Magyar Bancorp, Inc. - Quarter Report: 2021 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission File Number 000-51726

Magyar Bancorp, Inc.

(Exact Name of Registrant as Specified in Its Charter)

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

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 ☑   No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

Yes ☑   No ☐

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 Securities Exchange Act:

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 Securities Exchange Act. ☐

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

Yes ☐   No ☑

The number of shares outstanding of the issuer's common stock at February 1, 2022 was 7,097,825.

 

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		23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		31
Item 4.	Controls and Procedures		31
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		32
Item 1A.	Risk Factors		32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		32
Item 3.	Defaults Upon Senior Securities		32
Item 4.	Mine Safety Disclosures		32
Item 5.	Other Information		32
Item 6.	Exhibits		32
Signature Pages			33

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

(In Thousands, Except Share and Per Share Data)

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

MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Operations

(In Thousands, Except Share and Per Share Data)

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

MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

(In Thousands)

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

MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders' Equity

For the Three Months Ended December 31, 2021 and 2020

(In Thousands, Except for Share Amounts)

 

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

MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(In Thousands)

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

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 months ended December 31, 2021 are not necessarily indicative of the results that may be expected for the year ending September 30, 2021. The September 30, 2020 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 (“OREO”), 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 December 31, 2021 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 connection with the preparation of quarterly and annual reports in accordance with the Securities and Exchange Commission’s (“SEC”) Securities Exchange Act of 1934, SEC Staff Accounting Bulletin Topic 11.M requires the disclosure of the impact that recently issued accounting standards will have on financial statements when they are adopted in the future.

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses. ASU 2016-13 requires entities to report “expected” credit losses on financial instruments and other commitments to extend credit rather than the current “incurred loss” model. These expected credit losses for financial assets held at the reporting date are to be based on historical experience, current conditions, and reasonable and supportable forecasts. This ASU will also require enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements.

In October 2019, the FASB voted to defer the effective date of ASU 2016-13 for smaller reporting companies to fiscal years beginning after December 15, 2022 (October 1, 2023 for the Company), and interim periods within those fiscal years. The Company currently expects to continue to qualify as a smaller reporting company, based upon the current SEC definition, and as a result, will be able to defer implementation of the new standard for a period of time. The Company did not early adopt as of December 31, 2021, but will continue to review factors that might indicate that the full deferral time period should not be used. The Company continues to evaluate the impact the new standard will have on the accounting for credit losses, but the Company may recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, consistent with regulatory expectations set forth in interagency guidance issued at the end of 2016. The Company cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on its consolidated financial condition or results of operations.

In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. The ASU removes the disclosures of 1) the amounts in accumulated other comprehensive income that the entity expects to recognize in net periodic benefit cost during the next fiscal year, 2) the amount and timing of plan assets expected to be returned to the employer and 3) certain related party disclosures. The ASU clarifies the disclosure requirements for the projected benefit obligation (“PBO”) and fair value of plan assets for plans with PBOs in excess of plan assets and the accumulated benefit obligation (“ABO”) and fair value of plan assets for plans with ABOs in excess of plan assets. The ASU adds disclosure requirements for the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and for an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. ASU 2018-14 was effective for the Company beginning October 1, 2021 and did not have a material impact on its consolidated financial condition or results of operations.

In January 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls “reference rate reform” if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position and results of operations.

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

The following table presents a calculation of basic and diluted earnings per share for the three months ended December 31, 2021 and 2020. Basic and diluted earnings per share were calculated by dividing net income by the weighted-average number of shares outstanding for the periods. As a result of the second-step conversion completed on July 14, 2021, the previously reported number of shares for the year ended December 31, 2020 were adjusted to reflect the 1.2213 exchange ratio for comparative purposes.

There were no outstanding stock awards or options to purchase common stock at December 31, 2021 and 2020.

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.

There were no grants, vested shares or forfeitures of non-vested restricted stock awards for the three months ended December 31, 2021 and 2020. There were also no stock option and stock award expenses included with compensation expense for the three months ended December 31, 2021 and 2020.

The Company completed its first stock repurchase program of 130,927 shares in November 2007, and announced its second stock repurchase program of up to 5% of its publicly-held outstanding shares of common stock, or 129,924 shares, in November 2007. Through December 31, 2021, the Company had repurchased a total of 91,000 shares of its common stock at an average cost of $8.41 per share under this program.

Under current federal regulations, subject to limited exceptions, the Company may not repurchase shares of our common stock during the first year following the completion of its second-step conversion offering, which was completed on July 14, 2021. The Company did not repurchase any shares of its common stock during the three months ended December 31, 2021 and 2020. The Company held 112,996 total treasury stock shares at December 31, 2021.

The Company has an Employee Stock Ownership Plan ("ESOP") for the benefit of employees who meet certain eligibility requirements. The ESOP trust purchases shares of common stock in the open market using proceeds of a loan from the Company. The loan is secured by shares of the Company’s stock. The Bank makes cash contributions to the ESOP on an annual basis sufficient to enable the ESOP to make the required loan payments to the Company.

As the debt is repaid, shares are released as collateral and allocated to qualified employees. Accordingly, the shares pledged as collateral are reported as unearned ESOP shares in the Consolidated Balance Sheets. The Company accounts for its ESOP in accordance with FASB ASC Topic 718, “Employer’s Accounting for Employee Stock Ownership Plans.” As shares are released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations.

The Company’s ESOP (“2006 ESOP”) was established in 2006 as part of the Company’s initial public offering. The total cost of the 217,863 shares purchased by the 2006 ESOP trust was $2.3 million, reflecting an average cost per share of $10.58. The 2006 ESOP loan was fully repaid during the year ended September 30, 2021, and all shares were allocated to participants.

In connection with the second-step conversion offering, the ESOP trustees purchased 8% of the shares sold in the offering, or 312,800 shares (“2021 ESOP”). As a result of the second-step conversion offering being oversubscribed in the first tier of subscription priorities, the ESOP trustees were unable to purchase shares of the Company’s common stock in the second-step conversion offering. The total cost of the shares purchased by the 2021 ESOP trust was $3.4 million, reflecting an average cost per share of $10.77. The 2021 ESOP loan bears a variable interest rate that adjusts annually to Prime Rate (3.25% at January 1, 2022) with principal and interest payable annually in equal installments over thirty years.

The Company's contribution expense for the ESOP was $61,000 and $50,000 for the three months ended December 31, 2021 and 2020, respectively.

NOTE F – OTHER COMPREHENSIVE INCOME (LOSS)

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

 

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 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.

Derivatives

Magyar Bank executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. The fair values of such derivatives are based on valuation models from a third party using current market terms (including interest rates and fees), the remaining terms of the agreements and the credit worthiness of the counter party as of the measurement date (Level 2).

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.

 

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 MSRs is determined through a calculation of future cash flows, incorporating estimates of assumptions market participants would use in determining fair value including market discount rates, prepayment speeds, servicing income, servicing costs, default rates and other market driven data, including the market’s perception of future interest rate movements and, as such, are classified as Level 3. The Company had MSRs totaling $3,000 and $4,000 at December 31, 2021 and September 30, 2021, 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 by management as necessary, to reflect current market conditions and, as such, are generally classified as Level 3.

Appraisals of collateral securing impaired loans are conducted by approved, qualified, and independent third-party appraisers. Such appraisals are ordered via the 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. 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 December 31, 2021 and September 30, 2021.

 

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)

 

(1)Fair value is generally determined through independent appraisals for the underlying collateral, which generally include various level 3 inputs which are not identifiable.

(2)Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments carried at cost or amortized cost as of December 31, 2021 and September 30, 2021. For short-term financial assets such as cash and cash equivalents and accrued interest receivable, 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.

NOTE H – LEASES

The Company accounts for its leases in accordance with ASU 2016-02, Leases (Topic 842). Topic 842 requires lessees to recognize a lease liability and a right-of-use (“ROU”) asset, measured at the present value of the future minimum lease payments, at the lease commencement date.

The Company holds operating leases for five branch locations. Our leases have remaining lease terms of up to 11 years, some of which include options to extend the leases for up to 10 additional years. Operating leases are recorded as ROU assets and lease liabilities and are included within Other assets and Accounts payable and other liabilities, respectively, on our Consolidated Balance Sheets.

Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at lease commencement base on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate. The incremental borrowing rate used by the Company to value its operating leases is based on the interpolated term advance rate available from the Federal Home Loan Bank of New York, based on the remaining lease term.

At December 31, 2021, the Company’s operating lease right-of-use assets and operating lease liabilities totaled $3.7 million and $4.1 million, respectively.

The following table presents the balance sheet information related to our leases:

The following table summarizes the maturity of our remaining lease liabilities by year:

Total leases expense recorded on the Consolidated Statements of Income within Occupancy expense were $207,000 and $204,000 for the three months ended December 31, 2021 and 2020, respectively.

NOTE I – INVESTMENT SECURITIES

The following table summarizes the amortized cost and fair values of securities classified as available-for-sale and held-to-maturity at December 31, 2021:

The contractual maturities of mortgage-backed securities generally exceed 10 years; however, the effective lives are expected to be shorter due to anticipated prepayments. The maturities of the debt securities, municipal bonds and certain information regarding the mortgage backed securities at December 31, 2021 are summarized in the following table:

The following table summarizes the amortized cost and fair values of securities classified as available-for-sale and held-to-maturity at September 30, 2021:

NOTE J – 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.

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 greater than their amortized cost contain unrealized gains. 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 December 31, 2021 and September 30, 2021 for both available for sale and held to maturity securities by investment category and time frame for which the loss has been outstanding:

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 December 31, 2021 and September 30, 2021, there were 41 and 36, respectively, investment securities 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 December 31, 2021 and September 30, 2021.

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

Loans receivable, net were comprised of the following:

The Bank participated in the Paycheck Protection Program (“PPP”), which was designed by the U.S. Treasury under the Coronavirus Aid, Relief and Economic Security Act of 2020 (subsequently extended by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act) to provide liquidity using the SBA’s platform to small businesses and self-employed individuals to maintain their staff and operations through the COVID-19 pandemic. This liquidity is in the form of a loan, 100% guaranteed by the SBA, that is forgivable provided the funds are used on qualifying payroll costs, and to a lesser extent, rent, utilities and interest on qualifying mortgage payments. The loans bear a fixed rate of 1.0% and loan payments are deferred through the date that the SBA remits the borrower’s loan forgiveness amount to the lender. Included in commercial business loans at December 31, 2021 were 52 PPP loans totaling $14.8 million compared with 111 PPP loans totaling $25.1 million at September 30, 2021. The Company expects most of these loans to be approved for full forgiveness by the SBA.

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 consumer 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.

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 the dates presented:

The average recorded investment in impaired loans was $10.8 million and $13.7 million for the three months ended December 31, 2021 and 2020, 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 during the three months ended December 31, 2021 and there was one TDR totaling $218,000 during the three months ended December 31, 2020.

The following tables present the average recorded investment in impaired loans for the three and nine months ended December 31, 2021 and 2020. There was no interest income recognized on impaired loans during the periods presented.

 

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:

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans at the dates presented:

An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.

The Bank’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (discussed above) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance.

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative and economic factors.

The loans are segmented into classes based on their inherent varying degrees of risk, as described above. Management tracks the historical net charge-off activity by segment and utilizes this figure, as a percentage of the segment, as the general reserve percentage for pooled, homogenous loans that have not been deemed impaired. Typically, an average of losses incurred over 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 three months ended December 31, 2021 and 2020:

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 December 31, 2021 and September 30, 2021:

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 TDR 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 December 31, 2021, and there was one TDR totaling $218,000 during the three months ended December 31, 2020.

NOTE L – DEPOSITS

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

NOTE M – 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 December 31, 2021 or September 30, 2021.

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:

The Company’s statutory income tax rate in the State of New Jersey was 9.0% for the three months ending December 31, 2021 and 2020. The State of New Jersey imposed a temporary surtax on corporations earning New Jersey allocated income in excess of $1 million. The surtax is set at a rate of 2.5% and is currently effective through December 31, 2023. Accordingly, the Company used an 11.5% State tax rate for the calculation of its State income tax expense the three months ended December 31, 2021 and 2020.

NOTE N – FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Company may use derivative financial instruments, such as interest rate swaps and interest rate floors and caps, 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.

The Company is a party to interest rate derivatives that are not designated as hedging instruments. Under a program, the Company executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that the Company executes with a third-party financial institution, such that the Company minimizes its net risk exposure resulting from such transactions. Because the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined by taking into consideration the risk rating, probability of default and loss given default for all counterparties. The Company had $300,000 in cash pledged for collateral on its interest rate swaps with financial institutions at December 31, 2021 and September 30, 2021.

The following table presents summary information regarding these derivatives as of December 31, 2021 and September 30, 2021.

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business 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.

 

 

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 Company 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. In addition, the COVID-19 pandemic is having an adverse impact on the Company, its customers and the communities it serves. The adverse effect of the COVID-19 pandemic on the Company, its customers and the communities where it operates may adversely affect the Company’s business, results of operations and financial condition for an indefinite period of time.

 

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.

Critical Accounting Policies

 

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. Critical accounting policies may involve complex subjective decisions or assessments. We consider the following to be our critical accounting policies.

Allowance for Loan Loss. The allowance for loan losses is the amount estimated by management as necessary to cover credit losses in the loan portfolio both probable and reasonably estimable at the balance sheet date. The allowance is established through the provision for loan losses which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of our most critical. Due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses, the methodology for determining the allowance for loan losses is considered a critical accounting policy by management.

As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans and discounted cash flow valuations of properties are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisals and discounted cash flow valuations are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly affect the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals and discounted cash flow valuations are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans.

Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. We consider a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates by management that may be susceptible to significant change based on changes in economic and real estate market conditions.

The evaluation has a specific and general component. The specific component relates to loans that are delinquent or otherwise identified as impaired through the application of our loan review process and our loan grading system. All such loans are evaluated individually, with principal consideration given to the value of the collateral securing the loan and discounted cash flows. Specific impairment allowances are established as required by this analysis. However, the Bank’s Federal and State regulators generally require that the specific reserve against impaired collateral-dependent loans be charged-off, reducing the carrying balance of the loan and allowance for loan loss. The general component is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations in establishing the general portion of the reserve. This analysis establishes factors that are applied to the loan groups to determine the amount of the general component of the allowance for loan losses.

Actual loan losses may be significantly greater than the allowances we have established, which could have a material negative effect on our financial results.

 

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.

 

The Company accounts for other-than-temporary impairments based upon several considerations. First, other-than-temporary impairments on securities that the Company has decided to sell as of the close of a fiscal period, or will, more likely than not, be required to sell prior to the full recovery of their fair value to a level equal to their amortized cost, are recognized in operations. If neither of these criteria apply, then the other-than-temporary impairment is separated into credit-related and noncredit-related components. The credit-related impairment generally represents the amount by which the present value of the cash flows that are expected to be collected on an other-than-temporarily impaired security fall below its amortized cost while the noncredit-related component represents the remaining portion of the impairment not otherwise designated as credit-related. The Company recognizes credit-related, other-than-temporary impairments in earnings, while noncredit-related, other-than-temporary impairments on debt securities are recognized, net of deferred taxes, in AOCI. 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.

 

 

Impact of the Coronavirus/COVID-19 Pandemic.

 

During 2020 and continuing into 2021, the extraordinary impact of the COVID-19 pandemic has created an unprecedented environment for consumers and businesses alike. To protect our employees and customers from potential exposure to the virus, all Magyar Bank lobbies and operational areas continue to observe best practice protocols to limit exposure and/or spread of the virus.

 

To assist our loan customers, Magyar Bank has offered loan payment deferrals to borrowers unable to make their contractual payments due to COVID-19. Loan payments are deferred until the contractual maturity of the loan. Deferral requests are considered on a case-by-case basis and are initially approved for a three-month period for principal and interest payments or for interest-only payments depending on the borrower’s circumstances. An additional three-month period is available for businesses that remain unable to operate and for consumers unable to make their mortgage or home equity payments due to COVID-19. Additional deferrals were considered for businesses experiencing a prolonged impact from the COVID-19 pandemic, such as the accommodation and food service industries. Magyar Bank’s loan portfolio does not have a significant exposure to the travel or entertainment industry.

 

Through December 31, 2021, we had modified 284 loans aggregating $150.9 million for the deferral of principal and/or interest payments. Of these loans, 105 loans totaling $52.6 million repaid their deferred payments in full and 178 loans aggregating $96.9 million have resumed making their contractual loan payments. One loan totaling $1.4 million was past its deferral period and delinquent at December 31, 2021. The Company was not deferring any additional loan payments due to the COVID-19 pandemic at December 31, 2021. A total of $1.4 million in interest payments were deferred as of December 31, 2021.

 

The Bank participated in the PPP to provide liquidity using the SBA platform to small businesses and self-employed individuals to maintain their staff and operations through the COVID-19 pandemic. This liquidity is in the form of a loan, 100% guaranteed by the SBA, that is forgivable provided the funds are used on qualifying payroll costs, and to a lesser extent, rent, utilities and interest on qualifying mortgage payments. The loans bear a fixed rate of 1.0% and loan payments are deferred for the first 10 months following the covered period, which is eight to twenty-four weeks following the date the loan is made. We originated 562 PPP loans totaling $91.3 million for which we received $3.5 million in origination fees from the SBA. These fees are being amortized over the five year contractual term of the loan unless repaid or forgiven sooner. Through December 31, 2021, 510 loans totaling $76.5 million had been repaid, leaving 52 loans totaling $14.8 million at December 31, 2021. The Company expects most of these loans to be approved for full forgiveness by the SBA.

 

The health of the banking industry is highly correlated with that of the economy. The temporary and/or partial closures of non-essential businesses in our local and national economies increases the likelihood of recession, which typically results in an increased level of credit losses. Accordingly, our provisions for loan losses have increased and will be closely monitored throughout the pandemic. In addition to utilizing quantitative loss factors, the Company considers qualitative factors, such as changes in underwriting policies, current economic conditions, delinquency statistics, the adequacy of the underlying collateral, and the financial strength of the borrower. The impact of the COVID-19 pandemic on the performance of our loan portfolio in future quarters is unknown, however all of these factors are likely to be affected by the COVID-19 pandemic.

 

 

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

 

Total Assets. Total assets increased $6.7 million, or 0.9%, to $780.7 million during the three months ended December 31, 2021 from $774.0 million at September 30, 2021. The increase was primarily attributable to increases in cash, interest-earning deposits and investment securities, partially offset by lower balances of loans receivable, net of allowance for loan loss.

 

Cash and Interest-Earning Deposits with Banks. Cash and interest-earning deposits with banks increased $7.1 million, or 9.4%, to $82.3 million at December 31, 2021 from $75.2 million at September 30, 2021 from net loan repayments and deposit inflows during the three months ended December 31, 2021.

 

Total Loans Receivable. Total loans receivable decreased $11.3 million, or 1.9%, to $583.4 million at December 31, 2021 from $594.6 million at September 30, 2021. The loans receivable were comprised of $279.0 million (47.8%) in commercial real estate loans, $200.8 million (34.4%) in one-to four-family residential mortgage loans, $58.3 million (10.0%) in commercial business loans, $24.3 million (4.2%) in construction loans, $17.7 million (3.0%) in home equity lines of credit, and $3.3 million (0.6%) in other loans. Included with the commercial business loans were $14.8 million in PPP loans. The decrease in total loans receivable during the quarter occurred in commercial business loans, which decreased $10.4 million (PPP loans decreased $10.3 million), one-to four-family residential real estate loans (including home equity lines of credit), which decreased $2.5 million, commercial real estate loans, which decreased $1.9 million, and other loans, which decreased $462,000. Partially offsetting these decreases were construction loans, which increased $3.9 million during the quarter.

 

Total Non-Performing Loans. Total non-performing loans decreased $2.0 million, or 23.9%, to $6.2 million at December 31, 2021 from $8.2 million at September 30, 2021. Five loans totaling $1.5 million were brought current by payments from the borrowers. In addition, one non-performing residential mortgage loan totaling $473,000 was paid in full. There were no additions to the non-performing loans during the three months ended December 31, 2021.

 

Included in the non-performing loan totals were two construction loans totaling $4.6 million, one commercial business loan totaling $1.3 million, three commercial real estate loans totaling $254,000, and one residential mortgage loan totaling $30,000. The ratio of non-performing loans to total loans decreased to 1.1% at December 31, 2021 from 1.4% at September 30, 2021.

 

During the three months ended December 31, 2021, the allowance for loan losses increased $153,000 to $8.2 million from $8.1 million at September 30, 2021. The increase was attributable to provisions for loan losses totaling $101,000 and a $52,000 recovery from a loan previously charged off. The allowance for loan losses as a percentage of non-performing loans increased to 132.4% at December 31, 2021 from 99.0% at September 30, 2021. Our allowance for loan losses as a percentage of total loans was 1.41% at December 31, 2021 compared with 1.36% at September 30, 2021.

 

Future increases in the allowance for loan losses may be necessary based on possible future increases in non-performing loans and charge-offs, the possible deterioration of collateral values, and the possible deterioration of the current economic environment.

 

Investment Securities. At December 31, 2021, investment securities totaled $78.6 million, reflecting an increase of $8.1 million, or 11.4%, from September 30, 2021. The Company purchased three mortgage-backed securities totaling $7.5 million, one callable U.S. government-sponsored enterprise bond totaling $2.0 million, and one municipal bond totaling $600,000 during the three months ended December 31, 2021. During the quarter, the Company received payments from mortgage-backed securities totaling $2.0 million. There were no sales of investment securities during the period.

 

Investment securities at December 31, 2021 consisted of $58.2 million in mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises, $14.5 million in U.S. government-sponsored enterprise debt securities, $3.0 million in corporate notes, $2.7 million in municipal bonds, and $238,000 in “private-label” mortgage-backed securities. There were no other-than-temporary-impairment charges for the Company’s investment securities for the three months ended December 31, 2021.

 

Other Real Estate Owned. Other real estate owned increased $13,000, or 2.0%, to $649,000 at December 31, 2021 from $636,000 at September 30, 2021. The increase was due to capital improvements to one property in order to market it for sale. At December 31, 2021, of the two properties that remain in the OREO portfolio, one was under contract of sale and the other was listed for sale. The Company is determining the proper course of action for its remaining other real estate owned, which may include holding the properties until the real estate market further improves, leasing properties to offset carrying costs and selling the properties.

 

Total Deposits. Total deposits increased $7.9 million, or 1.2%, to $647.7 million at December 31, 2021 from $639.8 million at September 30, 2021. The inflow in deposits occurred in interest-bearing checking accounts (NOW), which increased $12.4 million, or 17.4%, to $83.7 million, in money market accounts, which increased $9.9 million, or 5.3%, to $197.8 million, in savings accounts, which increased $5.0 million, or 6.1%, to $86.7 million, and in non-interest bearing checking accounts, which increased $436,000, or 0.2%, to $182.4 million. Partially offsetting these increases were certificates of deposit (including individual retirement accounts), which decreased $19.9 million, or 17.0%, to $97.0 million. The Company held $6.0 million in brokered certificates of deposit at December 31, 2021 and September 30, 2021.

 

Borrowings. Borrowings decreased $2.0 million, or 8.6%, to $21.4 million at December 31, 2021 from $23.4 million at September 30, 2021. The Company repaid a matured $2.0 million term borrowings from the Federal Home Loan Bank of New York during the quarter.

 

Stockholders’ Equity. Stockholders’ equity increased $802,000, or 0.8%, to $98.4 million at December 31, 2021 from $97.6 million at September 30, 2021. The Company’s book value per share increased to $13.87 at December 31, 2021 from $13.76 at September 30, 2021. The increase in stockholders’ equity was attributable to the Company’s results from operations, partially offset by the special dividends paid during the quarter.

 

The Company did not repurchase shares of its common stock during the three months ended December 31, 2021. Through December 31, 2021, the Company had repurchased 91,000 shares at an average price of $8.41 pursuant to the second stock repurchase plan.

 

Average Balance Sheet for the Three Months Ended December 31, 2021 and 2020

 

The following table presents certain information regarding the Company’s financial condition and net interest income for the three months ended December 31, 2021 and 2020. The table presents the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown. We derived average balances from daily balances over the period indicated. Interest income includes fees that we consider adjustments to yields.

		For the Three Months Ended December 31,
		2021												2020
		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		$	84,088			$	35				0.17%			$	54,463			$	20				0.14%
Loans receivable, net			579,131				6,721				4.60%				606,109				6,751				4.42%
Securities
Taxable			71,946				226				1.25%				47,624				205				1.71%
Tax-exempt (1)			2,198				9				1.63%				—				—				—
FHLBNY stock			1,676				20				4.81%				1,981				25				5.05%
Total interest-earning assets			739,039				7,011				3.76%				710,177				7,001				3.91%
Noninterest-earning assets			44,299												43,502
Total assets		$	783,338											$	753,679
Interest-bearing liabilities:
Savings accounts (2)		$	84,542				36				0.17%			$	75,464				47				0.24%
NOW accounts (3)			263,626				140				0.21%				256,876				262				0.40%
Time deposits (4)			111,911				275				0.98%				120,898				456				1.50%
Total interest-bearing deposits			460,079				451				0.39%				453,238				765				0.67%
Borrowings			21,877				119				2.16%				65,387				191				1.16%
Total interest-bearing liabilities			481,956				570				0.47%				518,625				956				0.73%
Noninterest-bearing liabilities			202,334												176,867
Total liabilities			684,290												695,492
Retained earnings			99,048												58,187
Total liabilities and retained earnings		$	783,338											$	753,679
Tax-equivalent basis adjustment							(2	)											—
Net interest and dividend income						$	6,439											$	6,045
Interest rate spread											3.29%												3.18%
Net interest-earning assets		$	257,083											$	191,552
Net interest margin (5)											3.46%												3.38%
Average interest-earning assets to
average interest-bearing liabilities			153.34%												136.93%

 

⁽¹⁾    Calculated using the Company's 21% federal tax rate.

⁽²⁾    Includes passbook savings, money market passbook and club accounts.

⁽³⁾    Includes interest-bearing checking and money market accounts.

⁽⁴⁾    Includes certificates of deposits and individual retirement accounts.

⁽⁵⁾    Calculated as annualized net interest income divided by average total interest-earning assets.  

 

 

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

 

Net Income. Net income increased $356,000, or 26.6% to $1.7 million for the three-month period ended December 31, 2021 compared with net income of $1.3 million for the three-month period ended December 31, 2020. The increase was due to higher net interest and dividend income, lower provisions for loan loss and lower other expenses, partially offset by lower non-interest income.

 

Net Interest and Dividend Income. Net interest and dividend income increased $394,000, or 6.5%, to $6.4 million for the three months ended December 31, 2021 from $6.0 million for the three months ended December 31, 2020.

 

An eight basis point increase in the Company’s net interest margin to 3.46% for the three months ended December 31, 2021 from 3.38% for the three months ended December 31, 2020 as well as a $28.9 million increase in average-interest-earning assets to $739.0 million for the 2021 quarter from $710.1 million for the 2020 quarter resulted in higher net interest and dividend income.

 

The cost of the Company’s interest-bearing liabilities decreased 26 basis points to 0.47% for the three months ended December 31, 2021 from 0.73% for the three months ended December 31, 2020 due to lower market interest rates. The cost of interest-bearing deposits decreased 28 basis points to 0.39% for the three months ended December 31, 2021 from 0.67% for the three months ended December 31, 2020. In addition, the average balance of non-interest bearing liabilities increased $28.1 million to $204.0 million for the three months ended December 31, 2021 from $175.9 million for the three months ended December 31, 2020. The increase in non-interest bearing liabilities was due to higher business checking account balances resulting from supply chain issues and a preference for liquidity during the COVID-19 pandemic.

 

Interest and Dividend Income. Interest and dividend income was unchanged at $7.0 million for the three months ended December 31, 2021 and December 31, 2020. A $28.9 million, or 4.1%, increase in the average balance of interest-earning assets to $739.0 million was entirely offset by a 15 basis point decrease in the yield on such assets to 3.76% for the three months ended December 31, 2021 compared with 3.91% the prior year period.

 

The yield on average investment securities and interest-earning deposits decreased 19 basis points to 0.68% for the three months ended December 31, 2021 from 0.87% for the three months ended December 31, 2020 due to lower market interest rates. Offsetting this decrease was an 18 basis point increase in the yield on loans receivable to 4.60% for the three months ended December 31, 2021 from 4.42% for the three months ended December 31, 2020. Lower interest income from lower average balances of loans receivable was offset by the receipt of $173,000 in interest payments received during the current quarter on previously non-performing loans. Also included in the yield on loans receivable is the recognition of PPP loan fees, which have been accelerated with the repayment of PPP loans through forgiveness by the SBA. The Company recorded $407,000 in PPP fees during the three months ended December 31, 2021 compared with $417,000 during the three months ended December 31, 2020.

 

Interest earned on investment securities, including interest-earning deposits and excluding FHLB stock, increased $43,000, or 19.1%, to $268,000 for the quarter ended December 31, 2021 from $225,000 for the prior year quarter. A $56.1 million, or 55.0%, increase in the average balance of investment securities and interest-earning deposits to $158.2 million for the quarter ended December 31, 2021 more than offset the 19 basis point decrease in their average yield.

 

Interest Expense. Interest expense decreased $386,000, or 40.4%, to $570,000 for the three months ended December 31, 2021 from $956,000 for the three months ended December 31, 2020. A 26 basis point decrease in the cost of interest-bearing liabilities to 0.47% for the three months ended December 31, 2021 as well as a lower average balance of interest-bearing liabilities, which decreased $36.7 million, or 7.1%, to $482.0 million, accounted for the lower interest expense between periods.

 

The average balance of interest-bearing deposits increased $6.8 million, or 1.5%, to $460.0 million for the quarter ended December 31, 2021 from $453.2 million for the same quarter ended December 31, 2020, while the average cost of such deposits decreased 28 basis points to 0.39% from 0.67% between the two periods. As a result, interest paid on interest-bearing deposits decreased $314,000 to $451,000 for the three months ended December 31, 2021 compared with $765,000 for the three months ended December 31, 2020.

 

Interest paid on borrowings decreased $72,000, or 37.7%, to $119,000 for the three months ended December 31, 2021 from $191,000 for the prior year period. A $43.5 million decrease in the average balance of such borrowings to $21.9 million for the quarter ended December 31, 2021 from $65.4 million for the quarter ended December 31, 2020 more than offset a 100 basis point increase in the cost of borrowings to 2.16% for the three months ended December 31, 2021 from 1.16% for the three months ended December 31, 2020. The reduction in average balances and corresponding increase in cost of borrowings between periods resulted from the repayment of $29.8 million in PPP Liquidity Facility borrowings costing 0.35% from the Federal Reserve Bank of New York.

 

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 $101,000 for the three months ended December 31, 2021 compared to $640,000 for the three months ended December 31, 2020. The decreased provision for loan losses resulted from contraction in the Company’s loan portfolio and a decrease in non-performing loans between periods. In addition, the Company recorded higher provisions during the three months ended December 31, 2020 related to COVID-19 pandemic adjustments to the historical loss rates used in its calculation. The Company recorded $52,000 in net recoveries for the three months ended December 31, 2021 compared with $90,000 in net recoveries during the three months ended December 31, 2020.

 

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. In addition, the ongoing effects of the COVID-19 pandemic on the Company’s loan portfolio may also result in larger additions to the allowance for loan losses in future periods.

 

Other Income. Other income decreased $575,000, or 46.9%, to $650,000 during the three months ended December 31, 2021 compared to $1.2 million for the three months ended December 31, 2020.

 

Fees for other customer services were $0 for the three months ended December 31, 2021 compared with $464,000 for the three months ended December 31, 2020. The fees in the 2020 quarter were earned from the a local Small Business Relief Grant program offered in 2020 in response to the COVID-19 pandemic for which the Company received a fee of 3.0% of the grants it assisted with processing. In addition, the Company did not receive any interest rate swap fees during the three months ended December 31, 2021, compared with $102,000 during the three months ended December 31, 2020.

 

Other Expenses. Other expenses decreased $103,000, or 2.2%, to $4.6 million during the three months ended December 31, 2021 from $4.7 million during the three months ended December 31, 2020.

 

The decrease in other expenses was primarily attributable to decreases in professional fees, which decreased $141,000 to $387,000, due to lower legal and consulting fees related to the collection and foreclosure of non-performing loans, and in OREO expenses, which decreased $146,000 to $34,000, due to lower valuation allowances and fewer OREO properties between periods.

 

Partially offsetting the decrease in professional fees and OREO expenses were increases in compensation and benefit expenses as well as marketing and business development expenses. Compensation and benefit expense increased $155,000, or 6.1%, to $2.7 million for the three months ended December 31, 2021 from $2.5 million for the three months ended December 31, 2020 from the addition of one commercial lending position as well as annual merit increases for employees and higher education and training expenses. Marketing and business development expense increased $81,000, or 184.1%, to $125,000 for the three months ended December 31, 2021 from $44,000 for the three months ended December 31, 2020 due to COVID-19 pandemic restrictions suppressing the 2020 spend and reflecting a higher spend in the current year as the Company celebrates its 100^th year anniversary in 2022.

 

Income Tax Expense. The Company recorded tax expense of $674,000 on pre-tax income of $2.4 million for the three months ended December 31, 2021, compared to $569,000 on pre-tax income of $1.9 million for the three months ended December 31, 2020. The Company’s effective tax rate for the three months ended December 31, 2021 was 28.5% compared with 29.9% for the three months ended December 31, 2020.

 

 

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 three months ended December 31, 2021 in the ability of the Company and its subsidiaries to fund their operations.

 

Whether through significant deposit withdrawals, reductions in interest and principal payments on loans, or the tightening of the capital markets, it is possible that the COVID-19 pandemic will have a negative effect on the liquidity and capital resources of the Company.

 

At December 31, 2021, the Company had commitments outstanding under letters of credit of $2.8 million, commitments to originate loans of $28.5 million, and commitments to fund undisbursed balances of closed loans and unused lines of credit of $61.9 million. There has been no material change during the three months ended December 31, 2021 in any of the Company’s other contractual obligations or commitments to make future payments.

 

 

Capital Requirements

 

At December 31, 2021, the Bank’s Tier 1 capital as a percentage of the Bank's total assets was 10.50%, and total qualifying capital as a percentage of risk-weighted assets was 17.18%.

 

Under section 1102 of the CARES Act, a PPP loan is assigned a risk weight of zero percent under the risk-based capital rules of the federal banking agencies. On April 9, 2020, the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation issued an interim final rule to allow banking organizations to neutralize the effect of PPP loans financed under the PPP Liquidity Facility on Tier 1 leverage capital ratios.

 

 

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 three months ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

 

 

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 three months ended December 31, 2021. Through December 31, 2021, the Company had repurchased 91,000 shares at an average price of $8.41 pursuant to the second stock repurchase plan.

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

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 December 31, 2021 and September 30, 2021; (ii) the Consolidated Statements of Operations for the three months ended December 31, 2021 and 2020; (iii) the Consolidated Statements of Comprehensive Income for the three months ended December 31, 2021 and 2020; (iv) the Consolidated Statements of Changes in Stockholders’ Equity for the three months ended December 31, 2021 and 2020; (v) the Consolidated Statements of Cash Flows for the three months ended December 31, 2021 and 2020; and (vi) the Notes to Consolidated Financial Statements, tagged as blocks of text.

104

Cover Page Interactive Data File (embedded within Inline XBRL document contained in Exhibit 101).

 

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: February 11, 2022	/s/ John S. Fitzgerald
	John S. Fitzgerald
	President and Chief Executive Officer
Date: February 11, 2022	/s/ Jon R. Ansari
	Jon R. Ansari
	Executive Vice President and Chief Financial Officer