Marathon Bancorp, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2023, the first quarter of fiscal 2024. The request labels this “2023 Q1”; the filing itself reports the September 2023 quarter.
Business context and key financial metrics
Marathon Bancorp is the holding company for Marathon Bank, a Wisconsin community bank operating four facilities. It lends primarily in commercial real estate, residential, multifamily, construction, commercial and industrial, and consumer markets.
- Net income: $86,197, down 83.1% from $511,153 in the prior-year quarter. Diluted earnings per share were $0.04 versus $0.24.
- Revenue and margins: Interest income rose 18.7% to $2.41 million, but interest expense increased 167.9% to $842,000. Net interest income fell 8.7% to $1.56 million; net interest margin declined to 2.85% from 3.28%, and net interest rate spread to 2.57% from 3.16%.
- Other income and costs: Non-interest income was $228,000, down 36.7%. Non-interest expense was $1.46 million, up 1.2%. Income before taxes was $288,000; income tax expense was $201,000.
- Cash flow: Operating activities provided $367,000; investing activities used $1.52 million; financing activities used $3.65 million. Cash and cash equivalents ended at $6.98 million, down $4.79 million during the quarter.
- Balance sheet: Total assets were $235.6 million, down 1.3% from June 30, 2023. Loans, net, were $197.7 million, nearly unchanged. Deposits fell 4.4% to $188.6 million; FHLB advances rose $5.0 million to $13.0 million. Stockholders’ equity was $31.5 million.
- Credit and capital: The allowance for credit losses was $2.03 million, or 1.01% of loans, after a $41,000 provision. The Bank reported no nonaccrual or classified loans; nonperforming assets were $2.31 million, entirely foreclosed real estate. The Bank’s leverage ratio was 12.36% and it was categorized as well capitalized.
Material changes versus comparable periods
- Profit declined substantially year over year as deposit and borrowing costs rose faster than interest income. Average rates paid on interest-bearing liabilities increased to 1.84% from 0.73%; the average yield on earning assets increased to 4.41% from 3.89%.
- Prior-year non-interest income included a $173,000 life-insurance death-benefit gain, which did not recur. Mortgage banking income increased to $131,000 from $82,000.
- The effective tax rate increased to 70.0% from 18.6%. The filing attributes this principally to a Wisconsin tax-law change and the resulting reassessment of state deferred tax assets, along with the prior-year nontaxable insurance gain.
- Compared with June 30, deposits declined $8.6 million and cash and cash equivalents declined $4.8 million. Management said FHLB borrowings helped fund deposit outflows and a $1.6 million building purchase for a future branch.
- The company adopted CECL on July 1, 2023. The adoption reduced the loan allowance by $175,000, established a $6,702 reserve for unfunded commitments, and increased opening retained earnings by $133,375, net of tax.
Outlook, risks, contingencies and unusual items
- Management said it expects sufficient funds for current commitments and expects to retain a substantial portion of time deposits maturing within one year. If deposits run off, additional borrowing may be needed and could increase interest expense. The filing reports $53.4 million of time deposits maturing within one year, including $4.2 million of brokered CDs.
- At September 30, the Bank had an $84.0 million FHLB credit line with $13.0 million outstanding, $25.0 million available from the Federal Reserve subject to eligible collateral, and a $5.0 million unsecured federal funds purchasing limit.
- The Bank expects to open a Brookfield, Wisconsin branch in the third quarter of fiscal 2024, subject to regulatory approvals. No earnings or financial guidance was provided.
- Risks cited include interest-rate and funding-cost pressure, deposit competition and outflows, credit losses, real-estate values, economic conditions, securities-market changes, cyber and operational risks, and regulatory or tax changes. Management’s credit-loss estimates are judgmental and sensitive to economic assumptions.
- Control issue: Management identified a material weakness in controls over accounting for special tax provisions and concluded disclosure controls were not effective as of September 30, 2023. The weakness had led to prior-period restatements; management said remediation plans would be implemented in fiscal 2024.
- The portfolio had $1.16 million of gross unrealized losses on available-for-sale securities and $122,000 on held-to-maturity securities. Management attributed the declines primarily to interest rates and said it did not intend, and was not expected to be required, to sell before recovery.
- Outstanding commitments included $3.18 million to grant loans, $4.06 million of unused credit lines and $631,000 of MPF credit enhancements. Management said potential losses on MPF enhancements were estimated to be immaterial. No material litigation was reported.
Important facts for investors to verify
- Whether deposit trends, brokered-deposit levels and maturing CDs stabilize, and how any further deposit outflow affects borrowing costs and liquidity.
- Whether net interest margin and earnings recover as deposit pricing and asset yields change.
- Progress and independent validation of the planned remediation of the material weakness, including whether any further tax-related adjustments or restatements are needed.
- Credit performance and collateral values, particularly the $2.31 million foreclosed construction property, and the assumptions supporting the CECL allowance.
- Regulatory approvals, timing, and funding for the planned Brookfield branch.