Executive Summary / Key Takeaways

• Conversion Inflection: Marathon Bancorp completed its 123-year journey from mutual to stock ownership in April 2025, raising $16.9 million in fresh capital and gaining public-market currency for the first time, creating both growth opportunity and shareholder accountability pressures.

• Margin Expansion Story: Net interest margin surged 64 basis points to 3.49% in Q3 2025, driven by strategic shifts toward higher-yielding multi-family and residential loans, suggesting pricing power that could support profitability improvement if sustained.

• Scale Disadvantage: At $246 million in assets, Marathon operates at roughly 2% the size of regional peer Associated Banc-Corp and 15% of community rival PSB Holdings , creating a structural cost disadvantage that compresses returns and limits competitive flexibility.

• Asset Quality Overhang: A foreclosed construction loan originally valued at $2.3 million has required $1.3 million in valuation allowances and remains unsold at $1.1 million, representing 6.3% of total equity and raising questions about underwriting discipline.

• Valuation Disconnect: Trading at 0.72 times book value but 85 times trailing earnings, the market appears skeptical that Marathon can achieve the returns on equity necessary to justify its conversion premium, creating a potential opportunity if management executes effectively.

Setting the Scene: A Mutual Heritage Meets Public-Market Reality

Marathon Bancorp, founded in 1902 and headquartered in Wausau, Wisconsin, spent its first 123 years as a mutual savings bank, owned by its depositors rather than shareholders. This structure prioritized safety and community service over growth, resulting in a conservative institution with five branches serving Marathon, Ozaukee, and Waukesha counties. The April 2025 conversion to a stock holding company represented a fundamental strategic pivot, providing access to public capital markets and acquisition currency for the first time in the bank's history. The offering sold 1.69 million shares at $10 per share, generating $16.9 million in gross proceeds that management can now deploy to accelerate growth or improve operational efficiency.

The mutual-to-stock conversion creates a unique investment dynamic. Unlike typical IPOs that raise capital for high-growth ventures, Marathon's conversion funds a mature, profitable institution with a clear mandate to improve returns. The 1.37-to-1 exchange ratio for existing public shareholders reflects the mechanical nature of the transaction rather than market-driven pricing, leaving the stock to find its equilibrium based on fundamental performance. This creates an opportunity for investors to evaluate a traditional community bank through a public-market lens for the first time, with all the transparency and scrutiny that entails.

Marathon operates as a classic full-service community bank, gathering deposits through relationship-based banking and deploying them into loans within its local footprint. The bank's strategy centers on growing multi-family real estate and one-to-four-family residential loans, which carry higher yields than traditional savings bank portfolios. This asset mix shift, combined with a deliberate migration of deposits from fixed-rate certificates to variable-rate products, positions Marathon to benefit from the current interest rate environment while building more stable, lower-cost funding. However, the bank faces intense competition from larger regional players like Associated Banc-Corp and Nicolet Bankshares , which offer broader product suites, superior technology, and greater pricing flexibility due to their scale.

Business Model and Strategic Differentiation: Relationship Banking as a Double-Edged Sword

Marathon's core competitive advantage lies in its community-oriented approach and local decision-making authority. The bank emphasizes relationship management, securing deposit balances when granting new loans and maintaining personalized service that larger institutions struggle to replicate. This strategy manifests in the deposit composition: demand, NOW, and money market accounts grew 8.1% to $52.0 million in Q3 2025, while savings accounts increased 7.4% to $40.4 million. These low-cost, stable deposits provide a funding advantage that supports net interest margin expansion.

However, this relationship model also creates structural limitations. Marathon's five-branch network concentrates geographic risk in three Wisconsin counties, making the bank vulnerable to local economic downturns. The January 2024 Brookfield branch opening demonstrates management's growth ambitions but also increased salary and benefit expenses, contributing to non-interest expenses of $1.6 million in Q3 2025. This cost structure, while modest in absolute terms, represents a significant burden relative to the bank's $2.8 million in quarterly revenue, creating an efficiency ratio that lags larger peers who can spread fixed costs across bigger asset bases.

The loan portfolio strategy reflects a deliberate shift toward higher-yielding assets. Multi-family real estate loans grew 6.1% to $50.7 million, while one-to-four-family residential loans increased 4.6% to $58.9 million. These categories now represent 52.7% of the $208 million loan portfolio, up from prior periods. This mix improvement drives the 59 basis point increase in loan portfolio yield to 5.25%, directly boosting net interest income by $545,000 year-over-year. The strategy appears sound, but the foreclosed construction loan saga raises concerns about credit underwriting in these higher-yielding categories.

Financial Performance: Evidence of Strategy Working, But Scale Constrains Returns

Marathon's Q3 2025 results provide mixed evidence for the investment thesis. Net income surged 154% to $444,000, driven by a $533,000 increase in net interest income that more than offset a $115,000 reduction in credit loss recoveries. The net interest margin expansion to 3.49% from 2.85% demonstrates successful execution of the asset mix shift and deposit repricing strategy. Loan interest income jumped 26.3% to $2.62 million, reflecting both higher balances and improved yields. These numbers suggest the core banking engine is running more efficiently.

Yet profitability metrics reveal the scale challenge. Return on assets of 0.14% and return on equity of 0.80% trail all three identified peers by wide margins. Associated Banc-Corp achieves 0.41% ROA and 3.79% ROE, while Nicolet Bankshares delivers 1.64% ROA and 12.25% ROE. Even community rival PSB Holdings generates 0.88% ROA and 10.58% ROE. Marathon's sub-scale operations create a cost disadvantage that overwhelms the margin improvements, suggesting that growth alone may not solve the profitability equation without concurrent expense discipline.

The balance sheet shows prudent capital management but underutilized resources. Total assets grew 3% to $246 million, with loans increasing 2.7% to $208 million and deposits rising 3.7% to $181.7 million. The bank maintains $15.5 million in cash and cash equivalents, representing 6.3% of assets—adequate for liquidity but potentially excessive for a bank seeking to improve returns. The $83.4 million unused FHLB line provides additional funding capacity, while the $17 million Federal Reserve borrowing availability offers backup liquidity. Marathon's regulatory classification as "well capitalized" provides stability but also highlights that capital is not the binding constraint; profitable deployment is.

Asset Quality and Risk Management: The Foreclosure Saga as a Red Flag

The foreclosed construction loan represents Marathon's most significant credit challenge. Originally valued at $2.3 million when foreclosed in June 2023, the property's valuation was revised to $1.4 million in April 2024, triggering a $937,100 provision. An accepted offer of $1.1 million in August 2025 required an additional $378,767 provision, bringing total valuation allowances to $1.3 million. The sale had not closed as of November 12, 2025, leaving the bank exposed to further losses and carrying costs.

This situation matters for three reasons. First, the $1.3 million in provisions represents 2.8% of total equity, a material hit for a bank of Marathon's size. Second, the repeated valuation write-downs suggest initial underwriting and ongoing monitoring may have been inadequate, raising questions about management's credit culture. Third, the property remains on the books at $1.1 million, creating uncertainty about ultimate loss severity and management's ability to resolve problem assets efficiently.

The allowance for credit losses methodology adds another layer of risk. Management estimates lifetime losses using a historical look-back method adjusted for economic forecasts, with particular sensitivity to Wisconsin unemployment, housing prices, and GDP. A hypothetical shift to the next highest or lowest level in these indicators would increase the allowance by $108,000, or 6.3%. While this sensitivity appears modest, the subjective nature of the estimates and the regulator's ability to force adjustments create potential for future earnings volatility. The $40,000 credit loss recovery in Q3 2025, down from $155,000 in the prior year, reflects both improved economic conditions and the impact of loan growth on required reserves.

Competitive Positioning: Outmatched but Not Outgunned

Marathon competes in a fragmented Wisconsin banking market dominated by regional giants and savvy community players. Associated Banc-Corp , with $44 billion in assets and a 14.9% net margin, leverages scale to offer lower rates and superior technology across its extensive branch network. Nicolet Bankshares , at $8.5 billion in assets, combines commercial banking with wealth management, achieving 38.5% net margins and 12.25% ROE through product diversification. PSB Holdings , Marathon's closest peer at $1.5 billion in assets, focuses on community lending with 25.4% net margins and 10.58% ROE, demonstrating that local focus can deliver strong returns at sufficient scale.

Marathon's competitive disadvantages are stark. Its 4.27% net margin and 0.80% ROE reflect a cost structure that is materially higher per dollar of assets than all three peers. The bank's technology infrastructure likely lags competitors who invest millions in digital platforms. Associated Banc-Corp's mobile app enables faster loan approvals, while Nicolet's integrated systems support seamless onboarding. Marathon's relationship model provides some defense, but younger, tech-savvy customers may prefer digital convenience over personal service.

However, Marathon possesses two meaningful moats. First, its 123-year local heritage and mutual-to-stock conversion create deep community loyalty that larger banks struggle to replicate. This manifests in stable, low-cost deposits and sticky loan relationships. Second, the savings bank charter provides regulatory advantages for deposit gathering and may appeal to customers seeking a traditional, safe institution. These advantages help Marathon retain market share in Marathon County but do not offset the scale-driven cost disadvantages that compress returns.

Outlook and Execution Risk: Can Management Deploy Capital Effectively?

Marathon's post-conversion capital position creates both opportunity and execution risk. The $16.9 million in gross proceeds, net of $1.7 million in offering expenses, provides substantial dry powder relative to the bank's $46.3 million equity base. Management can deploy this capital through organic loan growth, branch expansion, technology investment, or acquisitions. The January 2024 Brookfield branch opening suggests a preference for organic growth, but this strategy has already increased salary expenses and will take years to generate meaningful returns.

The key question is whether Marathon can achieve the asset growth necessary to improve operational efficiency without sacrificing credit quality. The bank's $83.4 million unused FHLB borrowing capacity provides additional funding for loan growth, but the current 0.14% ROA suggests each new dollar of assets generates minimal profit. To reach peer-average ROA of 0.5%, Marathon would need to either increase net income by approximately 3.6 times on the same asset base or grow assets significantly while holding expenses constant—a challenging feat in a competitive market.

Management's commentary provides limited forward-looking insight. The focus on relationship management and deposit migration suggests a continuation of current strategies, but there is no explicit guidance on asset growth targets, efficiency goals, or technology investments. The absence of a clear capital deployment plan creates uncertainty about the timeline for ROE improvement. Investors must trust that management, which operated successfully under mutual ownership, can adapt to public-market pressures for consistent, profitable growth.

Valuation Context: Discount to Book, Premium to Earnings

At $11.37 per share, Marathon trades at 0.72 times book value of $15.75 per share, a significant discount to peers. Associated Banc-Corp (ASB) trades at 0.95 times book, Nicolet (NIC) at 1.62 times, and PSB Holdings (PSBQ) at 0.83 times. This discount suggests the market views Marathon's franchise as less valuable than its liquidation value, likely reflecting skepticism about management's ability to generate acceptable returns on equity. The price-to-tangible-book ratio would be even lower, as the bank carries no goodwill from acquisitions.

The price-to-earnings ratio of 85.69 times trailing earnings is misleadingly high due to Marathon's depressed profitability. Normalizing earnings provides a more meaningful valuation framework. If Marathon could achieve a peer-average ROE of 10% on its $46.3 million equity base, normalized net income would approximate $4.6 million annually. At the current $32.7 million market cap, this implies a normalized P/E of 7.1 times—a material discount to peer multiples of 11-14 times. This suggests significant upside if management can execute on its profitability improvement plan.

Cash flow metrics tell a similar story. The price-to-operating cash flow ratio of 33.85 times and price-to-free cash flow of 40.69 times appear elevated, but these reflect the bank's current low earnings rather than poor cash generation. Marathon's balance sheet remains liquid and well-capitalized, with no debt and substantial borrowing capacity. The absence of a dividend or share repurchase program indicates management is retaining all earnings for growth, a prudent strategy given the ROE improvement opportunity.

Risks and Asymmetries: What Could Break the Thesis

Three primary risks threaten Marathon's investment case. First, credit quality deterioration could erode capital and confidence. The foreclosed construction loan demonstrates underwriting vulnerabilities, and a similar loss on a larger loan could materially impact the small equity base. Wisconsin economic sensitivity compounds this risk; a downturn in manufacturing or housing could increase delinquencies and require larger loan loss provisions.

Second, competitive pressure could compress margins and limit growth. Larger banks can offer lower loan rates and higher deposit rates, while fintechs provide superior digital experiences. If Marathon cannot match these offerings, it may lose market share or be forced to accept lower spreads, preventing the NIM expansion necessary to drive ROE improvement.

Third, execution risk on capital deployment could destroy value. Poorly timed branch expansions, ill-advised acquisitions, or technology investments that fail to deliver efficiency gains would trap capital in low-return activities. The Brookfield branch's impact on expenses without corresponding revenue growth provides a cautionary tale.

The primary upside asymmetry lies in acquisition potential. Marathon's sub-scale operations, clean balance sheet, and attractive deposit franchise could make it a compelling target for a larger regional bank seeking entry into the Wausau market. An acquisition at 1.2-1.5 times book value would represent 70-110% upside from current levels, a scenario that becomes more likely if management fails to improve returns independently.

Conclusion: A Conversion Story with Execution Hurdles

Marathon Bancorp's conversion from mutual to stock ownership creates a compelling, albeit risky, investment proposition. The bank's 64 basis point margin expansion and strategic asset mix shift demonstrate that management can improve profitability, but the sub-scale operations and weak profitability metrics relative to peers show the magnitude of the challenge. Trading at a discount to book value, the market has priced Marathon as a below-average franchise, creating potential upside if management can achieve peer-level returns.

The central thesis hinges on whether Marathon can deploy its new capital effectively to grow assets and improve operational efficiency without sacrificing credit quality. The foreclosed construction loan saga provides a cautionary tale about underwriting discipline, while competitive pressures from larger, better-capitalized peers create headwinds. For investors, the key variables to monitor are loan growth quality, expense control, and resolution of the remaining foreclosed asset. If management executes, the normalized valuation suggests material upside; if not, the discount to book may be justified.