Magyar Bancorp, Inc. 10-K

ITEM 1. Business Forward Looking Statements We have included or incorporated by reference in this Annual Report on Form 10-K, and from time to time our management may make, statements that may constitute “forward-looking statements” within the meaning of the safe harbour provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts but instead represent only our beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These statements include statements other than historical information or statements of current condition and may relate to our future plans and objectives and results, as well as statements about the objective and effectiveness of our risk management and liquidity policies, statements about trends in or growth opportunities for our business, statements about our future status, and activities or reporting under U.S. banking and financial regulation. Forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Important factors that could cause our actual results and financial condition to differ from those indicated in the forward-looking statements include, among others, those discussed below and under “Risk Factors” in Part 1, Item 1A of this Annual Report on Form 10-K. Conversion and Reorganization of Magyar Bancorp, MHC Prior to consummation of its mutual to stock conversion in July 2021, Magyar Bancorp, MHC (the “MHC”) was the New Jersey-chartered mutual holding company of Magyar Bancorp, Inc. (the “Company”). The MHC’s only business was the ownership of 55.0% of the issued shares of common stock of the Company. On February 25, 2021, the MHC adopted a Plan of Conversion and Reorganization (the “Plan”) pursuant to which the MHC would undertake a “second-step” conversion and Magyar Bank, the Company’s wholly owned subsidiary, would reorganize from the two-tier mutual holding company structure to the fully-public stock holding company structure. The Plan received all required regulatory, depositor and stockholder approval, and the conversion and offering were consummated on July 14, 2021 on which date the MHC ceased to exist. Pursuant to the Plan, (i) the shares of the Company’s common stock held by persons other than the MHC (the shares held by the MHC were canceled) were converted into new shares of the Company’s common stock based on an exchange ratio designed to preserve the percentage ownership interests of such persons, and (ii) the Company offered and sold shares of common stock, representing the ownership interest of the MHC in the Company, in a subscription offering. In the stock offering, the Company raised gross proceeds of $39.1 million by selling 3,910,000 shares of common stock at $10.00 per share. Concurrent with the completion of the stock offering, each share of the Company’s common stock owned by public stockholders (stockholders other than the MHC) was exchanged for 1.2213 new shares of Company common stock. A total of 7,097,825 shares of common stock were issued and outstanding at September 30, 2021. As a result of the second-step conversion, all share and per share information has been subsequently revised to reflect the 1.2213 exchange ratio, unless otherwise noted. Magyar Bancorp, Inc. The Company is a Delaware-chartered corporation which owns 100% of the outstanding shares of common stock of Magyar Bank. Magyar Bancorp, Inc. has not engaged in any significant business activity other than owning all of the shares of common stock of Magyar Bank. At September 30, 2021, Magyar Bancorp, Inc. had consolidated assets of $774.0 million, total deposits of $639.8 million and stockholders’ equity of $97.6 million. The executive office of Magyar Bancorp, Inc. is located at 400 Somerset Street, New Brunswick, New Jersey 08901, and its telephone number is (732) 342-7600. Magyar Bancorp, Inc. is subject to regulation and examination by the Board of Governors of the Federal Reserve System (“FRB”) and the New Jersey Department of Banking and Insurance (“NJDBI”). 2 Table of Contents Magyar Bank Magyar Bank is a New Jersey-chartered savings bank headquartered in New Brunswick, New Jersey that was originally founded in 1922 as a New Jersey building and loan association. In 1954, Magyar Bank converted to a New Jersey savings and loan association, before converting to a New Jersey savings bank charter in 1993. We conduct business from our main office located at 400 Somerset Street, New Brunswick, New Jersey, and our seven branch offices located in New Brunswick, North Brunswick, South Brunswick, Branchburg, Bridgewater, and Edison, New Jersey. The telephone number at our main office is (732) 342-7600 and our website is located at www.magbank.com. General Our principal business consists of attracting retail deposits from the general public in the areas surrounding our main office in New Brunswick, New Jersey and our branch offices located in Middlesex and Somerset Counties, New Jersey, and investing those deposits, together with funds generated from operations and wholesale funding, in residential mortgage loans, home equity loans, home equity lines of credit, commercial real estate loans, commercial business loans, Small Business Administration (“SBA”) loans, construction loans and investment securities. We also originate consumer loans, which consist primarily of secured demand loans. We originate loans primarily for our loan portfolio. However, from time to time we have sold some of our long-term, fixed-rate residential mortgage loans into the secondary market, while retaining the servicing rights for such loans. In addition, we sell the SBA-guaranteed portion of SBA loans into the secondary market, while retaining the servicing rights for such loans. Our revenues are derived principally from interest on loans and securities, our investment securities consist primarily of mortgage-backed securities and U.S. Government and government-sponsored enterprise obligations. We also generate revenues from fees and service charges. Our primary sources of funds are deposits, borrowings and principal and interest payments on loans and securities. We are subject to comprehensive regulation and examination by the NJDBI and the Federal Deposit Insurance Corporation (“FDIC”). Market Area We are headquartered in New Brunswick, New Jersey, and our primary deposit market area is concentrated in the communities surrounding our headquarters branch and our branch offices located in Middlesex and Somerset Counties, New Jersey. Our primary lending market area is broader than our deposit market area and includes all of New Jersey. The economy of our primary market area is largely urban and suburban with a broad economic base that is typical for counties surrounding the New York metropolitan area. The median household income in Middlesex and Somerset Counties ranks among the highest in the nation. Competition We face intense competition within our market area both in making loans and attracting deposits. Our market area has a high concentration of financial institutions including large money center and regional banks, community banks and credit unions. Some of our competitors offer products and services that we currently do not offer, such as trust services and private banking. According to the Federal Deposit Insurance Corporation’s annual Summary of Deposit report, at June 30, 2021, our market share of deposits was 1.33% and 0.42% in Middlesex and Somerset Counties, respectively. Our market share of deposits was 1.22% and 0.46%, respectively, at June 30, 2020. Our competition for loans and deposits comes principally from commercial banks, savings institutions, mortgage banking firms and credit unions. We face additional competition for deposits from short-term money market funds, brokerage firms, mutual funds and insurance companies. Our primary focus is to build and develop profitable customer relationships across all lines of business while maintaining our role as a community bank. Lending Activities We originate residential mortgage loans to purchase or refinance residential real property. Residential mortgage loans represented $203.0 million, or 34.2% of our total loans at September 30, 2021. Historically, we have not originated a significant number of loans for the purpose of reselling them in the secondary market. In the future, however, to help manage interest rate risk and to increase fee income, we may increase our origination and sale of residential mortgage loans. No loans were held for sale at September 30, 2021. We also originate commercial real estate, commercial business and construction loans. At September 30, 2021, these loans totaled $280.8 million, or 47.2%, $68.7 million, or 11.6%, and $20.4 million, or 3.4%, respectively, of our total loan portfolio. We also offer consumer loans, which consist primarily of home equity lines of credit and stock-secured demand loans. At September 30, 2021, home equity lines of credit and stock-secured demand loans totaled $17.9 million, or 3.0% and $3.8 million, or 0.6%, respectively, of our total loan portfolio. 3 Table of Contents Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan, at the dates indicated. September 30, 2021 2020 2019 2018 2017 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent (Dollars in thousands) One-to-four-family residential $ 203,019 34.2% $ 210,360 34.4% $ 190,415 36.4% $ 185,287 36.2% $ 178,336 37.6% Commercial real estate 280,848 47.2% 248,134 40.6% 232,544 44.5% 219,347 42.8% 207,118 43.7% Construction 20,350 3.4% 28,242 4.6% 28,451 5.4% 30,412 5.9% 22,622 4.8% Home equity lines of credit 17,930 3.0% 19,373 3.2% 17,832 3.4% 17,982 3.5% 18,536 3.9% Commercial business 68,719 11.6% 100,993 16.5% 48,769 9.3% 53,320 10.4% 41,113 8.7% Other 3,751 0.6% 4,157 0.7% 4,990 1.0% 6,150 1.2% 6,266 1.3% Total loans receivable $ 594,617 100.0% $ 611,259 100.0% $ 523,001 100.0% $ 512,498 100.0% $ 473,991 100.0% Net deferred loan costs (1,241 ) (1,749 ) 104 132 177 Allowance for loan losses (8,075 ) (6,400 ) (4,888 ) (4,200 ) (3,475 ) Total loans receivable, net $ 585,301 $ 603,110 $ 518,217 $ 508,430 $ 470,693 Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at September 30, 2021. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. One-to-Four-Family Commercial Home Equity Residential Real Estate Construction Lines of Credit Due During the Weighted Weighted Weighted Weighted Fiscal Years Ending Average Average Average Average September 30, Amount Rate Amount Rate Amount Rate Amount Rate (Dollars in thousands) 2022 $ 2,432 4.15% $ 20,413 6.36% $ 19,391 6.60% $ 6,409 4.13% 2023 1,306 3.94% 2,003 5.21% — — 80 5.00% 2024 1,090 6.09% 5,134 4.71% 461 5.92% — — 2025 to 2026 2,004 4.25% 25,418 4.03% — — — — 2027 to 2031 9,336 4.00% 26,965 4.78% — — 403 4.00% 2032 to 2036 23,924 3.56% 29,512 4.59% — — 1,089 3.49% 2037 and beyond 162,927 3.92% 171,403 4.33% 498 4.71% 9,949 4.02% Total $ 203,019 3.90% $ 280,848 4.53% $ 20,350 6.53% $ 17,930 4.03% Commercial Business Other Total Due During the Weighted Weighted Weighted Fiscal Years Ending Average Average Average September 30, Amount Rate Amount Rate Amount Rate (Dollars in thousands) 2022 $ 24,574 4.22% $ 185 14.50% $ 73,404 5.46% 2023 1,639 4.33% 3 13.00% 5,031 4.60% 2024 848 4.99% 13 8.60% 7,546 5.02% 2025 to 2026 29,752 1.76% 26 9.84% 57,200 2.86% 2027 to 2031 3,817 4.55% — — 40,521 4.57% 2032 to 2036 606 5.67% 11 3.94% 55,142 4.13% 2037 and beyond 7,483 5.51% 3,513 2.37% 355,773 4.14% Total $ 68,719 3.34% $ 3,751 3.06% $ 594,617 4.22% 4 Table of Contents The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at September 30, 2021 that are contractually due after September 30, 2022. Due After September 30, 2022 Fixed Adjustable Total (In thousands) One-to-four-family residential $ 123,439 $ 77,148 $ 200,587 Commercial real estate 37,648 222,787 260,435 Construction 461 498 959 Home equity lines of credit 163 11,358 11,521 Commercial business 32,155 11,990 44,145 Other 44 3,522 3,566 Total $ 193,910 $ 327,303 $ 521,213 Residential Mortgage Loans. We originate residential mortgage loans, most of which are secured by properties located in our primary market area and most of which we hold in portfolio. At September 30, 2021, $203.0 million, or 34.2% of our total loan portfolio, consisted of residential mortgage loans (including home equity loans). Residential mortgage loan originations are generally obtained from our in-house loan representatives, from existing or past customers, through advertising, and through referrals from attorneys, real estate brokers, and local builders and are underwritten pursuant to Magyar Bank’s policies and standards. Generally, residential mortgage loans are originated in amounts up to 80% of the lesser of the appraised value or purchase price of the property, with private mortgage insurance required on loans with a loan-to-value ratio in excess of 80%. We generally will not make residential mortgage loans with a loan-to-value ratio in excess of 95%, which is the upper limit that has been established by the Board of Directors. Mortgage loans have been primarily originated for terms of up to 30 years. Magyar Bank does not originate or purchase “sub-prime” (mortgages granted to borrowers whose credit history is not sufficient to get a conventional mortgage) or option ARM mortgage loans. At September 30, 2021, non-performing residential mortgage loans totaled $1.2 million, or 0.57% of the total residential loan portfolio. Interest income of $55,000 would have been recorded on non-performing residential mortgage loans for the year ended September 30, 2021 if they had been current in accordance with their original terms. During the year ended September 30, 2021, there were no charge-offs against the allowance for loan loss for impaired residential real estate loans while $1,000 was recovered from prior year charge-offs. We also originate home equity loans secured by residences located in our market area. The underwriting standards we use for home equity loans include a determination of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations, the ongoing payments on the proposed loan and the value of the collateral securing the loan. The maximum combined (first and second mortgage liens) loan-to-value ratio for home equity loans and home equity lines of credit is 80%. Home equity loans are generally offered with fixed rates of interest with the loan amount not to exceed $500,000 and with terms of up to 30 years. There were no non-performing home equity loans and there were no charge-offs against the allowance for loan loss for impaired home equity loans while $1,000 was recovered from prior year charge-offs for the year ended September 30, 2021. We offer fixed-rate mortgage loans with terms of either 10, 15, 20 or up to 30 years. While these loans are normally originated with up to 30-year terms, such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full upon sale of the property pledged as security or upon refinancing the original loan. Therefore, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans. Generally, all fixed-rate residential mortgage loans are underwritten according to Federal Home Loan Mortgage Corporation (“Freddie Mac”) guidelines, policies and procedures. Historically, we have not originated a significant number of loans for the purpose of reselling them in the secondary market. In the future we may increase our origination and sale of fixed-rate residential mortgage loans to help manage interest rate risk and to increase fee income. There were no fixed-rate mortgage loans sold to Freddie Mac during the year ended September 30, 2021 and there were no loans were held for sale at September 30, 2021. We generally do not purchase residential mortgage loans, except for loans to low-income borrowers to enhance our Community Reinvestment Act performance. There were no residential mortgage loans purchased during the year ended 5 Table of Contents September 30, 2021. We underwrite purchased residential mortgage loans using the same criteria as if we were originating the loans. At September 30, 2021, we had $125.9 million of fixed-rate residential mortgage loans, which represented 62.0% of our total residential mortgage loan portfolio. At September 30, 2021, our largest fixed-rate residential mortgage loan was $1.8 million. The loan was performing in accordance with its repayment terms at September 30, 2021. We also offer adjustable-rate residential mortgage loans with interest rates based on the weekly average yield on U.S. Treasuries or the London Interbank Offering Rate (“LIBOR”) 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-, seven-, and ten-year initial fixed-rate period. Our adjustable-rate mortgage loans generally provide for maximum rate adjustments of 2% per adjustment, with a lifetime maximum adjustment up to 5%, regardless of the initial rate. We also offer adjustable-rate mortgage loans with an interest rate based on the prime rate as published in The Wall Street Journal or the Federal Home Loan Bank of New York advance rates. Due to historically low interest rate levels, borrowers generally have preferred fixed-rate mortgage loans in recent years. Adjustable-rate mortgage loans decrease the risk associated with changes in market interest rates by periodically repricing. However, these loans have other risks because, as interest rates increase, the underlying payments by the borrower increase, which increases the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. The maximum periodic and lifetime interest rate adjustments also may limit the effectiveness of adjustable-rate mortgage loans during periods of rapidly rising interest rates. At September 30, 2021, adjustable-rate residential mortgage loans totaled $77.1 million, or 38.0% of our total residential mortgage loan portfolio. The largest adjustable-rate residential mortgage loan was for $2.5 million. The loan was performing in accordance with its repayment terms at September 30, 2021. In an effort to provide financing for low-and moderate-income home buyers, we offer low-to-moderate income residential mortgage loans. These loans are offered with fixed rates of interest and terms of up to 40 years, and are secured by one-to four-family residential properties. All of these loans are originated using underwriting guidelines of U.S. government-sponsored enterprises such as Federal Home Loan Mortgage Corporation (“Freddie Mac”). These loans are originated with maximum loan-to-value ratios of 95%. All residential mortgage loans we originate include “due-on-sale” clauses, which give us the right to declare a loan immediately due and payable if the borrower sells or otherwise disposes of the real property securing the mortgage loan. All borrowers are required to obtain title insurance, fire and casualty insurance and, if warranted, flood insurance on properties securing real estate loans. Commercial Real Estate Loans. We also originate commercial real estate loans, most of which are secured by properties located in our primary market area. At September 30, 2021, $280.8 million, or 47.2%, 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. We generally originate adjustable-rate commercial real estate loans with a maximum term of 25 years with adjustable-rate periods every five years. The maximum loan-to-value ratio for our commercial real estate loans is 75%, based on the appraised value of the property. We consider a number of factors when we originate commercial real estate loans. During the underwriting process we evaluate the business qualifications and financial condition of the borrower, including credit history, profitability of the property being financed, as well as the value and condition of the mortgaged property securing the loan. When evaluating the business qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, we consider the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service) to ensure it is at least 120% of the monthly debt service. We require personal guarantees on all commercial real estate loans made to individuals. Generally, commercial real estate loans made to corporations, partnerships and other business entities require personal guarantees by the principals. All borrowers are required to obtain title, fire and casualty insurance and, if warranted, flood insurance. 6 Table of Contents Loans secured by commercial real estate generally are larger than residential mortgage loans and involve greater credit risk. Commercial real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Repayment of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Accordingly, the nature of these loans makes them more difficult for management to monitor and evaluate. The maximum amount of a commercial real estate loan is limited by our Board-established loans-to-one-borrower limit, which is currently 15% of Magyar Bank’s capital, or $13.0 million. At September 30, 2021, our largest commercial real estate loan was $12.0 million to finance the purchase of a nursing and rehabilitation home in Edison, New Jersey. The loan amount was 65% of the lower of the purchase price, which was lower than the appraised value. The loan was performing in accordance with its terms at September 30, 2021. Non-performing commercial real estate loans decreased $1.1 million, or 51.4%, to $1.1 million at September 30, 2021 from $2.2 million at September 30, 2020. During the year ended September 30, 2021, there was one charge-off totaling $51,000 against the allowance for loan loss and there were no recoveries of prior year charge-offs. Interest income of $97,000 would have been recorded on non-performing commercial real estate loans for the year ended September 30, 2021 if they had been current in accordance with their original terms. All other loans secured by commercial real estate were performing in accordance with their terms. Construction Loans. We also originate construction loans for the development of one-to four-family homes, apartment buildings and commercial properties. Construction loans are generally offered to experienced local developers operating in our primary market area and to individuals for the construction of their personal residences. At September 30, 2021, our construction loans totaled $20.4 million, or 3.4% of total loans. At September 30, 2021, construction loans for the development of one-to four-family residential properties totaled $10.9 million. These construction loans generally have a maximum term of 24 months. We provide financing for land acquisition, site improvement and construction of individual homes. Land acquisition loans are limited to 50% to 75% of the sale price of the land. Site improvement loans are limited to 100% of the bonded site improvement costs. Construction loans are limited to 75% of the lesser of the contract sale price or appraised value of the property (less funds already advanced for land acquisition and site improvement). At September 30, 2021, construction loans for the development of commercial properties totaled $9.1 million. These construction loans have a maximum term of 24 months. The maximum loan-to-value ratio limit applicable to these loans is 75% of the appraised value of the property. At September 30, 2021, construction loans for the development of town homes, condominiums and apartment buildings totaled $358,000. The maximum loan-to-value ratio limit applicable to these loans is 70% of the appraised value of the property. We may retain up to 10% of each loan advance until the property attains a 90% occupancy level. The maximum amount of a construction loan is limited by our loans-to-one-borrower limit, which is currently 15% of Magyar Bank’s capital, or $13.0 million. At September 30, 2021, our largest outstanding construction loan was a $2.8 million loan to finance the construction of a single-family home in Colts Neck, New Jersey. The loan has been past due greater than 90 days since the Bank declined to renew the loan upon its maturity in January 2018. At September 30, 2021, the Bank was in the process of foreclosing on the real estate collateral securing the loan as well as pursuing the personal guarantors of the loan. At September 30, 2021, there were a total of two non-performing construction loan totaling $4.6 million. Interest income of $327,000 would have been recorded on these non-performing construction loans for the year ended September 30, 2021, if they had been current in accordance with their original term. During the year ended September 30, 2021, there were no charge-offs against the allowance for loan loss and there were no recoveries from prior year charge-offs. Before making a commitment to fund a construction loan, we require an appraisal of the property by an independent licensed appraiser. We generally also engage an outside engineering firm to review and inspect each property before disbursement of funds during the term of a construction loan. Loan proceeds are disbursed after inspection based on the percentage of completion method. We require a personal guarantee from each principal of all of our construction loan borrowers. 7 Table of Contents Construction lending is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost is inaccurate, we may be required to advance funds beyond the amount originally committed in order to protect the value of the property. Additionally, if our estimate of the value of the completed property is inaccurate, our construction loan may exceed the value of the collateral. Commercial Business Loans. At September 30, 2021, our commercial business loans totaled $68.7 million, or 11.6% of total loans. We make commercial business loans primarily in our market area to a variety of professionals, sole proprietorships and small and mid-sized businesses. Our commercial business loans include term loans and revolving lines of credit. The maximum term of a commercial business loan is 25 years. Such loans are generally used for longer-term working capital purposes such as purchasing equipment or furniture. Commercial business loans are made with either adjustable or fixed rates of interest. The interest rates for adjustable commercial business loans are typically based on the prime rate as published in The Wall Street Journal . Included in commercial business loans are SBA 7(a) loans, on which the SBA provides guarantees of up to 75% (90% during the COVID-19 pandemic) of the principal balance (85% for loans under $150,000). These loans are made for the purposes of providing working capital and financing the purchase of equipment, inventory or commercial real estate, and may be made inside or outside the Company’s market place. Generally, an SBA 7(a) loan has a deficiency in its credit profile that would not allow the borrower to qualify for a traditional commercial loan, which is why the government provides the guarantee. The deficiency may be a higher loan to value ratio, lower debt service coverage ratio or weak personal financial guarantees. In addition, many SBA 7(a) loans are for start-up businesses where there is no history of financial information. Finally, many SBA borrowers do not have an ongoing and continuous banking relationship with the Bank, but merely work with the Bank on a single transaction. The guaranteed portions of the Company’s SBA loans are generally sold in the secondary market. When making commercial business loans, we consider the financial strength of the borrower, our lending history with the borrower, the debt service capabilities of the borrower, the projected cash flows of the business and the value and type of the collateral. Commercial business loans generally are secured by a variety of collateral, primarily accounts receivable, inventory, equipment, savings instruments and readily marketable securities. In addition, we generally require the business principals to execute personal guarantees. Commercial business loans generally have greater credit risk than residential mortgage loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to repay the loan from his or her employment income, and which are secured by real property with ascertainable value, commercial business loans generally are made on the basis of the borrower’s ability to repay the loan from the cash flow of the borrower’s business. As a result, the repayment of commercial business loans may depend substantially on the success of the borrower’s business. As such the performance of these types of loans may be particularly sensitive to local and/or national economic conditions. Further, any collateral securing commercial business loans may depreciate over time, may be difficult to appraise and may fluctuate in value. We try to minimize these risks through our underwriting standards. The Bank participated in the Paycheck Protection Program (“PPP”), which was designed by the U.S. Treasury under the Coronavirus Aid, Relief and Economic Security Act of 2020 (the “CARES Act”) to provide liquidity using the SBA’s platform to small businesses and self-employed individuals to maintain their staff and operations through the COVID-19 pandemic. This liquidity is in the form of a loan, 100% guaranteed by the SBA, that is forgivable provided the funds are used on qualifying payroll costs, and to a lesser extent, rent, utilities and interest on qualifying mortgage payments. The loans bear a fixed rate of 1.0% and loan payments are deferred through the date that the SBA remits the borrower’s loan forgiveness amount to the lender (or, if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness covered period). The Company originated 350 loans totaling $56.0 million under the CARES Act, all of which were repaid during the year ended September 30, 2021. The Company expects the majority of these loans to be approved for full forgiveness by the SBA. The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues (“Economic Aid Act”) extended the SBA’s authority to guarantee “Second Draw” PPP loans, under generally the same terms and conditions available under the First Draw program. In order to qualify for a Second Draw PPP loan, an applicant must have experienced a revenue reduction of at least 25% in 2020 relative to 2019. We originated 212 Second Draw PPP loans totaling $35.3 million. The contractual term of the loans is five years, although the Company expects the majority of these loans to be approved for full forgiveness by the SBA. At September 30, 2021, the Company held 111 Second Draw PPP loans totaling $25.1 million. 8 Table of Contents The maximum amount of a commercial business loan is limited by our loans-to-one-borrower limit, which is 15% of Magyar Bank’s capital, or $13.0 million. At September 30, 2021, our largest commercial business loan was a $6.0 million loan to a company that provides janitorial services and was secured by the accounts receivable of the company. This loan was performing according to its repayment terms at September 30, 2021. At September 30, 2021, one commercial business loan totaling $1.3 million was non-performing. Interest income of $75,000 would have been recorded on non-performing commercial business loans for the year ended September 30, 2021 if the loan had been current in accordance with its original term. During the year ended September 30, 2021, there were no charge-offs against the allowance for loan loss for impaired commercial business loans and there were $96,000 in recoveries from prior year charge-offs. Home Equity Lines of Credit and Other Loans. We originate home equity lines of credit secured by residences located in our market area. At September 30, 2021, these loans totaled $17.9 million, or 3.0% of our total loan portfolio. The underwriting standards we use for home equity lines of credit include a determination of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations, the ongoing payments on the proposed loan and the value of the collateral securing the loan. The maximum combined (first and second mortgage liens) loan-to-value ratio for home equity lines of credit is 80%. Home equity lines of credit have adjustable rates of interest, indexed to the prime rate, as reported in The Wall Street Journal , with terms of up to 25 years. The maximum amount of a home equity line of credit loan is limited by our loans-to-one-borrower limit, which is 15% of Magyar Bank’s capital, or $13.0 million. At September 30, 2021, our largest home equity line of credit loan was $1.4 million. The loan was performing according to its terms at September 30, 2021. At September 30, 2021, there were no charge-offs to home equity lines of credit, while there was $1,000 recovered from a prior year charge-off. We also originate loans secured by the common stock of publicly traded companies, provided their shares are listed on the New York Stock Exchange or the NASDAQ Stock Market, and provided the company is not a banking company. Stock-secured loans are interest-only and are offered for terms up to twelve months and for adjustable rates of interest indexed to the prime rate, as reported in The Wall Street Journal. The loan amount is not to exceed 70% of the value of the stock securing the loan at any time. At September 30, 2021, stock-secured loans totaled $3.8 million, or 0.6% of our total net loan portfolio. Generally, we limit the aggregate amount of loans secured by the common stock of any one corporation to 15% of Magyar Bank’s capital. At September 30, 2021, loans totaling $3.5 million, or 0.6% of our loan portfolio, were secured by the common stock of Johnson & Johnson a New York Stock Exchange company that operates a number of facilities in our market area and employs a substantial number of residents. Although these loans are underwritten based on the ability of the individual borrower to repay the loan, the concentration of our portfolio secured by this stock subjects us to the risk of a decline in the market price of the stock and, therefore, a reduction in the value of the collateral securing these loans. As of September 30, 2021, the aggregate loan-to-value ratio of the stock-secured portfolio was 13.6%. Loan Originations, Purchases, Participations and Servicing of Loans. Lending activities are conducted primarily by our loan personnel operating at our main and branch office locations. All loans originated by us are underwritten pursuant to our policies and procedures. We originate both adjustable rate and fixed rate loans. Our ability to originate fixed or adjustable rate loans is dependent upon the relative customer demand for such loans, which is affected by the current and expected future levels of market interest rates. Generally, we retain in our portfolio substantially all loans that we originate. Historically, we have not originated a significant number of loans for the purpose of selling them in the secondary market. In the future, however, to help manage our interest rate risk and to increase fee income, we may increase our origination and sale of fixed-rate residential loans and commercial business loans guaranteed by the SBA. All one-to four-family residential mortgage loans that we sell in the secondary market are sold with servicing rights retained pursuant to master commitments negotiated with Freddie Mac. We sell our loans to Freddie Mac without recourse. No loans were held for sale at September 30, 2021. At September 30, 2021, we were servicing SBA-guaranteed and commercial participation loans sold in the amount of $24.2 million and $11.4 million, respectively. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans. 9 Table of Contents From time-to-time, we will also participate in loans, sometimes as the “lead lender.” Whether we are the lead lender or not, we underwrite our participation portion of the loan according to our own underwriting criteria and procedures. At September 30, 2021, we had $28.4 million of loan participation interests in which we were the lead lender, and $17.6 million in loan participations in which we were not the lead lender. There were no commercial real estate loan participations originated during the year ended September 30, 2021 in which we were not the lead lender. We have entered into certain loan participations when the aggregate outstanding balance of a particular customer relationship exceeds our loan-to-one-borrower limit. All loan participations are loans secured by real estate that adhere to our loan policies. At September 30, 2021, all participation loans were performing in accordance with their terms. During the fiscal year ended September 30, 2021, we originated $31.3 million of fixed-rate and adjustable-rate one-to four-family residential mortgage loans and $60.5 million of fixed-rate and adjustable-rate commercial real estate loans. The fixed-rate loans are primarily loans with terms of 30 years or less. We also originated $47.9 million of commercial business loans (which includes $25.1 million of PPP loans), $9.5 million of construction loans, and $9.8 million of home equity lines of credit and other loans. We generally do not purchase residential mortgage loans, except for loans to low-income borrowers as part of our Community Reinvestment Act lenders program. At September 30, 2021, we had $6.7 million of one-to four-family residential mortgage loans that were serviced by other lenders. Asset Quality We commence collection efforts when a loan becomes 15 days past due with system-generated reminder notices. Subsequent late charge and delinquent notices are issued and the account is monitored on a regular basis thereafter. Personal, direct contact with the borrower is attempted early in the collection process as a courtesy reminder and later to determine the reason for the delinquency and to safeguard our collateral. When a loan is more than 60 days past due, the credit file is reviewed and, if deemed necessary, information is updated or confirmed and collateral re-evaluated. We make every effort to contact the borrower and develop a plan of repayment to cure the delinquency. Loans are placed on non-accrual status when they are delinquent for more than three months. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received. A summary report of all loans 30 days or more past due is provided to the Board of Directors on a monthly basis. If no repayment plan is in process, the file is referred to counsel for the commencement of foreclosure or other collection efforts. Non-Performing Assets. The following table sets forth the amounts and categories of our non-performing assets at the dates indicated. The table includes troubled debt restructurings (loans for which a portion of interest or principal has been forgiven and loans modified at interest rates materially less than current market rates) for each date presented. 10 Table of Contents September 30, 2021 2020 2019 2018 2017 (Dollars in thousands) Non-accrual loans: One-to four-family residential $ 1,152 $ 905 $ 114 $ 138 $ 1,663 Commercial real estate 1,079 2,219 2,652 455 482 Construction 4,580 5,141 2,900 — — Home equity lines of credit — — — 90 — Commercial business 1,349 1,467 1,228 223 213 Total non-accrual loans 8,160 9,732 6,894 906 2,358 Accruing loans three months or more past due: One-to four-family residential — — — — — Commercial real estate — — — — — Construction — — — — — Home equity lines of credit — — — — — Commercial business — — — — — Total loans three months or more past due — — — — — Total non-performing loans 8,160 9,732 6,894 906 2,358 Other real estate owned 636 2,594 7,528 8,586 11,056 Total non-performing assets 8,796 12,326 14,422 9,492 13,414 Performing troubled debt restructurings 340 220 363 — 182 Performing troubled debt restructurings and total non-performing assets $ 9,136 $ 12,546 $ 14,785 $ 9,492 $ 13,596 Ratios: Total non-performing loans to total loans 1.37% 1.59% 1.32% 0.18% 0.50% Total non-performing loans and performing troubled debt restructurings to total loans 1.43% 1.63% 1.39% 0.18% 0.54% Total non-performing assets to total assets 1.14% 1.63% 2.29% 1.52% 2.22% Total non-performing assets and performing troubled debt restructurings to total assets 1.18% 1.66% 2.35% 1.52% 2.25% Commercial business, commercial real estate and construction loans generally have more risk than one-to four-family residential mortgage loans. At September 30, 2021, our portfolio of commercial business, commercial real estate and construction loans totaled $369.9 million, or 62.2% of our total loans, compared to $377.4 million, or 61.7% of our total loans, at September 30, 2020. Additional interest income of approximately $555,000 and $508,000 would have been recorded during the fiscal years ended September 30, 2021 and 2020, respectively, if the non-accrual loans summarized in the above table had performed in accordance with their original terms. The Company accounts for its impaired loans in accordance with generally accepted accounting principles, which require that a creditor measure impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate except that, as a practical expedient, a creditor may measure impairment based on a loan’s observable market price less estimated costs of disposal, or the fair value of the collateral less estimated costs of disposal if the loan is collateral dependent. Regardless of the measurement method, a creditor may measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable. The Company records cash receipts on impaired loans that are non-performing as a reduction to principal before applying amounts to interest or late charges unless specifically directed by the Bankruptcy Court to apply payments otherwise. The Company generally continues to recognize interest income on impaired loans that are performing. Troubled debt restructurings (“TDRs”) occur when a creditor, for economic or legal reasons related to a debtor’s financial condition, grants a concession to the debtor that it would not otherwise consider, such as a below market interest rate, extending the maturity of a loan, or a combination of both. There were two new TDR loans totaling $340,000 during the 11 Table of Contents fiscal year ended September 30, 2021 that were performing in accordance with their restructured terms at September 30, 2021. For comparison purposes, there was one TDR loan totaling $220,000 during the fiscal year ended September 30, 2020. Delinquent Loans . The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated. Loans delinquent more than three months are generally classified as non-accrual loans. Loans Delinquent For 60-89 Days 90 Days and Over Total Number Amount Number Amount Number Amount (Dollars in thousands) At September 30, 2021 One-to four-family residential — $ — 4 $ 1,152 4 $ 1,152 Commercial real estate — — 3 1,079 3 1,079 Construction — — 2 4,580 2 4,580 Commercial business — — 1 1,349 1 1,349 Total — $ — 10 $ 8,160 10 $ 8,160 At September 30, 2020 One-to four-family residential — $ — 3 $ 905 3 $ 905 Commercial real estate 2 886 8 2,219 10 3,105 Construction — — 3 5,141 3 5,141 Commercial business 1 129 3 1,467 4 1,596 Total 3 $ 1,015 17 $ 9,732 20 $ 10,747 At September 30, 2019 One-to four-family residential — $ — 1 $ 114 1 $ 114 Commercial real estate 1 58 4 2,652 5 2,710 Construction — — 1 2,900 1 2,900 Commercial business — — 2 1,228 2 1,228 Total 1 $ 58 8 $ 6,894 9 $ 6,952 At September 30, 2018 One-to four-family residential — $ — 1 $ 138 1 $ 138 Commercial real estate — — 3 455 3 455 Home equity lines of credit — — 3 90 3 90 Commercial business — — 2 223 2 223 Total — $ — 9 $ 906 9 $ 906 At September 30, 2017 One-to four-family residential 1 $ 127 8 $ 1,663 9 $ 1,790 Commercial real estate — — 3 482 3 482 Home equity lines of credit 1 192 — — 1 192 Commercial business 1 80 1 213 2 293 Total 3 $ 399 12 $ 2,358 15 $ 2,757 Real Estate Owned . Real estate we acquire as a result of foreclosure or by deed in lieu of foreclosure is classified as other real estate owned (“OREO”) until sold. When property is acquired it is recorded at fair value less estimated cost to sell at the date of foreclosure, establishing a new cost basis. Holding costs and declines in fair value result in charges to expense after acquisition. The Company held $636,000 of OREO properties at September 30, 2021, a decrease of $2.0 million from $2.6 million at September 30, 2020. 12 Table of Contents Classified Assets. Federal banking regulations provide that loans and other assets of lesser quality should be classified as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” we will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “un-collectible” and of such little value their continuance as assets without the establishment of a specific loss reserve is not warranted. We classify an asset as “special mention” if the asset has a potential weakness that warrants management’s close attention. While such assets are not impaired, management has concluded that if the potential weakness in the asset is not addressed, the value of the asset may deteriorate, adversely affecting the repayment of the asset. On the basis of our review at September 30, 2021, classified assets consisted of $7.7 million in special mention loans, $9.2 million in substandard loans, and $636,000 in substandard OREO. We are required to establish an allowance for loan losses in an amount deemed prudent by management for loans classified substandard or doubtful, as well as for other problem loans. General allowances represent loss allowances which have been established to recognize the inherent losses associated with lending activities, but which, unlike impairment allowances, have not been allocated to particular problem assets. When we classify problem assets, we are required to determine whether or not impairment exists. A loan is impaired when, based on current information and events, it is probable that Magyar Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. When it is determined that impairment exists, a specific allowance for loss is established. For collateral-dependent loans, the loan is reduced by the impairment amount via a reduction to the loan and the allowance for loan loss. Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the NJDBI and the FDIC, which can direct us to establish additional loss allowances. The loan portfolio is reviewed on a regular basis to determine whether any loans require classification in accordance with applicable regulations. Not all classified assets constitute non-performing assets. Allowance for Loan Losses Our allowance for loan losses is maintained at a level management deems necessary to absorb loan losses that are both probable and reasonably estimable. Management, in determining the allowance for loan losses, considers the losses in our loan portfolio both probable and reasonably estimable, and changes in the nature and volume of loan activities, along with the general economic and real estate market conditions. The allowance for loan losses as of September 30, 2021 was maintained at a level that represents management’s best estimate of losses in the loan portfolio both probable and reasonably estimable. However, this analysis process is inherently subjective, as it requires us to make estimates that are susceptible to revisions as more information becomes available. Although we believe we have established the allowance at levels to absorb probable and estimable losses, future additions may be necessary if economic or other conditions in the future differ from the current environment. In addition, as an integral part of their examination process, the NJDBI and the FDIC will periodically review our allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on their judgments of information available to them at the time of their examination. The provision for loan losses decreased $37,000 to $1.6 million for the year ended September 30, 2021 compared to $1.7 million for the year ended September 30, 2020. The decrease was attributable to contraction in net total loans receivable, offset by adjustments to historical loss factors for economic conditions relating to the COVID-19 pandemic. 13 Table of Contents Allowance for Loan Losses. The following table sets forth activity in our allowance for loan losses for the periods indicated. September 30, 2021 2020 2019 2018 2017 (Dollars in thousands) Balance at beginning of period $ 6,400 $ 4,888 $ 4,200 $ 3,475 $ 3,056 Charge-offs: One-to four-family residential — — — 213 295 Commercial real estate 51 — 1 — 23 Construction — 65 — — — Commercial business — 204 100 170 672 Other 1 — — 3 — Total charge-offs 52 269 101 386 990 Recoveries: One-to four-family residential 1 9 120 87 35 Commercial real estate — 5 — 23 — Construction — — — 3 12 Home equity lines of credit 1 1 1 1 15 Commercial business 96 100 — — 4 Total recoveries 98 115 121 114 66 Net charge-offs (recoveries) (46 ) 154 (20 ) 272 924 Provision for loan losses 1,629 1,666 668 997 1,343 Balance at end of period $ 8,075 $ 6,400 $ 4,888 $ 4,200 $ 3,475 Ratios: Net charge-offs (recoveries) to average loans outstanding -0.01% 0.03% 0.00% 0.06% 0.20% Allowance for loan losses to total non-performing loans 98.96% 65.76% 70.90% 463.57% 147.37% Allowance for loan losses to total loans 1.36% 1.05% 0.93% 0.82% 0.73% 14 Table of Contents Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category, the percent of the allowance to the total allowance and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories. % of Allowance % of Loans In Category to In Category to Amount Total Allowance Total Loans (Dollars in thousands) At September 30, 2021 One-to four-family residential $ 1,136 14.07% 34.20% Commercial real estate 3,744 46.36% 47.20% Construction 594 7.36% 3.40% Home equity lines of credit 232 2.87% 3.00% Commercial business 2,046 25.34% 11.60% Other 15 0.19% 0.60% Unallocated 308 3.81% 0.00% Total allowance for loan losses $ 8,075 100.00% 100.00% At September 30, 2020 One-to four-family residential $ 1,035 16.17% 34.41% Commercial real estate 3,232 50.49% 40.59% Construction 672 10.50% 4.62% Home equity lines of credit 179 2.80% 3.17% Commercial business 1,034 16.16% 16.52% Other 1 0.02% 0.68% Unallocated 247 3.86% 0.00% Total allowance for loan losses $ 6,400 100.00% 100.00% At September 30, 2019 One-to four-family residential $ 731 14.95% 36.41% Commercial real estate 2,066 42.28% 44.46% Construction 511 10.45% 5.44% Home equity lines of credit 138 2.82% 3.41% Commercial business 1,184 24.23% 9.32% Other 8 0.16% 0.95% Unallocated 250 5.11% 0.00% Total allowance for loan losses $ 4,888 100.00% 100.00% At September 30, 2018 One-to four-family residential $ 687 16.36% 36.15% Commercial real estate 1,540 36.67% 42.80% Construction 493 11.74% 5.93% Home equity lines of credit 109 2.60% 3.51% Commercial business 1,151 27.40% 10.40% Other 25 0.60% 1.20% Unallocated 195 4.63% 0.00% Total allowance for loan losses $ 4,200 100.00% 100.00% At September 30, 2017 One-to four-family residential $ 587 16.89% 37.62% Commercial real estate 1,277 36.75% 43.70% Construction 490 14.10% 4.77% Home equity lines of credit 57 1.64% 3.91% Commercial business 956 27.51% 8.67% Other 6 0.17% 1.32% Unallocated 102 2.94% 0.00% Total allowance for loan losses $ 3,475 100.00% 100.00% 15 Table of Contents Investments Our Board of Directors has adopted our Investment Policy. This policy determines the types of securities in which we may invest. The Investment Policy is reviewed annually by the Board of Directors and changes to the policy are subject to approval by our Board of Directors. While general investment strategies are developed by the Asset and Liability Committee, the execution of specific actions rests primarily with our President and our Chief Financial Officer. They are responsible for ensuring the guidelines and requirements included in the Investment Policy are followed. They are authorized to execute transactions that fall within the scope of the established Investment Policy up to $2.5 million per transaction individually or $5.0 million per transaction jointly. Investment transactions in excess of $5.0 million must be approved by the Asset and Liability Committee. Investment transactions are reviewed and ratified by the Board of Directors at their regularly scheduled meetings. Our investments portfolio may include U.S. Treasury obligations, debt and equity securities issued by various government-sponsored enterprises, including Fannie Mae and Freddie Mac, mortgage-backed securities, certain certificates of deposit of insured financial institutions, overnight and short-term loans to other banks, investment-grade corporate debt instruments, and municipal securities. In addition, we may invest in equity securities subject to certain limitations and not in excess of Magyar Bank’s Tier 1 capital. The Investment Policy requires that securities transactions be conducted in a safe and sound manner, and purchase and sale decisions be based upon a thorough analysis of each security to determine its quality and inherent risks and fit within our overall asset/liability management objectives. The analysis must consider the effect of an investment or sale on our risk-based capital and prospects for yield and appreciation. At September 30, 2021, our securities portfolio totaled $70.6 million, or 9.1% of our total assets. Securities are classified as held-to-maturity or available-for-sale when purchased. At September 30, 2021, $57.7 million of our securities were classified as held-to-maturity and reported at amortized cost, and $12.9 million were classified as available-for-sale and reported at fair value. At September 30, 2021, we held no investment securities classified as held-for-trading. U.S. Government Agency and Government-Sponsored Enterprise Obligations. At September 30, 2021, our U.S. Government Agency and Government-Sponsored Enterprise Obligations totaled $65.3 million, or 92.5% of our total securities portfolio. Of this amount, $52.8 million were mortgage-backed securities and $12.5 million were debt securities. While these securities generally provide lower yields than other securities in our securities portfolio, we hold these securities, to the extent appropriate, for liquidity purposes and as collateral for certain deposits or borrowings. We invest in these securities to achieve positive interest rate spreads with minimal administrative expense, and to lower our credit risk as a result of the guarantees provided by these issuers. Mortgage-Backed Securities. We purchase mortgage-backed pass through and collateralized mortgage obligation (“CMO”) securities insured or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. To a lesser extent, we also invest in mortgage-backed securities issued or sponsored by private issuers. At September 30, 2021, our mortgage-backed securities, including CMOs, totaled $53.0 million, or 75.1% of our total securities portfolio. Included in this balance was a $242,000 mortgage-backed security issued by a private issuer. Our policy is to limit purchases of privately issued mortgage-backed securities to non-high risk securities rated “A” or higher by a nationally recognized credit rating agency. High risk securities generally are defined as those exhibiting significantly greater volatility of estimated average life and price due to changes in interest rates than 30-year fixed rate securities. Mortgage-backed pass through securities are created by pooling mortgages and issuing a security with an interest rate less than the interest rate on the underlying mortgages. Mortgage-backed pass through securities represent a participation interest in a pool of single-family or multi-family mortgages. As loan payments are made by the borrowers, the principal and interest portion of the payment is passed through to the investor as received. CMOs are also backed by mortgages, however they differ from mortgage-backed pass through securities because the principal and interest payments on the underlying mortgages are structured so that they are paid to the security holders of pre-determined classes or tranches at a faster or slower pace. The receipt of these principal and interest payments, which depends on the estimated average life for each class, is contingent on a prepayment speed assumption assigned to the underlying mortgages. Variances between the assumed payment speed and actual payments can significantly alter the average lives of such securities. Mortgage-backed securities and CMOs generally yield less than the loans that underlie such securities because of the cost of payment guarantees and credit enhancements. However, mortgage-backed securities are usually more liquid than individual mortgage loans and may be used to collateralize borrowings and other liabilities. Mortgage-backed securities present a risk that actual prepayments may differ from estimated prepayments over the life of the security, which may require adjustments to the amortization of any premium or accretion of any discount relating 16 Table of Contents to such instruments that can change the net yield on the securities. There is also reinvestment risk associated with the cash flows from such securities or if the securities are redeemed by the issuer. In addition, the market value of such securities may be adversely affected by changes in interest rates. Our mortgage-backed securities portfolio had a weighted average yield of 1.83% at September 30, 2021. The estimated fair value of our mortgage-backed securities portfolio at September 30, 2021 was $53.0 million, which was $166,000 less than the amortized cost. Mortgage-backed securities in Magyar Bank’s portfolio do not contain sub-prime mortgage loans. Corporate and Other Securities . At September 30, 2021, the Bank held one corporate note issued by Wells Fargo Bank at its amortized value totaling $3.0 million. Our Investment Policy allows for the purchase of such instruments and requires that corporate debt obligations be rated in one of the four highest categories by a nationally recognized rating service. We may invest up to 25% of Magyar Bank’s investment portfolio in corporate debt obligations and up to 15% of Magyar Bank’s capital in any one issuer. Equity Securities. At September 30, 2021, we held no equity securities other than $1.7 million in Federal Home Loan Bank of New York (“FHLBNY”) stock. The investment in FHLBNY stock is classified as a restricted security, carried at cost and evaluated for impairment. Equity securities are not insured or guaranteed investments and are affected by market interest rates and stock market fluctuations. Such investments other than the FHLBNY are carried at their fair value and fluctuations in the fair value of such investments, including temporary declines in value, directly affect our net capital position. Securities Portfolios. The following tables set forth the composition of our securities portfolio (excluding FHLBNY common stock) at the dates indicated. At September 30, 2021 2020 2019 Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value (In thousands) Securities available for sale: Obligations of U.S. government agencies: Mortgage backed securities-residential $ 179 $ 186 $ 350 $ 364 $ 480 $ 495 Obligations of U.S. government-sponsored enterprises: Mortgage-backed securities-residential 12,922 12,741 9,092 9,194 14,663 14,708 Debt securities — — 5,000 5,003 1,500 1,500 Total securities available for sale $ 13,101 $ 12,927 $ 14,442 $ 14,561 $ 16,643 $ 16,703 Securities held to maturity: Obligations of U.S. government agencies: Mortgage backed securities-residential $ 574 $ 549 $ 1,453 $ 1,431 $ 445 $ 391 Mortgage backed securities-commercial 703 703 775 775 842 836 Obligations of U.S. government-sponsored enterprises: Mortgage backed securities-residential 38,596 38,623 20,456 21,150 22,363 22,592 Debt securities 12,498 12,342 4,500 4,485 2,468 2,478 Private label mortgage-backed securities-residential 242 248 259 254 363 370 Obligations of state and political subdivisions 2,047 2,013 — — — — Corporate securities 3,000 2,804 3,000 2,804 3,000 2,677 Total securities held to maturity $ 57,660 $ 57,282 $ 30,443 $ 30,899 $ 29,481 $ 29,344 Total investment securities: $ 70,761 $ 70,209 $ 44,885 $ 45,460 $ 46,124 $ 46,047 At September 30, 2021, a total of 36 securities with an aggregate fair value of $53.7 million had gross unrealized losses of $1.0 million, or approximately 1.9% of fair value. None of these unrealized losses were considered other-than-temporary. Portfolio Maturities and Yields. The composition, maturities and weighted average yields of the investment debt securities portfolio and the mortgage-backed securities portfolio at September 30, 2021 are summarized in the following tables. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. 17 Table of Contents September 30, 2021 More Than Five Less Than Years Through More Than One Year or Less Five Years Ten Years Ten Years Total Securities Amortized Amortized Amortized Amortized Amortized Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield (Dollars in thousands) Securities available for sale: Obligations of U.S. government agencies: Mortgage backed securities - residential $ — —% $ — —% $ — —% $ 179 3.50% $ 179 3.50% Obligations of U.S. government-sponsored enterprises: Mortgage-backed securities-residential — —% — —% 1,593 1.73% 11,329 1.64% 12,922 1.65% Total securities available for sale $ — —% $ — —% $ 1,593 1.73% $ 11,508 1.66% $ 13,101 1.67% Securities held to maturity: Obligations of U.S. government agencies: Mortgage-backed securities - residential — —% $ — —% — —% $ 574 2.91% $ 574 2.91% Mortgage-backed securities - commercial — —% — —% 703 0.66% — —% 703 0.66% Obligations of U.S. government-sponsored enterprises: Mortgage backed securities - residential — —% 3,900 2.35% 7,009 1.87% 27,687 1.82% 38,596 1.88% Debt securities — —% 6,498 0.56% 6,000 0.83% — —% 12,498 0.69% Private label mortgage-backed securities - residential — —% — —% — —% 242 2.29% 242 2.29% Obligations of state and political subdivisions — —% — —% 1,531 1.89% 516 2.00% 2,047 1.91% Corporate securities — —% — —% 3,000 1.03% — —% 3,000 1.03% Total securities held to maturity $ — —% $ 10,398 1.23% $ 18,243 1.34% $ 29,019 1.85% $ 57,660 1.58% Sources of Funds General. Deposits, including certificates of deposit, demand, savings, NOW and money market accounts, have traditionally been the primary source of funds used for our lending and investment activities. We obtain certificates of deposit primarily through our branch network and to a lesser extent via the brokered CD market. We also use borrowings, primarily Federal Home Loan Bank advances, to supplement cash flow needs, to lengthen the maturities of liabilities for interest rate risk management and to manage our cost of funds. Additional sources of funds include principal and interest payments from loans and securities, loan and security prepayments and maturities, income on other earning assets and stockholders’ equity. While cash flows from loans and securities payments can be relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition. Deposits. Our deposits are generated primarily from customers within our primary market area. We offer a selection of deposit accounts, including demand accounts, NOW accounts, money market accounts, savings accounts, retirement accounts and certificates of deposit. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. We also accept brokered deposits when attractive rates and terms are available. At September 30, 2021, we had $6.0 million in brokered deposits, compared to $9.4 million at September 30, 2020. Interest rates, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. Personalized customer service, long-standing relationships with customers and an active marketing program are relied upon to attract and retain deposits. The flow of deposits is influenced significantly by general economic conditions, changes in money market and other prevailing interest rates and competition. The variety of deposit accounts offered allows us to be competitive in obtaining funds and responding to changes in consumer demand. Based on experience, we believe that our deposits are relatively stable. However, the ability to attract and maintain deposits, and the rates paid on these deposits, has been and will continue to be significantly affected by market conditions. At September 30, 2021, $116.9 million, or 18.3% of our deposit accounts, were certificates of deposit (including individual retirement accounts). The following table sets forth the distribution of total deposit accounts, by account type, at the dates indicated. 18 Table of Contents September 30, 2021 2020 2019 Weighted Weighted Weighted Average Average Average Deposit Type Balance Percent Rate Balance Percent Rate Balance Percent Rate (Dollars in thousands) Demand accounts $ 181,975 28.44% 0.00% $ 163,562 26.45% 0.00% $ 106,422 20.08% 0.00% Savings accounts 81,724 12.77% 0.17% 74,923 12.12% 0.26% 70,598 13.32% 0.67% NOW accounts 71,325 11.15% 0.12% 65,447 10.58% 0.32% 48,164 9.09% 0.59% Money market accounts 187,898 29.37% 0.22% 188,023 30.41% 0.47% 188,115 35.49% 1.35% Certificates of deposit 101,888 15.92% 0.94% 110,650 17.89% 1.49% 100,016 18.87% 1.97% Retirement accounts 15,004 2.35% 1.05% 15,725 2.54% 1.51% 16,760 3.16% 1.62% Total deposits $ 639,814 100.00% 0.27% $ 618,330 100.00% 0.51% $ 530,075 100.00% 1.04% At September 30, 2021 and 2020, the aggregate amount of uninsured deposits (which are deposits in amounts greater than $250,000, which is the maximum amount for federal deposit insurance) was $41.7 million and $52.7 million, respectively. At September 30, 2021 and September 30, 2020, we had no deposits that were uninsured for any reason other than being in excess of the maximum amount for federal deposit insurance. The following table sets forth the maturity of our uninsured certificates of deposit at September 30, 2021. At September 30, 2021 (In thousands) Maturity Period: Three months or less $ 24,257 Over three through six months 2,279 Over six through twelve months 5,126 Over twelve months 10,039 Total $ 41,701 At September 30, 2021, $72.8 million of our certificates of deposit had maturities of one year or less. We monitor activity on these accounts and, based on historical experience and our current pricing strategy, we believe we will retain a large portion of these accounts upon maturity. The following table sets forth the interest-bearing deposit activities for the periods indicated. September 30, 2021 2020 2019 (In thousands) Beginning balance $ 454,768 $ 423,653 $ 425,392 Net deposits before interest credited 877 26,494 (7,454 ) Interest credited 2,194 4,621 5,715 Ending balance $ 457,839 $ 454,768 $ 423,653 Borrowings. Borrowings decreased $44.0 million, or 65.4%, to $23.4 million at September 30, 2021 from $67.4 million at September 30, 2020. The Bank repaid all $36.9 million in Paycheck Protection Program Liquidity Facility (“PPPLF”) advances to the Federal Reserve Bank during the year ended September 30, 2021 that were used to fund Round 1 PPP loans. The Bank did not utilize the PPPLF to fund its Round 2 PPP loans. FHLBNY advances decreased $7.1 million to $23.4 million at September 30, 2021 from $30.5 million at September 30, 2020 as deposit inflows were used to repay maturing long-term advances. 19 Table of Contents The borrowings represent 3.5% of total liabilities and had a weighted average interest rate of 2.13% at September 30, 2021. Based on eligible collateral pledged to the FHLBNY at September 30, 2021, we had an aggregate borrowing capacity of $151.2 million with the FHLBNY. Long-term FHLBNY advances as of September 30, 2021 mature as follows (in thousands): Year Ending September 30, 2022 $ 10,731 2023 4,741 2024 4,384 2025 3,500 2026 — Thereafter — $ 23,356 The Bank is also able to borrow funds from an overnight line of credit with the FHLBNY. The Bank did not access the line of credit at any time during the years ended September 30, 2021 and 2020. Subsidiary Activities Magyar Investment Company is a New Jersey investment corporation subsidiary for the purpose of buying, selling and holding investment securities. The income earned on Magyar Investment Company’s investment securities are subject to a lower state tax than that assessed on income earned on investment securities maintained at Magyar Bank. Hungaria Urban Renewal, LLC is a Delaware limited-liability corporation established in 2002 as a qualified intermediary operating for the purpose of acquiring and developing Magyar Bank’s main office. In 2006, Magyar Bank acquired a 100% interest in Hungaria Urban Renewal, LLC, which has no other business other than owning Magyar Bank’s main office site. As part of a tax abatement agreement with the City of New Brunswick, Magyar Bank’s new office will remain in Hungaria Urban Renewal, LLC’s name. Magyar Service Corporation, a New Jersey corporation, is a wholly owned subsidiary of Magyar Bank. Magyar Service Corporation offers Magyar Bank customers and others a complete range of non-deposit investment products and financial planning services, including insurance products, fixed and variable annuities, and retirement planning for individual and commercial customers. Employees and Human Capital Resources At September 30, 2021 we employed 94 full-time employees and 7 part-time employees. Our employees are not represented by any collective bargaining group. Management believes that we have good relations with our employees. We encourage and support the growth and development of our employees and, wherever possible, seek to fill positions by promotion and transfer from within the organization. Continual learning and career development is advanced through annual performance and development conversations with employees, internally developed training programs, customized corporate training engagements and seminars, conferences, and other training events employees are encouraged to attend in connection with their job duties. The safety, health and wellness of our employees is a top priority. The COVID-19 pandemic presented a unique challenge with regard to maintaining employee safety while continuing successful operations. Through teamwork and the adaptability of our management and staff, our branches and operations centers remained open and in-person during the year ended September 30, 2021. All employees are asked not to come to work when they experience signs or symptoms of a possible COVID-19 illness and have been provided paid time off to cover compensation during such absences. On an ongoing basis, we further promote the health and wellness of our employees by strongly encouraging work-life balance, offering flexible work schedules, and keeping the employee portion of health care premiums to a minimum. Employee retention helps us operate efficiently and achieve one of our business objectives, which is being a high-level service provider. We believe our commitment to living out our core values, actively prioritizing concern for our employees’ well-being, supporting our employees’ career goals, offering competitive wages and providing valuable fringe 20 Table of Contents benefits aids in retention of our top-performing employees. In addition, nearly all of our employees are stockholders of the Company through participation in our Employee Stock Ownership Plan, which aligns associate and stockholder interests by providing stock ownership on a tax-deferred basis at no investment cost to our associates. At September 30, 2021, 27% of our current staff had been with us for fifteen years or more. FEDERAL AND STATE TAXATION Federal Taxation General . Magyar Bancorp, Inc. and Magyar Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The most recent audit of Magyar Bank’s federal tax returns by the Internal Revenue Service was for the period ended September 30, 2015. The audit did not result in any material adjustments to the Company’s tax returns or the Company’s financial statements. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to Magyar Bancorp, Inc. or Magyar Bank. Method of Accounting . For federal income tax purposes, Magyar Bancorp, Inc. reports its income and expenses on the accrual method of accounting and uses a tax year ending September 30th for filing its federal and state income tax returns. Bad Debt Reserves . Magyar Bank uses the direct charge off method to account for bad debt deductions for income tax purposes. Taxable Distributions and Recapture . Prior to the 1996 Act, bad debt reserves created prior to January 1, 1988 (pre-base year reserves) were subject to recapture into taxable income if Magyar Bank failed to meet certain thrift asset and definitional tests. At September 30, 2021, our total federal pre-base year reserve was approximately $1.3 million. However, under current law, pre-base year reserves remain subject to recapture if Magyar Bank makes certain non-dividend distributions, repurchases any of its stock, pays dividends in excess of tax earnings and profits, or ceases to maintain a bank charter. Net Operating Loss Carryovers . At September 30, 2021, a financial institution was able to carry back net operating losses to the preceding five taxable years and forward to the succeeding 20 taxable years. At September 30, 2021, the Company did not have any federal or state net operating loss carry forwards available to offset future taxable income for tax reporting purposes. Corporate Dividends-Received Deduction . Magyar Bancorp, Inc. may exclude from its federal taxable income 100% of dividends received from Magyar Bank as a wholly owned subsidiary. The corporate dividends-received deduction is 65% when the dividend is received from a corporation having at least 20% of its stock owned by the recipient corporation. A 50% dividends-received deduction is available for dividends received from corporations owned less than 20% by the recipient corporation. State Taxation New Jersey State Taxation. The income of savings institutions in New Jersey, which is calculated based on federal taxable income, subject to certain adjustments, is subject to New Jersey tax. For the tax years ending after July 31, 2019, New Jersey tax law requires members of an affiliated group where there is common ownership to calculate their corporation business tax on a combined or consolidated basis. Magyar Bancorp, Inc., Magyar Bank, Magyar Service Corporation, and Magyar Investment Company have filed a New Jersey tax return on a consolidated basis for the year ended September 30, 2020 and intend to file on a consolidated basis for the year ended September 30, 2021. Magyar Bancorp, Inc., Magyar Bank, Magyar Service Corporation, and Magyar Investment Company are not currently under audit with respect to their New Jersey income tax returns. Their respective state tax returns have not been audited within the past three years. Delaware and New Jersey State Taxation. As a Delaware holding company not earning income in Delaware, Magyar Bancorp, Inc. is exempt from Delaware corporate income tax, but is required to file annual returns and pay annual fees and a franchise tax to the State of Delaware. 21 Table of Contents Magyar Bancorp, Inc. is subject to New Jersey corporate income taxes in the same manner as described above for Magyar Bank. SUPERVISION AND REGULATION General Magyar Bank is a New Jersey-chartered savings bank, and its deposit accounts are insured up to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”) under the Deposit Insurance Fund (“DIF”). Magyar Bank is subject to extensive regulation, examination and supervision by the Commissioner of the New Jersey Department of Banking and Insurance (the “Commissioner”) as the issuer of its charter, and by the FDIC as deposit insurer and its primary federal regulator. Magyar Bank must file reports with the Commissioner and the FDIC concerning its activities and financial condition, and it must obtain regulatory approval prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions and opening or acquiring branch offices. The Commissioner and the FDIC conduct periodic examinations to assess Magyar Bank’s compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which a savings bank can engage and is intended primarily for the protection of the deposit insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Magyar Bancorp, Inc., as a bank holding company controlling Magyar Bank, is subject to the Bank Holding Company Act of 1956, as amended (“BHCA”), and the rules and regulations of the FRB under the BHCA and to the provisions of the New Jersey Banking Act of 1948 (the “New Jersey Banking Act”), and to the regulations of the Commissioner under the New Jersey Banking Act applicable to bank holding companies. Magyar Bank and Magyar Bancorp, Inc. are required to file reports with, and otherwise comply with the rules and regulations of the FRB and the Commissioner. Magyar Bancorp, Inc. is required to file certain reports with, and otherwise comply with, the rules and regulations of the Securities and Exchange Commission under the federal securities laws. Any change in such laws and regulations, whether by the Commissioner, the FDIC, the Federal Reserve Board or through legislation, could have a material adverse impact on Magyar Bank and Magyar Bancorp, Inc. and their operations and stockholders. Certain of the laws and regulations applicable to Magyar Bank and Magyar Bancorp, Inc. are summarized below. These summaries do not purport to be complete and are qualified in their entirety by reference to such laws and regulations. New Jersey Banking Regulation Activity Powers. Magyar Bank derives its lending, investment and other activity powers primarily from the applicable provisions of the New Jersey Banking Act and its related regulations. Under these laws and regulations, savings banks, including Magyar Bank, generally may invest in: · real estate mortgages; · consumer and commercial loans; · specific types of debt securities, including certain corporate debt securities and obligations of federal, state and local governments and agencies; · certain types of corporate equity securities; and · certain other assets. A savings bank may also make other investments pursuant to “leeway” authority that permits investments not otherwise permitted by the New Jersey Banking Act. “Leeway” investments must comply with a number of limitations on the individual and aggregate amounts of “leeway” investments. A savings bank may also exercise trust powers upon approval of the Commissioner. New Jersey savings banks may exercise those powers, rights, benefits or privileges authorized for national banks or out-of-state banks or for federal or out-of-state savings banks or savings associations, provided that before exercising any such power, right, benefit or privilege, prior approval by the Commissioner by regulation or by specific 22 Table of Contents authorization is required. The exercise of these lending, investment and activity powers are limited by federal law and regulations. See “Federal Banking Regulation-Activity Restrictions on State-Chartered Banks” below. Loans-to-One-Borrower Limitations. With certain specified exceptions, a New Jersey-chartered savings bank may not make loans or extend credit to a single borrower or to entities related to the borrower in an aggregate amount that would exceed 15% of the bank’s capital funds. A savings bank may lend an additional 10% of the bank’s capital funds if secured by collateral meeting the requirements of the New Jersey Banking Act. Magyar Bank currently complies with applicable loans-to-one-borrower limitations. Dividends. Under the New Jersey Banking Act, a stock savings bank may declare and pay a dividend on its capital stock only to the extent that the payment of the dividend would not impair the capital stock of the savings bank. In addition, a stock savings bank may not pay a dividend unless the savings bank would, after the payment of the dividend, have a surplus of not less than 50% of its capital stock, or alternatively, the payment of the dividend would not reduce the surplus. Federal law may also limit the amount of dividends that may be paid by Magyar Bank. See “Federal Banking Regulation-Prompt Corrective Action” below. Minimum Capital Requirements. Regulations of the Commissioner impose on New Jersey-chartered depository institutions, including Magyar Bank, minimum capital requirements similar to those imposed by the Federal Deposit Insurance Corporation on insured state banks. See “Federal Banking Regulation-Capital Requirements.” Examination and Enforcement. The NJDBI may examine Magyar Bank whenever it deems an examination advisable. The NJDBI examines Magyar Bank at least every three years. The Commissioner may order any savings bank to discontinue any violation of law or unsafe or unsound business practice and may direct any director, officer, attorney or employee of a savings bank engaged in an objectionable activity, after the Commissioner has ordered the activity to be terminated, to show cause at a hearing before the Commissioner why such person should not be removed. The Commissioner also has authority to appoint a conservator or receiver for a savings bank under certain circumstances such as insolvency or unsafe or unsound condition to transact business. Federal Banking Regulation Capital Requirements. Federal regulations require FDIC-insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio, a Tier 1 capital to risk-based assets ratio, a total capital to risk-based assets, and a Tier 1 capital to total assets leverage ratio. The existing capital requirements were effective January 1, 2015 and are the result of a final rule implementing regulatory amendments based on recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act. The capital standards require the maintenance of common equity Tier 1 capital, Tier 1 capital and total capital to risk-weighted assets of at least 4.5%, 6% and 8%, respectively, and a leverage ratio of at least 4% Tier 1 capital. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-sale-securities). Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. On April 9, 2020, the Federal Reserve Board, the OCC, and the FDIC issued an interim final rule to allow banking organizations to exclude from regulatory capital measures any exposures pledged as collateral for a non-recourse loan from the Federal Reserve. Since PPPLF extensions of credit are non-recourse, PPP loans pledged to the PPPLF qualify for exclusion under the interim final rule. In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash 23 Table of Contents and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one-to four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors. In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. In assessing an institution’s capital adequacy, the FDIC takes into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary. At September 30, 2021, Magyar Bank’s common equity Tier 1 capital to risk-based assets ratio was 15.74%, total capital to risk-based assets was 16.99%, and Tier 1 capital to total assets leverage ratio was 10.18%. Legislation enacted in May 2018 required the federal banking agencies to establish an optional “community bank leverage ratio” of between 8% to 10% Tier 1 equity/consolidated assets (the “Community Bank Leverage Ratio”). The Community Bank Leverage Ratio is available to institutions with less than $10 billion of assets that meet certain other requirements. Institutions with capital meeting or exceeding the specified requirements and electing to follow the alternative regulatory capital structure will be considered to comply with the applicable regulatory capital requirements, including the risk-based requirements. The federal banking agencies adopted final regulations that set 9.0% as the minimum capital for the Community Bank Leverage Ratio, effective January 1, 2020. A qualifying institution may opt in and out of the community bank leverage ratio framework on its quarterly call report. An institution that ceases to meet any qualifying criteria is provided with a two-quarter grace period to either comply with the community bank leverage ratio requirements or comply with the general capital regulations, including the risk-based capital requirements. Section 4012 of the CARES Act required that the community bank leverage ratio be temporarily lowered to 8%. The federal regulators issued a rule implementing the lower ratio effective April 23, 2020. The rule also established a two-quarter grace period for a qualifying institution whose leverage ratio falls below the 8% community bank leverage ratio requirement so long as the bank maintains a leverage ratio of 7% or greater. Another rule was issued to transition back to the 9% community bank leverage ratio by increasing the ratio to 8.5% for calendar year 2021 and 9% thereafter. Prompt Corrective Action. The FDIC Improvement Act established a system of prompt corrective action to resolve the problems of undercapitalized institutions. The FDIC has adopted regulations to implement the prompt corrective action legislation. The regulations were amended to incorporate the previously mentioned increased regulatory capital standards that were effective January 1, 2015. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%. Effective March 31, 2020, qualifying community banking organizations that elect to use the Community Bank Leverage Ratio framework and that maintain a leverage ratio of greater than 9.0% will be considered to have satisfied the risk-based and leverage capital requirements to be deemed well-capitalized. Undercapitalized institutions are subject to a variety of mandatory supervisory measures including the requirement to file a capital plan for the FDIC’s approval and dividend restrictions as well as other discretionary actions by the regulator. The FDIC is required, with some exceptions, to appoint a receiver or conservator for an insured state bank if that bank is “critically undercapitalized.” For this purpose, “critically undercapitalized” means having a ratio of tangible capital to total assets of less than 2%. The FDIC may also appoint a conservator or receiver for a state bank on the basis of the institution’s financial condition or upon the occurrence of certain events, including: · insolvency, or when the assets of the bank are less than its liabilities to depositors and others; 24 Table of Contents · substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices; · existence of an unsafe or unsound condition to transact business; · likelihood that the bank will be unable to meet the demands of its depositors or to pay its obligations in the normal course of business; and · insufficient capital, or the incurring or likely incurring of losses that will deplete substantially all of the institution’s capital with no reasonable prospect of replenishment of capital without federal assistance. Activity Restrictions on State-Chartered Banks. Federal law and FDIC regulations generally limit the activities and investments of state-chartered Federal Deposit Insurance Corporation-insured banks and their subsidiaries to those permissible for national banks and their subsidiaries, unless such activities and investments are specifically exempted by law or consented to by the Federal Deposit Insurance Corporation. Before making a new investment or engaging in a new activity that is not permissible for a national bank or otherwise permissible under federal law or the FDIC regulations, an insured bank must seek approval from the FDIC to make such investment or engage in such activity. The FDIC will not approve the activity unless the bank meets its minimum capital requirements and the FDIC determines that the activity does not present a significant risk to the DIF. Certain activities of subsidiaries that are engaged in activities permitted for national banks only through a “financial subsidiary” are subject to additional restrictions. Federal law permits a state-chartered savings bank to engage, through financial subsidiaries, in any activity in which a national bank may engage through a financial subsidiary and on substantially the same terms and conditions. In general, the law permits a national bank that is well-capitalized and well-managed to conduct, through a financial subsidiary, any activity permitted for a financial holding company other than insurance underwriting, insurance investments, real estate investment or development or merchant banking. The total assets of all such financial subsidiaries may not exceed the lesser of 45% of the bank’s total assets or $50 million. The bank must have policies and procedures to assess the financial subsidiary’s risk and protect the bank from such risk and potential liability, must not consolidate the financial subsidiary’s assets with the bank’s and must exclude from its own assets and equity all equity investments, including retained earnings, in the financial subsidiary. State-chartered savings banks may retain subsidiaries in existence as of March 11, 2000 and may engage in activities that are not authorized under federal law. Although Magyar Bank meets all conditions necessary to establish and engage in permitted activities through financial subsidiaries, it has not yet determined to engage in such activities. Federal Home Loan Bank System. Magyar Bank is a member of the Federal Home Loan Bank system, which consists of eleven regional federal home loan banks, each subject to supervision and regulation by the Federal Housing Finance Board. The federal home loan banks provide a central credit facility primarily for member thrift institutions as well as other entities involved in home mortgage lending. Magyar Bank, as a member of the FHLBNY, is required to purchase and hold shares of capital stock in the FHLBNY in specified amounts. As of September 30, 2021, Magyar Bank was in compliance with these requirements. Enforcement. The Federal Deposit Insurance Corporation has extensive enforcement authority over insured savings banks, including Magyar Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease and desist orders and remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and to unsafe or unsound practices. Deposit Insurance. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor. The FDIC’s assessment system is based on each institution’s total assets less tangible capital, and ranges from 1.5 to 40 basis points. Assessments for institutions of less than $10 billion of assets are based on financial measures and supervisory ratings derived from statistical modeling estimating the institution’s probability of failure over a three-year period. In June 2020, the FDIC issued a final rule that mitigates the deposit insurance assessment effects of participating in certain COVID-19 liquidity facilities. The FDIC will generally remove the effect of PPP lending in calculating an institution’s deposit insurance assessment. The final rule also provides an offset to an institution’s total assessment amount for the increase in its assessment base attributable to participation in the PPP. 25 Table of Contents Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The Bank does not believe that it is taking or is subject to any action, condition or violation that could lead to termination of its deposit insurance. Transactions with Affiliates of Magyar Bank. Magyar Bank’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and its implementing Regulation W promulgated by the Board of Governors of the Federal Reserve System. An affiliate is a company that controls, is controlled by, or is under common control with an insured depository institution such as Magyar Bancorp, Inc.. In general, loan transactions between an insured depository institution and its affiliates are subject to certain quantitative and collateral requirements. In this regard, transactions between an insured depository institution and its affiliates are limited to 10% of the institution’s unimpaired capital and unimpaired surplus for transactions with any one affiliate and 20% of unimpaired capital and unimpaired surplus for transactions in the aggregate with all affiliates. Collateral of specific types and in specified amounts ranging from 100% to 130% of the amount of the transaction must usually be provided by affiliates in order to receive loans from the savings association. In addition, transactions with affiliates must be consistent with safe and sound banking practices, not involve low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates. Magyar Bank is in compliance with these requirements. Prohibitions Against Tying Arrangements. Banks are subject to the prohibitions of 12 U.S.C. Section 1972 on certain tying arrangements. A depository institution is prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution. Community Reinvestment Act and Fair Lending Laws. All FDIC-insured institutions have a responsibility under the Community Reinvestment Act (“CRA”) and related regulations to help meet the credit needs of their communities, including low- and moderate-income neighbourhoods. In connection with its examination of a state chartered savings bank, the FDIC is required to assess the institution’s record of compliance with the CRA. Among other things, the current CRA regulations replace the prior process-based assessment factors with a new evaluation system that rates an institution based on its actual performance in meeting community needs. In particular, the current evaluation system focuses on three tests: · a lending test, to evaluate the institution’s record of making loans in its service areas; · an investment test, to evaluate the institution’s record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and · a service test, to evaluate the institution’s delivery of services through its service channels. An institution’s failure to comply with the provisions of the CRA could, at a minimum, result in regulatory restrictions on its activities. We received an “Outstanding” CRA rating in our most recently completed federal examination, which was conducted by the FDIC in 2019. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the FDIC, as well as other federal regulatory agencies and the Department of Justice. Consumer Protection . Magyar Bank and Magyar Bancorp are subject to federal and state laws designed to protect consumers and prohibit unfair, deceptive or abusive business practices, including the Equal Credit Opportunity Act, Fair Housing Act, Home Ownership Protection Act, Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”), the Gramm-Leach Bliley Act, the Truth in Lending Act (“TILA”), the CRA, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the National Flood Insurance Act and various state law counterparts. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must interact with clients when taking deposits, making loans, collecting loans and providing other services. Further, the Consumer Financial Protection Bureau also has a broad mandate to prohibit unfair or deceptive acts and practices and is specifically empowered to require certain disclosures to consumers and draft model disclosure forms. Failure to comply with consumer protection laws and regulations can subject financial institutions to enforcement actions, fines and other penalties. The failure to comply with these laws could result in enforcement actions by the federal banking agencies, as well as other federal regulatory agencies and the Department of Justice. 26 Table of Contents Mortgage Reform . The Dodd-Frank Act prescribes certain standards that mortgage lenders must consider before making a residential mortgage loan, including verifying a borrower’s ability to repay such mortgage loan, and allows borrowers to assert violations of certain provisions of TILA as a defense to foreclosure proceedings. Under the Dodd-Frank Act, prepayment penalties are prohibited for certain mortgage transactions and creditors are prohibited from financing insurance policies in connection with a residential mortgage loan or home equity line of credit. In addition, the Dodd-Frank Act prohibits mortgage originators from receiving compensation based on the terms of residential mortgage loans and generally limits the ability of a mortgage originator to be compensated by others if compensation is received from a consumer. The Dodd-Frank Act requires mortgage lenders to make additional disclosures prior to the extension of credit, and in each billing statement, for negative amortization loans and hybrid adjustable-rate mortgages. The Economic Growth Act included provisions that ease certain requirements related to mortgage transactions for certain institutions with less than $10 billion in total consolidated assets. Privacy Regulations . Federal regulations generally require that Magyar Bank disclose its privacy policy, including identifying with whom it shares a customer’s “non-public personal information,” to customers at the time of establishing the customer relationship and annually thereafter. In addition, Magyar Bank is required to provide its customers with the ability to “opt-out” of having their personal information shared with unaffiliated third parties and not to disclose account numbers or access codes to non-affiliated third parties for marketing purposes. Except as otherwise required or permitted by law, Magyar Bank is prohibited from disclosing such information. Magyar Bank currently has a privacy protection policy in place and believes that such policy is in compliance with the regulations. Loans to a Bank’s Insiders Federal Regulation. A bank’s loans to its executive officers, directors, any owner of 10% or more of its stock (each, an insider) and any of certain entities affiliated with any such person (an insider’s related interest) are subject to the conditions and limitations imposed by Section 22(h) of the Federal Reserve Act and its implementing regulations. Under these restrictions, the aggregate amount of the loans to any insider and the insider’s related interests may not exceed the loans-to-one-borrower limit applicable to national banks, which is comparable to the loans-to-one-borrower limit applicable to Magyar Bank’s loans. See “New Jersey Banking Regulation—Loans-to-One Borrower Limitations.” All loans by a bank to all insiders and insiders’ related interests in the aggregate may not exceed the bank’s unimpaired capital and unimpaired surplus. With certain exceptions, loans to an executive officer, other than loans for the education of the officer’s children and certain loans secured by the officer’s residence, may not exceed the lesser of (1) $100,000 or (2) the greater of $25,000 or 2.5% of the bank’s unimpaired capital and surplus. Federal regulation also requires that any proposed loan to an insider or a related interest of that insider be approved in advance by a majority of the Board of Directors of the bank, with any interested directors not participating in the voting, if such loan, when aggregated with any existing loans to that insider and the insider’s related interests, would exceed either (1) $250,000 or (2) the greater of $25,000 or 5% of the bank’s unimpaired capital and surplus. Generally, such loans must be made on substantially the same terms as, and follow credit underwriting procedures that are not less stringent than, those that are prevailing at the time for comparable transactions with other persons. An exception is made for extensions of credit made pursuant to a benefit or compensation plan of a bank that is widely available to employees of the bank and that does not give any preference to insiders of the bank over other employees of the bank. In addition, federal law prohibits extensions of credit to a bank’s insiders and their related interests by any other institution that has a correspondent banking relationship with the bank, unless such extension of credit is on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavourable features. New Jersey Regulation. Provisions of the New Jersey Banking Act impose conditions and limitations on the liabilities to a savings bank of its directors and executive officers and of corporations and partnerships controlled by such persons, that are comparable in many respects to the conditions and limitations imposed on the loans and extensions of credit to insiders and their related interests under federal law, as discussed above. The New Jersey Banking Act also provides that a savings bank that is in compliance with federal law is deemed to be in compliance with such provisions of the New Jersey Banking Act. Federal Reserve System Federal Reserve Board regulations require all depository institutions to maintain reserves at specified levels against their transaction accounts (primarily NOW and regular checking accounts). At September 30, 2021, Magyar Bank was in compliance with the Federal Reserve Board’s reserve requirements. Savings banks, such as Magyar Bank, are authorized to borrow from the Federal Reserve Bank “discount window.” Magyar Bank is deemed by the Federal Reserve Board to be 27 Table of Contents generally sound and thus is eligible to obtain secondary credit from its Federal Reserve Bank. Generally, secondary credit is extended on a very short-term basis to meet the liquidity needs of the institution. Loans must be secured by acceptable collateral and carry a rate of interest above the Federal Open Market Committee’s federal funds target rate. The USA PATRIOT Act The USA PATRIOT Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. The USA PATRIOT Act also requires the federal banking agencies to take into consideration the effectiveness of controls designed to combat money laundering activities in determining whether to approve a merger or other acquisition application of a member institution. Accordingly, if we engage in a merger or other acquisition, our controls designed to combat money laundering would be considered as part of the application process. We have established policies, procedures and systems designed to comply with these regulations. Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act of 2002 is intended to improve corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. We have policies, procedures and systems designed to comply with these regulations, and we review and document such policies, procedures and systems to ensure continued compliance with these regulations. Holding Company Regulation Federal Regulation. Magyar Bancorp, Inc. is regulated as a bank holding company. Bank holding companies are subject to examination, regulation and periodic reporting under the Bank Holding Company Act, as administered by the Federal Reserve Board (“FRB”). Bank holding companies are generally subject to consolidated capital requirements established by the FRB. Bank holding companies under $3 billion in consolidated assets remain exempt from consolidated regulatory capital requirements, unless the FRB determines otherwise in particular cases. Regulations of the FRB provide that a bank holding company must serve as a source of strength to any of its subsidiary banks and must not conduct its activities in an unsafe or unsound manner. The Dodd-Frank Act codified the source of strength policy and requires the promulgation of implementing regulations. Under the prompt corrective action provisions of the Dodd-Frank Act, a bank holding company parent of an undercapitalized subsidiary bank would be directed to guarantee, within limitations, the capital restoration plan that is required of such an undercapitalized bank. See “Federal Banking Regulation—Prompt Corrective Action.” If the undercapitalized bank fails to file an acceptable capital restoration plan or fails to implement an accepted plan, the FRB may prohibit the bank holding company parent of the undercapitalized bank from paying any dividend or making any other form of capital distribution without the prior approval of the FRB. As a bank holding company, Magyar Bancorp, Inc. is required to obtain the prior approval of the FRB to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior FRB approval is required for Magyar Bancorp, Inc. to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after giving effect to such acquisition, it would, directly or indirectly, own or control more than 5% of any class of voting shares of such bank or bank holding company. A bank holding company is required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, will be equal to 10% or more of the company’s consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, FRB order or directive, or any condition imposed by, or written agreement with, the FRB. Such notice and approval is not required for a bank holding company that would be treated as “well capitalized” under applicable regulations of the FRB, that has received a composite “1” or “2” rating, as well as a “satisfactory” rating for management, at its most recent bank holding company inspection by the FRB, and that is not the subject of any unresolved supervisory issues. In addition, a bank holding company that does not elect to be a financial holding company under federal regulation, is generally prohibited from engaging in, or acquiring direct or indirect control of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the FRB to be so closely related to banking or managing or controlling banks as to be permissible. Some of the principal activities that the FRB has determined by regulation to be so closely related to banking as to be permissible are: 28 Table of Contents · making or servicing loans; · performing certain data processing services; · providing discount brokerage services, or acting as fiduciary, investment or financial advisor; · leasing personal or real property; · making investments in corporations or projects designed primarily to promote community welfare; and · acquiring a savings and loan association. Bank holding companies that elect to be a financial holding company may engage in activities that are financial in nature or incident to activities which are financial in nature, including investment banking and insurance underwriting. Magyar Bancorp, Inc. has not elected to be a financial holding company, although it may seek to do so in the future. Bank holding companies may elect to become a financial holding company if: · each of its depository institution subsidiaries is “well capitalized;” · each of its depository institution subsidiaries is “well managed;” · each of its depository institution subsidiaries has at least a “satisfactory” Community Reinvestment Act rating at its most recent examination; and · the bank holding company has filed a certification with the FRB stating that it elects to become a financial holding company. Under federal law, depository institutions are liable to the FDIC for losses suffered or anticipated by the FDIC in connection with the default of a commonly controlled depository institution or any assistance provided by the FDIC to such an institution in danger of default. This law would be applicable potentially to Magyar Bancorp, Inc. if it ever acquired as a separate subsidiary a depository institution in addition to Magyar Bank. New Jersey Regulation. Under the New Jersey Banking Act, a company owning or controlling a savings bank is regulated as a bank holding company. The New Jersey Banking Act defines the terms “company” and “bank holding company” as such terms are defined under the BHCA. Each bank holding company controlling a New Jersey-chartered bank or savings bank must file certain reports with the Commissioner and is subject to examination by the Commissioner. Acquisition of Magyar Bancorp, Inc. Under federal law and under the New Jersey Banking Act, no person may acquire control of Magyar Bancorp, Inc. without first obtaining approval of such acquisition of control by the FRB and the Commissioner. Federal Securities Laws. Magyar Bancorp, Inc. common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Magyar Bancorp, Inc. is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.