Magyar Bancorp, Inc. 10-K

ITEM 8. Financial Statements and Supplementary Data   TABLE OF CONTENTS     Consolidated Financial Statements:   Report of Independent Registered Public Accounting Firm 49   Consolidated Balance Sheets as of September 30, 2021 and 2020 50   Consolidated Statements of Operations for the Years Ended September 30, 2021 and 2020 51   Consolidated Statements of Comprehensive Income for the Years Ended September 30, 2021 and 2020 52   Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended September 30, 2021 and 2020 53   Consolidated Statements of Cash Flows for the Years Ended September 30, 2021 and 2020 54   Notes to Consolidated Financial Statements 55 48 Table of Contents   Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders Magyar Bancorp, Inc. and Subsidiary Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Magyar Bancorp, Inc. and Subsidiary (the Company) as of September 30, 2021 and 2020, the related consolidated statements of operations, comprehensive income, changes in stockholders' equity and cash flows for each of the two years in the period ended September 30, 2021, and the related notes to the consolidated financial statements (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2021 and 2020 and the results of its operations and its cash flows for each of the two years in the period ended September 30, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or is required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Loan Losses – Qualitative Factors The allowance for loan losses as of September 30, 2021 was $8.1 million. As described in Notes B and E to the consolidated financial statements, the allowance for loan losses is established through a provision for loan losses and represents an amount which, in management’s judgement, will be adequate to absorb losses on existing loans. The allowance consists of specific and general components in the amounts of $0.2 million and $7.9 million, respectively. The specific component relates to loans that are delinquent or otherwise identified as impaired by management. All such loans are evaluated individually, with principal consideration given to the value of the collateral securing the loan and discounted cash flows. Specific impairment allowances are established as required by this analysis. The general loan loss allocation component is determined by segregating the remaining loans by type of loan, risk weighting, and payment history. This analysis establishes historical loss factors based on a five year look back period that are applied to the loan groups adjusted for the following qualitative factors: delinquency and non-accrual trends, volume and loan term trends, changes in the lending policy, national and local economic trends and conditions, changes in concentrations of credit, changes in risk selection and underwriting standards, the experience, ability and depth of lending management, and charge-off and recovery trends and trends in collateral value. The evaluation of the qualitative factors requires a significant amount of judgement by management and involves a high degree of subjectivity. We identified the qualitative factor component of the allowance for loan losses as a critical audit matter as auditing the underlying qualitative factors required significant auditor judgment as amounts determined by management rely on analysis that is often subjective in nature and the estimate is highly sensitive to changes in significant assumptions. Our audit procedures related to the qualitative factors of the allowance for loan losses included the following, among others: • We obtained an understanding of how management developed the estimates and related assumptions, including: – Testing completeness and accuracy of key data inputs used in forming assumptions or calculations and testing the reliability of the underlying data on which these factors are based by comparing information to source documents and external information sources. – Evaluating the reasonableness of the qualitative factors established by management as compared to the underlying internal or external information sources. /s/ RSM US LLP We have served as the Company's auditor since 2018. Philadelphia, Pennsylvania December 20, 2021 49 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Consolidated Balance Sheets (In Thousands, Except Share and Per Share Data)   September 30,     September 30,     2021     2020                   Assets           Cash $ 1,808 $ 1,494 Interest earning deposits with banks 73,393 60,232 Total cash and cash equivalents 75,201 61,726   Investment securities - available for sale, at fair value 12,927 14,561 Investment securities - held to maturity, at amortized cost (fair value of $ 57,282 and $ 30,899 at September 30, 2021 and 2020, respectively) 57,660 30,443 Federal Home Loan Bank of New York stock, at cost 1,738 1,981 Loans receivable, net of allowance for loan losses of $ 8,075 and $ 6,400 at September 30, 2021 and 2020, respectively 585,301 603,110 Bank owned life insurance 14,288 13,971 Accrued interest receivable 3,533 4,030 Premises and equipment, net 14,331 14,746 Other real estate owned ("OREO") 636 2,594 Other assets 8,375 6,835 Total assets $ 773,990 $ 753,997   Liabilities and Stockholders' Equity Liabilities Deposits $ 639,814 $ 618,330 Escrowed funds 3,242 2,413 Borrowings 23,356 67,410 Accrued interest payable 85 191 Accounts payable and other liabilities 9,852 8,803 Total liabilities 676,349 697,147   Stockholders' equity Preferred stock: $. 01 Par Value, 500,000 and 1,000,000 shares authorized at September 30, 2021 and 2020, respectively, none issued - - Common stock: $. 01 Par Value, 14,000,000 and 8,000,000 shares authorized; 7,097,825 and 5,923,742 shares issued; 7,097,825 and 5,810,746 shares outstanding at September 30, 2021 and 2020, respectively, at cost 71 59 Additional paid-in capital 63,713 26,294 Treasury stock: 112,996 shares, at cost ( 1,242 ) ( 1,242 ) Unearned Employee Stock Ownership Plan shares ( 3,235 ) ( 65 ) Retained earnings 39,281 33,161 Accumulated other comprehensive loss ( 947 ) ( 1,357 ) Total stockholders' equity 97,641 56,850 Total liabilities and stockholders' equity $ 773,990 $ 753,997 The accompanying notes are an integral part of these consolidated financial statements. 50 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Operations (In Thousands, Except Share and Per Share Data) For the Year Ended September 30, 2021 2020   Interest and dividend income Loans, including fees $ 27,551 $ 25,626 Investment securities Taxable 877 1,173 Tax-exempt 5 - Federal Home Loan Bank of New York stock 95 128   Total interest and dividend income 28,528 26,927   Interest expense Deposits 2,287 4,770 Borrowings 654 743   Total interest expense 2,941 5,513   Net interest and dividend income 25,587 21,414   Provision for loan losses 1,629 1,666   Net interest and dividend income after provision for loan losses 23,958 19,748   Other income Service charges 1,143 901 Income on bank owned life insurance 317 324 Fees for other customer services 777 - Interest rate swap fees 313 - Other operating income 110 106 Gains on sales of loans 749 317 Gains on sales of investment securities - 68   Total other income 3,409 1,716   Other expenses Compensation and employee benefits 10,619 10,283 Occupancy expenses 3,000 2,995 Professional fees 1,719 1,558 Data processing expenses 528 589 OREO expenses 225 499 FDIC deposit insurance premiums 422 479 Loan servicing expenses 318 308 Insurance expense 201 197 Other expenses 1,610 1,445 Total other expenses 18,642 18,353   Income before income tax expense 8,725 3,111   Income tax expense 2,605 921   Net income $ 6,120 $ 2,190   Net income per share-basic and diluted $ 1.01 $ 0.31   Weighted average basic and diluted shares outstanding 6,037,499 7,104,889 The accompanying notes are an integral part of these consolidated financial statements. 51 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Comprehensive Income (In Thousands) For the Year Ended September 30, 2021 2020   Net income $ 6,120 $ 2,190 Other comprehensive income Unrealized (loss) gain on securities available for sale ( 293 ) 127 Reclassification adjustments for security gains included in net income - ( 68 ) Defined benefit pension plan gain (loss) 893 ( 150 ) Other comprehensive income (loss), before tax 600 ( 91 ) Deferred income tax effect ( 190 ) 64 Total other comprehensive income (loss) 410 ( 27 ) Total comprehensive income $ 6,530 $ 2,163 The accompanying notes are an integral part of these consolidated financial statements. 52 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Changes in Stockholders' Equity For the Year Ended September 30, 2021 and 2020 (In Thousands, Except for Share Amounts) Accumulated Common Stock Additional Unearned Other Shares Par Paid-In Treasury ESOP Retained Comprehensive Outstanding Value Capital Stock Shares Earnings Loss Total   Balance, September 30, 2019 5,820,746 $ 59 $ 26,317 $ ( 1,152 ) $ ( 214 ) $ 30,971 $ ( 1,330 ) $ 54,651 Net income — — — — — 2,190 — 2,190 Other comprehensive income — — — — — — ( 27 ) ( 27 ) Purchase of treasury stock ( 10,000 ) — — ( 90 ) — — — ( 90 ) ESOP shares allocated — — ( 23 ) — 149 — — 126 Balance, September 30, 2020 5,810,746 $ 59 $ 26,294 $ ( 1,242 ) $ ( 65 ) $ 33,161 $ ( 1,357 ) $ 56,850 Net income — — — — — 6,120 — 6,120 Other comprehensive income — — — — — — 410 410 Common stock acquired by ESOP​​ — — — — ( 3,272 ) — — ( 3,272 ) ESOP shares allocated — — 5 — 102 — — 107 Second-step conversion and stock offering: Magyar Bancorp, MHC shares sold in public offering, net of offering costs 3,910,000 12 37,414 — — — — 37,426 Retirement of MHC shares ( 3,200,450 ) — — — — — — — Fractional shares and other adjustments resulting from conversion of existing shares at 1.2213 exchange rate 577,529 — — — — — — — Balance, September 30, 2021 7,097,825 $ 71 $ 63,713 $ ( 1,242 ) $ ( 3,235 ) $ 39,281 $ ( 947 ) $ 97,641 The accompanying notes are an integral part of these consolidated financial statements. 53 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows (In Thousands) For the Year Ended September 30, 2021 2020   Operating activities Net income $ 6,120 $ 2,190 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 835 854 Premium amortization on investment securities, net 167 107 Provision for loan losses 1,629 1,666 Provision for loss on other real estate owned 337 371 Originations of SBA loans held for sale ( 6,386 ) ( 3,623 ) Proceeds from the sales of SBA loans 7,135 3,941 Gains on sale of loans ( 749 ) ( 317 ) Gains on sales of investment securities - ( 68 ) Gains on the sales of other real estate owned ( 223 ) ( 43 ) Loss on the sale of premises and equipment - 16 ESOP compensation expense 107 126 Deferred income tax benefit ( 178 ) ( 880 ) Decrease (increase) in accrued interest receivable 497 ( 1,897 ) Increase in surrender value of bank owned life insurance ( 317 ) ( 324 ) (Increase) decrease in other assets ( 1,551 ) 700 Decrease in accrued interest payable ( 106 ) — Increase (decrease) in accounts payable and other liabilities 1,942 ( 2,005 ) Net cash provided by operating activities 9,259 814   Investing activities Net decrease (increase) in loans receivable 17,133 ( 72,887 ) Purchases of loans receivable ( 3,500 ) ( 13,672 ) Proceeds from the sale of loans receivable 2,000 — Purchases of investment securities held to maturity ( 38,907 ) ( 10,226 ) Purchases of investment securities available for sale ( 10,561 ) ( 9,557 ) Sales of investment securities available for sale — 6,073 Proceeds from calls of investment securities held to maturity 2,000 — Proceeds from calls of investment securities available for sale 5,000 — Principal repayments on investment securities held to maturity 9,595 9,206 Principal repayments on investment securities available for sale 6,830 5,704 Purchases of premises and equipment ( 420 ) ( 147 ) Proceeds from the sale of premises and equipment — 703 Investment in other real estate owned ( 25 ) ( 1 ) Proceeds from other real estate owned 2,415 4,606 Redemption of Federal Home Loan Bank stock 243 241 Net cash used in investing activities ( 8,197 ) ( 79,957 )   Financing activities Net increase in deposits 21,484 88,255 Net proceeds from issurance of common stock 37,426 — Purchase of common stock for ESOP ( 3,272 ) — Net increase in escrowed funds 829 14 Proceeds from long-term advances — 41,515 Repayments of long-term advances ( 44,054 ) ( 10,294 ) Purchase of treasury stock — ( 90 ) Net cash provided by financing activities 12,413 119,400 Net increase in cash and cash equivalents 13,475 40,257   Cash and cash equivalents, beginning of year 61,726 21,469   Cash and cash equivalents, end of year $ 75,201 $ 61,726   Supplemental disclosures of cash flow information Cash paid for Interest $ 3,047 $ 5,513 Income taxes $ 2,750 $ 2,275 Non-cash operating activities Real estate acquired in full satisfaction of loans in foreclosure $ 547 $ — Initial recognition of lease liability and right-of-use asset $ — $ 3,835 The accompanying notes are an integral part of these consolidated financial statements. 54 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   NOTE A - ORGANIZATION Magyar Bancorp, Inc. (the “Company”) is a Delaware-chartered bank holding company. On July 14, 2021, the Company completed a second-step conversion of the Bank from the two-tier mutual holding company structure to the stock holding company structure. Magyar Bancorp, MHC was the Company’s former mutual holding company parent prior to completion of the second-step conversion. In conjunction with the second-step conversion, Magyar Bancorp, MHC ceased to exist. During the second-step conversion, the Company sold, for gross proceeds of $ 39.1 million, a total of 3,910,000 shares of common stock at $ 10.00 per share. As part of the second-step conversion, each of the existing 5,810,746 outstanding shares of Magyar Bancorp, Inc. common stock owned by persons other than Magyar Bancorp, MHC was converted into 1.2213 shares of Company common stock. As a result of the second-step conversion, all share information has been subsequently revised to reflect the 1.2213 exchange ratio, unless otherwise noted. The Company owns 100 % of the outstanding common stock of Magyar Bank (the “Bank”), a New Jersey-chartered stock savings bank. The Bank offers consumer and commercial banking services to individuals, businesses, and nonprofit organizations throughout the central New Jersey area through its administrative office in New Brunswick, New Jersey and seven full-service branch offices in Middlesex and Somerset Counties in New Jersey. The Company is subject to regulation and supervision by the Board of Governors of the Federal Reserve System. The Bank is supervised and regulated by the Federal Deposit Insurance Corporation (the “FDIC”) and the New Jersey Department of Banking and Insurance. Magyar Investment Company, a New Jersey investment corporation subsidiary of the Bank, was formed on August 15, 2006 for the purpose of buying, selling and holding investment securities. Magyar Service Corporation, a New Jersey corporation, is a wholly owned, non-bank subsidiary of the Bank. Magyar Service Corporation, which also operates under the name Magyar Financial Services, receives commissions from annuity and life insurance sales referred to a licensed, non-bank financial planner. 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 the Bank’s new main office. The Bank owns a 100 % interest in Hungaria Urban Renewal, LLC, which has no other business other than owning the Bank’s main office site. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. Basis of Financial Statement Presentation The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“US GAAP”) and predominant practices within the banking industry. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, the Bank, and its wholly-owned subsidiaries Magyar Investment Company, Magyar Service Corporation, and Hungaria Urban Renewal, LLC. All intercompany balances and transactions have been eliminated in the consolidated financial statements. The Company has evaluated subsequent events and transactions occurring subsequent to the consolidated balance sheet date of September 30, 2021, for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were available to be issued. In preparing financial statements in conformity with US GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The principal estimates that are particularly susceptible to significant change in the near term relate to the allowance for loan losses and the deferred tax asset. The evaluation of the adequacy of the allowance for loan losses includes an analysis of the individual loans and overall risk characteristics and size of the different loan portfolios, and takes into consideration current economic and market conditions, the capability of specific borrowers to pay specific loan obligations, 55 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   as well as current loan collateral values. However, actual losses on specific loans, which also are encompassed in the analysis, may vary from estimated losses. The Company records income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities: (i) are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns; (ii) are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases; and (iii) are measured using enacted tax rates expected to apply in the years when those temporary differences are expected to be recovered or settled. Where applicable, deferred tax assets are reduced by a valuation allowance for any portions determined not likely to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period of enactment. The valuation allowance is adjusted, by a charge or credit to income tax expense, as changes in facts and circumstances warrant. 2. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, time deposits with original maturities less than three months and overnight deposits. 3. Investment Securities The Company classifies its investment securities into one of three portfolios: held to maturity, available for sale or trading. Investments in debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity securities and reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized holding gains and losses included in earnings. Debt securities not classified as either trading securities or as held to maturity securities are classified as available for sale securities and reported at fair value, with unrealized holding gains or losses, net of deferred income taxes, reported in the accumulated other comprehensive income (“AOCI”) component of stockholders’ equity. Equity securities, with certain exceptions, are measured at fair value with changes in fair value recognized in net income. If the fair value of a security is less than its amortized cost, the security is deemed to be impaired. Management evaluates all securities with unrealized losses quarterly to determine if such impairments are “temporary” or “other-than-temporary” in accordance with applicable accounting guidance. The Company accounts for temporary impairments based upon security classification as either available for sale, held to maturity or trading. Temporary impairments on “available for sale” securities are recognized, on a tax-effected basis, through AOCI with offsetting entries adjusting the carrying value of the security and the balance of deferred taxes. Conversely, the Company does not adjust the carrying value of “held to maturity” securities for temporary impairments, although information concerning the amount and duration of impairments on held to maturity securities is generally disclosed in periodic consolidated financial statements. The carrying value of securities held in a trading portfolio is adjusted to their fair value through earnings on a daily basis. However, the Company maintained no securities in trading portfolios at or during the periods presented in these consolidated financial statements. The Company accounts for other-than-temporary impairments based upon several considerations. First, other-than-temporary impairments on securities that the Company has decided to sell as of the close of a fiscal period, or will, more likely than not, be required to sell prior to the full recovery of their fair value to a level equal to their amortized cost, are recognized in operations. If neither of these criteria apply, then the other-than-temporary impairment is separated into credit-related and noncredit-related components. The credit-related impairment generally represents the amount by which the present value of the cash flows that are expected to be collected on an other-than-temporarily impaired security fall below its amortized cost while the noncredit-related component represents the remaining portion of the impairment not otherwise designated as credit-related. The Company recognizes credit-related, other-than-temporary impairments in earnings, while noncredit-related, other-than-temporary impairments on debt securities are recognized, net of deferred taxes, in AOCI. 56 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   Premiums and discounts on all securities are amortized or accreted to maturity by use of the level-yield method considering the impact of principal amortization and prepayments on mortgage-backed securities. Gain or loss on sales of securities is recognized on the specific identification method. 4. Regulatory Stock, at Cost Federal law requires a member institution of the Federal Home Loan Bank (“FHLB”) system to purchase and hold restricted stock of its district FHLB according to a predetermined formula. The Company invests in Federal Home Loan Bank of New York stock as required to support borrowing activities, as detailed in Note J to these consolidated financial statements. Although FHLB stock is an equity interest in a FHLB, it does not have a readily determinable fair value because its ownership is restricted and it lacks a market. FHLB stock can be sold back only at its par value of $ 100 per share and only to the FHLBs or to another member institution. Accordingly, the FHLB restricted stock is carried at cost, less any applicable impairment charges. 5. Loans and Allowance for Loan Losses Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal, adjusted for net deferred loan fees and costs, and reduced by an allowance for loan losses. Interest on loans is accrued and credited to operations based upon the principal amounts outstanding. The allowance for loan losses is established through a provision for possible loan losses charged to operations. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. Income recognition of interest is discontinued when, in the opinion of management, the collectability of such interest becomes doubtful. A loan is generally classified as non-accrual when the scheduled payment(s) due on the loan is delinquent for more than 90 days. Loan origination fees and certain direct origination costs are deferred and amortized over the life of the related loans as an adjustment to the yield on loans receivable using the effective interest method. The allowance for loan losses is maintained at an amount management deems adequate to cover estimated losses. In determining the level to be maintained, management evaluates many factors, including current economic trends, industry experience, historical loss experience, industry loan concentrations, the borrowers’ ability to repay and repayment performance, and estimated collateral values. In the opinion of management, the present allowance is adequate to absorb reasonable, foreseeable loan losses. While management uses the best information available to make such evaluations, future adjustments to the allowance may be necessary based on changes in economic conditions or any of the other factors used in management’s determination. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for losses on loans. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Charge-offs to the allowance are made when the loan is transferred to other real estate owned or other determination of a confirmed loss. Recoveries on loans previously charged off are also recorded through the allowance. A loan is considered impaired when, based upon current information and events, it is probable that a creditor will be unable to collect all amounts due including principal and interest, according to the contractual terms of the loan agreement. The Company measures impaired loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate or as a practical expedient, at the loan’s current observable market price, or the fair value of the collateral if the loan is collateral dependent. The amount by which the recorded investment of an impaired loan exceeds the measurement value is recognized by creating a valuation allowance through a charge to the provision for loan losses. Impairment criteria generally do not apply to those smaller-balance homogeneous loans that are collectively evaluated for impairment which, for the Company, includes one- to four-family first mortgage loans and consumer loans, other than those modified in a troubled debt restructuring. 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 may continue to recognize interest income on impaired loans where there is no confirmed loss. 57 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   6. Premises and Equipment Premises and equipment are carried at cost less accumulated depreciation, and include capitalized expenditures for new facilities, major betterments and renewals. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method based upon the estimated useful lives of the related assets for financial reporting purposes and using the mandated methods by asset type for income tax purposes. Leasehold improvements are depreciated using the straight-line method based upon the initial term of the lease. The Company accounts for the impairment of long-lived assets in accordance with US GAAP, which requires recognition and measurement for the impairment of long-lived assets to be held and used or to be disposed of by sale. The Company had no impaired long-lived assets at September 30, 2021 and 2020. 7. Revenue Recognition The Company recognizes revenue in the consolidated statements of income as it is earned and when collectability is reasonably assured. The primary source of revenue is interest income from interest earning assets, which is recognized on the accrual basis of accounting using the effective interest method. The recognition of revenues from interest earning assets is based upon formulas from underlying loan agreements, securities contracts, or other similar contracts. Non-interest income is recognized on the accrual basis of accounting as services are provided or as transactions occur. Non-interest income includes earnings on bank-owned life insurance, deposit accounts, merchant services, ATM and debit card fees, mortgage banking activities, commercial loan prepayment penalties and other miscellaneous services and transactions. The Company’s contracts with customers in the scope of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” are contracts for deposit accounts and contracts for non-deposit investment accounts through a third party service provider. Both types of contracts result in non-interest income being recognized. The revenue resulting from deposit accounts, which includes fees such as insufficient funds fees, wire transfer fees and out-of-network ATM transaction fees, is included as a component of service charges on the consolidated statements of income. The revenue resulting from non-deposit investment accounts is included as a component of other operating income on the consolidated statements of income. Revenue from contracts with customers included in service charges was $ 1.1 million and $ 901,000 for the years ended September 30, 2021 and 2020, respectively. Revenue from contracts with customers included in other operating income was $ 110,000 and $ 106,000 for the years ended September 30, 2021 and 2020, respectively. For our contracts with customers, we satisfy our performance obligations each day as services are rendered. For our deposit account revenue, we receive payment on a daily basis as services are rendered and for our non-deposit investment account revenue, we receive payment on a monthly basis from our third party service provider as services are rendered. During the year ended September 30, 2021, the Bank was awarded a contract to assist a local county with services related to a Small Business Relief Grant (“SBRG”) program from which the Bank recognized $ 777,000 as fees for other customer services. These services included the review of the applications, review of the required supporting documentation, including financial statements and tax returns, and the determination of whether or not the applicant qualified for the SBRG using the County’s eligibility criteria. The Bank applied the five-step approach outlined ASC Topic 606 to determine that there was a qualifying contract with specific services provided by the Bank for a fixed fee that was received and recognized for the completion of a specific performance obligation. 8. Other Real Estate Owned Real estate acquired through foreclosure, or a deed-in-lieu of foreclosure, is recorded at fair value less estimated selling costs at the date of acquisition or transfer, and subsequently at the lower of its net cost or fair value less estimated selling costs. Adjustments to the carrying value at the date of acquisition or transfer are charged to the allowance for loan losses. The carrying value of the individual properties is subsequently adjusted to the extent it exceeds estimated fair value less estimated selling costs, at which time a provision for losses on such real estate is charged to operations. The Company accounts for gains on sales of other real estate owned under ASC Topic 606 Revenue from Contracts with Customers , which uses a principles based methodology. As it pertains to the criteria for determining how a contract should be accounted for under the new guidance, judgment is required in evaluating if: (a) a commitment on the buyer’s part exists, (b) collection is probable in circumstances where the initial investment is minimal and (c) the 58 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   buyer has obtained control of the asset, including the significant risks and rewards of the ownership. If there is no commitment on the buyer’s part, collection is not probable or the buyer has not obtained control of the asset, then a gain cannot be recognized under the new guidance. Operating expenses of holding real estate, net of related income, are charged against income as incurred. Losses on the disposition of real estate, including expenses incurred in connection with the disposition, are charged to operations. 9. Pension and Postretirement Plans The Company sponsors qualified defined benefit pension plan and supplemental executive retirement plan (SERP). The qualified defined benefit pension plan is funded with trust assets invested in a diversified portfolio of debt and equity securities. Accounting for pensions and other postretirement benefits involves estimating the cost of benefits to be provided well into the future and attributing that cost over the time period each employee works. This involves extensive use of assumptions about inflation, investment returns, mortality, turnover, and discount rates. Among other factors, changes in interest rates, investment returns and the market value of plan assets can (i) affect the level of plan funding; (ii) cause volatility in the net periodic pension cost; and (iii) increase our future contribution requirements. A significant decrease in investment returns or the market value of plan assets or a significant decrease in interest rates could increase our net periodic pension costs and adversely affect our results of operations. A significant increase in our contribution requirements with respect to our qualified defined benefit pension plan could have an adverse impact on our cash flow. Changes in the key actuarial assumptions would impact net periodic benefit expense and the projected benefit obligation for our defined benefit and other postretirement benefit plan. See Note M, “Pension Plan,” and Note N, “Non-Qualified Compensation Plan” for information on these plans and the assumptions used. 10. Income Taxes The Company and its subsidiaries file consolidated federal and state income tax returns. Income taxes are allocated based on the contribution of their respective income or loss to the consolidated income tax returns. The Company records income taxes on the basis of reported income using the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. To the extent that current available evidence about the future raises doubt about the realization of a deferred tax asset, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company follows the provisions of Financial Accounting Standards Board Accounting Standards Codification Topic 740, which provides clarification on accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. At September 30, 2021 and 2020, no significant income tax uncertainties have been included in the Company’s Consolidated Balance Sheets. The Company’s policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense in the Consolidated Statements of Operations. No interest and penalties were recorded during the year ended September 30, 2021 and 2020. The tax years subject to examination by the taxing authorities are the years ended September 30, 2016 and forward. 11. Advertising Costs The Company expenses advertising costs as incurred. 59 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   12. Earnings Per Share Basic income per share is calculated by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding for the period. The weighted average common shares outstanding include shares allocated to the Employee Stock Ownership Plan. Diluted income per share is calculated by adjusting the weighted average common shares outstanding to reflect the potential dilution that could occur using the treasury stock method if securities or other contracts to issue common stock, such as stock options and unvested restricted stock, were exercised and converted into common stock. The resulting shares issued would share in the earnings of the Company. Shares issued and shares reacquired during the period are weighted for the portion of the period that they were outstanding. In periods of loss, dilution is not calculated and diluted loss per share is equal to basic loss per share. As there were no stock options of grants outstanding at September 30, 2021 or September 30, 2020, there is no calculated dilution to the Company’s earnings per share. The following table presents a calculation of basic and diluted earnings per share for the year ended September 30, 2021 and 2020. As a result of the second-step conversion, the number of shares for the year ended September 30, 2020 were adjusted to reflect the 1.2213 exchange ratio for comparative purposes. For the Years Ended September 30, 2021 2020 Weighted Per Weighted Per average share average share Income shares Amount Income shares Amount (In thousands, except share and per share data) Basic and diluted EPS Net income available to weighted average common shareholders $ 6,120 6,037,499 $ 1.01 $ 2,190 7,104,889 $ 0.31 13. Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss) Comprehensive income (loss) includes net income as well as certain other items which result in a change to equity during the period. The other items allocated to comprehensive income (loss), as well as the related income tax effects, for the years ended September 30, 2021 and 2020 were as follows: September 30, 2021 2020 Tax Net of Tax Net of Before Tax (Benefit) Tax Before Tax (Benefit) Tax Amount Expense Amount Amount Expense Amount (In thousands) Unrealized holding gain (loss) arising during period on: Available-for-sale investments $ ( 293 ) $ 79 $ ( 214 ) $ 127 $ ( 38 ) $ 89 Reclassification adjustments for security gains included in net income (a) (b) - - - ( 68 ) 19 ( 49 ) Defined benefit pension plan 893 ( 269 ) 624 ( 150 ) 83 ( 67 ) Other comprehensive income (loss), net $ 600 $ ( 190 ) $ 410 $ ( 91 ) $ 64 $ ( 27 )   (a) Realized gains on securities transactions included in gains on sales of investment securities in the accompanying Consolidated Statements of Operations (b) Tax effect included in income tax expense in the accompanying Consolidated Statements of Operations 60 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   The components of accumulated other comprehensive loss at September 30, 2021 and 2020 were as follows: September 30, 2021 2020 (In thousands)   Available-for-sale investments, net of tax $ ( 131 ) $ 83 Defined benefit pension plan, net of tax ( 816 ) ( 1,440 ) Total accumulated other comprehensive loss $ ( 947 ) $ ( 1,357 ) 14. Bank-Owned Life Insurance The Company has purchased Bank-Owned Life Insurance policies (“BOLI”). BOLI involves the purchasing of life insurance by the Company on directors and officers of the Bank. The proceeds are used to help defray the costs of non-qualified compensation plans. The Company is the owner and beneficiary of the policies. BOLI is recorded on the Consolidated Balance Sheets at its cash surrender value and changes in the cash surrender value are recorded in other income in the Consolidated Statement of Operations. 15. Off-Balance Sheet Credit Related Financial Instruments In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under commercial lines of credit. Such financial instruments are recorded when they are funded. The Company does not engage in the use of derivative financial instruments. See Note Q, “Financial Instruments With Off-Balance Risk.” 16. Segment Reporting The Company acts as an independent, community, financial services provider, and offers traditional banking and related financial services to individual, business and government customers. The Company offers a full array of commercial and retail financial services, including the taking of time, savings and demand deposits; the making of commercial, consumer and home equity loans; and the provision of other financial services. Management does not separately allocate expenses, including the cost of funding loan demand, between the commercial and retail operations of the Company. As such, discrete financial information is not available and segment reporting would not be meaningful. 17. New Accounting Pronouncements In connection with the preparation of quarterly and annual reports in accordance with the Securities and Exchange Commission’s (“SEC”) Securities Exchange Act of 1934, SEC Staff Accounting Bulletin Topic 11.M requires the disclosure of the impact that recently issued accounting standards will have on financial statements when they are adopted in the future. In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. ASU 2016-13 requires entities to report “expected” credit losses on financial instruments and other commitments to extend credit rather than the current “incurred loss” model. These expected credit losses for financial assets held at the reporting date are to be based on historical experience, current conditions, and reasonable and supportable forecasts. This ASU will also require enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In October 2019, the FASB voted to defer the effective date of ASU 2016-13 for smaller reporting companies to fiscal years beginning after December 15, 2022 (October 1, 2023 for the Company), and interim periods within those fiscal years. The Company currently expects to continue to qualify as a smaller reporting company, based upon the current SEC 61 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   definition, and as a result, will likely be able to defer implementation of the new standard for a period of time. The Company did not early adopt as of January 1, 2020, but will continue to review factors that might indicate that the full deferral time period should not be used. The Company continues to evaluate the impact the new standard will have on the accounting for credit losses, but the Company may recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, consistent with regulatory expectations set forth in interagency guidance issued at the end of 2016. The Company cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on its consolidated financial condition or results of operations. In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. The ASU removes the disclosures of 1) the amounts in accumulated other comprehensive income that the entity expects to recognize in net periodic benefit cost during the next fiscal year, 2) the amount and timing of plan assets expected to be returned to the employer and 3) certain related party disclosures. The ASU clarifies the disclosure requirements for the projected benefit obligation (“PBO”) and fair value of plan assets for plans with PBOs in excess of plan assets and the accumulated benefit obligation (“ABO”) and fair value of plan assets for plans with ABOs in excess of plan assets. The ASU adds disclosure requirements for the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and for an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. ASU 2018-14 is effective for public business entities in fiscal years ending after December 15, 2020 (Beginning October 1, 2021 for the Company). Early adoption is permitted. The Company is currently evaluating the impact this ASU will have, if any, on its consolidated financial condition or results of operations. In January 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020 , to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls “reference rate reform” if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position and results of operations. 18. Subsequent Events On November 16, 2021 , the Company declared a one-time special dividend of $ 0.12 per common share, payable December 14, 2021 , to common shareholders of record at the close of business on November 30, 2021 . NOTE C – STOCK-BASED COMPENSATION AND STOCK REPURCHASE PROGRAM The Company follows FASB Accounting Standards Codification (“ASC”) Section 718, Compensation-Stock Compensation, which covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. ASC 718 requires that compensation cost relating to share-based payment transactions be recognized in financial statements. The cost is measured based on the fair value of the equity or liability instruments issued. There was no stock option or stock award activity as of or during the years ended September 30, 2021 and 2020. Accordingly, there were no stock option or stock award expenses included with compensation expense for the years ended September 30, 2021 and 2020. The Company completed its first stock repurchase program of 130,927 shares in November 2007 and announced in November 2007 a second repurchase program of up to 5 % of its publicly-held outstanding shares of common stock, or 129,924 shares, under which 91,000 shares had been repurchased as of September 30, 2021 at an average price of $ 8.41 . The Company did not repurchase shares of its common stock during the fiscal year ended September 30, 2021. The Company repurchased 10,000 shares at an average price of $ 9.03 during the fiscal year ended September 30, 2020. 62 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   Under current federal regulations, subject to limited exceptions, the Company may not repurchase shares of our common stock during the first year following the completion of its second-step conversion offering, which was completed on July 14, 2021. The Company has an Employee Stock Ownership Plan ("ESOP") for the benefit of employees who meet certain eligibility requirements. The ESOP trust purchases shares of common stock in the open market using proceeds of a loan from the Company. The loan is secured by shares of the Company’s stock. The Bank makes cash contributions to the ESOP on an annual basis sufficient to enable the ESOP to make the required loan payments to the Company. As the debt is repaid, shares are released as collateral and allocated to qualified employees. Accordingly, the shares pledged as collateral are reported as unearned ESOP shares in the Consolidated Balance Sheets. The Company accounts for its ESOP in accordance with FASB ASC Topic 718, “Employer’s Accounting for Employee Stock Ownership Plans.” As shares are released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations. The Company’s ESOP (“2006 ESOP”) was established in 2006 as part of the Company’s initial public offering. The total cost of shares purchased by the 2006 ESOP trust was $ 2.3 million, reflecting an average cost per share of $ 10.58 . The loan bore a variable interest rate that adjusted annually to Prime Rate ( 3.25 % at January 1, 2021) with principal and interest payable annually in equal installments over thirty years. The 2006 ESOP loan was fully repaid during the year ended September 30, 2021. In connection with the second-step conversion offering, and as previously disclosed, the ESOP trustees subscribed for, and intended to purchase, on behalf of the ESOP, 8 % of the shares of the Company common stock sold in the offering, or 312,800 shares (“2021 ESOP”). As a result of the second-step conversion offering being oversubscribed in the first tier of subscription priorities, the ESOP trustees were unable to purchase shares of the Company’s common stock in the second-step conversion offering. Subsequent to the completion of the second-step conversion on July 14, 2021, the ESOP trustees purchased 304,377 shares of the Company’s common stock in the open market through September 30, 2021 for $ 3.2 million, reflecting an average cost per share of $ 10.75 . Subsequently, the ESOP trustee purchased the remaining 8,423 shares of Company common stock by October 8, 2021. The 2021 ESOP loan bears a variable interest rate that adjusts annually to Prime Rate ( 3.25 % at January 1, 2021) with principal and interest payable annually in equal installments over thirty years. The Company's contribution expense for the ESOP was $ 107,000 and $ 126,000 for years ended September 30, 2021 and 2020, respectively. The following table presents the components of the ESOP shares as of September 30, 2021: Unreleased shares at September 30, 2020 14,757 Shares released for allocation during the year ended September 30, 2021 ( 14,757 ) Shares purchased by ESOP trustee during the year ended September 30, 2021 304,377 Unreleased shares at September 30, 2021 304,377 Total released shares 217,863   Total ESOP shares 522,240 The aggregate fair value of the unreleased shares at September 30, 2021 was approximately $ 3.5 million. NOTE D - INVESTMENT SECURITIES The amortized cost, gross unrealized gains or losses and fair value of the Company’s investment securities available-for-sale and held-to-maturity are as follows: 63 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   September 30, 2021 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (In thousands) Securities available-for-sale: Obligations of U.S. government agencies: Mortgage-backed securities - residential $ 179 $ 7 $ — $ 186 Obligations of U.S. government-sponsored enterprises:​​ Mortgage-backed securities - residential 12,922 27 ( 208 ) 12,741 Total securities available for sale $ 13,101 $ 34 $ ( 208 ) $ 12,927 Securities held-to-maturity: Obligations of U.S. government agencies: Mortgage-backed securities - residential $ 574 $ — $ ( 25 ) $ 549 Mortgage-backed securities - commercial 703 — — 703 Obligations of U.S. government-sponsored enterprises: Mortgage backed securities - residential 38,596 416 ( 389 ) 38,623 Debt securities 12,498 — ( 156 ) 12,342 Private label mortgage-backed securities - residential 242 6 — 248 Obligations of state and political subdivisions 2,047 — ( 34 ) 2,013 Corporate securities 3,000 — ( 196 ) 2,804 Total securities held-to-maturity $ 57,660 $ 422 $ ( 800 ) $ 57,282 Total investment securities $ 70,761 $ 456 $ ( 1,008 ) $ 70,209 At September 30, 2020 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (In thousands) Securities available-for-sale: Obligations of U.S. government agencies: Mortgage-backed securities - residential $ 350 $ 14 $ — $ 364 Obligations of U.S. government-sponsored enterprises:​​ Mortgage-backed securities - residential $ 9,092 $ 108 $ ( 6 ) $ 9,194 Debt securities 5,000 3 — 5,003 Total securities available-for-sale $ 14,442 $ 125 $ ( 6 ) $ 14,561 Securities held-to-maturity: Obligations of U.S. government agencies: Mortgage-backed securities - residential $ 1,453 $ 11 $ ( 33 ) $ 1,431 Mortgage-backed securities - commercial 775 — — 775 Obligations of U.S. government-sponsored enterprises:​​ Mortgage backed securities - residential 20,456 697 ( 3 ) 21,150 Debt securities 4,500 1 ( 16 ) 4,485 Private label mortgage-backed securities - residential 259 — ( 5 ) 254 Corporate securities 3,000 — ( 196 ) 2,804 Total securities held-to-maturity $ 30,443 $ 709 $ ( 253 ) $ 30,899 Total investment securities $ 44,885 $ 834 $ ( 259 ) $ 45,460 64 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   The contractual maturities of mortgage-backed securities generally exceed 10 years; however, the effective lives are expected to be shorter due to anticipated prepayments. The maturities of the debt securities, municipal bonds and certain information regarding to the mortgage-backed securities available-for-sale at September 30, 2021 are summarized in the following table: September 30, 2021 (In thousands) Amortized Fair Cost Value Due within 1 year $ — $ — Due after 1 but within 5 years — — Due after 5 but within 10 years — — Due after 10 years — — Total debt securities — —   Mortgage-backed securities: Residential (1) 13,101 12,927 Commercial — — Total $ 13,101 $ 12,927   ​​ (1) Available-for-sale mortgage-backed securities – residential include an amortized cost of $179,000 and a fair value of $186,000 for obligations of U.S. government agencies issued by the Government National Mortgage Association and obligations of U.S. government-sponsored enterprises issued by Federal National Mortgage Association and Federal Home Loan Mortgage Corporation which had an amortized cost of $12.9 million and a fair value of $12.7 million. There were no residential mortgage backed securities issued by non-U.S. government agencies and government-sponsored enterprises. The maturities of the debt securities, municipal bonds and certain information regarding to the mortgage-backed securities held to maturity at September 30, 2021 are summarized in the following table: September 30, 2021 Amortized Fair Cost Value (In thousands) Due within 1 year $ — $ — Due after 1 but within 5 years 9,497 9,249 Due after 5 but within 10 years 7,532 7,405 Due after 10 years 516 505 Total debt securities 17,545 17,159   Mortgage backed securities: Residential (1) 39,412 39,420 Commercial (2) 703 703 Total $ 57,660 $ 57,282   ​​ (1) Held-to-maturity mortgage-backed securities – residential include an amortized cost of $574,000 and a fair value of $549,000 for obligations of U.S. government agencies issued by the Government National Mortgage Association and obligations of U.S. government-sponsored enterprises issued by Federal National Mortgage Association and Federal Home Loan Mortgage Corporation which had an amortized cost of $38.6 million and a fair value of $38.6 million. Also included are mortgage backed securities issued by non-U.S. government agencies and government-sponsored enterprises with an amortized cost of $242,000 and a fair value of $248,000.   ​​ (2) Held-to-maturity mortgage-backed securities – commercial include an amortized cost of $703,000 and a fair value of $703,000 for obligations of U.S. government agencies issued by the Small Business Administration. 65 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   There were no sales of securities from the available-for-sale portfolio during the year ended September 30, 2021 and $ 6.1 million in sales during the year ended September 30, 2020. There were no sales of securities from the held-to-maturity portfolio during the years ended September 30, 2021 and 2020. The net gain on sales of investment securities totaled $ 0 and $ 68,000 for the year ended September 30, 2021 and 2020, respectively. As of September 30, 2021 and 2020, securities having an estimated fair value of approximately $ 30.9 million and $ 22.6 million, respectively, were pledged to secure public deposits. Details of securities with unrealized losses at September 30, 2021 and 2020 are as follows: Less Than 12 Months 12 Months Or Greater Total Number of Fair Unrealized Fair Unrealized Fair Unrealized Securities Value Losses Value Losses Value Losses September 30, 2021 (In thousands) Obligations of U.S. government agencies: Mortgage-backed securities - residential 3 $ 318 $ ( 12 ) $ 232 $ ( 13 ) $ 550 $ ( 25 ) Mortgage-backed securities - commercial 1 — — 703 — 703 — Obligations of U.S. government-sponsored enterprises Mortgage backed securities - residential 20 33,690 ( 539 ) 1,610 ( 58 ) 35,300 ( 597 ) Debt securities 7 10,859 ( 139 ) 1,483 ( 17 ) 12,342 ( 156 ) Obligations of state and political subdivisions 4 2,013 ( 34 ) — — 2,013 ( 34 ) Corporate securities 1 — — 2,804 ( 196 ) 2,804 ( 196 ) Total 36 $ 46,880 $ ( 724 ) $ 6,832 $ ( 284 ) $ 53,712 $ ( 1,008 ) Less Than 12 Months 12 Months Or Greater Total Number of Fair Unrealized Fair Unrealized Fair Unrealized Securities Value Losses Value Losses Value Losses September 30, 2020 (In thousands) Obligations of U.S. government agencies: Mortgage-backed securities - residential 2 $ — $ — $ 284 $ ( 33 ) $ 284 $ ( 33 ) Mortgage-backed securities - commercial 1 — — 775 — 775 — Obligations of U.S. government-sponsored enterprises Mortgage-backed securities - residential 2 2,854 ( 3 ) 533 ( 6 ) 3,387 ( 9 ) Debt securities 2 2,484 ( 16 ) — — 2,484 ( 16 ) Private label mortgage-backed securities - residential 1 254 ( 5 ) — — 254 ( 5 ) Corporate securities 1 — — 2,804 ( 196 ) 2,804 ( 196 ) Total 9 $ 5,592 $ ( 24 ) $ 4,396 $ ( 235 ) $ 9,988 $ ( 259 ) The investment securities listed above currently have fair values less than amortized cost and therefore contain unrealized losses. The Company evaluated these securities and determined that the decline in value was primarily related to fluctuations in the interest rate environment and were not related to any company or industry specific event. The Company anticipates full recovery of amortized costs with respect to these securities. The Company does not intend to sell these securities and has determined that it is not more likely than not that the Company would be required to sell these securities prior to maturity or market price recovery. Management has considered factors regarding other than temporarily impaired securities and determined that there are no securities with impairment that is other than temporary as of September 30, 2021 and 2020. 66 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   NOTE E - LOANS RECEIVABLE, NET Loans receivable are comprised of the following: September 30, 2021     2020     (In thousands)     One-to four-family residential   $ 203,019     $ 210,360   Commercial real estate     280,848       248,134   Construction     20,350       28,242   Home equity lines of credit     17,930       19,373   Commercial business     68,719       100,993   Other     3,751       4,157   Total loans receivable     594,617       611,259   Net deferred loan costs     ( 1,241 )     ( 1,749 ) Allowance for loan losses     ( 8,075 )     ( 6,400 )                   Total loans receivable, net   $ 585,301     $ 603,110   Certain directors and executive officers of the Company have loans with the Bank. Such loans were made in the ordinary course of business at the Bank’s normal credit terms, including interest rate and collateralization, and do not represent more than a normal risk of collection. Total loans receivable from directors and executive officers, and affiliates thereof, were approximately $ 2.3 million and $ 2.5 million at September 30, 2021 and 2020, respectively. There were $ 31,000 and $ 400,000 in new loans or advances on existing lines of credit during the year ended September 30, 2021 and 2020, respectively. Total principal repayments were approximately $ 191,000 and $ 775,000 for the year ended September 30, 2021 and 2020, respectively. At September 30, 2021 and 2020, the Company was servicing loans for others amounting to approximately $ 39.3 million and $ 42.7 million, respectively. The Company held mortgage servicing rights in the amount of $ 4,000 and $ 12,000 at September 30, 2021 and 2020, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors, and foreclosure processing. Loan servicing income is recorded on the cash basis and includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees. In connection with loans serviced for others, the Company held borrowers’ escrow balances of approximately $ 33,000 and $ 61,000 at September 30, 2021 and 2020, respectively. The segments of the Bank’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The residential mortgage loan segment is further disaggregated into two classes: first lien, amortizing term loans, and the combination of second lien amortizing term loans and home equity lines of credit. The commercial loan segment is further disaggregated into three classes: loans secured by multifamily structures, loans secured by owner-occupied commercial structures, and loans secured by non-owner occupied nonresidential properties. The construction loan segment consists primarily of developers or investors for the purpose of acquiring, developing and constructing residential or commercial structures and to a lesser extent one-to-four family residential construction loans made to individuals for the acquisition of and/or construction on a lot or lots on which a residential dwelling is to be built. Construction loans to developers and investors have a higher risk profile because the ultimate buyer, once development is completed, is generally not known at the time of the loan. The commercial business loan segment consists of loans made for the purpose of financing the activities of commercial customers and consists primarily of revolving lines of credit. The consumer loan segment consists primarily of stock-secured installment loans, but also includes unsecured personal loans and overdraft lines of credit connected with customer deposit accounts. Management evaluates individual loans in all segments for possible impairment if the loan either is in nonaccrual status, or is risk rated Substandard and is 90 days or more past due. Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. 67 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   Once the determination has been made that a loan is impaired, the recorded investment in the loan is compared to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s current observable market price; or (c) the fair value of the collateral securing the loan, less anticipated selling and disposition costs. The method is selected on a loan-by loan basis, with management primarily utilizing the fair value of collateral method. If there is a shortfall between the fair value of the loan and the recorded investment in the loan, the Company charges the difference to the allowance for loan loss as a charge-off and carries the impaired loan on its books at fair value. It is the Company’s policy to evaluate impaired loans on an annual basis to ensure the recorded investment in a loan does not exceed its fair value. The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary for the periods presented:         Impaired Loans         Impaired Loans with     with No Specific         Specific Allowance     Allowance     Total Impaired Loans                 Unpaid At and for the year ended Recorded     Related     Recorded     Recorded     Principal September 30, 2021 Investment     Allowance     Investment     Investment     Balance     (In thousands)                                   One-to four-family residential   $ —     $ —     $ 2,711     $ 2,711     $ 2,711   Commercial real estate     —       —       2,270       2,270       2,270   Construction     2,835       224       1,745       4,580       4,645   Commercial business     —       —       1,507       1,507       1,507   Total impaired loans   $ 2,835     $ 224     $ 8,233     $ 11,068     $ 11,133           Impaired Loans         Impaired Loans with     with No Specific         Specific Allowance     Allowance     Total Impaired Loans                 Unpaid At and for the year ended Recorded     Related     Recorded     Recorded     Principal September 30, 2020 Investment     Allowance     Investment     Investment     Balance     (In thousands)                                   One-to four-family residential   $ —     $ —     $ 2,601     $ 2,601     $ 2,601   Commercial real estate     599       46       3,806       4,405       4,405   Construction     2,306       175       2,835       5,141       5,206   Commercial business     —       —       2,014       2,014       2,218   Total impaired loans   $ 2,905     $ 221     $ 11,256     $ 14,161     $ 14,430   The average recorded investment in impaired loans was $ 12.2 million and $ 11.7 million for the years ended September 30, 2021 and 2020, respectively. The Company’s impaired loans at September 30, 2021 include $ 8.2 million in delinquent loans and $ 2.9 million in performing Troubled Debt Restructurings (“TDRs”), as TDRs remain impaired loans until fully repaid. During the years ended September 30, 2021 and 2020, interest income of $ 139,000 and $ 142,000 , respectively, was recognized for TDR loans while no interest income was recognized for delinquent non-accrual loans. Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than three months past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category. To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as severe delinquency, bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. The Bank’s 68 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. The Asset Review Committee performs monthly reviews of all commercial relationships internally rated 6 (“Watch”) or worse. Confirmation of the appropriate risk grade is performed by an external loan review company that semi-annually reviews and assesses loans within the portfolio. Generally, the external consultant reviews commercial relationships greater than $500,000 and/or criticized relationships greater than $250,000. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a monthly basis. The following tables present the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the Bank’s internal risk rating system for the periods presented:     Special             Pass     Mention     Substandard     Doubtful     Total     (In thousands)   September 30, 2021                               One-to four-family residential   $ 200,510     $ 1,002     $ 1,507     $ —     $ 203,019   Commercial real estate     272,408       6,679       1,761       —       280,848   Construction     15,770       —       4,580       —       20,350   Home equity lines of credit     17,930       —       —       —       17,930   Commercial business     67,360       10       1,349       —       68,719   Other     3,751       —       —       —       3,751   Total   $ 577,729     $ 7,691     $ 9,197     $ —     $ 594,617       Special             Pass     Mention     Substandard     Doubtful     Total     (In thousands)   September 30, 2020                               One-to four-family residential   $ 208,658     $ —     $ 1,702     $ —     $ 210,360   Commercial real estate     242,003       2,623       3,508       —       248,134   Construction     23,101       —       5,141       —       28,242   Home equity lines of credit     19,373       —       —       —       19,373   Commercial business     98,967       178       1,848       —       100,993   Other     4,157       —       —       —       4,157   Total   $ 596,259     $ 2,801     $ 12,199     $ —     $ 611,259   Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans for the periods presented:     30-59     60-89                     Days     Days     90 Days +     Total     Non-     Total Current     Past Due     Past Due     Past Due     Past Due     Accrual     Loans     (In thousands)   September 30, 2021                                           One-to four-family residential   $ 201,868     $ —     $ —     $ 1,151     $ 1,151     $ 1,151     $ 203,019   Commercial real estate     279,769       —       —       1,079       1,079       1,079       280,848   Construction     15,770       —       —       4,580       4,580       4,580       20,350   Home equity lines of credit     17,930       —       —       —       —       —       17,930   Commercial business     67,370       —       —       1,349       1,349       1,349       68,719   Other     3,751       —       —       —       —       —       3,751   Total   $ 586,458     $ —     $ —     $ 8,159     $ 8,159     $ 8,159     $ 594,617   69 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020       30-59     60-89                     Days     Days     90 Days +     Total     Non-     Total Current     Past Due     Past Due     Past Due     Past Due     Accrual     Loans     (In thousands)   September 30, 2020                                           One-to four-family residential   $ 209,455     $ —     $ —     $ 905     $ 905     $ 905     $ 210,360   Commercial real estate     245,029       —       886       2,219       3,105       2,219       248,134   Construction     23,101       —       —       5,141       5,141       5,141       28,242   Home equity lines of credit     19,373       —       —       —       —       —       19,373   Commercial business     99,397       —       129       1,467       1,596       1,467       100,993   Other     4,157       —       —       —       —       —       4,157   Total   $ 600,512     $ —     $ 1,015     $ 9,732     $ 10,747     $ 9,732     $ 611,259   The amount of interest income not recognized on non-accrual loans was approximately $ 555,000 and $ 508,000 for the years ended September 30, 2021 and 2020, respectively. At September 30, 2021 and September 30, 2020, there were no commitments to lend additional funds to borrowers whose loans are classified as non-accrual. An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans. The Bank’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (discussed above) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance. Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative and economic factors. The loans are segmented into classes based on their inherent varying degrees of risk, as described above. Management tracks the historical net charge-off activity by segment and utilizes this figure, as a percentage of the segment, as the general reserve percentage for pooled, homogenous loans that have not been deemed impaired. Typically, an average of losses incurred over 5 historical years is used. Non-impaired credits are segregated for the application of qualitative factors. Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: national and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint. Management maintained or increased several of these factors during the year ended September 30, 2021 due to the higher risk of credit loss resulting from the COVID-19 pandemic and its ongoing impact on borrowers and economic conditions. Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL. Since loans individually evaluated for impairment are promptly written down to their fair value, typically there is no portion of the ALL for loans individually evaluated for impairment. 70 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   The following tables summarize the activity in the allowance for loan losses by loan category for the years ended September 30, 2021 and 2020:   One-to-Four             Home Equity                   Family     Commercial         Lines of     Commercial               Residential     Real Estate     Construction     Credit     Business     Other     Unallocated     Total     (In thousands)                                                     Balance-September 30, 2020   $ 1,035     $ 3,232     $ 672     $ 179     $ 1,034     $ 1     $ 247     $ 6,400   Charge-offs     —       ( 51 )     —     —       —       ( 1 )     —       ( 52 ) Recoveries     1       —       —       1       96       —       —       98   Provision (credit)     100       563       ( 78 )     52       916     15     61     1,629   Balance-September 30, 2021   $ 1,136     $ 3,744     $ 594     $ 232     $ 2,046     $ 15     $ 308     $ 8,075     One-to-Four             Home Equity                   Family     Commercial         Lines of     Commercial               Residential     Real Estate     Construction     Credit     Business     Other     Unallocated     Total     (In thousands)                                                     Balance-September 30, 2019   $ 731     $ 2,066     $ 511     $ 138     $ 1,184     $ 8     $ 250     $ 4,888   Charge-offs     —       —       ( 65 )     —       ( 204 )     —       —       ( 269 ) Recoveries     11       5       —       —       99       —       —       115   Provision (credit)     293       1,161       226       41       ( 45 )     ( 7 )     ( 3 )     1,666   Balance-September 30, 2020   $ 1,035     $ 3,232     $ 672     $ 179     $ 1,034     $ 1     $ 247     $ 6,400   The following tables summarize the ALL by loan category, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of September 30, 2021 and September 30, 2020:   One-to- Four             Home Equity                   Family     Commercial         Lines of     Commercial               Residential     Real Estate     Construction     Credit     Business     Other     Unallocated     Total     (In thousands)   Allowance for Loan Losses:                                                                 Balance - September 30, 2021​​   $ 1,136     $ 3,744     $ 594     $ 232     $ 2,046     $ 15     $ 308     $ 8,075   Individually evaluated                                                                 for impairment     —       —       224       —       —       —       —       224   Collectively evaluated                                                                 for impairment     1,136       3,744       370       232       2,046       15       308       7,851                                                                     Loans receivable:                                                                 Balance - September 30, 2021​​   $ 203,019     $ 280,848     $ 20,350     $ 17,930     $ 68,719     $ 3,751     $ —     $ 594,617   Individually evaluated                                                                 for impairment     2,711       2,270       4,580       —       1,507       —       —       11,068   Collectively evaluated                                                                 for impairment     200,308       278,578       15,770       17,930       67,212       3,751       —       583,549   71 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020     One-to- Four             Home Equity                   Family     Commercial         Lines of     Commercial               Residential     Real Estate     Construction     Credit     Business     Other     Unallocated     Total     (In thousands)   Allowance for Loan Losses:                                                                 Balance - September 30, 2020​​   $ 1,035     $ 3,232     $ 672     $ 179     $ 1,034     $ 1     $ 247     $ 6,400   Individually evaluated                                                                 for impairment     —       46       175       —       —       —       —       221   Collectively evaluated                                                                 for impairment     1,035       3,186       497       179       1,034       1       247       6,179                                                                     Loans receivable:                                                                 Balance - September 30, 2020​​   $ 210,360     $ 248,134     $ 28,242     $ 19,373     $ 100,993     $ 4,157     $ —     $ 611,259   Individually evaluated                                                                 for impairment     2,601       4,405       5,141       —       2,014       —       —       14,161   Collectively evaluated                                                                 for impairment     207,759       243,729       23,101       19,373       98,979       4,157       —       597,098   The allowance for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that the segmentation of the loan portfolio into homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date. A TDR is a loan that has been modified whereby the Bank has agreed to make certain concessions to a borrower to meet the needs of both the borrower and the Bank to maximize the ultimate recovery of a loan. TDR occurs when a borrower is experiencing, or is expected to experience, financial difficulties and the loan is modified using a modification that would otherwise not be granted to the borrower. The types of concessions granted generally included, but are not limited to interest rate reductions, limitations on the accrued interest charged, term extensions, and deferment of principal. A default on a troubled debt restructured loan for purposes of this disclosure occurs when a borrower is 90 days past due or a foreclosure or repossession of the applicable collateral has occurred. There were no defaults of TDRs during the year ended September 30, 2020. There were two TDR loans during the year ended September 30, 2021 and one TDR loan during the year ended September 30, 2020. All TDR loans were performing in accordance with their restructured terms as September 30, 2021. The following tables summarizes the TDRs during the years ended September 30, 2021 and 2020: Number of     Investment Before     Investment After   Loans     TDR Modification     TDR Modification September 30, 2021   (Dollars in thousands)   One-to four-family residential     2     $ 330     $ 340                             Total     2     $ 330     $ 340   Number of     Investment Before     Investment After   Loans     TDR Modification     TDR Modification September 30, 2020   (Dollars in thousands)   Commercial business     1     $ 252     $ 220                             Total     1     $ 252     $ 220   The Company offered loan payment deferrals to borrowers affected by COVID-19. Loan payment deferral requests were considered on a case-by-case basis and were approved for up to a six month period for principal and interest payments or for interest only payments, depending on the borrower’s circumstances. Through September 30, 2021, the Company had modified 284 loans aggregating $150.9 million for the deferral of principal and/or interest payments. Of these loans, at September 30, 2021, 227 loans aggregating $ 121.4 million had resumed making their contractual loan payments, 56 loans totaling $ 28.1 million repaid their deferred payments, and one loan totaling $ 1.4 million was delinquent more than 90 days and in the process of foreclosure. Details with respect to those loans that did not pay off or fully pay the deferred payments for the year ended September 30, 2021 and 2020 are as follows: 72 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   September 30, 2021 Number of Loans     Balance Weighted Average Interest Rate   (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. Total loans pledged as collateral against FHLBNY borrowings were $ 192.6 million and $ 184.1 million as of September 30, 2021 and 2020, respectively. NOTE F - ACCRUED INTEREST RECEIVABLE The following is a summary of accrued interest receivable: September 30, 2021 2020 (In thousands)   Loans $ 3,421 $ 3,943 Investment securities 43 22 Mortgage-backed securities 69 65   Total accrued interest receivable $ 3,533 $ 4,030 73 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   NOTE G - PREMISES AND EQUIPMENT Premises and equipment consist of the following: Estimated September 30, Useful Lives 2021 2020 (In thousands) Land     Indefinite     $ 3,811   $ 3,811   Buildings and improvements   10 - 40 years       21,678       21,622   Furniture, fixtures and equipment   5 - 10 years       3,562       3,407               29,051       28,840   Less accumulated depreciation         ( 14,720 )   ( 14,094 ) Premises and equipment, net           $ 14,331     $ 14,746   For the years ended September 30, 2021 and 2020, depreciation expense included in occupancy expense amounted to approximately $ 835,000 and $ 854,000 , respectively. NOTE H - OTHER REAL ESTATE OWNED The Company held $ 636,000 of real estate owned properties at September 30, 2021 and $2.6 million at September 30, 2020. The Company incurred write-downs totaling $ 337,000 and $ 371,000 on these properties for the years ended September 30, 2021 and 2020, respectively. These amounts were carried as valuation allowances, unless the properties were sold. Further declines in real estate values may result in increased foreclosed real estate expense in the future. Routine holding costs are charged to expense as incurred and improvements to real estate owned that enhance the value of the real estate are capitalized. NOTE I - DEPOSITS A summary of deposits by type of account follows: September 30, 2021 2020 (In thousands)   Demand accounts $ 181,975 $ 163,562 Savings accounts 81,724 74,923 NOW accounts 71,325 65,447 Money market accounts 187,898 188,023 Certificate of deposit 101,888 110,650 Retirement accounts 15,004 15,725 Total deposits $ 639,814 $ 618,330 The current FDIC insurance limit on bank deposit accounts is $250,000. The aggregate amount of deposit accounts with a minimum denomination of $250,000 was approximately $ 378.5 million at September 30, 2021 compared with $ 365.6 million at September 30, 2020. The aggregate amount of certificate deposits, including individual retirement accounts with balance of $250,000 or more was $ 39.4 million at September 30, 2021 compared with $ 45.6 million at September 30, 2020. At September 30, 2021, certificates of deposit (including retirement accounts and brokered certificate deposit accounts) have contractual maturities as follows (in thousands): 74 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   Year Ending September 30, 2022 $ 72,838 2023 17,130 2024 8,096 2025 6,226 2026 and after 12,602 Total $ 116,892 NOTE J - BORROWINGS 1. Federal Home Loan Bank of New York Advances Long term Federal Home Loan Bank of New York (“FHLBNY”) advances at September 30, 2021 and September 30, 2020 totaled approximately $23.4 million and $ 30.5 million, respectively. The weighted average interest rate on advances outstanding at September 30, 2021 and 2020 were 2.13 % and 2.09 %, respectively. The advances were collateralized by unencumbered qualified assets consisting of one-to-four family residential and commercial real estate mortgage loans. Advances are made pursuant to several different credit programs offered from time to time by 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 — Total $ 23,356 Additionally, the Company has established an Overnight Line of Credit arrangement with the FHLBNY. The total amount available under the line of credit is based on the amount of eligible collateral pledged to the FHLBNY. At September 30, 2021 and 2020, the Company had available credit from the FHLBNY totaling $ 87.9 million and $ 61.3 million, respectively. The Company did not utilize its line of credit with the FHLBNY during the years ended September 30 2021 and 2020. 2. Federal Reserve Bank of New York Advances The Company borrowed $ 36.9 million in Paycheck Protection Program Liquidity Facility advances from the Federal Reserve Bank of New York (“FRBNY”) during the year ended September 30, 2020. The interest rate on these advances was fixed at 0.35 % and the advances were collateralized by Paycheck Protection Program loans. The advances were required to be repaid as PPP loans pledged as collateral were repaid or forgiven by the SBA. We repaid all $ 36.9 million in PPPLF advances during the year ended September 30, 2021. 3. Securities Sold Under Reverse Repurchase Agreements Qualifying repurchase agreements are treated as financings and are reflected as a liability in the Consolidated Balance Sheets. The Company did not have repurchase agreements outstanding at September 30, 2021 and September 30, 2020. 75 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   NOTE K – SERVICING POLICY The Company originates and sells loans receivable secured by one-to four-family residential properties and commercial business loans guaranteed by the Small Business Administration (the “SBA”). The Company has sold loans on a servicing retained basis and on a servicing released basis. Loans sold with servicing retained and servicing released during the year ended September 30, 2021 were $ 7.1 million and $ 0 , respectively. Loans sold with servicing retained and servicing released during the year ended September 30, 2020 were $ 3.9 million and $ 0 , respectively. The Company accounts for sales in accordance with ASC 860, Transfers and Servicing. Upon sale, the receivables are removed from the balance sheet, mortgage servicing rights are recorded as an asset for servicing rights retained, and a gain on sale, if applicable, is recognized for the difference between the carrying value of the receivables and the sales proceeds, net of origination costs. Gains on sales of loans, representing the difference between the total sales price received for the loans and the allocated cost of the loans, are recognized when loans are sold and delivered to the purchasers. Loans are accounted for as sold when control of the loan is surrendered. Control over the loans is deemed surrendered when (1) the loans have been isolated from the Company, (2) the buyer has the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the loans and (3) the Company does not maintain effective control over the loans through either (a) an agreement that entitles and obligates the Company to repurchase or redeem the loans before maturity, or (b) the ability to unilaterally cause the buyer to return specific loans. The Company services one-to-four family residential mortgage loans for investors in the secondary mortgage market, which are not included in the Consolidated Balance Sheets. The Company’s fee is a percentage of the principal balance and is recognized as income when received. At September 30, 2021 and 2020, the Company was servicing such sold mortgage loans in the amount of $ 3.7 million and $ 5.2 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. Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing revenues and are included in other assets on the Consolidated Balance Sheets. Activity in mortgage servicing rights during the years ended September 30, 2021 and 2020 are summarized as follows: September 30, 2021 2020 (In thousands)   Beginning balance $ 12 $ 26 Origination of mortgage servicing rights — — Amortization ( 8 ) ( 14 ) Ending balance $ 4 $ 12 Mortgage servicing rights are carried at the lower of amortized cost or fair value. Fair values are estimated using discounted cash flows based on a current market interest rate. The Company also services the SBA guaranteed portion of commercial business loans sold to investors in the secondary market, which are not included in the Consolidated Balance Sheets. The Company’s fee is a percentage of the principal balance and is recognized as income when received. At September 30, 2021 and 2020, the Company was servicing SBA loans sold in the amount of $ 24.2 million and $ 22.2 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. NOTE L - INCOME TAXES The Company’s income tax expense is comprised of the following components for the years ended September 30, 2021 and 2020: 76 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   For the Year Ended September 30, 2021 2020 (In thousands)   Income tax expense at the statutory federal tax rate of 21% for the year ended September 30, 2021 and 2020 $ 1,832 $ 653 State tax expense 772 323 Other 1 ( 55 ) Income tax expense $ 2,605 $ 921 A reconciliation of income tax at the statutory tax rate to the effective income tax expense for the years ended September 30, 2021 and 2020 is as follows: September 30, 2021 2020 (In thousands)   Income tax expense at statutory rate $ 1,832 $ 653 Increase (decrease) resulting from: State income taxes, net of federal income tax benefit 772 323 Tax-exempt income, net ( 68 ) ( 68 ) Nondeductible expenses 26 18 Employee stock ownership plan 1 ( 5 ) Other, net 42 — Total income tax expense $ 2,605 $ 921 The major sources of temporary differences and their deferred tax effect at September 30, 2021 and 2020 are as follows: September 30, 2021 2020 (In thousands)   Allowance for loan losses $ 2,270 $ 1,799 Deferred loan fees 416 731 Unrealized loss, minimum pension liability 351 620 OREO 123 73 Straight line rent 101 110 Gross deferred tax asset 3,261 3,333   Depreciation ( 874 ) ( 872 ) Discount accretion on investments — ( 61 ) Employee benefits ( 183 ) ( 37 ) Mortgage servicing rights ( 1 ) ( 3 ) Gross deferred tax liability ( 1,058 ) ( 973 ) Net deferred tax asset, included in other assests $ 2,203 $ 2,360 In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent 77 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   upon the generation of future taxable income during the periods in which temporary differences are deductible and carry forwards are available. There were no valuation allowances for the year ended September 30, 2021 and 2020. The Company has considered future market growth, forecasted earnings, future taxable income, feasible and permissible tax planning strategies in determining the realizability of deferred tax assets. If the Company was to determine that it would not be able to realize a portion of its net deferred tax asset in the future for which there is currently no valuation allowance, an adjustment to the net deferred tax asset would be charged to earnings in the period such determination was made. The Bank’s statutory income tax rate in the State of New Jersey was 9.0 % for the years ending September 30, 2021 and 2020. The State of New Jersey imposed a temporary surtax on corporations earning New Jersey allocated income in excess of $ 1 million. The surtax is set at a rate of 2.5 % and it currently effective through December 31, 2023. Accordingly, the Company used an 11.5 % State tax rate for the calculation of its State income tax expense the years ended September 30, 2021 and 2020. NOTE M - PENSION PLAN The Company had a noncontributory defined benefit pension plan (the “Plan”) covering all eligible employees. On January 26, 2006, the Plan was frozen and amended to eliminate future benefit accruals after February 15, 2006. Plan assets are invested in seven diversified investment funds of the Pentegra Retirement Trust, a no load series open-ended mutual fund. The long-term investment objective is to be invested 65 % in equity securities (equity mutual funds) and 35 % in debt securities (bond mutual funds). Asset rebalancing is performed at least annually, with interim adjustments made when the investment mix varies more than 5% from the target (i.e., a 10% target range) . Risk/volatility is further managed by the distinct investment objectives of each of the funds and the diversification within each fund. The following table sets forth the Plan’s funded status and amounts recognized in the Company’s Consolidated Balance Sheets at September 30, 2021 and September 30, 2020. September 30, 2021 2020 (In thousands)   Actuarial present value of benefit obligations $ 4,926 $ 5,227   Change in benefit obligations Projected benefit obligation, beginning $ 5,227 $ 4,990 Interest cost 140 158 Actuarial (gain) loss ( 242 ) 278 Annuity payments and lump sum distributions ( 199 ) ( 199 )   Projected benefit obligation, end $ 4,926 $ 5,227   Change in plan assets Fair value of assets, beginning $ 3,579 $ 3,581 Actual return on plan assets 661 172 Employer contributions 830 25 Annuity payments and lump sum distributions ( 199 ) ( 199 )   Fair value of assets, end $ 4,871 $ 3,579   Funded status included with other liabilities $ ( 55 ) $ ( 1,648 ) Net pension cost for the years ended September 30, 2021 and 2020 included the following components: 78 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   September 30, 2021 2020 (In thousands)   Service cost benefits earned during the year $ — $ — Interest cost on projected benefit obligation 140 158 Expected return on plan assets ( 217 ) ( 225 ) Amortization of unrecognized net loss 206 181 Net pension cost $ 129 $ 114 For the year ended September 30, 2021 and 2020, the weighted average discount rate used in determining the actuarial net periodic pension cost was 2.75 % and 3.25 %, respectively. For the year ended September 30, 2021 and 2020, the weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 3.00 % and 2.75 %, respectively. The long-term rate-of-return-on-assets assumption was set based on historical returns earned by equities and fixed income securities, adjusted to reflect expectations of future returns as applied to the plan’s target allocation of asset classes. Equities and fixed income securities were assumed to earn rates of return in the ranges of 6 - 8 % and 3 - 5 %, respectively, with an assumed long-term inflation rate of 2.5 % reflected within these ranges for the year ended September 30, 2021. When these overall return expectations are applied to the plan’s target allocation, the result is an expected rate of return of 5.0 % to 7.0 %. Accordingly, the expected long-term rate of return on assets were 6.00 % for 2022 and 6.25 % for 2021. Current Asset Allocation The Plan’s weighted-average asset allocations at September 30, 2021 and 2020, by asset category are as follows: September 30, 2021 2020   Equity securities 68 % 64 % Debt securities (bond mutual funds) 31 % 35 % Other (money market fund) 1 % 1 % Total 100 % 100 % The target asset allocation set for the assets of the Plan are in equity securities ranging from 50 percent to 75 percent and in debt securities ranging from 25 percent to 50 percent. In general, the Plan assets are investment securities that are well-diversified in terms of industry, capitalization and asset class. The Plan assets are mostly a mix of mutual funds indexed to the performance of Fortune 500 U.S. companies, debt securities held in bond funds, domestic and foreign common equity funds, and a money market fund. The Plan’s exposure to a concentration of credit risk is limited by the diversification of the investments into various investment options with multiple asset managers. Expected Contributions For the fiscal year ending September 30, 2022, the Company does not expect to contribute to the Plan. Estimated Future Benefit Payments The following benefit payments are expected to be paid as follows (in thousands): 79 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   October 1, 2021 through September 30, 2022 $ 234 October 1, 2022 through September 30, 2023 235 October 1, 2023 through September 30, 2024 247 October 1, 2024 through September 30, 2025 246 October 1, 2025 through September 30, 2030 260 October 1, 2026 through September 30, 2031 1,276 Total $ 2,498 Included in the funded status of the Plan at September 30, 2021 and 2020, are actuarial losses of $ 1,167,000 and $ 2,060,000 , respectively. These amounts are included, net of related income tax effects of $ 351,000 and $ 620,000 , respectively, in the accumulated other comprehensive loss component of stockholders’ equity. During the year ending September 30, 2022, approximately $ 85,000 of the actuarial losses is expected to be amortized into net periodic pension expense. The following table presents the Plan assets that are measured at fair value on a recurring basis by level within the fair value hierarchy under ASC Topic 820. Financial assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. See Note R for further detail regarding fair value hierarchy. Fair Value Measurements at Reporting Date Using: Quoted Prices Significant in Active Markets Other Significant for Identical Observable Unobservable Total Assets (Level 1) Inputs (Level 2) Inputs (Level 3) (In thousands) At September 30, 2021 Investment Type Mutual Funds- Equity Large-Cap Value $ 749 $ 749 $ — $ — Large-Cap Core 749 749 — — Mid-Cap Core 506 506 — — Small-Cap Core 481 481 — — Non-U.S. Core 838 838 — — Mutual Funds- Fixed Income Intermediate Duration 665 665 Short-Duration Corporate 853 853 — — Cash Equivalents Money Market 30 30 — — Total Investment $ 4,871 $ 4,871 $ — $ —   At September 30, 2020 Investment Type Mutual Funds- Equity Large-Cap Value $ 468 $ 468 $ — $ — Large-Cap Core 576 576 — — Mid-Cap Core 220 220 — — Small-Cap Core 196 196 — — Non-U.S. Core 833 833 — — Mutual Funds- Fixed Income Intermediate-Term Core 1,241 1,241 — — Cash Equivalents Money Market 45 45 — — Total Investment $ 3,579 $ 3,579 $ — $ — 80 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   Equity and debt securities are reported at fair value in the table above utilizing exchange quoted prices in active markets for identical instruments (Level 1 inputs). NOTE N - NONQUALIFIED COMPENSATION PLAN The Company maintains a Supplemental Executive Retirement Plan (“SERP”) for the benefit of its senior officers. In addition, the Company also adopted voluntary Deferred Income and Retirement Plans on behalf of its directors. The SERP provides the Company with the opportunity to supplement the retirement income of selected officers to achieve equitable wage replacement at retirement while the Deferred Income Plan provides participating directors with an opportunity to defer all or a portion of their fees into a tax deferred accumulation account for future retirement. The Director Retirement Plan enables the Company to reward its directors for longevity of service in consideration of their availability and consultation. The SERP is based upon achieving a total retirement benefit equal to a percentage of the participants’ final annual salary. Under the Director Supplemental Retirement Income Plan (the “Plan”), directors are entitled to a benefit upon attainment of his/her benefit age. The directors will receive an annual amount in monthly installments based on his/her total Board and Committee fees in the twelve months prior to attainment of his/her benefit age. The amount will be ten percent (10%) plus two and one-half percent (2 1/2%) for each year of service as a Director, with a minimum of fifty percent (50%), provided the Director has served for at least five (5) years, and a maximum of sixty percent (60%). The maximum benefit increases for any Director serving as Chairman of the Board to seventy-five percent (75%). The Company funds the plans through modified endowment contracts. Income recorded for the plans represents life insurance income as recorded based on the projected increases in cash surrender values of life insurance policies. As of September 30, 2021 and 2020, the Life Insurance Contracts had cash surrender values of approximately $ 14,288,000 and $ 13,971,000 , respectively. The Company is recording benefit costs so that the cost of each participant’s retirement benefits is being expensed and accrued over the participant’s active employment so as to result in a liability at retirement date equal to the present value of the benefits expected to be provided. NOTE O - 401(K) EMPLOYEE CONTRIBUTION PLAN The Company has a defined contribution 401(k) plan covering all employees, as defined under the plan document. Employees may contribute to the plan, as defined under the plan document, and the Company can make discretionary contributions. The Company contributed $ 232,000 and $ 175,000 to the plan for the years ended September 30, 2021 and 2020, and is included in compensation and employee benefits in the accompanying Consolidated Statements of Operations. NOTE P - COMMITMENTS 1. Lease Commitments Approximate future minimum payments under non-cancelable operating leases are due as follows for the years indicated (in thousands): 81 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   September 30, 2022 $ 728 September 30, 2023 738 September 30, 2024 747 September 30, 2025 523 September 30, 2026 455 Thereafter 1,533 Total $ 4,724 Accounting Standard Update (“ASU”) No. 2016-02, Leases (Topic 842) requires lessees to recognize a lease liability and a right-of-use (“ROU”) asset, measured at the present value of the future minimum lease payments, at the lease commencement date. The Company has operating leases for five branch locations. Our leases have remaining lease terms of up to 10 years, some of which include options to extend the leases for up to 10 additional years. Operating leases are recorded as ROU assets and lease liabilities and are included within Other assets and Accounts payable and other liabilities, respectively, on our Consolidated Balance Sheets. Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at lease commencement base on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate. The incremental borrowing rate used by the Company to value its operating leases is based on the interpolated term advance rate available from the FHLBNY, based on the remaining lease term. The following table presents the balance sheet information related to our leases: September 30, September 30, 2021 2020 (Dollars in thousands)   Operating lease right-of-use asset $ 3,894 $ 3,240 Operating lease liabilities $ 4,254 $ 3,631 Weighted average remaining lease term in years 7.7 7.5 Weighted average discount rate 2.2 % 2.2 % The following table summarizes the maturity of our remaining lease liabilities by year: September 30, September 30, 2021 2020 (In thousands) For the Year Ending: 2022 $ 728 $ 705 2023 738 595 2024 747 602 2025 523 602 2026 455 378 2027 and thereafter 1,533 1,150 Total lease payments 4,724 4,032 Less imputed interest ( 470 ) ( 401 ) Present value of lease liabilities $ 4,254 $ 3,631 82 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   Total rental expense, included in occupancy expense, was approximately $ 811,000 and $ 802,000 for the years ended September 30, 2021 and 2020, respectively. 2. Contingencies The Company and its subsidiaries, from time to time, are a party to routine litigation that arises in the normal course of business. In the opinion of management, the resolution of this litigation, if any, would not have a material adverse effect on the Company’s consolidated financial position or results of operations. NOTE Q - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Company may use derivative financial instruments, such as interest rate floors and collars, as part of its interest rate risk management. Interest rate caps and floors are agreements whereby one party agrees to pay or receive a floating rate of interest on a notional principal amount for a predetermined period of time if certain market interest rate thresholds are met. The Company considers the credit risk inherent in these contracts to be negligible. As of September 30, 2021 and 2020, the Company did not hold any interest rate floors or collars. The Company is a party to interest rate derivatives that are not designated as hedging instruments. Under a program, the Company executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that the Bank executes with a third-party financial institution, such that the Bank minimizes its net risk exposure resulting from such transactions. Because the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined by taking into consideration the risk rating, probability of default and loss given default for all counterparties. The company had $ 300,000 in cash pledged for collateral on its interest rate swaps with financial institutions at September 30, 2021. The following table presents summary information regarding these derivatives for September 30, 2021. There were no derivatives as of September 30, 2020. Notional Amount Average Maturity (Years) Weighted Average Fixed Rate Weighted Average Variable Rate Fair Value   (Dollars in thousands) September 30, 2021 Classified in Other Assets: Customer interest rate swaps $ 20,111 6.9 3.61 % 1 Mo. LIBOR + 2.50 $ 183 Classified in Other Liabilities: 3rd Party interest rate swaps $ 20,111 6.9 3.61 % 1 Mo. LIBOR + 2.50 $ 183 At September 30, 2021 and 2020, the Company had outstanding commitments (substantially all of which expire within one year) to originate one-to four-family residential loans, construction loans, commercial real estate loans, commercial business loans and consumer loans. These commitments were comprised of fixed and variable rate loans. 83 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   September 30, 2021 2020 (In thousands) Financial instruments whose contract amounts represent credit risk Letters of credit $ 2,901 $ 1,041 Unused lines of credit 63,798 78,632 Fixed rate loan commitments 9,156 5,240 Variable rate loan commitments 14,558 15,864 Total $ 90,413 $ 100,777 NOTE R - FAIR VALUE DISCLOSURES The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The Company’s securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets or liabilities on a non-recurring basis, such as held-to-maturity securities, mortgage servicing rights, loans receivable and other real estate owned, or OREO. These non-recurring fair value adjustments involve the application of lower-of-cost-or-market accounting or write-downs of individual assets. In accordance with ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), the Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are: Level 1- Valuation is based upon quoted prices for identical instruments traded in active markets.   Level 2- Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.   Level 3- Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques. The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. The Company bases its fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The following is a description of valuation methodologies used for assets measured at fair value on a recurring basis. Securities available-for-sale The Company’s available-for-sale portfolio is carried at estimated fair value on a recurring basis, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income/loss in stockholders’ equity. The securities available-for-sale portfolio consists of U.S. government and government-sponsored enterprise obligations, municipal bonds, and mortgage-backed securities. The fair values of these securities are obtained from an independent nationally recognized pricing service. An independent pricing service provides prices which are categorized as Level 2, as quoted prices in active markets for identical assets are generally not available for the securities. The following table provides the level of valuation assumptions used to determine the carrying value of the Company’s assets measured at fair value on a recurring basis at September 30, 2021 and 2020: 84 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   September 30, 2021   Total     Level 1     Level 2     Level 3   Assets: (In thousands) Securities available for sale: Obligations of U.S. government agencies:           Mortgage-backed securities - residential $ 186 — $ 186 $ — Obligations of U.S. government-sponsored enterprises: Mortgage-backed securities-residential 12,741 — 12,741 — Total securities available for sale $ 12,927 $ — $ 12,927 $ — Derivative assets $ 183 — $ 183 — Total assets $ 13,110 $ — $ 13,110 $ — Liabilities: Derivative liabilities $ 183 $ — $ 183 $ — Total Liabilities $ 183 $ — $ 183 $ —   September 30, 2020 Assets: Securities available for sale: Obligations of U.S. government agencies:           Mortgage-backed securities - residential $ 364 $ — $ 364 $ — Obligations of U.S. government-sponsored enterprises: Mortgage-backed securities-residential 9,194 — 9,194 — Debt securities 5,003 — 5,003 — Total securities available for sale $ 14,561 $ — $ 14,561 $ — Total assets $ 14,561 $ — $ 14,561 $ — The following is a description of valuation methodologies used for assets measured at fair value on a non-recurring basis. Mortgage Servicing Rights Mortgage Servicing Rights (MSR’s) are carried at the lower of amortized cost or estimated fair value. The estimated fair value of MSRs is determined through a calculation of future cash flows, incorporating estimates of assumptions market participants would use in determining fair value including market discount rates, prepayment speeds, servicing income, servicing costs, default rates and other market driven data, including the market’s perception of future interest rate movements and, as such, are classified as Level 3. No valuation write-downs were made to MSR’s during the years ended September 30, 2021 and 2020. Impaired Loans Loans which meet certain criteria are evaluated individually for impairment. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest and principal payments of a loan will be collected as scheduled in the loan agreement. Three impairment measurement methods are used, depending upon the collateral securing the asset: 1) the present value of expected future cash flows discounted at the loan’s effective interest rate; 2) the asset’s observable market price; or 3) the fair value of the collateral if the asset is collateral dependent. The regulatory agencies require this method for loans from which repayment is expected to be provided solely by the underlying collateral. The Company’s impaired loans are generally collateral dependent and, as such, are carried at the estimated fair value of the collateral less estimated selling and disposition costs. Fair value is estimated through current appraisals, and adjusted as necessary, by management, to reflect current market conditions and, as such, are generally classified as Level 3. Appraisals of collateral securing impaired loans are conducted by approved, qualified, and independent third-party appraisers. Such appraisals are ordered via the Bank’s credit administration department, independent from the lender who 85 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   originated the loan, once the loan is deemed impaired, as described in the previous paragraph. Impaired loans are generally re-evaluated with an updated appraisal within one year of the last appraisal. However, the Company also obtains updated appraisals on performing construction loans that are approaching their maturity date to determine whether or not the fair value of the collateral securing the loan remains sufficient to cover the loan amount prior to considering an extension. The Company discounts the appraised “as is” value of the collateral for estimated selling and disposition costs and compares the resulting fair value of collateral to the outstanding loan amount. If the outstanding loan amount is greater than the discounted fair value, the Company requires a reduction in the outstanding loan balance or additional collateral before considering an extension to the loan. If the borrower is unwilling or unable to reduce the loan balance or increase the collateral securing the loan, it is deemed impaired and the difference between the loan amount and the fair value of collateral, net of estimated selling and disposition costs, is charged off through a reduction of the allowance for loan loss. Other Real Estate Owned Other real estate owned is carried at lower of cost or estimated fair value less disposal costs. The estimated fair value of the real estate is determined through current appraisals, and adjusted as necessary, by management, to reflect current market conditions. As such, other real estate owned is generally classified as Level 3. Valuation write-downs totaling $ 337,000 were made to two properties held as other real estate owned during the year ended September 30, 2021. The properties were written down based on an updated appraisal of the real estate. The following tables provide the level of valuation assumptions used to determine the carrying value of our assets measured at fair value on a non-recurring basis at September 30, 2021 and 2020:     Total     Level 1     Level 2     Level 3   September 30, 2021 (In thousands)   Impaired loans $ 11,134 $ — $ — $ 11,134 Other real estate owned 636 — — 636 Total $ 11,770 $ — $ — $ 11,770   September 30, 2020 Impaired loans $ 11,874 $ — $ — $ 11,874 Other real estate owned 2,594 — — 2,594 Total $ 14,468 $ — $ — $ 14,468 The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Company has utilized Level 3 inputs to determine fair value: Quantitative Information about Level 3 Fair Value Measurements (Dollars in thousands) September 30, 2021 Fair Value Estimate Valuation Techniques Unobservable Input Range (Weighted Average)   Impaired loans $ 11,134 Appraisal of collateral (1) Appraisal adjustments (2) 0 % to - 42.8 % (- 15.3 %) Other real estate owned $ 636 Appraisal of collateral (1) Liquidation expenses (2) - 31.2 % to - 45.5 % (- 39.4 %) 86 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   Quantitative Information about Level 3 Fair Value Measurements (Dollars in thousands) September 30, 2020 Fair Value Estimate Valuation Techniques Unobservable Input Range (Weighted Average)   Impaired loans $ 11,874 Appraisal of collateral (1) Appraisal adjustments (2) 0 % to - 50.0 % (- 11.6 %) Other real estate owned $ 2,594 Appraisal of collateral (1) Liquidation expenses (2) - 6.0 % to - 27.4 % (- 14.7 %)   ​​ (1) Fair value is generally determined through independent appraisals for the underlying collateral, which generally include various level 3 inputs which are not identifiable.   ​​ (2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal. The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments carried at cost or amortized cost as of September 30, 2021 and September 30, 2020. This table excludes financial instruments for which the carrying amount approximates fair value, which includes cash and cash equivalents, FHLBNY stock, bank owned life insurance, accrued interest receivable, interest and non-interest bearing demand, savings deposits, and accrued interest payable. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For financial liabilities such as interest-bearing demand, NOW, and money market savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity. Carrying Fair Fair Value Measurement Placement Amount Value (Level 1) (Level 2) (Level 3) (In thousands) September 30, 2021 Financial instruments - assets Investment securities held-to-maturity $ 57,660 $ 57,282 $ — $ 57,282 $ — Loans 585,301 594,674 — — 594,674 Financial instruments - liabilities Certificates of deposit 116,892 118,144 — 118,144 — Borrowings 23,356 23,753 — 23,753 —   September 30, 2020 Financial instruments - assets Investment securities held-to-maturity $ 30,443 $ 30,899 $ — $ 30,899 $ — Loans 603,110 617,418 — — 617,418 Financial instruments - liabilities Certificates of deposit 112,848 128,590 — 128,590 — Borrowings 67,410 68,386 — 68,386 — NOTE S - REGULATORY CAPITAL The Company and Bank are required to maintain minimum amounts of capital to total “risk-weighted” assets, as defined by the banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and Bank’s assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The capital 87 Table of Contents MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2021 and 2020   amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. The federal banking agencies substantially amended the regulatory risk-based capital rules applicable to the Bank in 2015. The amendments implemented the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. The rule includes a minimum common equity Tier 1 capital (“CET1”) to risk-weighted assets ratio of 4.5% of risk-weighted assets, a minimum Tier 1 capital to risk-weighted assets of 6.0% and a minimum leverage ratio of 4.0%. The required minimum ratio of total capital to risk-weighted assets is 8.0%. The amended rules also established a “capital conservation buffer” of 2.5% above the new regulatory minimum capital ratios, and resulted in the following phased-in minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%; (ii) a Tier 1 capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations established a maximum percentage of eligible retained income that could be utilized for such actions. As of September 30, 2021, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category. The following tables set forth the Company’s and the Bank’s actual and required capital levels under those measures: At September 30, 2021 Company Bank Required for capital adequacy purposes To be well- capitalized under prompt corrective action provisions Tier 1 leverage ratio 12.43 % 10.18 % ≥ 4.00 % ≥ 5.00 % CET1 19.19 % 15.74 % ≥ 7.00 %​​ (1) ≥ 6.50 % Tier 1 risk-based capital ratio 19.19 % 15.74 % ≥ 8.50 %​​ (1) ≥ 8.00 % Total risk-based capital ratio 20.44 % 16.99 % ≥ 10.50 %​​ (1) ≥ 10.00 %   At September 30, 2020 Tier 1 leverage ratio 7.84 % 8.30 % ≥ 4.00 % ≥ 5.00 % CET1 11.84 % 11.93 % ≥ 7.00 ​%​ (1) ≥ 6.50 % Tier 1 risk-based capital ratio 11.84 % 11.93 % ≥ 8.50 ​ %​ (1) ≥ 8.00 % Total risk-based capital ratio 13.09 % 13.18 % ≥ 10.50 %​​​ (1) ≥ 10.00 %   ​​ (1) Includes 2.50% capital conservation buffer 88 Table of Contents ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure None.