MARATHON BANCORP, INC. This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the accompanying consolidated financial statements. You should read the information in this section in conjunction with the business and financial information regardingMarathon Bancorp, Inc. provided in this Form 10-Q and the Company's Annual Report on Form 10-K for the year endedJune 30, 2022 as filed with theSecurities and Exchange Commission onSeptember 28, 2022 . CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This quarterly report contains certain forward-looking statements, which are included pursuant to the "safeharbor" provisions of the Private Securities Litigation Reform Act of 1995, and reflect management's beliefs and expectations based on information currently available. These forward-looking statements, which can be identified by the use of words such as "estimate," "project," "believe," "intend," "anticipate," "assume," "plan," "seek," "expect," "will," "may," "should," "indicate," "would," "contemplate," "continue," "potential," "target" and words of similar meaning. These forward-looking statements include, but are not limited to:
? statements of our goals, intentions and expectations;
? statements regarding our business plans, prospects, growth and operating
strategies;
? statements regarding the quality of our loan and investment portfolios; and
? estimates of our risks and future costs and benefits.
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Quarterly Report on Form 10-Q.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
inflation and changes in the interest rate environment that reduce our margins
? and yields, our mortgage banking revenues, the fair value of financial
instruments or our level of loan originations, or increase the level of
defaults, losses and prepayments on loans we have made and make;
? general economic conditions, either nationally or in our market areas, that are
worse than expected;
? changes in the level and direction of loan delinquencies and write-offs and
changes in estimates of the adequacy of the allowance for loan losses;
? our ability to access cost-effective funding;
? fluctuations in real estate values and both residential and commercial real
estate market conditions;
? demand for loans and deposits in our market area;
? our ability to implement and change our business strategies;
? competition among depository and other financial institutions;
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? adverse changes in the securities or secondary mortgage markets, including our
ability to sell loans in the secondary market;
? changes in laws or government regulations or policies affecting financial
institutions, including changes in regulatory fees and capital requirements;
? changes in the quality or composition of our loan or investment portfolios;
? technological changes that may be more difficult or expensive than expected;
? the inability of third-party providers to perform as expected;
? a failure or breach of our operational or security systems or infrastructure,
including cyberattacks;
? our ability to manage market risk, credit risk and operational risk in the
current economic environment;
? our ability to enter new markets successfully and capitalize on growth
opportunities;
our ability to successfully integrate into our operations any assets,
? liabilities, customers, systems and management personnel we may acquire and our
ability to realize related revenue synergies and cost savings within expected
time frames, and any goodwill charges related thereto;
? changes in consumer spending, borrowing and savings habits;
changes in accounting policies and practices, as may be adopted by the bank
? regulatory agencies, the
and
? our ability to retain key employees;
? our ability to control operating costs and expenses, including compensation
expense associated with equity allocated or awarded to our employees; and
? changes in the financial condition, results of operations or future prospects
of issuers of securities that we own.
Overview
Net Interest Income. Our primary source of income is net interest income. Net
interest income is the difference between interest income, which is the income
we earn on our loans and investments, and interest expense, which is the
interest we pay on our deposits and borrowings.
Provision for Loan Losses. The allowance for loan losses is a valuation
allowance for probable incurred credit losses. The allowance for loan losses is
increased through charges to the provision for loan losses. Loans are charged
against the allowance when management believes that the collectability of the
principal loan amount is not probable. Recoveries on loans previously
charged-off, if any, are credited to the allowance for loan losses when
realized.
Non-interest Income. Our primary sources of non-interest income are mortgage
banking income, service charges on deposit accounts and net gains in the cash
surrender value of bank owned life insurance and gain on proceeds from life
insurance. Other sources of non-interest income include net gain or losses on
sales and calls of securities, net gain or loss on disposal of foreclosed assets
and other income.
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Non-Interest Expenses. Our non-interest expenses consist of salaries and
employee benefits, net occupancy and equipment, data processing and office,
professional fees, marketing expenses and other general and administrative
expenses, including premium payments we make to the
Provision for Income Taxes. Our income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between the carrying amounts and the tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amounts expected to be realized.
Summary of Significant Accounting Policies and Estimates
The discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity withU.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be significant accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations. In 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an "emerging growth company" we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards. The following represent our significant accounting policies and estimates: Allowance for Loan Losses. The allowance for loan losses established as losses is estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. General components cover non-impaired loans and are based on historical loss rates for each portfolio segment, adjusted for the effects of qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the portfolio segment's historical loss experience. Qualitative factors include consideration of the following: changes in lending policies and procedures; changes in economic conditions, changes in the nature and volume of the portfolio; changes in the experience, ability, and depth of lending management and other relevant staff; changes in the volume and severity of past due, nonaccrual and other adversely graded loans; changes in the loan review system; changes in the value of the underlying collateral for collateral-dependent loans; concentrations of credit; and the effect of other external factors such as competition and legal and regulatory requirements. AtDecember 31, 2022 andJune 30, 2022 , the qualitative loan portfolio risk factors were slightly reduced in all loan categories except commercial 29
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and multi-family real estate which we believe exhibits the most credit risk related to local and national economic conditions as well as industry conditions and concentrations.
A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reason for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and commercial real estate loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. As an integral part of their examination process, various regulatory agencies review the allowance for loan losses as well. Such agencies may require that changes in the allowance for loan losses be recognized when such regulatory credit evaluations differ from those of management based on information available to the regulators at the time of their examinations. Provision for Income Taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. We recognize the tax effects from an uncertain tax position in the financial statements only if the position is more likely than not to be sustained on audit, based on the technical merits of the position. We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized, upon ultimate settlement with the relevant tax authority. We recognize interest and penalties accrued or released related to uncertain tax positions in current income tax expense or benefit.Debt Securities . Available-for-sale and held-to-maturity debt securities are reviewed by management on a quarterly basis, and more frequently when economic or market conditions warrant, for possible other-than-temporary impairment. In determining other-than-temporary impairment, management considers many factors, including the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospectus of the issuer, whether the market decline was affected by macroeconomic conditions and whether the bank has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. A decline in value that is considered to be other-than-temporary is recorded as a loss within non-interest income in the statement of income. The assessment of whether other-than-temporary impairment exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time. In order to determine other-than-temporary impairment for mortgage-backed securities, asset-backed securities and collateralized mortgage obligations, we compare the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. Other-than-temporary impairment is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows. 30
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Comparison of Financial Condition at
Total Assets. Total assets increased
Cash and Cash Equivalents. Total cash and cash equivalents increased$11.0 million , or 130.9%, to$19.5 million atDecember 31, 2022 from$8.4 million atJune 30, 2022 , primarily due to an increase in deposits of$14.9 million offset by an increase in cash used to fund new loan originations. Debt Securities Available for Sale. Total debt securities available for sale decreased$1.2 million , or 11.3%, to$9.4 million atDecember 31, 2022 from$10.6 million atJune 30, 2022 . The decrease was primarily due to paydowns and maturities and a decrease in the fair value of a corporate bond. Debt securities available for sale are carried at fair value with the unrealized gain or loss reflected in accumulated other comprehensive income (loss). Net Loans. Net loans increased$7.0 million , or 3.8%, to$192.6 million atDecember 31, 2022 from$185.6 million atJune 30, 2022 . The increase was primarily due to a$5.0 million , or 6.2%, increase in commercial real estate loans to$85.6 million atDecember 31, 2022 from$80.6 million atJune 30, 2022 , an increase in one- to four-family residential loans of$4.8 million , or 9.3%, to$56.7 million atDecember 31, 2022 from$51.9 million atJune 30, 2022 and an increase in multi-family real estate loans of$1.2 million , or 3.4%, to$35.1 million atDecember 31, 2022 from$33.9 million atJune 30, 2022 . Commercial and industrial loans decreased by$948,000 , or 10.8%, to$7.8 million atDecember 31, 2022 from$8.8 million atJune 30, 2022 . Construction loans decreased by$3.2 million , or 30.0%, to$7.4 million atDecember 31, 2022 from$10.6 million atJune 30, 2022 . The increase in commercial and multi-family real estate loans was primarily due to our strategy to enhance our commercial and multi-family real estate lending inSoutheastern Wisconsin . One- to four-family residential loans increased due to additional growth with respect to adjustable-rate one- to four-family residential loans. The decrease in commercial and industrial loans was due to the payoff of a$1.1 million participation loan. The decrease in construction loans was primarily related to a$3.5 million construction loan that was moved to permanent financing inSeptember 2022 . Deposits. Total deposits increased$14.9 million , or 7.9%, to$203.0 million atDecember 31, 2022 from$188.1 million atJune 30, 2022 . Non-interest-bearing demand accounts increased$1.2 million , or 5.1%, to$24.9 million atDecember 31, 2022 from$23.7 million atJune 30, 2022 . Certificates of deposit increased$22.8 million , or 38.0%, to$82.8 million atDecember 31, 2022 from$60.0 million atJune 30, 2022 . Offsetting these increases, was a decrease in demand, NOW and money market accounts of$7.5 million , or 13.0%, to$50.3 million atDecember 31, 2022 from$57.8 million atJune 30, 2022 . Savings deposits decreased$1.6 million , or 3.4%, to$45.0 million atDecember 31, 2022 from$46.6 million atJune 30, 2022 . The increase in certificates of deposit was due to the purchase of brokered certificates of deposit of$4.5 million during the six months endedDecember 31, 2022 and the offering of higher rate certificate of deposit products to keep rates in line with competitors and to attract new funds to the Bank. The decrease in demand, NOW and money market accounts was due to one depositor withdrawing approximately$9.0 million in money market funds inSeptember 2022 . Stockholders' Equity. Total stockholders' equity increased by$477,000 , or 1.6%, to$31.2 million atDecember 31, 2022 from$30.7 million atJune 30, 2022 . The increase was primarily due to net income of$813,000 during the six months endedDecember 31, 2022 offset by an increase in accumulated other comprehensive loss, net of tax of$343,000 related to the decrease in fair value of a corporate
bond.
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Average Balance Sheets
The following tables set forth average balances, average yields and costs, and
certain other information for the periods indicated. No tax-equivalent yield
adjustments have been made, as the effects would be immaterial. All average
balances are daily average balances. Non-accrual loans were included in the
computation of average balances. The yields set forth below include the effect
of deferred fees, discounts, and premiums that are amortized or accreted to
interest income or interest expense, as applicable. Loan balances include loans
held for sale.
For the Three Months Ended December 31,
2022 2021
Average Average Average Average
Outstanding Yield/Rate Outstanding Yield/Rate
Balance Interest (1) Balance Interest (1)
(Dollars in thousands)
Interest-earning assets:
Loans (excluding PPP loans) $ 194,530 $ 2,022 4.19 % $ 149,327 $ 1,501 4.05 %
PPP loans - - - % 772 110 69.64 %
Debt securities 10,336 60 2.32 % 12,670 83 2.62 %
Cash and cash equivalents 18,883 159 3.38 % 33,991 7 0.08 %
Other 770 4 2.08 % 262 1 1.52 %Total interest-earning assets 224,519 2,245
4.03 % 197,022 1,702 3.47 % Noninterest-earning assets 14,100 14,470 Total assets$ 238,619 $ 211,492 Interest-bearing liabilities: Demand, NOW and money market deposits$ 53,961 116 0.86 %$ 54,920 47 0.34 % Savings deposits 44,140 14 0.13 % 45,699 17 0.15 % Certificates of deposit 81,111 396 1.95 % 58,780 162 1.10 %
Total interest-bearing deposits 179,212 526 1.17 % 159,399 226 0.56 % FHLB advances and other borrowings 3,370 29 3.46 % - - - % PPP Liquidity Facility borrowings - - - % 895 3 1.34 % Total interest-bearing liabilities 182,582 555
1.21 % 160,294 229 0.57 % Non-interest bearing demand deposits 25,940 22,761 Other non-interest bearing liabilities 1,943 1,257 Total liabilities 210,465 184,312 Total stockholders' equity 28,154 27,180 Total liabilities and stockholders' equity$ 238,619 $ 211,492 Net interest income$ 1,690 $ 1,473 Net interest rate spread (2) 2.82 % 2.90 % Net interest-earning assets (3)$ 41,937 $ 36,728 Net interest margin (4) 3.02 % 3.00 % Average interest-earning assets to interest-bearing liabilities 122.97 % 122.91 % (1) Annualized.
Net interest rate spread represents the difference between the weighted (2) average yield on interest-earning assets and the weighted average rate of
interest-bearing liabilities.
(3) Net interest-earning assets represent total interest-earning assets less
total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total
interest-earning assets.
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For the Six Months Ended December 31,
2022 2021
Average Average Average Average
Outstanding Yield/Rate Outstanding Yield/Rate
Balance Interest (1) Balance Interest (1)
(Dollars in thousands)
Interest-earning assets:
Loans (excluding PPP loans) $ 192,047 $ 3,933 4.10 % $ 144,302 $ 2,940 4.08 %
PPP loans - - - % 1,912 483 56.33 %
Debt securities 10,648 130 2.44 % 12,667 163 2.57 %
Cash and cash equivalents 13,766 202 2.93 % 38,203 17 0.09 %
Other 562 8 2.49 % 262 3 2.28 %Total interest-earning assets 217,023 4,273
3.94 % 197,346 3,606 3.66 % Noninterest-earning assets 14,595 13,982 Total assets$ 231,618 $ 211,328 Interest-bearing liabilities: Demand, NOW and money market deposits$ 57,450 234 0.81 %$ 52,263 90 0.34 % Savings deposits 45,171 30 0.13 % 45,736 33 0.14 % Certificates of deposit 70,807 567 1.59 % 59,083 334 1.12 %
Total interest-bearing deposits 173,428 831 0.57 % 157,082 457 0.58 % FHLB advances and other borrowings 2,307 39 3.38 % - - - % PPP Liquidity Facility borrowings - - - % 2,538 6 0.47 % Total interest-bearing liabilities 175,735 870
0.98 % 159,620 463 0.58 % Non-interest-bearing demand deposits 26,194 22,999 Other non-interest-bearing liabilities 1,685 1,161 Total liabilities 203,614 183,780 Total stockholders' equity 28,004 27,548 Total liabilities and stockholders' equity$ 231,618 $ 211,328 Net interest income$ 3,403 $ 3,143 Net interest rate spread (2) 2.96 % 3.08 %
Net interest-earning assets (3)$ 41,288 $ 37,726 Net interest margin (4) 3.13 % 3.18 % Average interest-earning assets to interest-bearing liabilities 123.49 % 123.63 % (1) Annualized.
Net interest rate spread represents the difference between the weighted (2) average yield on interest-earning assets and the weighted average rate of
interest-bearing liabilities.
(3) Net interest-earning assets represent total interest-earning assets less
total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total
interest-earning assets.
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The following table presents the effects of changing rates and volumes on our
net interest income for the periods indicated. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate). The total column represents the sum of the
prior columns. For purposes of this table, changes attributable to both rate and
volume, which cannot be segregated, have been allocated proportionately based on
the changes due to rate and the changes due to volume.
Three Months Ended December 31, Six Months Ended December 31,
2022 vs. 2021 2022 vs. 2021
Increase (Decrease) Due to Total Increase (Decrease) Due to Total
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
(In thousands) (In thousands)
Interest-earning assets:
Loans (excluding PPP loans) $ 458 $ 63 $ 521 $ 975 $ 18 $ 993
PPP loans (135) 25 (110) (539) 56 (483)
Debt securities (15) (8) (23) (26) (7) (33)Cash and cash equivalents (3) 155 152 (11) 196 185 Other 2 1 3 4 1 5 Total interest-earning assets 307 236 543 403 264 667 Interest-bearing liabilities: Demand, NOW and money market deposits (1) 70
69 9 135 144
Savings deposits (1) (2) (3) (1) (3) (4)
Certificates of deposit 61 173 234 66 167 233Total interest-bearing deposits 59 241 300 74 299 373 FHLB advances and other borrowings - 29 29 - 39 39 PPP Liquidity Facility borrowings (3) - (3) (5) - (5) Total interest-bearing liabilities 56 270 326 69 338 407 Change in net interest income $ 251$ (34)
Comparison of Operating Results for the Three Months Ended
General. Net income was$301,000 for the three months endedDecember 31, 2022 , an increase of$16,000 , or 5.9%, from net income of$285,000 for the three months endedDecember 31, 2021 . The increase in net income for the three months endedDecember 31, 2022 was primarily attributable to an increase of$216,000 in net-interest income, offset by a$111,000 increase in non-interest expenses and a decrease in non-interest income of$96,000 . Interest Income. Interest income increased by$543,000 , or 31.9%, to$2.2 million for the three months endedDecember 31, 2022 compared to$1.7 million for the three months endedDecember 31, 2021 primarily due to increases in loan interest income of$411,000 and other interest income (cash and cash equivalents and other) of$155,000 . The increase in other interest income was primarily due to an increase in the average yield of 330 basis points on our cash and cash equivalents investments due to the recent increases in the federal funds rate. Loan interest income increased by$411,000 , or 25.6%, to$2.0 million for the three months endedDecember 31, 2022 from$1.6 million for the three months endedDecember 31, 2021 , due to an increase in the average balance of the loan portfolio and a slight increase in the average yield on loans (excluding PPP loans). The average balance of the loan portfolio (excluding PPP loans) increased by$45.2 million , or 30.3%, from$149.3 million for the three months endedDecember 31, 2021 to$194.5 million for the three months endedDecember 31, 2022 . The increase in the average balance of loans was due to our continued efforts to increase commercial and multi-family real estate loans inSoutheastern Wisconsin . The average balance of one-to-four family residential loans also increased. The increase was due to additional growth with respect to adjustable-rate one-to four-family residential loans. The average yield on the loan portfolio (excluding PPP loans) increased by 14 basis points from 4.05% for the three months endedDecember 31, 2021 to 4.19% for the three months endedDecember 31, 2022 . The increase in the average yield on loans (excluding PPP loans) was primarily due to new loans being booked at higher market interest rates subsequent to the recent rate hikes approved by theFederal Reserve . Loan interest income on PPP loans was positively impacted by the recognition of 34
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deferred fee income of$108,000 during the three months endedDecember 31, 2021 on the forgiven PPP loans repaid by the SBA compared to$0 for the three months endedDecember 31, 2022 . Debt securities interest income decreased by$23,000 , or 27.9%, to$60,000 for the three months endedDecember 31, 2022 from$83,000 for the three months endedDecember 31, 2021 due to a$2.3 million decrease in the average balance of debt securities associated with securities paydowns. This was in addition to a decrease of 30 basis points in the average yield on the debt securities portfolio to 2.32% for the three months endedDecember 31, 2022 from 2.62% for the three months endedDecember 31, 2021 . The decrease in the average yield was related to paydowns on securities bearing higher interest rates and the decrease in the average yield of our collateralized mortgage obligations with inverse floating rates. Interest Expense. Interest expense increased$326,000 , or 143.0%, to$555,000 for the three months endedDecember 31, 2022 from$229,000 for the three months endedDecember 31, 2021 , due to an increase of$300,000 in interest paid on deposits and an increase of$26,000 in interest paid on borrowings. Interest expense on deposits increased$300,000 , or 133.0%, to$526,000 for the three months endedDecember 31, 2022 from$226,000 for the three months endedDecember 31, 2021 due to an increase in the average rate paid on all deposit categories excluding savings deposits and an increase in the average balance of certificates of deposit which increased by$22.3 million , to$81.1 million as compared to$58.8 million when comparing the three months endedDecember 31, 2022 to the three months endedDecember 31, 2021 . The increase in the average rate paid on all deposit categories excluding savings deposits was due to the Bank raising the interest rates on these deposit categories to maintain customers and keep the rates in line with those competitors are offering. The increase in the average balance of certificates of deposit was due to the purchase of brokered certificates of deposit of$4.5 million and the offering of higher rate certificate of deposit products to attract new funds to the Bank during the three months endedDecember 31, 2022 . Net Interest Income. Net interest income increased by$217,000 , or 14.7%, to$1.7 million for the three months endedDecember 31, 2022 from$1.5 million for the three months endedDecember 31, 2021 . Also included in net interest income for the three months endedDecember 31, 2021 was the recognition of deferred fee income of$108,000 on the forgiven PPP loans repaid by the SBA compared to$0 for the three months endedDecember 31, 2022 . Net interest-earning assets increased by$5.2 million , or 14.2%, to$41.9 million for the three months endedDecember 31, 2022 from$36.7 million for the three months endedDecember 31, 2021 . Net interest rate spread decreased by eight basis points to 2.82% for the three months endedDecember 31, 2022 from 2.90% for the three months endedDecember 31, 2021 , reflecting a 64 basis points increase in the average rate paid on interest-bearing liabilities which was offset by a 56 basis points increase in the average yield on interest-earning assets. The net interest margin increased by two basis points to 3.02% for the three months endedDecember 31, 2022 from 3.00% for the three months endedDecember 31, 2021 . The increase in the average yield on interest earning assets for the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 was primarily due to an increase in the average yield of 330 basis points on our cash and cash equivalents investments due to the recent increases in the federal funds rate. The increase in the average interest rate paid on interest-bearing liabilities was due to the Bank raising the interest rates on all deposit categories excluding savings accounts to maintain customers and keep the rates in line with what the competitors were offering and to attract new funds to the Bank. Provision for Loan Losses. Provisions for loan losses are charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses in our loan portfolio that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses, management analyzes several qualitative loan portfolio risk factors including, but not limited to, management's ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, changes in the nature, volume and terms of loans, the fair value of underlying collateral, changes in lending personnel, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. AtDecember 31, 2022 andJune 30, 2022 , the qualitative loan portfolio risk factors were slightly reduced in all loan categories. However, due to the economic and social impacts of the Pandemic being significantly reduced from prior periods, atDecember 31, 2022 , further reduction of the COVID factor was applied to all loan categories. See 35
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"Management's Discussion and Analysis of Financial Condition and Results of
Operations of
After an evaluation of these factors, we recorded no provision for loan losses for the three months endedDecember 31, 2022 or 2021. Our allowance for loan losses was$2.1 million and$2.2 million atDecember 31, 2022 and 2021, respectively. The allowance for loan losses to total loans was 1.06% atDecember 31, 2022 and 1.38% atDecember 31, 2021 . We recorded no charge-offs or recoveries for the three months endedDecember 31, 2022 compared to net recoveries of$1,000 for the three months endedDecember 31, 2021 . Non-performing assets decreased to$55,000 , or 0.02% of total assets atDecember 31, 2022 , compared to$115,000 , or 0.05% of total assets, atJune 30, 2022 . To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate atDecember 31, 2022 . However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for loan losses. In addition, the WDFI and theFDIC , as an integral part of their examination process, will periodically review our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses.
Non-interest Income. Non-interest income information is as follows.
Three Months Ended
December 31, Change
2022 2021 Amount Percent
(Dollars in thousands)Service charges on deposit accounts$ 44 $ 42 $ 2 4.8 % Mortgage banking 55 172 (117) (68.0) % Increase in cash surrender value of BOLI 62 60 2 3.3 % Net gain on securities transactions 24 14 10
71.4 % Other 8 2 6 300.0 % Total non-interest income$ 193 $ 290 $ (97) (33.4) % Non-interest income decreased by$97,000 to$193,000 for the three months endedDecember 31, 2022 from$290,000 for the three months endedDecember 31, 2021 due primarily to a decrease in mortgage banking income (consisting primarily of sales of fixed-rate one- to four-family residential real estate loans) which decreased by$117,000 as we sold$101,000 of mortgage loans into the secondary market during the three months endedDecember 31, 2022 compared to$5.8 million of such sales during the three months endedDecember 31, 2021 due to an increase in market interest rates, which resulted in decreased demand for mortgage loan refinancing.
Non-interest Expenses. Non-interest expenses information is as follows.
Three Months Ended
December 31, Change
2022 2021 Amount Percent
(Dollars in thousands)
Salaries and employee benefits $ 832 $ 741 $ 91 12.3 %
Occupancy and equipment 177 186 (9) (4.8) %
Data processing and office 99 104 (5) (4.8) %
Professional fees 189 172 17 9.9 %
Marketing expenses 34 28 6 21.4 %
Other 159 148 11 7.4 %
Total non-interest expenses $ 1,490 $ 1,379 $ 111 8.0 %
Non-interest expenses were$1.5 million for the three months endedDecember 31, 2022 compared to$1.4 million for the three months endedDecember 31, 2021 . The increase was due to an increase in salaries and employee benefits of$91,000 related to the new stock compensation plan implemented by the Company onJune 28, 2022 . 36 Table of Contents Provision for Income Taxes. Income tax expense was$92,000 for the three months endedDecember 31, 2022 , a decrease of$8,000 , as compared to income tax expense of$100,000 for the three months endedDecember 31, 2021 . The decrease in income tax expense was primarily due to a change in the Company's effective tax rate. The effective tax rate for the three months endedDecember 31, 2022 and 2021 was 23.0% and 26.0%, respectively. The effective tax rate declined during the three months endedDecember 31, 2022 due to an increase in tax-exempt income as compared to the prior year period.
Comparison of Operating Results for the Six Months Ended
General. Net income was$813,000 for the six months endedDecember 31, 2022 , an increase of$111,000 , or 15.8%, from net income of$702,000 for the six months endedDecember 31, 2021 . The increase in net income for the six months endedDecember 31, 2022 was primarily attributable to an increase of$260,000 in net-interest income and a gain on proceeds from life insurance of$173,000 , offset by a$158,000 increase in non-interest expenses. Interest Income. Interest income increased by$667,000 , or 18.5%, to$4.3 million for the six months endedDecember 31, 2022 compared to$3.6 million for the six months endedDecember 31, 2021 primarily due to increases in loan interest income and other interest income (cash and cash equivalents and other). The increase in other interest income was primarily due to an increase in the average yield of 284 basis points on our cash and cash equivalents investments due to the recent increases in the federal funds rate. Loan interest income increased by$511,000 , or 14.9%, to$3.9 million for the six months endedDecember 31, 2022 from$3.4 million for the six months endedDecember 31, 2021 , due to an increase in the average balance of the loan portfolio and a slight increase in the average yield on loans (excluding PPP loans). The average balance of the loan portfolio (excluding PPP loans) increased by$47.7 million , or 33.1%, from$144.3 million for the six months endedDecember 31, 2021 to$192.0 million for the six months endedDecember 31, 2022 . The increase in the average balance of loans was due to our continued efforts to increase commercial and multi-family real estate loans inSoutheastern Wisconsin . The average balance of one-to-four family residential loans also increased. The increase was due to additional growth with respect to adjustable-rate one-to four-family residential loans. The average yield on the loan portfolio (excluding PPP loans) increased by two basis points from 4.08% for the six months endedDecember 31, 2021 to 4.10% for the six months endedDecember 31, 2022 . Loan interest income from PPP loans was positively impacted by the recognition of deferred fee income of$473,000 during the six months endedDecember 31, 2021 on the forgiven PPP loans repaid by the SBA compared to$0 for the six months endedDecember 31, 2022 . Debt securities interest income decreased$33,000 , or 20.2%, to$130,000 for the six months endedDecember 31, 2022 from$163,000 for the six months endedDecember 31, 2021 due to a$2.0 million decrease in the average balance of debt securities due to securities paydowns and a 13 basis points decrease in the average yield on the debt securities portfolio to 2.44% for the six months endedDecember 31, 2022 from 2.57% for the six months endedDecember 31, 2021 . The decrease in the average yield was related to paydowns on securities bearing higher interest rates and the decrease in the average yield of our collateralized mortgage obligations with inverse floating rates. Interest Expense. Interest expense increased$407,000 , or 87.8%, to$870,000 for the six months endedDecember 31, 2022 from$463,000 for the six months endedDecember 31, 2021 , due to an increase of$373,000 in interest paid on deposits and an increase of$34,000 in interest paid on borrowings. Interest expense on deposits increased$373,000 , or 81.9%, to$831,000 for the six months endedDecember 31, 2022 from$457,000 for the six months endedDecember 31, 2021 due to an increase in interest expense on all deposit categories excluding savings deposits. The average balance of interest-bearing demand, NOW and money market accounts and certificates of deposit increased with the average balance of demand, NOW and money market accounts increasing$5.2 million , or 9.0%, and the average balance of certificates of deposit increasing$11.7 million , or 19.8%. The increase in the average balance of certificates of deposit was due the purchase of brokered certificates of deposit of$4.5 million and the remaining increase in the average balance of certificates of deposit and demand, NOW and money market accounts was due to offering higher rate deposit products during the six months endedDecember 31, 2022 . The average rate paid on demand, NOW and money market accounts and certificates of deposit also increased with the average rate paid on demand, NOW and money market accounts increasing by 47 basis points and the average rate paid 37
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on certificates of deposit also increasing 47 basis points. The increase in the average rate paid on all deposit categories excluding savings deposits was due to the Bank raising the interest rates on these deposit categories to maintain customers and keep the rates in line with what the competitors were offering and to attract new funds to the Bank. Net Interest Income. Net interest income increased by$260,000 , or 8.3%, to$3.4 million for the six months endedDecember 31, 2022 from$3.1 million for the six months endedDecember 31, 2021 . Also included in net interest income for the six months endedDecember 31, 2021 was the recognition of deferred fee income of$473,000 on the forgiven PPP loans repaid by the SBA compared to$0 for the six months endedDecember 31, 2022 . Net interest-earning assets increased by$3.6 million , or 9.4%, to$41.3 million for the six months endedDecember 31, 2022 from$37.7 million for the six months endedDecember 31, 2021 . Net interest rate spread decreased by 12 basis points to 2.96% for the six months endedDecember 31, 2022 from 3.08% for the six months endedDecember 31, 2021 , reflecting a 40 basis points increase in the average rate paid on interest-bearing liabilities offset by a 28 basis points increase in the average yield on interest-earning assets. The net interest margin decreased five basis points to 3.13% for the six months endedDecember 31, 2022 from 3.18% for the six months endedDecember 31, 2021 . The increase in the average yield on interest earning assets for the six months endedDecember 31, 2022 compared to the six months endedDecember 31, 2021 was primarily due to an increase in the average yield of 284 basis points on our cash and cash equivalents investments due to the recent increases in the federal funds rate. The increase in the average interest rate paid on interest-bearing liabilities was due to the Bank raising the interest rates on all deposit categories excluding savings accounts to maintain customers and keep the rates in line with what the competitors were offering and to attract new funds to the Bank. Provision for Loan Losses. Provisions for loan losses are charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses in our loan portfolio that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses, management analyzes several qualitative loan portfolio risk factors including, but not limited to, management's ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, changes in the nature, volume and terms of loans, the fair value of underlying collateral, changes in lending personnel, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. AtDecember 31, 2022 andJune 30, 2022 , the qualitative loan portfolio risk factors were slightly reduced in all loan categories. However, due to the economic and social impacts of the Pandemic being significantly reduced from prior periods, atDecember 31, 2022 , further reduction of the COVID factor was applied to all loan categories. See "Management's Discussion and Analysis of Financial Condition and Results of Operations ofMarathon Bancorp. Inc. -Summary of Significant Accounting Policies and Estimates" for additional information. After an evaluation of these factors, we recorded no provision for loan losses for the six months endedDecember 31, 2022 or 2021. Our allowance for loan losses was$2.1 million and$2.2 million atDecember 31, 2022 and 2021, respectively. The allowance for loan losses to total loans was 1.06% atDecember 31, 2022 and 1.38% atDecember 31, 2021 . We recorded net charge-offs of$136,000 for the six months endedDecember 31, 2022 compared to net recoveries of$2,000 for the six months endedDecember 31, 2021 . The current period charge-off was related to a participation loan with another financial institution. Non-performing assets decreased to$55,000 , or 0.02% of total assets atDecember 31, 2022 , compared to$115,000 , or 0.05% of total assets, atJune 30, 2022 . To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate atDecember 31, 2022 . However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for loan losses. In addition, the WDFI and theFDIC , as an integral part of their examination process, will periodically review our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses. 38
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Non-interest Income. Non-interest income information is as follows.
Six Months Ended
December 31, Change
2022 2021 Amount Percent
(Dollars in thousands)
Service charges on deposit accounts $ 85 $ 83 $ 2 2.41 %
Mortgage banking 136 358 (222) (62.0) %
Increase in cash surrender value of BOLI 120 107 13 12.1 %
Net gain on securities transactions 24 14 10 71.43 %
Gain on proceeds from life insurance death benefit 173 - 173 100.00 %
Other 16 8 8 100.00 %
Total non-interest income $ 554 $
570
Non-interest income decreased by$16,000 to$554,000 for the six months endedDecember 31, 2022 from$570,000 for the six months endedDecember 31, 2021 due primarily to a decrease in mortgage banking income (consisting primarily of sales of fixed-rate one- to four-family residential real estate loans) which decreased by$222,000 as we sold$973,000 of mortgage loans into the secondary market during the six months endedDecember 31, 2022 compared to$12.4 million of such sales during the six months endedDecember 31, 2021 due to an increase in market interest rates, which resulted in decreased demand for mortgage loan refinancing. This decrease was offset by a gain on proceeds from life insurance death benefit of$173,000 .
Non-interest Expenses. Non-interest expenses information is as follows.
Six Months Ended
December 31, Change
2022 2021 Amount Percent
(Dollars in thousands)
Salaries and employee benefits $ 1,664 $ 1,566 $ 98 6.3 %
Occupancy and equipment 349 361 (12) (3.3) %
Data processing and office 186 201 (15) (7.5) %
Professional fees 374 330 44 13.3 %
Marketing expenses 51 43 8 18.6 %
Other 312 277 35 12.6 %
Total non-interest expenses $ 2,936 $ 2,778 $ 158 5.7 %
Non-interest expenses were$2.9 million and$2.8 million for the six months endedDecember 31, 2022 and 2021, respectively. The increase in salaries and employee benefits was due to an increase in salaries and employee benefits related to the new stock compensation plan implemented by the Company onJune 28, 2022 . Professional fees increased due to the use of an outside hiring service and professional fees associated with the implementation of the Company's new stock compensation plan. Provision for Income Taxes. Income tax expense was$208,000 for the six months endedDecember 31, 2022 , a decrease of$25,000 , as compared to income tax expense of$233,000 for the six months endedDecember 31, 2021 . The decrease in income tax expense was primarily due to a change in the Company's effective tax rate. The effective tax rate for the six months endedDecember 31, 2022 and 2021 was 20.4% and 24.9%, respectively. The effective tax rate declined during the six months endedDecember 31, 2022 as compared to the prior year period as the gain on life insurance proceeds was not subject to income taxes.
Asset Quality
Loans Past Due and Non-Performing Assets. Loans are reviewed on a regular basis.
Management determines that a loan is impaired or non-performing when it is
probable at least a portion of the loan will not be collected in accordance with
the original terms due to a deterioration in the financial condition of the
borrower or the value of the underlying collateral if the loan is collateral
dependent. When a loan is determined to be impaired, the measurement of
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the loan in the allowance for loan losses is based on present value of expected future cash flows, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Non-accrual loans are loans for which collectability is questionable and, therefore, interest on such loans will no longer be recognized on an accrual basis. All loans that become 90 days or more delinquent are placed on non-accrual status unless the loan is well secured and in the process of collection. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received on a cash basis or cost recovery method. When we acquire real estate as a result of foreclosure, the real estate is classified as real estate owned. The real estate owned is recorded at the lower of carrying amount or fair value, less estimated costs to sell. Soon after acquisition, we order a new appraisal to determine the current market value of the property. Any excess of the recorded value of the loan satisfied over the market value of the property is charged against the allowance for loan losses, or, if the existing allowance is inadequate, charged to expense of the current period. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value less estimated costs to sell. A loan is classified as a troubled debt restructuring if, for economic or legal reasons related to the borrower's financial difficulties, we grant a concession to the borrower that we would not otherwise consider. This usually includes a modification of loan terms, such as a reduction of the interest rate to below market terms, capitalizing past due interest or extending the maturity date and possibly a partial forgiveness of the principal amount due. Interest income on restructured loans is accrued after the borrower demonstrates the ability to pay under the restructured terms through a sustained period of repayment performance, which is generally six consecutive months.
Delinquent Loans. The following table sets forth our loan delinquencies, including non-accrual loans, by type and amount at the dates indicated.
At December 31, 2022 At June 30, 2022
30-59 60-89 90 Days 30-59 60-89 90 Days
Days Days or More Days Days or More
Past Due Past Due Past Due Past Due Past Due Past Due
(In thousands)
Real estate loans:
One- to- four-family residential $ 54 $ 70 $ 55 $ 70 $ -$ 115 Multifamily - - - - - - Commercial - - - - - - Construction - - - - - - Commercial and industrial - - - - - - Consumer - - - - - - Total$ 54 $ 70 $ 55 $ 70 $ -$ 115 40 Table of Contents
Non-Performing Assets. The following table sets forth information regarding our non-performing assets. Troubled debt restructurings include loans for which either a portion of interest or principal has been forgiven, or loans modified at interest rates materially less than current market rates. There were no non-accruing TDRs as ofDecember 31, 2022 orJune 30, 2022 . AtDecember 31 , AtJune 30, 2022 2022 (Dollars in thousands) Non-accrual loans: Real estate loans:
One- to four-family residential $ 55 $
64
Multifamily - -
Commercial - -
Construction - -
Commercial and industrial - -
Consumer - -
Total non-accrual loans 55 64Accruing loans past due 90 days or more -
51
Real estate owned: One- to four-family residential -
-
Multifamily - -
Commercial - -
Construction - -
Commercial and industrial - -
Consumer - -
Total real estate owned - -
Total non-performing assets $ 55 $ 115Total accruing troubled debt restructured loans $ 124 $
130
Total non-performing loans to total loans 0.03 % 0.06 % Total non-performing loans to total assets 0.02 % 0.05 % Total non-performing assets to total assets 0.02 %
0.05 %
Classified Assets. Federal regulations provide for the classification of loans
and other assets, such as debt and equity securities considered to be of lesser
quality, as "substandard," "doubtful" or "loss." An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss allowance is not warranted. Assets which do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are designated as "special mention" or "Watch" by our management.
When an insured institution classifies problem assets as either substandard or
doubtful, it may establish general allowances in an amount deemed prudent by
management to cover probable accrued losses. General allowances represent loss
allowances which have been established to cover probable accrued losses
associated with lending activities, but which, unlike specific allowances, have
not been allocated to particular problem assets. When an insured institution
classifies problem assets as "loss," it is required either to establish a
specific allowance for losses equal to 100% of that portion of the asset so
classified or to charge-off such amount. An institution's determination as to
the classification of its assets and the amount of its valuation allowances is
subject to review by the regulatory authorities, which may require the
establishment of additional general or specific loss allowances.
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On the basis of our review of our loans our classified and special mention or watch loans at the dates indicated were as follows:
At December 31, At June 30,
2022 2022
(In thousands)
Classification of Loans:
Substandard $ - $ -
Doubtful - -
Loss - -
Total Classified Loans $ - $ -
Special Mention $ 1,471 $ 1,389
Allowance for Loan Losses
The allowance for loan losses established as losses is estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the uncollectability
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectability of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral, and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
The allowance consists of allocated and general components. The allocated
component relates to loans that are classified as impaired. For those loans that
are classified as impaired, an allowance is established when the discounted cash
flows (or collateral value or observable market price) of the impaired loan is
lower than the carrying value of that loan. General components cover
non-impaired loans and are based on historical loss rates for each portfolio
segment, adjusted for the effects of qualitative or environmental factors that
are likely to cause estimated credit losses as of the evaluation date to differ
from the portfolio segment's historical loss experience. Qualitative factors
include consideration of the following: changes in lending policies and
procedures; changes in economic conditions, changes in the nature and volume of
the portfolio; changes in the experience, ability, and depth of lending
management and other relevant staff; changes in the volume and severity of past
due, nonaccrual and other adversely graded loans; changes in the loan review
system; changes in the value of the underlying collateral for
collateral-dependent loans; concentrations of credit; and the effect of other
external factors such as competition and legal and regulatory requirements. At
December 31, 2022 and June 30, 2022 , the qualitative loan portfolio risk factors
were slightly reduced in all loan categories except commercial and multi-family
real estate which we believe exhibits the most credit risk related to local and
national economic conditions as well as industry conditions and concentrations.
However, due to the economic and social impacts of the Pandemic being
significantly reduced from prior periods, at December 31, 2022 , further
reduction of the COVID factor was applied to all loan categories. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Marathon Bancorp. Inc. -Summary of Significant Accounting Policies
and Estimates" for additional information.
A loan is considered impaired when, based on current information and events, it
is probable that we will be unable to collect the scheduled payments of
principal and interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reason for the delay, the borrower's prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured
on a loan-by-loan basis for commercial and commercial real estate loans by
either the present value of expected future cash
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flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent.
In addition, the WDFI and theFDIC periodically review our allowance for loan losses and as a result of such reviews, we may have to adjust our allowance for loan losses or recognize further loan charge-offs.
The following table sets forth activity in our allowance for loan losses for the periods indicated.
For the Three Months Ended For the Six Months Ended
December 31, December 31,
2022 2021 2022 2021
(Dollars in thousands) (Dollars in thousands)Allowance at beginning of period$ 2,059 $ 2,187 $ 2,195 $ 2,186 Provision for loan losses - - - - Charge offs: Real estate loans: One- to four-family residential - -
- -
Multifamily - - - -
Commercial - - (137) -
Construction - - - -Commercial loans and industrial - -
- -
Consumer - - - -
Total charge-offs - - (137) -
Recoveries:
Real estate loans: - -One- to four-family residential - -
- -
Multifamily - - - -
Commercial - - - -
Construction - - - -
Commercial and industrial - - - -
Consumer - 1 1 2
Total recoveries - 1 1 2
Net (charge-offs) recoveries - 1 (136) 2
Allowance at end of period $ 2,059 $ 2,188 $ 2,059 $ 2,188
Allowance to non-performing loans 3,743.64 % 1,367.50 % 3,743.64 % 1,367.50 %
Allowance to total loans outstanding at
the end of the period 1.06 % 1.38 % 1.06 % 1.38 %
Net (charge-offs) recoveries to average
loans outstanding during the period 0.00 % 0.00 % (0.07) % 0.00 %
Net (charge-offs) recoveries to average
loans outstanding during the period
Real estate loans:
One- to four-family residential - % -% - % - % Multifamily - % - % - % - % Commercial - % - % (0.07) % - % Construction - % - % - % - % Commercial and industrial - % - % - % - % Consumer - % - % - % - % Net (charge-offs) recoveries to average loans outstanding during the period 0.00 % 0.00
% (0.07) % 0.00 %
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Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category and the percent of the allowance in each category to the total allocated allowance at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
At December 31, 2022 At June 30, 2022
Percent of Percent of Loans Percent of Percent of Loans
Allowance to In Category to Total Allowance to In Category to Total
Amount Total Allowance Loans Amount Total Allowance Loans
(Dollars in thousands)
Commercial real estate $ 1,285,009 62.4 % 44.0 % $ 1,591,644 72.5 % 42.9 %
Commercial and industrial 21,338 1.0 %
4.0 % 32,701 1.5 % 4.7 %
Construction 17,606 0.9 % 3.8 % 55,029 2.5 % 5.6 %One-to-four-family residential 208,286 10.1 % 29.1 % 263,951 12.0 % 27.6 % Multi-family real estate 195,757 9.5 %
18.0 % 233,371 10.6 % 18.1 %
Consumer 603 0.0 % 1.1 % 601 0.0 % 1.1 %
Unallocated 330,872 16.1 % - 17,753 0.8 % - %
Total $ 2,059,471 100 % 100 % $ 2,195,050 100.0 % 100.0 %
Liquidity and Capital Resources
Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities of securities. We also have the ability to borrow from theFederal Home Loan Bank of Chicago . AtDecember 31, 2022 , we had a$82.6 million line of credit with theFederal Home Loan Bank of Chicago , and had no borrowings outstanding as of that date. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period. Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was$962,000 as compared to$206,000 of cash provided by operating activities for the six months endedDecember 31, 2022 and 2021, respectively. Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans, proceeds from the sale of securities and proceeds from maturing securities and pay downs on securities, was$4.8 million and$17.8 million for the six months endedDecember 31, 2022 and 2021, respectively. Net cash provided by financing activities, consisting of activity in deposit accounts and borrowings, was$14.8 million compared to$1.2 million being used in financing activities for the six months endedDecember 31, 2022 and 2021, respectively. We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience, current pricing strategy and regulatory restrictions, we anticipate that a substantial portion of maturing time deposits will be retained, and that we can supplement our funding with borrowings in the event that we allow these deposits to run off at maturity. AtDecember 31, 2022 ,Marathon Bank was classified as "well capitalized" for regulatory capital purposes. See Note 8-Minimum Regulatory Capital Requirements in the accompanying consolidated financial statements for additional information.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual
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obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. AtDecember 31, 2022 , we had outstanding commitments to originate loans of$11.9 million , and no outstanding commitments to sell loans. We anticipate that we will have sufficient funds available to meet our current lending commitments. Time deposits that are scheduled to mature in one year or less fromDecember 31, 2022 totaled$46.6 million , which include$6.7 million in brokered certificates of deposit. Management expects that a substantial portion of the maturing time deposits will be renewed. However, if a substantial portion of these deposits is not retained, we may utilizeFederal Home Loan Bank advances or other borrowings, which may result in higher levels of interest expense. Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.
Recent Accounting Pronouncements
Please refer to Note 1 to the consolidated financial statements for a description of recent accounting pronouncements that may affect our financial condition and results of operations.
Impact of Inflation and Changing Price
The financial statements and related data presented herein have been prepared in accordance withU.S. GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution's performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
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