring loan and investment yields.
- Whether commercial real estate and other loan growth is accompanied by stable credit quality, and how allowance levels respond to changing conditions.
- Whether deposit growth is durable, including the role of stimulus-related balances, brokered certificates and maturing time deposits.
- How higher interest rates or weaker refinancing demand affect loan yields, deposit costs, securities values and mortgage banking income.
- The reported cash decline, planned loan growth and access to available borrowing facilities, including any material change in liquidity or capital after period-end.