Magyar Bancorp, Inc. 10-K

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview Magyar Bancorp, Inc. (the “Company”) is a Delaware-chartered stock holding company whose most significant business activity is ownership of 100% of the common stock of Magyar Bank. Magyar Bank’s principal business is attracting retail deposits from the general public and investing those deposits, together with funds generated from operations, principal repayments on loans and securities and borrowed funds, into one-to four-family residential mortgage loans, multi-family and commercial real estate mortgage loans, home equity loans and lines of credit, commercial business loans and construction loans. Our results of operations depend primarily on our net interest income which is the difference between the interest we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our net interest income is primarily affected by the market interest rate environment, the shape of the U.S. Treasury yield curve, the timing of the placement of interest-earning assets and interest-bearing liabilities, and the prepayment rate on our mortgage-related assets. Other factors that may affect our results of operations are general and local economic and competitive conditions, government policies and actions of regulatory authorities. During the year ended September 30, 2021, the Company’s total assets grew $20.0 million, or 2.7%, to $774.0 million. The increase was attributable to a $25.6 million, or 56.8%, increase in investment securities and a $13.5 million, or 21.8%, increase in cash and cash equivalents, partially offset by a $17.8 million, or 3.0%, decrease in loans receivable, net of allowance for loan loss. The increase in cash and investments resulted from a $21.5 million increase in deposits during the year ended September 30, 2021 as well as a $30.9 million net reduction in PPP loan balances to $25.1 million at September 30, 2021 from $56.0 million at September 30, 2020. Stockholders’ equity increased $40.8 million, or 71.8%, to $97.6 million at September 30, 2021 from $56.9 million at September 30, 2020. The increase in stockholders’ equity was primarily attributable to $37.4 million raised from the Company’s stock offering/second step conversion, net of offering costs, as well as the Company’s results of operations and for the year ended September 30, 2021. 36 Table of Contents Total deposits increased $21.5 million, or 3.5%, to $639.8 million during the year ended September 30, 2021. The growth in deposits during the twelve months ended September 30, 2021 occurred in non-interest checking account balances, which increased $18.4 million, or 11.3%, to $182.0 million, in savings account balances, which increased $6.8 million, or 9.1%, to $81.7 million, and in interest-bearing checking account balances, which increased $5.9 million, or 9.0% to $71.3 million. Offsetting these increases was a $9.5 million, or 7.5%, decrease in certificates of deposit (including individual retirement accounts), to $116.9 million, and a $125,000, or 0.1%, decrease in money market account balances to $187.9 million. The Company’s net income increased $3.9 million, or 179.5%, to $6.1 million during the year ended September 30, 2021 compared with net income of $2.2 million for the year ended September 30, 2020. The increase in net income was due to higher net interest and dividend income and higher non-interest income, partially offset by higher non-interest expenses. Throughout fiscal 2022, we expect to continue increasing our commercial real estate and commercial business loans while managing non-interest expenses in an effort to increase profitability of the Company. Critical Accounting Policies Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. Critical accounting policies may involve complex subjective decisions or assessments. We consider the following to be our critical accounting policies. Allowance for Loan Loss. The allowance for loan losses is the amount estimated by management as necessary to cover credit losses in the loan portfolio both probable and reasonably estimable at the balance sheet date. The allowance is established through the provision for loan losses which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of our most critical. Due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses, the methodology for determining the allowance for loan losses is considered a critical accounting policy by management. As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans and discounted cash flow valuations of properties are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisals and discounted cash flow valuations are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly affect the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals and discounted cash flow valuations are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans. Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. We consider a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates by management that may be susceptible to significant change based on changes in economic and real estate market conditions. The evaluation has a specific and general component. The specific component relates to loans that are delinquent or otherwise identified as impaired through the application of our loan review process and our loan grading system. All such loans are evaluated individually, with principal consideration given to the value of the collateral securing the loan and discounted cash flows. Specific impairment allowances are established as required by this analysis. However, the Bank’s Federal and State regulators generally require that the specific reserve against impaired collateral-dependent loans be charged-off, reducing the carrying balance of the loan and allowance for loan loss. The general component is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations in establishing the general portion of the reserve. This analysis establishes factors that are applied to the loan groups to determine the amount of the general component of the allowance for loan losses. Actual loan losses may be significantly greater than the allowances we have established, which could have a material negative effect on our financial results. 37 Table of Contents Deferred Income Taxes. The Company records income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities: (i) are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns; (ii) are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases; and (iii) are measured using enacted tax rates expected to apply in the years when those temporary differences are expected to be recovered or settled. Deferred tax assets are likely to be realized and therefore do not have a valuation allowance. Impact of the Coronavirus/COVID-19 Pandemic During 2020 and continuing into 2021, the extraordinary impact of the COVID-19 pandemic has created an unprecedented environment for consumers and businesses alike. To protect our employees and customers from potential exposure to the virus, all Magyar Bank lobbies and operational areas continue to observe best practice protocols to limit exposure and/or spread of the virus. To assist our loan customers, Magyar Bank has offered loan payment deferrals to borrowers unable to make their contractual payments due to COVID-19. Loan payments are deferred until the contractual maturity of the loan. Deferral requests are considered on a case-by-case basis and are initially approved for a three-month period for principal and interest payments or for interest-only payments depending on the borrower’s circumstances. An additional three-month period is available for businesses that remain unable to operate and for consumers unable to make their mortgage or home equity payments due to COVID-19. Additional deferrals were considered for businesses experiencing a prolonged impact from the COVID-19 pandemic, such as the accommodation and food service industries. Magyar Bank’s loan portfolio does not have a significant exposure to the travel or entertainment industry. Through September 30, 2021, we had modified 284 loans aggregating $150.9 million for the deferral of principal and/or interest payments. Of these loans, 56 loans totaling $28.1 million repaid their deferred payments in full and 227 loans aggregating $121.4 million had resumed making their contractual loan payments. One loan totaling $1.4 million was past its deferral period and delinquent at September 30, 2021. The Company was not deferring any additional loan payments due to the COVID-19 pandemic at September 30, 2021. Details with respect to loans with deferred payments as of September 30, 2021 and 2020 are as follows: Number of Loans Balance Weighted Average Interest Rate September 30, 2021 (Dollars in thousands) One-to-four family residential real estate (1) 75 $ 17,593 4.09% Commercial real estate 122 95,847 4.69% Construction 3 2,305 3.53% Home equity lines of credit 6 896 4.33% Commercial business 22 6,172 6.06% Total 228 $ 122,813 4.65% September 30, 2020 One- to four-family residential real estate (1) 94 $ 24,573 4.05% Commercial real estate 145 115,358 4.76% Construction 4 2,630 3.77% Home equity lines of credit 8 1,238 4.24% Commercial business 32 6,892 5.88% Total 283 $ 150,691 4.67% (1) Includes home equity loans. The Bank participated in the PPP to provide liquidity using the SBA platform to small businesses and self-employed individuals to maintain their staff and operations through the COVID-19 pandemic. This liquidity is in the form of a loan, 100% guaranteed by the SBA, that is forgivable provided the funds are used on qualifying payroll costs, and to a lesser extent, rent, utilities and interest on qualifying mortgage payments. The loans bear a fixed rate of 1.0% and loan payments are deferred for the first 10 months following the covered period, which is eight to twenty-four weeks following the date the loan is made. We originated 350 “First Draw” loans totaling $56.0 million through June 30, 2021 for which we received $2.0 million in origination fees from the SBA. These fees are being amortized over the contractual term of the loans, which is two 38 Table of Contents years for loans originated prior to June 4, 2020 and five years for loans originated June 5, 2020 or later. Through September 30, 2021, all First Draw loans totaling $56.0 million had been repaid. On December 27, 2020 the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues (“Economic Aid Act”) was signed into law, extending the SBA’s authority to guarantee “Second Draw” PPP loans, under generally the same terms and conditions available under the First Draw program, through March 31, 2021, subsequently extended by the Paycheck Protection Program Extension Act of 2021 to May 31, 2021. In order to qualify for a Second Draw PPP loan, an applicant must have experienced a revenue reduction of at least 25% in 2020 relative to 2019. As of September 30, 2021, the Company originated 212 PPP loans totaling $35.3 million under the Economic Aid Act to its eligible customers, for which it received $1.5 million in origination fees from the SBA. These fees are being amortized over the contractual term of the loans, which is five years, or until the loan is repaid. The Economic Aid Act also expanded the eligible expenditures for which a business could use PPP proceeds for and provided for a simplified forgiveness application for PPP loans $150,000 or less. Through September 30, 2021, 101 loans totaling $10.2 million had been forgiven by the SBA, leaving 111 PPP loans totaling $25.1 million outstanding at September 30, 2021. The Board of Governors of the Federal Reserve System created the Paycheck Protection Program Lending Facility (“PPPLF”) to facilitate lending by eligible financial institutions to small businesses under the PPP. Under the PPPLF, the Federal Reserve Bank of New York provided advances with a fixed interest rate of 0.35% to Magyar Bank on a non-recourse basis, taking PPP loans as collateral. In addition, the Federal Deposit Insurance Corporation allows Magyar Bank to neutralize the effect of PPP loans financed under the PPPLF on Tier 1 leverage capital ratios. The Bank repaid all $36.9 million in PPPLF advances to the Federal Reserve Bank during the year ended September 30, 2021 that were used to fund First Draw PPP loans. The Bank did not utilize the PPPLF to fund its Second Draw PPP loans. The health of the banking industry is highly correlated with that of the economy. The temporary and/or partial closures of non-essential businesses in our local and national economies increases the likelihood of recession, which typically results in an increased level of credit losses. Accordingly, our provisions for loan losses have increased and will be closely monitored throughout the pandemic. In addition to utilizing quantitative loss factors, the Company considers qualitative factors, such as changes in underwriting policies, current economic conditions, delinquency statistics, the adequacy of the underlying collateral, and the financial strength of the borrower. The impact of the COVID-19 pandemic on the performance of our loan portfolio in future quarters is unknown, however all of these factors are likely to be affected by the COVID-19 pandemic. Comparison of Financial Condition at September 30, 2021 and September 30, 2020 Total Assets. Total assets increased $20.0 million, or 2.7%, to $774.0 million during the year ended September 30, 2021 compared with $754.0 million at September 30, 202. The increase was attributable to a $25.6 million, or 56.8%, increase in investment securities and a $13.5 million, or 21.8%, increase in cash and cash equivalents, offset by a $17.8 million, or 3.0%, decrease in loans receivable, net of allowance for loan loss. The increase in cash and investments resulted from a $21.5 million increase in deposits during the year ended September 30, 2021 as well as a $30.9 million net reduction in PPP loan balances to $25.1 million at September 30, 2021 from $56.0 million at September 30, 2020. Loans Receivable. Total loan receivable decreased $16.7 million, or 2.7%, to $594.6 million at September 30, 2021 from $611.3 million at September 30, 2020. Total loans receivable at September 30, 2021 were comprised of $280.8 million (47.2%) in commercial real estate loans, $203.0 million (34.2%) in one- to four- family residential mortgage loans, $68.7 million (11.6%) in commercial business loans (including $25.1 million in PPP loans), $20.4 million (3.4%) in construction loans, and $21.7 million (3.6%) in home equity lines of credit and other loans. Total loans receivable at September 30, 2020 were comprised of $248.1 million (40.6%) in commercial real estate loans, $210.4 million (34.4%) in one- to four- family residential mortgage loans, $101.0 million (16.5%) in commercial business loans (including $56.0 million in PPP loans), $28.2 million (4.6%) in construction loans, and $23.5 million (3.9%) in home equity lines of credit and other loans. Total non-performing loans decreased $1.5 million, or 16.2%, to $8.2 million at September 30, 2021 from $9.7 million at September 30, 2020. At September 30, 2021 our OREO consisted of one commercial real estate property totaling $268,000 and one assemblage of approved real estate lots/land totaling $368,000. The ratio of non-performing loans to total loans was 1.4% at September 30, 2021 compared to 1.6% at September 30, 2020. Once a loan is deemed non-performing, the value of the collateral securing the loan must be assessed, which is typically done by obtaining an updated third-party appraisal. To the extent that the current appraised value of collateral is insufficient to cover a collateral-dependent loan, the Company reduces the balance of the loan via a charge to the allowance for loan loss. 39 Table of Contents Non-performing loans secured by one-to four-family residential properties, including home equity lines of credit and other consumer loans, increased $247,000, or27.3%, to $1.2 million at September 30, 2021 from $905,000 at September 30, 2020. Magyar Bank had begun foreclosure proceedings on the properties securing these loans at September 30, 2021. During the year ended September 30, 2021, there were no charge-offs against the allowance for loan loss for residential real estate loans while $1,000 was recovered from prior year charge-offs. Non-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. Magyar Bank had begun foreclosure proceedings on the properties securing these loans at September 30, 2021. During the year ended September 30, 2021 there was one charge-off totaling $51,000 against the allowance for loan loss and no recoveries of prior year charge-offs. Non-performing commercial business loans decreased $118,000, or 8.0%, to $1.3 million at September 30, 2021 from $1.5 million at September 30, 2020. Magyar Bank had begun foreclosure proceedings on the collateral securing the $1.3 million loan at September 30, 2021.During the year ended September 30, 2021, there were no charge-offs, but there were $96,000 in recoveries from a prior year charge-off. Non-performing construction loans decreased $561,000, or 10.9%, to $4.6 million at September 30, 2021 from $5.1 million at September 30, 2020. Magyar Bank had begun foreclosure proceedings on the properties securing these loans at September 30, 2021. During the year ended September 30, 2021, there were no charge-offs or recoveries on construction loans. The ratio of non-performing loans and troubled debt restructurings to total loans receivable decreased to 1.43% at September 30, 2021 from 1.63% at September 30, 2020. The allowance for loan losses increased $1.7 million to $8.1 million, or 99.0% of non-performing loans, at September 30, 2021 compared with $6.4 million, or 65.8% of non-performing loans, at September 30, 2020. Provisions for loan loss during the year ended September 30, 2021 were $1.6 million while net recoveries were $46,000, compared with a provision of $1.7 million and net charge-offs of $154,000 for the prior year period. The allowance for loan losses was 1.36% and 1.05% of gross loans outstanding at September 30, 2021 and 2020, respectively. Investment Securities. Investment securities increased $25.6 million, or 56.8%, to $70.6 million at September 30, 2021 from $45.0 million at September 30, 2020. Investment securities at September 30, 2021 consisted of $52.8 million in mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises, $12.5 million in U.S. government-sponsored enterprise debt securities, $3.0 million in corporate notes, $2.0 million in municipal bonds and $242,000 in “private-label” mortgage-backed securities. There were no other-than-temporary-impairment charges for the Company’s investment securities for the year ended September 30, 2021. Securities available-for-sale decreased $1.6 million, or 11.2%, to $12.9 million at September 30, 2021 from $14.6 million at September 30, 2020. The decrease was attributable to $6.9 million in principal repayments, $5.0 million in bonds called, and unrealized losses of $293,000, partially offset by purchases totaling $10.6 million during the year ended September 30, 2021. Securities held-to-maturity increased $27.2 million, or 89.4%, to $57.7 million at September 30, 2021 from $30.4 million at September 30, 2020. The increase was the result of $38.9 million in security purchases, partially offset by $9.7 million in principal repayments and $2.0 million in bonds called during the year ended September 30, 2021. Bank-Owned Life Insurance. The cash surrender value of life insurance held for directors and officers of Magyar Bank increased $317,000, or 2.3%, to $14.3 million at September 30, 2021 from $14.0 million at September 30, 2020. The increase was entirely due to the increase in cash surrender value of the policies, as the Company did not purchase any new bank-owned life insurance policies during the year ended September 30, 2021. Other Real Estate Owned. OREO decreased $2.0 million, or 75.5%, to $636,000 at September 30, 2021 from $2.6 million at September 30, 2020. The decrease was due to the sale of four properties totaling $2.3 million, in addition to valuation allowances and other net reductions totaling $205,000. Offsetting these decreases were two additions totaling $547,000 during the year, both of which were sold. The Company recorded $337,000 and $371,000 in valuation allowances against its OREO during the year ended September 30, 2021 and 2020, respectively, based on updated appraisals or executed contracts of sale. Further declines in real estate values may result in a charge to expense in the future. 40 Table of Contents OREO at September 30, 2021 consisted of one commercial real estate property totaling $268,000 and an assemblage of approved real estate lots/land totaling $368,000. All of the properties are listed for sale. The Bank is determining the proper course of action for its OREO, which may include holding the properties until the real estate market improves, marketing the properties for individual sale, or selling properties to an investor and/or developer. Deposits. Deposits, which include noninterest-bearing demand deposits, interest-bearing demand deposits, money market deposits, savings deposits and time deposits, are the primary source of the Company’s funds. The Company offers a variety of products designed to attract and retain customers, with primary focus on building and expanding relationships. The Company continues to focus on establishing relationships with business borrowers, seeking deposits as well as lending relationships. Total deposits increased $21.5 million, or 3.5%, to $639.8 million at September 30, 2021 from $618.3 million at September 30, 2020. The increase in deposits during the twelve month ended September 30, 2021 occurred in non-interest checking account balances, which increased $18.4 million, or 11.3%, to $182.0 million, in savings account balances, which increased $6.8 million, or 9.1%, to $81.7 million, and in interest-bearing checking account balances, which increased $5.9 million, or 9.0% to $71.3 million. Offsetting these increases was a $9.5 million, or 7.5%, decrease in certificates of deposit (including individual retirement accounts), to $116.9 million, and a $125,000, or 0.1%, decrease in money market account balances to $187.9 million. Deposits accounted for 82.7% of assets and 109.3% of net loans receivable at September 30, 2021 compared with 82.0% of assets and 102.5% of net loans receivable at September 30, 2020, respectively. Commercial and consumer deposit inflows were higher during this period from PPP loan disbursements, government stimulus programs, lower spending and customers’ preferences for liquidity during the ongoing COVID-19 pandemic. At September 30, 2021, the Company held $6.0 million in brokered certificates of deposit, compared with $9.4 million at September 30, 2020. The $3.4 million decrease resulted from the repayment of $7.4 million in matured deposits, offset by one new $4.0 million during the year ended September 30, 2021. The Company’s deposit strategy in 2021 focused on growing its non-interest checking account balances and reducing the overall cost of its interest-bearing accounts to offset declines in market interest rates. Borrowed Funds. 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 decrease was primarily due to the repayment of all $36.9 million in Paycheck PPPLF advances to the Federal Reserve Bank during the year ended September 30, 2021 that were used to fund Round 1 PPP loans. FHLBNY advances decreased $7.1 million to $23.4 million at September 30, 2021 from $30.5 million at September 30, 2020 as deposit inflows were used to repay maturing term advances. Stockholders’ Equity. Stockholders’ equity increased $40.8 million, or 71.8%, to $97.6 million at September 30, 2021 from $56.9 million at September 30, 2020. The increase in stockholders’ equity was primarily attributable to $37.4 million raised from the Company’s stock offering/second step conversion, net of offering costs, as well as the Company’s results of operations and for the year ended September 30, 2021. The Company’s book value per share increased $3.98 during the year to $13.76 at September 30, 2021, based on total equity of $97.6 million and 7,097,825 shares outstanding. The Company’s book value per share was $9.78 at September 30, 2020, based on total equity of $56.9 million and 5,810,746 shares outstanding. Comparison of Operating Results for the Years Ended September 30, 2021 and 2020 Net Income. The Company’s net income increased $3.9 million, or 179.5%, to $6.1 million during the year ended September 30, 2021 compared with $2.2 million for the year ended September 30, 2020 due to higher net interest and dividend income and higher non-interest income, partially offset by higher non-interest expenses. Net Interest and Dividend Income. The primary source of the Company’s operating income is net interest and dividend income, which is the difference between interest and dividends earned on earning assets and fees earned on loans, and interest paid on interest-bearing liabilities. The Company’s net interest and dividend income is affected by regulatory, economic and competitive factors that influence interest rates, loan demand, deposit flows and levels of nonperforming assets. During the year ended September 30, 2021, net interest and dividend income increased $4.2 million, or 19.5%, to $25.6 million compared to $21.4 million for the year ended September 30, 2020. Interest and dividend income increased $1.6 million, or 5.9%, to $28.5 million while interest expense decreased $2.6 million, or 46.7%, to $2.9 million. 41 Table of Contents Average Balance Sheet. The following table presents certain information regarding our financial condition and net interest income for the years ended September 30, 2021, 2020 and 2019. The table presents the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown. We derived average balances from daily balances over the periods indicated. Interest income includes fees that we consider adjustments to yields. For the Year Ended September 30, 2021 2020 2019 Average Balance Interest Income/ Expense Yield/Cost (Annualized) Average Balance Interest Income/ Expense Yield/Cost (Annualized) Average Balance Interest Income/ Expense Yield/Cost (Annualized) (Dollars In Thousands) Interest-earning assets: Interest-earning deposits $ 61,655 $ 88 0.14% $ 35,612 $ 208 0.58% $ 24,525 $ 510 2.08% Loans receivable, net 605,176 27,551 4.55% 562,209 25,626 4.55% 516,076 25,154 4.87% Securities Taxable 55,487 789 1.42% 45,308 965 2.13% 55,133 1,290 2.34% Tax-exempt (1) 410 7 1.64% — — 0.00% — — 0.00% FHLBNY stock 1,925 95 4.94% 2,018 128 6.33% 2,162 149 6.88% Total interest-earning assets 724,653 28,530 3.94% 645,147 26,927 4.16% 597,896 27,103 4.53% Noninterest-earning assets 44,193 46,839 42,566 Total assets $ 768,846 $ 691,986 $ 640,462 Interest-bearing liabilities: Savings accounts (2) $ 87,812 $ 155 0.18% $ 72,290 $ 347 0.48% $ 74,497 $ 493 0.66% NOW accounts (3) 258,261 707 0.27% 241,508 2,105 0.87% 234,953 3,231 1.38% Time deposits (4) 116,944 1,425 1.22% 127,576 2,318 1.81% 121,706 2,197 1.81% Total interest-bearing deposits 463,017 2,287 0.49% 441,374 4,770 1.08% 431,156 5,921 1.37% Borrowings 47,220 654 1.39% 45,647 743 1.62% 35,175 789 2.24% Total interest-bearing liabilities 510,237 2,941 0.58% 487,021 5,513 1.13% 466,331 6,710 1.44% Noninterest-bearing liabilities 188,084 148,080 119,384 Total liabilities 698,321 635,101 585,715 Retained earnings 70,525 56,885 54,747 Total liabilities and retained earnings $ 768,846 $ 691,986 $ 640,462 Tax-equivalent basis adjustment (2 ) — — Net interest and dividend income $ 25,587 $ 21,414 $ 20,393 Interest rate spread 3.36% 3.03% 3.09% Net interest-earning assets $ 214,416 $ 158,126 $ 131,565 Net interest margin (5) 3.53% 3.31% 3.41% Average interest-earning assets to average interest-bearing liabilities 142.02% 132.47% 128.21% (1) Calculated using the Company's 21% federal tax rate. (2) Includes passbook savings, money market passbook and club accounts. (3) Includes interest-bearing checking and money market accounts. (4) Includes certificates of deposits and individual retirement accounts. (5) Calculated as annualized net interest income divided by average total interest-earning assets. 42 Table of Contents Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by average volume). The volume column shows the effects attributable to changes in volume (changes in average volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume. September 30, 2021 vs. 2020 2020 vs. 2019 Increase (decrease) Increase (decrease) due to due to Volume Rate Net Volume Rate Net (In thousands) Interest-earning assets: Interest-earning deposits $ 95 $ (215 ) $ (120 ) $ 167 $ (469 ) $ (302 ) Loans 1,925 (0 ) 1,925 2,176 (1,704 ) 472 Securities Taxable 188 (364 ) (176 ) (216 ) (109 ) (325 ) Tax-exempt (1) 7 — 7 — — — FHLBNY stock (6 ) (27 ) (33 ) (10 ) (11 ) (21 ) Total interest-earning assets 2,209 (606 ) 1,603 2,117 (2,293 ) (176 ) Interest-bearing liabilities: Savings accounts (2) 62 (254 ) (192 ) (14 ) (132 ) (146 ) NOW accounts (3) 137 (1,535 ) (1,398 ) 89 (1,215 ) (1,126 ) Time deposits (4) (182 ) (711 ) (893 ) 121 0 121 Total interest-bearing deposits 17 (2,500 ) (2,483 ) 196 (1,347 ) (1,151 ) Borrowings 24 (113 ) (89 ) 202 (248 ) (46 ) Total interest-bearing liabilities 41 (2,613 ) (2,572 ) 398 (1,595 ) (1,197 ) Increase (decrease) in tax equivalent net interest income $ 2,169 $ 2,006 $ 4,175 $ 1,719 $ (698 ) $ 1,021 Change in tax-equivalent basis adjustment (2 ) — Increase in net interest income $ 4,173 $ 1,021 (1) Calculated using the Company's 21% federal tax rate. (2) Includes passbook savings, money market passbook and club accounts. (3) Includes interest-bearing checking and money market accounts. (4) Includes certificates of deposits and individual retirement accounts. Interest and Dividend Income. Interest and dividend income increased $1.6 million, or 5.9%, to $28.5 million for the year ended September 30, 2021 from $26.9 million for the year ended September 30, 2020. The average balance of interest-earnings assets between the two periods increased $79.5 million, or 12.3%, to $724.6 million from $645.1 million, while the yield on such assets decreased 22 basis points to 3.94% for the year ended September 30, 2021 from 4.16% for the year ended September 30, 2020. Interest income on loans increased $1.9 million, or 7.5%, to $27.5 million for the year ended September 30, 2021 from $25.6 million for the year ended September 30, 2020, while the average balance of loans increased $43.0 million, or 7.6%, to $605.2 million from $562.2 million. The average yield on such loans was 4.55% at September 30, 2021 and 2020. The recognition of PPP loans fees totaling $2.0 million during the year ended September 30, 2021, compared with $335,000 for the year ended September 30, 2020, accounted for the majority of the increase in interest income between periods. Interest earned on investment securities, including interest earned on deposits but excluding FHLBNY stock, decreased $291,000, or 24.8%, to $882,000 for the year ended September 30, 2021 from $1.2 million for the same period prior year. The decrease was attributable to a 70 basis point decrease in the average yield on investment securities and interest earned on deposits to 0.75% from 1.45%, partially offset by a $36.6 million, or 45.3%, increase in the average balance of 43 Table of Contents investment securities and interest earning deposits to $117.5 million from $80.9 million during the year ended September 30, 2021. Interest Expense. Interest expense decreased $2.6 million, or 46.7%, to $2.9 million for the year ended September 30, 2021 from $5.5 million for the year ended September 30, 2020. The average balance of interest-bearing liabilities increased $23.7 million, or 4.9%, to $510.7 million from $487.0 million between the two periods while the cost of such liabilities decreased 55 basis points to 0.58% for the year ended September 30, 2021 from 1.13% for the same period prior year due to the lower market interest rate environment. The average balance of interest-bearing deposits increased $21.6 million, or 4.9%, to $463.0 million for the year ended September 30, 2021 from $441.4 million for the prior year while the average cost of such deposits decreased 59 basis points to 0.49% from 1.08%. Interest expense on deposits decreased $2.5 million, or 52.1%, to $2.3 million for the year ended September 30, 2021 from $4.8 million for the year ended September 30, 2020. Interest expense on advances decreased $89,000, or 12.0%, to $654,000 for the year ended September 30, 2021 from $743,000 for the year ended September 30, 2020. The average cost of borrowings decreased 23 basis points to 1.39% for the year ended September 30, 2021 from 1.62% for the year ended September 30, 2020 while the average balance of borrowings increased $1.6 million to $47.2 million for the year ended September 30, 2021 from $45.6 million the prior year. Provision for Loan Losses. We establish provisions for loan losses, which are charged to earnings, at a level necessary to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, peer group information and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events occur. The provision for loan losses decreased $37,000 to $1.6 million for the year ended September 30, 2021 compared to $1.7 million for the year ended September 30, 2020. There were net recoveries of $46,000 during the year ended September 30, 2021 compared with net charge-offs of $154,000 for the year ended September 30, 2020. Other Income. Other income increased $1.7 million, or 98.7%, to $3.4 million during the year ended September 30, 2021 compared with $1.7 million the prior year. Higher fees for other customer services, gains from the sale of loans, interest rate swap fees, and service charges accounted for the increase. Fees for other customer services increased to $777,000 from fees earned from the Bank’s assistance with its local government’s Small Business Relief Grant program. The program was designed to assist small local businesses impacted by the COVID-19 pandemic. The Company received a fee of 3.0% of the grants it assisted with processing. The Bank sells the guaranteed portion of its SBA loans in the secondary market. During the year ended September 30, 2021, $6.4 million in loans were sold, generating $749,000 in gains compared with sales of $3.6 million and $317,000 in gains for the twelve months ended September 30, 2020. The Bank began offering a commercial loan swap product through a correspondent bank during its fiscal year 2021. During the twelve months ended September 30, 2021 the Company originated three commercial swap loans totaling $20.4 million, which generated $313,000 in interest rate swap fees. The Bank assesses service charges for a variety of loan and deposit services. These services were negatively impacted by the COVID-19 induced economic shut-down during our fiscal year 2020. The re-opening of the economy in turn increased the services and correspondent service charges the Bank receives. In addition, the Bank received more prepayment penalties from commercial loan payoffs. Accordingly, service charges increased $242,000, or 26.9%, to $1.1 million for the year ended September 30, 2021, compared with $901,000 for the year ended September 30, 2020. Other Expenses. Other expenses increased $289,000, or 1.6%, to $18.6 million for the year ended September 30, 2021 compared to $18.4 million for the year ended September 30, 2020. Higher compensation and benefit expenses, higher professional fees and higher other expenses were partially offset by lower OREO expenses, lower data processing expenses, and lower FDIC insurance assessments. 44 Table of Contents Compensation and benefit expenses increased $336,000, or 3.3%, to $10.6 million for the year ended September 30, 2021 from $10.3 million for the year ended September 30, 2020. Higher incentive accruals and employee benefit expenses accounted for the increase, partially offset by lower compensation expense due to lower staffing levels. Professional fees include legal and consulting fees related to the collection and foreclosure of non-performing assets. These fees increased $161,000, or 10.3%, to $1.7 million for the year ended September 30, 2021, compared with $1.6 million for the year ended September 30, 2020. In addition, other expenses increased $165,000, or 11.4%, to $1.6 million for the year ended September 30, 2021, compared with $1.4 million for the year ended September 30, 2020. The increases were primarily attributable to temporary prior year reductions related to the COVID-19 pandemic in areas such as marketing and business development, contributions, and operating costs. Offsetting the higher expenses were lower OREO expenses, data processing expenses, and FDIC insurance assessments. OREO expenses decreased $274,000, or 54.9%, to $225,000 from lower valuation allowances, higher gains on sales, and fewer properties compared with the prior year. Data processing expenses decreased $61,000, or 10.4%, to $528,000 from the extension and reduction in cost of the Bank’s core services provider contract. FDIC insurance assessments decreased $57,000, or 11.9%, to $422,000 from higher capital levels resulting from the Company’s stock offering completed in July of 2021 as well as higher income from operations and lower levels of non-performing assets. Income Tax Expense. The Company recorded tax expense of $2.6 million on income of $8.7 million for the year ended September 30, 2021 compared with tax expense of $920,000 on income of $3.1 million for the year ended September 30, 2020. The higher income tax expense resulted from a $5.6 million increase in the Company’s results from operations. The Company’s effective tax rate for the year ended September 30, 2021 was 29.9% compared with 29.6% for the year ended September 30, 2020. Management of Market Risk General . The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, our Board of Directors has established an Asset and Liability Management Committee which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. Senior management monitors the level of interest rate risk on a regular basis and the Asset and Liability Committee meets at least on a quarterly basis to review our asset/liability policies and interest rate risk position. We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. As part of our ongoing asset-liability management, we seek to manage our exposure to interest rate risk by retaining in our loan portfolio fewer fixed rate residential loans, by originating and retaining adjustable-rate loans in the residential, construction and commercial real estate loan portfolios, by using alternative funding sources, such as advances from the FHLBNY, to “match fund” longer-term residential and commercial mortgage loans, and by originating and retaining variable rate home equity and short-term and medium-term fixed-rate commercial business loans. We began offering a commercial loan swap product in our fiscal year 2021 that allows the Bank to receive floating-rate interest loan payments while its borrowers pay a fixed rate of interest on their loans. We have also increased money market account deposits as a percentage of our total deposits. Money market accounts offer a variable rate based on market indications. By following these strategies, we believe that we are well-positioned to react to changes in market interest rates. Net Interest Income Analysis. The table below sets forth, as of September 30, 2021, the estimated changes in our Net Interest Income (“NII”) for each of the next two years that would result from the designated instantaneous changes in interest rates. These estimates require making certain assumptions including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain and, as a result, we cannot precisely predict the impact of changes in interest rates on net interest income. Actual results may differ significantly due to timing, magnitude and frequency of interest rate changes and changes in market conditions. Further, certain shortcomings are inherent in the methodology used in the interest rate risk measurement. Modeling changes in net interest income require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. 45 Table of Contents Change in Estimated Decrease Estimated Increase Interest rates Estimated in NII Year 1 Estimated (Decrease) in NII Year 2 (Basis Points) (1) NII Year 1 Amount Percentage NII Year 2 Amount Percentage (Dollars in thousands) +200 $ 26,218 $ 895 3.53% $ 26,714 $ 1,800 7.22% Unchanged 25,323 — — 24,914 — — -100 24,191 (1,132 ) -4.47% 23,167 (1,747 ) -7.01% (1) Assumes an instantaneous uniform change in interest rates at all maturities. Liquidity and Capital Resources Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, FHLBNY borrowings and maturities and sales of investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs of our customers as well as unanticipated contingencies. We seek to maintain a liquidity ratio of 5.0% of assets or greater. The liquidity ratio is calculated by determining the sum of the difference between liquid assets (cash and unpledged investment securities) and short-term liabilities (estimated 30-day deposit outflows), plus our borrowing capacity from the FHLBNY and dividing the sum by total assets. At September 30, 2021, our liquidity ratio was 20.8% of assets. We regularly adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short-and intermediate-term securities. Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At September 30, 2021, cash and cash equivalents totaled $75.2 million compared with $61.7 million at September 30, 2020. Securities classified as available-for-sale, which provide additional sources of liquidity from sales, totaled $12.9 million at September 30, 2020 compared with $14.6 at September 30, 2020. At September 30, 2021, we also had the ability to borrow $151.2 million from the FHLBNY compare with $141.8 million at September 30 2021. On that date, we had an aggregate of $23.4 million in advances outstanding and $40.0 million in municipal letters of credit outstanding with the FHLBNY. Our cash flows are derived from operating activities, investing activities and financing activities as reported in our consolidated Statements of Cash Flows included in our consolidated Financial Statements. At September 30, 2021, we had $23.7 million in loan origination commitments outstanding. In addition to commitments to originate loans, we had $63.8 million in unused lines of credit to borrowers. Certificates of deposit due within one year of September 30, 2021 totaled $72.8 million, or 11.4% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits and FHLBNY advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit (including individual retirement accounts and brokered certificate deposit accounts) due on or before September 30, 2022. We believe, however, that based on past experience a significant portion of our certificates of deposit (including individual retirement accounts and brokered certificate deposit accounts) will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered. Our primary investing activities are the origination of loans and the purchase of investment securities. We originated $159.0 million in loans (including $35.3 million in PPP loans) and we purchased $49.5 million of investment securities for the year ended September 30, 2021. Comparatively, we originated $145.9 million in loans (including $56.0 million in PPP loans) and purchased $19.8 million of investment securities for the year ended September 30, 2020. Financing activities consist primarily of activity in deposit accounts and FHLBNY advances. We experienced a net increase in total deposits of $21.5 million, or 3.5%, to $639.8 million for the year ended September 30, 2021 compared with a net increase in total deposits of $88.3 million, or 16.6%, to $618.3 million for the year ended September 30, 2020. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. 46 Table of Contents Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLBNY, which provide an additional source of funds. FHLBNY advances totaled $23.4 million and $30.5 million at September 30, 2021 and September 30, 2020, respectively. FHLBNY advances have primarily been used to fund loan demand. In addition to borrowings, the Bank has the ability to raise deposits on the brokered market or through deposit listing services. At September 30, 2021, the Bank held $6.0 million in brokered deposits and $16.4 million from deposit listing services. Magyar Bank is subject to various regulatory capital requirements, (see “Supervision and Regulation-Federal Banking Regulation-Capital Requirements”). As of September 30, 2021, Magyar Bank’s Tier 1 capital as a percentage of the Bank's average assets was 10.18% and the total qualifying capital as a percentage of risk-weighted assets was 16.99%. Bank-owned life insurance is a tax-advantaged financing transaction that is used to offset employee benefit plan costs. Policies are purchased insuring directors and officers of Magyar Bank using a single premium method of payment. Magyar Bank is the owner and beneficiary of the policies and records tax-free income through cash surrender value accumulation. We have minimized our credit exposure by choosing carriers that are highly rated and limiting the concentration of any one carrier. The investment in bank-owned life insurance has no significant impact on our capital and liquidity. Off-Balance Sheet Arrangements and Aggregate Contractual Obligations Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit, standby letters of credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans made by us. For additional information, see Note P, “Commitments,” and Note Q “Financial Instruments with Off-Balance-Sheet Risk” to our consolidated financial statements. Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment. The following table summarizes our significant fixed and determinable contractual obligations and other funding needs by payment date at September 30, 2021. The payment amounts represent those amounts due to the recipient and do not include any unamortized premiums or discounts or other similar carrying amount adjustments. Payments Due by Period Less Than One to Three to More Than September 30, 2021 One Year Three Years Five Years Five Years Total (In thousands) Federal Home Loan Bank advances $ 10,731 $ 9,125 $ 3,500 $ — $ 23,356 Operating leases 728 1,485 978 1,533 4,724 Total $ 11,459 $ 10,610 $ 4,478 $ 1,533 $ 28,080 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk Not required for smaller reporting companies. 47 Table of Contents