ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis reflects our audited 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 audited consolidated financial statements, which appear beginning on page 51 of this Form 10-K.
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.
37
Table of Contents
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. Other sources of non-interest income include net gain on securities transactions, net gain or loss on disposal of foreclosed assets, gain on proceeds from life insurance death benefit, and other income.
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 FDIC for insurance of our deposits.
Income Tax Expense. 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 Estimates
The discussion and analysis of the financial condition and results of operations are based on our audited consolidated financial statements, which are prepared in conformity with U.S. GAAP. The preparation of these audited consolidated 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 and estimates. 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 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;
38
Table of Contents
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 June 30, 2023, the qualitative loan portfolio risk factors were 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.
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.
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 consolidated 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 consolidated 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 prospects of the issuer, whether the market decline was affected by macroeconomic conditions and whether the Company 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.
39
Table of Contents
Fair Value Measurements. The Company determines the fair value of certain assets in accordance with the provisions of FASB Accounting Standards Codification Topic Accounting Standards Codification 820, Fair Value Measurements, which provides a framework for measuring fair value under generally accepted accounting principles.
Fair value is defined as the exchange price that would be received for an asset in the principal or most advantageous market for the asset in an orderly transaction between market participants on the measurement date. It is required that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. The Standard also establishes a fair value hierarchy, which prioritizes the valuation inputs into three broad levels:
● Level 3 inputs are unobservable inputs related to the asset.
Restatement of Previously Issued Financials
During fiscal 2023, the Company corrected an accounting error related to $481,798 of deferred taxes recorded in years prior to fiscal 2022 by the Bank. See Note 1 of the notes to the audited consolidated financial statements.
On September 19, 2023, upon recommendation of management, the Audit Committee of the Company determined that the Company erroneously has maintained a deferred tax liability, which it will not be required to recapture as management does not intend to redeem stock, make distributions in excess of earnings and profits, or take other actions that would result in the recapture of this reserve. The Company previously included a deferred tax liability for its pre-1988 excess tax bad debt deductions because it originally concluded that its 1993 charter conversion resulted in it ceasing to be a “thrift”. Upon further investigation during fiscal year 2023, the Company determined that the charter conversion from a Mutual Savings and Loan Association to a Mutual Savings Bank charter did not disqualify it from the special provisions provided to “thrift” institutions regarding the ability to forego recognition of a deferred tax liability.
As a thrift institution, the Bank is subject to special provisions in the tax laws regarding its allowable tax bad debt deductions and related tax bad debt reserves. These deductions are determined using methods based on loss experience or a percentage of taxable income. Tax bad debt reserves represent the excess of allowable deductions over actual bad debt losses and include a defined base-year amount. Deferred tax liabilities are required to be recognized with respect to reserves in excess of the base-year amount, as well as any portion of the base-year amount that is expected to become taxable (or “recaptured”) in the foreseeable future.
Therefore, as of July 1, 2021, to correct this accounting error, the Company recorded an adjustment to opening retained earnings and deferred tax assets in the amount of $481,798.
At June 30, 2023 and 2022, the Company had an unrecaptured pre-1988 federal bad debt reserve of approximately $1.5 million for which no federal income tax provision has been made. As noted above, a deferred tax liability has not been provided on this amount, as management does not intend to redeem stock, make distributions in excess of earnings and profits, or take other actions that would result in recapture of the reserve.
In evaluating whether the previously issued Consolidated Financial Statements were materially misstated for the interim or annual periods June 30, 2023 and June 30, 2022, respectively, the Company applied the guidance of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 250, Accounting Changes and Error Corrections, SEC Staff Accounting Bulletin (“SAB”) Topic 1.M, Assessing Materiality, and SAB Topic 1.N, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements and concluded that the effect of the errors on prior period annual financial statements was material; and
40
Table of Contents
therefore as noted in SAB Topic 1.N. the Company has restated the June 30, 2022 consolidated financial statements in accordance with FASB ASC 250-10-45-23. Restatement requires all of the following:
a. The cumulative effect of the error on periods prior to those presented shall be reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented.
b. An offsetting adjustment, if any, shall be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period.
c. Financial statements for each individual prior period presented shall be adjusted to reflect correction of the period-specific effects of the error.
Please see Note 1 to the notes to the audited consolidated financial statements for more information regarding the Restatement.
Selected Financial Data
The following selected consolidated financial data sets forth certain financial highlights of the Company and should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K for 2023.
At June 30,
Restated
(In thousands)
Selected Financial Condition Data:
Debt securities available for sale 8,922 10,617
Debt securities held to maturity 516 532
Foreclosed assets (OREO) 2,312 -
Federal Home Loan Bank stock, at cost 770 323
Bank owned life insurance 8,724 9,193
Premises and equipment, net 2,128 1,676
Deferred tax asset 487 579
41
Table of Contents
For the Years
Ended June 30,
(In thousands)
Selected Operating Data:
Provision for loan losses — —
Net interest income after provision for loan losses 6,700 6,209
Income before income taxes 2,117 1,772
Income tax expense 445 437
At or For the Years
Ended June 30,
Performance Ratios:
Return on average assets 0.71 % 0.62 %
Return on average equity 5.91 % 4.90 %
Interest rate spread (1) 2.81 % 2.99 %
Net interest margin (2) 3.04 % 3.09 %
Non-interest expenses to average assets 2.50 % 2.59 %
Capital Ratios (4):
Average equity to average assets 12.01 % 12.69 %
Tier 1 capital to average assets 12.02 % 12.17 %
Asset Quality Ratios:
Allowance for loan losses as a percentage of total loans 1.08 % 1.17 %
Non-performing loans as a percentage of total loans - % 0.06 %
Non-performing loans as a percentage of total assets - % 0.05 %
Total non-performing assets as a percentage of total assets 0.97 % 0.05 %
Other:
Number of offices 4 4
Number of full-time equivalent employees 35 35
42
Table of Contents
Comparison of Financial Condition at June 30, 2023 and June 30, 2022
Total Assets. Total assets increased $18.3 million, or 8.3%, to $238.8 million at June 30, 2023 from $220.5 million at June 30, 2022. The increase was primarily due to an increase of $12.1 million, or 6.5%, in loans, net of the allowance for loan losses. Cash and cash equivalents, interest bearing deposits held in other financial institutions and foreclosed assets also increased by $3.4 million, $1.8 million and $2.3 million, respectively. These increases were offset by a decrease in debt securities available for sale of $1.7 million.
Cash and Cash Equivalents and Interest Bearing Deposits Held in Other Financial Institutions. Total cash and cash equivalents increased $3.4 million, or 39.7%, to $11.8 million at June 30, 2023 from $8.4 million at June 30, 2022, primarily due to an increase in deposits and FHLB borrowings of $9.2 million and $8.0 million, respectively, offset by an increase in cash used to fund new loan originations of $14.1 million. A portion of the increased cash flows from the above activity was invested in interest bearing deposits held in other financial institutions which increased by $1.8 million.
Debt Securities Available for Sale. Total debt securities available for sale decreased $1.7 million, or 16.0%, to $8.9 million at June 30, 2023 from $10.6 million at June 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 and Foreclosed Assets. Net loans increased $12.1 million, or 6.5%, to $197.7 million at June 30, 2023 from $185.6 million at June 30, 2022. The increase was primarily due to an increase in multi-family real estate loans of $10.2 million, or 30.2%, to $44.2 million at June 30, 2023 from $34.0 million at June 30, 2022, an increase in one-to-four-family residential loans of $7.6 million, or 14.6% to $59.5 million at June 30, 2023 from $51.9 million at June 30, 2022 and a $4.0 million increase in commercial real estate loans, or 5.0% to $84.6 million at June 30, 2023 from $80.6 million at June 30, 2022. Offsetting these increases was a decrease in construction loans of $8.7 million, or 82.1%, to $1.9 million at June 30, 2023 from $10.6 million at June 30, 2022 and a decrease in commercial and industrial loans of $1.9 million, or 21.7%, to $6.9 million at June 30, 2023 from $8.8 million at June 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 in Southeastern 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 in September 2022 and the foreclosure of collateral supporting a construction loan which was valued at $2.3 million and is included in foreclosed assets (OREO). The valuation was based on recently obtained independent appraisals subject to certain discounts less estimated costs to sell.
Deposits. Total deposits increased $9.2 million, or 4.9%, to $197.3 million at June 30, 2023 from $188.1 million at June 30, 2022. Non-interest-bearing demand accounts increased $2.5 million, or 10.5%, to $26.2 million at June 30, 2023 from $23.7 million at June 30, 2022. Certificates of deposit increased $23.9 million, or 39.8%, to $83.9 million at June 30, 2023 from $60.0 million at June 30, 2022. Offsetting these increases, was a decrease in demand, NOW and money market accounts of $13.1 million, or 22.7%, to $44.7 million at June 30, 2023 from $57.8 million at June 30, 2022. Savings deposits decreased $4.0 million, or 8.7%, to $42.6 million at June 30, 2023 from $46.6 million at June 30, 2022. The increase in certificates of deposit was due to the purchase of brokered certificates of deposit of $4.5 million during the year ended June 30, 2023 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 in September 2022.
Federal Home Loan Bank (FHLB) Advances. Federal Home Loan Bank (FHLB) advances increased $8.0 million to $8.0 million at June 30, 2023 compared to no borrowings at June 30, 2022 to provide additional funding for new loan originations and to increase balance sheet liquidity.
Stockholders’ Equity. Total stockholders’ equity increased by $55,000, or 0.2%, to $31.3 million at June 30, 2023 from $31.2 million at June 30, 2022. The increase was primarily due to net income of $1.7 million offset by the repurchase and retirement of common stock of $1.4 million during the year ended June 30, 2023 and an increase in accumulated other comprehensive loss, net of tax of $416,000 which was primarily related to the decrease in fair value of
43
Table of Contents
a corporate bond as a result of the increase in interest rates during the year ended June 30, 2023. Stock based compensation and expense related to the Company’s ESOP also increased stockholders’ equity by $171,000.
Average Balance Sheets
The following table sets forth average balances, average yields and costs, and certain other information for the years 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. Deferred loan fees accreted to interest income totaled $50,000 and $536,000 for the years ended June 30, 2023 and 2022, respectively.
For the Year Ended June 30,
Average Average Average Average
Outstanding Yield/Rate Outstanding Yield/Rate
Balance Interest Balance Interest
(Dollars in thousands)
Interest-earning assets:
Noninterest-earning assets 15,146 13,993
Interest-bearing liabilities:
FHLB advances and other borrowings 3,272 103 3.15 % — — — %
PPP Liquidity Facility borrowings — — — % 1,272 7 0.55 %
Non-interest-bearing demand deposits 25,829 23,684
Other non-interest-bearing liabilities 1,726 1,130
Total stockholders' equity 28,282 27,246
Total liabilities and stockholders' equity $ 235,447 $ 214,766
Net interest income $ 6,699 $ 6,209
Net interest rate spread (1) 2.81 % 2.99 %
Net interest-earning assets (2) $ 40,691 $ 38,067
Net interest margin (3) 3.04 % 3.09 %
44
Table of Contents
(2) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average total interest-earning assets.
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the years 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.
Year Ended June 30,
Increase (Decrease) Due to Total
Increase
Volume Rate (Decrease)
(In thousands)
Interest-earning assets:
PPP loans (493) — (493)
Debt securities (34) (47) (81)
Cash and cash equivalents (37) 498 461
Interest-bearing liabilities:
Demand, NOW and money market deposits (6) 299 293
Savings deposits (2) (4) (6)
FHLB advances and other borrowings — 103 103
PPP Liquidity Facility borrowings (7) — (7)
Total interest-bearing liabilities 185 1,146 1,331
Change in net interest income $ 904 $ (414) $ 490
Comparison of Operating Results for the Years Ended June 30, 2023 and 2022
General. Net income was $1.7 million for the year ended June 30, 2023, an increase of $337,000, or 25.3%, from net income of $1.3 million for the year ended June 30, 2022. The increase in net income for the year ended June 30, 2023 was primarily attributable to an increase of $490,000 in net interest income, a gain on proceeds from life insurance of $261,000 and a gain on the acquisition of foreclosed real estate of $247,000, offset by a $329,000 increase in non-interest expenses. Mortgage banking income also declined by $338,000.
Interest Income. Interest income increased by $1.8 million, or 25.4%, to $9.0 million for the year ended June 30, 2023 compared to $7.2 million for the year ended June 30, 2022 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 on our cash and cash equivalents investments of 387 basis points to 4.06% due to the increases in the federal funds rate.
Loan interest income increased by $1.4 million, or 21.0%, to $8.2 million for the year ended June 30, 2023 from $6.8 million for the year ended June 30, 2022, 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 $40.7 million, or 26.3%, from $155.0 million for the year ended June 30, 2022 to $195.7 million for
45
Table of Contents
the year ended June 30, 2023. The increase in the average balance of loans was due to our continued efforts to increase commercial and multi-family real estate loans in Southeastern 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 4.04% for the year ended June 30, 2022 to 4.18% for the year ended June 30, 2023 as a result of rising interest rates. Loan interest income from PPP loans was positively impacted by the recognition of deferred fee income of $483,000 during the year ended June 30, 2022 on the forgiven PPP loans repaid by the SBA compared to $0 for the year ended June 30, 2023.
Debt securities interest income decreased $82,000, or 24.6%, to $249,000 for the year ended June 30, 2023 from $331,000 for the year ended June 30, 2022 due to a $1.3 million decrease in the average balance of debt securities due to securities paydowns and a 44 basis points decrease in the average yield on the debt securities portfolio to 2.24% for the year ended June 30, 2023 from 2.68% for the year ended June 30, 2022. The decrease in the average yield was related to paydowns on securities earning higher interest rates and the decrease in the average yield of our collateralized mortgage obligations with inverse floating rates.
Interest Expense. Interest expense increased $1.3 million, or 140.4%, to $2.3 million for the year ended June 30, 2023 from $948,000 for the year ended June 30, 2022, due to an increase of $1.2 million in interest paid on deposits and an increase of $96,000 in interest paid on borrowings.
Interest expense on deposits increased $1.2 million, or 131.2%, to $2.2 million for the year ended June 30, 2023 from $941,000 for the year ended June 30, 2022 due to an increase in interest expense on all deposit categories excluding savings deposits. The average balance of certificates of deposit increased by $18.0 million, or 30.2% to $77.7 million for the year ended June 30, 2023 from $59.7 million for the year ended June 30, 2022 while the average balance of interest-bearing demand, NOW and money market accounts decreased slightly to $54.1 million, or 0.03% for the year ended June 30, 2023 from $55.7 million for the year ended June 30, 2022. The average balance of savings accounts also decreased slightly to $44.5 million, or 0.03% for the year ended June 30, 2023 from $46.1 million for the year ended June 30, 2022. The increase in the average balance of certificates of deposit was partly due to the purchase of brokered certificates of deposit of $4.5 million with the remaining increase in the average balance of certificates of deposit being due to offering higher rate deposit products during the year ended June 30, 2023. 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 55 basis points and the average rate paid on certificates of deposit increasing by 96 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 our competitors were offering and to attract new funds to the Bank.
Net Interest Income. Net interest income increased by $490,000, or 7.9%, to $6.7 million for the year ended June 30, 2023 from $6.2 million for the year ended June 30, 2022. Also included in net interest income for the year ended June 30, 2022 was the recognition of deferred fee income of $483,000 on the forgiven PPP loans repaid by the SBA compared to $0 for the year ended June 30, 2023. Net interest-earning assets increased by $2.6 million, or 6.9%, to $40.7 million for the year ended June 30, 2023 from $38.1 million for the year ended June 30, 2022. Net interest rate spread decreased by 18 basis points to 2.81% for the year ended June 30, 2023 from 2.99% for the year ended June 30, 2022, reflecting a 69 basis points increase in the average rate paid on interest-bearing liabilities offset by a 51 basis points increase in the average yield on interest-earning assets. The net interest margin decreased five basis points to 3.04% for the year ended June 30, 2023 from 3.09% for the year ended June 30, 2022. The increase in the average yield on interest earning assets for the year ended June 30, 2023 compared to the year ended June 30, 2022 was primarily due to an increase in the average yield of 387 basis points on our cash and cash equivalents investments due to the 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 our 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
46
Table of Contents
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. At June 30, 2023, the qualitative loan portfolio risk factors were 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.
After an evaluation of these factors, we recorded no provision for loan losses for the years ended June 30, 2023 or 2022. Our allowance for loan losses was $2.2 million and $2.2 million at June 30, 2023 and 2022, respectively. The allowance for loan losses to total loans was 1.08% at June 30, 2023 and 1.17% at June 30, 2022. We recorded net charge-offs of $36,000 for the year ended June 30, 2023 compared to net recoveries of $9,000 for the year ended June 30, 2022. The current year charge-off was related to a participation loan with another financial institution. There were $2.3 million in non-performing assets, or 0.97% at June 30, 2023, compared to $115,000, or 0.05% of total assets, at June 30, 2022.
To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate at June 30, 2023. 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 the FDIC, 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.
Year Ended
June 30, Change
(Dollars in thousands)
Service charges on deposit accounts $ 153 $ 165 $ (12) (7.3) %
Increase in cash surrender value of BOLI 236 225 11 4.9 %
Gain on acquisition of foreclosed real estate 247 — 247 100.0 %
Net gain on securities transactions 24 14 10 71.4 %
Non-interest income increased by $184,000, or 16.5% to $1.3 million for the year ended June 30, 2023 from $1.1 million for the year ended June 30, 2022 due primarily to a gain on proceeds from a life insurance death benefit and a gain on the acquisition of foreclosed real estate. These increases were offset by a decrease in mortgage banking income (consisting primarily of sales of fixed-rate one- to four-family residential real estate loans) which decreased by $338,000 as we sold $3.9 million of mortgage loans into the secondary market during the year ended June 30, 2023 compared to $16.8 million of such sales during the year ended June 30, 2022 due to an increase in market interest rates, which resulted in decreased demand for mortgage loan refinancing. The gain on acquisition of foreclosed real estate was related to the foreclosure of collateral supporting a construction loan which was valued at $2.3 million and is included in foreclosed assets (OREO). The valuation was based on recently obtained independent appraisals subject to certain discounts less estimated costs to sell.
47
Table of Contents
Non-Interest Expenses. Non-interest expenses information is as follows.
Year Ended
June 30, Change
(Dollars in thousands)
Data processing and office 401 394 7 1.8 %
Debit card expenses 90 78 12 15.4
Non-interest expenses were $5.9 million and $5.6 million for the years ended June 30, 2023 and 2022, respectively. The increase was primarily due to an increase in salaries and employee benefits related to the new stock compensation plan implemented by the Company on June 28, 2022.
Provision for Income Taxes. Income tax expense was $445,000 for the year ended June 30, 2023 as compared to $437,000 for the year ended June 30, 2022. The increase in income tax expense was primarily due to an increase in the income before income taxes of $345,000 offset by a decrease in the Company’s effective tax rate. The effective tax rate for the years ended June 30, 2023 and 2022 was 21.0% and 24.7%, respectively. The effective tax rate declined during the year ended June 30, 2023 as compared to the prior year because the gain on life insurance proceeds was not subject to income taxes.
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 the Federal Home Loan Bank of Chicago. At June 30, 2023, we had a $84.0 million line of credit with the Federal Home Loan Bank of Chicago, which had $8.0 million in borrowings outstanding as of that date. The Bank also has $25.0 million available to borrow from the Federal Reserve Bank when pledging acceptable assets and an unsecured Federal Funds purchasing limit of $5.0 million with the Bank’s correspondent bank.
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 $2.0 million and $826,000 for the years
48
Table of Contents
ended June 30, 2023 and 2022, respectively. Net cash used in investing activities, which consists primarily of disbursements for loan originations, the purchase of securities and the purchase of bank owned life insurance, offset by principal collections on loans, proceeds from the sale of securities and proceeds from maturing securities and pay downs on securities, was $14.4 million for the year ended June 30, 2023 compared to $44.2 million for the year ended June 30, 2022. Net cash provided by financing activities, consisting of activity in deposit accounts and borrowings was $15.8 million and $5.8 million for the years ended June 30, 2023 and 2022, 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.
At June 30, 2023, Marathon Bank was classified as “well capitalized” for regulatory capital purposes. See Note 16 in the Notes to the Audited Consolidated Financial Statements.
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 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. At June 30, 2023, we had outstanding commitments to originate loans of $1.2 million, and outstanding commitments to sell loans of $320,000. 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 from June 30, 2023 totaled $54.6 million. 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 utilize Federal 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 of the notes to consolidated the financial statements beginning on page 50 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 with U.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.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required of a smaller reporting company.
49
Table of Contents
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Marathon Bancorp, Inc.
Table of Contents
Report of Independent Registered Public Accounting Firm (PCAOB ID 1884) 51
Financial Statements
Consolidated Balance Sheets 52
Consolidated Statements of Income 53
Consolidated Statements of Comprehensive Income 54
Consolidated Statements of Changes in Stockholders’ Equity 55
Consolidated Statements of Cash Flows 56
Notes to the Consolidated Financial Statements 57
50
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Marathon Bancorp, Inc.
Wausau, Wisconsin
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Marathon Bancorp, Inc. (the “Company”) as of June 30, 2023 and 2022, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended June 30, 2023, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2023, and 2022, and the results of their operations and their cash flows for each of the years in the two-year period ended June 30, 2023, in conformity with accounting principles generally accepted in the United States of America.
Restatement of Previously Issued Financial Statements
As discussed in Note 1 to the consolidated financial statements, the 2022 consolidated financial statements have been restated to correct a misstatement.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2020.
/s/ Bonadio & Co., LLP
Syracuse, New York
September 20, 2023
51
Table of Contents
Marathon Bancorp, Inc.
Consolidated Balance Sheets
June 30, 2023 and 2022
June 30,
Restated
Assets
Foreclosed assets (OREO) 2,312,240 —
Liabilities and Stockholders' Equity
Liabilities
Deposits
Federal Home Loan Bank (FHLB) advances 8,000,000 —
Stockholders' Equity
See Notes to Consolidated Financial Statements
52
Table of Contents
Marathon Bancorp, Inc.
Consolidated Statements of Income
For the Years ended June 30, 2023 and 2022
June 30,
Interest Income
Interest Expense
Provision for Loan Losses — —
Net Interest Income After Provision for Loan Losses 6,699,311 6,209,375
Non-Interest Income
Increase in cash value of life insurance 236,420 224,580
Gain on proceeds from life insurance death benefit 261,297 —
Net gain on securities transactions 24,000 14,000
Gain on acquisition of foreclosed assets 246,751 —
Non-Interest Expenses
Net income per common shares-basic and diluted $ 0.79 $ 0.62
See Notes to Consolidated Financial Statements
53
Table of Contents
Marathon Bancorp, Inc.
Consolidated Statements of Comprehensive Income
For the Years Ended June 30, 2023 and 2022
June 30,
Other comprehensive loss
Unrealized losses on available for sale debt securities
Unrealized holding loss arising during the period (556,318) (682,767)
(b) The reclassification adjustment is reflected in the Consolidated Statement of Income as Net Gain on Securities
Transactions.
See Notes to Consolidated Financial Statements
54
Table of Contents
Marathon Bancorp, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
For the Years Ended June 30, 2023 and 2022
Accumulated
Additional Unearned Other
Preferred Common Paid-in Retained ESOP Comprehensive
Stock Stock Capital Earnings Shares Income (Loss) Total
Other comprehensive loss — — — — — (489,696) (489,696)
Stock based compensation 130,628 130,628
See Notes to Consolidated Financial Statements
55
Table of Contents
Marathon Bancorp, Inc.
Consolidated Statements of Cash Flows
For the Years Ended June 30, 2023 and 2022
June 30,
Operating Activities
Provision for loan losses — —
Amortization of deferred loan fees (50,036) (535,665)
Stock based compensation 130,628 —
Realized gain on available for sale debt securities (24,000) (14,000)
Net gain on foreclosed assets (246,751) —
Gain from proceeds on life insurance death benefit (261,297) —
Earnings on cash value of life insurance (236,420) (224,580)
Increase in interest receivable (46,795) (13,413)
Net amortization of operating lease right of use assets 106,855 —
Net change in operating lease liabilities (113,655) —
Investing Activities
Purchase of debt securities available for sale — (3,500,000)
Proceeds from life insurance death benefit 966,834 —
Purchase of bank owned life insurance — (3,000,000)
Net increase in restricted stock (447,273) (60,800)
Purchases of property and equipment (65,363) (34,094)
Financing Activities
Borrowings of FHLB advances 8,000,000 —
Borrowings (Repayments) of PPPLF funding, net — (10,372,148)
Purchase and retirement of common stock (1,371,844) —
Supplemental Disclosure of Cash Flow Information
Cash payments for
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Transfer of loans to foreclosed assets $ 2,087,809 $ —
Lease liabilities arising from using right-of-use assets 698,837 —
See Notes to Consolidated Financial Statements
56
Table of Contents
Marathon Bancorp, Inc.
Notes to the Consolidated Financial Statements
June 30, 2023 and 2022
Note 1 - Significant Accounting Policies
Restatement of Previously Issued Financial Statements
During fiscal 2023, the Company corrected an accounting error related to $481,798 of deferred taxes recorded in years prior to fiscal 2022 by the Bank.
On September 19, 2023, upon the recommendation of management, the Audit Committee of the Company determined that the Company erroneously has maintained a deferred tax liability, which it will not be required to recapture as management does not intend to redeem stock, make distributions in excess of earnings and profits, or take other actions that would result in the recapture of this reserve. The Company previously included a deferred tax liability for its pre-1988 excess tax bad debt deductions because it originally concluded that its 1993 charter conversion resulted in it ceasing to be a “thrift”. Upon further investigation during fiscal year 2023, the Company determined that the charter conversion from a Mutual Savings and Loan Association to a Mutual Savings Bank charter did not disqualify it from the special provisions provided to “thrift” institutions regarding the ability to forego recognition of a deferred tax liability.
As a thrift institution, the Bank is subject to special provisions in the tax laws regarding its allowable tax bad debt deductions and related tax bad debt reserves. These deductions are determined using methods based on loss experience or a percentage of taxable income. Tax bad debt reserves represent the excess of allowable deductions over actual bad debt losses and include a defined base-year amount. Deferred tax liabilities are required to be recognized with respect to reserves in excess of the base-year amount, as well as any portion of the base-year amount that is expected to become taxable (or “recaptured”) in the foreseeable future.
Therefore, as of July 1, 2021, to correct this accounting error, the Company recorded an adjustment to opening retained earnings and deferred tax assets in the amount of $481,798.
At June 30, 2023 and 2022, the Company had an unrecaptured pre-1988 federal bad debt reserve of approximately $1.5 million for which no federal income tax provision has been made. As noted above, a deferred tax liability has not been provided on this amount, as management does not intend to redeem stock, make distributions in excess of earnings and profits, or take other actions that would result in recapture of the reserve.
In evaluating whether the previously issued Consolidated Financial Statements were materially misstated for the interim or annual periods June 30, 2023 and June 30, 2022, respectively, the Company applied the guidance of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 250, Accounting Changes and Error Corrections, SEC Staff Accounting Bulletin (“SAB”) Topic 1.M, Assessing Materiality, and SAB Topic 1.N, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements and concluded that the effect of the errors on prior period annual financial statements was material; and therefore as noted in SAB Topic 1.N. the Company has restated the June 30, 2022 consolidated financial statements in accordance with FASB ASC 250-10-45-23. Restatement requires all of the following:
a. The cumulative effect of the error on periods prior to those presented shall be reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented.
b. An offsetting adjustment, if any, shall be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period.
c. Financial statements for each individual prior period presented shall be adjusted to reflect correction of the period-specific effects of the error.
Also, in accordance with SAB Topic 1.N., the Company has disclosed the nature and amount of the cumulative effect adjustment as well as how the error being corrected arose. Previously filed interim reports are not being amended, as the
57
Table of Contents
Marathon Bancorp, Inc.
Notes to the Consolidated Financial Statements
June 30, 2023 and 2022
Company is disclosing the impact to the consolidated financial statements for each quarterly period beginning July 1, 2021 within this footnote. Comparative information presented in reports for interim periods subsequent to June 30, 2023 will be adjusted to reflect the cumulative effect adjustment as of July 1, 2021.
Note 11- Income Taxes has also been updated to reflect this cumulative effect adjustment.
The following table shows the consolidated financial statement amounts as previously reported and as revised and for each quarterly period in the two-year period ended June 30, 2023:
As Previously Reported Adjustments Revised
Assets
Liabilities and Stockholders'
Equity
As Previously Reported Adjustments Revised
Assets
Liabilities and Stockholders'
Equity
As Previously Reported Adjustments Revised
Assets
Liabilities and Stockholders'
Equity
As Previously Reported Adjustments Revised
Assets
Liabilities and Stockholders'
Equity
58
Table of Contents
Marathon Bancorp, Inc.
Notes to the Consolidated Financial Statements
June 30, 2023 and 2022
As Previously Reported Adjustments Revised
Assets
Liabilities and Stockholders'
Equity
As Previously Reported Adjustments Revised
Assets
Liabilities and Stockholders'
Equity
Basis of Presentation and Nature of Operations
Marathon Bancorp, Inc. (the “Company”) is a Maryland chartered mid-tier stock holding company and was formed in connection with the conversion of Marathon Bank (the “Bank”) from a mutual to the mutual holding company form of organization in April 2021, and it is a subsidiary of Marathon MHC (the “Mutual Holding Company”), a Wisconsin chartered mutual holding company. The Mutual Holding Company received 1,226,223 shares, or 55.0%, of the Company’s issued stock at the time of the reorganization. In connection with the reorganization, Marathon Bancorp, Inc. sold 1,003,274 shares of common stock to the public at $10.00 per share, representing 45.0% of its outstanding shares of common stock at the time of the reorganization. The stock offering resulted in gross proceeds of $10.0 million, net of offering expenses of $1.4 million, resulting in net proceeds of $8.5 million. The Mutual Holding Company activity is not included in the accompanying consolidated financial statements. Marathon Bank is a wholly owned subsidiary of the Company. The same directors and officers, who manage the Bank, also manage the Company and the Mutual Holding Company.
The Bank is a Wisconsin stock savings bank, which conducts its business through four facilities. The Bank operates as a full-service financial institution with a primary market area including, but not limited to, Marathon County and Ozaukee County, Wisconsin. Its primary deposit products are demand deposits, savings, and certificates of deposits; and its primary lending products are commercial real estate, commercial and industrial, construction, one-to-four-family residential, multi-family real estate and consumer loans.
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. The Company maintains its accounts using the accrual basis of accounting. Under the accrual basis of accounting, revenues are recognized when earned and expenses are recognized when incurred. The significant accounting policies described below, together with the notes that follow, are an integral part of the consolidated financial statements.
59
Table of Contents
Marathon Bancorp, Inc.
Notes to the Consolidated Financial Statements
June 30, 2023 and 2022
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany transactions and balances have been eliminated in consolidation. The Company, as used in the consolidated financial statements, refers to the consolidated group.
Use of Estimates
In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for loan losses, valuation of deferred tax assets, other-than-temporary impairment of debt securities and fair value of financial assets and liabilities.
Concentrations of Credit Risk
The majority of the Company’s loans and commitments to extend credit have been granted to customers in the Company’s market area. Although the Company’s loan portfolio is diversified, a substantial portion of the Company’s customers’ ability to honor their contracts is dependent upon the local business economy in which the Company operates. The concentration of credit by type of loan is set forth in Note 4 of the notes to consolidated financial statements.
Cash and Cash Equivalents
For the purposes of the statement of cash flows, cash and cash equivalents include cash and balances due from banks and federal funds sold with other banks, all of which have original maturities of 90 days or less.
Balances in transaction accounts at other financial institutions may exceed amounts covered by federal deposit insurance. Management regularly evaluates the credit risk associated with other financial institutions and believes that the Company is not exposed to any significant credit risks on cash and cash equivalents.
Interest Bearing Deposits in Other Financial Institutions
Interest-bearing deposits with other financial institutions consist of certificates of deposits in other banks with original maturities of less than one year.
Debt Securities
The Company classifies its debt securities as available for sale or held to maturity. Debt securities classified as available for sale are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in comprehensive income. Debt securities, which the Company has the positive intent and ability to hold to maturity, are classified as held to maturity and are carried at amortized cost.
Purchase premiums and discounts are recognized in interest income using the interest method to the call date or over the terms of the securities, if there is no call date. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
For a debt security transferred into the held to maturity category from the available for sale category, the unrealized holding gain or loss at the date of the transfer is reported in accumulated other comprehensive income and amortized over the
60
Table of Contents
Marathon Bancorp, Inc.
Notes to the Consolidated Financial Statements
June 30, 2023 and 2022
remaining life of the security as an adjustment of yield in a manner consistent with the amortization of any premium or discount.
The Company follows the accounting guidance related to recognition and presentation of other-than-temporary impairment. This guidance specifies that (a) if the Company does not have the intent to sell a debt security prior to recovery, and (b) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a credit loss. When an entity does not intend to sell the security and it is more likely than not that the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income.
Investments in Restricted Stock
Investments in restricted stock consist of Federal Home Loan Bank stock. The Bank, as a member of the Federal Home Loan Bank System, is required to hold a specific number of shares of capital stock in the Federal Home Loan Bank of Chicago. Since ownership of this stock is restricted, the stock is carried at cost and evaluated periodically for impairment. The carrying amount of the Bank’s investment in Federal Home Loan Bank stock was $770,273 and $323,000 as of June 30, 2023 and 2022.
Fair Value Measurements
The Company determined the fair value of certain assets in accordance with the provisions of FASB Accounting Standards Codification Topic Accounting Standards Codification 820, Fair Value Measurements, which provides a framework for measuring fair value under generally accepted accounting principles.
Fair value is defined as the exchange price that would be received for an asset in the principal or most advantageous market for the asset in an orderly transaction between market participants on the measurement date. It is required that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. The Standard also establishes a fair value hierarchy, which prioritizes the valuation inputs into three broad levels:
● Level 3 inputs are unobservable inputs related to the asset.
See Note 18 of the notes to consolidated financial statements.
Loans Held for Sale
Loans originated and intended for sale in the secondary market are carried at lower of cost or fair value. For loans carried at the lower of cost or fair value, gains and losses on loan sales (sales proceeds minus carrying value) are recorded in non-interest income, and direct loan origination costs and fees are deferred at origination of the loan and are recognized in non-interest income upon sale of the loan. The Company had $0 and $78,000 of loans held for sale as of June 30, 2023 and 2022, included in net loans on the consolidated balance sheet.
Loans
Loans are reported at their outstanding unpaid principal balance adjusted for the allowance for loan losses.
61
Table of Contents
Marathon Bancorp, Inc.
Notes to the Consolidated Financial Statements
June 30, 2023 and 2022
Interest income is accrued on the unpaid principal balance. The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. Loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on non-accrual or charged-off is reversed against interest income.
The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Loan Origination Fees and Costs
Loan origination fees and related direct origination costs associated with loans are deferred and amortized over the life of the loan on a level-yield basis as an adjustment to interest income over the contractual life of the loan.
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, general and unallocated 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.
The unallocated component of the allowance for loan losses covers several considerations that are not specifically measurable through either the allocated or general components. For example, at times the Company could face increasing credit risks and uncertainties, not yet reflected in recent historical losses or qualitative factor assessments, associated with unpredictable changes in economic growth or business conditions in our markets or for certain industries in which we have commercial loan borrowers, or unanticipated stresses to the values of real estate held as collateral. Any or all of these additional issues can adversely affect our borrowers’ ability to timely repay their loans. Also, the unallocated component allocation recognizes the inherent imprecision in our allowance for loan loss methodology, or any alternative methodology, for estimating allocated and general loan losses, including the unpredictable timing and amounts of charge-offs, the fact that historical loss averages don’t necessarily correlate to future loss trends, and unexpected changes to specific-credit or general portfolio future cash flows and collateral values which could negatively impact unimpaired portfolio loss factors.
62
Table of Contents
Marathon Bancorp, Inc.
Notes to the Consolidated Financial Statements
June 30, 2023 and 2022
A loan is considered impaired when, based on current information and events, it is probable that the Company 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.
Troubled debt restructurings (“TDRs”) are individually evaluated for impairment and included in the separately identified impairment disclosures. Loans whose terms are modified are classified as troubled debt restructurings if the Company grants borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a below-market interest rate based on the loan’s risk characteristics, an extension of a loan’s stated maturity date or a significant delay in payment. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for a sustained period after modification. For TDRs that subsequently default, the Company determines the amount of the allowance on that loan in accordance with the accounting policy for the allowance for loan losses on loans individually identified as impaired.
Major categories of loans are further defined by the Company into portfolio segments identified by the Company including commercial and industrial, commercial real estate, construction, one-to-four-family residential, multi-family real estate and consumer loans. Relevant risk characteristics for these portfolio segments generally include debt service coverage, loan-to-value ratios and financial performance on non-consumer loans and credit scores, debt-to-income, collateral type and loan-to-value ratios for consumer loans.
Credit Related Financial Instruments
In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments to grant loans. Such financial instruments are recorded when they are funded.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company – put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership; (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Foreclosed Assets
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less estimated cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets.
63
Table of Contents
Marathon Bancorp, Inc.
Notes to the Consolidated Financial Statements
June 30, 2023 and 2022
The recorded investment in 1-4 family owner occupied properties that were in process of foreclosure was $0 and $0 at June 30, 2023 and June 30, 2022, respectively. Foreclosed assets were $2,312,240 and $0 at June 30, 2023 and 2022, respectively.
Cash Surrender Value Life Insurance
Investment in life insurance contracts is stated at cash surrender value of the various insurance policies. The income on the investment is included in non-interest income.
Mortgage Servicing Rights
Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Generally, purchased servicing rights are capitalized at the cost to acquire the rights. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on its fair value. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is recognized through valuation allowance for individual tranches, to the extent that fair value is less than the capitalized amount for the tranches. If the Company later determines that all or a portion of the impairment no longer exists, a reduction of the allowance may be recorded as an increase to income. Capitalized servicing rights are included with other assets on the consolidated balance sheet and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.
Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income.
Loans serviced for others are not included in the consolidated balance sheet. The unpaid principal balances of mortgage loans serviced for others was approximately $81,849,000 and $85,493,000 as of June 30, 2023 and 2022, respectively. The Company had a mortgage servicing right asset of $818,151 and $790,482 as of June 30, 2023 and 2022, included in other assets on the consolidated balance sheets.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Software amortization is included in depreciation expense. Buildings and related components are depreciated using the straight-line method over the estimated useful lives of the assets ranging from 5 to 40 years for buildings and improvements and 3 to 10 years for furniture and equipment. Leasehold improvements are amortized over the lesser of the related terms of the leases or their useful lives.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of property and equipment, allowance for loan losses, mortgage servicing rights, and net operating losses for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. 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.
64
Table of Contents
Marathon Bancorp, Inc.
Notes to the Consolidated Financial Statements
June 30, 2023 and 2022
The Company evaluates its tax positions that have been taken or are expected to be taken on income tax returns to determine if an accrual is necessary for uncertain tax positions. As of June 30, 2023 and 2022, the unrecognized tax benefit accrual was zero. The Company will recognize future accrued interest and penalties related to unrecognized tax benefits in income tax expense if incurred.
Employee Benefit Plans
The Company sponsors a 401(k) salary deferral plan available to substantially all employees. The plan provides for Company-matching contributions based on a percentage of participant contributions as well as Company profit-sharing and safe harbor contributions.
The Company also sponsors an Employee Stock Ownership Plan (“ESOP”) that is available to substantially all employees. Shares are released to employees on a straight-line basis over the loan term and allocated based on participant compensation. See Note 11 of the Notes to Consolidated Financial Statements.
Advertising Costs
Advertising costs are expensed as incurred. Such costs were $87,179 and $77,626 for the years ended June 30, 2023 and 2022, respectively.
Stock-Based Compensation
Compensation costs related to share-based payment transactions are recognized based on the grant-date fair value of the stock-based compensation issued. Compensation costs are recognized over the period that an employee provides service in exchange for the award. Compensation costs related to the Employee Stock Ownership Plan are dependent upon the average stock price and the shares committed to be released to plan participants through the period in which income is reported.