Business context and reporting period
Marathon Bancorp, Inc. filed this Form 10-Q for the quarter ended December 31, 2020, its fiscal second quarter, and six-month year-to-date period. The holding company was still being formed and had no assets, liabilities, or business activity; the financial results presented are those of Marathon Bank, a Wisconsin community bank. The reorganization and public stock offering remained subject to regulatory approvals. The filing reports no Bancorp common shares issued and outstanding as of March 26, 2021.
Key financial metrics
- Six months ended December 31, 2020: net income was $756,000, versus $297,000 in the prior-year period; net interest income was $2.49 million versus $2.32 million. Total interest income was $3.06 million and interest expense was $574,000. Non-interest income was $1.07 million, and non-interest expense was $2.58 million.
- Quarter ended December 31, 2020: net income was $391,000, versus $152,000 a year earlier. Net interest income was $1.31 million, up 11.5%; non-interest income was $507,000, up $329,000, largely reflecting mortgage banking activity.
- Margins: net interest margin was 3.10% for the six-month period, down from 3.34%; for the quarter it was 3.26%, down from 3.44%. Management expects further margin compression.
- Balance sheet at December 31: assets were $174.5 million, net loans $123.2 million, deposits $139.2 million, and equity $21.6 million. Loans grew 5.3% and deposits grew 3.9% from June 30, 2020.
- Credit quality: the allowance for loan losses was $2.12 million, or 1.69% of total loans, compared with $1.70 million at June 30. No provision for loan losses was recorded in the six-month period; the allowance increase reflected net recoveries of $418,000. Non-performing assets declined to $78,000 from $319,000 at June 30.
- Cash flow and liquidity: six-month operating cash flow was $200,000, investing cash flow was negative $3.28 million, and financing cash flow was positive $3.35 million. Cash and cash equivalents were $24.5 million; including interest-bearing deposits at other institutions, cash and cash equivalents totaled approximately $27.8 million.
- Debt and capital: FHLB advances were $8.0 million and PPPLF funding was $4.5 million. The Bank reported capital ratios of 11.86% CET1, 13.05% total risk-based capital, and 12.60% Tier 1 leverage, and was categorized as well capitalized.
Material changes versus prior comparable periods
- Six-month net income rose 154.5%, primarily as mortgage banking income increased to $882,000 from $156,000, on residential mortgage loan sales of $30.9 million versus $4.4 million. Lower deposit costs also helped; interest expense fell 19.9%.
- Net interest income increased 7.0% year over year, but net interest margin contracted as market rates fell and lower-yielding cash balances increased.
- Loan growth was concentrated in commercial real estate, multifamily, and one-to-four-family residential lending. Available-for-sale and held-to-maturity securities declined to $12.0 million and $1.6 million, respectively, from $15.0 million and $2.8 million at June 30.
- Deposits increased, principally in demand, NOW, money market, and savings accounts, while certificates of deposit declined as the Bank sought to reduce higher-cost funding.
- Credit indicators improved in some respects: non-performing assets and classified loans decreased. The Bank upgraded $2.2 million of commercial and industrial loans and $236,000 of commercial real estate loans from substandard to special mention/watch during the six months.
Outlook, risks, and unusual items
- Management cited COVID-19 uncertainty and increased qualitative credit-risk factors across loan segments due to worsening infection rates and potential local economic effects. The Bank reported no significant business disruption, but actual credit losses and allowance needs could change materially.
- Management expects further net interest margin compression. Results also remain sensitive to interest rates, loan demand and quality, real estate values, deposit retention and funding costs, and secondary mortgage market conditions.
- At December 31, 52 COVID-related loan deferrals totaling approximately $19.0 million had been granted; 49 loans totaling $18.6 million had returned to normal payment status. The filing lists three remaining modified loans totaling $343,051. The Bank elected applicable CARES Act relief so qualifying COVID-related modifications were not treated as troubled debt restructurings.
- The Bank had originated 137 PPP loans totaling $6.5 million by December 31; $1.9 million had been forgiven. It reported $11.5 million of new PPP loans originated under the December 2020 program through the filing date.
- Management anticipated sufficient liquidity and expected a substantial portion of $22.5 million in time deposits maturing within one year to renew. The Bank had a $60.2 million FHLB credit line, with $8.0 million outstanding.
- Reorganization costs of $324,000 had been incurred by December 31 and were to be deferred against offering proceeds; if the reorganization failed, the costs would be charged to operations. The offering and reorganization were subject to regulatory approval.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. No material legal proceeding was reported.
Important facts for investors to verify
- Confirm completion, approvals, final terms, proceeds, and share issuance for the mutual holding company reorganization and offering; the filing states no Bancorp shares were outstanding as of March 26, 2021.
- Track subsequent-period net interest margin, mortgage banking income, and loan-sale volumes to assess whether the earnings increase is sustainable.
- Monitor credit grades, delinquencies, loan modifications, PPP repayment/forgiveness, and any future allowance provisions as pandemic effects evolve.
- Verify deposit retention and liquidity, including maturities, FHLB borrowing capacity, and PPPLF repayment.
- Review the effect of adopting lease accounting and the expected adoption of the credit-loss standard, which management said could materially change credit-loss accounting.