Marathon Bancorp, Inc. annual report, FY2023

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Marathon Bancorp, Inc. — Form 10-K Summary

Reporting period: Fiscal year ended June 30, 2023, compared with the year ended June 30, 2022. This is an annual filing, not a standalone 2022 fourth-quarter report. Marathon Bancorp is the holding company for Marathon Bank, a Wisconsin community bank operating four offices.

Financial results and condition

  • Assets and lending: Total assets rose 8.3% to $238.8 million. Net loans increased 6.5% to $197.7 million; deposits were $197.3 million and stockholders’ equity was $31.3 million.
  • Earnings: Net income increased 25.3% to $1.67 million ($0.79 per basic and diluted share). Net interest income rose 7.9% to $6.70 million. Interest income increased to $8.98 million, while interest expense more than doubled to $2.28 million.
  • Margins: Net interest margin declined to 3.04% from 3.09%; interest-rate spread fell to 2.81% from 2.99%. Return on average assets was 0.71%, and return on average equity was 5.91%.
  • Other income and expenses: Non-interest income was $1.30 million, including a $261,000 life-insurance death-benefit gain and a $247,000 gain on acquiring foreclosed real estate. Mortgage banking income fell 49.1% to $351,000. Non-interest expenses increased 5.9% to $5.88 million.
  • Cash flow and liquidity: Operating activities provided $2.0 million; investing activities used $14.4 million; financing activities provided $15.8 million. Cash and cash equivalents ended at $11.8 million, with an additional $3.8 million in interest-bearing deposits at other institutions. The Bank had $8.0 million of FHLB advances and access to an $84.0 million FHLB facility, subject to collateral, plus other borrowing arrangements.
  • Funding: Deposits increased 4.9%. Certificates of deposit rose 39.8% to $83.9 million, while demand/NOW/money-market balances declined 22.7% to $44.7 million. Core deposits were $113.4 million, or 57.5% of deposits; brokered deposits were $22.2 million. Uninsured deposits totaled $47.9 million.
  • Credit quality: The allowance for loan losses was $2.16 million, or 1.08% of loans, versus $2.20 million, or 1.17%, a year earlier. There was no provision for loan losses in either year; 2023 net charge-offs were $36,000. Non-performing loans were zero at year-end, but non-performing assets were $2.31 million (0.97% of assets), reflecting foreclosed construction-loan collateral.
  • Capital and debt: The Bank reported a 12.02% Tier 1 capital-to-average-assets ratio and was classified as well capitalized. FHLB advances were $8.0 million at year-end, compared with none a year earlier.

Material changes versus prior year

  • Loan growth was led by multifamily real estate, up 30.2% to $44.2 million, and one- to four-family residential loans, up 14.6% to $59.6 million. Commercial real estate loans reached $84.6 million and represented 42.3% of total loans.
  • Interest income benefited from loan growth and higher yields on cash, while higher deposit rates and increased certificate-of-deposit funding raised interest expense and compressed spread and margin.
  • The Bank foreclosed on collateral for a construction loan and recorded $2.31 million of foreclosed assets. Construction loans fell to $1.9 million from $10.6 million.
  • Stockholders’ equity was nearly flat: net income was largely offset by $1.37 million of share repurchases and a $416,000 increase in accumulated other comprehensive loss, primarily related to interest-rate-driven securities valuation declines.
  • The 2022 financial statements were restated for a $481,798 deferred-tax accounting error. The correction increased opening retained earnings and deferred tax assets; the audited statements include the restatement.

Outlook, risks and unusual items

  • Management intends to continue expanding commercial and multifamily real estate lending, particularly in southeastern Wisconsin, while maintaining residential mortgage lending. A Brookfield, Wisconsin branch was expected in the third quarter of fiscal 2024, subject to regulatory approval.
  • Management said it expects sufficient funding for current commitments and anticipates retaining a substantial portion of maturing time deposits; borrowings could supplement funding if deposits run off. Time deposits due within one year totaled $54.6 million.
  • Key disclosed risks include interest-rate changes and margin pressure, deposit competition and funding costs, commercial and multifamily property values and cash flows, credit losses, access to funding, cyber and operational risks, and regulatory or FDIC insurance-cost changes. Management identified commercial and multifamily real estate as the portfolio’s greatest credit-risk area.
  • The filing identifies a material weakness in internal controls over financial reporting related to the tax-reserve error. Management concluded disclosure controls were not effective as of June 30, 2023 and said remediation was implemented in fiscal 2024. The auditor gave an unqualified opinion on the financial statements, including the restatement, but did not audit or attest to internal-control effectiveness.
  • Available-for-sale securities had $1.04 million of gross unrealized losses at June 30, 2023, which management attributed to interest-rate changes and did not consider other-than-temporary. The filing also reports a $138,000 unrealized loss on held-to-maturity securities.
  • No cash dividends were paid in fiscal 2023 or 2022; the Company said it did not currently intend to pay dividends. The stock repurchase program was completed in May 2023.

Important facts for investors to verify

  • Review the restatement details and the status and independent validation of fiscal 2024 remediation of the material weakness.
  • Track deposit mix, uninsured and brokered deposits, certificate maturities, deposit pricing, and use and terms of FHLB borrowing facilities.
  • Assess the $2.31 million foreclosed construction property, its appraisal assumptions, disposition prospects, and any further credit exposure or charge-offs.
  • Monitor commercial and multifamily loan concentrations, borrower performance, collateral values, and the allowance methodology, including the transition to CECL effective July 1, 2023.
  • Reconcile reported earnings with unusual gains and assess ongoing earnings and margins without the life-insurance benefit and foreclosed-asset gain.