Marathon Bancorp, Inc. annual report, FY2022

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Marathon Bancorp, Inc. — FY2022 Form 10-K

Reporting period: Fiscal year ended June 30, 2022, compared with fiscal 2021. The request metadata says “2021 Q4,” but the filing is an annual report for FY2022, not a quarterly filing. Marathon Bancorp is the holding company of Wisconsin community bank Marathon Bank, operating four offices and focused on commercial and multifamily real estate lending alongside residential mortgages and deposits.

Financial performance and condition

  • Assets and balance sheet: Total assets were $220.0 million, up 3.0% year over year. Net loans rose 28.8% to $185.6 million; deposits increased 9.4% to $188.1 million; stockholders’ equity was $30.7 million.
  • Earnings: Net income was $1.335 million, down 2.8% from $1.373 million; diluted EPS was $0.62 versus $0.64. Return on average assets was 0.62% (0.73% prior year), and return on average equity was 4.90% (6.14%).
  • Net interest and margins: Net interest income increased 15.1% to $6.21 million. Net interest margin was 3.09%, versus 3.10%; the interest-rate spread remained 2.99%. Average yield on loans excluding PPP loans fell to 4.04% from 4.79%, while loan balances grew.
  • Other income and costs: Non-interest income declined 41.0% to $1.12 million, principally as mortgage banking income fell to $689,000 from $1.53 million amid higher rates and lower mortgage refinancing. Non-interest expense rose 2.2% to $5.56 million, including higher public-company professional fees. Effective tax rate was 24.7%.
  • Credit quality: No provision for loan losses was recorded in either year; the allowance was $2.20 million, or 1.17% of loans, compared with 1.49% a year earlier. Non-performing assets were $115,000 (0.05% of assets), down from $178,000. Watch/special-mention loans fell to $1.39 million from $5.26 million; no loans were classified substandard or worse.
  • Cash flow and liquidity: Operating cash flow was $826,000. Investing activities used $44.2 million, largely reflecting loan growth; financing provided $5.8 million. Cash and cash equivalents fell to $8.4 million from $46.0 million. The bank had no FHLB advances outstanding and reported a $77.4 million FHLB borrowing capacity, subject to additional collateral.
  • Funding and capital: Core deposits were $128.1 million, or 68.1% of deposits; brokered deposits were $19.8 million. Uninsured deposits totaled $46.7 million. The bank’s Tier 1 leverage ratio was 12.17%, and it was classified as well capitalized.

Material changes versus FY2021

  • Loan growth shifted the balance sheet toward commercial and multifamily real estate. Commercial real estate loans rose 54.6% to $80.6 million; multifamily loans rose 96.6% to $33.9 million. Together they represented 61.0% of the loan portfolio, versus 47.3% a year earlier.
  • PPP loans were fully forgiven, reducing commercial and industrial loans to $8.8 million from $19.3 million and eliminating $10.4 million of PPPLF borrowing. PPP fee accretion added $483,000 to interest income in FY2022.
  • Cash and cash equivalents declined substantially as funds supported loan growth, a $3.5 million corporate-bond purchase and a $3.0 million purchase of bank-owned life insurance. Deposits increased, particularly demand, NOW and money-market accounts.
  • Available-for-sale securities recorded $490,000 of after-tax other comprehensive loss, primarily reflecting higher market interest rates. The company reported $489,000 of gross unrealized losses on available-for-sale securities and a $113,000 fair-value shortfall on held-to-maturity securities; management attributed the losses to rates and did not consider them other-than-temporary.

Outlook, risks and notable items

  • Management intends to continue growing commercial and multifamily real estate lending in Southeastern Wisconsin, expand core deposits and continue selling most conforming fixed-rate residential mortgages. It also may pursue acquisitions or new branches, but reported no current plans. The filing provides no numerical earnings or growth guidance.
  • Management highlights greater credit risk in commercial and multifamily real estate, dependence on property cash flows and local economic conditions, and the possibility that loan growth could outpace allowance growth. Rising rates may affect funding costs, asset yields, mortgage activity, borrower repayment and securities values. Other stated risks include competition, deposit retention, inflation, cyber and third-party risks, regulation and broader economic conditions.
  • Management expects non-interest expense to increase due to public-company costs and the 2022 Equity Incentive Plan. Options and restricted stock awards were granted in June 2022; disclosed compensation expense of approximately $692,000 is to be recognized over 60 months beginning July 1, 2022.
  • All 56 COVID-related modified loans, totaling approximately $20.0 million at their reported aggregate principal, had returned to normal payment status; management anticipated no further modifications. No material pending legal proceedings were reported.
  • The bank planned to adopt CECL beginning July 1, 2023; management said the impact was under evaluation and could materially change credit-loss accounting. Lease accounting was adopted July 1, 2022, with a reported $699,000 right-of-use asset and lease liability and no material operational or capital impact.

Key facts for investors to verify

  • Whether commercial and multifamily real estate growth remains profitable and appropriately underwritten, given the combined 61.0% portfolio concentration and rate/economic exposure.
  • How the allowance and credit quality evolve as loan balances grow, including watch-rated loans, nonperforming loans and the forthcoming CECL adoption impact.
  • Deposit stability and funding costs, particularly the $46.7 million of uninsured deposits, brokered deposits and $25.9 million of certificates of deposit maturing within one year.
  • Whether margin and earnings can withstand higher rates, loan-yield repricing, and the continuing decline in mortgage banking activity; note FY2022 earnings included PPP fee accretion.
  • Liquidity after the cash decline, the collateral available for the stated FHLB capacity, and exposure to unrealized securities losses if sales become necessary.
  • Future costs and dilution associated with the equity awards; also note that no cash dividends were paid in FY2021 or FY2022 and the company said it did not currently intend to pay them.

The independent auditor issued an unqualified opinion on the consolidated financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not attest to internal control effectiveness.