MARATHON BANCORP, INC. / MD /: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)

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This discussion and analysis reflects our audited consolidated financial statements and other relevant statistical data, and is intended to improve your understanding of our financial condition and results of operations. The information in this section is taken from the audited consolidated financial statements, which appear from page 50 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 or loss on disposal of foreclosed assets and other
income.

Non-interest charges. Our non-interest expenses include salaries and benefits, net occupancy and equipment, data processing and office costs, professional fees, marketing costs and other general and administrative costs, including the premiums we pay to FDIC for the 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.

Impact of the COVID-19 epidemic


During the first quarter of 2020, global financial markets experienced
significant volatility resulting from the spread of COVID-19. In March 2020, the
World Health Organization declared COVID-19 a global pandemic and the United
States declared a National Public Health Emergency. The COVID-19 pandemic has
restricted the level of economic activity in our markets. In response to the
pandemic, the governments of the state of Wisconsin and of most other states
have taken preventative or protective actions, such as imposing restrictions on
travel and business operations, advising or requiring individuals to limit or
forego time outside of their homes, and ordering temporary closures of
businesses that have been deemed to be non-essential. These measures have
dramatically increased unemployment in the United States and have negatively
impacted many businesses, and thereby threatened the repayment ability of some
of our borrowers.

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As of June 30, 2021, some of these restrictions have been removed and many
non-essential businesses have been allowed to re-open in a limited capacity,
adhering to social distancing and disinfection guidelines. In many instances,
vaccines are proving effective and rapidly scaling, bending the pandemic curve
in many geographies. A new variant of the coronavirus, generally referred to as
the "Delta" variant, has emerged in the United States and remains a significant
concern in some regions and potentially, throughout the country. This variant is
believed to be significantly more contagious than earlier variants of the
coronavirus. Certain previously-relaxed social distancing and safety protocols
have been reinstated in some areas of the country and it is possible that such
protocols could be reinstated broadly in the future. The economic effects of
these varying protocol reinstatement actions on the Company's operations cannot
be determined with certainty at this time. The direct and indirect effects of
the COVID-19 pandemic have resulted in dramatic reductions in the level of
economic activity in the Company's market area, as well as in the national and
global economies and financial markets, and have severely hampered the ability
for certain businesses and consumers to meet their current repayment
obligations.

To address the economic impact of COVID-19 in the United States, the CARES Act
was signed into law on March 27, 2020. The CARES Act included a number of
provisions that affected us, including accounting relief for TDRs. The CARES Act
also established the PPP through the SBA, which allowed us to lend money to
small businesses to maintain employee payrolls through the crisis with
guarantees from the SBA. Under this program, loan amounts may be forgiven if the
borrower maintains employee payrolls and meets certain other requirements. At
June 30, 2021, we had $10.4 million of PPP loans outstanding.

In response to the COVID-19 pandemic, we have put in place protocols and processes to help protect our employees, customers and communities. These measures include:

The safety and health of our staff and customers is our top priority.

We have installed plexiglass sneeze barriers in all checkout areas, new account

offices, and reception desks, and air purification systems in each of our

· Branches. Hand sanitizer is available at each of the counters / new

accounts offices. Face masks are optional for all employees at work. All the employees

also have access to gloves, hand sanitizer and Clorox wipes at work. We

continue to follow CDC guidelines.

Provide assistance to our customers affected by the COVID-19 pandemic, which

Includes payment deferrals, interest-only loans, waivers of certain fees,

suspend foreclosures and participate in the CARES law and

business loan programs, including PPP. The PPP ended in May 2021.





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 of December 31, 2019 are exempt from
TDR classification under U.S. GAAP through the earlier of January 1, 2022, or
60 days after the national emergency concerning COVID-19 declared by the
President of the United States terminates. 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 of
June 30, 2021, we had granted short-term payment deferrals on 56 loans, totaling
approximately $20.0 million in aggregate principal amount. As of June 30, 2021,
all of these loans have returned to normal payment status.

Given the unprecedented uncertainty and rapidly evolving economic effects and
social impacts of the COVID-19 pandemic, the future direct and indirect impact
on our business, results of operations and financial condition are highly
uncertain. Should current economic conditions persist or continue to
deteriorate, we expect that this macroeconomic environment will have a continued
adverse effect on our business and results of operations, which could include,
but not be limited to: decreased demand for our products and services,
protracted periods of lower interest rates, increased non-interest expenses,
including operational losses, and increased credit losses due to deterioration
in the financial condition of our consumer and commercial borrowers, including
declining asset and collateral values, which may continue to increase our
provision for loan losses and net charge-offs.

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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 118-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 growth Southeastern
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 the Southeastern Wisconsin market, including the Milwaukee
metropolitan area, our commercial real estate loans, including multifamily
loans, increased to $69.4 million, or 47.3% of our loan portfolio, at June 30,
2021, compared to $50.3 million, or 42.4% of our loan portfolio, at June 30,
2020. 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 in existing and other growth markets in Southeastern Wisconsin, including
Milwaukee. 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 our Southeastern 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, in Southeastern 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,
including the effects of the COVID-19 pandemic.

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 ended June 30, 2021, we originated and sold $51.7 million of
one- to four-family residential real estate loans held for sale for gains on
sale of loans of $1.0 million. 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 (including due to the effects of the COVID-19 pandemic) 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 maintaining our concentration of
certificates of deposit at approximately 35.4% of total deposits at June 30,
2021 and 2020, while growing our core deposits to $112.7 million at June 30,
2021 from $86.5 million at June 30, 2020. 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 0.12% and
0.27% as of June 30, 2021 and June 30, 2020, respectively. We

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We intend to continue to support our investment in our trade 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 into Southeastern 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 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.

Expected increase in non-interest charges


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 allocation of shares of common stock by our
employee stock ownership plan and the possible implementation of one or more
stock-based benefit plans, if approved by our stockholders, no earlier than
six months after the completion of the reorganization and stock offering.

Summary of significant accounting policies


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. 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 are our main accounting policies:


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,

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and current economic conditions. This assessment is inherently subjective as it requires estimates that may be revised significantly 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. As a
result of the COVID-19 pandemic, at June 30, 2020, we slightly increased certain
of our qualitative loan portfolio risk factors relating to local and national
economic conditions as well as industry conditions and concentrations, which
have experienced deterioration due to the effects of the COVID-19 pandemic. At
June 30, 2021, the qualitative loan portfolio risk factors were slightly reduced
in all loan categories except commercial 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.

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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 appraisals. 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 in accordance with 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 1 inputs consist of quoted prices in active markets for identical assets

which the reporting entity can access on the valuation date.

? Level 2 inputs are inputs other than the indicated prices included in level 1 which

are observable for the asset concerned.

? 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 2021 and the Bank in 2020.




                                                              At June 30,
                                                          2021           2020

                                                           (In thousands)
Selected Financial Condition Data:
Total assets                                           $   213,627    $   

170 650

Cash, cash equivalents and interest-bearing
deposits in other financial institutions                    48,111        

26,219

Debt securities available for sale                          10,910        

15,008

Debt securities held to maturity                               709         

2,841

Loans receivable, net                                      144,169        

116,919

Federal Home Loan Bank stock, at cost                          262         
  262
Bank owned life insurance                                    5,969          5,804
Premises and equipment, net                                  1,850          1,969
Deferred tax asset                                             270            700
Deposits                                                   171,956        134,015
Federal Home Loan advances                                       -          8,000
PPPLF Funding                                               10,372          6,375
Stockholders' Equity                                        29,849         20,782




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                                                          For the Years
                                                         Ended June 30,
                                                         2021       2020

                                                          (In thousands)
Selected Operating Data:
Interest income                                        $  6,484    $ 5,909
Interest expense                                          1,091      1,357
Net interest income                                       5,393      4,552
Provision for loan losses                                     -        150
Net interest income after provision for loan losses       5,393      4,402
Non-interest income                                       1,896      1,006
Non-interest expense                                      5,438      4,902
Income before income taxes                                1,851        506
Income tax expense                                          478         88
Net income                                             $  1,373    $   418





                                                                        At or For the Years
                                                                          Ended June 30,
                                                                        2021           2020
Performance Ratios:
Return on average assets                                                   0.73  %        0.27 %
Return on average equity                                                   6.14  %        2.08 %
Interest rate spread (1)                                                   2.99  %        2.89 %
Net interest margin (2)                                                    3.10  %        3.08 %
Non-interest expenses to average assets                                    2.90  %        3.21 %
Efficiency ratio (3)                                                      74.61  %       88.20 %
Average interest-earning assets to average interest-bearing
liabilities                                                              117.93  %      120.43 %


Capital Ratios (4):
Average equity to average assets                                          11.88  %       13.19 %
Total capital to risk-weighted assets                                       N/A          14.74 %
Tier 1 capital to risk-weighted assets                                      N/A          13.58 %
Common equity tier 1 capital to risk-weighted assets                        N/A          13.58 %
Tier 1 capital to average assets                                          

12.47% 13.12%


Asset Quality Ratios:
Allowance for loan losses as a percentage of total loans                   1.49  %        1.43 %
Allowance for loan losses as a percentage of non-performing loans      1,228.10  %      666.67 %
Net (charge-offs) recoveries to average outstanding loans during
the year                                                                   0.38  %      (0.07) %
Non-performing loans as a percentage of total loans                        0.12  %        0.27 %
Non-performing loans as a percentage of total assets                       0.08  %        0.19 %
Total non-performing assets as a percentage of total assets               
0.08  %        0.19 %

Other:
Number of offices                                                             4              4
Number of full-time equivalent employees                                   
 36             33



Represents the difference between the weighted average return on the average (1) of interest-bearing assets and the weighted average cost of interest-bearing assets

Liabilities.

(2) Represents net interest income as a percentage of average interest income

assets.

(3) Represents non-interest expense divided by the sum of net interest income

and non-interest income.

(4) The capital ratios only concern the Bank. From June 30, 2021, the Bank elected

    to adopt the Community Bank Leverage Ratio Framework.


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Comparison of financial position to June 30, 2021 and June 30, 2020


Total Assets. Total assets increased $43.0 million, or 25.2%, to $213.6 million
at June 30, 2021 from $170.7 million at June 30, 2020. The increase was
primarily due to an increase of $21.8 million, or 89.7%, in cash and cash
equivalents, offset in part by a $4.1 million, or 27.3% decrease in debt
securities available-for-sale. Net loans also increased by $27.3 million, or
23.3%.

Cash and Cash Equivalents. Total cash and cash equivalents increased $21.8
million, or 89.7%, to $46.0 million at June 30, 2021 from $24.3 million at
June 30, 2020, as securities matured, deposits increased and the Company raised
$8.6 million from its common stock offering. This increase was partially offset
by the use of cash to fund loan originations.

Debt Securities Available for Sale. Total debt securities available for sale
decreased $4.1 million, or 27.3%, to $10.9 million at June 30, 2021 from $15.0
million at June 30, 2020. The decrease was primarily due to a decrease of $3.9
million in mortgage-backed securities and $1.2 million in state and municipal
obligations as a result of maturities, offset by a purchase of $1.1 million in
corporate bonds.

Debt Securities Held to Maturity. Total debt securities held to maturity
decreased $2.1 million, or 75.0%, to $709,000 at June 30, 2021 from $2.8 million
at June 30, 2020. The decrease was primarily due to a decrease of $2.1 million
in mortgage-backed securities as a result of maturities.

Net Loans. Net loans increased $27.3 million, or 23.3%, to $144.2 million at
June 30, 2021 from $116.9 million at June 30, 2020. The increase was due to a
$11.4 million, or 27.9%, increase in commercial real estate loans to $52.1
million at June 30, 2021 from $40.8 million at June 30, 2020 and an increase in
multifamily loans of $7.7 million, or 80.0%, to $17.3 million at June 30, 2021
from $9.6 million at June 30, 2020. One- to four-family residential mortgage
loans also increased by $6.7 million, or 16.0%, to $48.4 million at June 30,
2021 from $41.7 million at June 30, 2020. Commercial and industrial loans
(including Paycheck Protection Program Loans) increased by $6.3 million, or
47.9%, to $19.3 million at June 30, 2021 from $13.0 million at June 30, 2020.
These increases were partially offset by a decrease in construction loans of
$3.1 million, or 28.0%, to $8.0 million at June 30, 2021 from $11.1 million at
June 30, 2020. The increase in commercial and industrial, commercial real estate
and multifamily loans was primarily due to our strategy to enhance our
commercial lending in Southeastern Wisconsin and our participation in the PPP.
The increase in one- to four-family residential mortgage loans was primarily the
result of customers refinancing their loans at lower rates. Construction loans
decreased due to a decrease in our construction loan participations.

Deposits. Total deposits increased $37.9 million, or 28.3%, to $172.0 million at
June 30, 2021 from $134.0 million at June 30, 2020. The increase in deposits
reflected an increase in demand, NOW and money market accounts of $9.5 million,
or 27.3%, to $44.4 million at June 30, 2021 from $34.9 million at June 30, 2020
and an increase in savings accounts of $5.4 million, or 13.8%, to $44.7 million
at June 30, 2021 from $39.3 million at June 30, 2020. Certificates of deposit
also increased by $11.8 million, or 24.8%, to $59.2 million at June 30, 2021
from $47.5 million at June 30, 2020. The increase in all deposit accounts
primarily reflected deposit customers increasing cash balances during the
COVID-19 pandemic along with the impact of federal stimulus programs and an
increase in new customers.

Borrowings. Borrowings decreased by $8.0 million as we paid down our Federal
Home Loan Bank advances as the interest rates on these borrowings were higher
than what we earn on our investments in Federal funds sold. We increased our
borrowings from the Federal Reserve PPP Liquidity Facility by $4.0 million to
fund our PPP loans originated after June 30, 2020 such that our total PPP
Liquidity Facility borrowings at June 30, 2021 was $10.4 million.

Stockholders' Equity. Total stockholders' equity increased by $9.1 million, or
43.6%, to $29.9 million at June 30, 2021 from $20.8 million at June 30, 2020.
The increase was due to net income of $1.4 million and the $8.6 million raised
from our common stock offering.

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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 $429,000
and $29,000 for the years ended June 30, 2021 and 2020, respectively.




                                                                    For the Year Ended June 30,
                                                         2021                                         2020
                                          Average                      Average         Average                      Average
                                        Outstanding                   Yield/Rate     Outstanding                   Yield/Rate
                                          Balance        Interest                      Balance        Interest

                                                                       (Dollars in thousands)
Interest-earning assets:
Loans (excluding PPP loans)            $     119,103    $    5,700          4.79 %  $     109,624    $    5,253          4.79 %
PPP loans                                      7,964           390          4.90 %          1,177            29          2.46 %
Debt securities                               14,122           362          2.56 %         19,646           533          2.71 %
Cash and cash equivalents                     32,394            20          0.06 %         16,882            84          0.50 %
Other                                            262            12          4.58 %            263            10          3.80 %
Total interest-earning assets                173,845         6,484         
3.73 %        147,592         5,909          4.00 %
Noninterest-earning assets                    13,534                                        4,985
Total assets                           $     187,379                                $     152,577
Interest-bearing liabilities:
Demand, NOW and money market
deposits                               $      41,737           146          0.35 %  $      34,176           145          0.42 %
Savings deposits                              41,824            60          0.14 %         38,049            67          0.18 %
Certificates of deposit                       50,233           843         

1.68% 47,613 1,123 2.36% Total interest-bearing deposits

              133,794         1,049          

0.78% 119,838 1,335 1.11% Advances and other loans FHLB

             6,441            19          0.29 %          2,000            19          0.95 %
PPP Liquidity Facility borrowings              7,181            23          0.32 %            719             3          0.42 %
Total interest-bearing liabilities           147,416         1,091         
0.74 %        122,557         1,357          1.11 %
Non-interest-bearing demand
deposits                                      16,482                                        8,870
Other non-interest-bearing
liabilities                                    1,216                                        1,027
Total liabilities                            165,114                                      132,454
Total stockholders' equity                    22,265                                       20,123
Total liabilities and stockholders'
equity                                 $     187,379                                $     152,577
Net interest income                                     $    5,393                                   $    4,552
Net interest rate spread (1)                                                2.99 %                                       2.89 %
Net interest-earning assets (2)        $      26,429                                $      25,035
Net interest margin (3)                                                     3.10 %                                       3.08 %
Average interest-earning assets to
interest-bearing liabilities                  117.93 %                                     120.43 %



The net interest rate differential represents the difference between the weighted average return (1) on interest-bearing assets and the weighted average rate of

interest bearing liabilities.

(2) Net interest-bearing assets represent total interest-bearing assets less total interest-bearing liabilities.

(3) The net interest margin represents the net interest income divided by the average total of interest-bearing assets.




Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our
net interest income for the periods indicated. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior

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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,
                                                          2021 vs. 2020
                                            Increase (Decrease) Due to          Total
                                                                              Increase
                                            Volume              Rate         (Decrease)

                                                        (In thousands)
Interest-earning assets:
Loans (excluding PPP loans)              $         454      $         (7)    $       447
PPP loans                                          167                194            361
Debt securities                                  (150)               (21)          (171)
Cash and cash equivalents                           77              (141)           (64)
Other                                                -                  2              2
Total interest-earning assets                      548                 27            575
Interest-bearing liabilities:
Demand, NOW and money market deposits               32               (31)  
           1
Savings deposits                                     7               (14)            (7)
Certificates of deposit                             62              (342)          (280)
Total interest-bearing deposits                    101              (387)  

(286)

FHLB advances and other borrowings                  42               (42)              -
PPP Liquidity Facility borrowings                   27                (7)  

20

Total interest-bearing liabilities                 170              (436)  
       (266)
Change in net interest income            $         378      $         463    $       841



Comparison of Operating Results for the Years Ended June 30, 2021 and 2020

General. Net income was $1.4 million for the year ended June 30, 2021, an
increase of $955,000, or 228.6%, from net income of $418,000 for the year ended
June 30, 2020. The increase in net income for the year ended June 30, 2021 was
primarily attributed to an increase in net interest income of $841,000, a
decrease in the provision for loan losses of $150,000, and an increase in
non-interest income of $890,000, partially offset by an increase in non-interest
expenses of $535,000 and an increase in the provision for income taxes of
$390,000.

Interest Income. Interest income increased by $576,000, or 9.7%, to $6.5 million
for the year ended June 30, 2021 from $5.9 million for the year ended June 30,
2020, primarily due to an increase in loan interest income which was offset by
decreases in debt securities interest income and cash and cash equivalents
interest income.

Loan interest income increased by $808,000, or 15.3%, to $6.1 million for
the year ended June 30, 2021 from $5.3 million for the year ended June 30, 2020,
due primarily to an increase in the average balance of the loan portfolio. The
average balance of the loan portfolio increased by $16.3 million, or 14.7%, from
$110.8 million for the year ended June 30, 2020 to $127.1 million for the year
ended June 30, 2021. The increase in the average balance of loans was primarily
due to an increase in the average balances of commercial (including PPP loans)
and residential loans offset by a decrease in the average balances of
construction and consumer loans. The average yield on the loan portfolio
(including PPP loans) was 4.79% and 4.77% for the years ended June 30, 2021 and
2020, respectively.

Debt securities interest income decreased $172,000, or 32.2%, to $362,000 for
the year ended June 30, 2021 from $533,000 for the year ended June 30, 2020,
primarily due to a decrease of $5.5 million in the average balance of the debt
securities portfolio and a decrease in the average yield on the debt securities
portfolio of 15 basis points from 2.71% for the year ended June 30, 2020 to
2.56% for the year ended June 30, 2021. The decrease in the average balance of
the debt securities portfolio was primarily due to securities paydowns and
redemptions in municipal bonds and mortgage-backed securities offset by a
purchase of corporate bonds. The decrease in the average yield of debt
securities

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  Table of Contents

is explained by redemptions and repurchases of higher rate securities and new investments purchased at lower interest rates due to falling market rates since June 30, 2020.

Cash and cash equivalent interest income decreased by $64,000, or 76.2%, to
$20,000 for the year ended June 30, 2021 as compared to $84,000 for the year
ended June 30, 2020. The average yield decreased to 0.06% for the year ended
June 30, 2021 from 0.50% for the year ended June 30, 2020, while the average
balance of cash and cash equivalents increased from $16.9 million for the year
ended June 30, 2020 to $32.3 million for the year ended June 30, 2021. The
decrease in the average yield on cash and cash equivalents was primarily due to
lower average rates earned on fed funds, as a result of the decrease in market
rates since June 30, 2020. The increase in the average balance of cash and cash
equivalents was primarily due to an increase in fed funds that were only
partially used to fund loan originations.

Interest Expense. Interest expense decreased $265,000, or 19.6%, to $1.1 million
for the year ended June 30, 2021 from $1.4 million for the year ended June 30,
2020 primarily due to a decrease of $285,000 in interest paid on deposits,
partially offset by an increase of $20,000 in interest paid on borrowings.

Interest expense on deposits decreased $285,000, or 21.4%, to $1.0 million for
the year ended June 30, 2021 as compared to $1.3 million for the year ended
June 30, 2020 primarily due to a decrease in interest expense on certificates of
deposit. Interest expense on certificates of deposit decreased $280,000, or
24.5%, to $843,000 for the year ended June 30, 2021 as compared to the
prior year due to a decrease in the average rate paid on certificates of
deposit, offset by a slight increase in the average balance of certificates of
deposit. The average rate paid on certificates of deposit decreased 68 basis
points to 1.68% for the year ended June 30, 2021 from 2.36% for the year ended
June 30, 2020 due to the general drop in short-term interest rates. The average
balance of certificates of deposit increased by $2.6 million for the year ended
June 30, 2021 compared to the prior year due to the number of new customers
added by the Company, offset by our strategic initiative to reduce our higher
cost certificates of deposit.

The interest expense on borrowings increased $20,000 to $42,000 for the year
ended June 30, 2021 when compared to the year ended June 30, 2020 primarily due
to an increase in the average balance of borrowings from the FHLB and the
Federal Reserve PPP Liquidity Facility. The average balance of borrowings for
the year ended June 30, 2021 was $13.6 million with an average rate of 0.31%
compared to an average balance of $2.7 million and an average rate of 0.81% for
the year ended June 30, 2020. The increase in the average balance of borrowings
was due to additional borrowings that primarily enhanced our liquidity as a
result of the COVID-19 pandemic and to participate in the PPP loan program. The
50 basis points decrease in the average rate paid on borrowings was primarily
due to the decrease in market rates since June 30, 2020.

Net Interest Income. Net interest income increased $841,000, or 18.5%, to $5.4
million for the year ended June 30, 2021 from $4.6 million for the year ended
June 30, 2020. This increase reflected a 10 basis points increase in the net
interest rate spread to 2.99% for the year ended June 30, 2021 from 2.89% for
the year ended June 30, 2020. The increase in net interest rate spread reflected
a 37 basis points decrease in the average rate paid on interest-bearing
liabilities offset by a 27 basis points decrease in the average yield on
interest-earning assets. The net interest margin increased two basis points to
3.10% for the year ended June 30, 2021 from 3.08% for the year ended June 30,
2020. Net- interest earning assets also increased by $1.4 million, or 5.6%, to
$26.4 million for the year ended June 30, 2021 from $25.0 million for the year
ended June 30, 2020.

Provision for Loan Losses. We recorded no provision for loan losses for the year
ended June 30, 2021 compared to a provision of $150,000 for the year ended
June 30, 2020. The decrease in the provision was due primarily to a commercial
and industrial loan participation that was impaired during the year ended
June 30, 2020 which is no longer impaired. Net recoveries were $486,000 for the
year ended June 30, 2021 compared to net charge-offs of $79,000 for the year
ended June 30, 2020. Non-performing assets decreased to $178,000, or 0.08% of
total assets, at June 30, 2021, compared to $319,000, or 0.19% of total assets,
at June 30, 2020. The allowance for loan losses was $2.2 million, or 1.49% of
loans outstanding, at June 30, 2021 and $1.7 million, or 1.43% of loans
outstanding, at June 30, 2020. We expect economic uncertainty to continue for
additional periods which may result in the allowance for loan losses as
a percentage of total loans increasing in the future.

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To the best of our knowledge, we have recorded all loan losses that are both
probable and reasonable to estimate at June 30, 2021. 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 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.

Income other than interest. Information on non-interest income is as follows.




                                                     Year Ended
                                                     June 30,                Change
                                                  2021       2020      Amount     Percent

                                                          (Dollars in thousands)
Service charges on deposit accounts              $   168    $   178    $  (10)      (5.6) %
Mortgage banking                                   1,527        606        921      152.0 %
Increase in cash surrender value of BOLI             165        164          1        0.6 %
Gain (loss) on sale of foreclosed real estate         11        (3)        
14    1,200.0 %
Other                                                 25         61       (36)     (59.0) %
Total non-interest income                        $ 1,896    $ 1,006    $   890       88.5 %




Non-interest income increased by $890,000, or 88.5%, to $1.9 million for
the year ended June 30, 2021 from $1.0 million for the year ended June 30, 2020
due primarily to an increase in mortgage banking income. Mortgage banking income
(consisting primarily of sales of fixed-rate one- to four-family residential
real estate loans) increased $921,000 as we sold $50.6 million of mortgage loans
during the year ended June 30, 2021 compared to $26.6 million of such sales
during the year ended June 30, 2020 due to the decrease in market rates, which
resulted in increased demand for mortgage loan refinancing.

Non-interest charges. Information on non-interest charges is as follows.




                                      Year Ended
                                      June 30,                Change
                                   2021       2020      Amount     Percent

                                           (Dollars in thousands)
Salaries and employee benefits    $ 3,345    $ 3,022    $   323        8.7 %
Occupancy and equipment               671        674        (3)      (0.4) %
Data processing and office            463        416         47       11.3 %
Professional fees                     367        274         93       33.9 %
Marketing expenses                     63         64        (1)      (1.6) %
Debit card expenses                    89         80          9       11.3
Directors fees                         78         68         10       14.7
Other                                 362        304         58       19.1 %
Total non-interest expenses       $ 5,438    $ 4,902    $   536       10.9 %



Non-interest expenses were $5.4 million for the year ended June 30, 2021 as
compared to $4.9 million for the year ended June 30, 2020. Salaries and employee
benefits increased $323,000 which was primarily related to new hires to assist
with the growth of the Company. Professional fees increased $93,000 due to
additional costs associated with being a new public reporting company.

Income Tax Expense. Income tax expense increased to $478,000 for the year ended
June 30, 2021 from $87,000 for the year ended June 30, 2020 due to an increase
in income before income taxes. The effective tax rate was 25.8% for the year
ended June 30, 2021 as compared to 17.3% for the year ended June 30, 2020.

Liquidity and capital resources

Liquidity describes our ability to meet financial obligations that arise in the normal course of business. Liquidity is primarily needed to meet our clients’ borrowing and deposit withdrawal needs and to fund


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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, 2021, we had a
$75.5 million line of credit (subject to providing additional collateral) with
the Federal Home Loan Bank of Chicago, and had no borrowings outstanding as of
that date. Under the Federal Reserve PPP Liquidity Facility program, we have
borrowed $10.4 million to fund PPP loans as of June 30, 2021, which is 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 $1.5 million and $1.1 million for the years
ended June 30, 2021 and 2020, respectively. Net cash used in investing
activities, which consists primarily of disbursements for loan originations and
the purchase of securities, offset by principal collections on loans, proceeds
from the sale of securities and proceeds from maturing securities and pay downs
on securities, was $21.3 million compared to $3.5 million provided by investing
activities for the years ended June 30, 2021 and 2020, respectively. Net cash
provided by financing activities, consisting of activity in deposit accounts and
borrowings and net proceeds from our common stock offering, was $41.6 million
and $17.1 million for the years ended June 30, 2021 and 2020, 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.

TO June 30, 2021, Marathon Bank has been classified as “well capitalized†for regulatory capital purposes. See note 14 of the notes to the audited consolidated financial statements.

Off-balance sheet arrangements and global 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, 2021, we had outstanding commitments to originate loans of $15.2
million, and outstanding commitments to sell loans of $3.8 million. 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, 2021 totaled $21.2 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 positions

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.

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Impact of inflation and price changes


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.

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