MARATHON BANCORP, INC. 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.
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 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
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.
Impact of COVID-19 Outbreak
The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law onMarch 27, 2020 and provided over$2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized theSmall Business Administration ("SBA") to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program ("PPP"). This was considered Round 1 of the PPP. Although we were not already a qualified SBA lender, we enrolled in the PPP by completing the required documentation. We subsequently obtained approval as a qualified SBA lender. OnDecember 27, 2020 , the Consolidated Appropriations Act, 2021 was signed into law and included new funding for the PPP (Round 2). The PPP program ended inMay 2021 . Commercial and industrial loans include loans originated under the PPP, a specialized low-interest (1%) forgivable loan program funded by theU.S. Treasury Department and administered by the SBA. The SBA guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower's PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and the loan proceeds are used for other qualifying expenses. As ofJune 30, 2022 , we had originated 109 PPP loans totaling$10.4 million . As ofJune 30, 2022 , all of these PPP loans have been forgiven. As ofJune 30, 2022 , we had no PPP loans outstanding. We have implemented various consumer and commercial loan modification programs to provide our borrowers relief from the economic impacts of COVID-19. Based on guidance in the CARES Act and COVID-19 related legislation, COVID-19 related modifications to loans that were current as ofDecember 31, 2019 are exempt from TDR classification underU.S. GAAP throughJanuary 1, 2022 . In addition, the bank regulatory agencies issued interagency guidance stating that COVID-19 related short-term modifications (i.e., six months or less) granted to loans that were current as of the loan modification program implementation date are not TDRs. As ofJune 30, 2022 , we had granted short-term payment deferrals on 56 loans, totaling approximately$20.0 million in aggregate principal amount. As ofJune 30, 2022 , all of these loans have returned to normal payment status.
Business Strategy
Our business strategy is to operate as a well-capitalized and profitable community bank dedicated to providing personal service to our individual and business customers. We believe that we have a competitive advantage in the markets we serve because of our 119-year history in the community, our knowledge of the local marketplace and our long-standing reputation for providing superior, relationship-based customer service. The following are the key elements of our business strategy: Increase our commercial real estate lending into the higher growthSoutheastern Wisconsin market. As a result of our recent efforts to better balance the overall loan portfolio between commercial and non-commercial lending and expansion into theSoutheastern Wisconsin market, including theMilwaukee metropolitan area, our commercial real estate loans, including multifamily loans, increased to$114.5 million , or 61.0% of our loan portfolio, atJune 30, 2022 , compared to$69.4 million , or 47.3% of our loan portfolio, atJune 30, 2021 . We intend to retain our presence as a commercial real estate lender (which includes multifamily loans) in our market area and seek to expand our market share 37 Table of Contents in existing and other growth markets inSoutheastern Wisconsin , includingMilwaukee . We intend to continue to build relationships with small and medium-sized businesses and high net worth individuals in these market areas focusing on lending to manufacturing, wholesale distribution and professional service businesses. We also intend to increase ourSoutheastern Wisconsin presence by using the capital raised in our stock offering to hire experienced local commercial real estate lenders with credit skills that fit well with our focus on asset quality, as well as possibly expand our branch network, either through acquisitions or organically, inSoutheastern Wisconsin . We believe the additional capital raised in the offering will enable us to increase our originations of commercial real estate loans and related lending limits, which will enable us to originate larger loans to new and existing customers. Given their larger balances and the complexity of the underlying collateral, commercial real estate and multifamily real estate loans generally have more risk than the owner-occupied one- to four-family residential real estate loans we originate. Because the repayment of commercial real estate and multifamily real estate loans depends on the successful management and operation of the borrower's properties or related businesses, repayment of such loans can be affected by adverse conditions in the local real estate market or economy. Furthermore, the significant loan growth may require an increase in our provision for loan losses as the portfolio growth continues to outpace the growth in our allowance for loan losses. Continue to originate and sell certain residential real estate loans. Residential mortgage lending has historically been a significant part of our business, and we recognize that originating one- to four-family residential real estate loans is essential to our status as a community-oriented bank. During the year endedJune 30, 2022 , we originated and sold$16.8 million of one- to four-family residential real estate loans held for sale for gains on sale of loans of$308,000 . These amounts are significantly below 2021's activity due to the increase in market interest rates over the past year. We intend to continue to sell in the secondary market most of the long-term conforming fixed-rate one- to four-family residential real estate loans that we originate for fee income that enhances our non-interest income and mitigates the risks associated with changes in market interest rates that may adversely impact our interest income. Increase our share of lower-cost core deposit growth. We have made a concerted effort to reduce our reliance on higher cost certificates of deposit in favor of obtaining lower cost retail and commercial deposit accounts. We have also made significant investments in our technology-based products. For example, we have enhanced our suite of deposit products, including remote deposit capture, commercial cash management and mobile deposits in order to accommodate business customers. This has had the dual effect of reducing our concentration of certificates of deposit to approximately 31.9% atJune 30, 2022 from 35.4% of total deposits atJune 30, 2021 , while growing our core deposits to$128.1 million atJune 30, 2022 from$112.7 million atJune 30, 2021 . We intend to continue our focus on core deposit growth by offering our retail and commercial customers a full selection of deposit-related services, and making further investments in technology so that we can deliver high-quality, innovative products and services to our customers. Manage credit risk to maintain a low level of non-performing assets. We believe that credit risk management is paramount to our long-term success. Over the past several years, we have invested significantly in both personnel and software to effectively manage our portfolio, and we have considerably enhanced our controls. We have established an experienced commercial credit team and we have implemented well-defined policies, a thorough and efficient loan underwriting process, and active credit monitoring. As a result of our continued focus on credit risk management, our non-performing loans to total loans was 0.06% and 0.12% as ofJune 30, 2022 andJune 30, 2021 , respectively. We intend to continue to support our investment in our commercial credit department as we grow our loan portfolio in the future. Grow organically and through opportunistic bank or branch acquisitions or de novo branching. In addition to organic growth, we will also consider acquisition opportunities that we believe would enhance the value of our franchise and yield potential financial benefits for our stockholders. Although we believe opportunities exist to increase our market share in our historical markets, we expect to continue to expand intoSoutheastern Wisconsin . We will consider expanding our branch network through acquisitions and/or through establishing de novo branches, although we have no current acquisitions or new branches planned. The recent capital we raised provides us the opportunity to make acquisitions of other financial institutions or branches thereof, and will also help fund improvements in our operating facilities, credit reporting and customer delivery services in order to enhance our competitiveness. Remain a community-oriented institution and relying on high quality service to maintain and build a loyal local customer base. We were established in 1902 and have been operating continuously since that time in our local 38
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community. Through the goodwill we have developed over the years of providing timely, efficient banking services, we believe that we have been able to attract a solid base of local retail customers on which we hope to continue to build our banking business.
Anticipated Increase in Non-interest Expense
Our non-interest expense is expected to increase because of the increased costs associated with operating as a public company, and the increased compensation expenses associated with the implementation of the Company's 2022 Equity Incentive Plan.
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 withU.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; 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. AtJune 30, 2022 and 2021, the qualitative loan portfolio risk factors were slightly reduced in all loan categories except commercial real estate which 39
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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.
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.
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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 1 inputs consist of quoted prices in active markets for identical assets
that the reporting entity has the ability to access at the measurement date.
? Level 2 inputs are inputs other than quoted prices included within Level 1 that
are observable for the related asset.
? Level 3 inputs are unobservable inputs related to the asset.
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 2022.
At June 30,
2022 2021
(In thousands)
Selected Financial Condition Data:
Total assets $ 220,019 $ 213,627
Cash, cash equivalents and interest-bearing deposits in other financial institutions 10,373
48,111
Debt securities available for sale 10,617
10,910
Debt securities held to maturity 532
709
Loans receivable, net 185,630
144,169
Federal Home Loan Bank stock, at cost 323
262
Bank owned life insurance 9,193 5,969
Premises and equipment, net 1,676 1,850
Deferred tax asset 97 270
Deposits 188,100 171,956
PPPLF Funding - 10,372
Stockholders' Equity 30,743 29,849
For the Years
Ended June 30,
2022 2021
(In thousands)
Selected Operating Data:
Interest income $ 7,157 $ 6,484
Interest expense 948 1,091
Net interest income 6,209 5,393
Provision for loan losses - -
Net interest income after provision for loan losses 6,209 5,393
Non-interest income 1,118 1,896
Non-interest expense 5,555 5,438
Income before income taxes 1,772 1,851
Income tax expense 437 478
Net income $ 1,335 $ 1,373
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At or For the Years
Ended June 30,
2022 2021
Performance Ratios:
Return on average assets 0.62 % 0.73 %
Return on average equity 4.90 % 6.14 %
Interest rate spread (1) 2.99 % 2.99 %
Net interest margin (2) 3.09 % 3.10 %Non-interest expenses to average assets 2.59 % 2.90 % Efficiency ratio (3)
75.82 % 74.61 % Average interest-earning assets to average interest-bearing liabilities
123.40 % 117.93 %
Capital Ratios (4): Average equity to average assets 12.69 % 11.88 % Tier 1 capital to average assets
12.17 % 12.47 %
Asset Quality Ratios: Allowance for loan losses as a percentage of total loans 1.17 % 1.49 % Allowance for loan losses as a percentage of non-performing loans 1,908.70 % 1,228.09 % Net recoveries to average outstanding loans during the year 0.01 % 0.38 % Non-performing loans as a percentage of total loans 0.06 % 0.12 % Non-performing loans as a percentage of total assets 0.05 % 0.08 % Total non-performing assets as a percentage of total assets
0.05 % 0.08 % Other: Number of offices 4 4
Number of full-time equivalent employees 35 36
Represents the difference between the weighted average yield on average (1) interest-earning assets and the weighted average cost of interest-bearing
liabilities.
(2) Represents net interest income as a percentage of average interest-earning
assets.
(3) Represents non-interest expenses divided by the sum of net interest income
and non-interest income.
(4) Capital ratios are for the Bank only. As of
elected to adopt the Community Bank Leverage Ratio Framework.
Comparison of Financial Condition at
Total Assets. Total assets increased$6.4 million , or 3.0%, to$220.0 million atJune 30, 2022 from$213.6 million atJune 30, 2021 . The increase was primarily due to an increase of$41.4 million , or 28.8%, in net loans and an increase in the cash surrender value of life insurance of$3.2 million or 54.0% which was offset by a decrease in cash and cash equivalents of$37.6 million or 81.7%.
Cash and Cash Equivalents. Total cash and cash equivalents decreased
Debt Securities Available for Sale. Total debt securities available for sale decreased$293,000 , or 2.7%, to$10.6 million atJune 30, 2022 from$10.9 million atJune 30, 2021 . The decrease was primarily due to a decrease of$2.0 million in mortgage-backed securities and$819,000 in state and municipal obligations as a result of paydowns and maturities, offset by the purchase of$3.5 million in corporate bonds. 42
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Debt Securities Held to Maturity. Total debt securities held to maturity
decreased
Net Loans. Net loans increased$41.4 million , or 28.8%, to$185.6 million atJune 30, 2022 from$144.2 million atJune 30, 2021 . The increase was due to a$28.5 million , or 54.6%, increase in commercial real estate loans to$80.6 million atJune 30, 2022 from$52.1 million atJune 30, 2021 and an increase in multifamily loans of$16.6 million , or 96.6%, to$33.9 million atJune 30, 2022 from$17.3 million atJune 30, 2021 . One-to four-family residential mortgage loans also increased by$3.5 million , or 7.2%, to$51.9 million atJune 30, 2022 from$48.4 million atJune 30, 2021 . Construction loans also increased by$2.6 million , or 32.5%, to$10.6 million atJune 30, 2022 from$8.0 million atJune 30, 2021 . Commercial and industrial loans (including Paycheck Protection Program Loans) decreased by$10.5 million , or 54.5%, to$8.8 million atJune 30, 2022 from$19.3 million atJune 30, 2021 due to the repayment by the SBA of forgiven PPP loans. The increase in commercial and multifamily real estate loans was primarily due to our strategy to enhance our commercial lending inSoutheastern Wisconsin . The increase in one- to four-family residential mortgage loans was due to additional growth with respect to adjustable-rate one-to four-family residential loans. Construction loans increased due to an increase in our construction loan participations. Deposits. Total deposits increased$16.1 million , or 9.4%, to$188.1 million atJune 30, 2022 from$172.0 million atJune 30, 2021 . The increase in deposits reflected an increase in demand, NOW and money market accounts of$13.4 million , or 30.2%, to$57.8 million atJune 30, 2022 from$44.4 million atJune 30, 2021 and an increase in savings accounts of$1.9 million , or 4.3%, to$46.6 million atJune 30, 2022 from$44.7 million atJune 30, 2021 . Certificates of deposit also increased by$769,000 , or 1.3%, to$60.0 million atJune 30, 2022 from$59.2 million atJune 30, 2021 . The increase in all deposit accounts was related to new customers. Borrowings. Our borrowings from the Federal Reserve PPP Liquidity Facility to fund our PPP loans decreased by$10.4 million , or 100%, to$0 atJune 30, 2022 from$10.4 million atJune 30, 2021 due to the repayment by the SBA of forgiven PPP loans and subsequent paydown of the related borrowings. Stockholders' Equity. Total stockholders' equity increased by$893,000 , or 3.0%, to$30.7 million atJune 30, 2022 from$29.8 million atJune 30, 2021 . The increase was primarily due to net income of$1.3 million offset by an increase in accumulated other comprehensive loss of$490,000 during the year endedJune 30, 2022 as a result of an increase in market interest rates.
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
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income or interest expense, as applicable. Loan balances include loans held for
sale. Deferred loan fees accreted to interest income totaled
For the Year Ended June 30,
2022 2021
Average Average Average Average
Outstanding Yield/Rate Outstanding Yield/Rate
Balance Interest Balance Interest
(Dollars in thousands)
Interest-earning assets:
Loans (excluding PPP loans) $ 154,982 $ 6,266 4.04 % $ 119,103 $ 5,700 4.79 %
PPP loans 958 493 51.57 % 7,964 390 4.90 %
Debt securities 12,355 331 2.68 % 14,122 362 2.56 %
Cash and cash equivalents 32,201 61 0.19 % 32,394 20 0.06 %
Other 277 6 2.17 % 262 12 4.58 %Total interest-earning assets 200,773 7,157
3.57 % 173,845 6,484 3.73 % Noninterest-earning assets 13,993 13,534 Total assets$ 214,766 $ 187,379 Interest-bearing liabilities: Demand, NOW and money market deposits$ 55,676 213 0.38 %$ 41,737 146 0.35 % Savings deposits 46,069 67 0.15 % 41,824 60 0.14 % Certificates of deposit 59,689 661 1.11 % 50,233 843 1.68 %
Total interest-bearing deposits 161,434 941
0.58 % 133,794 1,049 0.78 % FHLB advances and other borrowings
- - - % 6,441 19 0.29 %
PPP Liquidity Facility borrowings 1,272 7 0.55 % 7,181 23 0.32 %
Total interest-bearing liabilities 162,706 948 0.58 % 147,416 1,091 0.74 % Non-interest-bearing demand deposits 23,684 16,482 Other non-interest-bearing liabilities 1,130 1,216 Total liabilities 187,520 165,114 Total stockholders' equity 27,246 22,265 Total liabilities and stockholders' equity$ 214,766 $ 187,379 Net interest income$ 6,209 $ 5,393 Net interest rate spread (1) 2.99 % 2.99 %
Net interest-earning assets (2)$ 38,067 $ 26,429 Net interest margin (3) 3.09 % 3.10 % Average interest-earning assets to interest-bearing liabilities 123.40 % 117.93 %
Net interest rate spread represents the difference between the weighted (1) average yield on interest-earning assets and the weighted average rate of
interest-bearing liabilities.
(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
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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,
2022 vs. 2021
Increase (Decrease) Due to Total
Increase
Volume Rate (Decrease)
(In thousands)
Interest-earning assets:
Loans (excluding PPP loans) $ 1,717 $ (1,151) $ 566 PPP loans (343) 446 103 Debt securities (45) 14 (31)
Cash and cash equivalents - 41 41 Other 1 (7) (6) Total interest-earning assets 1,330 (657) 673 Interest-bearing liabilities: Demand, NOW and money market deposits 49
18 67
Savings deposits 6 1 7
Certificates of deposit 159 (341) (182)Total interest-bearing deposits 214 (322) (108) FHLB advances and other borrowings (19) - (19) PPP Liquidity Facility borrowings (19) 3 (16) Total interest-bearing liabilities 176 (319) (143) Change in net interest income$ 1,154
$ (338)
Comparison of Operating Results for the Years Ended
General. Net income was$1.3 million for the year endedJune 30, 2022 , a decrease of$38,000 , or 2.8%, from net income of$1.4 million for the year endedJune 30, 2021 . The decrease in net income for the year endedJune 30, 2022 was primarily attributed to a decrease in non-interest income of$777,000 and an increase in non-interest expenses of$118,000 , offset by an increase in net interest income of$816,000 . The provision for income taxes decreased$40,000 . Interest Income. Interest income increased by$673,000 , or 10.4%, to$7.2 million for the year endedJune 30, 2022 from$6.5 million for the year endedJune 30, 2021 , primarily due to increases in loan interest income and cash and cash equivalents interest income which was offset by a decrease in debt securities interest income. Loan interest income increased by$669,000 , or 11.0%, to$6.8 million for the year endedJune 30, 2022 from$6.1 million for the year endedJune 30, 2021 , due to an increase in the average balance of the loan portfolio, offset by a decrease in the average yield on loans (excluding PPP loans). The average balance of the loan portfolio (excluding PPP loans) increased by$35.9 million , or 30.1%, from$119.1 million for the year endedJune 30, 2021 to$155.0 million for the year endedJune 30, 2022 . The increase in the average balance of loans was due to our continued efforts to increase commercial and multifamily real estate loans inSoutheastern Wisconsin . The average balance of PPP loans decreased due to the repayment by the SBA of forgiven PPP loans. There were no outstanding PPP loans as ofJune 30, 2022 . The average yield on the loan portfolio (excluding PPP loans) decreased 75 basis points from 4.79% for the year endedJune 30, 2021 to 4.04% for the year endedJune 30, 2022 . The decrease in the average yield on loans (excluding PPP loans) was primarily due to new loans being booked at low market interest rates prior to the recent increases in market interest rates approved by theFederal Reserve . In addition, loan interest income was positively impacted by the recognition of deferred fee income of$483,000 during the year endedJune 30, 2022 on the forgiven PPP loans repaid by the SBA compared to$404,000 for the year endedJune 30, 2021 . Debt securities interest income decreased$31,000 , or 8.6%, to$331,000 for the year endedJune 30, 2022 from$362,000 for the year endedJune 30, 2021 due to a decrease of$1.8 million in the average balance of the debt securities portfolio which was offset by a 12 basis points increase in the average yield on the debt securities portfolio to 2.68% for the year endedJune 30, 2022 from 2.56% for the year endedJune 30, 2021 . The decrease in the average balance
of
the
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debt securities portfolio was primarily due to securities paydowns which was
offset by the purchase of $3.5 million in corporate bonds during the year ended
June 30, 2022 . The increase in the average yield on the debt securities
portfolio was due to higher interest rates on the $3.5 million in corporate
bonds purchased partially offset by the decrease in average yield of our
collateralized mortgage obligations with inverse floating rates.
Cash and cash equivalent interest income increased by $41,000 , or 205.0%, to
$61,000 for the year ended June 30, 2022 as compared to $20,000 for the year
ended June 30, 2021 . The average yield increased to 0.19% for the year ended
June 30, 2022 from 0.06% for the year ended June 30, 2021 , while the average
balance of cash and cash equivalents decreased slightly from $32.4 million for
the year ended June 30, 2021 to $32.2 million for the year ended June 30, 2022 .
The increase in the average yield on cash and cash equivalents was primarily due
to higher average rates earned on federal funds sold, as a result of the
increase in market interest rates since June 30, 2021 .
Interest Expense. Interest expense decreased $143,000 , or 13.2%, to $948,000 for
the year ended June 30, 2022 from $1.1 million for the year ended June 30, 2021 ,
due to a decrease of $108,000 in interest paid on deposits and a decrease of
$35,000 in interest paid on borrowings.
Interest expense on deposits decreased $108,000 , or 12.8%, to $941,000 for the
year ended June 30, 2022 from $1.0 million for the year ended June 30, 2021 due
to a decrease in interest expense on certificates of deposit which was offset by
an increase in interest expense on interest-bearing core deposits (consisting of
demand, NOW, money market and savings accounts). Interest expense on
certificates of deposit decreased $182,000 , or 21.6%, to $661,000 for the year
ended June 30, 2022 from $843,000 for the year ended June 30, 2021 due to a
decrease in the average rate paid on certificates of deposit which was offset by
an increase in the average balance of certificates of deposit. The average rate
paid on certificates of deposit decreased 57 basis points to 1.11% for the year
ended June 30, 2022 from 1.68% for the year ended June 30, 2021 primarily due to
higher rate certificates of deposit becoming due and reinvested at lower rates
and the purchase of lower rate brokered certificates of deposit. The average
balance of certificates of deposit increased by $9.5 million to $59.7 million ,
for the year ended June 30, 2022 compared to the year ended June 30, 2021 due to
the purchase of $15.1 million in brokered certificates of deposit in March 2021
and an increase in new customers added by the Bank. Interest expense on
interest-bearing core deposits increased by $74,000 , or 35.9%, to $280,000 for
the year ended June 30, 2022 from $206,000 for the year ended June 30, 2021 . The
average rate paid on our interest-bearing core deposits was 0.28% for the year
ended June 30, 2022 compared to 0.25% for the year ended June 30, 2021 . The
average balance of our interest-bearing core deposits increased by $18.2 million
during the year ended June 30, 2022 compared to the year ended June 30, 2021 and
was related to new customers.
Net Interest Income. Net interest income increased $816,000 , or 15.1%, to $6.2
million for the year ended June 30, 2022 from $5.4 million for the year ended
June 30, 2021 due to an increase in net interest-earning assets. The net
interest rate spread remained the same at 2.99% for the years ended June 30,
2022 and 2021. 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 $404,000 for the year ended June 30, 2021 .
Net interest-earning assets increased by $11.7 million , or 44.0%, to $38.1
million for the year ended June 30, 2022 from $26.4 million for the year ended
June 30, 2021 . The net interest margin decreased one basis point to 3.09% for
the year ended June 30, 2022 from 3.10% for the year ended June 30, 2021 . Even
though the net interest rate spread and net interest margin remained relatively
unchanged when comparing the years ended June 30, 2022 with 2021, there were
several components within the calculation that changed. The average yield on
interest-earning assets decreased by 16 basis points while the average rate on
interest-bearing liabilities decreased by 16 basis points. The decrease in the
average yield on interest earning assets was primarily due to a decrease in the
average yield on the loan portfolio (excluding PPP loans) of 75 basis points.
The decrease in the average rate paid on interest-bearing liabilities is
primarily due to higher rate certificates of deposit becoming due and reinvested
at lower rates and the purchase of lower rate brokered certificates of deposit.
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
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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. AtJune 30, 2022 andJune 30, 2021 , 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. After an evaluation of these factors, we recorded no provision for loan losses for the years endedJune 30, 2022 or 2021. Our allowance for loan losses was$2.2 million atJune 30, 2022 and 2021, respectively. The allowance for loan losses to total loans was 1.17% atJune 30, 2022 and 1.49% atJune 30, 2021 . We recorded net recoveries of$9,000 for the year endedJune 30, 2022 and net recoveries of$486,000 for the year endedJune 30, 2021 . Non-performing assets decreased to$115,000 , or 0.05% of total assets, atJune 30, 2022 , compared to$178,000 , or 0.08% of total assets, atJune 30, 2021 . To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate atJune 30, 2022 . However, future changes in the factors described herein, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for loan losses. In addition, the WDFI and theFDIC , as an integral part of their examination process, will periodically review our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses.
Non-Interest Income. Non-interest income information is as follows.
Year Ended
June 30, Change
2022 2021 Amount Percent
(Dollars in thousands)Service charges on deposit accounts$ 165 $ 168 $ (3) (1.8) % Mortgage banking 689 1,527 (838) (54.9) % Increase in cash surrender value of BOLI 225 165 60 36.4 % Gain on sale of foreclosed real estate - 11 (11) 100.0 % Net gain on securities transactions 14 - 14
100.0 %
Other 25 25 - - %
Total non-interest income $ 1,118 $ 1,896 $ (778) (41.0) %
Non-interest income decreased by $778,000 to $1.1 million for the year ended
June 30, 2022 from $1.9 million for the year ended June 30, 2021 due primarily
to a decrease in mortgage banking income. Mortgage banking income (consisting
primarily of sales of fixed-rate one- to four-family residential real estate
loans) decreased by $838,000 as we sold $16.8 million of mortgage loans into the
secondary market during the year ended June 30, 2022 compared to $50.6 million
of such sales during the year ended June 30, 2021 due to an increase in market
rates, which resulted in decreased demand for mortgage loan refinancing.
Non-Interest Expenses. Non-interest expenses information is as follows.
Year Ended
June 30, Change
2022 2021 Amount Percent
(Dollars in thousands)
Salaries and employee benefits $ 3,135 $ 3,345 $ (210) 8.7 %
Occupancy and equipment 711 671 40 6.0 %
Data processing and office 394 463 (69) (14.9) %
Professional fees 657 367 290 79.0 %
Marketing expenses 78 63 15 23.8 %
Debit card expenses 78 89 (11) (12.4)
Directors fees 68 78 (10) (12.8)
Other 435 362 73 20.2 %
Total non-interest expenses $ 5,556 $ 5,438 $ 118 2.2 %
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Non-interest expenses were$5.6 million for the year endedJune 30, 2022 as compared to$5.4 million for the year endedJune 30, 2021 . Professional fees increased$290,000 primarily due to costs associated with being a public company including but not limited to preparing and filing the required periodic reports with theSecurities and Exchange Commission . Salaries and employee benefits decreased$210,000 due primarily to a reduction in health insurance expense. Income Tax Expense. Income tax expense was$437,000 for the year endedJune 30, 2022 as compared to$478,000 for the year endedJune 30, 2021 . The effective tax rate was 24.7% for the year endedJune 30, 2022 as compared to 25.8% for the year endedJune 30, 2021 . The decrease in the effective tax rate was a result of an increase in earnings on bank owned life insurance.
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 . AtJune 30, 2022 , we had a$77.4 million line of credit (subject to providing additional collateral) with theFederal Home Loan Bank of Chicago , and had no borrowings outstanding as of that date. Under the Federal Reserve PPP Liquidity Facility program, we had no borrowings to fund PPP loans as ofJune 30, 2022 compared to borrowings of$10.4 million to fund PPP loans as ofJune 30, 2021 , which were secured by an equal amount of PPP loans. 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$826,000 and$1.0 million for the years endedJune 30, 2022 and 2021, 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$44.2 million for the year endedJune 30, 2022 compared to$20.8 million for the year endedJune 30, 2021 . Net cash provided by financing activities, consisting of activity in deposit accounts and borrowings and net proceeds from our common stock offering, was$5.8 million and$41.6 million for the years endedJune 30, 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.
At
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
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loans we make. AtJune 30, 2022 , we had outstanding commitments to originate loans of$10.7 million , and outstanding commitments to sell loans of$696,000 . 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 fromJune 30, 2022 totaled$25.9 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 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 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 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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