Magyar Bancorp, Inc. - Quarter Report: 2019 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

Commission File Number 000-51726

Magyar Bancorp, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	20-4154978
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)

400 Somerset Street, New Brunswick, New Jersey	08901
(Address of Principal Executive Office)	(Zip Code)

(732) 342-7600

(Issuer’s Telephone Number including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol	Name of each exchange on which registered
Common Stock, $.01 per share	MGYR	The NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	þ
Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

The number of shares outstanding of the issuer's common stock at August 1, 2019 was 5,820,746.

MAGYAR BANCORP, INC.

Form 10-Q Quarterly Report

Table of Contents

PART I. FINANCIAL INFORMATION

		Page Number

Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	35
Item 6.	Exhibits	35

Signature Pages		36

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

(In Thousands, Except Share and Per Share Data)

	June 30,			September 30,
	2019			2018
Assets	(Unaudited)

Cash	$	1,183		$	674
Interest earning deposits with banks		6,756			14,694
Total cash and cash equivalents		7,939			15,368

Investment securities - available for sale, at fair value		20,941			22,469
Investment securities - held to maturity, at amortized cost (fair value of
$31,771 and $32,151 at June 30, 2019 and September 30, 2018, respectively)		32,014			33,645
Federal Home Loan Bank of New York stock, at cost		2,861			2,164
Loans receivable, net of allowance for loan losses of $4,693 and $4,200
at June 30, 2019 and September 30, 2018, respectively		526,279			508,430
Bank owned life insurance		13,565			11,843
Accrued interest receivable		2,385			2,181
Premises and equipment, net		16,369			16,990
Other real estate owned ("OREO")		7,534			8,586
Other assets		2,687			2,292

Total assets	$	632,574		$	623,968

Liabilities and Stockholders' Equity
Liabilities
Deposits	$	520,039		$	530,137
Escrowed funds		2,657			2,285
Federal Home Loan Bank of New York advances		50,389			35,524
Accrued interest payable		162			193
Accounts payable and other liabilities		5,085			4,467

Total liabilities		578,332			572,606

Stockholders' equity
Preferred stock: $.01 Par Value, 1,000,000 shares authorized; none issued		—			—
Common stock: $.01 Par Value, 8,000,000 shares authorized;
5,923,742 issued; 5,820,746 shares outstanding
at June 30, 2019 and September 30, 2018		59			59
Additional paid-in capital		26,316			26,310
Treasury stock: 102,996 shares
at June 30, 2019 and September 30, 2018, at cost		(1,152	)		(1,152	)
Unearned Employee Stock Ownership Plan shares		(250	)		(356	)
Retained earnings		30,153			27,975
Accumulated other comprehensive loss		(884	)		(1,474	)

Total stockholders' equity		54,242			51,362

Total liabilities and stockholders' equity	$	632,574		$	623,968

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Operations

(In Thousands, Except Share and Per Share Data)

	For the Three Months				For the Nine Months
	Ended June 30,				Ended June 30,
	2019		2018		2019		2018
	(Unaudited)
Interest and dividend income
Loans, including fees	$	6,442	$	5,736	$	18,794	$	16,579
Investment securities
Taxable		432		399		1,466		1,236
Federal Home Loan Bank of New York stock		32		33		114		97

Total interest and dividend income		6,906		6,168		20,374		17,912

Interest expense
Deposits		1,482		981		4,427		2,746
Borrowings		200		185		570		512

Total interest expense		1,682		1,166		4,997		3,258

Net interest and dividend income		5,224		5,002		15,377		14,654

Provision for loan losses		194		276		501		782

Net interest and dividend income after
provision for loan losses		5,030		4,726		14,876		13,872

Other income
Service charges		285		268		886		749
Income on bank owned life insurance		75		73		222		218
Other operating income		35		34		96		101
Gains on sales of loans		—		146		151		362
Gains on sales of investment securities		27		—		59		107

Total other income		422		521		1,414		1,537

Other expenses
Compensation and employee benefits		2,581		2,496		7,541		7,297
Occupancy expenses		749		718		2,233		2,190
Professional fees		258		284		827		768
Data processing expenses		165		143		472		424
OREO expenses		12		63		273		462
FDIC deposit insurance premiums		114		114		330		319
Loan servicing expenses		65		73		171		231
Insurance expense		51		50		153		152
Other expenses		430		418		1,207		1,207
Total other expenses		4,425		4,359		13,207		13,050

Income before income tax expense		1,027		888		3,083		2,359

Income tax expense		301		289		905		1,035

Net income	$	726	$	599	$	2,178	$	1,324

Net income per share-basic and diluted	$	0.12	$	0.10	$	0.37	$	0.23

Weighted average basic and diluted shares outstanding		5,820,746		5,820,746		5,820,746		5,820,746

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

(In Thousands)

	For the Three Months						For the Nine Months
	Ended June 30,						Ended June 30,
	2019			2018			2019			2018
	(Unaudited)
Net income	$	726		$	599		$	2,178		$	1,324
Other comprehensive income (loss)
Unrealized gain (loss) on
securities available for sale		239			(223	)		878			(469	)
Less reclassification adjustments for:
Net unrealized gains on securities
reclassified available for sale		—			—			—			104
Net gains realized on securities
available for sale		(27	)		—			(59	)		(107	)
Other comprehensive income (loss), before tax		212			(223	)		819			(472	)
Deferred income tax effect		(59	)		115			(229	)		130
Total other comprehensive income (loss)		153			(108	)		590			(342	)
Total comprehensive income	$	879		$	491		$	2,768		$	982

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders' Equity

For the Three and Nine Months Ended June 30, 2019 and 2018

(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
	(Unaudited)
Balance, September 30, 2018		5,820,746	$	59	$	26,310	$	(1,152	)	$	(356	)	$	27,975	$	(1,474	)	$	51,362
Net income		—		—		—		—			—			685		—			685
Other comprehensive income		—		—		—		—			—			—		246			246
ESOP shares allocated		—		—		4		—			35			—		—			39
Balance, December 31, 2018		5,820,746	$	59	$	26,314	$	(1,152	)	$	(321	)	$	28,660	$	(1,228	)	$	52,332
Net income		—		—		—		—			—			767		—			767
Other comprehensive loss		—		—		—		—			—			—		191			191
ESOP shares allocated		—		—		—		—			36			—		—			36
Balance, March 31, 2019		5,820,746	$	59	$	26,314	$	(1,152	)	$	(285	)	$	29,427	$	(1,037	)	$	53,326
Net income		—		—		—		—			—			726		—			726
Other comprehensive loss		—		—		—		—			—			—		153			153
ESOP shares allocated		—		—		2		—			35			—		—			37
Balance, June 30, 2019		5,820,746	$	59	$	26,316	$	(1,152	)	$	(250	)	$	30,153	$	(884	)	$	54,242

															Accumulated
	Common Stock				Additional					Unearned					Other
	Shares		Par		Paid-In		Treasury			ESOP			Retained		Comprehensive
	Outstanding		Value		Capital		Stock			Shares			Earnings		Loss			Total
	(Unaudited)
Balance, September 30, 2017		5,820,746	$	59	$	26,289	$	(1,152	)	$	(492	)	$	25,757	$	(1,004	)	$	49,457
Net income		—		—		—		—			—			329		—			329
Other comprehensive income		—		—		—		—			—			—		19			19
ESOP shares allocated		—		—		6		—			33			—		—			39
Balance, December 31, 2017		5,820,746	$	59	$	26,295	$	(1,152	)	$	(459	)	$	26,086	$	(985	)	$	49,844
Net income		—		—		—		—			—			396		—			396
Other comprehensive loss		—		—		—		—			—			—		(441	)		(441	)
Reclassification of the stranded tax
effect related to defferred taxes for:
Defined benefit pension plan⁽¹⁾		—		—		—		—			—			177		—			177
Securities available-for-sale⁽¹⁾		—		—		—		—			—			11		—			11
ESOP shares allocated		—		—		5		—			35			—		—			40
Balance, March 31, 2018		5,820,746	$	59	$	26,300	$	(1,152	)	$	(424	)	$	26,670	$	(1,426	)	$	50,027
Net income		—		—		—		—			—			599		—			599
Other comprehensive loss		—		—		—		—			—			—		(108	)		(108	)
ESOP shares allocated		—		—		5		—			34			—		—			39
Balance, June 30, 2018		5,820,746	$	59	$	26,305	$	(1,152	)	$	(390	)	$	27,269	$	(1,534	)	$	50,557

⁽¹⁾	In January 2018, the Company adopted ASU 2018-02, as a result, the Company made a policy election to release income tax effects, as a result of the Tax Act, from AOCI to retained earnings.

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(In Thousands)

	For the Nine Months Ended
	June 30,
	2019			2018
	(Unaudited)
Operating activities
Net income	$	2,178		$	1,324
Adjustment to reconcile net income to net cash provided
by operating activities
Depreciation expense		686			612
Premium amortization on investment securities, net		80			104
Provision for loan losses		501			782
Provision for loss on other real estate owned		212			308
Originations of SBA loans held for sale		(2,170	)		(6,255	)
Proceeds from the sales of SBA loans		2,321			6,617
Gains on sale of loans receivable		(151	)		(362	)
Gains on sales of investment securities		(59	)		(107	)
Gains on the sales of other real estate owned		(57	)		(66	)
ESOP compensation expense		112			118
Deferred income tax (benefit) expense		(171	)		638
Increase in accrued interest receivable		(204	)		(85	)
Increase in surrender value of bank owned life insurance		(222	)		(218	)
Increase in other assets		(453	)		(377	)
(Decrease) increase in accrued interest payable		(31	)		55
Increase in accounts payable and other liabilities		618			1,762
Net cash provided by operating activities		3,190			4,850

Investing activities
Net increase in loans receivable		(28,305	)		(28,166	)
Purchases of loans receivable		—			(4,463	)
Proceeds from the sale of loans receivable		9,452			3,399
Purchases of investment securities held to maturity		(1,645	)		(3,492	)
Purchases of investment securities available for sale		(3,088	)		(1,443	)
Sales of investment securities held to maturity		—			3,408
Sales of investment securities available for sale		3,921			—
Principal repayments on investment securities held to maturity		3,229			4,542
Principal repayments on investment securities available for sale		1,540			2,246
Purchase of bank owned life insurance		(1,500	)		—
Purchases of premises and equipment		(65	)		(243	)
Investment in other real estate owned		(11	)		(182	)
Proceeds from other real estate owned		1,411			1,279
Purchases of Federal Home Loan Bank stock		(697	)		(758	)
Net cash used by investing activities		(15,758	)		(23,873	)

Financing activities
Net decrease in deposits		(10,098	)		(7,217	)
Net increase in escrowed funds		372			541
Proceeds from long-term advances		9,605			4,059
Repayments of long-term advances		(6,940	)		(2,000	)
Net change in short-term advances		12,200			14,800
Net cash provided by financing activities		5,139			10,183
Net decrease in cash and cash equivalents		(7,429	)		(8,840	)

Cash and cash equivalents, beginning of period		15,368			22,334

Cash and cash equivalents, end of period	$	7,939		$	13,494

Supplemental disclosures of cash flow information
Cash paid for
Interest	$	5,028		$	3,204
Income taxes	$	774		$	964
Non-cash investing activities
Real estate acquired in full satisfaction of loans in foreclosure	$	503		$	—
Investment securities transferred from held to maturity to available for sale	$	—		$	12,619

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

MAGYAR BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

NOTE A – BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Magyar Bancorp, Inc. (the “Company”), its wholly owned subsidiary, Magyar Bank (the “Bank”), and the Bank’s wholly owned subsidiaries Magyar Service Corporation, Hungaria Urban Renewal, LLC, and MagBank Investment Company. All material intercompany transactions and balances have been eliminated. The Company prepares its financial statements on the accrual basis and in conformity with accounting principles generally accepted in the United States of America ("US GAAP"). The unaudited information furnished herein reflects all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented.

Operating results for the three and nine months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending September 30, 2019. The September 30, 2018 information has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by US GAAP for complete consolidated financial statements.

The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of other real estate owned, and the assessment of realizability of deferred income tax assets.

The Company has evaluated events and transactions occurring subsequent to the balance sheet date of June 30, 2019 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 issued.

NOTE B- RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which superseded the previous revenue recognition requirements in Topic 605, Revenue Recognition. ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” The Company’s main source of revenue is comprised of interest income on interest earning assets and non-interest income. The scope of the guidance explicitly excludes interest income as well as many other revenues for financial assets and liabilities including loans and investment securities.

Under previous U.S. GAAP, when full consideration is not expected and financing is required by the buyer to purchase the property, there were very prescriptive requirements in determining when foreclosed real estate property sold by an institution should be derecognized and a gain or loss be recognized. The new guidance that was applied to these sales is more principles based. For example, as it pertains to the criteria for determining how a contract should be accounted for under the new guidance, judgment will need to be exercised 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. The initial investment requirement for the buyer along with the various methods for profit recognition are no longer applicable.

For deposit-related fees, considering the straightforward nature of the arrangements with the Company’s deposits customers, the Company's recognition and measurement outcomes of deposit-related fees was not significantly different under the new guidance compared to previous U.S. GAAP.

ASU 2014-09 was to be effective for interim and annual periods beginning after December 15, 2016 and was to be applied on either a modified retrospective or full retrospective basis. In August 2015, the FASB issued ASU 2015-14 which deferred the original effective date for all public business entities to be effective for annual reporting periods beginning after December 15, 2017 (October 1, 2018 for the Company), including interim reporting periods within that reporting period. The adoption of ASU 2014-09 did not have a significant impact on the Company’s consolidated financial statements.

Table of Contents

In January 2016, FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income; (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale. In addition, the amendments in this ASU require an entity to disclose the fair value of its financial instruments using the exit price notion. Exit price is 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. For public entities, the guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company has updated the fair value disclosure on Note G “Fair Value Disclosures” in this report to reflect adoption of this standard, to include using the exit price notion in the fair value disclosure of financial instruments. The Company`s adoption of the ASU did not have a significant impact on the Company's consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which will supersede the current lease requirements in Topic 840. The ASU requires lessees to recognize a right of use asset and related lease liability for all leases, with a limited exception for short-term leases. Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the statement of income. Currently, leases are classified as either capital or operating, with only capital leases recognized on the balance sheet. The reporting of lease related expenses in the statements of operations and cash flows will be generally consistent with the current guidance. The new guidance will be effective for years beginning after December 15, 2018 for public companies. Once effective, the standard will be applied using a modified retrospective transition method to the beginning of the earliest period presented. The Company is currently assessing the impacts this new standard will have on its consolidated financial statements.

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. For public business entities that are U.S. Securities and Exchange Commission filers, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on its consolidated financial statements.

In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, which clarifies that receivables arising from operating leases are not within the scope of Topic 326. In December 2018, regulators issued a final rule related to regulatory capital (Regulatory Capital Rule: Implementation and Transition of the Current Expected Credit Losses Methodology for Allowances and Related Adjustments to the Regulatory Capital Rule and Conforming Amendments to Other Regulations) which is intended to provide regulatory capital relief for entities transitioning to CECL. The Company does not plan to early adopt this guidance and will adopt this guidance on January 1, 2020.

In August 2017, the FASB issued the ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The purpose of this guidance is to better align a company’s financial reporting for hedging relationships with the company’s risk management activities by expanding strategies that qualify for hedge accounting, modifying the presentation of certain hedging relationships in the financial statements and simplifying the application of hedge accounting in certain situations. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted in any interim or annual period before the effective date. ASU 2017-12 was applied using a modified retrospective approach through a cumulative-effect adjustment related to the elimination of the separate measurement of ineffectiveness to the balance of accumulated other comprehensive income with a corresponding adjustment to retained earnings as of the beginning of the fiscal year in which the amendments in this update are adopted. The amended presentation and disclosure guidance is required only prospectively. Upon adoption, the ASU allows for the reclassification of debt securities eligible to be hedged under the ASU from held-to-maturity to available-for-sale. The Company adopted ASU 2017-12 during the quarter ended December 31, 2017 and reclassified ten mortgage-backed securities totaling $12.6 million from the held-to-maturity portfolio to the available-for-sale portfolio.

Table of Contents

In February 2018, the FASB issued ASU 2018-02, Income Statement- Reporting Comprehensive Income (Topic 220) – Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 allows a reclassification from accumulated other comprehensive income (loss) ("AOCI") to retained earnings for the stranded tax effects caused by the revaluation of deferred taxes resulting from the newly enacted corporate tax rate in the Tax Cuts and Jobs Act. The ASU is effective in years beginning after December 15, 2018, but permits early adoption in a period for which financial statements have not yet been issued. The Company elected to early adopt the ASU as of January 1, 2018 which resulted in a reclassification adjustment of $188,000 from AOCI to retained earnings in the consolidated statements of stockholders’ equity.

NOTE C - CONTINGENCIES

The Company, from time to time, is 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 D - EARNINGS PER SHARE

Basic and diluted earnings per share for the three and nine months ended June 30, 2019 and 2018 were calculated by dividing net income by the weighted-average number of shares outstanding for the period considering the effect of dilutive equity options and stock awards for the diluted earnings per share calculations.

	Three Months				Nine Months
	Ended June 30,				Ended June 30,
	2019		2018		2019		2018
	(In thousands except for per share data)

Income applicable to common shares	$	726	$	599	$	2,178	$	1,324
Weighted average number of common shares
outstanding - basic		5,821		5,821		5,821		5,821
Stock options and restricted stock		—		—		—		—
Weighted average number of common shares
and common share equivalents - diluted		5,821		5,821		5,821		5,821

Basic earnings per share	$	0.12	$	0.10	$	0.37	$	0.23

Diluted earnings per share	$	0.12	$	0.10	$	0.37	$	0.23

There were no outstanding options to purchase common stock at June 30, 2019 and June 30, 2018.

NOTE E – 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 consolidated financial statements. The cost is measured based on the fair value of the equity or liability instruments issued.

Table of Contents

There were no grants, vested shares or forfeitures of non-vested restricted stock awards the three and nine months ended June 30, 2019 and 2018 nor were there any stock option and stock award expenses included with compensation expense for the three and nine months ended June 30, 2019 and 2018.

The Company announced in November 2007 its second stock repurchase program of up to 5% of its publicly-held outstanding shares of common stock, or 129,924 shares. Through June 30, 2019, the Company had repurchased a total of 81,000 shares of its common stock at an average cost of $8.33 per share under this program. No shares were repurchased during the nine months ended June 30, 2019 and 2018, respectively. Under the stock repurchase program, 48,924 shares of the 129,924 shares authorized remained available for repurchase as of June 30, 2019. The Company’s intended use of the repurchased shares is for general corporate purposes. The Company held 102,996 total treasury stock shares at June 30, 2019.

The Company has an Employee Stock Ownership Plan ("ESOP") for the benefit of employees of the Company and the Bank who meet the eligibility requirements as defined in the plan. The ESOP trust purchased 217,863 shares of common stock in the open market using proceeds of a loan from the Company. The total cost of shares purchased by the ESOP trust was $2.3 million, reflecting an average cost per share of $10.58. 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. The loan bears a variable interest rate that adjusts annually every January 1^st to the then published Prime Rate (5.50% at January 1, 2019) with principal and interest payable annually in equal installments over thirty years. The loan is secured by shares of the Company’s stock.

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. As shares are released from collateral, the Company reports compensation expense equal to the then current market price of the shares, and the shares become outstanding for earnings per share computations.

At June 30, 2019, shares allocated to participants totaled 178,216. Unallocated ESOP shares held in suspense totaled 39,647 at June 30, 2019 and had a fair market value of $479,729. The Company's contribution expense for the ESOP was $112,000 and $118,000 for the nine months ended June 30, 2019 and 2018, respectively.

NOTE F – OTHER COMPREHENSIVE INCOME

The components of other comprehensive income and the related income tax effects are as follows:

	Three Months Ended June 30,
	2019									2018
				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	$	239		$	(67	)	$	172		$	(223	)	$	115	$	(108	)

Less reclassification adjustments for:
Net gains realized on securities
available for sale ^{(a) (b)}		(27	)		8			(19	)		—			—		—

Other comprehensive income (loss), net	$	212		$	(59	)	$	153		$	(223	)	$	115	$	(108	)

Table of Contents

	Nine Months Ended June 30,
	2019									2018
				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	$	878		$	(246	)	$	632		$	(469	)	$	129		$	(340	)

Less reclassification adjustments for:
Net unrealized gains on securities
reclassified available for sale		—			—			—			104			(32	)		72
Net gains realized on securities
available for sale ^{(a) (b)}		(59	)		17			(42	)		(107	)		33			(74	)


Other comprehensive income (loss), net	$	819		$	(229	)	$	590		$	(472	)	$	130		$	(342	)

(a) Realized gains on securities transactions included in gains on sales of investment securities in the accompanying Consolidated Statements of Operation.
(b) Tax effect included in income tax expense in the accompanying Consolidated Statements of Operation.

NOTE G – 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 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, 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 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 based 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 securities 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-sponsored mortgage-backed securities and private label mortgage-backed securities. The fair values of these securities are obtained from an independent nationally recognized pricing service. An independent pricing service provides the Company with prices which are categorized as Level 2, as quoted prices in active markets for identical assets are generally not available for the securities in the Company’s portfolio. Various modeling techniques are used to determine pricing for Company’s mortgage-backed securities, including option pricing and discounted cash flow models. The inputs to these models include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data.

Table of Contents

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.

	Fair Value at June 30, 2019
	Total		Level 1		Level 2		Level 3
	(In thousands)
Securities available for sale:
Obligations of U.S. government agencies:
Mortgage-backed securities - residential	$	1,968	$	—	$	1,968	$	—
Obligations of U.S. government-sponsored enterprises:
Mortgage-backed securities-residential		16,479		—		16,479		—
Debt securities		2,494		—		2,494		—
Total securities available for sale	$	20,941	$	—	$	20,941	$	—

	Fair Value at September 30, 2018
	Total		Level 1		Level 2		Level 3
	(In thousands)
Securities available for sale:
Obligations of U.S. government agencies:
Mortgage-backed securities - residential	$	1,495	$	—	$	1,495	$	—
Obligations of U.S. government-sponsored enterprises:
Mortgage-backed securities-residential		18,613		—		18,613		—
Debt securities		2,361		—		2,361		—
Total securities available for sale	$	22,469	$	—	$	22,469	$	—

The following is a description of valuation methodologies used for assets measured at fair value on a non-recurring basis.

Mortgage Servicing Rights, net

Mortgage Servicing Rights (“MSRs”) are carried at the lower of cost or estimated fair value. The estimated fair value of MSR 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. The Company had MSRs totaling $33,000 and $49,000 at June 30, 2019 and September 30, 2018, respectively.

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 (the rate of return implicit in the loan); 2) the asset’s observable market price; or 3) the fair value of the collateral, less anticipated selling and disposition costs, if the asset is collateral dependent. The regulatory agencies require the last 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 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.

Table of Contents

Appraisals of collateral securing impaired loans are conducted by approved, qualified, and independent third-party appraisers. Such appraisals are ordered via the Company’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.

Other Real Estate Owned

The fair value of other real estate owned is determined through current appraisals, and adjusted as necessary, by management, to reflect current market conditions and anticipated selling and disposition costs. As such, other real estate owned is generally classified as Level 3.

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 non-recurring basis at June 30, 2019 and September 30, 2018.

	Fair Value at June 30, 2019
	Total		Level 1		Level 2		Level 3
	(In thousands)

Impaired loans	$	902	$	—	$	—	$	902
Other real estate owned		7,534		—		—		7,534
Total	$	8,436	$	—	$	—	$	8,436

	Fair Value at September 30, 2018
	Total		Level 1		Level 2		Level 3
	(In thousands)

Impaired loans	$	464	$	—	$	—	$	464
Other real estate owned		8,586		—		—		8,586
Total	$	9,050	$	—	$	—	$	9,050

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)

	Fair Value	Valuation
June 30, 2019	Estimate	Techniques	Unobservable Input	Range (Weighted Average)

Impaired loans	$ 902	Appraisal of collateral ⁽¹⁾	Appraisal adjustments (2)	-1.6% to -53.6% (-41.1%)
Other real estate owned	$ 7,534	Appraisal of collateral ⁽¹⁾	Liquidation expenses (2)	-9.2% to -48.5% (-19.4%)

Table of Contents

Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands)

	Fair Value	Valuation
September 30, 2018	Estimate	Techniques	Unobservable Input	Range (Weighted Average)

Impaired loans	$ 464	Appraisal of collateral (1)	Appraisal adjustments (2)	-10.2% to -32.0% (-21.3%)
Other real estate owned	$ 8,586	Appraisal of collateral (1)	Liquidation expenses (2)	-5.6% to -48.5% (-15.4%)

(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 downward 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 June 30, 2019 and September 30, 2018. This table excludes financial instruments for which the carrying amount approximates level 1 fair value. 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 being payable on demand and having no stated maturity.

	Carrying		Fair		Fair Value Measurement Placement
	Value		Value		(Level 1)		(Level 2)		(Level 3)
	(In thousands)
June 30, 2019
Financial instruments - assets
Investment securities held to maturity	$	32,014	$	31,771	$	—	$	31,771	$	—
Loans		526,279		532,778		—		—		532,778

Financial instruments - liabilities
Certificates of deposit including retirement certificates		112,623		113,361		—		113,361		—
Borrowings		50,389		50,676		—		50,676		—

September 30, 2018
Financial instruments - assets
Investment securities held to maturity	$	33,645	$	32,151	$	—	$	32,151	$	—
Loans		508,430		505,479		—		—		505,479

Financial instruments - liabilities
Certificates of deposit including retirement certificates		130,343		130,813		—		130,813		—
Borrowings		35,524		34,863		—		34,863		—

There were no transfers between fair value measurement placements during the nine months ended June 30, 2019.

Table of Contents

NOTE H - INVESTMENT SECURITIES

The following tables summarize the amortized cost and fair values of securities available for sale at June 30, 2019 and September 30, 2018:

	June 30, 2019
			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	$	1,918	$	50	$	—		$	1,968
Obligations of U.S. government-sponsored enterprises:
Mortgage-backed securities-residential		16,460		83		(64	)		16,479
Debt securities		2,500		—		(6	)		2,494
Total securities available for sale	$	20,878	$	133	$	(70	)	$	20,941

	September 30, 2018
			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	$	1,463	$	40	$	(8	)	$	1,495
Obligations of U.S. government-sponsored enterprises:
Mortgage-backed securities-residential		19,262		13		(662	)		18,613
Debt securities		2,500		—		(139	)		2,361
Total securities available for sale	$	23,225	$	53	$	(809	)	$	22,469

The maturities of the debt securities and certain information regarding the mortgage-backed securities available for sale at June 30, 2019 are summarized in the following table:

	June 30, 2019
	Amortized		Fair
	Cost		Value
	(In thousands)
Due within 1 year	$	—	$	—
Due after 1 but within 5 years		2,500		2,494
Due after 5 but within 10 years		—		—
Due after 10 years		—		—
Total debt securities		2,500		2,494

Mortgage-backed securities:
Residential		18,378		18,447
Commercial		—		—
Total	$	20,878	$	20,941

Table of Contents

The following tables summarize the amortized cost and fair values of securities held to maturity at June 30, 2019 and September 30, 2018:

	June 30, 2019
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In thousands)
Securities held to maturity:
Obligations of U.S. government agencies:
Mortgage-backed securities - residential	$	463	$	—	$	(62	)	$	401
Mortgage-backed securities - commercial		858		—		(4	)		854
Obligations of U.S. government-sponsored enterprises:
Mortgage-backed-securities - residential		24,858		197		(85	)		24,970
Debt securities		2,467		4		—			2,471
Private label mortgage-backed securities - residential		368		7		—			375
Corporate securities		3,000		—		(300	)		2,700
Total securities held to maturity	$	32,014	$	208	$	(451	)	$	31,771

	September 30, 2018
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In thousands)
Securities held to maturity:
Obligations of U.S. government agencies:
Mortgage-backed securities - residential	$	568	$	—	$	(93	)	$	475
Mortgage-backed securities - commercial		904		—		(9	)		895
Obligations of U.S. government-sponsored enterprises:
Mortgage backed securities - residential		26,316		4		(867	)		25,453
Debt securities		2,464		—		(142	)		2,322
Private label mortgage-backed securities - residential		393		1		—			394
Corporate securities		3,000		—		(388	)		2,612
Total securities held to maturity	$	33,645	$	5	$	(1,499	)	$	32,151

The maturities of the debt securities and certain information regarding the mortgage backed securities held to maturity at June 30, 2019 are summarized in the following table:

	June 30, 2019
	Amortized		Fair
	Cost		Value
	(In thousands)
Due within 1 year	$	—	$	—
Due after 1 but within 5 years		1,499		1,500
Due after 5 but within 10 years		3,968		3,671
Due after 10 years		—		—
Total debt securities		5,467		5,171

Mortgage-backed securities:
Residential		25,689		25,746
Commercial		858		854
Total	$	32,014	$	31,771

Table of Contents

NOTE I – IMPAIRMENT OF INVESTMENT SECURITIES

The Company recognizes credit-related other-than-temporary impairment on debt securities in earnings while noncredit-related other-than-temporary impairment on debt securities not expected to be sold are recognized in other comprehensive income (“OCI”).

The Company reviews its investment portfolio on a quarterly basis for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and the intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in the market. The Company evaluates its intent and ability to hold debt securities based upon its investment strategy for the particular type of security and its cash flow needs, liquidity position, capital adequacy and interest rate risk position. In addition, the risk of future other-than-temporary impairment may be influenced by prolonged recession in the U.S. economy, changes in real estate values and interest deferrals.

Investment securities with fair values less than their amortized cost contain unrealized losses. The following tables present the gross unrealized losses and fair value at June 30, 2019 and September 30, 2018 for both available for sale and held to maturity securities by investment category and time frame for which the loss has been outstanding:

			June 30, 2019
			Less Than 12 Months					12 Months Or Greater					Total
	Number of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Securities		Value		Losses			Value		Losses			Value		Losses
			(Dollars in thousands)
Obligations of U.S. government agencies:
Mortgage-backed securities - residential		2	$	—	$	—		$	401	$	(62	)	$	401	$	(62	)
Mortgage-backed securities - commercial		1		—		—			854		(4	)		854		(4	)
Obligations of U.S. government-sponsored enterprises:
Mortgage-backed securities - residential		19		1,432		(3	)		21,210		(146	)		22,642		(149	)
Debt securities		1		—		—			1,494		(6	)		1,494		(6	)
Corporate securities		1		—		—			2,700		(300	)		2,700		(300	)
Total		24	$	1,432	$	(3	)	$	26,659	$	(518	)	$	28,091	$	(521	)

			September 30, 2018
			Less Than 12 Months					12 Months Or Greater					Total
	Number of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Securities		Value		Losses			Value		Losses			Value		Losses
			(Dollars in thousands)
Obligations of U.S. government agencies:
Mortgage-backed securities - residential		3	$	532	$	(8	)	$	475	$	(93	)	$	1,007	$	(101	)
Mortgage-backed securities - commercial		1		—		—			895		(9	)		895		(9	)
Obligations of U.S. government-sponsored enterprises:
Mortgage-backed securities - residential		34		11,336		(312	)		30,605		(1,217	)		41,941		(1,529	)
Debt securities		4		—		—			4,683		(281	)		4,683		(281	)
Private label mortgage-backed securities residential		1		—		—			104		—			104		—
Corporate securities		1		—		—			2,612		(388	)		2,612		(388	)
Total		44	$	11,868	$	(320	)	$	39,374	$	(1,988	)	$	51,242	$	(2,308	)

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. At June 30, 2019 and September 30, 2018, there were twenty-four and forty-four investment securities, respectively, with unrealized losses.

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 June 30, 2019 and September 30, 2018.

Table of Contents

NOTE J – LOANS RECEIVABLE, NET AND RELATED ALLOWANCE FOR LOAN LOSSES

Loans receivable, net were comprised of the following:

	June 30,			September 30,
	2019			2018
	(In thousands)

One-to four-family residential	$	191,248		$	185,287
Commercial real estate		234,437			219,347
Construction		30,536			30,412
Home equity lines of credit		18,346			17,982
Commercial business		51,628			53,320
Other		4,629			6,150
Total loans receivable		530,824			512,498
Net deferred loan costs		148			132
Allowance for loan losses		(4,693	)		(4,200	)

Total loans receivable, net	$	526,279		$	508,430

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: amortizing term loans, which are primarily first liens, and home equity lines of credit, which are generally second liens. The commercial real estate loan segment is further disaggregated into three classes: loans secured by multifamily structures, owner-occupied commercial structures, and non-owner occupied nonresidential properties. The construction loan segment consists primarily of loans to 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 other 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.

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 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.

Table of Contents

The following tables present impaired loans by class, segregated by those for which a specific allowance was required and charged-off and those for which a specific allowance was not necessary at nine months ended June 30, 2019 and September 30, 2018:

					Impaired
					Loans with
	Impaired Loans with				No Specific
	Specific Allowance				Allowance		Total Impaired Loans
									Unpaid
	Recorded		Related		Recorded		Recorded		Principal
June 30, 2019	Investment		Allowance		Investment		Investment		Balance
	(In thousands)

One-to four-family residential	$	—	$	—	$	1,339	$	1,339	$	1,339
Commercial real estate		—		—		4,355		4,355		4,355
Construction		—		—		2,900		2,900		2,900
Commercial business		—		—		482		482		482
Total impaired loans	$	—	$	—	$	9,076	$	9,076	$	9,076

					Impaired
					Loans with
	Impaired Loans with				No Specific
	Specific Allowance				Allowance		Total Impaired Loans
									Unpaid
	Recorded		Related		Recorded		Recorded		Principal
September 30, 2018	Investment		Allowance		Investment		Investment		Balance
	(In thousands)

One-to four-family residential	$	—	$	—	$	1,132	$	1,132	$	1,132
Commercial real estate		—		—		3,961		3,961		3,961
Home equity lines of credit		—		—		58		58		58
Commercial business		—		—		710		710		801
Total impaired loans	$	—	$	—	$	5,861	$	5,861	$	5,952

The average recorded investment in impaired loans was $8.9 million and $6.5 million for the nine months ended June 30, 2019 and 2018, respectively. The Company’s impaired loans include delinquent non-accrual loans and performing Troubled Debt Restructurings (“TDRs”), as TDRs remain impaired loans until fully repaid. There were no TDRs for the three months ended June30, 2019. There was one TDR during the nine months ended June 30, 2019 totaling $365,000 that resulted from the restructure of a previously impaired, non-accrual loan. There were no TDRs during the three and nine months ended June 30, 2018. During the nine months ended June 30, 2019 and 2018, interest income of $179,000 and $180,000, respectively, was recognized for TDR loans while no interest income was recognized for delinquent non-accrual loans.

The following tables present the average recorded investment in impaired loans for the three and nine months ended June 30, 2019 and 2018.

	Three Months		Nine Months
	June 30, 2019		June 30, 2019
	(In thousands)

One-to four-family residential	$	1,344	$	1,273
Commercial real estate		4,133		4,067
Construction		2,900		2,900
Home equity lines of credit		20		32
Commercial business		533		591
Average investment in impaired loans	$	8,930	$	8,863

Table of Contents

	Three Months		Nine Months
	June 30, 2018		June 30, 2018
	(In thousands)

One-to four-family residential	$	1,878	$	2,360
Commercial real estate		3,661		3,771
Home equity lines of credit		29		15
Commercial business		361		332
Average investment in impaired loans	$	5,929	$	6,478

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. Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. 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.

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 at the dates presented:

			Special
	Pass		Mention		Substandard		Doubtful		Total

	(In thousands)
June 30, 2019
One-to four-family residential	$	190,846	$	—	$	402	$	—	$	191,248
Commercial real estate		232,493		835		1,109		—		234,437
Construction		27,636		—		2,900		—		30,536
Home equity lines of credit		18,346		—		—		—		18,346
Commercial business		51,376		—		252		—		51,628
Other		4,629		—		—		—		4,629
Total	$	525,326	$	835	$	4,663	$	—	$	530,824

Table of Contents

			Special
	Pass		Mention		Substandard		Doubtful		Total

	(In thousands)
September 30, 2018
One-to four-family residential	$	185,118	$	—	$	169	$	—	$	185,287
Commercial real estate		217,935		753		659		—		219,347
Construction		30,412		—		—		—		30,412
Home equity lines of credit		17,924		—		58		—		17,982
Commercial business		52,845		—		475		—		53,320
Other		6,150		—		—		—		6,150
Total	$	510,384	$	753	$	1,361	$	—	$	512,498

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 table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans at the dates 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)
June 30, 2019
One-to four-family residential	$	191,210	$	—	$	—	$	38	$	38	$	38	$	191,248
Commercial real estate		231,116		1,682		719		920		3,321		920		234,437
Construction		27,636		—		—		2,900		2,900		2,900		30,536
Home equity lines of credit		18,317		—		29		—		29		—		18,346
Commercial business		51,079		297		—		252		549		252		51,628
Other		4,629		—		—		—		—		—		4,629
Total	$	523,987	$	1,979	$	748	$	4,110	$	6,837	$	4,110	$	530,824

			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, 2018
One-to four-family residential	$	185,132	$	17	$	—	$	138	$	155	$	138	$	185,287
Commercial real estate		218,892		—		—		455		455		455		219,347
Construction		30,412		—		—		—		—		—		30,412
Home equity lines of credit		17,892		—		—		90		90		90		17,982
Commercial business		52,845		252		—		223		475		223		53,320
Other		6,150		—		—		—		—		—		6,150
Total	$	511,323	$	269	$	—	$	906	$	1,175	$	906	$	512,498

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 (“NPLs”).

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.

Table of Contents

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 a defined number of consecutive 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 include: 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 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.

The following table summarizes the ALL by loan category and the related activity for the nine months ended June 30, 2019:

	One-to-Four									Home Equity
	Family			Commercial						Lines of		Commercial
	Residential			Real Estate			Construction			Credit		Business			Other			Unallocated			Total
	(In thousands)

Balance- September 30, 2018	$	687		$	1,540		$	493		$	109	$	1,151		$	25		$	195		$	4,200
Charge-offs		—			—			—			—		—			—			—			—
Recoveries		—			—			—			1		—			—			—			1
Provision (credit)		11			50			181			11		31			(21	)		(62	)		201
Balance- December 31, 2018	$	698		$	1,590		$	674		$	121	$	1,182		$	4		$	133		$	4,402
Charge-offs		—			—			—			—		—			—			—			—
Recoveries		92			—			—			—		—			—			—			92
Provision (credit)		(80	)		95			142			17		(78	)		(1	)		11			106
Balance- March 31, 2019	$	710		$	1,685		$	816		$	138	$	1,104		$	3		$	144		$	4,600
Charge-offs		—			(1	)		—			—		(100	)		—			—			(101	)
Recoveries		—			—			—			—		—			—			—			—
Provision (credit)		3			219			(52	)		1		26			1			(4	)		194
Balance- June 30, 2019	$	713		$	1,903		$	764		$	139	$	1,030		$	4		$	140		$	4,693

Table of Contents

The following table summarizes the ALL by loan category and the related activity for the nine months ended June 30, 2018:

	One-to-Four									Home Equity
	Family			Commercial						Lines of			Commercial
	Residential			Real Estate			Construction			Credit			Business			Other			Unallocated			Total
	(In thousands)

Balance-September 30, 2017	$	587		$	1,277		$	490		$	57		$	956		$	6		$	102		$	3,475
Charge-offs		(127	)		—			—			—			(170	)		—			—			(297	)
Recoveries		82			23			3			—			1			—			—			109
Provision		21			(1	)		(109	)		74			265			(2	)		2			250
Balance-December 31, 2017	$	563		$	1,299		$	384		$	131		$	1,052		$	4		$	104		$	3,537
Charge-offs		(25	)		—			—			—			—			—			—			(25	)
Recoveries		—			—			—			—			—			—			—			—
Provision		(5	)		119			58			(19	)		106			—			(2	)		257
Balance- March 31, 2018	$	533		$	1,418		$	442		$	112		$	1,158		$	4		$	102		$	3,769
Charge-offs		(61	)		—			—			—			—			(3	)		—			(64	)
Recoveries		4			—			—			—			—			—			—			4
Provision		58			70			70			4			19			3			52			276
Balance- June 30, 2018	$	534		$	1,488		$	512		$	116		$	1,177		$	4		$	154		$	3,985

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 June 30, 2019 and September 30, 2018:

	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 - June 30, 2019	$	713	$	1,903	$	764	$	139	$	1,030	$	4	$	140	$	4,693
Individually evaluated
for impairment		—		—		—		—		—		—		—		—
Collectively evaluated
for impairment		713		1,903		764		139		1,030		4		140		4,693

Loans receivable:
Balance - June 30, 2019	$	191,248	$	234,437	$	30,536	$	18,346	$	51,628	$	4,629	$	—	$	530,824
Individually evaluated
for impairment		1,339		4,355		2,900		—		482		—		—		9,076
Collectively evaluated
for impairment		189,909		230,082		27,636		18,346		51,146		4,629		—		521,748

Table of Contents

	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, 2018	$	687	$	1,540	$	493	$	109	$	1,151	$	25	$	195	$	4,200
Individually evaluated
for impairment		—		—		—		—		—		—		—		—
Collectively evaluated
for impairment		687		1,540		493		109		1,151		25		195		4,200

Loans receivable:
Balance - September 30, 2018	$	185,287	$	219,347	$	30,412	$	17,982	$	53,320	$	6,150	$	—	$	512,498
Individually evaluated
for impairment		1,132		3,961		—		58		710		—		—		5,861
Collectively evaluated
for impairment		184,155		215,386		30,412		17,924		52,610		6,150		—		506,637

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 Troubled Debt Restructuring (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 include, 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 TDRs for the three months ended June30, 2019. There was one TDR during the nine months ended June 30, 2019 totaling $365,000 that resulted from the restructure of a previously impaired, non-accrual loan. There were no TDRs for the three and nine months ended June 30, 2018.

The following table summarizes the TDRs for the nine months ended June 30, 2019:

	Nine Months Ended June 30, 2019
	Number of		Investment Before		Investment After
	Loans		TDR Modification		TDR Modification
	(Dollars in thousands)
One-to four-family residential		1	$	260	$	365

Total		1	$	260	$	365

Table of Contents

NOTE K - DEPOSITS

A summary of deposits by type of account are summarized as follows:

	June 30,		September 30,
	2019		2018
	(In thousands)

Demand accounts	$	106,728	$	104,745
Savings accounts		71,894		81,373
NOW accounts		39,988		46,336
Money market accounts		188,806		167,340
Certificates of deposit		95,748		112,014
Retirement certificates		16,875		18,329
Total deposits	$	520,039	$	530,137

NOTE L – 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.

Where applicable, deferred tax assets are reduced by a valuation allowance for any portions determined not likely to be realized. The valuation allowance is assessed by management on a quarterly basis and adjusted, by a charge or credit to income tax expense, as changes in facts and circumstances warrant. In assessing whether it is more likely than not that some portion or all of the deferred tax assets will not be realized, management considers projections of future taxable income, the projected periods in which current temporary differences will be deductible, the availability of carry forwards, feasible and permissible tax planning strategies and existing tax laws and regulations. The Company did not have a valuation allowance against its net deferred tax assets at June 30, 2019 or September 30, 2018.

A reconciliation of income tax between the amounts calculated based upon pre-tax income at the Company’s federal statutory rate and the amounts reflected in the consolidated statements of operations are as follows:

	For the Three Months					For the Nine Months
	Ended June 30,					Ended June 30,
	2019			2018		2019			2018
	(In thousands)

Income tax expense at the statutory federal tax rate
of 21% and 24% for the three and nine months ended
June 30, 2019 and 2018, respectively	$	191		$	213	$	573		$	565
State tax expense		118			61		355			161
Reduction of deferred tax asset from change in federal tax rate		—			—		—			306
Other		(8	)		15		(23	)		3
Income tax expense	$	301		$	289	$	905		$	1,035

On December 22, 2017, the Company revised its estimated annual effective rate to reflect a change in the United States federal corporate tax rate from 34% to 21%. The rate change was administratively effective to the beginning of our fiscal year resulting in the use of a statutory rate of 21% for the three and nine months ended June 30, 2019 and a blended rate of 24% for the three and nine months ended June 30, 2018. Included in the income tax expense for the nine months ended June 30, 2018 was a $306,000 expense for a reduction in the Company’s net deferred tax assets resulting from the impact of the Tax Cuts and Jobs Act.

On July 1, 2018, the State of New Jersey's Assembly signed into law a new bill, effective January 1, 2018, that imposed a temporary surtax on corporations earning New Jersey allocated income in excess of $1 million. The surtax was set at a rate of 2.5% for tax years beginning on or after January 1, 2018 through December 31, 2019, and at a rate of 1.5% for years beginning on or after January 1, 2020, through December 31, 2021. Accordingly, the Company is using an 11.5% State tax rate for the calculation of its State income tax expense the three and nine months ended June 30, 2019.

Table of Contents

In addition, effective for periods on or after January 1, 2019, the State of New Jersey is adopting mandatory unitary combined reporting for its Corporation Business Tax. The change is not expected to have a material impact on the Company’s State income tax.

NOTE M - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Company uses 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 June 30, 2019 and September 30, 2018, the Company did not hold any interest rate floors or collars.

In the normal course of business the Bank is a party to financial instruments with off-balance-sheet risk and in only to meet the financing needs of its customers. These financial instruments are commitments to extend credit are summarized in the below table. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.

	June 30,		September 30,
	2019		2018
	(In thousands)
Financial instruments whose contract amounts
represent credit risk
Letters of credit	$	1,455	$	1,939
Unused lines of credit		57,088		54,127
Fixed rate loan commitments		2,217		4,397
Variable rate loan commitments		16,908		12,523
Total	$	77,668	$	72,986

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

When used in this filing and in future filings by the Company with the Securities and Exchange Commission, in the Company’s press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases, “anticipate,” “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “projected,” “believes”, or similar expressions are intended to identify “forward looking statements.” Forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, those risks previously disclosed by the Company in Item 1A of its Annual Report on Form 10-K as may be supplemented by Quarterly Reports on Form 10-Q filed with the SEC, general economic conditions, changes in interest rates, regulatory considerations, competition, technological developments, retention and recruitment of qualified personnel, and market acceptance of the Company’s pricing, products and services, and with respect to the loans extended by the Bank and real estate owned, the following: risks related to the economic environment in the market areas in which the Bank operates, particularly with respect to the real estate market in New Jersey; the risk that the value of the real estate securing these loans may decline in value; and the risk that significant expense may be incurred by the Company in connection with the resolution of these loans.

The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and advises readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investing activities, and competitive and regulatory factors, could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated or projected.

The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

Table of Contents

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 Losses. 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. The general component is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. 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.

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 new 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.

Appraisals are critical in determining the fair value of the other real estate owned amount. Assumptions for appraisals are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly affect the valuation of a property. The assumptions supporting such appraisals are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable.

Investment Securities. 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 accumulated other comprehensive income (“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 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 financial statements.

Table of Contents

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 the their fair value to a level equal to or exceeding 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. Management did not account for any other-than-temporary impairments at or during the periods presented in these financial statements.

Fair Value. We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Our securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, we 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. 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, we group our 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. We base our 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 us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

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.

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.

Comparison of Financial Condition at June 30, 2019 and September 30, 2018

Total assets increased $8.6 million, or 1.4%, to $632.6 million during the nine months ended June 30, 2019 from $624.0 million at September 30, 2018. The increase was attributable to a $17.8 million, or 3.5%, increase in net loans receivable to $526.3 million at June 30, 2019 from $508.4 million September 30, 2018, offset by a $7.4 million decrease in cash and cash equivalents, a $3.2 million decrease in investment securities, and a $1.1 million decrease in other real estate owned properties.

Cash and interest bearing deposits with banks decreased $7.4 million, or 48.3%, to $7.9 million at June 30, 2019 from $15.4 million at September 30, 2018 as interest bearing balances with the Federal Reserve Bank were used to fund loan originations and deposit outflows.

At June 30, 2019, investment securities totaled $53.0 million, reflecting a decrease of $3.2 million, or 5.6%, from $56.1 million at September 30, 2018. The Company purchased $4.7 million of U.S. Government-sponsored enterprise obligations, sold securities totaling $3.9 million and received principal repayments totaling $4.8 million during the nine months ended June 30, 2019. In addition, the mark-to-market value of the Company’s available-for-sale investment portfolio increased $819,000 during the nine months ended June 30, 2019 due to lower market interest rates.

Table of Contents

Investment securities at June 30, 2019 consisted of $44.6 million in mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises, $5.0 million in debt securities issued by U.S. government agencies and U.S. government-sponsored enterprises, $3.0 million in corporate notes, and $368,000 in “private-label” mortgage-backed securities. There were no other-than-temporary-impairment charges for the Company’s investment securities for the six months ended June 30, 2019.

Total loans receivable increased $18.3 million during the nine months ended June 30, 2019 to $530.8 million and were comprised of $234.4 million (44.1%) commercial real estate loans, $191.3 million (36.0%) one-to-four family residential mortgage loans, $51.6 million (9.7%) commercial business loans, $30.5 million (5.8%) construction loans, $18.4 million (3.5%) home equity lines of credit and $4.6 million (0.9%) other loans.

Total non-performing loans increased $331,000 to $4.1 million during the three months ended June 30, 2019 due to the addition of one commercial real estate loan. Total non-performing loans increased $3.2 million from $906,000 at September 30, 2018 primarily due to one construction loan that ceased performing and in accordance with Company policy resulted in the initiation of foreclosure proceedings. Based on updated appraisals of the real estate securing the loans, management believes the new non-performing loans are adequately secured by real estate. The ratio of non-performing loans to total loans increased to 0.77% at June 30, 2019 from 0.18% at September 30, 2018.

During the nine months ended June 30, 2019, the allowance for loan losses increased $493,000 to $4.7 million. The allowance for loan losses as a percentage of non-performing loans decreased to 114.2% at June 30, 2019 compared with 463.6% at September 30, 2018. At June 30, 2019 the Company’s allowance for loan losses as a percentage of total loans was 0.88% compared with 0.82% at September 30, 2018. Future increases in the allowance for loan losses may be necessary based on the growth of the loan portfolio, the change in composition of the loan portfolio, possible future increases in non-performing loans and charge-offs, and the possible deterioration of the current economic environment.

Other real estate owned decreased $1.1 million to $7.5 million at June 30, 2019 from $8.6 million at September 30, 2018. The decrease was the result of the four sales totaling $1.4 million and valuation allowances totaling $212,000 based on updated appraisals. The four properties were each sold above carrying value for a total gain of $57,000. During the nine months ended June 30, 2019, the Bank added two properties totaling $503,000 from the foreclosure of collateral securing non-performing loans. The Company is determining the proper course of action for its other real estate owned, which may include holding the properties until the real estate market further improves, marketing the individual properties for sale, or selling multiple properties to a real estate investor.

Total deposits decreased $10.1 million, or 1.9%, to $520.0 million during the nine months ended June 30, 2019. The decrease in deposits occurred in certificates of deposit (including individual retirement accounts), which decreased $17.7 million, or 13.6%, to $112.6 million, in savings accounts, which decreased $9.5 million, or 11.7%, to $71.9 million, and in interest-bearing checking (NOW) accounts, which decreased $6.3 million, or 13.7%, to $40.0 million. Offsetting these decreases were increases in money market accounts, which increased $21.5 million, or 12.8%, to $188.8 million and in non-interest bearing checking (demand) accounts, which increased $2.0 million, or 1.9%, to $106.7 million.

Included in the total deposits were $6.9 million in brokered certificates of deposit at June 30, 2019 and $14.8 million at September 30, 2018. Also included with the total deposits were listing service certificate of deposits totaling $8.0 million at June 30, 2019 and $12.6 million at September 30, 2018.

Federal Home Loan Bank of New York advances increased $14.9 million to $50.4 million at June 30, 2019 from $35.5 million at September 30, 2018. Long-term advances increased $2.7 million while overnight borrowings increased $12.2 million to replace the seasonal deposit outflows.

Stockholders’ equity increased $2.9 million, or 5.6%, to $54.2 million at June 30, 2019 from $51.4 million at September 30, 2018. The Company’s book value per share increased to $9.32 at June 30, 2019 from $8.82 at September 30, 2018. The increase in stockholders’ equity was attributable to the Company’s results from operations for the nine months ended June 30, 2019 and by lower accumulated other comprehensive losses related to the valuation of the Company’s available-for-sale investment portfolio.

The Company did not repurchase any shares of its common stock during the nine months ended June 30, 2019. Through June 30, 2019, the Company had repurchased 81,000 shares at an average price of $8.33 pursuant to the second stock repurchase plan, which reduced outstanding shares to 5,820,746.

Table of Contents

Average Balance Sheet for the Three and Nine Months Ended June 30, 2019 and 2018

The tables on the following pages present certain information regarding the Company’s financial condition and net interest income for the three and nine months ended June 30, 2019 and 2018. The tables present 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 Three Months Ended June 30,
	2019						2018
	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	$	18,375	$	105		2.29%	$	13,500	$	53		1.59%
Loans receivable, net		523,057		6,442		4.94%		493,170		5,736		4.67%
Securities
Taxable		56,133		327		2.34%		58,530		346		2.37%
FHLB of NY stock		2,161		32		5.95%		2,200		33		5.98%
Total interest-earning assets		599,726		6,906		4.62%		567,400		6,168		4.36%
Noninterest-earning assets		42,426						45,427
Total assets	$	642,152					$	612,827

Interest-bearing liabilities:
Savings accounts ⁽¹⁾	$	73,207		120		0.66%	$	92,982		152		0.66%
NOW accounts ⁽²⁾		234,918		826		1.41%		195,813		389		0.80%
Time deposits ⁽³⁾		116,922		536		1.84%		120,827		440		1.46%
Total interest-bearing deposits		425,047		1,482		1.40%		409,622		981		0.96%
Borrowings		34,854		200		2.30%		36,353		185		2.04%
Total interest-bearing liabilities		459,901		1,682		1.47%		445,975		1,166		1.05%
Noninterest-bearing liabilities		129,621						116,975
Total liabilities		589,522						562,950
Retained earnings		52,630						49,877
Total liabilities and retained earnings	$	642,152					$	612,827

Net interest and dividend income			$	5,224					$	5,002
Interest rate spread						3.15%						3.31%
Net interest-earning assets	$	139,825					$	121,425
Net interest margin ⁽⁴⁾						3.49%						3.54%
Average interest-earning assets to
average interest-bearing liabilities		130.40%						127.23%

⁽¹⁾ Includes passbook savings, money market passbook and club accounts.

⁽²⁾ Includes interest-bearing checking and money market accounts.

⁽³⁾ Includes certificates of deposits and individual retirement accounts.

⁽⁴⁾ Calculated as annualized net interest income divided by average total interest-earning assets.

Table of Contents

	For the Nine Months Ended June 30,
	2019						2018
	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	$	29,126	$	463		2.13%	$	17,274	$	186		1.44%
Loans receivable, net		515,082		18,795		4.88%		481,502		16,579		4.60%
Securities
Taxable		56,658		1,002		2.37%		60,444		1,050		2.32%
FHLB of NY stock		2,110		114		7.25%		2,083		97		6.19%
Total interest-earning assets		602,976		20,374		4.52%		561,303		17,912		4.27%
Noninterest-earning assets		42,363						45,716
Total assets	$	645,339					$	607,019

Interest-bearing liabilities:
Savings accounts (1)	$	75,579	$	371		0.66%	$	99,507	$	519		0.70%
NOW accounts (2)		235,987		2,415		1.37%		188,346		1,011		0.72%
Time deposits (3)		123,740		1,641		1.77%		122,253		1,216		1.33%
Total interest-bearing deposits		435,306		4,427		1.36%		410,106		2,746		0.90%
Borrowings		34,123		570		2.23%		33,717		512		2.03%
Total interest-bearing liabilities		469,429		4,997		1.42%		443,823		3,258		0.98%
Noninterest-bearing liabilities		122,084						112,483
Total liabilities		591,513						556,306
Retained earnings		53,826						50,713
Total liabilities and retained earnings	$	645,339					$	607,019

Net interest and dividend income			$	15,377					$	14,654
Interest rate spread						3.10%						3.29%
Net interest-earning assets	$	133,547					$	117,480
Net interest margin (4)						3.41%						3.49%
Average interest-earning assets to
average interest-bearing liabilities		128.45%						126.47%

⁽¹⁾ Includes passbook savings, money market passbook and club accounts.

⁽²⁾ Includes interest-bearing checking and money market accounts.

⁽³⁾ Includes certificates of deposits and individual retirement accounts.

⁽⁴⁾ Calculated as annualized net interest income divided by average total interest-earning assets.

Comparison of Operating Results for the Three Months Ended June 30, 2019 and 2018

Net Income. Net income increased $127,000, or 21.2%, to $726,000 during the three month period ended June 30, 2019 compared with $599,000 at three month period ended June 30, 2018 primarily due to higher net interest and dividend income and lower provisions for loan loss.

Net Interest and Dividend Income. Net interest and dividend income increased $222,000, or 4.4%, to $5.2 million for the three months ended June 30, 2019 from $5.0 million for the three months ended June 30, 2018. The Company’s net interest margin decreased by 5 basis points to 3.49% for the three months ended June 30, 2019 compared to 3.54% for the three months ended June 30, 2018.

Table of Contents

The yield on the Company’s interest-earning assets increased 26 basis points to 4.62% for the three months ended June 30, 2019 from 4.36% for the three months ended June 30, 2018 primarily due to higher average balances of loans receivable, net of allowance for loan losses, which increased $29.9 million, as well as the higher interest rate environment affecting the benchmarks of adjustable-rate loans. The average yield on net loans receivable increased 27 basis points to 4.94% for the three months ended June 30, 2019 from 4.67% for the three months ended June 30, 2018, due to higher average balances of loan receivable and higher market interest rates. The cost of interest-bearing liabilities increased 42 basis points to 1.47% for the three months ended June 30, 2019 from 1.05% for the three months ended June 30, 2018. The increase in the cost of interest-bearing liabilities was attributable to higher average balances of money market accounts and the higher interest rate environment.

Interest and Dividend Income. Interest and dividend income increased $738,000, or 12.0%, to $6.9 million for the three months ended June 30, 2019 from $6.2 million for the three months ended June 30, 2018. The increase was attributable to a $32.3 million, or 5.7%, increase in the average balance of interest-earning assets in addition to a 26 basis point increase in the yield on such assets to 4.62% for the quarter ended June 30, 2019 compared with 4.36% the prior year period.

Interest earned on loans increased $706,000, or 12.3%, to $6.4 million for the three months ended June 30, 2019 compared with $5.7 million the same period prior year due to a $29.9 million increase in the average balance in the net loan receivable and the higher interest rate environment affecting the benchmarks of adjustable-rate loans.

Interest earned on our investment securities, including interest earning deposits and excluding FHLB stock, increased $33,000, or 8.3%, to $432,000 at June 30, 2019 from $399,000 at June 30, 2018. The average yield on investment securities and interest earning deposits increased 11 basis points to 2.33% for the three months ended June 30, 2019 from 2.22% for the three months ended June 30, 2018.

Interest Expense. Interest expense increased $516,000, or 44.3%, to $1.7 million for the three months ended June 30, 2019 from $1.2 million for the three months ended June 30, 2018. The average balance of interest-bearing liabilities increased $13.9 million, or 3.1%, to $460.0 million from $446.0 million between the two periods, while the cost on such liabilities increased 42 basis points to 1.47% for the three months ended June 30, 2019 from 1.05% compared with the prior year period.

The average balance of interest bearing deposits increased $15.4 million, or 3.8%, to $425.0 million at June 30, 2019 from $409.6 million at June 30, 2018, while the average cost of such deposits increased 44 basis points to 1.40% from 0.96% between the two periods. The increase in the cost of interest bearing deposits was attributable to higher average balances of money market accounts and the higher interest rate environment. As a result, interest paid on interest-bearing deposits increased $501,000, or 51.1%, to $1.5 million for the three months ended June 30, 2019 from $981,000 for the three months ended June 30, 2018.

Interest paid on advances increased $15,000, or 8.1%, to $200,000 for the three months ended June 30, 2019 from $185,000 for the same period prior year due to a higher average cost of advances, which increased 26 basis points to 2.30% for the three months ended June 30, 2019 from 2.04% for the three months ended June 30, 2018, reflecting the higher market interest rate environment.

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.

After an evaluation of these factors, management recorded a provision of $194,000 for the three months ended June 30, 2019 compared to a provision of $276,000 for the three months ended June 30, 2018. The provision for loan losses decreased during the current period due to lower growth in net loans receivable, which increased $10.9 million during the three months ended June 30, 2019 compared with growth of $15.2 million for the three months ended June 30, 2018. Net charge-offs increased $41,000 to $100,000 for the three months ended June 30, 2019 compared with $60,000 for the three months ended June 30, 2018.

Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Management reviews the level of the allowance on a quarterly basis, and establishes the provision for loan losses based on the factors set forth in the preceding paragraph. As management evaluates the allowance for loan losses, the increased risk associated with larger non-homogenous construction, commercial real estate and commercial business loans may result in larger additions to the allowance for loan losses in future periods.

Table of Contents

Other Income. Non-interest income decreased $99,000, or 19.0%, to $422,000 during the three months ended June 30, 2019 compared to $521,000 for the three months ended June 30, 2018. The decrease was attributable to lower gains from the sale of the guaranteed portion of Small Business Administration 7(a) loans, which decreased $146,000 from the prior year period.

Other Expenses. Non-interest expenses increased $66,000, or 1.5%, to $4.4 million compared with the three months ended June 30, 2018. Compensation and benefit expenses increased $85,000, or 3.4%, from the prior year period due to annual merit increases for employees and higher employee medical insurance expenses. Partially offsetting the increase in compensation and benefit expense were lower expenses from other real estate owned. Other real estate owned expenses declined $51,000 to $12,000 due to sales of properties during the year and net gains recorded on sales during the three months ended June 30, 2019 totaling $22,000.

Income Tax Expense. The Company recorded tax expense of $301,000 on income of $1.0 million for the three months ended June 30, 2019, compared to tax expense of $289,000 on income of $888,000 for the three months ended June 30, 2018. The increase was due to a $139,000 increase in the Company’s results from operations, partially offset by the lower corporate tax rate resulting from the Tax Cuts and Jobs Act that was signed into law December 22, 2018. The effective tax rate for the three months ended June 30, 2019 was 29.3% compared with 32.5% for the three months ended June 30, 2018.

Comparison of Operating Results for the Nine Months Ended June 30, 2019 and 2018

Net Income. Net income increased $854,000, or 64.5%, to $2.2 million during the nine month period ended June 30, 2019 compared with $1.3 million for the nine month period ended June 30, 2018 due to higher net interest and dividend income and lower provisions for loan loss.

Net Interest and Dividend Income. The Company’s net interest and dividend income increased $723,000, or 4.9%, to $15.4 million for the nine month period ended June 30, 2019 from $14.6 million for the nine months ended June 30, 2018. The net interest margin decreased by 8 basis points to 3.41% for the nine months ended June 30 compared to 3.49% for the nine months ended June 30, 2018.

The yield on interest-earning assets increased 25 basis points to 4.52% for the nine months ended June 30, 2019 from 4.27% for the nine months ended June 30, 2018 primarily due to higher average balances of loans receivable, net of allowance for loan losses, which increased $33.6 million, as well as the higher interest rate environment affecting the benchmarks of adjustable-rate loans. The average yield on net loans receivable increased 28 basis points to 4.88% for the nine months ended June 30, 2019 from 4.60% for the nine months ended June 30, 2018, due to higher average balances of loan receivable and higher market interest rates. The cost of interest-bearing liabilities increased 44 basis points to 1.42% for the nine months ended June 30, 2019 from 0.98% for the nine months ended June 30, 2018. The increase in the cost of interest-bearing liabilities was attributable to higher average balances of money market accounts and the higher interest rate environment.

Interest and Dividend Income. Interest and dividend income increased $2.5 million, or 13.7%, to $20.4 million for the nine months ended June 30, 2019 compared to $17.9 million for the nine months ended June 30, 2018. The average balance of interest-earning assets increased $41.7 million, or 7.4%, to $603.0 million from $561.3 million between the nine months periods ended June 30, 2019 and 2018, respectively, while the yield on such assets increased 25 basis points to 4.52% for the nine months ended June 30, 2019 compared with 4.27% for the nine months ended June 30, 2018.

Interest earned on loans increased $2.2 million, or 13.4%, to $18.8 million for the nine months ended June 30, 2019 compared with $16.6 million the same period prior year due to a $33.6 million increase in the average balance in the net loan receivable and the higher interest rate environment affecting the benchmarks of adjustable-rate loans.

Interest earned on our investment securities, including interest earning deposits and excluding FHLB stock, increased $230,000, or 18.6%, to $1.5 million for the nine months ended June 30, 2019 compared with $1.2 million for the same period last year. The increase was due to a $8.1 million, or 10.4%, increase in the average balance of such securities and deposits to $86.8 million for the nine months ended June 30, 2019 from $77.7 million at June 30, 2018. The average yield on investment securities and interest earning deposits increased 17 basis points to 2.29% for the nine months ended June 30, 2019 from 2.12% for the nine months ended June 30, 2018 due to higher market interest rates.

Table of Contents

Interest Expense. Interest expense increased $1.7 million, or 53.4%, to $5.0 million for the nine months ended June 30, 2019 from $3.3 million for the nine months ended June 30, 2018. The average balance of interest-bearing liabilities increased $25.6 million, or 5.8%, to $469.4 million from $443.8 million between the two periods while the cost on such liabilities increased 44 basis points to 1.42% from 0.98%.

The average balance of interest bearing deposits increased $25.2 million, or 6.1%, to $435.3 million at June 30, 2019 from $410.1 million at June 30, 2018, while the average cost of such deposits increased 46 basis points to 1.36% for the nine months ended June 30, 2019 from 0.90% for the nine months ended June 30, 2018. Interest paid on deposits increased $1.7 million, or 61.2%, to $4.4 million for the nine months ended June 30, 2019 from $2.7 million for the nine months ended June 30, 2018. Contributing to the higher balance and cost of deposits were money market account deposit promotions run during the Company’s first quarter.

Interest paid on advances increased $58,000, or 11.3%, to $570,000 for the nine months ended June 30, 2019 compared with $512,000 for the same period prior year. The average balance of such borrowings increased $406,000 to $34.1 million from $33.7 million while the average cost of advances increased 20 basis points to 2.23% for the nine months ended June 30, 2019 from 2.03% for the same period of June 30, 2018.

After an evaluation of these factors, management recorded a provision of $501,000 for the nine months ended June 30, 2019 compared to $782,000 for the nine months ended June 30, 2018. The provision for loan losses decreased during the current period due to lower growth in net loans receivable, which increased $17.8 million during the nine months ended June 30, 2019 compared with growth of $28.1 million for the nine months ended June 30, 2018. In addition, the Company recorded net charge-offs totaling $8,000 for the nine months ended June 30, 2019 compared to $272,000 for the nine months ended June 30, 2018.

Other Income. Non-interest income decreased $123,000, or 8.0%, to $1.4 million for the nine months ended June 30, 2019 compared to $1.5 million the prior year period. The decrease was attributable to lower gains on the sale of investment securities and the guaranteed portion of Small Business Administration 7(a) loans, which decreased $259,000 to $210,000 for the nine months ended June 30, 2019 from $469,000 for the nine months ended June 30, 2018. Partially offsetting this decrease was a $137,000 increase in service charge income due to higher loan prepayment fees and late charges as well as higher deposit fee income.

Other Expenses. Non-interest expenses increased $157,000, or 1.2%, to $13.2 million during the nine months ended June 30, 2019 from $13.0 million the nine months ended June 30, 2018. Compensation and benefit expenses increased $244,000, or 3.3%, from the prior year period due to annual merit increases for employees. Professional fees increased $59,000 due to higher legal expenses related to the collection and foreclosure of non-performing loans. Data processing expenses increased $48,000 due to product and marketing enhancements as well as growth in the number of deposit accounts. Offsetting these increases was a $189,000 decrease in OREO expenses to $273,000 due to sales of properties during the year and net losses recorded on sales during the nine months ended June 30, 2019 totaling $150,000 compared with $241,000 for the prior year period.

Income Tax Expense. The Company recorded income tax expense of $905,000 on income of $3.1 million for the nine months ended June 30, 2019, compared to tax expense of $1.0 million on income of $2.4 million for the nine months ended June 30, 2018. The decrease was due to the enactment of the Tax Cuts and Jobs Act on December 22, 2018, which lowered the Company’s federal income tax rate from 34% to 21% and resulted in a $306,000 charge from the write-down of deferred tax assets for the prior year period. The effective tax rate for the nine months ended June 30, 2019 was 29.4% compared with 43.9% for the nine months ended June 30, 2018.

Table of Contents

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

The Company’s liquidity is a measure of its ability to fund loans, pay withdrawals of deposits, and other cash outflows in an efficient, cost-effective manner. The Company’s short-term sources of liquidity include maturity, repayment and sales of assets, excess cash and cash equivalents, new deposits, other borrowings, and new advances from the Federal Home Loan Bank. There has been no material adverse change during the nine months ended June 30, 2019 in the ability of the Company and its subsidiaries to fund their operations.

At June 30, 2019, the Company had commitments outstanding under letters of credit of $1.5 million, commitments to originate loans of $19.1 million, and commitments to fund undisbursed balances of closed loans and unused lines of credit of $57.1 million. There has been no material change during the nine months ended June 30, 2019 in any of the Company’s other contractual obligations or commitments to make future payments.

Capital Requirements

At June 30, 2019, the Bank’s Tier 1 capital as a percentage of the Bank's total assets was 8.67%, and total qualifying capital as a percentage of risk-weighted assets was 12.67%.

Item 3- Quantitative and Qualitative Disclosures about Market Risk

Not applicable to smaller reporting companies.

Item 4 – 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.

There has been no change in the Company's internal control over financial reporting during the nine months ended June 30, 2019 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

Table of Contents

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

None.

Item 1A.

Risk Factors

Not applicable to smaller reporting companies.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

a.)

Not applicable.

b.)

Not applicable.

c.)

The Company did not repurchase shares of its common stock during the nine months ended June 30, 2019. Through June 30, 2019, the Company had repurchased 81,000 shares at an average price of $8.33.

Item 3.

Defaults Upon Senior Securities

None

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

a.)

Not applicable.

b.)

None.

Item 6.

Exhibits

31.1

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)

31.2

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)

32.1

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

Interactive data file containing the following financial statements formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets at June 30, 2019 and September 30, 2018; (ii) the Consolidated Statements of Operations for the three and nine months ended June 30, 2019 and 2018; (iii) the Consolidated Statements of Comprehensive Income for the three and nine months ended June 30, 2019 and 2018; (iv) the Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended June 30, 2019 and 2018; (v) the Consolidated Statements of Cash Flows for the nine months ended June 30, 2019 and 2018; and (vi) the Notes to Consolidated Financial Statements, tagged as blocks of text.

Table of Contents

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	MAGYAR BANCORP, INC.
	(Registrant)




Date: August 14, 2019	/s/ John S. Fitzgerald
	John S. Fitzgerald
	President and Chief Executive Officer



Date: August 14, 2019	/s/ Jon R. Ansari
	Jon R. Ansari
	Executive Vice President and Chief Financial Officer