EDGAR 10-K Filing

Company CIK: 1337068
Filing Year: 2022
Filename: 1337068_10-K_2022_0001174947-22-001281.json

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ITEM 1. BUSINESS
ITEM 1. Business
Forward Looking Statements
We have included or incorporated by reference in this Annual Report on Form 10-K, and from time to time our management may make, statements that may constitute “forward-looking statements” within the meaning of the safe harbour provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts but instead represent only our beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These statements include statements other than historical information or statements of current condition and may relate to our future plans and objectives and results, as well as statements about the objective and effectiveness of our risk management and liquidity policies, statements about trends in or growth opportunities for our business, statements about our future status, and activities or reporting under U.S. banking and financial regulation. Forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Important factors that could cause our actual results and financial condition to differ from those indicated in the forward-looking statements include, among others, those discussed below and under “Risk Factors” in Part 1, Item 1A of this Annual Report on Form 10-K.
Conversion and Reorganization of Magyar Bancorp, MHC
Prior to consummation of its mutual to stock conversion in July 2021, Magyar Bancorp, MHC (the “MHC”) was the New Jersey-chartered mutual holding company of Magyar Bancorp, Inc. (the “Company”). The MHC’s only business was the ownership of 55.0% of the issued shares of common stock of the Company. On February 25, 2021, the MHC adopted a Plan of Conversion and Reorganization (the “Plan”) pursuant to which the MHC would undertake a “second-step” conversion and Magyar Bank, the Company’s wholly owned subsidiary, would reorganize from the two-tier mutual holding company structure to the fully-public stock holding company structure. The Plan received all required regulatory, depositor and stockholder approval, and the conversion and offering were consummated on July 14, 2021 on which date the MHC ceased to exist.
Pursuant to the Plan, (i) the shares of the Company’s common stock held by persons other than the MHC (the shares held by the MHC were canceled) were converted into new shares of the Company’s common stock based on an exchange ratio designed to preserve the percentage ownership interests of such persons, and (ii) the Company offered and sold shares of common stock, representing the ownership interest of the MHC in the Company, in a subscription offering. In the stock offering, the Company raised gross proceeds of $39.1 million by selling 3,910,000 shares of common stock at $10.00 per share. Concurrent with the completion of the stock offering, each share of the Company’s common stock owned by public stockholders (stockholders other than the MHC) was exchanged for 1.2213 new shares of Company common stock. A total of 7,097,825 shares of common stock were issued and outstanding at September 30, 2021. As a result of the second-step conversion, all share and per share information prior to the reorganization was subsequently revised to reflect the 1.2213 exchange ratio, unless otherwise noted.
Magyar Bancorp, Inc.
The Company is a Delaware-chartered corporation which owns 100% of the outstanding shares of common stock of Magyar Bank. Magyar Bancorp, Inc. has not engaged in any significant business activity other than owning all of the shares of common stock of Magyar Bank. At September 30, 2022, Magyar Bancorp, Inc. had consolidated assets of $798.5 million, total deposits of $667.7 million and stockholders’ equity of $98.5 million. The executive office of Magyar Bancorp, Inc. is located at 400 Somerset Street, New Brunswick, New Jersey 08901, and its telephone number is (732) 342-7600. Magyar Bancorp, Inc. is subject to regulation and examination by the Board of Governors of the Federal Reserve System (“FRB”) and the New Jersey Department of Banking and Insurance (“NJDBI”).
Magyar Bank
Magyar Bank is a New Jersey-chartered savings bank headquartered in New Brunswick, New Jersey that was originally founded in 1922 as a New Jersey building and loan association. In 1954, Magyar Bank converted to a New Jersey
savings and loan association, before converting to a New Jersey savings bank charter in 1993. We conduct business from our main office located at 400 Somerset Street, New Brunswick, New Jersey, and our seven branch offices located in New Brunswick, North Brunswick, South Brunswick, Branchburg, Bridgewater, and Edison, New Jersey. The telephone number at our main office is (732) 342-7600 and our website is located at www.magbank.com.
General
Our principal business consists of attracting retail deposits from the general public in the areas surrounding our main office in New Brunswick, New Jersey and our branch offices located in Middlesex and Somerset Counties, New Jersey, and investing those deposits, together with funds generated from operations and wholesale funding, in residential mortgage loans, home equity loans, home equity lines of credit, commercial real estate loans, commercial business loans, Small Business Administration (“SBA”) loans, construction loans and investment securities. We also originate consumer loans, which consist primarily of secured demand loans. We originate loans primarily for our loan portfolio. However, from time to time we have sold some of our long-term, fixed-rate residential mortgage loans into the secondary market, while retaining the servicing rights for such loans. In addition, we sell the SBA-guaranteed portion of SBA loans into the secondary market, while retaining the servicing rights for such loans. Our revenues are derived principally from interest on loans and securities, our investment securities consist primarily of mortgage-backed securities and U.S. Government and government-sponsored enterprise obligations. We also generate revenues from fees and service charges. Our primary sources of funds are deposits, borrowings and principal and interest payments on loans and securities. We are subject to comprehensive regulation and examination by the NJDBI and the Federal Deposit Insurance Corporation (“FDIC”).
Market Area
We are headquartered in New Brunswick, New Jersey, and our primary deposit market area is concentrated in the communities surrounding our headquarters branch and our branch offices located in Middlesex and Somerset Counties, New Jersey. Our primary lending market area is broader than our deposit market area and includes all of New Jersey.
The economy of our primary market area is largely urban and suburban with a broad economic base that is typical for counties surrounding the New York metropolitan area. The median household income in Middlesex and Somerset Counties ranks among the highest in the nation.
Competition
We face intense competition within our market area both in making loans and attracting deposits. Our market area has a high concentration of financial institutions including large money center and regional banks, community banks and credit unions. Some of our competitors offer products and services that we currently do not offer, such as trust services and private banking. According to the Federal Deposit Insurance Corporation’s annual Summary of Deposit report, at June 30, 2022, our market share of deposits was 1.11% and 0.42% in Middlesex and Somerset Counties, respectively. Our market share of deposits was 1.33% and 0.42%, respectively, at June 30, 2021.
Our competition for loans and deposits comes principally from commercial banks, savings institutions, mortgage banking firms and credit unions. We face additional competition for deposits from short-term money market funds, brokerage firms, mutual funds and insurance companies. Our primary focus is to build and develop profitable customer relationships across all lines of business while maintaining our role as a community bank.
Lending Activities
We originate residential mortgage loans to purchase or refinance residential real property. Residential mortgage loans represented $214.4 million, or 34.1% of our total loans at September 30, 2022. Historically, we have not originated a significant number of loans for the purpose of reselling them in the secondary market. In the future, however, to help manage interest rate risk and to increase fee income, we may increase our origination and sale of residential mortgage loans. No loans were held for sale at September 30, 2022. We also originate commercial real estate, commercial business and construction loans. At September 30, 2022, these loans totaled $342.8 million, or 54.5%, $34.7 million, or 5.5%, and $15.2 million, or 2.4%, respectively, of our total loan portfolio. We also offer consumer loans, which consist primarily of home equity lines of credit and stock-secured demand loans. At September 30, 2022, home equity lines of credit and stock-secured demand loans totaled $18.7 million, or 3.0% and $3.1 million, or 0.5%, respectively, of our total loan portfolio.
Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan, at the dates indicated.
September 30,
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
(Dollars in thousands)
One-to-four-family residential
$ 214,377
34.1%
$ 203,019
34.2%
$ 210,360
34.4%
$ 190,415
36.4%
$ 185,287
36.2%
Commercial real estate
342,791
54.5%
280,848
47.2%
248,134
40.6%
232,544
44.5%
219,347
42.8%
Construction
15,230
2.4%
20,350
3.4%
28,242
4.6%
28,451
5.4%
30,412
5.9%
Home equity lines of credit
18,704
3.0%
17,930
3.0%
19,373
3.2%
17,832
3.4%
17,982
3.5%
Commercial business
34,672
5.5%
68,719
11.6%
100,993
16.5%
48,769
9.3%
53,320
10.4%
Other
3,130
0.5%
3,751
0.6%
4,157
0.7%
4,990
1.0%
6,150
1.2%
Total loans receivable
$ 628,904
100.0%
$ 594,617
100.0%
$ 611,259
100.0%
$ 523,001
100.0%
$ 512,498
100.0%
Net deferred loan costs
(628 )
(1,241 )
(1,749 )
Allowance for loan losses
(8,433 )
(8,075 )
(6,400 )
(4,888 )
(4,200 )
Total loans receivable, net
$ 619,843
$ 585,301
$ 603,110
$ 518,217
$ 508,430
Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at September 30, 2022. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.
One-to-Four-Family
Commercial
Home Equity
Residential
Real Estate
Construction
Lines of Credit
Due During the
Weighted
Weighted
Weighted
Weighted
Fiscal Years Ending
Average
Average
Average
Average
September 30,
Amount
Rate
Amount
Rate
Amount
Rate
Amount
Rate
(Dollars in thousands)
$ 1,843
4.10%
$ 29,703
4.74%
$ 12,303
7.69%
$ 4,654
6.27%
1,014
6.18%
9,714
4.36%
1,161
7.28%
1,067
4.25%
1,092
4.58%
2,444
3.54%
-
-
-
-
2026 to 2027
1,473
3.92%
34,964
4.54%
4.25%
5.25%
2028 to 2032
10,856
3.89%
37,740
4.52%
-
-
4.76%
2033 to 2037
28,685
3.76%
36,374
4.69%
4.82%
5.33%
2038 and beyond
169,414
3.96%
191,852
4.60%
1,605
5.87%
11,585
5.20%
Total
$ 214,377
3.94%
$ 342,791
4.59%
$ 15,230
7.44%
$ 18,704
5.41%
Commercial Business
Other
Total
Due During the
Weighted
Weighted
Weighted
Fiscal Years Ending
Average
Average
Average
September 30,
Amount
Rate
Amount
Rate
Amount
Rate
(Dollars in thousands)
$ 21,567
6.69%
$
13.00%
$ 70,071
5.95%
4.94%
8.55%
13,551
4.76%
1,685
3.67%
11.11%
5,235
3.82%
2026 to 2027
5.26%
6.90%
37,620
4.54%
2028 to 2032
4,379
4.48%
-
-
53,450
4.39%
2033 to 2037
7.00%
3.25%
66,109
4.30%
2038 and beyond
5,395
6.73%
3,017
5.31%
382,868
4.38%
Total
$ 34,672
6.21%
$ 3,130
5.38%
$ 628,904
4.56%
The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at September 30, 2022 that are contractually due after September 30, 2023.
Due After September 30,
Fixed
Adjustable
Total
(In thousands)
One-to-four-family residential
$ 125,107
$ 87,427
$ 212,534
Commercial real estate
55,375
257,713
313,088
Construction
2,669
2,927
Home equity lines of credit
1,219
12,831
14,050
Commercial business
4,582
8,523
13,105
Other
3,022
3,129
Total
$ 186,648
$ 372,185
$ 558,833
Residential Mortgage Loans. We originate residential mortgage loans, most of which are secured by properties located in our primary market area and most of which we hold in portfolio. At September 30, 2022, $214.4 million, or 34.1% of our total loan portfolio, consisted of residential mortgage loans (including home equity loans). Residential mortgage loan originations are generally obtained from our in-house loan representatives, from existing or past customers, through advertising, and through referrals from attorneys, real estate brokers, and local builders and are underwritten pursuant to Magyar Bank’s policies and standards. Generally, residential mortgage loans are originated in amounts up to 80% of the lesser of the appraised value or purchase price of the property, with private mortgage insurance required on loans with a loan-to-value ratio in excess of 80%. We generally will not make residential mortgage loans with a loan-to-value ratio in excess of 95%, which is the upper limit that has been established by the Board of Directors. Mortgage loans have been primarily originated for terms of up to 30 years. Magyar Bank does not originate or purchase “sub-prime” (mortgages granted to borrowers whose credit history is not sufficient to get a conventional mortgage) or option ARM mortgage loans. At September 30, 2022, there were no non-performing residential mortgage loans, and there were no charge-offs against the allowance for loan loss for impaired residential real estate loans while $1,000 was recovered from prior year charge-offs.
We also originate home equity loans secured by residences located in our market area. The underwriting standards we use for home equity loans include a determination of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations, the ongoing payments on the proposed loan and the value of the collateral securing the loan. The maximum combined (first and second mortgage liens) loan-to-value ratio for home equity loans and home equity lines of credit is 80%. Home equity loans are generally offered with fixed rates of interest with the loan amount not to exceed $500,000 and with terms of up to 30 years. There were no non-performing home equity loans at September 30 2022 and there were no charge-offs or recoveries for impaired home equity loans during the year ended September 30, 2022.
We offer fixed-rate mortgage loans with terms of either 10, 15, 20 or up to 30 years. While these loans are normally originated with up to 30-year terms, such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full upon sale of the property pledged as security or upon refinancing the original loan. Therefore, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans.
Generally, all fixed-rate residential mortgage loans are underwritten according to Federal Home Loan Mortgage Corporation (“Freddie Mac”) guidelines, policies and procedures. Historically, we have not originated a significant number of loans for the purpose of reselling them in the secondary market. In the future we may increase our origination and sale of fixed-rate residential mortgage loans to help manage interest rate risk and to increase fee income. There were no fixed-rate mortgage loans sold to Freddie Mac during the year ended September 30, 2022 and there were no loans were held for sale at September 30, 2022.
We generally do not purchase residential mortgage loans, except for loans to low-income borrowers to enhance our Community Reinvestment Act performance. There were no residential mortgage loans purchased during the year ended September 30, 2022. We underwrite purchased residential mortgage loans using the same criteria as if we were originating the loans.
At September 30, 2022, we had $126.6 million of fixed-rate residential mortgage loans, which represented 59.1% of our total residential mortgage loan portfolio. At September 30, 2022, our largest fixed-rate residential mortgage loan was $1.7 million. The loan was performing in accordance with its contractual repayment terms at September 30, 2022.
We also offer adjustable-rate residential mortgage loans with interest rates based on the weekly average yield on U.S. Treasuries or the Secured Overnight Financing Rate (“SOFR”), which adjust either semi-annually or annually from the outset of the loan or which adjusts annually after a one-, three-, five-, seven-, and ten-year initial fixed-rate period. Our adjustable-rate mortgage loans generally provide for maximum rate adjustments of 2% per adjustment, with a lifetime maximum adjustment up to 5%, regardless of the initial rate. We also offer adjustable-rate mortgage loans with an interest rate based on the prime rate as published in The Wall Street Journal or the Federal Home Loan Bank of New York advance rates.
Due to historically low interest rate levels, borrowers generally have preferred fixed-rate mortgage loans in recent years. Adjustable-rate mortgage loans decrease the risk associated with changes in market interest rates by periodically repricing. However, these loans have other risks because, as interest rates increase, the underlying payments by the borrower increase, which increases the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. The maximum periodic and lifetime interest rate adjustments also may limit the effectiveness of adjustable-rate mortgage loans during periods of rapidly rising interest rates.
At September 30, 2022, adjustable-rate residential mortgage loans totaled $87.8 million, or 40.9% of our total residential mortgage loan portfolio. The largest adjustable-rate residential mortgage loan was for $2.4 million. The loan was performing in accordance with its repayment terms at September 30, 2022.
In an effort to provide financing for low-and moderate-income home buyers, we offer low-to-moderate income residential mortgage loans. These loans are offered with fixed rates of interest and terms of up to 40 years, and are secured by one-to four-family residential properties. All of these loans are originated using underwriting guidelines of U.S. government-sponsored enterprises such as Federal Home Loan Mortgage Corporation (“Freddie Mac”). These loans are originated with maximum loan-to-value ratios of 95%.
All residential mortgage loans we originate include “due-on-sale” clauses, which give us the right to declare a loan immediately due and payable if the borrower sells or otherwise disposes of the real property securing the mortgage loan. All borrowers are required to obtain title insurance, fire and casualty insurance and, if warranted, flood insurance on properties securing real estate loans.
Commercial Real Estate Loans. We also originate commercial real estate loans, most of which are secured by properties located in our primary market area. At September 30, 2022, $342.8 million, or 54.5%, of our total loan portfolio consisted of these types of loans. Commercial real estate loans are generally secured by five-or-more-unit apartment buildings, industrial properties and properties used for business purposes such as small office buildings, warehouses and retail facilities. We generally originate adjustable-rate commercial real estate loans with a maximum term of 25 years with adjustable-rate periods every five years. The maximum loan-to-value ratio for our commercial real estate loans is 75%, based on the appraised value of the property.
We consider a number of factors when we originate commercial real estate loans. During the underwriting process we evaluate the business qualifications and financial condition of the borrower, including credit history, profitability of the property being financed, as well as the value and condition of the mortgaged property securing the loan. When evaluating the business qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, we consider the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service) to ensure it is at least 120% of the monthly debt service. We require personal guarantees on all commercial real estate loans made to individuals. Generally, commercial real estate loans made to corporations, partnerships and other business entities require personal guarantees by the principals. All borrowers are required to obtain title, fire and casualty insurance and, if warranted, flood insurance.
Loans secured by commercial real estate generally are larger than residential mortgage loans and involve greater credit risk. Commercial real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Repayment of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the
real estate market or the economy in general. Accordingly, the nature of these loans makes them more difficult for management to monitor and evaluate.
The maximum amount of a commercial real estate loan is limited by our Board-established loans-to-one-borrower limit, which is currently 15% of Magyar Bank’s capital, or $14.4 million. At September 30, 2022, our largest commercial real estate loan was $13.7 million to finance the purchase and operation of a nursing and rehabilitation home in Edison, New Jersey. The original loan amount was 65% of the purchase price, which was lower than the appraised value. The loan was performing in accordance with its terms at September 30, 2022.
There were no non-performing commercial real estate loans at September 30, 2022 compared with $1.1 million at September 30, 2021. During the year ended September 30, 2022, there were no charge-offs from commercial real estate loans, however there were $53,000 in recoveries received from prior year charge-offs.
Construction Loans. We also originate construction and land acquisition loans for the development of one-to four-family homes, apartment buildings and commercial properties. Construction loans are generally offered to experienced local developers operating in our primary market area and to individuals for the construction of their personal residences. At September 30, 2022, our construction loans totaled $15.2 million, or 2.4% of total loans.
At September 30, 2022, construction loans for the development of one-to four-family residential properties totaled $9.6 million. These construction loans generally have a maximum term of 24 months. We provide financing for land acquisition, site improvement and construction of individual homes. Land acquisition loans are limited to 50% to 75% of the sale price of the land. Site improvement loans are limited to 100% of the bonded site improvement costs. Construction loans are limited to 75% of the lesser of the contract sale price or appraised value of the property (less funds already advanced for land acquisition and site improvement).
At September 30, 2022, construction loans for the development of commercial properties totaled $4.0 million. These construction loans have a maximum term of 24 months. The maximum loan-to-value ratio limit applicable to these loans is 75% of the appraised value of the property.
At September 30, 2022, construction loans for the development of town homes, condominiums and apartment buildings totaled $1.7 million. The maximum loan-to-value ratio limit applicable to these loans is 70% of the appraised value of the property. We may retain up to 10% of each loan advance until the property attains a 90% occupancy level.
The maximum amount of a construction loan is limited by our loans-to-one-borrower limit, which is currently 15% of Magyar Bank’s capital, or $14.4 million. At September 30, 2022, our largest outstanding construction loan was a $2.8 million loan to finance the construction of a single-family home in Colts Neck, New Jersey. The loan has been past due greater than 90 days since the Bank declined to renew the loan upon its maturity in January 2018. At September 30, 2022, the Bank was in the process of foreclosing on the real estate collateral securing the loan as well as pursuing the personal guarantors of the loan. At September 30, 2022, the $2.8 million loan was the only non-performing construction loan in the Bank’s portfolio. Interest income of $220,000 would have been recorded on this non-performing construction loan for the year ended September 30, 2022, if it had been current in accordance with their original term. During the year ended September 30, 2022, there were no charge-offs against the allowance for loan loss and there were no recoveries from prior year charge-offs.
Before making a commitment to fund a construction loan, we require an appraisal of the property by an independent licensed appraiser. We generally also engage an outside engineering firm to review and inspect each property before disbursement of funds during the term of a construction loan. Loan proceeds are disbursed after inspection based on the percentage of completion method. We require a personal guarantee from each principal of all of our construction loan borrowers.
Construction lending is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost is inaccurate, we may be required to advance funds beyond the amount originally committed in order to protect the value of the property. Additionally, if our estimate of the value of the completed property is inaccurate, our construction loan may exceed the value of the collateral.
Commercial Business Loans. At September 30, 2022, our commercial business loans totaled $34.7 million, or 5.5% of total loans. We make commercial business loans primarily in our market area to a variety of professionals, sole proprietorships and small and mid-sized businesses. Our commercial business loans include term loans and revolving lines of credit. The maximum term of a commercial business loan is 25 years. Such loans are generally used for longer-term working capital purposes such as purchasing equipment or furniture. Commercial business loans are made with either adjustable or fixed rates of interest. The interest rates for adjustable commercial business loans are typically based on the prime rate as published in The Wall Street Journal.
Included in commercial business loans are SBA 7(a) loans, on which the SBA provides guarantees of up to 75% of the principal balance (85% for loans under $150,000). These loans are made for the purposes of providing working capital and financing the purchase of equipment, inventory or commercial real estate, and may be made inside or outside the State of New Jersey. Generally, an SBA 7(a) loan has a deficiency in its credit profile that would not allow the borrower to qualify for a traditional commercial loan, which is why the government provides the guarantee. The deficiency may be a higher loan to value ratio, lower debt service coverage ratio or weak personal financial guarantees. In addition, many SBA 7(a) loans are for start-up businesses where there is no history of financial information. Finally, many SBA borrowers do not have an ongoing and continuous banking relationship with the Bank, but merely work with the Bank on a single transaction. We generally sell the guaranteed portions of these SBA loans in the secondary market.
When making commercial business loans, we consider the financial strength of the borrower, our lending history with the borrower, the debt service capabilities of the borrower, the projected cash flows of the business and the value and type of the collateral. Commercial business loans generally are secured by a variety of collateral, primarily accounts receivable, inventory, equipment, savings instruments and readily marketable securities. In addition, we generally require the business principals to execute personal guarantees.
Commercial business loans generally have greater credit risk than residential mortgage loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to repay the loan from his or her employment income, and which are secured by real property with ascertainable value, commercial business loans generally are made on the basis of the borrower’s ability to repay the loan from the cash flow of the borrower’s business. As a result, the repayment of commercial business loans may depend substantially on the success of the borrower’s business. As such the performance of these types of loans may be particularly sensitive to local and/or national economic conditions. Further, any collateral securing commercial business loans may depreciate over time, may be difficult to appraise and may fluctuate in value. We try to minimize these risks through our underwriting standards.
The Bank participated in the Paycheck Protection Program (“PPP”), which was designed by the U.S. Treasury under the Coronavirus Aid, Relief and Economic Security Act of 2020 (the “CARES Act”) to provide liquidity using the SBA’s platform to small businesses and self-employed individuals to maintain their staff and operations through the COVID-19 pandemic. This liquidity was in the form of a loan, 100% guaranteed by the SBA, that was forgivable provided the funds were used on qualifying payroll costs, and to a lesser extent, rent, utilities and interest on qualifying mortgage payments. The loans bear a fixed rate of 1.0% and loan payments were deferred through the date that the SBA remits the borrower’s loan forgiveness amount to the lender (or, if the borrower did not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness covered period). All 350 PPP loans totaling $56.0 million originated by the Company under the CARES Act were fully forgiven and paid off.
The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues (“Economic Aid Act”) extended the SBA’s authority to guarantee “Second Draw” PPP loans, under generally the same terms and conditions available under the First Draw program. In order to qualify for a Second Draw PPP loan, an applicant must have experienced a revenue reduction of at least 25% in 2020 relative to 2019. Of the 212 Second Draw PPP loans totaling $35.3 million originated by the Company, only one loan totaling $3,000 did not apply for forgiveness and was the only PPP loan outstanding at September 30, 2022. The loan is expected to be repaid over the contractual term of the loan, or five years.
The maximum amount of a commercial business loan is limited by our loans-to-one-borrower limit, which is 15% of Magyar Bank’s capital, or $14.4 million. At September 30, 2022, our largest commercial business loan was a $7.2 million loan to a company that provides janitorial services and was secured by the accounts receivable of the company. This loan was performing according to its repayment terms at September 30, 2022. At September 30, 2022, there were no charge-offs against the allowance for loan loss for impaired commercial business loans and there were no recoveries from prior year charge-offs.
Home Equity Lines of Credit and Other Loans. We originate home equity lines of credit secured by residences located in our market area. At September 30, 2022, these loans totaled $18.7 million, or 3.0% of our total loan portfolio. The
underwriting standards we use for home equity lines of credit include a determination of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations, the ongoing payments on the proposed loan and the value of the collateral securing the loan. The maximum combined (first and second mortgage liens) loan-to-value ratio for home equity lines of credit is 80%. Home equity lines of credit have adjustable rates of interest, indexed to the prime rate, as reported in The Wall Street Journal, with terms of up to 25 years.
The maximum amount of a home equity line of credit loan is limited by our loans-to-one-borrower limit, which is 15% of Magyar Bank’s capital, or $14.4 million. At September 30, 2022, our largest home equity line of credit loan was $1.1 million. The loan was performing according to its terms at September 30, 2022. At September 30, 2022, there were no charge-offs to home equity lines of credit and there were no recoveries of any prior year charge-offs.
We also originate loans secured by the common stock of publicly traded companies, provided their shares are listed on the New York Stock Exchange or the NASDAQ Stock Market, and provided the company is not a banking company. Stock-secured loans are interest-only and are offered for terms up to twelve months and for adjustable rates of interest indexed to the prime rate, as reported in The Wall Street Journal. The loan amount is not to exceed 70% of the value of the stock securing the loan at any time.
At September 30, 2022, stock-secured and other loans totaled $3.1 million, or 0.5% of our total net loan portfolio. Generally, we limit the aggregate amount of loans secured by the common stock of any one corporation to 15% of Magyar Bank’s capital, or $14.4 million. At September 30, 2022, loans totaling $3.0 million, or 0.5% of our loan portfolio, were secured by the common stock of Johnson & Johnson a New York Stock Exchange company that operates a number of facilities in our market area and employs a substantial number of residents. Although these loans are underwritten based on the ability of the individual borrower to repay the loan, the concentration of our portfolio secured by this stock subjects us to the risk of a decline in the market price of the stock and, therefore, a reduction in the value of the collateral securing these loans. As of September 30, 2022, the aggregate loan-to-value ratio of the stock-secured portfolio was 15.8%.
Loan Originations, Purchases, Participations and Servicing of Loans. Lending activities are conducted primarily by our loan personnel operating at our main and branch office locations. All loans originated by us are underwritten pursuant to our policies and procedures. We originate both adjustable rate and fixed rate loans. Our ability to originate fixed or adjustable rate loans is dependent upon the relative customer demand for such loans, which is affected by the current and expected future levels of market interest rates.
Generally, we retain in our portfolio substantially all loans that we originate. Historically, we have not originated a significant number of loans for the purpose of selling them in the secondary market. In the future, however, to help manage our interest rate risk and to increase fee income, we may increase our origination and sale of fixed-rate residential loans and commercial business loans guaranteed by the SBA. All one-to four-family residential mortgage loans that we sell in the secondary market are sold with servicing rights retained pursuant to master commitments negotiated with Freddie Mac. We sell our loans to Freddie Mac without recourse. No loans were held for sale at September 30, 2022.
At September 30, 2022, we were servicing SBA-guaranteed and commercial participation loans sold in the amount of $32.0 million and $9.5 million, respectively. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans.
From time-to-time, we will also participate in loans, sometimes as the “lead lender.” Whether we are the lead lender or not, we underwrite our participation portion of the loan according to our own underwriting criteria and procedures. At September 30, 2022, we had $24.3 million of loan participation interests in which we were the lead lender, and $17.1 million in loan participations in which we were not the lead lender. There were no commercial real estate loan participations originated during the year ended September 30, 2022 in which we were not the lead lender. We have entered into certain loan participations when the aggregate outstanding balance of a particular customer relationship exceeds our loan-to-one-borrower limit. All loan participations are loans secured by real estate that adhere to our loan policies. At September 30, 2022, all participation loans were performing in accordance with their terms.
During the fiscal year ended September 30, 2022, we originated $87.0 million of fixed-rate and adjustable-rate commercial real estate loans and $38.6 million of fixed-rate and adjustable-rate one-to four-family residential mortgage loans. The fixed-rate loans are primarily loans with terms of 30 years or less. We also originated $16.2 million of home equity lines of credit and other loans, $9.0 million of construction loans and $8.5 million of commercial business loans.
We generally do not purchase residential mortgage loans, except for loans to low-income borrowers as part of our Community Reinvestment Act lenders program. At September 30, 2022, we had $5.3 million of one-to four-family residential mortgage loans that were serviced by other lenders.
Asset Quality
We commence collection efforts when a loan becomes 15 days past due with system-generated reminder notices. Subsequent late charge and delinquent notices are issued and the account is monitored on a regular basis thereafter. Personal, direct contact with the borrower is attempted early in the collection process as a courtesy reminder and later to determine the reason for the delinquency and to safeguard our collateral. When a loan is more than 60 days past due, the credit file is reviewed and, if deemed necessary, information is updated or confirmed and collateral re-evaluated. We make every effort to contact the borrower and develop a plan of repayment to cure the delinquency. Loans are placed on non-accrual status when they are delinquent for more than three months. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received.
A summary report of all loans 30 days or more past due is provided to the Board of Directors on a monthly basis. If no repayment plan is in process, the file is referred to counsel for the commencement of foreclosure or other collection efforts.
Non-Performing Assets. The following table sets forth the amounts and categories of our non-performing assets at the dates indicated. The table includes troubled debt restructurings (loans for which a portion of interest or principal has been forgiven and loans modified at interest rates materially less than current market rates) for each date presented.
September 30,
(Dollars in thousands)
Non-accrual loans:
One-to four-family residential
$ -
$ 1,152
$
$
$
Commercial real estate
-
1,079
2,219
2,652
Construction
2,835
4,580
5,141
2,900
-
Home equity lines of credit
-
-
-
-
Commercial business
-
1,349
1,467
1,228
Total non-accrual loans
2,835
8,160
9,732
6,894
Accruing loans three months or more past due:
One-to four-family residential
-
-
-
-
Commercial real estate
-
-
-
-
-
Construction
-
-
-
-
-
Home equity lines of credit
-
-
-
-
-
Commercial business
-
-
-
-
-
Total loans three months or more past due
-
-
-
-
Total non-performing loans
3,309
8,160
9,732
6,894
Other real estate owned
2,594
7,528
8,586
Total non-performing assets
3,590
8,796
12,326
14,422
9,492
Performing troubled debt restructurings
-
-
Performing troubled debt restructurings
and total non-performing assets
$ 3,590
$ 9,136
$ 12,546
$ 14,785
$ 9,492
Ratios:
Total non-performing loans to total loans
0.53%
1.37%
1.59%
1.32%
0.18%
Total non-performing loans and performing
troubled debt restructurings to total loans
0.53%
1.43%
1.63%
1.39%
0.18%
Total non-performing assets to total assets
0.45%
1.14%
1.63%
2.29%
1.52%
Total non-performing assets and performing
troubled debt restructurings to total assets
0.45%
1.18%
1.66%
2.35%
1.52%
Commercial business, commercial real estate and construction loans generally have more risk than one-to four-family residential mortgage loans. At September 30, 2022, our portfolio of commercial business, commercial real estate and construction loans totaled $392.7 million, or 62.4% of our total loans, compared to $369.9 million, or 62.2% of our total loans, at September 30, 2021.
The Company’s non-accrual loans decreased $5.3 million, or 65.3%, to $2.8 million at September 30, 2022 from $8.2 million at September 30, 2021. During the year ended September 30, 2022, $1.3 million in non-accrual commercial business loans, $1.1 million in non-accrual commercial real estate loans and $685,000 in non-accrual one-to four-family residential mortgage loans were paid off by the borrowers. In addition, $1.7 million in non-accrual construction loans and $467,000 in non-accrual one-to four-family residential mortgage loans were paid current by the borrowers.
Additional interest income of approximately $220,000 and $555,000 would have been recorded during the fiscal years ended September 30, 2022 and 2021, respectively, if the non-accrual loans summarized in the above table had performed in accordance with their original terms.
The Company accounts for its impaired loans in accordance with generally accepted accounting principles, which require that a creditor measure impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate except that, as a practical expedient, a creditor may measure impairment based on a loan’s observable market price less estimated costs of disposal, or the fair value of the collateral less estimated costs of disposal if the loan is collateral dependent. Regardless of the measurement method, a creditor may measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable.
The Company records cash receipts on impaired loans that are non-performing as a reduction to principal before applying amounts to interest or late charges unless specifically directed by the Bankruptcy Court to apply payments otherwise. The Company generally continues to recognize interest income on impaired loans that are performing.
Troubled debt restructurings (“TDRs”) occur when a creditor, for economic or legal reasons related to a debtor’s financial condition, grants a concession to the debtor that it would not otherwise consider, such as a below market interest rate, extending the maturity of a loan, or a combination of both. There were no new TDR loans during the fiscal year ended September 30, 2022. For comparison purposes, there were two TDR loans totaling $340,000 during the fiscal year ended September 30, 2021.
Delinquent Loans. The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated. Loans delinquent more than three months are generally classified as non-accrual loans.
Loans Delinquent For
60-89 Days
90 Days and Over
Total
Number
Amount
Number
Amount
Number
Amount
(Dollars in thousands)
At September 30, 2022
One-to four-family residential
$
-
$ -
$
Commercial real estate
-
-
Construction
-
-
2,835
2,835
Total
$
$ 2,835
$ 3,396
At September 30, 2021
One-to four-family residential
-
$ -
$ 1,152
$ 1,152
Commercial real estate
-
-
1,079
1,079
Construction
-
-
4,580
4,580
Commercial business
-
-
1,349
1,349
Total
-
$ -
$ 8,160
$ 8,160
At September 30, 2020
One-to four-family residential
-
$ -
$
$
Commercial real estate
2,219
3,105
Construction
-
-
5,141
5,141
Commercial business
1,467
1,596
Total
$ 1,015
$ 9,732
$ 10,747
At September 30, 2019
One-to four-family residential
-
$ -
$
$
Commercial real estate
2,652
2,710
Construction
-
-
2,900
2,900
Commercial business
-
-
1,228
1,228
Total
$
$ 6,894
$ 6,952
At September 30, 2018
One-to four-family residential
-
$ -
$
$
Commercial real estate
-
-
Home equity lines of credit
-
-
Commercial business
-
-
Total
-
$ -
$
$
Real Estate Owned. Real estate we acquire as a result of foreclosure or by deed in lieu of foreclosure is classified as other real estate owned (“OREO”) until sold. When property is acquired it is recorded at fair value less estimated cost to sell at the date of foreclosure, establishing a new cost basis. Holding costs and declines in fair value result in charges to expense after acquisition.
The Company held one OREO property totaling $281,000 at September 30, 2022, a decrease of $355,000, or 55.8% from $636,000 on at September 30, 2021.
Classified Assets. Federal banking regulations provide that loans and other assets of lesser quality should be classified as “substandard,” “doubtful” or “loss” assets. 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” we 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 “un-collectible” and of such little value their continuance as assets without the establishment of a specific loss reserve is not warranted. We classify an asset as “special mention” if the asset has a potential weakness that warrants management’s close attention. While such assets are not impaired, management has concluded that if the potential weakness in the asset is not addressed, the value of the asset may deteriorate, adversely affecting the repayment of the asset. On the basis of our review at September 30, 2022, classified assets consisted of $1.2 million in special mention loans, $4.8 million in substandard loans, and $281,000 in substandard OREO.
We are required to establish an allowance for loan losses in an amount deemed prudent by management for loans classified substandard or doubtful, as well as for other problem loans. General allowances represent loss allowances which have been established to recognize the inherent losses associated with lending activities, but which, unlike impairment allowances, have not been allocated to particular problem assets. When we classify problem assets, we are required to determine whether or not impairment exists. A loan is impaired when, based on current information and events, it is probable that Magyar Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. When it is determined that impairment exists, a specific allowance for loss is established. For collateral-dependent loans, the loan is reduced by the impairment amount via a reduction to the loan and the allowance for loan loss. Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the NJDBI and the FDIC, which can direct us to establish additional loss allowances.
The loan portfolio is reviewed on a regular basis to determine whether any loans require classification in accordance with applicable regulations. Not all classified assets constitute non-performing assets.
Allowance for Loan Losses
Our allowance for loan losses is maintained at a level management deems necessary to absorb loan losses that are both probable and reasonably estimable. Management, in determining the allowance for loan losses, considers the losses in our loan portfolio both probable and reasonably estimable, and changes in the nature and volume of loan activities, along with the general economic and real estate market conditions. The allowance for loan losses as of September 30, 2022 was maintained at a level that represents management’s best estimate of losses in the loan portfolio both probable and reasonably estimable. However, this analysis process is inherently subjective, as it requires us to make estimates that are susceptible to revisions as more information becomes available. Although we believe we have established the allowance at levels to absorb probable and estimable losses, future additions may be necessary if economic or other conditions in the future differ from the current environment.
In addition, as an integral part of their examination process, the NJDBI and the FDIC will periodically review our allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on their judgments of information available to them at the time of their examination.
The provision for loan losses decreased $1.3 million, or 81.3%, to $304,000 for the year ended September 30, 2022 compared to $1.6 million for the year ended September 30, 2021. The decrease was attributable to lower adjustments for the COVID-19 pandemic, lower balances of higher-risk loan segments within the allowance for loan loss calculation and lower non-performing loan balance at September 30, 2022.
Allowance for Loan Losses. The following table sets forth activity in our allowance for loan losses for the periods indicated.
September 30,
(Dollars in thousands)
Balance at beginning of period
$ 8,075
$ 6,400
$ 4,888
$ 4,200
$ 3,475
Charge-offs:
One-to four-family residential
-
-
-
-
Commercial real estate
-
-
-
Construction
-
-
-
-
Home equity lines of credit
-
-
-
-
-
Commercial business
-
-
Other
-
-
-
Total charge-offs
-
Recoveries:
One-to four-family residential
Commercial real estate
-
-
Construction
-
-
-
-
Home equity lines of credit
-
Commercial business
-
-
-
Total recoveries
Net (recoveries) charge-offs
(54 )
(46 )
(20 )
Provision for loan losses
1,629
1,666
Balance at end of period
$ 8,433
$ 8,075
$ 6,400
$ 4,888
$ 4,200
Ratios:
Net (recoveries) charge-offs to average loans outstanding
-0.01%
-0.01%
0.03%
0.00%
0.06%
Allowance for loan losses to total non-performing loans
254.85%
98.96%
65.76%
70.90%
463.57%
Allowance for loan losses to total loans
1.34%
1.36%
1.05%
0.93%
0.82%
Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category, the percent of the allowance to the total allowance and the percent of loans in each category to total loans 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.
% of Allowance
% of Loans
In Category to
In Category to
Amount
Total Allowance
Total Loans
(Dollars in thousands)
At September 30, 2022
One-to four-family residential
$ 1,223
14.50%
34.10%
Commercial real estate
4,612
54.69%
54.50%
Construction
5.47%
2.40%
Home equity lines of credit
3.12%
3.00%
Commercial business
1,484
17.60%
5.50%
Other
0.01%
0.50%
Unallocated
4.61%
0.00%
Total allowance for loan losses
$ 8,433
100.00%
100.00%
At September 30, 2021
One-to four-family residential
$ 1,136
14.07%
34.20%
Commercial real estate
3,744
46.36%
47.20%
Construction
7.36%
3.40%
Home equity lines of credit
2.87%
3.00%
Commercial business
2,046
25.34%
11.60%
Other
0.19%
0.60%
Unallocated
3.81%
0.00%
Total allowance for loan losses
$ 8,075
100.00%
100.00%
At September 30, 2020
One-to four-family residential
$ 1,035
16.17%
34.41%
Commercial real estate
3,232
50.49%
40.59%
Construction
10.50%
4.62%
Home equity lines of credit
2.80%
3.17%
Commercial business
1,034
16.16%
16.52%
Other
0.02%
0.68%
Unallocated
3.86%
0.00%
Total allowance for loan losses
$ 6,400
100.00%
100.00%
At September 30, 2019
One-to four-family residential
$
14.95%
36.41%
Commercial real estate
2,066
42.28%
44.46%
Construction
10.45%
5.44%
Home equity lines of credit
2.82%
3.41%
Commercial business
1,184
24.23%
9.32%
Other
0.16%
0.95%
Unallocated
5.11%
0.00%
Total allowance for loan losses
$ 4,888
100.00%
100.00%
At September 30, 2018
One-to four-family residential
$
16.36%
36.15%
Commercial real estate
1,540
36.67%
42.80%
Construction
11.74%
5.93%
Home equity lines of credit
2.60%
3.51%
Commercial business
1,151
27.40%
10.40%
Other
0.60%
1.20%
Unallocated
4.63%
0.00%
Total allowance for loan losses
$ 4,200
100.00%
100.00%
Investments
Our Board of Directors has adopted our Investment Policy. This policy determines the types of securities in which we may invest. The Investment Policy is reviewed annually by the Board of Directors and changes to the policy are subject to approval by our Board of Directors. While general investment strategies are developed by the Asset and Liability Committee, the execution of specific actions rests primarily with our President and our Chief Financial Officer. They are responsible for ensuring the guidelines and requirements included in the Investment Policy are followed. They are authorized to execute transactions that fall within the scope of the established Investment Policy up to $5.0 million per transaction individually or $10.0 million per transaction jointly. Investment transactions in excess of $10.0 million must be approved by the Asset and Liability Committee. Investment transactions are reviewed and ratified by the Board of Directors at their regularly scheduled meetings.
Our investments portfolio may include U.S. Treasury obligations, debt and equity securities issued by various government-sponsored enterprises, including Fannie Mae and Freddie Mac, mortgage-backed securities, certain certificates of deposit of insured financial institutions, overnight and short-term loans to other banks, investment-grade corporate debt instruments, and municipal debt securities. In addition, we may invest in equity securities subject to certain limitations and not in excess of Magyar Bank’s Tier 1 capital.
The Investment Policy requires that securities transactions be conducted in a safe and sound manner, and purchase and sale decisions be based upon a thorough analysis of each security to determine its quality and inherent risks and fit within our overall asset/liability management objectives. The analysis must consider the effect of an investment or sale on our risk-based capital and prospects for yield and appreciation.
At September 30, 2022, our securities portfolio totaled $100.9 million, or 12.6% of our total assets. Securities are classified as held-to-maturity or available-for-sale when purchased. At September 30, 2022, $91.6 million of our securities were classified as held-to-maturity and reported at amortized cost, and $9.2 million were classified as available-for-sale and reported at fair value. At September 30, 2022, we held no investment securities classified as held-for-trading.
U.S. Government Agency and Government-Sponsored Enterprise Obligations. At September 30, 2022, our U.S. Government Agency and Government-Sponsored Enterprise Obligations totaled $89.2 million, or 88.4% of our total securities portfolio. Of this amount, $64.3 million were mortgage-backed securities and $24.8 million were debt securities. While these securities generally provide lower yields than other securities in our securities portfolio, we hold these securities, to the extent appropriate, for liquidity purposes and as collateral for certain deposits or borrowings. We invest in these securities to achieve positive interest rate spreads with minimal administrative expense, and to lower our credit risk as a result of the guarantees provided by these issuers.
Mortgage-Backed Securities. We purchase mortgage-backed pass through and collateralized mortgage obligation (“CMO”) securities insured or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. To a lesser extent, we also invest in mortgage-backed securities issued or sponsored by private issuers. At September 30, 2022, our mortgage-backed securities, including CMOs, totaled $64.6 million, or 64.0% of our total securities portfolio. Included in this balance was a $224,000 mortgage-backed security issued by a private issuer. Our policy is to limit purchases of privately issued mortgage-backed securities to non-high risk securities rated “A” or higher by a nationally recognized credit rating agency. High risk securities generally are defined as those exhibiting significantly greater volatility of estimated average life and price due to changes in interest rates than 30-year fixed rate securities.
Mortgage-backed pass through securities are created by pooling mortgages and issuing a security with an interest rate less than the interest rate on the underlying mortgages. Mortgage-backed pass through securities represent a participation interest in a pool of single-family or multi-family mortgages. As loan payments are made by the borrowers, the principal and interest portion of the payment is passed through to the investor as received. CMOs are also backed by mortgages, however they differ from mortgage-backed pass through securities because the principal and interest payments on the underlying mortgages are structured so that they are paid to the security holders of pre-determined classes or tranches at a faster or slower pace. The receipt of these principal and interest payments, which depends on the estimated average life for each class, is contingent on a prepayment speed assumption assigned to the underlying mortgages. Variances between the assumed payment speed and actual payments can significantly alter the average lives of such securities. Mortgage-backed securities and CMOs generally yield less than the loans that underlie such securities because of the cost of payment guarantees and credit enhancements. However, mortgage-backed securities are usually more liquid than individual mortgage loans and may be used to collateralize borrowings and other liabilities.
Mortgage-backed securities present a risk that actual prepayments may differ from estimated prepayments over the life of the security, which may require adjustments to the amortization of any premium or accretion of any discount relating
to such instruments that can change the net yield on the securities. There is also reinvestment risk associated with the cash flows from such securities or if the securities are redeemed by the issuer. In addition, the market value of such securities may be adversely affected by changes in interest rates.
Our mortgage-backed securities portfolio had a weighted average yield of 1.97% at September 30, 2022. The estimated fair value of our mortgage-backed securities portfolio at September 30, 2022 was $56.3 million, which was $10.2 million less than the amortized cost. Mortgage-backed securities in Magyar Bank’s portfolio do not contain sub-prime mortgage loans.
Corporate and Other Securities. At September 30, 2022, the Bank held two corporate notes issued by Goldman Sachs Corporate and Wells Fargo Bank totaling $5.0 million and $3.0 million, respectively. Our Investment Policy allows for the purchase of such instruments and requires that corporate debt obligations be rated in one of the four highest categories by a nationally recognized rating service. We may invest up to 25% of Magyar Bank’s investment portfolio in corporate debt obligations and up to 15% of Magyar Bank’s capital in any one issuer.
Equity Securities. At September 30, 2022, we held no equity securities other than $1.4 million in Federal Home Loan Bank of New York (“FHLBNY”) stock. The investment in FHLBNY stock is classified as a restricted security, carried at cost and evaluated for impairment. Equity securities are not insured or guaranteed investments and are affected by market interest rates and stock market fluctuations. Such investments other than the FHLBNY are carried at their fair value and fluctuations in the fair value of such investments, including temporary declines in value, directly affect our net capital position.
Securities Portfolios. The following table sets forth the composition of our securities portfolio (excluding FHLBNY common stock) at the dates indicated.
At September 30,
Amortized
Unrealized
Unrealized
Fair
Amortized
Fair
Amortized
Fair
Cost
Gains
Losses
Value
Cost
Value
Cost
Value
(In thousands)
Securities available for sale:
Obligations of U.S. government agencies:
Mortgage backed securities-residential
$
$ -
$ (11 )
$
$
$
$
$
Obligations of U.S. government-sponsored enterprises:
Mortgage-backed securities-residential
11,029
-
(1,907 )
9,122
12,922
12,741
9,092
9,194
Debt securities
-
-
-
-
-
-
5,000
5,003
Total securities available for sale
$ 11,147
$ -
$ (1,918 )
$ 9,229
$ 13,101
$ 12,927
$ 14,442
$ 14,561
Securities held to maturity:
Obligations of U.S. government agencies:
Mortgage backed securities-residential
5,525
-
(717 )
4,808
$
$
$ 1,453
$ 1,431
Mortgage backed securities-commercial
-
-
Obligations of U.S. government-sponsored enterprises:
Mortgage backed securities-residential
48,961
(7,548 )
41,425
38,596
38,623
20,456
21,150
Debt securities
24,821
-
(2,395 )
22,426
12,498
12,342
4,500
4,485
Private label mortgage-backed securities-residential
-
(10 )
Obligations of state and political subdivisions
3,484
-
(638 )
2,846
2,047
2,013
-
-
Corporate securities
8,000
-
(436 )
7,564
3,000
2,804
3,000
2,804
Total securities held to maturity
$ 91,646
$
$ (11,744 )
$ 79,914
$ 57,660
$ 57,282
$ 30,443
$ 30,899
Total investment securities:
$ 102,793
$
$ (13,662 )
$ 89,143
$ 70,761
$ 70,209
$ 44,885
$ 45,460
At September 30, 2022, a total of 80 securities with an aggregate fair value of $88.9 million had gross unrealized losses of $13.7 million, or approximately 15.4% of fair value. The lower market values of our securities reflects higher market interest rates. None of these unrealized losses were considered other-than-temporary.
Portfolio Maturities and Yields. The composition, maturities and weighted average yields of the investment debt securities portfolio and the mortgage-backed securities portfolio at September 30, 2022 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur.
September 30, 2022
More Than Five
Less Than
Years Through
More Than
One Year or Less
Five Years
Ten Years
Ten Years
Total Securities
Amortized
Amortized
Amortized
Amortized
Amortized
Cost
Yield
Cost
Yield
Cost
Yield
Cost
Yield
Cost
Yield
(Dollars in thousands)
Securities available for sale:
Obligations of U.S. government agencies:
Mortgage backed securities - residential
$ -
-%
$ -
-%
$ -
-%
$
3.50%
$
3.50%
Obligations of U.S. government-sponsored enterprises:
Mortgage-backed securities-residential
-
-%
2.00%
1.57%
9,598
1.61%
11,029
1.62%
Total securities available for sale
$ -
-%
$
2.00%
$
1.57%
$ 9,716
1.63%
$ 11,147
1.64%
Securities held to maturity:
Obligations of U.S. government agencies:
Mortgage-backed securities - residential
-
-%
$ -
-%
-
-%
$ 5,525
2.27%
$ 5,525
2.27%
Mortgage-backed securities - commercial
-
-%
-
-%
2.16%
-
-%
2.16%
Obligations of U.S. government-sponsored enterprises:
Mortgage backed securities - residential
2.00%
3,696
2.55%
8,588
1.79%
36,642
1.99%
48,961
2.00%
Debt securities
1,333
0.29%
21,488
0.84%
2,000
1.00%
-
-%
24,821
0.82%
Private label mortgage-backed securities - residential
-
-%
-
-%
3.05%
-
-%
3.05%
Obligations of state and political subdivisions
-
-%
3.00%
2,442
2.12%
2.00%
3,484
2.23%
Corporate securities
5,000
3.00%
3,000
2.38%
-
-%
-
-%
8,000
2.77%
Total securities held to maturity
$ 6,368
2.43%
$ 28,713
1.26%
$ 13,885
1.77%
$ 42,680
2.03%
$ 91,646
1.78%
Sources of Funds
General. Deposits, including certificates of deposit, demand, savings, NOW and money market accounts, have traditionally been the primary source of funds used for our lending and investment activities. We obtain certificates of deposit primarily through our branch network and to a lesser extent via the brokered CD market. We also use borrowings, primarily Federal Home Loan Bank advances, to supplement cash flow needs, to lengthen the maturities of liabilities for interest rate risk management and to manage our cost of funds. Additional sources of funds include principal and interest payments from loans and securities, loan and security prepayments and maturities, income on other earning assets and stockholders’ equity. While cash flows from loans and securities payments can be relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition.
Deposits. Our deposits are generated primarily from customers within our primary market area. We offer a selection of deposit accounts, including demand accounts, NOW accounts, money market accounts, savings accounts, retirement accounts and certificates of deposit. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. We also accept brokered deposits when attractive rates and terms are available. We had $6.0 million in brokered deposits at September 30, 2022 and September 30, 2021.
Interest rates, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. Personalized customer service, long-standing relationships with customers and an active marketing program are relied upon to attract and retain deposits.
The flow of deposits is influenced significantly by general economic conditions, changes in money market and other prevailing interest rates and competition. The variety of deposit accounts offered allows us to be competitive in obtaining funds and responding to changes in consumer demand. Based on experience, we believe that our deposits are relatively stable. However, the ability to attract and maintain deposits, and the rates paid on these deposits, has been and will continue to be significantly affected by market conditions. At September 30, 2022, $82.6 million, or 12.4% of our deposit accounts, were certificates of deposit (including individual retirement accounts).
The following table sets forth the distribution of total deposit accounts, by account type, at the dates indicated.
September 30,
Weighted
Weighted
Weighted
Average
Average
Average
Deposit Type
Balance
Percent
Rate
Balance
Percent
Rate
Balance
Percent
Rate
(Dollars in thousands)
Demand accounts
$ 182,417
27.32%
0.00%
$ 181,975
28.44%
0.00%
$ 163,562
26.45%
0.00%
Savings accounts
81,850
12.26%
0.33%
81,724
12.77%
0.17%
74,923
12.12%
0.26%
NOW accounts
98,643
14.77%
0.93%
71,325
11.15%
0.12%
65,447
10.58%
0.32%
Money market accounts
222,214
33.28%
1.27%
187,898
29.37%
0.22%
188,023
30.41%
0.47%
Certificates of deposit
69,929
10.47%
0.95%
101,888
15.92%
0.94%
110,650
17.89%
1.49%
Retirement accounts
12,680
1.90%
0.81%
15,004
2.35%
1.05%
15,725
2.54%
1.51%
Total deposits
$ 667,733
100.00%
0.72%
$ 639,814
100.00%
0.27%
$ 618,330
100.00%
0.51%
At September 30, 2022, 2021 and 2020, the aggregate amount of un-insured deposits (which are deposits in amounts greater than $250,000, which is the maximum amount for federal deposit insurance) was $396.7 million, $374.7 million and $363.4 million, respectively. At September 30, 2022 and September 30, 2021, we had no deposits that were uninsured for any reason other than being in excess of the maximum amount for federal deposit insurance.
The following table sets forth the maturity of our un-insured certificates of deposit at September 30, 2022.
At September 30,
(In thousands)
Maturity Period:
Three months or less
$ 4,095
Over three through six months
Over six through twelve months
1,784
Over twelve months
5,227
Total
$ 11,357
At September 30, 2022, $44.6 million of our certificates of deposit had maturities of one year or less. We monitor activity on these accounts and, based on historical experience and our current pricing strategy, we believe we will retain a large portion of these accounts upon maturity.
The following table sets forth the interest-bearing deposit activities for the periods indicated.
September 30,
(In thousands)
Beginning balance
$ 457,839
$ 454,768
$ 423,653
Net deposits before interest credited
26,087
26,494
Interest credited
1,390
2,194
4,621
Ending balance
$ 485,316
$ 457,839
$ 454,768
Borrowings. Borrowings from the Federal Home Loan Bank of New York (“FHLBNY”) decreased $7.7 million, or 33.1%, to $15.6 million at September 30, 2022 from $23.4 million at September 30, 2021 as deposit inflows were used to repay maturing long-term advances. The borrowings represent 2.2% of total liabilities and had a weighted average interest rate of 2.48% at September 30, 2022. Based on eligible collateral pledged to the FHLBNY at September 30, 2022, we had an aggregate borrowing capacity of $138.9 million with the FHLBNY.
Long-term FHLBNY advances as of September 30, 2022 mature as follows (in thousands):
Year Ending September 30,
$ 4,741
4,384
3,500
-
3,000
Thereafter
-
$ 15,625
The Bank is also able to borrow funds from an overnight line of credit with the FHLBNY. Information concerning overnight line of credit advances with the Federal Home Loan Bank of New York is summarized as follows:
September 30,
(Dollars in thousands)
Balance at end of year
$ -
$ -
Weighted average balance during the year
$
$ -
Maximum month-end balance during the year
$ 2,450
$ -
Average interest rate during the year
2.67%
-
Subsidiary Activities
Magyar Investment Company is a New Jersey investment corporation subsidiary for the purpose of buying, selling and holding investment securities. The income earned on Magyar Investment Company’s investment securities are subject to a lower state tax than that assessed on income earned on investment securities maintained at Magyar Bank.
Hungaria Urban Renewal, LLC is a Delaware limited-liability corporation established in 2002 as a qualified intermediary operating for the purpose of acquiring and developing Magyar Bank’s main office. In 2006, Magyar Bank acquired a 100% interest in Hungaria Urban Renewal, LLC, which has no other business other than owning Magyar Bank’s main office site. As part of a tax abatement agreement with the City of New Brunswick, Magyar Bank’s new office will remain in Hungaria Urban Renewal, LLC’s name.
Magyar Service Corporation, a New Jersey corporation, is a wholly owned subsidiary of Magyar Bank. Magyar Service Corporation offers Magyar Bank customers and others a complete range of non-deposit investment products and financial planning services, including insurance products, fixed and variable annuities, and retirement planning for individual and commercial customers.
Employees and Human Capital Resources
At September 30, 2022 we employed 87 full-time employees and 7 part-time employees. Our employees are not represented by any collective bargaining group. Management believes that we have good relations with our employees.
We encourage and support the growth and development of our employees and, wherever possible, seek to fill positions by promotion and transfer from within the organization. Continual learning and career development is advanced through annual performance and development conversations with employees, internally developed training programs, customized corporate training engagements and seminars, conferences, and other training events employees are encouraged to attend in connection with their job duties.
The safety, health and wellness of our employees is a top priority. The COVID-19 pandemic presented a unique challenge with regard to maintaining employee safety while continuing successful operations. Through teamwork and the adaptability of our management and staff, our branches and operations centers remained open and in-person during the year ended September 30, 2022. All employees are asked not to come to work when they experience signs or symptoms of a possible COVID-19 illness and have been provided paid time off to cover compensation during such absences. On an ongoing
basis, we further promote the health and wellness of our employees by strongly encouraging work-life balance, offering flexible work schedules, and keeping the employee portion of health care premiums to a minimum.
Employee retention helps us operate efficiently and achieve one of our business objectives, which is being a high-level service provider. We believe our commitment to living out our core values, actively prioritizing concern for our employees’ well-being, supporting our employees’ career goals, offering competitive wages and providing valuable fringe benefits aids in retention of our top-performing employees. In addition, nearly all of our employees are stockholders of the Company through participation in our Employee Stock Ownership Plan, which aligns associate and stockholder interests by providing stock ownership on a tax-deferred basis at no investment cost to our associates. At September 30, 2022, 32% of our current staff had been with us for fifteen years or more.
FEDERAL AND STATE TAXATION
Federal Taxation
General. Magyar Bancorp, Inc. and Magyar Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The most recent audit of Magyar Bank’s federal tax returns by the Internal Revenue Service was for the period ended September 30, 2015. The audit did not result in any material adjustments to the Company’s tax returns or the Company’s financial statements. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to Magyar Bancorp, Inc. or Magyar Bank.
Method of Accounting. For federal income tax purposes, Magyar Bancorp, Inc. reports its income and expenses on the accrual method of accounting and uses a tax year ending September 30th for filing its federal and state income tax returns.
Bad Debt Reserves. Magyar Bank uses the direct charge off method to account for bad debt deductions for income tax purposes.
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt reserves created prior to January 1, 1988 (pre-base year reserves) were subject to recapture into taxable income if Magyar Bank failed to meet certain thrift asset and definitional tests.
At September 30, 2022, our total federal pre-base year reserve was approximately $1.3 million. However, under current law, pre-base year reserves remain subject to recapture if Magyar Bank makes certain non-dividend distributions, repurchases any of its stock, pays dividends in excess of tax earnings and profits, or ceases to maintain a bank charter.
Net Operating Loss Carryovers. At September 30, 2022, a financial institution was able to carry back net operating losses to the preceding five taxable years and forward to the succeeding 20 taxable years. At September 30, 2022, the Company did not have any federal or state net operating loss carry forwards available to offset future taxable income for tax reporting purposes.
Corporate Dividends-Received Deduction. Magyar Bancorp, Inc. may exclude from its federal taxable income 100% of dividends received from Magyar Bank as a wholly owned subsidiary. The corporate dividends-received deduction is 65% when the dividend is received from a corporation having at least 20% of its stock owned by the recipient corporation. A 50% dividends-received deduction is available for dividends received from corporations owned less than 20% by the recipient corporation.
State Taxation
New Jersey State Taxation. The income of savings institutions in New Jersey, which is calculated based on federal taxable income, subject to certain adjustments, is subject to New Jersey tax. For the tax years ending after July 31, 2019, New Jersey tax law requires members of an affiliated group where there is common ownership to calculate their corporation business tax on a combined or consolidated basis. Magyar Bancorp, Inc., Magyar Bank, Magyar Service Corporation, and Magyar Investment Company have filed a New Jersey tax return on a consolidated basis for the year ended September 30, 2021 and intend to file on a consolidated basis for the year ended September 30, 2022.
Magyar Bancorp, Inc., Magyar Bank, Magyar Service Corporation, and Magyar Investment Company are not currently under audit with respect to their New Jersey income tax returns. Their respective state tax returns have not been audited within the past three years.
Delaware and New Jersey State Taxation. As a Delaware holding company not earning income in Delaware, Magyar Bancorp, Inc. is exempt from Delaware corporate income tax, but is required to file annual returns and pay annual fees and a franchise tax to the State of Delaware.
Magyar Bancorp, Inc. is subject to New Jersey corporate income taxes in the same manner as described above for Magyar Bank.
SUPERVISION AND REGULATION
General
Magyar Bank is a New Jersey-chartered savings bank, and its deposit accounts are insured up to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”) under the Deposit Insurance Fund (“DIF”). Magyar Bank is subject to extensive regulation, examination and supervision by the Commissioner of the New Jersey Department of Banking and Insurance (the “Commissioner”) as the issuer of its charter, and by the FDIC as deposit insurer and its primary federal regulator. Magyar Bank must file reports with the Commissioner and the FDIC concerning its activities and financial condition, and it must obtain regulatory approval prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions and opening or acquiring branch offices. The Commissioner and the FDIC conduct periodic examinations to assess Magyar Bank’s compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which a savings bank can engage and is intended primarily for the protection of the deposit insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.
Magyar Bancorp, Inc., as a bank holding company controlling Magyar Bank, is subject to the Bank Holding Company Act of 1956, as amended (“BHCA”), and the rules and regulations of the FRB under the BHCA and to the provisions of the New Jersey Banking Act of 1948 (the “New Jersey Banking Act”), and to the regulations of the Commissioner under the New Jersey Banking Act applicable to bank holding companies. Magyar Bank and Magyar Bancorp, Inc. are required to file reports with, and otherwise comply with the rules and regulations of the FRB and the Commissioner. Magyar Bancorp, Inc. is required to file certain reports with, and otherwise comply with, the rules and regulations of the Securities and Exchange Commission under the federal securities laws.
Any change in such laws and regulations, whether by the Commissioner, the FDIC, the Federal Reserve Board or through legislation, could have a material adverse impact on Magyar Bank and Magyar Bancorp, Inc. and their operations and stockholders.
Certain of the laws and regulations applicable to Magyar Bank and Magyar Bancorp, Inc. are summarized below. These summaries do not purport to be complete and are qualified in their entirety by reference to such laws and regulations.
New Jersey Banking Regulation
Activity Powers. Magyar Bank derives its lending, investment and other activity powers primarily from the applicable provisions of the New Jersey Banking Act and its related regulations. Under these laws and regulations, savings banks, including Magyar Bank, generally may invest in:
· real estate mortgages;
· consumer and commercial loans;
· specific types of debt securities, including certain corporate debt securities and obligations of federal, state and local governments and agencies;
· certain types of corporate equity securities; and
· certain other assets.
A savings bank may also make other investments pursuant to “leeway” authority that permits investments not otherwise permitted by the New Jersey Banking Act. “Leeway” investments must comply with a number of limitations on the individual and aggregate amounts of “leeway” investments. A savings bank may also exercise trust powers upon approval
of the Commissioner. New Jersey savings banks may exercise those powers, rights, benefits or privileges authorized for national banks or out-of-state banks or for federal or out-of-state savings banks or savings associations, provided that before exercising any such power, right, benefit or privilege, prior approval by the Commissioner by regulation or by specific authorization is required. The exercise of these lending, investment and activity powers are limited by federal law and regulations. See “Federal Banking Regulation-Activity Restrictions on State-Chartered Banks” below.
Loans-to-One-Borrower Limitations. With certain specified exceptions, a New Jersey-chartered savings bank may not make loans or extend credit to a single borrower or to entities related to the borrower in an aggregate amount that would exceed 15% of the bank’s capital funds. A savings bank may lend an additional 10% of the bank’s capital funds if secured by collateral meeting the requirements of the New Jersey Banking Act. Magyar Bank currently complies with applicable loans-to-one-borrower limitations.
Dividends. Under the New Jersey Banking Act, a stock savings bank may declare and pay a dividend on its capital stock only to the extent that the payment of the dividend would not impair the capital stock of the savings bank. In addition, a stock savings bank may not pay a dividend unless the savings bank would, after the payment of the dividend, have a surplus of not less than 50% of its capital stock, or alternatively, the payment of the dividend would not reduce the surplus. Federal law may also limit the amount of dividends that may be paid by Magyar Bank. See “Federal Banking Regulation-Prompt Corrective Action” below.
Minimum Capital Requirements. Regulations of the Commissioner impose on New Jersey-chartered depository institutions, including Magyar Bank, minimum capital requirements similar to those imposed by the Federal Deposit Insurance Corporation on insured state banks. See “Federal Banking Regulation-Capital Requirements.”
Examination and Enforcement. The NJDBI may examine Magyar Bank whenever it deems an examination advisable. The NJDBI examines Magyar Bank at least every three years. The Commissioner may order any savings bank to discontinue any violation of law or unsafe or unsound business practice and may direct any director, officer, attorney or employee of a savings bank engaged in an objectionable activity, after the Commissioner has ordered the activity to be terminated, to show cause at a hearing before the Commissioner why such person should not be removed. The Commissioner also has authority to appoint a conservator or receiver for a savings bank under certain circumstances such as insolvency or unsafe or unsound condition to transact business.
Federal Banking Regulation
Capital Requirements. Federal regulations require FDIC-insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio, a Tier 1 capital to risk-based assets ratio, a total capital to risk-based assets, and a Tier 1 capital to total assets leverage ratio.
The capital standards require the maintenance of common equity Tier 1 capital, Tier 1 capital and total capital to risk-weighted assets of at least 4.5%, 6% and 8%, respectively, and a leverage ratio of at least 4% Tier 1 capital. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-sale-securities). Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one-to four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements.
In assessing an institution’s capital adequacy, the FDIC takes into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary.
At September 30, 2022, Magyar Bank’s common equity Tier 1 capital to risk-based assets ratio was 15.22%, total capital to risk-based assets was 16.47%, and Tier 1 capital to total assets leverage ratio was 11.13%.
Legislation enacted in May 2018 required the federal banking agencies to establish an optional “community bank leverage ratio” of between 8% to 10% Tier 1 equity/consolidated assets (the “Community Bank Leverage Ratio”). The Community Bank Leverage Ratio is available to institutions with less than $10 billion of assets that meet certain other requirements. Institutions with capital meeting or exceeding the specified requirements and electing to follow the alternative regulatory capital structure will be considered to comply with the applicable regulatory capital requirements, including the risk-based requirements. The federal banking agencies adopted final regulations that set 9.0% as the minimum capital for the Community Bank Leverage Ratio, effective January 1, 2020. A qualifying institution may opt in and out of the community bank leverage ratio framework on its quarterly call report. An institution that ceases to meet any qualifying criteria is provided with a two-quarter grace period to either comply with the community bank leverage ratio requirements or comply with the general capital regulations, including the risk-based capital requirements.
Prompt Corrective Action. The FDIC Improvement Act established a system of prompt corrective action to resolve the problems of undercapitalized institutions. The FDIC has adopted regulations to implement the prompt corrective action legislation. The regulations were amended to incorporate the previously mentioned increased regulatory capital standards that were effective January 1, 2015. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%. Effective March 31, 2020, qualifying community banking organizations that elect to use the Community Bank Leverage Ratio framework and that maintain a leverage ratio of greater than 9.0% will be considered to have satisfied the risk-based and leverage capital requirements to be deemed well-capitalized.
Undercapitalized institutions are subject to a variety of mandatory supervisory measures including the requirement to file a capital plan for the FDIC’s approval and dividend restrictions as well as other discretionary actions by the regulator.
The FDIC is required, with some exceptions, to appoint a receiver or conservator for an insured state bank if that bank is “critically undercapitalized.” For this purpose, “critically undercapitalized” means having a ratio of tangible capital to total assets of less than 2%. The FDIC may also appoint a conservator or receiver for a state bank on the basis of the institution’s financial condition or upon the occurrence of certain events, including:
· insolvency, or when the assets of the bank are less than its liabilities to depositors and others;
· substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices;
· existence of an unsafe or unsound condition to transact business;
· likelihood that the bank will be unable to meet the demands of its depositors or to pay its obligations in the normal course of business; and
· insufficient capital, or the incurring or likely incurring of losses that will deplete substantially all of the institution’s capital with no reasonable prospect of replenishment of capital without federal assistance.
Activity Restrictions on State-Chartered Banks. Federal law and FDIC regulations generally limit the activities and investments of state-chartered Federal Deposit Insurance Corporation-insured banks and their subsidiaries to those
permissible for national banks and their subsidiaries, unless such activities and investments are specifically exempted by law or consented to by the Federal Deposit Insurance Corporation.
Before making a new investment or engaging in a new activity that is not permissible for a national bank or otherwise permissible under federal law or the FDIC regulations, an insured bank must seek approval from the FDIC to make such investment or engage in such activity. The FDIC will not approve the activity unless the bank meets its minimum capital requirements and the FDIC determines that the activity does not present a significant risk to the DIF. Certain activities of subsidiaries that are engaged in activities permitted for national banks only through a “financial subsidiary” are subject to additional restrictions.
Federal law permits a state-chartered savings bank to engage, through financial subsidiaries, in any activity in which a national bank may engage through a financial subsidiary and on substantially the same terms and conditions. In general, the law permits a national bank that is well-capitalized and well-managed to conduct, through a financial subsidiary, any activity permitted for a financial holding company other than insurance underwriting, insurance investments, real estate investment or development or merchant banking. The total assets of all such financial subsidiaries may not exceed the lesser of 45% of the bank’s total assets or $50 million. The bank must have policies and procedures to assess the financial subsidiary’s risk and protect the bank from such risk and potential liability, must not consolidate the financial subsidiary’s assets with the bank’s and must exclude from its own assets and equity all equity investments, including retained earnings, in the financial subsidiary. State-chartered savings banks may retain subsidiaries in existence as of March 11, 2000 and may engage in activities that are not authorized under federal law. Although Magyar Bank meets all conditions necessary to establish and engage in permitted activities through financial subsidiaries, it has not yet determined to engage in such activities.
Federal Home Loan Bank System. Magyar Bank is a member of the Federal Home Loan Bank system, which consists of eleven regional federal home loan banks, each subject to supervision and regulation by the Federal Housing Finance Board. The federal home loan banks provide a central credit facility primarily for member thrift institutions as well as other entities involved in home mortgage lending. Magyar Bank, as a member of the FHLBNY, is required to purchase and hold shares of capital stock in the FHLBNY in specified amounts.
As of September 30, 2022, Magyar Bank was in compliance with these requirements.
Enforcement. The Federal Deposit Insurance Corporation has extensive enforcement authority over insured savings banks, including Magyar Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease and desist orders and remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and to unsafe or unsound practices.
Deposit Insurance. The Deposit Insurance Fund of the Federal Deposit Insurance Corporation insures deposits at Federal Deposit Insurance Corporation insured financial institutions such as Magyar Bank generally up to a maximum of $250,000 per separately insured depositor.
Under the Federal Deposit Insurance Corporation’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other risk factors. Rates are based on each institution’s risk category and certain specified risk adjustments. Institutions deemed to be less risky pay lower rates while institutions deemed riskier pay higher rates. Assessment rates (inclusive of possible adjustments) currently range from 2 1/2 to 45 basis points of each institution’s total assets less tangible capital. The Federal Deposit Insurance Corporation may increase or decrease the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment rulemaking. The Federal Deposit Insurance Corporation’s current system represents a change, required by the Dodd-Frank Act, from its prior practice of basing the assessment on an institution’s deposits.
In June 2020, the FDIC issued a final rule that mitigates the deposit insurance assessment effects of participating in certain COVID-19 liquidity facilities. The FDIC will generally remove the effect of PPP lending in calculating an institution’s deposit insurance assessment. The final rule also provides an offset to an institution’s total assessment amount for the increase in its assessment base attributable to participation in the PPP.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The Bank does not believe that it is taking or is subject to any action, condition or violation that could lead to termination of its deposit insurance.
Transactions with Affiliates of Magyar Bank. Magyar Bank’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and its implementing Regulation W promulgated by the Board of Governors of the Federal Reserve System. An affiliate is a company that controls, is controlled by, or is under common control with an insured depository institution such as Magyar Bancorp, Inc. In general, loan transactions between an insured depository institution and its affiliates are subject to certain quantitative and collateral requirements. In this regard, transactions between an insured depository institution and its affiliates are limited to 10% of the institution’s unimpaired capital and unimpaired surplus for transactions with any one affiliate and 20% of unimpaired capital and unimpaired surplus for transactions in the aggregate with all affiliates. Collateral of specific types and in specified amounts ranging from 100% to 130% of the amount of the transaction must usually be provided by affiliates in order to receive loans from the savings association. In addition, transactions with affiliates must be consistent with safe and sound banking practices, not involve low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates. Magyar Bank is in compliance with these requirements.
Prohibitions Against Tying Arrangements. Banks are subject to the prohibitions of 12 U.S.C. Section 1972 on certain tying arrangements. A depository institution is prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
Community Reinvestment Act and Fair Lending Laws. All FDIC-insured institutions have a responsibility under the Community Reinvestment Act (“CRA”) and related regulations to help meet the credit needs of their communities, including low- and moderate-income neighbourhoods. In connection with its examination of a state chartered savings bank, the FDIC is required to assess the institution’s record of compliance with the CRA. Among other things, the current CRA regulations replace the prior process-based assessment factors with a new evaluation system that rates an institution based on its actual performance in meeting community needs. In particular, the current evaluation system focuses on three tests:
· a lending test, to evaluate the institution’s record of making loans in its service areas;
· an investment test, to evaluate the institution’s record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and
· a service test, to evaluate the institution’s delivery of services through its service channels.
An institution’s failure to comply with the provisions of the CRA could, at a minimum, result in regulatory restrictions on its activities. We received an “Outstanding” CRA rating in our most recently completed federal examination, which was conducted by the FDIC in 2022.
In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the FDIC, as well as other federal regulatory agencies and the Department of Justice.
Consumer Protection. Magyar Bank and Magyar Bancorp are subject to federal and state laws designed to protect consumers and prohibit unfair, deceptive or abusive business practices, including the Equal Credit Opportunity Act, Fair Housing Act, Home Ownership Protection Act, Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”), the Gramm-Leach Bliley Act, the Truth in Lending Act (“TILA”), the CRA, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the National Flood Insurance Act and various state law counterparts. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must interact with clients when taking deposits, making loans, collecting loans and providing other services. Further, the Consumer Financial Protection Bureau also has a broad mandate to prohibit unfair or deceptive acts and practices and is specifically empowered to require certain disclosures to consumers and draft model disclosure forms. Failure to comply with consumer protection laws and regulations can subject financial institutions to enforcement actions, fines and other penalties. The failure to comply with these laws could result in enforcement actions by the federal banking agencies, as well as other federal regulatory agencies and the Department of Justice.
Mortgage Reform. The Dodd-Frank Act prescribes certain standards that mortgage lenders must consider before making a residential mortgage loan, including verifying a borrower’s ability to repay such mortgage loan, and allows borrowers to assert violations of certain provisions of TILA as a defense to foreclosure proceedings. Under the Dodd-Frank Act, prepayment penalties are prohibited for certain mortgage transactions and creditors are prohibited from financing insurance policies in connection with a residential mortgage loan or home equity line of credit. In addition, the Dodd-Frank Act prohibits mortgage originators from receiving compensation based on the terms of residential mortgage loans and
generally limits the ability of a mortgage originator to be compensated by others if compensation is received from a consumer. The Dodd-Frank Act requires mortgage lenders to make additional disclosures prior to the extension of credit, and in each billing statement, for negative amortization loans and hybrid adjustable-rate mortgages. The Economic Growth Act included provisions that ease certain requirements related to mortgage transactions for certain institutions with less than $10 billion in total consolidated assets.
Privacy Regulations. Federal regulations generally require that Magyar Bank disclose its privacy policy, including identifying with whom it shares a customer’s “non-public personal information,” to customers at the time of establishing the customer relationship and annually thereafter. In addition, Magyar Bank is required to provide its customers with the ability to “opt-out” of having their personal information shared with unaffiliated third parties and not to disclose account numbers or access codes to non-affiliated third parties for marketing purposes. Except as otherwise required or permitted by law, Magyar Bank is prohibited from disclosing such information. Magyar Bank currently has a privacy protection policy in place and believes that such policy is in compliance with the regulations.
Loans to a Bank’s Insiders
Federal Regulation. A bank’s loans to its executive officers, directors, any owner of 10% or more of its stock (each, an insider) and any of certain entities affiliated with any such person (an insider’s related interest) are subject to the conditions and limitations imposed by Section 22(h) of the Federal Reserve Act and its implementing regulations. Under these restrictions, the aggregate amount of the loans to any insider and the insider’s related interests may not exceed the loans-to-one-borrower limit applicable to national banks, which is comparable to the loans-to-one-borrower limit applicable to Magyar Bank’s loans. See “New Jersey Banking Regulation-Loans-to-One Borrower Limitations.” All loans by a bank to all insiders and insiders’ related interests in the aggregate may not exceed the bank’s unimpaired capital and unimpaired surplus. With certain exceptions, loans to an executive officer, other than loans for the education of the officer’s children and certain loans secured by the officer’s residence, may not exceed the lesser of (1) $100,000 or (2) the greater of $25,000 or 2.5% of the bank’s unimpaired capital and surplus. Federal regulation also requires that any proposed loan to an insider or a related interest of that insider be approved in advance by a majority of the Board of Directors of the bank, with any interested directors not participating in the voting, if such loan, when aggregated with any existing loans to that insider and the insider’s related interests, would exceed either (1) $250,000 or (2) the greater of $25,000 or 5% of the bank’s unimpaired capital and surplus. Generally, such loans must be made on substantially the same terms as, and follow credit underwriting procedures that are not less stringent than, those that are prevailing at the time for comparable transactions with other persons.
An exception is made for extensions of credit made pursuant to a benefit or compensation plan of a bank that is widely available to employees of the bank and that does not give any preference to insiders of the bank over other employees of the bank.
In addition, federal law prohibits extensions of credit to a bank’s insiders and their related interests by any other institution that has a correspondent banking relationship with the bank, unless such extension of credit is on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavourable features.
New Jersey Regulation. Provisions of the New Jersey Banking Act impose conditions and limitations on the liabilities to a savings bank of its directors and executive officers and of corporations and partnerships controlled by such persons, that are comparable in many respects to the conditions and limitations imposed on the loans and extensions of credit to insiders and their related interests under federal law, as discussed above. The New Jersey Banking Act also provides that a savings bank that is in compliance with federal law is deemed to be in compliance with such provisions of the New Jersey Banking Act.
Federal Reserve System
Federal Reserve Board regulations require all depository institutions to maintain reserves at specified levels against their transaction accounts (primarily NOW and regular checking accounts). At September 30, 2022, Magyar Bank was in compliance with the Federal Reserve Board’s reserve requirements. Savings banks, such as Magyar Bank, are authorized to borrow from the Federal Reserve Bank “discount window.” Magyar Bank is deemed by the Federal Reserve Board to be generally sound and thus is eligible to obtain secondary credit from its Federal Reserve Bank. Generally, secondary credit is extended on a very short-term basis to meet the liquidity needs of the institution. Loans must be secured by acceptable collateral and carry a rate of interest above the Federal Open Market Committee’s federal funds target rate.
The USA PATRIOT Act
The USA PATRIOT Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. The USA PATRIOT Act also requires the federal banking agencies to take into consideration the effectiveness of controls designed to combat money laundering activities in determining whether to approve a merger or other acquisition application of a member institution. Accordingly, if we engage in a merger or other acquisition, our controls designed to combat money laundering would be considered as part of the application process. We have established policies, procedures and systems designed to comply with these regulations.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 is intended to improve corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. We have policies, procedures and systems designed to comply with these regulations, and we review and document such policies, procedures and systems to ensure continued compliance with these regulations.
Holding Company Regulation
Federal Regulation. Magyar Bancorp, Inc. is regulated as a bank holding company. Bank holding companies are subject to examination, regulation and periodic reporting under the Bank Holding Company Act, as administered by the Federal Reserve Board (“FRB”). Bank holding companies are generally subject to consolidated capital requirements established by the FRB. Bank holding companies under $3 billion in consolidated assets remain exempt from consolidated regulatory capital requirements, unless the FRB determines otherwise in particular cases.
Regulations of the FRB provide that a bank holding company must serve as a source of strength to any of its subsidiary banks and must not conduct its activities in an unsafe or unsound manner. The Dodd-Frank Act codified the source of strength policy and requires the promulgation of implementing regulations. Under the prompt corrective action provisions of the Dodd-Frank Act, a bank holding company parent of an undercapitalized subsidiary bank would be directed to guarantee, within limitations, the capital restoration plan that is required of such an undercapitalized bank. See “Federal Banking Regulation-Prompt Corrective Action.” If the undercapitalized bank fails to file an acceptable capital restoration plan or fails to implement an accepted plan, the FRB may prohibit the bank holding company parent of the undercapitalized bank from paying any dividend or making any other form of capital distribution without the prior approval of the FRB.
As a bank holding company, Magyar Bancorp, Inc. is required to obtain the prior approval of the FRB to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior FRB approval is required for Magyar Bancorp, Inc. to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after giving effect to such acquisition, it would, directly or indirectly, own or control more than 5% of any class of voting shares of such bank or bank holding company.
A bank holding company is required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, will be equal to 10% or more of the company’s consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, FRB order or directive, or any condition imposed by, or written agreement with, the FRB. Such notice and approval is not required for a bank holding company that would be treated as “well capitalized” under applicable regulations of the FRB, that has received a composite “1” or “2” rating, as well as a “satisfactory” rating for management, at its most recent bank holding company inspection by the FRB, and that is not the subject of any unresolved supervisory issues.
In addition, a bank holding company that does not elect to be a financial holding company under federal regulation, is generally prohibited from engaging in, or acquiring direct or indirect control of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the FRB to be so closely related to banking or managing or controlling banks as to be permissible. Some of the principal activities that the FRB has determined by regulation to be so closely related to banking as to be permissible are:
· making or servicing loans;
· performing certain data processing services;
· providing discount brokerage services, or acting as fiduciary, investment or financial advisor;
· leasing personal or real property;
· making investments in corporations or projects designed primarily to promote community welfare; and
· acquiring a savings and loan association.
Bank holding companies that elect to be a financial holding company may engage in activities that are financial in nature or incident to activities which are financial in nature, including investment banking and insurance underwriting. Magyar Bancorp, Inc. has not elected to be a financial holding company, although it may seek to do so in the future. Bank holding companies may elect to become a financial holding company if:
· each of its depository institution subsidiaries is “well capitalized;”
· each of its depository institution subsidiaries is “well managed;”
· each of its depository institution subsidiaries has at least a “satisfactory” Community Reinvestment Act rating at its most recent examination; and
· the bank holding company has filed a certification with the FRB stating that it elects to become a financial holding company.
Under federal law, depository institutions are liable to the FDIC for losses suffered or anticipated by the FDIC in connection with the default of a commonly controlled depository institution or any assistance provided by the FDIC to such an institution in danger of default. This law would be applicable potentially to Magyar Bancorp, Inc. if it ever acquired as a separate subsidiary a depository institution in addition to Magyar Bank.
New Jersey Regulation. Under the New Jersey Banking Act, a company owning or controlling a savings bank is regulated as a bank holding company. The New Jersey Banking Act defines the terms “company” and “bank holding company” as such terms are defined under the BHCA. Each bank holding company controlling a New Jersey-chartered bank or savings bank must file certain reports with the Commissioner and is subject to examination by the Commissioner.
Acquisition of Magyar Bancorp, Inc. Under federal law and under the New Jersey Banking Act, no person may acquire control of Magyar Bancorp, Inc. without first obtaining approval of such acquisition of control by the FRB and the Commissioner.
Federal Securities Laws. Magyar Bancorp, Inc. common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Magyar Bancorp, Inc. is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

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ITEM 1A. RISK FACTORS
ITEM 1A. Risk Factors
In addition to factors discussed in the description of our business and elsewhere in this report, the following are factors that could adversely affect our future results of operations and financial condition.
Economic and Market Area
Inflation can have an adverse impact on our business and on our customers.
Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the value of money. Recently, there have been market indicators of a pronounced rise in inflation and the Federal Reserve Board has indicated its intention to raise certain benchmark interest rates in an effort to combat inflation. As inflation increases and market interest rates rise, the value of our investment securities, particularly those with longer maturities, would decrease, although this effect can be less pronounced for floating rate instruments. In addition, inflation generally increases the cost of goods and services we use in our business operations, such as electricity and other utilities, which increases our noninterest expenses. Furthermore, our customers are also affected by inflation and the rising costs of goods and services used in their households and businesses, which could have a negative impact on their ability to repay their loans with us.
The COVID-19 Pandemic Has and Will Continue to Pose Risks and Could Harm Our Business, Results of Operations and Prospects.
The COVID-19 pandemic is having an adverse impact on the Company, its customers and the communities it serves. Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on the business of the Company, its customers, employees and third-party service providers. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened in an efficient manner. Additionally, the responses of various governmental and nongovernmental authorities to curtail business and consumer activities in an effort to mitigate the pandemic will have material long-term effects on the Company and its customers which are difficult to quantify in the near-term or long-term.
As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, the Company is subject to the following risks, any of which could have a material, adverse effect on the business, financial condition, liquidity, and results of operations of the Company:
• risks to the capital markets that may impact the performance of the investment securities portfolio of the Company, as well as limit our access to capital markets and other funding sources;
• effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating the companies’ financial reporting and internal controls;
• declines in demand for loans and other banking services and products, as well as a decline in the credit quality of our loan portfolio, owing to the effects of COVID-19 in the markets served by the Company;
• if the economy is unable to substantially reopen or reopen in an efficient manner, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;
• collateral for loans, especially real estate, may continue to decline in value, which could cause loan losses to increase;
• allowance for loan losses may increase if borrowers experience financial difficulties, which will adversely affect net income;
• the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments;
• as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on assets may decline to a greater extent than the decline in cost of interest-bearing liabilities, reducing net interest margin and spread and reducing net income;
• cyber security risks are increased as the result of an increase in the number of employees working remotely;
• declines in demand resulting from adverse impacts of the disease on businesses deemed to be “non-essential” by governments in the markets served by the Company; and
• increasing or protracted volatility in the price of the Company’s common stock.
A Worsening of Economic Conditions Could Reduce Demand for Our Products and Services and/or Result in Increases in Our Level of Non-performing Loans, Which Could Have an Adverse Effect on Our Results of Operations.
Unlike larger financial institutions that are more geographically diversified, our profitability depends primarily on the general economic conditions in New Jersey and the greater New York metropolitan area. Local economic conditions have a significant impact on our commercial real estate and construction and consumer loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans. Almost all of our loans are to borrowers located in or secured by collateral located in New Jersey and the New York metropolitan area.
In addition, the COVID-19 pandemic is having an adverse impact on the Company, its customers and the communities it serves. The adverse effect of the COVID-19 pandemic on the Company, its customers and the communities
where it operates may adversely affect the Company’s business, results of operations and financial condition for an indefinite period of time.
A deterioration in economic conditions could result in the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations:
• demand for our products and services may decline;
• loan delinquencies, problem assets and foreclosures may increase;
• collateral for loans, especially real estate, may decline in value, in turn reducing customers’ future borrowing power, and reducing the value of assets and collateral associated with existing loans;
• the value of our securities portfolio may decline; and
• the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.
Moreover, a significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, unemployment or other factors beyond our control could further impact these local economic conditions and could further negatively affect the financial results of our banking operations. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.
Strong Competition Within Our Market Area May Limit Our Growth and Profitability.
Competition in the banking and financial services industry is intense. In our market area, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Some of our competitors have substantially greater resources and lending limits than we, have greater name recognition and market presence that benefit them in attracting business, and offer certain services that we do not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively than we do. Our profitability depends upon our continued ability to successfully compete in our market area. The greater resources and deposit and loan products offered by some of our competitors may limit our ability to increase our interest-earning assets. For additional information see “Business of Magyar Bank-Competition.”
We Are a Community Bank and Our Ability to Maintain Our Reputation is Critical to the Success of Our Business. The Failure to do so May Adversely Affect Our Performance.
We are a community bank and our reputation is one of the most valuable assets of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our market area. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers. If our reputation is negatively affected by the actions of our employees, by our inability to conduct our operations in a manner that is appealing to current or prospective customers or otherwise, our business and operating results may be materially adversely affected.
Interest Rate and Asset Quality
The reversal of the historically low interest rate environment may adversely affect our net interest income and profitability.
The Federal Reserve Board decreased benchmark interest rates significantly, to near zero, in response to the COVID-19 pandemic. The Federal Reserve Board is reversing its policy of near zero interest rates given its concerns over inflation. In recent periods, market interest rates have risen in response to the Federal Reserve Board’s recent rate increases. As discussed below, the increase in market interest rates could have an adverse effect on our net interest income and profitability.
Changes in Interest Rates May Hurt Our Profits and Asset Values.
Our earnings largely depend on our net interest income, which could be negatively affected by changes in interest rates. Net interest income is the difference between:
· the interest income we earn on our interest-earning assets, such as loans and securities; and
· the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings.
The rates we earn on our assets and the rates we pay on our liabilities are generally fixed for a contractual period of time. While we have taken steps to attempt to reduce our exposure to increases in interest rates, historically our liabilities generally have shorter contractual maturities than our assets. This imbalance can create significant earnings volatility, because market interest rates change over time. In a period of rising interest rates, the interest income earned on our assets may not increase as rapidly as the interest paid on our liabilities. Likewise, in a period of falling interest rates, the interest expense paid on our liabilities may not decrease as rapidly as the interest income received on our assets. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Management of Market Risk.”
In addition, changes in interest rates can affect the average life of loans and mortgage-backed securities. A reduction in interest rates causes increased prepayments of loans and mortgage-backed securities as borrowers tend to refinance their debt to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest the funds from faster prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities. Additionally, increases in interest rates may decrease loan demand and/or make it more difficult for borrowers to repay adjustable-rate loans.
Changes in interest rates also affect the current market value of our interest-earning securities portfolio. Generally, the value of securities moves inversely with changes in interest rates. At September 30, 2022, the fair value of our total securities portfolio was $89.1 million. The unrealized net loss on securities totaled $13.7 million on a pre-tax basis at September 30, 2022.
We evaluate interest rate sensitivity using models that estimate the change in Magyar Bank’s net interest income over a range of interest rate scenarios. At September 30, 2022, in the event of an immediate 200 basis point increase in interest rates, the model projects that we would experience a $212,000, or 0.7%, decrease in net interest income in the first year following the change in interest rates, and a $1.1 million, or 3.4%, increase in net interest income in the second year following the change in interest rates. At September 30, 2022, in the event of an immediate 200 basis point decrease in interest rates, the model projects that we would experience a $946,000, or 3.3%, decrease in net interest income in the first year following the change in interest rates, and a $2.7 million, or 8.6%, decrease in net interest income in the second year following the change in interest rates.
At September 30, 2022, our available-for-sale securities portfolio at fair value totaled $9.2 million, which consisted entirely of mortgage-backed securities. To the extent interest rates decrease and the value of our available-for-sale portfolio increases, our stockholders’ equity will be affected accordingly.
Because We Intend to Continue our Emphasis on the Origination of Commercial Business Loans and Commercial Real Estate Loans, Our Lending Risk Has Increased in Recent Years and May Increase in Future Years.
At September 30, 2022, our portfolio of commercial real estate and commercial business loans totaled $377.5 million, or 60.0% of our total loans, compared to $349.6 million (including $25.1 million in PPP loans), or 58.8% of our total loans at September 30, 2021 and $349.1 million (including $56.0 million in PPP loans), or 57.1% of our total loans at September 30, 2020. It is our intent to continue to emphasize the origination of commercial business and commercial real estate loans. Commercial business and commercial real estate loans generally have more risk than one-to four-family residential mortgage loans. At September 30, 2022, there were no non-performing commercial real estate and commercial business loans compared with $2.4 million at September 30, 2021.
Because the repayment of commercial business and commercial real estate loans depends on the successful management and operation of the borrower’s properties or related businesses, repayment of these loans has been and may continue to be affected by adverse conditions in the real estate market or the local economy. Further, these loans typically have larger loan balances, and several of our borrowers have more than one commercial business and commercial real estate loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan. Finally, if we foreclose on a commercial business or commercial real estate loan, our holding period for the collateral, if any, typically is longer than for one- to four-family residential mortgage loans because there are fewer potential purchasers of the collateral. Because we plan to continue to emphasize the origination of these loans, it may be necessary to
increase our allowance for loan losses because of the increased credit risk associated with these types of loans. Any increase to our allowance for loan losses would adversely affect our earnings.
If Our Allowance for Loan Losses is Not Sufficient to Cover Actual Loan Losses, Our Earnings Could Decrease.
Our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, requiring additions to our allowance, which could materially decrease our net income. The allowance for loan losses increased by $358,000 during the year ended September 30, 2022 to $8.4 million from $8.1 million for the year ended September 30, 2021. The increases were attributable to the growth in loan receivable, which increased by $34.3 million to $628.9 million at September 30, 2022 from $594.6 million at September 30, 2021, and higher adjustments to the economic conditions. The allowance for loan losses as a percentage of non-performing loans increased to 297.5% at September 30, 2022 compared with 99.0% at September 30, 2021. At September 30, 2022 our allowance for loan losses as a percentage of total loans was 1.34%, compared with 1.36% at September 30, 2021.
Future increases in the allowance for loan losses may be necessary based on possible future increases in total loans receivable, increases in non-performing loans and charge-offs, deterioration of collateral values securing impaired real estate loans, and deterioration of the current economic environment. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. Based on this review, we believe our allowance for loan losses is adequate to absorb losses in our loan portfolio as of September 30, 2022.
Bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities will have a material adverse effect on our financial condition and results of operations.
The Financial Accounting Standards Board has adopted a new accounting standard that is referred to as Current Expected Credit Loss, or CECL. The implementation of CECL has been delayed for smaller reporting companies, such as the Company, until January 2023 (effective October 1, 2023 for the Company). CECL will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses. This will change the current method of providing allowances for loan losses that are probable, which may require us to increase our allowance for loan losses, and to greatly increase the types of data we will need to collect and review to determine the appropriate level of the allowance for loan losses. Any increase in our allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses may have a material adverse effect on our financial condition and results of operations.
Regulatory Matters
We Operate in a Highly Regulated Environment and May Be Adversely Affected by Changes in Laws and Regulations.
Magyar Bank is subject to extensive regulation, supervision and examination by the NJDBI, its chartering authority, and by the Federal Deposit Insurance Corporation, which insures Magyar Bank’s deposits. As a bank holding company, Magyar Bancorp, Inc. is subject to regulation and supervision by the Federal Reserve Board. Such regulation and supervision govern the activities in which financial institutions and their holding companies may engage and are intended primarily for the protection of the federal deposit insurance fund and depositors. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operations of financial institutions, the classification of assets by financial institutions and the adequacy of financial institutions’ allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, could have a material impact on Magyar Bank and Magyar Bancorp, Inc.
Magyar Bank’s operations are also subject to extensive regulation by other federal, state and local governmental authorities, and are subject to various laws and judicial and administrative decisions that impose requirements and restrictions on operations. These laws, rules and regulations are frequently changed by legislative and regulatory authorities. There can be no assurance that changes to existing laws, rules and regulations, or any other new laws, rules or regulations, will not be adopted in the future, which could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or prospects.
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or Other Laws and Regulations Could Result in Fines or Sanctions.
The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions, including restrictions on conducting acquisitions or establishing new branches. During the last year, several banking institutions have received large fines for non-compliance with these laws and regulations. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, these policies and procedures may not be effective in preventing violations of these laws and regulations.
Security
System Failure or Breaches of Our Network Security Could Subject Us to Increased Operating Costs as well as Litigation and Other Liabilities.
The computer systems and network infrastructure we and our third-party service providers use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures designed to prevent such damage, our security measures may not be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on our financial condition and results of operations.
It is possible that a significant amount of time and money may be spent to rectify the harm caused by a breach or hack. While we have general liability insurance, there are limitations on coverage as well as dollar amount. Furthermore, cyber incidents carry a greater risk of injury to our reputation. Finally, depending on the type of incident, banking regulators can impose restrictions on our business and consumer laws may require reimbursement of customer loss.
Risks Associated with Cyber-Security Could Negatively Affect Our Earnings.
The financial services industry has experienced an increase in both the number and severity of reported cyber-attacks aimed at gaining unauthorized access to bank systems as a way to misappropriate assets and sensitive information, corrupt and destroy data, or cause operational disruptions. We have established policies and procedures to prevent or limit the impact of security breaches, but such events may still occur or may not be adequately addressed if they do occur. Although we rely on security safeguards to secure our data, these safeguards may not fully protect our systems from compromises or breaches.
We also rely on the integrity and security of a variety of third party processors, payment, clearing and settlement systems, as well as the various participants involved in these systems, many of which have no direct relationship with us. Failure by these participants or their systems to protect our customers' transaction data may put us at risk for possible losses due to fraud or operational disruption.
Our customers are also the target of cyber-attacks and identity theft. Large scale identity theft could result in customers' accounts being compromised and fraudulent activities being performed in their name. We have implemented certain safeguards against these types of activities but they may not fully protect us from fraudulent financial losses.
The occurrence of a breach of security involving our customers' information, regardless of its origin, could damage our reputation and result in a loss of customers and business and subject us to additional regulatory scrutiny, and could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. Unresolved Staff Comments
Not required for smaller reporting companies.

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ITEM 2. PROPERTIES
ITEM 2. Properties
The following table provides certain information with respect to our offices as of September 30, 2022:
Leased or Original Year Year of
Location Owned Leased or Acquired Lease Expiration
Main Office:
400 Somerset Street Owned -
New Brunswick, New Jersey, 08901
Full - Service Branches:
3050 State Route 27 Owned -
Kendall Park, New Jersey, 08824
596 Milltown Road Leased
North Brunswick, New Jersey, 08902
1000 Route 202 South Leased
Branchburg, New Jersey, 08876
475 North Bridge Street Leased
Bridgewater, New Jersey, 08807
1167 Inman Avenue Leased
Edison, New Jersey, 08820
1199 Amboy Avenue Leased
Edison, New Jersey, 08837
The net book value of our premises, land and equipment was approximately $13.9 million and $14.3 million at September 30, 2022 and 2021, respectively.
For information regarding Magyar Bancorp, Inc.’s investment in mortgages and mortgage-related securities, see “Item 1. Business” herein.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. Legal Proceedings
In the ordinary course of business, we are a party to various legal actions which are incidental to the operation of our business. Although the ultimate outcome and amount of liability, if any, with respect to these legal actions cannot presently be ascertained with certainty, in the opinion of management, based upon information currently available to us, any resulting liability is believed to be immaterial to our consolidated financial position, results of operations and cash flows.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. Mine Safety Disclosures
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
(a) Our shares of common stock are traded on the NASDAQ Global Market under the symbol “MGYR.” The approximate number of holders of record of Magyar Bancorp, Inc.’s common stock as of September 30, 2022 was 475. Certain shares of Magyar Bancorp, Inc. are held in “nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.
The Company declared four dividends totaling $0.21 per share paid to common shareholders during the year ended September 30, 2022. In the future, the Company intends to continue to pay a regular cash dividend. In determining
whether and in what amount to pay a cash dividend, the Board will continue to take into account a number of factors, including capital requirements, our consolidated financial condition and results of operations, tax considerations, statutory and regulatory limitations and general economic conditions. No assurances can be given that cash dividends will continue to be paid or that, if paid, will not be reduced. For more information on regulatory restrictions regarding the payment of dividends, see “Item 1 - Business- Supervision and Regulation- New Jersey Banking Regulation-Dividends.”
Other than its employee stock ownership plan, Magyar Bancorp, Inc. does not have any equity compensation plans that were not approved by stockholders. The following table sets forth information with respect to the Magyar Bancorp’s equity compensation plans.
Number of securities to
Number of
be issued upon exercise
Weighted
securities remaining
of outstanding options
average exercise
available for
September 30, 2022
and rights
price
issuance under plan
Stock options
293,200
$ 12.58
97,800
Shares of restricted stock
156,400
-
-
Total
449,600
$ -
97,800
(b) Not applicable.
(c) Share repurchases.
The Company announced on July 21, 2022 that its Board of Directors authorized a third stock repurchase program pursuant to which the Company intends to repurchase up to 5% of its outstanding shares, or up to 354,891 shares. The timing of the repurchases will depend on certain factors, including but not limited to, market conditions and prices, the Company's liquidity requirements and alternative uses of capital. Any repurchased shares will be held as treasury stock and will be available for general corporate purposes. Under the third stock repurchase program, the company repurchased 352,697 shares through September 30, 2022, increasing its total treasury shares to 465,693 at September 30, 2022.
The following table reports information regarding repurchases of our common stock during the year ended September 30, 2022.
Remaining Number
Total Number
Average
of Shares That
of Shares
Price Paid
May be Purchased
Period
Purchased
Per Share
Under the Plan
July 1, 2022 through July 31, 2022
-
$ -
-
August 1, 2022 through August 31, 2022
8,748
$ 12.13
346,143
September 1, 2022 through September 30, 2022
343,949
$ 12.92
2,194
Total
352,697
$ 12.90

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. [Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Magyar Bancorp, Inc. (the “Company”) is a Delaware-chartered stock holding company whose most significant business activity is ownership of 100% of the common stock of Magyar Bank. Magyar Bank’s principal business is attracting retail deposits from the general public and investing those deposits, together with funds generated from operations, principal repayments on loans and securities and borrowed funds, into one-to four-family residential mortgage loans, multi-family and commercial real estate mortgage loans, home equity loans and lines of credit, commercial business loans and construction loans. Our results of operations depend primarily on our net interest income which is the difference between the interest we
earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our net interest income is primarily affected by the market interest rate environment, the shape of the U.S. Treasury yield curve, the timing of the placement of interest-earning assets and interest-bearing liabilities, and the prepayment rate on our mortgage-related assets. Other factors that may affect our results of operations are general and local economic and competitive conditions, government policies and actions of regulatory authorities.
During the year ended September 30, 2022, the Company’s total assets grew $24.6 million, or 3.2%, to $798.5 million. The increase was attributable to a $34.5 million increase, or 5.9%, to $619.8 million in loans receivable, net of allowance of loss and a $30.3 million increase, or 42.9%, to $100.9 million in investment securities, partially offset by a $44.3 million decrease in cash and cash equivalents.
Stockholders’ equity increased $861,000, or 0.9%, to $98.5 million at September 30, 2022 from $97.6 million at September 30, 2021. The increase in stockholders’ equity was primarily attributable to the Company’s results of operations for the year ended September 30, 2022, partially offset by stock repurchases dividends paid and other comprehensive loss. On July 21, 2022, the Company announced a stock repurchase program of up to 5% of its outstanding shares of common stock, or 354,891 shares. The Company repurchased 352,697 shares at an average price of $12.90 per share through September 30, 2022, reducing outstanding shares to 6,745,128. In addition, during the year ended September 30, 2022, the Company paid dividends totaling $0.21 per share.
Total deposits increased $27.9 million, or 4.4%, to $667.7 million during the year ended September 30, 2022 from $639.8 million at September 30 2021. The growth in deposits during the twelve months ended September 30, 2022 occurred in money market account balances, which increased $34.3 million, or 18.3%, to $222.2 million, in interest-bearing checking account balances, which increased $27.3 million, or 38.3% to $98.6 million, in non-interest checking account balances, which increased $442,000, or 0.2%, to $182.4 million, and in savings account balances, which increased $126,000, or 0.2%, to $81.9 million. Offsetting these increases was a $34.3 million, or 29.3%, decrease in certificates of deposit (including individual retirement accounts), to $82.6 million.
The Company’s net income increased $1.8 million, or 29.4%, to $7.9 million during the year ended September 30, 2022 compared with net income of $6.1 million for the year ended September 30, 2021. The increase in net income was due to higher net interest and dividend income, lower provisions for loan losses, and lower non-interest expenses, partially offset by lower non-interest income.
Throughout fiscal 2023, we expect to continue increasing our commercial real estate and commercial business loans while managing non-interest expenses in an effort to increase profitability of the Company.
Critical Accounting Policies
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. Critical accounting policies may involve complex subjective decisions or assessments. We consider the following to be our critical accounting policies.
Allowance for Loan Loss. The allowance for loan losses is the amount estimated by management as necessary to cover credit losses in the loan portfolio both probable and reasonably estimable at the balance sheet date. The allowance is established through the provision for loan losses which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of our most critical. Due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses, the methodology for determining the allowance for loan losses is considered a critical accounting policy by management.
As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans and discounted cash flow valuations of properties are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisals and discounted cash flow valuations are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly affect the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals and discounted cash flow valuations are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans.
Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. We consider a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics,
geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates by management that may be susceptible to significant change based on changes in economic and real estate market conditions.
The evaluation has a specific and general component. The specific component relates to loans that are delinquent or otherwise identified as impaired through the application of our loan review process and our loan grading system. All such loans are evaluated individually, with principal consideration given to the value of the collateral securing the loan and discounted cash flows. Specific impairment allowances are established as required by this analysis. However, the Bank’s Federal and State regulators generally require that the specific reserve against impaired collateral-dependent loans be charged-off, reducing the carrying balance of the loan and allowance for loan loss. The general component is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations in establishing the general portion of the reserve. This analysis establishes factors that are applied to the loan groups to determine the amount of the general component of the allowance for loan losses.
Actual loan losses may be significantly greater than the allowances we have established, which could have a material negative effect on our financial results.
For the fiscal year ended September 30, 2022 and through the fiscal year ending September 30, 2023, we followed and will follow the incurred loss methodology for determining our allowance for loan loss. We intend to adopt the CECL standard for determining the amount of our allowance for credit loss beginning October 1, 2023.
Deferred Income Taxes. The Company records income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities: (i) are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns; (ii) are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases; and (iii) are measured using enacted tax rates expected to apply in the years when those temporary differences are expected to be recovered or settled.
Deferred tax assets are likely to be realized and therefore do not have a valuation allowance.
Comparison of Financial Condition at September 30, 2022 and September 30, 2021
Total Assets. Total assets increased $24.6 million, or 3.2%, to $798.5 million during the year ended September 30, 2022 compared with $774.0 million at September 30, 2021. The change was attributable to a $34.5 million, or 5.9%, increase in loans receivable, net of allowance of loss, to $619.8 million and a $30.3 million, or 42.9%, increase in investment securities to $100.9 million, partially offset by a $44.3 million decrease in cash and cash equivalents. Stockholders’ equity increased $861,000, or 0.9%, to $98.5 million at September 30, 2022 from $97.6 million at September 30, 2021.
Loans Receivable. Total loan receivable increased $34.3 million, or 5.8%, to $628.9 million at September 30, 2022 from $594.6 million at September 30, 2021. Growth occurred in commercial real estate loans, which increased $61.9 million, or 22.1%, to $342.8 million and in one-to four-family residential mortgage loans (including home equity lines of credit), which increased $12.1 million, or 5.5%, to $233.1 million. Offsetting these increases were decreases in commercial business loans, which decreased $34.0 million, or 49.5%, to $34.7 million, in construction loans, which decreased $5.1 million, or 25.2%, to $15.2 million and in other consumer loans, which decreased $621,000, or 16.6%, to $3.1 million. Included in the reduction of commercial business loans were the repayment of $25.1 million in PPP loans.
Total loans receivable at September 30, 2022 were comprised of $342.8 million (54.5%) in commercial real estate loans, $214.4 million (34.1%) in one- to four- family residential mortgage loans, $34.7 million (5.5%) in commercial business loans, $15.2 million (2.4%) in construction loans, and $21.8 million (3.5%) in home equity lines of credit and other loans. For comparison, total loans receivable at September 30, 2021 were comprised of $280.8 million (47.2%) in commercial real estate loans, $203.0 million (34.2%) in one- to four- family residential mortgage loans, $68.7 million (11.6%) in commercial business loans (including $25.1 million in PPP loans), $20.4 million (3.4%) in construction loans, and $21.7 million (3.6%) in home equity lines of credit and other loans.
Total non-performing loans decreased $5.3 million, or 65.3%, to $2.8 million at September 30, 2022 from $8.2 million at September 30, 2021. The ratio of non-performing loans to total loans was 0.5% at September 30, 2022 compared to 1.4% at September 30, 2021.
There were no non-performing loans secured by one-to four-family residential properties, including home equity lines of credit and other consumer loans, at September 30, 2022, compared with $1.2 million at September 30, 2021. During the year ended September 30, 2022, there were no charge-offs against the allowance for loan loss for residential real estate loans while $1,000 was recovered from prior year charge-offs.
There were no non-performing commercial real estate loans at September 30, 2022, compared with $1.1 million at September 30, 2021. During the year ended September 30, 2022 there were no charge-offs against the allowance for loan loss and for commercial real estate loans while $53,000 was recovered from prior year charge-offs.
There were no non-performing commercial business loans at September 30, 2022, compared with $1.3 million at September 30, 2021. During the year ended September 30, 2022 there were no charge-offs against the allowance for loan loss for commercial business loans and there were no recoveries from prior year charge-offs.
Non-performing construction loans decreased $1.7 million, or 38.1%, to $2.8 million at September 30, 2022 from $4.6 million at September 30, 2021. Magyar Bank had begun foreclosure proceedings on the properties securing these loans at September 30, 2022. During the year ended September 30, 2022, there were no charge-offs or recoveries on construction loans.
The ratio of non-performing loans and troubled debt restructurings to total loans receivable decreased to 0.53% at September 30, 2022 from 1.43% at September 30, 2021. The allowance for loan losses increased $358,000 to $8.4 million, or 297.5% of non-performing loans at September 30, 2022 compared with $8.1 million, or 99.0% of non-performing loans, at September 30, 2021. Provisions for loan loss during the year ended September 30, 2022 were $304,000 while net recoveries were $54,000, compared with a provision of $1.6 million and net recoveries of $46,000 for the prior year period. The allowance for loan losses was 1.34% and 1.36% of gross loans outstanding at September 30, 2022 and 2021, respectively.
Investment Securities. Investment securities increased $30.3 million, or 42.9%, to $100.9 million at September 30, 2022 from $70.6 million at September 30, 2021. Investment securities at September 30, 2022 consisted of $64.3 million in mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises, $24.8 million in U.S. government-sponsored enterprise debt securities, $8.0 million in corporate notes, $3.5 million in municipal bonds and $224,000 in “private-label” mortgage-backed securities. There were no other-than-temporary-impairment charges for the Company’s investment securities for the year ended September 30, 2022.
Securities available-for-sale decreased $3.7 million, or 28.6%, to $9.2 million at September 30, 2022 from $12.9 million at September 30, 2021. The decrease was attributable to $1.9 million in principal repayments and unrealized losses of $1.7 million. There were no purchases of securities available-for-sale during the year ended September 30, 2022.
Securities held-to-maturity increased $34.0 million, or 58.9%, to $91.6 million at September 30, 2022 from $57.7 million at September 30, 2021. The increase was the result of $41.1 million in security purchases, partially offset by $7.0 million in principal repayments and the amortization of $112,000 in net premiums paid during the year ended September 30, 2022.
Bank-Owned Life Insurance. The cash surrender value of life insurance held for directors and officers of Magyar Bank increased $3.4 million, or 23.6%, to $17.7 million at September 30, 2022 from $14.3 million at September 30, 2021. The Company purchased new policies on officers of the Bank totaling $3.0 million and recorded an increase in the cash surrender value of the policies totaling $372,000 during the twelve months ended September 30, 2022.
Other Real Estate Owned. OREO decreased $355,000, or 55.8%, to $281,000 at September 30, 2022 from $636,000 at September 30, 2021 due to the sale of two properties during the year. The Company’s OREO was reduced to one commercial real estate property totaling $281,000 that was under contract of sale at September 30, 2022.
Deposits. Deposits, which include noninterest-bearing demand deposits, interest-bearing demand deposits, money market deposits, savings deposits and time deposits, are the primary source of the Company’s funds. The Company offers a variety of products designed to attract and retain customers, with primary focus on building and expanding relationships. The Company continues to focus on establishing relationships with business borrowers, seeking deposits as well as lending relationships.
Total deposits increased $27.9 million, or 4.4%, to $667.7 million at September 30, 2022 from $639.8 million at September 30, 2021. The increase in deposits during the twelve month ended September 30, 2022 occurred in money market account balances, which increased $34.3 million, or 18.3%, to $222.2 million, in interest-bearing checking account balances, which increased $27.3 million, or 38.3% to $98.6 million, in non-interest checking account balances, which increased
$442,000, or 0.2%, to $182.4 million, and in savings account balances, which increased $126,000, or 0.2%, to $81.9 million. Offsetting these increases was a $34.3 million, or 29.3%, decrease in certificates of deposit (including individual retirement accounts), to $82.6 million. Included in certificates of deposit were $6.0 million in brokered certificates of deposit at September 30, 2022 and 2021.
The Company’s deposit strategy in 2022 focused on growing its non-interest checking account balances and reducing the overall cost of its interest-bearing liabilities to offset rising market interest rates.
Borrowed Funds. Borrowings decreased $7.7 million, or 33.1%, to $15.6 million at September 30, 2022 from $23.4 million at September 30, 2021. The decrease was due to the repayment of maturing long-term FHLBNY advances.
Stockholders’ Equity. Stockholders’ equity increased $861,000, or 0.9%, to $98.5 million at September 30, 2022 from $97.6 million at September 30, 2021. The increase was attributable to the Company’s net income from operations totaling $7.9 million, partially offset by $4.5 million in share repurchases, $1.4 million in dividends paid, and $1.2 million in other comprehensive losses. The Company’s book value per share increased to $14.60 at September 30, 2022 from $13.76 at September 30, 2021, based on total equity of $98.5 million and 6,745,128 shares outstanding.
Comparison of Operating Results for the Years Ended September 30, 2022 and 2021
Net Income. The Company’s net income increased $1.8 million, or 29.4%, to $7.9 million during the year ended September 30, 2022 compared with $6.1 million for the year ended September 30, 2021 due to higher net interest and dividend income, lower provisions for loan losses, and lower non-interest expenses, partially offset by lower non-interest income.
Net Interest and Dividend Income. The primary source of the Company’s operating income is net interest and dividend income, which is the difference between interest and dividends earned on earning assets and fees earned on loans, and interest paid on interest-bearing liabilities. The Company’s net interest and dividend income is affected by regulatory, economic and competitive factors that influence interest rates, loan demand, deposit flows and levels of nonperforming assets.
During the year ended September 30, 2022, net interest and dividend income increased $1.4 million, or 5.6%, to $27.0 million compared to $25.6 million for the year ended September 30, 2021. Interest and dividend income increased $975,000, or 3.4%, to $29.5 million at September 30, 2022 from $28.5 million at September 30, 2021, while interest expense decreased $457,000, or 15.5%, to $2.5 million at September 30, 2022 from $2.9 million at September 30, 2021. The Company’s net interest margin increased eight basis points to 3.61% for the year ended September 30, 2022 from 3.53% for the year ended September 30, 2021.
Average Balance Sheet. The following table presents certain information regarding our financial condition and net interest income for the years ended September 30, 2022, 2021 and 2020. The table presents the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown. We derived average balances from daily balances over the periods indicated. Interest income includes fees that we consider adjustments to yields.
For the Year Ended September 30,
Average
Balance
Interest
Income/
Expense
Yield/Cost
(Annualized)
Average
Balance
Interest
Income/
Expense
Yield/Cost
(Annualized)
(Dollars In Thousands)
Interest-earning assets:
Interest-earning deposits
$ 53,714
$
0.49%
$ 61,655
$
0.14%
Loans receivable, net
600,630
27,841
4.64%
605,176
27,551
4.55%
Securities
Taxable
89,001
1,279
1.44%
55,487
1.42%
Tax-exempt (1)
2,769
1.89%
1.64%
FHLBNY stock
1,547
5.02%
1,925
4.94%
Total interest-earning assets
747,661
29,514
3.95%
724,653
28,530
3.94%
Noninterest-earning assets
45,960
44,193
Total assets
$ 793,621
$ 768,846
Interest-bearing liabilities:
Savings accounts (2)
$ 85,834
0.18%
$ 87,812
$
0.18%
NOW accounts (3)
288,222
1,007
0.35%
258,261
0.27%
Time deposits (4)
96,442
0.94%
116,944
1,425
1.22%
Total interest-bearing deposits
470,498
2,070
0.44%
463,017
2,287
0.49%
Borrowings
18,399
2.25%
47,220
1.39%
Total interest-bearing liabilities
488,897
2,484
0.51%
510,237
2,941
0.58%
Noninterest-bearing liabilities
200,702
188,084
Total liabilities
689,599
698,321
Retained earnings
104,022
70,525
Total liabilities and retained earnings
$ 793,621
$ 768,846
Tax-equivalent basis adjustment
(11 )
(2 )
Net interest and dividend income
$ 27,019
$ 25,587
Interest rate spread
3.44%
3.36%
Net interest-earning assets
$ 258,764
$ 214,416
Net interest margin (5)
3.61%
3.53%
Average interest-earning assets to
average interest-bearing liabilities
152.93%
142.02%
(1) Calculated using the Company's 21% federal tax rate.
(2) Includes passbook savings, money market passbook and club accounts.
(3) Includes interest-bearing checking and money market accounts.
(4) Includes certificates of deposits and individual retirement accounts.
(5) Calculated as annualized 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 average volume). The volume column shows the effects attributable to changes in volume (changes in average volume multiplied by prior rate). The net 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.
September 30,
2022 vs. 2021
Increase (decrease) due to
Volume
Rate
Net
(In thousands)
Interest-earning assets:
Interest-earning deposits
$ (13 )
$
$
Loans
(220 )
Securities
Taxable
Tax-exempt (1)
FHLBNY stock
(19 )
(17 )
Total interest-earning assets
Interest-bearing liabilities:
Savings accounts (2)
NOW accounts (3)
Time deposits (4)
(224 )
(294 )
(518 )
Total interest-bearing deposits
(139 )
(78 )
(217 )
Borrowings
(523 )
(240 )
Total interest-bearing liabilities
(661 )
(457 )
Increase (decrease) in tax equivalent
net interest income
$
$
$ 1,441
Change in tax-equivalent basis adjustment
(9 )
Increase in net interest income
$ 1,432
(1) Calculated using the Company's 21% federal tax rate.
(2) Includes passbook savings, money market passbook and club accounts.
(3) Includes interest-bearing checking and money market accounts.
(4) Includes certificates of deposits and individual retirement accounts.
Interest and Dividend Income. Interest and dividend income increased $975,000, or 3.4%, to $29.5 million for the year ended September 30, 2022 from $28.5 million for the year ended September 30, 2021. The average balance of interest-earnings assets between the two periods increased $23.0 million, or 3.2%, to $747.7 million from $724.6 million, while the yield on such assets increased 1 basis point to 3.95% for the year ended September 30, 2022 from 3.94% for the year ended September 30, 2021.
The increase in yield on the Company’s assets was attributable to 1) the reinvestment of repaid Paycheck Protection Program (“PPP”) loans (earning 1.0%) into higher yielding commercial real estate loans, 2) the receipt of $681,000 in prior period interest income during the year ended September 30, 2022 from previously non-performing loans, and 3) higher market interest rates, which increased the yield on the Company’s interest-earning deposits with banks. Offsetting these increases was a $1.2 million decrease in PPP loan fees recognized, which totaled $836,000 during the twelve months ended September 30, 2022 compared with $2.0 million for the twelve months ended September 30, 2021.
Interest income on loans increased $290,000, or 1.1%, to $27.8 million for the year ended September 30, 2022 from $27.5 million for the year ended September 30, 2021, while the average balance of loans decreased $4.5 million, or 0.8%, to $600.6 million from $605.2 million. The average yield on such loans increased nine basis points to 4.64% at September 30, 2022 from 4.55% for the year ended September 30, 2021.
Interest earned on investment securities, including interest earned on deposits but excluding FHLBNY stock, increased $702,000, or 79.6%, to $1.6 million for the year ended September 30, 2022 from $882,000 for fiscal 2021. The increase was attributable to a 35 basis point increase in the average yield on investment securities and interest earned on deposits to 1.10% from 0.75%, and a $27.9 million, or 23.8%, increase in the average balance of investment securities and interest earning deposits to $145.5 million from $117.5 million during the year ended September 30, 2022.
Interest Expense. Interest expense decreased $457,000, or 15.5%, to $2.5 million for the year ended September 30, 2022 from $2.9 million for the year ended September 30, 2021. The average balance of interest-bearing liabilities decreased $21.3 million, or 4.2%, between the two periods while the cost of such liabilities decreased seven basis points to 0.51% for the year ended September 30, 2022 compared with the prior year period. Lower market interest rates were primarily responsible for the drop in the cost of the Company’s interest-bearing liabilities for the year ended September 30, 2022.
The average balance of interest-bearing deposits increased $7.5 million, or 1.6%, to $470.5 million for the year ended September 30, 2022 from $463.0 million for the prior year while the average cost of such deposits decreased 5 basis points to 0.44% from 0.49%. Interest expense on deposits decreased $217,000, or 9.5%, to $2.1 million for the year ended September 30, 2022 from $2.3 million for the year ended September 30, 2021.
Interest expense on advances decreased $240,000, or 36.7%, to $414,000 for the year ended September 30, 2022 from $654,000 for the year ended September 30, 2021. The average cost of borrowings increased 86 basis points to 2.25% for the year ended September 30, 2022 from 1.39% for the year ended September 30, 2021 while the average balance of those borrowings decreased $28.8 million to $18.4 million for the year ended September 30, 2022 from $47.2 million the prior year.
Provision for Loan Losses. We establish provisions for loan losses, which are charged to earnings, at a level necessary to absorb known and inherent losses 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 considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, peer group information and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events occur.
The provision for loan losses decreased $1.3 million, or 81.3%, to $304,000 for the year ended September 30, 2022 compared to $1.6 million for the year ended September 30, 2021. The lower provisions resulted from lower qualitative adjustment factors to the historical loss rates in fiscal 2022 compared with the prior year as well as lower balances in higher risk segments of the loan portfolio. There were net recoveries of $54,000 during the year ended September 30, 2022 compared with net recoveries of $46,000 for the year ended September 30, 2021.
Other Income. Other income decreased $694,000, or 20.4%, to $2.7 million during the twelve months ended September 30, 2022 compared to $3.4 million for the twelve months ended September 30, 2021. Fees for other customer services decreased to $0 for fiscal 2022 from $777,000 for fiscal 2021, during which the Company received a fee of three percent of the Small Business Relief Grants it assisted with processing.
Higher gains from the sale of SBA loans helped offset lower interest rate swap fees between periods. The Bank sells the guaranteed portion of its SBA loans in the secondary market. During the year ended September 30, 2022, $9.5 million in loans were sold, generating $925,000 in gains compared with sales of $6.4 million and $749,000 in gains for the twelve months ended September 30, 2021. During the twelve months ended September 30, 2022, the Company generated $76,000 in interest rate swap fees compared with $313,000 for the year ended September 30, 2021.
Other Expenses. Other expenses decreased $381,000, or 2.0%, to $18.3 million compared to $18.6 million for the year ended September 30, 2021. The decrease was primarily attributable to professional fees, which decreased $657,000, or 38.2%, due to lower legal and consulting fees related to the collection and foreclosure of non-performing loans.
Loan servicing expenses and FDIC deposit insurance premiums decreased $212,000 and $207,000, respectively, from lower levels of non-performing loans and the Company’s higher capital levels. Partially offsetting these decreases were higher compensation and marketing and business development expenses. Compensation and benefit expense increased $411,000, or 3.9%, due to annual merit increases, fewer open positions within the Bank, and higher incentive plan accruals. Marketing and business development expenses increased $221,000, or 97.8%, as the Bank is celebrating its 100 year anniversary with increased events and advertising, while business development opportunities increased as the COVID pandemic restrictions were lifted.
Income Tax Expense. The Company recorded tax expense of $3.3 million on income of $11.2 million for the year ended September 30, 2022 compared with tax expense of $2.6 million on income of $8.7 million for the year ended September 30, 2021. The higher income tax expense resulted from a $2.5 million increase in the Company’s results from operations.
The Company’s effective tax rate for the year ended September 30, 2022 was 29.1% compared with 29.9% for the year ended September 30, 2021.
Management of Market Risk
General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, our Board of Directors has established an Asset and Liability Management Committee which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. Senior management monitors the level of interest rate risk on a regular basis and the Asset and Liability Committee meets at least on a quarterly basis to review our asset/liability policies and interest rate risk position.
We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. As part of our ongoing asset-liability management, we seek to manage our exposure to interest rate risk by retaining in our loan portfolio fewer fixed-rate residential loans, by originating and retaining adjustable-rate loans in the residential, construction and commercial real estate loan portfolios, by using alternative funding sources, such as advances from the FHLBNY, to “match fund” longer-term residential and commercial mortgage loans, and by originating and retaining variable-rate home equity and short-term and medium-term fixed-rate commercial business loans. We also offer a commercial loan swap product that allows the Bank to receive floating-rate interest loan payments while its borrowers pay a fixed rate of interest on their loans. We have also increased money market account deposits as a percentage of our total deposits. Money market accounts offer a variable rate based on market indications. By following these strategies, we believe that we are well-positioned to react to changes in market interest rates.
Net Interest Income Analysis. The table below sets forth, as of September 30, 2022, the estimated changes in our Net Interest Income (“NII”) for each of the next two years that would result from the designated instantaneous changes in interest rates. These estimates require making certain assumptions including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain and, as a result, we cannot precisely predict the impact of changes in interest rates on net interest income. Actual results may differ significantly due to timing, magnitude and frequency of interest rate changes and changes in market conditions. Further, certain shortcomings are inherent in the methodology used in the interest rate risk measurement. Modeling changes in net interest income require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates.
Change in
Estimated Decrease
Estimated Increase
Interest rates
Estimated
in NII Year 1
Estimated
(Decrease) in NII Year
(Basis Points)(1)
NII Year 1
Amount
Percentage
NII Year 2
Amount
Percentage
(Dollars in thousands)
+200
$ 28,550
$ (212 )
-0.74%
$ 31,968
$ 1,056
3.42%
Unchanged
28,762
-
-
30,912
-
-
27,816
(946 )
-3.29%
28,259
(2,653 )
-8.58%
(1) Assumes an instantaneous uniform change in interest rates at all maturities.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, FHLBNY borrowings and maturities and sales of investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity targets and strategies in
order to ensure that sufficient liquidity exists for meeting the borrowing needs of our customers as well as unanticipated contingencies. We seek to maintain a liquidity ratio of 5.0% of assets or greater. The liquidity ratio is calculated by determining the sum of the difference between liquid assets (cash and unpledged investment securities) and short-term liabilities (estimated 30-day deposit outflows), plus our borrowing capacity from the FHLBNY and dividing the sum by total assets. At September 30, 2022, our liquidity ratio was 16.6% of assets.
We regularly adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short-and intermediate-term securities.
Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At September 30, 2022, cash and cash equivalents totaled $30.9 million compared with $75.2 million at September 30, 2021. Securities classified as available-for-sale, which provide additional sources of liquidity from sales, totaled $9.2 million at September 30, 2022 compared with $12.9 million at September 30, 2021. At September 30, 2022, we also had the ability to borrow $138.9 million from the FHLBNY compared with $151.2 million at September 30 2021. On that date, we had an aggregate of $15.6 million in advances outstanding and $40.0 million in municipal letters of credit outstanding with the FHLBNY. Our cash flows are derived from operating activities, investing activities and financing activities as reported in our consolidated Statements of Cash Flows included in our consolidated Financial Statements.
At September 30, 2022, we had $52.5 million in loan origination commitments outstanding. In addition to commitments to originate loans, we had $73.8 million in unused lines of credit to borrowers. Certificates of deposit due within one year of September 30, 2022 totaled $44.6 million, or 6.7% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits and FHLBNY advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit (including individual retirement accounts and brokered certificate deposit accounts) due on or before September 30, 2023. We believe, however, that based on past experience a significant portion of our certificates of deposit (including individual retirement accounts and brokered certificate deposit accounts) will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.
Our primary investing activities are the origination of loans and the purchase of investment securities. We originated $159.2 million in loans and we purchased $41.1 million of investment securities for the year ended September 30, 2022. Comparatively, we originated $159.0 million in loans (including $35.3 million in PPP loans) and purchased $49.5 million of investment securities for the year ended September 30, 2021.
Financing activities consist primarily of activity in deposit accounts and FHLBNY advances. We experienced a net increase in total deposits of $27.9 million, or 4.4%, to $667.7 million for the year ended September 30, 2022 compared with a net increase in total deposits of $21.5 million, or 3.5%, to $639.8 million for the year ended September 30, 2021. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors.
Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLBNY, which provide an additional source of funds. FHLBNY advances totaled $15.6 million and $23.4 million at September 30, 2022 and September 30, 2021, respectively. FHLBNY advances have primarily been used to fund loan demand.
In addition to borrowings, the Bank has the ability to raise deposits on the brokered market or through deposit listing services. At September 30, 2022, the Bank held $6.0 million in brokered deposits and $14.6 million from deposit listing services.
Magyar Bank is subject to various regulatory capital requirements, (see “Supervision and Regulation-Federal Banking Regulation-Capital Requirements”). As of September 30, 2022, Magyar Bank’s Tier 1 capital as a percentage of the Bank’s average assets was 11.13% and the total qualifying capital as a percentage of risk-weighted assets was 16.47%.
Bank-owned life insurance is a tax-advantaged financing transaction that is used to offset employee benefit plan costs. Policies are purchased insuring directors and officers of Magyar Bank using a single premium method of payment. Magyar Bank is the owner and beneficiary of the policies and records tax-free income through cash surrender value accumulation. We have minimized our credit exposure by choosing carriers that are highly rated and limiting the concentration of any one carrier. The investment in bank-owned life insurance has no significant impact on our capital and liquidity.
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, standby letters of 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 made by us. For additional information, see Note P, “Commitments,” and Note Q “Financial Instruments with Off-Balance-Sheet Risk” to our consolidated financial statements.
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment.
The following table summarizes our significant fixed and determinable contractual obligations and other funding needs by payment date at September 30, 2022. The payment amounts represent those amounts due to the recipient and do not include any unamortized premiums or discounts or other similar carrying amount adjustments.
Payments Due by Period
Less Than
One to
Three to
More Than
September 30, 2022
One Year
Three Years
Five Years
Five Years
Total
(In thousands)
Federal Home Loan Bank advances
$ 4,741
$ 7,884
$ 3,000
$ -
$ 15,625
Operating leases
1,270
1,199
3,996
Total
$ 5,479
$ 9,154
$ 3,789
$ 1,199
$ 19,621

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting companies.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8.Financial Statements and Supplementary Data
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm (PCAOB ID )
Consolidated Balance Sheets as of September 30, 2022 and 2021
Consolidated Statements of Income for the Years Ended September 30, 2022 and 2021
Consolidated Statements of Comprehensive Income for the Years Ended September 30, 2022 and 2021
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended September 30, 2022 and 2021
Consolidated Statements of Cash Flows for the Years Ended September 30, 2022 and 2021
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Magyar Bancorp, Inc. and Subsidiary
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Magyar Bancorp, Inc. and Subsidiary (the Company) as of September 30, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the two years in the period ended September 30, 2022, and the related notes to the consolidated financial statements (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended September 30, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or is required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses - Qualitative Factors
The allowance for loan losses as of September 30, 2022 was $8.4 million. As described in Notes B and E to the consolidated financial statements, the allowance for loan losses is established through a provision for loan losses and represents an amount which, in management’s judgement, will be adequate to absorb losses on existing loans. The allowance consists of specific and general components in the amounts of $0.1 million and $8.3 million, respectively. The specific component relates to loans that are delinquent or otherwise identified as impaired by management. All such loans are evaluated individually, with principal consideration given to the value of the collateral securing the loan and discounted cash flows. Specific impairment allowances are established as required by this analysis. The general loan loss allocation component is determined by segregating the remaining loans by type of loan, risk weighting, and payment history. This analysis establishes historical loss factors based on a five year look back period that are applied to the loan groups adjusted for the following qualitative factors: levels of trends in delinquency and non-accrual loans, volume and loan term trends, changes in the lending policy, national and local economic trends and conditions, changes in concentrations of credit from a loan type, industry and/or geographic standpoint, the experience, ability and depth of lending management, and trends in collateral value. The evaluation of the qualitative factors requires a significant amount of judgement by management and involves a high degree of subjectivity.
We identified the qualitative factor component of the allowance for loan losses as a critical audit matter as auditing the underlying qualitative factors required significant auditor judgment as amounts determined by management rely on analysis that is often subjective in nature and the estimate is highly sensitive to changes in significant assumptions.
Our audit procedures related to the qualitative factors of the allowance for loan losses included the following, among others:
•
We obtained an understanding of how management developed the estimates and related assumptions, including:
-
Testing completeness and accuracy of key data inputs used in forming assumptions or calculations and testing the reliability of the underlying data on which these factors are based by comparing information to source documents and external information sources.
-
Evaluating the reasonableness of the qualitative factors established by management as compared to the underlying internal or external information sources.
We have served as the Company's auditor since 2018.
/s/ RSM US LLP
Philadelphia, Pennsylvania
December 22, 2022
MAGYAR BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
September 30,
September 30,
Assets
Cash
$
2,869
$
1,808
Interest earning deposits with banks
28,067
73,393
Total cash and cash equivalents
30,936
75,201
Investment securities - available for sale, at fair value
9,229
12,927
Investment securities - held to maturity, at amortized cost (fair value of
$79,914 and $57,282 at September 30, 2022 and 2021, respectively)
91,646
57,660
Federal Home Loan Bank of New York stock, at cost
1,447
1,738
Loans receivable, net of allowance for loan losses of $8,433 and $8,075
at September 30, 2022 and 2021, respectively
619,843
585,301
Bank owned life insurance
17,660
14,288
Accrued interest receivable
3,478
3,533
Premises and equipment, net
13,880
14,331
Other real estate owned ("OREO")
Other assets
10,143
8,375
Total assets
$
798,543
$
773,990
Liabilities and Stockholders' Equity
Liabilities
Deposits
$
667,733
$
639,814
Escrowed funds
3,407
3,242
Borrowings
15,625
23,356
Accrued interest payable
Accounts payable and other liabilities
13,191
9,852
Total liabilities
700,041
676,349
Stockholders' equity
Preferred stock: $.01 Par Value, 500,000 shares authorized; at September 30, 2022 and 2021, none issued
-
-
Common stock: $.01 Par Value, 14,000,000 shares authorized;
7,097,825 shares issued; 6,745,128 and 7,097,825 shares
outstanding at September 30, 2022 and 2021, respectively, at cost
Additional paid-in capital
63,734
63,713
Treasury stock: 465,693 and 112,996 shares at September 30, 2022 and 2021, respectively, at cost
(5,793
)
(1,242
)
Unearned Employee Stock Ownership Plan shares
(3,169
)
(3,235
)
Retained earnings
45,773
39,281
Accumulated other comprehensive loss
(2,114
)
(947
)
Total stockholders' equity
98,502
97,641
Total liabilities and stockholders' equity
$
798,543
$
773,990
The accompanying notes are an integral part of these consolidated financial statements.
MAGYAR BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(In Thousands, Except Share and Per Share Data)
Year Ended
September 30,
Interest and dividend income
Loans, including fees
$
27,841
$
27,551
Investment securities
Taxable
1,543
Tax-exempt
Federal Home Loan Bank of New York stock
Total interest and dividend income
29,503
28,528
Interest expense
Deposits
2,070
2,287
Borrowings
Total interest expense
2,484
2,941
Net interest and dividend income
27,019
25,587
Provision for loan losses
1,629
Net interest and dividend income after
provision for loan losses
26,715
23,958
Other income
Service charges
1,188
1,143
Income on bank owned life insurance
Fees for other customer services
-
Interest rate swap fees
Other operating income
Gains on sales of loans
Gains on sale of OREO
-
Total other income
2,715
3,409
Other expenses
Compensation and employee benefits
11,030
10,619
Occupancy expenses
3,016
3,000
Professional fees
1,062
1,719
Data processing expenses
Marketing and business development
OREO expenses
FDIC deposit insurance premiums
Loan servicing expenses
Other expenses
1,770
1,585
Total other expenses
18,261
18,642
Income before income tax expense
11,169
8,725
Income tax expense
3,250
2,605
Net income
$
7,919
$
6,120
Net income per share-basic and diluted
$
1.17
$
1.01
Weighted average basic and diluted shares outstanding
6,781,659
6,037,499
The accompanying notes are an integral part of these consolidated financial statements.
MAGYAR BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(In Thousands)
Year Ended
September 30,
Net income
$
7,919
$
6,120
Other comprehensive income (loss)
Unrealized loss on securities available for sale
(1,744
)
(293
)
Defined benefit pension plan gain
Other comprehensive (loss) income, before tax
(1,533
)
Deferred income tax effect
(190
)
Total other comprehensive (loss) income
$
(1,167
)
$
Total comprehensive income
$
6,752
$
6,530
The accompanying notes are an integral part of these consolidated financial statements.
MAGYAR BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
For the Year Ended September 30, 2022 and 2021
(In Thousands, Except for Share Amounts)
Accumulated
Common Stock
Additional
Unearned
Other
Shares
Par
Paid-In
Treasury
ESOP
Retained
Comprehensive
Outstanding
Value
Capital
Stock
Shares
Earnings
Loss
Total
Balance, September 30, 2020
5,810,746
$
$
26,294
$
(1,242
)
$
(65
)
$
33,161
$
(1,357
)
$
56,850
Net income
-
-
-
-
-
6,120
-
6,120
Other comprehensive income
-
-
-
-
-
-
Common stock acquired by ESOP
-
-
-
-
(3,272
)
-
-
(3,272
)
ESOP shares allocated
-
-
-
-
-
Second-step conversion and stock offering:
Magyar Bancorp, MHC shares sold in public offering, net of offering costs
3,910,000
37,414
-
-
-
-
37,426
Retirement of MHC shares
(3,200,450
)
-
-
-
-
-
-
-
Fractional shares and other adjustments resulting from conversion of existing shares at 1.2213 exchange rate
577,529
-
-
-
-
-
-
-
Balance, September 30, 2021
7,097,825
$
$
63,713
$
(1,242
)
$
(3,235
)
$
39,281
$
(947
)
$
97,641
Net income
-
-
-
-
-
7,919
-
7,919
Dividends paid on common stock ($0.21 per share)
(1,427
)
(1,427
)
Other comprehensive loss
-
-
-
-
-
-
(1,167
)
(1,167
)
Common stock acquired by ESOP
-
-
-
-
(98
)
-
-
(98
)
ESOP shares allocated
-
-
-
-
-
Purchase of treasury stock
(352,697
)
-
-
(4,551
)
-
-
-
(4,551
)
Stock-based compensation expense
-
-
-
-
-
-
Balance, September 30, 2022
$
6,745,128
$
$
63,734
$
(5,793
)
$
(3,169
)
$
45,773
$
(2,114
)
$
98,502
The accompanying notes are an integral part of these consolidated financial statements.
MAGYAR BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In Thousands)
For the Year Ended
September 30,
Operating activities
Net income
$
7,919
$
6,120
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense
Premium amortization on investment securities, net
Provision for loan losses
1,629
Provision for loss on other real estate owned
-
Originations of SBA loans held for sale
(9,533
)
(6,386
)
Proceeds from the sales of SBA loans
10,457
7,135
Gains on sale of loans receivable
(925
)
(749
)
Gains on the sales of other real estate owned
(67
)
(223
)
ESOP compensation expense
Stock-based compensation expense
-
Deferred income tax expense (benefit)
(178
)
Decrease in accrued interest receivable
Increase in surrender value of bank owned life insurance
(372
)
(317
)
Increase in other assets
(1,555
)
(1,551
)
Decrease in accrued interest payable
-
(106
)
Increase in accounts payable and other liabilities
3,551
1,942
Net cash provided by operating activities
11,201
9,259
Investing activities
Net increase in loans receivable
(37,235
)
17,133
Purchases of loans receivable
-
(3,500
)
Proceeds from the sale of loans receivable
2,389
2,000
Purchases of investment securities held to maturity
(41,138
)
(38,907
)
Purchases of investment securities available for sale
-
(10,561
)
Proceeds from calls of investment securities held to maturity
-
2,000
Proceeds from calls of investment securities available for sale
-
5,000
Principal repayments on investment securities held to maturity
7,040
9,595
Principal repayments on investment securities available for sale
1,875
6,830
Purchase of bank owned life insurance
(3,000
)
-
Purchases of premises and equipment
(387
)
(420
)
Investment in other real estate owned
(12
)
(25
)
Proceeds from other real estate owned
2,415
Redemption of Federal Home Loan Bank stock
Net cash used in investing activities
(69,743
)
(8,197
)
Financing activities
Net increase in deposits
27,919
21,484
Net proceeds from issuance of common stock
-
37,426
Purchase of common stock for ESOP
(98
)
(3,272
)
Net increase in escrowed funds
Proceeds from long-term advances
3,000
-
Repayments of long-term advances
(10,731
)
(44,054
)
Cash paid on common stock dividends
(1,427
)
-
Purchase of treasury stock
(4,551
)
-
Net cash provided by financing activities
14,277
12,413
Net (decrease) increase in cash and cash equivalents
(44,265
)
13,475
Cash and cash equivalents, beginning of year
75,201
61,726
Cash and cash equivalents, end of year
$
30,936
$
75,201
Supplemental disclosures of cash flow information
Cash paid for
Interest
$
2,485
$
3,047
Income taxes
$
3,140
$
2,750
Non-cash operating activities
Real estate acquired in full satisfaction of loans in foreclosure
$
-
$
The accompanying notes are an integral part of these consolidated financial statements.
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
NOTE A - ORGANIZATION
Magyar Bancorp, Inc. (the “Company”) is a Delaware-chartered bank holding company. The Company owns 100% of the outstanding common stock of Magyar Bank (the “Bank”), a New Jersey-chartered stock savings bank. The Bank offers consumer and commercial banking services to individuals, businesses, and nonprofit organizations throughout the central New Jersey area through its administrative office in New Brunswick, New Jersey and seven full-service branch offices in Middlesex and Somerset Counties in New Jersey. The Company is subject to regulation and supervision by the Board of Governors of the Federal Reserve System. The Bank is supervised and regulated by the Federal Deposit Insurance Corporation (the “FDIC”) and the New Jersey Department of Banking and Insurance.
Magyar Investment Company, a New Jersey investment corporation subsidiary of the Bank, was formed on August 15, 2006 for the purpose of buying, selling and holding investment securities.
Magyar Service Corporation, a New Jersey corporation, is a wholly owned, non-bank subsidiary of the Bank. Magyar Service Corporation, which also operates under the name Magyar Financial Services, receives commissions from annuity and life insurance sales referred to a licensed, non-bank financial planner.
Hungaria Urban Renewal, LLC is a Delaware limited-liability corporation established in 2002 as a qualified intermediary operating for the purpose of acquiring and developing the Bank’s new main office. The Bank owns a 100% interest in Hungaria Urban Renewal, LLC, which has no other business other than owning the Bank’s main office site.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Basis of Financial Statement Presentation
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“US GAAP”) and predominant practices within the banking industry. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, the Bank, and its wholly-owned subsidiaries Magyar Investment Company, Magyar Service Corporation, and Hungaria Urban Renewal, LLC. All intercompany balances and transactions have been eliminated in the consolidated financial statements.
The Company has evaluated subsequent events and transactions occurring subsequent to the consolidated balance sheet date of September 30, 2022, for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were available to be issued.
In preparing financial statements in conformity with US GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The principal estimates that are particularly susceptible to significant change in the near term relate to the allowance for loan losses and the deferred tax asset. The evaluation of the adequacy of the allowance for loan losses includes an analysis of the individual loans and overall risk characteristics and size of the different loan portfolios, and takes into consideration current economic and market conditions, the capability of specific borrowers to pay specific loan obligations, as well as current loan collateral values. However, actual losses on specific loans, which also are encompassed in the analysis, may vary from estimated losses.
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
The Company records income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities: (i) are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns; (ii) are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases; and (iii) are measured using enacted tax rates expected to apply in the years when those temporary differences are expected to be recovered or settled.
Where applicable, deferred tax assets are reduced by a valuation allowance for any portions determined not likely to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period of enactment. The valuation allowance is adjusted, by a charge or credit to income tax expense, as changes in facts and circumstances warrant.
2. Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, time deposits with original maturities less than three months and overnight deposits.
3. Investment Securities
The Company classifies its investment securities into one of three portfolios: held to maturity, available for sale or trading. Investments in debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity securities and reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized holding gains and losses included in earnings. Debt securities not classified as either trading securities or as held to maturity securities are classified as available for sale securities and reported at fair value, with unrealized holding gains or losses, net of deferred income taxes, reported in the accumulated other comprehensive income (“AOCI”) component of stockholders’ equity. Equity securities, with certain exceptions, are measured at fair value with changes in fair value recognized in net income.
If the fair value of a security is less than its amortized cost, the security is deemed to be impaired. Management evaluates all securities with unrealized losses quarterly to determine if such impairments are “temporary” or “other-than-temporary” in accordance with applicable accounting guidance. The Company accounts for temporary impairments based upon security classification as either available for sale, held to maturity or trading. Temporary impairments on “available for sale” securities are recognized, on a tax-effected basis, through AOCI with offsetting entries adjusting the carrying value of the security and the balance of deferred taxes. Conversely, the Company does not adjust the carrying value of “held to maturity” securities for temporary impairments, although information concerning the amount and duration of impairments on held to maturity securities is generally disclosed in periodic consolidated financial statements. The carrying value of securities held in a trading portfolio is adjusted to their fair value through earnings on a daily basis. However, the Company maintained no securities in trading portfolios at or during the periods presented in these consolidated financial statements.
The Company accounts for other-than-temporary impairments based upon several considerations. First, other-than-temporary impairments on securities that the Company has decided to sell as of the close of a fiscal period, or will, more likely than not, be required to sell prior to the full recovery of their fair value to a level equal to their amortized cost, are recognized in operations. If neither of these criteria apply, then the other-than-temporary impairment is separated into credit-related and noncredit-related components. The credit-related impairment generally represents the amount by which the present value of the cash flows that are expected to be collected on an other-than-temporarily impaired security fall below its amortized cost while the noncredit-related component represents the remaining portion of the impairment not otherwise designated as credit-related. The Company recognizes credit-related, other-than-temporary impairments in earnings, while noncredit-related, other-than-temporary impairments on debt securities are recognized, net of deferred taxes, in AOCI.
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
Premiums and discounts on all securities are amortized or accreted to maturity by use of the level-yield method considering the impact of principal amortization and prepayments on mortgage-backed securities. Gain or loss on sales of securities is recognized on the specific identification method.
4. Regulatory Stock, at Cost
Federal law requires a member institution of the Federal Home Loan Bank (“FHLB”) system to purchase and hold restricted stock of its district FHLB according to a predetermined formula. The Company invests in Federal Home Loan Bank of New York stock as required to support borrowing activities, as detailed in Note J to these consolidated financial statements. Although FHLB stock is an equity interest in a FHLB, it does not have a readily determinable fair value because its ownership is restricted and it lacks a market. FHLB stock can be sold back only at its par value of $100 per share and only to the FHLBs or to another member institution. Accordingly, the FHLB restricted stock is carried at cost, less any applicable impairment charges.
5. Loans and Allowance for Loan Losses
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal, adjusted for net deferred loan fees and costs, and reduced by an allowance for loan losses. Interest on loans is accrued and credited to operations based upon the principal amounts outstanding. The allowance for loan losses is established through a provision for possible loan losses charged to operations. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely.
Income recognition of interest is discontinued when, in the opinion of management, the collectability of such interest becomes doubtful. A loan is generally classified as non-accrual when the scheduled payment(s) due on the loan is delinquent for more than 90 days. Loan origination fees and certain direct origination costs are deferred and amortized over the life of the related loans as an adjustment to the yield on loans receivable using the effective interest method.
The allowance for loan losses is maintained at an amount management deems adequate to cover estimated losses. In determining the level to be maintained, management evaluates many factors, including current economic trends, industry experience, historical loss experience, industry loan concentrations, the borrowers’ ability to repay and repayment performance, and estimated collateral values. In the opinion of management, the present allowance is adequate to absorb reasonable, foreseeable loan losses. While management uses the best information available to make such evaluations, future adjustments to the allowance may be necessary based on changes in economic conditions or any of the other factors used in management’s determination. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for losses on loans. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Charge-offs to the allowance are made when the loan is transferred to other real estate owned or other determination of a confirmed loss. Recoveries on loans previously charged off are also recorded through the allowance.
A loan is considered impaired when, based upon current information and events, it is probable that a creditor will be unable to collect all amounts due including principal and interest, according to the contractual terms of the loan agreement. The Company measures impaired loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate or as a practical expedient, at the loan’s current observable market price, or the fair value of the collateral if the loan is collateral dependent. The amount by which the recorded investment of an impaired loan exceeds the measurement value is recognized by creating a valuation allowance through a charge to the provision for loan losses. Impairment criteria generally do not apply to those smaller-balance homogeneous loans that are collectively evaluated for impairment which, for the Company, includes one- to four-family first mortgage loans and consumer loans, other than those modified in a troubled debt restructuring.
The Company records cash receipts on impaired loans that are non-performing as a reduction to principal before applying amounts to interest or late charges unless specifically directed by the Bankruptcy Court to apply payments otherwise. The Company may continue to recognize interest income on impaired loans where there is no confirmed loss.
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
6. Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation, and include capitalized expenditures for new facilities, major betterments and renewals. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method based upon the estimated useful lives of the related assets for financial reporting purposes and using the mandated methods by asset type for income tax purposes. Leasehold improvements are depreciated using the straight-line method based upon the initial term of the lease.
The Company accounts for the impairment of long-lived assets in accordance with US GAAP, which requires recognition and measurement for the impairment of long-lived assets to be held and used or to be disposed of by sale. The Company had no impaired long-lived assets at September 30, 2022 and 2021.
7. Revenue Recognition
The Company recognizes revenue in the consolidated statements of income as it is earned and when collectability is reasonably assured. The primary source of revenue is interest income from interest earning assets, which is recognized on the accrual basis of accounting using the effective interest method. The recognition of revenues from interest earning assets is based upon formulas from underlying loan agreements, securities contracts, or other similar contracts. Non-interest income is recognized on the accrual basis of accounting as services are provided or as transactions occur. Non-interest income includes earnings on bank-owned life insurance, deposit accounts, merchant services, ATM and debit card fees, mortgage banking activities, commercial loan prepayment penalties and other miscellaneous services and transactions.
The Company’s contracts with customers in the scope of ASC 606, “Revenue from Contracts with Customers” are contracts for deposit accounts and contracts for non-deposit investment accounts through a third party service provider. Both types of contracts result in non-interest income being recognized. The revenue resulting from deposit accounts, which includes fees such as insufficient funds fees, wire transfer fees and out-of-network ATM transaction fees, is included as a component of service charges on the consolidated statements of income. The revenue resulting from non-deposit investment accounts is included as a component of other operating income on the consolidated statements of income.
Revenue from contracts with customers included in service charges was $1.2 million and $1.1 million for the years ended September 30, 2022 and 2021, respectively. Revenue from contracts with customers included in other operating income was $87,000 and $110,000 for the years ended September 30, 2022 and 2021, respectively.
For our contracts with customers, we satisfy our performance obligations each day as services are rendered. For our deposit account revenue, we receive payment on a daily basis as services are rendered and for our non-deposit investment account revenue, we receive payment on a monthly basis from our third party service provider as services are rendered.
There was no fee income from other customer services at September 30, 2022. During the year ended September 30, 2021, the Bank assisted a local county with services related to a Small Business Relief Grant (“SBRG”) program from which the Bank recognized $777,000 as fees for other customer services. These services included the review of the applications, review of the required supporting documentation, including financial statements and tax returns, and the determination of whether or not the applicant qualified for the SBRG using the County’s eligibility criteria. The Bank applied the five-step approach outlined ASC Topic 606 to determine that there was a qualifying contract with specific services provided by the Bank for a fixed fee that was received and recognized for the completion of a specific performance obligation.
8. Other Real Estate Owned
Real estate acquired through foreclosure, or a deed-in-lieu of foreclosure, is recorded at fair value less estimated selling costs at the date of acquisition or transfer, and subsequently at the lower of its net cost or fair value less estimated selling costs. Adjustments to the carrying value at the date of acquisition or transfer are charged to the allowance for loan losses. The carrying value of the individual properties is subsequently adjusted to the extent it exceeds estimated fair value less estimated selling costs, at which time a provision for losses on such real estate is charged to operations.
The Company accounts for gains on sales of other real estate owned under ASC Topic 606 Revenue from Contracts with Customers, which uses a principles based methodology. As it pertains to the criteria for determining how a contract should be accounted for under the new guidance, judgment is required in evaluating if: (a) a commitment on the buyer’s part exists, (b) collection is probable in circumstances where the initial investment is minimal and (c) the buyer has obtained control of the asset, including the significant risks and rewards of the ownership. If there is no commitment on the buyer’s part, collection is not probable or the buyer has not obtained control of the asset, then a gain cannot be recognized under the new guidance.
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
Operating expenses of holding real estate, net of related income, are charged against income as incurred. Losses on the disposition of real estate, including expenses incurred in connection with the disposition, are charged to operations.
9. Pension and Postretirement Plans
The Company sponsors qualified defined benefit pension plan and supplemental executive retirement plan (SERP). The qualified defined benefit pension plan is funded with trust assets invested in a diversified portfolio of debt and equity securities. Accounting for pensions and other postretirement benefits involves estimating the cost of benefits to be provided well into the future and attributing that cost over the time period each employee works. This involves extensive use of assumptions about inflation, investment returns, mortality, turnover, and discount rates. Among other factors, changes in interest rates, investment returns and the market value of plan assets can (i) affect the level of plan funding; (ii) cause volatility in the net periodic pension cost; and (iii) increase our future contribution requirements. A significant decrease in investment returns or the market value of plan assets or a significant decrease in interest rates could increase our net periodic pension costs and adversely affect our results of operations. A significant increase in our contribution requirements with respect to our qualified defined benefit pension plan could have an adverse impact on our cash flow. Changes in the key actuarial assumptions would impact net periodic benefit expense and the projected benefit obligation for our defined benefit and other postretirement benefit plan. See Note M, “Pension Plan,” and Note N, “Non-Qualified Compensation Plan” for information on these plans and the assumptions used.
10. Income Taxes
The Company and its subsidiaries file consolidated federal and state income tax returns. Income taxes are allocated based on the contribution of their respective income or loss to the consolidated income tax returns.
The Company records income taxes on the basis of reported income using the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. To the extent that current available evidence about the future raises doubt about the realization of a deferred tax asset, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years 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.
The Company follows the provisions of Financial Accounting Standards Board Accounting Standards Codification Topic 740, which provides clarification on accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
At September 30, 2022 and 2021, no significant income tax uncertainties have been included in the Company’s Consolidated Balance Sheets. The Company’s policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense in the Consolidated Statements of Income. No interest and penalties were recorded during the year ended September 30, 2022 and 2021. The tax years subject to examination by the taxing authorities are the years ended September 30, 2017 and forward.
11. Advertising Costs
The Company expenses advertising costs as incurred.
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
12. Earnings Per Share
Basic income per share is calculated by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding for the period. The weighted average common shares outstanding include shares allocated to the Employee Stock Ownership Plan.
Diluted income per share is calculated by adjusting the weighted average common shares outstanding to reflect the potential dilution that could occur using the treasury stock method if securities or other contracts to issue common stock, such as stock options and unvested restricted stock, were exercised and converted into common stock. The resulting shares issued would share in the earnings of the Company. Shares issued and shares reacquired during the period are weighted for the portion of the period that they were outstanding. In periods of loss, dilution is not calculated and diluted loss per share is equal to basic loss per share.
The following tables illustrate the reconciliation of the numerators and denominators of the basic and diluted earnings per share (“EPS”) calculations.
For the Years Ended September 30,
Weighted
Per
Weighted
Per
average
share
average
share
Income
shares
Amount
Income
shares
Amount
(In thousands, except share and per share data)
Basic and diluted EPS
Net income available to weighted average common shareholders
$
7,919
6,781,659
$
1.17
$
6,120
6,037,499
$
1.01
13. Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss)
Comprehensive income (loss) includes net income as well as certain other items which result in a change to equity during the period. The other items allocated to comprehensive income (loss), as well as the related income tax effects, for the years ended September 30, 2022 and 2021 were as follows:
September 30,
Tax
Net of
Tax
Net of
Before Tax
(Benefit)
Tax
Before Tax
(Benefit)
Tax
Amount
Expense
Amount
Amount
Expense
Amount
(In thousands)
Unrealized holding gain (loss) arising during period on:
Available-for-sale investments
$
(1,744
)
$
$
(1,315
)
$
(293
)
$
$
(214
)
Defined benefit pension plan
(64
)
(269
)
Other comprehensive income (loss), net
$
(1,533
)
$
$
(1,167
)
$
$
(190
)
$
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
The components of accumulated other comprehensive loss at September 30, 2022 and 2021 were as follows:
September 30,
(In thousands)
Available-for-sale investments, net of tax
$
(1,446
)
$
(131
)
Defined benefit pension plan, net of tax
(668
)
(816
)
Total accumulated other comprehensive loss
$
(2,114
)
$
(947
)
14. Bank-Owned Life Insurance
The Company has purchased Bank-Owned Life Insurance policies (“BOLI”). BOLI involves the purchasing of life insurance by the Company on directors and officers of the Bank. The proceeds are used to help defray the costs of non-qualified compensation plans. The Company is the owner and beneficiary of the policies. BOLI is recorded on the Consolidated Balance Sheets at its cash surrender value and changes in the cash surrender value are recorded in other income in the Consolidated Statement of Operations.
15. Off-Balance Sheet Credit Related Financial Instruments
In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under commercial lines of credit. Such financial instruments are recorded when they are funded. The Company does not engage in the use of derivative financial instruments. See Note Q, “Financial Instruments With Off-Balance Risk.”
16. Segment Reporting
The Company acts as an independent, community, financial services provider, and offers traditional banking and related financial services to individual, business and government customers. The Company offers a full array of commercial and retail financial services, including the taking of time, savings and demand deposits; the making of commercial, consumer and home equity loans; and the provision of other financial services.
Management does not separately allocate expenses, including the cost of funding loan demand, between the commercial and retail operations of the Company. As such, discrete financial information is not available and segment reporting would not be meaningful.
17. New Accounting Pronouncements
In connection with the preparation of quarterly and annual reports in accordance with the Securities and Exchange Commission’s (“SEC”) Securities Exchange Act of 1934, SEC Staff Accounting Bulletin Topic 11.M requires the disclosure of the impact that recently issued accounting standards will have on financial statements when they are adopted in the future.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. ASU 2016-13 requires entities to report “expected” credit losses on financial instruments and other commitments to extend credit rather than the current “incurred loss” model. These expected credit losses for financial assets held at the reporting date are to be based on historical experience, current conditions, and reasonable and supportable forecasts. This ASU will also require enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements.
In October 2019, the FASB voted to defer the effective date of ASU 2016-13 for smaller reporting companies to fiscal years beginning after December 15, 2022 (effective October 1, 2023 for the Company), and interim periods within those fiscal years. The Company currently expects to continue to qualify as a smaller reporting company, based upon the current SEC definition, and as a result, will likely be able to defer implementation of the new standard for a period of time. The Company did not early adopt, but will continue to review factors that might indicate that the full deferral time period should not be used. The Company continues to evaluate the impact the new standard will have on the accounting for credit losses, but the Company may recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, consistent with regulatory expectations set forth in interagency guidance issued at the end of 2016. The Company cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on its consolidated financial condition or results of operations.
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
In January 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls “reference rate reform” if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position and results of operations.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The amendments in this ASU eliminate the accounting guidance for troubled debt restructurings (TDRs) by creditors in Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinances and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, for public business entities, the amendments in this ASU require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost. For entities that have not yet adopted the amendments in Update 2016-13, which is discussed in greater detail above, the effective dates for the amendments in this update are the same as the effective dates in Update 2016-13. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position and results of operations.
18. Subsequent Events
On October 27, 2022, the Company declared dividend of $0.03 per common share, payable on November 23, 2022, to common shareholders of record at the close of business on November 10, 2022.
On November 15, 2022, the Company declared a special dividend of $0.08 per common share, payable on December 13, 2022, to common shareholders of record at the close of business on November 29, 2022.
NOTE C - STOCK-BASED COMPENSATION AND STOCK REPURCHASE PROGRAM
The Company follows FASB Accounting Standards Codification (“ASC”) Section 718, Compensation-Stock Compensation, which covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. ASC 718 requires that compensation cost relating to share-based payment transactions be recognized in financial statements. The cost is measured based on the fair value of the equity or liability instruments issued.
ASC 718 also requires the Company to realize as a financing cash flow rather than an operating cash flow, as previously required, the benefits of realized tax deductions in excess of previously recognized tax benefits on compensation expense. In accordance with SEC Staff Accounting Bulletin (“SAB”) No. 107, the Company classified share-based compensation for employees and outside directors within “compensation and employee benefits” in the Consolidated Statements of Income to correspond with the same line item as the cash compensation paid.
Stock options generally vest over a five-year service period and expire ten years from issuance. Management recognizes compensation expense for all option grants over the awards’ respective requisite service periods. The fair values of all option grants were estimated using the Black-Scholes option-pricing model. Since there was limited historical information on the volatility of the Company’s stock, management also considered the average volatilities of similar entities for an appropriate period in determining the assumed volatility rate used in the estimation of fair value. Management estimated the expected life of the options using the simplified method allowed under SAB No. 107. The 7-year Treasury yield in effect at the time of the grant provided the risk-free rate for periods within the contractual life of the option. Management recognizes compensation expense for the fair values of these awards, which have graded vesting, on a straight-line basis over the requisite service period of the awards. Management estimated a 95% retention rate for stock option recipients. Once vested, these awards are irrevocable. Shares will be obtained from either the open market or treasury stock upon share option exercise.
Restricted shares generally vest over a five-year service period on the anniversary of the grant date. Once vested, these awards are irrevocable. The product of the number of shares granted and the grant date market price of the Company’s common stock determine the fair value of restricted shares under the Company’s restricted stock plans. Management recognizes compensation expense for the fair value of restricted shares on a straight-line basis over the requisite service period.
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
The following is a summary of the status of the Company’s stock option activity and related information for its option plan for the period ended September 30, 2022 and 2021:
Number of
Stock Options
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contractual Life
Aggregate
Intrinsic
Value
Balance at September 30, 2021
-
$
-
-
$
-
Granted
293,200
12.58
9.98
-
Exercised
-
-
-
-
Forfeited
-
-
-
-
Expired
-
-
-
-
Balance at September 30, 2022
293,200
$
12.58
9.98
-
Exercisable at September 30, 2022
-
$
-
-
$
-
The following is a summary of the status of the Company’s non-vested restricted shares as of September 30, 2022 and 2021, and changes during those years:
Number of
Stock Awards
Weighted
Average
Grant Date
Fair Value
Balance at September 30, 2021
-
$
-
Granted
156,400
12.63
Vested
-
-
Forfeited
-
-
Balance at September 30, 2022
156,400
$
12.63
Stock option and stock award expenses included with compensation expense were $0 and $6,000, respectively, for the year ended September 30, 2022. There was no stock option or stock award expense for the year ended September 30, 2021. The Company had no other stock-based compensation plans as of September 30, 2022 except as disclosed below.
On July 21, 2022 the Company announced its third stock repurchase program and authorized the repurchase of up to 5% of its outstanding shares of common stock, or 354,891 shares. As of September 30, 2022, 352,697 shares had been repurchased at an average price of $12.90.
The Company has an Employee Stock Ownership Plan ("ESOP") for the benefit of employees who meet certain eligibility requirements. The ESOP trust purchases shares of common stock in the open market using proceeds of a loan from the Company. The loan is secured by shares of the Company’s stock. The Bank makes cash contributions to the ESOP on an annual basis sufficient to enable the ESOP to make the required loan payments to the Company. As the debt is repaid, shares are released as collateral and allocated to qualified employees. Accordingly, the shares pledged as collateral are reported as unearned ESOP shares in the Consolidated Balance Sheets. The Company accounts for its ESOP in accordance with FASB ASC Topic 718, “Employer’s Accounting for Employee Stock Ownership Plans.” As shares are released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations.
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
The Company’s ESOP (“2006 ESOP”) was established in 2006 as part of the Company’s initial public offering. The total cost of shares purchased by the 2006 ESOP trust was $2.3 million, reflecting an average cost per share of $10.58. The loan bore a variable interest rate that adjusted annually to Prime Rate (3.25% at January 1, 2021) with principal and interest payable annually in equal installments over thirty years. The 2006 ESOP loan was fully repaid during the year ended September 30, 2021 and the remaining shares were allocated to participants.
In connection with the Company’s second-step stock offering, the ESOP trustees subscribed for, and intended to purchase, on behalf of the ESOP, 8% of the shares of the Company common stock sold in the offering, or 312,800 shares (“2021 ESOP”). The ESOP trustees purchased 312,800 shares of the Company’s common stock in the open market through September 30, 2022 for $3.4 million, reflecting an average cost per share of $10.77. The 2021 ESOP loan bears a variable interest rate that adjusts annually to Prime Rate (3.25% at January 1, 2022) with principal and interest payable annually in equal installments over thirty years.
The following table presents the components of the ESOP shares as of September 30, 2022:
Unreleased shares at September 30, 2020
14,757
Shares released for allocation during the year ended September 30, 2021
(14,757
)
Shares purchased by ESOP trustee during the year ended September 30, 2021
304,377
Unreleased shares at September 30, 2021
304,377
Shares released for allocation during the year ended September 30, 2022
(10,427
)
Shares purchased by ESOP trustee during the year ended September 30, 2022
8,423
Unreleased shares at September 30, 2022
302,373
Total released shares
187,887
Total ESOP shares
490,260
The Company's contribution expense for the ESOP was $177,000 and $107,000 for years ended September 30, 2022 and 2021, respectively. The aggregate fair value of the unreleased ESOP shares at September 30, 2022 was approximately $3.8 million.
NOTE D - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains or losses and fair value of the Company’s investment securities available-for-sale and held-to-maturity are as follows:
September 30, 2022
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
(In thousands)
Securities available-for-sale:
Obligations of U.S. government agencies:
Mortgage backed securities - residential
$
$
-
$
(11
)
$
Obligations of U.S. government-sponsored enterprises:
Mortgage-backed securities - residential
11,029
-
(1,907
)
9,122
Total securities available for sale
$
11,147
$
-
$
(1,918
)
$
9,229
Securities held-to-maturity:
Obligations of U.S. government agencies:
Mortgage-backed securities - residential
$
5,525
$
-
$
(717
)
$
4,808
Mortgage-backed securities - commercial
-
-
Obligations of U.S. government-sponsored enterprises:
Mortgage backed securities - residential
48,961
(7,548
)
41,425
Debt securities
24,821
-
(2,395
)
22,426
Private label mortgage-backed securities - residential
-
(10
)
Obligations of state and political subdivisions
3,484
-
(638
)
2,846
Corporate securities
8,000
-
(436
)
7,564
Total securities held to maturity
$
91,646
$
$
(11,744
)
$
79,914
Total investment securities
$
102,793
$
$
(13,662
)
$
89,143
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
At September 30, 2021
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
(In thousands)
Securities available-for-sale:
Obligations of U.S. government agencies:
Mortgage backed securities - residential
$
$
$
-
$
Obligations of U.S. government-sponsored enterprises:
Mortgage-backed securities - residential
$
12,922
$
$
(208
)
$
12,741
Total securities available-for-sale
$
13,101
$
$
(208
)
$
12,927
Securities held-to-maturity:
Obligations of U.S. government agencies:
Mortgage-backed securities - residential
$
$
-
$
(25
)
$
Mortgage-backed securities - commercial
-
-
Obligations of U.S. government-sponsored enterprises:
Mortgage backed securities - residential
38,596
(389
)
38,623
Debt securities
12,498
-
(156
)
12,342
Private label mortgage-backed securities - residential
-
Obligations of state and political subdivisions
2,047
-
(34
)
2,013
Corporate securities
3,000
-
(196
)
2,804
Total securities held-to-maturity
$
57,660
$
$
(800
)
$
57,282
Total investment securities
$
70,761
$
$
(1,008
)
$
70,209
The contractual maturities of mortgage-backed securities generally exceed 10 years; however, the effective lives are expected to be shorter due to anticipated prepayments. At September 30, 2022, the available-for-sale mortgage-backed securities - residential included an amortized cost of $118,000 and a fair value of $107,000 for obligations of U.S. government agencies issued by the Government National Mortgage Association and obligations of U.S. government-sponsored enterprises issued by Federal National Mortgage Association and Federal Home Loan Mortgage Corporation with an amortized cost of $11.0 million and a fair value of $9.1 million.
The maturities of the debt securities, municipal bonds and certain information regarding to the mortgage-backed securities held-to-maturity at September 30, 2022 are summarized in the following table:
September 30, 2022
Amortized
Fair
Cost
Value
(In thousands)
Due within 1 year
$
6,333
$
6,209
Due after 1 but within 5 years
25,017
22,696
Due after 5 but within 10 years
4,442
3,565
Due after 10 years
Total debt securities
36,305
32,836
Mortgage backed securities:
Residential(1)
54,710
46,447
Commercial(2)
Total
$
91,646
$
79,914
(1)
Held-to-maturity mortgage-backed securities - residential include an amortized cost of $5.5million and a fair value of $4.8 million for obligations of U.S. government agencies issued by the Government National Mortgage Association and obligations of U.S. government-sponsored enterprises issued by Federal National Mortgage Association and Federal Home Loan Mortgage Corporation which had an amortized cost of $49.0 million and a fair value of $41.4 million. Also included are mortgage backed securities issued by non-U.S. government agencies and government-sponsored enterprises with an amortized cost of $224,000 and a fair value of $214,000.
(2)
Held-to-maturity mortgage-backed securities - commercial include an amortized cost of $631,000 and a fair value of $631,000 for obligations of U.S. government agencies issued by the United States Small Business Administration.
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
There were no sales of securities during the years ended September 30, 2022 and 2021.
As of September 30, 2022 and 2021, securities having an estimated fair value of approximately $37.7 million and $30.9 million, respectively, were pledged to secure public deposits.
Details of securities with unrealized losses at September 30, 2022 and 2021 are as follows:
Less Than 12 Months
12 Months Or Greater
Total
Number of
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Securities
Value
Losses
Value
Losses
Value
Losses
September 30, 2022
(Dollars in thousands)
Obligations of U.S. government agencies:
Mortgage-backed securities - residential
$
2,364
$
(140
)
$
2,551
$
(588
)
$
4,915
$
(728
)
Mortgage-backed securities - commercial
-
-
-
-
Obligations of U.S. government-sponsored enterprises
Mortgage backed securities - residential
21,180
(2,795
)
29,088
(6,660
)
50,268
(9,455
)
Debt securities
11,664
(660
)
10,763
(1,735
)
22,427
(2,395
)
Private label mortgage-backed securities residential
(10
)
-
-
(10
)
Obligations of state and political subdivisions
1,268
(181
)
1,577
(457
)
2,845
(638
)
Corporate securities
2,646
(353
)
4,917
(83
)
7,563
(436
)
Total
$
39,968
$
(4,139
)
$
48,896
$
(9,523
)
$
88,864
$
(13,662
)
Less Than 12 Months
12 Months Or Greater
Total
Number of
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Securities
Value
Losses
Value
Losses
Value
Losses
September 30, 2021
(Dollars in thousands)
Obligations of U.S. government agencies:
Mortgage-backed securities - residential
$
$
(12
)
$
$
(13
)
$
$
(25
)
Mortgage-backed securities - commercial
-
-
-
-
Obligations of U.S. government-sponsored enterprises
Mortgage backed securities - residential
33,690
(539
)
1,610
(58
)
35,300
(597
)
Debt securities
10,859
(139
)
1,483
(17
)
12,342
(156
)
Obligations of state and political subdivisions
2,013
(34
)
-
-
2,013
(34
)
Corporate securities
-
-
2,804
(196
)
2,804
(196
)
Total
$
46,880
$
(724
)
$
6,832
$
(284
)
$
53,712
$
(1,008
)
The investment securities listed above currently have fair values less than amortized cost and therefore contain unrealized losses. The Company evaluated these securities and determined that the decline in value was primarily related to fluctuations in the interest rate environment and were not related to any company or industry specific event.
The Company anticipates full recovery of amortized costs with respect to these securities. The Company does not intend to sell these securities and has determined that it is not more likely than not that the Company would be required to sell these securities prior to maturity or market price recovery. Management has considered factors regarding other than temporarily impaired securities and determined that there are no securities with impairment that is other than temporary as of September 30, 2022 and 2021.
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
NOTE E - LOANS RECEIVABLE, NET
Loans receivable are comprised of the following:
September 30,
(In thousands)
One-to four-family residential
$
214,377
$
203,019
Commercial real estate
342,791
280,848
Construction
15,230
20,350
Home equity lines of credit
18,704
17,930
Commercial business
34,672
68,719
Other
3,130
3,751
Total loans receivable
628,904
594,617
Net deferred loan costs
(628
)
(1,241
)
Allowance for loan losses
(8,433
)
(8,075
)
Total loans receivable, net
$
619,843
$
585,301
Certain directors and executive officers of the Company have loans with the Bank. Such loans were made in the ordinary course of business at the Bank’s normal credit terms, including interest rate and collateralization, and do not represent more than a normal risk of collection. Total loans receivable from directors and executive officers, and affiliates thereof, were approximately $2.3 million at both September 30, 2022 and 2021. There were $738,000 and $31,000 in new loans or advances on existing lines of credit during the year ended September 30, 2022 and 2021, respectively. Total principal repayments were approximately $731,000 and $191,000 for the year ended September 30, 2022 and 2021, respectively.
At September 30, 2022 and 2021, the Company was servicing loans for others amounting to approximately $43.6 million and $39.3 million, respectively. The Company held mortgage servicing rights in the amount of $0 and $4,000 at September 30, 2022 and 2021, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors, and foreclosure processing. Loan servicing income is recorded on the cash basis and includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees. In connection with loans serviced for others, the Company held borrowers’ escrow balances of approximately $27,000 and $33,000 at September 30, 2022 and 2021, respectively.
The segments of the Bank’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The residential mortgage loan segment is further disaggregated into two classes: first lien, amortizing term loans, and the combination of second lien amortizing term loans and home equity lines of credit. The commercial loan segment is further disaggregated into three classes: loans secured by multifamily structures, loans secured by owner-occupied commercial structures, and loans secured by non-owner occupied nonresidential properties. The construction loan segment consists primarily of developers or investors for the purpose of acquiring, developing and constructing residential or commercial structures and to a lesser extent one-to-four family residential construction loans made to individuals for the acquisition of and/or construction on a lot or lots on which a residential dwelling is to be built. Construction loans to developers and investors have a higher risk profile because the ultimate buyer, once development is completed, is generally not known at the time of the loan. The commercial business loan segment consists of loans made for the purpose of financing the activities of commercial customers and consists primarily of revolving lines of credit. The consumer loan segment consists primarily of stock-secured installment loans, but also includes unsecured personal loans and overdraft lines of credit connected with customer deposit accounts.
Management evaluates individual loans in all segments for possible impairment if the loan either is in nonaccrual status, or is risk rated Substandard and is 90 days or more past due. Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. 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 reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
Once the determination has been made that a loan is impaired, the recorded investment in the loan is compared to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s current observable market price; or (c) the fair value of the collateral securing the loan, less anticipated selling and disposition costs. The method is selected on a loan-by loan basis, with management primarily utilizing the fair value of collateral method. If there is a shortfall between the fair value of the loan and the recorded investment in the loan, the Company charges the difference to the allowance for loan loss as a charge-off and carries the impaired loan on its books at fair value. It is the Company’s policy to evaluate impaired loans on an annual basis to ensure the recorded investment in a loan does not exceed its fair value.
The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary for the periods presented:
Impaired Loans
Impaired Loans with
with No Specific
Specific Allowance
Allowance
Total Impaired Loans
Unpaid
At and for the year ended
Recorded
Related
Recorded
Recorded
Principal
September 30, 2022
Investment
Allowance
Investment
Investment
Balance
(In thousands)
One-to four-family residential
$
-
$
-
$
1,512
$
1,512
$
1,512
Commercial real estate
-
-
1,159
1,159
1,159
Construction
2,835
-
2,835
2,900
Commercial business
-
-
Total impaired loans
$
2,835
$
$
2,824
$
5,659
$
5,724
Impaired Loans
Impaired Loans with
with No Specific
Specific Allowance
Allowance
Total Impaired Loans
Unpaid
At and for the year ended
Recorded
Related
Recorded
Recorded
Principal
September 30, 2021
Investment
Allowance
Investment
Investment
Balance
(In thousands)
One-to four-family residential
$
-
$
-
$
2,711
$
2,711
$
2,711
Commercial real estate
-
-
2,270
2,270
2,270
Construction
2,835
1,745
4,580
4,645
Commercial business
-
-
1,507
1,507
1,507
Total impaired loans
$
2,835
$
$
8,233
$
11,068
$
11,133
The average recorded investment in impaired loans was $8.1 million and $12.2 million for the years ended September 30, 2022 and 2021, respectively. During the years ended September 30, 2022 and 2021, interest income of $135,000 and $139,000, respectively, was recognized for performing TDR loans while no interest income was recognized for delinquent non-accrual loans.
Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than three months past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category.
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as severe delinquency, bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. The Bank’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. The Asset Review Committee performs monthly reviews of all commercial relationships internally rated 6 (“Watch”) or worse. Confirmation of the appropriate risk grade is performed by an external loan review company that semi-annually reviews and assesses loans within the portfolio. Generally, the external consultant reviews commercial relationships greater than $500,000 and/or criticized relationships greater than $250,000. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a monthly basis.
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
The following tables present the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the Bank’s internal risk rating system for the periods presented:
Special
Pass
Mention
Substandard
Doubtful
Total
(In thousands)
September 30, 2022
One-to four-family residential
$
213,173
$
$
$
-
$
214,377
Commercial real estate
342,593
-
-
342,791
Construction
10,652
-
4,578
-
15,230
Home equity lines of credit
18,704
-
-
-
18,704
Commercial business
34,672
-
-
-
34,672
Other
3,130
-
-
-
3,130
Total
$
622,924
$
1,178
$
4,802
$
-
$
628,904
Special
Pass
Mention
Substandard
Doubtful
Total
(In thousands)
September 30, 2021
One-to four-family residential
$
200,510
$
1,002
$
1,507
$
-
$
203,019
Commercial real estate
272,408
6,679
1,761
-
280,848
Construction
15,770
-
4,580
-
20,350
Home equity lines of credit
17,930
-
-
-
17,930
Commercial business
67,360
1,349
-
68,719
Other
3,751
-
-
-
3,751
Total
$
577,729
$
7,691
$
9,197
$
-
$
594,617
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans for the periods presented:
30-59
60-89
Days
Days
90 Days +
Total
Non-
Total
Current
Past Due
Past Due
Past Due
Past Due
Accrual
Loans
(In thousands)
September 30, 2022
One-to four-family residential
$
213,903
$
$
$
-
$
$
-
$
214,377
Commercial real estate
342,404
-
-
-
342,791
Construction
12,395
-
-
2,835
2,835
2,835
15,230
Home equity lines of credit
18,704
-
-
-
-
-
18,704
Commercial business
34,672
-
-
-
-
-
34,672
Other
3,130
-
-
-
-
-
3,130
Total
$
625,208
$
$
$
2,835
$
3,696
$
2,835
$
628,904
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
30-59
60-89
Days
Days
90 Days +
Total
Non-
Total
Current
Past Due
Past Due
Past Due
Past Due
Accrual
Loans
(In thousands)
September 30, 2021
One-to four-family residential
$
201,868
$
-
$
-
$
1,151
$
1,151
$
1,151
$
203,019
Commercial real estate
279,769
-
-
1,079
1,079
1,079
280,848
Construction
15,770
-
-
4,580
4,580
4,580
20,350
Home equity lines of credit
17,930
-
-
-
-
-
17,930
Commercial business
67,370
-
-
1,349
1,349
1,349
68,719
Other
3,751
-
-
-
-
-
3,751
Total
$
586,458
$
-
$
-
$
8,159
$
8,159
$
8,159
$
594,617
The amount of interest income not recognized on non-accrual loans was approximately $220,000 and $555,000 for the years ended September 30, 2022 and 2021, respectively. At September 30, 2022 and September 30, 2021, there were no commitments to lend additional funds to borrowers whose loans are classified as non-accrual.
An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.
The Bank’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (discussed above) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance.
Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative and economic factors.
The loans are segmented into classes based on their inherent varying degrees of risk, as described above. Management tracks the historical net charge-off activity by segment and utilizes this figure, as a percentage of the segment, as the general reserve percentage for pooled, homogenous loans that have not been deemed impaired. Typically, an average of losses incurred over 5 historical years is used.
Non-impaired credits are segregated for the application of qualitative factors. Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: national and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint. Management maintained or increased several of these factors during the year ended September 30, 2022 due to the higher risk of credit loss resulting from the a higher likelihood of economic recession and its ongoing impact on borrowers.
Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL. Since loans individually evaluated for impairment are promptly written down to their fair value, typically there is no portion of the ALL for loans individually evaluated for impairment.
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
The following tables summarize the activity in the allowance for loan losses by loan category for the years ended September 30, 2022 and 2021:
One-to Four-
Home Equity
Family
Commercial
Lines of
Commercial
Residential
Real Estate
Construction
Credit
Business
Other
Unallocated
Total
(In thousands)
Balance-September 30, 2021
$
1,136
$
3,744
$
$
$
2,046
$
$
$
8,075
Charge-offs
-
-
-
-
-
-
-
-
Recoveries
-
-
-
-
-
Provision (credit)
(133
)
(562
)
(14
)
Balance-September 30, 2022
$
1,223
$
4,612
$
$
$
1,484
$
$
$
8,433
One-to Four-
Home Equity
Family
Commercial
Lines of
Commercial
Residential
Real Estate
Construction
Credit
Business
Other
Unallocated
Total
(In thousands)
Balance-September 30, 2020
$
1,035
$
3,232
$
$
$
1,034
$
$
$
6,400
Charge-offs
-
(51
)
-
-
-
(1
)
-
(52
)
Recoveries
-
-
-
-
Provision (credit)
(78
)
1,629
Balance-September 30, 2021
$
1,136
$
3,744
$
$
$
2,046
$
$
$
8,075
The following tables summarize the ALL by loan category, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of September 30, 2022 and September 30, 2021:
One-to- Four
Home Equity
Family
Commercial
Lines of
Commercial
Residential
Real Estate
Construction
Credit
Business
Other
Unallocated
Total
(In thousands)
Allowance for Loan Losses:
Balance - September 30, 2022
$
1,223
$
4,612
$
$
$
1,484
$
$
$
8,433
Individually evaluated for impairment
-
-
-
-
-
-
Collectively evaluated for impairment
1,223
4,612
1,484
8,319
Loans receivable:
Balance - September 30, 2022
$
214,377
$
342,791
$
15,230
$
18,704
$
34,672
$
3,130
$
-
$
628,904
Individually evaluated for impairment
1,512
1,159
2,835
-
-
-
5,659
Collectively evaluated for impairment
212,865
341,632
12,395
18,704
34,519
3,130
-
623,245
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
One-to- Four
Home Equity
Family
Commercial
Lines of
Commercial
Residential
Real Estate
Construction
Credit
Business
Other
Unallocated
Total
(In thousands)
Allowance for Loan Losses:
Balance - September 30, 2021
$
1,136
$
3,744
$
$
$
2,046
$
$
$
8,075
Individually evaluated for impairment
-
-
-
-
-
-
Collectively evaluated for impairment
1,136
3,744
2,046
7,851
Loans receivable:
Balance - September 30, 2021
$
203,019
$
280,848
$
20,350
$
17,930
$
68,719
$
3,751
$
-
$
594,617
Individually evaluated for impairment
2,711
2,270
4,580
-
1,507
-
-
11,068
Collectively evaluated for impairment
200,308
278,578
15,770
17,930
67,212
3,751
-
583,549
The allowance for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that the segmentation of the loan portfolio into homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.
A TDR is a loan that has been modified whereby the Bank has agreed to make certain concessions to a borrower to meet the needs of both the borrower and the Bank to maximize the ultimate recovery of a loan. TDR occurs when a borrower is experiencing, or is expected to experience, financial difficulties and the loan is modified using a modification that would otherwise not be granted to the borrower. The types of concessions granted generally included, but are not limited to interest rate reductions, limitations on the accrued interest charged, term extensions, and deferment of principal.
A default on a troubled debt restructured loan for purposes of this disclosure occurs when a borrower is 90 days past due or a foreclosure or repossession of the applicable collateral has occurred. There were no defaults of TDRs during the year ended September 30, 2022.
There were no TDR loans during the year ended September 30, 2022, compared with two TDR loans during the year ended September 30, 2021. All TDR loans were performing in accordance with their restructured terms as September 30, 2022. The following tables summarizes the TDRs during the years ended September 30, 2022 and 2021:
Number of
Loans
Investment Before
TDR Modification
Investment After
TDR Modification
September 30, 2022
(Dollars in thousands)
Total
-
$
-
$
-
Number of
Loans
Investment Before
TDR Modification
Investment After
TDR Modification
September 30, 2021
(Dollars in thousands)
One-to four-family residential
$
$
Total
$
$
Total loans pledged as collateral against FHLBNY borrowings were $181.2 million and $192.6 million as of September 30, 2022 and 2021, respectively.
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
NOTE F - ACCRUED INTEREST RECEIVABLE
The following is a summary of accrued interest receivable:
September 30,
(In thousands)
Loans
$
3,236
$
3,421
Investment securities
Mortgage-backed securities
Total accrued interest receivable
$
3,478
$
3,533
NOTE G - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
Estimated
September 30,
Useful Lives
(In thousands)
Land
Indefinite
$
3,811
$
3,811
Buildings and improvements
10-40 years
21,866
21,678
Furniture, fixtures and equipment
5-10 years
3,762
3,562
29,439
29,051
Less accumulated depreciation
(15,559
)
(14,720
)
Premises and equipment, net
$
13,880
$
14,331
For the years ended September 30, 2022 and 2021, depreciation expense included in occupancy expense amounted to approximately $839,000 and $835,000, respectively.
NOTE H - OTHER REAL ESTATE OWNED
The Company held $281,000 of real estate owned properties at September 30, 2022 and $636,000 at September 30, 2021. The Company did not have any write-downs on these properties at September 30, 2022 compared with $337,000 for the years ended September 30, 2021. The write-down amounts were carried as valuation allowances, unless the properties were sold. Further declines in real estate values may result in increased foreclosed real estate expense in the future. Routine holding costs are charged to expense as incurred and improvements to real estate owned that enhance the value of the real estate are capitalized.
NOTE I - DEPOSITS
A summary of deposits by type of account follows:
September 30,
(In thousands)
Demand accounts
$
182,417
$
181,975
Savings accounts
81,850
81,724
NOW accounts
98,643
71,325
Money market accounts
222,214
187,898
Certificate of deposit
69,929
101,888
Retirement accounts
12,680
15,004
Total deposits
$
667,733
$
639,814
The current FDIC insurance limit on bank deposit accounts is $250,000. The aggregate amount of deposit accounts with a denomination of $250,000 or more was approximately $399.9 million at September 30, 2022 compared with $378.5 million at September 30, 2021. The aggregate amount of certificate deposits, including individual retirement accounts with balances of $250,000 or more was $14.6 million at September 30, 2022 compared with $39.4 million at September 30, 2021.
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
At September 30, 2022, certificates of deposit (including retirement accounts and brokered certificate deposit accounts) have contractual maturities as follows (in thousands):
Year Ending September 30,
$
44,589
17,340
6,613
4,675
2027 and after
9,392
Total
$
82,609
NOTE J - BORROWINGS
1. Federal Home Loan Bank of New York Advances
Long term Federal Home Loan Bank of New York (“FHLBNY”) advances at September 30, 2022 and September 30, 2021 totaled approximately $15.6 million and $23.4 million, respectively. The weighted average interest rates on advances outstanding at September 30, 2022 and 2021 were 2.48% and 2.13%, respectively. The advances were collateralized by unencumbered qualified assets consisting of one-to-four family residential and commercial real estate mortgage loans. Advances are made pursuant to several different credit programs offered from time to time by the FHLBNY.
Long term FHLBNY advances as of September 30, 2022 mature as follows (in thousands):
Year Ending September 30,
$
4,741
4,384
3,500
-
3,000
Thereafter
-
Total
$
15,625
Additionally, the Company has established an Overnight Line of Credit arrangement with the FHLBNY. The total amount available under the line of credit is based on the amount of eligible collateral pledged to the FHLBNY. At September 30, 2022 and 2021, the Company had available credit from the FHLBNY totaling $83.2 million and $87.9 million, respectively. Information concerning short-term arrangement with the FHLBNY is summarized as follows:
September 30,
(Dollars in thousands)
Balance at end of year
$
-
$
-
Weighted average balance during the year
$
$
-
Maximum month-end balance during the year
$
2,450
$
-
Average interest rate during the year
2.67
%
-
2. Securities Sold Under Reverse Repurchase Agreements
Qualifying repurchase agreements are treated as financings and are reflected as a liability in the Consolidated Balance Sheets. The Company did not have repurchase agreements outstanding at September 30, 2022 and September 30, 2021.
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
NOTE K - SERVICING POLICY
The Company originates and sells loans receivable secured by one-to four-family residential properties and commercial business loans guaranteed by the Small Business Administration (the “SBA”). The Company has sold loans on a servicing retained basis and on a servicing released basis. Loans sold with servicing retained and servicing released during the year ended September 30, 2022 were $10.5 million and $0, respectively. Loans sold with servicing retained and servicing released during the year ended September 30, 2021 were $7.1 million and $0, respectively. The Company accounts for sales in accordance with ASC 860, Transfers and Servicing. Upon sale, the receivables are removed from the balance sheet, mortgage servicing rights are recorded as an asset for servicing rights retained, and a gain on sale, if applicable, is recognized for the difference between the carrying value of the receivables and the sales proceeds, net of origination costs.
Gains on sales of loans, representing the difference between the total sales price received for the loans and the allocated cost of the loans, are recognized when loans are sold and delivered to the purchasers. Loans are accounted for as sold when control of the loan is surrendered. Control over the loans is deemed surrendered when (1) the loans have been isolated from the Company, (2) the buyer has the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the loans and (3) the Company does not maintain effective control over the loans through either (a) an agreement that entitles and obligates the Company to repurchase or redeem the loans before maturity, or (b) the ability to unilaterally cause the buyer to return specific loans.
The Company services one-to-four family residential mortgage loans for investors in the secondary mortgage market, which are not included in the Consolidated Balance Sheets. The Company’s fee is a percentage of the principal balance and is recognized as income when received. At September 30, 2022 and 2021, the Company was servicing such sold mortgage loans in the amount of $2.1 million and $3.7 million, respectively. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans. Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing revenues and are included in other assets on the Consolidated Balance Sheets. Activity in mortgage servicing rights during the years ended September 30, 2022 and 2021 are summarized as follows:
September 30,
(In thousands)
Beginning balance
$
$
Origination of mortgage servicing rights
-
-
Amortization
(4
)
(8
)
Ending balance
$
-
$
Mortgage servicing rights are carried at the lower of amortized cost or fair value. Fair values are estimated using discounted cash flows based on a current market interest rate.
The Company also services the SBA guaranteed portion of commercial business loans sold to investors in the secondary market, which are not included in the Consolidated Balance Sheets. The Company’s fee is a percentage of the principal balance and is recognized as income when received. At September 30, 2022 and 2021, the Company was servicing SBA loans sold in the amount of $32.0 million and $24.2 million, respectively. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans.
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
NOTE L - INCOME TAXES
The Company’s income tax expense is comprised of the following components for the years ended September 30, 2022 and 2021:
For the Year Ended
September 30,
(In thousands)
Current
$
3,163
$
2,718
Deferred
(113)
Total income tax expense
$
3,250
$
2,605
A reconciliation of income tax at the statutory tax rate to the effective income tax expense for the years ended September 30, 2022 and 2021 is as follows:
September 30,
(In thousands)
Income tax expense at statutory rate
$
2,339
$
1,832
Increase (decrease) resulting from:
State income taxes, net of federal income tax benefit
Tax-exempt income, net
(87
)
(68
)
Nondeductible expenses
Employee stock ownership plan
Other, net
Total income tax expense
$
3,250
$
2,605
The major sources of temporary differences and their deferred tax effect at September 30, 2022 and 2021 are as follows:
September 30,
(In thousands)
Allowance for loan losses
$
2,369
$
2,270
Deferred loan fees
Unrealized loss, minimum pension liability
OREO
-
Straight line rent
Gross deferred tax asset
2,989
3,261
Depreciation
(816
)
(874
)
Employee benefits
(122
)
(183
)
Mortgage servicing rights
-
(1
)
Gross deferred tax liability
(938
)
(1,058
)
Net deferred tax asset, included in other assets
$
2,051
$
2,203
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible and carry forwards are available.
There were no valuation allowances for the year ended September 30, 2022 and 2021. The Company has considered future market growth, forecasted earnings, future taxable income, feasible and permissible tax planning strategies in determining the realizability of deferred tax assets. If the Company was to determine that it would not be able to realize a portion of its net deferred tax asset in the future for which there is currently no valuation allowance, an adjustment to the net deferred tax asset would be charged to earnings in the period such determination was made.
The Bank’s statutory income tax rate in the State of New Jersey was 9.0% for the years ending September 30, 2022 and 2021. The State of New Jersey imposed a temporary surtax on corporations earning New Jersey allocated income in excess of $1 million. The surtax is set at a rate of 2.5% and it currently effective through December 31, 2023. Accordingly, the Company used an 11.5% State tax rate for the calculation of its State income tax expense the years ended September 30, 2022 and 2021.
NOTE M - PENSION PLAN
The Company had a noncontributory defined benefit pension plan (the “Plan”) covering all eligible employees. On January 26, 2006, the Plan was frozen and amended to eliminate future benefit accruals after February 15, 2006.
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
Plan assets are invested in seven diversified investment funds of the Pentegra Retirement Trust, a no load series open-ended mutual fund. The long-term investment objective is to be invested 65% in equity securities (equity mutual funds) and 35% in debt securities (bond mutual funds). Asset rebalancing is performed at least annually, with interim adjustments made when the investment mix varies more than 5% from the target (i.e., a 10% target range). Risk/volatility is further managed by the distinct investment objectives of each of the funds and the diversification within each fund.
The following table sets forth the Plan’s funded status and amounts recognized in the Company’s Consolidated Balance Sheets at September 30, 2022 and September 30, 2021.
September 30,
(In thousands)
Actuarial present value of benefit obligations
$
3,735
$
4,926
Change in benefit obligations
Projected benefit obligation, beginning
$
4,926
$
5,227
Interest cost
Actuarial (gain) loss
(1,071
)
(242
)
Annuity payments and lump sum distributions
(264
)
(199
)
Projected benefit obligation, end
$
3,735
$
4,926
Change in plan assets
Fair value of assets, beginning
$
4,871
$
3,579
Actual return on plan assets
(721
)
Employer contributions
-
Annuity payments and lump sum distributions
(264
)
(199
)
Fair value of assets, end
$
3,886
$
4,871
Funded status included with other assets
$
$
-
Funded status included with other liabilities
$
-
$
(55
)
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
Net pension cost for the years ended September 30, 2022 and 2021 included the following components:
September 30,
(In thousands)
Service cost benefits earned during the year
$
-
$
-
Interest cost on projected benefit obligation
Expected return on plan assets
(285
)
(217
)
Amortization of unrecognized net loss
Net pension cost
$
$
For the year ended September 30, 2022 and 2021, the weighted average discount rate used in determining the actuarial net periodic pension cost was 3.0% and 2.75%, respectively. For the year ended September 30, 2022 and 2021, the weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 5.25% and 3.00%, respectively.
The long-term rate-of-return-on-assets assumption was set based on historical returns earned by equities and fixed income securities, adjusted to reflect expectations of future returns as applied to the plan’s target allocation of asset classes. Equities and fixed income securities were assumed to earn rates of return in the ranges of 6-8% and 3-5%, respectively, with an assumed long-term inflation rate of 2.5% reflected within these ranges for the year ended September 30, 2022. When these overall return expectations are applied to the plan’s target allocation, the result is an expected rate of return of 5.0% to 7.0%. Accordingly, the expected long-term rate of return on assets were 6.00% for 2023 and 6.00% for 2022.
Current Asset Allocation
The Plan’s weighted-average asset allocations at September 30, 2022 and 2021, by asset category are as follows:
September 30,
Equity securities
68%
68%
Debt securities (bond mutual funds)
31%
31%
Other (money market fund)
1%
1%
Total
100%
100%
The target asset allocation set for the assets of the Plan are in equity securities ranging from 50 percent to 75 percent and in debt securities ranging from 25 percent to 50 percent. In general, the Plan assets are investment securities that are well-diversified in terms of industry, capitalization and asset class. The Plan assets are mostly a mix of mutual funds indexed to the performance of Fortune 500 U.S. companies, debt securities held in bond funds, domestic and foreign common equity funds, and a money market fund. The Plan’s exposure to a concentration of credit risk is limited by the diversification of the investments into various investment options with multiple asset managers.
Expected Contributions
For the fiscal year ending September 30, 2023, the Company does not expect to make a contribution to the Plan.
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
Estimated Future Benefit Payments
The following benefit payments are expected to be paid as follows (in thousands):
October 1, 2022 through September 30, 2023
$
October 1, 2023 through September 30, 2024
October 1, 2024 through September 30, 2025
October 1, 2025 through September 30, 2030
October 1, 2026 through September 30, 2031
October 1, 2027 through September 30, 2032
1,304
Total
$
2,591
Included in the funded status of the Plan at September 30, 2022 and 2021, are actuarial losses of $956,000 and $1,167,000, respectively. These amounts are included, net of related income tax effects of $288,000 and $351,000, respectively, in the accumulated other comprehensive loss component of stockholders’ equity.
The following table presents the Plan assets that are measured at fair value on a recurring basis by level within the fair value hierarchy under ASC Topic 820. Financial assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. See Note R for further detail regarding fair value hierarchy.
Fair Value Measurements at Reporting Date Using:
Quoted Prices
Significant
in Active Markets
Other
Significant
for Identical
Observable
Unobservable
Total
Assets (Level 1)
Inputs (Level 2)
Inputs (Level 3)
(In thousands)
At September 30, 2022
Investment Type
Mutual Funds- Equity
Large-Cap Value
$
$
$
-
$
-
Large-Cap Core
-
-
Mid-Cap Core
-
-
Small-Cap Core
-
-
Non-U.S. Core
-
-
Mutual Funds- Fixed Income
Intermediate Duration
-
-
Short-Duration Corporate
Cash Equivalents
Money Market
-
-
Total Investment
$
3,886
$
3,886
$
-
$
-
At September 30, 2021
Investment Type
Mutual Funds- Equity
Large-Cap Value
$
$
$
-
$
-
Large-Cap Core
-
-
Mid-Cap Core
-
-
Small-Cap Core
-
-
Non-U.S. Core
-
-
Mutual Funds- Fixed Income
Intermediate Duration
-
-
Short-Duration Corporate
Cash Equivalents
Money Market
-
-
Total Investment
$
4,871
$
4,871
$
-
$
-
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
Equity and debt securities are reported at fair value in the table above utilizing exchange quoted prices in active markets for identical instruments (Level 1 inputs).
NOTE N - NONQUALIFIED COMPENSATION PLAN
The Company maintains a Supplemental Executive Retirement Plan (“SERP”) for the benefit of its senior officers. In addition, the Company also adopted voluntary Deferred Income and Retirement Plans on behalf of its directors. The SERP provides the Company with the opportunity to supplement the retirement income of selected officers to achieve equitable wage replacement at retirement while the Deferred Income Plan provides participating directors with an opportunity to defer all or a portion of their fees into a tax deferred accumulation account for future retirement. The Director Retirement Plan enables the Company to reward its directors for longevity of service in consideration of their availability and consultation. The SERP is based upon achieving a total retirement benefit equal to a percentage of the participants’ final annual salary.
Under the Director Supplemental Retirement Income Plan (the “Plan”), directors that began service before 2002 are entitled to a benefit upon attainment of his/her benefit age. The directors will receive an annual amount in monthly installments based on his/her total Board and Committee fees in the twelve months prior to attainment of his/her benefit age. The amount will be ten percent (10%) plus two and one-half percent (2 1/2%) for each year of service as a Director, with a minimum of fifty percent (50%), provided the Director has served for at least five (5) years, and a maximum of sixty percent (60%). The maximum benefit increases for any Director serving as Chairman of the Board for at least five years to seventy-five percent (75%).
The Company funds the plans through modified endowment contracts. Income recorded for the plans represents life insurance income as recorded based on the projected increases in cash surrender values of life insurance policies. As of September 30, 2022 and 2021, the Company’s life insurance contracts had cash surrender values of approximately $17,660,000 and $14,288,000, respectively.
The Company is recording benefit costs so that the cost of each participant’s retirement benefits is being expensed and accrued over the participant’s active employment so as to result in a liability at retirement date equal to the present value of the benefits expected to be provided.
NOTE O - 401(K) EMPLOYEE CONTRIBUTION PLAN
The Company has a defined contribution 401(k) plan covering all employees, as defined under the plan document. Employees may contribute to the plan, as defined under the plan document, and the Company can make discretionary contributions. The Company contributed $271,000 and $232,000 to the plan for the years ended September 30, 2022 and 2021, and is included in compensation and employee benefits in the accompanying Consolidated Statements of Income.
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
NOTE P - COMMITMENTS
1.Lease Commitments
Approximate future minimum payments under non-cancelable operating leases are due as follows for the years indicated (in thousands):
September 30, 2023
$
September 30, 2024
September 30, 2025
September 30, 2026
September 30, 2027
Thereafter
1,199
Total
$
3,996
Accounting Standard Update ASC 842, “Leases” requires lessees to recognize a lease liability and a right-of-use (“ROU”) asset, measured at the present value of the future minimum lease payments, at the lease commencement date.
The Company has operating leases for five branch locations. Our leases have remaining lease terms of up to 10 years, some of which include options to extend the leases for up to 10 additional years. Operating leases are recorded as ROU assets and lease liabilities and are included within Other assets and Accounts payable and other liabilities, respectively, on our Consolidated Balance Sheets.
Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at lease commencement base on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate. The incremental borrowing rate used by the Company to value its operating leases is based on the interpolated term advance rate available from the FHLBNY, based on the remaining lease term.
The following table presents the balance sheet information related to our leases:
September 30,
September 30,
(Dollars in thousands)
Operating lease right-of-use asset
$
3,292
$
3,894
Operating lease liabilities
$
3,605
$
4,254
Weighted average remaining lease term in years
7.0
7.7
Weighted average discount rate
2.2%
2.2%
The following table summarizes the maturity of our remaining lease liabilities by year:
September 30,
(In thousands)
For the Year Ending:
$
2028 and thereafter
1,199
Total lease payments
3,996
Less imputed interest
(391
)
Present value of lease liabilities
$
3,605
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
Total rental expense, included in occupancy expense, was approximately $807,000 and $811,000 for the years ended September 30, 2022 and 2021, respectively.
2.Contingencies
The Company and its subsidiaries, from time to time, are a party to routine litigation that arises in the normal course of business. In the opinion of management, the resolution of this litigation, if any, would not have a material adverse effect on the Company’s consolidated financial position or results of operations.
NOTE Q - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company may use derivative financial instruments, such as interest rate floors and collars, as part of its interest rate risk management. Interest rate caps and floors are agreements whereby one party agrees to pay or receive a floating rate of interest on a notional principal amount for a predetermined period of time if certain market interest rate thresholds are met. The Company considers the credit risk inherent in these contracts to be negligible. As of September 30, 2022 and 2021, the Company did not hold any interest rate floors or collars.
The Company is a party to interest rate derivatives that are not designated as hedging instruments. Under a program, the Company executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that the Bank executes with a third-party financial institution, such that the Bank minimizes its net risk exposure resulting from such transactions. Because the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined by taking into consideration the risk rating, probability of default and loss given default for all counterparties. The Company had $0 and $300,000 in cash pledged for collateral on its interest rate swaps with financial institutions at September 30, 2022 and 2021, respectively.
The following table presents summary information regarding these derivatives for September 30, 2022 and 2021.
Notional
Amount
Average
Maturity
(Years)
Weighted
Average
Fixed Rate
Weighted Average
Variable Rate
Fair Value
(Dollars in thousands)
September 30, 2022
Classified in Other Assets:
Customer interest rate swaps
$
19,512
5.9
3.63%
1 Mo. LIBOR + 2.50
$
(2,275)
$
6,940
4.6
6.13%
1 Mo. BSBY + 3.00
$
(212)
Total
$
26,452
5.2
4.88%
$
(2,487)
Classified in Other Liabilities:
3rd Party interest rate swaps
$
19,512
5.9
3.63%
1 Mo. LIBOR + 2.50
$
2,275
$
6,940
4.6
6.13%
1 Mo. BSBY + 3.00
$
Total
$
26,452
5.2
4.88%
$
2,487
September 30, 2021
Classified in Other Assets:
Customer interest rate swaps
$
20,111
6.9
3.61%
1 Mo. LIBOR + 2.50
$
Classified in Other Liabilities:
3rd Party interest rate swaps
$
20,111
6.9
3.61%
1 Mo. LIBOR + 2.50
$
(183)
At September 30, 2022 and 2021, the Company had outstanding commitments (substantially all of which expire within one year) to originate one-to four-family residential loans, construction loans, commercial real estate loans, commercial business loans and consumer loans. These commitments were comprised of fixed and variable rate loans.
September 30,
(In thousands)
Financial instruments whose contract amounts represent credit risk
Letters of credit
$
$
2,901
Unused lines of credit
73,825
63,798
Fixed rate loan commitments
2,550
9,156
Variable rate loan commitments
49,913
14,558
Total
$
127,028
$
90,413
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
NOTE R - FAIR VALUE DISCLOSURES
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The Company’s securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets or liabilities on a non-recurring basis, such as held-to-maturity securities, mortgage servicing rights, loans receivable and other real estate owned, or OREO. These non-recurring fair value adjustments involve the application of lower-of-cost-or-market accounting or write-downs of individual assets.
In accordance with ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), the Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1-
Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2-
Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3-
Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques. The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability.
The Company bases its fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The following is a description of valuation methodologies used for assets measured at fair value on a recurring basis.
Securities available-for-sale
The Company’s available-for-sale portfolio is carried at estimated fair value on a recurring basis, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income/loss in stockholders’ equity. The securities available-for-sale portfolio consists of U.S. government and government-sponsored enterprise obligations, municipal bonds, and mortgage-backed securities. The fair values of these securities are obtained from an independent nationally recognized pricing service. An independent pricing service provides prices which are categorized as Level 2, as quoted prices in active markets for identical assets are generally not available for the securities.
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
The following tables provide the level of valuation assumptions used to determine the carrying value of the Company’s assets measured at fair value on a recurring basis at September 30, 2022 and 2021:
September 30, 2022
Total
Level 1
Level 2
Level 3
Assets:
(In thousands)
Securities available for sale:
Obligations of U.S. government agencies:
Mortgage-backed securities - residential
$
$
-
$
$
-
Obligations of U.S. government-sponsored enterprises:
Mortgage-backed securities-residential
9,122
-
9,122
-
Total securities available for sale
$
9,229
$
-
$
9,229
$
-
Derivative assets
(2,487
)
-
(2,487
)
-
Total assets
$
6,742
$
-
$
6,742
$
-
Liabilities:
Derivative liabilities
$
2,487
$
-
$
2,487
$
-
Total Liabilities
$
2,487
$
-
$
2,487
$
-
September 30, 2021
Assets:
Securities available for sale:
Obligations of U.S. government agencies:
Mortgage-backed securities - residential
$
$
-
$
$
-
Obligations of U.S. government-sponsored enterprises:
Mortgage-backed securities-residential
12,741
-
12,741
-
Total securities available for sale
$
12,927
$
-
$
12,927
$
-
Derivative assets
-
-
Total assets
$
13,110
$
-
$
13,110
$
-
Liabilities:
Derivative liabilities
$
(183
)
$
-
$
(183
)
$
-
Total Liabilities
$
(183
)
$
-
$
(183
)
$
-
The following is a description of valuation methodologies used for assets measured at fair value on a non-recurring basis.
Mortgage Servicing Rights
Mortgage Servicing Rights (MSR’s) are carried at the lower of amortized cost or estimated fair value. The estimated fair value of MSRs is determined through a calculation of future cash flows, incorporating estimates of assumptions market participants would use in determining fair value including market discount rates, prepayment speeds, servicing income, servicing costs, default rates and other market driven data, including the market’s perception of future interest rate movements and, as such, are classified as Level 3. No valuation write-downs were made to MSR’s during the years ended September 30, 2022 and 2021.
Impaired Loans
Loans which meet certain criteria are evaluated individually for impairment. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest and principal payments of a loan will be collected as scheduled in the loan agreement. Three impairment measurement methods are used, depending upon the collateral securing the asset: 1) the present value of expected future cash flows discounted at the loan’s effective interest rate; 2) the asset’s observable market price; or 3) the fair value of the collateral if the asset is collateral dependent. The regulatory agencies require this method for loans from which repayment is expected to be provided solely by the underlying collateral. The Company’s impaired loans are generally collateral dependent and, as such, are carried at the estimated fair value of the collateral less estimated selling and disposition costs. Fair value is estimated through current appraisals, and adjusted as necessary, by management, to reflect current market conditions and, as such, are generally classified as Level 3.
Appraisals of collateral securing impaired loans are conducted by approved, qualified, and independent third-party appraisers. Such appraisals are ordered via the Bank’s credit administration department, independent from the lender who originated the loan, once the loan is deemed impaired, as described in the previous paragraph. Impaired loans are generally re-evaluated with an updated appraisal within one year of the last appraisal. However, the Company also obtains updated appraisals on performing construction loans that are approaching their maturity date to determine whether or not the fair value of the collateral securing the loan remains sufficient to cover the loan amount prior to considering an extension. The Company discounts the appraised “as is” value of the collateral for estimated selling and disposition costs and compares the resulting fair value of collateral to the outstanding loan amount. If the outstanding loan amount is greater than the discounted fair value, the Company requires a reduction in the outstanding loan balance or additional collateral before considering an extension to the loan. If the borrower is unwilling or unable to reduce the loan balance or increase the collateral securing the loan, it is deemed impaired and the difference between the loan amount and the fair value of collateral, net of estimated selling and disposition costs, is charged off through a reduction of the allowance for loan loss.
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
Other Real Estate Owned
Other real estate owned is carried at lower of cost or estimated fair value less disposal costs. The estimated fair value of the real estate is determined through current appraisals, and adjusted as necessary, by management, to reflect current market conditions. As such, other real estate owned is generally classified as Level 3. There were no valuation write-downs for the year ended September 30, 2022, and $337,000 were made to two properties held as other real estate owned during the year ended September 30, 2021. The properties were written down based on an updated appraisal of the real estate.
The following tables provide the level of valuation assumptions used to determine the carrying value of our assets measured at fair value on a non-recurring basis at September 30, 2022 and 2021:
Total
Level 1
Level 2
Level 3
September 30, 2022
(In thousands)
Impaired loans
$
5,659
$
-
$
-
$
5,659
Other real estate owned
-
-
Total
$
5,940
$
-
$
-
$
5,940
September 30, 2021
Impaired loans
$
11,134
$
-
$
-
$
11,134
Other real estate owned
-
-
Total
$
11,770
$
-
$
-
$
11,770
The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Company has utilized Level 3 inputs to determine fair value:
Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands)
September 30, 2022
Fair Value
Estimate
Valuation
Techniques
Unobservable Input
Range (Weighted Average)
Impaired loans
$
5,659
Appraisal ofcollateral (1)
Appraisal adjustments (2)
0% to -31.7% (-9.9%)
Other real estate owned
$
Appraisal ofcollateral (1)
Liquidation expenses (2)
-28.0% to -28.0% (-28.0%)
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands)
September 30, 2021
Fair Value
Estimate
Valuation
Techniques
Unobservable Input
Range (Weighted Average)
Impaired loans
$
11,134
Appraisal ofcollateral (1)
Appraisal adjustments (2)
-8.0% to -42.8% (-15.3%)
Other real estate owned
$
Appraisal ofcollateral (1)
Liquidation expenses (2)
-31.2% to -45.5% (-39.4%)
(1)
Fair value is generally determined through independent appraisals for the underlying collateral, which generally include various level 3 inputs which are not identifiable.
(2)
Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.
The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments carried at cost or amortized cost as of September 30, 2022 and September 30, 2021. This table excludes financial instruments for which the carrying amount approximates fair value, which includes cash and cash equivalents, FHLBNY stock, bank owned life insurance, accrued interest receivable, interest and non-interest bearing demand, savings deposits, and accrued interest payable. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For financial liabilities such as interest-bearing demand, NOW, and money market savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.
Carrying
Fair
Fair Value Measurement Placement
Amount
Value
(Level 1)
(Level 2)
(Level 3)
(In thousands)
September 30, 2022
Financial instruments - assets
Investment securities held-to-maturity
$
91,646
$
79,914
$
-
$
79,914
$
-
Loans
619,843
592,804
-
-
592,804
Financial instruments - liabilities
Certificates of deposit
82,609
81,289
-
81,289
-
Borrowings
15,625
14,762
-
14,762
-
September 30, 2021
Financial instruments - assets
Investment securities held-to-maturity
$
57,660
$
57,282
$
-
$
57,282
$
-
Loans
585,301
594,674
-
-
594,674
Financial instruments - liabilities
Certificates of deposit
116,892
118,144
-
118,144
-
Borrowings
23,356
23,753
-
23,753
-
NOTE S - REGULATORY CAPITAL
The Company and Bank are required to maintain minimum amounts of capital to total “risk-weighted” assets, as defined by the banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and Bank’s assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
MAGYAR BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
 
The “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act include a minimum common equity Tier 1 capital (“CET1”) to risk-weighted assets ratio of 4.5% of risk-weighted assets, a minimum Tier 1 capital to risk-weighted assets of 6.0% and a minimum leverage ratio of 4.0%. The required minimum ratio of total capital to risk-weighted assets is 8.0%. The regulatory banking rules also require a “capital conservation buffer” of 2.5% above the new regulatory minimum capital ratios, and resulted in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%; (ii) a Tier 1 capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations established a maximum percentage of eligible retained income that could be utilized for such actions.
As of September 30, 2022, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category.
The following tables set forth the Company’s and the Bank’s actual and required capital levels under those measures:
At September 30, 2022
Company
Bank
Required for capital
adequacy purposes
To be well-
capitalized under
prompt corrective
action provisions
Tier 1 leverage ratio
12.57%
11.13%
≥ 4.00
%
≥
5.00
%
CET1
17.16%
15.22%
≥ 7.00
% (1)
≥
6.50
%
Tier 1 risk-based capital ratio
17.16%
15.22%
≥ 8.50
% (1)
≥
8.00
%
Total risk-based capital ratio
18.41%
16.47%
≥ 10.50
% (1)
≥
10.00
%
At September 30, 2021
Tier 1 leverage ratio
12.43%
10.18%
≥ 4.00
%
≥
5.00
%
CET1
19.19%
15.74%
≥ 7.00
% (1)
≥
6.50
%
Tier 1 risk-based capital ratio
19.19%
15.74%
≥ 8.50
% (1)
≥
8.00
%
Total risk-based capital ratio
20.44%
16.99%
≥ 10.50
% (1)
≥
10.00
%
(1)
Includes 2.50% capital conservation buffer

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. Controls and Procedures
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There has been no change in Magyar Bancorp, Inc.'s internal control over financial reporting during Magyar Bancorp, Inc.'s fourth quarter of fiscal year 2022 that has materially affected, or is reasonably likely to materially affect, Magyar Bancorp, Inc.'s internal control over financial reporting.
Report by Management on Internal Control over Financial Reporting
The management of Magyar Bancorp, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Magyar Bancorp Inc.'s internal control system was designed to provide reasonable assurance to the Magyar Bancorp, Inc.'s management and board of directors regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Magyar Bancorp, Inc.'s management assessed the effectiveness of the Company's internal control over financial reporting as of September 30, 2022. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) 2013 in Internal Control-Integrated Framework. Based on our assessment, we believe that, as of September 30, 2022, the Company's internal control over financial reporting was effective based on those criteria.
The Annual Report on Form 10-K does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to exemption rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.

---

ITEM 9B. OTHER INFORMATION
ITEM 9B. Other Information
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. Directors, Executive Officers, and Corporate Governance
Magyar Bancorp, Inc. has adopted a Code of Ethics that applies to Magyar Bancorp, Inc.’s principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. The Code of Ethics, and any amendments to and waivers from the Code of Ethics, will be posted on the Company’s website
located at www.magbank.com. A copy of the Code will be furnished without charge upon written request to the Secretary, Magyar Bancorp, Inc., 400 Somerset Street, New Brunswick, New Jersey.
Information concerning directors and executive officers of Magyar Bancorp, Inc. is incorporated herein by reference from our definitive Proxy Statement related to our 2023 Annual Meeting of Stockholders (the “Proxy Statement”), specifically the section captioned “Proposal I - Election of Directors.”

---

ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. Executive Compensation
Information concerning executive compensation is incorporated herein by reference from our Proxy Statement, specifically the section captioned “Proposal I - Election of Directors.”

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information concerning security ownership of certain owners and management is incorporated herein by reference from our Proxy Statement, specifically the sections captioned “Voting Securities and Principal Holders Thereof” and “Proposal I - Election of Directors.”

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
Information concerning relationships and transactions is incorporated herein by reference from our Proxy Statement, specifically the section captioned “Transactions with Certain Related Persons.”

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. Principal Accountant Fees and Services
Information concerning principal accountant fees and services is incorporated herein by reference from our Proxy Statement, specifically the section captioned “Proposal II - Ratification of Appointment of Independent Registered Public Accounting Firm.”
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. Exhibits and Financial Statement Schedules
3.1 Certificate of Incorporation of Magyar Bancorp, Inc. (1)
3.2 Bylaws of Magyar Bancorp, Inc. (2)
4.1 Form of Common Stock Certificate of Magyar Bancorp, Inc. (2)
4.2 Description of the Capital Stock of Magyar Bancorp, Inc. (3)
10.1 Form of Employee Stock Ownership Plan (2)
10.2 Restated Director Supplemental Retirement Income and Deferred Compensation Agreement for Joseph A. Yelencsics (4)
10.3 Restated Director Supplemental Retirement Income and Deferred Compensation Agreement for Edward C. Stokes, III (4)
10.4 Restated Director Supplemental Retirement Income and Deferred Compensation Agreement for Martin A. Lukacs (4)
10.5 Restated Director Supplemental Retirement Income and Deferred Compensation Agreement for Thomas Lankey (4)
10.6 Restated Director Supplemental Retirement Income and Deferred Compensation Agreement for Andrew G. Hodulik (4)
10.7 Form of Change in Control Agreement for Executive Officers (2)
10.8 Executive Supplemental Retirement Income Agreement for John Fitzgerald (4)
10.9 Executive Supplemental Retirement Income Agreement for Jon Ansari (4)
10.10 Employment Agreement for John Fitzgerald (5)
10.11 Employment Agreement for Jon Ansari
10.12 Change in Control Agreement for Peter Brown (5)
10.13 Supplemental Executive Retirement Plan for John Fitzgerald (6)
10.14 Supplemental Executive Retirement Plan for Jon Ansari (6)
10.15 Magyar Bancorp, Inc. 2022 Equity Incentive Plan (7)
Subsidiaries of Registrant (2)
Consent of Experts and Counsel
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The following materials from the Company’s Annual Report on Form 10-K for the year ended September 30, 2022, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statement of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.
Inline XBRL Cover Page Interactive Data File
____________________________
(1) Incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on July 12, 2021 and the Registration Statement on Form SB-2 of Magyar Bancorp, Inc. (file no. 333-128392), originally filed with the Securities and Exchange Commission on September 16, 2005, as amended.
(2) Incorporated by reference to the Registration Statement on Form SB-2 of Magyar Bancorp, Inc. (file no. 333-128392), originally filed with the Securities and Exchange Commission on September 16, 2005, as amended.
(3) Incorporated by reference to the Annual Report on Form 10-K of Magyar Bancorp, Inc. (file no. 000-51726), filed with the Securities and Exchange Commission on December 20, 2021.
(4) Incorporated by reference to the Annual Report on Form 10-KSB of Magyar Bancorp, Inc. (file no. 000-51726), originally filed with the Securities and Exchange Commission on December 29, 2006.
(5) Incorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-254282), filed with the Securities and Exchange Commission on March 15, 2021.
(6) Incorporated by reference to the Current Report on Form 8-K of Magyar Bancorp, Inc. (file no 000-51726), originally filed with the Securities and Exchange Commission on May 29, 2019.
(7) Incorporated by reference to Appendix A to the Company’s definitive Proxy Statement (file no. 000-51726) filed with the SEC on July 18, 2022.