SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

☒ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended September 30, 20212022

OR

☐ TRANSITION REPORT UNDER 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:

Securities Registered Pursuant to Section 12(g) of the Act:

None

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act.

Yes ☐ No ☒

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 during the preceding twelve 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 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, a 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:

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. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

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

Yes ☐ No ☒

The aggregate value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing price of the Common Stock as of March 31, 20212022 was $79.9$79.6 million. As of December 15, 2021,2022, there were 7,097,8256,742,934 outstanding shares of the registrant’s Common Stock,

DOCUMENTS INCORPORATED BY REFERENCE

1.    Proxy Statement for the Annual Meeting of Stockholders to be held on February 16, 20222023 (Part III)

 

Magyar Bancorp, Inc.

Annual Report On Form 10-K

For The Fiscal Year Ended

September 30, 20212022

 

 

Table Of Contents

 

PART I
ITEM 1.	Business	2
ITEM 1A.	Risk Factors	29
ITEM 1B.	Unresolved Staff Comments	34
ITEM 2.	Properties	3435
ITEM 3.	Legal Proceedings	35
ITEM 4.	Mine Safety Disclosures	35
PART II
ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	35
ITEM 6.	[Reserved]	36
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	4746
ITEM 8.	Financial Statements and Supplementary Data	4847
ITEM 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure	8988
ITEM 9A.	Controls and Procedures	8988
ITEM 9B.	Other Information	8988
PART III
ITEM 10.	Directors, Executive Officers, and Corporate Governance	8988
ITEM 11.	Executive Compensation	9089
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	9089
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	9089
ITEM 14.	Principal Accountant Fees and Services	9089
PART IV
ITEM 15.	Exhibits and Financial Statement Schedules	9190
ITEM 16.	Form 10-K Summary	9291
	SIGNATURES	9392

 

PART I

 

ITEM 1.

Business

 

Forward Looking Statements

 

We have included or incorporated by reference in this Annual Report on Form 10-K, and from time to time our management may make, statements that may constitute “forward-looking statements” within the meaning of the safe harbour provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts but instead represent only our beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These statements include statements other than historical information or statements of current condition and may relate to our future plans and objectives and results, as well as statements about the objective and effectiveness of our risk management and liquidity policies, statements about trends in or growth opportunities for our business, statements about our future status, and activities or reporting under U.S. banking and financial regulation. Forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Important factors that could cause our actual results and financial condition to differ from those indicated in the forward-looking statements include, among others, those discussed below and under “Risk Factors” in Part 1, Item 1A of this Annual Report on Form 10-K.

 

Conversion and Reorganization of Magyar Bancorp, MHC

 

Prior to consummation of its mutual to stock conversion in July 2021, Magyar Bancorp, MHC (the “MHC”) was the New Jersey-chartered mutual holding company of Magyar Bancorp, Inc. (the “Company”). The MHC’s only business was the ownership of 55.0% of the issued shares of common stock of the Company. On February 25, 2021, the MHC adopted a Plan of Conversion and Reorganization (the “Plan”) pursuant to which the MHC would undertake a “second-step” conversion and Magyar Bank, the Company’s wholly owned subsidiary, would reorganize from the two-tier mutual holding company structure to the fully-public stock holding company structure. The Plan received all required regulatory, depositor and stockholder approval, and the conversion and offering were consummated on July 14, 2021 on which date the MHC ceased to exist.

 

Pursuant to the Plan, (i) the shares of the Company’s common stock held by persons other than the MHC (the shares held by the MHC were canceled) were converted into new shares of the Company’s common stock based on an exchange ratio designed to preserve the percentage ownership interests of such persons, and (ii) the Company offered and sold shares of common stock, representing the ownership interest of the MHC in the Company, in a subscription offering. In the stock offering, the Company raised gross proceeds of $39.1 million by selling 3,910,000 shares of common stock at $10.00 per share. Concurrent with the completion of the stock offering, each share of the Company’s common stock owned by public stockholders (stockholders other than the MHC) was exchanged for 1.2213 new shares of Company common stock. A total of 7,097,825 shares of common stock were issued and outstanding at September 30, 2021. As a result of the second-step conversion, all share and per share information has beenprior to the reorganization was subsequently revised to reflect the 1.2213 exchange ratio, unless otherwise noted.

 

Magyar Bancorp, Inc.

 

The Company is a Delaware-chartered corporation which owns 100% of the outstanding shares of common stock of Magyar Bank. Magyar Bancorp, Inc. has not engaged in any significant business activity other than owning all of the shares of common stock of Magyar Bank. At September 30, 2021,2022, Magyar Bancorp, Inc. had consolidated assets of $774.0$798.5 million, total deposits of $639.8$667.7 million and stockholders’ equity of $97.6$98.5 million. The executive office of Magyar Bancorp, Inc. is located at 400 Somerset Street, New Brunswick, New Jersey 08901, and its telephone number is (732) 342-7600. Magyar Bancorp, Inc. is subject to regulation and examination by the Board of Governors of the Federal Reserve System (“FRB”) and the New Jersey Department of Banking and Insurance (“NJDBI”).

 

Magyar Bank

 

Magyar Bank is a New Jersey-chartered savings bank headquartered in New Brunswick, New Jersey that was originally founded in 1922 as a New Jersey building and loan association. In 1954, Magyar Bank converted to a New Jersey

savings and loan association, before converting to a New Jersey savings bank charter in 1993. We conduct business from our main office located at 400 Somerset Street, New Brunswick, New Jersey, and our seven branch offices located in New Brunswick, North Brunswick, South Brunswick, Branchburg, Bridgewater, and Edison, New Jersey. The telephone number at our main office is (732) 342-7600 and our website is located at www.magbank.com.

 

General

 

Our principal business consists of attracting retail deposits from the general public in the areas surrounding our main office in New Brunswick, New Jersey and our branch offices located in Middlesex and Somerset Counties, New Jersey, and investing those deposits, together with funds generated from operations and wholesale funding, in residential mortgage loans, home equity loans, home equity lines of credit, commercial real estate loans, commercial business loans, Small Business Administration (“SBA”) loans, construction loans and investment securities. We also originate consumer loans, which consist primarily of secured demand loans. We originate loans primarily for our loan portfolio. However, from time to time we have sold some of our long-term, fixed-rate residential mortgage loans into the secondary market, while retaining the servicing rights for such loans. In addition, we sell the SBA-guaranteed portion of SBA loans into the secondary market, while retaining the servicing rights for such loans. Our revenues are derived principally from interest on loans and securities, our investment securities consist primarily of mortgage-backed securities and U.S. Government and government-sponsored enterprise obligations. We also generate revenues from fees and service charges. Our primary sources of funds are deposits, borrowings and principal and interest payments on loans and securities. We are subject to comprehensive regulation and examination by the NJDBI and the Federal Deposit Insurance Corporation (“FDIC”).

 

Market Area

 

We are headquartered in New Brunswick, New Jersey, and our primary deposit market area is concentrated in the communities surrounding our headquarters branch and our branch offices located in Middlesex and Somerset Counties, New Jersey. Our primary lending market area is broader than our deposit market area and includes all of New Jersey.

 

The economy of our primary market area is largely urban and suburban with a broad economic base that is typical for counties surrounding the New York metropolitan area. The median household income in Middlesex and Somerset Counties ranks among the highest in the nation.

 

Competition

 

We face intense competition within our market area both in making loans and attracting deposits. Our market area has a high concentration of financial institutions including large money center and regional banks, community banks and credit unions. Some of our competitors offer products and services that we currently do not offer, such as trust services and private banking. According to the Federal Deposit Insurance Corporation’s annual Summary of Deposit report, at June 30, 2021,2022, our market share of deposits was 1.33%1.11% and 0.42% in Middlesex and Somerset Counties, respectively. Our market share of deposits was 1.22%1.33% and 0.46%0.42%, respectively, at June 30, 2020.2021.

 

Our competition for loans and deposits comes principally from commercial banks, savings institutions, mortgage banking firms and credit unions. We face additional competition for deposits from short-term money market funds, brokerage firms, mutual funds and insurance companies. Our primary focus is to build and develop profitable customer relationships across all lines of business while maintaining our role as a community bank.

 

Lending Activities

 

We originate residential mortgage loans to purchase or refinance residential real property. Residential mortgage loans represented $203.0$214.4 million, or 34.2%34.1% of our total loans at September 30, 2021.2022. Historically, we have not originated a significant number of loans for the purpose of reselling them in the secondary market. In the future, however, to help manage interest rate risk and to increase fee income, we may increase our origination and sale of residential mortgage loans. No loans were held for sale at September 30, 2021.2022. We also originate commercial real estate, commercial business and construction loans. At September 30, 2021,2022, these loans totaled $280.8$342.8 million, or 47.2%54.5%, $68.7$34.7 million, or 11.6%5.5%, and $20.4$15.2 million, or 3.4%2.4%, respectively, of our total loan portfolio. We also offer consumer loans, which consist primarily of home equity lines of credit and stock-secured demand loans. At September 30, 2021,2022, home equity lines of credit and stock-secured demand loans totaled $17.9$18.7 million, or 3.0% and $3.8$3.1 million, or 0.6%0.5%, respectively, of our total loan portfolio.

Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan, at the dates indicated.

 

 

Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at September 30, 2021.2022. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.

 

 

		Commercial Business								Other								Total
Due During the						Weighted								Weighted								Weighted
Fiscal Years Ending						Average								Average								Average
September 30,		Amount				Rate				Amount				Rate				Amount				Rate
		(Dollars in thousands)
2022		$	24,574				4.22%			$	185				14.50%			$	73,404				5.46%
2023			1,639				4.33%				3				13.00%				5,031				4.60%
2024			848				4.99%				13				8.60%				7,546				5.02%
2025 to 2026			29,752				1.76%				26				9.84%				57,200				2.86%
2027 to 2031			3,817				4.55%				—				—				40,521				4.57%
2032 to 2036			606				5.67%				11				3.94%				55,142				4.13%
2037 and beyond			7,483				5.51%				3,513				2.37%				355,773				4.14%
Total		$	68,719				3.34%			$	3,751				3.06%			$	594,617				4.22%

		Commercial Business								Other								Total
Due During the						Weighted								Weighted								Weighted
Fiscal Years Ending						Average								Average								Average
September 30,		Amount				Rate				Amount				Rate				Amount				Rate
		(Dollars in thousands)
2023		$	21,567				6.69%			$	1				13.00%			$	70,071				5.95%
2024			588				4.94%				7				8.55%				13,551				4.76%
2025			1,685				3.67%				14				11.11%				5,235				3.82%
2026 to 2027			868				5.26%				84				6.90%				37,620				4.54%
2028 to 2032			4,379				4.48%				—				—				53,450				4.39%
2033 to 2037			190				7.00%				7				3.25%				66,109				4.30%
2038 and beyond			5,395				6.73%				3,017				5.31%				382,868				4.38%
Total		$	34,672				6.21%			$	3,130				5.38%			$	628,904				4.56%

The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at September 30, 20212022 that are contractually due after September 30, 2022.2023.

 

 

Residential Mortgage Loans. We originate residential mortgage loans, most of which are secured by properties located in our primary market area and most of which we hold in portfolio. At September 30, 2021, $203.02022, $214.4 million, or 34.2%34.1% of our total loan portfolio, consisted of residential mortgage loans (including home equity loans). Residential mortgage loan originations are generally obtained from our in-house loan representatives, from existing or past customers, through advertising, and through referrals from attorneys, real estate brokers, and local builders and are underwritten pursuant to Magyar Bank’s policies and standards. Generally, residential mortgage loans are originated in amounts up to 80% of the lesser of the appraised value or purchase price of the property, with private mortgage insurance required on loans with a loan-to-value ratio in excess of 80%. We generally will not make residential mortgage loans with a loan-to-value ratio in excess of 95%, which is the upper limit that has been established by the Board of Directors. Mortgage loans have been primarily originated for terms of up to 30 years. Magyar Bank does not originate or purchase “sub-prime” (mortgages granted to borrowers whose credit history is not sufficient to get a conventional mortgage) or option ARM mortgage loans. At September 30, 2021,2022, there were no non-performing residential mortgage loans, totaled $1.2 million, or 0.57% of the total residential loan portfolio. Interest income of $55,000 would have been recorded on non-performing residential mortgage loans for the year ended September 30, 2021 if they had been current in accordance with their original terms. During the year ended September 30, 2021,and there were no charge-offs against the allowance for loan loss for impaired residential real estate loans while $1,000 was recovered from prior year charge-offs.

We also originate home equity loans secured by residences located in our market area. The underwriting standards we use for home equity loans include a determination of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations, the ongoing payments on the proposed loan and the value of the collateral securing the loan. The maximum combined (first and second mortgage liens) loan-to-value ratio for home equity loans and home equity lines of credit is 80%. Home equity loans are generally offered with fixed rates of interest with the loan amount not to exceed $500,000 and with terms of up to 30 years. There were no non-performing home equity loans at September 30 2022 and there were no charge-offs against the allowance for loan lossor recoveries for impaired home equity loans while $1,000 was recovered from prior year charge-offs forduring the year ended September 30, 2021.2022.

We offer fixed-rate mortgage loans with terms of either 10, 15, 20 or up to 30 years. While these loans are normally originated with up to 30-year terms, such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full upon sale of the property pledged as security or upon refinancing the original loan. Therefore, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans.

Generally, all fixed-rate residential mortgage loans are underwritten according to Federal Home Loan Mortgage Corporation (“Freddie Mac”) guidelines, policies and procedures. Historically, we have not originated a significant number of loans for the purpose of reselling them in the secondary market. In the future we may increase our origination and sale of fixed-rate residential mortgage loans to help manage interest rate risk and to increase fee income. There were no fixed-rate mortgage loans sold to Freddie Mac during the year ended September 30, 20212022 and there were no loans were held for sale at September 30, 2021.2022.

We generally do not purchase residential mortgage loans, except for loans to low-income borrowers to enhance our Community Reinvestment Act performance. There were no residential mortgage loans purchased during the year ended

September 30, 2021.2022. We underwrite purchased residential mortgage loans using the same criteria as if we were originating the loans.

At September 30, 2021,2022, we had $125.9$126.6 million of fixed-rate residential mortgage loans, which represented 62.0%59.1% of our total residential mortgage loan portfolio. At September 30, 2021,2022, our largest fixed-rate residential mortgage loan was $1.8$1.7 million. The loan was performing in accordance with its contractual repayment terms at September 30, 2021.2022.

We also offer adjustable-rate residential mortgage loans with interest rates based on the weekly average yield on U.S. Treasuries or the London Interbank OfferingSecured Overnight Financing Rate (“LIBOR”SOFR”) adjusted to a constant maturity of one year,, which adjustsadjust either semi-annually or annually from the outset of the loan or which adjusts annually after a one-, three-, five-, seven-, and ten-year initial fixed-rate period. Our adjustable-rate mortgage loans generally provide for maximum rate adjustments of 2% per adjustment, with a lifetime maximum adjustment up to 5%, regardless of the initial rate. We also offer adjustable-rate mortgage loans with an interest rate based on the prime rate as published in The Wall Street Journal or the Federal Home Loan Bank of New York advance rates.

Due to historically low interest rate levels, borrowers generally have preferred fixed-rate mortgage loans in recent years. Adjustable-rate mortgage loans decrease the risk associated with changes in market interest rates by periodically repricing. However, these loans have other risks because, as interest rates increase, the underlying payments by the borrower increase, which increases the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. The maximum periodic and lifetime interest rate adjustments also may limit the effectiveness of adjustable-rate mortgage loans during periods of rapidly rising interest rates.

At September 30, 2021,2022, adjustable-rate residential mortgage loans totaled $77.1$87.8 million, or 38.0%40.9% of our total residential mortgage loan portfolio. The largest adjustable-rate residential mortgage loan was for $2.5$2.4 million. The loan was performing in accordance with its repayment terms at September 30, 2021.2022.

In an effort to provide financing for low-and moderate-income home buyers, we offer low-to-moderate income residential mortgage loans. These loans are offered with fixed rates of interest and terms of up to 40 years, and are secured by one-to four-family residential properties. All of these loans are originated using underwriting guidelines of U.S. government-sponsored enterprises such as Federal Home Loan Mortgage Corporation (“Freddie Mac”). These loans are originated with maximum loan-to-value ratios of 95%.

All residential mortgage loans we originate include “due-on-sale” clauses, which give us the right to declare a loan immediately due and payable if the borrower sells or otherwise disposes of the real property securing the mortgage loan. All borrowers are required to obtain title insurance, fire and casualty insurance and, if warranted, flood insurance on properties securing real estate loans.

Commercial Real Estate Loans. We also originate commercial real estate loans, most of which are secured by properties located in our primary market area. At September 30, 2021, $280.82022, $342.8 million, or 47.2%54.5%, of our total loan portfolio consisted of these types of loans. Commercial real estate loans are generally secured by five-or-more-unit apartment buildings, industrial properties and properties used for business purposes such as small office buildings, warehouses and retail facilities. We generally originate adjustable-rate commercial real estate loans with a maximum term of 25 years with adjustable-rate periods every five years. The maximum loan-to-value ratio for our commercial real estate loans is 75%, based on the appraised value of the property.

We consider a number of factors when we originate commercial real estate loans. During the underwriting process we evaluate the business qualifications and financial condition of the borrower, including credit history, profitability of the property being financed, as well as the value and condition of the mortgaged property securing the loan. When evaluating the business qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, we consider the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service) to ensure it is at least 120% of the monthly debt service. We require personal guarantees on all commercial real estate loans made to individuals. Generally, commercial real estate loans made to corporations, partnerships and other business entities require personal guarantees by the principals. All borrowers are required to obtain title, fire and casualty insurance and, if warranted, flood insurance.

Loans secured by commercial real estate generally are larger than residential mortgage loans and involve greater credit risk. Commercial real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Repayment of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the

real estate market or the economy in general. Accordingly, the nature of these loans makes them more difficult for management to monitor and evaluate.

The maximum amount of a commercial real estate loan is limited by our Board-established loans-to-one-borrower limit, which is currently 15% of Magyar Bank’s capital, or $13.0$14.4 million. At September 30, 2021,2022, our largest commercial real estate loan was $12.0$13.7 million to finance the purchase and operation of a nursing and rehabilitation home in Edison, New Jersey. The original loan amount was 65% of the lower of the purchase price, which was lower than the appraised value. The loan was performing in accordance with its terms at September 30, 2021.2022.

 

Non-performingThere were no non-performing commercial real estate loans decreased $1.1 million, or 51.4%, toat September 30, 2022 compared with $1.1 million at September 30, 2021 from $2.2 million at September 30, 2020.2021. During the year ended September 30, 2021, there was one charge-off totaling $51,000 against the allowance for loan loss and2022, there were no recoveries of prior year charge-offs. Interest income of $97,000 would have been recorded on non-performingcharge-offs from commercial real estate loans, for thehowever there were $53,000 in recoveries received from prior year ended September 30, 2021 if they had been current in accordance with their original terms. All other loans secured by commercial real estate were performing in accordance with their terms.charge-offs.

Construction Loans. We also originate construction and land acquisition loans for the development of one-to four-family homes, apartment buildings and commercial properties. Construction loans are generally offered to experienced local developers operating in our primary market area and to individuals for the construction of their personal residences. At September 30, 2021,2022, our construction loans totaled $20.4$15.2 million, or 3.4%2.4% of total loans.

At September 30, 2021,2022, construction loans for the development of one-to four-family residential properties totaled $10.9$9.6 million. These construction loans generally have a maximum term of 24 months. We provide financing for land acquisition, site improvement and construction of individual homes. Land acquisition loans are limited to 50% to 75% of the sale price of the land. Site improvement loans are limited to 100% of the bonded site improvement costs. Construction loans are limited to 75% of the lesser of the contract sale price or appraised value of the property (less funds already advanced for land acquisition and site improvement).

At September 30, 2021,2022, construction loans for the development of commercial properties totaled $9.1$4.0 million. These construction loans have a maximum term of 24 months. The maximum loan-to-value ratio limit applicable to these loans is 75% of the appraised value of the property.

At September 30, 2021,2022, construction loans for the development of town homes, condominiums and apartment buildings totaled $358,000.$1.7 million. The maximum loan-to-value ratio limit applicable to these loans is 70% of the appraised value of the property. We may retain up to 10% of each loan advance until the property attains a 90% occupancy level.

The maximum amount of a construction loan is limited by our loans-to-one-borrower limit, which is currently 15% of Magyar Bank’s capital, or $13.0$14.4 million. At September 30, 2021,2022, our largest outstanding construction loan was a $2.8 million loan to finance the construction of a single-family home in Colts Neck, New Jersey. The loan has been past due greater than 90 days since the Bank declined to renew the loan upon its maturity in January 2018. At September 30, 2021,2022, the Bank was in the process of foreclosing on the real estate collateral securing the loan as well as pursuing the personal guarantors of the loan. At September 30, 2021, there were a total of two2022, the $2.8 million loan was the only non-performing construction loan totaling $4.6 million.in the Bank’s portfolio. Interest income of $327,000$220,000 would have been recorded on thesethis non-performing construction loansloan for the year ended September 30, 2021,2022, if theyit had been current in accordance with their original term. During the year ended September 30, 2021,2022, there were no charge-offs against the allowance for loan loss and there were no recoveries from prior year charge-offs.

 

Before making a commitment to fund a construction loan, we require an appraisal of the property by an independent licensed appraiser. We generally also engage an outside engineering firm to review and inspect each property before disbursement of funds during the term of a construction loan. Loan proceeds are disbursed after inspection based on the percentage of completion method. We require a personal guarantee from each principal of all of our construction loan borrowers.

Construction lending is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost is inaccurate, we may be required to advance funds beyond the amount originally committed in order to protect the value of the property. Additionally, if our estimate of the value of the completed property is inaccurate, our construction loan may exceed the value of the collateral.

Commercial Business Loans. At September 30, 2021,2022, our commercial business loans totaled $68.7$34.7 million, or 11.6%5.5% of total loans. We make commercial business loans primarily in our market area to a variety of professionals, sole proprietorships and small and mid-sized businesses. Our commercial business loans include term loans and revolving lines of credit. The maximum term of a commercial business loan is 25 years. Such loans are generally used for longer-term working capital purposes such as purchasing equipment or furniture. Commercial business loans are made with either adjustable or fixed rates of interest. The interest rates for adjustable commercial business loans are typically based on the prime rate as published in The Wall Street Journal.

Included in commercial business loans are SBA 7(a) loans, on which the SBA provides guarantees of up to 75% (90% during the COVID-19 pandemic) of the principal balance (85% for loans under $150,000). These loans are made for the purposes of providing working capital and financing the purchase of equipment, inventory or commercial real estate, and may be made inside or outside the Company’s market place.State of New Jersey. Generally, an SBA 7(a) loan has a deficiency in its credit profile that would not allow the borrower to qualify for a traditional commercial loan, which is why the government provides the guarantee. The deficiency may be a higher loan to value ratio, lower debt service coverage ratio or weak personal financial guarantees. In addition, many SBA 7(a) loans are for start-up businesses where there is no history of financial information. Finally, many SBA borrowers do not have an ongoing and continuous banking relationship with the Bank, but merely work with the Bank on a single transaction. TheWe generally sell the guaranteed portions of the Company’sthese SBA loans are generally sold in the secondary market.

 

When making commercial business loans, we consider the financial strength of the borrower, our lending history with the borrower, the debt service capabilities of the borrower, the projected cash flows of the business and the value and type of the collateral. Commercial business loans generally are secured by a variety of collateral, primarily accounts receivable, inventory, equipment, savings instruments and readily marketable securities. In addition, we generally require the business principals to execute personal guarantees.

Commercial business loans generally have greater credit risk than residential mortgage loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to repay the loan from his or her employment income, and which are secured by real property with ascertainable value, commercial business loans generally are made on the basis of the borrower’s ability to repay the loan from the cash flow of the borrower’s business. As a result, the repayment of commercial business loans may depend substantially on the success of the borrower’s business. As such the performance of these types of loans may be particularly sensitive to local and/or national economic conditions. Further, any collateral securing commercial business loans may depreciate over time, may be difficult to appraise and may fluctuate in value. We try to minimize these risks through our underwriting standards.

The Bank participated in the Paycheck Protection Program (“PPP”), which was designed by the U.S. Treasury under the Coronavirus Aid, Relief and Economic Security Act of 2020 (the “CARES Act”) to provide liquidity using the SBA’s platform to small businesses and self-employed individuals to maintain their staff and operations through the COVID-19 pandemic. This liquidity iswas in the form of a loan, 100% guaranteed by the SBA, that iswas forgivable provided the funds arewere 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 arewere deferred through the date that the SBA remits the borrower’s loan forgiveness amount to the lender (or, if the borrower doesdid not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness covered period). The Company originatedAll 350 PPP loans totaling $56.0 million originated by the Company under the CARES Act all of which were repaid during the year ended September 30, 2021. The Company expects the majority of these loans to be approved for full forgiveness by the SBA.fully forgiven and paid off.

 

The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues (“Economic Aid Act”) extended the SBA’s authority to guarantee “Second Draw” PPP loans, under generally the same terms and conditions available under the First Draw program. In order to qualify for a Second Draw PPP loan, an applicant must have experienced a revenue reduction of at least 25% in 2020 relative to 2019. We originatedOf the 212 Second Draw PPP loans totaling $35.3 million.million originated by the Company, only one loan totaling $3,000 did not apply for forgiveness and was the only PPP loan outstanding at September 30, 2022. The loan is expected to be repaid over the contractual term of the loans isloan, or five years, although the Company expects the majority of these loans to be approved for full forgiveness by the SBA. At September 30, 2021, the Company held 111 Second Draw PPP loans totaling $25.1 million.years.

 

The maximum amount of a commercial business loan is limited by our loans-to-one-borrower limit, which is 15% of Magyar Bank’s capital, or $13.0$14.4 million. At September 30, 2021,2022, our largest commercial business loan was a $6.0$7.2 million loan to a company that provides janitorial services and was secured by the accounts receivable of the company. This loan was performing according to its repayment terms at September 30, 2021.2022. At September 30, 2021, one commercial business loan totaling $1.3 million was non-performing. Interest income of $75,000 would have been recorded on non-performing commercial business loans for the year ended September 30, 2021 if the loan had been current in accordance with its original term. During the year ended September 30, 2021,2022, there were no charge-offs against the allowance for loan loss for impaired commercial business loans and there were $96,000 inno recoveries from prior year charge-offs.

Home Equity Lines of Credit and Other Loans. We originate home equity lines of credit secured by residences located in our market area. At September 30, 2021,2022, these loans totaled $17.9$18.7 million, or 3.0% of our total loan portfolio. The

underwriting standards we use for home equity lines of credit include a determination of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations, the ongoing payments on the proposed loan and the value of the collateral securing the loan. The maximum combined (first and second mortgage liens) loan-to-value ratio for home equity lines of credit is 80%. Home equity lines of credit have adjustable rates of interest, indexed to the prime rate, as reported in The Wall Street Journal, with terms of up to 25 years.

The maximum amount of a home equity line of credit loan is limited by our loans-to-one-borrower limit, which is 15% of Magyar Bank’s capital, or $13.0$14.4 million. At September 30, 2021,2022, our largest home equity line of credit loan was $1.4$1.1 million. The loan was performing according to its terms at September 30, 2021.2022. At September 30, 2021,2022, there were no charge-offs to home equity lines of credit whileand there was $1,000 recovered from awere no recoveries of any prior year charge-off.charge-offs.

We also originate loans secured by the common stock of publicly traded companies, provided their shares are listed on the New York Stock Exchange or the NASDAQ Stock Market, and provided the company is not a banking company. Stock-secured loans are interest-only and are offered for terms up to twelve months and for adjustable rates of interest indexed to the prime rate, as reported in The Wall Street Journal. The loan amount is not to exceed 70% of the value of the stock securing the loan at any time.

At September 30, 2021,2022, stock-secured and other loans totaled $3.8$3.1 million, or 0.6%0.5% of our total net loan portfolio. Generally, we limit the aggregate amount of loans secured by the common stock of any one corporation to 15% of Magyar Bank’s capital.capital, or $14.4 million. At September 30, 2021,2022, loans totaling $3.5$3.0 million, or 0.6%0.5% of our loan portfolio, were secured by the common stock of Johnson & Johnson a New York Stock Exchange company that operates a number of facilities in our market area and employs a substantial number of residents. Although these loans are underwritten based on the ability of the individual borrower to repay the loan, the concentration of our portfolio secured by this stock subjects us to the risk of a decline in the market price of the stock and, therefore, a reduction in the value of the collateral securing these loans. As of September 30, 2021,2022, the aggregate loan-to-value ratio of the stock-secured portfolio was 13.6%15.8%.

Loan Originations, Purchases, Participations and Servicing of Loans. Lending activities are conducted primarily by our loan personnel operating at our main and branch office locations. All loans originated by us are underwritten pursuant to our policies and procedures. We originate both adjustable rate and fixed rate loans. Our ability to originate fixed or adjustable rate loans is dependent upon the relative customer demand for such loans, which is affected by the current and expected future levels of market interest rates.

Generally, we retain in our portfolio substantially all loans that we originate. Historically, we have not originated a significant number of loans for the purpose of selling them in the secondary market. In the future, however, to help manage our interest rate risk and to increase fee income, we may increase our origination and sale of fixed-rate residential loans and commercial business loans guaranteed by the SBA. All one-to four-family residential mortgage loans that we sell in the secondary market are sold with servicing rights retained pursuant to master commitments negotiated with Freddie Mac. We sell our loans to Freddie Mac without recourse. No loans were held for sale at September 30, 2021.2022.

At September 30, 2021,2022, we were servicing SBA-guaranteed and commercial participation loans sold in the amount of $24.2$32.0 million and $11.4$9.5 million, respectively. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans.

From time-to-time, we will also participate in loans, sometimes as the “lead lender.” Whether we are the lead lender or not, we underwrite our participation portion of the loan according to our own underwriting criteria and procedures. At September 30, 2021,2022, we had $28.4$24.3 million of loan participation interests in which we were the lead lender, and $17.6$17.1 million in loan participations in which we were not the lead lender. There were no commercial real estate loan participations originated during the year ended September 30, 20212022 in which we were not the lead lender. We have entered into certain loan participations when the aggregate outstanding balance of a particular customer relationship exceeds our loan-to-one-borrower limit. All loan participations are loans secured by real estate that adhere to our loan policies. At September 30, 2021,2022, all participation loans were performing in accordance with their terms.

During the fiscal year ended September 30, 2021,2022, we originated $31.3$87.0 million of fixed-rate and adjustable-rate commercial real estate loans and $38.6 million of fixed-rate and adjustable-rate one-to four-family residential mortgage loans and $60.5 million of fixed-rate and adjustable-rate commercial real estate loans. The fixed-rate loans are primarily loans with terms of 30 years or less. We also originated $47.9 million of commercial business loans (which includes $25.1 million of PPP loans), $9.5 million of construction loans, and $9.8$16.2 million of home equity lines of credit and other loans, $9.0 million of construction loans and $8.5 million of commercial business loans.

We generally do not purchase residential mortgage loans, except for loans to low-income borrowers as part of our Community Reinvestment Act lenders program. At September 30, 2021,2022, we had $6.7$5.3 million of one-to four-family residential mortgage loans that were serviced by other lenders.

Asset Quality

 

We commence collection efforts when a loan becomes 15 days past due with system-generated reminder notices. Subsequent late charge and delinquent notices are issued and the account is monitored on a regular basis thereafter. Personal, direct contact with the borrower is attempted early in the collection process as a courtesy reminder and later to determine the reason for the delinquency and to safeguard our collateral. When a loan is more than 60 days past due, the credit file is reviewed and, if deemed necessary, information is updated or confirmed and collateral re-evaluated. We make every effort to contact the borrower and develop a plan of repayment to cure the delinquency. Loans are placed on non-accrual status when they are delinquent for more than three months. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received.

A summary report of all loans 30 days or more past due is provided to the Board of Directors on a monthly basis. If no repayment plan is in process, the file is referred to counsel for the commencement of foreclosure or other collection efforts.

Non-Performing Assets. The following table sets forth the amounts and categories of our non-performing assets at the dates indicated. The table includes troubled debt restructurings (loans for which a portion of interest or principal has been forgiven and loans modified at interest rates materially less than current market rates) for each date presented.

		September 30,
		2022				2021				2020				2019				2018
		(Dollars in thousands)
Non-accrual loans:
One-to four-family residential		$	—			$	1,152			$	905			$	114			$	138
Commercial real estate			—				1,079				2,219				2,652				455
Construction			2,835				4,580				5,141				2,900				—
Home equity lines of credit			—				—				—				—				90
Commercial business			—				1,349				1,467				1,228				223
Total non-accrual loans			2,835				8,160				9,732				6,894				906
Accruing loans three months or more past due:
One-to four-family residential			474				—				—				—				—
Commercial real estate			—				—				—				—				—
Construction			—				—				—				—				—
Home equity lines of credit			—				—				—				—				—
Commercial business			—				—				—				—				—
Total loans three months or more past due			474				—				—				—				—
Total non-performing loans			3,309				8,160				9,732				6,894				906
Other real estate owned			281				636				2,594				7,528				8,586
Total non-performing assets			3,590				8,796				12,326				14,422				9,492
Performing troubled debt restructurings			—				340				220				363				—
Performing troubled debt restructurings
and total non-performing assets		$	3,590			$	9,136			$	12,546			$	14,785			$	9,492
Ratios:
Total non-performing loans to total loans			0.53%				1.37%				1.59%				1.32%				0.18%
Total non-performing loans and performing
troubled debt restructurings to total loans			0.53%				1.43%				1.63%				1.39%				0.18%
Total non-performing assets to total assets			0.45%				1.14%				1.63%				2.29%				1.52%
Total non-performing assets and performing
troubled debt restructurings to total assets			0.45%				1.18%				1.66%				2.35%				1.52%

		September 30,
		2021				2020				2019				2018				2017
		(Dollars in thousands)
Non-accrual loans:
One-to four-family residential		$	1,152			$	905			$	114			$	138			$	1,663
Commercial real estate			1,079				2,219				2,652				455				482
Construction			4,580				5,141				2,900				—				—
Home equity lines of credit			—				—				—				90				—
Commercial business			1,349				1,467				1,228				223				213
Total non-accrual loans			8,160				9,732				6,894				906				2,358
Accruing loans three months or more past due:
One-to four-family residential			—				—				—				—				—
Commercial real estate			—				—				—				—				—
Construction			—				—				—				—				—
Home equity lines of credit			—				—				—				—				—
Commercial business			—				—				—				—				—
Total loans three months or more past due			—				—				—				—				—
Total non-performing loans			8,160				9,732				6,894				906				2,358
Other real estate owned			636				2,594				7,528				8,586				11,056
Total non-performing assets			8,796				12,326				14,422				9,492				13,414
Performing troubled debt restructurings			340				220				363				—				182
Performing troubled debt restructurings
and total non-performing assets		$	9,136			$	12,546			$	14,785			$	9,492			$	13,596
Ratios:
Total non-performing loans to total loans			1.37%				1.59%				1.32%				0.18%				0.50%
Total non-performing loans and performing
troubled debt restructurings to total loans			1.43%				1.63%				1.39%				0.18%				0.54%
Total non-performing assets to total assets			1.14%				1.63%				2.29%				1.52%				2.22%
Total non-performing assets and performing
troubled debt restructurings to total assets			1.18%				1.66%				2.35%				1.52%				2.25%

Commercial business, commercial real estate and construction loans generally have more risk than one-to four-family residential mortgage loans. At September 30, 2021,2022, our portfolio of commercial business, commercial real estate and construction loans totaled $392.7 million, or 62.4% of our total loans, compared to $369.9 million, or 62.2% of our total loans, compared to $377.4 million, or 61.7% of our total loans, at September 30, 2020.2021.

The Company’s non-accrual loans decreased $5.3 million, or 65.3%, to $2.8 million at September 30, 2022 from $8.2 million at September 30, 2021. During the year ended September 30, 2022, $1.3 million in non-accrual commercial business loans, $1.1 million in non-accrual commercial real estate loans and $685,000 in non-accrual one-to four-family residential mortgage loans were paid off by the borrowers. In addition, $1.7 million in non-accrual construction loans and $467,000 in non-accrual one-to four-family residential mortgage loans were paid current by the borrowers.

 

Additional interest income of approximately $555,000$220,000 and $508,000$555,000 would have been recorded during the fiscal years ended September 30, 20212022 and 2020,2021, respectively, if the non-accrual loans summarized in the above table had performed in accordance with their original terms.

 

The Company accounts for its impaired loans in accordance with generally accepted accounting principles, which require that a creditor measure impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate except that, as a practical expedient, a creditor may measure impairment based on a loan’s observable market price less estimated costs of disposal, or the fair value of the collateral less estimated costs of disposal if the loan is collateral dependent. Regardless of the measurement method, a creditor may measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable.

 

The Company records cash receipts on impaired loans that are non-performing as a reduction to principal before applying amounts to interest or late charges unless specifically directed by the Bankruptcy Court to apply payments otherwise. The Company generally continues to recognize interest income on impaired loans that are performing.

 

Troubled debt restructurings (“TDRs”) occur when a creditor, for economic or legal reasons related to a debtor’s financial condition, grants a concession to the debtor that it would not otherwise consider, such as a below market interest rate, extending the maturity of a loan, or a combination of both. There were no new TDR loans during the fiscal year ended September 30, 2022. For comparison purposes, there were two new TDR loans totaling $340,000 during the fiscal year ended September 30, 2021.

fiscal year ended September 30, 2021 that were performing in accordance with their restructured terms at September 30, 2021. For comparison purposes, there was one TDR loan totaling $220,000 during the fiscal year ended September 30, 2020.

Delinquent Loans. The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated. Loans delinquent more than three months are generally classified as non-accrual loans.

 

 

Real Estate Owned. Real estate we acquire as a result of foreclosure or by deed in lieu of foreclosure is classified as other real estate owned (“OREO”) until sold. When property is acquired it is recorded at fair value less estimated cost to sell at the date of foreclosure, establishing a new cost basis. Holding costs and declines in fair value result in charges to expense after acquisition.

 

The Company held $636,000 ofone OREO propertiesproperty totaling $281,000 at September 30, 2021,2022, a decrease of $2.0 million$355,000, or 55.8% from $2.6 million$636,000 on at September 30, 2020.

2021.

Classified Assets. Federal banking regulations provide that loans and other assets of lesser quality should be classified as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” we will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “un-collectible” and of such little value their continuance as assets without the establishment of a specific loss reserve is not warranted. We classify an asset as “special mention” if the asset has a potential weakness that warrants management’s close attention. While such assets are not impaired, management has concluded that if the potential weakness in the asset is not addressed, the value of the asset may deteriorate, adversely affecting the repayment of the asset. On the basis of our review at September 30, 2021,2022, classified assets consisted of $7.7$1.2 million in special mention loans, $9.2$4.8 million in substandard loans, and $636,000$281,000 in substandard OREO.

We are required to establish an allowance for loan losses in an amount deemed prudent by management for loans classified substandard or doubtful, as well as for other problem loans. General allowances represent loss allowances which have been established to recognize the inherent losses associated with lending activities, but which, unlike impairment allowances, have not been allocated to particular problem assets. When we classify problem assets, we are required to determine whether or not impairment exists. A loan is impaired when, based on current information and events, it is probable that Magyar Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. When it is determined that impairment exists, a specific allowance for loss is established. For collateral-dependent loans, the loan is reduced by the impairment amount via a reduction to the loan and the allowance for loan loss. Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the NJDBI and the FDIC, which can direct us to establish additional loss allowances.

The loan portfolio is reviewed on a regular basis to determine whether any loans require classification in accordance with applicable regulations. Not all classified assets constitute non-performing assets.

 

 

Allowance for Loan Losses

Our allowance for loan losses is maintained at a level management deems necessary to absorb loan losses that are both probable and reasonably estimable. Management, in determining the allowance for loan losses, considers the losses in our loan portfolio both probable and reasonably estimable, and changes in the nature and volume of loan activities, along with the general economic and real estate market conditions. The allowance for loan losses as of September 30, 20212022 was maintained at a level that represents management’s best estimate of losses in the loan portfolio both probable and reasonably estimable. However, this analysis process is inherently subjective, as it requires us to make estimates that are susceptible to revisions as more information becomes available. Although we believe we have established the allowance at levels to absorb probable and estimable losses, future additions may be necessary if economic or other conditions in the future differ from the current environment.

In addition, as an integral part of their examination process, the NJDBI and the FDIC will periodically review our allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on their judgments of information available to them at the time of their examination.

 

The provision for loan losses decreased $37,000$1.3 million, or 81.3%, to $304,000 for the year ended September 30, 2022 compared to $1.6 million for the year ended September 30, 2021 compared to $1.7 million for the year ended September 30, 2020.2021. The decrease was attributable to contraction in net total loans receivable, offset bylower adjustments to historical loss factors for economic conditions relating to the COVID-19 pandemic.pandemic, lower balances of higher-risk loan segments within the allowance for loan loss calculation and lower non-performing loan balance at September 30, 2022.

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

 

		September 30,
		2021				2020				2019				2018				2017
		(Dollars in thousands)
Balance at beginning of period		$	6,400			$	4,888			$	4,200			$	3,475			$	3,056
Charge-offs:
One-to four-family residential			—				—				—				213				295
Commercial real estate			51				—				1				—				23
Construction			—				65				—				—				—
Commercial business			—				204				100				170				672
Other			1				—				—				3				—
Total charge-offs			52				269				101				386				990
Recoveries:
One-to four-family residential			1				9				120				87				35
Commercial real estate			—				5				—				23				—
Construction			—				—				—				3				12
Home equity lines of credit			1				1				1				1				15
Commercial business			96				100				—				—				4
Total recoveries			98				115				121				114				66
Net charge-offs (recoveries)			(46	)			154				(20	)			272				924
Provision for loan losses			1,629				1,666				668				997				1,343
Balance at end of period		$	8,075			$	6,400			$	4,888			$	4,200			$	3,475
Ratios:
Net charge-offs (recoveries) to average loans outstanding			-0.01%				0.03%				0.00%				0.06%				0.20%
Allowance for loan losses to total non-performing loans			98.96%				65.76%				70.90%				463.57%				147.37%
Allowance for loan losses to total loans			1.36%				1.05%				0.93%				0.82%				0.73%

		September 30,
		2022				2021				2020				2019				2018
		(Dollars in thousands)
Balance at beginning of period		$	8,075			$	6,400			$	4,888			$	4,200			$	3,475
Charge-offs:
One-to four-family residential			—				—				—				—				213
Commercial real estate			—				51				—				1				—
Construction			—				—				65				—				—
Home equity lines of credit			—				—				—				—				—
Commercial business			—				—				204				100				170
Other			—				1				—				—				3
Total charge-offs			—				52				269				101				386
Recoveries:
One-to four-family residential			1				1				9				120				87
Commercial real estate			53				—				5				—				23
Construction			—				—				—				—				3
Home equity lines of credit			—				1				1				1				1
Commercial business			—				96				100				—				—
Total recoveries			54				98				115				121				114
Net (recoveries) charge-offs			(54	)			(46	)			154				(20	)			272
Provision for loan losses			304				1,629				1,666				668				997
Balance at end of period		$	8,433			$	8,075			$	6,400			$	4,888			$	4,200
Ratios:
Net (recoveries) charge-offs to average loans outstanding			-0.01%				-0.01%				0.03%				0.00%				0.06%
Allowance for loan losses to total non-performing loans			254.85%				98.96%				65.76%				70.90%				463.57%
Allowance for loan losses to total loans			1.34%				1.36%				1.05%				0.93%				0.82%

 

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

						% of Allowance				% of Loans
						In Category to				In Category to
		Amount				Total Allowance				Total Loans
		(Dollars in thousands)
At September 30, 2022
One-to four-family residential		$	1,223				14.50%				34.10%
Commercial real estate			4,612				54.69%				54.50%
Construction			461				5.47%				2.40%
Home equity lines of credit			263				3.12%				3.00%
Commercial business			1,484				17.60%				5.50%
Other			1				0.01%				0.50%
Unallocated			389				4.61%				0.00%
Total allowance for loan losses		$	8,433				100.00%				100.00%
At September 30, 2021
One-to four-family residential		$	1,136				14.07%				34.20%
Commercial real estate			3,744				46.36%				47.20%
Construction			594				7.36%				3.40%
Home equity lines of credit			232				2.87%				3.00%
Commercial business			2,046				25.34%				11.60%
Other			15				0.19%				0.60%
Unallocated			308				3.81%				0.00%
Total allowance for loan losses		$	8,075				100.00%				100.00%
At September 30, 2020
One-to four-family residential		$	1,035				16.17%				34.41%
Commercial real estate			3,232				50.49%				40.59%
Construction			672				10.50%				4.62%
Home equity lines of credit			179				2.80%				3.17%
Commercial business			1,034				16.16%				16.52%
Other			1				0.02%				0.68%
Unallocated			247				3.86%				0.00%
Total allowance for loan losses		$	6,400				100.00%				100.00%
At September 30, 2019
One-to four-family residential		$	731				14.95%				36.41%
Commercial real estate			2,066				42.28%				44.46%
Construction			511				10.45%				5.44%
Home equity lines of credit			138				2.82%				3.41%
Commercial business			1,184				24.23%				9.32%
Other			8				0.16%				0.95%
Unallocated			250				5.11%				0.00%
Total allowance for loan losses		$	4,888				100.00%				100.00%
At September 30, 2018
One-to four-family residential		$	687				16.36%				36.15%
Commercial real estate			1,540				36.67%				42.80%
Construction			493				11.74%				5.93%
Home equity lines of credit			109				2.60%				3.51%
Commercial business			1,151				27.40%				10.40%
Other			25				0.60%				1.20%
Unallocated			195				4.63%				0.00%
Total allowance for loan losses		$	4,200				100.00%				100.00%

Investments

Our Board of Directors has adopted our Investment Policy. This policy determines the types of securities in which we may invest. The Investment Policy is reviewed annually by the Board of Directors and changes to the policy are subject to approval by our Board of Directors. While general investment strategies are developed by the Asset and Liability Committee, the execution of specific actions rests primarily with our President and our Chief Financial Officer. They are responsible for ensuring the guidelines and requirements included in the Investment Policy are followed. They are authorized to execute transactions that fall within the scope of the established Investment Policy up to $2.5$5.0 million per transaction individually or $5.0$10.0 million per transaction jointly. Investment transactions in excess of $5.0$10.0 million must be approved by the Asset and Liability Committee. Investment transactions are reviewed and ratified by the Board of Directors at their regularly scheduled meetings.

Our investments portfolio may include U.S. Treasury obligations, debt and equity securities issued by various government-sponsored enterprises, including Fannie Mae and Freddie Mac, mortgage-backed securities, certain certificates of deposit of insured financial institutions, overnight and short-term loans to other banks, investment-grade corporate debt instruments, and municipal debt securities. In addition, we may invest in equity securities subject to certain limitations and not in excess of Magyar Bank’s Tier 1 capital.

The Investment Policy requires that securities transactions be conducted in a safe and sound manner, and purchase and sale decisions be based upon a thorough analysis of each security to determine its quality and inherent risks and fit within our overall asset/liability management objectives. The analysis must consider the effect of an investment or sale on our risk-based capital and prospects for yield and appreciation.

At September 30, 2021,2022, our securities portfolio totaled $70.6$100.9 million, or 9.1%12.6% of our total assets. Securities are classified as held-to-maturity or available-for-sale when purchased. At September 30, 2021, $57.72022, $91.6 million of our securities were classified as held-to-maturity and reported at amortized cost, and $12.9$9.2 million were classified as available-for-sale and reported at fair value. At September 30, 2021,2022, we held no investment securities classified as held-for-trading.

U.S. Government Agency and Government-Sponsored Enterprise Obligations. At September 30, 2021,2022, our U.S. Government Agency and Government-Sponsored Enterprise Obligations totaled $65.3$89.2 million, or 92.5%88.4% of our total securities portfolio. Of this amount, $52.8$64.3 million were mortgage-backed securities and $12.5$24.8 million were debt securities. While these securities generally provide lower yields than other securities in our securities portfolio, we hold these securities, to the extent appropriate, for liquidity purposes and as collateral for certain deposits or borrowings. We invest in these securities to achieve positive interest rate spreads with minimal administrative expense, and to lower our credit risk as a result of the guarantees provided by these issuers.

Mortgage-Backed Securities. We purchase mortgage-backed pass through and collateralized mortgage obligation (“CMO”) securities insured or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. To a lesser extent, we also invest in mortgage-backed securities issued or sponsored by private issuers. At September 30, 2021,2022, our mortgage-backed securities, including CMOs, totaled $53.0$64.6 million, or 75.1%64.0% of our total securities portfolio. Included in this balance was a $242,000$224,000 mortgage-backed security issued by a private issuer. Our policy is to limit purchases of privately issued mortgage-backed securities to non-high risk securities rated “A” or higher by a nationally recognized credit rating agency. High risk securities generally are defined as those exhibiting significantly greater volatility of estimated average life and price due to changes in interest rates than 30-year fixed rate securities.

Mortgage-backed pass through securities are created by pooling mortgages and issuing a security with an interest rate less than the interest rate on the underlying mortgages. Mortgage-backed pass through securities represent a participation interest in a pool of single-family or multi-family mortgages. As loan payments are made by the borrowers, the principal and interest portion of the payment is passed through to the investor as received. CMOs are also backed by mortgages, however they differ from mortgage-backed pass through securities because the principal and interest payments on the underlying mortgages are structured so that they are paid to the security holders of pre-determined classes or tranches at a faster or slower pace. The receipt of these principal and interest payments, which depends on the estimated average life for each class, is contingent on a prepayment speed assumption assigned to the underlying mortgages. Variances between the assumed payment speed and actual payments can significantly alter the average lives of such securities. Mortgage-backed securities and CMOs generally yield less than the loans that underlie such securities because of the cost of payment guarantees and credit enhancements. However, mortgage-backed securities are usually more liquid than individual mortgage loans and may be used to collateralize borrowings and other liabilities.

Mortgage-backed securities present a risk that actual prepayments may differ from estimated prepayments over the life of the security, which may require adjustments to the amortization of any premium or accretion of any discount relating

to such instruments that can change the net yield on the securities. There is also reinvestment risk associated with the cash flows from such securities or if the securities are redeemed by the issuer. In addition, the market value of such securities may be adversely affected by changes in interest rates.

Our mortgage-backed securities portfolio had a weighted average yield of 1.83%1.97% at September 30, 2021.2022. The estimated fair value of our mortgage-backed securities portfolio at September 30, 20212022 was $53.0$56.3 million, which was $166,000$10.2 million less than the amortized cost. Mortgage-backed securities in Magyar Bank’s portfolio do not contain sub-prime mortgage loans.

Corporate and Other Securities. At September 30, 2021,2022, the Bank held onetwo corporate notenotes issued by Goldman Sachs Corporate and Wells Fargo Bank at its amortized value totaling $5.0 million and $3.0 million.million, respectively. Our Investment Policy allows for the purchase of such instruments and requires that corporate debt obligations be rated in one of the four highest categories by a nationally recognized rating service. We may invest up to 25% of Magyar Bank’s investment portfolio in corporate debt obligations and up to 15% of Magyar Bank’s capital in any one issuer.

Equity Securities. At September 30, 2021,2022, we held no equity securities other than $1.7$1.4 million in Federal Home Loan Bank of New York (“FHLBNY”) stock. The investment in FHLBNY stock is classified as a restricted security, carried at cost and evaluated for impairment. Equity securities are not insured or guaranteed investments and are affected by market interest rates and stock market fluctuations. Such investments other than the FHLBNY are carried at their fair value and fluctuations in the fair value of such investments, including temporary declines in value, directly affect our net capital position.

Securities Portfolios. The following tables settable sets forth the composition of our securities portfolio (excluding FHLBNY common stock) at the dates indicated.

 

 

At September 30, 2021,2022, a total of 3680 securities with an aggregate fair value of $53.7$88.9 million had gross unrealized losses of $1.0$13.7 million, or approximately 1.9%15.4% of fair value. The lower market values of our securities reflects higher market interest rates. None of these unrealized losses were considered other-than-temporary.

 

Portfolio Maturities and Yields. The composition, maturities and weighted average yields of the investment debt securities portfolio and the mortgage-backed securities portfolio at September 30, 20212022 are summarized in the following tables.table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur.

		September 30, 2022
																		More Than Five
										Less Than								Years Through								More Than
		One Year or Less								Five Years								Ten Years								Ten Years								Total Securities
		Amortized								Amortized								Amortized								Amortized								Amortized
		Cost				Yield				Cost				Yield				Cost				Yield				Cost				Yield				Cost				Yield
		(Dollars in thousands)
Securities available for sale:
Obligations of U.S. government agencies:
Mortgage backed securities - residential		$	—				—%			$	—				—%			$	—				—%			$	118				3.50%			$	118				3.50%
Obligations of U.S. government-sponsored enterprises:
Mortgage-backed securities-residential			—				—%				432				2.00%				999				1.57%				9,598				1.61%				11,029				1.62%
Total securities available for sale		$	—				—%			$	432				2.00%			$	999				1.57%			$	9,716				1.63%			$	11,147				1.64%
Securities held to maturity:
Obligations of U.S. government agencies:
Mortgage-backed securities - residential			—				—%			$	—				—%				—				—%			$	5,525				2.27%			$	5,525				2.27%
Mortgage-backed securities - commercial			—				—%				—				—%				631				2.16%				—				—%				631				2.16%
Obligations of U.S. government-sponsored enterprises:
Mortgage backed securities - residential			35				2.00%				3,696				2.55%				8,588				1.79%				36,642				1.99%				48,961				2.00%
Debt securities			1,333				0.29%				21,488				0.84%				2,000				1.00%				—				—%				24,821				0.82%
Private label mortgage-backed securities - residential			—				—%				—				-%				224				3.05%				—				—%				224				3.05%
Obligations of state and political subdivisions			—				—%				529				3.00%				2,442				2.12%				513				2.00%				3,484				2.23%
Corporate securities			5,000				3.00%				3,000				2.38%				—				—%				—				—%				8,000				2.77%
Total securities held to maturity		$	6,368				2.43%			$	28,713				1.26%			$	13,885				1.77%			$	42,680				2.03%			$	91,646				1.78%

		September 30, 2021
																		More Than Five
										Less Than								Years Through								More Than
		One Year or Less								Five Years								Ten Years								Ten Years								Total Securities
		Amortized								Amortized								Amortized								Amortized								Amortized
		Cost				Yield				Cost				Yield				Cost				Yield				Cost				Yield				Cost				Yield
		(Dollars in thousands)
Securities available for sale:
Obligations of U.S. government agencies:
Mortgage backed securities - residential		$	—				—%			$	—				—%			$	—				—%			$	179				3.50%			$	179				3.50%
Obligations of U.S. government-sponsored enterprises:
Mortgage-backed securities-residential			—				—%				—				—%				1,593				1.73%				11,329				1.64%				12,922				1.65%
Total securities available for sale		$	—				—%			$	—				—%			$	1,593				1.73%			$	11,508				1.66%			$	13,101				1.67%
Securities held to maturity:
Obligations of U.S. government agencies:
Mortgage-backed securities - residential			—				—%			$	—				—%				—				—%			$	574				2.91%			$	574				2.91%
Mortgage-backed securities - commercial			—				—%				—				—%				703				0.66%				—				—%				703				0.66%
Obligations of U.S. government-sponsored enterprises:
Mortgage backed securities - residential			—				—%				3,900				2.35%				7,009				1.87%				27,687				1.82%				38,596				1.88%
Debt securities			—				—%				6,498				0.56%				6,000				0.83%				—				—%				12,498				0.69%
Private label mortgage-backed securities - residential			—				—%				—				—%				—				—%				242				2.29%				242				2.29%
Obligations of state and political subdivisions			—				—%				—				—%				1,531				1.89%				516				2.00%				2,047				1.91%
Corporate securities			—				—%				—				—%				3,000				1.03%				—				—%				3,000				1.03%
Total securities held to maturity		$	—				—%			$	10,398				1.23%			$	18,243				1.34%			$	29,019				1.85%			$	57,660				1.58%

 

Sources of Funds

 

General. Deposits, including certificates of deposit, demand, savings, NOW and money market accounts, have traditionally been the primary source of funds used for our lending and investment activities. We obtain certificates of deposit primarily through our branch network and to a lesser extent via the brokered CD market. We also use borrowings, primarily Federal Home Loan Bank advances, to supplement cash flow needs, to lengthen the maturities of liabilities for interest rate risk management and to manage our cost of funds. Additional sources of funds include principal and interest payments from loans and securities, loan and security prepayments and maturities, income on other earning assets and stockholders’ equity. While cash flows from loans and securities payments can be relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition.

Deposits. Our deposits are generated primarily from customers within our primary market area. We offer a selection of deposit accounts, including demand accounts, NOW accounts, money market accounts, savings accounts, retirement accounts and certificates of deposit. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. We also accept brokered deposits when attractive rates and terms are available. At September 30, 2021, weWe had $6.0 million in brokered deposits compared to $9.4 million at September 30, 2020.2022 and September 30, 2021.

Interest rates, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. Personalized customer service, long-standing relationships with customers and an active marketing program are relied upon to attract and retain deposits.

The flow of deposits is influenced significantly by general economic conditions, changes in money market and other prevailing interest rates and competition. The variety of deposit accounts offered allows us to be competitive in obtaining funds and responding to changes in consumer demand. Based on experience, we believe that our deposits are relatively stable. However, the ability to attract and maintain deposits, and the rates paid on these deposits, has been and will continue to be significantly affected by market conditions. At September 30, 2021, $116.92022, $82.6 million, or 18.3%12.4% of our deposit accounts, were certificates of deposit (including individual retirement accounts).

The following table sets forth the distribution of total deposit accounts, by account type, at the dates indicated.

 

 

At September 30, 2022, 2021 and 2020, the aggregate amount of uninsuredun-insured deposits (which are deposits in amounts greater than $250,000, which is the maximum amount for federal deposit insurance) was $41.7$396.7 million, $374.7 million and $52.7$363.4 million, respectively. At September 30, 20212022 and September 30, 2020,2021, we had no deposits that were uninsured for any reason other than being in excess of the maximum amount for federal deposit insurance.

The following table sets forth the maturity of our uninsuredun-insured certificates of deposit at September 30, 2021.2022.

 

 

At September 30, 2021, $72.82022, $44.6 million of our certificates of deposit had maturities of one year or less. We monitor activity on these accounts and, based on historical experience and our current pricing strategy, we believe we will retain a large portion of these accounts upon maturity.

 

The following table sets forth the interest-bearing deposit activities for the periods indicated.

 

Borrowings. Borrowings from the Federal Home Loan Bank of New York (“FHLBNY”) decreased $44.0$7.7 million, or 65.4%33.1%, to $15.6 million at September 30, 2022 from $23.4 million at September 30, 2021 from $67.4 million at September 30, 2020. The Bank repaid all $36.9 million in Paycheck Protection Program Liquidity Facility (“PPPLF”) advances to the Federal Reserve Bank during the year ended September 30, 2021 that were used to fund Round 1 PPP loans. The Bank did not utilize the PPPLF to fund its Round 2 PPP loans. FHLBNY advances decreased $7.1 million to $23.4 million at September 30, 2021 from $30.5 million at September 30, 2020 as deposit inflows were used to repay maturing long-term advances. The borrowings represent 2.2% of total liabilities and had a weighted average interest rate of 2.48% at September 30, 2022. Based on eligible collateral pledged to the FHLBNY at September 30, 2022, we had an aggregate borrowing capacity of $138.9 million with the FHLBNY.

The borrowings represent 3.5% of total liabilities and had a weighted average interest rate of 2.13% at September 30, 2021. Based on eligible collateral pledged to the FHLBNY at September 30, 2021, we had an aggregate borrowing capacity of $151.2 million with the FHLBNY.

Long-term FHLBNY advances as of September 30, 20212022 mature as follows (in thousands):

 

The Bank is also able to borrow funds from an overnight line of credit with the FHLBNY. The Bank did not access theInformation concerning overnight line of credit at any time duringadvances with the years ended September 30, 2021 and 2020.Federal Home Loan Bank of New York is summarized as follows:

		September 30,
		2022				2021
		(Dollars in thousands)
Balance at end of year		$	—			$	—
Weighted average balance during the year		$	33			$	—
Maximum month-end balance during the year		$	2,450			$	—
Average interest rate during the year			2.67%				—

 

 

Subsidiary Activities

 

Magyar Investment Company is a New Jersey investment corporation subsidiary for the purpose of buying, selling and holding investment securities. The income earned on Magyar Investment Company’s investment securities are subject to a lower state tax than that assessed on income earned on investment securities maintained at Magyar Bank.

Hungaria Urban Renewal, LLC is a Delaware limited-liability corporation established in 2002 as a qualified intermediary operating for the purpose of acquiring and developing Magyar Bank’s main office. In 2006, Magyar Bank acquired a 100% interest in Hungaria Urban Renewal, LLC, which has no other business other than owning Magyar Bank’s main office site. As part of a tax abatement agreement with the City of New Brunswick, Magyar Bank’s new office will remain in Hungaria Urban Renewal, LLC’s name.

Magyar Service Corporation, a New Jersey corporation, is a wholly owned subsidiary of Magyar Bank. Magyar Service Corporation offers Magyar Bank customers and others a complete range of non-deposit investment products and financial planning services, including insurance products, fixed and variable annuities, and retirement planning for individual and commercial customers.

 

Employees and Human Capital Resources

At September 30, 20212022 we employed 9487 full-time employees and 7 part-time employees. Our employees are not represented by any collective bargaining group. Management believes that we have good relations with our employees.

 

We encourage and support the growth and development of our employees and, wherever possible, seek to fill positions by promotion and transfer from within the organization. Continual learning and career development is advanced through annual performance and development conversations with employees, internally developed training programs, customized corporate training engagements and seminars, conferences, and other training events employees are encouraged to attend in connection with their job duties.

 

The safety, health and wellness of our employees is a top priority. The COVID-19 pandemic presented a unique challenge with regard to maintaining employee safety while continuing successful operations. Through teamwork and the adaptability of our management and staff, our branches and operations centers remained open and in-person during the year ended September 30, 2021.2022. All employees are asked not to come to work when they experience signs or symptoms of a possible COVID-19 illness and have been provided paid time off to cover compensation during such absences. On an ongoing

basis, we further promote the health and wellness of our employees by strongly encouraging work-life balance, offering flexible work schedules, and keeping the employee portion of health care premiums to a minimum.

 

Employee retention helps us operate efficiently and achieve one of our business objectives, which is being a high-level service provider. We believe our commitment to living out our core values, actively prioritizing concern for our employees’ well-being, supporting our employees’ career goals, offering competitive wages and providing valuable fringe

benefits aids in retention of our top-performing employees. In addition, nearly all of our employees are stockholders of the Company through participation in our Employee Stock Ownership Plan, which aligns associate and stockholder interests by providing stock ownership on a tax-deferred basis at no investment cost to our associates. At September 30, 2021, 27%2022, 32% of our current staff had been with us for fifteen years or more.

 

 

FEDERAL AND STATE TAXATION

 

Federal Taxation

General. Magyar Bancorp, Inc. and Magyar Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The most recent audit of Magyar Bank’s federal tax returns by the Internal Revenue Service was for the period ended September 30, 2015. The audit did not result in any material adjustments to the Company’s tax returns or the Company’s financial statements. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to Magyar Bancorp, Inc. or Magyar Bank.

Method of Accounting. For federal income tax purposes, Magyar Bancorp, Inc. reports its income and expenses on the accrual method of accounting and uses a tax year ending September 30th for filing its federal and state income tax returns.

Bad Debt Reserves. Magyar Bank uses the direct charge off method to account for bad debt deductions for income tax purposes.

Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt reserves created prior to January 1, 1988 (pre-base year reserves) were subject to recapture into taxable income if Magyar Bank failed to meet certain thrift asset and definitional tests.

At September 30, 2021,2022, our total federal pre-base year reserve was approximately $1.3 million. However, under current law, pre-base year reserves remain subject to recapture if Magyar Bank makes certain non-dividend distributions, repurchases any of its stock, pays dividends in excess of tax earnings and profits, or ceases to maintain a bank charter.

 

Net Operating Loss Carryovers. At September 30, 2021,2022, a financial institution was able to carry back net operating losses to the preceding five taxable years and forward to the succeeding 20 taxable years. At September 30, 2021,2022, the Company did not have any federal or state net operating loss carry forwards available to offset future taxable income for tax reporting purposes.

 

Corporate Dividends-Received Deduction. Magyar Bancorp, Inc. may exclude from its federal taxable income 100% of dividends received from Magyar Bank as a wholly owned subsidiary. The corporate dividends-received deduction is 65% when the dividend is received from a corporation having at least 20% of its stock owned by the recipient corporation. A 50% dividends-received deduction is available for dividends received from corporations owned less than 20% by the recipient corporation.

 

State Taxation

New Jersey State Taxation. The income of savings institutions in New Jersey, which is calculated based on federal taxable income, subject to certain adjustments, is subject to New Jersey tax. For the tax years ending after July 31, 2019, New Jersey tax law requires members of an affiliated group where there is common ownership to calculate their corporation business tax on a combined or consolidated basis. Magyar Bancorp, Inc., Magyar Bank, Magyar Service Corporation, and Magyar Investment Company have filed a New Jersey tax return on a consolidated basis for the year ended September 30, 20202021 and intend to file on a consolidated basis for the year ended September 30, 2021.2022.

Magyar Bancorp, Inc., Magyar Bank, Magyar Service Corporation, and Magyar Investment Company are not currently under audit with respect to their New Jersey income tax returns. Their respective state tax returns have not been audited within the past three years.

Delaware and New Jersey State Taxation. As a Delaware holding company not earning income in Delaware, Magyar Bancorp, Inc. is exempt from Delaware corporate income tax, but is required to file annual returns and pay annual fees and a franchise tax to the State of Delaware.

Magyar Bancorp, Inc. is subject to New Jersey corporate income taxes in the same manner as described above for Magyar Bank.

 

 

SUPERVISION AND REGULATION

 

General

Magyar Bank is a New Jersey-chartered savings bank, and its deposit accounts are insured up to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”) under the Deposit Insurance Fund (“DIF”). Magyar Bank is subject to extensive regulation, examination and supervision by the Commissioner of the New Jersey Department of Banking and Insurance (the “Commissioner”) as the issuer of its charter, and by the FDIC as deposit insurer and its primary federal regulator. Magyar Bank must file reports with the Commissioner and the FDIC concerning its activities and financial condition, and it must obtain regulatory approval prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions and opening or acquiring branch offices. The Commissioner and the FDIC conduct periodic examinations to assess Magyar Bank’s compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which a savings bank can engage and is intended primarily for the protection of the deposit insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.

Magyar Bancorp, Inc., as a bank holding company controlling Magyar Bank, is subject to the Bank Holding Company Act of 1956, as amended (“BHCA”), and the rules and regulations of the FRB under the BHCA and to the provisions of the New Jersey Banking Act of 1948 (the “New Jersey Banking Act”), and to the regulations of the Commissioner under the New Jersey Banking Act applicable to bank holding companies. Magyar Bank and Magyar Bancorp, Inc. are required to file reports with, and otherwise comply with the rules and regulations of the FRB and the Commissioner. Magyar Bancorp, Inc. is required to file certain reports with, and otherwise comply with, the rules and regulations of the Securities and Exchange Commission under the federal securities laws.

Any change in such laws and regulations, whether by the Commissioner, the FDIC, the Federal Reserve Board or through legislation, could have a material adverse impact on Magyar Bank and Magyar Bancorp, Inc. and their operations and stockholders.

Certain of the laws and regulations applicable to Magyar Bank and Magyar Bancorp, Inc. are summarized below. These summaries do not purport to be complete and are qualified in their entirety by reference to such laws and regulations.

 

New Jersey Banking Regulation

 

Activity Powers. Magyar Bank derives its lending, investment and other activity powers primarily from the applicable provisions of the New Jersey Banking Act and its related regulations. Under these laws and regulations, savings banks, including Magyar Bank, generally may invest in:

·

real estate mortgages;

·

consumer and commercial loans;

·

specific types of debt securities, including certain corporate debt securities and obligations of federal, state and local governments and agencies;

·

certain types of corporate equity securities; and

·

certain other assets.

A savings bank may also make other investments pursuant to “leeway” authority that permits investments not otherwise permitted by the New Jersey Banking Act. “Leeway” investments must comply with a number of limitations on the individual and aggregate amounts of “leeway” investments. A savings bank may also exercise trust powers upon approval

of the Commissioner. New Jersey savings banks may exercise those powers, rights, benefits or privileges authorized for national banks or out-of-state banks or for federal or out-of-state savings banks or savings associations, provided that before exercising any such power, right, benefit or privilege, prior approval by the Commissioner by regulation or by specific

authorization is required. The exercise of these lending, investment and activity powers are limited by federal law and regulations. See “Federal Banking Regulation-Activity Restrictions on State-Chartered Banks” below.

Loans-to-One-Borrower Limitations. With certain specified exceptions, a New Jersey-chartered savings bank may not make loans or extend credit to a single borrower or to entities related to the borrower in an aggregate amount that would exceed 15% of the bank’s capital funds. A savings bank may lend an additional 10% of the bank’s capital funds if secured by collateral meeting the requirements of the New Jersey Banking Act. Magyar Bank currently complies with applicable loans-to-one-borrower limitations.

Dividends. Under the New Jersey Banking Act, a stock savings bank may declare and pay a dividend on its capital stock only to the extent that the payment of the dividend would not impair the capital stock of the savings bank. In addition, a stock savings bank may not pay a dividend unless the savings bank would, after the payment of the dividend, have a surplus of not less than 50% of its capital stock, or alternatively, the payment of the dividend would not reduce the surplus. Federal law may also limit the amount of dividends that may be paid by Magyar Bank. See “Federal Banking Regulation-Prompt Corrective Action” below.

Minimum Capital Requirements. Regulations of the Commissioner impose on New Jersey-chartered depository institutions, including Magyar Bank, minimum capital requirements similar to those imposed by the Federal Deposit Insurance Corporation on insured state banks. See “Federal Banking Regulation-Capital Requirements.”

Examination and Enforcement. The NJDBI may examine Magyar Bank whenever it deems an examination advisable. The NJDBI examines Magyar Bank at least every three years. The Commissioner may order any savings bank to discontinue any violation of law or unsafe or unsound business practice and may direct any director, officer, attorney or employee of a savings bank engaged in an objectionable activity, after the Commissioner has ordered the activity to be terminated, to show cause at a hearing before the Commissioner why such person should not be removed. The Commissioner also has authority to appoint a conservator or receiver for a savings bank under certain circumstances such as insolvency or unsafe or unsound condition to transact business.

 

Federal Banking Regulation

 

Capital Requirements. Federal regulations require FDIC-insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio, a Tier 1 capital to risk-based assets ratio, a total capital to risk-based assets, and a Tier 1 capital to total assets leverage ratio. The existing capital requirements were effective January 1, 2015 and are the result of a final rule implementing regulatory amendments based on recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.

The capital standards require the maintenance of common equity Tier 1 capital, Tier 1 capital and total capital to risk-weighted assets of at least 4.5%, 6% and 8%, respectively, and a leverage ratio of at least 4% Tier 1 capital. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-sale-securities). Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.

On April 9, 2020, the Federal Reserve Board, the OCC, and the FDIC issued an interim final rule to allow banking organizations to exclude from regulatory capital measures any exposures pledged as collateral for a non-recourse loan from the Federal Reserve. Since PPPLF extensions of credit are non-recourse, PPP loans pledged to the PPPLF qualify for exclusion under the interim final rule.

In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash

and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one-to four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements.

In assessing an institution’s capital adequacy, the FDIC takes into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary.

At September 30, 2021,2022, Magyar Bank’s common equity Tier 1 capital to risk-based assets ratio was 15.74%15.22%, total capital to risk-based assets was 16.99%16.47%, and Tier 1 capital to total assets leverage ratio was 10.18%11.13%.

 

Legislation enacted in May 2018 required the federal banking agencies to establish an optional “community bank leverage ratio” of between 8% to 10% Tier 1 equity/consolidated assets (the “Community Bank Leverage Ratio”). The Community Bank Leverage Ratio is available to institutions with less than $10 billion of assets that meet certain other requirements. Institutions with capital meeting or exceeding the specified requirements and electing to follow the alternative regulatory capital structure will be considered to comply with the applicable regulatory capital requirements, including the risk-based requirements. The federal banking agencies adopted final regulations that set 9.0% as the minimum capital for the Community Bank Leverage Ratio, effective January 1, 2020. A qualifying institution may opt in and out of the community bank leverage ratio framework on its quarterly call report. An institution that ceases to meet any qualifying criteria is provided with a two-quarter grace period to either comply with the community bank leverage ratio requirements or comply with the general capital regulations, including the risk-based capital requirements.

Section 4012 of the CARES Act required that the community bank leverage ratio be temporarily lowered to 8%. The federal regulators issued a rule implementing the lower ratio effective April 23, 2020. The rule also established a two-quarter grace period for a qualifying institution whose leverage ratio falls below the 8% community bank leverage ratio requirement so long as the bank maintains a leverage ratio of 7% or greater. Another rule was issued to transition back to the 9% community bank leverage ratio by increasing the ratio to 8.5% for calendar year 2021 and 9% thereafter.

 

Prompt Corrective Action. The FDIC Improvement Act established a system of prompt corrective action to resolve the problems of undercapitalized institutions. The FDIC has adopted regulations to implement the prompt corrective action legislation. The regulations were amended to incorporate the previously mentioned increased regulatory capital standards that were effective January 1, 2015. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%. Effective March 31, 2020, qualifying community banking organizations that elect to use the Community Bank Leverage Ratio framework and that maintain a leverage ratio of greater than 9.0% will be considered to have satisfied the risk-based and leverage capital requirements to be deemed well-capitalized.

Undercapitalized institutions are subject to a variety of mandatory supervisory measures including the requirement to file a capital plan for the FDIC’s approval and dividend restrictions as well as other discretionary actions by the regulator.

The FDIC is required, with some exceptions, to appoint a receiver or conservator for an insured state bank if that bank is “critically undercapitalized.” For this purpose, “critically undercapitalized” means having a ratio of tangible capital to total assets of less than 2%. The FDIC may also appoint a conservator or receiver for a state bank on the basis of the institution’s financial condition or upon the occurrence of certain events, including:

·

insolvency, or when the assets of the bank are less than its liabilities to depositors and others;

·

substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices;

·

existence of an unsafe or unsound condition to transact business;

·

likelihood that the bank will be unable to meet the demands of its depositors or to pay its obligations in the normal course of business; and

·

insufficient capital, or the incurring or likely incurring of losses that will deplete substantially all of the institution’s capital with no reasonable prospect of replenishment of capital without federal assistance.

Activity Restrictions on State-Chartered Banks. Federal law and FDIC regulations generally limit the activities and investments of state-chartered Federal Deposit Insurance Corporation-insured banks and their subsidiaries to those

permissible for national banks and their subsidiaries, unless such activities and investments are specifically exempted by law or consented to by the Federal Deposit Insurance Corporation.

Before making a new investment or engaging in a new activity that is not permissible for a national bank or otherwise permissible under federal law or the FDIC regulations, an insured bank must seek approval from the FDIC to make such investment or engage in such activity. The FDIC will not approve the activity unless the bank meets its minimum capital requirements and the FDIC determines that the activity does not present a significant risk to the DIF. Certain activities of subsidiaries that are engaged in activities permitted for national banks only through a “financial subsidiary” are subject to additional restrictions.

Federal law permits a state-chartered savings bank to engage, through financial subsidiaries, in any activity in which a national bank may engage through a financial subsidiary and on substantially the same terms and conditions. In general, the law permits a national bank that is well-capitalized and well-managed to conduct, through a financial subsidiary, any activity permitted for a financial holding company other than insurance underwriting, insurance investments, real estate investment or development or merchant banking. The total assets of all such financial subsidiaries may not exceed the lesser of 45% of the bank’s total assets or $50 million. The bank must have policies and procedures to assess the financial subsidiary’s risk and protect the bank from such risk and potential liability, must not consolidate the financial subsidiary’s assets with the bank’s and must exclude from its own assets and equity all equity investments, including retained earnings, in the financial subsidiary. State-chartered savings banks may retain subsidiaries in existence as of March 11, 2000 and may engage in activities that are not authorized under federal law. Although Magyar Bank meets all conditions necessary to establish and engage in permitted activities through financial subsidiaries, it has not yet determined to engage in such activities.

Federal Home Loan Bank System. Magyar Bank is a member of the Federal Home Loan Bank system, which consists of eleven regional federal home loan banks, each subject to supervision and regulation by the Federal Housing Finance Board. The federal home loan banks provide a central credit facility primarily for member thrift institutions as well as other entities involved in home mortgage lending. Magyar Bank, as a member of the FHLBNY, is required to purchase and hold shares of capital stock in the FHLBNY in specified amounts.

As of September 30, 2021,2022, Magyar Bank was in compliance with these requirements.

Enforcement. The Federal Deposit Insurance Corporation has extensive enforcement authority over insured savings banks, including Magyar Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease and desist orders and remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and to unsafe or unsound practices.

Deposit Insurance. The Dodd-Frank Act permanently increasedDeposit Insurance Fund of the Federal Deposit Insurance Corporation insures deposits at Federal Deposit Insurance Corporation insured financial institutions such as Magyar Bank generally up to a maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per separately insured depositor.

 

The FDIC’sUnder the Federal Deposit Insurance Corporation’s risk-based assessment system, isinsured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other risk factors. Rates are based on each institution’s risk category and certain specified risk adjustments. Institutions deemed to be less risky pay lower rates while institutions deemed riskier pay higher rates. Assessment rates (inclusive of possible adjustments) currently range from 2 1/2 to 45 basis points of each institution’s total assets less tangible capital,capital. The Federal Deposit Insurance Corporation may increase or decrease the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and rangescomment rulemaking. The Federal Deposit Insurance Corporation’s current system represents a change, required by the Dodd-Frank Act, from 1.5 to 40 basis points. Assessments for institutionsits prior practice of less than $10 billion of assets are basedbasing the assessment on financial measures and supervisory ratings derived from statistical modeling estimating thean institution’s probability of failure over a three-year period.deposits.

 

In June 2020, the FDIC issued a final rule that mitigates the deposit insurance assessment effects of participating in certain COVID-19 liquidity facilities. The FDIC will generally remove the effect of PPP lending in calculating an institution’s deposit insurance assessment. The final rule also provides an offset to an institution’s total assessment amount for the increase in its assessment base attributable to participation in the PPP.

Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The Bank does not believe that it is taking or is subject to any action, condition or violation that could lead to termination of its deposit insurance.

 

Transactions with Affiliates of Magyar Bank. Magyar Bank’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and its implementing Regulation W promulgated by the Board of Governors of the Federal Reserve System. An affiliate is a company that controls, is controlled by, or is under common control with an insured depository institution such as Magyar Bancorp, Inc..Inc. In general, loan transactions between an insured depository institution and its affiliates are subject to certain quantitative and collateral requirements. In this regard, transactions between an insured depository institution and its affiliates are limited to 10% of the institution’s unimpaired capital and unimpaired surplus for transactions with any one affiliate and 20% of unimpaired capital and unimpaired surplus for transactions in the aggregate with all affiliates. Collateral of specific types and in specified amounts ranging from 100% to 130% of the amount of the transaction must usually be provided by affiliates in order to receive loans from the savings association. In addition, transactions with affiliates must be consistent with safe and sound banking practices, not involve low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates. Magyar Bank is in compliance with these requirements.

Prohibitions Against Tying Arrangements. Banks are subject to the prohibitions of 12 U.S.C. Section 1972 on certain tying arrangements. A depository institution is prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.

Community Reinvestment Act and Fair Lending Laws. All FDIC-insured institutions have a responsibility under the Community Reinvestment Act (“CRA”) and related regulations to help meet the credit needs of their communities, including low- and moderate-income neighbourhoods. In connection with its examination of a state chartered savings bank, the FDIC is required to assess the institution’s record of compliance with the CRA. Among other things, the current CRA regulations replace the prior process-based assessment factors with a new evaluation system that rates an institution based on its actual performance in meeting community needs. In particular, the current evaluation system focuses on three tests:

·

a lending test, to evaluate the institution’s record of making loans in its service areas;

·

an investment test, to evaluate the institution’s record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and

·

a service test, to evaluate the institution’s delivery of services through its service channels.

An institution’s failure to comply with the provisions of the CRA could, at a minimum, result in regulatory restrictions on its activities. We received an “Outstanding” CRA rating in our most recently completed federal examination, which was conducted by the FDIC in 2019.2022.

In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the FDIC, as well as other federal regulatory agencies and the Department of Justice.

 

Consumer Protection. Magyar Bank and Magyar Bancorp are subject to federal and state laws designed to protect consumers and prohibit unfair, deceptive or abusive business practices, including the Equal Credit Opportunity Act, Fair Housing Act, Home Ownership Protection Act, Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”), the Gramm-Leach Bliley Act, the Truth in Lending Act (“TILA”), the CRA, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the National Flood Insurance Act and various state law counterparts. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must interact with clients when taking deposits, making loans, collecting loans and providing other services. Further, the Consumer Financial Protection Bureau also has a broad mandate to prohibit unfair or deceptive acts and practices and is specifically empowered to require certain disclosures to consumers and draft model disclosure forms. Failure to comply with consumer protection laws and regulations can subject financial institutions to enforcement actions, fines and other penalties. The failure to comply with these laws could result in enforcement actions by the federal banking agencies, as well as other federal regulatory agencies and the Department of Justice.

Mortgage Reform. The Dodd-Frank Act prescribes certain standards that mortgage lenders must consider before making a residential mortgage loan, including verifying a borrower’s ability to repay such mortgage loan, and allows borrowers to assert violations of certain provisions of TILA as a defense to foreclosure proceedings. Under the Dodd-Frank Act, prepayment penalties are prohibited for certain mortgage transactions and creditors are prohibited from financing insurance policies in connection with a residential mortgage loan or home equity line of credit. In addition, the Dodd-Frank Act prohibits mortgage originators from receiving compensation based on the terms of residential mortgage loans and

generally limits the ability of a mortgage originator to be compensated by others if compensation is received from a consumer. The Dodd-Frank Act requires mortgage lenders to make additional disclosures prior to the extension of credit, and in each billing statement, for negative amortization loans and hybrid adjustable-rate mortgages. The Economic Growth Act included provisions that ease certain requirements related to mortgage transactions for certain institutions with less than $10 billion in total consolidated assets.

Privacy Regulations. Federal regulations generally require that Magyar Bank disclose its privacy policy, including identifying with whom it shares a customer’s “non-public personal information,” to customers at the time of establishing the customer relationship and annually thereafter. In addition, Magyar Bank is required to provide its customers with the ability to “opt-out” of having their personal information shared with unaffiliated third parties and not to disclose account numbers or access codes to non-affiliated third parties for marketing purposes. Except as otherwise required or permitted by law, Magyar Bank is prohibited from disclosing such information. Magyar Bank currently has a privacy protection policy in place and believes that such policy is in compliance with the regulations.

 

Loans to a Bank’s Insiders

 

Federal Regulation. A bank’s loans to its executive officers, directors, any owner of 10% or more of its stock (each, an insider) and any of certain entities affiliated with any such person (an insider’s related interest) are subject to the conditions and limitations imposed by Section 22(h) of the Federal Reserve Act and its implementing regulations. Under these restrictions, the aggregate amount of the loans to any insider and the insider’s related interests may not exceed the loans-to-one-borrower limit applicable to national banks, which is comparable to the loans-to-one-borrower limit applicable to Magyar Bank’s loans. See “New Jersey Banking Regulation—Loans-to-One Borrower Limitations.” All loans by a bank to all insiders and insiders’ related interests in the aggregate may not exceed the bank’s unimpaired capital and unimpaired surplus. With certain exceptions, loans to an executive officer, other than loans for the education of the officer’s children and certain loans secured by the officer’s residence, may not exceed the lesser of (1) $100,000 or (2) the greater of $25,000 or 2.5% of the bank’s unimpaired capital and surplus. Federal regulation also requires that any proposed loan to an insider or a related interest of that insider be approved in advance by a majority of the Board of Directors of the bank, with any interested directors not participating in the voting, if such loan, when aggregated with any existing loans to that insider and the insider’s related interests, would exceed either (1) $250,000 or (2) the greater of $25,000 or 5% of the bank’s unimpaired capital and surplus. Generally, such loans must be made on substantially the same terms as, and follow credit underwriting procedures that are not less stringent than, those that are prevailing at the time for comparable transactions with other persons.

 

An exception is made for extensions of credit made pursuant to a benefit or compensation plan of a bank that is widely available to employees of the bank and that does not give any preference to insiders of the bank over other employees of the bank.

 

In addition, federal law prohibits extensions of credit to a bank’s insiders and their related interests by any other institution that has a correspondent banking relationship with the bank, unless such extension of credit is on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavourable features.

 

New Jersey Regulation. Provisions of the New Jersey Banking Act impose conditions and limitations on the liabilities to a savings bank of its directors and executive officers and of corporations and partnerships controlled by such persons, that are comparable in many respects to the conditions and limitations imposed on the loans and extensions of credit to insiders and their related interests under federal law, as discussed above. The New Jersey Banking Act also provides that a savings bank that is in compliance with federal law is deemed to be in compliance with such provisions of the New Jersey Banking Act.

 

Federal Reserve System

 

Federal Reserve Board regulations require all depository institutions to maintain reserves at specified levels against their transaction accounts (primarily NOW and regular checking accounts). At September 30, 2021,2022, Magyar Bank was in compliance with the Federal Reserve Board’s reserve requirements. Savings banks, such as Magyar Bank, are authorized to borrow from the Federal Reserve Bank “discount window.” Magyar Bank is deemed by the Federal Reserve Board to be

generally sound and thus is eligible to obtain secondary credit from its Federal Reserve Bank. Generally, secondary credit is extended on a very short-term basis to meet the liquidity needs of the institution. Loans must be secured by acceptable collateral and carry a rate of interest above the Federal Open Market Committee’s federal funds target rate.

 

The USA PATRIOT Act

 

The USA PATRIOT Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. The USA PATRIOT Act also requires the federal banking agencies to take into consideration the effectiveness of controls designed to combat money laundering activities in determining whether to approve a merger or other acquisition application of a member institution. Accordingly, if we engage in a merger or other acquisition, our controls designed to combat money laundering would be considered as part of the application process. We have established policies, procedures and systems designed to comply with these regulations.

 

Sarbanes-Oxley Act of 2002

 

The Sarbanes-Oxley Act of 2002 is intended to improve corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. We have policies, procedures and systems designed to comply with these regulations, and we review and document such policies, procedures and systems to ensure continued compliance with these regulations.

 

Holding Company Regulation

 

Federal Regulation. Magyar Bancorp, Inc. is regulated as a bank holding company. Bank holding companies are subject to examination, regulation and periodic reporting under the Bank Holding Company Act, as administered by the Federal Reserve Board (“FRB”). Bank holding companies are generally subject to consolidated capital requirements established by the FRB. Bank holding companies under $3 billion in consolidated assets remain exempt from consolidated regulatory capital requirements, unless the FRB determines otherwise in particular cases.

 

Regulations of the FRB provide that a bank holding company must serve as a source of strength to any of its subsidiary banks and must not conduct its activities in an unsafe or unsound manner. The Dodd-Frank Act codified the source of strength policy and requires the promulgation of implementing regulations. Under the prompt corrective action provisions of the Dodd-Frank Act, a bank holding company parent of an undercapitalized subsidiary bank would be directed to guarantee, within limitations, the capital restoration plan that is required of such an undercapitalized bank. See “Federal Banking Regulation—Prompt Corrective Action.” If the undercapitalized bank fails to file an acceptable capital restoration plan or fails to implement an accepted plan, the FRB may prohibit the bank holding company parent of the undercapitalized bank from paying any dividend or making any other form of capital distribution without the prior approval of the FRB.

 

As a bank holding company, Magyar Bancorp, Inc. is required to obtain the prior approval of the FRB to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior FRB approval is required for Magyar Bancorp, Inc. to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after giving effect to such acquisition, it would, directly or indirectly, own or control more than 5% of any class of voting shares of such bank or bank holding company.

A bank holding company is required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, will be equal to 10% or more of the company’s consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, FRB order or directive, or any condition imposed by, or written agreement with, the FRB. Such notice and approval is not required for a bank holding company that would be treated as “well capitalized” under applicable regulations of the FRB, that has received a composite “1” or “2” rating, as well as a “satisfactory” rating for management, at its most recent bank holding company inspection by the FRB, and that is not the subject of any unresolved supervisory issues.

 

In addition, a bank holding company that does not elect to be a financial holding company under federal regulation, is generally prohibited from engaging in, or acquiring direct or indirect control of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the FRB to be so closely related to banking or managing or controlling banks as to be permissible. Some of the principal activities that the FRB has determined by regulation to be so closely related to banking as to be permissible are:

 

·

making or servicing loans;

·

performing certain data processing services;

·

providing discount brokerage services, or acting as fiduciary, investment or financial advisor;

·

leasing personal or real property;

·

making investments in corporations or projects designed primarily to promote community welfare; and

·

acquiring a savings and loan association.

Bank holding companies that elect to be a financial holding company may engage in activities that are financial in nature or incident to activities which are financial in nature, including investment banking and insurance underwriting. Magyar Bancorp, Inc. has not elected to be a financial holding company, although it may seek to do so in the future. Bank holding companies may elect to become a financial holding company if:

·

each of its depository institution subsidiaries is “well capitalized;”

·

each of its depository institution subsidiaries is “well managed;”

·

each of its depository institution subsidiaries has at least a “satisfactory” Community Reinvestment Act rating at its most recent examination; and

·

the bank holding company has filed a certification with the FRB stating that it elects to become a financial holding company.

Under federal law, depository institutions are liable to the FDIC for losses suffered or anticipated by the FDIC in connection with the default of a commonly controlled depository institution or any assistance provided by the FDIC to such an institution in danger of default. This law would be applicable potentially to Magyar Bancorp, Inc. if it ever acquired as a separate subsidiary a depository institution in addition to Magyar Bank.

 

New Jersey Regulation. Under the New Jersey Banking Act, a company owning or controlling a savings bank is regulated as a bank holding company. The New Jersey Banking Act defines the terms “company” and “bank holding company” as such terms are defined under the BHCA. Each bank holding company controlling a New Jersey-chartered bank or savings bank must file certain reports with the Commissioner and is subject to examination by the Commissioner.

Acquisition of Magyar Bancorp, Inc. Under federal law and under the New Jersey Banking Act, no person may acquire control of Magyar Bancorp, Inc. without first obtaining approval of such acquisition of control by the FRB and the Commissioner.

Federal Securities Laws. Magyar Bancorp, Inc. common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Magyar Bancorp, Inc. is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

 

 

ITEM 1A.

Risk Factors

 

In addition to factors discussed in the description of our business and elsewhere in this report, the following are factors that could adversely affect our future results of operations and financial condition.

 

Economic and Market Area

Inflation can have an adverse impact on our business and on our customers.

Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the value of money. Recently, there have been market indicators of a pronounced rise in inflation and the Federal Reserve Board has indicated its intention to raise certain benchmark interest rates in an effort to combat inflation. As inflation increases and market interest rates rise, the value of our investment securities, particularly those with longer maturities, would decrease, although this effect can be less pronounced for floating rate instruments. In addition, inflation generally increases the cost of goods and services we use in our business operations, such as electricity and other utilities, which increases our noninterest expenses. Furthermore, our customers are also affected by inflation and the rising costs of goods and services used in their households and businesses, which could have a negative impact on their ability to repay their loans with us.

The COVID-19 Pandemic Has and Will Continue to Pose Risks and Could Harm Our Business, Results of Operations and Prospects.

 

The COVID-19 pandemic is having an adverse impact on the Company, its customers and the communities it serves. Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on the business of the Company, its customers, employees and third-party service providers. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened in an efficient manner. Additionally, the responses of various governmental and

nongovernmental authorities to curtail business and consumer activities in an effort to mitigate the pandemic will have material long-term effects on the Company and its customers which are difficult to quantify in the near-term or long-term.

 

As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, the Company is subject to the following risks, any of which could have a material, adverse effect on the business, financial condition, liquidity, and results of operations of the Company:

 

•

risks to the capital markets that may impact the performance of the investment securities portfolio of the Company, as well as limit our access to capital markets and other funding sources;

 

•

effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating the companies’ financial reporting and internal controls;

 

•

declines in demand for loans and other banking services and products, as well as a decline in the credit quality of our loan portfolio, owing to the effects of COVID-19 in the markets served by the Company;

 

•

if the economy is unable to substantially reopen or reopen in an efficient manner, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

 

•

collateral for loans, especially real estate, may continue to decline in value, which could cause loan losses to increase;

 

•

allowance for loan losses may increase if borrowers experience financial difficulties, which will adversely affect net income;

 

•

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments;

 

•

as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on assets may decline to a greater extent than the decline in cost of interest-bearing liabilities, reducing net interest margin and spread and reducing net income;

 

•

cyber security risks are increased as the result of an increase in the number of employees working remotely;

 

•

declines in demand resulting from adverse impacts of the disease on businesses deemed to be “non-essential” by governments in the markets served by the Company; and

 

•

increasing or protracted volatility in the price of the Company’s common stock.

A Worsening of Economic Conditions Could Reduce Demand for Our Products and Services and/or Result in Increases in Our Level of Non-performing Loans, Which Could Have an Adverse Effect on Our Results of Operations.

 

Unlike larger financial institutions that are more geographically diversified, our profitability depends primarily on the general economic conditions in New Jersey and the greater New York metropolitan area. Local economic conditions have a significant impact on our commercial real estate and construction and consumer loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans. Almost all of our loans are to borrowers located in or secured by collateral located in New Jersey and the New York metropolitan area.

 

In addition, the COVID-19 pandemic is having an adverse impact on the Company, its customers and the communities it serves. The adverse effect of the COVID-19 pandemic on the Company, its customers and the communities

where it operates may adversely affect the Company’s business, results of operations and financial condition for an indefinite period of time.

 

A deterioration in economic conditions could result in the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations:

 

•

demand for our products and services may decline;

 

•

loan delinquencies, problem assets and foreclosures may increase;

 

•

collateral for loans, especially real estate, may decline in value, in turn reducing customers’ future borrowing power, and reducing the value of assets and collateral associated with existing loans;

 

•

the value of our securities portfolio may decline; and

 

•

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.

Moreover, a significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, unemployment or other factors beyond our control could further impact these local economic conditions and could further negatively affect the financial results of our banking operations. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

 

Strong Competition Within Our Market Area May Limit Our Growth and Profitability.

 

Competition in the banking and financial services industry is intense. In our market area, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Some of our competitors have substantially greater resources and lending limits than we, have greater name recognition and market presence that benefit them in attracting business, and offer certain services that we do not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively than we do. Our profitability depends upon our continued ability to successfully compete in our market area. The greater resources and deposit and loan products offered by some of our competitors may limit our ability to increase our interest-earning assets. For additional information see “Business of Magyar Bank-Competition.”

 

We Are a Community Bank and Our Ability to Maintain Our Reputation is Critical to the Success of Our Business. The Failure to do so May Adversely Affect Our Performance.

 

We are a community bank and our reputation is one of the most valuable assets of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our market area. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers. If our reputation is negatively affected by the actions of our employees, by our inability to conduct our operations in a manner that is appealing to current or prospective customers or otherwise, our business and operating results may be materially adversely affected.

 

Interest Rate and Asset Quality

 

The reversal of the historically low interest rate environment may adversely affect our net interest income and profitability.

The Federal Reserve Board decreased benchmark interest rates significantly, to near zero, in response to the COVID-19 pandemic. The Federal Reserve Board is reversing its policy of near zero interest rates given its concerns over inflation. In recent periods, market interest rates have risen in response to the Federal Reserve Board’s recent rate increases. As discussed below, the increase in market interest rates could have an adverse effect on our net interest income and profitability.

Changes in Interest Rates May Hurt Our Profits and Asset Values.

Our earnings largely depend on our net interest income, which could be negatively affected by changes in interest rates. Net interest income is the difference between:

 

·

the interest income we earn on our interest-earning assets, such as loans and securities; and

·

the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings.

 

The rates we earn on our assets and the rates we pay on our liabilities are generally fixed for a contractual period of time. While we have taken steps to attempt to reduce our exposure to increases in interest rates, historically our liabilities generally have shorter contractual maturities than our assets. This imbalance can create significant earnings volatility, because market interest rates change over time. In a period of rising interest rates, the interest income earned on our assets may not increase as rapidly as the interest paid on our liabilities. Likewise, in a period of falling interest rates, the interest expense

paid on our liabilities may not decrease as rapidly as the interest income received on our assets. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Management of Market Risk.”

 

In addition, changes in interest rates can affect the average life of loans and mortgage-backed securities. A reduction in interest rates causes increased prepayments of loans and mortgage-backed securities as borrowers tend to refinance their debt to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest the funds from faster prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities. Additionally, increases in interest rates may decrease loan demand and/or make it more difficult for borrowers to repay adjustable-rate loans.

 

Changes in interest rates also affect the current market value of our interest-earning securities portfolio. Generally, the value of securities moves inversely with changes in interest rates. At September 30, 2021,2022, the fair value of our total securities portfolio was $70.2$89.1 million. The unrealized net loss on securities totaled $1.0$13.7 million on a pre-tax basis at September 30, 2021.2022.

We evaluate interest rate sensitivity using models that estimate the change in Magyar Bank’s net interest income over a range of interest rate scenarios. At September 30, 2021,2022, in the event of an immediate 200 basis point increase in interest rates, the model projects that we would experience a $895,000,$212,000, or 3.5%0.7%, increasedecrease in net interest income in the first year following the change in interest rates, and a $1.8$1.1 million, or 7.2%3.4%, increase in net interest income in the second year following the change in interest rates. At September 30, 2021,2022, in the event of an immediate 100200 basis point decrease in interest rates, the model projects that we would experience a $1.1 million,$946,000, or 4.5%3.3%, decrease in net interest income in the first year following the change in interest rates, and a $1.7$2.7 million, or 7.0%8.6%, decrease in net interest income in the second year following the change in interest rates.

At September 30, 2021,2022, our available-for-sale securities portfolio at fair value totaled $12.9$9.2 million, which consisted entirely of mortgage-backed securities. To the extent interest rates decrease and the value of our available-for-sale portfolio increases, our stockholders’ equity will be affected accordingly.

Because We Intend to Continue our Emphasis on the Origination of Commercial Business Loans and Commercial Real Estate Loans, Our Lending Risk Has Increased in Recent Years and May Increase in Future Years.

At September 30, 2021,2022, our portfolio of commercial businessreal estate and commercial real estatebusiness loans totaled $377.5 million, or 60.0% of our total loans, compared to $349.6 million (including $25.1 million in PPP loans), or 58.8% of our total loans compared toat September 30, 2021 and $349.1 million (including $56.0 million in PPP loans), or 57.1% of our total loans at September 30, 2020 and $281.3 million, or 53.8% of our total loans at September 30, 2019.2020. It is our intent to continue to emphasize the origination of commercial business and commercial real estate loans. Commercial business and commercial real estate loans generally have more risk than one-to four-family residential mortgage loans. At September 30, 2021, our2022, there were no non-performing commercial business and commercial real estate and commercial business loans werecompared with $2.4 million and $3.7 million, respectively, at September 30, 2021 and 2020.2021.

Because the repayment of commercial business and commercial real estate loans depends on the successful management and operation of the borrower’s properties or related businesses, repayment of these loans has been and may continue to be affected by adverse conditions in the real estate market or the local economy. Further, these loans typically have larger loan balances, and several of our borrowers have more than one commercial business and commercial real estate loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan. Finally, if we foreclose on a commercial business or commercial real estate loan, our holding period for the collateral, if any, typically is longer than for one- to four-family residential mortgage loans because there are fewer potential purchasers of the collateral. Because we plan to continue to emphasize the origination of these loans, it may be necessary to

increase our allowance for loan losses because of the increased credit risk associated with these types of loans. Any increase to our allowance for loan losses would adversely affect our earnings.

If Our Allowance for Loan Losses is Not Sufficient to Cover Actual Loan Losses, Our Earnings Could Decrease.

Our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, requiring additions to our allowance, which could materially decrease our net income. The allowance for loan losses increased by $1.7 million$358,000 during the year ended September 30, 20212022 to $8.1$8.4 million from $6.4$8.1 million for the year ended September 30, 2020.2021. The increases were attributable to netthe growth in non-PPP loansloan receivable, which increased by $34.3 million to $628.9 million at September 30, 2022 from $594.6 million at September 30, 2021, and higher adjustments to the historical loss factors for economic conditions relating to the COVID-19 pandemic.conditions. The allowance for loan losses as a percentage of non-performing loans increased to 297.5% at September 30, 2022 compared with 99.0% at September 30, 2021 compared with 65.8% at September 30, 2020.2021. At September 30, 20212022 our allowance for loan losses as a percentage of total loans was 1.36%1.34%, compared with 1.05%1.36% at September 30, 2020.

2021.

Future increases in the allowance for loan losses may be necessary based on possible future increases in total loans receivable, increases in non-performing loans and charge-offs, deterioration of collateral values securing impaired real estate loans, and deterioration of the current economic environment. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. Based on this review, we believe our allowance for loan losses is adequate to absorb losses in our loan portfolio as of September 30, 2021.2022.

Bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities will have a material adverse effect on our financial condition and results of operations.

The Financial Accounting Standards Board has adopted a new accounting standard that is referred to as Current Expected Credit Loss, or CECL. The implementation of CECL has been delayed for smaller reporting companies, such as the Company, until January 2023.2023 (effective October 1, 2023 for the Company). CECL will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses. This will change the current method of providing allowances for loan losses that are probable, which may require us to increase our allowance for loan losses, and to greatly increase the types of data we will need to collect and review to determine the appropriate level of the allowance for loan losses. Any increase in our allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses may have a material adverse effect on our financial condition and results of operations.

 

Regulatory Matters

We Operate in a Highly Regulated Environment and May Be Adversely Affected by Changes in Laws and Regulations.

 

Magyar Bank is subject to extensive regulation, supervision and examination by the NJDBI, its chartering authority, and by the Federal Deposit Insurance Corporation, which insures Magyar Bank’s deposits. As a bank holding company, Magyar Bancorp, Inc. is subject to regulation and supervision by the Federal Reserve Board. Such regulation and supervision govern the activities in which financial institutions and their holding companies may engage and are intended primarily for the protection of the federal deposit insurance fund and depositors. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operations of financial institutions, the classification of assets by financial institutions and the adequacy of financial institutions’ allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, could have a material impact on Magyar Bank and Magyar Bancorp, Inc.

 

Magyar Bank’s operations are also subject to extensive regulation by other federal, state and local governmental authorities, and are subject to various laws and judicial and administrative decisions that impose requirements and restrictions on operations. These laws, rules and regulations are frequently changed by legislative and regulatory authorities. There can be no assurance that changes to existing laws, rules and regulations, or any other new laws, rules or regulations, will not be adopted in the future, which could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or prospects.

 

Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or Other Laws and Regulations Could Result in Fines or Sanctions.

The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions, including restrictions on conducting acquisitions or establishing new branches. During the last year, several banking institutions have received large fines for non-compliance with these laws and regulations. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, these policies and procedures may not be effective in preventing violations of these laws and regulations.

 

Security

System Failure or Breaches of Our Network Security Could Subject Us to Increased Operating Costs as well as Litigation and Other Liabilities.

The computer systems and network infrastructure we and our third-party service providers use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures designed to prevent such damage, our security measures may not be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on our financial condition and results of operations.

It is possible that a significant amount of time and money may be spent to rectify the harm caused by a breach or hack. While we have general liability insurance, there are limitations on coverage as well as dollar amount. Furthermore, cyber incidents carry a greater risk of injury to our reputation. Finally, depending on the type of incident, banking regulators can impose restrictions on our business and consumer laws may require reimbursement of customer loss.

 

Risks Associated with Cyber-Security Could Negatively Affect Our Earnings.

 

The financial services industry has experienced an increase in both the number and severity of reported cyber-attacks aimed at gaining unauthorized access to bank systems as a way to misappropriate assets and sensitive information, corrupt and destroy data, or cause operational disruptions. We have established policies and procedures to prevent or limit the impact of security breaches, but such events may still occur or may not be adequately addressed if they do occur. Although we rely on security safeguards to secure our data, these safeguards may not fully protect our systems from compromises or breaches.

 

We also rely on the integrity and security of a variety of third party processors, payment, clearing and settlement systems, as well as the various participants involved in these systems, many of which have no direct relationship with us. Failure by these participants or their systems to protect our customers' transaction data may put us at risk for possible losses due to fraud or operational disruption.

 

Our customers are also the target of cyber-attacks and identity theft. Large scale identity theft could result in customers' accounts being compromised and fraudulent activities being performed in their name. We have implemented certain safeguards against these types of activities but they may not fully protect us from fraudulent financial losses.

 

The occurrence of a breach of security involving our customers' information, regardless of its origin, could damage our reputation and result in a loss of customers and business and subject us to additional regulatory scrutiny, and could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.

 

 

ITEM 1B.

Unresolved Staff Comments

 

Not required for smaller reporting companies.

ITEM 2.

Properties

 

The following table provides certain information with respect to our offices as of September 30, 2021:2022:

 

	Leased or	Original Year	Year of
Location	Owned	Leased or Acquired	Lease Expiration
Main Office:
400 Somerset Street	Owned	2005	-
New Brunswick, New Jersey, 08901
Full - Service Branches:
3050 State Route  27	Owned	1969	-
Kendall Park, New Jersey, 08824
596 Milltown Road	Leased	2002	2031
North Brunswick, New Jersey, 08902
1000 Route 202 South	Leased	2006	2031
Branchburg, New Jersey, 08876
475 North Bridge Street	Leased	2010	2025
Bridgewater, New Jersey, 08807
1167 Inman Avenue	Leased	2011	2026
Edison, New Jersey, 08820
1199 Amboy Avenue	Leased	2017	2027
Edison, New Jersey, 08837

	Leased or	Original Year	Year of
Location	Owned	Leased or Acquired	Lease Expiration
Main Office:
400 Somerset Street	Owned	2005	—
New Brunswick, New Jersey, 08901
Full - Service Branches:
3050 State Route  27	Owned	1969	—
Kendall Park, New Jersey, 08824
596 Milltown Road	Leased	2002	2031
North Brunswick, New Jersey, 08902
1000 Route 202 South	Leased	2006	2031
Branchburg, New Jersey, 08876
475 North Bridge Street	Leased	2010	2025
Bridgewater, New Jersey, 08807
1167 Inman Avenue	Leased	2011	2026
Edison, New Jersey, 08820
1199 Amboy Avenue	Leased	2017	2027
Edison, New Jersey, 08837

 

The net book value of our premises, land and equipment was approximately $14.3$13.9 million and $14.7$14.3 million at September 30, 20212022 and 2020,2021, respectively.

 

For information regarding Magyar Bancorp, Inc.’s investment in mortgages and mortgage-related securities, see “Item 1. Business” herein.

 

 

ITEM 3.

Legal Proceedings

 

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

 

 

ITEM 4.

Mine Safety Disclosures

 

Not applicable.

 

 

PART II

 

 

ITEM 5.

Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

 

(a)

Our shares of common stock are traded on the NASDAQ Global Market under the symbol “MGYR.” The approximate number of holders of record of Magyar Bancorp, Inc.’s common stock as of September 30, 20212022 was 482.475. Certain shares of Magyar Bancorp, Inc. are held in “nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.

 

The Company has not historicallydeclared four dividends totaling $0.21 per share paid a dividend to stockholders. However, on November 16, 2021, the Company declared a one-time special dividend of $0.12 per common share, payable December 14, 2021, to common shareholders of record atduring the close of business on Novemberyear ended September 30, 2021.2022. In the future, the Company intends to consider adoptingcontinue to pay a regular cash dividend policy but no assurance can be given as to the timing of when or if any such regulardividend. In determining

whether and in what amount to pay a cash dividend, payments would commence.the Board will continue to take into account a number of factors, including capital requirements, our consolidated financial condition and results of operations, tax considerations, statutory and regulatory limitations and general economic conditions. No assurances can be given that cash dividends will continue to be paid or that, if paid, will not be reduced. For more information on regulatory restrictions regarding the payment of dividends, see “Item 1- Business- Supervision and Regulation- New Jersey Banking Regulation-Dividends.”

 

Other than its Employee Stock Ownership Plan,employee stock ownership plan, Magyar Bancorp, Inc. does not have any equity compensation plans that were not approved by stockholders. There were no stock options or shares of restricted stock available for issuanceThe following table sets forth information with respect to the Magyar Bancorp’s equity compensation plans at September 30, 2021plans.

		Number of securities to								Number of
		be issued upon exercise				Weighted				securities remaining
		of outstanding options				average exercise				available for
September 30, 2022		and rights				price				issuance under plan
Stock options			293,200			$	12.58				97,800
Shares of restricted stock			156,400				—				—
Total			449,600			$	—				97,800

 

(b)

The Company completed its second step conversion and related public stock offering on July 14, 2021. In the stock offering, the Company sold 3,910,000 shares of common stock at $10.00 per share in a subscription offering pursuant to a Registration Statement on Form S-1 (SEC File No. 333-254282), which was declared effective by the Securities and Exchange Commission on May 14, 2021. In addition, the Company issued 3,187,825 new shares of Company common stock in exchange for the 2,610,296 shares of common stock which were owned by shareholders other than Magyar Bancorp, MHC. As a result, the Company registered 7,098,070 shares pursuant to the Registration Statement. The subscription offering resulted in gross offering proceeds of approximately $39.1 million. The net offering proceeds (after payment of offering expenses) were approximately $37.4 million. From the net offering proceeds, the Company used $3.4 million to fund a loan to Magyar Bank’s employee stock ownership (which in turn used those funds to purchase 312,800 shares of common stock in the subscription offering), invested $18.7 million in Magyar Bank as additional capital, and retained $18.7 million for general corporate purposes. Keefe, Bruyette & Woods, Inc. served as marketing agent to the Company in connection with the subscription offering.Not applicable.

(c)	Share repurchases.

 

The Company completedannounced on July 21, 2022 that its firstBoard of Directors authorized a third stock repurchase program of 130,927 shares in November 2007 and announced in November 2007 a secondpursuant to which the Company intends to repurchase program of up to 5% of its publicly-held outstanding shares, or up to 354,891 shares. The timing of commonthe repurchases will depend on certain factors, including but not limited to, market conditions and prices, the Company's liquidity requirements and alternative uses of capital. Any repurchased shares will be held as treasury stock or 129,924and will be available for general corporate purposes. Under the third stock repurchase program, the company repurchased 352,697 shares under which 91,000through September 30, 2022, increasing its total treasury shares had been repurchased as of July 13, 2021to 465,693 at an average price of $8.41.September 30, 2022.

 

Under current federal regulations, subject to limited exceptions, the Company may not repurchase sharesThe following table reports information regarding repurchases 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 fiscal year ended September 30, 2021.2022.

 

										Remaining Number
		Total Number				Average				of Shares That
		of Shares				Price Paid				May be Purchased
Period		Purchased				Per Share				Under the Plan
July 1, 2022 through July 31, 2022			—			$	—				—
August 1, 2022 through August 31, 2022			8,748			$	12.13				346,143
September 1, 2022 through September 30, 2022			343,949			$	12.92				2,194
Total			352,697			$	12.90

 

ITEM 6.

[Reserved]

 

 

ITEM 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

Magyar Bancorp, Inc. (the “Company”) is a Delaware-chartered stock holding company whose most significant business activity is ownership of 100% of the common stock of Magyar Bank. Magyar Bank’s principal business is attracting retail deposits from the general public and investing those deposits, together with funds generated from operations, principal repayments on loans and securities and borrowed funds, into one-to four-family residential mortgage loans, multi-family and commercial real estate mortgage loans, home equity loans and lines of credit, commercial business loans and construction loans. Our results of operations depend primarily on our net interest income which is the difference between the interest we

earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our net interest income is primarily affected by the market interest rate environment, the shape of the U.S. Treasury yield curve, the timing of the placement of interest-earning assets and interest-bearing liabilities, and the prepayment rate on our mortgage-related assets. Other factors that may affect our results of operations are general and local economic and competitive conditions, government policies and actions of regulatory authorities.

 

During the year ended September 30, 2021,2022, the Company’s total assets grew $20.0$24.6 million, or 2.7%3.2%, to $774.0$798.5 million. The increase was attributable to a $25.6$34.5 million increase, or 56.8%5.9%, increase in investment securities and a $13.5to $619.8 million or 21.8%, increase in cash and cash equivalents, partially offset by a $17.8 million, or 3.0%, decrease in loans receivable, net of allowance for loan loss. Theof loss and a $30.3 million increase, or 42.9%, to $100.9 million in investment securities, partially offset by a $44.3 million decrease in cash and investments resulted from a $21.5 million increase in deposits during the year ended September 30, 2021 as well as a $30.9 million net reduction in PPP loan balancescash equivalents.

Stockholders’ equity increased $861,000, or 0.9%, to $25.1$98.5 million at September 30, 20212022 from $56.0 million at September 30, 2020. Stockholders’ equity increased $40.8 million, or 71.8%, to $97.6 million at September 30, 2021 from $56.9 million at September 30, 2020.2021. The increase in stockholders’ equity was primarily attributable to $37.4 million raised from the Company’s stock offering/second step conversion, net of offering costs, as well as the Company’s results of operations and for the year ended September 30, 2021.2022, partially offset by stock repurchases dividends paid and other comprehensive loss. On July 21, 2022, the Company announced a stock repurchase program of up to 5% of its outstanding shares of common stock, or 354,891 shares. The Company repurchased 352,697 shares at an average price of $12.90 per share through September 30, 2022, reducing outstanding shares to 6,745,128. In addition, during the year ended September 30, 2022, the Company paid dividends totaling $0.21 per share.

 

Total deposits increased $21.5$27.9 million, or 3.5%4.4%, to $639.8$667.7 million during the year ended September 30, 2022 from $639.8 million at September 30 2021. The growth in deposits during the twelve months ended September 30, 20212022 occurred in money market account balances, which increased $34.3 million, or 18.3%, to $222.2 million, in interest-bearing checking account balances, which increased $27.3 million, or 38.3% to $98.6 million, in non-interest checking account balances, which increased $18.4 million,$442,000, or 11.3%0.2%, to $182.0$182.4 million, and in savings account balances, which increased $6.8 million,$126,000, or 9.1%0.2%, to $81.7 million, and in interest-bearing checking account balances, which increased $5.9 million, or 9.0% to $71.3$81.9 million. Offsetting these increases was a $9.5$34.3 million, or 7.5%29.3%, decrease in certificates of deposit (including individual retirement accounts), to $116.9 million, and a $125,000, or 0.1%, decrease in money market account balances to $187.9$82.6 million.

 

The Company’s net income increased $3.9$1.8 million, or 179.5%29.4%, to $6.1$7.9 million during the year ended September 30, 20212022 compared with net income of $2.2$6.1 million for the year ended September 30, 2020.2021. The increase in net income was due to higher net interest and dividend income, lower provisions for loan losses, and higherlower non-interest income,expenses, partially offset by higherlower non-interest expenses.income.

 

Throughout fiscal 2022,2023, we expect to continue increasing our commercial real estate and commercial business loans while managing non-interest expenses in an effort to increase profitability of the Company.

 

 

Critical Accounting Policies

 

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

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

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

Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. We consider a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics,

geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates by management that may be susceptible to significant change based on changes in economic and real estate market conditions.

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

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

 

Deferred Income Taxes. The Company records income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities: (i) are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns; (ii) are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases; and (iii) are measured using enacted tax rates expected to apply in the years when those temporary differences are expected to be recovered or settled.

 

Deferred tax assets are likely to be realized and therefore do not have a valuation allowance.

 

 

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 September 30, 2021, we had modified 284 loans aggregating $150.9 million for the deferral of principal and/or interest payments. Of these loans, 56 loans totaling $28.1 million repaid their deferred payments in full and 227 loans aggregating $121.4 million had resumed making their contractual loan payments. One loan totaling $1.4 million was past its deferral period and delinquent at September 30, 2021. The Company was not deferring any additional loan payments due to the COVID-19 pandemic at September 30, 2021. Details with respect to loans with deferred payments as of September 30, 2021 and 2020 are as follows:

		Number of Loans				Balance				Weighted Average Interest Rate
September 30, 2021						(Dollars in  thousands)
One-to-four family residential real estate (1)			75			$	17,593				4.09%
Commercial real estate			122				95,847				4.69%
Construction			3				2,305				3.53%
Home equity lines of credit			6				896				4.33%
Commercial business			22				6,172				6.06%
Total			228			$	122,813				4.65%
September 30, 2020
One- to four-family residential real estate (1)			94			$	24,573				4.05%
Commercial real estate			145				115,358				4.76%
Construction			4				2,630				3.77%
Home equity lines of credit			8				1,238				4.24%
Commercial business			32				6,892				5.88%
Total			283			$	150,691				4.67%
(1) Includes home equity loans.

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 350 “First Draw” loans totaling $56.0 million through June 30, 2021 for which we received $2.0 million in origination fees from the SBA. These fees are being amortized over the contractual term of the loans, which is two

years for loans originated prior to June 4, 2020 and five years for loans originated June 5, 2020 or later. Through September 30, 2021, all First Draw loans totaling $56.0 million had been repaid.

On December 27, 2020 the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues (“Economic Aid Act”) was signed into law, extending the SBA’s authority to guarantee “Second Draw” PPP loans, under generally the same terms and conditions available under the First Draw program, through March 31, 2021, subsequently extended by the Paycheck Protection Program Extension Act of 2021 to May 31, 2021. In order to qualify for a Second Draw PPP loan, an applicant must have experienced a revenue reduction of at least 25% in 2020 relative to 2019. As of September 30, 2021, the Company originated 212 PPP loans totaling $35.3 million under the Economic Aid Act to its eligible customers, for which it received $1.5 million in origination fees from the SBA. These fees are being amortized over the contractual term of the loans, which is five years, or until the loan is repaid. The Economic Aid Act also expanded the eligible expenditures for which a business could use PPP proceeds for and provided for a simplified forgiveness application for PPP loans $150,000 or less. Through September 30, 2021, 101 loans totaling $10.2 million had been forgiven by the SBA, leaving 111 PPP loans totaling $25.1 million outstanding at September 30, 2021.

The Board of Governors of the Federal Reserve System created the Paycheck Protection Program Lending Facility (“PPPLF”) to facilitate lending by eligible financial institutions to small businesses under the PPP. Under the PPPLF, the Federal Reserve Bank of New York provided advances with a fixed interest rate of 0.35% to Magyar Bank on a non-recourse basis, taking PPP loans as collateral. In addition, the Federal Deposit Insurance Corporation allows Magyar Bank to neutralize the effect of PPP loans financed under the PPPLF on Tier 1 leverage capital ratios. The Bank repaid all $36.9 million in PPPLF advances to the Federal Reserve Bank during the year ended September 30, 2021 that were used to fund First Draw PPP loans. The Bank did not utilize the PPPLF to fund its Second Draw PPP loans.

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 September 30, 20212022 and September 30, 20202021

 

Total Assets. Total assets increased $20.0$24.6 million, or 2.7%3.2%, to $774.0$798.5 million during the year ended September 30, 20212022 compared with $754.0$774.0 million at September 30, 202.2021. The increasechange was attributable to a $25.6$34.5 million, or 56.8%5.9%, increase in investment securities and a $13.5 million, or 21.8%, increase in cash and cash equivalents, offset by a $17.8 million, or 3.0%, decrease in loans receivable, net of allowance for loan loss. Theof loss, to $619.8 million and a $30.3 million, or 42.9%, increase in investment securities to $100.9 million, partially offset by a $44.3 million decrease in cash and investments resulted from a $21.5 million increase in deposits during the year ended September 30, 2021 as well as a $30.9 million net reduction in PPP loan balancescash equivalents. Stockholders’ equity increased $861,000, or 0.9%, to $25.1$98.5 million at September 30, 20212022 from $56.0$97.6 million at September 30, 2020.2021.

 

Loans Receivable. Total loan receivable decreased $16.7increased $34.3 million, or 2.7%5.8%, to $628.9 million at September 30, 2022 from $594.6 million at September 30, 2021 from $611.32021. Growth occurred in commercial real estate loans, which increased $61.9 million, or 22.1%, to $342.8 million and in one-to four-family residential mortgage loans (including home equity lines of credit), which increased $12.1 million, or 5.5%, to $233.1 million. Offsetting these increases were decreases in commercial business loans, which decreased $34.0 million, or 49.5%, to $34.7 million, in construction loans, which decreased $5.1 million, or 25.2%, to $15.2 million and in other consumer loans, which decreased $621,000, or 16.6%, to $3.1 million. Included in the reduction of commercial business loans were the repayment of $25.1 million in PPP loans.

Total loans receivable at September 30, 2020. Total2022 were comprised of $342.8 million (54.5%) in commercial real estate loans, $214.4 million (34.1%) in one- to four- family residential mortgage loans, $34.7 million (5.5%) in commercial business loans, $15.2 million (2.4%) in construction loans, and $21.8 million (3.5%) in home equity lines of credit and other loans. For comparison, total loans receivable at September 30, 2021 were comprised of $280.8 million (47.2%) in commercial real estate loans, $203.0 million (34.2%) in one- to four- family residential mortgage loans, $68.7 million (11.6%) in commercial business loans (including $25.1 million in PPP loans), $20.4 million (3.4%) in construction loans, and $21.7 million (3.6%) in home equity lines of credit and other loans. Total loans receivable at September 30, 2020 were comprised of $248.1 million (40.6%) in commercial real estate loans, $210.4 million (34.4%) in one- to four- family residential mortgage loans, $101.0 million (16.5%) in commercial business loans (including $56.0 million in PPP loans), $28.2 million (4.6%) in construction loans, and $23.5 million (3.9%) in home equity lines of credit and other loans.

 

Total non-performing loans decreased $1.5$5.3 million, or 16.2%65.3%, to $2.8 million at September 30, 2022 from $8.2 million at September 30, 2021 from $9.7 million at September 30, 2020. At September 30, 2021 our OREO consisted of one commercial real estate property totaling $268,000 and one assemblage of approved real estate lots/land totaling $368,000.2021. The ratio of non-performing loans to total loans was 0.5% at September 30, 2022 compared to 1.4% at September 30, 2021 compared to 1.6% at September 30, 2020.

Once a loan is deemed non-performing, the value of the collateral securing the loan must be assessed, which is typically done by obtaining an updated third-party appraisal. To the extent that the current appraised value of collateral is insufficient to cover a collateral-dependent loan, the Company reduces the balance of the loan via a charge to the allowance for loan loss.2021.

 

Non-performingThere were no non-performing loans secured by one-to four-family residential properties, including home equity lines of credit and other consumer loans, increased $247,000, or27.3%, to $1.2 million at September 30, 2021 from $905,000 at September 30, 2020. Magyar Bank had begun foreclosure proceedings on the properties securing these loans2022, compared with $1.2 million at September 30, 2021. During the year ended September 30, 2021,2022, there were no charge-offs against the allowance for loan loss for residential real estate loans while $1,000 was recovered from prior year charge-offs.

 

Non-performingThere were no non-performing commercial real estate loans decreased $1.1 million, or 51.4%, toat September 30, 2022, compared with $1.1 million at September 30, 20212021. During the year ended September 30, 2022 there were no charge-offs against the allowance for loan loss and for commercial real estate loans while $53,000 was recovered from $2.2prior year charge-offs.

There were no non-performing commercial business loans at September 30, 2022, compared with $1.3 million at September 30, 2020.2021. During the year ended September 30, 2022 there were no charge-offs against the allowance for loan loss for commercial business loans and there were no recoveries from prior year charge-offs.

Non-performing construction loans decreased $1.7 million, or 38.1%, to $2.8 million at September 30, 2022 from $4.6 million at September 30, 2021. Magyar Bank had begun foreclosure proceedings on the properties securing these loans at September 30, 2021.2022. During the year ended September 30, 2021 there was one charge-off totaling $51,000 against the allowance for loan loss and no recoveries of prior year charge-offs.

Non-performing commercial business loans decreased $118,000, or 8.0%, to $1.3 million at September 30, 2021 from $1.5 million at September 30, 2020. Magyar Bank had begun foreclosure proceedings on the collateral securing the $1.3 million loan at September 30, 2021.During the year ended September 30, 2021, there were no charge-offs, but there were $96,000 in recoveries from a prior year charge-off.

Non-performing construction loans decreased $561,000, or 10.9%, to $4.6 million at September 30, 2021 from $5.1 million at September 30, 2020. Magyar Bank had begun foreclosure proceedings on the properties securing these loans at September 30, 2021. During the year ended September 30, 2021,2022, there were no charge-offs or recoveries on construction loans.

 

The ratio of non-performing loans and troubled debt restructurings to total loans receivable decreased to 0.53% at September 30, 2022 from 1.43% at September 30, 2021 from 1.63% at September 30, 2020.2021. The allowance for loan losses increased $1.7$358,000 to $8.4 million, toor 297.5% of non-performing loans at September 30, 2022 compared with $8.1 million, or 99.0% of non-performing loans, at September 30, 2021 compared with $6.4 million, or 65.8% of non-performing loans, at September 30, 2020.2021. Provisions for loan loss during the year ended September 30, 20212022 were $1.6 million$304,000 while net recoveries were $46,000,$54,000, compared with a provision of $1.7$1.6 million and net charge-offsrecoveries of $154,000$46,000 for the prior year period. The allowance for loan losses was 1.36%1.34% and 1.05%1.36% of gross loans outstanding at September 30, 20212022 and 2020,2021, respectively.

 

Investment Securities. Investment securities increased $25.6$30.3 million, or 56.8%42.9%, to $100.9 million at September 30, 2022 from $70.6 million at September 30, 2021 from $45.0 million at September 30, 2020.2021. Investment securities at September 30, 20212022 consisted of $52.8$64.3 million in mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises, $12.5$24.8 million in U.S. government-sponsored enterprise debt securities, $3.0$8.0 million in corporate notes, $2.0$3.5 million in municipal bonds and $242,000$224,000 in “private-label” mortgage-backed securities. There were no other-than-temporary-impairment charges for the Company’s investment securities for the year ended September 30, 2021.2022.

 

Securities available-for-sale decreased $1.6$3.7 million, or 11.2%28.6%, to $9.2 million at September 30, 2022 from $12.9 million at September 30, 2021 from $14.6 million at September 30, 2020.2021. The decrease was attributable to $6.9$1.9 million in principal repayments $5.0 million in bonds called, and unrealized losses of $293,000, partially offset by$1.7 million. There were no purchases totaling $10.6 millionof securities available-for-sale during the year ended September 30, 2021.2022.

 

Securities held-to-maturity increased $27.2$34.0 million, or 89.4%58.9%, to $91.6 million at September 30, 2022 from $57.7 million at September 30, 2021 from $30.4 million at September 30, 2020.2021. The increase was the result of $38.9$41.1 million in security purchases, partially offset by $9.7$7.0 million in principal repayments and $2.0 millionthe amortization of $112,000 in bonds callednet premiums paid during the year ended September 30, 2021.2022.

 

Bank-Owned Life Insurance. The cash surrender value of life insurance held for directors and officers of Magyar Bank increased $317,000,$3.4 million, or 2.3%23.6%, to $17.7 million at September 30, 2022 from $14.3 million at September 30, 2021 from $14.02021. The Company purchased new policies on officers of the Bank totaling $3.0 million at September 30, 2020. Theand recorded an increase was entirely due toin the increase in cash surrender value of the policies as the Company did not purchase any new bank-owned life insurance policiestotaling $372,000 during the yeartwelve months ended September 30, 2021.2022.

 

Other Real Estate Owned. OREO decreased $2.0 million,$355,000, or 75.5%55.8%, to $281,000 at September 30, 2022 from $636,000 at September 30, 2021 from $2.6 million at September 30, 2020. The decrease was due to the sale of fourtwo properties totaling $2.3 million, in addition to valuation allowances and other net reductions totaling $205,000. Offsetting these decreases were two additions totaling $547,000 during the year, both of which were sold.

year. The Company recorded $337,000 and $371,000 in valuation allowances against itsCompany’s OREO during the year ended September 30, 2021 and 2020, respectively, based on updated appraisals or executed contracts of sale. Further declines in real estate values may result in a chargewas reduced to expense in the future.

OREO at September 30, 2021 consisted of one commercial real estate property totaling $268,000 and an assemblage$281,000 that was under contract of approved real estate lots/land totaling $368,000. All of the properties are listed for sale. The Bank is determining the proper course of action for its OREO, which may include holding the properties until the real estate market improves, marketing the properties for individual sale or selling properties to an investor and/or developer.at September 30, 2022.

 

Deposits. Deposits, which include noninterest-bearing demand deposits, interest-bearing demand deposits, money market deposits, savings deposits and time deposits, are the primary source of the Company’s funds.  The Company offers a variety of products designed to attract and retain customers, with primary focus on building and expanding relationships.  The Company continues to focus on establishing relationships with business borrowers, seeking deposits as well as lending relationships.

 

Total deposits increased $21.5$27.9 million, or 3.5%4.4%, to $667.7 million at September 30, 2022 from $639.8 million at September 30, 2021 from $618.3 million at September 30, 2020.2021. The increase in deposits during the twelve month ended September 30, 20212022 occurred in money market account balances, which increased $34.3 million, or 18.3%, to $222.2 million, in interest-bearing checking account balances, which increased $27.3 million, or 38.3% to $98.6 million, in non-interest checking account balances, which increased $18.4 million,

$442,000, or 11.3%0.2%, to $182.0$182.4 million, and in savings account balances, which increased $6.8 million,$126,000, or 9.1%0.2%, to $81.7 million, and in interest-bearing checking account balances, which increased $5.9 million, or 9.0% to $71.3$81.9 million. Offsetting these increases was a $9.5$34.3 million, or 7.5%29.3%, decrease in certificates of deposit (including individual retirement accounts), to $116.9 million, and a $125,000, or 0.1%, decrease$82.6 million. Included in money market account balances to $187.9 million. Deposits accounted for 82.7%certificates of assets and 109.3% of net loans receivable at September 30, 2021 compared with 82.0% of assets and 102.5% of net loans receivable at September 30, 2020, respectively.

Commercial and consumer deposit inflows were higher during this period from PPP loan disbursements, government stimulus programs, lower spending and customers’ preferences for liquidity during the ongoing COVID-19 pandemic.

At September 30, 2021, the Company held $6.0 million in brokered certificates of deposit compared with $9.4 million at September 30, 2020. The $3.4 million decrease resulted from the repayment of $7.4 million in matured deposits, offset by one new $4.0 million during the year ended September 30,2022 and 2021.

 

The Company’s deposit strategy in 20212022 focused on growing its non-interest checking account balances and reducing the overall cost of its interest-bearing accountsliabilities to offset declines inrising market interest rates.

 

Borrowed Funds. Borrowings decreased $44.0$7.7 million, or 65.4%33.1%, to $15.6 million at September 30, 2022 from $23.4 million at September 30, 2021 from $67.4 million at September 30, 2020.2021. The decrease was primarily due to the repayment of all $36.9 million in Paycheck PPPLF advances to the Federal Reserve Bank during the year ended September 30, 2021 that were used to fund Round 1 PPP loans.maturing long-term FHLBNY advances decreased $7.1 million to $23.4 million at September 30, 2021 from $30.5 million at September 30, 2020 as deposit inflows were used to repay maturing term advances.

 

Stockholders’ Equity. Stockholders’ equity increased $40.8$861,000, or 0.9%, to $98.5 million or 71.8%, toat September 30, 2022 from $97.6 million at September 30, 2021 from $56.9 million at September 30, 2020.2021. The increase in stockholders’ equity was primarily attributable to $37.4 million raised from the Company’s stock offering/second step conversion, net of offering costs, as well as the Company’s results ofincome from operations totaling $7.9 million, partially offset by $4.5 million in share repurchases, $1.4 million in dividends paid, and for the year ended September 30, 2021.

$1.2 million in other comprehensive losses. The Company’s book value per share increased $3.98 during the year to $14.60 at September 30, 2022 from $13.76 at September 30, 2021, based on total equity of $97.6$98.5 million and 7,097,8256,745,128 shares outstanding. The Company’s book value per share was $9.78 at September 30, 2020, based on total equity of $56.9 million and 5,810,746 shares outstanding.

 

Comparison of Operating Results for the Years Ended September 30, 20212022 and 20202021

 

Net Income. The Company’s net income increased $3.9$1.8 million, or 179.5%29.4%, to $6.1$7.9 million during the year ended September 30, 20212022 compared with $2.2$6.1 million for the year ended September 30, 20202021 due to higher net interest and dividend income, lower provisions for loan losses, and higherlower non-interest income,expenses, partially offset by higherlower non-interest expenses.income.

 

Net Interest and Dividend Income. The primary source of the Company’s operating income is net interest and dividend income, which is the difference between interest and dividends earned on earning assets and fees earned on loans, and interest paid on interest-bearing liabilities.  The Company’s net interest and dividend income is affected by regulatory, economic and competitive factors that influence interest rates, loan demand, deposit flows and levels of nonperforming assets.

 

During the year ended September 30, 2021,2022, net interest and dividend income increased $4.2$1.4 million, or 19.5%5.6%, to $25.6$27.0 million compared to $21.4$25.6 million for the year ended September 30, 2020.2021. Interest and dividend income increased $1.6 million,$975,000, or 5.9%3.4%, to $29.5 million at September 30, 2022 from $28.5 million at September 30, 2021, while interest expense decreased $2.6 million,$457,000, or 46.7%15.5%, to $2.5 million at September 30, 2022 from $2.9 million.million at September 30, 2021. The Company’s net interest margin increased eight basis points to 3.61% for the year ended September 30, 2022 from 3.53% for the year ended September 30, 2021.

 

Average Balance Sheet. The following table presents certain information regarding our financial condition and net interest income for the years ended September 30, 2022, 2021 2020 and 2019.2020. The table presents the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown. We derived average balances from daily balances over the periods indicated. Interest income includes fees that we consider adjustments to yields.

		For the Year Ended September 30,
		2021												2020												2019
		Average Balance				Interest Income/ Expense				Yield/Cost (Annualized)				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		$	61,655			$	88				0.14%			$	35,612			$	208				0.58%			$	24,525			$	510				2.08%
Loans receivable, net			605,176				27,551				4.55%				562,209				25,626				4.55%				516,076				25,154				4.87%
Securities
Taxable			55,487				789				1.42%				45,308				965				2.13%				55,133				1,290				2.34%
Tax-exempt (1)			410				7				1.64%				—				—				0.00%				—				—				0.00%
FHLBNY stock			1,925				95				4.94%				2,018				128				6.33%				2,162				149				6.88%
Total interest-earning assets			724,653				28,530				3.94%				645,147				26,927				4.16%				597,896				27,103				4.53%
Noninterest-earning assets			44,193												46,839												42,566
Total assets		$	768,846											$	691,986											$	640,462
Interest-bearing liabilities:
Savings accounts (2)		$	87,812			$	155				0.18%			$	72,290			$	347				0.48%			$	74,497			$	493				0.66%
NOW accounts (3)			258,261				707				0.27%				241,508				2,105				0.87%				234,953				3,231				1.38%
Time deposits (4)			116,944				1,425				1.22%				127,576				2,318				1.81%				121,706				2,197				1.81%
Total interest-bearing deposits			463,017				2,287				0.49%				441,374				4,770				1.08%				431,156				5,921				1.37%
Borrowings			47,220				654				1.39%				45,647				743				1.62%				35,175				789				2.24%
Total interest-bearing liabilities			510,237				2,941				0.58%				487,021				5,513				1.13%				466,331				6,710				1.44%
Noninterest-bearing liabilities			188,084												148,080												119,384
Total liabilities			698,321												635,101												585,715
Retained earnings			70,525												56,885												54,747
Total liabilities and retained earnings		$	768,846											$	691,986											$	640,462
Tax-equivalent basis adjustment							(2	)											—												—
Net interest and dividend income						$	25,587											$	21,414											$	20,393
Interest rate spread											3.36%												3.03%												3.09%
Net interest-earning assets		$	214,416											$	158,126											$	131,565
Net interest margin (5)											3.53%												3.31%												3.41%
Average interest-earning assets to
average interest-bearing liabilities			142.02%												132.47%												128.21%

		For the Year Ended September 30,
		2022												2021
		Average Balance				Interest Income/ Expense				Yield/Cost (Annualized)				Average Balance				Interest Income/ Expense				Yield/Cost (Annualized)
		(Dollars In Thousands)
Interest-earning assets:
Interest-earning deposits		$	53,714			$	264				0.49%			$	61,655			$	88				0.14%
Loans receivable, net			600,630				27,841				4.64%				605,176				27,551				4.55%
Securities
Taxable			89,001				1,279				1.44%				55,487				789				1.42%
Tax-exempt (1)			2,769				52				1.89%				410				7				1.64%
FHLBNY stock			1,547				78				5.02%				1,925				95				4.94%
Total interest-earning assets			747,661				29,514				3.95%				724,653				28,530				3.94%
Noninterest-earning assets			45,960												44,193
Total assets		$	793,621											$	768,846
Interest-bearing liabilities:
Savings accounts (2)		$	85,834				156				0.18%			$	87,812			$	155				0.18%
NOW accounts (3)			288,222				1,007				0.35%				258,261				707				0.27%
Time deposits (4)			96,442				907				0.94%				116,944				1,425				1.22%
Total interest-bearing deposits			470,498				2,070				0.44%				463,017				2,287				0.49%
Borrowings			18,399				414				2.25%				47,220				654				1.39%
Total interest-bearing liabilities			488,897				2,484				0.51%				510,237				2,941				0.58%
Noninterest-bearing liabilities			200,702												188,084
Total liabilities			689,599												698,321
Retained earnings			104,022												70,525
Total liabilities and retained earnings		$	793,621											$	768,846
Tax-equivalent basis adjustment							(11	)											(2	)
Net interest and dividend income						$	27,019											$	25,587
Interest rate spread											3.44%												3.36%
Net interest-earning assets		$	258,764											$	214,416
Net interest margin (5)											3.61%												3.53%
Average interest-earning assets to
average interest-bearing liabilities			152.93%												142.02%

 

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

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

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

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

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

Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by average volume). The volume column shows the effects attributable to changes in volume (changes in average volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

 

 

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

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

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

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

 

Interest and Dividend Income. Interest and dividend income increased $1.6$975,000, or 3.4%, to $29.5 million or 5.9%, tofor the year ended September 30, 2022 from $28.5 million for the year ended September 30, 2021 from $26.9 million for the year ended September 30, 2020.2021. The average balance of interest-earnings assets between the two periods increased $79.5$23.0 million, or 12.3%3.2%, to $724.6$747.7 million from $645.1$724.6 million, while the yield on such assets decreased 22increased 1 basis pointspoint to 3.95% for the year ended September 30, 2022 from 3.94% for the year ended September 30, 2021 from 4.16% for2021.

The increase in yield on the Company’s assets was attributable to 1) the reinvestment of repaid Paycheck Protection Program (“PPP”) loans (earning 1.0%) into higher yielding commercial real estate loans, 2) the receipt of $681,000 in prior period interest income during the year ended September 30, 2020.2022 from previously non-performing loans, and 3) higher market interest rates, which increased the yield on the Company’s interest-earning deposits with banks. Offsetting these increases was a $1.2 million decrease in PPP loan fees recognized, which totaled $836,000 during the twelve months ended September 30, 2022 compared with $2.0 million for the twelve months ended September 30, 2021.

 

Interest income on loans increased $1.9$290,000, or 1.1%, to $27.8 million or 7.5%, tofor the year ended September 30, 2022 from $27.5 million for the year ended September 30, 2021, from $25.6 million for the year ended September 30, 2020, while the average balance of loans increased $43.0decreased $4.5 million, or 7.6%0.8%, to $605.2$600.6 million from $562.2$605.2 million. The average yield on such loans was 4.55%increased nine basis points to 4.64% at September 30, 2021 and 2020. The recognition of PPP loans fees totaling $2.0 million during the year ended September 30, 2021, compared with $335,0002022 from 4.55% for the year ended September 30, 2020, accounted for the majority2021.

Interest earned on investment securities, including interest earned on deposits but excluding FHLBNY stock, decreased $291,000,increased $702,000, or 24.8%79.6%, to $882,000$1.6 million for the year ended September 30, 20212022 from $1.2 million$882,000 for the same period prior year.fiscal 2021. The decreaseincrease was attributable to a 7035 basis point decreaseincrease in the average yield on investment securities and interest earned on deposits to 0.75%1.10% from 1.45%0.75%, partially offset byand a $36.6$27.9 million, or 45.3%23.8%, increase in the average balance of

investment securities and interest earning deposits to $117.5$145.5 million from $80.9$117.5 million during the year ended September 30, 2021.2022.

 

Interest Expense. Interest expense decreased $2.6$457,000, or 15.5%, to $2.5 million or 46.7%, tofor the year ended September 30, 2022 from $2.9 million for the year ended September 30, 2021 from $5.5 million for the year ended September 30, 2020.2021. The average balance of interest-bearing liabilities increased $23.7decreased $21.3 million, or 4.9%4.2%, to $510.7 million from $487.0 million between the two periods while the cost of such liabilities decreased 55seven basis points to 0.58%0.51% for the year ended September 30, 2021 from 1.13%2022 compared with the prior year period. Lower market interest rates were primarily responsible for the same period priordrop in the cost of the Company’s interest-bearing liabilities for the year due to the lower market interest rate environment.ended September 30, 2022.

 

The average balance of interest-bearing deposits increased $21.6$7.5 million, or 4.9%1.6%, to $463.0$470.5 million for the year ended September 30, 20212022 from $441.4$463.0 million for the prior year while the average cost of such deposits decreased 595 basis points to 0.49%0.44% from 1.08%0.49%. Interest expense on deposits decreased $2.5$217,000, or 9.5%, to $2.1 million or 52.1%, tofor the year ended September 30, 2022 from $2.3 million for the year ended September 30, 2021 from $4.8 million for the year ended September 30, 2020.2021.

 

Interest expense on advances decreased $89,000,$240,000, or 12.0%36.7%, to $414,000 for the year ended September 30, 2022 from $654,000 for the year ended September 30, 2021 from $743,0002021. The average cost of borrowings increased 86 basis points to 2.25% for the year ended September 30, 2020. The average cost of borrowings decreased 23 basis points to2022 from 1.39% for the year ended September 30, 2021 from 1.62% for the year ended September 30, 2020 while the average balance of those borrowings increased $1.6decreased $28.8 million to $47.2$18.4 million for the year ended September 30, 20212022 from $45.6$47.2 million the prior year.

 

Provision for Loan Losses. We establish provisions for loan losses, which are charged to earnings, at a level necessary to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, peer group information and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events occur.

 

The provision for loan losses decreased $37,000$1.3 million, or 81.3%, to $304,000 for the year ended September 30, 2022 compared to $1.6 million for the year ended September 30, 20212021. The lower provisions resulted from lower qualitative adjustment factors to the historical loss rates in fiscal 2022 compared to $1.7 millionwith the prior year as well as lower balances in higher risk segments of the loan portfolio. There were net recoveries of $54,000 during the year ended September 30, 2022 compared with net recoveries of $46,000 for the year ended September 30, 2020. There were net recoveries of $46,000 during the year ended September 30, 2021 compared with net charge-offs of $154,000 for the year ended September 30, 2020.2021.

 

Other Income. Other income increased $1.7decreased $694,000, or 20.4%, to $2.7 million or 98.7%,during the twelve months ended September 30, 2022 compared to $3.4 million duringfor the yeartwelve months ended September 30, 2021 compared with $1.7 million the prior year. Higher fees for other customer services, gains from the sale of loans, interest rate swap fees, and service charges accounted for the increase.

2021. Fees for other customer services increaseddecreased to $0 for fiscal 2022 from $777,000 from fees earned fromfor fiscal 2021, during which the Bank’s assistance with its local government’s Small Business Relief Grant program. The program was designed to assist small local businesses impacted by the COVID-19 pandemic. The Company received a fee of 3.0%three percent of the grantsSmall Business Relief Grants it assisted with processing.

 

Higher gains from the sale of SBA loans helped offset lower interest rate swap fees between periods. The Bank sells the guaranteed portion of its SBA loans in the secondary market. During the year ended September 30, 2021, $6.42022, $9.5 million in loans were sold, generating $749,000$925,000 in gains compared with sales of $3.6$6.4 million and $317,000$749,000 in gains for the twelve months ended September 30, 2020.

The Bank began offering a commercial loan swap product through a correspondent bank during its fiscal year 2021. During the twelve months ended September 30, 20212022, the Company originated three commercial swap loans totaling $20.4 million, which generated $313,000$76,000 in interest rate swap fees.

The Bank assesses service charges for a variety of loan and deposit services. These services were negatively impacted by the COVID-19 induced economic shut-down during our fiscal year 2020. The re-opening of the economy in turn increased the services and correspondent service charges the Bank receives. In addition, the Bank received more prepayment penalties from commercial loan payoffs. Accordingly, service charges increased $242,000, or 26.9%, to $1.1 millionfees compared with $313,000 for the year ended September 30, 2021, compared with $901,000 for the year ended September 30, 2020.2021.

 

Other Expenses. Other expenses increased $289,000,decreased $381,000, or 1.6%2.0%, to $18.3 million compared to $18.6 million for the year ended September 30, 2021 compared2021. The decrease was primarily attributable to $18.4 million for the year ended September 30, 2020. Higher compensation and benefit expenses, higher professional fees, and higher other expenses were partially offset by lower OREO expenses, lower data processing expenses, and lower FDIC insurance assessments.

Compensation and benefit expenses increased $336,000,which decreased $657,000, or 3.3%38.2%, to $10.6 million for the year ended September 30, 2021 from $10.3 million for the year ended September 30, 2020. Higher incentive accruals and employee benefit expenses accounted for the increase, partially offset by lower compensation expense due to lower staffing levels.

Professional fees include legal and consulting fees related to the collection and foreclosure of non-performing assets. These fees increased $161,000, or 10.3%, to $1.7 million forloans.

Loan servicing expenses and FDIC deposit insurance premiums decreased $212,000 and $207,000, respectively, from lower levels of non-performing loans and the year ended September 30, 2021, compared with $1.6 million for the year ended September 30, 2020. In addition, other expenses increased $165,000, or 11.4%, to $1.6 million for the year ended September 30, 2021, compared with $1.4 million for the year ended September 30, 2020. The increasesCompany’s higher capital levels. Partially offsetting these decreases were primarily attributable to temporary prior year reductions related to the COVID-19 pandemic in areas such ashigher compensation and marketing and business development contributions,expenses. Compensation and operating costs.benefit expense increased $411,000, or 3.9%, due to annual merit increases, fewer open positions within the Bank, and higher incentive plan accruals. Marketing and business development expenses increased $221,000, or 97.8%, as the Bank is celebrating its 100 year anniversary with increased events and advertising, while business development opportunities increased as the COVID pandemic restrictions were lifted.

Income Tax Expense. The Company recorded tax expense of $3.3 million on income of $11.2 million for the year ended September 30, 2022 compared with tax expense of $2.6 million on income of $8.7 million for the year ended September 30, 2021 compared with tax expense of $920,000 on income of $3.1 million for the year ended September 30, 2020.2021. The higher income tax expense resulted from a $5.6$2.5 million increase in the Company’s results from operations.

 

The Company’s effective tax rate for the year ended September 30, 20212022 was 29.9%29.1% compared with 29.6%29.9% for the year ended September 30, 2020.2021.

 

 

Management of Market Risk

 

General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, our Board of Directors has established an Asset and Liability Management Committee which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. Senior management monitors the level of interest rate risk on a regular basis and the Asset and Liability Committee meets at least on a quarterly basis to review our asset/liability policies and interest rate risk position.

 

We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. As part of our ongoing asset-liability management, we seek to manage our exposure to interest rate risk by retaining in our loan portfolio fewer fixed ratefixed-rate residential loans, by originating and retaining adjustable-rate loans in the residential, construction and commercial real estate loan portfolios, by using alternative funding sources, such as advances from the FHLBNY, to “match fund” longer-term residential and commercial mortgage loans, and by originating and retaining variable ratevariable-rate home equity and short-term and medium-term fixed-rate commercial business loans. We began offeringalso offer a commercial loan swap product in our fiscal year 2021 that allows the Bank to receive floating-rate interest loan payments while its borrowers pay a fixed rate of interest on their loans. We have also increased money market account deposits as a percentage of our total deposits. Money market accounts offer a variable rate based on market indications. By following these strategies, we believe that we are well-positioned to react to changes in market interest rates.

Net Interest Income Analysis. The table below sets forth, as of September 30, 2021,2022, the estimated changes in our Net Interest Income (“NII”) for each of the next two years that would result from the designated instantaneous changes in interest rates. These estimates require making certain assumptions including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain and, as a result, we cannot precisely predict the impact of changes in interest rates on net interest income. Actual results may differ significantly due to timing, magnitude and frequency of interest rate changes and changes in market conditions. Further, certain shortcomings are inherent in the methodology used in the interest rate risk measurement. Modeling changes in net interest income require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates.

 

Change in						Estimated Decrease												Estimated Increase
Interest rates		Estimated				in NII Year 1								Estimated				(Decrease) in NII Year 2
(Basis Points)(1)		NII Year 1				Amount				Percentage				NII Year 2				Amount				Percentage
(Dollars in thousands)
+200		$	26,218			$	895				3.53%			$	26,714			$	1,800				7.22%
Unchanged			25,323				—				—				24,914				—				—
-100			24,191				(1,132	)			-4.47%				23,167				(1,747	)			-7.01%

⁽¹⁾ Assumes an instantaneous uniform change in interest rates at all maturities.

Change in						Estimated Decrease												Estimated Increase
Interest rates		Estimated				in NII Year 1								Estimated				(Decrease) in NII Year 2
(Basis Points)(1)		NII Year 1				Amount				Percentage				NII Year 2				Amount				Percentage
(Dollars in thousands)
+200		$	28,550			$	(212	)			-0.74%			$	31,968			$	1,056				3.42%
Unchanged			28,762				—				—				30,912				—				—
-200			27,816				(946	)			-3.29%				28,259				(2,653	)			-8.58%
(1) Assumes an instantaneous uniform change in interest rates at all maturities.

 

Liquidity and Capital Resources

 

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, FHLBNY borrowings and maturities and sales of investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity targets and strategies in

order to ensure that sufficient liquidity exists for meeting the borrowing needs of our customers as well as unanticipated contingencies. We seek to maintain a liquidity ratio of 5.0% of assets or greater. The liquidity ratio is calculated by determining the sum of the difference between liquid assets (cash and unpledged investment securities) and short-term liabilities (estimated 30-day deposit outflows), plus our borrowing capacity from the FHLBNY and dividing the sum by total assets. At September 30, 2021,2022, our liquidity ratio was 20.8%16.6% of assets.

We regularly adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short-and intermediate-term securities.

Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At September 30, 2021,2022, cash and cash equivalents totaled $75.2$30.9 million compared with $61.7$75.2 million at September 30, 2020.2021. Securities classified as available-for-sale, which provide additional sources of liquidity from sales, totaled $9.2 million at September 30, 2022 compared with $12.9 million at September 30, 2020 compared with $14.6 at September 30, 2020.2021. At September 30, 2021,2022, we also had the ability to borrow $151.2$138.9 million from the FHLBNY comparecompared with $141.8$151.2 million at September 30 2021. On that date, we had an aggregate of $23.4$15.6 million in advances outstanding and $40.0 million in municipal letters of credit outstanding with the FHLBNY. Our cash flows are derived from operating activities, investing activities and financing activities as reported in our consolidated Statements of Cash Flows included in our consolidated Financial Statements.

At September 30, 2021,2022, we had $23.7$52.5 million in loan origination commitments outstanding. In addition to commitments to originate loans, we had $63.8$73.8 million in unused lines of credit to borrowers. Certificates of deposit due within one year of September 30, 20212022 totaled $72.8$44.6 million, or 11.4%6.7% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits and FHLBNY advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit (including individual retirement accounts and brokered certificate deposit accounts) due on or before September 30, 2022.2023. We believe, however, that based on past experience a significant portion of our certificates of deposit (including individual retirement accounts and brokered certificate deposit accounts) will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Our primary investing activities are the origination of loans and the purchase of investment securities. We originated $159.2 million in loans and we purchased $41.1 million of investment securities for the year ended September 30, 2022. Comparatively, we originated $159.0 million in loans (including $35.3 million in PPP loans) and we purchased $49.5 million of investment securities for the year ended September 30, 2021. Comparatively, we originated $145.9 million in loans (including $56.0 million in PPP loans) and purchased $19.8 million of investment securities for the year ended September 30, 2020.

Financing activities consist primarily of activity in deposit accounts and FHLBNY advances. We experienced a net increase in total deposits of $27.9 million, or 4.4%, to $667.7 million for the year ended September 30, 2022 compared with a net increase in total deposits of $21.5 million, or 3.5%, to $639.8 million for the year ended September 30, 2021 compared with a net increase in total deposits of $88.3 million, or 16.6%, to $618.3 million for the year ended September 30, 2020.2021. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors.

Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLBNY, which provide an additional source of funds. FHLBNY advances totaled $23.4$15.6 million and $30.5$23.4 million at September 30, 20212022 and September 30, 2020,2021, respectively. FHLBNY advances have primarily been used to fund loan demand.

In addition to borrowings, the Bank has the ability to raise deposits on the brokered market or through deposit listing services. At September 30, 2021,2022, the Bank held $6.0 million in brokered deposits and $16.4$14.6 million from deposit listing services.

Magyar Bank is subject to various regulatory capital requirements, (see “Supervision and Regulation-Federal Banking Regulation-Capital Requirements”). As of September 30, 2021,2022, Magyar Bank’s Tier 1 capital as a percentage of the Bank'sBank’s average assets was 10.18%11.13% and the total qualifying capital as a percentage of risk-weighted assets was 16.99%16.47%.

Bank-owned life insurance is a tax-advantaged financing transaction that is used to offset employee benefit plan costs. Policies are purchased insuring directors and officers of Magyar Bank using a single premium method of payment. Magyar Bank is the owner and beneficiary of the policies and records tax-free income through cash surrender value accumulation. We have minimized our credit exposure by choosing carriers that are highly rated and limiting the concentration of any one carrier. The investment in bank-owned life insurance has no significant impact on our capital and liquidity.

 

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

 

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit, standby letters of credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans made by us. For additional information, see Note P, “Commitments,” and Note Q “Financial Instruments with Off-Balance-Sheet Risk” to our consolidated financial statements.

 

Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment.

 

The following table summarizes our significant fixed and determinable contractual obligations and other funding needs by payment date at September 30, 2021.2022. The payment amounts represent those amounts due to the recipient and do not include any unamortized premiums or discounts or other similar carrying amount adjustments.

 

 

 

ITEM 7A.

Quantitative and Qualitative Disclosures About Market Risk

 

Not required for smaller reporting companies.

ITEM 8.Financial Statements and Supplementary Data

 

TABLE OF CONTENTS

 

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

Magyar Bancorp, Inc. and Subsidiary

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Magyar Bancorp, Inc. and Subsidiary (the Company) as of September 30, 20212022 and 2020,2021, the related consolidated statements of operations,income, comprehensive income, changes in stockholders'stockholders’ equity and cash flows for each of the two years in the period ended September 30, 2021,2022, and the related notes to the consolidated financial statements (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 20212022 and 20202021, and the results of its operations and its cash flows for each of the two years in the period ended September 30, 2021,2022, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or is required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Loan Losses – Qualitative Factors

The allowance for loan losses as of September 30, 20212022 was $8.1$8.4 million. As described in Notes B and E to the consolidated financial statements, the allowance for loan losses is established through a provision for loan losses and represents an amount which, in management’s judgement, will be adequate to absorb losses on existing loans. The allowance consists of specific and general components in the amounts of $0.2$0.1 million and $7.9$8.3 million, respectively. The specific component relates to loans that are delinquent or otherwise identified as impaired by management. All such loans are evaluated individually, with principal consideration given to the value of the collateral securing the loan and discounted cash flows. Specific impairment allowances are established as required by this analysis. The general loan loss allocation component is determined by segregating the remaining loans by type of loan, risk weighting, and payment history. This analysis establishes historical loss factors based on a five year look back period that are applied to the loan groups adjusted for the following qualitative factors: levels of trends in delinquency and non-accrual trends,loans, volume and loan term trends, changes in the lending policy, national and local economic trends and conditions, changes in concentrations of credit changes in risk selection and underwriting standards,from a loan type, industry and/or geographic standpoint, the experience, ability and depth of lending management, and charge-off and recovery trends and trends in collateral value. The evaluation of the qualitative factors requires a significant amount of judgement by management and involves a high degree of subjectivity.

We identified the qualitative factor component of the allowance for loan losses as a critical audit matter as auditing the underlying qualitative factors required significant auditor judgment as amounts determined by management rely on analysis that is often subjective in nature and the estimate is highly sensitive to changes in significant assumptions.

Our audit procedures related to the qualitative factors of the allowance for loan losses included the following, among others:

/s/ RSM US LLP

We have served as the Company's auditor since 2018.

/s/ RSM US LLP

Philadelphia, Pennsylvania

December 20, 202122, 2022

MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

(In Thousands, Except Share and Per Share Data)