Marathon Bancorp, Inc.: Form 10-Q for the period ended Dec 31, 2021

This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the accompanying consolidated financial statements. You should read the information in this section in conjunction with the business and financial information regarding Marathon Bancorp, Inc. provided in this Form 10-Q and the Company’s Annual Report on Form 10-K for the year ended June 30, 2021 as filed with the Securities and Exchange Commission on September 28, 2021.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report contains certain forward-looking statements, which are included pursuant to the “safeharbor” provisions of the Private Securities Litigation Reform Act of 1995, and reflect management’s beliefs and expectations based on information currently available. These forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “contemplate,” “continue,” “potential,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:

• statements of our goals, intentions and expectations;
• statements regarding our business plans, prospects, growth and operating strategies;
• statements regarding the quality of our loan and investment portfolios; and
• estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this quarterly report on Form 10-Q.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

• conditions relating to the COVID-19 pandemic, including the severity and duration of the associated economic slowdown either nationally or in our market areas, that are worse than expected;
• Government action in response to the COVID-19 pandemic and its effects on our business and operations, including vaccination mandates and their effects on our workforce, human capital resources and infrastructure;
• general economic conditions, either nationally or in our market areas, that are worse than expected;
• changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;
• our ability to access cost-effective funding;
• fluctuations in real estate values and both residential and commercial real estate market conditions;
• demand for loans and deposits in our market area;
• our ability to implement and change our business strategies;
• competition among depository and other financial institutions;
• inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;
• adverse changes in the securities or secondary mortgage markets, including our ability to sell loans in the secondary market;
• changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
• changes in the quality or composition of our loan or investment portfolios;
• technological changes that may be more difficult or expensive than expected;
• the inability of third-party providers to perform as expected;
• a failure or breach of our operational or security systems or infrastructure, including cyberattacks;
• our ability to manage market risk, credit risk and operational risk in the current economic environment;
• our ability to enter new markets successfully and capitalize on growth opportunities;
• our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;
• changes in consumer spending, borrowing and savings habits;
• changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;
• our ability to retain key employees;
• our ability to control operating costs and expenses, including compensation expense associated with equity allocated or awarded to our employees in the future; and
• changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

Overview

Net Interest Income. Our primary source of income is net interest income. Net interest income is the difference between interest income, which is the income we earn on our loans and investments, and interest expense, which is the interest we pay on our deposits and borrowings.

Provision for Loan Losses. The allowance for loan losses is a valuation allowance for probable incurred credit losses. The allowance for loan losses is increased through charges to the provision for loan losses. Loans are charged against the allowance when management believes that the collectability of the principal loan amount is not probable. Recoveries on loans previously charged-off, if any, are credited to the allowance for loan losses when realized.

Non-interest Income. Our primary sources of non-interest income are mortgage banking income, service charges on deposit accounts and net gains in the cash surrender value of bank owned life insurance. Other sources of non-interest income include net gain or losses on sales and calls of securities, net gain or loss on disposal of foreclosed assets and other income.

Non-Interest Expenses. Our non-interest expenses consist of salaries and employee benefits, net occupancy and equipment, data processing and office, professional fees, marketing expenses and other general and administrative expenses, including premium payments we make to the FDIC for insurance of our deposits.

Provision for Income Taxes. Our income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between the carrying amounts and the tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amounts expected to be realized.

Summary of Significant Accounting Policies

The discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be significant accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.

In 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.

The following represent our significant accounting policies:

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. 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 December 31, 2021 and 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.

Provision for Income Taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

We recognize the tax effects from an uncertain tax position in the financial statements only if the position is more likely than not to be sustained on audit, based on the technical merits of the position. We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized, upon ultimate settlement with the relevant tax authority. We recognize interest and penalties accrued or released related to uncertain tax positions in current income tax expense or benefit.

Debt Securities. Available-for-sale and held-to-maturity debt securities are reviewed by management on a quarterly basis, and more frequently when economic or market conditions warrant, for possible other-than-temporary impairment. In determining other-than-temporary impairment, management considers many factors, including the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospectus of the issuer, whether the market decline was affected by macroeconomic conditions and whether the bank has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. A decline in value that is considered to be other-than-temporary is recorded as a loss within non-interest income in the statement of income. The assessment of whether other-than-temporary impairment exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time. In order to determine other-than-temporary impairment for mortgage-backed securities, asset-backed securities and collateralized mortgage obligations, we compare the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. Other-than-temporary impairment is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

Comparison of Financial Condition at December 31, 2021 and June 30, 2021

Total Assets. Total assets increased $1.6 million, or 0.7%, to $215.2 million at December 31, 2021 from $213.6 million at June 30, 2021. The increase was primarily due to an increase of $1.6 million, or 14.7%, in debt securities available for sale and a $12.2 million, or 8.4% increase, in loans, net of the allowance for loan losses offset by a decrease of $16.4 million, or 35.5%, in cash and cash equivalents. Interest bearing deposits held in other financial institutions also increased by $1.5 million, or 70.6%. The Company also purchased an additional $3.0 million of bank owned life insurance during the six months ended December 31, 2021.

Cash and Cash Equivalents. Total cash and cash equivalents decreased $16.4 million, or 35.5%, to $29.7 million at December 31, 2021 from $46.1 million at June 30, 2021, primarily due to cash used to fund loan originations, the purchase of $3.0 million of corporate bonds in our debt securities available for sale portfolio and an additional purchase of $3.0 million of bank owned life insurance.

Debt Securities Available for Sale. Total debt securities available for sale increased $1.6 million, or 14.7%, to $12.5 million at December 31, 2021 from $10.9 million at June 30, 2021. The increase was primarily due to the purchase of $3.0 million in corporate bonds offset by paydowns and maturities of our mortgage-backed securities portfolio.

Debt Securities Held to Maturity. Total debt securities held to maturity decreased $83,000, or 11.7%, to $626,000 at December 31, 2021 from $709,000 at June 30, 2021. The decrease was primarily due to a decrease of mortgage-backed securities as a result of maturities.

Net Loans. Net loans increased $12.2 million, or 8.4%, to $156.3 million at December 31, 2021 from $144.1 million at June 30, 2021. The increase was primarily due to a $10.8 million, or 20.9%, increase in commercial real estate loans to $63.0 million at December 31, 2021 from $52.1 million at June 30, 2021, an increase in one- to four-family residential loans of $3.3 million, or 6.8%, to $51.7 million at December 31, 2021 from $48.4 million at June 30, 2021 and an increase in multi-family real estate loans of $7.3 million, or 42.6%, to $24.6 million at December 31, 2021 from $17.3 million at June 30, 2021. Commercial and industrial loans decreased by $10.4 million, or 53.8%, to $8.9 million at December 31, 2021 from $19.3 million at June 30, 2021 primarily due to the repayment by the SBA of forgiven PPP loans. PPP loans totaled $150,000 as of December 31, 2021 as compared to $10.4 million as of June 30, 2021. The increase in commercial and multi-family real estate loans was primarily due to our strategy to enhance our commercial and multi-family real estate lending in Southeastern Wisconsin. One- to four-family residential loans increased due to additional growth with respect to adjustable-rate one- to four-family residential loans.

Deposits. Total deposits increased $11.4 million, or 6.7%, to $183.4 million at December 31, 2021 from $172.0 million at June 30, 2021. The increase in deposits was primarily due to an increase in demand, NOW and money market accounts of $11.1 million, or 25.0%, to $55.5 million at December 31, 2021 from $44.4 million at June 30, 2021. The remaining deposit categories remained virtually unchanged when comparing December 31, 2021 to June 30, 2021. The increase in deposits was primarily related to deposits associated with the origination of Paycheck Protection Program (PPP) loans and consumer stimulus payments.

Borrowings. Our borrowings from the Federal Reserve PPP Liquidity Facility to fund our PPP loans decreased by $10.2 million, or 98.6%, to $150,000 at December 31, 2021 from $10.4 million at June 30, 2021. This decrease was due to the repayment by the SBA of forgiven PPP loans.

Stockholders’ Equity. Total stockholders’ equity increased by $679,000, or 0.7%, to $30.5 million at December 31, 2021 from $29.8 million at June 30, 2021. The increase was primarily due to net income of $702,000 during the six months ended December 31, 2021.

Average Balance Sheets

The following tables set forth average balances, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense, as applicable. Loan balances include loans held for sale.

(1) Annualized.

(2) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.

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

(4) Net interest margin represents net interest income divided by average total interest-earning assets.

(1) Annualized.

(2) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.

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

(4) Net interest margin represents net interest income divided by average total interest-earning assets.

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 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.

(In thousands)

(In thousands)

Comparison of Operating Results for the Three Months Ended December 31, 2021 and 2020

General. Net income was $285,000 for the three months ended December 31, 2021, a decrease of $106,000, or 27.1%, from net income of $391,000 for the three months ended December 31, 2020. The decrease in net income for the three months ended December 31, 2021 was primarily attributed to a $217,000 decrease in non-interest income and a $78,000 increase in non-interest expenses offset by a $161,000 increase in net-interest income and a $29,000 decrease in the provision for income taxes.

Interest Income. Interest income increased by $110,000, or 6.9%, to $1.7 million for the three months ended December 31, 2021 compared to $1.6 million for the three months ended December 31, 2020 due to an increase in loan interest income, partially offset by a decrease in debt securities interest income.

Loan interest income increased by $119,000, or 8.0%, to $1.6 million for the three months ended December 31, 2021 from $1.5 million for the three months ended December 31, 2020, due to an increase in the average balance of the loan portfolio partially offset by a decrease in the average yield on loans (excluding PPP loans). The average balance of the loan portfolio (including PPP loans) increased by $32.0 million, or 27.1%, from $118.1 million for the three months ended December 31, 2020 to $150.1 million for the three months ended December 31, 2021. The increase in the average balance of loans was due to our continued efforts to increase commercial and multi-family real estate loans in Southeastern Wisconsin offset by a decrease in the average balance of PPP loans due to the repayment by the SBA of forgiven PPP loans. One-to-four family residential loans also increased. The increase in one- to four-family residential mortgage loans was primarily the result of customers refinancing their loans at lower rates. The average yield on the loan portfolio (excluding PPP loans) decreased by 100 basis points from 5.05% for the three months ended December 31, 2020 to 4.05% for the three months ended December 31, 2021. The decrease in the average yield on loans was primarily due to a decrease in market interest rates since December 31, 2020. In addition, loan interest income was positively impacted by the recognition of deferred fee income of $108,000 during the three months ended December 31, 2021 on the forgiven PPP loans repaid by the SBA compared to $57,000 for the three months ended December 31, 2020. As of December 31, 2021, we had $150,000 of outstanding PPP loans, net of deferred fee income of $10,694. The remaining deferred fee income will be recognized as forgiven PPP loans are repaid by the SBA.

Debt securities interest income decreased $10,000, or 10.8%, to $83,000 for the three months ended December 31, 2021 from $93,000 for the three months ended December 31, 2020 due to a decrease of $2.1 million in the average balance of the debt securities portfolio offset by a nine basis points increase in the average yield on the debt securities portfolio to 2.62% for the three months ended December 31, 2021 from 2.53% for the three months ended December 31, 2020. The decrease in the average balance of the debt securities portfolio was primarily due to securities paydowns which was offset by the purchase of a $1.0 million corporate bond during the three months ended December 31, 2021. The increase in the average yield of debt securities was due to the purchase of the $3.0 million in corporate bonds for the six months ended December 31, 2021.

Interest Expense. Interest expense decreased $51,000, or 18.1%, to $229,000 for the three months ended December 31, 2021 from $279,000 for the three months ended December 31, 2020, due to a decrease of $41,000 in interest paid on deposits and a decrease of $10,000 in interest paid on borrowings.

Interest expense on deposits decreased $41,000, or 15.4%, to $226,000 for the three months ended December 31, 2021 from $267,000 for the three months ended December 31, 2020 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 $57,000, or 26.0%, to $162,000 for the three months ended December 31, 2021 from $219,000 for the three months ended December 31, 2020 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 82 basis points to 1.10% for the three months ended December 31, 2021 from 1.92% for the three months ended December 31, 2020 due to the decline in market rates. The average balance of certificates of deposit increased by $13.1 million, to $58.8 million, for the three months ended December 31, 2021 compared to the three months ended December 31, 2020 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 Company. Interest expense on interest-bearing core deposits increased by $17,000, or 36.1%, to $64,000 for the three months ended December 31, 2021 from $47,000 for the three months ended December 31, 2020. The average rate paid on our interest-bearing core deposits increased slightly by 1 basis point to 0.25% for the three months ended December 31, 2021 from 0.24% for the three months ended December 31, 2020. The average balance of our interest-bearing core deposits increased by $22.6 million during the three months ended December 31, 2021 compared to the three months ended December 31, 2020 and was primarily related to deposits associated with the origination of PPP loans and consumer stimulus payments.

Net Interest Income. Net interest income increased $161,000, or 12.2%, to $1.5 million for the three months ended December 31, 2021 from $1.3 million for the three months ended December 31, 2020 due to an increase in net interest-earning assets offset by a decrease in the net interest rate spread. Also included in net interest income for the three months ended December 31, 2021 was the recognition of deferred fee income of $108,000 on the forgiven PPP loans repaid by the SBA compared to $57,000 for the three months ended December 31, 2020. Net interest-earning assets increased by $11.8 million, or 47.2%, to $36.7 million for the three months ended December 31, 2021 from $24.9 million for the three months ended December 31, 2020. Net interest rate spread decreased by 25 basis points to 2.90% for the three months ended December 31, 2021 from 3.15% for the three months ended December 31, 2020, reflecting a 49 basis points decrease in the average yield on interest-earning assets and a 24 basis points decrease in the average rate paid on interest-bearing liabilities. The net interest margin decreased 26 basis points to 3.00% for the three months ended December 31, 2021 from 3.26% for the three months ended December 31, 2020. The decrease in the average yield on interest earning assets for the three months ended December 31, 2021 compared to the three months ended December 31, 2020 was primarily due to a decrease in the average yield of 100 basis points on the loan portfolio (excluding PPP loans) as we continue to book new loans at lower interest rates based on the low current interest rate environment. The decrease in the average interest rate paid on interest-bearing liabilities continues to be due to the decrease in interest rates in response to the economic downturn caused by the COVID-19 pandemic.

Provision for Loan Losses. Provisions for loan losses are charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses in our loan portfolio that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses, management analyzes several qualitative loan portfolio risk factors including, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, changes in the nature, volume and terms of loans, the fair value of underlying collateral, changes in lending personnel, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. Beginning with the three months ended June 30, 2020, as a result of the COVID-19 pandemic, we 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 December 31, 2021 and 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Marathon Bancorp. Inc.—Summary of Significant Accounting Policies” for additional information.

After an evaluation of these factors, we recorded no provision for loan losses for the three months ended December 31, 2021 or 2020. Our allowance for loan losses was $2.2 million and $2.1 million at December 31, 2021 and 2020, respectively. The allowance for loan losses to total loans was 1.38% at December 31, 2021 and 1.69% at December 31, 2020. We recorded net recoveries of $1,000 for the three months ended December 31, 2021 and net recoveries of $343,000 for the three months ended December 31, 2020. Non-performing assets decreased to $160,000, or 0.07% of total assets, at December 31, 2021, compared to $178,000, or 0.08% of total assets, at June 30, 2021.

To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate at December 31, 2021. However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for loan losses. In addition, the WDFI and the FDIC, as an integral part of their examination process, will periodically review our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses.

Non-interest Income. Non-interest income information is as follows.

(Dollars in thousands)

Non-interest income decreased by $217,000 to $290,000 for the three months ended December 31, 2021 from $507,000 for the three months ended December 31, 2020 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 $231,000 as we sold $5.8 million of mortgage loans into the secondary market during the three months ended December 31, 2021 compared to $13.5 million of such sales during the three months ended December 31, 2020 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.

(Dollars in thousands)

Non-interest expenses were $1.4 million for the three months ended December 31, 2021 as compared to $1.3 million for the three months ended December 31, 2020. Professional fees increased $97,000 primarily due to costs associated with being a public company including but not limited to preparing and filing the required periodic reports with the Securities and Exchange Commission. Salaries and employee benefits decreased by $73,000 due primarily to personnel changes.

Provision for Income Taxes. Income tax expense was $100,000 for the three months ended December 31, 2021, a decrease of $28,000, as compared to income tax expense of $128,000 for the three months ended December 31, 2020. The decrease in income tax expense was primarily due to a decrease in income before taxes. The effective tax rate for the three months ended December 31, 2021 and 2020 was 25.9% and 24.7%, respectively. The increase in effective tax rate was primarily related to an increase in non-deductible expenses for income tax purposes.

Comparison of Operating Results for the Six Months Ended December 31, 2021 and 2020

General. Net income was $702,000 for the six months ended December 31, 2021, a decrease of $54,000, or 7.2%, from net income of $756,000 for the six months ended December 31, 2020. The decrease in net income for the six months ended December 31, 2021 was primarily attributed to a $501,000 decrease in non-interest income, a $199,000 increase in non-interest expenses, and a $10,000 increase in the provision for income taxes. These were offset by a $656,000 increase in net-interest income.

Interest Income. Interest income increased by $546,000, or 17.8%, to $3.6 million for the six months ended December 31, 2021 compared to $3.1 million for the six months ended December 31, 2020 due to an increase in loan interest income, partially offset by a decrease in debt securities interest income. Other interest income also increased by $6,000.

Loan interest income increased by $584,000, or 20.6%, to $3.4 million for the six months ended December 31, 2021 from $2.8 million for the six months ended December 31, 2020, due to an increase in the average balance of the loan portfolio partially offset by a decrease in the average yield on loans (excluding PPP loans). The average balance of the loan portfolio (including PPP loans) increased by $28.4 million, or 24.1%, from $117.8 million for the six months ended December 31, 2020 to $146.2 million for the six months ended December 31, 2021. The increase in the average balance of loans was due to our continued efforts to increase commercial and multi-family real estate loans in Southeastern Wisconsin offset by a decrease in the average balance of PPP loans due to the repayment by the SBA of forgiven PPP loans. One-to-four family residential loans also increased. The increase in one- to four-family residential mortgage loans was primarily the result of customers refinancing their loans at lower rates. The average yield on the loan portfolio (excluding PPP loans) decreased by 81 basis points from 4.89% for the six months ended December 31, 2020 to 4.08% for the six months ended December 31, 2021. The decrease in the average yield on loans was primarily due to a decrease in market interest rates since December 31, 2020. In addition, loan interest income was positively impacted by the recognition of deferred fee income of $473,000 during the six months ended December 31, 2021 on the forgiven PPP loans repaid by the SBA compared to only $95,000 for the six months ended December 31, 2020. As of December 31, 2021, we had $150,000 of outstanding PPP loans, net of deferred fee income of $10,694. The remaining deferred fee income will be recognized as forgiven PPP loans are repaid by the SBA.

Debt securities interest income decreased $44,000, or 21.1%, to $163,000 for the six months ended December 31, 2021 from $207,000 for the six months ended December 31, 2020 due to decreases of $3.3 million in the average balance of the debt securities portfolio and two basis points in the average yield on the debt securities portfolio to 2.57% for the six months ended December 31, 2021 from 2.59% for the six months ended December 31, 2020. The decrease in the average balance of the debt securities portfolio was primarily due to securities paydowns which was offset by the purchase of $3.0 million in corporate bonds during the six months ended December 31, 2021. The decrease in the average yield of debt securities was due to the decrease in the average yield of our collateralized mortgage obligations with inverse floating rates which was partially offset by the higher interest rates on the $3.0 million in corporate bonds purchased during the six months ended December 31, 2021.

Interest Expense. Interest expense decreased $110,000, or 19.3%, to $463,000 for the six months ended December 31, 2021 from $573,000 for the six months ended December 31, 2020, due to a decrease of $92,000 in interest paid on deposits and a decrease of $18,000 in interest paid on borrowings.

Interest expense on deposits decreased $92,000, or 16.8%, to $457,000 for the six months ended December 31, 2021 from $549,000 for the six months ended December 31, 2020 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 $119,000, or 26.3%, to $334,000 for the six months ended December 31, 2021 from $453,000 for the six months ended December 31, 2020 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 84 basis points to 1.12% for the six months ended December 31, 2021 from 1.96% for the six months ended December 31, 2020 due to the decline in market rates. The average balance of certificates of deposit increased by $13.0 million to $59.1 million, for the six months ended December 31, 2021 compared to the six months ended December 31, 2020 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 Company. Interest expense on interest-bearing core deposits increased by $27,000, or 28.1%, to $123,000 for the six months ended December 31, 2021 from $96,000 for the six months ended December 31, 2020. The average rate paid on our interest-bearing core deposits was 0.25% for the six months ended December 31, 2021 and 2020. The average balance of our interest-bearing core deposits increased by $21.3 million during the six months ended December 31, 2021 compared to the six months ended December 31, 2020 and was primarily related to deposits associated with the origination of PPP loans and consumer stimulus payments.

Net Interest Income. Net interest income increased $656,000, or 26.4%, to $3.1 million for the six months ended December 31, 2021 from $2.5 million for the six months ended December 31, 2020 due to an increase in net interest-earning assets and an increase in the net interest rate spread. Also included in net interest income for the six months ended December 31, 2021 was the recognition of deferred fee income of $473,000 on the forgiven PPP loans repaid by the SBA compared to only $95,000 for the six months ended December 31, 2020. Net interest-earning assets increased by $13.7 million, or 57.4%, to $37.7 million for the six months ended December 31, 2021 from $24.0 million for the six months ended December 31, 2020. Net interest rate spread increased by nine basis points to 3.08% for the six months ended December 31, 2021 from 2.99% for the six months ended December 31, 2020, reflecting a 16 basis points decrease in the average yield on interest-earning assets and a 26 basis points decrease in the average rate paid on interest-bearing liabilities. The net interest margin increased eight basis points to 3.18% for the six months ended December 31, 2021 from 3.10% for the six months ended December 31, 2020. The decrease in the average yield on interest earning assets for the six months ended December 31, 2021 compared to the six months ended December 31, 2020 was primarily due to a decrease in the average yield of 81 basis points on the loan portfolio (excluding PPP loans) as we continue to book new loans at lower interest rates based on the low current interest rate environment. This decrease was offset by the $473,000 in deferred fee income recognized on the forgiven PPP loans repaid by the SBA. The decrease in the average interest rate paid on interest-bearing liabilities continues to be due to the decrease in interest rates in response to the economic downturn caused by the COVID-19 pandemic. The net interest rate spread and net interest margin for the six months ended December 31, 2021 would have been approximately 2.60% and 2.70%, respectively when excluding the $473,000 in deferred fee income recognized on forgiven PPP loans repaid by the SBA.

Provision for Loan Losses. Provisions for loan losses are charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses in our loan portfolio that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses, management analyzes several qualitative loan portfolio risk factors including, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, changes in the nature, volume and terms of loans, the fair value of underlying collateral, changes in lending personnel, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. Beginning with the three months ended June 30, 2020, as a result of the COVID-19 pandemic, we 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 December 31, 2021 and 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Marathon Bancorp. Inc.—Summary of Significant Accounting Policies” for additional information.

After an evaluation of these factors, we recorded no provision for loan losses for the six months ended December 31, 2021 or 2020. Our allowance for loan losses was $2.2 million and $2.1 million at December 31, 2021 and 2020, respectively. The allowance for loan losses to total loans was 1.38% at December 31, 2021 and 1.69% at December 31, 2020. We recorded net recoveries of $2,000 for the six months ended December 31, 2021 and net recoveries of $418,000 for the six months ended December 31, 2020. Non-performing assets decreased to $160,000, or 0.07% of total assets, at December 31, 2021, compared to $178,000, or 0.08% of total assets, at June 30, 2021.

To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate at December 31, 2021. However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for loan losses. In addition, the WDFI and the FDIC, as an integral part of their examination process, will periodically review our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses.

Non-interest Income. Non-interest income information is as follows.

(Dollars in thousands)

Non-interest income decreased by $502,000 to $570,000 for the six months ended December 31, 2021 from $1.1 million for the six months ended December 31, 2020 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 $524,000 as we sold $12.4 million of mortgage loans into the secondary market during the six months ended December 31, 2021 compared to $30.9 million of such sales during the six months ended December 31, 2020 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.

(Dollars in thousands)

Non-interest expenses were $2.8 million for the six months ended December 31, 2021 as compared to $2.6 million for the six months ended December 31, 2020. Professional fees increased $196,000 primarily due to costs associated with being a public company including but not limited to preparing and filing the required periodic reports with the Securities and Exchange Commission. Salaries and employee benefits decreased $42,000 due primarily to personnel changes.

Provision for Income Taxes. Income tax expense was $233,000 for the six months ended December 31, 2021, an increase of $10,000, as compared to income tax expense of $223,000 for the six months ended December 31, 2020. The effective tax rate for the six months ended December 31, 2021 and 2020 was 24.9% and 22.8%, respectively. The increase in effective tax rate was primarily related to an increase in non-deductible expenses for income tax purposes.

Asset Quality

Loans Past Due and Non-Performing Assets. Loans are reviewed on a regular basis. Management determines that a loan is impaired or non-performing when it is probable at least a portion of the loan will not be collected in accordance with the original terms due to a deterioration in the financial condition of the borrower or the value of the underlying collateral if the loan is collateral dependent. When a loan is determined to be impaired, the measurement of the loan in the allowance for loan losses is based on present value of expected future cash flows, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Non-accrual loans are loans for which collectability is questionable and, therefore, interest on such loans will no longer be recognized on an accrual basis. All loans that become 90 days or more delinquent are placed on non-accrual status unless the loan is well secured and in the process of collection. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received on a cash basis or cost recovery method.

When we acquire real estate as a result of foreclosure, the real estate is classified as real estate owned. The real estate owned is recorded at the lower of carrying amount or fair value, less estimated costs to sell. Soon after acquisition, we order a new appraisal to determine the current market value of the property. Any excess of the recorded value of the loan satisfied over the market value of the property is charged against the allowance for loan losses, or, if the existing allowance is inadequate, charged to expense of the current period. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value less estimated costs to sell.

A loan is classified as a troubled debt restructuring if, for economic or legal reasons related to the borrower’s financial difficulties, we grant a concession to the borrower that we would not otherwise consider. This usually includes a modification of loan terms, such as a reduction of the interest rate to below market terms, capitalizing past due interest or extending the maturity date and possibly a partial forgiveness of the principal amount due. Interest income on restructured loans is accrued after the borrower demonstrates the ability to pay under the restructured terms through a sustained period of repayment performance, which is generally six consecutive months.

The CARES Act, in addition to providing financial assistance to both businesses and consumers, creates a forbearance program for federally-backed mortgage loans, protects borrowers from negative credit reporting due to loan accommodations related to the national emergency, and provides financial institutions the option to temporarily suspend certain requirements under U.S. GAAP related to troubled debt restructurings for a limited period of time to account for the effects of COVID-19. The Federal banking regulatory agencies have likewise issued guidance encouraging financial institutions to work prudently with borrowers who are, or may be, unable to meet their contractual payment obligations because of the effects of COVID-19. That guidance, with concurrence of the Financial Accounting Standards Board, and provisions of the CARES Act allow modifications made on a good faith basis in response to COVID-19 to borrowers who were generally current with their payments prior to any relief, to not be treated as troubled debt restructurings. Modifications may include payment deferrals, fee waivers, extensions of repayment term, or other delays in payment.

To work with customers impacted by COVID-19, the Company offered short-term (i.e., three months or less with the potential to extend up to six months, if necessary) loan modifications on a case by case basis to borrowers who were current in their payments at the inception of the loan modification program. Under Section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 are considered current for COVID-19 modifications. A financial institution can then suspend the requirements under U.S. GAAP for loan modifications related to COVID-19 that would otherwise be categorized as a TDR, and suspend any determination of a loan modified as a result of COVID-19 as being a TDR, including the requirement to determine impairment for accounting purposes. Financial institutions wishing to utilize this authority must make a policy election, which applies to any COVID-19 modification made between March 1, 2020 and the earlier of either January 1, 2022 or the 60th day after the end of the COVID-19 national emergency. The Company made this policy election. Similarly, the Financial Accounting Standards Board (“FASB”) has confirmed that short-term modifications made on a good faith basis in response to COVID-19 to loan customers who were current prior to any relief are not TDRs. Lastly, prior to the enactment of the CARES Act, the banking regulatory agencies provided guidance as to how certain short-term modifications would not be considered TDRs, and have subsequently confirmed that such guidance could be applicable for loans that do not qualify for favorable accounting treatment under Section 4013 of the CARES Act.

The Company received requests to modify loans, primarily consisting of the deferral of principal and interest payments and the extension of the maturity date. Of these modifications, 100% were performing in accordance with the accounting treatment under Section 4013 of the CARES Act and therefore did not qualify as TDRs. As of December 31, 2021, we had granted short-term payment deferrals on 56 loans, totaling approximately $20.0 million in aggregate principal amount. As of December 31, 2021, all of these loans have returned to normal payment status.

Delinquent Loans. The following table sets forth our loan delinquencies, including non-accrual loans, by type and amount at the dates indicated. We had no PPP loans delinquent at December 31, 2021 or June 30, 2021.

(In thousands)

Non-Performing Assets. The following table sets forth information regarding our non-performing assets. Non-accrual loans include non-accruing troubled debt restructurings of $67,000 and $72,000 as of December 31, 2021 and June 30, 2021, respectively. Troubled debt restructurings include loans for which either a portion of interest or principal has been forgiven, or loans modified at interest rates materially less than current market rates.

(Dollars in thousands)

Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss allowance is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention” or “Watch” by our management.

When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover probable accrued losses. General allowances represent loss allowances which have been established to cover probable accrued losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of additional general or specific loss allowances.

On the basis of our review of our loans our classified and special mention or watch loans at the dates indicated were as follows:

(In thousands)

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. 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 December 31, 2021 and 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Marathon Bancorp. Inc.—Summary of Significant Accounting Policies” for additional information.

A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reason for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and commercial real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.

In addition, the WDFI and the FDIC periodically review our allowance for loan losses and as a result of such reviews, we may have to adjust our allowance for loan losses or recognize further loan charge-offs.

The following table sets forth activity in our allowance for loan losses for the periods indicated.

(Dollars in thousands)

(Dollars in thousands)

Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category and the percent of the allowance in each category to the total allocated allowance at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

Liquidity and Capital Resources

Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities of securities. We also have the ability to borrow from the Federal Home Loan Bank of Chicago. At December 31, 2021, we had a $72.4 million line of credit 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 outstanding $150,000 to fund PPP loans as of December 31, 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 $206,000 and $105,000 for the six months ended December 31, 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 $17.8 million and $3.2 million for the six months ended December 31, 2021 and 2020, respectively. Net cash provided by financing activities, consisting of activity in deposit accounts and borrowings, was $1.2 million and $3.4 million for the six months ended December 31, 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.

At December 31, 2021, Marathon Bank was classified as “well capitalized” for regulatory capital purposes.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At December 31, 2021, we had outstanding commitments to originate loans of $11.5 million, and outstanding commitments to sell loans of $844,000. We anticipate that we will have sufficient funds available to meet our current lending commitments. Time deposits that are scheduled to mature in one year or less from December 31, 2021 totaled $24.9 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 utilize Federal Home Loan Bank advances or other borrowings, which may result in higher levels of interest expense.

Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.

Recent Accounting Pronouncements

Please refer to Note 1 to the consolidated financial statements for a description of recent accounting pronouncements that may affect our financial condition and results of operations.

Impact of Inflation and Changing Price

The financial statements and related data presented herein have been prepared in accordance 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.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”) were effective as of the end of the period covered by this Form 10-Q.

Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.