Filed pursuant to Rule 424(b)(3)
File No.: 333-128392
The stock offering expiration date
referenced herein has been
extended to 12:00 noon, Eastern
time, December 30, 2005.
PROSPECTUS SUPPLEMENT
INTERESTS IN
MAGYAR BANK
401(K) PROFIT SHARING PLAN
OFFERING OF UP TO 153,333 SHARES OF
MAGYAR BANCORP, INC.
COMMON STOCK
In connection with the adoption of a Plan of Reorganization from a
Mutual Savings Bank to a Mutual Holding Company and Stock Issuance Plan, Magyar
Bancorp, Inc. is allowing participants in the Magyar Bank 401(k) Profit Sharing
Plan (the "Plan") to invest all or a portion of their accounts in stock units
representing an ownership interest in the common stock of Magyar Bancorp, Inc.
(the "Common Stock"). Based upon the value of the Plan assets at August 23,
2005, the trustee of the Plan could purchase up to 153,333 shares of the Common
Stock, at the purchase price of $10.00 per share. This prospectus supplement
relates to the initial election of Plan participants to direct the trustee of
the Plan to invest all or a portion of their Plan accounts in stock units
representing an ownership interest in the Magyar Bancorp, Inc. Stock Fund at the
time of the stock offering. After the stock offering, participants will continue
to be able to invest in the Magyar Bancorp, Inc. Stock Fund.
Magyar Bancorp, Inc.'s prospectus, dated November 14, 2005, is attached
to this prospectus supplement. It contains detailed information regarding the
reorganization and stock offering of Magyar Bancorp, Inc. common stock and the
financial condition, results of operations and business of Magyar Bank This
prospectus supplement provides information regarding the Plan. You should read
this prospectus supplement together with the prospectus to which it is attached
and keep both for future reference.
--------------------------------
FOR A DISCUSSION OF INVESTMENT RISKS THAT YOU SHOULD CONSIDER, SEE "RISK
FACTORS" BEGINNING ON PAGE 24 OF THE PROSPECTUS.
THE INTERESTS IN THE PLAN AND THE OFFERING OF THE COMMON STOCK HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE FEDERAL DEPOSIT INSURANCE COMPANY, THE
SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER FEDERAL OR STATE AGENCY. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OFFERED IN THIS PROSPECTUS SUPPLEMENT AND IN THE
PROSPECTUS ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR GUARANTEED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
This prospectus supplement may be used only in connection with offers
and sales by Magyar Bancorp, Inc., in the stock offering, of stock units
representing an interest in shares of Common Stock in the Magyar Bancorp, Inc.
Stock Fund of the Plan. No one may use this prospectus supplement to reoffer or
resell interests in shares of Common Stock acquired through the Plan.
You should rely only on the information contained in this prospectus
supplement and the attached prospectus. Magyar Bancorp, Inc., Magyar Bank and
the Plan have not authorized anyone to provide you with information that is
different.
This prospectus supplement does not constitute an offer to sell or
solicitation of an offer to buy any securities in any jurisdiction to any person
to whom it is unlawful to make an offer or solicitation in that jurisdiction.
Neither the delivery of this prospectus supplement and the prospectus nor any
sale of Common Stock or stock units representing an ownership interest in Common
Stock shall under any circumstances imply that there has been no change in the
affairs of Magyar Bank or the Plan since the date of this prospectus supplement,
or that the information contained in this prospectus supplement or incorporated
by reference is correct as of any time after the date of this prospectus
supplement.
The date of this prospectus supplement is November 21, 2005.
TABLE OF CONTENTS
THE OFFERING.............................................................................1
SECURITIES OFFERED....................................................................1
PURCHASE PRIORITIES...................................................................1
ALLOCATION OF UNITS...................................................................2
COMPOSITION OF AND PURPOSE OF STOCK UNITS.............................................3
VALUE OF PLAN ASSETS..................................................................3
ELECTION TO PURCHASE STOCK UNITS IN THE STOCK OFFERING................................3
HOW TO ORDER STOCK IN THE OFFERING....................................................4
ELECTION FORM DEADLINE................................................................4
IRREVOCABILITY OF TRANSFER DIRECTION..................................................5
FUTURE DIRECTION TO PURCHASE COMMON STOCK.............................................5
VOTING RIGHTS OF COMMON STOCK.........................................................5
DESCRIPTION OF THE PLAN..................................................................6
INTRODUCTION..........................................................................6
ELIGIBILITY AND PARTICIPATION.........................................................6
CONTRIBUTIONS UNDER THE PLAN..........................................................6
LIMITATIONS ON CONTRIBUTIONS..........................................................7
BENEFITS UNDER THE PLAN...............................................................7
WITHDRAWALS AND DISTRIBUTIONS FROM THE PLAN...........................................8
INVESTMENT OF CONTRIBUTIONS AND ACCOUNT BALANCES......................................8
PERFORMANCE HISTORY...................................................................9
INVESTMENT IN COMMON STOCK OF MAGYAR BANCORP, INC....................................13
ADMINISTRATION OF THE PLAN...........................................................14
AMENDMENT AND TERMINATION............................................................14
MERGER, CONSOLIDATION OR TRANSFER....................................................14
FEDERAL INCOME TAX CONSEQUENCES......................................................15
ADDITIONAL EMPLOYEE RETIREMENT INCOME SECURITY ACT ("ERISA") CONSIDERATIONS..........16
SECURITIES AND EXCHANGE COMMISSION REPORTING AND SHORT-SWING PROFIT LIABILITY........16
FINANCIAL INFORMATION REGARDING PLAN ASSETS..........................................17
LEGAL OPINION...........................................................................17
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS AS OF DECEMBER 31, 2004...............18
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS.......................19
THE OFFERING
SECURITIES OFFERED Magyar Bancorp, Inc. is offering stock units in the
Magyar Bank 401(k) Profit Sharing Plan (the "Plan"). The
stock units represent indirect ownership of Magyar
Bancorp, Inc.'s common stock through the Magyar Bancorp,
Inc. Stock Fund being established under the Plan in
connection with the stock offering. Given the purchase
price of $10 per share in the stock offering, the Plan
may acquire up to 153,333 shares of Magyar Bancorp, Inc.
Common Stock in the stock offering. Only employees of
Magyar Bank may become participants in the Plan and only
participants may purchase stock units in the Magyar
Bancorp, Inc. Stock Fund. Your investment in stock units
in connection with the stock offering through the Magyar
Bancorp, Inc. Stock Fund, is subject to the purchase
priorities contained in the Plan of Reorganization from
a Mutual Savings Bank to a Mutual Holding Company and
Stock Issuance Plan of Magyar Bank (the "Stock Issuance
Plan").
Information with regard to the Plan is contained in this
prospectus supplement and information with regard to the
financial condition, results of operations and business
of Magyar Bancorp, Inc. is contained in the accompanying
prospectus. The address of the principal executive
office of Magyar Bancorp, Inc. and Magyar Bank is 400
Somerset Street, New Brunswick, New Jersey 08903.
PURCHASE PRIORITIES In connection with the stock offering, you may elect to
transfer all or part of your account balances in the
Plan to the Magyar Bancorp, Inc. Stock Fund, to be used
to purchase stock units representing an ownership
interest in the Common Stock issued in the stock
offering. The manner in which you make this election and
transfer is discussed below under "Election to Purchase
Stock in the Stock Offering." All Plan participants are
eligible to direct a transfer of funds to the Magyar
Bancorp, Inc. Stock Fund. However, such directions are
subject to the purchase priorities in the Stock Issuance
Plan, which contemplates a subscription offering and,
possibly, a community offering. Subscription offering
categories, in descending order of purchase priorities
are as follows: (1) eligible account holders; (2)
tax-qualified employee benefit plans of Magyar Bank,
including this Plan and the employee stock ownership
plan which we intend to adopt; (3) supplemental eligible
account holders; and (4) voting depositors. An eligible
account holder is a depositor whose deposit account(s)
totaled $50.00 or more on June 30, 2004. A supplemental
eligible account holder is a depositor whose deposit
account(s) totaled $50.00 or more on September 30, 2005.
Voting depositors are depositors of the Bank as of
November 4, 2005. If you fall into subscription offering
categories (1), (3) or (4), you have
subscription rights to subscribe for stock in the
subscription offering. You may do so through the Plan
and/or outside of the Plan. Units representing an
ownership interest in shares of Magyar Bancorp, Inc.
Common Stock can be subscribed for through the Plan by
using funds in the Plan to pay for the stock units. You
may also be able to purchase stock units in the
subscription offering through the Plan even though you
are ineligible to purchase through subscription offering
categories (1), (3) or (4) if Magyar Bancorp, Inc.
determines to allow the Plan to purchase stock through
subscription offering category (2), reserved for its
tax-qualified employee plans. If the Plan is not
included in category (2), then any order for stock units
placed by those ineligible to subscribe in categories
(1), (3), and (4) will be considered an order placed in
the community offering, if one is held, to members of
the general public. Subscription offering orders,
however, will have preference over orders placed in a
community offering.
If you choose not to direct the investment of your
account balances towards the purchase of any stock units
through the Magyar Bancorp, Inc. Stock Fund in
connection with the offering, your account balances will
remain in the investment funds of the Plan as previously
directed by you.
If you are eligible to subscribe for stock in the
subscription offering through subscription categories
(1), (3), or (4), you will receive a separate mailing,
including a Stock Order Form. You may subscribe for
stock OUTSIDE OF THE PLAN by completing the Stock Order
Form and submitting it to the Stock Information Center
(do NOT return your Stock Order Form to Karen J. Golden
for shares you intend to purchase outside the Plan).
ALLOCATION OF UNITS The trustee of the Magyar Bancorp, Inc. Stock Fund will
subscribe for Common Stock in the stock offering in
accordance with your directions. No later than the end
of the offering period, December 16, 2005, the
investment amount that you have elected for the purchase
of stock units will be placed in the Magyar Bancorp,
Inc. Stock Fund. For information on how to make this
election, SEE --- below under "Election to Purchase
Stock Units in the Stock Offering" and "How to Order
Stock in the Offering." After December 16, 2005, we will
determine whether all or any portion of your order will
be filled (if the offering is oversubscribed you may not
receive any or all of your order, depending on your
purchase priority, as described above, and whether the
Plan will purchase through category 2). The amount that
can be used toward your order will be applied to the
purchase of stock units.
In the event the offering is oversubscribed, I.E., there
are more
2
orders for Common Stock than shares available for sale
in the offering, and the trustee is unable to use the
full amount allocated by you to purchase interests in
Common Stock in the offering, the amount that cannot be
invested in Common Stock, and any interest earned on
such amount, will be returned to the Transamerica Stable
Value Fund. The prospectus describes the allocation
procedures in the event of an oversubscription. See "The
Reorganization and the Stock Offering" section in the
prospectus.
COMPOSITION OF AND The Magyar Bancorp, Inc. Stock Fund, which is being
PURPOSE OF STOCK established in the Plan in, will invest in the Common
UNITS Stock of Magyar Bancorp, Inc. Following the stock
offering, the Magyar Bancorp, Inc. Stock Fund will
maintain a cash component for liquidity purposes.
Liquidity is required in order to facilitate daily
transactions such as investment transfers or
distributions from the Magyar Bancorp, Inc. Stock Fund.
For purchases in the offering, there will be no cash
component. A stock unit will be valued at $10. After the
offering, newly issued units will consist of a
percentage interest in both the Common Stock and cash
held in the Magyar Bancorp, Inc. Stock Fund. Unit values
(similar to the stock's share price) and the number of
units (similar to number of shares) will be used to
communicate the dollar value of a participant's account.
Following the stock offering, each day, the stock unit
value of the Magyar Bancorp, Inc. Stock Fund will be
determined by dividing the total market value of the
fund at the end of the day by the total number of units
held in the fund by all participants as of the previous
day's end. The change in stock unit value reflects the
day's change in stock price, any cash dividends accrued
and the interest earned on the cash component of the
fund, less any investment management fees. The market
value and unit holdings of your account in the Magyar
Bancorp, Inc. Stock Fund will be reported to you on your
quarterly statements.
VALUE OF PLAN ASSETS As of August 23, 2005, the market value of the assets of
the Plan was approximately $1,580,172.23, of which
approximately $1,533,337.36 is eligible to purchase
Common Stock in the offering.
ELECTION TO PURCHASE In connection with the stock offering, the Plan will
STOCK UNITS IN THE permit you to direct the trustee to transfer all or part
STOCK OFFERING of the funds which represent your current beneficial
interest in the assets of the Plan to the Magyar
Bancorp, Inc. Stock Fund. However, the amount that you
wish to invest in stock units must first be transferred
to the Transamerica Stable Value Fund. Following the
transfer to the Transamerica Stable Value Fund, you may
use the Special Election Form to indicate the amount you
wish to invest in stock units in the Magyar Bancorp,
Inc. Stock Fund. But remember, prior to submitting the
Special Election Form, you must ensure that you
3
have sufficient amounts in the Transamerica Stable Value
Fund to purchase stock units pursuant to your request.
The trustee of the Plan will subscribe for Magyar
Bancorp, Inc. Common Stock offered for sale in
connection with the stock offering, in accordance with
each participant's direction. In order to purchase stock
units representing an ownership interest in Common Stock
in the stock offering through the Plan, you must
purchase stock units representing an ownership interest
in at least 25 shares in the offering through the Plan.
The prospectus describes maximum purchase limits for
investors in the stock offering. The trustee will pay
$10.00 per stock unit representing an ownership interest
in a share, which will be the same price paid by all
other persons who purchase shares in the subscription
and community offerings.
HOW TO ORDER STOCK Enclosed is a Special Election Form on which you can
IN THE OFFERING elect to transfer all or a portion of your account
balance in the Plan to the Magyar Bancorp, Inc. Stock
Fund for the purchase of stock units in connection with
the stock offering, provided that you purchase stock
units representing an ownership interest in at least 25
shares through the Plan. If you wish to use all or part
of your account balance in the Plan to purchase Common
Stock issued in the stock offering, you should indicate
that decision on the Special Election Form. In order to
direct the Trustee to purchase stock units in the
offering, you must do two things. First, if you do not
have sufficient funds in the Transamerica Stable Value
Fund, you must transfer to that fund from your other
investment funds the amount that you wish to invest in
the Magyar Bancorp, Inc. Stock Fund. You should make
this transfer in the manner that you normally transfer
amounts between funds, I.E., THROUGH AN ELECTRONIC
TRANSFER OR A TELEPHONE TRANSFER. Once you have made the
transfer to the Transamerica Stable Value Fund, you may
then complete a Special Election Form indicating the
amount that you wish to have invested from the
Transamerica Stable Value Fund. Please note that you
need not invest all the amounts that you have invested
in the Transamerica Stable Value Fund in the Magyar
Bancorp, Inc. Stock Fund. You will file the Special
Election Form with Karen J. Golden, at Magyar Bank, 400
Somerset Street, New Brunswick, New Jersey 08903. You
may file the Special Election Form on the day after you
transfer the amount you wish to invest in stock units to
the Transamerica Stable Value Fund, however, you must
file the Special Election Form no later than 5:00 p.m.,
New Jersey Time, on December 8, 2005. If you do not wish
to make an election, you should check Box E in Section D
of the Special Election Form and return the form to
Karen J. Golden as indicated above.
ELECTION FORM If you wish to purchase stock units representing an
DEADLINE ownership
4
interest in Common Stock with your Plan account
balances, you must return your Special Election Form to
Karen J Golden, at Magyar Bank, 400 Somerset Street, New
Brunswick, New Jersey 08903, TO BE RECEIVED NO LATER
THAN 5:00 P.M., NEW JERSEY TIME, ON DECEMBER 8, 2005.
You may return your Special Election Form by hand
delivery, mail or by faxing it to (732) 565-9953, so
long as it is returned by the time specified. This
return date is earlier than the deadline for purchases
made outside of the Plan. In order to purchase shares
outside the Plan you must complete and return a Stock
Order Form along with payment by check or by authorizing
withdrawal from your Magyar deposit account(s) to the
Stock Information Center no later than 12:00 p.m., New
Jersey Time, on December 16, 2005.
IRREVOCABILITY OF YOU MAY NOT CHANGE YOUR ELECTION TO TRANSFER AMOUNTS TO
TRANSFER DIRECTION THE MAGYAR BANCORP, INC. STOCK FUND IN CONNECTION WITH
THE STOCK OFFERING. Your election is irrevocable. You
will, however, continue to have the ability to transfer
amounts not directed towards the purchase of stock units
among all of the other investment funds on a daily
basis.
FUTURE DIRECTION TO You will be able to purchase stock units representing an
PURCHASE COMMON STOCK ownership interest in stock AFTER the offering through
your investment in the Magyar Bancorp, Inc. Stock Fund.
You may direct that your future contributions or your
account balance in the Plan be transferred to the Magyar
Bancorp, Inc. Stock Fund. After the offering, to the
extent that shares are available, the trustee of the
Plan will acquire Common Stock at your election in open
market transactions at the prevailing price. You may
change your investment allocation on a daily basis.
Special restrictions may apply to transfers directed to
and from the Magyar Bancorp, Inc. Stock Fund by the
participants who are subject to the provisions of
section 16(b) of the Securities Exchange Act of 1934, as
amended, relating to the purchase and sale of securities
by officers, directors and principal shareholders of
Magyar Bancorp, Inc.
VOTING RIGHTS OF The Plan provides that, after the offering, you may
COMMON STOCK direct the trustee how to vote any shares of Magyar
Bancorp, Inc. Common Stock held by the Magyar Bancorp,
Inc. Stock Fund, and the interest in such shares that is
credited to your account. If the trustee does not
receive your voting instructions, the Plan administrator
will exercise these rights as it determines in its
discretion and will direct the trustee accordingly. All
voting instructions will be kept confidential.
5
DESCRIPTION OF THE PLAN
INTRODUCTION
Magyar Bank adopted the Magyar Bank 401(k) Profit Sharing Plan effective
as of January 1, 1994, and subsequently amended, effective January 1, 2004 (the
"Plan"). The Plan is a tax-qualified plan, with a cash or deferred compensation
feature, established in accordance with the requirements under Section 401(a)
and Section 401(k) of the Internal Revenue Code of 1986, as amended (the
"Code").
Magyar Bank intends that the Plan, in operation, will comply with the
requirements under Section 401(a) and Section 401(k) of the Code. Magyar Bank
will adopt any amendments to the Plan that may be necessary to ensure the
continuing qualified status of the Plan under the Code and applicable Treasury
Regulations.
EMPLOYEE RETIREMENT INCOME SECURITY ACT ("ERISA"). The Plan is an
"individual account plan" other than a "money purchase pension plan" within the
meaning of ERISA. As such, the Plan is subject to all of the provisions of Title
I (Protection of Employee Benefit Rights) and Title II (Amendments to the Code
Relating to Retirement Plans) of ERISA, except to the funding requirements
contained in Part 3 of Title I of ERISA, which by their terms, do not apply to
an individual account plan (other than a money purchase plan). The Plan is not
subject to Title IV (Plan Termination Insurance) of ERISA. The funding
requirements contained in Title IV of ERISA are not applicable to participants
or beneficiaries under the Plan.
REFERENCE TO FULL TEXT OF PLAN. The following portions of this
prospectus supplement summarize certain provisions of the Plan. They are not
complete and are qualified in their entirety by the full text of the Plan.
Copies of the Plan are available to all employees by filing a request with the
Plan Administrator at Magyar Bank, 101 French Street, New Brunswick, New Jersey
08903. You are urged to read carefully the full text of the Plan.
ELIGIBILITY AND PARTICIPATION
Employees who are at least 21 years old and have completed at least six
months of service with Magyar Bank are eligible to enter the Plan on the first
day of the payroll period of the month next following the date on which the
employee meets the age and six months of service requirements (there is no hours
of service requirement). Leased employees are not eligible to participate in the
Plan. The Plan year is January 1 to December 31 (the "Plan Year").
As of July 31, 2005, there were approximately 66 employees and former
employees eligible to participate in the Plan.
CONTRIBUTIONS UNDER THE PLAN
ELECTIVE DEFERRAL CONTRIBUTIONS. You are permitted to defer on a pre-tax
basis up to 60% of your compensation (expressed in terms of whole percentages),
subject to certain restrictions imposed by the Code, and to have that amount
contributed to the Plan on your behalf. For
6
purposes of the Plan, "compensation" means your compensation subject to income
tax withholding at the source, as reported on your Form W-2, with all pre-tax
deductions added back. In 2005, the annual compensation of each participant
taken into account under the Plan is limited to $210,000. (Limits established by
the Internal Revenue Service are subject to increase pursuant to an annual
cost-of-living adjustment, as permitted by the Code). You may elect to modify
the amount contributed to the Plan at any time by filing a new elective deferral
agreement with the Plan administrator.
EMPLOYER CONTRIBUTIONS. Magyar Bank will make employer non-matching
contributions to the Plan in an amount equal to 3% of your eligible
compensation. This contribution will be made to your account regardless of
whether you make elective deferral contributions.
LIMITATIONS ON CONTRIBUTIONS
LIMITATIONS ON EMPLOYEE SALARY DEFERRALS. For the Plan Year beginning
January 1, 2005, the amount of your before-tax contributions may not exceed
$14,000 per calendar year. This amount is increased by $1,000 in 2006 and
thereafter may be adjusted periodically by law, based on changes in the cost of
living. In addition, if you have attained age 50 years by 2005, you will be able
to make a "catch-up" contribution of up to $4,000 in addition to the $14,000
limit. The "catch-up" contribution limit is increased by $1,000 in 2006 and
thereafter may be adjusted periodically by law, based on changes in the cost of
living. Contributions in excess of these limits, as applicable to you, are known
as excess deferrals. If you defer amounts in excess of these limitations, as
applicable to you, your gross income for federal income tax purposes will
include the excess in the year of the deferral. In addition, unless the excess
deferral is distributed before April 15 of the following year, it will be taxed
again in the year distributed. Income on the excess deferral distributed by
April 15 of the immediately succeeding year will be treated, for federal income
tax purposes, as earned and received by you in the tax year in which the
contribution is made.
LIMITATION ON PLAN CONTRIBUTIONS FOR HIGHLY COMPENSATED EMPLOYEES.
Special provisions of the Code limit the amount of elective deferrals and
employer non-matching contributions that may be made to the Plan in any year on
behalf of highly compensated employees, in relation to the amount of elective
deferrals and employer non-matching contributions made by or on behalf of all
other employees eligible to participate in the Plan. A highly compensated
employee includes any employee who (1) was a 5% owner of Magyar Bancorp, Inc. at
any time during the current or preceding year, or (2) had compensation for the
preceding year of more than $95,000. The dollar amounts in the foregoing
sentence may be adjusted annually to reflect increases in the cost of living. If
these limitations are exceeded, the level of deferrals by highly compensated
employees may have to be adjusted.
BENEFITS UNDER THE PLAN
VESTING. At all times, you have a fully vested, nonforfeitable interest
in the 401(k) deferrals you have made, the qualified matching contributions and
qualified non-elective contributions and their investment earnings. Employer
contributions for participants covered under the Plan on or before January 1,
2004, were subject to a 5-year graded vesting schedule in which such amounts
vested in 20% increments after completed year of service until a participant
7
became 100% vested upon completion of 5 years of service. Participants covered
under the Plan on or after January 1, 2004 are 100% vested in the employer
contributions at all times.
WITHDRAWALS AND DISTRIBUTIONS FROM THE PLAN
In-service withdrawals are not permitted under the Plan until a
participant attains age 59 1/2. However, in the event of certain types of
financial hardship, participants may withdraw their elective deferrals.
WITHDRAWAL UPON TERMINATION OF EMPLOYMENT. If your employment is
terminated for any reason, other than your retirement, disability, or death, you
may take withdrawals from your account.
Distributions are made in a lump sum, or equal monthly installments
covering the shorter period of either 15 years or your life expectancy.
WITHDRAWAL UPON RETIREMENT. You may take withdrawals from your account
upon attainment of normal retirement age (the later of age 65 or the date 5
years after you first participate in the Plan, but no later than age 70).
However, if you continue working past your normal retirement age, the
distribution of your benefits will be postponed until you actually retire. You
may also leave your account with the Plan and defer commencement of receipt of
your vested balance until April 1 of the later of the calendar year following
the calendar year in which you attain age 70 1/2, or the calendar year in which
you retire, except that distributions to a 5% owner must commence no later than
the April 1 of the calendar year following the calendar year in which the
participant attains age 70 1/2 .
Distributions are made in a lump sum, or equal monthly installments
covering the shorter period of either 15 years or your life expectancy.
Plan participants may also obtain loans from their accounts.
INVESTMENT OF CONTRIBUTIONS AND ACCOUNT BALANCES
All amounts credited to your accounts under the Plan are held in the
Plan trust (the "Trust") which is administered by the trustee appointed by
Magyar Bank's Board of Directors.
Prior to the effective date of the offering, you were provided the
opportunity to direct the investment of your account into one of the following
funds:
1. Transamerica Stable Value Fund
2. Diversified Core Bond Fund
3. Diversified Short Horizon Fund
4. Diversified Intermediate Horizon Fund
5. Diversified Long Horizon Fund
6. Diversified Value & Income Fund
7. Transamerica Premier Diversified Equity Fund
8. Diversified Stock Index Fund
9. Mutual Qualified Fund
10. Fidelity Advisor Mid Cap Fund
11. Fidelity Advisor Small Cap Fund
8
In connection with the offering, the Plan now provides that in addition
to the funds specified above, you may direct the trustee, or its representative,
to invest all or a portion of your account in the Magyar Bancorp, Inc. Stock
Fund. You may elect to have both past contributions and earnings, as well as
future contributions to your account invested among the funds listed above. If
you fail to provide an effective investment direction, your contributions will
be invested in the Transamerica Stable Value Fund until such time as you provide
an effective investment direction. Transfers of past contributions and the
earnings thereon do not affect the investment mix of future contributions. You
may change your investment directions at any time. You may also redirect the
investment of your investment accounts such that a percentage of any one or more
investment accounts may be transferred to any one or more other investment
accounts.
PERFORMANCE HISTORY
The following table provides performance data with respect to the
investment funds available under the Plan through September 30, 2005:
AVERAGE COMPOUND RATE OF RETURN
AS OF THE QUARTER ENDED SEPTEMBER 30, 2005
STOCK FUNDS QTR 1 YEAR 3 YEAR 5 YEAR 10 YEAR SINCE
INCEPTION(1)
Transamerica Stable Value Fund 3.47% 3.30% 3.17% 3.88% -- 4.57%
Diversified Core Bond Fund -0.59% 2.36% 4.02% 5.69% 5.53% --
Diversified Short Horizon Fund 0.45% 3.58% 4.94% 4.77% -- 5.25%
Diversified Intermediate
Horizon Fund 2.77% 9.06% 10.22% 2.49% -- 6.20%
Diversified Long Horizon Fund 5.17% 15.03% 15.55% -0.76% -- 3.03%
Diversified Value & Income Fund 4.52% 15.07% 17.68% 5.63% 10.19% --
Transamerica Premier
Diversified Equity Fund 7.97% 13.43% 15.76% 1.66% -- 4.35%
Diversified Stock Index Fund 3.34% 11.45% 15.96% -2.16% 8.80%
Mutual Qualified Fund 4.75% 19.53% 18.70% 9.37% 11.68% --
Fidelity Advisor Mid Cap Fund 9.70% 23.38% 24.16% 4.68% -- 15.06%
Fidelity Advisor Small Cap Fund 7.30% 26.15% 25.24% 4.04% -- 15.37%
- ----------------------------
(1) This figure is given only if the fund has not been in existence for 10
years.
9
MARKET COMPARISONS
QTR 1 YEAR 3 YEAR 5 YEAR 10 YEAR
S&P 500 Index(2) 3.61% 12.24% 16.71% -1.49% 9.49%
Lehman Aggregate Bond Index(3) -0.68% 2.80% 3.96% 6.63% 6.55%
80% Lehman Aggregate Bond Index
10% Russell 1000 Value Index
10% Citigroup T-Bill - 3 Mos. Index(4) -0.07% 4.13% 5.34% 6.22% 6.87%
50% Lehman Aggregate Bond Index
30% Russell 1000 Index/12% Russell 2000
Small Cap Index/8% MSCI World Ex-US
Equity Index(5) 2.29% 9.98% 12.21% 4.95% 8.45%
60% Russell 1000 Index/25% Russell 2000
Small Cap Index/15% MSCI World Ex-US
Equity Index(6) 5.19% 17.17% 20.56% 2.68% 9.77%
Russell 1000 Value Index(7) 3.88% 16.68% 20.48% 5.76% 11.52%
S&P Mid-Cap 400 Index(8) 4.87% 22.16% 22.12% 7.05% 14.14%
Russell 2000 Stock Index(9) 4.70% 17.96% 24.12% 6.45% 9.38%
The following is a description of each of the Plan's investment funds:
TRANSAMERICA STABLE VALUE FUND. The Transamerica Stable Value Fund seeks to
protect against loss of principal while providing returns in excess of money
market funds and one-year Treasury bills. Best suited for investors seeking a
stable return and safety of principal, this Fund has a portfolio investment rate
design in which all deposits are credited with the same interest
- ----------------------------
(2) This is the benchmark index for the Transamerica Premier Diversified Equity
Fund and the Diversified Stock Index Fund.
(3) This is the benchmark index for the Diversified Core Bond Fund.
(4) This is the benchmark index for the Diversified Short Horizon Fund.
(5) This is the benchmark index for the Diversified Intermediate Horizon Fund.
(6) This is the benchmark index for the Diversified Long Horizon Fund.
(7) This is the benchmark index for the Diversified Value & Income Fund.
(8) This is the benchmark index for the Fidelity Advisor Mid Cap Fund.
(9) This is the benchmark index for the Fidelity Advisor Small Cap Fund.
10
rate, credited on a daily basis, and there is no set maturity. The effective
credited interest rate is set monthly and effective on the first day of the
month. Contract charges may reduce this return. Deposits to this account are
invested in Transamerica Life Insurance and Annuity Company's (TALIAC) general
account. Because the interest rate is guaranteed for a specific period of time
by TALIAC, whose financial strength is highly rated, the account carries a low
amount of risk.
DIVERSIFIED CORE BOND FUND. This Fund invests primarily in investment grade debt
securities and U.S. government obligations (including mortgage-backed securities
guaranteed by U.S. government agencies and instrumentalities). This Fund also
invests in securities of foreign issuers. This Fund is a mutual fund within the
Diversified Investors Funds Group and, under a Core Fund and Feeder structure,
invests its assets in a "Core Fund" with a similar investment objective. The
values of bonds change in response to changes in economic conditions, interest
rates and the creditworthiness of individual issuers. Funds that invest in bonds
can lose their value as interest rates rise and an investor can lose principal.
DIVERSIFIED SHORT HORIZON FUND. This Fund seeks high level of current income and
preservation of capital by primarily investing in a diversified portfolio of
fixed income funds. This Fund will be invested across the High Quality Bond,
Intermediate Government Bond, Core Bond, and Money Market Funds. A portion of
the fund may be invested in relatively conservative equity funds, namely the
Value & Income, Growth & Income and Equity Growth funds as a hedge against
inflation. The values of stocks change in response to general market and
economic conditions and the circumstances of individual issuers. The values of
bonds change in response to changes in economic conditions, interest rates and
the creditworthiness of individual issuers.
DIVERSIFIED INTERMEDIATE HORIZON FUND. This Fund seeks a high level of current
income and capital appreciation by investing in a diversified portfolio of fixed
income and equity funds. This Fund portfolio will invest in a combination of
both fixed income and equity funds maintaining approximately equal exposure to
both asset classes. The values of stocks change in response to general market
and economic conditions and the circumstances of individual issuers. The values
of bonds change in response to changes in economic conditions, interest rates
and the creditworthiness of individual issuers.
DIVERSIFIED LONG HORIZON FUND. This Fund seeks to provide long-term returns from
growth of capital and growth of income. This Fund invests in 9.75% in bond and
90% in stocks. This Fund may invest up to 0.25% of its assets money market
Funds. This Fund invests in a combination of bond stocks and money market Funds.
This Fund is best suited for those investors who intend to achieve long term
growth through equity investments. This Fund is a relatively aggressive balanced
portfolio that seeks competitive returns with slightly more volatility. The
values of stocks change in response to general market and economic conditions
and the circumstances of individual issuers. The values of bonds change in
response to changes in economic conditions, interest rates and the
creditworthiness of individual issuers.
DIVERSIFIED VALUE INCOME FUND. This Fund invests primarily in stocks of medium
sized companies which the Fund's advisers believe that the potential to deliver
earnings growth in excess of the market average or to become market leaders.
This Fund invests 80% of its net assets in securities of medium sized companies
(market capitalizations between $2 billion and
11
$15 billion) and related investments. This Fund invests in equity securities,
emphasizing common stocks listed on the New York Stock Exchange and on other
national securities exchanges and stocks that are traded over the counter, but
may also invest in foreign securities. Historically, stocks have provided
greater long-term returns and have entailed greater short-term risks than other
investments. Value stocks may be subject to special risks that have caused the
stocks to be out of favor and undervalued in the Diversified Investment
Advisors' opinion.
TRANSAMERICA PREMIER DIVERSIFIED EQUITY FUND. This Fund seeks to invest in
domestic common stocks that Diversified Investment Advisors believes are
undervalued relative to the intrinsic or private market value of the company
(intrinsic value is what an informed financial or strategic buyer would pay to
own the entire company). This Fund offering is for the Investor Class shares.
Historically, common stocks have provided greater long-term returns and have
entailed greater short-term risks than other investment choices. Smaller or
newer issuers carry more risk than larger, more established issuers.
DIVERSIFIED STOCK INDEX FUND. This Fund seeks to match the performance of the
Standard & Composite Stock Price Index. This Fund invests substantially 90% of
its net assets in the stocks comprising the Standard & Poor's 500 Composite
Stock Price Index 1 and related investments. This Fund may also use various
investment techniques such as buying and selling futures contracts and options
entering into swap agreements and purchasing indexed securities. This Fund
invests in securities through an underlying mutual fund having similar
investment goals and strategies. This Fund invests in all of its assets in the
S&P 500 Index Master Portfolio of Master Investment Portfolio. Historically,
common stocks have provided greater long-term returns and have entailed greater
short-term risks than other investment choices. Smaller or newer issuers carry
more risk than larger, more established issuers.
MUTUAL QUALIFIED FUND. The principal investment goal of this Fund is capital
appreciation which may occasionally be short term and secondary goal is income.
This Fund invests mainly in equity securities of companies of any nation. The
Funds invest substantially in mid- and large cap companies with market
capitalization values greater than $1.5 billion and may also invest a
significant portion of its assets in small cap companies. The Fund expects to
invest not less than 50% of its assets in foreign securities. Historically,
common stocks have provided greater long-term returns and have entailed greater
short-term risks than other investment choices. Smaller or newer issuers carry
more risk than larger, more established issuers.
FIDELITY ADVISOR MID CAP FUND. This Fund seeks long-term growth of capital by
investing primarily in common stocks. At least 80% of this Fund's assets are
invested in securities of companies with medium market capitalizations. The Fund
invests in domestic and foreign issuers. This Fund invests in growth or value
stocks or both. The Fund uses fundamental analysis of each issuer's financial
condition and industry position and market and economic conditions to select
investments. Historically, common stocks have provided greater long-term returns
and have entailed greater short-term risks than other investment choices.
Smaller or newer issuers carry more risk than larger, more established issuers.
12
FIDELITY ADVISOR SMALL CAP FUND.
This Fund seeks long-term growth of capital by investing primarily in common
stocks. This Fund normally invests at least 80% of assets in securities of
companies with small market capitalizations. This Fund invests in domestic and
foreign issuers. The Fund invests in either growth stocks or value stocks or
both. This Fund uses fundamental analysis of each issuer's financial condition
and industry position and market and economic conditions to select investments.
Historically, smaller company stocks have generally experienced greater price
swings, and have fluctuated independently from larger company stocks. Smaller or
relatively newer companies can be particularly sensitive to changing economic
conditions and can have less-certain growth prospects compared to larger company
stocks. Also, since small company stocks may not be traded as often as larger
company stocks, it may be difficult or impossible for the portfolio to sell
securities at a desirable price.
AN INVESTMENT IN ANY OF THE FUNDS LISTED ABOVE IS NOT A DEPOSIT OF A
BANK AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY. AS WITH ANY MUTUAL FUND
INVESTMENT, THERE IS ALWAYS A RISK THAT YOU MAY LOSE MONEY ON YOUR
INVESTMENT IN ANY OF THE FUNDS LISTED ABOVE.
INVESTMENT IN COMMON STOCK OF MAGYAR BANCORP, INC.
In connection with the offering, the Plan now offers the Magyar Bancorp,
Inc. Stock Fund as an additional choice to these investments options. The Magyar
Bancorp, Inc. Stock Fund invests primarily in the common stock of Magyar
Bancorp, Inc. In connection with the offering, you may direct the trustee to
invest up to 100% of your Plan account in the Magyar Bancorp, Inc. Stock Fund as
a one-time special election. Subsequent to the offering, you may elect to invest
all or a portion of your payroll deduction contributions in the Magyar Bancorp,
Inc. Stock Fund. Subsequent to the offering, you may also elect to transfer into
the Magyar Bancorp, Inc. Stock Fund all or a portion of your accounts currently
invested in other funds under the Plan.
The Magyar Bancorp, Inc. Stock Fund consists primarily of investments in
the Common Stock of Magyar Bancorp, Inc. After the offering, the trustee of the
Plan will, to the extent practicable, use all amounts held by it in the Magyar
Bancorp, Inc. Stock Fund, including cash dividends paid on the Common Stock held
in the fund, to purchase additional shares of Common Stock of Magyar Bancorp,
Inc.
As of the date of this prospectus supplement, none of the shares of
Magyar Bancorp, Inc. Common Stock have been issued or are outstanding and there
is no established market for Magyar Bancorp, Inc. Common Stock. Accordingly,
there is no record of the historical performance of the Magyar Bancorp, Inc.
Stock Fund. Performance of the Magyar Bancorp, Inc. Stock Fund depends on a
number of factors, including the financial condition and profitability of Magyar
Bancorp, Inc. and Magyar Bank and market conditions for Magyar Bancorp, Inc.
Common Stock generally.
13
Investments in the Magyar Bancorp, Inc. Stock Fund involve special risks
common to investments in the Common Stock of Magyar Bancorp, Inc.
FOR A DISCUSSION OF MATERIAL RISKS YOU SHOULD CONSIDER, SEE "RISK
FACTORS" BEGINNING ON PAGE 24 OF THE ATTACHED PROSPECTUS.
ADMINISTRATION OF THE PLAN
THE TRUSTEE AND CUSTODIAN. The trustee of the Plan is Investors Bank &
Trust Company. Investors Bank & Trust Company serves as trustee for all the
investments funds under the Plan, including during the offering period, for
Magyar Bancorp, Inc. Common Stock. Following the offering period, Investors Bank
& Trust Company will also serve as the trustee of the Magyar Bancorp, Inc. Stock
Fund.
PLAN ADMINISTRATOR. Pursuant to the terms of the Plan, the Plan is
administered by the Plan Administrator, Magyar Bank. The address of the Plan
Administrator is 400 Somerset Street, New Brunswick, New Jersey 08903, telephone
number (732) 342-7600. The Plan Administrator is responsible for the
administration of the Plan, interpretation of the provisions of the Plan,
prescribing procedures for filing applications for benefits, preparation and
distribution of information explaining the Plan, maintenance of Plan records,
books of account and all other data necessary for the proper administration of
the Plan, preparation and filing of all returns and reports relating to the Plan
which are required to be filed with the U.S. Department of Labor and the
Internal Revenue Service, and for all disclosures required to be made to
participants, beneficiaries and others under Sections 104 and 105 of ERISA.
REPORTS TO PLAN PARTICIPANTS. The Plan Administrator will furnish you a
statement at least quarterly showing the balance in your account as of the end
of that period, the amount of contributions allocated to your account for that
period, and any adjustments to your account to reflect earnings or losses (if
any).
AMENDMENT AND TERMINATION
It is the intention of Magyar Bank to continue the Plan indefinitely.
Nevertheless, Magyar Bank may terminate the Plan at any time. If the Plan is
terminated in whole or in part, then regardless of other provisions in the Plan,
you will have a fully vested interest in your accounts. Magyar Bank reserves the
right to make any amendment or amendments to the Plan which do not cause any
part of the trust to be used for, or diverted to, any purpose other than the
exclusive benefit of participants or their beneficiaries; provided, however,
that Magyar Bank may make any amendment it determines necessary or desirable,
with or without retroactive effect, to comply with ERISA.
MERGER, CONSOLIDATION OR TRANSFER
In the event of the merger or consolidation of the Plan with another
plan, or the transfer of the trust assets to another plan, you will receive a
benefit immediately after the merger, consolidation or transfer that is equal to
the benefit that you would have been entitled to receive immediately before the
merger, consolidation or transfer.
14
FEDERAL INCOME TAX CONSEQUENCES
The following is a brief summary of the material federal income tax
aspects of the Plan. You should not rely on this summary as a complete or
definitive description of the material federal income tax consequences relating
to the Plan. Statutory provisions change, as do their interpretations, and their
application may vary in individual circumstances. Finally, the consequences
under applicable state and local income tax laws may not be the same as under
the federal income tax laws. Please consult your tax advisor with respect to any
distribution from the Plan and transactions involving the Plan.
As a "tax-qualified retirement plan," the Code affords the Plan special
tax treatment, including:
(1) the sponsoring employer is allowed an immediate tax deduction
for the amount contributed to the Plan each year;
(2) participants pay no current income tax on amounts contributed by
the employer on their behalf; and
(3) earnings of the Plan are tax-deferred, thereby permitting the
tax-free accumulation of income and gains on investments.
Magyar Bank will administer the Plan to comply with the requirements of
the Code as of the applicable effective date of any change in the law.
LUMP-SUM DISTRIBUTION. A distribution from the Plan to a participant or
the beneficiary of a participant will qualify as a lump-sum distribution if it
is made within one taxable year, on account of the participant's death,
disability or separation from service, or after the participant attains age 59
1/2, and consists of the balance credited to participants under the Plan. The
portion of any lump-sum distribution required to be included in your taxable
income for federal income tax purposes consists of the entire amount of the
lump-sum distribution you have made to this Plan.
MAGYAR BANCORP, INC. COMMON STOCK INCLUDED IN LUMP-SUM DISTRIBUTION. If
a lump-sum distribution includes Magyar Bancorp, Inc. Common Stock, the
distribution generally will be taxed in the manner described above, except that
the total taxable amount may be reduced by the amount of any net unrealized
appreciation with respect to Magyar Bancorp, Inc. Common Stock; that is, the
excess of the value of Magyar Bancorp, Inc. Common Stock at the time of the
distribution over its cost of the securities to the trust. The tax basis of
Magyar Bancorp, Inc. Common Stock, for purposes of computing gain or loss on its
subsequent sale, equals the value of Magyar Bancorp, Inc. Common Stock at the
time of distribution, less the amount of net unrealized appreciation. Any gain
on a subsequent sale or other taxable disposition of Magyar Bancorp, Inc. Common
Stock, to the extent of the amount of net unrealized appreciation at the time of
distribution, will constitute long-term capital gain, regardless of the holding
period of Magyar Bancorp, Inc. Common Stock. Any gain on a subsequent sale or
other taxable disposition of Magyar Bancorp, Inc. Common Stock, in excess of the
amount of net unrealized
15
appreciation at the time of distribution, will be considered long-term capital
gain. The recipient of a distribution may elect to include the amount of any net
unrealized appreciation in the total taxable amount of the distribution, to the
extent allowed by regulations to be issued by the Internal Revenue Service.
DISTRIBUTIONS: ROLLOVERS AND DIRECT TRANSFERS TO ANOTHER QUALIFIED PLAN
OR TO AN IRA. You may roll over virtually all distributions from the Plan to
another qualified plan or to an individual retirement account in accordance with
the terms of the other plan or account.
ADDITIONAL EMPLOYEE RETIREMENT INCOME SECURITY ACT ("ERISA") CONSIDERATIONS
As noted above, the Plan is subject to certain provisions of ERISA,
including special provisions relating to control over the Plan's assets by
participants and beneficiaries. The Plan's feature that allows you to direct the
investment of your account balances is intended to satisfy the requirements of
section 404(c) of ERISA relating to control over plan assets by a participant or
beneficiary. The effect of this is two-fold. First, you will not be deemed a
"fiduciary" because of your exercise of investment discretion. Second, no person
who otherwise is a fiduciary, such as Magyar Bank, the Plan administrator, or
the Plan's trustee is liable under the fiduciary responsibility provision of
ERISA for any loss which results from your exercise of control over the assets
in your Plan account.
Because you will be entitled to invest all or a portion of your account
balance in the Plan in Magyar Bancorp, Inc. Common Stock, the regulations under
ERISA section 404(c) require that the Plan establish procedures that ensure the
confidentiality of your decision to purchase, hold, or sell employer securities,
except to the extent that disclosure of such information is necessary to comply
with federal or state laws not preempted by ERISA. These regulations also
require that your exercise of voting and similar rights with respect to the
Common Stock be conducted in a way that ensures the confidentiality of your
exercise of these rights.
SECURITIES AND EXCHANGE COMMISSION REPORTING AND SHORT-SWING PROFIT LIABILITY
Section 16 of the Securities Exchange Act of 1934 imposes reporting and
liability requirements on officers, directors, and persons beneficially owning
more than 10% of public companies such as Magyar Bancorp, Inc. Section 16(a) of
the Securities Exchange Act of 1934 requires the filing of reports of beneficial
ownership. Within 10 days of becoming an officer, director or person
beneficially owning more than 10% of the shares of Magyar Bancorp, Inc., a Form
3 reporting initial beneficial ownership must be filed with the Securities and
Exchange Commission. Changes in beneficial ownership, such as purchases, sales
and gifts generally must be reported on a Form 4 within 2 business days after
the change occurs. Insiders must file a Form 5 to report any transactions that
should have been reported earlier on a Form 4 or were eligible for deferred
reporting. If a Form 5 must be filed, it is due 45 days after the end of Magyar
Bancorp, Inc.'s fiscal year. Discretionary transactions in and beneficial
ownership of the Common Stock through the Magyar Bancorp, Inc. Stock Fund of the
Plan by officers, directors and persons beneficially owning more than 10% of the
Common Stock of Magyar Bancorp, Inc. generally must be reported to the
Securities and Exchange Commission by such individuals.
16
In addition to the reporting requirements described above, section 16(b)
of the Securities Exchange Act of 1934 provides for the recovery by Magyar
Bancorp, Inc. of profits realized by an officer, director or any person
beneficially owning more than 10% of Magyar Bancorp, Inc.'s Common Stock
resulting from non-exempt purchases and sales of Magyar Bancorp, Inc. Common
Stock within any six-month period.
The Securities and Exchange Commission has adopted rules that provide
exemptions from the profit recovery provisions of section 16(b) for all
transactions in employer securities within an employee benefit plan, provided
certain requirements are met. These requirements generally involve restrictions
upon the timing of elections to acquire or dispose of employer securities for
the accounts of section 16(b) persons. Except for distributions of Common Stock
due to death, disability, retirement, termination of employment or under a
qualified domestic relations order, persons affected by section 16(b) are
required to hold shares of Common Stock distributed from the Plan for six months
following such distribution and are prohibited from directing additional
purchases of units within the Magyar Bancorp, Inc. Stock Fund for six months
after receiving such a distribution.
FINANCIAL INFORMATION REGARDING PLAN ASSETS
Financial information representing the net assets available for Plan
benefits and the change in net assets available for Plan benefits at December
31, 2004, are attached to this prospectus supplement.
LEGAL OPINION
The validity of the issuance of the Common Stock has been passed upon by
Luse Gorman Pomerenk & Schick, P.C., Washington, D.C., which firm acted as
special counsel to Magyar Bank in connection with Magyar Bancorp, Inc.'s
offering.
17
MAGYAR BANCORP, INC.
401(k) SAVINGS PLAN
Statement of Net Assets Available for Benefits as of December 31, 2004
December 31, 2004
--------------------------------------
Beginning of Year End of Year
----------------- -----------------
Assets.................................. $ 1,155,202 $ 1,493,220
Investments............................. $ 1,155,202 $ 1,493,220
Liabilities............................. $ 0 $ 0
Net Assets Available for Plan Benefits.. $ 1,155,202 $ 1,493,220
18
MAGYAR BANCORP, INC.
401(k) SAVINGS PLAN
Statement of Changes in Net Assets Available For Plan Benefits
DECEMBER 31, 2004
-----------------
Investment Income........................... $ 140,677
Investment Expense.......................... $ (1,118)
Net Investment Income....................... $ 139,559
Contributions............................... $ 210,329
Total Additions............................. $ 349,888
Benefits paid:
Withdrawals................................. $ (11,870)
Increase in Net Assets...................... $ 338,018
Net Assets Available for Plan...............
Benefits: Beginning of Year.............. $ 1,155,202
End of Year................................. $ 1,493,220
19
PROSPECTUS
MAGYAR BANCORP, INC.
PROPOSED HOLDING COMPANY FOR MAGYAR BANK
2,277,000 SHARES OF COMMON STOCK
Magyar Bancorp, Inc., a Delaware corporation, is offering for sale
2,277,000 shares of its common stock in connection with the reorganization of
Magyar Bank into the mutual holding company form of ownership. The shares being
offered represent 44.20% of the shares of common stock of Magyar Bancorp, Inc.
that will be outstanding following the reorganization. We also intend to issue
up to 91,080 shares of common stock, or 1.77% of the shares of Magyar Bancorp,
Inc. that will be outstanding following the reorganization, and contribute
$500,000 in cash to a charitable foundation to be established by Magyar Bank, a
New Jersey-chartered savings bank. After the stock offering, 54.03% of Magyar
Bancorp, Inc.'s outstanding shares of common stock will be owned by Magyar
Bancorp, MHC, our proposed New Jersey-chartered mutual holding company parent.
Magyar Bancorp, Inc. is the proposed holding company for Magyar Bank. An
application has been filed with Nasdaq and we expect that the shares of common
stock of Magyar Bancorp, Inc. will be quoted on the Nasdaq National Market under
the symbol "MGYR."
We must sell a minimum of 1,683,000 shares in order to complete the
reorganization and the stock offering. We will terminate the stock offering if
we do not sell the minimum number of shares. We may sell up to 2,618,550 shares
without resoliciting subscribers. The stock offering is scheduled to expire at
12:00 noon on December 16, 2005. We may extend the expiration date without
notice to you, until January 30, 2006. No extension may go beyond January 3,
2008.
The minimum purchase is 25 shares of common stock. The maximum purchase
allowable for an individual, or individuals exercising subscription rights
through a single qualifying deposit account is 25,000 shares of common stock,
and no person, together with an associate or group of persons acting in concert,
may purchase more than 35,000 shares of common stock. For further information
concerning the limitations on purchases of shares of common stock, see "The
Reorganization and the Stock Offering--Limitations on Purchase of Shares." Once
submitted, orders are irrevocable unless the stock offering is terminated or
extended beyond January 30, 2006. Funds received during the stock offering will
be held in a segregated account at Magyar Bank and will bear interest at our
passbook savings rate, which is currently 0.50% per annum. If the stock offering
is terminated, subscribers will have their funds returned promptly, with
interest. If the stock offering is extended beyond January 30, 2006 or there is
a resolicitation of subscribers, we will notify you, and you will have the
opportunity to renew, change or cancel your order. If you do not provide us with
a positive indication of your intent to renew your order, your funds will be
returned to you with interest.
Ryan Beck & Co., Inc. will use its best efforts to assist us in selling
our shares of common stock, but is not obligated to purchase any of the shares
of common stock that are being offered for sale. The shares of common stock are
being offered at $10.00 per share. Subscribers will not pay any commissions to
purchase shares of common stock in the stock offering. There is currently no
public market for the shares of common stock.
THIS INVESTMENT INVOLVES RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
PLEASE READ THE "RISK FACTORS" BEGINNING ON PAGE 24.
================================================================================
OFFERING SUMMARY
PRICE: $10.00 PER SHARE
MINIMUM MIDPOINT MAXIMUM ADJUSTED MAXIMUM
--------------- ---------------- --------------- ------------------
Number of shares............................... 1,683,000 1,980,000 2,277,000 2,618,550
Estimated stock offering expenses including
underwriting commissions and expenses (1)..... $ 773,000 $ 801,000 $ 828,000 $ 859,000
Net proceeds................................... $ 16,057,000 $ 18,999,000 $ 21,942,000 $ 25,326,500
Net proceeds per share......................... $ 9.54 $ 9.60 $ 9.64 $ 9.67
- ---------------------------
(1) See "The Reorganization and the Stock Offering--Plan of Distribution and
Marketing Arrangements" for a discussion of Ryan Beck & Co., Inc.'s
compensation for this stock offering.
THESE SECURITIES ARE NOT DEPOSITS OR SAVINGS ACCOUNTS AND ARE NOT
INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
NONE OF THE SECURITIES AND EXCHANGE COMMISSION, THE BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
NEW JERSEY DEPARTMENT OF BANKING AND INSURANCE, NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED OR DISAPPROVED THESE SECURITIES OR HAS DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-----------------------------
RYAN BECK & CO., INC.
-----------------------------
The date of this prospectus is November 14, 2005
[MAP]
TABLE OF CONTENTS
SUMMARY........................................................................1
RECENT DEVELOPMENTS...........................................................18
RISK FACTORS..................................................................24
FORWARD LOOKING STATEMENTS....................................................31
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA................................32
HOW WE INTEND TO USE THE PROCEEDS FROM THE STOCK OFFERING.....................34
OUR POLICY REGARDING DIVIDENDS................................................35
MARKET FOR THE COMMON STOCK...................................................36
REGULATORY CAPITAL COMPLIANCE.................................................37
CAPITALIZATION................................................................38
PRO FORMA DATA................................................................40
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH AND
WITHOUT THE CHARITABLE FOUNDATION...........................................46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF MAGYAR BANCORP, INC............................47
BUSINESS OF MAGYAR BANCORP, INC...............................................65
BUSINESS OF MAGYAR BANK.......................................................65
FEDERAL AND STATE TAXATION....................................................91
SUPERVISION AND REGULATION....................................................93
MANAGEMENT...................................................................108
THE REORGANIZATION AND THE STOCK OFFERING....................................122
MAGYAR BANK CHARITABLE FOUNDATION............................................146
RESTRICTIONS ON THE ACQUISITION OF MAGYAR BANCORP, INC. AND MAGYAR BANK......149
DESCRIPTION OF CAPITAL STOCK OF MAGYAR BANCORP, INC..........................153
TRANSFER AGENT AND REGISTRAR.................................................155
LEGAL AND TAX MATTERS........................................................155
EXPERTS......................................................................155
WHERE YOU CAN FIND MORE INFORMATION..........................................156
REGISTRATION REQUIREMENTS....................................................156
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...................................F-1
SUMMARY
THE FOLLOWING SUMMARY EXPLAINS SELECTED INFORMATION REGARDING THE MUTUAL
HOLDING COMPANY REORGANIZATION, THE OFFERING OF SHARES OF COMMON STOCK BY MAGYAR
BANCORP, INC. AND THE BUSINESS OF MAGYAR BANK. HOWEVER, NO SUMMARY CAN CONTAIN
ALL THE INFORMATION THAT MAY BE IMPORTANT TO YOU. FOR ADDITIONAL INFORMATION,
YOU SHOULD READ THIS PROSPECTUS CAREFULLY, INCLUDING THE FINANCIAL STATEMENTS
AND THE NOTES TO THE FINANCIAL STATEMENTS OF MAGYAR BANK.
THE COMPANIES
MAGYAR BANCORP, MHC
Upon completion of the reorganization and the stock offering, Magyar
Bancorp, MHC will be the New Jersey-chartered mutual holding company of Magyar
Bancorp, Inc. Magyar Bancorp, MHC is not currently an operating company. After
the completion of the reorganization and the stock offering, Magyar Bancorp, MHC
is expected to own 54.03% of the outstanding shares of common stock of Magyar
Bancorp, Inc. So long as Magyar Bancorp, MHC exists, it will be required to own
a majority of the voting stock of Magyar Bancorp, Inc. The executive office of
Magyar Bancorp, MHC will be located at 400 Somerset Street, New Brunswick, New
Jersey 08903, and its telephone number will be (732) 342-7600. Magyar Bancorp,
MHC will be subject to comprehensive regulation and examination by the Board of
Governors of the Federal Reserve System, and the New Jersey Department of
Banking and Insurance.
MAGYAR BANCORP, INC.
Magyar Bancorp, Inc. will be the Delaware-chartered mid-tier stock
holding company of Magyar Bank. Magyar Bancorp, Inc. is not currently an
operating company. Upon completion of the reorganization and stock offering,
Magyar Bancorp, Inc. will own 100% of the outstanding shares of common stock of
Magyar Bank. Magyar Bancorp, Inc.'s executive office is located at 400 Somerset
Street, New Brunswick, New Jersey 08903, and its telephone number is (732)
342-7600.
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 the 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 two branch offices located
in North Brunswick and South Brunswick, New Jersey. We anticipate opening a
third branch office located in New Brunswick, New Jersey during the first
calendar quarter of 2006. The telephone number at our main office is (732)
342-7600. At June 30, 2005, our assets totaled $325.1 million, our deposits
totaled $259.1 million and our retained earnings were $23.1 million.
We are in the business of attracting deposits from the public through
our branch network, and borrowing funds to originate loans and to invest in
securities. We originate mortgage loans secured by one- to four-family
residential real estate (including home equity lines of credit) and
commercial real estate, as well as commercial business loans and construction
loans. We also originate consumer loans, the majority of which are secured
demand loans. We offer a variety of deposit accounts and emphasize exceptional
customer service. Our investment securities consist primarily of mortgage-backed
securities and U.S. Government and Federal Agency obligations. We are subject to
comprehensive regulation and examination by both the New Jersey Department of
Banking and Insurance and the Federal Deposit Insurance Corporation.
BUSINESS STRATEGY
Our business strategy is to grow and improve profitability by:
o expanding our retail banking franchise through de novo branching
and, potentially, acquisitions;
o expanding and strengthening our customer base by offering new
products and services;
o increasing our loan portfolio and, in particular, commercial
real estate, commercial business and construction loans;
o reducing our reliance on net interest income by increasing fee
income from a variety of products and services, such as fixed
and variable annuities, retirement and investment planning, life
insurance and long-term care insurance;
o maintaining asset quality;
o managing our exposure to interest rate risk; and
o improving operating efficiencies and cost control.
A full description of our products and services begins on page 66 of
this prospectus. See also "Business of Magyar Bank--Business Strategy" for a
discussion of our business strategy.
OUR REORGANIZATION INTO A MUTUAL HOLDING COMPANY AND THE STOCK OFFERING
We do not have stockholders in our current mutual form of ownership. The
reorganization is a series of transactions by which we will convert our
corporate structure from our current status as a mutual savings bank to the
mutual holding company form of ownership. Following the reorganization, Magyar
Bank will become a New Jersey-chartered stock savings bank subsidiary of Magyar
Bancorp, Inc. Magyar Bancorp, Inc. will be a majority-owned subsidiary of Magyar
Bancorp, MHC. Our depositors will continue to have the same rights in Magyar
Bancorp, MHC as they have in Magyar Bank. As a New Jersey-chartered stock
savings bank, we will continue to be subject to the regulation and supervision
of the New Jersey Department of Banking and Insurance and the Federal Deposit
Insurance Corporation. Also, upon consummation of the reorganization and stock
offering, Magyar Bancorp, MHC and Magyar Bancorp, Inc. will be registered with
the Board of Governors of the Federal Reserve
2
System as bank holding companies, and will be subject to the regulations,
supervision and reporting requirements of the Board of Governors of the Federal
Reserve System.
The primary reasons for our decision to reorganize into the mutual
holding company structure and conduct the stock offering are to establish an
organizational structure that will enable us to compete more effectively in the
financial services marketplace, offer our depositors, employees, management and
directors an equity ownership interest in Magyar Bank and thereby obtain an
economic interest in our future success, and increase our capital to support
future growth and profitability.
Our new structure will permit us to issue capital stock, which is a
source of capital not available to a mutual savings bank.
The reorganization and the capital raised in the stock offering are
expected to:
o allow us to grow through whole bank or branch acquisitions, or
de novo branching;
o increase our lending capacity by providing us with additional
capital to support new loans and higher lending limits;
o increase our capacity to invest in securities, including
mortgage-backed securities;
o increase our capital base, which will provide greater
flexibility to invest in longer-term, higher-yielding assets;
and
o allow us to pay cash dividends and repurchase shares of our
common stock.
The reorganization and stock offering also will allow us to establish
stock benefit plans for management and employees which will help us to attract
and retain qualified personnel.
Unlike a standard conversion transaction in which all of the common
stock issued by the converting savings bank is sold to the public, in a mutual
holding company reorganization only a minority of the converting bank's stock is
sold to the public. A majority of the outstanding shares of common stock must be
held by the mutual holding company. Consequently, the shares that we are
permitted to sell in the stock offering represent a minority of our outstanding
shares of common stock. As a result, a mutual holding company stock offering
raises less than half of the capital of a standard conversion offering. Based on
these restrictions and our Board of Directors' evaluation of our capital needs,
our Board of Directors has decided to offer 44.20% of our outstanding shares of
common stock for sale in the stock offering, and 54.03% of our shares will be
retained by Magyar Bancorp, MHC. The Board of Directors determined that offering
44.20% of our outstanding shares of common stock for sale in the stock offering
would enable management to more effectively invest the capital raised in the
stock offering. We also intend to issue up to 91,080 shares of common stock (at
the maximum of the offering range), or 1.77% of the shares of Magyar Bancorp,
Inc. that will be outstanding following the stock offering, and contribute
$500,000 in cash to a charitable foundation to be established by Magyar Bank.
3
The following chart shows our corporate structure following the
reorganization and stock offering:
------------------------- ---------------------------------------
Public Stockholders
Magyar Bancorp, MHC (Including the Charitable Foundation)
------------------------- ---------------------------------------
54.03% 45.97%
of of
common stock common stock
--------------------------------------------
Magyar Bancorp, Inc.
--------------------------------------------
100% of common stock
--------------------------------------------
Magyar Bank
--------------------------------------------
TERMS OF THE STOCK OFFERING
We are offering between 1,683,000 and 2,277,000 shares of common stock
of Magyar Bancorp, Inc. to eligible depositors, our tax-qualified plans,
including an employee stock ownership plan, and, to the extent shares remain
available, to the public. The maximum number of shares that we sell in the stock
offering may increase by up to 15%, to 2,618,550 shares, as a result of strong
demand for the shares of common stock in the stock offering and/or positive
changes in financial markets in general and with respect to financial
institution stocks in particular. Unless the estimated pro forma market value of
Magyar Bancorp, Inc. decreases below $38,073,200 or increases above $59,237,420,
you will not have the opportunity to change or cancel your stock order once
submitted. The offering price of the shares of common stock is $10.00 per share.
Ryan Beck & Co., Inc., our marketing advisor in connection with the stock
offering, will use its best efforts to assist us in selling our shares of common
stock, but Ryan Beck & Co., Inc. is not obligated to purchase any shares in the
stock offering.
We also intend to issue up to 104,742 shares of common stock (at the
adjusted maximum of the offering range), or 1.77% of the shares of Magyar
Bancorp, Inc. that will be outstanding following the stock offering, and
contribute $500,000 in cash to a charitable foundation to be established by
Magyar Bank.
PERSONS WHO MAY ORDER STOCK IN THE STOCK OFFERING
We are offering the shares of common stock of Magyar Bancorp, Inc. in a
"subscription offering" in the following order of priority:
(1) Depositors who had accounts at Magyar Bank with aggregate
balances of at least $50 as of the close of business on June 30,
2004;
(2) The Magyar Bank tax-qualified employee plans, including the
employee stock ownership plan and Magyar Bank's existing 401(k)
plan;
(3) Depositors who had accounts at Magyar Bank with aggregate
balances of at least $50 as of the close of business on
September 30, 2005; and
4
(4) Depositors who had accounts at Magyar Bank as of the close of
business on November 4, 2005.
If any shares of our common stock remain unsold in the subscription
offering, we may offer such shares for sale in a community offering. Natural
persons residing in Middlesex and Somerset Counties, New Jersey, will have a
purchase preference in any community offering. Shares of common stock also may
be offered to the general public. The community offering, if any, may commence
concurrently with, during or promptly after, the subscription offering. We also
may offer shares of common stock not purchased in the subscription offering or
the community offering through a syndicate of broker-dealers in what is referred
to as a syndicated community offering. The syndicated community offering, if
necessary, would be managed by Ryan Beck & Co., Inc. We have the right to accept
or reject, in our sole discretion, any orders received in the community offering
or the syndicated community offering.
To ensure a proper allocation of stock, each eligible account holder
must list on his or her stock order form all deposit accounts in which he or she
had an ownership interest on June 30, 2004, September 30, 2005 or November 4,
2005, as applicable. Failure to list an account, or providing incorrect
information, could result in the loss of all or part of a subscriber's stock
allocation. We will strive to identify your ownership in all accounts, but we
cannot guarantee that we will identify all accounts in which you have an
ownership interest. Our interpretation of the terms and conditions of the plan
of reorganization and stock issuance and of the acceptability of the order forms
will be final.
LIMITS ON YOUR PURCHASE OF SHARES OF COMMON STOCK
The minimum purchase is 25 shares of common stock. Generally, no
individual, or individuals exercising subscription rights through a single
qualifying deposit account, may purchase more than $250,000 (25,000 shares of
common stock). If any of the following persons purchase shares of common stock,
their purchases, when combined with your purchases, cannot exceed $350,000
(35,000 shares):
o your spouse, or immediate family members of you or your spouse
living in your house;
o companies or other entities in which you have a 10% or greater
equity or substantial beneficial interest or in which you serve
as a senior officer or partner;
o a trust or other estate, in which you have a substantial
beneficial interest in the trust or estate or you are a trustee
or fiduciary for the trust or other estate; or
o other persons who may be acting together with you (including,
but not limited to, persons who file jointly a Schedule 13G or
Schedule 13D Beneficial Ownership Report with the Securities and
Exchange Commission).
Unless we determine otherwise, persons having the same address and
persons exercising subscription rights through qualifying deposit accounts
registered to the same address will be subject to the overall purchase
limitations. A detailed discussion of the limitations on purchases
5
of shares of common stock by an individual, associates and persons acting
together is set forth under the caption "The Reorganization and the Stock
Offering--Limitations on Purchase of Shares."
We may increase or decrease the purchase limitations in the stock
offering at any time.
Our employee stock ownership plan intends to purchase 8.0% of the shares
of common stock sold in the stock offering and issued to the charitable
foundation, without regard to these purchase limitations.
HOW WE DETERMINED TO OFFER BETWEEN 1,683,000 SHARES AND 2,277,000 SHARES
The decision to offer between 1,683,000 shares and 2,277,000 shares,
subject to adjustment, which is our offering range, is based on an independent
appraisal of our pro forma market value prepared by FinPro, Inc., a firm
experienced in appraisals of financial institutions. FinPro, Inc. is of the
opinion that as of September 2, 2005, the estimated pro forma market value of
the common stock of Magyar Bancorp, Inc. on a fully-converted basis was between
$38,073,200 and $51,510,800, with a midpoint of $44,792,000. The term "fully
converted" assumes that 100% of our shares of common stock had been sold to the
public, as opposed to the 44.20% that will be sold in the stock offering.
In preparing its appraisal, FinPro, Inc. considered the information
contained in this prospectus, including Magyar Bancorp, Inc.'s consolidated
financial statements. FinPro, Inc. also considered the following factors, among
others:
o the present and projected operating results and financial
condition of Magyar Bancorp, Inc. and Magyar Bank, and the
economic and demographic conditions in Magyar Bank's existing
market areas;
o certain historical, financial and other information relating to
Magyar Bank;
o a comparative evaluation of the operating and financial
statistics of Magyar Bank with those of other similarly situated
publicly traded thrifts and mutual holding companies (peer
group);
o the impact of the stock offering on Magyar Bancorp, Inc.'s
consolidated net worth and earnings potential; and
o the trading market for securities of comparable institutions and
general conditions in the market for such securities.
We also intend to issue up to 104,742 shares of common stock (at the
adjusted maximum of the offering range), or 1.77% of the shares of Magyar
Bancorp, Inc. that will be outstanding following the stock offering, and
contribute $500,000 in cash to a charitable foundation to be established by
Magyar Bank. The intended contribution of cash and shares of common stock to the
charitable foundation has the effect of reducing our estimated pro forma market
valuation. See "Comparison of Valuation and Pro Forma Information With and
Without the Charitable Foundation."
6
In reviewing the appraisal prepared by FinPro, Inc., the Board of
Directors considered the methodologies and the appropriateness of the
assumptions used by FinPro, Inc. in addition to the factors listed above. The
Board of Directors believes these assumptions are reasonable.
The Board of Directors determined the common stock should be sold at
$10.00 per share and that 44.20% of the shares of Magyar Bancorp, Inc. common
stock should be offered for sale in the stock offering. Based on the estimated
valuation range and the $10.00 per share purchase price, the number of shares of
Magyar Bancorp, Inc. common stock that will be outstanding upon completion of
the stock offering will range from 3,807,320 to 5,151,080 (subject to adjustment
to 5,923,742), and the number of shares of Magyar Bancorp, Inc. common stock
that will be sold in the stock offering will range from 1,683,000 shares to
2,277,000 shares (subject to adjustment to 2,618,550), with a midpoint of
1,980,000 shares. The number of shares of common stock that Magyar Bancorp, MHC
will own after the stock offering will range from 2,057,000 to 2,783,000
(subject to adjustment to 3,200,450). The number of shares of common stock that
the charitable foundation will own after the stock offering will range from
67,320 to 91,080 (subject to adjustment to 104,742).
The appraisal will be updated before we complete the stock offering. If
the estimated pro forma market value of the shares of Magyar Bancorp, Inc.
common stock at that time is either below $38,073,200 or above $59,237,420, then
Magyar Bancorp, Inc. may: terminate the stock offering and return all funds
promptly; extend the stock offering or hold a new subscription or community
offering, or both; establish a new offering range and commence a resolicitation
of subscribers; or take such other actions as may be permitted by the plan of
reorganization and stock issuance. If the stock offering is extended, we will
notify you, and you will have the opportunity to renew, change or cancel your
order. If you do not provide us with a positive indication of your intention to
renew your order, your funds will be returned to you with interest at our
passbook savings rate.
Two measures that investors often use to analyze an issuer's stock are
the ratio of the offering price to the issuer's tangible book value and the
ratio of the offering price to the issuer's annual net income. According to
FinPro, Inc., while appraisers (as well as investors) use both ratios to
evaluate an issuer's stock, the price to tangible book value ratio has
historically been the most frequently used method due to the volatility of
earnings in the thrift industry in the early-to-mid 1990s and, generally, the
lower price to earnings multiples of recently converted institutions, and more
recently, volatile interest rates. FinPro, Inc. considered both of these ratios,
among other factors, in preparing its appraisal. Tangible book value is the same
as tangible equity, and represents the difference between the issuer's tangible
assets and liabilities.
FinPro, Inc. considered the information contained in the following
table, which presents a summary of selected pricing ratios for peer group
companies and for us (on an adjusted core earnings basis). As Magyar Bancorp,
Inc. and the individual peer companies have different percentages of shares
owned by public stockholders, FinPro, Inc. relied on ratios that assume the full
conversion of Magyar Bancorp, Inc. and all of the peer companies. The peer group
consists of 12 publicly traded mutual holding companies that FinPro, Inc.
considered comparable to Magyar Bancorp, Inc. FinPro, Inc.'s appraisal is based
on a comparison of financial and other characteristics of Magyar Bancorp, Inc.
relative to the peer group. A share of common stock is priced at 52.63 times and
66.67 times our pro forma fully converted last twelve months' core
7
earnings, at the midpoint and adjusted maximum of the valuation range,
respectively. The common stock is valued at 71.63% and 79.11% of our pro forma
adjusted fully converted tangible book value, at the midpoint and adjusted
maximum of the valuation range, respectively. As of October 14, 2005, the median
trading price of the peer group companies was 29.52 times their last twelve
months' core earnings per share on a fully converted basis and 92.50% of their
fully converted tangible book value per share. At the midpoint of the value
range, Magyar Bancorp, Inc. is priced at a 78.29% premium on a fully converted
core earnings basis and a 22.56% discount on a fully converted tangible book
value basis relative to the peer group median. At the adjusted maximum of the
value range, Magyar Bancorp, Inc. is priced at a 125.85% premium on a fully
converted core earnings basis and an 14.47% discount on a fully converted
adjusted tangible book value basis relative to the peer group median. FinPro,
Inc. determined that Magyar Bancorp, Inc. should be priced at a discount to the
peer group on a tangible book value basis because of Magyar Bancorp, Inc.'s
weaker earnings, lower expected trading liquidity and lower expected dividend
levels. FinPro, Inc. also considered the pricing and after-market performance of
other recent mutual holding company stock offerings in determining the
appropriateness of the pricing discount.
AT OR FOR THE TWELVE MONTHS ENDED
JUNE 30, 2005
-----------------------------------------------
ADJUSTED
PRICE-TO-CORE PRICE-TO-TANGIBLE
EARNINGS MULTIPLE(1) BOOK VALUE RATIO(2)
--------------------- ---------------------
MAGYAR BANCORP, INC.(2)
Minimum................................... 50.00x 67.07%
Midpoint.................................. 52.63x 71.63%
Maximum................................... 62.50x 75.41%
Maximum, as adjusted...................... 66.67x 79.11%
PEER GROUP(3)
Average................................... 33.26x 93.40%
Median.................................... 29.52x 92.50%
- ---------------------------
(1) The price-to-core earnings multiples set forth above reflect the
recognition of compensation expense in accordance with recently finalized
rules issued by the Financial Accounting Standards Board, and the
Securities and Exchange Commission requiring public companies to expense
the grant-date fair value of stock options granted to officers, directors
and employees. The implementation of this accounting rule will increase our
compensation costs over the vesting period of the options. FinPro, Inc.
assumed that the entire stock option plan would be expensed over a
five-year period. In calculating the fully converted pricing multiples
FinPro, Inc. assumed that the peer group implemented an employee stock
ownership plan and stock-based incentive plans, as part of their second
step conversions, and factored in the expensing of stock options. The pro
forma information beginning on page 40 reflects an estimated expense for
the stock option plan that may be adopted by Magyar Bancorp, Inc. and the
resulting effect on the pro forma price-to-earnings multiples for Magyar
Bancorp, Inc.
(2) Based on Magyar Bank's financial data as of and for the twelve months ended
June 30, 2005, adjusted to reflect the net gain on the sale of land and
building recognized in the quarter ended September 30, 2005.
(3) Reflects earnings for the most recent twelve-month period for which data
were publicly available.
THE INDEPENDENT APPRAISAL DOES NOT INDICATE AFTER-MARKET TRADING VALUE.
DO NOT ASSUME OR EXPECT THAT MAGYAR BANCORP, INC.'S VALUATION AS INDICATED ABOVE
MEANS THAT THE COMMON STOCK WILL TRADE AT OR ABOVE THE $10.00 PURCHASE PRICE
AFTER THE STOCK OFFERING.
8
AFTER-MARKET STOCK PRICE PERFORMANCE PROVIDED BY INDEPENDENT APPRAISER
The following table presents stock price appreciation information (as of
October 14, 2005) for all mutual holding company initial public offerings
completed between January 1, 2005 and October 14, 2005.
ALL MUTUAL HOLDING COMPANY STOCK OFFERINGS WITH COMPLETED CLOSING DATES
BETWEEN JANUARY 1, 2005 AND OCTOBER 14, 2005
PERCENT CHANGE SINCE IPO
----------------------------------------------------
AFTER 1 AFTER AFTER AFTER
COMPANY NAME IPO DATE DAY 1 WEEK 1 MONTH 3 MONTHS
- ------------ ------------ ----------------------------------------------------
(%) (%) (%) (%)
Investors Bancorp, Inc. (MHC) 10/12/2005 0.20 NA NA NA
Wauwatosa Holdings, Inc. (MHC) 10/05/2005 12.50 11.50 NA NA
Ottawa Savings Bancorp, Inc. (MHC) 07/15/2005 10.00 5.00 7.00 NA
United Financial Bancorp, Inc. (MHC) 07/13/2005 17.50 15.70 17.00 13.70
Colonial Bankshares, Inc. (MHC) 06/30/2005 6.00 6.90 7.50 5.70
Heritage Financial Group (MHC) 06/30/2005 7.50 7.20 9.30 10.00
North Penn Bancorp, Inc. (MHC) 06/02/2005 10.00 2.50 1.50 1.50
Rockville Financial, Inc. (MHC) 05/23/2005 4.80 10.50 19.60 38.90
FedFirst Financial Corp. (MHC) 04/07/2005 (6.60) (7.10) (14.50) (9.00)
Brooklyn Federal Bancorp, Inc. (MHC) 04/06/2005 (0.50) (0.10) (5.00) 7.90
Prudential Bancorp, Inc. of Pennsylvania (MHC) 03/30/2005 (1.50) (6.50) (12.50) 8.40
Kentucky First Federal Bancorp (MHC) 03/03/2005 7.90 11.00 12.40 15.50
Kearny Financial Corp. (MHC) 02/24/2005 13.90 14.30 10.80 6.00
Home Federal Bancorp, Inc. of Louisiana (MHC) 01/21/2005 (1.00) -- (0.80) (6.00)
BV Financial, Inc. (MHC) 01/14/2005 (6.50) (4.00) (1.50) (8.60)
Georgetown Bancorp, Inc. (MHC) 01/06/2005 2.00 -- 0.50 (3.50)
- ------------------------------------------------------ -------------- ------------ ------------- ------------ ------------
AVERAGE: 4.76 4.46 3.66 6.19
MEDIAN: 5.40 5.00 4.25 6.00
- ------------------------------------------------------ -------------- ------------ ------------- ------------ ------------
Stock prices of some recent mutual holding company stock offerings have
decreased below their initial offering prices. For example, while the above
table illustrates an average appreciation of 3.66% after one month of trading,
the stock of five companies were trading below their initial offering price
after one month of trading. The table above presents only short-term historical
information on stock price performance, which may not be indicative of the
longer-term performance of such stock prices. It is also not intended to predict
how shares of our common stock may perform following the stock offering.
The market price of any particular company's stock is subject to various
factors, including the amount of proceeds a company raises and management's
ability to deploy proceeds (such as through investments, the acquisition of
other financial institutions or other businesses, the payment of dividends and
common stock repurchases). In addition, stock prices may be affected by general
market conditions, the interest rate environment, the market for financial
institutions, merger or takeover transactions, the presence of professional and
other investors who purchase stock on speculation, as well as other
unforeseeable events not necessarily in the control of management or the Board
of Directors.
FinPro, Inc. advised the Board of Directors that the appraisal was
prepared in conformance with the regulatory appraisal methodology. That
methodology requires a valuation
9
based on an analysis of the trading prices of comparable public companies whose
stocks have traded for at least one year prior to the valuation date. FinPro,
Inc. also advised the Board of Directors that the after-market trading
experience of recent transactions was considered in the appraisal as a general
indicator of current market conditions, but was not relied upon as a primary
valuation methodology.
BEFORE YOU MAKE AN INVESTMENT DECISION, WE URGE YOU TO CAREFULLY READ
THIS PROSPECTUS, INCLUDING, BUT NOT LIMITED TO, THE SECTION ENTITLED "RISK
FACTORS" BEGINNING ON PAGE 24.
OUR OFFICERS, DIRECTORS AND EMPLOYEES WILL RECEIVE ADDITIONAL COMPENSATION AND
BENEFIT PROGRAMS AFTER THE REORGANIZATION AND STOCK OFFERING
The Board of Directors of Magyar Bank has adopted an employee stock
ownership plan, which will award shares of our common stock to eligible
employees primarily based on their compensation. It is expected that our
employee stock ownership plan will purchase 8.0% of the shares of common stock
sold in the stock offering and issued to the charitable foundation, and that
Magyar Bank's existing 401(k) plan will purchase shares of common stock in the
stock offering to the extent shares are available. Additionally, we may
implement a stock-based incentive plan that will provide for grants of stock
options and restricted stock.
In addition to shares of common stock purchased by the employee stock
ownership plan, we may grant options and awards under the stock-based incentive
plan. If the stock-based incentive plan is implemented and approved by
stockholders within one year of the completion of the stock offering, the number
of options granted or shares awarded under the stock-based incentive plan may
not exceed 10% and 4%, respectively, of the shares of common stock sold in the
stock offering and issued to the charitable foundation.
The employee stock ownership plan and the stock-based incentive plan
will increase our future compensation costs, thereby reducing our earnings. The
Financial Accounting Standards Board and the Securities and Exchange Commission
recently finalized rules that require public companies to expense the grant-date
fair value of stock options granted to officers, directors and employees by
their first fiscal year beginning after June 15, 2005, which, for us, is the
fiscal year beginning October 1, 2005. Since all stock options will be granted
after October 1, 2005, we will expense the grant-date fair value of such stock
options. Recognizing an expense equal to the grant-date fair value of stock
options will increase our compensation costs over the vesting period of the
options. Additionally, stockholders will experience a reduction in their
ownership interest if we issue new shares of our common stock to fund stock
options and stock awards. See "Risk Factors--Risks Related to the Stock
offering--Our Stock-Based Incentive and Benefit Plans Will Increase Our Costs,
Which Will Reduce Our Income" and "Management--Stock Benefit Plans."
The following table summarizes the stock benefits that our officers,
directors and employees may receive following the reorganization and stock
offering at the maximum of the offering range and assuming that we initially
implement a stock-based incentive plan granting options to purchase 10% of the
shares sold in the stock offering and issued to the charitable foundation, and
awarding shares of common stock equal to 4% of the shares sold in the stock
10
offering and issued to the charitable foundation. In the table below, it is
assumed that, at the maximum of the offering range, a total of 2,368,080 shares
of common stock will be sold to the public and issued to the charitable
foundation, and a total of 5,151,080 shares will be outstanding after the stock
offering, including shares issued to Magyar Bancorp, MHC and to the charitable
foundation.
VALUE OF BENEFITS
NUMBER OF INDIVIDUALS ELIGIBLE TO BASED ON MAXIMUM
SHARES PLAN RECEIVE AWARDS OF OFFERING RANGE (1)
- ------------- ------------------------------ ----------------------------------- -------------------------
(IN THOUSANDS)
189,446 Employee stock ownership plan All employees $ 1,894,460
94,723 Stock awards Directors, officers and employees $ 947,230
236,808 Stock options Directors, officers and employees $ 906,975
- ---------------------------
(1) The actual value of the stock awards will be determined based on their fair
value as of the date the grants are made. For purposes of this table, fair
value is assumed to be the offering price of $10.00 per share. The fair
value of stock options has been estimated at $3.83 per option using the
Black-Scholes option pricing model with the following assumptions: a
grant-date share price and option exercise price of $10.00; dividend yield
of zero; expected option life of 10 years; risk free interest rate of 3.97%
(based on the 10-year Treasury Note rate); and a volatility rate of 16.65%
based on an index of publicly traded mutual holding company institutions.
The actual expense of the stock options will be determined by the
grant-date fair value of the options, which will depend on a number of
factors, including the valuation assumptions used in the option pricing
model ultimately adopted.
The value of the restricted shares of common stock will be based on the
price of Magyar Bancorp, Inc.'s common stock at the time those shares are
awarded, which, subject to stockholder approval, cannot occur until at least six
months after the reorganization. The following table presents the total value of
all restricted shares to be available for award and issuance under the
stock-based incentive plan, assuming the shares of common stock for the plan are
purchased or issued in a range of market prices from $8.00 per share to $14.00
per share.
70,013 SHARES AWARDED 82,368 SHARES AWARDED 94,723 SHARES AWARDED 108,932 SHARES AWARDED
AT MINIMUM OF OFFERING AT MIDPOINT OF OFFERING AT MAXIMUM OF OFFERING AT ADJUSTED MAXIMUM
SHARE PRICE RANGE RANGE RANGE OF OFFERING RANGE
- ----------------- ------------------------ ------------------------- ------------------------ ------------------------
(IN THOUSANDS, EXCEPT PRICE PER SHARE DATA)
$ 8.00 $ 560,102 $ 658,944 $ 757,786 $ 871,453
$10.00 $ 700,128 $ 823,680 $ 947,232 $ 1,089,317
$12.00 $ 840,154 $ 988,416 $ 1,136,678 $ 1,307,180
$14.00 $ 980,179 $ 1,153,152 $ 1,326,125 $ 1,525,044
The grant-date fair value of the options granted under the stock-based
incentive plan will be based in part on the price of Magyar Bancorp, Inc.'s
common stock at the time the options are granted, which, subject to stockholder
approval, cannot occur until at least six months after the reorganization. The
value will also depend on the various assumptions utilized in estimating the
value using the Black-Scholes option pricing model. The following table presents
the total estimated value of the options to be available for grant under the
stock-based incentive plan, assuming the market price and exercise price for the
stock options are equal and the range of market prices for the shares is $8.00
per share to $14.00 per share.
272,329 OPTIONS
175,032 OPTIONS 205,920 OPTIONS 236,808 OPTIONS AT ADJUSTED
MARKET/EXERCISE GRANT-DATE FAIR AT MINIMUM OF AT MIDPOINT OF AT MAXIMUM OF MAXIMUM OF
PRICE VALUE PER OPTION OFFERING RANGE OFFERING RANGE OFFERING RANGE OFFERING RANGE
- ------------------- ------------------ ------------------ ------------------ ------------------ ------------------
(IN THOUSANDS, EXCEPT PRICE PER SHARE DATA)
$ 8.00 $ 3.06 $ 535,957 $ 630,538 $ 725,119 $ 833,887
$10.00 $ 3.83 $ 670,373 $ 788,674 $ 906,975 $ 1,043,021
$12.00 $ 4.59 $ 803,936 $ 945,807 $ 1,087,678 $ 1,250,830
$14.00 $ 5.36 $ 937,925 $ 1,103,442 $ 1,268,958 $ 1,459,301
11
OUR ISSUANCE OF SHARES OF COMMON STOCK TO THE CHARITABLE FOUNDATION
To further our commitment to our local community, we intend to establish
a charitable foundation as part of the stock offering. Three current members of
Magyar Bank's Board of Directors, as well as an individual from the community
designated by the Board of Directors of Magyar Bank, will serve on the Board of
Directors of the charitable foundation. The officers and board members of the
charitable foundation initially will not be compensated for their service.
We will contribute cash in the amount of $500,000 and issue shares of
our common stock, ranging from 67,320 shares at the minimum of the valuation
range to 91,080 shares at the maximum of the valuation range, which shares will
have a value of $673,200 at the minimum of the valuation range and $910,800 at
the maximum of the valuation range, based on the $10.00 per share offering
price. As a result of the issuance of shares of common stock and the
contribution of cash to the charitable foundation, we will record an after-tax
expense of approximately $704,000 at the minimum of the valuation range and of
approximately $847,000 at the maximum of the valuation range, during the quarter
in which the stock offering is completed. The charitable foundation will be
dedicated exclusively to supporting charitable causes and community development
activities in the communities in which we operate.
Issuing shares of common stock to the charitable foundation will:
o dilute the voting interests of purchasers of shares of our
common stock in the stock offering; and
o result in an expense, and a reduction in earnings during the
quarter in which the contribution is made, equal to the full
amount of the contribution to the charitable foundation, offset
in part by a corresponding tax benefit.
Specifically, stockholders other than Magyar Bancorp, MHC will
experience an 80 basis point dilution in their ownership of stock in Magyar
Bancorp, Inc. as a result of the issuance of shares of common stock to the
foundation. Similarly, on a pro forma basis assuming the stock offering closed
at the midpoint of the offering range, Magyar Bancorp, Inc.'s return on assets
ratio will be 0.06% with the foundation as compared to 0.07% without the
foundation and its return on equity ratio will be 0.52% with the foundation as
compared to 0.58% without the foundation. See "Risk Factors--The Contribution of
Shares to the Charitable Foundation Will Dilute Your Ownership Interests and
Adversely Affect Net Income in Fiscal Year 2006," "Comparison of Valuation and
Pro Forma Information With and Without the Charitable Foundation" and "Magyar
Bank Charitable Foundation."
HOW YOU MAY PAY FOR YOUR SHARES
In the subscription offering and the community offering you may pay for
your shares of common stock only by:
(1) personal check, bank check or money order payable to Magyar
Bancorp, Inc.; or
12
(2) authorizing us to withdraw money from your deposit account(s)
maintained with Magyar Bank (you may not authorize direct
withdrawal from accounts with check-writing privileges; you
should submit a check instead).
If you wish to use your Magyar Bank individual retirement account to pay
for your shares of common stock, please be aware that federal law requires that
such funds first be transferred to a self-directed retirement account with a
trustee other than Magyar Bank. The transfer of such funds to a new trustee
takes time, so please make arrangements as soon as possible or contact the Stock
Information Center for further information. We cannot assure you that you will
be able to use retirement account funds for this purchase.
Also, please be aware that Magyar Bank is not permitted to lend funds to
anyone for the purpose of purchasing shares of common stock in the stock
offering. Therefore, you may not submit Magyar Bank line of credit checks to
purchase shares of common stock in the stock offering.
You can subscribe for shares of common stock in the stock offering by
delivering to Magyar Bank a signed and completed original stock order form,
together with full payment, provided we receive the stock order form before the
end of the stock offering. Check and money order payments received by Magyar
Bank will be cashed immediately and placed in a segregated account at Magyar
Bank. We will pay interest at Magyar Bank's passbook savings rate, currently
0.50% per annum, from the date funds are received until completion or
termination of the stock offering. Withdrawals from certificates of deposit at
Magyar Bank for the purpose of purchasing shares of common stock in the stock
offering may be made without incurring an early withdrawal penalty. All funds
authorized for withdrawal from deposit accounts with Magyar Bank must be in the
deposit accounts at the time the stock order form is received. However, funds
will not be withdrawn from the accounts until the stock offering is completed
and will continue to earn interest at the applicable deposit account rate until
the completion of the stock offering. A hold will be placed on those funds when
your stock order is received, making the designated funds unavailable to you.
After we receive an order, the order cannot be revoked or changed, except with
our consent. Payment may not be made by cash, or by submitting third party
checks or wire transfer or any other electronic transfer of funds. In addition,
we are not required to accept copies or facsimiles of order forms.
For a further discussion regarding the stock ordering procedures, see
"The Reorganization and the Stock Offering--Prospectus Delivery and Procedure
for Purchasing Shares."
YOU MAY NOT SELL OR TRANSFER YOUR SUBSCRIPTION RIGHTS
If you order shares of common stock in the subscription offering, you
will be required to state that you are purchasing the shares of common stock for
yourself and that you have no agreement or understanding to sell or transfer
your subscription rights. We intend to take legal action, including reporting
persons to federal or state regulatory agencies, against anyone who we believe
sells or in any way transfers his or her subscription rights. We will not accept
your stock order if we have reason to believe that you sold or transferred your
subscription rights. In addition, you may not add the names of others for joint
stock registration unless you share the
13
same subscription offering eligibility priority. Failure to list all deposit
accounts in which you have an interest, or providing incomplete or incorrect
information, may result in a loss of part or all of your share allocation.
DEADLINE FOR ORDERS OF COMMON STOCK
If you wish to purchase shares of common stock, we must receive, not
simply have post-marked, your properly completed stock order form, together with
payment for the shares, no later than 12:00 noon, Eastern time, on December 16,
2005, unless we extend this deadline. You may submit your stock order form by
mail using the return envelope provided, by overnight courier to the indicated
address on the stock order form, or by bringing your stock order form to our
Stock Information Center, located at our main office. WE WILL NOT ACCEPT STOCK
ORDER FORMS AT ANY OF OUR BRANCH OFFICES.
EXPIRATION OF THE STOCK OFFERING
The subscription offering will expire at 12:00 noon, Eastern time, on
December 16, 2005. We expect that the community offering, if held, would expire
at the same time. We may extend this expiration date without notice to you,
until January 30, 2006. If the subscription offering and/or community offerings
extend beyond January 30, 2006, we will be required to resolicit subscribers
before proceeding with the stock offering. In such event, if you do not respond,
your funds will be promptly returned to you with interest and/or your deposit
account withdrawal authorization will be canceled. No extension may go beyond
January 3, 2008, which is two years after the date of the special meeting of
depositors called to consider and vote upon the reorganization.
STEPS WE MAY TAKE IF WE DO NOT RECEIVE ORDERS FOR THE MINIMUM NUMBER OF SHARES
If we do not receive orders for at least 1,683,000 shares of common
stock after the expiration of the subscription offering, and any community
offering and syndicated community offering, and we chose not to terminate the
stock offering, we may take several steps to sell the minimum number of shares
of common stock in the offering range. Specifically, we may
o increase the maximum number of shares that may be purchased by
any subscriber (including our subscribing directors and
officers); and/or
o extend the stock offering beyond January 30, 2006, provided that
any such extension will require us to resolicit subscriptions
received in the stock offering.
OUR POLICY REGARDING DIVIDENDS
Following completion of the stock offering, our Board of Directors will
have the authority to declare dividends on our shares of common stock, subject
to statutory and regulatory requirements. However, no decision has been made
with respect to the amount and timing of any dividend payments. The payment and
amount of any dividend payments will depend upon a number of factors, including
the following:
14
o regulatory capital requirements;
o our financial condition and results of operations;
o tax considerations;
o statutory and regulatory limitations; and
o general economic conditions.
MARKET FOR THE SHARES OF COMMON STOCK
We anticipate that the shares of common stock sold in the stock offering
will be quoted on the Nasdaq National Market under the symbol "MGYR". Ryan Beck
& Co., Inc. currently intends to make a market in the shares of common stock,
but it is under no obligation to do so.
HOW WE INTEND TO USE THE PROCEEDS WE RAISE FROM THE STOCK OFFERING
Assuming we sell 2,277,000 shares of common stock in the stock offering,
resulting in estimated net proceeds of $21.9 million, we intend to distribute
the net proceeds as follows:
o $11.7 million (53.5% of the net proceeds) will be contributed to
Magyar Bank;
o $1.9 million (8.6% of the net proceeds) will be loaned to our
employee stock ownership plan to fund its purchase of 8.0% of
the shares of common stock sold in the stock offering and issued
to the charitable foundation; and
o $8.3 million (37.9% of the net proceeds) will be retained by
Magyar Bancorp, Inc.
We may use the net proceeds of the stock offering to invest in
securities, to deposit funds in Magyar Bank, to finance the possible acquisition
of other financial institutions or financial service businesses, to pay
dividends or for other general corporate purposes, including repurchasing shares
of our common stock. Magyar Bank may use the proceeds it receives to make loans,
to purchase securities, to expand its banking franchise internally, through
branching or through acquisitions, and for general corporate purposes. See "How
We Intend to Use the Proceeds from the Stock Offering." Neither Magyar Bank nor
Magyar Bancorp, Inc. is considering any specific acquisition transaction at this
time.
ONCE SUBMITTED, YOUR PURCHASE ORDER MAY NOT BE REVOKED UNLESS THE STOCK OFFERING
IS TERMINATED, OR EXTENDED BEYOND JANUARY 30, 2006.
Funds that you submit by check or money order to purchase shares of our
common stock in the stock offering will be held in an interest-bearing account
until the termination or completion of the stock offering, including any
extension of the expiration date. Because completion of the stock offering will
be subject to an update of the independent appraisal, among other factors, there
may be one or more delays in the completion of the stock offering. Any orders
that you submit to purchase shares of our common stock in the stock offering are
irrevocable, and you will not have access to subscription funds or amounts
designated for deposit
15
account withdrawal unless the stock offering is terminated, or extended beyond
January 30, 2006.
PROPOSED STOCK PURCHASES BY MANAGEMENT
Magyar Bank's directors and executive officers and their associates are
expected to purchase approximately 150,000 shares of common stock in the stock
offering, which represents 7.6% of the shares sold to the public and 3.3% of the
total shares to be outstanding after the stock offering at the midpoint of the
offering range. Directors and executive officers will pay the same $10.00 per
share price paid by all other persons who purchase shares of common stock in the
stock offering. These shares of common stock will be counted in determining
whether the minimum of the range of the stock offering is reached.
RESTRICTIONS ON THE ACQUISITION OF MAGYAR BANCORP, INC. AND MAGYAR BANK
Federal regulations, as well as our mutual holding company structure,
restrict the ability of any person, firm or entity to acquire Magyar Bancorp,
Inc., Magyar Bank, or their respective capital stock. These restrictions include
the requirement that a potential acquirer of common stock obtain the prior
approval of the Board of Governors of the Federal Reserve System before
acquiring 10% or more of the shares of common stock of Magyar Bancorp, Inc.
Under New Jersey law and our governing corporate instruments, at least
50.1% of Magyar Bancorp, Inc.'s voting shares must be owned by Magyar Bancorp,
MHC, as long as Magyar Bancorp, MHC is in existence. Magyar Bancorp, MHC will be
controlled by its Board of Directors, who will consist of persons who also are
members of the Board of Directors of Magyar Bancorp, Inc. and Magyar Bank.
Magyar Bancorp, MHC will be able to elect all members of the Board of Directors
of Magyar Bancorp, Inc., and as a general matter, will be able to control the
outcome of all matters presented to the stockholders of Magyar Bancorp, Inc. for
resolution by vote, except for matters that require a vote greater than a
majority. Magyar Bancorp, MHC, acting through its Board of Directors, will be
able to control the business and operations of Magyar Bancorp, Inc. and Magyar
Bank, and will be able to prevent any challenge to the ownership or control of
Magyar Bancorp, Inc. by public stockholders. Accordingly, a change in control of
Magyar Bancorp, Inc. and Magyar Bank cannot occur unless agreed to by the Board
of Directors of Magyar Bancorp, MHC.
POSSIBLE CONVERSION OF MAGYAR BANCORP, MHC TO STOCK FORM
In the future, Magyar Bancorp, MHC may convert from the mutual to stock
form in a transaction commonly known as a "second-step" conversion. In a
second-step conversion, depositors of Magyar Bank would have subscription rights
to purchase shares of common stock of Magyar Bancorp, Inc. or its successor, and
the public stockholders of Magyar Bancorp, Inc. would be entitled to exchange
their shares of common stock for an equal percentage of shares of the stock
holding company resulting from the conversion. This percentage may be adjusted
to reflect any assets owned by Magyar Bancorp, MHC.
The Board of Directors of Magyar Bancorp, MHC has no current plan to
undertake a second-step conversion transaction. Any second-step conversion
transaction would require the approval of holders of a majority of the
outstanding shares of Magyar Bancorp, Inc. common
16
stock (excluding shares held by Magyar Bancorp, MHC) and the approval of a
majority of the eligible votes of depositors of Magyar Bank.
HOW YOU MAY OBTAIN ADDITIONAL INFORMATION REGARDING THE STOCK OFFERING
If you have any questions regarding the stock offering, please call the
Stock Information Center at (732) 214-2092, Monday through Friday between 10:00
a.m. and 4:00 p.m., Eastern time. The Stock Information Center is located at our
main office, 400 Somerset Street, New Brunswick, New Jersey. The Stock
Information Center will be closed weekends and bank holidays.
TO ENSURE THAT EACH PERSON RECEIVES A PROSPECTUS AT LEAST 48 HOURS PRIOR
TO THE EXPIRATION DATE OF DECEMBER 16, 2005 IN ACCORDANCE WITH FEDERAL LAW, NO
PROSPECTUS WILL BE MAILED ANY LATER THAN FIVE DAYS PRIOR TO DECEMBER 16, 2005 OR
HAND-DELIVERED ANY LATER THAN TWO DAYS PRIOR TO DECEMBER 16, 2005. ORDER FORMS
WILL BE DISTRIBUTED ONLY WHEN PRECEDED OR ACCOMPANIED BY A PROSPECTUS.
17
RECENT DEVELOPMENTS
The selected financial condition and other data presented below as of
September 30, 2005 and June 30, 2005, for the three months ended September 30,
2005 and 2004, and for the twelve months ended September 30, 2005 are unaudited.
In the opinion of management, the unaudited selected data reflect all
adjustments (none of which were other than normal recurring entries) necessary
for a fair presentation of the results of such periods. This information should
be read in conjunction with the financial statements and notes beginning on page
F-2. The selected data as of and for the twelve months ended September 30, 2004,
is derived from the audited financial statements of Magyar Bank.
AT AT AT
SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
2005 2005 2004
-------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
SELECTED FINANCIAL CONDITION DATA: (IN THOUSANDS)
Total assets.................................... $ 357,449 $ 325,052 $ 287,078
Cash and interest-bearing deposits with banks... 3,209 3,718 4,975
Securities held to maturity..................... 34,008 36,068 42,615
Securities available for sale, at fair value.... 20,602 22,086 31,171
Loans receivable, net........................... 280,771 248,312 193,550
Deposits........................................ 281,275 259,081 223,974
Borrowings...................................... 49,050 36,729 35,043
Equity.......................................... 24,500 23,121 23,112
FOR THE THREE MONTHS ENDED FOR THE TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2005 2004 2005 2004
-------------- -------------- -------------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
SELECTED DATA: (IN THOUSANDS)
Interest and dividend income.................... $ 4,891 $ 3,214 $ 16,221 $ 12,584
Interest expense................................ 1,941 1,060 5,953 4,259
-------------- -------------- -------------- --------------
Net interest and dividend income............. 2,950 2,154 10,268 8,325
Provision for loan losses....................... 654 50 891 202
-------------- -------------- -------------- --------------
Net interest and dividend income after
provision for loan losses.................. 2,296 2,104 9,377 8,123
-------------- -------------- -------------- --------------
Gain on sale of real property................... 2,887 -- 2,887 --
Other non-interest income....................... 229 203 766 796
-------------- -------------- -------------- --------------
Non-interest income.......................... 3,116 203 3,653 796
Non-interest expense ........................... 3,025 1,988 10,590 8,050
-------------- -------------- -------------- --------------
Income before income taxes...................... 2,387 319 2,440 869
Income tax expense.............................. 941 110 926 257
-------------- -------------- -------------- --------------
Net income................................... $ 1,446 $ 209 $ 1,514 $ 612
============== ============== ============== ==============
18
FOR THE THREE MONTHS ENDED AT OR FOR THE TWELVE
------------------------------ ------------------------------
2005 2004 2005 2004
-------------- -------------- -------------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
Return on average assets (1).................... 1.68% 0.30% 1.95% 0.22%
Return on average equity (1).................... 24.47% 3.63% 25.44% 2.69%
Interest rate spread (2)........................ 3.32% 3.06% 3.24% 3.02%
Net interest margin (1) (3)..................... 3.56% 3.23% 3.44% 3.04%
Efficiency ratio (4)............................ 49.87% 84.34% 76.07% 90.27%
Non-interest expense to average total assets (1) 3.52% 2.85% 3.41% 2.94%
Average interest-earning assets to average
interest-bearing liabilities................. 110.53% 110.80% 110.46% 109.72%
ASSET QUALITY RATIOS:
Non-performing assets as a percent of total
assets....................................... 0.16% 0.09% 0.16% 0.09%
Non-performing loans as a percent of total loans 0.20% 0.13% 0.20% 0.13%
Allowance for loan losses as a percent of
non-performing loans ........................ 542.20% 947.77% 542.20% NM(5)
Allowance for loan losses as a percent of total
loans........................................ 1.10% 1.20% 1.10% 1.20%
CAPITAL RATIOS:
Total risk-based capital (to risk weighted
assets)...................................... 10.30% 13.79% 10.30% 13.79%
Tier 1 risk-based capital (to risk weighted
assets)...................................... 9.15% 12.54% 9.15% 12.54%
Tier 1 leverage (core) capital (to adjusted
tangible assets)............................. 7.23% 8.36% 7.23% 8.36%
Equity to total assets.......................... 7.17% 8.05% 7.16% 8.05%
OTHER DATA:
Number of full service offices.................. 3 3 3 3
- ---------------------------
(1) Ratios have been annualized, where appropriate.
(2) Represents the difference between the weighted-average yield on
interest-earning assets and the weighted-average cost of interest-bearing
liabilities for the period.
(3) The net interest margin represents net interest income as a percent of
average interest-earning assets for the period.
(4) The efficiency ratio represents non-interest expense divided by the sum of
net interest income and non-interest income.
(5) Ratio not meaningful.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2005 AND JUNE 30, 2005
ASSETS. Total assets increased $32.4 million, or 10.0%, to $357.4
million at September 30, 2005 from $325.1 million at June 30, 2005. The increase
reflected continued growth in net loans, partially offset by a decrease in
securities available-for-sale and held-to-maturity, as well as a decrease in
cash and cash equivalents. The growth in net loans was primarily funded by
deposits, which increased to $281.3 million at September 30, 2005 from $259.1
million at June 30, 2005.
Net loans increased $32.5 million, or 13.1%, to $280.8 million at
September 30, 2005 from $248.3 million at June 30, 2005. Commercial real estate
loans increased $7.6 million and construction loans increased $20.8 million,
reflecting continued strong economic conditions in our primary market area as
well as our efforts to diversify lending activities and improve our net interest
rate spread by increasing the origination of these generally higher-yielding
loans. At September 30, 2005, commercial real estate, construction and
commercial business loans, in the aggregate, represented 46.7% of our total
loans. One- to four-family residential mortgage loans, which increased to $126.3
million at September 30, 2005 from $118.7 million at June 30, 2005,
19
decreased as a percentage of our total loans to 44.5% at September 30, 2005 from
47.3% at June 30, 2005.
Securities available-for-sale and securities held-to-maturity decreased
6.7% and 5.7%, respectively, as principal repayments and prepayments of
mortgage-backed securities and calls of federal agency obligations, as well as
the deployment of investment securities proceeds into new loans, continued
during the three months ended September 30, 2005.
The increase in total deposits was concentrated in certificates of
deposit, which increased to $151.4 million at September 30, 2005 from $137.5
million at June 30, 2005. At September 30, 2005, brokered deposits totaled $17.9
million. Federal Home Loan Bank advances increased to $49.1 million from $36.7
million, as we continued to "match-fund" a portion of our longer-term loans in
an attempt to reduce our interest rate risk.
Total retained earnings increased to $24.5 million at September 30, 2005
from $23.1 million at June 30, 2005, reflecting net income of $1.4 million for
the three months ended September 30, 2005.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005
AND 2004
NET INCOME. Net income increased to $1.4 million for the three months
ended September 30, 2005 from $209,000 for the prior year period, due to a $2.9
million gain on the sale of our main office, as well as higher net interest and
dividend income.
NET INTEREST AND DIVIDEND INCOME. Net interest and dividend income
increased to $3.0 million for the three months ended September 30, 2005 from
$2.2 million for the prior year period. The increase reflected an increase in
the average balance of our net interest-earning assets to $331.1 million for the
three months ended September 30, 2005 from $266.6 million for the prior year
period. In addition, our interest rate spread improved to 3.32% from 3.06%.
INTEREST INCOME. Interest income increased $1.7 million, or 52.2%, to
$4.9 million for the three months ended September 30, 2005 from $3.2 million for
the prior year period. The increase reflected an increase in the average balance
of our interest-earning assets to $331.1 million from $266.6 million, as well as
an improvement in the average yield on such assets to 5.91% from 4.82%. Interest
earned on loans increased to $4.3 million for the three months ended September
30, 2005 from $2.5 million for the prior year, reflecting a 45.4% increase in
the average balance of our loans as well as a 105 basis point increase in the
average yield on such loans to 6.41% from 5.36%. The higher yield on our loans
reflected the higher balances of higher-yielding commercial real estate and
construction loans. Interest earned on our investment securities decreased to
$573,000 from $728,000, reflecting the lower average balances of such
securities, which more than offset a 13 basis point increase in the average
yield on such securities to 3.90% from 3.77%.
INTEREST EXPENSE. Interest expense increased to $1.9 million for the
three months ended September 30, 2005 from $1.1 million for the prior year
period, due to an increase in the average
20
balance of interest-bearing liabilities to $300.0 million from $240.6 million.
In addition, the average cost of such liabilities increased to 2.59% from 1.76%.
Interest paid on deposits increased to $1.4 million from $785,000, reflecting an
increase in the average balance of deposits to $251.3 million for the three
months ended September 30, 2005 from $214.4 million for the prior year period.
In addition, the average cost of such deposits increased to 2.27% from 1.46%,
reflecting continued increases in the interest rate environment as well as
promotional rates on time deposits offered during the period. Interest paid on
Federal Home Loan Bank advances increased to $515,000 from $275,000, reflecting
an increase in the average balance of advances to $48.3 million for the three
months ended September 30, 2005 from $26.2 million for the prior year period.
PROVISION FOR LOAN LOSSES. Management made a provision of $654,000 for
the three months ended September 30, 2005, compared to a $50,000 provision for
the earlier year period. The increase in the provision for the 2005 period was
due primarily to the following factors. Additional provisions totaling $427,000
were allocated during the fourth quarter applying existing risk factors to the
portfolio. There has been a significant increase in the amount and proportion of
construction and commercial real estate loans in our portfolio. In particular,
during the fourth fiscal quarter, construction loans increased by $20.8 million,
or 55.9%, and commercial real estate loans increased by $7.6 million, or 15.3%.
As of September 30, 2005, these generally higher-risk loans had increased by
$89.8 million, and represented 40.6% of our total loan portfolio, compared to
13.0% of our loan portfolio as of September 30, 2004. Finally, due to the
continued growth of these loans at a faster than anticipated rate during the
fourth quarter, management determined to establish an unallocated allowance of
$227,000 reflecting the imprecision in estimating losses in light of the
unseasoned nature of the portfolio of construction and commercial real estate
loans. As a result of the fourth quarter provision, the allowance for loan
losses was $3.1 million, representing 1.10% of loans outstanding at September
30, 2005, compared to $2.3 million, or 1.20% of loans outstanding at September
30, 2004.
NON-INTEREST INCOME. Non-interest income increased to $3.1 million for
the three months ended September 30, 2005 from $203,000 for the prior year
period as a result of a $2.9 million gain on the sale of our main office during
the three months ended September 30, 2005.
NON-INTEREST EXPENSE. Non-interest expense increased to $3.0 million for
the three months ended September 30, 2005 from $2.0 million for the prior year
period. Compensation and employee benefits were the largest component of the
increase, rising to $1.6 million from $1.2 million. The increase in compensation
expense reflected the addition of several senior positions as we increased our
capacity to originate construction and commercial loans. Occupancy expense
increased to $488,000 from $230,000 due to the relocation of our main office and
work on our new branch office. Finally, professional services expense, employee
training expense and business development expense increased to $130,000 from
$63,000, to $63,000 from $14,000 and to $174,000 from $64,000, respectively, for
the three months ended September 30, 2005 compared to the prior year period. A
significant portion of the increase in the professional services expense and the
business development expense related to the opening of our new headquarters
office.
21
INCOME TAX EXPENSE. Income tax expense was $941,000 for the three months
ended September 30, 2005 compared to $110,000 for the three months ended
September 30, 2004. The principal reason for the increase in income tax expense
was higher net income for the 2005 period.
COMPARISON OF OPERATING RESULTS FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 2005
AND 2004
NET INCOME. Net income increased to $1.5 million for the twelve months
ended September 30, 2005 from $612,000 for the prior year period, due to a $2.9
million gain on the sale of our main office, as well as higher net interest and
dividend income.
NET INTEREST AND DIVIDEND INCOME. Net interest and dividend income
increased to $10.3 million for the twelve months ended September 30, 2005 from
$8.3 million for the twelve months ended September 30, 2004. The increase
reflected an increase in the average balance of our net interest-earning assets
to $298.1 million for the twelve months ended September 30, 2005 from $261.5
million for the twelve months ended September 30, 2004. In addition, our
interest rate spread improved to 3.23% from 3.02%.
INTEREST INCOME. Interest income increased $3.6 million, or 28.9%, to
$16.2 million for the twelve months ended September 30, 2005, due to an increase
in the average balance of our interest-earning assets as well as an improvement
in the average yield on such assets to 5.44% from 4.81%. Interest earned on
loans increased to $13.7 million from $9.6 million, due to a 29.3% increase in
the average balance of our loans, as well as a 53 basis point increase in the
average yield on such loans to 5.93% from 5.4%. The higher yield on our loans
reflected higher balances of higher-yielding commercial real estate and
construction loans. Interest earned on our investment securities decreased to
$2.5 million from $2.9 million, reflecting the lower average balances of such
securities, which more than offset a 12 basis point increase in the average
yield on such securities to 3.89% from 3.77%.
INTEREST EXPENSE. Interest expense increased to $6.0 million for the
twelve months ended September 30, 2005 from $4.3 million for the twelve months
ended September 30, 2004, due primarily to an increase in the average balance of
interest-bearing liabilities to $269.9 million, as well as an increase in the
average cost of such liabilities to 2.21% from 1.79%. Interest paid on deposits
increased to $4.4 million from $3.2 million, reflecting an increase in the
average balance of such deposits to $232.6 million from $215.5 million, as well
as an increase in the average cost of such deposits to 1.88% from 1.49%.
Interest paid on Federal Home Loan Bank advances increased to $1.6 million from
$1.0 million, reflecting an increase in the average balance of such advances to
$37.3 million.
PROVISION FOR LOAN LOSSES. Management made a provision of $891,000 for
the twelve months ended September 30, 2005 compared to $202,000 for the twelve
months ended September 30, 2004, due primarily to the increase in our portfolio
of construction and commercial real estate loans, as noted above.
22
NON-INTEREST INCOME. Non-interest income increased to $3.7 million for
the twelve months ended September 30, 2005 from $796,000 for the twelve months
ended September 30, 2004 as a result of a gain of $2.9 million resulting from
the sale of our main office during the twelve months ended September 30, 2005.
NON-INTEREST EXPENSE. Non-interest expense increased to $10.6 million
for the twelve months ended September 30, 2005 from $8.1 million for the twelve
months ended September 30, 2004. The biggest component of non-interest expense,
compensation and employee benefits expense, increased to $6.0 million from $4.1
million, reflecting higher staffing levels as well as average annual salary
increases of 3.7%. The increased compensation and employee benefits expense also
reflected severance payments for departing senior executives, including the
retirement of our former Chief Executive Officer in December 2004. Occupancy
expenses increased to $1.5 million from $883,000, reflecting the construction of
our new headquarters building.
INCOME TAX EXPENSE. Income tax expense increased to $926,000 from
$257,000, due primarily to higher income before taxes for the twelve months
ended September 30, 2005 compared to September 30, 2004. The effective tax rate
was 38.0% and 29.6% for the periods ended September 30, 2005 and 2004,
respectively.
23
RISK FACTORS
- --------------------------------------------------------------------------------
You should consider carefully the following risk factors in evaluating an
investment in the shares of common stock.
- --------------------------------------------------------------------------------
RISKS RELATED TO OUR BUSINESS
A SIGNIFICANT PORTION OF OUR COMMERCIAL BUSINESS, COMMERCIAL REAL ESTATE AND
CONSTRUCTION LOAN PORTFOLIO HAS BEEN ORIGINATED IN THE LAST TWO YEARS.
Our portfolio of commercial business, commercial real estate and
construction loans has grown from $34.2 million at September 30, 2003 to $107.2
million at June 30, 2005, an increase of 213.8%. Accordingly, a large portion of
this loan portfolio does not provide a significant payment history pattern that
can be used to evaluate ongoing credit risk. Therefore, it is difficult to
predict the future performance of this part of our loan portfolio. These loans
may have delinquency or charge-off levels above our historical experience, which
could adversely affect our future performance.
BECAUSE WE INTEND TO CONTINUE OUR EMPHASIS ON THE ORIGINATION OF COMMERCIAL
BUSINESS, COMMERCIAL REAL ESTATE AND CONSTRUCTION LOANS, OUR LENDING RISK WILL
INCREASE.
At June 30, 2005, our portfolio of commercial business, commercial real
estate and construction loans totaled $107.2 million, or 42.7% of our total
loans, compared to $53.2 million or 27.1% of our total loans at September 30,
2004 and $34.2 million, or 19.4% of our total loans at September 30, 2003. It is
our intent to continue to emphasize the origination of these loans. Commercial
business, commercial real estate and construction loans generally have more risk
than one- to four-family residential mortgage loans. At June 30, 2005, our
non-performing loans increased to $1.5 million from $247,000 at September 30,
2004, reflecting our increased originations of these loans. In addition, because
the repayment of these loans depends on the successful management and operation
of the borrower's properties or related businesses, repayment of these loans can
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, commercial real estate
and construction 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, commercial real estate or construction 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.
24
OUR PROFITS HAVE DECLINED OVER THE PAST TWO YEARS, AND MAY NOT IMPROVE IN THE
FORESEEABLE FUTURE.
Over the past two years our earnings have declined as a direct result of
our branch expansion, the relocation of our headquarters office, and the
addition of experienced senior lending and administrative personnel. We plan to
add up to four new branches by 2008. It is possible that our business plan will
not succeed, or that our new branches, when added, will not become profitable.
Accordingly, we may not experience any improvement in our net income in the near
future as a result of these efforts.
A DOWNTURN IN THE NEW JERSEY ECONOMY OR A DECLINE IN REAL ESTATE VALUES COULD
REDUCE OUR PROFITS.
Virtually all of our real estate loans are secured by real estate
located in New Jersey. At June 30, 2005, loans secured by real estate, including
home equity loans and lines of credit, represented 86.1% of our total loans. As
a result of this concentration, a downturn in this market area could cause
significant increases in non-performing loans, which would reduce our profits.
Additionally, a decrease in asset quality could require additions to our
allowance for loan losses through increased provisions for loan losses, which
would reduce our profits. In recent years, there have been significant increases
in real estate values in our market area. As a result of rising home prices, our
seasoned loans have been well collateralized. A decline in real estate values
could cause some of our mortgage loans to become inadequately collateralized,
which would expose us to a greater risk of loss. For a discussion of our market
area, see "Business of Magyar Bank--Market Area."
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:
o the interest income we earn on our interest-earning assets, such
as loans and securities; and
o 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Magyar Bancorp, Inc.--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
25
mortgage-backed securities as borrowers 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 June 30, 2005, the fair value of
our total securities portfolio was $58.1 million. Unrealized net losses on
securities totaled $511,000 on an after-tax basis at June 30, 2005.
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 June 30, 2005, in the event of an immediate 200 basis point
increase in interest rates, the model projects that we would experience a
$114,000, or 1.09%, increase in net interest income in the first year following
the change in interest rates, and a $317,000, or 3.03%, increase in net interest
income in the second year following the change in interest rates. At June 30,
2005, in the event of an immediate 200 basis point decrease in interest rates,
the model projects that we would experience a $609,000, or 5.82%, decrease in
net interest income in the first year following the change in interest rates,
and a $1.2 million, or 11.19%, decrease in net interest income in the second
year following the change in interest rates. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Magyar Bancorp,
Inc."
At June 30, 2005, our securities available-for-sale portfolio totaled
$22.1 million, which included $18.0 million of mortgage-backed securities. To
the extent interest rates increase and the value of our available-for-sale
portfolio decreases, our stockholders' equity will be adversely affected.
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, resulting in additions to our allowance, which
could materially decrease our net income. Our allowance for loan losses was
0.99% of total loans and 166.22% of non-performing loans at June 30, 2005. We
make various assumptions and judgments about the collectibility 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 June 30, 2005.
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.
26
OUR RETURN ON EQUITY WILL BE LOW COMPARED TO OTHER FINANCIAL INSTITUTIONS. THIS
MAY NEGATIVELY AFFECT THE PRICE OF OUR COMMON STOCK.
Net income divided by average equity, known as "return on equity," is a
ratio many investors use to compare the performance of a financial institution
to its peers. We expect our return on equity to remain below the industry
average until we are able to leverage the additional capital we will receive
from the stock offering. Our return on equity will be reduced by the capital
raised in the stock offering, higher expenses from the costs of being a public
company, and added expenses associated with our employee stock ownership plan
and the stock-based incentive plan we intend to adopt. For the nine months ended
June 30, 2005, our return on average equity was 0.39%, compared to a return on
average equity of 8.32% for all publicly traded savings institutions having
liquid trading markets. Following the stock offering, we expect our pro forma
consolidated equity to increase from $23.1 million at June 30, 2005 to between
$37.0 million at the minimum and $42.3 million at the maximum of the stock
offering range. Until we can increase our net interest income and other income,
we expect our return on equity to be below the industry average, which may
reduce the market value of our common stock. On a pro forma basis, assuming the
stock offering closed at the maximum of the offering range, our return on
average equity would be 0.40% for the nine months ended June 30, 2005.
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."
IF WE DECLARE DIVIDENDS ON OUR COMMON STOCK, MAGYAR BANCORP, MHC WILL BE
PROHIBITED FROM WAIVING THE RECEIPT OF DIVIDENDS BY CURRENT FEDERAL RESERVE
BOARD POLICY, WHICH MAY RESULT IN LOWER DIVIDENDS FOR ALL OTHER STOCKHOLDERS.
The Board of Directors of Magyar Bancorp, Inc. will have the authority
to declare dividends on its common stock, subject to statutory and regulatory
requirements. So long as Magyar Bancorp, MHC is regulated by the Federal Reserve
Board, if Magyar Bancorp, Inc. pays dividends to its stockholders, it also will
be required to pay dividends to Magyar Bancorp, MHC, unless Magyar Bancorp, MHC
is permitted by the Federal Reserve Board to waive the receipt of dividends. The
Federal Reserve Board's current policy is to not permit a mutual holding company
to waive dividends declared by its subsidiary. Accordingly, because dividends
will be required to be paid to Magyar Bancorp, MHC along with all other
stockholders, the amount of dividends available for all other stockholders will
be less than if Magyar Bancorp, MHC were permitted to waive the receipt of
dividends.
27
RISKS RELATED TO THE STOCK OFFERING
THE FUTURE PRICE OF THE SHARES OF COMMON STOCK MAY BE LESS THAN THE PURCHASE
PRICE IN THE STOCK OFFERING.
If you purchase shares of common stock in the stock offering you may not
later be able to sell them at or above the purchase price in the stock offering.
In numerous recent cases, shares of common stock issued by newly converted
savings institutions or mutual holding companies have traded below the price at
which such shares were sold in the stock offerings conducted by those companies.
The final aggregate purchase price of the shares of common stock in the stock
offering will be based on an independent appraisal. The appraisal is not
intended, and should not be construed, as a recommendation of any kind as to the
advisability of purchasing shares of common stock. The valuation is based on
estimates and projections of a number of matters, all of which are subject to
change from time to time. After our shares begin trading, the trading price of
our common stock will be determined by the marketplace, and may be influenced by
many factors, including prevailing interest rates, the overall performance of
the economy, investor perceptions of Magyar Bancorp, Inc. and the outlook for
the financial institutions industry in general.
THE CONTRIBUTION OF SHARES TO THE CHARITABLE FOUNDATION WILL DILUTE YOUR
OWNERSHIP INTERESTS AND ADVERSELY AFFECT NET INCOME IN FISCAL YEAR 2006.
We intend to establish a charitable foundation in connection with the
stock offering. Persons purchasing shares in the stock offering will have their
ownership and voting interests in Magyar Bancorp, Inc. diluted by 1.77% due to
the issuance of shares of common stock to the Magyar Bank Charitable Foundation
(the "Charitable Foundation"). We will make a contribution to the Charitable
Foundation in the form of shares of Magyar Bancorp, Inc. common stock and
$500,000 in cash for an aggregate total contribution equal to 6.53% of the gross
proceeds of the stock offering at the midpoint of the offering range. The common
stock portion of the contribution, at the midpoint of the offering range, will
be 79,200 shares, which equals 4.00% of the shares of common stock sold in the
stock offering. The aggregate contribution will also have an adverse effect on
our net income for the quarter and year in which we make the issuance and
contribution to the Charitable Foundation. The after-tax expense of the
contribution will reduce net after-tax income in our 2006 fiscal year by
approximately $776,000 at the midpoint of the offering range.
OUR CONTRIBUTION TO THE CHARITABLE FOUNDATION MAY NOT BE TAX DEDUCTIBLE, WHICH
COULD REDUCE OUR PROFITS.
We believe that the contribution to the Charitable Foundation will be
deductible for federal income tax purposes. However, there is no certainty that
the Internal Revenue Service will grant tax-exempt status to the Charitable
Foundation. If the contribution is not deductible, we would not receive any tax
benefit from the contribution. In addition, even if the contribution is tax
deductible, we may not have sufficient profits to be able to use the deduction
fully.
28
OUR STOCK-BASED INCENTIVE AND BENEFIT PLANS WILL INCREASE OUR COSTS, WHICH WILL
REDUCE OUR INCOME.
We anticipate that our employee stock ownership plan will purchase 8.0%
of the shares of common stock sold in the stock offering and issued to the
Charitable Foundation, and that Magyar Bank's existing 401(k) plan will purchase
shares of common stock in the stock offering to the extent available. Assuming
the employee stock ownership plan purchases all of its shares at $10.00 per
share, the cost of acquiring the shares of common stock will be between $1.4
million at the minimum of the offering range and $2.2 million at the adjusted
maximum of the offering range. We will record annual employee stock ownership
plan expenses in an amount equal to the fair value of shares of common stock
committed to be released to employees. If shares of common stock appreciate in
value over time, compensation expense relating to the employee stock ownership
plan will increase.
We also intend to adopt a stock-based incentive plan after the stock
offering under which plan participants would be awarded shares of our common
stock (at no cost to them) or options to purchase shares of our common stock. If
the stock-based incentive plan is implemented and approved by stockholders
within one year of the completion of the stock offering, the number of shares of
common stock or options granted under any initial stock-based incentive plan may
not exceed 4% and 10%, respectively, of the shares sold in the stock offering
and issued to the Charitable Foundation. If we award shares of common stock or
grant options in excess of these amounts, our costs would increase further.
The shares of common stock granted under the stock-based incentive plan
will be expensed by us over their vesting period at the fair market value of the
shares on the date they are awarded. If the shares of common stock to be granted
under the plan are repurchased in the open market (rather than issued directly
from authorized but unissued shares of Magyar Bancorp, Inc.) and cost the same
as the purchase price of our common stock issued in the stock offering, the
reduction to stockholders' equity due to the plan would be between $700,000 at
the minimum of the offering range and $1.1 million at the adjusted maximum of
the offering range. To the extent we repurchase shares of common stock in the
open market to fund the grants of shares under the plan, and the price of such
shares exceeds the offering price of $10.00 per share, the reduction to
stockholders' equity would exceed the range described above. Conversely, to the
extent the price of such shares is below the offering price of $10.00 per share,
the reduction to stockholders' equity would be less than the range described
above.
Finally, new accounting rules require public companies to expense the
grant-date fair value of stock options, by their first fiscal year beginning
after June 15, 2005. When we record an expense for the grant of options using
the fair value method as described in the new accounting rules, we will incur
significant compensation and benefits expense. We estimate this annual expense
would be approximately $220,000 on a pre-tax basis, assuming the adjusted
maximum number of shares is sold in the stock offering.
THE IMPLEMENTATION OF STOCK-BASED INCENTIVE PLANS MAY DILUTE YOUR OWNERSHIP
INTEREST.
We intend to adopt a stock-based incentive plan following the stock
offering. This stock-based incentive plan will be funded through either open
market purchases, if permitted, or from
29
the issuance of authorized but unissued shares of our common stock. Stockholders
would experience a reduction in ownership interest (including shares held by
Magyar Bancorp, MHC) totaling 6.4% in the event newly issued shares of our
common stock are used to fund stock options or awards of shares of common stock
under the plan in an amount equal to 10% and 4%, respectively, of the shares
sold in the stock offering and issued to the Charitable Foundation.
WE HAVE BROAD DISCRETION IN USING THE PROCEEDS OF THE STOCK OFFERING. OUR
FAILURE TO EFFECTIVELY USE SUCH PROCEEDS COULD REDUCE OUR PROFITS.
Magyar Bancorp, Inc. will use a portion of the net proceeds to finance
the purchase of shares of common stock in the stock offering by the employee
stock ownership plan and may use the remaining net proceeds to pay dividends to
stockholders, repurchase shares of common stock, purchase securities, deposit
funds in Magyar Bank, acquire other financial services companies or for other
general corporate purposes. Magyar Bank may use the proceeds it receives to
establish or acquire new branches, fund new loans and offer new products and
services, purchase securities, or for general corporate purposes. In addition,
we intend to expand our presence inside and outside our primary market area
through DE NOVO branching and, possibly, acquisitions, which may negatively
affect our earnings until these branches achieve profitability. We have not,
however, identified specific amounts of proceeds for any of these purposes and
we will have significant flexibility in determining the amount of net proceeds
we apply to different uses and the timing of such applications. Our failure to
utilize these funds effectively could reduce our profitability. We have not
established a timetable for the effective deployment of the proceeds, and we
cannot predict how long we will require to effectively deploy the proceeds.
THERE MAY BE A LIMITED TRADING MARKET IN OUR COMMON STOCK, WHICH MAY HINDER YOUR
ABILITY TO TRADE OUR COMMON STOCK AND MAY LOWER THE MARKET PRICE OF THE STOCK.
It is possible that an active and liquid trading market in shares of our
common stock will not develop. Magyar Bancorp, Inc. has never issued common
stock and, therefore, there is no current trading market for the shares of
common stock. We expect that our shares of common stock will be quoted on the
Nasdaq National Market. Persons purchasing shares of common stock may not be
able to sell their shares when they desire if a liquid trading market does not
develop or sell them at a price equal to or above the initial purchase price of
$10.00 per share even if a liquid trading market develops. This limited trading
market for our common stock may reduce the market value of the shares of common
stock and make it difficult to buy or sell our shares on short notice. For
additional information see "Market for the Common Stock."
PERSONS WHO PURCHASE STOCK IN THE STOCK OFFERING WILL OWN A MINORITY OF MAGYAR
BANCORP, INC.'S COMMON STOCK AND WILL NOT BE ABLE TO EXERCISE VOTING CONTROL
OVER MOST MATTERS PUT TO A VOTE OF STOCKHOLDERS.
Public stockholders will own a minority of the outstanding shares of
Magyar Bancorp, Inc.'s common stock. As a result, stockholders other than Magyar
Bancorp, MHC will not be able to exercise voting control over most matters put
to a vote of stockholders. Magyar Bancorp, MHC will own a majority of Magyar
Bancorp, Inc.'s shares of common stock after the stock offering and, through its
Board of Directors, will be able to exercise voting control over most
30
matters put to a vote of stockholders. The same directors and officers who
manage Magyar Bancorp, Inc. and Magyar Bank will also manage Magyar Bancorp,
MHC. Finally, Magyar Bancorp, MHC may exercise its voting control to prevent a
sale or merger transaction in which stockholders could receive a premium for
their shares.
OUR STOCK VALUE MAY BE NEGATIVELY AFFECTED BY FEDERAL REGULATIONS RESTRICTING
TAKEOVERS AND BY OUR MUTUAL HOLDING COMPANY STRUCTURE.
FEDERAL REGULATIONS RESTRICTING TAKEOVERS. Federal law prohibits any
person from acquiring 10% or more of our shares of common stock without the
prior written approval of the Federal Reserve Board. See "Restrictions on the
Acquisition of Magyar Bancorp, Inc. and Magyar Bank" for a discussion of
applicable Federal Reserve Board regulations regarding acquisitions.
THE MUTUAL HOLDING COMPANY STRUCTURE. Magyar Bancorp, MHC, as the
majority stockholder of Magyar Bancorp, Inc., will be able to control the
outcome of virtually all matters presented to stockholders for their approval,
including a proposal to acquire Magyar Bancorp, Inc. Accordingly, Magyar
Bancorp, MHC can prevent the sale of control or merger of Magyar Bancorp, Inc.
or its subsidiaries even if such a transaction were favored by a majority of the
public stockholders of Magyar Bancorp, Inc. In addition, regulatory restrictions
applicable to Magyar Bancorp, MHC may prohibit a sale of Magyar Bancorp, Inc.
unless the mutual holding company first undertakes a second-step conversion.
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements, which can be
identified by the use of such words as estimate, project, believe, intend,
anticipate, plan, seek, expect and similar expressions. These forward-looking
statements include:
o statements of our goals, intentions and expectations;
o statements regarding our business plans and prospects and growth
and operating strategies;
o statements regarding the asset quality of our loan and
investment portfolios; and
o estimates of our risks and future costs and benefits.
These forward-looking statements are subject to significant risks,
assumptions and uncertainties, including, among other things, the following
important factors that could affect the actual outcome of future events:
o significantly increased competition among depository and other
financial institutions;
o inflation and changes in the interest rate environment that
reduce our margins or reduce the fair value of financial
instruments;
31
o general economic conditions, either nationally or in our market
areas, that are worse than expected;
o adverse changes in the securities markets;
o legislative or regulatory changes that adversely affect our
business;
o our ability to enter new markets successfully and take advantage
of growth opportunities;
o changes in consumer spending, borrowing and savings habits;
o changes in accounting policies and practices, as may be adopted
by the bank regulatory agencies, the Securities and Exchange
Commission, and the Financial Accounting Standards Board; and
o changes in our organization, compensation and benefit plans.
Because of these and other uncertainties, our actual future results may
be materially different from the results indicated by these forward-looking
statements. We discuss these and other uncertainties in "Risk Factors" beginning
on page 24.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The summary information presented below at each date or for each period
presented is derived in part from the financial statements of Magyar Bank. The
following information is only a summary, and should be read in conjunction with
our consolidated financial statements and notes beginning on page F-1 of this
prospectus. The operating data for the nine months ended June 30, 2005 and 2004,
and the financial condition data at June 30, 2005 were not audited. However, in
the opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the results of operations for
the unaudited periods have been made. No adjustments were made other than normal
recurring entries. The results of operations for the nine months ended June 30,
2005 are not necessarily indicative of the results of operations that may be
expected for the entire fiscal year.
AT AT SEPTEMBER 30
JUNE 30, --------------------------------------------------------------------
2005 2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
SELECTED FINANCIAL CONDITION DATA: (unaudited)
Total assets.................................... $ 325,052 $ 287,078 $ 273,912 $ 258,758 $ 242,339 $ 226,110
Cash and interest-bearing deposits with banks... 3,718 4,975 8,549 13,258 11,939 2,665
Securities held to maturity..................... 36,068 42,615 37,267 38,275 40,947 47,323
Securities available for sale, at fair value.... 22,086 31,171 40,076 13,528 4,396 3,385
Loans receivable, net........................... 248,312 193,550 173,768 180,258 173,706 162,451
Deposits........................................ 259,081 223,974 225,675 212,194 202,486 197,941
Borrowings...................................... 36,729 35,043 20,027 20,337 16,597 7,200
Retained earnings............................... 23,121 23,112 22,659 21,442 19,798 18,027
32
FOR THE NINE MONTHS
ENDED JUNE 30, FOR THE YEARS ENDED SEPTEMBER 30,
---------------------- ------------------------------------------------------------
2005 2004 2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
SELECTED DATA: (unaudited)
Interest and dividend income.................. $ 11,330 $ 9,374 $ 12,584 $ 13,370 $ 14,478 $ 15,976 $ 15,308
Interest expense.............................. 4,012 3,199 4,259 5,207 6,259 8,881 8,396
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest and dividend income........... 7,318 6,175 8,325 8,163 8,218 7,095 6,912
Provision for loan losses..................... 237 152 202 230 277 231 218
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest and dividend income after
provision for loan losses................ 7,081 6,023 8,123 7,933 7,942 6,840 6,694
Non-interest income........................... 537 593 796 970 906 803 813
Non-interest expense ......................... 7,568 6,093 8,050 6,752 6,404 5,339 5,017
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes.................... 50 523 869 2,151 2,444 2,327 2,490
Income tax (benefit) expense.................. (18) 137 257 624 867 810 755
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income................................. $ 68 $ 386 $ 612 $ 1,527 $ 1,577 $ 1,517 $ 1,735
========== ========== ========== ========== ========== ========== ==========
FOR THE NINE MONTHS
ENDED JUNE 30, AT OR FOR THE YEARS ENDED SEPTEMBER 30,
---------------------- ------------------------------------------------------------
2005 2004 2004 2003 2002 2001 2000
SELECTED FINANCIAL RATIOS AND OTHER DATA: ---------- ---------- ---------- ---------- ---------- ---------- ----------
(unaudited)
PERFORMANCE RATIOS:
Return on average assets (1).................. 0.03% 0.19% 0.22% 0.58% 0.64% 0.64% 0.78%
Return on average equity (1).................. 0.39% 2.28% 2.69% 6.97% 7.71% 7.66% 9.62%
Interest rate spread (2)...................... 3.21% 3.02% 3.02% 3.04% 3.24% 2.83% 3.02%
Net interest margin (1) (3)................... 3.26% 3.03% 3.04% 3.08% 3.33% 3.08% 3.15%
Efficiency ratio (4).......................... 96.35% 90.03% 90.27% 75.84% 72.39% 69.64% 66.83%
Non-interest expense to average total
assets (1)................................. 3.37% 2.99% 2.94% 2.55% 2.60% 2.26% 2.25%
Average interest-earning assets to average
interest-bearing liabilities............... 110.17% 109.29% 109.72% 108.83% 109.08% 110.85% 106.95%
ASSET QUALITY RATIOS:
Non-performing assets as a percent of total
assets..................................... 0.46% 0.05% 0.09% 0.07% 0.06% 0.03% 0.09%
Non-performing loans as a percent of total
loans...................................... 0.59% 0.08% 0.13% 0.10% 0.09% 0.05% 0.13%
Allowance for loan losses as a percent of
non-performing loans (5)................... 166.22% NM NM NM NM NM NM
Allowance for loan losses as a percent of
total loans................................ 0.99% 1.25% 1.20% 1.22% 1.06% 0.94% 0.88%
CAPITAL RATIOS:
Total risk-based capital (to risk weighted
assets).................................... 10.96% 14.45% 13.79% 15.07% 14.80% 14.42% 15.41%
Tier 1 risk-based capital (to risk weighted
assets).................................... 9.91% 13.20% 12.54% 13.82% 13.57% 13.30% 14.28%
Tier 1 leverage (core) capital (to adjusted
tangible assets)........................... 7.46% 8.34% 8.36% 8.29% 8.25% 8.19% 8.10%
Equity to total assets........................ 7.11% 8.21% 8.05% 8.27% 8.29% 8.17% 7.97%
OTHER DATA:
Number of full service offices................ 3 3 3 3 3 2 2
- ---------------------------
(1) Ratios have been annualized, where appropriate.
(2) Represents the difference between the weighted-average yield on
interest-earning assets and the weighted-average cost of interest-bearing
liabilities for the period.
(3) The net interest margin represents net interest income as a percent of
average interest-earning assets for the period.
(4) The efficiency ratio represents non-interest expense divided by the sum of
net interest income and non-interest income.
(5) "NM" indicates ratio is not meaningful.
33
HOW WE INTEND TO USE THE PROCEEDS FROM THE STOCK OFFERING
Although we will not be able to determine the amount of actual net
proceeds we will receive from the sale of shares of common stock until the stock
offering is completed, we anticipate that the net proceeds will be between $16.1
million and $21.9 million, or $25.3 million if the stock offering is increased
by 15%.
Magyar Bancorp, Inc. intends to distribute the net proceeds from the
stock offering as follows:
1,683,000 SHARES 1,980,000 SHARES AT 2,277,000 SHARES AT 2,618,550 SHARES
AT MINIMUM OF MIDPOINT OF MAXIMUM OF AT ADJUSTED MAXIMUM
OFFERING RANGE OFFERING RANGE OFFERING RANGE OF OFFERING RANGE
-------------------- -------------------- -------------------- --------------------
PERCENT PERCENT PERCENT PERCENT
OF NET OF NET OF NET OF NET
AMOUNT PROCEEDS AMOUNT PROCEEDS AMOUNT PROCEEDS AMOUNT PROCEEDS
-------- ---------- -------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Offering proceeds....................... $ 16,830 $ 19,800 $ 22,770 $ 26,186
Less: offering expenses................. (773) (801) (828) (859)
-------- -------- -------- --------
Net offering proceeds................... 16,057 100.00% 18,999 100.00% 21,942 100.00% 25,327 100.00%
Less:
Proceeds contributed to Magyar Bank.. (10,990) (68.44)% (11,360) (59.79)% (11,730) (53.46)% (12,664) (50.00)%
Proceeds used for loan to employee
stock ownership plan............... (1,400) (8.72)% (1,647) (8.67)% (1,894) (8.63)% (2,179) (8.60)%
-------- ---------- -------- ---------- -------- ---------- -------- ----------
Proceeds retained by Magyar Bancorp,
Inc.................................. $ 3,667 22.84% $ 5,992 31.54% $ 8,318 37.91% $ 10,484 41.40%
======== ========== ======== ========== ======== ========== ======== ==========
The net proceeds may vary because total expenses relating to the
reorganization and the stock offering may be more or less than our estimates.
For example, our expenses would increase if a syndicated community offering were
used to sell shares of common stock not purchased in the subscription offering
and any community offering. Payments for shares made through withdrawals from
existing deposit accounts will not result in the receipt of new funds for
investment but will result in a reduction of Magyar Bank's deposits. In all
instances, Magyar Bank will receive at least 50% of the net proceeds of the
stock offering.
We are undertaking the reorganization and the stock offering at this
time to increase our capital in order to expand and diversify our business. For
further information, see "Business of Magyar Bank--Business Strategy." The stock
offering proceeds will increase our capital resources, and the amount of funds
available for lending and investment purposes. The proceeds will also give us
greater flexibility to diversify operations, and expand the products and
services we offer to our customers.
MAGYAR BANCORP, INC. MAY USE THE PROCEEDS IT RETAINS FROM THE STOCK OFFERING:
o to finance the purchase of shares of common stock in the stock
offering by Magyar Bank's employee stock ownership plan (between
$1.4 million and $1.9 million);
o to invest in securities;
o to deposit funds in Magyar Bank;
34
o to pay dividends to its stockholders;
o to repurchase its shares of common stock;
o to finance acquisitions of financial institutions or branches
and other financial services businesses, although no specific
transactions are being considered at this time; and
o for general corporate purposes.
During the first year following the stock offering, we may be prohibited
from repurchasing shares of our common stock, except to fund benefit plans. The
loan that will be used to fund the purchases by the employee stock ownership
plan will accrue interest.
MAGYAR BANK MAY USE THE PROCEEDS IT RECEIVES FROM THE STOCK OFFERING:
o to expand its retail banking franchise by establishing DE NOVO
branches and, potentially, by acquiring existing branches or by
acquiring other financial institutions or other financial
services companies, although no acquisitions are specifically
being considered at this time;
o to fund new loans;
o to invest in securities;
o to repay borrowings; and
o for general corporate purposes.
The use of the proceeds outlined above may change, based on changes in
interest rates, equity markets, laws and regulations affecting the financial
services industry, our relative position in the financial services industry, the
attractiveness of potential acquisitions to expand our operations, and overall
market conditions.
Except for the loan to the employee stock ownership plan and the
establishment of the DE NOVO branches discussed elsewhere in this prospectus, no
determination has been made by either Magyar Bancorp, Inc. or Magyar Bank as to
specific amounts of the net proceeds to be deployed for any of the purposes
described above. However, it is expected that initially a substantial portion of
the net proceeds will be invested in short-term investment securities and other
liquid investments.
OUR POLICY REGARDING DIVIDENDS
Following completion of the stock offering, our Board of Directors will
have the authority to declare dividends on our shares of common stock, subject
to statutory and regulatory requirements. However, no decision has been made
with respect to the payment of dividends. In determining whether and in what
amount to pay a cash dividend, the Board is expected to take into account a
number of factors, including capital requirements, Magyar Bancorp, Inc.'s and
35
Magyar Bank's financial condition and results of operations, tax considerations,
statutory and regulatory limitations, general economic conditions and regulatory
restrictions that affect the payment of dividends by Magyar Bank to Magyar
Bancorp, Inc. No assurances can be given that any dividends will be paid or
that, if paid, will not be reduced or eliminated in the future. Special cash
dividends, stock dividends or returns of capital, to the extent permitted by
applicable policy and regulation, may be paid in addition to, or in lieu of,
regular cash dividends. It is anticipated that any cash distributions made by
Magyar Bancorp, Inc. to its stockholders would be treated as cash dividends and
not as a non-taxable return of capital for federal and state tax purposes.
So long as Magyar Bancorp, MHC is regulated by the Federal Reserve
Board, if Magyar Bancorp, Inc. pays dividends to its stockholders, it also will
be required to pay dividends to Magyar Bancorp, MHC, unless Magyar Bancorp, MHC
is permitted by the Federal Reserve Board to waive the receipt of dividends. The
Federal Reserve Board's current policy is to not permit a bank holding company
to waive dividends declared by its subsidiary. See "Supervision and
Regulation--Holding Company Regulation--Federal Regulation."
In the future, dividends from Magyar Bancorp, Inc. may depend, in part,
upon the receipt of dividends from Magyar Bank, because Magyar Bancorp, Inc.
initially will have no source of income other than earnings from the investment
of net proceeds retained from the sale of shares of common stock and interest
earned on Magyar Bancorp, Inc.'s loan to the employee stock ownership plan.
Under New Jersey law, Magyar Bank may not pay a cash dividend unless, after the
payment of such dividend, its capital stock will not be impaired and either it
will have a statutory surplus of not less than 50% of its capital stock, or the
payment of such dividend will not reduce its statutory surplus.
MARKET FOR THE COMMON STOCK
Magyar Bancorp, Inc. has never issued capital stock. An application has
been filed with Nasdaq Stock Market, Inc. and we expect that our shares of
common stock will be quoted on the Nasdaq National Market under the symbol
"MGYR." To list our stock on the Nasdaq National Market, we are required to have
at least three broker-dealers who will make a market in shares of our common
stock. Ryan Beck & Co., Inc. has advised us that it intends to make a market in
shares of our common stock following the stock offering, but it is under no
obligation to do so. While we will attempt before completion of the stock
offering to obtain commitments from at least two other broker-dealers to make a
market in shares of our common stock, there can be no assurance that we will be
successful in obtaining such commitments.
The development of an active trading market depends on the existence of
willing buyers and sellers, the presence of which is not within our control, or
that of any market maker. The number of active buyers and sellers of the shares
of common stock at any particular time may be limited. Under such circumstances,
you could have difficulty selling your shares of common stock on short notice
and, therefore, you should not view the shares of common stock as a short-term
investment. We cannot assure you that an active trading market for the shares of
common stock will develop or that, if it develops, it will continue. Nor can we
assure you that if you purchase shares of common stock, you will be able to sell
them at or above the $10.00 per share offering purchase price.
36
REGULATORY CAPITAL COMPLIANCE
At June 30, 2005, Magyar Bank exceeded all regulatory capital
requirements. The following table sets forth our compliance, as of June 30,
2005, with the regulatory capital standards, on a historical and pro forma
basis, assuming that the indicated number of shares of common stock were sold as
of such date at $10.00 per share, and Magyar Bank received estimated net
proceeds in an amount such that Magyar Bank will have a 10% regulatory tangible
and core capital ratio upon completion of the stock offering. Accordingly,
proceeds received by Magyar Bank have been assumed to equal $8.9 million, $8.9
million, $8.9 million and $9.4 million at the minimum, midpoint, maximum and
adjusted maximum of the offering range, respectively. These amounts represent
the proceeds assumed to be contributed to Magyar Bank by Magyar Bancorp, Inc.,
less shares of common stock acquired by the employee stock ownership plan, the
stock-based incentive plan and the cash contribution to the Charitable
Foundation. For a discussion of the applicable capital requirements, see
"Supervision and Regulation--Federal Banking Regulation--Capital Requirements."
PRO FORMA AT JUNE 30, 2005, BASED UPON THE SALE OF
--------------------------------------------------------------------------------------
2,618,550 SHARES
1,683,000 SHARES 1,980,000 SHARES 2,277,000 SHARES AT ADJUSTED
HISTORICAL AT AT MINIMUM OF AT MIDPOINT OF AT MAXIMUM OF MAXIMUM OF
JUNE 30, 2005 OFFERING RANGE OFFERING RANGE OFFERING RANGE OFFERING RANGE (1)
-------------------- -------------------- -------------------- -------------------- --------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
-------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
GAAP capital........... $ 23,121 7.11% $ 32,011 9.59% $ 32,010 9.59% $ 32,010 9.59% $ 32,517 9.72%
======== ======= ======== ======= ======== ======= ======== ======= ======== =======
Core capital:
Core capital (3)(4).. $ 23,504 7.46% $ 32,394 10.00% $ 32,393 10.00% $ 32,393 10.00% $ 32,900 10.14%
Requirement (5)...... 12,600 4.00 12,956 4.00 12,956 4.00 12,956 4.00 12,976 4.00
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Excess.............. $ 10,904 3.46% $ 19,438 6.00% $ 19,437 6.00% $ 19,437 6.00% $ 19,924 6.14%
======== ======= ======== ======= ======== ======= ======== ======= ======== =======
Tier I Risk-based
capital:
Tier I Risk-based
capital (4)......... $ 23,504 9.90% $ 32,394 13.55% $ 32,393 13.55% $ 32,393 13.55% $ 32,900 13.75%
Requirement (5)...... 9,495 4.00 9,566 4.00 9,566 4.00 9,566 4.00 9,570 4.00
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Excess.............. $ 14,009 5.90% $ 22,828 9.55% $ 22,827 9.55% $ 22,827 9.55% $ 23,330 9.75%
======== ======= ======== ======= ======== ======= ======== ======= ======== =======
Total Risk-based
capital:
Risk-based capital
(4)(6).............. $ 25,985 10.95% $ 34,875 14.58% $ 34,874 14.58% $ 34,874 14.58% $ 35,381 14.79%
Requirement.......... 18,989 8.00 19,132 8.00 19,132 8.00 19,132 8.00 19,140 8.00
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Excess.............. $ 6,996 2.95% $ 15,743 6.58% $ 15,742 6.58% $ 15,742 6.58% $ 16,241 6.79%
======== ======= ======== ======= ======== ======= ======== ======= ======== =======
Assets................. $325,052 $333,942 $333,941 $333,941 $334,448
Core assets............ $315,005 $323,895 $323,894 $323,894 $324,401
Risk based assets...... $237,367 $239,145 $239,145 $239,145 $239,246
- ---------------------------
(1) As adjusted to give effect to a 15% increase in the number of shares of
common stock outstanding after the stock offering which could occur due to
an increase in the maximum of the independent valuation as a result of
regulatory considerations, demand for the shares, or changes in market
conditions or general economic conditions following the commencement of the
stock offering.
(2) Based on pre-offering adjusted total assets of $315.0 million for the
purposes of the tangible and core capital requirements, and risk-weighted
assets of $237.4 million for the purposes of the risk-based capital
requirement.
(3) Risk-based capital levels are shown as a percentage of risk-weighted
assets.
(4) Pro forma capital levels assume that Magyar Bancorp, Inc. funds the
stock-based incentive plan with purchases in the open market of 4% of the
shares of common stock sold in the stock offering and issued to the
Charitable Foundation, at a price equal to the price for which the shares
of common stock are sold in the stock offering, and that the employee stock
ownership plan purchases 8% of the shares of common stock sold in the stock
offering and issued to the Charitable Foundation with funds borrowed from
Magyar Bancorp, Inc. Magyar Bank's pro forma GAAP and regulatory capital
have been reduced by the amount required to fund both of these plans and
the cash contribution to the Charitable Foundation. See "Management" for a
discussion of the stock-based incentive plan and employee stock ownership
plan.
(5) The current core capital requirement for savings banks that receive the
highest supervisory rating for safety and soundness is 3% of total adjusted
assets and 4% to 5% of total adjusted assets for all other savings banks.
See "Supervision and Regulation--Federal Banking Regulation--Capital
Requirements."
(6) Assumes net proceeds are invested in assets that carry a 20%
risk-weighting.
37
CAPITALIZATION
The following table presents the historical capitalization of Magyar
Bank at June 30, 2005, and the pro forma consolidated capitalization of Magyar
Bancorp, Inc. after giving effect to the stock offering, based upon the sale of
the number of shares of common stock indicated in the table and the other
assumptions set forth under "Pro Forma Data."
PRO FORMA CONSOLIDATED CAPITALIZATION OF
MAGYAR BANCORP, INC.
BASED UPON THE SALE FOR $10.00 PER SHARE OF
-------------------------------------------------------
2,618,550
1,683,000 1,980,000 2,277,000 SHARES AT
SHARES AT SHARES AT SHARES AT ADJUSTED
MAGYAR BANK MINIMUM OF MIDPOINT OF MAXIMUM OF MAXIMUM OF
HISTORICAL OFFERING OFFERING OFFERING OFFERING
CAPITALIZATION RANGE RANGE RANGE RANGE (1)
-------------- ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Deposits (2)........................................ $ 259,081 $ 259,081 $ 259,081 $ 259,081 $ 259,081
Borrowed funds (3).................................. 36,729 36,729 36,729 36,729 36,729
-------------- ------------ ------------- ------------ ------------
Total deposits and borrowed funds................... $ 295,810 $ 295,810 $ 295,810 $ 295,810 $ 295,810
============== ============ ============= ============ ============
Stockholders' equity:
Preferred Stock, $0.01 par value per share,
1,000,000 shares authorized; none to be issued... $ -- $ -- $ -- $ -- $ --
Common Stock, $0.01 par value per share:
8,000,000 shares authorized; shares to be
issued as reflected............................ -- 38 45 52 59
Additional paid-in capital (4).................... -- 15,494 18,429 21,365 24,743
Retained earnings................................. 23,504 23,504 23,504 23,504 23,504
Plus:
Amount of the Charitable Foundation............. -- 1,173 1,292 1,411 1,547
Less:
After-tax expense of contribution to Charitable
Foundation (5)................................. -- 704 775 847 928
Net unrealized loss on available for sale
securities..................................... 383 383 383 383 383
Common stock acquired by employee stock
ownership plan (6)............................. -- 1,400 1,647 1,894 2,179
Common stock acquired by stock-based incentive
plan (7)....................................... -- 700 824 947 1,089
-------------- ------------ ------------- ------------ ------------
Total stockholders' equity (8)................ $ 23,121 $ 37,022 $ 39,641 $ 42,261 $ 45,274
============== ============ ============= ============ ============
Pro forma shares outstanding:
Total shares outstanding.......................... 3,807,320 4,479,200 5,151,080 5,923,742
Shares issued to Magyar Bancorp, MHC.............. 2,057,000 2,420,000 2,783,000 3,200,450
Shares offered for sale........................... 1,683,000 1,980,000 2,277,000 2,618,550
Shares issued to the Charitable Foundation........ 67,320 79,200 91,080 104,742
Total stockholders' equity as a percentage of pro
forma total assets................................ 10.92% 11.61% 12.28% 13.04%
- ---------------------------
(1) As adjusted to give effect to a 15% increase in the number of shares of
common stock outstanding after the stock offering that could occur due to
an increase in the maximum of the independent valuation as a result of
regulatory considerations, demand for the shares of common stock, or
changes in market conditions or general financial and economic conditions
following the commencement of the stock offering.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
shares of common stock in the stock offering. Such withdrawals would reduce
pro forma deposits by the amount of such withdrawals.
(3) Substantially all borrowings are Federal Home Loan Bank advances. See
"Business of Magyar Bank--Sources of Funds--Borrowings."
(4) No effect has been given to the issuance of additional shares of common
stock pursuant to the stock-based incentive plan that Magyar Bancorp, Inc.
expects to adopt. The plan of reorganization permits Magyar Bancorp, Inc.
to adopt one or more stock benefit plans, subject to stockholder approval,
that may award stock or stock options in an aggregate amount of up to 25%
of the number of shares of common stock held by persons other than Magyar
Bancorp, MHC. The stock-based incentive plan will not be implemented for at
least six months after the stock offering and until it has been approved by
the stockholders.
(5) Represents the tax effect of the contribution to the Charitable Foundation
based on a 40% tax rate. The realization of the tax benefit is limited
annually to a maximum deduction for charitable contributions equal to 10%
of Magyar Bancorp, Inc.'s annual consolidated taxable income, subject to
our ability to carry forward any unused portion of the deduction for up to
five years following the year in which the contribution is made.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
38
(6) Assumes that 8% of the shares of common stock sold in the stock offering
and issued to the Charitable Foundation will be purchased by the employee
stock ownership plan and that the funds used to acquire the employee stock
ownership plan shares will be borrowed from Magyar Bancorp, Inc. The shares
of common stock acquired by the employee stock ownership plan are reflected
as a reduction of stockholders' equity. Magyar Bank will provide the funds
to repay the employee stock ownership plan loan. See "Management--Benefit
Plans."
(7) Assumes that subsequent to the stock offering, 4% of the shares of common
stock sold in the stock offering and issued to the Charitable Foundation
are purchased (with funds provided by Magyar Bancorp, Inc.) by the
stock-based incentive plan in the open market at a price equal to the price
for which the shares are sold in the stock offering. The shares of common
stock to be purchased by the stock-based incentive plan is reflected as a
reduction of stockholders' equity. See "Pro Forma Data" and "Management."
The plan of reorganization and stock issuance permits Magyar Bancorp, Inc.
to adopt one or more stock benefit plans that award stock or stock options,
in an aggregate amount up to 25% of the number of shares of common stock
held by persons other than Magyar Bancorp, MHC. The stock-based incentive
plan will not be implemented for at least six months after the stock
offering and until it has been approved by stockholders.
(8) Total stockholders' equity equals GAAP capital.
39
PRO FORMA DATA
We cannot determine the actual net proceeds from the sale of the shares
of common stock until the stock offering is completed. However, we estimate that
net proceeds will be between $16.1 million and $21.9 million, or $25.3 million
if the offering range is increased by 15%, based upon the following assumptions:
o we will sell all shares of common stock in the subscription and
community offerings;
o our employee stock ownership plan will purchase 8% of the shares
of common stock sold in the stock offering and issued to the
Charitable Foundation with a loan from Magyar Bancorp, Inc. The
loan will be repaid in substantially equal principal and
interest payments over a period of 30 years;
o expenses of the reorganization and the stock offering, other
than fees and expenses to be paid to Ryan Beck & Co., Inc., are
estimated to be $629,000;
o 150,000 shares of common stock will be purchased by our
executive officers and directors, and their immediate families;
and
o Ryan Beck & Co., Inc. will receive fees equal to 1.0% of the
aggregate purchase price of the shares of common stock sold in
the stock offering, excluding any shares purchased by any
employee benefit plans, the Charitable Foundation and any of our
directors, officers or employees or members of their immediate
families.
We calculated the pro forma consolidated net income and stockholders'
equity of Magyar Bancorp, Inc. for the year ended September 30, 2004 and the
nine months ended June 30, 2005 as if the shares of common stock had been sold
at the beginning of those periods and the net proceeds had been invested at
3.69% for the nine months ended June 30, 2005 and the year ended September 30,
2004, which assumes reinvestment of the net proceeds at a rate equal to the
three-year United States Treasury yield for the respective periods. We assumed a
tax rate of 40.0% for both periods. This results in an annualized after-tax
yield of 2.22% for the nine months ended June 30, 2005 and for the year ended
September 30, 2004.
We calculated historical and pro forma per share amounts by dividing
historical and pro forma amounts of consolidated net income and stockholders'
equity by the indicated number of shares of common stock. We adjusted these
figures to give effect to the shares of common stock purchased by the employee
stock ownership plan. We computed per share amounts for each period as if the
common stock was outstanding at the beginning of the periods, but we did not
adjust per share historical or pro forma stockholders' equity to reflect the
earnings on the estimated net proceeds.
The pro forma table gives effect to the implementation of a stock-based
incentive plan. Subject to the receipt of stockholder approval, we have assumed
that a stock-based incentive plan will grant restricted shares of common stock
in an amount equal to 4% of the shares of
40
common stock sold in the stock offering and issued to the Charitable Foundation.
In preparing the table below, we assumed that stockholder approval has been
obtained and that the stock-based incentive plan purchases in the open market a
number of shares equal to 4% of the shares of common stock sold in the stock
offering and issued to the Charitable Foundation, at the same price for which
they were sold in the stock offering. We assumed that shares of common stock
granted under the plan vest over a five-year period.
Subject to receipt of stockholder approval, we also assumed that the
stock-based incentive plan will grant options to acquire common stock equal to
10% of the shares of common stock sold in the stock offering and issued to the
Charitable Foundation. In preparing the table below, we also assumed that
stockholder approval was obtained, that the exercise price of the stock options
and the market price of the stock on the date of grant were $10.00 per share,
and that the stock options had a term of ten years and vested over five years.
We applied the Black-Scholes option pricing model to estimate a grant-date fair
value of $3.83 for each option. In addition to the terms of the options
described above, the Black-Scholes option pricing model incorporated an
estimated volatility rate of 16.65% for the shares of common stock based on an
index of publicly traded mutual holding companies, a dividend yield of zero, an
expected option life of 10 years and a risk-free interest rate of 3.97%.
As discussed under "How We Intend to Use the Proceeds from the Stock
Offering," Magyar Bancorp, Inc. intends to retain up to 41.4% of the net
proceeds from the stock offering and contribute the remaining net proceeds from
the stock offering to Magyar Bank. Magyar Bancorp, Inc. will use a portion of
the proceeds it retains to make a loan to the employee stock ownership plan, and
retain the rest of the proceeds for future use.
The pro forma table does not give effect to:
o withdrawals from deposit accounts for the purpose of purchasing
shares of common stock in the stock offering;
o Magyar Bancorp, Inc.'s results of operations after the stock
offering; or
o changes in the market price of the shares of common stock after
the stock offering.
The following pro forma information may not represent the financial
effects of the stock offering at the date on which the stock offering actually
occurs and you should not use the table to indicate future results of
operations. Pro forma stockholders' equity represents the difference between the
stated amounts of assets and liabilities of Magyar Bancorp, Inc., computed in
accordance with accounting principles generally accepted in the United States of
America. We did not increase or decrease stockholders' equity to reflect the
difference between the carrying value of loans, securities and other assets and
their market value. Pro forma stockholders' equity is not intended to represent
the fair market value of the shares of common stock, and may be different than
the amounts that would be available for distribution to stockholders if we
liquidated. Pro forma stockholders' equity does not give effect to the impact of
tax bad debt reserves in the event we are liquidated.
41
AT OR FOR THE NINE MONTHS ENDED JUNE 30, 2005
BASED UPON THE SALE AT $10.00 PER SHARE OF
-----------------------------------------------------------------------------
1,683,000 1,980,000 2,277,000 2,618,550 SHARES
SHARES AT SHARES AT SHARES AT AT ADJUSTED
MINIMUM OF MIDPOINT OF MAXIMUM OF MAXIMUM OF
OFFERING RANGE OFFERING RANGE OFFERING RANGE OFFERING RANGE (1)
---------------- ---------------- ---------------- --------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Gross proceeds.................................. $ 16,830 $ 19,800 $ 22,770 $ 26,186
Plus: market value of shares issued to
Charitable Foundation........................ 673 792 911 1,047
---------------- ---------------- ---------------- --------------------
Market value of stock offering and Charitable
Foundation shares............................ $ 17,503 $ 20,592 $ 23,681 $ 27,233
================ ================ ================ ====================
Gross proceeds.................................. $ 16,830 $ 19,800 $ 22,770 $ 26,186
Less: expenses................................. (773) (801) (828) (859)
---------------- ---------------- ---------------- --------------------
Estimated net proceeds.......................... 16,057 18,999 21,942 25,327
Less: capitalization of the Mutual Holding
Company...................................... (25) (25) (25) (25)
Less: common stock acquired by employee stock
ownership plan (2)........................... (1,400) (1,647) (1,894) (2,179)
Less: common stock acquired by stock-based
incentive plan (3)........................... (700) (824) (947) (1,089)
Less: cash contribution to Charitable
Foundation................................... (500) (500) (500) (500)
---------------- ---------------- ---------------- --------------------
Estimated net proceeds after adjustment for
stock benefit plans and cash
contributions to Charitable Foundation.... $ 13,432 $ 16,003 $ 18,576 $ 21,534
================ ================ ================ ====================
FOR THE NINE MONTHS ENDED JUNE 30, 2005:
Net income:
Historical................................... $ 68 $ 68 $ 68 $ 68
Pro forma adjustments:
Income on adjusted net proceeds.............. 223 266 308 358
Employee stock ownership plan (2)............ (21) (25) (28) (33)
Options granted under stock-based incentive
plan (4).................................. (101) (118) (136) (156)
Shares granted under stock-based incentive
plan (3).................................. (63) (74) (85) (98)
---------------- ---------------- ---------------- --------------------
Pro forma net income....................... $ 106 $ 117 $ 127 $ 139
================ ================ ================ ====================
Net income per share:
Historical................................... $ 0.02 $ 0.02 $ 0.02 $ 0.01
Pro forma adjustments:
Income on adjusted net proceeds.............. 0.06 0.06 0.06 0.06
Employee stock ownership plan (2)............ 0.00 0.00 0.00 0.00
Options granted under stock-based incentive
plan (4).................................. (0.03) (0.03) (0.03) (0.03)
Shares granted under stock-based incentive
plan (3).................................. (0.02) (0.02) (0.02) (0.02)
---------------- ---------------- ---------------- --------------------
Pro forma net income per share (2)(3)(4)... $ 0.03 $ 0.03 $ 0.03 $ 0.02
================ ================ ================ ====================
Offering price to pro forma net income per
share........................................ 250.00x 250.00x 250.00x 375.00x
Shares considered outstanding in calculating
pro forma net income per share............... 3,670,796 4,318,582 4,966,370 5,711,326
AT JUNE 30, 2005:
Stockholders' equity:
Historical................................... $ 23,121 $ 23,121 $ 23,121 $ 23,121
Estimated net proceeds....................... 16,057 18,999 21,942 25,327
Market value of shares issued to Charitable
Foundation................................ 673 792 911 1,047
Less:
Expense, net of tax, of contribution to
Charitable Foundation................... (704) (775) (847) (928)
Capitalization of the Mutual Holding
Company................................. (25) (25) (25) (25)
Common stock acquired by employee stock
ownership plan (2)...................... (1,400) (1,647) (1,894) (2,179)
Shares of common stock awarded under
stock-based incentive plan (3).......... (700) (824) (947) (1,089)
---------------- ---------------- ---------------- --------------------
Pro forma stockholders' equity (5)......... $ 37,022 $ 39,641 $ 42,261 $ 45,274
================ ================ ================ ====================
Stockholders' equity per share:
Historical................................... $ 6.07 $ 5.16 $ 4.49 $ 3.90
Estimated net proceeds....................... 4.22 4.24 4.26 4.28
Market value of shares issued to Charitable
Foundation................................ 0.18 0.18 0.18 0.18
Less:
Expense, net of tax, of contribution to
Charitable Foundation................... (0.18) (0.17) (0.16) (0.16)
Capitalization of the Mutual Holding
Company................................. (0.01) (0.01) (0.01) (0.01)
Common stock acquired by employee stock
ownership plan (2)...................... (0.37) (0.37) (0.37) (0.37)
Shares of common stock awarded under
stock-based incentive plan (3).......... (0.18) (0.18) (0.18) (0.18)
---------------- ---------------- ---------------- --------------------
Pro forma stockholders' equity per share
(3)(4)(5)............................... $ 9.73 $ 8.85 $ 8.21 $ 7.64
================ ================ ================ ====================
Offering price as percentage of pro forma
stockholders' equity per share............... 102.77% 112.99% 121.80% 130.89%
Shares considered outstanding in calculating
offering price as a percentage of pro forma
stockholders' equity per share............... 3,807,320 4,479,200 5,151,080 5,923,742
Charitable Foundation ownership................. 1.77% 1.77% 1.77% 1.77%
Public ownership................................ 44.20% 44.20% 44.20% 44.20%
42
(1) As adjusted to give effect to a 15% increase in the number of shares of
common stock outstanding after the stock offering which could occur due to
an increase in the maximum of the independent valuation as a result of
regulatory considerations, demand for the shares, or changes in market
conditions or general financial and economic conditions following the
commencement of the stock offering.
(2) It is assumed that 8% of the shares of common stock sold in the stock
offering and issued to the Charitable Foundation will be purchased by the
employee stock ownership plan. For purposes of this table, the funds used
to acquire such shares are assumed to have been borrowed by the employee
stock ownership plan from Magyar Bancorp, Inc. The amount to be borrowed is
reflected as a reduction of stockholders' equity. Magyar Bank intends to
make annual contributions to the employee stock ownership plan in an amount
at least equal to the principal and interest requirement of the debt.
Magyar Bank's total annual payment of the employee stock ownership plan
debt is based upon 30 equal annual installments of principal and interest.
The pro forma net earnings information makes the following assumptions: (a)
Magyar Bank's contribution to the employee stock ownership plan is
equivalent to the debt service requirement for the period presented and was
made at the end of the period; (b) 3,501 shares, 4,118 shares, 4,736 shares
and 5,447 shares at the minimum, midpoint, maximum and adjusted maximum of
the offering range, respectively (based upon a 30-year loan term), were
committed to be released during the nine months ended June 30, 2005, at an
average fair value equal to the price for which the shares of common stock
are sold in the stock offering in accordance with Statement of Position
("SOP") 93-6; and (c) only the employee stock ownership plan shares
committed to be released were considered outstanding for purposes of the
net loss per share calculations.
(3) Gives effect to the stock-based incentive plan expected to be adopted
following the stock offering. We have assumed that this plan acquires a
number of shares of common stock equal to 4% of the shares sold in the
stock offering and issued to the Charitable Foundation, either through open
market purchases or from authorized but unissued shares of common stock or
treasury stock of Magyar Bancorp, Inc., if any. Funds used by the
stock-based incentive plan to purchase the shares of common stock will be
contributed by Magyar Bancorp, Inc. In calculating the pro forma effect of
the stock-based incentive plan, it is assumed that the shares of common
stock were acquired by the plan in open market purchases at the beginning
of the period presented for a purchase price equal to the price for which
the shares are sold in the stock offering, and that 15% of the amount
contributed was an amortized expense (20% annually based upon a five-year
vesting period) during the nine months ended June 30, 2005. There can be no
assurance that the actual purchase price of the shares of common stock
granted under the stock-based incentive plan will be equal to the $10.00
subscription price. If shares are acquired from authorized but unissued
shares of common stock or from treasury shares of Magyar Bancorp, Inc., our
net loss per share and stockholders' equity per share will decrease. This
will also have a dilutive effect of approximately 1.81% (at the maximum of
the offering range) on the ownership interest of stockholders. The impact
on pro forma net loss per share and pro forma stockholders' equity per
share is not material. The following table shows pro forma net income per
share and pro forma stockholders' equity per share, assuming all the shares
of common stock to fund the stock awards are obtained from authorized but
unissued shares.
AT OR FOR THE NINE MONTHS ADJUSTED
ENDED JUNE 30, 2005 MINIMUM MIDPOINT MAXIMUM MAXIMUM
------------------------------------------- ----------- ------------ ----------- -----------
Pro forma net income per share $ 0.03 $ 0.03 $ 0.03 $ 0.03
Pro forma stockholders' equity per share 9.55 8.69 8.06 7.50
(4) Gives effect to the granting of options pursuant to the stock-based
incentive plan, which is expected to be adopted by Magyar Bancorp, Inc.
following the stock offering and presented to stockholders for approval not
earlier than six months after the completion of the stock offering. We have
assumed that options will be granted to acquire shares of common stock
equal to 10% of the shares sold in the stock offering and issued to the
Charitable Foundation. In calculating the pro forma effect of the stock
options, it is assumed that the exercise price of the stock options and the
trading price of the stock at the date of grant were $10.00 per share, and
the estimated grant-date fair value pursuant to the application of the
Black-Scholes option pricing model was $3.83 for each option. The pro forma
net income assumes that the options granted under the stock option plan
have a value of $3.83 per option, which was determined using the
Black-Scholes option pricing formula using the following assumptions: (i)
the trading price on date of grant was $10.00 per share; (ii) exercise
price is equal to the trading price on the date of grant; (iii) dividend
yield of 0%; (iv) expected life of 10 years; (v) expected volatility of
16.65%; and (vi) risk-free interest rate of 3.97%. Because there is
currently no market for shares of Magyar Bancorp, Inc.'s common stock, the
assumed expected volatility is based on the SNL Financial MHC index. If the
fair market value per share on the date of grant is different than $10.00,
or if the assumptions used in the option pricing formula are different from
those used in preparing this pro forma data, the value of options and the
related expense recognized will be different. The aggregate grant-date fair
value of the stock options was amortized to expense on a straight-line
basis over a five-year vesting period of the options. There can be no
assurance that the actual exercise price of the stock options will be equal
to the $10.00 price per share. If a portion of the shares to satisfy the
exercise of options under the stock-based incentive plan is obtained from
the issuance of authorized but unissued shares of common stock, our net
income and stockholders' equity per share will decrease. This also will
have a dilutive effect of up to 4.40% on the ownership interest of persons
who purchase shares of common stock in the stock offering.
(5) The retained earnings of Magyar Bank will continue to be substantially
restricted after the stock offering. See "Supervision and
Regulation--Federal Banking Regulation."
43
AT OR FOR THE YEAR ENDED SEPTEMBER 30, 2004
BASED UPON THE SALE AT $10.00 PER SHARE OF
-----------------------------------------------------------------------------
1,683,000 1,980,000 2,277,000 2,618,550 SHARES
SHARES AT SHARES AT SHARES AT AT ADJUSTED
MINIMUM OF MIDPOINT OF MAXIMUM OF MAXIMUM OF
OFFERING RANGE OFFERING RANGE OFFERING RANGE OFFERING RANGE (1)
---------------- ---------------- ---------------- --------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Gross proceeds.................................. $ 16,830 $ 19,800 $ 22,770 $ 26,186
Plus: market value of shares issued to
Charitable Foundation........................ 673 792 911 1,047
---------------- ---------------- ---------------- --------------------
Market value of stock offering and Charitable
Foundation shares............................ $ 17,503 $ 20,592 $ 23,681 $ 27,233
================ ================ ================ ====================
Gross proceeds.................................. $ 16,830 $ 19,800 $ 22,770 $ 26,186
Less: expenses................................. (773) (801) (828) (859)
---------------- ---------------- ---------------- --------------------
Estimated net proceeds.......................... 16,057 18,999 21,942 25,327
Less: capitalization of the Mutual Holding
Company...................................... (25) (25) (25) (25)
Less: common stock acquired by employee stock
ownership plan (2)........................... (1,400) (1,647) (1,894) (2,179)
Less: common stock acquired by stock-based
incentive plan (3)........................... (700) (824) (947) (1,089)
Less: cash contribution to Charitable
Foundation................................... (500) (500) (500) (500)
---------------- ---------------- ---------------- --------------------
Estimated net proceeds after adjustment for
stock benefit plans and cash
contributions to Charitable Foundation.... $ 13,432 $ 16,003 $ 18,576 $ 21,534
================ ================ ================ ====================
FOR THE YEAR ENDED SEPTEMBER 30, 2004:
Net income:
Historical................................... $ 612 $ 612 $ 612 $ 612
Pro forma adjustments:
Income on adjusted net proceeds.............. 297 354 411 477
Employee stock ownership plan (2)............ (28) (33) (38) (44)
Options granted under stock-based incentive
plan (4).................................. (134) (158) (181) (209)
Shares granted under stock-based incentive
plan (3).................................. (84) (99) (114) (131)
---------------- ---------------- ---------------- --------------------
Pro forma net income....................... $ 663 $ 676 $ 690 $ 705
================ ================ ================ ====================
Net income per share:
Historical................................... $ 0.17 $ 0.14 $ 0.12 $ 0.11
Pro forma adjustments:
Income on adjusted net proceeds.............. 0.08 0.08 0.08 0.08
Employee stock ownership plan (2)............ (0.01) (0.01) (0.01) (0.01)
Options granted under stock-based incentive
plan (4).................................. (0.04) (0.04) (0.04) (0.04)
Shares granted under stock-based incentive
plan (3).................................. (0.02) (0.02) (0.02) (0.02)
---------------- ---------------- ---------------- --------------------
Pro forma net income per share (2)(3)(4)... $ 0.18 $ 0.15 $ 0.13 $ 0.12
================ ================ ================ ====================
Offering price to pro forma net income per
share........................................ 55.56x 66.67x 76.92x 83.33x
Shares considered outstanding in calculating
pro forma net income per share............... 3,671,963 4,319,955 4,967,949 5,713,141
AT SEPTEMBER 30, 2004:
Stockholders' equity:
Historical................................... $ 23,112 $ 23,112 $ 23,112 $ 23,112
Estimated net proceeds....................... 16,057 18,999 21,942 25,327
Market value of shares issued to Charitable
Foundation................................ 673 792 911 1,047
Less:
Expense, net of tax, of contribution to
Charitable Foundation................... (704) (775) (847) (928)
Capitalization of the Mutual Holding
Company................................. (25) (25) (25) (25)
Common stock acquired by employee stock
ownership plan (2)...................... (1,400) (1,647) (1,894) (2,179)
Shares of common stock awarded under
stock-based incentive plan (3).......... (700) (824) (947) (1,089)
---------------- ---------------- ---------------- --------------------
Pro forma stockholders' equity (6)......... $ 37,013 $ 39,632 $ 42,252 $ 45,265
================ ================ ================ ====================
Stockholders' equity per share:
Historical................................... $ 6.07 $ 5.16 $ 4.49 $ 3.90
Estimated net proceeds....................... 4.22 4.24 4.26 4.28
Market value of shares issued to Charitable
Foundation................................ 0.18 0.18 0.18 0.18
Less:
Expense, net of tax, of contribution to
Charitable Foundation................... (0.18) (0.17) (0.17) (0.16)
Capitalization of the Mutual Holding
Company................................. (0.01) (0.01) (0.01) --
Common stock acquired by employee stock
ownership plan (2)...................... (0.37) (0.37) (0.37) (0.37)
Shares of common stock awarded under
stock-based incentive plan (3).......... (0.18) (0.18) (0.18) (0.18)
---------------- ---------------- ---------------- --------------------
Pro forma stockholders' equity per share
(3)(4)(5)............................... $ 9.73 $ 8.85 $ 8.20 $ 7.65
================ ================ ================ ====================
Offering price as percentage of pro forma
stockholders' equity per share............... 102.77% 112.99% 121.65% 130.72%
Shares considered outstanding in calculating
offering price as a percentage of pro forma
stockholders' equity per share............... 3,807,320 4,479,200 5,151,080 5,923,742
Charitable Foundation ownership................. 1.77% 1.77% 1.77% 1.77%
Public ownership................................ 44.20% 44.20% 44.20% 44.20%
44
(1) As adjusted to give effect to a 15% increase in the number of shares of
common stock outstanding after the stock offering which could occur due to
an increase in the maximum of the independent valuation as a result of
regulatory considerations, demand for the shares, or changes in market
conditions or general financial and economic conditions following the
commencement of the stock offering.
(2) It is assumed that 8% of the shares of common stock sold in the stock
offering and issued to the Charitable Foundation will be purchased by the
employee stock ownership plan. For purposes of this table, the funds used
to acquire such shares of common stock are assumed to have been borrowed by
the employee stock ownership plan from Magyar Bancorp, Inc. The amount to
be borrowed is reflected as a reduction of stockholders' equity. Magyar
Bank intends to make annual contributions to the employee stock ownership
plan in an amount at least equal to the principal and interest requirement
of the debt. Magyar Bank's total annual payment of the employee stock
ownership plan debt is based upon 30 equal annual installments of principal
and interest. The pro forma net earnings information makes the following
assumptions: (a) Magyar Bank's contribution to the employee stock ownership
plan is equivalent to the debt service requirement for the period presented
and was made at the end of the period; (b) 4,668 shares, 5,491 shares,
6,315 shares and 7,262 shares at the minimum, midpoint, maximum and
adjusted maximum of the offering range, respectively (based upon a 30-year
loan term), were committed to be released during the year ended September
30, 2004, at an average fair value equal to the price for which the shares
of common stock are sold in the stock offering in accordance with SOP 93-6;
and (c) only the employee stock ownership plan shares committed to be
released were considered outstanding for purposes of the net income per
share calculations.
(3) Gives effect to the stock-based incentive plan expected to be adopted
following the stock offering. We have assumed that this plan acquires a
number of shares of common stock equal to 4% of the shares sold in the
stock offering and issued to the Charitable Foundation, either through open
market purchases or from authorized but unissued shares of common stock or
treasury stock of Magyar Bancorp, Inc., if any. Funds used by the
stock-based incentive plan to purchase the shares of common stock will be
contributed by Magyar Bancorp, Inc. In calculating the pro forma effect of
the stock-based incentive plan, it is assumed that the shares of common
stock were acquired by the plan in open market purchases at the beginning
of the period presented for a purchase price equal to the price for which
the shares are sold in the stock offering, and that 20% of the amount
contributed was an amortized expense (based upon a five-year vesting
period) during the year ended September 30, 2004. There can be no assurance
that the actual purchase price of the shares of common stock granted under
the stock-based incentive plan will be equal to the $10.00 subscription
price. If shares are acquired from authorized but unissued shares of common
stock or from treasury shares of Magyar Bancorp, Inc., our net income per
share and stockholders' equity per share will decrease. This will also have
a dilutive effect of approximately 1.81% (at the maximum of the offering
range) on the ownership interest of stockholders. The impact on pro forma
net income per share and pro forma stockholders' equity per share is not
material. The following table shows pro forma net income per share and pro
forma stockholders' equity per share, assuming all the shares of common
stock to fund the stock awards are obtained from authorized but unissued
shares.
AT OR FOR THE YEAR ADJUSTED
ENDED SEPTEMBER 30, 2004 MINIMUM MIDPOINT MAXIMUM MAXIMUM
------------------------------------------- ----------- ------------ ----------- -----------
Pro forma net income per share $ 0.18 $ 0.16 $ 0.14 $ 0.13
Pro forma stockholders' equity per share 9.55 8.69 8.05 7.50
(4) Gives effect to the granting of options pursuant to the stock-based
incentive plan, which is expected to be adopted by Magyar Bancorp, Inc.
following the stock offering and presented to stockholders for approval not
earlier than six months after the completion of the stock offering. We have
assumed that options will be granted to acquire shares of common stock
equal to 10% of shares sold in the stock offering and issued to the
Charitable Foundation. In calculating the pro forma effect of the stock
options, it is assumed that the exercise price of the stock options and the
trading price of the stock at the date of grant were $10.00 per share, and
the estimated grant-date fair value pursuant to the application of the
Black-Scholes option pricing model was $3.83 for each option. The pro forma
net income assumes that the options granted under the stock option plan
have a value of $3.83 per option, which was determined using the
Black-Scholes option pricing formula using the following assumptions: (i)
the trading price on date of grant was $10.00 per share; (ii) exercise
price is equal to the trading price on the date of grant; (iii) dividend
yield of 0%; (iv) expected life of 10 years; (v) expected volatility of
16.65%; and (vi) risk-free interest rate of 3.97%. Because there is
currently no market for shares of Magyar Bancorp, Inc.'s common stock, the
assumed expected volatility is based on the SNL Financial MHC index. If the
fair market value per share on the date of grant is different than $10.00,
or if the assumptions used in the option pricing formula are different from
those used in preparing this pro forma data, the value of options and the
related expense recognized will be different. The aggregate grant-date fair
value of the stock options was amortized to expense on a straight-line
basis over a five-year vesting period of the options. Under the above
assumptions, the adoption of the stock-based incentive plan will result in
no additional shares under the treasury stock method for purposes of
calculating earnings per share. There can be no assurance that the actual
exercise price of the stock options will be equal to the $10.00 price per
share. If a portion of the shares to satisfy the exercise of options under
the stock-based incentive plan is obtained from the issuance of authorized
but unissued shares of common stock, our net income per share and
stockholders' equity per share will decrease. This also will have a
dilutive effect of up to 4.40% on the ownership interest of persons who
purchase shares of common stock in the stock offering.
(5) The retained earnings of Magyar Bank will continue to be substantially
restricted after the stock offering. See "Supervision and
Regulation--Federal Banking Regulation."
45
COMPARISON OF VALUATION AND PRO FORMA INFORMATION
WITH AND WITHOUT THE CHARITABLE FOUNDATION
As reflected in the table below, if the Charitable Foundation is not
established and funded as part of the reorganization, FinPro, Inc. estimates
that the pro forma valuation of Magyar Bancorp, Inc. would be greater and, as a
result, a greater number of shares of common stock would be issued in the stock
offering. At the minimum, midpoint, maximum and adjusted maximum of the
valuation range, the pro forma valuation of Magyar Bancorp, Inc. is $38.1
million, $44.8 million, $51.5 million and $59.2 million with the Charitable
Foundation, as compared to $39.4 million, $46.3 million, $53.3 million and $61.3
million, respectively, without the Charitable Foundation. There is no assurance
that if the Charitable Foundation were not formed, the appraisal prepared at
that time would conclude that the pro forma market value of Magyar Bancorp, Inc.
would be the same as that estimated in the table below. Any appraisal prepared
at that time would be based on the facts and circumstances existing at that
time, including, among other things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing
ratios and financial data and ratios at and for the nine months ended June 30,
2005 at the minimum, midpoint, maximum and adjusted maximum of the offering
range, assuming the stock offering was completed at June 30, 2005, with and
without the Charitable Foundation.
1,683,000 SHARES SOLD 1,980,000 SHARES SOLD
-------------------------- --------------------------
WITH WITHOUT WITH WITHOUT
FOUNDATION FOUNDATION FOUNDATION FOUNDATION
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Estimated offering amount....................... $ 16,830 $ 17,714 $ 19,800 $ 20,840
Pro forma market capitalization of stock
offering and Charitable Foundation............ 17,503 17,714 20,592 20,840
Estimated full value
Total assets.................................... 338,953 339,833 341,572 342,555
Total liabilities............................... 301,937 301,937 301,937 301,937
Pro forma stockholders' equity.................. 37,022 37,902 39,641 40,624
Pro forma net earnings.......................... 106 126 117 139
Pro forma stockholders' equity per share........ 9.73 9.63 8.85 8.77
Pro forma net earnings per share................ 0.03 0.02 0.03 0.01
PRO FORMA PRICING RATIOS:
Offering price as a percentage of pro forma
stockholders' equity per share................ 102.77% 103.84% 112.99% 114.03%
Offering price to pro forma net earnings
per share..................................... 250.00x 375.00x 250.00x 750.00x
Offering price to assets........................ 11.23% 11.58% 13.11% 13.52%
PRO FORMA FINANCIAL RATIOS:
Return on assets................................ 0.04% 0.05% 0.05% 0.05%
Return on equity................................ 0.38% 0.44% 0.39% 0.46%
Equity to assets................................ 10.92% 11.15% 11.61% 11.86%
2,277,000 SHARES SOLD 2,618,550 SHARES SOLD
-------------------------- --------------------------
WITH WITHOUT WITH WITHOUT
FOUNDATION FOUNDATION FOUNDATION FOUNDATION
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Estimated offering amount....................... $ 22,770 $ 23,965 $ 26,186 $ 27,560
Pro forma market capitalization of stock
offering and Charitable Foundation............ 23,681 23,965 27,233 27,560
Estimated full value
Total assets.................................... 344,192 345,277 347,205 348,407
Total liabilities............................... 301,937 301,937 301,937 301,937
Pro forma stockholders' equity.................. 42,261 43,346 45,274 46,476
Pro forma net earnings.......................... 127 151 139 166
Pro forma stockholders' equity per share........ 8.21 8.14 7.64 7.59
Pro forma net earnings per share................ 0.03 0.03 0.02 0.02
PRO FORMA PRICING RATIOS:
Offering price as a percentage of pro forma
stockholders' equity per share................ 121.80% 122.85% 130.89% 131.75%
Offering price to pro forma net earnings
per share..................................... 250.00x 250.00x 375.00x 375.00x
Offering price to assets........................ 14.97% 15.43% 17.06% 17.58%
PRO FORMA FINANCIAL RATIOS:
Return on assets................................ 0.05% 0.06% 0.05% 0.06%
Return on equity................................ 0.40% 0.46% 0.41% 0.48%
Equity to assets................................ 12.28% 12.55% 13.04% 13.34%
46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF MAGYAR BANCORP, INC.
This section is intended to help potential investors understand the
financial performance of Magyar Bancorp, Inc. and Magyar Bank through a
discussion of the factors affecting our financial condition and our results of
operations at and for the periods presented. This section should be read in
conjunction with the financial statements and notes to the financial statements
that appear elsewhere in this prospectus.
OVERVIEW
Magyar Bancorp, Inc. was formed in connection with our reorganization
and has not yet commenced operations. Our results of operations will be
dependent upon the results of operations of Magyar Bank, which will be a
wholly-owned subsidiary. Magyar Bank's results of operations are primarily
dependent upon its net interest income. Net interest income is the difference
between interest income earned on loans and investments and interest expense
paid on deposits and borrowings. Net interest and dividend income before
provision for loan losses increased $1.1 million, or 18.5%, to $7.3 million for
the nine months ended June 30, 2005 from $6.2 million for the nine months ended
June 30, 2004. The primary reason for the improvement in our net interest and
dividend income was a $27.5 million, or 10.6%, increase in our average
interest-earning assets, to $287.1 million for the nine months ended June 30,
2005, reflecting strong demand for loans in our primary market area due to the
continued low interest rate environment. While the current low interest rate
environment is not expected to continue indefinitely, any negative impact of
rising interest rates on our net interest income would be mitigated to some
extent by the net proceeds from the stock offering which will support the
continued growth of our interest-earning assets in future periods.
Results of operations are also affected by our provision for loan
losses, fees collected on deposit accounts, investment and loan sales, loan
servicing income, and income from other products and services that we offer.
Non-interest expense consists mainly of salary and benefits expense, net
occupancy expense, data processing expense, advertising and promotion expense
and other operating expenses. Results of operations are also affected by changes
in interest rates, economic conditions, competition and changes in government
policies, accounting changes and regulatory actions.
ANTICIPATED INCREASE IN NON-INTEREST EXPENSE
Following the completion of the stock offering, we anticipate that our
non-interest expense will increase as a result of the increased costs associated
with managing a public company, increased compensation expenses associated with
the purchases of shares of common stock by our employee stock ownership plan,
the adoption of the stock-based incentive plan, if approved by our stockholders,
and the costs of funding the charitable foundation. In addition, our business
plan contemplates the expansion of our retail banking franchise through the
establishment of up to four additional DE NOVO branch offices by 2008. This
branching strategy will initially add to our non-interest expense without
generating offsetting revenues until the new branches achieve profitability.
Generally, management expects that the new branches will achieve profitability
within 24-48 months after opening.
47
Assuming that the adjusted maximum number of shares is sold in the stock
offering (2,618,550 shares):
o the employee stock ownership plan will acquire 217,863 shares of
common stock with a $2,178,630 loan that is expected to be
repaid over 30 years, resulting in an annual expense (pre-tax)
of approximately $72,600 (assuming that the common stock
maintains a value of $10.00 per share; the ultimate expense
would be higher if the stock price is higher);
o the stock-based incentive plan would grant options to purchase
shares equal to 10% of the shares sold in the stock offering and
issued to the Charitable Foundation, or 272,329 shares, to
eligible participants, which would result in compensation
expense over the vesting period of the options. Assuming the
market price of the common stock is $10.00 per share; the
options are granted with an exercise price of $10.00 per share;
the dividend yield on the stock is zero; the expected option
life is 10 years; the risk free interest rate is 3.97% (based on
the ten-year Treasury rate) and the volatility rate on the
common stock is 16.65% (based on an index of publicly traded
mutual holding company institutions), the estimated grant-date
fair value of the options utilizing a Black-Scholes option
pricing analysis is $3.83 per option granted. Assuming this
value is amortized over the five year vesting period, the
corresponding annual expense (pre-tax) associated with the stock
options would be approximately $208,600;
o the stock-based incentive plan would award a number of shares of
common stock equal to 4% of the shares sold in the stock
offering and issued to the charitable foundation, or 108,932
shares, to eligible participants, which would be expensed as the
awards vest. Assuming that all shares are awarded under the
stock-based incentive plan at a price of $10.00 per share, and
that the awards vest over a five year period, the corresponding
annual expense (pre-tax) associated with shares awarded under
the stock-based incentive plan would be approximately $218,000;
and
o the contribution to the Charitable Foundation will be
approximately $500,000 in cash and 104,742 shares, the cost of
which will be expensed in the quarter during which the stock
offering is completed.
The actual expense that will be recorded for the employee stock
ownership plan will be determined by the market value of the shares of common
stock as they are released to employees over the term of the loan, and whether
the loan is repaid faster than its contractual term. Accordingly, increases in
the stock price above $10.00 per share will increase the total employee stock
ownership plan expense, and any accelerated repayment of the loan will increase
the annual employee stock ownership plan expense. Further, the actual expense of
the stock-based incentive plan will be determined by the fair market value of
the stock on the grant date, which might be greater than $10.00 per share. The
actual expense of the stock-based incentive plan will be determined by the
grant-date fair value of the options which will depend on a number of factors,
including the valuation assumptions used in the Black-Scholes option pricing
model.
48
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. We
believe that the most critical accounting policy upon which our financial
condition and results of operation depend, and which involves the most complex
subjective decisions or assessments, is the allowance for loan losses.
The allowance for loan losses is the amount estimated by management as
necessary to cover credit losses in the loan portfolio both probable and
reasonably estimable at the balance sheet date. The allowance is established
through the provision for loan losses which is charged against income. In
determining the allowance for loan losses, management makes significant
estimates and has identified this policy as one of our most critical. The
methodology for determining the allowance for loan losses is considered a
critical accounting policy by management 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.
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 a
problem loan 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. Specific
allowances are established as required by this analysis. The general component
is determined by segregating the remaining loans by type of loan, risk weighting
(if applicable) and payment history. We also analyze historical loss experience,
delinquency trends, general economic conditions and geographic and industry
concentrations. This analysis establishes factors that are applied to the loan
groups to determine the amount of the general component of the allowance for
loan losses.
49
Actual loan losses may be significantly more than the allowances we have
established which could have a material negative effect on our financial
results.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2005 AND SEPTEMBER 30, 2004
Total assets increased $38.0 million, or 13.2%, to $325.1 million at
June 30, 2005 from $287.1 million at September 30, 2004. The increase reflected
continued substantial growth in net loans, partially offset by a decrease in
securities available-for-sale and held-to-maturity, as well as a decrease in
cash and cash equivalents. The growth in net loans was primarily funded by
deposits, which increased to $259.1 million at June 30, 2005 from $224.0 million
at September 30, 2004.
Net loans increased $54.8 million, or 28.3%, to $248.3 million at June
30, 2005 from $193.5 million at September 30, 2004. Growth in loans was highest
in the commercial real estate loan portfolio, which increased $29.8 million, or
149.7%, and in the construction loan portfolio, which increased $31.6 million,
or 571.7%. These increases reflected continued strong economic conditions in our
primary market area as well as our continued efforts to diversify our lending
activities and improve our net interest rate spread by increasing our
origination of generally higher-yielding loans. In addition, the increase in
construction loans reflected the hiring of a seasoned construction loan officer
in January 2005, and the increase in commercial real estate and commercial
business lending reflected the hiring of a seasoned commercial loan officer in
April 2005. Finally, the increases also were due to somewhat reduced competition
from community banks in our market area, as a highly regarded local community
bank was acquired by a substantially larger commercial bank during the period.
At June 30, 2005, commercial real estate, construction and commercial business
loans, in the aggregate, represented 42.7% of our total loans, compared to 27.1%
of our total loans at September 30, 2004. While one- to four-family residential
mortgage loans also increased to $118.7 million at June 30, 2005 from $108.7
million at September 30, 2004, these loans decreased as a percentage of our
total loans to 47.3% at June 30, 2005 from 55.5% at September 30, 2004.
Securities available-for-sale and securities held-to-maturity decreased
$9.1 million, or 29.2%, and $6.5 million, or 15.3%, respectively, reflecting
principal repayments and prepayments of mortgage-backed securities and calls of
federal agency obligations in the continued low market interest rate
environment. The decrease also reflected the deployment of investment securities
proceeds into new loans, as discussed above.
Total cash and cash equivalents decreased $1.3 million, or 25.3%, to
$3.7 million at June 30, 2005 from $5.0 million at September 30, 2004. The
decrease reflected routine fluctuations in cash balances as well the deployment
of available cash to support loan growth. Our holdings of stock in the Federal
Home Loan Bank of New York increased to $1.8 million at June 30, 2005 from $1.7
million at September 30, 2004, resulting from increases in advances from the
Federal Home Loan Bank, which totaled $26.8 million at June 30, 2005.
Total deposits increased $35.1 million, or 15.7%, to $259.1 million at
June 30, 2005. The increase was primarily concentrated in certificates of
deposit, which increased to $113.0 million at June 30, 2005 from $89.5 million
at September 30, 2004. Federal Home Loan Bank advances also increased to $26.8
million from $25.5 million. We increasingly used such advances to
50
"match fund" a portion of our longer-term loans in order to reduce our interest
rate risk. Securities sold under agreements to repurchase increased slightly to
$10.0 million from $9.5 million.
Total retained earnings increased $9,000 to $23.1 million at June 30,
2005 from $23.1 million at September 30, 2004. The increase reflected net income
of $68,000 for the nine months ended June 30, 2005, which was partially offset
by a $59,000 increase in our other comprehensive losses due to unrealized losses
on securities available for sale at June 30, 2005. The other comprehensive
losses due to unrealized losses on securities available for sale were due to
increases in interest rates since the securities were purchased. Management has
concluded that none of the securities have impairments that are other than
temporary.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED JUNE 30, 2005 AND 2004
NET INCOME. Net income decreased to $68,000 for the nine months ended
June 30, 2005 from $386,000 for the prior year period. The decrease resulted
primarily from higher non-interest expense and lower non-interest income, which
more than offset increased net interest and dividend income.
NET INTEREST AND DIVIDEND INCOME. Net interest and dividend income
increased $1.1 million, or 18.5%, to $7.3 million for the nine months ended June
30, 2005 from $6.2 million for the nine months ended June 30, 2004. The increase
reflected a $4.4 million increase in our net interest-earning assets, as the
average balance of our total interest-earning assets increased by $27.5 million,
or 10.6%, to $287.1 million for the nine months ended June 30, 2005 from $259.6
million for the nine months ended June 30, 2004. In addition, the improvement in
net interest and dividend income reflected an increase in our interest rate
spread to 3.21% from 3.02%.
INTEREST INCOME. Interest income increased $2.0 million, or 20.9%, to
$11.3 million for the nine months ended June 30, 2005 from $9.4 million for the
prior year period. The increase reflected an increase in the average balance of
our interest-earning assets to $287.1 million from $259.6 million, as well as an
improvement in the average yield on such assets to 5.26% from 4.81%. Interest
earned on loans increased to $9.4 million for the nine months ended June 30,
2005 from $7.1 million for the prior year period, reflecting a $41.5 million, or
23.6%, increase in the average balance of our loans as well as a 33 basis point
increase in the average yield on such loans to 5.74% from 5.41%. The improved
yield on our loans reflected the higher balance of higher yielding commercial
real estate and construction loans, as we continued our efforts to increase
these loans as a percentage of our overall portfolio. Interest earned on our
investment securities decreased $296,000, or 13.3%, reflecting a $10.4 million,
or 13.4%, decrease in the average balance of such securities, which more than
offset a 10 basis point increase in the average yield on such securities to
3.88% from 3.78%. The decreased average balance of our investment securities
reflected the deployment of proceeds from prepayments or repayments into higher
yielding loans.
INTEREST EXPENSE. Interest expense increased $813,000, or 25.4%, to $4.0
million for the nine months ended June 30, 2005 from $3.2 million for the nine
months ended June 30, 2004. The increase in interest expense was due to a $23.0
million, or 9.7%, increase in the average
51
balance of interest-bearing liabilities to $260.6 million from $237.6 million.
In addition, the average cost of such liabilities increased to 2.05% from 1.80%.
The interest paid on deposits increased to $3.0 million from $2.4 million,
reflecting an increase in the average balance of such deposits to $226.3 million
from $215.9 million, as well as an increase in the average cost of such deposits
to 1.74% from 1.50%. The interest paid on both time deposits and NOW accounts
increased, reflecting both higher average balances and the higher costs of these
deposits in the higher interest rate environment that prevailed in 2005 compared
to 2004. The interest paid on our savings accounts decreased slightly,
reflecting a lower average balance and a lower average cost of these accounts.
Interest paid on Federal Home Loan Bank advances increased to $1.1 million for
the nine months ended June 30, 2005 from $764,000 for the prior year period,
reflecting an increase in the average balance of such advances to $34.3 million
from $21.7 million. We have increased the use of such advances to match fund
loans, particularly when such advances are available at attractive rates. The
average cost of Federal Home Loan Bank advances decreased to 4.12% for the nine
months ended June 30, 2005 from 4.69% for the prior year period.
PROVISION FOR LOAN LOSSES. We establish provisions for loan losses,
which are charged to earnings, at a level necessary to absorb known and inherent
losses that are both probable and reasonably estimable at the date of the
financial statements. In evaluating the level of the allowance for loan losses,
management considers historical loss experience, the types of loans and the
amount of loans in the loan portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
peer group information and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available or as future events
occur. After an evaluation of these factors, management made a provision of
$237,000 for the nine months ended June 30, 2005 compared to a $152,000
provision for the prior year period. The increase in the provision in 2005 as
compared to 2004 was due primarily to the increase in the proportion of
construction and commercial real estate loans in our portfolio and higher
non-performing loans (up 504.0%) at June 30, 2005 as compared to September 30,
2004. The allowance for loan losses was $2.5 million, or 1.0% of loans
outstanding at June 30, 2005, as compared to $2.3 million, or 1.2% of loans
outstanding at September 30, 2004.
Determining the amount of the allowance for loan losses necessarily
involves a high degree of judgment. Management reviews the level of the
allowance on a quarterly basis, and establishes the provision for loan losses
based on the factors set forth in the preceding paragraph. Historically, our
loan portfolio has consisted primarily of one-to four-family residential
mortgage loans. However, our current business plan calls for increases in
construction, commercial real estate and commercial business loans. As
management evaluates the allowance for loan losses, the increased risk
associated with larger non-homogenous construction, commercial real estate and
commercial business loans may result in larger additions to the allowance for
loan losses in future periods.
Although we believe that we use the best information available to
establish the allowance for loan losses, future additions to the allowance may
be necessary, based on estimates that are susceptible to change as a result of
changes in economic conditions and other factors. In addition, the Federal
Deposit Insurance Corporation, as an integral part of its examination process,
will periodically review our allowance for loan losses. This agency may require
us to
52
recognize adjustments to the allowance, based on its judgments about information
available to it at the time of its examination.
NON-INTEREST INCOME. Non-interest income decreased to $537,000 for the
nine months ended June 30, 2005 from $593,000 for the nine months ended June 30,
2004. The decrease reflected a smaller increase in the cash surrender value of
Magyar Bank's bank owned life insurance for the nine months ended June 30, 2005
compared to the earlier year period, due principally to lower market interest
rates in 2005. Partially offsetting this was an increase in service charges in
the 2005 period, particularly service charges on deposits, due to higher deposit
balances in 2005 compared to 2004.
NON-INTEREST EXPENSE. Non-interest expense increased to $7.6 million for
the nine months ended June 30, 2005 from $6.1 million for the prior year period.
Compensation and employee benefits were the largest component of this increase,
rising to $3.8 million from $2.8 million. The increase reflected the addition of
several senior positions, including a new construction loan officer and a new
commercial loan officer, as we increased our capacity to originate construction
and commercial loans. In addition, we increased staffing in the administrative
area, including a new marketing officer, a new human resources officer and a new
CRA/community development officer. We expect the addition of these positions
will enable us to administer higher balances of loans and deposits after the
infusion of capital resulting from the stock offering. The increased
compensation and employee benefits expense also reflected severance payments for
departing senior executives, including the retirement of our former Chief
Executive Officer in December 2004. The higher non-interest expense also was due
to higher occupancy expenses, which increased to $1.3 million for the nine
months ended June 30, 2005 from $966,000 for the prior year period. The increase
reflected expenses related to the relocation of our current headquarters office.
These increases were partially offset by lower professional fees, which
decreased to $237,000 from $521,000. The higher professional fees for the nine
months ended June 30, 2004 reflected a data processing conversion undertaken
during that period.
INCOME TAX (BENEFIT) EXPENSE. Income tax (benefit) expense was $(18,000)
for the nine months ended June 30, 2005 and $137,000 for the nine months ended
June 30, 2004. The decrease in the effective rate is due to tax exempt income as
a percentage of pre-tax income which has decreased.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2004 AND 2003
Total assets increased $13.2 million, or 4.8%, to $287.1 million at
September 30, 2004 from $273.9 million at September 30, 2003. The increase
reflected substantial growth in net loans, partially offset by a decrease in
securities available for sale and cash and cash equivalents. The growth in net
loans was primarily funded by an increase in Federal Home Loan Bank of New York
advances, which increased to $25.5 million at September 30, 2004 from $10.5
million at September 30, 2003.
Net loans increased $19.8 million, or 11.4%, to $193.5 million at
September 30, 2004 from $173.8 million at September 30, 2003. Commercial
business loans and commercial real estate loans increased $18.1 million, or
187.6%, and $581,000, or 3.0%, respectively, reflecting
53
strong economic conditions in our primary market area as well as our efforts to
diversify our lending activities and improve our net interest rate spread by
increasing our origination of these higher-yielding loans. At September 30,
2004, commercial business and commercial real estate loans represented 24.3% of
our total loan portfolio compared to 16.5% at September 30, 2003. One- to
four-family residential mortgage loans increased $1.2 million, or 1.1%, to
$108.7 million at September 30, 2004, reflecting continued strong demand in our
primary market area for residential mortgage loans and the continued low
interest rate environment. While demand for loans was strong, the relatively
static balance of the portfolio reflected high loan refinancing activity by our
customers as well as our sale into the secondary mortgage market of a portion of
our fixed-rate residential loan originations. Our portfolio of home equity lines
of credit increased $1.8 million, or 24.2%, to $9.1 million at September 30,
2004. The increase reflected aggressive marketing activities and competitive
pricing on our home equity line of credit products. Constructions loans
increased $338,000, or 6.5%, to $5.5 million at September 30, 2004, reflecting
continuing strong demand for such loans in our market area, particularly for
commercial construction loans.
Securities available for sale decreased $8.9 million, or 22.2%, to $31.2
million at September 30, 2004 from $40.1 million at September 30, 2003. The
decrease resulted from $5.5 million in principal repayments and prepayments of
mortgage-backed securities and $5.0 million in calls of Federal agency
obligations in the low market interest rate environment that prevailed in 2004.
Our portfolio of mortgage-backed securities and U.S. government and agency
obligations decreased $3.6 million, or 13.3%, and $5.2 million, or 48.5%,
respectively, at September 30, 2004 from September 30, 2003. These decreases
were partially offset by an increase in our held-to-maturity investment
securities portfolio, which increased to $42.6 million at September 30, 2004
from $37.3 million at September 30, 2003. The largest component of this increase
was our mortgage-backed securities portfolio, which increased to $33.2 million
from $29.7 million.
Total cash and cash equivalents decreased $3.6 million, or 41.8%, to
$5.0 million at September 30, 2004 from $8.5 million at September 30, 2003,
reflecting routine fluctuations in cash balances as well as the deployment of
cash into higher-yielding loans. Our holdings of stock in the Federal Home Loan
Bank of New York increased to $1.7 million at September 30, 2004 from $1.6
million at September 30, 2003, resulting from increases in advances outstanding
from the Federal Home Loan Bank.
Total deposits decreased slightly to $224.0 million at September 30,
2004 from $225.7 million at September 30, 2003. We took advantage of attractive
rates available on Federal Home Loan Bank advances to increase such advances as
a funding source during this period. Federal Home Loan Bank advances increased
$15.0 million, or 142.6%, to $25.5 million at September 30, 2004 from $10.5
million at September 30, 2003. We also used such advances to "match fund" a
portion of our longer-term loans in an effort to reduce our interest rate risk.
Securities sold under agreements to repurchase were unchanged at $9.5 million at
September 30, 2004.
Total retained earnings increased $452,000, or 2.0%, to $23.1 million at
September 30, 2004 from $22.7 million at September 30, 2003. The increase
reflected net income of $612,000
54
for the year ended September 30, 2004, which was partially offset by a $160,000
increase in other comprehensive losses due to unrealized losses on securities
available for sale at September 30, 2004. The other comprehensive losses were
due to changes in interest rates since the securities were purchased. Management
has concluded that none of the securities have impairments that are other than
temporary.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 2003
NET INCOME. Net income decreased $915,000, or 59.9%, to $612,000 for the
year ended September 30, 2004 from $1.5 million for the year ended September 30,
2003. The decrease resulted primarily from lower non-interest income and higher
non-interest expense, partially offset by increased net interest income.
NET INTEREST AND DIVIDEND INCOME. Net interest income increased
$162,000, or 2.0%, to $8.3 million for the year ended September 30, 2004 from
$8.2 million for the year ended September 30, 2003. The increase reflected a
$2.6 million, or 12.8%, increase in our net interest-earning assets, which was
partially offset by a two basis point decline in our net interest rate spread to
3.02% for the year ended September 30, 2004 from 3.04% for the year ended
September 30, 2003. The reduction in the net interest rate spread was partially
attributable to the flattening of the yield curve whereby short-term interest
rates generally increased while longer-term rates remained essentially flat
during fiscal year 2004. This trend has continued into fiscal year 2005.
INTEREST AND DIVIDEND INCOME. Interest income decreased $786,000, or
5.9%, to $12.6 million for the year ended September 30, 2004 from $13.4 million
for the year ended September 30, 2003. The decrease resulted from a decrease in
the average yield on interest-earning assets to 4.81% from 5.28%, which more
than offset an increase in the average balance of interest-earning assets to
$261.5 million from $253.1 million. Interest income attributable to loans
decreased $805,000, or 7.7%, to $9.6 million for the year ended September 30,
2004, reflecting a 48 basis point decrease in the average yield on loans to
5.4%, which more than offset a slight increase in the average balance of loans
to $178.3 million for the year ended September 30, 2004 from $177.3 million for
the year ended September 30, 2003, as the continued low market interest rate
environment combined with strong demand for residential financing in our primary
market area resulted in new loan originations more than offsetting loan
prepayments and repayments. Interest earned on investment securities increased
$67,000, or 2.4%, to $2.9 million for the year ended September 30, 2004. The
increase reflected substantially higher average balances of such securities to
$77.5 million from $64.9 million, which more than offset a decrease in the yield
on such securities in the lower market interest rate environment that prevailed
during fiscal 2004.
INTEREST EXPENSE. Interest expense decreased $948,000, or 18.2%, to $4.3
million for the year ended September 30, 2004 from $5.2 million for the year
ended September 30, 2003. The decrease in interest expense was due to the
decrease in the average cost of such liabilities to 1.79% for the year ended
September 30, 2004 from 2.24% for the prior year, which more than offset the
$5.8 million, or 2.5%, increase in the average balance of such liabilities.
Interest paid on deposits decreased to $3.2 million for the year ended September
30, 2004 from $4.3 million for the prior year, due to a decrease in the average
cost of such deposits to 1.49% from 1.98% in the lower market interest rate
environment. In particular, interest paid on time deposits
55
decreased $517,000, or 16.2%, for the year ended September 30, 2004, primarily
because the average cost of such deposits decreased to 2.39% from 2.84%. The
interest paid on Federal Home Loan Bank borrowings increased $35,000, or 3.5%,
for the year ended September 30, 2004, as a decrease in the average cost of such
borrowings to 4.55% from 5.01%, was more than offset by a $2.8 million, or
14.0%, increase in the average balance of such borrowings. The higher balance of
such borrowings reflected our use of Federal Home Loan Bank advances because of
the attractive rates available.
PROVISION FOR LOAN LOSSES. Management made a provision of $202,500 for
the year ended September 30, 2004 compared to a $230,000 provision for the prior
year. The allowance for loan losses was $2.3 million, or 1.2% of loans
outstanding, at September 30, 2004 as compared to $2.2 million, or 1.2% of loans
outstanding at September 30, 2003.
NON-INTEREST INCOME. Non-interest income decreased $174,000, or 17.9%,
to $796,000 for the year ended September 30, 2004 from $970,000 for the year
ended September 30, 2003. The decrease reflected lower service charges on
deposits in the 2004 period related to waived customer deposit fees associated
with our data processing conversion and upgrade. In addition, the decrease
reflected a smaller increase in the cash surrender value of Magyar Bank's bank
owned life insurance for the year ended September 30, 2004 compared to the prior
year.
NON-INTEREST EXPENSE. Non-interest expense increased $1.3 million, or
19.2%, to $8.0 million for the year ended September 30, 2004 from $6.7 million
for the prior year. Compensation and employee benefits increased to $3.8 million
from $3.1 million, reflecting higher staffing levels as well as average annual
salary increases of 3.7%. Occupancy expenses increased to $1.3 million from $1.2
million, reflecting the construction of our new headquarters building.
Professional fees increased to $628,000 from $234,000, reflecting a substantial
data processing system upgrade and consultants hired to facilitate this process.
Advertising expense increased to $279,000 from $216,000, partly reflecting
expense associated with the change of the name of the bank to Magyar Bank.
INCOME TAX EXPENSE. Income tax expense decreased to $257,000 for the
year ended September 30, 2004 from $624,000 for the prior year. The lower
expense was due to lower income in 2004. The effective tax rate was 29.6% and
29.0% for fiscal years 2004 and 2003, respectively.
AVERAGE BALANCES AND YIELDS. The following tables set forth average
balance sheets, average yields and costs, and certain other information for the
periods indicated. No tax-equivalent yield adjustments were made, as the effect
thereof was not material. All average balances are daily average balances.
Non-accrual loans were included in the computation of average balances, but have
been reflected in the table as loans carrying a zero yield. The yields set forth
below include the effect of deferred fees, discounts and premiums that are
amortized or accreted to interest income or expense.
56
For the Nine Months Ended June 30,
At June 30, ------------------------------------------------------------------------------------
2005 2005 2004
---------- ---------------------------------------- ----------------------------------------
Interest Interest
Actual Average Income/ Average Income/
Yield/Cost Balance Expense Yield/Cost Balance Expense Yield/Cost
---------- ----------- ----------- ------------ ----------- ----------- ------------
(Dollars in thousands)
INTEREST-EARNING ASSETS:
Interest-earning deposits
with banks................... 1.60% $ 2,442 $ 16 0.85% $ 6,123 $ 27 0.57%
Loans........................... 6.12% 217,488 9,355 5.74% 175,945 7,144 5.41%
Securities
Taxable...................... 3.81% 67,039 1,952 3.88% 77,405 2,196 3.78%
Tax-exempt (4)............... 8.52% 150 7 8.52% 160 7 8.52%
----------- ----------- ----------- -----------
Total interest-earning
assets................... 5.59% 287,119 11,330 5.26% 259,633 9,374 4.81%
Non-interest-earning assets..... 12,034 12,290
----------- -----------
Total assets................. $ 299,153 $ 271,923
=========== ===========
INTEREST-BEARING
LIABILITIES:
Savings accounts (1)............ 0.75% $ 50,880 $ 212 0.55% $ 52,296 $ 238 0.61%
NOW accounts (2)................ 1.13% 57,945 433 1.00% 51,045 174 0.46%
Time deposits (3)............... 2.92% 117,516 2,308 2.62% 112,520 2,023 2.40%
----------- ----------- ----------- -----------
Total interest-bearing
deposits................... 2.04% 226,341 2,953 1.74% 215,862 2,435 1.50%
Borrowings...................... 4.48% 34,283 1,059 4.12% 21,711 764 4.69%
----------- ----------- ----------- -----------
Total interest-bearing
liabilities................ 2.33% 260,624 4,012 2.05% 237,573 3,199 1.80%
=========== ===========
Non-interest-bearing
liabilities.................. 15,290 11,728
----------- -----------
Total liabilities.......... 275,914 249,301
Retained earnings............... 23,239 22,622
----------- -----------
Total liabilities and
retained earnings.......... $ 299,153 $ 271,923
=========== ===========
Net interest income............. $ 7,318 $ 6,175
=========== ===========
Interest rate spread............ 3.26% 3.21% 3.02%
Net interest-earning assets..... $ 26,495 $ 22,060
=========== ===========
Net interest margin............. 3.26% 3.03%
Average interest-earning
assets to average
interest-bearing
liabilities.................. 110.17% 109.29%
- ------------------
(1) Includes passbook savings, money market passbook and club accounts.
(2) Includes regular and money market NOW accounts.
(3) Includes certificates of deposits and individual retirement accounts.
(4) Interest income on tax-exempt securities is stated on a tax-equivalent
basis.
57
FOR THE YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------------------------
2004 2003 2002
--------------------------------- --------------------------------- ---------------------------------
Interest Interest Interest
Average Income/ Average Income/ Average Income/
Balance Expense Yield/Cost Balance Expense Yield/Cost Balance Expense Yield/Cost
--------- --------- ----------- --------- --------- ----------- --------- --------- -----------
(Dollars in thousands)
INTEREST-EARNING ASSETS:
Interest-earning deposits
with banks............... $ 5,578 $ 33 0.59% $ 10,714 $ 97 0.90% $ 10,302 $ 158 1.54%
Loans...................... 178,304 9,627 5.40% 177,275 10,432 5.88% 177,547 11,729 6.61%
Securities
Taxable................. 77,465 2,915 3.76% 64,934 2,831 4.36% 48,177 2,580 5.35%
Tax-exempt (4).......... 159 9 8.52% 169 10 8.52% 179 11 8.52%
--------- --------- --------- --------- --------- ---------
Total interest-
earning assets........ 261,506 12,584 4.81% 253,092 13,370 5.28% 236,205 14,478 6.13%
Non-interest-earning
assets.................. 12,088 12,087 10,417
--------- --------- ---------
Total assets............ $ 273,594 $ 265,179 $ 246,622
========= ========= =========
INTEREST-BEARING
LIABILITIES:
Savings accounts (1)....... $ 52,522 305 0.58% $ 49,747 546 1.10% $ 43,619 700 1.60%
NOW accounts (2)........... 50,990 238 0.47% 50,460 464 0.92% 45,706 676 1.48%
Time deposits (3).......... 111,988 2,676 2.39% 112,310 3,193 2.84% 109,405 4,042 3.69%
--------- --------- --------- --------- --------- ---------
Total interest-bearing
deposits.............. 215,500 3,219 1.49% 212,517 4,203 1.98% 198,730 5,418 2.73%
Borrowings................. 22,833 1,039 4.55% 20,034 1,004 5.01% 17,817 841 4.72%
--------- --------- --------- --------- --------- ---------
Total interest-bearing
liabilities........... 238,333 4,259 1.79% 232,551 5,207 2.24% 216,547 6,259 2.89%
========= ========= =========
Non-interest-bearing
liabilities.............. 12,541 10,707 9,623
--------- --------- ---------
Total liabilities..... 250,874 243,258 226,170
Retained earnings.......... 22,720 21,921 20,452
--------- --------- ---------
Total liabilities and
retained earnings..... $ 273,594 $ 265,179 $ 246,622
========= ========= =========
Net interest income........ $ 8,326 $ 8,163 $ 8,219
======== ======== ========
Interest rate spread....... 3.02% 3.04% 3.24%
Net interest-earning
assets.................. $ 23,173 $ 20,541 $ 19,658
========= ========= =========
Net interest margin........ 3.04% 3.08% 3.33%
Average interest-earning
assets to average
interest-bearing
liabilities............. 109.72% 108.83% 109.08%
- ---------------------------
(1) Includes passbook savings, money market passbook and club accounts.
(2) Includes regular and money market NOW accounts.
(3) Includes certificates of deposits and individual retirement accounts.
(4) Interest income on tax-exempt securities is stated on a tax-equivalent
basis.
58
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 prior
volume). The volume column shows the effects attributable to changes in volume
(changes in 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.
FOR THE FOR THE FOR THE
NINE MONTHS ENDED JUNE 30, YEARS ENDED SEPTEMBER 30, YEARS ENDED SEPTEMBER 30,
2005 VS. 2004 2004 VS. 2003 2003 VS. 2002
----------------------------- ----------------------------- -----------------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO DUE TO
------------------- ------------------- -------------------
VOLUME RATE NET VOLUME RATE NET VOLUME RATE NET
-------- -------- ------- -------- -------- ------- -------- -------- -------
(IN THOUSANDS)
INTEREST-EARNING ASSETS:
Interest-earning
deposits with banks..... $ (16) $ 5 $ (11) $ (46) $ (17) $ (63) $ 6 $ (68) $ (62)
Loans...................... 1,687 524 2,211 61 (866) (805) (18) (1,279) (1,297)
Securities
Taxable................... (286) 42 (244) 546 (462) 84 897 (646) 251
Tax-exempt................ -- -- -- (1) -- (1) (1) -- (1)
-------- -------- ------- -------- -------- ------- -------- -------- -------
Total interest-earning
assets............... $ 1,385 $ 571 $ 1,956 $ 560 $ (1,345) $ (785) $ 884 $ (1,993) $(1,109)
======== ======== ======= ======== ======== ======= ======== ======== =======
INTEREST-BEARING
LIABILITIES:
Savings accounts (1)....... $ (6) $ (20) $ (26) $ 30 $ (271) $ (241) $ 98 $ (252) $ (154)
NOW accounts (2)........... 24 236 260 5 (231) (226) 70 (282) (212)
Time deposits (3).......... 90 195 285 (9) (507) (516) 107 (957) (850)
-------- -------- ------- -------- -------- ------- -------- -------- -------
Total interest-bearing
deposits................ 108 411 519 26 (1,009) (983) 275 (1,491) (1,216)
Borrowings................. 442 (147) 295 140 (105) 35 105 59 163
-------- -------- ------- -------- -------- ------- -------- -------- -------
Total interest-bearing
liabilities.......... $ 550 $ 264 $ 814 $ 166 $ (1,114) $ (948) $ 380 $ (1,433) $(1,053)
======== ======== ======= ======== ======== ======= ======== ======== =======
Net change in interest
income................. $ 835 $ 307 $ 1,142 $ 394 $ (231) $ 163 $ 504 $ (560) $ (56)
======== ======== ======= ======== ======== ======= ======== ======== =======
- ---------------------------
(1) Includes passbook savings, money market passbook and club accounts.
(2) Includes regular and money market NOW accounts.
(3) Includes certificates of deposits and individual retirement accounts.
59
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/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/Liability
Committee meets at least on a quarterly basis to review our asset/liability
policies and interest rate risk position.
We have sought to manage our interest rate risk in order to minimize the
exposure of our earnings and capital to changes in interest rates. As part of
our ongoing asset-liability management, we seek to manage our exposure to
interest rate risk by retaining in our loan portfolio fewer fixed rate
residential loans, by originating and retaining adjustable-rate loans in the
residential, construction and commercial real estate loan portfolios, by using
alternative funding sources, such as advances from the Federal Home Loan Bank of
New York, to "match fund" longer-term one- to four-family residential mortgage
loans, and by originating and retaining variable rate home equity and short-term
and medium-term fixed-rate commercial business loans. We also use our portfolio
of short-term and adjustable-rate investment securities and mortgage-backed
securities to manage our interest rate risk exposure. Finally, we have increased
non-interest-bearing demand deposits as a percentage of our total deposits. By
following these strategies, we believe that we are well-positioned to react to
increases in market interest rates.
NET INTEREST INCOME ANALYSIS. The table below sets forth, as of June 30,
2005, the estimated changes in our net interest income for each of the next two
years that would result from the designated instantaneous changes in the United
States Treasury yield curve. 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.
60
ESTIMATED INCREASE ESTIMATED INCREASE
CHANGE IN ESTIMATED (DECREASE) IN NII YEAR 1 (DECREASE) IN NII YEAR 2
INTEREST RATES NET INTEREST -------------------------- --------------------------
(BASIS POINTS) INCOME ESTIMATED
(1) (NII) YEAR 1 AMOUNT PERCENT NII YEAR 2 AMOUNT PERCENT
---------------- -------------- ------------ ----------- ------------ ------------ -----------
(DOLLARS IN THOUSANDS)
200 $ 10,579 $ 114 1.09% $ 10,782 $ 317 3.03%
Unchanged 10,465 -- -- 10,856 391 3.74
-200 9,856 (609) (5.82) 9,294 (1,171) (11.19)
- ------------------------------------
(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 and maturities and sales of 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
3.0% of assets or greater. For the year ended September 30, 2004, our liquidity
ratio averaged 21.6% 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 June 30, 2005, cash and cash equivalents
totaled $3.7 million. Securities classified as available-for-sale, which provide
additional sources of liquidity, totaled $22.1 million at June 30, 2005. In
addition, at June 30, 2005, we had the ability to borrow $83.9 million
(including securities sold under agreements to repurchase) from the Federal Home
Loan Bank of New York. On that date, we had an aggregate of $36.7 million in
advances outstanding.
Our cash flows are derived from operating activities, investing
activities and financing activities as reported in our Statements of Cash Flows
included in our Financial Statements.
At June 30, 2005, we had $50.5 million in loan commitments outstanding.
In addition to commitments to originate loans, we had $28.4 million in unused
lines of credit to borrowers. Certificates of deposit due within one year of
June 30, 2005 totaled $68.5 million, or 26.4% of total deposits. If these
deposits do not remain with us, we will be required to seek other sources of
funds, including other certificates of deposit and Federal Home Loan Bank
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 due on or before June 30, 2006. We believe, however, based on past
experience, that a significant portion of our certificates of deposit will
remain with us. We have the ability to attract and retain deposits by adjusting
the interest rates offered.
61
Our primary investing activities are the origination of loans and the
purchase of securities. For the nine months ended June 30, 2005, we originated
$87.1 million of loans and purchased $2.0 million of securities. For the year
ended September 30, 2004, we originated $49.9 million of loans and purchased
$19.2 million of securities.
Financing activities consist primarily of activity in deposit accounts
and Federal Home Loan Bank advances. We experienced a net increase in total
deposits of $35.1 million for the nine months ended June 30, 2005 and a net
decrease in total deposits of $1.7 million for the year ended September 30,
2004. 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 Federal Home Loan Bank of New York, which
provide an additional source of funds. Federal Home Loan Bank advances totaled
$26.7 million, $25.5 million and $10.5 million at June 30, 2005, and September
30, 2004 and 2003, respectively. Federal Home Loan Bank advances have primarily
been used to fund loan demand and to purchase securities. Our current
asset/liability management strategy has been to "match-fund" longer-term loans
with Federal Home Loan Bank advances.
Magyar Bank is subject to various regulatory capital requirements,
including a risk-based capital measure. The risk-based capital guidelines
include both a definition of capital and a framework for calculating
risk-weighted assets by assigning balance sheet assets and off-balance sheet
items to broad risk categories. At June 30, 2005, Magyar Bank exceeded all
regulatory capital requirements. Magyar Bank is considered "well capitalized"
under regulatory guidelines. See "Supervision and Regulation--Federal Banking
Regulation--Capital Requirements."
The net proceeds from the stock offering will significantly increase our
liquidity and capital resources. Over time, the initial level of liquidity will
be reduced as net proceeds from the stock offering are used for general
corporate purposes, including the funding of loans. Our financial condition and
results of operations will be enhanced by the net proceeds from the stock
offering, resulting in increased net interest-earning assets and net income.
However, due to the increase in equity resulting from the net proceeds raised in
the stock offering, return on equity will be adversely affected following the
stock offering.
Bank owned life insurance is a tax-advantaged financing transaction that
is used to offset employee benefit plan costs. Policies are purchased insuring
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. 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
62
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. We consider
commitments to extend credit in determining our allowance for loan losses. For
additional information, see Note M, "Lease Commitments," and Note N, "Financial
Instruments with Off-Balance-Sheet Risk" to our 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 June 30,
2005. The payment amounts represent those amounts due to the recipient and do
not include any unamortized premiums or discounts or other similar carrying
amount adjustments.
PAYMENTS DUE BY PERIOD
-------------------------------------------------------------------------
LESS THAN ONE TO THREE THREE TO MORE THAN
CONTRACTUAL OBLIGATIONS ONE YEAR YEARS FIVE YEARS FIVE YEARS TOTAL
- ----------------------------------------- ------------ ------------ ------------ ------------- ------------
(IN THOUSANDS)
Certificates of deposit.................. $ 68,523 $ 43,794 $ 642 $ -- $ 112,959
Federal Home Loan Bank advances (1)...... 5,657 8,530 7,086 5,456 26,729
Repurchase Agreements.................... 5,000 5,000 -- -- 10,000
Standby letters of credit................ 12,554 3,536 -- 12,324 28,414
Operating leases......................... 101 224 348 -- 673
------------ ------------ ------------ ------------ ------------
Total.................................. $ 91,835 $ 61,084 $ 8,076 $ 17,780 $ 178,775
============ ============ ============ ============ ============
Commitments to extend credit............. $ 50,500 $ -- $ -- $ -- $ 50,500
============ ============ ============ ============ ============
- ------------------
(1) Reflects all debt.
RECENT ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board recently issued Statement 154,
"Accounting Changes and Error Corrections," a replacement of APB Opinion No. 20
and Financial Accounting Standards Board Statement No. 3, as part of its
short-term convergence project with the International Accounting Standards
Board. Statement 154 requires that all voluntary changes in accounting
principles and changes required by a new accounting pronouncement that do not
include specific transition provisions be applied retrospectively to prior
periods' financial statements, unless it is impracticable to do so. Opinion 20,
Accounting Changes, required that most voluntary changes in accounting principle
be recognized by including the cumulative effect of changing to the new
accounting principle as a component of net income in the period of the change.
Statement 154 is effective prospectively for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
Earlier application is permitted for accounting changes and corrections of
errors made in fiscal years beginning after the date the Statement was issued
(May 2005). Statement 154 does not change the transition provisions of any
existing accounting pronouncements, including those that are in a transition
phase as of the effective date of the Statement. Magyar Bank is currently
evaluating its possible impact.
63
FASB STATEMENT NO. 123 (REVISED 2004), SHARE-BASED PAYMENT. Statement
123(R) addresses the accounting for share-based payment transactions in which an
enterprise receives employee services in exchange for (a) equity instruments of
the enterprise or (b) liabilities that are based on the fair value of the
enterprise's equity instruments or that may be settled by the issuance of such
equity instruments. Statement 123(R) requires an entity to recognize the
grant-date fair-value of stock options and other equity-based compensation
issued to employees in the income statement. The revised Statement generally
requires that an entity account for those transactions using the
fair-value-based method; and eliminates an entity's ability to account for
share-based compensation transactions using the intrinsic value method of
accounting in APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,
which was permitted under Statement 123, as originally issued. The revised
Statement requires entities to disclose information about the nature of the
share-based payment transactions and the effects of those transactions on the
financial statements. Statement 123(R) is effective for Magyar Bank beginning
July 1, 2005. Magyar Bank must use either the modified prospective or the
modified retrospective transition method. Early adoption of this Statement for
interim or annual periods for which financial statements or interim reports have
not been issued is permitted. The adoption of Statement 123(R) is expected to
reduce reported net income and earnings per share. Management is in the process
of evaluating Statement 123(R) and does not know its full impact on the
consolidated financial statements at this time.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related notes of Magyar Bank have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP"). GAAP generally requires the measurement of
financial position and operating results in terms of historical dollars without
consideration for changes in the relative purchasing power of money over time
due to inflation. The impact of inflation is reflected in the increased cost of
our operations. Unlike industrial companies, our assets and liabilities are
primarily monetary in nature. As a result, changes in market interest rates have
a greater impact on performance than the effects of inflation.
64
BUSINESS OF MAGYAR BANCORP, INC.
Magyar Bancorp, Inc. was formed in September, 2005 and we have not
engaged in any business to date. Upon completion of the reorganization and the
stock offering, Magyar Bancorp, Inc. will own all of the issued and outstanding
common stock of Magyar Bank. Magyar Bancorp, Inc. will retain up to 50% of the
net proceeds from the stock offering. A portion of the net proceeds will be used
for the purpose of making a loan to fund the purchase of shares of our common
stock by the Magyar Bank employee stock ownership plan. We will contribute the
remaining net proceeds to Magyar Bank as additional capital. We intend to invest
our capital as discussed in "How We Intend to Use the Proceeds from the Stock
Offering."
In the future, Magyar Bancorp, Inc., as the holding company of Magyar
Bank, will be authorized to pursue other business activities permitted by
applicable laws and regulations for bank holding companies, which may include
the acquisition of banking and financial services companies. We have no plans
for any mergers or acquisitions, or other diversification of the activities of
Magyar Bancorp, Inc. at the present time.
Our cash flow will depend on earnings from the investment of the net
proceeds we retain, and any dividends received from Magyar Bank. Magyar Bancorp,
Inc. neither owns nor leases any property, but instead will use the premises,
equipment and furniture of Magyar Bank. We will employ as officers only certain
persons who are also officers of Magyar Bank, and we will use the support staff
of Magyar Bank from time to time. These persons will not be separately
compensated by Magyar Bancorp, Inc. Magyar Bancorp, Inc. may hire additional
employees, as appropriate, to the extent it expands its business in the future.
BUSINESS OF MAGYAR BANK
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 County, 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,
construction loans and securities. We also originate consumer loans, primarily
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. Our revenues are derived principally from
interest on loans and securities. 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.
Our website address is www.magbank.com. Information on our website is
not a part of this prospectus.
65
BUSINESS STRATEGY
Our business strategy is designed to enhance our profitability and
strengthen our franchise in our market area. The highlights of our strategy
include the following:
o EXPANSION OF THE RETAIL BANKING FRANCHISE. We have increased our
focus on expanding our retail banking franchise, increasing the
number of households and businesses served, and the number of
bank products per customer, primarily through DE NOVO branching.
In addition to the new branch office opened in 2002, we
currently are in the process of establishing a new branch office
in New Brunswick and relocating our main office to a
higher-growth part of our market area. Our current strategic
plan includes opening up to four additional branch offices by
2008. In addition, we hope to generate internal growth by
offering and promoting a greater variety of products and
services to our customers which should expand our relationship
with such customers.
o DEPOSIT AND CUSTOMER GATHERING. We have focused on generating
new deposit and customer relationships, particularly
non-interest-bearing checking accounts for both consumer and
business customers. Our emphasis on non-interest-bearing
checking accounts and other low-cost deposit accounts will
further our efforts to improve our net interest margin.
o LOAN PORTFOLIO GROWTH AND DIVERSIFICATION. Historically, one- to
four-family residential mortgage loans have been the largest
portion of our loan portfolio. However, we have increased our
origination of commercial real estate loans, commercial business
loans and construction loans in recent years, and we intend to
continue emphasizing these loans in the future. At June 30,
2005, our net loan portfolio totaled $248.3 million, an increase
of $74.5 million, or 42.9%, since September 30, 2003. The net
loan portfolio represented 76.4% of total assets and 95.8% of
total deposits at June 30, 2005, compared to 63.4% of total
assets and 77.0% of deposits at September 30, 2003. We
originated $31.5 million of commercial real estate, $16.6
million of construction and $9.3 million of commercial business
loans during the nine months ended June 30, 2005. At June 30,
2005, our commercial real estate, construction and commercial
business loans totaled 19.8%, 14.8% and 8.1%, respectively, of
our total loan portfolio. The additional capital raised in the
stock offering will enable us to further increase our commercial
business and commercial real estate lending capacity by enabling
us to originate more of these loans and loans with larger
balances. This will permit us to serve commercial borrowers with
larger lending needs. More commercial business and commercial
real estate lending exposes us to increased risks, as discussed
in the "Risk Factors" section of this prospectus.
o INCREASING NON-INTEREST INCOME. By diversifying the financial
products and services we offer, we intend to increase
non-interest income. In 2005, we entered into an exclusive
arrangement with a full-service investment and insurance
advisory firm to offer an expanded product line, including fixed
and variable annuities, retirement and investment planning, life
insurance and long-term care
66
insurance. The sale of these products, as well as the addition
of new deposit products and services will generate fee income
which will help to reduce the exposure of our net interest
income to changes in market interest rates.
o MAINTAINING ASSET QUALITY. We have emphasized maintaining strong
asset quality by following conservative underwriting criteria,
and primarily originating loans secured by real estate. We will
continue to emphasize asset quality as we expand the scope of
our lending activities. At June 30, 2005, our non-performing
loans totaled $1.5 million, representing 0.6% of the loan
portfolio. Our allowance for loan losses totaled $2.5 million at
June 30, 2005, and represented 1.0% of our loan portfolio and
166.2% of non-performing loans.
o MANAGING INTEREST RATE RISK. We seek to manage our exposure to
interest rate risk by retaining in our loan portfolio fewer
fixed rate residential loans, by originating and retaining
adjustable-rate residential, construction and commercial real
estate loans by using alternative funding sources, such as
advances from the Federal Home Loan Bank of New York, to "match
fund" longer-term one- to four-family residential mortgage
loans, and by originating and retaining adjustable rate home
equity and short-term and medium-term fixed-rate commercial
business loans. We also invest in short-term and adjustable-rate
investment securities, and mortgage-backed securities to manage
our interest rate risk exposure. Finally, we have increased
non-interest-bearing demand deposits as a percentage of our
total deposits. At June 30, 2005, 35.0% of our loan portfolio
matured or repriced in one year or less or had an adjustable
interest rate. In addition, as of June 30, 2005, our investment
portfolio securities had an expected average life of 16.4 years.
As a result of these steps, our assets are more sensitive to
changes in interest rates than our liabilities, which we believe
will reduce the exposure of our net interest income to rising
market interest rates.
o IMPROVING OPERATING EFFICIENCIES AND EXPENSE CONTROL. Our
efficiency ratio was 96.35% for the nine months ended June 30,
2005. The ratio reflects our investment of resources in
expanding and strengthening our management team and in
technological infrastructure that is capable of managing and
processing a larger asset and deposit base than we currently
have. As a result, we have residential, commercial and consumer
loan departments staffed with experienced professionals who are
capable of promoting the continued growth of our loan portfolio
and branch network. We intend to approach future growth
opportunities with a view toward achieving improved economies of
scale. We plan to continue to monitor and control costs,
although we recognize that our growth, particularly our planned
de novo branching strategy, will require continued investments
in personnel, marketing, premises and equipment.
67
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 County, New
Jersey. Our primary lending market area is broader than our deposit market area
and includes all of New Jersey. At June 30, 2005, 62.8% of our mortgage loan
portfolio consisted of loans secured by real estate located in Middlesex and
Somerset Counties in New Jersey.
The economy of our primary market area is diverse. It is largely urban
and suburban with a broad economic base that is typical for counties surrounding
the New York metropolitan area. Middlesex and Somerset Counties are projected to
experience moderate population and household growth through 2010. These counties
have an aging population base with the strongest growth projected in the
55-and-older age group and $50,000 or greater household income category.
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. As of June
30, 2005, our market share of deposits was 0.12% of deposits in the State of New
Jersey. See "Risk Factors--Strong Competition Within Our Market Area May Limit
Our Growth and Profitability."
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 $118.7
million, or 47.3% of our total loans at June 30, 2005. 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 intend to increase our origination and sale in
the secondary market of 15- to 30-year, fixed-rate residential mortgage loans,
while retaining the servicing rights on those loans. No loans were held for sale
at June 30, 2005. We also originate commercial real estate, commercial business
and construction loans. At June 30, 2005, these loans totaled $49.8 million,
$20.3 million and $37.1 million, respectively. We also offer consumer loans,
which consist primarily of home equity loans and home equity lines of credit, as
well as secured demand loans. At June 30, 2005, home equity loans and lines of
credit totaled $10.6 million, or 4.2% of our total loan portfolio.
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LOAN PORTFOLIO COMPOSITION. The following table sets forth the
composition of our loan portfolio by type of loan, at the dates indicated,
excluding loans held for sale.
AT SEPTEMBER 30,
AT JUNE 30, ---------------------------------------------
2005 2004 2003
--------------------- --------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- --------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
One- to four-family
residential................. $ 118,672 47.27% $ 108,722 55.50% $ 107,531 61.08%
Commercial real estate......... 49,770 19.83 19,935 10.17 19,354 10.99
Construction (1)............... 37,117 14.78 5,526 2.82 5,188 2.95
Home equity lines of credit.... 10,640 4.24 9,065 4.63 7,301 4.15
Commercial business............ 20,331 8.10 27,698 14.14 9,630 5.47
Other.......................... 14,511 5.78 24,964 12.74 27,042 15.36
---------- --------- ---------- --------- ---------- ---------
Total loans receivable......... $ 251,041 100.00% $ 195,910 100.00% $ 176,046 100.00%
========= ========= =========
Deferred loan costs (fees)..... (248) (19) (128)
Allowance for loan losses...... (2,481) (2,341) (2,150)
---------- ---------- ----------
Total loans receivable, net.... $ 248,312 $ 193,550 $ 173,768
========== ========== ==========
AT SEPTEMBER 30,
---------------------------------------------------------------------
2002 2001 2000
--------------------- --------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- --------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
One- to four-family
residential................. $ 119,876 65.81% $ 132,927 75.85% $ 130,264 79.51%
Commercial real estate......... 17,574 9.65 14,072 8.03 8,092 4.94
Construction (1)............... 1,883 1.03 2,258 1.29 560 0.34
Home equity lines of credit.... 6,963 3.82 6,813 3.89 5,515 3.37
Commercial business............ 7,985 4.38 5,227 2.98 3,139 1.92
Other.......................... 27,882 15.31 13,963 7.97 16,269 9.93
---------- --------- ---------- --------- ---------- ---------
Total loans receivable......... $ 182,163 100.00% $ 175,260 100.00% $ 163,839 100.00%
========= ========= =========
Deferred loan costs (fees)..... 21 95 58
Allowance for loan losses...... (1,926) (1,649) (1,446)
---------- ---------- ----------
Total loans receivable, net.... $ 180,258 $ 173,706 $ 162,451
========== ========== ==========
- ------------------
(1) Includes loan of $11,302,766 to an outside party related to Magyar Bank's
headquarters office relocation.
69
LOAN PORTFOLIO MATURITIES AND YIELDS. The following table summarizes the
scheduled repayments of our loan portfolio at September 30, 2004. Demand loans,
loans having no stated repayment schedule or maturity, and overdraft loans are
reported as being due in one year or less.
ONE- TO FOUR-FAMILY HOME EQUITY LINES OF
RESIDENTIAL COMMERCIAL REAL ESTATE CONSTRUCTION CREDIT
---------------------- ---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Due During the Years
Ending September 30,
- --------------------
2005................... $ 47 7.76% $ 86 7.33% $ 5,526 5.72% $ 111 5.65%
2006................... 190 8.02% 45 8.75% -- --% 89 1.99%
2007................... 890 7.11% 927 5.82% -- --% 98 5.87%
2008 to 2009........... 4,111 5.44% 1,577 7.59% -- --% 40 5.55%
2010 to 2014........... 18,816 5.61% 1,103 6.81% -- --% 143 5.75%
2015 to 2019........... 30,920 5.31% 4,260 7.16% -- --% -- --%
2019 and beyond........ 53,748 5.58% 11,937 6.72% -- --% 8,584 4.38%
---------- ---------- ---------- ----------
Total......... $ 108,722 5.52% $ 19,935 6.85% $ 5,526 5.72% $ 9,065 4.41%
========== ========== ========== ==========
COMMERCIAL BUSINESS OTHER TOTAL
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Due During the Years
Ending September 30,
- --------------------
2005................... $ 15,717 4.67% $ 24,115 3.77% $ 45,602 4.33%
2006................... 2,434 5.40% 724 4.98% 3,482 5.42%
2007................... 173 8.55% 51 10.79% 2,139 6.70%
2008 to 2009........... 769 3.75% 34 10.62% 6,530 5.78%
2010 to 2014........... 2,476 6.52% 40 4.00% 22,578 5.77%
2015 to 2019........... -- --% -- --% 35,180 5.53%
2019 and beyond........ 6,129 6.69% -- --% 80,399 5.71%
---------- ---------- ----------
Total......... $ 27,698 5.34% $ 24,964 3.83% $ 195,910 5.37%
========== ========== ==========
The following table sets forth the scheduled repayments of fixed- and
adjustable-rate loans at September 30, 2004 that are contractually due after
September 30, 2005.
DUE AFTER SEPTEMBER 30, 2005
----------------------------------------
FIXED ADJUSTABLE TOTAL
----------- ------------ -----------
(IN THOUSANDS)
One- to four-family
residential........... $ 97,058 $ 11,617 $ 108,675
Commercial real estate... 6,083 13,766 19,849
Construction............. -- -- --
Home equity lines of
credit................ -- 8,954 8,954
Commercial business...... 1,294 10,687 11,981
Other.................... 135 714 849
----------- ------------ -----------
Total loans... $ 104,570 $ 45,738 $ 150,308
=========== ============ ===========
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 June 30, 2005, $118.7 million, or 47.3%
of our total loan portfolio, consisted of residential mortgage loans.
Residential mortgage loan originations are generally obtained from our in-house
loan representatives, from existing or past customers, through advertising, and
70
through referrals from local builders, real estate brokers and attorneys, 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 loans with a loan-to-value ratio in excess of 97%, which
is the upper limit that has been established by the Board of Directors.
Fixed-rate mortgage loans are originated for terms of up to 30 years.
Generally, all fixed-rate residential mortgage loans are underwritten
according to 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, however, to help manage interest
rate risk and to increase fee income, we intend to increase our origination and
sale in the secondary market of 30-year, fixed-rate residential mortgage loans,
while retaining the servicing rights on these loans. No loans were held for sale
at June 30, 2005.
We generally do not purchase residential mortgage loans, except for
loans to low-income borrowers to enhance our Community Reinvestment Act
performance. At June 30, 2005, we had $7.3 million of purchased one- to
four-family residential mortgage loans. No loans were purchased in the nine
months ended June 30, 2005.
At June 30, 2005, we had $96.5 million of fixed-rate residential
mortgage loans, which represented 81.3% of our total residential mortgage loan
portfolio. At June 30, 2005, our largest residential mortgage loan was for $2.6
million. The loan was performing in accordance with its terms at June 30, 2005.
We also offer adjustable-rate residential mortgage loans with an
interest rate based on the weekly average yield on U.S. Treasuries adjusted to a
constant maturity of one year, which adjusts either annually from the outset of
the loan or which adjusts annually after a one-, three-, five- or seven-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. Our adjustable-rate
mortgage loans amortize over terms of up to 30 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 June 30, 2005,
adjustable-rate residential mortgage loans totaled $22.2 million, or 18.7% of
our total residential mortgage loan portfolio.
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 30 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 agencies
such as Freddie Mac or Fannie Mae. These loans are originated with maximum
loan-
71
to-value ratios of 97%, which is higher than the maximum loan-to-value ratios of
our standard one- to four-family mortgage loans. In addition, we have a small
portfolio of Veterans Administration (VA) and Federal Housing Administration
(FHA) loans. Private mortgage insurance is required on all such loans. At June
30, 2005, we had $61,000 of VA loans (0.02% of total loans) and $5,000 in FHA
loans (less than 0.01% of total loans).
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. As part of our strategy to add to and
diversify our loan portfolio, we recently have increased our originations of
commercial real estate loans. At June 30, 2005, $49.8 million, or 19.8%, 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 and retail facilities primarily located in our market area. We
generally originate adjustable-rate commercial real estate loans with a maximum
term of 25 years, provided adjustable rate periods limit the initial payment
period to no more than 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.
72
The maximum amount of a commercial real estate loan is limited by our
Board-established loans-to-one-borrower limit, which is currently 14.25% of
Magyar Bank's capital, or $3.3 million. At June 30, 2005, our largest commercial
real estate loan was $3.1 million and is secured by three commercial rental
properties, including a restaurant, a marina and a retail store. At June 30,
2005, with the exception of a $380,000 loan secured by a retail office building,
all of our loans secured by commercial real estate were performing in accordance
with their terms.
CONSTRUCTION LOANS. We also originate construction loans for the
development of one- to four-family homes, townhomes and condominiums located in
our primary market area. 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 June 30, 2005, construction loans for the development of one- to
four-family residential properties totaled $14.3 million, or 5.7% of total
loans. These construction loans have a maximum term of 24 months. We provide
financing for land acquisition, site improvement and construction of individual
homes. Land acquisition funds are limited to 50% to 75% of the sale price of the
land. Site improvement funds are limited to 100% of the bonded site improvement
costs. Construction funds 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 June 30, 2005, construction loans for the development of townhomes
and condominiums totaled $22.9 million, or 9.1% of total loans. These
construction loans also have a maximum term of 24 months. We generally require
that a commitment for permanent financing be in place prior to closing
construction loans. The maximum loan-to-value ratio limit applicable to these
loans is 75% of the appraised value of the property. In addition, the property
must maintain a debt service coverage ratio of 125%. Finally, 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 14.25% of Magyar Bank's capital,
or $3.3 million. At June 30, 2005, our largest outstanding construction loan
balance was for $3.3 million. The loan is secured by a residential
condominium/townhome development project located in our primary market area.
This loan was performing according to its terms at June 30, 2005. At June 30,
2005, with the exception of a $145,000 residential construction loan, all of our
construction loans were performing in accordance with their terms.
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 guaranty 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
73
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 June 30, 2005, our commercial business
loans total $20.3 million, or 8.1% 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 15 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 commercial business loans are based on the
prime rate as published in THE WALL STREET JOURNAL.
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. 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 maximum amount of a commercial business loan is
limited by our loans-to-one-borrower limit, which is 14.25% of Magyar Bank's
capital, or $3.3 million currently. At June 30, 2005, our largest commercial
business loan was a $2.7 million loan to a manufacturing company and was secured
by business assets and real estate located in our primary market area. This loan
was performing according to its terms at June 30, 2005. At June 30, 2005, with
the exception of a $345,000 loan to a wholesale supply company as well as an
additional $8,000 loan, all of our commercial business loans were performing in
accordance with their terms.
HOME EQUITY LOANS, HOME EQUITY LINES OF CREDIT AND OTHER LOANS. We
originate home equity loans and home equity lines of credit secured by
residences located in our market area. At June 30, 2005, these loans totaled
$10.6 million, or 4.2% of our total loan portfolio. The underwriting standards
we use for home equity loans and 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 combined
(first and second mortgage liens) loan-to-value ratio for home equity loans and
home equity lines of credit is 90%. Home equity loans are offered with fixed and
adjustable rates of interest with the loan amount not to exceed $500,000 and
with terms of up to
74
20 years, while 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.
We also originate loans secured by the common stock of publicly traded
companies, provided their shares are listed on the New York Stock Exchange, the
American Stock Exchange or the Nasdaq 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 may not exceed 70%
of the value of the stock securing the loan as of the date of the loan.
At June 30, 2005, stock-secured loans totaled $17.9 million, or 7.1% of
our total loan portfolio. Generally, we limit the aggregate amount of loans
secured by the common stock of any one corporation to 14.25% of Magyar Bank's
capital, with the exception of Johnson & Johnson, for which the collateral
concentration limit is 150% of Magyar Bank's capital. At June 30, 2005, $15.1
million, or 6.0% of our loan portfolio, was 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 June 30, 2005, the aggregate loan-to-value ratio of the stock-secured
portfolio was 35%.
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 reselling them in the secondary market. In the future,
however, to help manage our interest rate risk and to increase fee income, we
intend to increase our origination and sale in the secondary market of 30-year,
fixed-rate residential loans, while retaining the servicing rights on those
loans. No loans were held for sale at June 30, 2005 or 2004. All one- to
four-family residential mortgage loans that we sell are sold pursuant to master
commitments negotiated with Freddie Mac. We sell our loans without recourse.
Historically, we have retained the servicing rights on the mortgage loans we
sell to Freddie Mac.
At June 30, 2005, we were servicing loans sold in the amount of $12.9
million. 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
75
according to our own underwriting criteria and procedures. At June 30, 2005, we
had $13.4 million of loan participation interests in which we were the lead
lender, and $3.4 million in loan participations in which we were not the lead
lender. We have entered into loan participations when the aggregate outstanding
balance of a particular customer relationship exceeds our loan-to-one-borrower
limit. We have the right to repurchase any or all portions of the participations
at our discretion. All loan participations are loans secured by real estate or
stock certificates that adhere to our loan policies. We have not experienced any
loan losses in our loan participations portfolio.
During the nine months ended June 30, 2005, we originated $19.9 million
of fixed rate and adjustable rate one- to four-family residential mortgage
loans, of which $19.8 million were retained by us. The fixed rate loans retained
by us consisted primarily of loans with terms of 30 years or less. We also
originated $31.5 million of commercial real estate, $16.6 million of
construction loans, and $9.3 million of commercial business loans during the
nine months ended June 30, 2005.
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 June 30, 2005, we had $7.3 million of one- to four-family
residential mortgage loans that were purchased from other lenders. No loans were
purchased in the nine months ended June 30, 2005.
LOAN APPROVAL PROCEDURES AND AUTHORITY. Our lending activities follow
written, non-discriminatory underwriting standards and loan origination
procedures established by our Board of Directors. In the approval process for
loans, we assess the borrower's ability to repay the loan and the value of the
property securing the loan. To assess an individual borrower's ability to repay,
we review income and expense, employment and credit history. To assess a
business entity's ability to repay, we review financial statements (including
balance sheets, income statements and cash flow statements), rent rolls, other
debt service, and projected income and expense.
We generally require appraisals for all real estate securing loans.
Appraisals are performed by independent licensed appraisers who are approved
annually by our Board of Directors. We require borrowers to obtain title, fire
and casualty, general liability, and, if warranted, flood insurance in amounts
at least equal to the principal amount of the loan. For construction loans, we
require a detailed plan and cost review, to be reviewed by an outside
engineering firm, and all construction-related state and local approvals
necessary for a particular project.
Our loan approval policies and limits are established by our Board of
Directors. All loans are approved in accordance with the loan approval policies
and limits. Lending authorities are approved annually by the Board of Directors,
and Magyar Bank lending staff are authorized to approve loans up to their
lending authority limits, provided the loan meets all of our underwriting
guidelines.
Loan requests for aggregate borrowings up to $1.25 million must be
approved by Magyar Bank's Chief Lending Officer or President. Other members of
our lending staff have lesser amounts of lending authority based on their
experience as lending officers. Loan requests for
76
aggregate borrowings up to $1.75 million must be approved by Magyar Bank's
Management Loan Committee. The Management Loan Committee is comprised of the
President, Chief Lending Officer and various bank officers appointed by the
Board of Directors. A quorum of three members including either the President or
the Chief Lending Officer is required for all Management Loan Committee
meetings. The Directors Loan Committee and the Board of Directors must approve
all loan requests for aggregate borrowings in excess of $1.75 million.
NON-PERFORMING AND PROBLEM ASSETS
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. A
summary report of all loans 30 days or more past due is given 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.
Loans are placed on non-accrual status when they are 90 days or more
delinquent. When loans are placed on non-accrual status, unpaid accrued interest
is fully reversed, and further income is recognized only to the extent received.
NON-PERFORMING ASSETS. The table below sets forth the amounts and
categories of our non-performing assets at the dates indicated. At each date
presented, we had no 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).
77
AT AT SEPTEMBER 30,
JUNE 30, ----------------------------------------------------------
2005 2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Non-accrual loans:
One- to four-family residential............ $ 608 $ 153 $ 178 $ 155 $ -- $ --
Commercial real estate..................... 380 -- -- -- -- --
Construction............................... 145 -- -- -- -- --
Home equity lines of credit................ -- -- -- -- -- --
Commercial business........................ 353 94 -- -- -- 101
Other...................................... 6 -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total................................... 1,492 247 178 155 -- 101
---------- ---------- ---------- ---------- ---------- ----------
Accruing loans 90 days or more past due:
One- to four-family residential............ -- -- -- -- 83 84
Commercial real estate..................... -- -- -- -- -- --
Construction............................... -- -- -- -- -- --
Home equity lines of credit................ -- -- -- -- -- --
Commercial business........................ -- -- -- -- -- --
Other...................................... -- -- 3 -- -- 24
---------- ---------- ---------- ---------- ---------- ----------
Total loans 90 days or more past due.... -- -- 3 -- 83 108
---------- ---------- ---------- ---------- ---------- ----------
Total non-performing loans.............. 1,492 247 181 155 83 209
---------- ---------- ---------- ---------- ---------- ----------
Foreclosed real estate....................... -- -- -- -- -- 73
Other non-performing assets.................. -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total non-performing assets.................. 1,492 247 181 155 83 282
========== ========== ========== ========== ========== ==========
Ratios:
Total non-performing loans to total
loans................................... 0.59% 0.13% 0.10% 0.09% 0.05% 0.13%
Total non-performing loans to total
assets.................................. 0.46% 0.09% 0.07% 0.06% 0.03% 0.09%
Total non-performing assets to total
assets.................................. 0.46% 0.09% 0.07% 0.06% 0.03% 0.12%
At June 30, 2005, our portfolio of commercial business, commercial real
estate and construction loans totaled $107.2 million, or 42.7% of our total
loans, compared to $34.2 million, or 19.4% of our total loans, at September 30,
2003. Commercial business, commercial real estate and construction loans
generally have more risk than one- to four-family residential mortgage loans. As
shown in the table above, at June 30, 2005, our non-performing loans increased
to $1.5 million from $247,000 at September 30, 2004 and $181,000 at September
30, 2003, reflecting our increased originations of these loans.
Additional interest income of approximately $43,000 and $12,000 would
have been recorded during the nine months ended June 30, 2005 and 2004,
respectively, if the non-accrual loans summarized in the above table had
performed in accordance with their original terms. Interest income of $0 and $0
was recorded on non-accrual loans more than 90 days delinquent for the nine
months ended June 30, 2005 and 2004, respectively.
78
DELINQUENT LOANS. The following table sets forth certain information
with respect to our loan portfolio delinquencies at the dates indicated. Loans
delinquent for 90 days or more are generally classified as nonaccrual loans.
LOANS DELINQUENT FOR
----------------------------------------------------
60-89 DAYS 90 DAYS AND OVER TOTAL
------------------------ ------------------------ ---------- ----------
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
At June 30, 2005
- ----------------
One- to four-family residential 5 $ 397 6 $ 608 11 $ 1,005
Commercial real estate......... -- -- 1 380 1 380
Construction................... -- -- 1 145 1 145
Home equity lines of credit.... -- -- -- -- -- --
Commercial business............ 9 333 2 353 11 686
Other.......................... 8 47 4 6 12 53
---------- ---------- ---------- ---------- ---------- ----------
Total..................... 22 $ 777 14 $ 1,492 36 $ 2,269
========== ========== ========== ========== ========== ==========
At September 30, 2004
- ---------------------
One- to four-family residential 5 $ 586 3 $ 153 8 $ 739
Commercial real estate......... -- -- -- -- -- --
Construction................... -- -- -- -- -- --
Home equity lines of credit.... -- -- -- -- -- --
Commercial business............ 3 1,628 1 94 4 1,722
Other.......................... 3 70 -- -- 3 70
---------- ---------- ---------- ---------- ---------- ----------
Total..................... 11 $ 2,284 4 $ 247 15 $ 2,531
========== ========== ========== ========== ========== ==========
At September 30, 2003
- ---------------------
One- to four-family residential 2 $ 466 3 $ 178 5 $ 644
Commercial real estate......... -- -- -- -- -- --
Construction................... -- -- -- -- -- --
Home equity lines of credit.... -- -- -- -- -- --
Commercial business............ 1 106 -- -- 1 106
Other.......................... 1 5 1 3 2 8
---------- ---------- ---------- ---------- ---------- ----------
Total..................... 4 $ 577 4 $ 181 8 $ 758
========== ========== ========== ========== ========== ==========
At September 30, 2002
- ---------------------
One- to four-family residential 1 $ 96 3 $ 155 4 $ 251
Commercial real estate......... -- -- -- -- -- --
Construction................... -- -- -- -- -- --
Home equity lines of credit.... -- -- -- -- -- --
Commercial business............ -- -- -- -- -- --
Other.......................... -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total..................... 1 $ 96 3 $ 155 4 $ 251
========== ========== ========== ========== ========== ==========
REAL ESTATE OWNED. Real estate we acquire as a result of foreclosure or
by deed in lieu of foreclosure is classified as real estate owned until sold.
When property is acquired it is recorded at fair market value at the date of
foreclosure, establishing a new cost basis. Holding costs and declines in fair
value result in charges to expense after acquisition. At June 30, 2005, we held
no real estate owned.
CLASSIFIED ASSETS. Federal 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 the
weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
79
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 of assets at June 30, 2005, classified assets consisted of $1.2 million
of special mention assets, $2.4 million of substandard assets, $530,000 of
doubtful assets and $13,000 of loss assets.
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 specific allowances, have not been
allocated to particular problem assets. When we classify problem assets as
"loss," we are required either to establish a specific allowance for losses
equal to 100% of the amount of the asset so classified or to charge off such
amount. Our determination as to the classification of our assets and the amount
of our valuation allowances is subject to review by the New Jersey Department of
Banking and Insurance and the Federal Deposit Insurance Corporation which can
direct us to establish additional general or specific 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 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. A description of our methodology in establishing our
allowance for loan losses is set forth in the section "Management's Discussion
and Analysis of Financial Condition and Results of Operations of Magyar Bancorp,
Inc.--Critical Accounting Policies." The allowance for loan losses as of June
30, 2005 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 New
Jersey Department of Banking and Insurance and the Federal Deposit Insurance
Corporation 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.
80
ALLOWANCE FOR LOAN LOSSES. The following table sets forth activity in
our allowance for loan losses for the periods indicated.
AT OR FOR THE NINE
MONTHS ENDED JUNE 30, AT OR FOR THE YEARS ENDED SEPTEMBER 30,
-------------------- ---------------------------------------------------------
2005 2004 2004 2003 2002 2001 2000
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of period........... $ 2,341 $ 2,150 $ 2,150 $ 1,926 $ 1,649 $ 1,446 $ 1,297
-------- -------- -------- -------- -------- -------- --------
Charge-offs:
One- to four-family residential......... -- -- -- -- -- 25 28
Commercial real estate.................. -- -- -- -- -- -- --
Construction............................ -- -- -- -- -- -- --
Home equity lines of credit............. -- -- -- -- -- -- --
Commercial business..................... 94 -- -- -- -- -- --
Other................................... 3 11 11 6 -- 4 42
-------- -------- -------- -------- -------- -------- --------
Total charge-offs................... 97 11 11 6 -- 29 70
Recoveries:
One- to four-family residential......... -- -- -- -- -- -- --
Commercial real estate.................. -- -- -- -- -- -- --
Construction............................ -- -- -- -- -- -- --
Home equity lines of credit............. -- -- -- -- -- -- --
Commercial business..................... -- -- -- -- -- -- --
Other................................... -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total recoveries.................... -- -- -- -- -- 1 --
-------- -------- -------- -------- -------- -------- --------
Net charge-offs.......................... 97 11 11 6 -- 28 70
Provision for loan losses................ 237 152 202 230 277 231 219
-------- -------- -------- -------- -------- -------- --------
Balance at end of period................. $ 2,481 $ 2,291 $ 2,341 $ 2,150 $ 1,926 $ 1,649 $ 1,446
======== ======== ======== ======== ======== ======== ========
Ratios:
Net charge-offs to average loans
outstanding........................... 0.04% 0.01% 0.01% --% --% 0.02% 0.04%
Allowance for loan losses to
non-performing loans at end
of period (1)......................... 166.22% NM NM NM NM NM NM
Allowance for loan losses to total
loans at end of period................ 0.99% 1.25% 1.20% 1.22% 1.06% 0.94% 0.88%
- ---------------------------
(1) "NM" indicates ratio is not meaningful.
81
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following tables set 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.
AT SEPTEMBER 30,
AT JUNE 30, ------------------------------------------
2005 2004
------------------------------------------ ------------------------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
ALLOWANCE TO LOANS IN ALLOWANCE TO LOANS IN
TOTAL CATEGORY TO TOTAL CATEGORY TO
AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS
------------ ------------- ------------- ------------ ------------- -------------
(DOLLARS IN THOUSANDS)
One- to four-family residential...... $ 402 16.21% 47.27% $ 281 12.02% 55.50%
Commercial real estate............... 1,084 43.73 19.83 857 36.62 10.17
Construction......................... 426 17.17 14.78 56 2.40 2.82
Home equity lines of credit.......... 107 4.31 4.24 222 9.46 4.63
Commercial business.................. 380 15.32 8.10 721 30.81 14.14
Other................................ 82 3.26 5.78 170 7.27 12.74
Unallocated.......................... -- -- -- 34 1.41 --
------------ ------------- ------------- ------------ ------------- -------------
Total allowance for loan losses... $ 2,481 100.00% 100.00% $ 2,341 100.00% 100.00%
============ ============= ============= ============ ============= =============
AT SEPTEMBER 30,
----------------------------------------------------------------------------------------
2003 2002
------------------------------------------ ------------------------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
ALLOWANCE TO LOANS IN ALLOWANCE TO LOANS IN
TOTAL CATEGORY TO TOTAL CATEGORY TO
AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS
------------ ------------- ------------- ------------ ------------- -------------
(DOLLARS IN THOUSANDS)
One- to four-family residential...... $ 196 9.14% 61.08% $ 230 11.92% 65.81%
Commercial real estate............... 822 38.24 10.99 717 37.20 9.65
Construction......................... 301 14.01 2.95 102 5.32 1.03
Home equity lines of credit.......... 190 8.83 4.15 180 9.33 3.82
Commercial business.................. 426 19.80 5.47 268 13.91 4.38
Other................................ 164 7.61 15.36 146 7.59 15.31
Unallocated.......................... 51 2.37 -- 283 14.74 --
------------ ------------- ------------- ------------ ------------- -------------
Total allowance for loan losses... $ 2,150 100.00% 100.00% $ 1,926 100.00% 100.00%
============ ============= ============= ============ ============= =============
AT SEPTEMBER 30,
----------------------------------------------------------------------------------------
2001 2000
------------------------------------------ ------------------------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
ALLOWANCE TO LOANS IN ALLOWANCE TO LOANS IN
TOTAL CATEGORY TO TOTAL CATEGORY TO
AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS
------------ ------------- ------------- ------------ ------------- -------------
(DOLLARS IN THOUSANDS)
One- to four-family residential...... $ 227 13.77% 75.84% $ 395 27.35% 79.54%
Commercial real estate............... 506 30.69 8.03 284 19.62 4.93
Construction......................... 57 3.47 1.29 41 2.86 0.34
Home equity lines of credit.......... 193 11.71 3.89 166 11.45 3.36
Commercial business.................. 273 16.58 2.98 150 10.38 1.91
Other................................ 103 6.24 7.97 121 8.35 9.92
Unallocated.......................... 290 17.53 -- 289 19.98 --
------------ ------------- ------------- ------------ ------------- -------------
Total allowance for loan losses... $ 1,649 100.00% 100.00% $ 1,446 100.00% 100.00%
============ ============= ============= ============ ============= =============
82
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 Investment Committee of the Board of Directors and
changes to the policy are recommended to and subject to approval by our Board of
Directors. While general investment strategies are developed by the Investment
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 and
all prudent securities are considered for investment. They are authorized to
execute transactions that fall within the scope of the established Investment
Policy up to $2.0 million per transaction. Investment transactions in excess of
$2.0 million must be approved by the Investment 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,
securities issued by various federal agencies, 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 Fannie Mae and Freddie Mac equity 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 June 30, 2005, our securities portfolio totaled $58.1 million, or
17.9% of our total assets. Securities are classified as held-to-maturity or
available-for-sale when purchased. At June 30, 2005, $36.0 million of our
securities were classified as held-to-maturity and reported at amortized cost,
and $22.1 million were classified as available-for-sale and reported at fair
value.
U.S. GOVERNMENT AND FEDERAL AGENCY OBLIGATIONS. At June 30, 2005, our
U.S. Government and Federal Agency securities portfolio totaled $8.2 million, or
14.2% of our total securities portfolio. 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 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 June 30,
2005, the fair market value of our mortgage-backed securities, including CMOs,
was $47.7 million, or 82.1% of our total securities portfolio. Included in this
balance was $527,000 of mortgage-backed securities issued by private issuers.
83
Our policy is to limit purchases of privately issued mortgage-backed securities
to non-high risk securities rated "AAA" 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
3.81% at June 30, 2005. The estimated fair value of our mortgage-backed
securities portfolio at June 30, 2005 was $47.7 million, which was $440,000 less
than the amortized cost of $48.1 million.
CORPORATE NOTES. At June 30, 2005, our corporate notes portfolio totaled
$2.0 million, or 3.5% of our total securities portfolio, all of which was
classified as held-to-maturity and all of which was comprised of corporate notes
issued by a single financial services company. Although corporate notes may
offer higher yields than U.S. Treasury or agency securities of comparable
duration, corporate notes also have a higher risk of default due to possible
adverse changes in the creditworthiness of the issuer. In order to mitigate this
risk, our Investment Policy 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 June 30, 2005, our equity securities totaled
$142,000, or 0.2% of our total securities portfolio and consisted of a mutual
fund which invests primarily in mortgage-backed securities. All of our equity
securities were classified as available-for-sale at June 30, 2005. Equity
securities are not insured or guaranteed investments and are affected by market
interest rates and stock market fluctuations. Such investments are carried at
their fair value and
84
fluctuation in the fair value of such investments, including temporary declines
in value, directly affect our net capital position.
SECURITIES PORTFOLIOS. The following table sets forth the composition of
our securities portfolio (excluding Federal Home Loan Bank of New York common
stock) at the dates indicated.
AT SEPTEMBER 30,
AT JUNE 30, ---------------------------------------------------------------------
2005 2004 2003 2002
--------------------- --------------------- --------------------- ---------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
--------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
SECURITIES AVAILABLE-FOR-SALE:
U.S. Government and agency
obligations.................. $ 4,000 $ 3,918 $ 5,498 $ 5,516 $ 10,496 $ 10,703 $ 7,494 $ 7,592
Corporate notes................. -- -- 2,002 2,007 2,031 2,125 2,060 2,182
Equity securities............... 142 142 142 142 142 142 142 142
Mortgage-backed securities...... 18,356 18,026 23,841 23,506 27,426 27,106 3,605 3,612
--------- --------- --------- --------- --------- --------- --------- ---------
Total securities
available-for-sale.......... $ 22,498 $ 22,086 $ 31,483 $ 31,171 $ 40,095 $ 40,076 $ 13,301 $ 13,528
========= ========= ========= ========= ========= ========= ========= =========
SECURITIES HELD-TO-MATURITY:
U.S. Government and agency
obligations (1).............. $ 4,331 $ 4,314 $ 7,423 $ 7,445 $ 5,533 $ 5,629 $ 5,727 $ 5,845
Corporate notes................. 2,002 2,031 2,005 2,097 2,008 2,202 2,013 2,223
Mortgage-backed securities...... 29,735 29,625 33,187 33,315 29,726 30,367 30,535 31,551
--------- --------- --------- --------- --------- --------- --------- ---------
Total securities
held-to-maturity.......... $ 36,068 $ 35,970 $ 42,615 $ 42,857 $ 37,267 $ 38,198 $ 38,275 $ 39,619
========= ========= ========= ========= ========= ========= ========= =========
- --------------------------------
(1) Includes New Jersey state obligations.
At June 30, 2005, we had no investments that had an aggregate book value
in excess of 10% of our retained earnings.
85
PORTFOLIO MATURITIES AND YIELDS. The composition and maturities of the
investment debt securities portfolio and the mortgage-backed securities
portfolio at June 30, 2005 are summarized in the following table. Maturities are
based on the final contractual payment dates, and do not reflect the impact of
prepayments or early redemptions that may occur. State and municipal securities
yields have been adjusted to a tax-equivalent basis.
MORE THAN ONE YEAR MORE THAN FIVE YEARS
ONE YEAR OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
SECURITIES AVAILABLE-FOR-SALE:
U.S. Government and agency obligations..... $ -- --% $ 4,000 2.73% $ -- --%
Corporate notes............................. -- --% -- --% -- --%
Equity securities........................... 142 2.82% -- --% -- --%
Mortgage-backed securities.................. -- --% -- --% 6,781 3.78%
---------- ---------- ----------
Total securities available-for-sale...... $ 142 2.82% $ 4,000 2.73% $ 6,781 3.78%
========== ========== ==========
SECURITIES HELD-TO-MATURITY:
U.S. Government and agency obligations (1).. $ -- --% $ 4,000 3.33% $ 147 6.00%
Corporate notes............................. 2,002 6.39% -- --% -- --%
Mortgage-backed securities.................. 19 6.00% 4,649 4.93% 11,558 3.96%
---------- ---------- ----------
Total securities held-to-maturity........ $ 2,021 6.39% $ 8,649 4.19% $ 11,705 3.98%
========== ========== ==========
TOTAL SECURITIES.............................. $ 2,163 6.16% $ 12,649 3.73% $ 18,486 3.91%
========== ========== ==========
MORE THAN TEN YEARS TOTAL SECURITIES
---------------------- ----------------------------------
WEIGHTED WEIGHTED
AVERAGE FAIR AVERAGE
AMOUNT RATE AMOUNT VALUE RATE
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
SECURITIES AVAILABLE-FOR-SALE:
U.S. Government and agency obligations..... $ -- --% $ 4,000 $ 3,918 2.73%
Corporate notes............................. -- --% -- -- --%
Equity securities........................... -- --% 142 142 2.82%
Mortgage-backed securities.................. 11,575 3.05% 18,356 18,026 3.32%
---------- ---------- ----------
Total securities available-for-sale...... $ 11,575 3.05% $ 22,498 $ 22,086 3.21%
========== ========== ==========
SECURITIES HELD-TO-MATURITY:
U.S. Government and agency obligations (1).. $ 184 3.91% $ 4,331 $ 4,314 3.45%
Corporate notes............................. -- --% 2,002 2,031 6.39%
Mortgage-backed securities.................. 13,509 3.94% 29,735 29,625 4.11%
---------- ---------- ----------
Total securities held-to-maturity........ $ 13,693 3.94% $ 36,068 $ 35,970 4.16%
========== ========== ==========
TOTAL SECURITIES.............................. $ 25,269 3.53% $ 58,566 $ 58,056 3.79%
========== ========== ==========
- --------------------------------
(1) Includes New Jersey state obligations.
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SOURCES OF FUNDS
GENERAL. Deposits, primarily certificates of deposit, have traditionally
been the primary source of funds used for our lending and investment activities.
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 retained
earnings. 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 residents 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 have the authority
to accept brokered deposits and do so when attractive rates are available. At
June 30, 2005, we had $9.9 million in brokered deposits.
Interest rates paid, 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,
have been and will continue to be significantly affected by market conditions.
At June 30, 2005, $113.0 million, or 43.6% of our deposit accounts, were
certificates of deposit, of which $68.5 million had maturities of one year or
less. We monitor activity in 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.
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The following table sets forth the distribution of total deposit
accounts, by account type, at the dates indicated.
AT SEPTEMBER 30,
AT JUNE 30, ------------------------------
2005 2004
------------------------------ ------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
BALANCE PERCENT RATE BALANCE PERCENT RATE
--------- --------- -------- --------- --------- --------
(DOLLARS IN THOUSANDS)
DEPOSIT TYPE:
Demand........................... $ 13,429 5.18% --% $ 9,925 4.43% --%
Passbook savings................. 51,918 20.04% 0.87% 49,550 22.12% 0.51%
Money market passbook............ 1,630 0.63% 0.35% 2,206 0.99% 0.35%
Club accounts.................... 165 0.06% 0.25% 229 0.10% 0.25%
Regular NOW accounts............. 24,551 9.48% 0.51% 24,548 10.96% 0.31%
Money market NOW accounts........ 29,853 11.52% 1.68% 25,164 11.24% 0.82%
Certificates of deposit.......... 112,959 43.60% 2.91% 89,487 39.95% 2.15%
Individual retirement accounts... 24,576 9.49% 3.58% 22,865 10.21% 3.44%
--------- --------- --------- ---------
Total deposits................ $ 259,081 100.00% 2.03% $ 223,974 100.00% 1.45%
========= ========= ========= =========
AT SEPTEMBER 30,
---------------------------------------------------------------
2003 2002
------------------------------ ------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
BALANCE PERCENT RATE BALANCE PERCENT RATE
--------- --------- -------- --------- --------- --------
(DOLLARS IN THOUSANDS)
DEPOSIT TYPE:
Demand........................... $ 8,250 3.66% --% $ 7,004 3.30% --%
Passbook savings................. 47,625 21.10% 0.91% 42,487 20.02% 1.51%
Money market passbook............ 3,290 1.46% 0.75% 3,545 1.67% 1.49%
Club accounts.................... 238 0.11% 0.65% 250 0.12% 0.75%
Regular NOW accounts............. 25,706 11.39% 0.35% 23,059 10.87% 0.82%
Money market NOW accounts........ 26,909 11.92% 1.02% 24,168 11.39% 1.87%
Certificates of deposit.......... 90,485 40.09% 2.28% 89,253 42.06% 2.93%
Individual retirement accounts... 23,172 10.27% 3.63% 22,428 10.57% 4.14%
--------- --------- --------- ---------
Total deposits................ $ 225,675 100.00% 1.65% $ 212,194 100.00% 2.30%
========= ========= ========= =========
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As of June 30, 2005, the aggregate amount of outstanding certificates of
deposit in amounts greater than or equal to $100,000 was $28.4 million. The
following table sets forth the maturity of these certificates as of June 30,
2005.
AT
JUNE 30, 2005
-----------------
(IN THOUSANDS)
Three months or less................ $ 5,072
Over three months through six months 3,138
Over six months through one year.... 7,732
Over one year to three years........ 12,002
Over three years.................... 467
----------
Total............................... $ 28,411
==========
At June 30, 2005, $68.5 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.
FOR THE NINE MONTHS ENDED
JUNE 30, FOR THE YEARS ENDED SEPTEMBER 30,
---------------------------- -------------------------------------------
2005 2004 2004 2003 2002
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
Beginning balance..................... $ 214,049 $ 217,426 $ 217,426 $ 205,190 $ 197,191
Net deposits (withdrawals) before
interest credited.................. 28,709 (4,249) (6,705) 7,880 2,337
Interest credited..................... 2,893 2,445 3,328 4,356 5,662
------------ ------------ ------------ ------------ ------------
Ending balance........................ $ 245,651 $ 215,621 $ 214,049 $ 217,426 $ 205,190
============ ============ ============ ============ ============
BORROWINGS. Our borrowings consist of short- and long-term advances from
and securities sold under agreements to repurchase with the Federal Home Loan
Bank of New York. As of June 30, 2005, we had short-term and long-term advances
from the Federal Home Loan Bank in the amount of $21.7 million and $5.0 million,
respectively. In addition, our repurchase agreements totaled $10.0 million at
June 30, 2005. These aggregate advances represented 12.2% of total liabilities
and had a weighted average rate of 4.30%. As a member of the Federal Home Loan
Bank of New York, we had an aggregate borrowing capacity of $83.9 million
including repurchase agreements with the Federal Home Loan Bank. Our repurchase
agreements are recorded as financing transactions as we maintain effective
control over the transferred or pledged securities. The dollar amount of the
securities underlying the agreements continues to be carried in our securities
portfolio while the obligations to repurchase the securities are reported as
liabilities in our consolidated balance sheets. The securities underlying the
agreements are delivered to the party with whom each transaction is executed.
Those parties agree to resell to us the identical securities we delivered to
them at the maturity or call period of the agreement.
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Long term Federal Home Loan Bank of New York advances as of June 30,
2005 mature as follows (in thousands):
2006 $ 657
2007 1,951
2008 6,579
2009 1,022
2010 6,064
Thereafter 5,456
--------------
$ 21,729
==============
Information concerning these short term advances with the Federal Home
Loan Bank of New York are summarized as follows (in thousands, except
percentages):
2005 2004 2004 2003
---------- ---------- ---------- ----------
Balance at end of period $ 5,000 $ -- $ -- $ --
Weighted average balance during the years $ 8,500 $ 900 $ 4,900 $ --
Weighted average interest rate at end of period 2.64% 1.12% 1.25% --%
Maximum month-end balance during period 20,700 1,500 11,500 --
Average interest during the period 2.55% 1.02% 1.52% --%
Outstanding securities sold under agreements to repurchase as of June
30, 2005 mature as follows (in thousands):
2006 $ 5,000
2007 --
2008 5,000
--------------
$ 10,000
==============
PROPERTIES
The following table provides certain information as of the date of this
prospectus with respect to our main office located in New Brunswick, New Jersey
and our three other full-service branch offices.
ORIGINAL YEAR
LEASED OR LEASED OR YEAR OF LEASE
LOCATION OWNED ACQUIRED EXPIRATION
- ----------------------------------------------- ------------ --------------- ---------------
MAIN OFFICE: Owned 2005 --
400 Somerset Street
New Brunswick, New Jersey
FULL-SERVICE BRANCHES:
582 Milltown Road Leased 2002 2012
North Brunswick, New Jersey
3050 Highway No. 27 Owned 1969 --
South Brunswick, New Jersey
89 French Street Leased 2006 2011
New Brunswick, New Jersey
(scheduled to open during the first calendar
quarter of 2006)
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SUBSIDIARY ACTIVITIES
Magyar Service Corp., a New Jersey corporation, is a wholly owned
subsidiary of Magyar Bank. Magyar Service Corp. 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.
Magyar Bank intends to organize Magbank Investment Company as a New
Jersey investment corporation subsidiary for the purpose of buying, selling and
holding investment securities. The income earned on Magbank Investment Company's
investment securities is expected to be subject to a significantly lower rate of
state tax than that assessed on income earned on investment securities
maintained at Magyar Bank.
LEGAL PROCEEDINGS
At June 30, 2005, we were not involved in any legal proceedings, the
outcome of which would be material to our financial condition, results of
operations or cash flows.
PERSONNEL
As of June 30, 2005, we had 79 full-time employees and seven part-time
employees. Our employees are not represented by any collective bargaining group.
Management believes that we have good relations with our employees.
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. Magyar Bank's federal tax returns are not currently
under audit, and Magyar Bank has not been audited during the past five years.
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. will report its income and expenses on the accrual method of accounting and
will use a tax year ending September 30 for filing its federal and state income
tax returns.
BAD DEBT RESERVES. Historically, Magyar Bank has been subject to special
provisions in the tax law regarding allowable tax bad debt deductions and
related reserves. Tax law changes were enacted in 1996, pursuant to the Small
Business Protection Act of 1996 (the "1996 Act"), that eliminated the use of the
percentage of taxable income method for computing tax bad debt deductions for
tax years after 1995, and required recapture into taxable income over a six-year
period all applicable excess bad debt reserves accumulated after 1988. Magyar
Bank has fully recaptured its reserve balance.
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Currently, Magyar Bank uses the reserve 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 June 30, 2005, 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.
ALTERNATIVE MINIMUM TAX. The Internal Revenue Code imposes an
alternative minimum tax ("AMT") at a rate of 20% on a base of regular taxable
income plus certain tax preferences ("alternative minimum taxable income" or
"AMTI"). The AMT is payable to the extent such AMTI is in excess of an exemption
amount and the AMT exceeds the regular income tax. Net operating losses can
offset no more than 90% of AMTI. Certain payments of AMT may be used as credits
against regular tax liabilities in future years. Magyar Bancorp, Inc. and Magyar
Bank have not been subject to the AMT and have no such amounts available as
credits for carryover.
NET OPERATING LOSS CARRYOVERS. A financial institution may carry back
net operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. Magyar Bank had approximately $440,000 of net
operating loss carryforwards for federal income tax purposes that were generated
in the tax year ended September 30, 2004. The bank anticipates that the entire
NOL carryforward will be utilized in the tax year ending September 30, 2005.
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 80% when
the dividend is received from a corporation having at least 20% of its stock
owned by the recipient corporation. A 70% dividends-received deduction is
available for dividends received from corporations owning 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. Magyar Bank files a New Jersey
corporate income tax return. Magyar Bank is not currently under audit with
respect to its New Jersey income tax returns and Magyar Bank's state tax returns
have not been audited for the past five years.
On July 2, 2002, the State of New Jersey enacted income tax law changes
that were retroactive to tax years beginning January 1, 2002. The more relevant
changes include an increase in the tax rate for savings banks from three percent
to nine percent and the establishment of an Alternative Minimum Assessment
("AMA") tax. Under the legislation, a taxpayer, including Magyar Bank, will pay
the greater of the corporate business tax ("CBT") (at 9% of taxable income) or
the AMA tax. The AMA tax is a gross receipts tax that is calculated by
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multiplying the gross receipts by the applicable factor, which ranges from
0.125% to 0.4%. The AMA tax is creditable against the CBT in a year in which the
CBT is higher, limited to the AMA for that year, and limited to an amount such
that the tax is not reduced by more than 50% of the tax otherwise due and other
statutory minimums. The AMA tax for each taxpayer may not exceed $5.0 million
per year and the sum of the AMA for each member of an affiliated group may not
exceed $20.0 million per year for members of an affiliated group with five or
more taxpayers. The AMA for tax years beginning after June 30, 2006 will be
zero.
New Jersey tax law does not and has not allowed for a taxpayer to file a
tax return on a combined or consolidated basis with another member of the
affiliated group where there is common ownership. However, under recent tax
legislation, if the taxpayer cannot demonstrate by clear and convincing evidence
that the tax filing discloses the true earnings of the taxpayer on its business
carried on in the State of New Jersey, the New Jersey Director of the Division
of Taxation may, at the director's discretion, require the taxpayer to file a
consolidated return of the entire operations of the affiliated group or
controlled group, including its own operations and income.
DELAWARE AND NEW JERSEY STATE TAXATION. As a Delaware holding company
not earning income in Delaware, Magyar Bancorp, Inc. will be exempt from
Delaware corporate income tax, but will be required to file annual returns and
pay annual fees and a franchise tax to the State of Delaware.
Magyar Bancorp, Inc. will be 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 under the Bank Insurance Fund ("BIF") and, to a lesser extent, the
Savings Association Insurance Fund ("SAIF"). 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 Federal Deposit Insurance Corporation as deposit insurer and
its primary federal regulator. Magyar Bank must file reports with the
Commissioner and the Federal Deposit Insurance Corporation 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 Federal Deposit Insurance Corporation 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.
93
Magyar Bancorp, Inc., as a bank holding company controlling Magyar Bank,
will be subject to the Bank Holding Company Act of 1956, as amended ("BHCA"),
and the rules and regulations of the Federal Reserve Board 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.
will be required to file reports with, and otherwise comply with the rules and
regulations of the Federal Reserve Board and the Commissioner. Following
completion of the stock offering, Magyar Bancorp, Inc. will be 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 Federal Deposit Insurance Corporation, 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 or elsewhere in this prospectus. 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:
(1) real estate mortgages;
(2) consumer and commercial loans;
(3) specific types of debt securities, including certain corporate
debt securities and obligations of federal, state and local
governments and agencies;
(4) certain types of corporate equity securities; and
(5) 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
94
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 New Jersey Department of Banking and
Insurance may examine Magyar Bank whenever it deems an examination advisable.
The New Jersey Department of Banking and Insurance examines Magyar Bank at least
every two 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.
FEDERAL BANKING REGULATION
CAPITAL REQUIREMENTS. Federal Deposit Insurance Corporation regulations
require banks to maintain minimum levels of capital. The Federal Deposit
Insurance Corporation regulations define two tiers, or classes, of capital.
Tier 1 capital is comprised of the sum of:
o common stockholders' equity, excluding the unrealized
appreciation or depreciation, net of tax, from
available-for-sale securities;
o non-cumulative perpetual preferred stock, including any related
retained earnings; and
95
o minority interests in consolidated subsidiaries minus all
intangible assets, other than qualifying servicing rights and
any net unrealized loss on marketable equity securities.
The components of Tier 2 capital currently include:
o cumulative perpetual preferred stock;
o certain perpetual preferred stock for which the dividend rate
may be reset periodically;
o hybrid capital instruments, including mandatory convertible
securities;
o term subordinated debt;
o intermediate term preferred stock;
o allowance for loan losses; and
o up to 45% of pretax net unrealized holding gains on
available-for-sale equity securities with readily determinable
fair market values.
The allowance for loan losses includible in Tier 2 capital is limited to
a maximum of 1.25% of risk-weighted assets (as discussed below). Overall, the
amount of Tier 2 capital that may be included in total capital cannot exceed
100% of Tier 1 capital. The Federal Deposit Insurance Corporation regulations
establish a minimum leverage capital requirement for banks in the strongest
financial and managerial condition, with a rating of 1 (the highest examination
rating of the Federal Deposit Insurance Corporation for banks) under the Uniform
Financial Institutions Rating System, of not less than a ratio of 3.0% of Tier 1
capital to total assets. For all other banks, the minimum leverage capital
requirement is 4.0%, unless a higher leverage capital ratio is warranted by the
particular circumstances or risk profile of the depository institution.
The Federal Deposit Insurance Corporation regulations also require that
banks meet a risk-based capital standard. The risk-based capital standard
requires the maintenance of a ratio of total capital, which is defined as the
sum of Tier 1 capital and Tier 2 capital, to risk-weighted assets of at least 8%
and a ratio of Tier 1 capital to risk-weighted assets of at least 4%. In
determining the amount of risk-weighted assets, all assets, plus certain off
balance sheet items, are multiplied by a risk-weight of 0% to 100%, based on the
risks the Federal Deposit Insurance Corporation believes are inherent in the
type of asset or item.
The federal banking agencies, including the Federal Deposit Insurance
Corporation, have also adopted regulations to require an assessment of an
institution's exposure to declines in the economic value of a bank's capital due
to changes in interest rates when assessing the bank's capital adequacy. Under
such a risk assessment, examiners evaluate a bank's capital for interest rate
risk on a case-by-case basis, with consideration of both quantitative and
qualitative factors. According to the agencies, applicable considerations
include:
96
o the quality of the bank's interest rate risk management process;
o the overall financial condition of the bank; and
o the level of other risks at the bank for which capital is
needed.
Institutions with significant interest rate risk may be required to hold
additional capital. The agencies also issued a joint policy statement providing
guidance on interest rate risk management, including a discussion of the
critical factors affecting the agencies' evaluation of interest rate risk in
connection with capital adequacy.
As of June 30, 2005, Magyar Bank was considered "well-capitalized" under
Federal Deposit Insurance Corporation guidelines.
ACTIVITY RESTRICTIONS ON STATE-CHARTERED BANKS. Federal law and Federal
Deposit Insurance Corporation 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 Federal Deposit Insurance Corporation regulations, an insured bank must seek
approval from the Federal Deposit Insurance Corporation to make such investment
or engage in such activity. The Federal Deposit Insurance Corporation will not
approve the activity unless the bank meets its minimum capital requirements and
the Federal Deposit Insurance Corporation determines that the activity does not
present a significant risk to the Federal Deposit Insurance Corporation
insurance funds. 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 whether or the extent to which it will
seek to engage in such activities.
97
FEDERAL HOME LOAN BANK SYSTEM. Magyar Bank is a member of the Federal
Home Loan Bank system, which consists of twelve regional federal home loan
banks, each subject to supervision and regulation by the Federal Housing Finance
Board ("FHFB"). 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. It is funded primarily from proceeds derived from the
sale of consolidated obligations of the federal home loan banks. The federal
home loan banks make loans to members (i.e., advances) in accordance with
policies and procedures, including collateral requirements, established by the
respective boards of directors of the federal home loan banks. These policies
and procedures are subject to the regulation and oversight of the FHFB. All
long-term advances are required to provide funds for residential home financing.
The FHFB has also established standards of community or investment service that
members must meet to maintain access to such long-term advances. Magyar Bank, as
a member of the Federal Home Loan Bank of New York, is required to purchase and
hold shares of capital stock in the Federal Home Loan Bank of New York in an
amount at least equal to the greater of:
(i) 1% of the aggregate principal amount of its unpaid mortgage
loans, home purchase contracts and similar obligations at the
beginning of each year;
(ii) 0.3% of its assets; or
(iii) 5% (or such greater fraction as established by the Federal Home
Loan Bank of New York) of its advances from the Federal Home
Loan Bank of New York.
Magyar Bank is 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, to issue cease and desist orders and to 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.
PROMPT CORRECTIVE ACTION. The Federal Deposit Improvement Act also
established a system of prompt corrective action to resolve the problems of
undercapitalized institutions. The Federal Deposit Insurance Corporation, as
well as the other federal banking regulators, adopted regulations governing the
supervisory actions that may be taken against undercapitalized institutions. The
regulations establish five categories, consisting of "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized." The Federal Deposit Insurance Corporation's
regulations define the five capital categories as follows:
An institution will be treated as "well-capitalized" if:
o its ratio of total capital to risk-weighted assets is at least
10%;
o its ratio of Tier 1 capital to risk-weighted assets is at least
6%; and
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o its ratio of Tier 1 capital to total assets is at least 5%, and
it is not subject to any order or directive by the Federal
Deposit Insurance Corporation to meet a specific capital level.
An institution will be treated as "adequately capitalized" if:
o its ratio of total capital to risk-weighted assets is at least
8%; or
o its ratio of Tier 1 capital to risk-weighted assets is at least
4%; and
o its ratio of Tier 1 capital to total assets is at least 4% (3%
if the bank receives the highest rating under the Uniform
Financial Institutions Rating System) and it is not a
well-capitalized institution.
An institution will be treated as "undercapitalized" if:
o its total risk-based capital is less than 8%; or
o its Tier 1 risk-based-capital is less than 4%; and
o its leverage ratio is less than 4% (or less than 3% if the
institution receives the highest rating under the Uniform
Financial Institutions Rating System).
An institution will be treated as "significantly undercapitalized" if:
o its total risk-based capital is less than 6%;
o its Tier 1 capital is less than 3%; or
o its leverage ratio is less than 3%.
An institution that has a tangible capital to total assets ratio equal
to or less than 2% would be deemed to be "critically undercapitalized."
The Federal Deposit Insurance Corporation 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 Federal Deposit Insurance Corporation 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:
o insolvency, or when the assets of the bank are less than its
liabilities to depositors and others;
o substantial dissipation of assets or earnings through violations
of law or unsafe or unsound practices;
o existence of an unsafe or unsound condition to transact
business;
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o 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
o 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.
Magyar Bank is in compliance with the Prompt Corrective Action rules.
DEPOSIT INSURANCE. The Federal Deposit Insurance Corporation has
established a system for setting deposit insurance premiums based upon the risks
a particular bank or savings association posed to its deposit insurance funds.
Under the risk-based deposit insurance assessment system, the Federal Deposit
Insurance Corporation assigns an institution to one of three capital categories
based on the institution's financial information, as of the reporting period
ending six months before the assessment period. The three capital categories are
(1) well-capitalized, (2) adequately capitalized and (3) undercapitalized. With
respect to the capital ratios, institutions are classified as well capitalized,
adequately capitalized or undercapitalized using ratios that are substantially
similar to the prompt corrective action capital ratios discussed above. The
Federal Deposit Insurance Corporation also assigns an institution to supervisory
subgroups based on a supervisory evaluation provided to the Federal Deposit
Insurance Corporation by the institution's primary federal regulator and
information that the Federal Deposit Insurance Corporation determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance funds, which may include information provided by the
institution's state supervisor.
An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Under the final risk-based
assessment system, there are nine assessment risk classifications, or
combinations of capital groups and supervisory subgroups, to which different
assessment rates are applied. Assessment rates for deposit insurance currently
range from 0 basis points to 27 basis points. The capital and supervisory
subgroup to which an institution is assigned by the Federal Deposit Insurance
Corporation is confidential and may not be disclosed. A bank's rate of deposit
insurance assessments will depend upon the category and subcategory to which the
bank is assigned by the Federal Deposit Insurance Corporation. Any increase in
insurance assessments could have an adverse effect on the earnings of insured
institutions, including Magyar Bank.
Since January 1, 1997, the premium schedule for insured institutions in
the Bank Insurance Fund and the Savings Association Insurance Fund has ranged
from 0 to 27 basis points. However, Savings Association Insurance Fund and Bank
Insurance Fund insured institutions are required to pay a Financing Corporation
or "FICO" assessment, in order to fund the interest on bonds issued to resolve
thrift failures in the 1980s. For the quarter ended March 31, 2005, the FICO
assessment for both Savings Association Insurance Fund and Bank Insurance Fund
insured institutions was equal to 1.44 basis points for each $100 in domestic
deposits maintained at the institution. These assessments, which will be revised
based upon the level of Savings Association Insurance Fund and Bank Insurance
Fund deposits, will continue until the bonds mature in the years 2017 through
2019.
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The Federal Deposit Insurance Corporation may terminate the insurance of
an institution's deposits upon a finding that the 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 Federal Deposit Insurance Corporation. The management
of Magyar Bank does not know of any practice, condition or violation that might
lead to termination of deposit insurance.
TRANSACTIONS WITH AFFILIATES OF MAGYAR BANK. Transactions between an
insured bank, such as Magyar Bank, and any of its affiliates is governed by
Sections 23A and 23B of the Federal Reserve Act and implementing regulations. An
affiliate of a bank is any company or entity that controls, is controlled by or
is under common control with the bank. Generally, a subsidiary of a bank that is
not also a depository institution or financial subsidiary is not treated as an
affiliate of the bank for purposes of Sections 23A and 23B.
Section 23A:
o limits the extent to which the bank or its subsidiaries may
engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such bank's capital stock and retained
earnings, and limits all such transactions with all affiliates
to an amount equal to 20% of such capital stock and retained
earnings; and
o requires that all such transactions be on terms that are
consistent with safe and sound banking practices.
The term "covered transaction" includes the making of loans, purchase of
assets, issuance of guarantees and other similar types of transactions. Further,
most loans by a bank to any of its affiliates must be secured by collateral in
amounts ranging from 100 to 130 percent of the loan amounts. In addition, any
covered transaction by a bank with an affiliate and any purchase of assets or
services by a bank from an affiliate must be on terms that are substantially the
same, or at least as favorable to the bank, as those that would be provided to a
non-affiliate.
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.
PRIVACY STANDARDS. Federal Deposit Insurance Corporation regulations
require Magyar Bank to disclose their privacy policy, including identifying with
whom they share "non-public personal information" to customers at the time of
establishing the customer relationship and annually thereafter.
The regulations also require Magyar Bank to provide their customers with
initial and annual notices that accurately reflect its privacy policies and
practices. In addition, Magyar Bank is required to provide its customers with
the ability to "opt-out" of having Magyar Bank
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share their non-public personal information with unaffiliated third parties
before they can disclose such information, subject to certain exceptions.
The Federal Deposit Insurance Corporation and other federal banking
agencies adopted guidelines establishing standards for safeguarding customer
information. The guidelines describe the agencies' expectations for the
creation, implementation and maintenance of an information security program,
which would include administrative, technical and physical safeguards
appropriate to the size and complexity of the institution and the nature and
scope of its activities. The standards set forth in the guidelines are intended
to insure the security and confidentiality of customer records and information,
protect against any anticipated threats or hazards to the security or integrity
of such records, and protect against unauthorized access to or use of such
records or information that could result in substantial harm or inconvenience to
any customer.
On March 29, 2005, the federal banking regulators jointly issued
guidance stating that financial institutions, such as Magyar Bank, should
develop and implement a response program to address security breaches involving
customer information, including customer notification procedures.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING LAWS. All Federal Deposit
Insurance Corporation insured institutions have a responsibility under the
Community Reinvestment Act and related regulations to help meet the credit needs
of their communities, including low- and moderate-income neighborhoods. In
connection with its examination of a state chartered savings bank, the Federal
Deposit Insurance Corporation is required to assess the institution's record of
compliance with the Community Reinvestment Act. Among other things, the current
Community Reinvestment Act 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:
o a lending test, to evaluate the institution's record of making
loans in its service areas;
o 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
o a service test, to evaluate the institution's delivery of
services through its branches, ATMs and other offices.
An institution's failure to comply with the provisions of the Community
Reinvestment Act could, at a minimum, result in regulatory restrictions on its
activities. We received a "satisfactory" Community Reinvestment Act rating in
our most recently completed federal examination, which was conducted by the
Federal Deposit Insurance Corporation in 2001.
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
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could result in enforcement actions by the Federal Deposit Insurance
Corporation, as well as other federal regulatory agencies and the Department of
Justice.
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 unfavorable 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.
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FEDERAL RESERVE SYSTEM
Federal Reserve Board regulations require all depository institutions to
maintain non-interest-earning reserves at specified levels against their
transaction accounts (primarily NOW and regular checking accounts). At June 30,
2005, Magyar Bank was in compliance with the Federal Reserve Board's reserve
requirements. Savings associations, 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
primary credit from its Federal Reserve Bank. Generally, primary 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 of 100 basis points 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 a law that addresses, among other
issues, corporate governance, auditing and accounting, executive compensation,
and enhanced and timely disclosure of corporate information. As directed by
Section 302(a) of Sarbanes-Oxley Act of 2002, Magyar Bancorp, Inc.'s Chief
Executive Officer and Chief Financial Officer each will be required to certify
that its quarterly and annual reports do not contain any untrue statement of a
material fact. The rules have several requirements, including having these
officers certify that: they are responsible for establishing, maintaining and
regularly evaluating the effectiveness of our internal controls; they have made
certain disclosures to our auditors and the audit committee of the Board of
Directors about our internal controls; and they have included information in our
quarterly and annual reports about their evaluation and whether there have been
significant changes in our internal controls or in other factors that could
significantly affect internal controls. Magyar Bancorp, Inc. will be subject to
further reporting and audit requirements beginning with the year ending
September 30, 2006 under the requirements of the Sarbanes-Oxley Act. Magyar
Bancorp, Inc. has existing policies, procedures and systems designed to comply
with these regulations, and is further enhancing and documenting such policies,
procedures and systems to ensure continued compliance with these regulations.
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HOLDING COMPANY REGULATION
FEDERAL REGULATION. After the reorganization, Magyar Bancorp, Inc. will
be 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. The Federal Reserve Board has
adopted capital adequacy guidelines for bank holding companies on a consolidated
basis substantially similar to those of the Federal Deposit Insurance
Corporation for Magyar Bank. As of June 30, 2005, Magyar Bancorp, Inc.'s total
capital and Tier 1 capital ratios would, on a pro forma basis, exceed these
minimum capital requirements. See "Regulatory Capital Compliance."
Regulations of the Federal Reserve Board 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. Under the prompt
corrective action provisions of the Federal Deposit Insurance 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 Federal
Reserve Board 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 Federal Reserve Board.
As a bank holding company, Magyar Bancorp, Inc. will be required to
obtain the prior approval of the Federal Reserve Board to acquire all, or
substantially all, of the assets of any bank or bank holding company. Prior
Federal Reserve Board approval will be 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 Federal Reserve Board
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 Federal Reserve Board 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, Federal Reserve Board
order or directive, or any condition imposed by, or written agreement with, the
Federal Reserve Board. Such notice and approval is not required for a bank
holding company that would be treated as "well capitalized" under applicable
regulations of the Federal Reserve Board, 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 Federal Reserve Board, 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
105
exceptions to this prohibition is for activities found by the Federal Reserve
Board to be so closely related to banking or managing or controlling banks as to
be permissible. Some of the principal activities that the Federal Reserve Board
has determined by regulation to be so closely related to banking as to be
permissible are:
o making or servicing loans;
o performing certain data processing services;
o providing discount brokerage services, or acting as fiduciary,
investment or financial advisor;
o leasing personal or real property;
o making investments in corporations or projects designed
primarily to promote community welfare; and
o 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. 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:
o each of its depository institution subsidiaries is "well
capitalized";
o each of its depository institution subsidiaries is "well
managed";
o each of its depository institution subsidiaries has at least a
"satisfactory" Community Reinvestment Act rating at its most
recent examination; and
o the bank holding company has filed a certification with the
Federal Reserve Board stating that it elects to become a
financial holding company.
Under federal law, depository institutions are liable to the Federal
Deposit Insurance Corporation for losses suffered or anticipated by the Federal
Deposit Insurance Corporation in connection with the default of a commonly
controlled depository institution or any assistance provided by the Federal
Deposit Insurance Corporation 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.
It has been the policy of many mutual holding companies to waive the
receipt of dividends declared by its subsidiary. In connection with its approval
of the reorganization, however, the Federal Reserve Board will require Magyar
Bancorp, MHC to obtain prior Federal Reserve Board approval before it may waive
any dividends. As of the date hereof, Federal Reserve Board policy is to
prohibit a mutual holding company from waiving the receipt of dividends from its
holding company or bank subsidiary, and management is not aware of any
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instance in which the Federal Reserve Board has given its approval for a mutual
holding company to waive dividends. Additionally, under Federal Deposit
Insurance Corporation policy, the cumulative amount of waived dividends, if any,
must not be available for distribution to public stockholders. See "Supervision
and Regulation-Holding Company Regulation." It is not currently intended that
Magyar Bancorp, MHC will waive dividends declared by Magyar Bancorp, Inc. as
long as Magyar Bancorp, MHC is regulated by the Federal Reserve Board.
CONVERSION OF MAGYAR BANCORP, MHC TO STOCK FORM. The plan of
reorganization permits Magyar Bancorp, MHC to convert from the mutual form of
organization to the capital stock form of organization (a "Conversion
Transaction"). There can be no assurance when, if ever, a Conversion Transaction
will occur, and the Board of Directors has no current intention or plan to
undertake a Conversion Transaction. In a Conversion Transaction a new stock
holding company may be formed as the successor to Magyar Bancorp, Inc. (the "New
Holding Company"), Magyar Bancorp, MHC's corporate existence would end, and
certain depositors of Magyar Bank would receive the right to subscribe for
additional shares of the New Holding Company. In a Conversion Transaction, each
share of common stock held by stockholders other than Magyar Bancorp, MHC
("Minority Stockholders") would be converted into a number of shares of common
stock of the New Holding Company determined pursuant to an exchange ratio that
ensures that Minority Stockholders own the same percentage of common stock in
the New Holding Company as they owned in Magyar Bancorp, Inc. immediately before
the Conversion Transaction, subject to any adjustment required by regulation or
regulatory policy. The Federal Deposit Insurance Corporation will require that
dividends waived by Magyar Bancorp, MHC be taken into account. The total number
of shares held by Minority Stockholders after a Conversion Transaction also
would be increased by any purchases by Minority Stockholders in the stock
offering conducted as part of the Conversion Transaction.
Any Conversion Transaction would require the approval of a majority of
the outstanding shares of Magyar Bancorp, Inc. common stock held by Minority
Stockholders and the approval of a majority of the eligible votes of depositors
of 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. or
Magyar Bank without first obtaining approval of such acquisition of control by
the Federal Reserve Board and the Commissioner. See "Restrictions on Acquisition
of Magyar Bancorp, Inc. and Magyar Bank."
FEDERAL SECURITIES LAWS. Upon completion of the stock offering, Magyar
Bancorp, Inc. common stock will be registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended. Magyar
Bancorp, Inc. will then be subject to the information, proxy solicitation,
insider trading restrictions and other requirements under the Securities
Exchange Act of 1934.
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The registration under the Securities Act of 1933 of shares of the
common stock in the stock offering does not cover the resale of the shares.
Shares of the common stock purchased by persons who are not affiliates of Magyar
Bancorp, Inc. may be resold without registration. Shares purchased by an
affiliate of Magyar Bancorp, Inc. will be subject to the resale restrictions of
Rule 144 under the Securities Act of 1933. If Magyar Bancorp, Inc. meets the
current public information requirements of Rule 144 under the Securities Act of
1933, each affiliate of Magyar Bancorp, Inc. who complies with the other
conditions of Rule 144, including those that require the affiliate's sale to be
aggregated with those of other persons, would be able to sell in the public
market, without registration, a number of shares not to exceed, in any three
month period, the greater of 1% of the outstanding shares of Magyar Bancorp,
Inc., or the average weekly volume of trading in the shares during the preceding
four calendar weeks. Provision may be made in the future by Magyar Bancorp, Inc.
to permit affiliates to have their shares registered for sale under the
Securities Act of 1933.
MANAGEMENT
SHARED MANAGEMENT STRUCTURE
The directors of Magyar Bancorp, Inc. are those same persons who are the
directors of Magyar Bank. In addition, each executive officer of Magyar Bancorp,
Inc. is also an executive officer of Magyar Bank. Although there are no present
plans to do so, both Magyar Bancorp, Inc. and Magyar Bank may choose to appoint
additional or different persons as directors and executive officers in the
future.
We expect that Magyar Bancorp, Inc. and Magyar Bank will continue to
have common executive officers until there is a business reason to establish
separate management structures. To date, directors and executive officers have
been compensated for their services to Magyar Bank. These individuals may
receive additional compensation for their services to Magyar Bancorp, Inc.
DIRECTORS OF MAGYAR BANCORP, INC.
The Board of Directors of Magyar Bancorp, Inc. currently consists of
eight members. Directors serve three-year staggered terms so that one class of
directors is elected at each annual meeting of stockholders. The class of
directors whose term of office expires at the first annual meeting of
stockholders following completion of the stock offering are Directors Hodulik
and Martin Lukacs. The class of directors whose term expires at the second
annual meeting of stockholders following completion of the stock offering are
Directors Hance, Lankey and Yelencsics. The class of directors whose term of
office expires at the third annual meeting of stockholders following the
completion of the stock offering are Directors Joseph L. Lukacs, Jr. (Chairman),
Romano and Stokes.
EXECUTIVE OFFICERS OF MAGYAR BANCORP, INC.
The following individuals are the executive officers of Magyar Bancorp,
Inc. and hold the offices set forth below opposite their names.
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NAME AGE(1) POSITION
- ------------------- ------- --------------------------------------------------
Elizabeth E. Hance 50 President and Chief Executive Officer
John S. Fitzgerald 41 Executive Vice President and Chief Lending Officer
Jon R. Ansari 31 Vice President and Chief Financial Officer
- ---------------------------
(1) As of June 30, 2005.
The executive officers of Magyar Bancorp, Inc. are elected annually and
hold office until their respective successors are elected or until death,
resignation, retirement or removal by the Board of Directors.
DIRECTORS OF MAGYAR BANK
COMPOSITION OF OUR BOARD. Magyar Bank has eight directors. Directors
serve three-year staggered terms so that approximately one-third of the
directors are elected at each annual meeting. Directors of Magyar Bank will be
elected by Magyar Bancorp, Inc. as its sole stockholder.
The following table states our directors' names, their ages as of June
30, 2005, the years when they began serving as directors of Magyar Bank and when
their current term expires:
DIRECTORS AGE(1) POSITION DIRECTOR SINCE TERM EXPIRES
- ---------------------------------- --------- ------------------------------- ---------------- --------------
Elizabeth E. Hance 50 President and Chief Executive 1994 2007
Officer
Andrew G. Hodulik, CPA 48 Director 1995 2006
Thomas Lankey 45 Vice Chairman of the Board 1994 2007
Martin A. Lukacs, D.M.D 59 Director 2000 2006
Joseph J. Lukacs, Jr., D.M.D. 63 Chairman of the Board 1976 2008
Salvatore J. Romano, Ph.D. 64 Director 2000 2008
Edward C. Stokes, III 57 Director 2001 2008
Joseph A. Yelencsics 50 Director 2000 2007
- ---------------------------
(1) As of June 30, 2005.
THE BUSINESS BACKGROUND OF OUR DIRECTORS AND EXECUTIVE OFFICERS. The
business experience for the past five years of each of our directors and
executive officers is set forth below. Unless otherwise indicated, directors and
executive officers have held their positions for the past five years.
DIRECTORS
ELIZABETH E. HANCE. Ms. Hance was appointed the President and Chief
Executive Officer of Magyar Bank in January 2005. She has been a member of the
Board of Directors since 1994. Previously, she served as Executive Vice
President and Chief Financial Officer of Magyar Bank from 1990 to 2002, and
Executive Vice President and Chief Operating Officer from 2003 through 2004.
ANDREW G. HODULIK, CPA. Mr. Hodulik is a certified public accountant
with the accounting firm of Hodulik & Morrison, P.A.
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THOMAS LANKEY. Mr. Lankey is the Senior Vice President of Long Term Care
for Solaris Health Systems. Mr. Lankey's first cousin is Joseph Yelencsics, who
is also a director of Magyar Bank.
JOSEPH J. LUKACS, JR., D.M.D. Dr. Lukacs is retired. Until 2005, Dr.
Lukacs was a dentist with Drs. Joseph & Martin Lukacs, P.A. He has been a member
of the Board of Directors since 1976 and currently is the Chairman of the Board
of Directors. Dr. Lukacs' brother is Martin A. Lukacs, who is also a director of
Magyar Bank.
MARTIN A. LUKACS, D.M.D. Dr. Lukacs is a dentist with Dr. Lea Grand,
D.M.D., P.A. Dr. Lukacs' brother is Joseph J. Lukacs, the Chairman of the Board
of Directors of Magyar Bank.
SALVATORE J. ROMANO, PH.D. Dr. Romano is retired. He was formerly a Vice
President with Johnson & Johnson. Dr. Romano currently teaches Chemistry as a
part-time Professor at Rutgers University.
EDWARD C. STOKES, III. Mr. Stokes is the managing partner of the law
firm of Stokes and Throckmorton. He is also the General Counsel of Magyar Bank.
JOSEPH A. YELENCSICS. Mr. Yelencsics is a private investor. He was
part-owner of Bristol Motors, Inc., an automobile dealership. Mr. Yelencsics is
the first cousin of Tom Lankey, who is also a director of Magyar Bank.
EXECUTIVE OFFICERS OF THE BANK WHO ARE NOT ALSO DIRECTORS
JON R. ANSARI. Mr. Ansari is the Vice President and Chief Financial
Officer of Magyar Bank. Mr. Ansari joined Magyar Bank in July 1999. Prior to
being appointed to his current position in June 2005, Mr. Ansari held various
financial positions at Magyar Bank such as Vice President of Finance,
Controller, Assistant Controller and Accountant.
JOHN S. FITZGERALD. Mr. Fitzgerald is Executive Vice President and Chief
Lending Officer of Magyar Bank. Mr. Fitzgerald joined Magyar Bank in June 2001.
Until his appointment to this position in July 2005, he was Department Head of
Commercial Lending at Magyar Bank. Prior to this employment at Magyar Bank, Mr.
Fitzgerald was the Vice President of Commercial Lending at United Trust Bank.
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES
Magyar Bank's Board of Directors meets on a monthly basis and may hold
additional special meetings. During the year ended September 30, 2004, the Board
of Directors of Magyar Bank held 12 regular meetings and four special meetings.
Following the reorganization and stock offering, Magyar Bank's Board of
Directors is expected to continue to meet monthly and hold special meetings as
necessary.
Magyar Bancorp, Inc. was not incorporated during fiscal year 2004 and,
therefore, no board or committee meetings were held during fiscal year 2004.
Following the reorganization
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and stock offering, the Board of Directors of Magyar Bancorp, Inc. is expected
to meet monthly, or more often as may be necessary.
COMMITTEES OF MAGYAR BANCORP, INC.
Magyar Bancorp, Inc. will have standing Audit, Nominating, Compensation
and Executive Committees.
The Audit Committee will review audit reports and related matters to
ensure effective compliance with regulations and internal policies and
procedures. The Audit Committee is expected to be comprised of Directors
Hodulik, Martin Lukacs, Romano, Lankey and Yelencsics. This committee also will
act on the recommendation by management of an independent registered public
accounting firm to perform Magyar Bancorp, Inc.'s annual audit, and will act as
a liaison between the independent registered public accounting firm and the
Board of Directors. The Audit Committee's directors are expected to be
"independent," as defined by current Nasdaq listing standards. The Audit
Committee is expected to designate Director Hodulik as an "audit committee
financial expert," as defined under applicable Securities and Exchange
Commission regulations.
The Nominating Committee will meet annually in order to nominate
candidates for membership on the Board of Directors. The Nominating Committee is
expected to be comprised of all the directors of the Magyar Bancorp, Inc. other
than Elizabeth E. Hance, Edward C. Stokes and any other directors whose terms
are expiring and are up for reelection to the Board of Directors.
The Compensation Committee will establish Magyar Bancorp, Inc.'s
compensation policies and will review compensation matters. The Compensation
Committee is expected to be comprised of Directors Lankey, Hodulik, Romano and
Yelencsics.
The Executive Committee will be authorized to act with the same
authority as the Board of Directors of Magyar Bancorp, Inc. between meetings of
the Board. The Executive Committee is expected to be comprised of Directors
Joseph Lukacs, Lankey, Hodulik and Hance.
CORPORATE GOVERNANCE POLICIES AND PROCEDURES
In addition to having established committees of the Board of Directors,
Magyar Bancorp, Inc. also will adopt several policies to govern the activities
of both Magyar Bancorp, Inc. and Magyar Bank, including a corporate governance
policy and a code of business conduct and ethics. The corporate governance
policy will set forth:
o the duties and responsibilities of each director;
o the composition, responsibilities and operation of the Board of
Directors;
o the establishment and operation of board committees, including
audit, nominating and compensation committees;
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o succession planning;
o convening executive sessions of independent directors;
o the Board of Directors' interaction with management and third
parties; and
o the evaluation of the performance of the Board of Directors and
the chief executive officer.
The code of business conduct and ethics, which applies to all employees
and directors, will address conflicts of interest, the treatment of confidential
information, general employee conduct and compliance with applicable laws, rules
and regulations. In addition, the code of business conduct and ethics is
designed to deter wrongdoing and to promote honest and ethical conduct, the
avoidance of conflicts of interest, full and accurate disclosure and compliance
with all applicable laws, rules and regulations.
DIRECTOR COMPENSATION
Each of the individuals who will serve as a director of Magyar Bancorp,
Inc. currently serves as a director of Magyar Bank and earns director fees in
that capacity. Magyar Bank pays each director an annual retainer fee of $24,000.
The Chairman of the Board of Directors receives an annual retainer fee of
$60,000 and the Vice Chairman of the Board of Directors receives an annual
retainer fee of $29,000. Each director also receives a fee of $500 for each
committee meeting attended. Each director of Magyar Bancorp will be paid a
quarterly retainer fee of $2,500. The chairman of the audit committee will
receive an additional retainer fee of $5,000, and members of the audit committee
will be paid a fee of $1,000 for attendance at committee meetings.
EXECUTIVE OFFICER COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth for the year
ended September 30, 2004, certain information as to the total remuneration paid
by Magyar Bank to its Chief Executive Officer as well as to the four most highly
compensated executive officers of Magyar Bank, other than the Chief Executive
Officer, who received total annual compensation in excess of $100,000. Each of
the individuals listed in the table below are referred to as Named Executive
Officers.
ANNUAL COMPENSATION(1)
--------------------------------------------------------------------
FISCAL OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION ($)(2) COMPENSATION ($)
- ----------------------------------- -------- ---------- --------- -------------------- --------------------
Elizabeth E. Hance (3) 2004 125,692 17,360 -- 10,347 (7)
Robert E. Pastor (4) 2004 169,046 23,500 -- 41,786 (8)
John S. Fitzgerald(5) 2004 95,982 9,042 -- --
Donna L. Grocholske (6) 2004 85,984 12,480 -- 1,869 (9)
- ------------------------------------
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(1) Summary compensation information is excluded for prior years, as Magyar
Bancorp, Inc. was not a public company during those periods.
(2) Magyar Bank provides certain of its executive officers with non-cash
benefits and perquisites. Management believes that the aggregate value of
these benefits for 2004 did not, in the case of the named executive
officers, exceed $50,000 or 10% of the aggregate salary and annual bonus
reported for them in the Summary Compensation Table.
(3) Ms. Hance was appointed President and Chief Executive Officer of Magyar
Bank in January 2005. During 2004, she served as Executive Vice President
and Chief Operating Officer of Magyar Bank. For the fiscal year ended
September 30, 2005, Ms. Hance was paid a base salary of $177,500.
(4) Mr. Pastor retired as President and Chief Executive Officer of Magyar Bank
in December 2004.
(5) For the fiscal year ended September 30, 2005, Mr. Fitzgerald was paid a
base salary of $125,000.
(6) Ms. Grocholske served as Vice President and Chief Financial Officer of
Magyar Bank until December 2004. Mr. Ansari succeeded her as Vice President
and Chief Financial Officer in June 2005.
(7) Represents premiums paid on behalf of Ms. Hance by Magyar Bank associated
with Magyar Bank's life insurance plan and Board fees paid.
(8) Represents premiums paid on behalf of Mr. Pastor by Magyar Bank associated
with Magyar Bank's life insurance plan, Board fees paid and an automobile
allowance.
(9) Represents premiums paid on behalf of Ms. Grocholske by Magyar Bank
associated with Magyar Bank's life insurance plan.
BENEFIT PLANS
DIRECTOR SUPPLEMENTAL RETIREMENT INCOME AND DEFERRED COMPENSATION
AGREEMENTS. In February 2004, Magyar Bank entered into Director Supplemental
Retirement Income and Deferred Compensation Agreements with each of directors
Elizabeth E. Hance, Andrew Hodulik, Thomas Lankey, Joseph J. Lukacs, Jr., Martin
Lukacs, Salvatore Romano, Edward Stokes, and Joseph Yelencsics in order to
provide retirement, disability and death benefits to such directors and their
beneficiaries. The agreements with each director replace a prior non-qualified
deferred compensation plan under which each director deferred all or a portion
of his or her board fees, committee fees and retainer and such deferrals
generated earnings at a 10% interest rate. Under the replacement agreements,
each director makes an elective contribution equal to such director's voluntary
monthly pre-tax deferrals of board fees, committee fees and or retainer to a
so-called secular trust (i.e., a trust where the individual is the grantor)
established by such director with the assistance of Magyar Bank; each such trust
is referred to as a retirement income trust fund. In addition, Magyar Bank
contributes an amount to the retirement income trust funds to supplement the
directors' deferrals, and replace the 10% interest that would have accrued under
the prior nonqualified plan. Magyar Bank also makes a contribution, actuarially
determined to be equal to the amount necessary to support the annual retirement
benefit payable to the director once he reaches his benefit age, based upon a
percentage of the director's total board fees, committee fees and/or retainer in
the twelve-month period prior to the date on which the director is entitled to
receive retirement benefits. Provided a director has served for at least five
years, the director's retirement benefit will be at least 50% of such board
fees, committee fees and/or retainer, with a maximum retirement benefit of 60%,
based on years of service. If a director serves less than five years at
termination of service, the benefit to such director would be between 12 1/2%
and 20% of such fees and/or retainer. Any director who serves as board chairman
for a five-year term (other than the chairman serving as of February 1, 2004)
will be entitled to receive a maximum benefit equal to 75% of his fees and/or
retainer. Funds contributed to the retirement income trust fund will be invested
by the trustee and are taxable to the director in the year of the contribution.
Each director is annually given a limited period of time following Magyar Bank's
contribution to the director's retirement income trust fund to withdraw the
contribution to such director's retirement income trust fund, provided, however,
that if a director exercises his withdrawal rights, Magyar Bank will thereafter
cease making contributions to the retirement income trust fund and will instead
commence bookkeeping entries representing phantom contributions towards the
director's accrued benefit account.
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Upon retirement, the amounts accumulated in the director's retirement
income trust fund and/or phantom contributions to any accrued benefit account
established for such director, if any, will be annuitized and paid in monthly
installments for the payout period unless the director has elected a lump sum
payment. In the event the director dies after attaining his benefit age but
prior to commencement or completion of his monthly payments, the amounts accrued
for the benefit of the director will be paid to his or her beneficiary in either
monthly installments or a lump sum. In the event a director has elected to
receive a lump sum benefit and dies while employed by Magyar Bank, the balance
of his benefit will be paid to his beneficiary in a lump sum. In the event the
director's service is terminated prior to benefit age due to disability, the
director will also be entitled to a lump sum benefit.
EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME AGREEMENT. In 1996, Magyar Bank
adopted an Executive Supplemental Retirement Income Agreement for Elizabeth
Hance ("SERP"). The SERP is designed to provide an annual benefit to Ms. Hance
at age 65 equal to $59,191, payable monthly for a period of 180 months following
retirement. A secular trust (i.e., a grantor trust established by the individual
and not the bank) has also been established by Ms. Hance, with the assistance of
Magyar Bank, in connection with the establishment of the SERP. An amount is
annually contributed by Magyar Bank to Ms. Hance's secular trust, in an amount
intended to be sufficient to fully fund the expected benefit at Ms. Hance's
retirement. The amount contributed to the secular trust each year is taxable to
Ms. Hance in the year of the contribution. Ms. Hance is annually given a limited
period of time following Magyar Bank's contribution to her secular trust to
withdraw the contribution, provided, however, that if she exercises her
withdrawal rights, Magyar Bank will thereafter cease making contributions to the
secular trust and will instead commence bookkeeping entries representing phantom
contributions towards an accrued benefit account that Magyar Bank will establish
on its books.
In the event of Ms. Hance's voluntary or involuntary termination of
employment for reasons other than cause or due to a change in control, or in the
event of disability or death during employment, Ms. Hance, or her beneficiary,
as applicable, will receive an annuitized benefit based on the contributions
and/or phantom contributions, if any, to the secular trust and/or accrued
benefit account, respectively, made or required to be made as of the date of
such termination, disability or death. The benefits due on death or disability
will be paid shortly following the occurrence of such event. The benefits due on
a voluntary or involuntary termination of employment, other than due to cause or
a change in control, will be paid at the time Ms. Hance attains age 65. In the
event of a change in control of Magyar Bank followed within 60 months by Ms.
Hance's involuntary termination of employment or resignation due to the
occurrence of certain events, then Magyar Bank, or its successor will be
required to make a final contribution to the secular trust or a final phantom
contribution to the accrued benefit account, as applicable, equal to the present
value of all future contributions which would have been made had she continued
in employment until her retirement age, subject to reduction to avoid an excise
tax on excess parachute payments. The benefit payable to Ms. Hance following a
change in control will not be paid until Ms. Hance attains age 65. If a timely
election has been made, the benefits payable from the SERP will be paid to Ms.
Hance, or her beneficiary, as applicable, in a lump sum. In the fiscal year
ended September 30, 2005, Magyar Bank contributed $16,827 to Ms. Hance's secular
trust under the SERP.
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In consideration of the right to receive the promised benefits, Ms.
Hance has agreed that during employment and, thereafter, during the period over
which the annual benefits will be paid, she will not engage in any activity
which is directly or indirectly competitive with Magyar Bank.
EMPLOYMENT AGREEMENT. Magyar Bancorp, Inc. intends to enter into an
employment agreement with Elizabeth E. Hance at the closing of the
reorganization and stock offering. The agreement will have an initial term of
three years. Unless notice of non-renewal is provided, the agreement renews
annually. Under the agreement, the initial base salary is $177,500. The base
salary will be reviewed at least annually and may be increased, but not
decreased. In addition to base salary, the agreement provides for, among other
things, participation in bonus programs and other employee pension benefit and
fringe benefit plans applicable to executive employees, use of an automobile and
reimbursement of expenses associated with the use of such automobile. The
executive's employment may be terminated for just cause at any time, in which
event the executive would have no right to receive compensation or other
benefits for any period after termination.
The executive is entitled to severance payments and benefits in the
event of her termination of employment under specified circumstances. In the
event the executive's employment is terminated for reasons other than for just
cause, disability or retirement, or in the event the executive resigns during
the term of the agreement following (1) the failure to elect or reelect or to
appoint or reappoint executive to her executive position, (2) a material change
in the executive's functions, duties, or responsibilities, which change would
cause executive's position to become one of lesser responsibility, importance or
scope, (3) the liquidation or dissolution of Magyar Bancorp, Inc. or Magyar
Bank, or (4) a breach of the employment agreement by Magyar Bancorp, Inc., the
executive would be entitled to a severance payment equal to three times the
executive's base salary, and the executive would be entitled to the continuation
of life, medical, and dental coverage for 36 months. In the event of a
termination following a change in control of Magyar Bancorp, Inc., the executive
would be entitled to a severance payment equal to three times the sum of the
executive's base salary and the highest rate of bonus paid to her during the
prior three years, plus the continuation of insurance coverage for 36 months. In
the event that the severance payment provisions of the employment agreement are
triggered, the executive would be entitled to a cash severance benefit in the
amount of approximately $630,000. The executive would be entitled to no
additional benefits under the employment agreement upon retirement at age 65. In
the event of the termination of Ms. Hance's employment, Ms. Hance also agrees to
resign from the Board of Directors.
Upon termination of the executive's employment other than in connection
with a change in control, the executive agrees not to compete with Magyar
Bancorp, Inc. for one year following termination of employment within 25 miles
of any existing branch of Magyar Bank or 25 miles of any office for which Magyar
Bank or a subsidiary has filed an application for regulatory approval. Should
the executive become disabled, Magyar Bancorp, Inc. would continue to pay the
executive her base salary for the longer of the remaining term of the agreement
or one year, provided that any amount paid to the executive pursuant to any
disability insurance would reduce the compensation she would receive. In the
event the executive dies while employed by Magyar Bancorp, Inc., the executive's
estate will be paid the executive's base salary for one year and the
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executive's family will be entitled to continuation of medical and dental
benefits for one year after the executive's death.
CHANGE-IN-CONTROL AGREEMENTS. Magyar Bancorp, Inc. intends to enter into
change-in-control agreements with John Ansari and John Fitzgerald, which would
provide certain benefits in the event of a termination of employment following a
change in control of Magyar Bancorp, Inc. or Magyar Bank. Each of the
change-in-control agreements provides for a term of two years. Commencing on
each anniversary date, the agreements will be renewed for an additional year so
that the remaining term will be two years, subject to termination by the Board
of Directors on notice of non-renewal. The change-in-control agreements enable
Magyar Bancorp, Inc. to offer to designated officers certain protections against
termination without just cause in the event of a change in control. Such
protections are frequently offered by other financial institutions, and Magyar
Bancorp, Inc. may be at a competitive disadvantage in attracting and retaining
key employees if it does not offer similar protections.
Following a change in control of Magyar Bancorp, Inc. or Magyar Bank, an
officer is entitled under the agreement to a payment if the officer's employment
is terminated during the term of such agreement, other than for just cause, or
if the officer voluntarily terminates employment during the term of such
agreement as a result of a demotion, loss of title, office or significant
authority (in each case, other than as a result of the fact that either Magyar
Bank or Magyar Bancorp, Inc. is merged into another entity in connection with a
change in control and will not operate as a stand-alone, independent entity),
reduction in his annual compensation or benefits, or relocation of his or her
principal place of employment by more than 30 miles from its location
immediately prior to the change in control. In the event an officer who is a
party to a change-in-control agreement is entitled to receive payments pursuant
to the change-in-control agreement, he will receive a cash payment equal to two
times the sum of his highest rate of base salary and the highest rate of bonus
awarded to the executive during the prior three years, payable in a lump sum. If
a change in control occurs, Mr. Ansari and Mr. Fitzgerald would be entitled to a
cash payment in the aggregate amount of approximately $506,000. In addition to
the cash payment, each covered officer is entitled to receive life, medical, and
dental coverage for a period of 24 months from the date of termination.
Notwithstanding any provision to the contrary in the change-in-control
agreements, payments under the change in control agreements are limited so that
they will not constitute an excess parachute payment under Section 280G of the
Internal Revenue Code.
401(K) PROFIT SHARING PLAN. Magyar Bank maintains the Magyar Savings
Bank 401(k) Profit Sharing Plan which is a qualified, tax-exempt profit sharing
plan with a salary deferral feature under Section 401(k) of the Code (the
"401(k) Plan"). All employees who have attained age 21 and have completed six
consecutive calendar months of service are eligible to participate in the 401(k)
Plan. Under the 401(k) Plan, participants are permitted to make salary reduction
contributions up to the lesser of 60% of compensation or $14,000 (as indexed
annually). All employee contributions and earnings thereon are fully and
immediately vested. The employer makes annual non-matching contributions equal
to 3% of each participant's eligible compensation. Participants are 100% vested
at all times in employer non-matching contributions. However, employer
contributions made on or prior to January 1, 2004 will vest over a five-year
period, at the rate of 20% per year. Withdrawals of employer non-matching
contributions are permitted upon the participant's termination of employment,
retirement, death, disability, or attainment of age 59 1/2 while the participant
is employed. A participant may withdraw his elective contributions upon
termination of employment, retirement, death,
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disability, attainment of age 59 1/2 while the participant is employed, or in
the event of financial hardship. The 401(k) Plan permits loans to participants.
The 401(k) Plan allows employees to direct the investment of their own accounts
into various investment options. Participants are entitled to benefit payments
upon termination of employment due to normal or early retirement, disability or
death. Benefits will be distributed in the form of a lump sum unless the
participant elects installment payments over a period not exceeding the shorter
of 15 years or the participant's life expectancy. In connection with the
conversion of Magyar Bank into the mutual holding company form of ownership, an
employer stock fund will be created within the 401(k) Plan that will permit
participants in the 401(k) Plan to purchase shares of employer stock for their
accounts.
DEFINED BENEFIT PENSION PLAN. Magyar Bank sponsors the Magyar Savings
Bank Retirement Plan, which is a qualified, tax-exempt defined benefit plan (the
"Retirement Plan"). Any employee age 21 or older who has completed one year of
service with Magyar Bank in which the employee has completed at least 1,000
hours of service is eligible to participate in the Retirement Plan. Magyar Bank
annually contributes an amount to the plan necessary to satisfy the minimum
funding requirements established under the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"). The regular form of retirement benefit is a
life annuity (if the participant is single) and a joint and survivor annuity (if
the participant is married); however, various alternative forms of joint and
survivor annuities may be selected instead. In the event a participant dies
before his annuity starting date, death benefits will generally be paid to the
participant's surviving spouse in the form of a pre-retirement survivor annuity.
A participant who retires on his normal retirement date is entitled to
an annual benefit equal to his accrued benefit based on a retirement benefit
formula equal to the sum of 35% of the participant's average annual compensation
plus 22.75% of his average annual compensation in excess of covered
compensation. However, participants who have earned less than 35 years of
service at the end of the plan year in which they attain normal retirement age
will be entitled to reduced benefits. The minimum amount of annual retirement
benefit provided to participants who retire on their normal retirement date will
be equal to 1.5% of the participant's average annual compensation multiplied by
the participant's number of years of service, up to a maximum of 30 years.
The following table indicates the annual retirement benefit that would
be payable under the plan upon retirement at age 65 in calendar year 2005,
expressed in the form of a single life annuity for the final average salary and
benefit service classification specified below:
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YEARS OF BENEFIT SERVICE AND BENEFIT PAYABLE AT RETIREMENT
FINAL AVERAGE --------------------------------------------------------------------
ANNUAL COMPENSATION 5 10 20 30 40
- --------------------------- ------------ ------------ ------------ ------------ ------------
$ 10,000 $ 800 $ 1,500 $ 3,000 $ 4,500 $ 4,500
30,000 $ 2,300 $ 4,500 $ 9,000 $ 13,500 $ 13,500
60,000 $ 4,500 $ 9,000 $ 18,000 $ 27,000 $ 27,000
90,000 $ 6,800 $ 13,500 $ 27,000 $ 40,500 $ 40,900
120,000 $ 9,000 $ 18,000 $ 36,000 $ 54,000 $ 58,200
150,000 $ 11,300 $ 22,500 $ 45,000 $ 67,500 $ 75,500
160,000 $ 12,000 $ 24,000 $ 48,000 $ 72,000 $ 81,300
170,000 $ 12,800 $ 25,500 $ 51,000 $ 76,500 $ 87,100
200,000 $ 15,000 $ 30,000 $ 60,000 $ 90,000 $ 104,400
210,000 (1) $ 15,800 $ 31,500 $ 63,000 $ 94,500 $ 110,200
- ---------------------------
(1) Reflects the maximum benefit payable under the Retirement Plan due to tax
law limitations.
STOCK BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST. We intend to implement an
employee stock ownership plan in connection with the stock offering. The Board
of Directors of Magyar Bank intends to adopt the employee stock ownership plan,
and the Board of Directors of Magyar Bancorp, Inc. will, at the completion of
the stock offering, ratify the loan to the employee stock ownership plan.
Employees who are at least 21 years old with at least one year of employment
with Magyar Bank are eligible to participate. As part of the stock offering, the
employee stock ownership plan trust intends to borrow funds from Magyar Bancorp,
Inc. and use those funds to purchase a number of shares equal to 8% of the
common stock sold in the stock offering and issued to the Charitable Foundation.
Collateral for the loan will be the common stock purchased by the employee stock
ownership plan. The loan will be repaid principally from Magyar Bank
discretionary contributions to the employee stock ownership plan over a period
of up to 30 years. The loan documents will provide that the loan may be repaid
over a shorter period, without penalty for prepayments. It is anticipated that
the interest rate for the loan will be an adjustable-rate, adjusting annually,
equal to the prime rate at the closing of the stock offering and adjusting to
the beginning of each calendar year. Shares purchased by the employee stock
ownership plan will be held in a suspense account for allocation among
participants as the loan is repaid.
Contributions to the employee stock ownership plan and shares released
from the suspense account in an amount proportional to the repayment of the
employee stock ownership plan loan will be allocated among employee stock
ownership plan participants on the basis of compensation in the year of
allocation. Benefits under the plan will vest at the rate of 20% per year so
that a participant who has five years of credited service after adoption of the
plan will be fully vested in his or her account balance under the plan. A
participant's interest in his account under the plan will also fully vest in the
event of termination of service due to a participant's early or normal
retirement, death, disability, or upon a change in control (as defined in the
plan). Vested benefits will be payable generally in the form of common stock or
cash in accordance with the plan's terms. Magyar Bank's contributions to the
employee stock ownership plan are discretionary, subject to the loan terms and
tax law limits. Therefore, benefits payable under the employee stock ownership
plan cannot be estimated. Pursuant to SOP 93-6, we will be required to record
compensation expense each year in an amount equal to the fair market value of
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the shares released from the suspense account. In the event of a change in
control, the employee stock ownership plan will terminate.
STOCK-BASED INCENTIVE PLAN. Following the stock offering, we intend to
adopt a stock-based incentive plan that will provide for grants of stock options
and restricted common stock awards. The number of options granted or shares
awarded under the plan may not exceed 10% and 4%, respectively, of the shares
sold in the stock offering and issued to the Charitable Foundation if the
stock-based incentive plan is adopted within one year after the stock offering.
The number of options granted or shares awarded under the plan, when aggregated
with any subsequently adopted stock-based benefit plans (exclusive of any shares
held by any employee stock ownership plan), may not exceed 25% of the number of
shares of common stock held by persons other than Magyar Bancorp, MHC.
The stock-based incentive plan will not be established sooner than six
months after the stock offering and if adopted within one year after the stock
offering would require the approval of a majority of the outstanding shares of
Magyar Bancorp, Inc. eligible to be cast (excluding votes eligible to be cast by
Magyar Bancorp, MHC). If the stock-based benefit plan is established no earlier
than one year after the stock offering, it would require the approval of our
stockholders by a majority of votes cast (excluding shares voted by Magyar
Bancorp, MHC). The following additional restrictions would apply to our
stock-based incentive plan if the plan is adopted within one year after the
stock offering:
o non-employee directors in the aggregate may not receive more
than 30% of the options and restricted stock awards authorized
under the plan;
o any one non-employee director may not receive more than 5% of
the options and restricted stock awards authorized under the
plan;
o any officer or employee may not receive more than 25% of the
options and restricted stock awards authorized under the plan;
o the options and restricted stock awards may not vest more
rapidly than 20% per year, beginning on the first anniversary of
stockholder approval of the plan;
o accelerated vesting is not permitted except for death,
disability or upon a change in control of Magyar Bank or Magyar
Bancorp, Inc; and
o our executive officers or directors must exercise or forfeit
their options in the event that Magyar Bank becomes critically
undercapitalized, is subject to enforcement action or receives a
capital directive.
In the event either federal or state regulators change their regulations
or policies regarding stock-based benefit plans, including any regulations or
policies restricting the size of awards and vesting of benefits as described
above, the restrictions described above may not be applicable.
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TRANSACTIONS WITH CERTAIN RELATED PERSONS
LOANS AND EXTENSIONS OF CREDIT. The Sarbanes-Oxley Act of 2002 generally
prohibits us from making loans to our executive officers and directors, but it
contains a specific exemption from such prohibition for loans made by Magyar
Bank to our executive officers and directors in compliance with federal banking
regulations. Federal regulations require that all loans or extensions of credit
to executive officers and directors of insured institutions must be made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons and must
not involve more than the normal risk of repayment or present other unfavorable
features. Magyar Bank is therefore prohibited from making any loans or
extensions of credit to executive officers and directors at different rates or
terms than those offered to the general public, except for loans made under a
benefit program generally available to all other employees and that does not
give preference to any executive officer or director over any other employee.
In addition, loans made to a director or executive officer must be
approved in advance by a majority of the disinterested members of the Board of
Directors. The aggregate amount of our loans to our officers and directors was
$2.6 million at June 30, 2005. These loans were performing according to their
original terms at June 30, 2005.
OTHER TRANSACTIONS. During the year ended September 30, 2004, the law
firm of Stokes and Throckmorton received fees of $71,000 for services rendered
on behalf of Magyar Bank, including fees paid by borrowers in connection with
loan closings. Director Edward C. Stokes, III is a partner of the law firm.
PARTICIPATION BY DIRECTORS AND EXECUTIVE OFFICERS IN THE STOCK OFFERING
The following table sets forth information regarding intended common
stock purchases by each of the directors and executive officers of Magyar Bank
and their associates, and by all directors and executive officers as a group. In
the event the individual maximum purchase limitation is increased, persons
subscribing for the maximum amount may increase their purchase order. Directors
and executive officers will purchase shares of common stock at the same $10.00
purchase price per share and on the same terms as other purchasers in the stock
offering. This table excludes shares of common stock to be purchased by the
employee stock ownership plan, as well as any stock awards or stock option
grants that may be made no earlier than six months after the completion of the
stock offering. The directors and officers have indicated their intention to
purchase in the stock offering an aggregate of $1.5 million of shares of common
stock, equal to 7.6% of the number of shares of common stock to be sold in the
stock offering, at the midpoint of the estimated valuation range.
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AGGREGATE
NAME PURCHASE PRICE (1) NUMBER OF SHARES PERCENT AT MIDPOINT
- ----------------------------------- ------------------- ------------------ ---------------------
BOARD OF DIRECTORS:
Elizabeth E. Hance................. $ 350,000 35,000 1.8%
Andrew G. Hodulik, CPA............. 100,000 10,000 0.5
Thomas Lankey...................... 175,000 17,500 0.9
Joseph J. Lukacs, Jr., D.M.D....... 150,000 15,000 0.8
Martin A. Lukacs, D.M.D............ 100,000 10,000 0.5
Salvatore J. Romano, Ph.D.......... 200,000 20,000 1.0
Edward C. Stokes, III.............. 250,000 25,000 1.3
Joseph A. Yelencsics............... 100,000 10,000 0.5
SENIOR OFFICERS:
John S. Fitzgerald................. 50,000 5,000 0.3
Jon R. Ansari...................... 25,000 2,500 0.1
------------------- ------------------ ---------------------
All directors and executive
officers as a group............. $ 1,500,000 150,000 7.6%
=================== ================== =====================
- ---------------------------
(1) Includes purchases by the individual's spouse and other relatives of the
named individual living in the same household. The above named individuals
are not aware of any other purchases by a person who, or entity which
would be considered an associate of the named individuals under the plan of
reorganization.
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THE REORGANIZATION AND THE STOCK OFFERING
GENERAL
On July 6, 2005, our Board of Directors unanimously adopted the plan
pursuant to which we will reorganize from a New Jersey-chartered mutual savings
bank into a two-tier mutual holding company structure. The plan has been
approved by the New Jersey Department of Banking and Insurance and the Federal
Deposit Insurance Corporation subject to, among other things, approval of the
plan by our depositors as of the voting record date. A special meeting of
depositors has been called for this purpose, to be held on January 3, 2006. The
reorganization will be completed as follows, or in any manner approved by the
New Jersey Department of Banking and Insurance and the Federal Deposit Insurance
Corporation, that is consistent with the purposes of the plan and applicable
laws and regulations:
(i) Magyar Bank will organize an interim stock savings bank as a
wholly-owned subsidiary ("Interim One");
(ii) Interim One will organize an interim stock savings bank as a
wholly-owned subsidiary ("Interim Two");
(iii) Interim One will organize Magyar Bancorp, Inc. as a wholly-owned
subsidiary;
(iv) Magyar Bank will amend its charter to be in the form of a New
Jersey-chartered stock savings bank charter, at which time it
will become a stock savings bank (the "Stock Bank"), and Interim
One will exchange its charter for a New Jersey mutual holding
company charter to become Magyar Bancorp, MHC;
(v) simultaneously with step (iv), Interim Two will merge with and
into the Stock Bank, and the Stock Bank will be the surviving
institution;
(vi) all of the stock constructively issued by the Stock Bank will be
transferred to Magyar Bancorp, MHC in exchange for membership
interests in Magyar Bancorp, MHC; and
(vii) Magyar Bancorp, MHC will contribute the Stock Bank's stock to
Magyar Bancorp, Inc., and the Stock Bank will become a wholly
owned subsidiary of Magyar Bancorp, Inc.
We have mailed to each person eligible to vote at the special meeting a
proxy statement containing information concerning the business purposes of the
reorganization and the effects of the reorganization on voting rights,
liquidation rights, existing savings accounts, deposit insurance, loans and
Magyar Bank's business. The proxy statement also describes the manner in which
the plan may be amended or terminated. Included with the proxy statement is a
proxy card to be used to vote on the plan.
Concurrently with the reorganization, Magyar Bancorp, Inc. will sell
shares of its common stock to depositors of Magyar Bank and certain other
persons, and issue shares of its common stock to Magyar Bancorp, MHC. We also
intend to issue up to 91,080 shares of
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common stock (at the maximum of the offering range) or 1.77% of the shares of
Magyar Bancorp, Inc. that will be outstanding following the stock offering and
contribute $500,000 in cash to a charitable foundation to be established by
Magyar Bank. After the reorganization and the stock offering, purchasers in the
stock offering will own 44.20% of Magyar Bancorp, Inc.'s outstanding shares of
common stock, Magyar Bancorp, MHC will own 54.03% of Magyar Bancorp, Inc.'s
outstanding shares of common stock and the Charitable Foundation will own 1.77%
of the outstanding shares of common stock.
The aggregate price of the shares of common stock sold in the stock
offering will be within an offering range of between $16.8 million and $22.8
million (or $26.2 million at the adjusted maximum) has been established by the
Board of Directors, based upon an independent appraisal of the estimated pro
forma market value of the common stock of Magyar Bancorp, Inc. The appraisal was
prepared by FinPro, Inc., a consulting firm experienced in the valuation and
appraisal of savings institutions. All shares of common stock to be sold in the
stock offering will be sold at the same price per share. The independent
appraisal will be affirmed or, if necessary, updated at the completion of the
stock offering. See "-How We Determined Stock Pricing and the Number of Shares
to be Issued" for additional information as to the determination of the
estimated pro forma market value of the common stock.
- --------------------------------------------------------------------------------
The following is a brief summary of all material aspects of the plan of
reorganization. A copy of the plan of reorganization is available from Magyar
Bank upon request and is available for inspection at the offices of Magyar Bank.
The plan is also filed as an exhibit to the Registration Statement of which this
prospectus is a part, copies of which may be obtained from the Securities and
Exchange Commission. See "Where You Can Find More Information."
- --------------------------------------------------------------------------------
REASONS FOR THE REORGANIZATION
The primary purpose of the reorganization is to establish a holding
company and to convert Magyar Bank to the stock form of ownership in order to
compete and expand more effectively in the financial services marketplace. The
stock form of ownership is the corporate form used by commercial banks, most
major businesses and a large number of savings institutions. The reorganization
also will enable customers, employees, management and directors to have an
equity ownership interest in our company. Management believes that this will
enhance the long-term growth and performance of Magyar Bank and Magyar Bancorp,
Inc. by enabling us to attract and retain qualified employees who have a direct
interest in our financial success. The reorganization will permit us to issue
and sell capital stock, which is a source of capital not available to mutual
savings associations. Since we will not be offering all of our common stock for
sale in the stock offering, the reorganization will result in less capital
raised in comparison to a standard mutual-to-stock conversion. We are not
undertaking a standard mutual-to-stock conversion at this time since we do not
believe we could effectively deploy that amount of additional capital on a
short-term or near-term basis. The reorganization, however, also will allow us
to raise additional capital in the future because a majority of our shares of
common stock will be available for sale in the event of a conversion of Magyar
Bancorp, MHC to stock form. The reorganization also will give us greater
flexibility to structure and finance the expansion of our operations, including
the potential acquisition of other financial institutions, and to diversify into
other financial services, to the extent permissible by applicable law and
regulation. Although there are no current arrangements, understandings or
agreements
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regarding any such opportunities, we will be in a position after the
reorganization, subject to regulatory limitations and our financial condition,
to take advantage of any such opportunities that may arise. Lastly, the
reorganization will enable us to better manage our capital by providing broader
investment opportunities through the holding company structure and by enabling
us to repurchase our shares of common stock as market conditions permit.
Although the reorganization and stock offering will create a stock bank and
stock holding company, only a minority of the common stock will be offered for
sale in the stock offering. As a result, our mutual form of ownership and its
ability to provide community-oriented financial services will be preserved
through the mutual holding company structure.
The Board of Directors believes that these advantages outweigh the
potential disadvantages of the mutual holding company structure, including the
inability of stockholders other than Magyar Bancorp, MHC to own a majority of
the common stock of Magyar Bancorp, Inc. and Magyar Bank. A majority of our
voting stock will be owned by Magyar Bancorp, MHC, which will be controlled by
its Board of Directors. While this structure will permit management to focus on
our long-term business strategy for growth and capital redeployment without
undue pressure from stockholders, it will also serve to perpetuate our existing
management and directors. Magyar Bancorp, MHC will be able to elect all the
members of Magyar Bancorp, Inc.'s Board of Directors, and will be able to
control the outcome of all matters presented to our stockholders for resolution
by vote. No assurance can be given that Magyar Bancorp, MHC will not take action
adverse to the interests of stockholders, other than the mutual holding company.
For example, Magyar Bancorp, MHC could prevent the sale of control of Magyar
Bancorp, Inc., or defeat a candidate for the Board of Directors of Magyar
Bancorp, Inc. or other proposals put forth by stockholders.
The reorganization does not preclude the conversion of Magyar Bancorp,
MHC from the mutual to stock form of organization in the future. No assurance
can be given when, if ever, Magyar Bancorp, MHC will convert to stock form or
what conditions the New Jersey Department of Banking and Insurance or other
regulatory agencies may impose on such a transaction. See "Risk Factors" and
"Summary--Possible Conversion of Magyar Bancorp, MHC to Stock Form."
EFFECTS OF THE REORGANIZATION AND STOCK OFFERING ON DEPOSITORS AND BORROWERS OF
MAGYAR BANK
GENERAL. Each depositor in a New Jersey mutual savings bank has both a
deposit account in the institution and a pro rata ownership interest in the
equity of the savings institution based upon the balance in the depositor's
account. This interest may only be realized in the event of a liquidation of the
savings institution. However, this ownership interest is tied to the depositor's
account and has no tangible market value separate from such deposit account. Any
depositor who opens a deposit account obtains a pro rata ownership interest in
the equity of the institution without any additional payment beyond the amount
of the deposit. A depositor who reduces or closes such depositor's account
receives the balance in the account but receives nothing for such depositor's
ownership interest in the equity of the institution, which is lost to the extent
that the balance in the account is reduced. Consequently, depositors of a mutual
savings bank have no way to realize the value of their ownership interest,
except in the unlikely event that the mutual savings bank is liquidated. In such
event, the depositors of record at that time would share pro
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rata in any residual surplus and reserves after other claims, including claims
of depositors to the amounts of their deposits, are paid.
When a mutual savings bank converts to stock form, permanent
non-withdrawable capital stock is created to represent the ownership of the
institution's equity and the former pro rata ownership of depositors is
thereafter represented exclusively by their liquidation rights. SUCH CAPITAL
STOCK IS SEPARATE AND APART FROM DEPOSIT ACCOUNTS AND CANNOT BE AND IS NOT
INSURED BY THE FDIC OR ANY OTHER GOVERNMENTAL AGENCY. Certificates are issued to
evidence ownership of the capital stock sold in connection with the
reorganization. The stock certificates are transferable, and therefore, the
stock may be sold or traded with no effect on any deposit account the seller may
hold in the institution.
CONTINUITY. While the reorganization is being accomplished, and after
its completion, the routine business of accepting deposits and making loans of
Magyar Bank will continue without interruption. Magyar Bank will continue to be
subject to regulation by the New Jersey Department of Banking and Insurance, and
the Federal Deposit Insurance Corporation. After the reorganization, Magyar Bank
will continue to provide services for depositors and borrowers under current
policies by our management and staff.
VOTING RIGHTS OF DEPOSITORS. Voting rights and control of Magyar Bank,
as a mutual savings bank, are vested in the Board of Directors. After the
reorganization, direction of Magyar Bank will be under the control of the Board
of Directors of Magyar Bank. Magyar Bancorp Inc., as the holder of all of the
outstanding common stock of Magyar Bank, will have exclusive voting rights with
respect to any matters concerning Magyar Bank requiring stockholder approval,
including the election of directors of Magyar Bank.
After the reorganization, the holders of common stock of Magyar Bancorp
will have exclusive voting rights with respect to any matters concerning Magyar
Bancorp. These voting rights will be exclusive except to the extent Magyar
Bancorp in the future issues preferred stock with voting rights. Each holder of
common stock will be entitled to vote on any matters to be considered by Magyar
Bancorp Inc.'s stockholders, including the election of directors of Magyar
Bancorp Inc., subject to the restrictions and limitations set forth in Magyar
Bancorp Inc.'s certificate of incorporation discussed below.
By virtue of its ownership of a majority of the outstanding shares of
the common stock of Magyar Bancorp Inc., Magyar Bancorp, MHC will be able to
elect all members of the Board of Directors of Magyar Bancorp, Inc. and
generally will be able to control the outcome of most matters presented to the
stockholders of Magyar Bancorp Inc. for resolution by vote. Magyar Bancorp, MHC
will be controlled by its Board of Directors, which will initially consist of
the current members of the Board of Directors of Magyar Bank. Under the mutual
form of ownership, existing directors of Magyar Bancorp, MHC elect new directors
of Magyar Bancorp, MHC.
LIQUIDATION RIGHTS. Following the completion of the reorganization, all
depositors who had liquidation rights with respect to Magyar Bank as of the
effective date of the reorganization will continue to have such rights solely
with respect to Magyar Bancorp, MHC so long as they continue to hold deposit
accounts with Magyar Bank. In addition, all persons who become
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depositors of Magyar Bank subsequent to the reorganization will have such
liquidation rights with respect to Magyar Bancorp, MHC.
DEPOSIT ACCOUNTS AND LOANS. Under the plan of reorganization, each
depositor of Magyar Bank at the time of the reorganization will automatically
continue as a depositor after the reorganization, and each such deposit account
will remain the same with respect to deposit balance, interest rate and other
terms, except to the extent such deposit is reduced by withdrawals to purchase
common stock in the stock offering. All insured deposit accounts of Magyar Bank
will continue to be federally insured by the Federal Deposit Insurance
Corporation up to the legal maximum limit in the same manner as deposit accounts
existing in Magyar Bank immediately prior to the reorganization. Furthermore, no
loan outstanding will be affected by the reorganization, and the amounts,
interest rates, maturity and security for each loan will remain the same as they
were prior to the reorganization.
OFFERING OF SHARES OF COMMON STOCK
Under the plan of reorganization, up to 2,618,550 shares of Magyar
Bancorp, Inc. common stock will be offered for sale at a price of $10.00 per
share, subject to certain restrictions described below, through a subscription
and community offering.
SUBSCRIPTION OFFERING. The subscription offering will expire at 12:00
noon, Eastern time, on December 16, 2005, unless otherwise extended by Magyar
Bank and Magyar Bancorp, Inc. All shares to be sold in the stock offering must
be sold within a period ending not more than 45 days after the expiration of the
subscription offering. This period expires on January 30, 2006. If the stock
offering is not completed by January 30, 2006, all subscribers will have the
right to modify or rescind their subscriptions and to have their subscription
funds returned promptly with interest. In the event of an extension of this
type, all subscribers will be notified in writing of the time period within
which subscribers must notify Magyar Bank of their intention to maintain, modify
or rescind their subscriptions. If the subscriber rescinds or does not respond
in any manner to Magyar Bank's notice, the funds submitted will be refunded to
the subscriber with interest at Magyar Bank's current passbook savings rate,
and/or the subscriber's withdrawal authorizations will be terminated. In the
event that the stock offering is not effected, all funds submitted and not
previously refunded pursuant to the subscription and community offering will be
promptly refunded to subscribers with interest at Magyar Bank's current passbook
savings rate, and all withdrawal authorizations will be terminated.
SUBSCRIPTION RIGHTS. Under the plan of reorganization, nontransferable
subscription rights to purchase the shares of common stock have been issued to
persons and entities entitled to purchase the shares of common stock in the
subscription offering. The amount of shares of common stock that these parties
may purchase will depend on the availability of the common stock for purchase
under the categories described in the plan of reorganization. Subscription
priorities have been established for the allocation of shares of common stock to
the extent that shares of common stock are available. These priorities are as
follows:
CATEGORY 1: ELIGIBLE ACCOUNT HOLDERS. Subject to the maximum purchase
limitations, each depositor with $50 or more on deposit at Magyar Bank, as of
the close of business on
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June 30, 2004, will receive nontransferable subscription rights to subscribe for
up to the greater of the following:
(i) $250,000 of common stock;
(ii) one-tenth of one percent of the total offering of common stock;
or
(iii) 15 times the product, rounded down to the nearest whole number,
obtained by multiplying the total number of shares of common
stock to be sold by a fraction, the numerator of which is the
amount of the qualifying deposit of the eligible account holder
and the denominator is the total amount of qualifying deposits
of all eligible account holders.
If the exercise of subscription rights in this category results in an
oversubscription, shares of common stock will be allocated among subscribing
eligible account holders so as to permit each one, to the extent possible, to
purchase a number of shares sufficient to make the person's total allocation
equal 100 shares or the number of shares actually subscribed for, whichever is
less. Thereafter, unallocated shares will be allocated among the remaining
subscribing eligible account holders whose subscriptions remain unfilled in the
proportion that the amounts of their respective qualifying deposits bear to the
total amount of qualifying deposits of all remaining eligible account holders
whose subscriptions remain unfilled; however, no fractional shares will be
issued. If the amount so allocated exceeds the amount subscribed for by any one
or more eligible account holders, the excess will be reallocated, one or more
times as necessary, among those eligible account holders whose subscriptions are
still not fully satisfied on the same principle until all available shares have
been allocated. Subscription rights received by officers and directors and their
associates in this category based on their increased deposits in Magyar Bank in
the one-year period preceding June 30, 2004 are subordinated to the subscription
rights of other eligible account holders.
CATEGORY 2: TAX-QUALIFIED EMPLOYEE PLANS. The tax-qualified employee
plans of Magyar Bank, such as the employee stock ownership plan and Magyar
Bank's existing 401(k) plan, have nontransferable subscription rights to
purchase up to 10% of the shares of common stock sold in the stock offering. The
employee stock ownership plan intends to purchase 8.0% of the shares of common
stock sold in the stock offering and issued to the Charitable Foundation. If
there are insufficient shares available to satisfy the aggregate subscriptions
of the employee stock ownership plan and the 401(k) plan, available shares will
be allocated first to satisfy the subscription of the 401(k) plan and then, to
the extent shares remain available, to satisfy the subscription of the employee
stock ownership plan. If any of Magyar Bank's tax-qualified employee plans'
subscriptions are not filled in their entirety, the plans may purchase shares of
common stock in the open market. Further, if Magyar Bank's employee stock
ownership plan's subscription is not filled in its entirety, it may purchase
shares of common stock directly from the holding company subsequent to
completion of the stock offering. Finally, if market conditions warrant, in the
judgment of its trustee, the employee stock ownership plan may elect to fill its
subscription rights, in whole or in part, through open-market purchases.
CATEGORY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. To the extent that
there are sufficient shares of common stock remaining after satisfaction of
subscriptions by eligible
127
account holders and the tax-qualified employee plans, and subject to the maximum
purchase limitations, each depositor with $50 or more on deposit as of the close
of business on September 30, 2005, will receive nontransferable subscription
rights to subscribe for up to the greater of:
(i) $250,000 of common stock;
(ii) one-tenth of one percent of the total offering of common stock;
or
(iii) 15 times the product, rounded down to the nearest whole number,
obtained by multiplying the total number of shares of common
stock to be issued by a fraction, the numerator of which is the
amount of qualifying deposits of the supplemental eligible
account holder and the denominator is the total amount of
qualifying deposits of all supplemental eligible account
holders.
If the exercise of subscription rights in this category results in an
oversubscription, shares of common stock will be allocated among subscribing
supplemental eligible account holders so as to permit each supplemental eligible
account holder, to the extent possible, to purchase a number of shares
sufficient to make his or her total allocation equal 100 shares or the number of
shares actually subscribed for, whichever is less. Thereafter, unallocated
shares will be allocated among subscribing supplemental eligible account holders
whose subscriptions remain unfilled in the proportion that the amounts of their
respective qualifying deposits bear to total qualifying deposits of all
subscribing supplemental eligible account holders.
CATEGORY 4: VOTING DEPOSITORS. To the extent that there are sufficient
shares of common stock remaining after satisfaction of subscriptions by eligible
account holders, the tax-qualified employee plans and supplemental eligible
account holders, and subject to the maximum purchase limitations, each depositor
of Magyar Bank who is not an eligible account holder, supplemental eligible
account holder or tax-qualified employee plan, as of the close of business on
November 4, 2005, will receive nontransferable subscription rights to subscribe
for up to the greater of:
(i) $250,000 of common stock;
(ii) one-tenth of one percent of the total offering of common stock;
or
(iii) 15 times the product, rounded down to the nearest whole number,
obtained by multiplying the total number of shares of common
stock to be issued by a fraction, the numerator of which is the
amount of qualifying deposits of the voting depositor and the
denominator is the total amount of qualifying deposits of all
voting depositors.
If the exercise of subscription rights in this category results in an
oversubscription, shares of common stock will be allocated among subscribing
voting depositors so as to permit each voting depositor, to the extent possible,
to purchase a number of shares sufficient to make his or her total allocation
equal 100 shares or the number of shares actually subscribed for, whichever is
less. Thereafter, unallocated shares will be allocated among subscribing voting
depositors whose subscriptions remain unfilled in the proportion that the
amounts of their respective qualifying deposits bear to total qualifying
deposits of all subscribing voting depositors.
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COMMUNITY OFFERING. Any shares of common stock that remain unsubscribed
for in the subscription offering may be offered by Magyar Bancorp, Inc. in a
community offering to members of the general public to whom Magyar Bancorp, Inc.
delivers a copy of this prospectus and a stock order form, with preference given
to natural persons residing in Middlesex and Somerset Counties, New Jersey (the
"Local Community"). We will consider persons to be residing in one of the
specified counties if they occupy a dwelling in the county and establish an
ongoing physical presence in the county that is not merely transitory in nature.
We may utilize depositor or loan records or other evidence provided to us to
make a determination as to whether a person is a resident in one of the
specified counties. In all cases, the determination of residence status will be
made by us in our sole discretion. Subject to the maximum purchase limitations,
these persons may purchase up to $250,000 of common stock. The community
offering, if any, may begin concurrently with, during or promptly after the
subscription offering, and may terminate at any time without notice, but may not
terminate later than January 30, 2006, unless extended by Magyar Bancorp, Inc.
and Magyar Bank. If we extend the stock offering, all subscribers will be
notified of the extension and of the duration of any extension that has been
granted, and will have the right to confirm, increase, decrease or rescind their
orders. If we do not receive an affirmative response from a subscriber to any
resolicitation, the subscriber's order will be rescinded and all funds received
will be promptly returned with interest. Subject to any required regulatory
approvals, Magyar Bancorp, Inc. will determine, in its discretion, the
advisability of a community offering, the commencement and expiration dates of
any community offering, and the methods of finding potential purchasers in such
offering.
THE OPPORTUNITY TO SUBSCRIBE FOR SHARES OF COMMON STOCK IN THE COMMUNITY
OFFERING CATEGORY IS SUBJECT TO THE RIGHT OF MAGYAR BANCORP, INC. AND MAGYAR
BANK, IN THEIR SOLE DISCRETION, TO ACCEPT OR REJECT THESE ORDERS IN WHOLE OR IN
PART EITHER AT THE TIME OF RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE
THEREAFTER. IF YOUR ORDER IS REJECTED IN PART, YOU WILL NOT HAVE THE RIGHT TO
CANCEL THE REMAINDER OF YOUR ORDER.
If there are not sufficient shares of common stock available to fill
orders in the community offering, the shares of common stock will be allocated,
if possible, first to each natural person residing in the Local Community whose
order is accepted by Magyar Bank, in an amount equal to the lesser of 1,000
shares of common stock or the number of shares of common stock subscribed for by
each subscriber residing in the Local Community. Thereafter, unallocated shares
of common stock will be allocated among the subscribers residing in the Local
Community, whose orders remain unsatisfied, on an equal number of shares basis
per order. If there are any shares of common stock remaining, shares will be
allocated to other members of the general public who subscribe in the community
offering applying the same allocation described above for subscribers residing
in the Local Community.
SYNDICATED COMMUNITY OFFERING. The plan of reorganization provides that
shares of common stock not purchased in the subscription offering and community
offering may be offered for sale to the general public in a syndicated community
offering to be managed by Ryan Beck & Co., Inc., acting as our agent. In such
capacity, Ryan Beck & Co., Inc. may form a syndicate of other brokers-dealers
who are National Association of Securities Dealers member firms. Alternatively,
we may sell any remaining shares in an underwritten public stock offering.
Neither Ryan Beck & Co., Inc. nor any registered broker-dealer will have any
obligation to take or purchase any shares of the common stock in the syndicated
community offering; however,
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Ryan Beck & Co., Inc. has agreed to use its best efforts in the sale of shares
in any syndicated community offering. We have not selected any particular
broker-dealers to participate in a syndicated community offering and will not do
so until prior to the commencement of the syndicated community offering.
THE OPPORTUNITY TO SUBSCRIBE FOR SHARES OF COMMON STOCK IN THE
SYNDICATED COMMUNITY OFFERING IS SUBJECT TO OUR RIGHT TO REJECT ORDERS, IN WHOLE
OR PART, EITHER AT THE TIME OF RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE
FOLLOWING THE EXPIRATION DATE OF THE STOCK OFFERING. IF YOUR ORDER IS REJECTED
IN PART, YOU WILL NOT HAVE THE RIGHT TO CANCEL THE REMAINDER OF YOUR ORDER.
Stock sold in the syndicated community offering also will be sold at the
$10.00 per share purchase price. Purchasers in the syndicated community offering
are eligible to purchase up to $250,000 of common stock (which equals 25,000
shares). See "--How We Determined Stock Pricing and the Number of Shares to be
Issued." We may begin the syndicated community offering or underwritten public
stock offering at any time following the commencement of the subscription
offering. The syndicated community offering will terminate no later than 45 days
following the subscription offering expiration date, unless extended. We may
terminate the community offering or the syndicated community offering at any
time after we have received orders for at least the minimum number of shares
available for purchase in the stock offering.
The syndicated community offering will be conducted in accordance with
certain SEC rules applicable to best efforts offerings. Generally under these
rules, Ryan Beck & Co., Inc., a broker-dealer, will deposit funds it receives
prior to the closing date from interested investors into a separate
non-interest-bearing bank account. If and when all the conditions for the
closing are met, funds for common stock sold by Ryan Beck & Co., Inc. in the
syndicated community offering will be promptly delivered to us. If the stock
offering closes, but some or all of an interested investor's funds are not
accepted by us, those funds will be returned to the interested investor promptly
after the closing, without interest. If the stock offering does not close, funds
in the account will be returned promptly, without interest, to the potential
investor. Normal customer ticketing will be used. In the syndicated community
offering, stock order forms will not be used.
If we are unable to find purchases from the general public for
unsubscribed shares, we will make other purchase arrangements, if feasible. If
other purchase arrangements cannot be made, we may terminate the stock offering
and promptly return all funds, set a new offering range and give all subscribers
the opportunity to place a new order for shares of Magyar Bancorp, Inc. common
stock; or take such other actions as may be permitted.
LIMITATIONS ON PURCHASE OF SHARES. The plan provides for certain
limitations on the purchase of shares of common stock in the stock offering.
These limitations are as follows:
A. The aggregate amount of outstanding common stock of Magyar
Bancorp, Inc. owned or controlled by persons other than Magyar
Bancorp, MHC at the close of the stock offering shall be less
than 50% of Magyar Bancorp, Inc.'s total outstanding common
stock.
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B. The maximum purchase of common stock in the subscription
offering by a person or group of persons through a single
qualifying deposit account is $250,000. No person together with
an associate or group of persons acting in concert, may purchase
more than $350,000 of the common stock offered in the stock
offering, except that: (1) Magyar Bancorp, Inc. may, in its sole
discretion and without further notice to or solicitation of
subscribers or other prospective purchasers, increase such
maximum purchase limitations to 5% of the number of shares
offered in the stock offering; (2) the employee stock ownership
plan intends to purchase 8% of the shares sold in the stock
offering and issued to the Charitable Foundation; and (3) shares
to be held by any tax-qualified employee plan and attributable
to a person shall not be aggregated with other shares purchased
directly by or otherwise attributable to such person.
C. The aggregate amount of common stock acquired in the stock
offering, plus all prior issuances by Magyar Bancorp, Inc., by
any non-tax-qualified employee plan or any management person and
his or her associates, exclusive of any shares of common stock
acquired by such plan or management person and his or her
associates in the secondary market, shall not exceed 4.9% of the
outstanding shares of common stock of Magyar Bancorp, Inc. at
the conclusion of the stock offering. In calculating the number
of shares held by any management person and his or her
associates under this paragraph, shares held by any
tax-qualified employee plan or non-tax-qualified employee plan
of Magyar Bancorp, Inc. or Magyar Bank that are attributable to
such person shall not be counted.
D. The aggregate amount of common stock acquired in the stock
offering, plus all prior issuances by Magyar Bancorp, Inc., by
any non-tax-qualified employee plan or any management person and
his or her associates, or any management person and his or her
associates, exclusive of any common stock acquired by such plan
or management person and his or her associates in the secondary
market, shall not exceed 4.9% of the stockholders' equity of
Magyar Bancorp, Inc. at the conclusion of the stock offering. In
calculating the number of shares held by any management person
and his or her associates under this paragraph, shares held by
any tax-qualified employee plan or non-tax-qualified employee
plan of Magyar Bancorp, Inc. or Magyar Bank that are
attributable to such person shall not be counted.
E. The aggregate amount of common stock acquired in the stock
offering, plus all prior issuances by Magyar Bancorp, Inc., by
any one or more tax-qualified employee stock benefit plans,
exclusive of any shares of common stock acquired by such plans
in the secondary market, shall not exceed 4.9% of the
outstanding shares of common stock of Magyar Bancorp, Inc. at
the conclusion of the stock offering.
F. The aggregate amount of common stock acquired in the stock
offering, plus all prior issuances by Magyar Bancorp, Inc., by
any one or more tax-qualified employee stock benefit plans,
exclusive of any shares of common stock acquired
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by such plans in the secondary market, shall not exceed 4.9% of
the stockholders' equity of Magyar Bancorp, Inc. at the
conclusion of the stock offering.
G. The aggregate amount of common stock acquired in the stock
offering, plus all prior issuances by Magyar Bancorp, Inc., by
all non-tax-qualified employee plans or management persons and
their associates, exclusive of any common stock acquired by such
plans or management persons and their associates in the
secondary market, shall not exceed 25% of the outstanding shares
of common stock held by persons other than Magyar Bancorp, MHC
at the conclusion of the stock offering. In calculating the
number of shares held by management persons and their associates
under this paragraph, shares held by any tax-qualified employee
plan or non-tax-qualified employee plan that are attributable to
such persons shall not be counted.
H. The aggregate amount of common stock acquired in the stock
offering, plus all prior issuances by Magyar Bancorp, Inc., by
all non-tax-qualified employee stock benefit plans or management
persons and their associates, exclusive of any common stock
acquired by such plans or management persons and their
associates in the secondary market, shall not exceed 29% of the
stockholders' equity of Magyar Bancorp, Inc. held by persons
other than Magyar Bancorp, MHC at the conclusion of the stock
offering. In calculating the number of shares held by management
persons and their associates under this paragraph, shares held
by any tax-qualified employee plan or non-tax-qualified employee
plan that are attributable to such persons shall not be counted.
I. The aggregate amount of common stock acquired in the stock
offering, plus all prior issuances by Magyar Bancorp, Inc., by
all stock benefit plans of Magyar Bancorp, Inc. or Magyar Bank,
or management persons and their associates, exclusive of any
common stock acquired by such plans or management persons and
their associates in the secondary market, shall not exceed 29%
of the outstanding common stock of Magyar Bancorp, Inc. held by
persons other than the Magyar Bancorp, MHC.
J. Notwithstanding any other provision of the plan of
reorganization, no person shall be entitled to purchase any
common stock to the extent such purchase would be illegal under
any federal law or state law or regulation or would violate
regulations or policies of the National Association of
Securities Dealers, Inc., particularly those regarding free
riding and withholding. Magyar Bancorp, Inc. and/or its agents
may ask for an acceptable legal opinion from any purchaser as to
the legality of such purchase and may refuse to honor any
purchase order if such opinion is not timely furnished.
K. The Board of Directors of Magyar Bancorp, Inc. has the right in
its sole discretion to reject any order submitted by a person
whose representations the Board of Directors believes to be
false or who it otherwise believes, either alone or acting in
concert with others, is violating, circumventing, or intends to
violate, evade or circumvent the terms and conditions of the
plan of reorganization.
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L. A minimum of 25 shares of common stock must be purchased by each
person purchasing shares in the stock offering to the extent
those shares are available; provided, however, that in the event
the minimum number of shares of common stock purchased times the
price per share exceeds $500, then such minimum purchase
requirement shall be reduced to such number of shares which when
multiplied by the price per share shall not exceed $500, as
determined by the Board of Directors.
For purposes of the plan, the members of the Board of Directors are not
deemed to be acting in concert solely by reason of their board membership. The
term "associate" is used above to indicate any of the following relationships
with a person:
o any corporation or organization, other than Magyar Bancorp, MHC,
Magyar Bancorp, Inc. or Magyar Bank or a majority-owned
subsidiary of Magyar Bancorp, Inc. or Magyar Bank, of which a
person is a senior officer or partner, or beneficially owns,
directly or indirectly, 10% or more of any class of equity
securities of the corporation or organization;
o any trust or other estate if the person has a substantial
beneficial interest in the trust or estate or is a trustee or
fiduciary of the estate. For purposes of the plan of
reorganization, a person who has a substantial beneficial
interest in a tax-qualified or non-tax-qualified employee plan,
or who is a trustee or fiduciary of the plan is not an associate
of the plan. For purposes of the plan of reorganization, a
tax-qualified employee plan is not an associate of a person;
o any person who is a relative or spouse of such person or a
relative of such spouse and (1) who lives in the same house as
the person; or (2) who is a director or senior officer of Magyar
Bancorp, MHC, Magyar Bancorp, Inc. or Magyar Bank or a
subsidiary thereof; and
o any person acting in concert with the persons or entities
specified above.
As used above, the term "acting in concert" means:
o knowing participation in a joint activity or interdependent
conscious parallel action towards a common goal whether or not
pursuant to an express agreement;
o a combination or pooling of voting or other interests in the
securities of an issuer for a common purpose pursuant to any
contract, understanding, relationship, agreement or other
arrangement, whether written or otherwise; or
o a person or company which acts in concert with another person or
company ("other party") shall also be deemed to be acting in
concert with any person or company who is also acting in concert
with that other party, except that any tax-qualified employee
plan will not be deemed to be acting in concert with its trustee
or a person who serves in a similar capacity solely for the
purpose of determining whether stock held by the trustee and
stock held by the plan will be aggregated.
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Persons or companies who file jointly a Schedule 13D or Schedule 13G
with any regulatory agency will be deemed to be acting in concert.
The Boards of Directors of Magyar Bancorp, Inc. and Magyar Bank may, in
their sole discretion increase the maximum purchase limitations up to 5% of the
shares being offered in the stock offering or decrease such maximum purchase
limitations to 0.1% of the maximum number of shares being offered in the stock
offering. However, orders for shares exceeding 5% of the shares sold may not
exceed, in the aggregate, 10% of the shares sold. Requests to purchase shares of
Magyar Bancorp, Inc. common stock under this provision will be allocated by the
boards of directors in accordance with the priority rights and allocation
procedures set forth above. Depending upon market and financial conditions, and
subject to certain limitations, the Boards of Directors of Magyar Bancorp, Inc.
and Magyar Bank, without further approval of the depositors, may increase or
decrease any of the above purchase limitations at any time. In computing the
number of shares of common stock to be allocated, all numbers will be rounded
down to the next whole number.
Shares of common stock purchased in the stock offering will be freely
transferable except for shares of common stock purchased by executive officers
and directors of Magyar Bank or Magyar Bancorp, Inc. and except as described
below. In addition, under National Association of Securities Dealers, Inc.
("NASD") guidelines, members of the NASD and their associates are subject to
certain reporting requirements upon purchase of these securities.
TAX EFFECTS OF THE REORGANIZATION
We intend to proceed with the reorganization on the basis of an opinion
from our special counsel, Luse Gorman Pomerenk & Schick, P.C., Washington, D.C.,
as to tax matters that are material to the reorganization. The opinion is based,
among other things, on factual representations made by us, including the
representation that the exercise price of the subscription rights to purchase
the common stock will be approximately equal to the fair market value of the
stock at the time of the completion of the reorganization. Luse Gorman Pomerenk
& Schick, P.C.'s opinion provides as follows:
1. The conversion of Magyar Bank's charter from a mutual savings
bank charter to a stock savings bank charter will qualify as a
tax-free reorganization under Section 368(a)(1)(F) of the
Internal Revenue Code of 1986 (the "Code"), and no gain or loss
will be recognized by Magyar Bank in either its mutual form (the
"Mutual Bank") or stock form (the "Stock Bank") as a result.
2. Stock Bank's holding period in the assets received from the
Mutual Bank will include the period during which such assets
were held by the Mutual Bank.
3. The Stock Bank's basis in its assets will be the same as the
basis of such assets in the hands of the Mutual Bank immediately
prior to the reorganization.
4. Mutual Bank depositors will recognize no gain or loss upon the
constructive receipt of solely Stock Bank common stock in
exchange for their liquidation and other interests.
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5. The Stock Bank will succeed to and take into account the Mutual
Bank's earnings and profits or deficit in earnings and profits,
as of the date of the reorganization.
6. For purposes of Code Section 381, Stock Bank will be treated the
same as Mutual Bank, and therefore, Mutual Bank's tax year will
not end merely as a result of the conversion of the Mutual Bank
to stock form and Stock Bank will not be required to obtain a
new employee identification number.
7. No gain or loss will be recognized by eligible account holders,
supplemental eligible account holders or voting depositors of
Mutual Bank on the issuance to them of withdrawable deposit
accounts in Stock Bank plus liquidation rights with respect to
Magyar Bancorp, MHC, in exchange for their deposit accounts in
Mutual Bank or to the voting depositors on the issuance to them
of withdrawable deposit accounts.
8. It is more likely than not that the fair market value of the
subscription rights to purchase common stock is zero.
Accordingly, no gain or loss will be recognized by eligible
account holders, supplemental eligible account holders or voting
depositors of the Mutual Bank upon the distribution to them of
the nontransferable subscription rights to purchase shares of
stock in Magyar Bancorp, Inc. Gain realized, if any, by the
eligible account holders, supplemental eligible account holders
and voting depositors of the Mutual Bank on the distribution to
them of the nontransferable subscription rights to purchase
shares of common stock will be recognized but only in an amount
not in excess of the fair market value of such subscription
rights. Eligible account holders, supplemental eligible account
holders and voting depositors will not realize any taxable
income as a result of the exercise by them of the
nontransferable subscription rights.
9. The basis of the deposit accounts in Stock Bank to be received
by the eligible account holders, supplemental eligible account
holders and voting depositors of Mutual Bank will be the same as
the basis of their deposit accounts in Mutual Bank surrendered
in exchange therefor. The basis of the interests in the
liquidation rights in Magyar Bancorp, MHC to be received by the
eligible account holders and supplemental eligible account
holders of Mutual Bank will be zero.
10. The exchange of Stock Bank common stock constructively received
by eligible account holders, supplemental eligible account
holders and voting depositors in exchange for membership
interests in Magyar Bancorp, MHC will constitute a tax-free
exchange of property solely for "stock."
11. Eligible account holders, supplemental eligible account holders
and voting depositors will recognize no gain or loss upon the
transfer of Stock Bank common stock (which they constructively
received in the conversion of the Mutual Bank to stock form) to
Magyar Bancorp, MHC solely in exchange for membership interests
in Magyar Bancorp, MHC.
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12. Eligible account holders, supplemental eligible account holders
and voting depositors' basis in the Magyar Bancorp, MHC
membership interests received in the transaction (which basis is
-0-) will be the same as the basis of the property transferred
in exchange for such interests.
13. Magyar Bancorp, MHC will recognize no gain or loss upon receipt
of property from eligible account holders, supplemental eligible
account holders and voting depositors in exchange for membership
interests in Magyar Bancorp, MHC.
14. Magyar Bancorp, MHC's basis in the property received from
eligible account holders, supplemental eligible account holders
and voting depositors (which basis is -0-) will be the same as
the basis of such property in the hands of eligible account
holders, supplemental eligible account holders and voting
depositors.
15. Magyar Bancorp, MHC's holding period for the property received
from eligible account holders, supplemental account holders and
voting depositors will include the period during which such
property was held by such persons.
16. Magyar Bancorp, MHC and the persons who purchased common stock
of Magyar Bancorp, Inc. in the subscription and community
offering ("minority stockholders") will recognize no gain or
loss upon the transfer of Stock Bank common stock and cash,
respectively, to Magyar Bancorp, Inc. in exchange for common
stock in Magyar Bancorp, Inc.
17. Magyar Bancorp, Inc. will recognize no gain or loss on its
receipt of Stock Bank common stock and cash in exchange for
Magyar Bancorp, Inc. common stock.
18. Magyar Bancorp, MHC's basis in the Magyar Bancorp, Inc. common
stock will be the same as its basis in the Stock Bank common
stock exchanged for such stock.
19. Magyar Bancorp, MHC's holding period in the Magyar Bancorp, Inc.
common stock received will include the period during which it
held the Stock Bank common stock, provided that such property
was a capital asset on the date of the exchange.
20. Magyar Bancorp, Inc.'s basis in the Stock Bank stock received
from Magyar Bancorp, MHC will be the same as the basis of such
property in the hands of Magyar Bancorp, MHC.
21. Magyar Bancorp, Inc.'s holding period for the Stock Bank common
stock received from Magyar Bancorp, MHC will include the period
during which such property was held by Magyar Bancorp, MHC.
22. It is more likely than not that the basis of the Magyar Bancorp,
Inc. common stock to its minority stockholders will be the
purchase price thereof. The holding period of the Magyar
Bancorp, Inc. common stock purchased pursuant to the
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exercise of subscription rights will commence on the date on
which the right to acquire such stock was exercised.
The opinion addresses all material Federal income tax consequences of
the reorganization. The tax opinion as to items 8 and 22 above is based on the
position that subscription rights to be received by eligible account holders and
supplemental eligible account holders do not have any economic value at the time
of distribution or the time the subscription rights are exercised. In this
regard, Luse Gorman Pomerenk & Schick, P.C. noted that the subscription rights
will be granted at no cost to the recipients, are legally non-transferable and
of short duration, and will provide the recipient with the right only to
purchase shares of common stock at the same price to be paid by members of the
general public in any community offering. The firm also noted that the Internal
Revenue Service has not in the past concluded that subscription rights have
value. Based on the foregoing, Luse Gorman Pomerenk & Schick, P.C. believes that
it is more likely than not that the nontransferable subscription rights to
purchase shares of common stock have no value. However, the issue of whether or
not the nontransferable subscription rights have value is based on all the facts
and circumstances. If the nontransferable subscription rights granted to
eligible subscribers are subsequently found to have an ascertainable value
greater than zero, income may be recognized by various recipients of the
nontransferable subscription rights (in certain cases, whether or not the rights
are exercised) and we could recognize gain on the distribution of the
nontransferable subscription rights. The Federal tax opinion referred to in this
prospectus is filed as an exhibit to the registration statement. See "Where You
Can Find More Information."
The opinions of Luse Gorman Pomerenk & Schick, P.C., unlike a letter
ruling issued by the Internal Revenue Service, are not binding on the Internal
Revenue Service and the conclusions expressed therein may be challenged at a
future date. The Internal Revenue Service has issued favorable rulings for
transactions substantially similar to the proposed reorganization, but any such
ruling may not be cited as precedent by any taxpayer other than the taxpayer to
whom the ruling is addressed. We do not plan to apply for a letter ruling
concerning the transactions described in this prospectus.
We also have received an opinion from Grant Thornton LLP that the New
Jersey State income tax consequences of the proposed transaction are consistent
with the Federal income tax consequences.
RESTRICTIONS ON TRANSFERABILITY OF SUBSCRIPTION RIGHTS
Subscription rights are nontransferable. Magyar Bank may reasonably
investigate to determine compliance with this restriction. Persons selling or
otherwise transferring their rights to subscribe for shares of common stock in
the subscription offering or subscribing for shares of common stock on behalf of
another person may forfeit those rights and may face possible further sanctions
and penalties imposed by agencies of the United States Government. MAGYAR BANK
AND MAGYAR BANCORP, INC. WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE REMEDIES IN
THE EVENT THEY BECOME AWARE OF THE TRANSFER OF SUBSCRIPTION RIGHTS AND WILL NOT
HONOR ORDERS KNOWN BY THEM TO INVOLVE THE TRANSFER OF THESE RIGHTS. Each person
exercising subscription rights will be required to certify on the order form
that he or she is purchasing shares solely for his or her own account and that
he or she has no agreement or understanding with any other person for the
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sale or transfer of the shares of common stock. Once tendered, orders cannot be
revoked without the consent of Magyar Bank and Magyar Bancorp, Inc.
PERSONS IN NON-QUALIFIED STATES
We will make reasonable efforts to comply with the securities laws of
all states in the United States in which persons entitled to subscribe for stock
under the plan of reorganization reside. However, we are not required to offer
stock in the subscription offering to any person who resides in a foreign
country or who resides in a state of the United States in which (1) only a small
number of persons otherwise eligible to subscribe for shares of common stock
reside; (2) the granting of subscription rights or the offer or sale of shares
to such person would require that we or our officers or directors register as a
broker dealer, salesman or selling agent under the securities laws of the state,
or register or otherwise qualify the subscription rights or common stock for
sale or qualify as a foreign corporation or file a consent to service of
process; or (3) we determine that compliance with that state's securities laws
would be impracticable for reasons of cost or otherwise.
PLAN OF DISTRIBUTION AND MARKETING ARRANGEMENTS
Offering materials have been mailed to persons with subscription rights,
with additional copies made available through our Stock Information Center. All
prospective purchasers in the subscription offering and the community offering
are to send payment directly to Magyar Bank, where such funds will be held in a
segregated account at Magyar Bank or, at our discretion, another federally
insured depository institution, and not released until the stock offering is
completed or terminated.
To assist in the marketing of the common stock, we have retained Ryan
Beck & Co., Inc., which is a broker-dealer registered with the NASD. Ryan Beck &
Co., Inc. will assist us in the stock offering as follows:
(i) serving as our financial advisor for the stock offering;
(ii) educating our employees regarding the stock offering;
(iii) providing administrative services and managing the Stock
Information Center; and
(iv) coordinating proxy solicitation and selling efforts and
soliciting orders for shares of common stock.
For these services, Ryan Beck & Co., Inc. will receive a sales fee equal to 1.0%
of the dollar amount of the shares of common stock sold in the subscription and
community offerings, except that no fee will be payable to Ryan Beck & Co., Inc.
with respect to shares purchased by officers, directors and employees or their
immediate families, the Charitable Foundation, or shares purchased by our
tax-qualified and non-qualified employee benefit plans. Ryan Beck & Co., Inc.
will also receive a $25,000 administrative service fee, which will be credited
toward the sales fee. If there is a syndicated community offering, Ryan Beck &
Co., Inc. will receive a management fee of 1.0% of the aggregate dollar amount
of shares of common stock
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sold in the syndicated community offering, which fee, along with the fee payable
directly to the NASD member firms participating in the syndicated community
offering (including Ryan Beck & Co., Inc.) shall not exceed 6.0% of the
aggregate dollar amount of the shares of common stock sold in the syndicated
community offering.
We also will reimburse Ryan Beck & Co., Inc. for its reasonable expenses
associated with its marketing efforts (including legal fees), up to a maximum of
$55,000 plus legal expenses. We will indemnify Ryan Beck & Co., Inc. against
liabilities and expenses (including legal fees) incurred in connection with
certain claims or litigation arising out of or based upon untrue statements or
omissions contained in the offering material for the common stock, including
liabilities under the Securities Act of 1933.
Our directors and executive officers may participate in the solicitation
of offers to purchase shares of common stock. Other trained employees may
participate in the stock offering in ministerial capacities, providing clerical
work in effecting a sales transaction or answering questions of a ministerial
nature. Other questions of prospective purchasers will be directed to executive
officers or registered representatives of Ryan Beck & Co., Inc. We will rely on
Rule 3a4-1 of the Exchange Act to permit officers, directors, and employees to
participate in the sale of common stock. No officer, director or employee will
be compensated for his or her participation by the payment of commissions or
other remuneration based either directly or indirectly on the transactions in
the common stock.
HOW WE DETERMINED STOCK PRICING AND THE NUMBER OF SHARES TO BE ISSUED
The plan of reorganization and federal regulations require that the
aggregate purchase price of the common stock sold in the stock offering be based
on the appraised pro forma market value of the common stock, as determined on
the basis of an independent valuation. We retained FinPro, Inc. to make the
independent valuation. FinPro, Inc. will receive a fee of $45,000 for business
planning and appraisal services, plus reasonable out-of-pocket expenses. We have
agreed to indemnify FinPro, Inc. and its employees and affiliates against
certain losses (including any losses in connection with claims under the federal
securities laws) arising out of its services as appraiser, except where FinPro,
Inc.'s liability results from its negligence or bad faith. Over the past three
years, we have engaged FinPro, Inc. to perform: strategic planning, market
feasibility, CRA and other general consulting services. The revenue derived from
these engagements was immaterial to FinPro, Inc.'s gross revenues during such
time periods. FinPro, Inc. received no fees from Magyar Bancorp, Inc. in 2005
except for those fees related to the business planning and appraisal services.
The independent valuation was prepared by FinPro, Inc. in reliance upon
the information contained in the prospectus, including the financial statements.
FinPro, Inc. also considered the following factors, among others:
o the present and projected operating results and financial
condition of Magyar Bank and the economic and demographic
conditions in our existing market area;
o historical, financial and other information relating to Magyar
Bank;
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o a comparative evaluation of the operating and financial
statistics of Magyar Bank with those of other publicly traded
subsidiaries of holding companies and mutual holding companies;
o the impact of the stock offering on our stockholders' equity and
earnings potential;
o the proposed dividend policy of Magyar Bancorp, Inc.;
o the trading market for securities of comparable institutions and
general conditions in the market for such securities; and
o the issuance of shares to the Charitable Foundation.
On the basis of the foregoing, FinPro, Inc. advised us that as of
September 2, 2005, the estimated pro forma market value of the common stock on a
fully converted basis ranged from a minimum of $38.1 million to a maximum of
$51.5 million, with a midpoint of $44.8 million (the estimated valuation range).
The board determined to offer the shares of common stock in the stock offering
at the purchase price of $10.00 per share and that 44.20% of the shares issued
should be held by purchasers in the stock offering and 54.03% should be held by
Magyar Bancorp, MHC after giving effect to the issuance of shares to the
Charitable Foundation. Based on the estimated valuation range and the purchase
price of $10.00 per share, the number of shares of common stock that Magyar
Bancorp, Inc. will sell in the stock offering will range from 1,683,000 shares
to 2,277,000 shares, with a midpoint of 1,980,000 shares, and the number of
shares to be issued to Magyar Bancorp, MHC will range from 2,057,000 shares to
2,783,000 shares, with a midpoint of 2,420,000 shares.
FinPro, Inc. determined that Magyar Bancorp, Inc. should be priced at a
discount to the peer group on a tangible book value basis because of Magyar
Bancorp, Inc.'s weaker earnings, lower expected trading liquidity and lower
expected dividend levels. FinPro, Inc. also considered the pricing and after
market performance of other recent mutual holding company stock offerings in
determining the appropriateness of the pricing discount.
The Board reviewed the independent valuation and, in particular,
considered (1) our financial condition and results of operations for the nine
months ended June 30, 2005 and for the year ended September 30, 2004, (2)
financial comparisons to other financial institutions, and (3) stock market
conditions generally and, in particular, for financial institutions, all of
which are set forth in the independent valuation. The Board also reviewed the
methodology and the assumptions used by FinPro, Inc. in preparing the
independent valuation. The estimated valuation range may be amended, if
necessitated by subsequent developments in our financial condition or market
conditions generally.
Following commencement of the subscription offering, the maximum of the
estimated valuation range may be increased by up to 15%, to $59.2 million and
the maximum number of shares that will be outstanding immediately following the
stock offering may be increased by up to 15% to 5,923,742 shares. Under such
circumstances, the number of shares sold in the stock offering will be increased
to 2,618,550 shares and the number of shares to be issued to Magyar
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Bancorp, MHC will be increased to 3,200,450 shares. The increase in the
valuation range may occur to reflect changes in market and financial conditions
or demand for the shares without the resolicitation of subscribers. The minimum
of the estimated valuation range and the minimum of the offering range may not
be decreased without a resolicitation of subscribers. The purchase price of
$10.00 per share will remain fixed. See "--Limitations on Purchase of Shares" as
to the method of distribution and allocation of additional shares of common
stock that may be issued in the event of an increase in the offering range to
fill unfilled orders in the subscription and community offerings.
The independent valuation is not intended, and must not be construed, as
a recommendation of any kind as to the advisability of purchasing shares of
common stock. FinPro, Inc. did not independently verify the financial statements
and other information provided by Magyar Bancorp, Inc., nor did FinPro, Inc.
value independently the assets or liabilities of Magyar Bank. The independent
valuation considers Magyar Bancorp, Inc. as a going concern and should not be
considered as an indication of its liquidation value. Moreover, because the
valuation is necessarily based upon estimates and projections of a number of
matters, all of which are subject to change from time to time, no assurance can
be given that persons purchasing shares in the stock offering will thereafter be
able to sell such shares at prices at or above the purchase price.
The independent valuation will be updated at the time of the completion
of the stock offering. If the update to the independent valuation at the
conclusion of the stock offering results in an increase in the pro forma market
value of the common stock to more than $59.2 million or a decrease in the pro
forma market value to less than $38.1 million, then Magyar Bancorp, Inc., may
terminate the plan of reorganization and return all funds promptly, with
interest on payments made by check, certified or teller's check, bank draft or
money order, extend or hold a new subscription offering, community offering, or
both, establish a new offering range, commence a resolicitation of subscribers
or take such other actions as may be permitted, in order to complete the stock
offering. In the event that a resolicitation is commenced, unless an affirmative
response is received within a reasonable period of time, all funds will be
promptly returned to investors as described above.
An increase in the independent valuation and the number of shares to be
issued in the stock offering would decrease both a subscriber's ownership
interest and Magyar Bancorp, Inc.'s pro forma earnings and stockholders' equity
on a per share basis while increasing pro forma earnings and stockholders'
equity on an aggregate basis. A decrease in the independent valuation and the
number of shares of common stock to be issued in the stock offering would
increase both a subscriber's ownership interest and Magyar Bancorp, Inc.'s pro
forma earnings and stockholders' equity on a per share basis while decreasing
pro forma net income and stockholders' equity on an aggregate basis. For a
presentation of the effects of such changes, see "Pro Forma Data."
Copies of the appraisal report of FinPro, Inc. and the detailed
memorandum of the appraiser setting forth the method and assumptions for such
appraisal are available for inspection at the main office of Magyar Bank and the
other locations specified under "Where You Can Find More Information."
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No sale of shares of common stock may occur unless, prior to such sale,
FinPro, Inc. confirms to Magyar Bank that, to the best of its knowledge, nothing
of a material nature has occurred that, taking into account all relevant
factors, would cause FinPro, Inc. to conclude that the independent valuation is
incompatible with its estimate of the pro forma market value of the common stock
of Magyar Bancorp, Inc. at the conclusion of the stock offering. Any change that
would result in an aggregate purchase price that is below the minimum or more
than 15% above the maximum of the estimated valuation range will be considered
incompatible. If such confirmation is not received, we may extend the stock
offering, reopen the stock offering or commence a new stock offering, establish
a new estimated valuation range or commence a resolicitation of all purchasers
to complete the stock offering.
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING SHARES
PROSPECTUS DELIVERY. To ensure that each purchaser receives a prospectus
at least 48 hours prior to the end of the stock offering, in accordance with
Rule 15c2-8 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), no prospectus will be mailed later than five days or hand delivered any
later than two days prior to the end of the stock offering. Execution of the
order form will confirm receipt or delivery of a prospectus in accordance with
Rule 15c2-8. Order forms will be distributed only with or preceded by a
prospectus. Neither we nor Ryan Beck & Co., Inc. is obligated to deliver a
prospectus and an order form by any means other than the U.S. Postal Service.
EXPIRATION DATE. The stock offering will expire at 12:00 noon, Eastern
time, on December 16, 2005, unless extended by us for up to 45 days following
the expiration date of the subscription offering, which is January 30, 2006 (the
"expiration date"). We are not required to give purchasers notice of any
extension unless the expiration date is later than January 30, 2006, in which
event purchasers will be given the right to increase, decrease, confirm, or
rescind their orders. No extension may go beyond January 3, 2008, which is two
years after the date of the special meeting of depositors called to consider and
vote upon the reorganization.
USE OF ORDER FORMS. In order to purchase shares of common stock in the
subscription and community offering, each purchaser must complete an order form,
as more fully described below. Any person receiving an order form who desires to
purchase shares of common stock may do so by delivering to the Stock Information
Center a properly executed and completed order form, together with full payment
for the shares of common stock purchased. The order form must be received, not
post-marked, prior to 12:00 noon, Eastern time, on December 16, 2005. You may
submit your stock order form by mail using the return envelope provided, by
overnight courier, or by bringing your stock order form to our Stock Information
Center. Stock order forms may not be delivered to Magyar Bank branch offices.
Each person ordering shares of common stock is required to represent that he or
she is purchasing such shares for his or her own account. Our interpretation of
the terms and conditions of the plan of reorganization and of the acceptability
of the order forms will be final.
To ensure that eligible account holders, supplemental eligible account
holders and voting depositors are properly identified as to their stock purchase
priorities, such parties must list all deposit accounts on the order form giving
all names on each deposit account and the account numbers at the applicable
eligibility date. Failure to list all of your account relationships could
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result in a loss of all or part of your share allocation in the event of an
oversubscription. Should an oversubscription result in an allocation of shares,
the allocation of shares will be completed in accordance with the plan of
reorganization.
WE ARE NOT OBLIGATED TO ACCEPT AN ORDER SUBMITTED ON PHOTOCOPIED OR
TELECOPIED ORDER FORMS. ORDERS CANNOT AND WILL NOT BE ACCEPTED WITHOUT THE
EXECUTION OF THE CERTIFICATION APPEARING ON THE ORDER FORM. We are not required
to notify subscribers of incomplete or improperly executed order forms and we
have the right to waive or permit the correction of incomplete or improperly
executed order forms as long as it is performed before the expiration of the
stock offering. We do not represent, however, that we will do so, and we have no
affirmative duty to notify any prospective subscriber of any such defects.
PAYMENT FOR SHARES. Payment for all shares will be required to accompany
a completed order form for the purchase to be valid. Payment for shares may be
made by check, money order, or authorization of withdrawal from a deposit
account maintained with Magyar Bank. Third party checks will not be accepted as
payment for a subscriber's order. Appropriate means by which such withdrawals
may be authorized are provided in the order forms.
Once such a withdrawal amount has been authorized, a hold will be placed
on such funds, making them unavailable to the depositor until the stock offering
has been completed or terminated. In the case of payments authorized to be made
through withdrawal from deposit accounts, all funds authorized for withdrawal
will continue to earn interest at the contract rate until the stock offering is
completed or terminated.
Interest penalties for early withdrawal applicable to certificate of
deposit accounts at Magyar Bank will not apply to withdrawals authorized for the
purchase of shares of common stock. However, if a withdrawal results in a
certificate of deposit account with a balance less than the applicable minimum
balance requirement, the certificate of deposit will be canceled at the time of
withdrawal without penalty, and the remaining balance will earn interest at our
passbook rate subsequent to the withdrawal.
Payments received by Magyar Bank will be placed in a segregated savings
account at Magyar Bank and will be paid interest at our passbook rate from the
date payment is received until the stock offering is completed or terminated.
Such interest will be paid by check on all funds held, including funds accepted
as payment for shares of common stock, promptly following completion or
termination of the stock offering.
The employee stock ownership plan will not be required to pay for the
shares of common stock it intends to purchase until consummation of the stock
offering, provided that there is a loan commitment to lend to the employee stock
ownership plan the amount of funds necessary to purchase the number of shares
ordered.
You may not designate direct withdrawal of funds from a Magyar Bank
individual retirement account. By regulation, our individual retirement accounts
do not permit investment in our shares of common stock. Persons with individual
retirement accounts maintained with Magyar Bank must transfer their accounts to
a self-directed individual retirement account with an unaffiliated trustee (such
as a brokerage firm) in order to purchase shares of common stock in
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the stock offering. There will be no early withdrawal or Internal Revenue
Service interest penalties for transfers. The new trustee will hold the shares
of common stock in a self-directed account in the same manner as we now hold the
depositor's individual retirement account funds. An annual administrative fee
may be payable to the new trustee. Assistance on how to transfer individual
retirement accounts maintained at Magyar Bank can be obtained from the Stock
Information Center. Depositors interested in using funds in an individual
retirement account maintained at Magyar Bank, or elsewhere, should contact the
Stock Information Center as soon as possible. Whether such funds can be used may
depend on limitations imposed by the institutions where funds are currently
held. We cannot guarantee that you will be able to use such funds.
Once submitted, an order cannot be modified or revoked unless the stock
offering is terminated or extended beyond January 30, 2006.
We will have the right, in our sole discretion, to permit institutional
investors to submit irrevocable orders together with the legally binding
commitment for payment and to thereafter pay for the shares of common stock for
which they subscribe in the community offering at any time prior to 48 hours
before the completion of the reorganization. This payment may be made by wire
transfer.
DELIVERY OF STOCK CERTIFICATES. Certificates representing shares of
common stock issued in the stock offering will be mailed to the persons entitled
thereto at the registration address noted on the order form as soon as
practicable following consummation of the stock offering. Any certificates
returned as undeliverable will be held by us until claimed by persons legally
entitled thereto or otherwise disposed of in accordance with applicable law.
Although the shares of common stock will have begun trading, until certificates
for the shares of common stock are available and delivered to purchasers,
purchasers may not be able to sell the shares of common stock that they ordered.
RESTRICTIONS ON PURCHASE OR TRANSFER OF STOCK BY DIRECTORS AND OFFICERS
All shares of the common stock purchased by our directors and officers
in the stock offering will be subject to the restriction that such shares may
not be sold or otherwise disposed of for value for a period of one year
following the date of purchase, except for any disposition of such shares (1)
following the death of the original purchaser or (2) by reason of an exchange of
securities in connection with a merger or acquisition approved by the applicable
regulatory authorities. Sales of shares of common stock by Magyar Bancorp,
Inc.'s directors and officers will also be subject to certain insider trading
and other transfer restrictions under the federal securities laws. See
"Supervision and Regulation--Federal Securities Laws."
Purchases of outstanding shares of common stock of Magyar Bancorp, Inc.
by directors, executive officers, or any person who was an executive officer or
director of Magyar Bank after adoption of the plan of reorganization, and their
associates during the three-year period following the stock offering may be made
only through a broker or dealer registered with the Securities and Exchange
Commission. This restriction does not apply, however, to negotiated transactions
involving more than 1% of Magyar Bancorp, Inc.'s outstanding common stock or to
the purchase
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of shares of common stock under the stock option plan expected to be implemented
subsequent to completion of the stock offering.
Magyar Bancorp, Inc. has filed with the Securities and Exchange
Commission a registration statement under the Securities Act of 1933, as
amended, for the registration of the shares of common stock to be issued in the
stock offering. The registration under the Securities Act of shares of common
stock to be issued in the stock offering does not cover the resale of the shares
of common stock. Shares of common stock purchased by persons who are not
affiliates of Magyar Bancorp, Inc. may be resold without registration. Shares
purchased by an affiliate of Magyar Bancorp, Inc. will have resale restrictions
under Rule 144 of the Securities Act of 1933. If Magyar Bancorp, Inc. meets the
current public information requirements of Rule 144 under the Securities Act of
1933, each affiliate of Magyar Bancorp, Inc. who complies with the other
conditions of Rule 144, including those that require the affiliate's sale to be
aggregated with those of certain other persons, would be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of 1% of the outstanding shares of Magyar
Bancorp, Inc. common stock or the average weekly volume of trading in the shares
of common stock during the preceding four calendar weeks. Provision may be made
in the future by Magyar Bancorp, Inc. to permit affiliates to have their shares
of common stock registered for sale under the Securities Act of 1933 under
certain circumstances.
Under guidelines of the NASD, members of the NASD and their associates
face certain reporting requirements upon purchase of the securities.
INTERPRETATION, AMENDMENT AND TERMINATION
All interpretations of the plan of reorganization by the Board of
Directors will be final. The plan of reorganization provides that, if deemed
necessary or desirable by the Board of Directors of Magyar Bancorp, Inc., the
plan may be substantially amended by a majority vote of the Board of Directors
as a result of comments from regulatory authorities or otherwise, at any time.
The plan of reorganization may be terminated by a majority vote of the Board of
Directors at any time.
STOCK INFORMATION CENTER
If you have any questions regarding the stock offering, please call the
Stock Information Center at (732) 214-2092, from 10:00 a.m. to 4:00 p.m.,
Eastern time, Monday through Friday. The Stock Information Center is located at
our main office, 400 Somerset Street, New Brunswick, New Jersey.
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MAGYAR BANK CHARITABLE FOUNDATION
GENERAL
In furtherance of our commitment to our local community, the plan of
reorganization and stock issuance provides that we will establish Magyar Bank
Charitable Foundation as a non-stock, nonprofit Delaware corporation in
connection with the stock offering. The Charitable Foundation will be funded
with cash and shares of Magyar Bancorp, Inc. common stock, as further described
below. By further enhancing our visibility and reputation in our local
community, we believe that the Charitable Foundation will enhance the long-term
value of our community banking franchise. The stock offering presents us with a
unique opportunity to provide a substantial and continuing benefit to our
community and to receive the associated tax benefits.
PURPOSE OF THE CHARITABLE FOUNDATION
In connection with the closing of the stock offering, we intend to
contribute $500,000 in cash and issue up to 1.77% of the shares of common stock
issued in the stock offering to the Charitable Foundation. The total aggregate
contribution to the Charitable Foundation will equal 6.53% of the gross proceeds
of the stock offering at the midpoint of the offering range. The purpose of the
Charitable Foundation is to provide financial support to charitable
organizations in the communities in which we operate and to enable our
communities to share in our long-term growth. The Charitable Foundation will be
dedicated completely to community activities and the promotion of charitable
causes, focusing particularly on the issues of education, health and human
services, affordable housing and youth programs and may be able to support such
activities in ways that are not presently available to us. The Charitable
Foundation plans to support non-profit organizations except for political or
religious organizations that focus on the above mentioned issues and service our
market area. Accordingly, the Charitable Foundation will support our ongoing
obligations to the community under the Community Reinvestment Act. Magyar Bank
received a "satisfactory" rating in its most recent Community Reinvestment Act
examination by the Federal Deposit Insurance Corporation.
Funding the Charitable Foundation with shares of Magyar Bancorp, Inc.
common stock is also intended to allow our community to share in the potential
growth and success of Magyar Bank after the stock offering is completed because
the Charitable Foundation will benefit directly from increases in the value of
Magyar Bancorp, Inc. common stock. In addition, the Charitable Foundation will
maintain close ties with Magyar Bank, thereby forming a partnership within the
communities in which Magyar Bank operates.
STRUCTURE OF THE CHARITABLE FOUNDATION
The Charitable Foundation will be incorporated under Delaware law as a
non-stock, nonprofit corporation. The certificate of incorporation of the
Charitable Foundation will provide that the corporation is organized exclusively
for charitable purposes as set forth in Section 501(c)(3) of the Internal
Revenue Code. The Charitable Foundation's certificate of incorporation will
further provide that no part of the net earnings of the Charitable Foundation
will inure to the benefit of, or be distributable to, its directors, officers or
members.
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We have selected three of our current directors, Salvatore J. Romano,
Elizabeth E. Hance and Joseph J. Lukacs, Jr. to serve on the initial Board of
Directors of the Charitable Foundation. We also will select one person to serve
on the initial Board of Directors who will not be affiliated with Magyar Bank
but who will have experience with local charitable organizations and grant
making. For five years after the stock offering, one seat on the Charitable
Foundation's Board of Directors will be reserved for a person from our local
community who has experience with local community charitable organizations and
grant making and who is not one of our officers, directors or employees, and one
seat on the Charitable Foundation's Board of Directors will be reserved for one
of Magyar Bank's directors.
The business experience of our current directors is described in
"Management."
The Board of Directors of the Charitable Foundation will be responsible
for establishing its grant and donation policies, consistent with the purposes
for which it was established. As directors of a nonprofit corporation, directors
of the Charitable Foundation will at all times be bound by their fiduciary duty
to advance the Charitable Foundation's charitable goals, to protect its assets
and to act in a manner consistent with the charitable purposes for which the
Charitable Foundation is established. The directors of the Charitable Foundation
also will be responsible for directing the activities of the Charitable
Foundation, including the management and voting of the shares of common stock of
Magyar Bancorp, Inc. held by the Charitable Foundation. All shares of common
stock held by the Charitable Foundation must be voted in the same ratio as all
other shares of the common stock on all proposals considered by stockholders of
Magyar Bancorp, Inc.
The Charitable Foundation's place of business will be located at our
administrative offices. The Board of Directors of the Charitable Foundation will
appoint such officers and employees as may be necessary to manage its
operations. To the extent applicable, we will comply with the affiliates
restrictions set forth in Sections 23A and 23B of the Federal Reserve Act
regulations governing transactions between Magyar Bank and the Charitable
Foundation.
The Charitable Foundation will receive working capital from the initial
cash contribution of $500,000 and:
(1) any dividends that may be paid on Magyar Bancorp, Inc.'s shares
of common stock in the future;
(2) within the limits of applicable federal and state laws, loans
collateralized by the shares of common stock; or
(3) the proceeds of the sale of any of the shares of common stock in
the open market from time to time.
As a private foundation under Section 501(c)(3) of the Internal Revenue
Code, the Charitable Foundation will be required to distribute annually in
grants or donations a minimum of 5% of the average fair market value of its net
investment assets. One of the conditions imposed on the gift of common stock is
that the amount of common stock that may be sold by the Charitable Foundation in
any one year may not exceed 5% of the average market value of the assets held by
the Charitable Foundation, except where the Board of Directors of the Charitable
Foundation
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determines that the failure to sell an amount of common stock greater than such
amount would result in a long-term reduction of the value of its assets and/or
would otherwise jeopardize its capacity to carry out its charitable purposes.
TAX CONSIDERATIONS
Our special counsel, Luse Gorman Pomerenk & Schick, P.C., has advised us
that an organization created for the above purposes should qualify as a Section
501(c)(3) exempt organization under the Internal Revenue Code and should be
classified as a private foundation. The Charitable Foundation will submit a
timely request to the Internal Revenue Service to be recognized as an exempt
organization. As long as the Charitable Foundation files its application for
tax-exempt status within 15 months from the date of its organization, and
provided the Internal Revenue Service approves the application, its effective
date as a Section 501(c)(3) organization will be the date of its organization.
Luse Gorman Pomerenk & Schick, P.C., however, has not rendered any advice on
whether the Charitable Foundation's tax exempt status will be affected by the
regulatory requirement that all shares of common stock of Magyar Bancorp, Inc.
held by the Charitable Foundation must be voted in the same ratio as all other
outstanding shares of common stock of Magyar Bancorp, Inc. on all proposals
considered by stockholders of Magyar Bancorp, Inc.
Magyar Bancorp, Inc. and Magyar Bank are authorized by federal law to
make charitable contributions. We believe that the stock offering presents a
unique opportunity to establish and fund a charitable foundation given the
substantial amount of additional capital being raised. In making such a
determination, we considered the dilutive impact to our stockholders of the
contribution of shares of common stock to the Charitable Foundation. We believe
that the size of the contribution to the Charitable Foundation is justified
given Magyar Bank's capital position and its earnings, the substantial
additional capital being raised in the stock offering and the potential benefits
of the Charitable Foundation to our community. See "Capitalization," "Regulatory
Capital Compliance," and "Comparison of Valuation and Pro Forma Information With
and Without the Charitable Foundation." The amount of the contribution will not
adversely affect our financial condition. We therefore believe that the amount
of the charitable contribution is reasonable given our pro forma capital
position, and it does not raise safety and soundness concerns.
We have received an opinion from Luse Gorman Pomerenk & Schick, P.C.
that our contribution of shares of Magyar Bancorp, Inc. common stock to the
Charitable Foundation should not constitute an act of self-dealing and that we
should be entitled to a deduction in the amount of the fair market value of the
stock at the time of the contribution. We are permitted to deduct charitable
contributions only in an amount up to 10% of our annual taxable income in any
one year. We are permitted under the Internal Revenue Code to carry over the
excess contribution to the five-year period following the year of the
contribution to the Charitable Foundation. We estimate that all or substantially
all of the contribution should be deductible over the six-year period (I.E., the
year in which the contribution is made and the succeeding five-year period).
However, we do not have any assurance that the Internal Revenue Service will
grant tax-exempt status to the Charitable Foundation. Furthermore, even if the
contribution is deductible, we may not have sufficient earnings to be able to
use the deduction in full. We do not expect to make any further contributions to
the Charitable Foundation within the first five
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years following the initial contribution, unless such contributions would be
deductible under the Internal Revenue Code. Any such decisions would be based on
an assessment of, among other factors, our financial condition at that time, the
interests of our stockholders and depositors, and the financial condition and
operations of the Charitable Foundation.
Although we have received an opinion from Luse Gorman Pomerenk & Schick,
P.C. that we should be entitled to a deduction for the charitable contribution,
there can be no assurances that the Internal Revenue Service will recognize the
Charitable Foundation as a Section 501(c)(3) exempt organization or that the
deduction will be permitted. In such event, our contribution to the Charitable
Foundation would be expensed without tax benefit, resulting in a reduction in
earnings in the year in which the Internal Revenue Service makes such a
determination.
As a private foundation, earnings and gains, if any, from the sale of
common stock or other assets are exempt from federal and state income taxation.
However, investment income, such as interest, dividends and capital gains, is
generally taxed at a rate of 2.0%. The Charitable Foundation will be required to
file an annual return with the Internal Revenue Service within four and one-half
months after the close of its fiscal year. The Charitable Foundation will be
required to make its annual return available for public inspection. The annual
return for a private foundation includes, among other things, an itemized list
of all grants made or approved, showing the amount of each grant, the recipient,
any relationship between a grant recipient and the foundation's managers and a
concise statement of the purpose of each grant.
REGULATORY REQUIREMENTS IMPOSED ON THE CHARITABLE FOUNDATION
The Federal Reserve Board has imposed the following requirements on the
establishment of the Charitable Foundation:
o the Charitable Foundation cannot acquire additional common stock
of Magyar Bancorp, Inc. without notifying the Federal Reserve
Board; and
o the Charitable Foundation will be considered an affiliate of
Magyar Bancorp, Inc. and Magyar Bancorp, MHC for purposes of
Regulation W of the Board of Governors of the Federal Reserve
System, 12 C.F.R. ss.223.
RESTRICTIONS ON THE ACQUISITION OF
MAGYAR BANCORP, INC. AND MAGYAR BANK
GENERAL
The principal federal regulatory restrictions which affect the ability
of any person, firm or entity to acquire Magyar Bancorp, Inc. or Magyar Bank or
their respective capital stock are described below. Also discussed are certain
provisions in Magyar Bancorp, Inc.'s charter and bylaws which may be deemed to
affect the ability of a person, firm or entity to acquire Magyar Bancorp, Inc.
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FEDERAL AND STATE LAW
FEDERAL CHANGE IN BANK CONTROL ACT. Federal law provides that no person,
acting directly or indirectly or through or in concert with one or more other
persons, may acquire control of a bank holding company unless the Federal
Reserve Board has been given 60 days prior written notice. For this purpose, the
term "control" means the acquisition of the ownership, control, or holding of
the power to vote, 25% or more of any class of a bank holding company's voting
stock, and the term "person" includes an individual, corporation, partnership,
and various other entities. In addition, an acquiring person is presumed to
acquire control if the person acquires the ownership, control or holding of the
power to vote of 10% or more of any class of the holding company's voting stock
if (a) the bank holding company's shares are registered pursuant to Section 12
of the Exchange Act or (b) no other person will own, control or hold the power
to vote a greater percentage of that class of voting securities. Accordingly,
the prior approval of the Federal Reserve Board would be required before any
person may acquire 10% or more of the common stock of Magyar Bancorp, Inc.
The Federal Reserve Board may prohibit an acquisition of control if:
o it would result in a monopoly or substantially lessen
competition;
o the financial condition of the acquiring person might jeopardize
the financial stability of the institution; or
o the competence, experience or integrity of the acquiring person
indicates that it would not be in the interest of the depositors
or of the public to permit the acquisition of control by such
person.
FEDERAL BANK HOLDING COMPANY ACT. Federal law provides that no company
may acquire control of a bank directly or indirectly without the prior approval
of the Federal Reserve Board. Any company that acquires control of a bank
becomes a "bank holding company" subject to registration, examination and
regulation by the Federal Reserve Board. Pursuant to federal regulations, the
term "company" is defined to include banks, corporations, partnerships,
associations, and certain trusts and other entities, and "control" of a bank is
deemed to exist if a company has voting control, directly or indirectly, of 25%
or more of any class of a bank's voting stock, and may be found to exist if a
company controls in any manner the election of a majority of the directors of
the bank or has the power to exercise a controlling influence over the
management or policies of the bank. In addition, a bank holding company must
obtain Federal Reserve Board approval prior to acquiring voting control of more
than 5% of any class of voting stock of a bank or another bank holding company.
An acquisition of control of a bank that requires the prior approval of
the Federal Reserve Board under the BHCA is not subject to the notice
requirements of the Change in Bank Control Act. Accordingly, the prior approval
of the Federal Reserve Board under the BHCA would be required (a) before any
bank holding company may acquire 5% or more of the common stock of Magyar
Bancorp, Inc. and (b) before any other company may acquire 25% or more of the
common stock of Magyar Bancorp, Inc.
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NEW JERSEY RESTRICTIONS. The New Jersey Banking Act requires prior
approval of the Commissioner before any person may acquire a New Jersey bank
holding company, such as Magyar Bancorp, Inc., except as otherwise expressly
permitted by federal law. For this purpose, the term "person" is defined broadly
to mean a natural person or a corporation, company, partnership, or other forms
of organized entities. The term "acquire" is defined differently for an existing
bank holding company and for other companies or persons. A bank holding company
will be treated as "acquiring" a New Jersey bank holding company if the bank
holding company acquires more than 5% of any class of the voting shares of the
bank holding company. Any other person will be treated as "acquiring" a New
Jersey bank holding company if it acquires ownership or control of more than 25%
of any class of the voting shares of the bank holding company.
THE MUTUAL HOLDING COMPANY STRUCTURE
Under applicable law and our governing corporate instruments, at least
50.1% of Magyar Bancorp, Inc.'s voting shares must be owned by Magyar Bancorp,
MHC. Magyar Bancorp, MHC will be controlled by its Board of Directors, who will
consist of persons who also are members of the Board of Directors of Magyar
Bancorp, Inc. and Magyar Bank. Magyar Bancorp, MHC will be able to elect all
members of the Board of Directors of Magyar Bancorp, Inc., and as a general
matter, will be able to control the outcome of all matters presented to the
stockholders of Magyar Bancorp, Inc. for resolution by vote, except for matters
that require a vote greater than a majority. Magyar Bancorp, MHC, acting through
its Board of Directors, will be able to control the business and operations of
Magyar Bancorp, Inc. and Magyar Bank, and will be able to prevent any challenge
to the ownership or control of Magyar Bancorp, Inc. by minority stockholders.
Accordingly, a change in control of Magyar Bancorp, Inc. and Magyar Bank cannot
occur unless Magyar Bancorp, MHC first converts to the stock form of
organization. It is not anticipated that a conversion of the Magyar Bancorp, MHC
will occur in the foreseeable future.
CORPORATE GOVERNANCE PROVISIONS IN THE CERTIFICATE OF INCORPORATION AND BYLAWS
OF MAGYAR BANCORP, INC.
The following discussion is a summary of certain provisions of the
certificate of incorporation and bylaws of Magyar Bancorp, Inc. that relate to
corporate governance. The description is necessarily general and qualified by
reference to the certificate of incorporation and bylaws.
CLASSIFIED BOARD OF DIRECTORS. The Board of Directors of Magyar Bancorp,
Inc. is required by the bylaws to be divided into three staggered classes. Each
year one class will be elected by stockholders of Magyar Bancorp, Inc. for a
three-year term. A classified board promotes continuity and stability of
management of Magyar Bancorp, Inc., but makes it more difficult for stockholders
to change a majority of the directors because it generally takes at least two
annual elections of directors for this to occur.
AUTHORIZED BUT UNISSUED SHARES OF CAPITAL STOCK. Following the stock
offering, Magyar Bancorp, Inc. will have authorized but unissued shares of
preferred stock and common stock. See "Description of Capital Stock of Magyar
Bancorp, Inc." Although these shares could be used by
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the Board of Directors of Magyar Bancorp, Inc. to make it more difficult or to
discourage an attempt to obtain control of Magyar Bancorp, Inc. through a
merger, tender offer, proxy contest or otherwise, it is unlikely that we would
use or need to use shares for these purposes since Magyar Bancorp, MHC owns a
majority of the common stock.
HOW SHARES ARE VOTED. Magyar Bancorp, Inc.'s certificate of
incorporation provides that there will not be cumulative voting by stockholders
for the election of Magyar Bancorp, Inc.'s directors. No cumulative voting
rights means that Magyar Bancorp, MHC, as the holder of a majority of the shares
eligible to be voted at a meeting of stockholders, may elect all directors of
Magyar Bancorp, Inc. to be elected at that meeting. This could prevent minority
stockholder representation on Magyar Bancorp, Inc.'s Board of Directors.
RESTRICTIONS ON CALL OF SPECIAL MEETINGS. The certificate of
incorporation and bylaws provide that special meetings of stockholders can be
called only by the Board of Directors pursuant to a resolution adopted by a
majority of the Board of Directors. Stockholders are not authorized to call a
special meeting of stockholders.
LIMITATION OF VOTING RIGHTS. The certificate of incorporation provides
that in no event will any record owner of any outstanding common stock which is
beneficially owned, directly or indirectly, by a person who beneficially owns
more than 10% of the then outstanding shares of common stock, be entitled or
permitted to vote any of the shares held in excess of the 10% limit. This
restriction does not apply to Magyar Bancorp, MHC or to any tax-qualified
employee stock benefit plan established by Magyar Bancorp, Inc. or Magyar Bank.
RESTRICTIONS ON REMOVING DIRECTORS FROM OFFICE. The certificate of
incorporation provides that directors may only be removed for cause, and only by
the affirmative vote of the holders of at least 80% of the voting power of all
of our then-outstanding stock entitled to vote (after giving effect to the
limitation on voting rights discussed above in "--Limitation of Voting Rights.")
PROCEDURES FOR STOCKHOLDER NOMINATIONS. The bylaws of Magyar Bancorp,
Inc. provide an advance notice procedure for certain business, or nominations to
the Board of Directors, to be brought before an annual meeting of stockholders.
In order for a stockholder to properly bring business before an annual meeting,
or to propose a nominee to the Board of Directors, the stockholder must give
written notice to the Secretary of Magyar Bancorp, Inc. not less than 90 days
prior to the date of Magyar Bancorp, Inc.'s proxy materials for the preceding
year's annual meeting; provided, however, that if the date of the annual meeting
is advanced more than 30 days prior to or delayed by more than 30 days after the
anniversary of the preceding year's annual meeting, notice by the stockholder to
be timely must be so delivered not later than the close of business on the tenth
day following the day on which public announcement of the date of such annual
meeting is first made. As to the first annual meeting of stockholders, to be
timely notice must be provided no later than the close of business on the tenth
day following the day on which public announcement of the date of the meeting is
first made. The notice must include the stockholder's name, record address, and
number of shares owned, describe briefly the proposed business, the reasons for
bringing the business before the annual meeting, and any material interest of
the stockholder in the proposed business. In the case of nominations to the
Board of Directors, certain information regarding the nominee must be provided.
Nothing in this
152
paragraph shall be deemed to require Magyar Bancorp, Inc. to include in its
proxy statement and proxy relating to an annual meeting any stockholder proposal
that does not meet all of the requirements for inclusion established by the
Securities and Exchange Commission in effect at the time such proposal is
received.
AMENDMENTS TO CERTIFICATE OF INCORPORATION AND BYLAWS. Amendments to the
certificate of incorporation must be approved by Magyar Bancorp, Inc.'s Board of
Directors and also by a majority of the outstanding shares of Magyar Bancorp,
Inc.'s voting stock; provided, however, that approval by at least 80% of the
outstanding voting stock is generally required to amend the following
provisions:
(1) The limitation on voting rights of persons who directly or
indirectly offer to acquire or acquire the beneficial ownership
of more than 10% of any class of equity security of Magyar
Bancorp, Inc.;
(2) The inability of stockholders to act by written consent;
(3) The inability of stockholders to call special meetings of
stockholders;
(4) The division of the Board of Directors into three staggered
classes;
(5) The ability of the Board of Directors to fill vacancies on the
board;
(6) The inability to deviate from the manner prescribed in the
bylaws by which stockholders nominate directors and bring other
business before meetings of stockholders;
(7) The requirement that at least 80% of stockholders must vote to
remove directors, and can only remove directors for cause;
(8) The ability of the Board of Directors to amend and repeal the
bylaws; and
(9) The ability of the Board of Directors to evaluate a variety of
factors in evaluating offers to purchase or otherwise acquire
Magyar Bancorp, Inc.
The bylaws may be amended by the affirmative vote of a majority of the
directors of Magyar Bancorp, Inc. or the affirmative vote of at least 80% of the
total votes eligible to be voted at a duly constituted meeting of stockholders.
DESCRIPTION OF CAPITAL STOCK OF MAGYAR BANCORP, INC.
GENERAL
Magyar Bancorp, Inc. is authorized to issue 8,000,000 shares of common
stock having a par value of $0.01 per share and 1,000,000 shares of serial
preferred stock. Each share of Magyar Bancorp, Inc.'s common stock will have the
same relative rights as, and will be identical in all respects with, each other
share of common stock. Upon payment of the purchase price for the common stock
in accordance with the plan of reorganization, all of the stock will be duly
153
authorized, fully paid and nonassessable. Presented below is a description of
Magyar Bancorp, Inc.'s capital stock which is deemed material to an investment
decision with respect to the stock offering. The common stock of Magyar Bancorp,
Inc. will represent nonwithdrawable capital, will not be an account of an
insurable type, and will not be insured by the Federal Deposit Insurance
Corporation.
Magyar Bancorp, Inc. currently expects that it will have a maximum of up
to 5,923,742 shares of common stock outstanding after the stock offering, of
which 2,723,292 shares will be held by persons other than Magyar Bancorp, MHC
including 104,742 shares issued to the Charitable Foundation. The Board of
Directors can, without stockholder approval, issue additional shares of common
stock, although Magyar Bancorp, MHC, so long as it is in existence, must own a
majority of Magyar Bancorp, Inc.'s outstanding shares of common stock. Magyar
Bancorp, Inc.'s issuance of additional shares of common stock could dilute the
voting strength of the holders of the common stock and may assist management in
impeding an unfriendly takeover or attempted change in control. Magyar Bancorp,
Inc. has no present plans to issue additional shares of common stock other than
pursuant to the stock benefit plans previously discussed.
COMMON STOCK
DISTRIBUTIONS. Magyar Bancorp, Inc. can pay dividends if, as and when
declared by its Board of Directors, subject to compliance with limitations that
are imposed by law. The holders of common stock of Magyar Bancorp, Inc. will be
entitled to receive and share equally in such dividends as may be declared by
the Board of Directors of Magyar Bancorp, Inc. out of funds legally available
therefor. In the future, dividends from Magyar Bancorp, Inc. may depend, in
part, upon the receipt of dividends from Magyar Bank, because Magyar Bancorp,
Inc. initially will have no source of income other than the investment of
proceeds from the sale of shares of common stock and interest payments received
in connection with its loan to the employee stock ownership plan. See
"Supervision and Regulation-- Federal Banking Regulation--Capital Requirements."
Pursuant to our certificate of incorporation, Magyar Bancorp, Inc. is authorized
to issue preferred stock. If Magyar Bancorp, Inc. does issue preferred stock,
the holders thereof may have a priority over the holders of the common stock
with respect to dividends.
VOTING RIGHTS. Upon the effective date of the stock offering, the
holders of common stock of Magyar Bancorp, Inc. will possess exclusive voting
rights in Magyar Bancorp, Inc. Each holder of common stock will be entitled to
one vote per share and will not have any right to cumulate votes in the election
of directors. Under certain circumstances, shares in excess of 10% of the issued
and outstanding shares of common stock may be considered "Excess Shares" and,
accordingly, will not be entitled to vote. See "Restrictions on the Acquisition
of Magyar Bancorp, Inc. and Magyar Bank." If Magyar Bancorp, Inc. issues
preferred stock, holders of the preferred stock may also possess voting rights.
LIQUIDATION. In the event of any liquidation, dissolution or winding up
of Magyar Bank, Magyar Bancorp, Inc., as holder of Magyar Bank's capital stock,
would be entitled to receive, after payment or provision for payment of all
debts and liabilities of Magyar Bank, including all deposit accounts and accrued
interest thereon, all assets of Magyar Bank available for distribution. In the
event of liquidation, dissolution or winding up of Magyar Bancorp, Inc., the
154
holders of its common stock would be entitled to receive, after payment or
provision for payment of all its debts and liabilities, all of the assets of
Magyar Bancorp, Inc. available for distribution. If preferred stock is issued,
the holders thereof may have a priority over the holders of the common stock in
the event of liquidation or dissolution.
RIGHTS TO BUY ADDITIONAL SHARES. Holders of the common stock of Magyar
Bancorp, Inc. will not be entitled to preemptive rights with respect to any
shares which may be issued. Preemptive rights are the priority right to buy
additional shares if Magyar Bancorp, Inc. issues more shares in the future. The
common stock is not subject to redemption.
PREFERRED STOCK
None of the shares of Magyar Bancorp, Inc.'s authorized preferred stock
will be issued in the stock offering. Such stock may be issued with such
preferences and designations as the Board of Directors may from time to time
determine. The Board of Directors can, without stockholder approval, issue
preferred stock with voting, dividend, liquidation and conversion rights, which
could dilute the voting strength of the holders of the common stock and may
assist management in impeding an unfriendly takeover or attempted change in
control. Magyar Bancorp, Inc. has no present plans to issue preferred stock.
TRANSFER AGENT AND REGISTRAR
Registrar and Transfer Company, Cranford, New Jersey, will act as the
transfer agent and registrar for the common stock.
LEGAL AND TAX MATTERS
The legality of the common stock and the federal income tax consequences
of the stock offering and the establishment of the Charitable Foundation have
been passed upon for Magyar Bank and Magyar Bancorp, Inc. by Luse Gorman
Pomerenk & Schick, P.C., Washington, D.C. Luse Gorman Pomerenk & Schick, P.C.
has consented to the references in this prospectus to its opinion. Certain legal
matters regarding the stock offering will be passed upon for Ryan Beck & Co.,
Inc. by McCarter & English, LLP.
EXPERTS
The financial statements of Magyar Bank as of and for the years ended
September 30, 2004 and 2003 included in this prospectus and in the registration
statement have been audited by Grant Thornton LLP, independent registered public
accounting firm, as indicated in their reports with respect thereto, and are
included therein in reliance upon the authority of said firm as experts in
accounting and auditing.
FinPro, Inc. has consented to the publication in this prospectus of the
summary of its report to Magyar Bank and Magyar Bancorp, Inc. setting forth its
opinion as to the estimated pro forma market value of the common stock upon the
completion of the stock offering and its letter with respect to subscription
rights.
155
WHERE YOU CAN FIND MORE INFORMATION
Magyar Bancorp, Inc. has filed a registration statement with the
Securities and Exchange Commission under the Securities Act of 1933, with
respect to the shares of common stock offered hereby. As permitted by the rules
and regulations of the Securities and Exchange Commission, this prospectus does
not contain all the information set forth in the registration statement. This
information can be examined without charge at the public reference facilities of
the Securities and Exchange Commission located at 100 F Street, NE, Washington,
D.C. 20549, and copies of the material can be obtained from the Securities and
Exchange Commission at prescribed rates. The registration statement also is
available through the Securities and Exchange Commission's world wide web site
on the internet at http://www.sec.gov. The statements contained in this
prospectus as to the contents of any contract or other document filed as an
exhibit to the registration statement are, of necessity, brief descriptions
thereof and are not necessarily complete, but do contain all material
information regarding the documents; each statement is qualified by reference to
the contract or document.
A copy of the certificate of incorporation and bylaws of Magyar Bancorp,
Inc. are available without charge from Magyar Bancorp, Inc., Attention:
Corporate Secretary.
REGISTRATION REQUIREMENTS
In connection with the stock offering, Magyar Bancorp, Inc. will
register the common stock with the Securities and Exchange Commission under
Section 12(g) of the Securities Exchange Act of 1934; and, upon this
registration, Magyar Bancorp, Inc. and the holders of its shares of common stock
will become subject to the proxy solicitation rules, reporting requirements and
restrictions on stock purchases and sales by directors, officers and greater
than 10% stockholders, the annual and periodic reporting and certain other
requirements of the Securities Exchange Act of 1934. Under the plan of
reorganization, Magyar Bancorp, Inc. has undertaken that it will not terminate
this registration for a period of at least three years following the stock
offering.
156
INDEX TO FINANCIAL STATEMENTS
Page
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2005, (UNAUDITED)
AND SEPTEMBER 30, 2004 AND 2003 F-3
CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS
ENDED JUNE 30, 2005 AND 2004 (UNAUDITED) AND FOR THE YEARS
ENDED SEPTEMBER 30, 2004 AND 2003 F-4
CONSOLIDATED STATEMENT OF CHANGES IN RETAINED EARNINGS
FOR THE NINE MONTHS ENDED JUNE 30, 2005 AND 2004 (UNAUDITED)
AND FOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 2003 F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS
ENDED JUNE 30, 2005 AND 2004 (UNAUDITED) AND FOR THE YEARS
ENDED SEPTEMBER 30, 2004 AND 2003 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7
F-1
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
Board of Directors
Magyar Bank (Formerly Magyar Savings Bank)
We have audited the accompanying consolidated balance sheets of Magyar Bank
as of September 30, 2004 and 2003 and the related consolidated statements of
income, changes in retained earnings and cash flows for the years then ended.
These financial statements are the responsibility of the Bank' s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances but not for
the purpose of expressing an opinion on the effectiveness of the Bank's internal
control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Magyar Bank as
of September 30, 2004 and 2003 and the consolidated results of its operations
and its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
December 1, 2004
F-2
MAGYAR BANK
Consolidated Balance Sheets
(In Thousands)
September 30,
June 30, --------------------
2005 2004 2003
-------- -------- --------
(Unaudited)
ASSETS
Cash $ 1,343 $ 1,863 $ 2,595
Interest bearing deposits with banks 2,375 3,112 5,954
-------- -------- --------
Total cash and cash equivalents 3,718 4,975 8,549
Investment securities - available for sale, at fair value 22,086 31,171 40,076
Investment securities - held to maturity, at cost (fair value
of $35,970 at June 30, 2005 (unaudited), $42,857 and $38,198
at September 30, 2004, and 2003, respectively) 36,068 42,615 37,267
Federal Home Loan Bank of New York stock, at cost 1,828 1,745 1,602
Loans receivable, net 248,312 193,550 173,768
Bank owned life insurance 5,764 5,636 5,181
Accrued interest receivable 1,342 1,274 1,155
Premises and equipment, net 4,302 4,230 4,461
Other assets 1,632 1,882 1,853
-------- -------- --------
Total assets $325,052 $287,078 $273,912
======== ======== ========
LIABILITIES AND RETAINED EARNINGS
Liabilities
Deposits $259,081 $223,974 $225,675
Escrowed funds 1,297 1,101 1,197
Federal Home Loan Bank of New York advances 26,729 25,543 10,527
Securities sold under agreements to repurchase 10,000 9,500 9,500
Accrued interest payable 160 58 78
Accounts payable and other liabilities 4,664 3,790 4,276
-------- -------- --------
Total liabilities 301,931 263,966 251,253
-------- -------- --------
Retained earnings
Retained earnings - substantially restricted 23,504 23,436 22,824
Accumulated other comprehensive loss, net (383) (324) (165)
-------- -------- --------
Total retained earnings 23,121 23,112 22,659
-------- -------- --------
Total liabilities and retained earnings $325,052 $287,078 $273,912
======== ======== ========
The accompanying notes are an integral part of these statements.
F-3
MAGYAR BANK
Consolidated Statements of Income
(In Thousands)
Nine months ended June 30, Year ended September 30,
-------------------------- ------------------------
2005 2004 2004 2003
------- ------ ------- -------
(Unaudited)
Interest and dividend income
Loans, including fees $ 9,355 $7,144 $ 9,627 $10,432
Investment securities 1,918 2,213 2,930 2,863
Federal Home Loan Bank of New York stock 57 17 27 75
------- ------ ------- -------
Total interest and dividend income 11,330 9,374 12,584 13,370
------- ------ ------- -------
Interest expense
Deposits 2,953 2,435 3,220 4,203
Borrowed money 1,059 764 1,039 1,004
------- ------ ------- -------
Total interest expense 4,012 3,199 4,259 5,207
------- ------ ------- -------
Net interest and dividend income 7,318 6,175 8,325 8,163
Provision for loan losses 237 152 202 230
------- ------ ------- -------
Net interest and dividend income after provision
for loan losses 7,081 6,023 8,123 7,933
------- ------ ------- -------
Other income
Service charges 390 369 511 597
Other operating income 147 224 285 373
------- ------ ------- -------
Total other income 537 593 796 970
------- ------ ------- -------
Other expenses
Compensation and employee benefits 3,762 2,784 3,794 3,113
Occupancy expenses 1,296 966 1,301 1,213
Advertising 256 216 279 216
Professional fees 237 521 628 234
Federal insurance premiums and assessments 25 25 34 35
Service fees 281 266 356 323
Directors fees 899 546 703 534
Other expenses 812 769 955 1,084
------- ------ ------- -------
Total other expenses 7,568 6,093 8,050 6,752
------- ------ ------- -------
Income before income taxes 50 523 869 2,151
Income tax (benefit) expense (18) 137 257 624
------- ------ ------- -------
Net income $ 68 $ 386 $ 612 $ 1,527
======= ====== ======= =======
The accompanying notes are an integral part of these statements.
F-4
MAGYAR BANK
Consolidated Statement of Changes in Retained Earnings
Nine months ended June 30, 2005 (unaudited) and years ended
September 30, 2004 and 2003
(In Thousands)
Accumulated
other
Retained comprehensive Comprehensive
earnings income (loss) income Total
-------- ------------- ------------- -------
Balance at September 30, 2002 $21,297 $ 145 -- $21,442
Net income for year ended September 30, 2003 1,527 -- $1,527 1,527
Other comprehensive loss, net of
reclassification adjustments and taxes -- (310) (310) (310)
------- ----- ------ -------
Total comprehensive income $1,217
======
Balance, September 30, 2003 22,824 (165) -- 22,659
Net income for year ended September 30, 2004 612 -- $ 612 612
Other comprehensive loss, net of
reclassification adjustments and taxes -- (159) (159) (159)
------- ----- ------ -------
Total comprehensive income $ 453
======
Balance, September 30, 2004 23,436 (324) 23,112
Net income for nine months ended June 30, 2005 (unaudited) 68 -- $ 68 68
Other comprehensive loss, net of
reclassification adjustments and taxes
(unaudited) -- (59) (59) (59)
------- ----- ------ -------
Total comprehensive income (unaudited) $ 9
======
Balance, June 30, 2005 (unaudited) $23,504 $(383) $23,121
======= ===== =======
The accompanying notes are an integral part of these statements.
F-5
MAGYAR BANK
Consolidated Statements of Cash Flows
(In Thousands)
Nine months ended June 30, Year ended September 30,
-------------------------- ------------------------
2005 2004 2004 2003
-------- -------- -------- --------
(Unaudited)
Operating activities
Net income $ 68 $ 386 $ 612 $ 1,527
Adjustment to reconcile net income to net cash provided by (used in)
operating activities
Depreciation and amortization 391 375 503 511
Premium amortization on investment and mortgage-backed
securities, net 120 171 233 151
Gains on sale of loans -- (5) (5) (95)
Losses on sale of investment securities 6 -- -- --
Provision for loan losses 237 152 202 230
Deferred income tax (benefit) (195) 894 253 141
(Increase) decrease in accrued interest receivable (68) (55) (119) 89
(Increase) decrease in bank owned life insurance (140) 124 65 (253)
(Increase) decrease in other assets 487 (111) (149) (758)
(Decrease) increase in accrued interest payable 102 (12) (20) (75)
(Decrease) increase in other liabilities 874 (1,959) (486) 572
-------- -------- -------- --------
Net cash provided by (used in) operating activities 1,882 (40) 1,089 2,040
-------- -------- -------- --------
Investing activities
Net (increase) decrease in loans receivable (55,000) (6,777) (19,980) 6,342
Purchases of investment securities held to maturity -- (17,165) (17,165) (19,032)
Purchases of investment securities available for sale -- (1,994) (1,994) (33,441)
Sales of investment securities available for sale 3,116 -- -- --
Proceeds from maturities/calls of investment securities held to maturity 3,000 2,173 2,239 7,124
Proceeds from maturities/calls of investment securities available for sale 2,002 5,000 5,000 4,000
Proceeds from maturities/calls of Federal Home Loan Bank of
New York stock -- -- -- 38
Principal repayments on investment securities held to maturity 3,505 7,315 9,495 12,846
Principal repayments on investment securities available for sale 3,795 4,124 5,457 2,565
Purchases of bank owned life insurance -- (520) (520) (80)
Purchases of premises and equipment (464) (225) (271) (142)
Purchases of Federal Home Loan Bank of New York stock (82) (79) (143) --
-------- -------- -------- --------
Net cash used in investing activities (40,128) (8,148) (17,882) (19,780)
-------- -------- -------- --------
Financing activities
Net (decrease) increase in deposits 35,107 (8) (1,701) 13,482
Net increase (decrease) in escrowed funds 196 73 (96) (141)
Net proceeds (repayments) from long-term borrowings (3,314) 4,310 3,516 (310)
Net proceeds from short-term borrowing 5,000 -- 11,500 --
-------- -------- -------- --------
Net cash provided by financing activities 36,989 4,375 13,219 13,031
-------- -------- -------- --------
Net decrease in cash and cash equivalents (1,257) (3,813) (3,574) (4,709)
Cash and cash equivalents, beginning of year 4,975 8,549 8,549 13,258
-------- -------- -------- --------
Cash and cash equivalents, end of year $ 3,718 $ 4,736 $ 4,975 $ 8,549
======== ======== ======== ========
Supplemental disclosures of cash flow information
Cash paid for
Interest $ 3,944 $ 3,192 $ 4,378 $ 5,275
Income taxes $ -- $ 140 $ 176 $ 990
The accompanying notes are an integral part of these statements.
F-6
MAGYAR BANK
Notes to Consolidated Financial Statements
June 30, 2005 (unaudited) and September 30, 2004 and 2003
NOTE A - ORGANIZATION
Magyar Bank (the Bank) is a New Jersey Chartered Mutual Savings Bank subject
to regulations issued by the New Jersey Department of Banking and Insurance
and the Federal Deposit Insurance Corporation. The Bank's administrative
offices are located in New Brunswick, New Jersey. The Bank has three branch
offices which are located in New Brunswick (main branch), North Brunswick
and South Brunswick, New Jersey. The Bank's savings deposits are insured by
the FDIC through the Savings Association Insurance Fund (SAIF); also, the
Bank is a member of the Federal Home Loan Bank of New York. Magyar Services
Corp. is a wholly owned non-bank subsidiary of the Bank and is an inactive
corporation.
The Bank competes with other banking and financial institutions in its
primary market areas. Commercial banks, savings banks, savings and loan
associations, credit unions and money market funds actively compete for
savings and time certificates of deposit and all types of loans. Such
institutions, as well as consumer financial and insurance companies, may be
considered competitors of the Bank with respect to one or more of the
services it renders.
The Bank is subject to regulations of certain state and federal agencies
and, accordingly, the Bank is periodically examined by such regulatory
authorities. As a consequence of the regulation of commercial banking
activities, the Bank's business is particularly susceptible to future state
and federal legislation and regulations.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Basis of Financial Statement Presentation
-----------------------------------------
The consolidated financial statements include the accounts of Magyar Bank
and its wholly owned subsidiary, Magyar Services Corp. (collectively, the
"Company"). All significant intercompany accounts and transactions have been
eliminated.
In preparing financial statements in conformity with US GAAP, management is
required to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
The consolidated balance sheet at June 30, 2005, and the consolidated
statements of income and cash flows for the nine month periods ended June
30, 2005 and 2004, and the consolidated statement of retained earnings for
the nine month period ended June 30, 2005 are unaudited and, in the opinion
of management, all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation have been made. Amounts appearing in the
accompanying notes as of June 30, 2005 and for the nine month periods ended
June 30, 2005 and 2004 are unaudited. The results of operations for the nine
months ended June 30, 2005 and 2004 are not necessarily indicative of the
results that may be attained for an entire fiscal year.
(Continued)
F-7
MAGYAR BANK
Notes to Consolidated Financial Statements - Continued
June 30, 2005 (unaudited) and September 30, 2004 and 2003
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The principal estimate that is particularly susceptible to significant
change in the near term relates to the allowance for loan losses. The
evaluation of the adequacy of the allowance for loan losses includes an
analysis of the individual loans and overall risk characteristics and size
of the different loan portfolios, and takes into consideration current
economic and market conditions, the capability of specific borrowers to pay
specific loan obligations, as well as current loan collateral values.
However, actual losses on specific loans, which also are encompassed in the
analysis, may vary from estimated losses.
2. Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, time deposits with original maturities less
than three months and overnight deposits.
3. Investment Securities
---------------------
The Bank classifies investment securities as either held to maturity or
available for sale.
Investment securities held to maturity are carried at cost adjusted for
amortization of premium and accretion of discount over the term of the
related investments using the interest method. The Bank has the ability and
positive intent to hold these securities to maturity and, accordingly,
adjustments are not made for temporary declines in fair value below
amortized cost. A decline in the fair value of any held to maturity security
that is deemed other than temporary is charged to earnings. The investment
in Federal Home Loan Bank stock is carried at cost.
Investment securities classified as available for sale are carried at fair
value with unrealized gains and losses excluded from earnings and reported
in a separate component of retained earnings, net of related income tax
effects. Gains and losses on sales of investment securities are recognized
upon realization utilizing the specific identification method.
Premium or discount on investment securities is recognized as an adjustment
of yield by use of the interest method over the life of the investment
security.
The Bank follows Statement of Financial Accounting Standards (SFAS) No. 133,
which was amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities", and SFAS
No. 150, "Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity", (collectively SFAS No. 133). SFAS No. 133,
as amended, requires that entities recognize all derivatives as either
assets or liabilities in the statement of financial condition and measure
those instruments at fair value. The Bank did not have any derivative
instruments as of June 30, 2005 and 2004 and September 30, 2004 and 2003.
In November 2003, the Emerging Issues Task Force (EITF) of the FASB issued
EITF Abstract 03-1, The Meaning of Other than Temporary Impairment and its
Application to Certain Investments (EITF 03-1). The quantitative and
qualitative disclosure provisions of EITF 03-1 were effective for years
ending after December 15, 2003 and were included in the Bank's 2003
financial statements. In March 2004, the EITF issued a Consensus on Issue
03-1 requiring that the
(Continued)
F-8
MAGYAR BANK
Notes to Consolidated Financial Statements - Continued
June 30, 2005 (unaudited) and September 30, 2004 and 2003
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
provisions of EITF 03-1 be applied for reporting periods beginning after
June 15, 2004 to investments accounted for under SFAS No. 115 and 124. EITF
03-1 establishes a three step approach for determining whether an investment
is considered impaired, whether that impairment is other-than-temporary, and
the measurement of an impairment loss. The Board decided to issue proposed
FSP EITF 03-1a, "Implementation Guidance for the Application of Paragraph 16
of EITF Issue No. 03-1", as final without providing additional guidance on
the meaning of "Other-Than-Temporary Impairment and Its Application to
Certain Investments", and will supersede EITF 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments."
and EITF Topic D-44, "Recognition of Other-Than-Temporary Impairment upon
the Planned Sale of a Security Whose Cost Exceeds Fair Value."
The final FSP will replace the guidance in paragraphs 10-18 of EITF Issue
03-1 (which had been deferred by FSP EITF 03-1-1, "Effective Date of
Paragraphs 10-20 of EITF Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments")
with references to existing other-than-temporary impairment guidance, such
as Statement 115, Accounting for Certain Investments in Debt and Equity
Securities, Staff Accounting Bulletin 59, Accounting for Noncurrent
Marketable Equity Securities, and Opinion 18, The Equity Method of
Accounting for Investments in Common Stock. FSP FAS 115-1 will codify the
guidance set forth in EITF Topic D-44 and clarify that an investor should
recognize an impairment loss no later than when the impairment is considered
other than temporary, even if a decision to sell has not been made.
FSP FAS 115-1 will be effective for other-than-temporary impairment analysis
conducted in periods beginning after September 15, 2005. The Bank is in the
process of determining the impact that this EITF will have on its financial
statements.
4. Loans and Allowance for Loan Losses
-----------------------------------
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or payoff are stated at the amount of unpaid
principal and reduced by an allowance for loan losses. Interest on loans is
accrued and credited to operations based upon the principal amounts
outstanding. The allowance for loan losses is established through a
provision for possible loan losses charged to operations. Loans are charged
against the allowance for loan losses when management believes that the
collectibility of the principal is unlikely.
Income recognition of interest is discontinued when, in the opinion of
management, the collectibility of such interest becomes doubtful. A loan is
generally classified as nonaccrual when the loan is 90 days or more
delinquent. Loan origination fees and certain direct origination costs are
deferred and amortized over the life of the related loans as an adjustment
to the yield on loans receivable using the effective interest method.
The allowance for loan losses is maintained at an amount management deems
adequate to cover estimated losses. In determining the level to be
maintained, management evaluates many factors, including current economic
trends, industry experience, historical loss experience, industry loan
concentrations, the borrowers' ability to repay and repayment performance,
and estimated collateral values. In the opinion of management, the present
allowance is adequate to absorb reasonable, foreseeable loan losses. While
management uses the best information available to
(Continued)
F-9
MAGYAR BANK
Notes to Consolidated Financial Statements - Continued
June 30, 2005 (unaudited) and September 30, 2004 and 2003
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
make such evaluations, future adjustments to the allowance may be necessary
based on changes in economic conditions or any of the other factors used in
management's determination. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowance for losses on loans. Such agencies may require the Bank to
recognize additions to the allowance based on their judgments about
information available to them at the time of their examination. Charge-offs
to the allowance are made when the loan is transferred to other real estate
owned or other determination of impairment.
The Bank accounts for its impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures." This standard requires 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,
or the fair value of the collateral 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. At June 30, 2005, September 30, 2004 and 2003, the
Bank had no loans that would be defined as impaired under SFAS No. 114.
The bank accounts for its transfers of financial assets, including sales of
loans and loan participations and servicing financial assets in accordance
with SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." Transfers of financial assets,
including sales of loans and loan participations are accounted for as sales
when control over the assets has been surrendered. Control over transferred
assets is deemed to be surrendered when (1) the assets have been isolated
from the Company, (2) the transferee obtains the right (free of conditions
that constrain it from taking advantage of that right) to pledge or exchange
the transferred assets, and (3) the Company does not maintain effective
control over the transferred assets through an agreement to repurchase them
before their maturity.
The Bank follows Financial Accounting Standards Board (FASB) Interpretation
(FIN) 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, including Indirect Guarantees of Indebtedness of Others." FIN 45
requires a guarantor entity, at the inception of a guarantee covered by the
measurement provisions of the interpretation, to record a liability for the
fair value of the obligation undertaken in issuing the guarantee. At June
30, 2005 and September 30, 2004, the Bank did not hold any guarantees
subject to FIN 45.
In October 2003, the AICPA issued Statement of Position (SOP) 03-3,
"Accounting for Loans or Certain Debt Securities Acquired in a Transfer."
SOP 03-3 applies to a loan with the evidence of deterioration of credit
quality since origination acquired by completion of a transfer for which it
is probable, at acquisition, that the Bank will be unable to collect all
contractually required payments receivable. SOP 03-3 is effective for loans
acquired in fiscal years beginning after December 31, 2004. At June 30,
2005, the Bank does not have any such loans covered by this SOP.
(Continued)
F-10
MAGYAR BANK
Notes to Consolidated Financial Statements - Continued
June 30, 2005 (unaudited) and September 30, 2004 and 2003
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
5. Premises and Equipment
----------------------
Premises and equipment are carried at cost less accumulated depreciation,
and include expenditures for new facilities, major betterments and renewals.
Expenditures for maintenance and repairs are charged to expense as incurred.
Depreciation is computed using the straight-line method based upon the
estimated useful lives of the related assets.
The Bank accounts for rental costs associated with operating leases incurred
for and during construction of its new headquarters / main branch building
by expensing such costs on a straight line basis as required under FASB
Technical Bulletin 88-1, "Issues Related to Accounting for Leases".
The Bank accounts for the impairment of long-lived assets in accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." The standard requires recognition and measurement for the
impairment of long-lived assets to be held and used or to be disposed of by
sale. The Bank had no impaired long-lived assets at June 30, 2005 or at
September 30, 2004 and 2003.
6. Real Estate Owned
-----------------
Real estate properties acquired through loan foreclosures are recorded at
estimated fair value less cost to sell at the time of foreclosure with any
writedown charged against the allowance for loan losses. Subsequent
valuations are periodically performed by management and the carrying value
is adjusted by a charge to expense to reflect any subsequent declines in the
estimated fair value. For the nine months ended June 30, 2005 and 2004, and
the years ended September 30, 2004 and 2003, the Bank did not incur any
writedowns on foreclosed properties. Further declines in real estate values
may result in increased foreclosed real estate expense in the future.
Routine holding costs are charged to expense as incurred and improvements to
real estate owned that enhance the value of the real estate are capitalized.
7. Income Taxes
------------
Under the liability method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and the
tax basis of assets and liabilities as measured by the enacted tax rates,
which will be in effect when these temporary differences are estimated to
reverse. Deferred tax expense is the result of changes in deferred tax
assets and liabilities. The principal types of accounts resulting in
differences between assets and liabilities for financial statement and tax
return purposes are allowance for loan losses, deferred loan fees,
accumulated depreciation and investment securities available for sale.
8. Advertising Costs
-----------------
The Bank expenses advertising costs as incurred.
(Continued)
F-11
MAGYAR BANK
Notes to Consolidated Financial Statements - Continued
June 30, 2005 (unaudited) and September 30, 2004 and 2003
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
9. Financial Instruments
---------------------
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires the Bank to disclose the estimated fair value of their assets and
liabilities considered to be financial instruments. Financial instruments
requiring disclosure consist primarily of investment securities, loans and
deposits.
10. Comprehensive Income
--------------------
SFAS No. 130, "Reporting Comprehensive Income," established standards for
reporting comprehensive income, which includes net income as well as certain
other items which result in a change to equity during the period.
The income tax effects allocated to comprehensive income is as follows (in
thousands):
Nine months ended June 30, 2005
-------------------------------
Net of
Before tax Tax tax
amount expense amount
---------- ------- ------
(Unaudited)
Unrealized gains (losses) on securities
Unrealized holding losses arising during period $ (105) $ 31 $ (74)
Less reclassification adjustment for losses
realized in net income 6 (2) 4
Minimum pension liability 20 (9) 11
---- ---- ----
Other comprehensive loss, net $ (79) $ 20 $ (59)
===== ==== =====
Year ended September 30, 2004 Year ended September 30, 2003
------------------------------------- ---------------------------------
Net of Net of
Before tax Tax tax Before tax Tax tax
amount expense amount amount expense amount
----------- -------- ----------- ---------- ------- ------
Unrealized gains (losses)
on securities
Unrealized holding losses
arising during period $ (292) $ 122 $ (170) $ (246) $ 90 $(156)
Less reclassification
adjustment for gains
realized in net income -- -- -- -- -- --
Minimum pension liability 20 (9) 11 (280) 126 (154)
----- ----- ------ ------ ---- -----
Other comprehensive loss, net $ (272) $ 113 $ (159) $ (526) $216 $(310)
====== ===== ====== ====== ==== =====
(Continued)
F-12
MAGYAR BANK
Notes to Consolidated Financial Statements - Continued
June 30, 2005 (unaudited) and September 30, 2004 and 2003
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
11. Reclassifications
-----------------
Certain 2004 amounts have been reclassified to conform to the 2005 financial
statement presentation.
12. New Accounting Pronouncements
-----------------------------
The FASB recently issued Statement 154, "Accounting Changes and Error
Corrections," a replacement of APB Opinion No. 20 and FASB Statement No. 3,
as part of its short-term convergence project with the International
Accounting Standards Board. Statement 154 requires that all voluntary
changes in accounting principles and changes required by a new accounting
pronouncement that do not include specific transition provisions be applied
retrospectively to prior periods' financial statements, unless it is
impracticable to do so. Opinion 20, Accounting Changes, required that most
voluntary changes in accounting principle be recognized by including the
cumulative effect of changing to the new accounting principle as a component
of net income in the period of the change. Statement 154 is effective
prospectively for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. Earlier application is
permitted for accounting changes and corrections of errors made in fiscal
years beginning after the date the Statement was issued (May 2005).
Statement 154 does not change the transition provisions of any existing
accounting pronouncements, including those that are in a transition phase as
of the effective date of the Statement. The Bank is currently evaluating its
possible impact.
FASB Statement No. 123 (revised 2004), Share-Based Payment. Statement 123(R)
addresses the accounting for share-based payment transactions in which an
enterprise receives employee services in exchange for (a) equity instruments
of the enterprise or (b) liabilities that are based on the fair value of the
enterprise's equity instruments or that may be settled by the issuance of
such equity instruments. Statement 123(R) requires an entity to recognize
the grant-date fair-value of stock options and other equity-based
compensation issued to employees in the income statement. The revised
Statement generally requires that an entity account for those transactions
using the fair-value-based method; and eliminates an entity's ability to
account for share-based compensation transactions using the intrinsic value
method of accounting in APB Opinion No. 25, Accounting for Stock Issued to
Employees, which was permitted under Statement 123, as originally issued.
The revised Statement requires entities to disclose information about the
nature of the share-based payment transactions and the effects of those
transactions on the financial statements. Statement 123(R) is effective for
the Bank beginning July 1, 2005. The Bank must use either the modified
prospective or the modified retrospective transition method. Early adoption
of this Statement for interim or annual periods for which financial
statements or interim reports have not been issued is permitted. The
adoption of Statement 123(R) is expected to reduce reported net income and
ea mgs per share. Management is in the process of evaluating Statement
123(R) and does not know its full impact on the consolidated financial
statements at this time.
F-13
MAGYAR BANK
Notes to Consolidated Financial Statements - Continued
June 30, 2005 (unaudited) and September 30, 2004 and 2003
NOTE C - INVESTMENT SECURITIES
The unamortized cost, gross unrealized gains or losses and the fair value of
the Bank's investment securities available for sale and held to maturity are
as follows (in thousands):
June 30, 2005
------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------- --------- ---------- -------
(Unaudited)
Available for sale
U.S. government and agency obligations $ 4,000 $ -- $ (82) $ 3,918
Equity securities 142 -- -- 142
Mortgage-backed securities 18,356 -- (330) 18,026
------- ----- ------- -------
Total $22,498 $ -- $ (412) $22,086
======= ===== ======= =======
Held to maturity
U.S. government and agency obligations $ 4,331 $ 19 $ (36) $ 4,314
Corporate notes 2,002 29 -- 2,031
Mortgage-backed securities 29,735 189 (299) 29,625
------- ----- ------- -------
Total $36,068 $ 237 $ (335) $35,970
======= ===== ======= =======
September 30, 2004
-------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------- --------- ---------- -------
Available for sale
U.S. government and agency obligations $ 5,498 $ 57 $ (39) $ 5,516
Corporate notes 2,002 5 -- 2,007
Equity securities 142 -- -- 142
Mortgage-backed securities 23,841 1 (336) 23,506
------- ----- ------- -------
Total $31,483 $ 63 $ (375) $31,171
======= ===== ======= =======
Held to maturity
U.S. government and agency obligations $ 7,423 $ 30 $ (8) $ 7,445
Corporate notes 2,005 92 -- 2,097
Mortgage-backed securities 33,187 352 (224) 33,315
------- ----- ------- -------
Total $42,615 $ 474 $ (232) $42,857
======= ===== ======= =======
(Continued)
F-14
MAGYAR BANK
Notes to Consolidated Financial Statements - Continued
June 30, 2005 (unaudited) and September 30, 2004 and 2003
NOTE C - INVESTMENT SECURITIES - Continued
September 30, 2003
---------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------- ---------- ---------- -------
Available for sale
U.S. government and agency obligations $10,496 $ 207 $ -- $10,703
Corporate notes 2,031 94 -- 2,125
Equity securities 142 -- -- 142
Mortgage-backed securities 27,426 -- (320) 27,106
------- ------- ------- -------
Total $40,095 $ 301 $ (320) $40,076
======= ======= ======= =======
Held to maturity
U.S. government and agency obligations $ 5,533 $ 96 $ -- $ 5,629
Corporate notes 2,008 194 -- 2,202
Mortgage-backed securities 29,726 713 (72) 30,367
------- ------- ------- -------
Total $37,267 $ 1,003 $ (72) $38,198
======= ======= ======= =======
The amortized cost and fair value of the Bank's investment securities available
for sale and held to maturity at June 30, 2005, by contractual maturity, is
shown below (in thousands). Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
June 30, 2005
---------------------------------------------------------
Available for sale Held to maturity
------------------------ -------------------------
Amortized Fair Amortized Fair
cost value cost value
--------- ------- --------- -------
(Unaudited)
Due in one year or less $ -- $ -- $ 2,002 $ 2,031
Due after one year through five years 4,000 3,918 4,000 3,966
Due after five years through ten years -- -- 147 162
Due after ten years -- -- 184 186
Equity securities 142 142 -- --
Mortgage-backed securities 18,356 18,026 29,735 29,625
------- ------- ------- -------
$22,498 $22,086 $36,068 $35,970
======= ======= ======= =======
Gross gains of approximately $36,000 and gross losses of $43,000 were realized
on sales of investment securities classified as available for sale for the nine
months ended June 30, 2005.
(Continued)
F-15
MAGYAR BANK
Notes to Consolidated Financial Statements - Continued
June 30, 2005 (unaudited) and September 30, 2004 and 2003
NOTE C - INVESTMENT SECURITIES - Continued
There were no sales of investment securities during the fiscal year ended
September 30, 2004, the nine months ended June 30, 2004 and fiscal year
ended September 30, 2003.
As of June 30, 2005, September 30, 2004 and 2003, securities having an
estimated fair value of approximately $1,221,000, $1,207,000 and $2,510,000
were pledged to secure public deposits.
As of June 30 2005 (unaudited), details of securities with unrealized losses
are as follows (dollars in thousands):
Less than 12 months 12 months or longer Total
Number ------------------------ ------------------------ ---------------------
Description of of Fair Unrealized Fair Unrealized Fair Unrealized
securities securities value losses value losses value losses
-------------------- ---------- ------- ---------- ------- ---------- ------- ----------
U.S. government
and agencies 5 $ 149 $ 2 $ 7,884 $ 116 $ 8,033 $ 118
Mortgage-backed
securities 37 2,400 12 38,200 617 40,600 629
------- ------- ------- ------- ------- ------- -------
Total temporarily
impaired
investment
securities 42 $ 2,549 $ 14 $46,084 $ 733 $48,633 $ 747
======= ======= ======= ======= ======= ======= =======
As of September 30, 2004, details of securities with unrealized losses are
as follows (dollars in thousands):
Less than 12 months 12 months or longer Total
Number ------------------------ ------------------------ ---------------------
Description of of Fair Unrealized Fair Unrealized Fair Unrealized
securities securities value losses value losses value losses
-------------------- ---------- ------- ---------- ------- ---------- ------- ----------
U.S. government
and agencies 3 $ 5,953 $ 47 $ -- $ -- $ 5,953 $ 47
Mortgage-backed
securities 29 23,590 221 19,166 339 42,756 560
------- ------- ------- ------- ------- ------- -------
Total temporarily
impaired
investment
securities 32 $29,543 $ 268 $19,166 $ 339 $48,709 $ 607
======= ======= ======= ======= ======= ======= =======
The investment securities listed above currently have fair values less than
amortized cost and therefore contain unrealized losses. The Company
evaluated these securities and determined that the decline in value is
related to fluctuations in the interest rate environment and not related to
any company or industry specific event. At June 30, 2005 and September 30,
2004, there were approximately forty-two and thirty-two investment
securities with unrealized losses. The Company anticipates full recovery of
amortized costs with respect to these securities. The Company has the intent
and ability to hold these investments until maturity or market price
recovery.
F-16
MAGYAR BANK
Notes to Consolidated Financial Statements - Continued
June 30, 2005 (unaudited) and September 30, 2004 and 2003
NOTE D - LOANS RECEIVABLE, NET
Loans receivable are comprised of the following (in thousands):
September 30,
June 30, --------------------------
2005 2004 2003
-------- -------- --------
(Unaudited)
One-to-four family residential $118,672 $108,722 $107,531
Commercial Real Estate 49,770 19,935 19,354
Construction 37,117 5,526 5,188
Home equity lines of credit 10,640 9,065 7,301
Commercial business 20,331 27,698 9,630
Other 14,511 24,964 27,042
-------- -------- --------
Total loans receivable 251,041 195,910 176,046
Deferred loan costs (fees) (248) (19) (128)
Allowance for loan losses (2,481) (2,341) (2,150)
-------- -------- --------
Total loans receivable, net $248,312 $193,550 $173,768
======== ======== ========
Certain directors and executive officers of the Bank have loans with the
Bank. Such loans were made in the ordinary course of business at the Bank's
normal credit terms, including interest rate and collateralization, and do
not represent more than a normal risk of collection. Total loans receivable
from directors and executive officers was approximately $2,571,000,
$2,324,000 and $2,393,000 at June 30, 2005, September 30, 2004 and 2003,
respectively. During the period between September 30, 2004 and June 30,
2005, total principal additions were approximately $978,000 and total
principal repayments were $731,000, respectively.
At June 30, 2005, September 30, 2004 and 2003, the Bank was servicing loans
for others amounting to approximately $12,900,000, $3,032,000 and
$7,770,000, respectively. Servicing loans for others generally consist of
collecting mortgage payments, maintaining escrow accounts, disbursing
payments to investors, and foreclosure processing. Loan servicing income is
recorded on the cash basis and includes servicing fees from investors and
certain charges collected from borrowers, such as late payment fees. In
connection with loans serviced for others, the Bank held borrowers' escrow
balances of approximately $38,000, $34,000 and $33,000 at June 30, 2005,
September 30, 2004 and 2003, respectively.
(Continued)
F-17
MAGYAR BANK
Notes to Consolidated Financial Statements - Continued
June 30, 2005 (unaudited) and September 30, 2004 and 2003
NOTE D - LOANS RECEIVABLE, NET - Continued
The following summarizes the activity in the allowance for losses on loans
(in thousands):
June 30, September 30,
----------------------------- -----------------------------
2005 2004 2004 2003
------- ------- ------- -------
(Unaudited)
Balance, beginning of period $ 2,341 $ 2,150 $ 2,150 $ 1,926
Provision charged to income 237 152 202 230
Charge-offs (97) (11) (11) (6)
------- ------- ------- -------
Balance, end of period $ 2,481 $ 2,291 $ 2,341 $ 2,150
======= ======= ======= =======
As of June 30, 2005, September 30, 2004 and 2003 nonaccrual loans had a
total principal balance of approximately $1,492,000, $247,000 and $178,000,
respectively. The amount of interest income not recognized on loans more
than 90 days delinquent was approximately $43,000, $12,000, $17,000 and
$9,000 for the nine months ended June 30, 2005 and 2004, respectively, and
for the years ended September 30, 2004 and 2003, respectively. As of June
30, 2005, September 30, 2004 and 2003 there were no loans greater than 90
days past due on which the Bank continued to accrue interest income, and the
Bank did not have any impaired loans. At June 30, 2005 and September 30,
2004, there were no commitments to lead additional funds to borrowers whose
loans are classified as nonaccrual.
NOTE E - ACCRUED INTEREST RECEIVABLE
The following is a summary of accrued interest receivable (in thousands):
September 30,
June 30, -----------------------------
2005 2004 2003
------------ ----------- ------------
(Unaudited)
Loans $ 1,052 $ 870 $ 722
Investment securities 109 195 219
Mortgage-backed securities 181 209 214
------ ------ ------
Accrued interest receivable $ 1,342 $ 1,274 $ 1,155
======= ======= =======
F-18
MAGYAR BANK
Notes to Consolidated Financial Statements - Continued
June 30, 2005 (unaudited) and September 30, 2004 and 2003
NOTE F - PREMISES AND EQUIPMENT
Premises and equipment consist of the following (in thousands):
September 30,
Estimated June 30, ----------------------
useful lives 2005 2004 2003
-------------- ----------- -------- --------
(Unaudited)
Land Indefinite $ 516 $ 516 $ 516
Buildings and improvements 10-35 years 4,939 4,768 4,735
Furniture, fixtures and equipment 5-7 years 1,731 1,442 1,298
-------- -------- --------
7,186 6,726 6,549
Less accumulated depreciation (2,884) (2,496) (2,088)
-------- -------- --------
$ 4,302 $ 4,230 $ 4,461
======== ======== ========
For the nine months ended June 30, 2005 and 2004 and years ended September
30, 2004 and 2003, depreciation expense included in occupancy expense
amounted to approximately $391,000, $375,000, $503,000 and $511,000,
respectively.
NOTE G - DEPOSITS
A summary of deposits by type of account follows (in thousands):
September 30,
June 30, -------------------------
2005 2004 2003
-------- -------- --------
(Unaudited)
Demand $ 13,429 $ 9,925 $ 8,250
Passbook savings 51,918 49,550 47,625
Money market passbook 1,630 2,206 3,290
Club accounts 165 229 238
Regular NOW accounts 24,551 24,548 25,706
Money market NOW accounts 29,853 25,164 26,909
Certificates of deposit 112,959 89,487 90,485
IRA 24,576 22,865 23,172
-------- -------- --------
$259,081 $223,974 $225,675
======== ======== ========
At June 30, 2005 (unaudited), certificates of deposit have contractual
maturities as follows (in thousands):
2006 $ 68,523
2007 35,943
2008 6,667
2009 1,184
2010 642
--------
$112,959
========
(Continued)
F-19
MAGYAR BANK
Notes to Consolidated Financial Statements - Continued
June 30, 2005 (unaudited) and September 30, 2004 and 2003
NOTE G - DEPOSITS - Continued
The aggregate amount of accounts with a minimum denomination of $100,000 was
approximately $28,411,000, $18,786,000 and $23,681,000 at June 30, 2005,
September 30, 2004 and 2003, respectively.
NOTE H - BORROWINGS
1. Federal Home Loan Bank of New York Advances
Long term Federal Home Loan Bank of New York (FHLBNY) advances at June 30,
2005, September 30, 2004 and 2003 totaled approximately $21,729,000,
$25,543,000 and $10,527,000, respectively. The advances were collateralized
by FHLB stock and otherwise unencumbered qualified assets. These advances
had a weighted average interest rate of 4.20%, 3.08% and 5.09% during the
nine months ended June 30, 2005 and the years ended September 30, 2004 and
2003, respectively. Advances are made pursuant to several different credit
programs offered from time to time by the FHLBNY.
Long term FHLBNY advances as of June 30, 2005 (unaudited) mature as follows
(in thousands):
2006 $ 657
2007 1,951
2008 6,579
2009 1,022
2010 6,064
Thereafter 5,456
--------
$ 21,729
Additionally, the Bank has established two short-term borrowing arrangements
with the FHLBNY: (1) an Overnight Line of Credit and (2) a One-Month
Overnight Repricing Line of Credit in the amount of $16,000,000 each. Each
of the foregoing expire on July 29, 2005. As of June 30, 2005, the Bank had
an aggregate balance of $5,000,000 outstanding under these short term
arrangements. There was no outstanding borrowing under these arrangements as
of September 30, 2004 and 2003.
Information concerning these short-term arrangements with the FHLBNY are
summarized as follows (in thousands, except percentages):
June 30, September 30,
--------------------------- -------------------------
2005 2004 2004 2003
------- ------- -------- ------
(Unaudited)
Balance at end of period $ 5,000 $ - $ - $ -
Weighted average balance during the years $ 8,500 $ 900 $ 4,900 $ -
Weighted average interest rate at end of period 2.64% 1.12% 1.25% -%
Maximum month-end balance during period 20,700 1,500 11,500 -
Average interest during the period 2.55% 1.02% 1.52% -%
As of June 30, 2005, the Bank had an aggregate borrowing capacity of $83.9
million, including repurchase agreements from the FHLBNY, described below.
(Continued)
F-20
MAGYAR BANK
Notes to Consolidated Financial Statements - Continued
June 30, 2005 (unaudited) and September 30, 2004 and 2003
NOTE H - BORROWINGS - Continued
2. Securities Sold Under Agreements to Repurchase
Qualifying repurchase agreements are treated as financings and are reflected
as liabilities on the consolidated balance sheet. At June 30, 2005,
September 30, 2004 and 2003, the Bank had long-term repurchase agreements
with the FHLBNY of approximately $10,000,000, $9,500,000, and $9,500,000,
respectfully. These agreements were collateralized by securities underlying
the agreements and were held in safekeeping with the FHLBNY. At June 30,
2005, the fair value of the collateral for these agreements totaled
approximately $10,000,000.
Outstanding securities sold under agreements to repurchase as of June 30,
2005 (unaudited) mature as follows (in thousands):
2006 $ 5,000
2007 -
2008 5,000
-------
$10,000
NOTE I - INCOME TAXES
The income tax provision is comprised of the following components (in
thousands):
June 30, September 30,
-------------------- -------------------
2005 2004 2004 2003
----- ----- ----- -----
(Unaudited)
Current $ 177 $(757) $ 4 $ 483
Deferred (195) 894 253 141
----- ----- ----- -----
$ (18) $ 137 $ 257 $ 624
===== ===== ===== =====
A reconciliation of the statutory income tax rate to the effective income
tax rate is as follows:
Nine months ended
June 30, Year ended September 30,
-------------------- ------------------------
2005 2004 2004 2003
------ ------- ------ ------
(Unaudited)
Income tax at statutory rate $ 17 $ 178 $ 295 $ 627
Increase (decrease) resulting from
State income taxes, net of Federal
income tax benefit (2) 21 38 120
Tax-exempt income, net (40) (68) (87) (90)
Nondeductible expenses 7 6 7 9
Other, net -- -- 4 (42)
------ ------- ------ ------
Total income tax provision $ (18) $ 137 $ 257 $ 624
====== ======= ====== ======
(Continued)
F-21
MAGYAR BANK
Notes to Consolidated Financial Statements - Continued
June 30, 2005 (unaudited) and September 30, 2004 and 2003
NOTE I - INCOME TAXES - Continued
The major sources of temporary differences and their deferred tax effect as
of June 30, 2005, September 30, 2004 and 2003 are as follows:
September 30,
June 30, --------------------
2005 2004 2003
----- ----- -----
(Unaudited)
Non-qualified compensation plan $ 158 $ 50 $ 532
Accrued compensation 23 23 23
Net unrealized holding losses on investment securities
available for sale 162 131 8
Unrealized loss, minimum pension liability adjustment (14) (14) (126)
Deferred loan fees (3) (107) (69)
Discount accretion on loans (113) (103) (106)
Depreciation (50) (115) (122)
Pension (115) (144) (123)
Allowance for loan losses 535 440 359
Other -- 20 --
Net operating loss -- 177 --
----- ----- -----
Net deferred tax asset, included in other assets $ 583 $ 358 $ 376
===== ===== =====
Prior to 1996, savings banks that met certain definitions, tests and other
conditions prescribed by the Internal Revenue Code were allowed to deduct,
with limitations, a bad debt deduction computed as a percentage of taxable
income before such deduction. Currently, the Bank employs the reserve method
to account for bad debt.
The Bank is not required to provide a deferred tax liability for its tax
loss reserve as of December 31, 1987 (the Base Year). The amount of this
reserve on which no deferred taxes have been provided is approximately
$1,258,000. This reserve could be recognized as taxable income and create a
current and/or deferred tax liability using the income tax rates then in
effect if one of the following occur: (1) the Bank's retained earnings
represented by this reserve is used for purposes other than to absorb losses
from bad debts, including dividends or distributions in liquidation, (2) the
Bank fails to meet the definitions, tests, or other conditions provided by
the Internal Revenue Code for a qualified savings and loan association, or
(3) there is a change in the Federal tax law. Deferred tax liabilities have
been recorded for tax loss reserves in excess of book reserves recorded
after the Base Year.
NOTE J - PENSION PLAN
The Bank has a noncontributory defined benefit pension plan covering all
eligible employees. The Bank's policy is to fund pension benefits as
accrued. Plan assets are invested in six diversified investment funds of the
RSI Retirement Trust (the Trust), a no load series open-ended mutual fund.
The investment funds include four equity mutual funds and two bond mutual
funds, each with its own investment objectives, investment strategies and
risks, as detailed in the Trust's prospectus. The Trust has been given
discretion by the Plan Sponsor to determine the
(Continued)
F-22
MAGYAR BANK
Notes to Consolidated Financial Statements - Continued
June 30, 2005 (unaudited) and September 30, 2004 and 2003
NOTE J - PENSION PLAN - Continued
appropriate strategic asset allocation versus plan liabilities, as governed
by the Trust's Statement of Investment Objectives and Guidelines (the
Guidelines).
The long-term investment objective is to be invested 65% in equity
securities (equity mutual funds) and 35% in debt securities (bond mutual
funds). If the plan is underfunded under the Guidelines, the bond fund
portion will be temporarily increased to 50% in order to lessen asset value
volatility. When the plan is no longer underfunded, the bond fund portion
will be decreased back to 35%. Asset rebalancing is performed at least
annually, with interim adjustments made when the investment mix varies more
than 5% from the target (i.e., a 10% target range).
The investment goal is to achieve investment results that will contribute to
the proper funding of the pension plan by exceeding the rate of inflation
over the long-term. In addition, investment managers for the Trust are
expected to provide above average performance when compared to their peer
managers. Performance volatility is also monitored. Risk/volatility is
further managed by the distinct investment objectives of each of the Trust
funds and the diversification within each fund.
The following table sets forth the plan's funded status and amounts
recognized in the Bank's balance sheet at September 30, 2004 and 2003 (in
thousands):
2004 2003
------- -------
Actuarial present value of benefit obligations $ 2,110 $ 1,748
======= =======
Change in benefit obligation
Projected benefit obligation $ 2,383 $ 1,885
Service cost 125 106
Interest cost 149 136
Actuarial gains 81 264
Annuity payments and lump sum distributions (8) (8)
------- -------
Projected benefit obligation $ 2,730 $ 2,383
======= =======
Change in plan assets
Market value of assets $ 1,536 $ 1,156
Actual return on plan assets 129 127
Employer contributions 233 260
Annuity payments and lump sum distributions (8) (8)
------- -------
Market value of assets 1,890 1,535
------- -------
Projected benefit obligation in excess of plan assets (840) (847)
Unrecognized net obligation 54 57
Unrecognized net losses 931 915
Prior service cost due to plan amendment August 1, 1998 57 71
------- -------
Prepaid pension costs $ 202 $ 196
======= =======
(Continued)
F-23
MAGYAR BANK
Notes to Consolidated Financial Statements - Continued
June 30, 2005 (unaudited) and September 30, 2004 and 2003
NOTE J - PENSION PLAN - Continued
Employer contribution made for the nine months ended June 30, 2005 and 2004
was $48,000 and $233,000, respectively.
Net pension cost for the periods ended June 30, 2005 and 2004 and September
30, 2004 and 2003, respectively, included the following components (in
thousands):
June 30, September 30,
-------------------- --------------------
2005 2004 2004 2003
----- ----- ----- -----
(unaudited)
Service cost benefits earned during the year $ 105 $ 94 $ 125 $ 106
Interest cost on projected benefit obligation 130 111 149 136
Expected return on plan assets (111) (95) (127) (118)
Amortization of transitional obligation 3 3 3 3
Amortization of unrecognized loss 46 47 63 60
Amortization of unrecognized past service
liability 20 10 14 14
----- ----- ----- -----
Net periodic pension cost $ 193 $ 170 $ 227 $ 201
===== ===== ===== =====
For 2004 and 2003, the weighted average discount rate and rate of increase
in future compensation levels used in determining the actuarial present
value of the projected benefit obligation were 6.125% and 6.25% and 3.25%
and 3.50%, respectively. The expected long-term rates of return on assets
were 7.50% and 7.50% for 2004 and 2003.
Determination of Long-Term Rate-of-Return
-----------------------------------------
The long-term rate-of-return on assets assumption was set based on
historical returns earned by equities and fixed income securities, adjusted
to reflect expectations of future returns as applied to the plan's target
allocation of asset classes. Equities and fixed income securities were
assumed to earn real rates of return in the ranges of 5-9% and 2-6%,
respectively. The long-term inflation rate was estimated to be 3%. When
these overall return expectations are applied to the plan's target
allocation, the expected rate of return is determined to be between 6.5% and
10.5%.
Current Asset Allocation
------------------------
The Bank's pension plan weighted-average asset allocations at September 30,
2004 and 2003, by asset category are as follows:
2004 2003
---- ----
Equity securities 52% 52%
Debt Securities (Bond Mutual Funds) 48% 48%
---- ----
Total 100% 100%
==== ====
(Continued)
F-24
MAGYAR BANK
Notes to Consolidated Financial Statements - Continued
June 30, 2005 (unaudited) and September 30, 2004 and 2003
NOTE J - PENSION PLAN - Continued
Expected Contributions
----------------------
For the Fiscal Year ending September 30, 2005, the Bank expects to
contribute approximately $170,000 to the Plan.
Estimated Future Benefit Payments
---------------------------------
The following benefit payments, which reflect approximate expected future
service, as appropriate, are expected to be paid as follows (in thousands):
2005 $ 21
2006 30
2007 40
2008 61
2009 85
Years 2010-2014 806
NOTE K - NONQUALIFIED COMPENSATION PLAN
During 1996, the Bank adopted a Supplemental Executive Retirement Plan
(SERP) for the benefit of its officers. In addition, the Bank also adopted
voluntary Deferred Income and Emeritus Plans on behalf of their directors
and those directors elected by the Board as "Director Emeritus." The SERP
provides the Bank with the opportunity to supplement the retirement income
of selected officers to achieve equitable wage replacement at retirement
while the Deferred Income Plan provides participating directors with an
opportunity to defer all or a portion of their fees into a tax deferred
accumulation account for future retirement. The Director Emeritus Plan
enables the Bank to reward its directors for longevity of service in
consideration of their availability and consultation at a sum equal to a
fifteen year certain annuity based on fifty-percent of their directors' last
years' Board fee. The SERP is based upon achieving retirement benefits equal
to two percent multiplied by the number of service years multiplied by the
final salary.
In 2001, the Bank adopted a New Director Emeritus Plan (the New Plan), which
supplemented the prior Director Emeritus Plans. Under the New Plan, the
Directors will be entitled to a Benefit upon attainment of his/her benefit
age. The Directors will receive an annual amount in monthly installments
based on the his/her total Board and Committee fees in the twelve month
prior to attainment of his/her benefit age. The amount will be 10% plus 2%
for each year of service with a maximum of 50%, provided that the Director
has served for at least five years with a maximum of 60%.
The Bank funded the original plans through a modified endowment contract
with a cash premium paid of $2,468,250 during fiscal 1996 and an additional
cash premium of $800,000 during 2000. The New Plan was funded on August 1,
2001 with a cash premium paid of $845,000. Income recorded for the plans
represents life insurance income as recorded based on the projected
increases in cash surrender values of life insurance policies. As of June
30, 2005, September 30, 2004 and 2003, the Life Insurance Contracts have a
cash surrender value of approximately $5,764,000, $5,636,000 and $5,181,000,
respectively.
(Continued)
F-25
MAGYAR BANK
Notes to Consolidated Financial Statements - Continued
June 30, 2005 (unaudited) and September 30, 2004 and 2003
NOTE K - NONQUALIFIED COMPENSATION PLAN - Continued
The Bank is recording benefit costs so that the cost of each participant's
retirement benefits is being expensed and accrued over the participant's
active employment so as to result in a liability at retirement date equal to
the present value of the benefits expected to be provided.
As of June 30, 2005, September 30, 2004 and 2003, the Bank had accrued
approximately $395,000, $127,000 and $1,332,000, respectively, for benefits
under these Plans.
NOTE L - 401(K) EMPLOYEE CONTRIBUTION PLAN
The Bank has a defined contribution 401(k) plan covering all employees, as
defined under the plan document. Employees may contribute to the plan, as
defined under the plan document, and the Bank can make discretionary
contributions. The Bank contributed approximately $81,000, $53,000, $76,000
and $51,000 to the plan for the nine months ended June 30, 2005 and 2004 and
years ended September 30, 2004 and 2003, respectively.
NOTE M - LEASE COMMITMENTS
Approximate future minimum payments under non-cancelable operating leases
relating to one of our operating branches due as follows (in thousands):
June 30, September 30,
2005 2004
----------- -------------
(unaudited)
2005 N/A $101
2006 $101 101
2007 108 116
2008 116 116
2009 116 116
2010 116 116
Thereafter 116 116
---- ----
$673 $782
==== ====
The total rental expense was approximately $114,000, $238,000, $333,000 and
$258,000 for the nine months ended June 30, 2005 and 2004, and years ended
September 30, 2004 and 2003, respectively.
NOTE N - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments are commitments to extend credit. Those
instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amounts recognized in the balance sheets.
(Continued)
F-26
MAGYAR BANK
Notes to Consolidated Financial Statements - Continued
June 30, 2005 (unaudited) and September 30, 2004 and 2003
NOTE N - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - Continued
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The
Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
At June 30, 2005, September 30, 2004 and 2003, the Bank had outstanding
commitments (substantially all of which expire within one year) to originate
residential mortgage loans, construction loans, commercial real estate and
consumer loans. These commitments were comprised of fixed and variable rate
loans (in thousands).
September 30,
June 30, ----------------------
2005 2004 2003
-------- -------- --------
Financial instruments whose contract amounts
represent credit risk
Unused lines of credit $ 28,414 $ 18,190 $ 12,976
Fixed rate loan commitments $ 10,200 $ 763 $ 571
Variable rate loan commitments $ 40,300 $ 30,888 $ 16,139
Unused lines of credit are legally binding agreements to lend to a customer
as long as there is no violation of any condition established in the
contract. Lines of credit generally have fixed expiration dates or other
termination clauses. The amount of collateral obtained, if deemed necessary
by the Bank, is based on management's credit evaluation of the borrower.
NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate fair value:
Cash on hand and on deposit -- For these short-term instruments, the
carrying amount is a reasonable estimate of fair value.
Investment securities -- For investment securities, fair values are based
on quoted market prices.
Loans -- Fair value for the loan portfolio is based on independent prices
obtained from an independent brokerage firm. Such estimates incorporate
information relating to weighted average term to maturity, weighted
average coupon, the weighted average balance, the value of servicing
rights, rate resetting characteristics, maturity and amortization
attributes.
For nonperforming loans, fair value is calculated by first reducing the
carrying value by a reserve amount based on internal and regulatory loan
classifications. Values are further adjusted according to recent
appraised values on the individual properties. If recent appraisals are
not available, a discount is applied depending on the date of the last
appraisal performed on the property. The carrying value, which is net of
reserves and valuation allowances, is therefore considered a reasonable
estimate of fair value.
(Continued)
F-27
MAGYAR BANK
Notes to Consolidated Financial Statements - Continued
June 30, 2005 (unaudited) and September 30, 2004 and 2003
NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
The fair value of commitments to extend credit is estimated based on the
amount of unamortized deferred loan commitment fees. The fair value of
letters of credit is based on the amount of unearned fees plus the
estimated costs to terminate the letters of credit. Fair values of
unrecognized financial instruments including commitments to extend credit
and the fair value of letter of credit are considered immaterial.
Savings deposits -- The fair value of savings deposits with no stated
maturity, such as money market deposit accounts, interest-bearing
checking accounts and savings accounts, is equal to the amount payable on
demand. The fair value of certificates of deposit is based on the
discounted value of contractual cash flows. The discount rate is
equivalent to the rate currently offered by the Bank for deposits of
similar size, type and maturity.
Accrued interest receivable and payable -- For these short-term
instruments, the carrying amount is a reasonable estimate of fair value.
Federal Home Loan Bank of New York advances and Securities sold under
reverse repurchase agreements -- The fair value of borrowings is based on
the discounted value of contractual cash flows. The discount rate is
equivalent to the rate currently offered by the Federal Home Loan Bank of
New York for borrowings of similar maturity and terms.
The carrying amounts and estimated fair values of the Bank's financial
instruments at June 30, 2005 (unaudited), September 30, 2004 and 2003 are as
follows (in thousands):
2005
-------------------------
Carrying Fair
value value
-------- --------
Financial assets
Investment and mortgage-backed securities $ 58,154 $ 58,056
Loans, less allowance for loan losses 248,312 249,820
Bank owned life insurance 5,764 5,764
Financial liabilities
Deposits
Demand, NOW and money market savings 121,547 121,547
Certificates of deposit, other 137,534 137,093
-------- --------
Total deposits 259,081 258,640
-------- --------
Federal Home Loan Bank of New York
Advances and securities sold under reverse repurchase agreements $ 36,729 $ 37,008
======== ========
(Continued)
F-28
MAGYAR BANK
Notes to Consolidated Financial Statements - Continued
June 30, 2005 (unaudited) and September 30, 2004 and 2003
NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
2004 2003
------------------------- -------------------------
Carrying Fair Carrying Fair
value value value value
-------- -------- -------- --------
Financial assets
Investment and mortgage-backed securities $ 73,786 $ 74,029 $ 77,343 $ 78,274
Loans, less allowance for loan losses 193,550 194,971 173,768 176,366
Bank owned insurance policies 5,636 5,636 5,181 5,181
Financial liabilities
Deposits
Demand, NOW and money market savings $111,730 $111,730 $112,018 $112,018
Certificates of deposit, other 112,244 112,577 113,657 115,020
-------- -------- -------- --------
Total deposits 223,974 224,307 225,675 227,038
-------- -------- -------- --------
Federal Home Loan Bank of New York
Advances and securities sold under reverse
repurchase agreements $ 35,043 $ 36,110 $ 20,027 $ 20,027
======== ======== ======== ========
The fair value of commitments to extend credit is estimated based on the
amount of unamortized deferred loan commitment fees. The fair value of
letters of credit is based on the amount of unearned fees plus the estimated
cost to terminate the letters of credit. Fair values of unrecognized
financial instruments including commitments to extend credit and the fair
value of letters of credit are considered immaterial.
NOTE P - REGULATORY CAPITAL
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank. The average amount of this balance for the nine months ended
June 30, 2005, was approximately $375,000.
The Bank is required to maintain minimum amounts of capital to total
"risk-weighted" assets, as defined by the banking regulators. Failure to
meet minimum capital requirements can initiate certain mandatory and
possibly discretionary actions by regulators that, if undertaken, could have
a direct material effect on the Banks' financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain off
balance sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum ratios of Leverage Capital, Tier I and
Total Risk-based Capital. The following table sets forth (in thousands) the
Bank's actual and required capital levels under those measures:
(Continued)
F-29
MAGYAR BANK
Notes to Consolidated Financial Statements - Continued
June 30, 2005 (unaudited) and September 30, 2004 and 2003
NOTE P - REGULATORY CAPITAL - Continued
To be well-
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------------------- -------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
--------- ----- --------- ----- -------- -----
As of June 30, 2005 (unaudited)
Total capital (to risk-weighted assets) $ 25,985 10.96% $ 18,966 => 8.00% $ 23,708 =>10.00%
Tier I Capital (to risk-weighted assets) 23,504 9.91% 9,483 => 4.00% 14,225 => 6.00%
Tier I Capital (to average assets) 23,504 7.46% 9,450 => 3.00% 15,750 => 5.00%
As of September 30, 2004
Total capital (to risk-weighted assets) $ 25,602 13.79% $ 14,849 => 8.00% $ 18,561 =>10.00%
Tier I Capital (to risk-weighted assets) 23,227 12.54% 7,424 => 4.00% 11,137 => 6.00%
Tier I Capital (to average assets) 23,227 8.36% 8,357 => 3.00% 13,929 => 5.00%
As of September 30, 2003
Total capital (to risk-weighted assets) $ 24,552 15.07% $ 13,030 => 8.00% $ 16,288 =>10.00%
Tier I Capital (to risk-weighted assets) 22,516 13.82% 6,515 => 4.00% 9,773 => 6.00%
Tier I Capital (to average assets) 22,516 8.29% 8,147 => 3.00% 13,578 => 5.00%
As of September 30, 2004, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well-capitalized under
the regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management believes have
changed the Bank's category. At September 30, 2004, management believes that
the Bank meets all capital adequacy requirements to which it is subject.
NOTE Q - REORGANIZATION (UNAUDITED)
On July 6, 2005, the Board of Directors of Magyar Bank adopted a Plan of
Reorganization from a Mutual Savings Bank to a Mutual Holding Company and
Stock Issuance Plan pursuant to which the Bank proposes to reorganize from a
New Jersey-chartered mutual savings bank into the mutual holding company
structure pursuant to the laws of the State of New Jersey, the regulations
of the Commissioner, the regulations of the FDIC, and other applicable
federal laws and regulations. A principal part of the Reorganization is (i)
the formation of the Mutual Holding Company as a New Jersey-chartered mutual
holding company, (ii) the formation of the Stock Holding Company as a
capital stock corporation and a wholly-owned subsidiary of the Mutual
Holding Company, and (iii) the conversion of the Bank to the Stock Bank,
which will be a New Jersey-chartered stock savings bank and a wholly-owned
subsidiary of the Stock Holding Company as long as the Mutual Holding
Company is in. existence. The Mutual Holding Company will always own at
least a majority of the Stock Holding Company's common stock so long as the
Mutual Holding Company is in existence. The Reorganization is subject to the
approval of the Commissioner, the FDIC, and the FRB.
(Continued)
F-30
MAGYAR BANK
Notes to Consolidated Financial Statements - Continued
June 30, 2005 (unaudited) and September 30, 2004 and 2003
NOTE Q - REORGANIZATION - Continued
Concurrently with the Reorganization, the Stock Holding Company intends to
offer for sale up to 49.9% of its Common Stock in the Stock Offering on a
priority basis to qualifying depositors and Tax-Qualified Employee Plans of
the Bank, with any remaining shares offered to the public in a Community
Offering or a Syndicated Community Offering, or a combination thereof. The
Stock Offering will be conducted in accordance with applicable federal and
state laws and regulations.
In the event the Stock Holding Company is not established as part of the
Reorganization, the Board of Directors may elect to proceed with the
Reorganization by forming the Stock Bank as a direct majority-owned
subsidiary of the Mutual Holding Company. In such event, any reference in
this Plan to a Stock Offering by the Stock Holding Company shall mean a
stock offering by the Stock Bank directly, and the terms and conditions of
the Stock Offering described herein shall apply to a stock offering by the
Stock Bank unless clearly inapplicable.
As part of the Stock Offering and consistent with the Bank's ongoing
commitment to remain an independent community-oriented savings bank, the
Bank will establish a charitable foundation or trust. The charitable
foundation would complement the Bank's existing community reinvestment and
charitable activities in a manner that will allow the community to share in
the growth and success of the Bank. Accordingly, concurrently with the
completion of the Stock Offering, the Stock Holding Company will contribute
to a new charitable foundation shares of Common Stock and/or cash, provided
the total contribution of Common Stock and/or cash to the charitable
foundation does not exceed 8% of the gross proceeds of the Stock Offering,
and provided that the number of shares of Common Stock to be held by the
charitable foundation following such contribution shall be less than 2% of
the total number of shares of Common Stock to be outstanding.
F-31
You should rely only on the information contained in this document or
that to which we have referred you. We have not authorized anyone to provide you
with information that is different. This document does not constitute an offer
to sell, or the solicitation of an offer to buy, any of the securities offered
hereby to any person in any jurisdiction in which such offer or solicitation
would be unlawful. The affairs of Magyar Bank or Magyar Bancorp, Inc. may change
after the date of this prospectus. Delivery of this document and the sales of
shares made hereunder does not mean otherwise.
Magyar Bancorp, Inc.
Proposed Holding Company for Magyar Bank
2,277,000 Shares of Common Stock
(Subject to Increase to up to 2,618,550 Shares)
---------------
PROSPECTUS
---------------
Ryan Beck & Co., Inc.
November 14, 2005
UNTIL THE LATER OF DECEMBER 16, 2005 OR 25 DAYS AFTER THE COMMENCEMENT OF THE
SYNDICATED COMMUNITY OFFERING, IF ANY, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.