Magyar Bancorp, Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements When used in this filing and in future filings by the Company with the Securities and Exchange Commission, in the Company’s press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases, “anticipate,” “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “projected,” “believes”, or similar expressions are intended to identify “forward looking statements.” Forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, those risks previously disclosed by the Company in Item 1A of its Annual Report on Form 10-K as may be supplemented by Quarterly Reports on Form 10-Q filed with the SEC, general economic conditions, changes in interest rates, regulatory considerations, competition, technological developments, retention and recruitment of qualified personnel, and market acceptance of the Company’s pricing, products and services, and with respect to the loans extended by the Company and real estate owned, the following: risks related to the economic environment in the market areas in which the Bank operates, particularly with respect to the real estate market in New Jersey; the risk that the value of the real estate securing these loans may decline in value; and the risk that significant expense may be incurred by the Company in connection with the resolution of these loans. In addition, the COVID-19 pandemic is having an adverse impact on the Company, its customers and the communities it serves. The adverse effect of the COVID-19 pandemic on the Company, its customers and the communities where it operates may adversely affect the Company’s business, results of operations and financial condition for an indefinite period of time. 24 Table of Contents The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and advises readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investing activities, and competitive and regulatory factors, could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated or projected. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements. Critical Accounting Policies Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. Critical accounting policies may involve complex subjective decisions or assessments. We consider the following to be our critical accounting policies. Allowance for Loan Loss. The allowance for loan losses is the amount estimated by management as necessary to cover credit losses in the loan portfolio both probable and reasonably estimable at the balance sheet date. The allowance is established through the provision for loan losses which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of our most critical. Due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses, the methodology for determining the allowance for loan losses is considered a critical accounting policy by management. As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans and discounted cash flow valuations of properties are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisals and discounted cash flow valuations are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly affect the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals and discounted cash flow valuations are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans. Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. We consider a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates by management that may be susceptible to significant change based on changes in economic and real estate market conditions. The evaluation has a specific and general component. The specific component relates to loans that are delinquent or otherwise identified as impaired through the application of our loan review process and our loan grading system. All such loans are evaluated individually, with principal consideration given to the value of the collateral securing the loan and discounted cash flows. Specific impairment allowances are established as required by this analysis. However, the Bank’s Federal and State regulators generally require that the specific reserve against impaired collateral-dependent loans be charged-off, reducing the carrying balance of the loan and allowance for loan loss. The general component is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations in establishing the general portion of the reserve. This analysis establishes factors that are applied to the loan groups to determine the amount of the general component of the allowance for loan losses. 25 Table of Contents Actual loan losses may be significantly greater than the allowances we have established, which could have a material negative effect on our financial results. We intend to adopt the Current Expected Credit Losses (CECL) Methodology effective October 1, 2023. The adoption of the CECL standard for determining the amount of our allowance for credit losses may increase our allowance for loan and lease losses upon adoption and cause our historic allowance for loan and lease losses not to be indicative of how we will maintain our allowance for credit losses beginning October 1, 2023. 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 new 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. Appraisals are critical in determining the fair value of the other real estate owned amount. Assumptions for appraisals are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly affect the valuation of a property. The assumptions supporting such appraisals are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable. Investment Securities. 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 accumulated other comprehensive income (“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 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 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. Management did not account for any other-than-temporary impairments at or during the periods presented in these financial statements. Fair Value. We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Our securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, we 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. 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, we group our 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. We base our 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 us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Deferred Income Taxes. The Company records income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities: (i) are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns; (ii) are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases; and (iii) are measured using enacted tax rates expected to apply in the years when those temporary differences are expected to be recovered or settled. 26 Table of Contents 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. Impact of the Coronavirus/COVID-19 Pandemic. Beginning in 2020 and continuing into 2022, the extraordinary impact of the COVID-19 pandemic has created an unprecedented environment for consumers and businesses alike. To protect our employees and customers from potential exposure to the virus, all Magyar Bank lobbies and operational areas continue to observe best practice protocols to limit exposure and/or spread of the virus. To assist our loan customers, Magyar Bank has offered loan payment deferrals to borrowers unable to make their contractual payments due to COVID-19. Loan payments are deferred until the contractual maturity of the loan. Deferral requests are considered on a case-by-case basis and are initially approved for a three-month period for principal and interest payments or for interest-only payments depending on the borrower’s circumstances. An additional three-month period is available for businesses that remain unable to operate and for consumers unable to make their mortgage or home equity payments due to COVID-19. Additional deferrals were considered for businesses experiencing a prolonged impact from the COVID-19 pandemic, such as the accommodation and food service industries. Magyar Bank’s loan portfolio does not have a significant exposure to the travel or entertainment industry. Through March 31, 2022, we had modified 284 loans aggregating $150.9 million for the deferral of principal and/or interest payments. Of these loans, 109 loans totaling $53.4 million repaid their deferred payments in full and 174 loans aggregating $96.1 million have resumed making their contractual loan payments. One loan totaling $1.4 million was past its deferral period and delinquent at March 31, 2022. The Company was not deferring any additional loan payments due to the COVID-19 pandemic at March 31, 2022. A total of $1.4 million in interest payments were deferred as of March 31, 2022. The Bank participated in the PPP to provide liquidity using the SBA platform to small businesses and self-employed individuals to maintain their staff and operations through the COVID-19 pandemic. This liquidity is in the form of a loan, 100% guaranteed by the SBA, that is forgivable provided the funds are used on qualifying payroll costs, and to a lesser extent, rent, utilities and interest on qualifying mortgage payments. The loans bear a fixed rate of 1.0% and loan payments are deferred for the first 10 months following the covered period, which is eight to twenty-four weeks following the date the loan is made. We originated 562 PPP loans totaling $91.3 million for which we received $3.5 million in origination fees from the SBA. These fees are being amortized over the five year contractual term of the loan unless repaid or forgiven sooner. Through March 31, 2022, 543 loans totaling $86.1 million had been repaid, leaving 19 loans totaling $5.2 million at March 31, 2022. The Company expects most of these loans to be approved for full forgiveness by the SBA. The health of the banking industry is highly correlated with that of the economy. The temporary and/or partial closures of non-essential businesses in our local and national economies increases the likelihood of recession, which typically results in an increased level of credit losses. Accordingly, our provisions for loan losses have increased and will be closely monitored throughout the pandemic. In addition to utilizing quantitative loss factors, the Company considers qualitative factors, such as changes in underwriting policies, current economic conditions, delinquency statistics, the adequacy of the underlying collateral, and the financial strength of the borrower. The impact of the COVID-19 pandemic on the performance of our loan portfolio in future quarters is unknown, however all of these factors are likely to be affected by the COVID-19 pandemic. Comparison of Financial Condition at March 31, 2022 and September 30, 2021 Total Assets. Total assets increased $32.7 million, or 4.2%, to $806.7 million at March 31, 2022 from $774.0 million at September 30, 2021. The increase was attributable to higher balances of investment securities and loans receivable, net of allowance for loan loss, partially offset by lower balances of cash and interest-earning deposits with banks. Cash and Interest-Earning Deposits with Banks. Cash and interest-earning deposits with banks decreased $19.9 million, or 26.5%, to $55.3 million at March 31, 2022 from $75.2 million at September 30, 2021 as funds were used for loan originations and investment securities purchases during the six months ended March 31, 2022. 27 Table of Contents Investment Securities. At March 31, 2022, investment securities totaled $95.3 million, reflecting an increase of $24.7 million, or 35.0%, from $70.6 million at September 30, 2021. The Company purchased seven mortgage-backed securities totaling $16.4 million, seven callable U.S. government-sponsored enterprise bond totaling $12.3 million, and one municipal bond totaling $600,000 during the six months ended March 31, 2022. Offsetting the purchases were payments from mortgage-backed securities totaling $3.7 million and unrealized losses on securities available-for-sale totaling $795,000 during the six months ended March 31, 2022. Investment securities at March 31, 2022 consisted of $64.6 million in mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises, $24.8 million in U.S. government-sponsored enterprise debt securities, $3.0 million in corporate notes, $2.7 million in municipal bonds, and $233,000 in “private-label” mortgage-backed securities. There were no other-than-temporary-impairment charges for the Company’s investment securities for the six months ended March 31, 2022. Total Loans Receivable. Total loans receivable increased $23.8 million, or 4.0%, to $618.5 million at March 31, 2022 from $594.6 million at September 30, 2021. Total loans receivable were comprised of $317.7 million (51.4%) in commercial real estate loans, $206.1 million (33.3%) in one- to four- family residential mortgage loans, $48.9 million (7.9%) in commercial business loans, $26.9 million (4.4%) in construction loans, $15.6 million (2.5%) in home equity lines of credit, and $3.3 million (0.5%) in other loans. Included with the commercial business loans were $5.2 million in PPP loans. The increase in total loans receivable at March 31, 2022 occurred in commercial real estate loans, which increased $36.8 million, or 13.1%, in construction loans, which increased $6.5 million, or 31.9%, and in one- to four- family residential real estate loans (including home equity lines of credit), which increased $757,000, or 0.3%. Partially offsetting these increases were decreases in commercial business loans, which decreased $19.8 million (PPP loans decreased $19.9 million), and other loans, which decreased $459,000. Total Non-Performing Loans. Total non-performing loans decreased $2.3 million, or 27.3%, to $5.9 million at March 31, 2022 from $8.2 million at September 30, 2021. During the six months ended March 31, 2022, five loans totaling $1.0 million were repaid in full and three loans totaling $1.3 million were paid current by the borrowers. There were no additions to the non-performing loans during the six months ended March 31, 2022. The ratio of non-performing loans to total loans decreased to 0.96% at March 31, 2022 from 1.37% at September 30, 2021. During the six months ended March 31, 2022, the allowance for loan losses increased $225,000 to $8.3 million from $8.1 million at September 30, 2021. The increase was attributable to provisions for loan losses totaling $171,000 and $54,000 in net recoveries from loans previously charged off. The allowance for loan losses as a percentage of non-performing loans increased to 140.0% at March 31, 2022 from 99.0% at September 30, 2021. Our allowance for loan losses as a percentage of total loans was 1.34% at March 31, 2022 compared with 1.36% at September 30, 2021. Future increases in the allowance for loan losses may be necessary based on the growth of the loan portfolio, the change in composition of the loan portfolio, possible future increases in non-performing loans and charge-offs, and the possible deterioration of the current economic environment. Additionally, we intend to adopt the CECL Methodology effective October 1, 2023. The adoption of the CECL standard for determining the amount of our allowance for credit losses may increase our allowance for loan and lease losses upon adoption and cause our historic allowance for loan and lease losses not to be indicative of how we will maintain our allowance for credit losses beginning October 1, 2023. Other Real Estate Owned. Other real estate owned increased $13,000, or 2.0%, to $649,000 at March 31, 2022 from $636,000 at September 30, 2021. The increase was due to capital improvements to one property in order to market it for sale. At March 31, 2022, of the two properties that remain in the OREO portfolio, one was under contract of sale and the other was listed for sale. Total Deposits. Total deposits increased $35.4 million, or 5.5%, to $675.2 million at March 31, 2022 from $639.8 million at September 30, 2021. The net inflow in deposits occurred in money market accounts, which increased $19.8 million, or 10.5%, to $207.7 million, in non-interest bearing checking accounts, which increased $16.4 million, or 9.0%, to $198.4 million, in interest-bearing checking accounts (NOW), which increased $16.3 million, or 22.9%, to $87.6 million, and in savings accounts, which increased $5.5 million, or 6.7%, to $87.2 million. These increases were partially offset by a decrease in certificates of deposit (including individual retirement accounts), of $22.6 million, or 19.4%, to $94.3 million. We believe that deposit inflows were the result of a combination of supply chain issues negatively affecting depositors’ ability to spend and depositors’ continued preference for liquidity that began with the onset of the pandemic. The Company held $6.0 million in brokered certificates of deposit at March 31, 2022 and September 30, 2021. 28 Table of Contents Borrowings. Borrowings decreased $4.2 million, or 18.0%, to $19.2 million at March 31, 2022 from $23.4 million at September 30, 2021. The Company repaid matured term borrowings from the Federal Home Loan Bank of New York during the six months ended March 31, 2022. Stockholders’ Equity. Stockholders’ equity increased $1.8 million, or 1.8%, to $99.4 million at March 31, 2022 from $97.6 million at September 30, 2021. The Company’s book value per share increased to $14.00 at March 31, 2022 from $13.76 at September 30, 2021. The increase was due to the Company’s net income during the six months ended March 31, 2022, partially offset by dividends totaling $0.15 per share paid during the six months ended March 31, 2022. The Company did not repurchase shares of its common stock during the three months ended March 31, 2022. Under current federal regulations, subject to limited exceptions, the Company may not repurchase shares of its common stock during the first year following the completion of its second-step conversion offering, which was completed on July 14, 2021. Through March 31, 2022, the Company had repurchased 91,000 shares at an average price of $8.41 pursuant to the second stock repurchase plan. Average Balance Sheet for the Three and Six Months Ended March 31, 2022 and 2021 The following tables present certain information regarding the Company’s financial condition and net interest income for the three and six months ended March 31, 2022 and 2021. The tables present the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown. We derived average balances from daily balances over the period indicated. Interest income includes fees that we consider adjustments to yields. 29 Table of Contents For the Three Months Ended March 31, 2022 2021 Average Balance Interest Income/ Expense Yield/Cost (Annualized) Average Balance Interest Income/ Expense Yield/Cost (Annualized) (Dollars in thousands) Interest-earning assets: Interest-earning deposits $ 72,144 $ 35 0.19% $ 49,004 $ 15 0.13% Loans receivable, net 585,199 6,543 4.44% 607,743 6,890 4.60% Securities Taxable 88,835 299 1.33% 52,387 192 1.49% Tax-exempt (1) 2,550 10 1.67% — — — FHLBNY stock 1,612 18 4.53% 1,956 25 5.16% Total interest-earning assets 750,340 6,905 3.65% 711,090 7,122 4.06% Noninterest-earning assets 45,700 43,461 Total assets $ 796,040 $ 754,551 Interest-bearing liabilities: Savings accounts (2) $ 87,494 37 0.17% $ 77,700 38 0.20% NOW accounts (3) 288,921 145 0.20% 259,291 169 0.26% Time deposits (4) 95,904 233 0.97% 117,210 362 1.25% Total interest-bearing deposits 472,319 415 0.35% 454,201 569 0.51% Borrowings 20,277 111 2.17% 55,195 175 1.28% Total interest-bearing liabilities 492,596 526 0.42% 509,396 744 0.59% Noninterest-bearing liabilities 205,216 186,842 Total liabilities 697,812 696,238 Retained earnings 98,228 58,313 Total liabilities and retained earnings $ 796,040 $ 754,551 Tax-equivalent basis adjustment (2 ) — Net interest and dividend income $ 6,377 $ 6,378 Interest rate spread 3.23% 3.47% Net interest-earning assets $ 257,744 $ 201,694 Net interest margin (5) 3.37% 3.64% Average interest-earning assets to average interest-bearing liabilities 152.32% 139.59% (1) Calculated using the Company's 21% federal tax rate. (2) Includes passbook savings, money market passbook and club accounts. (3) Includes interest-bearing checking and money market accounts. (4) Includes certificates of deposits and individual retirement accounts. (5) Calculated as annualized net interest income divided by average total interest-earning assets. 30 Table of Contents For the Six Months Ended March 31, 2022 2021 Average Balance Interest Income/ Expense Yield/Cost (Annualized) Average Balance Interest Income/ Expense Yield/Cost (Annualized) (Dollars In Thousands) Interest-earning assets: Interest-earning deposits $ 78,182 $ 71 0.18% $ 51,764 $ 35 0.14% Loans receivable, net 582,108 13,263 4.57% 606,757 13,641 4.51% Securities Taxable 80,298 523 1.31% 49,979 398 1.60% Tax-exempt (1) 2,372 20 1.67% — — 0.00% FHLBNY stock 1,645 39 4.72% 1,968 50 5.10% Total interest-earning assets 744,605 13,916 3.75% 710,468 14,124 3.99% Noninterest-earning assets 44,991 43,482 Total assets $ 789,596 $ 753,950 Interest-bearing liabilities: Savings accounts (2) $ 86,001 $ 73 0.17% $ 76,570 $ 85 0.22% NOW accounts (3) 276,135 285 0.21% 258,070 430 0.33% Time deposits (4) 103,995 509 0.98% 119,074 819 1.38% Total interest-bearing deposits 466,131 867 0.37% 453,714 1,334 0.59% Borrowings 21,086 230 2.19% 60,347 366 1.21% Total interest-bearing liabilities 487,217 1,097 0.45% 514,061 1,700 0.66% Noninterest-bearing liabilities 202,050 180,218 Total liabilities 689,267 694,279 Retained earnings 100,329 59,671 Total liabilities and retained earnings $ 789,596 $ 753,950 Tax-equivalent basis adjustment (4 ) — Net interest and dividend income $ 12,815 $ 12,424 Interest rate spread 3.30% 3.33% Net interest-earning assets $ 257,388 $ 196,407 Net interest margin (5) 3.45% 3.51% Average interest-earning assets to average interest-bearing liabilities 152.83% 138.21% (1) Calculated using the Company's 21% federal tax rate. (2) Includes passbook savings, money market passbook and club accounts. (3) Includes interest-bearing checking and money market accounts. (4) Includes certificates of deposits and individual retirement accounts. (5) Calculated as annualized net interest income divided by average total interest-earning assets. Comparison of Operating Results for the Three Months Ended March 31, 2022 and 2021 Net Income . The Company’s net income increased $173,000, or 11.5% to $1.7 million for the three-month period ended March 31, 2022 compared with net income of $1.5 million for the three-month period ended March 31, 2021. The increase was due to lower provisions for loan loss and other expenses, partially offset by lower non-interest income. Net Interest and Dividend Income. Net interest and dividend income was unchanged at $6.4 million for the three months ended March 31, 2022 and 2021. A $56.1 million increase in the average balance of net interest-earning assets between periods was offset by a 27 basis point decrease in the Company’s net interest margin to 3.37% for the three months ended March 31, 2022 from 3.64% for the three months ended March 31, 2021. 31 Table of Contents Interest and Dividend Income. Interest and dividend income decreased $219,000, or 3.1%, to $6.9 million for the three months ended March 31, 2022 from $7.1 million for the three months ended March 31, 2021. The decrease was attributable to a 41 basis point decline in yield on interest-earning assets, partially offset by higher average balances of interest-earning assets, which increased $39.3 million between periods. The lower yield on interest-earning assets was attributable to lower yields on loans receivable, which decreased 16 basis points to 4.44% for the three months ended March 31, 2022 compared with 4.60% for the three months ended March 31, 2021 as well as higher average balances of lower yielding interest-earnings deposits, which increased $23.1 million, or 47.2%, between periods. Interest earned on investment securities, including interest-earning deposits and excluding FHLB stock, increased $135,000, or 65.2%, to $342,000 for the three months ended March 31, 2022 from $207,000 for the three months ended March 31, 2021. The increase resulted primarily from a $62.1 million, or 61.3%, increase in the average balance of investment securities and interest-earning deposits to $163.5 million for the three months ended March 31, 2022 from $101.4 million for the three months ended March 31, 2021. Interest Expense. Interest expense decreased $218,000, or 29.3%, to $526,000 for the three months ended March 31, 2022 from $744,000 for the three months ended March 31, 2021. The cost of the Company’s interest-bearing liabilities decreased 17 basis points to 0.42% for the three months ended March 31, 2022 from 0.59% for the three months ended March 31, 2021 due to lower market interest rates between periods. The cost of interest-bearing deposits decreased 16 basis points to 0.35% for the three months ended March 31, 2022 from 0.51% for the three months ended March 31, 2021. In addition, the average balance of non-interest bearing liabilities increased $18.4 million, or 9.8%, to $205.2 million for the three months ended March 31, 2022 from $186.8 million for the three months ended March 31, 2021. The increase in non-interest bearing liabilities was due to higher business checking account balances resulting from supply chain issues and a preference for liquidity during the COVID-19 pandemic. As a result, interest paid on interest-bearing deposits decreased $154,000 to $415,000 for the three months ended March 31, 2022 compared with $569,000 for the three months ended March 31, 2021. Interest paid on borrowings decreased $64,000, or 36.6%, to $111,000 for the three months ended March 31, 2022 from $175,000 for the prior year period. A $34.9 million decrease in the average balance of such borrowings to $20.3 million for the quarter ended March 31, 2022 from $55.2 million for the quarter ended March 31, 2021 more than offset a 89 basis point increase in the cost of borrowings to 2.17% for the three months ended March 31, 2022 from 1.28% for the three months ended March 31, 2021. The reduction in average balances and corresponding increase in cost of borrowings between periods resulted from the repayment of Paycheck Protection Program Liquidity Facility (“PPPLF”) advances to the Federal Reserve Bank of New York. Provision for Loan Losses. We establish provisions for loan losses, which are charged to earnings, at a level necessary to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, peer group information and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events occur. After an evaluation of these factors, management recorded a provision of $71,000 for the three months ended March 31, 2022 compared to $467,000 for the three months ended March 31, 2021. The lower provisions for loss resulted from lower adjustments to the Company’s historical loan losses related to the COVID-19 pandemic’s anticipated impact on the Company’s consumer and business loan portfolios. In addition, the Company recorded $1,000 in net recoveries during the three months ended March 31, 2022 compared with $43,000 in net charge-offs during the three months ended March 31, 2021. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Management reviews the level of the allowance on a quarterly basis, and establishes the provision for loan losses based on the factors set forth in the preceding paragraph. As management evaluates the allowance for loan losses, the increased risk associated with larger non-homogenous construction, commercial real estate and commercial business loans may result in larger additions to the allowance for loan losses in future periods . Other Income. Other income decreased $365,000, or 39.0%, to $572,000 during the three months ended March 31, 2022 compared to $937,000 for the three months ended March 31, 2021. 32 Table of Contents Fees for other customer services were $0 for the three months ended March 31, 2022 compared with $303,000 for the three months ended March 31, 2021. The fees in the 2021 quarter were earned from the Small Business Relief Grant program offered in response to the COVID pandemic for which the Company received a fee of 3.0% of the grants it assisted with processing. In addition, the Company did not receive any interest rate swap fees during the three months ended March 31, 2022 compared with $107,000 during the three months ended March 31, 2021. However, the Company recorded higher gains from the sales of loans, which were $139,000 for the three months ended March 31, 2022 compared with $106,000 for the three months ended March 31, 2021. Other Expenses. Other expenses decreased $181,000, or 3.9%, to $4.5 million during the three months ended March 31, 2022 from $4.7 million during the three months ended March 31, 2021. The decrease in other expenses was primarily attributable to lower professional fees, which decreased $205,000, or 43.2%, due to lower legal and consulting fees related to the collection and foreclosure of non-performing loans. FDIC deposit insurance assessment premiums and loan servicing expenses decreased $78,000 and $76,000, respectively, from the Company’s higher capital levels and lower levels of non-performing loans. Partially offsetting these decreases were higher compensation and other expenses. Compensation and benefit expense increased $71,000, or 2.7%, due to annual merit increases as well as expenses for the employee stock ownership plan resulting from the Company’s stock offering in July 2021. Other expenses increased $69,000, or 17.8%, from higher expenses related to being a fully public company as well as annual increases in vendor contracts. Income Tax Expense. The Company recorded tax expense of $690,000 on pre-tax income of $2.4 million for the three months ended March 31, 2022, compared to $652,000 on pre-tax income of $2.2 million for the three months ended March 31, 2021. The Company’s effective tax rate for the three months ended March 31, 2022 was 29.1% compared with 30.2% for the three months ended March 31, 2021. Comparison of Operating Results for the Six Months Ended March 31, 2022 and 2021 Net Income. Net income increased $529,000, or 18.6%, to $3.4 million during the six-month period ended March 31, 2022 compared with $2.8 million for the six-month period ended March 31, 2021 due to higher net interest and dividend income and non-interest income, lower provisions for loan loss and lower other expenses, partially offset by lower other income. Net Interest and Dividend Income. Net interest and dividend income increased $391,000, or 3.1%, to $12.8 million for the six months ended March 31, 2022 from $12.4 million for the six months ended March 31, 2021. The increase was attributable to a $61.0 million increase in the average balance of net interest-earning assets, partially offset by a six basis point decrease in the Company’s net interest margin to 3.45% for the six months ended March 31, 2022 compared to 3.51% for the six months ended March 31, 2021. Interest and Dividend Income. Interest and dividend income decreased $212,000, or 1.5%, to $13.9 million for the six months ended March 31, 2022 from $14.1 million for the six months ended March 31, 2021. The decrease was attributable to a 24 basis point decline in yield on interest-earning assets, partially offset by higher average balances of interest-earning assets, which increased $34.1 million between periods. Interest earned on investment securities, including interest-earning deposits, and excluding FHLB stock, increased $177,000, or 40.9%, to $610,000 for the six months ended March 31, 2022 from $433,000 the prior year period. The increase resulted primarily from a $59.1 million, or 58.1%, increase in the average balance of investment securities and interest-earning deposits to $160.8 million for the six months ended March 31, 2022 from $101.7 million for the six months ended March 31, 2021. Offsetting the higher interest from higher average balances was a 28 basis point decline in yield on investment securities to 1.32% for the six months ended March 31, 2022 compared with 1.60% for the six months ended March 31, 2021. Interest earned on loans receivable, net, decreased $378,000, or 2.8%, to $13.3 million for the six months ended March 31, 2022 from $13.6 million the prior year period. The decrease resulted from a $24.6 million, or 4.1%, decline in the average balance of loans receivable and lower PPP fees recognized, partially offset by a six basis point increase in the yield on such assets to 4.57% for the six months ended March 31, 2022 from 4.51% for the six months ended March 31, 2021. Included in the yield on loans receivable is the recognition of PPP loan fees, which have been accelerated with the repayment of PPP loans through forgiveness by the SBA. The Company recorded $730,000 in PPP fees during the six months ended March 31, 2022 compared with $1.0 million during the six months ended March 31, 2021. 33 Table of Contents Interest Expense. Interest expense decreased $603,000, or 35.5%, to $1.1 million for the six months ended March 31, 2022 compared with $1.7 million for the six months ended March 31, 2021. The average balance of interest-bearing liabilities decreased $26.8 million, or 5.2%, to $487.2 million compared with $514.0 million between the two periods while the cost of such liabilities decreased 21 basis points to 0.45% for the six months ended March 31, 2022 compared with 0.66% for the prior year period. The average balance of interest-bearing deposits increased $12.4 million, or 2.7%, to $466.1 million for the six months ended March 31, 2022 from $453.7 million for the six months ended March 31, 2021, while the average cost of such deposits decreased 22 basis points to 0.37% from 0.59% between the two periods. As a result, interest paid on interest-bearing deposits decreased $467,000, or 36.0%, to $867,000 for the six months ended March 31, 2022 compared with $1.3 million for the six months ended March 31, 2021. Lower market interest rates accounted for the decrease in the cost of interest-bearing deposits. Interest paid on borrowings decreased $136,000, or 37.2%, to $230,000 for the six months ended March 31, 2022 from $366,000 for the prior year period. The average balance of such borrowings decreased $39.2 million to $21.1 million for the six months ended March 31, 2022 from $60.3 million for the six months ended March 31, 2021 while the average cost of such borrowings increased 98 basis points to 2.19% for the six months ended March 31, 2022 from 1.21% for the six months ended March 31, 2021. Lower average balances of PPPLF advances (costing 0.35%) contributed to the lower average balance of borrowings as well as their higher cost. Provision for Loan Losses. We establish provisions for loan losses, which are charged to earnings, at a level necessary to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, peer group information and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events occur. After an evaluation of these factors, management recorded a provision of $171,000 for the six months ended March 31, 2022 compared to $1.1 million for the six months ended March 31, 2021. The lower provisions for loan loss resulted from lower adjustments to the Company’s historical loan losses related to the COVID-19 pandemic’s anticipated impact on the Company’s consumer and business loan portfolios. In addition, the Company recorded $54,000 in net recoveries during the six months ended March 31, 2022 compared with $47,000 in net recoveries during the six months ended March 31, 2021. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Management reviews the level of the allowance on a quarterly basis, and establishes the provision for loan losses based on the factors set forth “Summary of Significant Accounting Policies − Allowance for Loan Losses.” As management evaluates the allowance for loan losses, the increased risk associated with larger non-homogenous construction, commercial real estate and commercial business loans may result in larger additions to the allowance for loan losses in future periods. In addition, the ongoing effects of the COVID-19 pandemic on our borrowers may also result in larger additions to the allowance for loan losses in future periods. Other Income. Other income decreased $941,000, or 43.5%, to $1.2 million during the six months ended March 31, 2022 compared to $2.2 million for the six months ended March 31, 2021. Fees for other customer services were $0 for the six months ended March 31, 2022 compared with $768,000 for the six months ended March 31, 2021. The fees during the 2021 fiscal period were earned from the Small Business Relief Grant program offered in response to the COVID pandemic for which the Company received a fee of 3.0% of the grants it assisted with processing. In addition, the Company did not receive any interest rate swap fees during the six months ended March 31, 2022 compared with $208,000 during the six months ended March 31, 2021. However, the Company recorded higher gains from the sales of loans, which were $420,000 for the six months ended March 31, 2022 compared with $369,000 for the six months ended March 31, 2021. Other Expenses. Other expenses decreased $286,000, or 3.0%, to $9.1 million during the six months ended March 31, 2022 from $9.4 million during the six months ended March 31, 2021. Lower other expenses were primarily attributable to professional fees, which decreased $345,000, or 34.4%, due to lower legal and consulting fees related to the collection and foreclosure of non-performing loans. OREO, FDIC deposit insurance assessment premiums and loan servicing expenses decreased $151,000, $150,000 and $115,000, respectively, from lower OREO valuation allowances, higher capital levels and lower levels of non-performing loans. Partially offsetting these decreases were higher compensation and other expenses. Compensation and benefit expense increased $225,000, or 4.4%, due to annual merit increases and higher professional development expenses as well as higher expenses for the employee stock ownership plan resulting from the Company’s stock offering in July 2021. Other expenses increased $112,000, or 15.1%, from higher expenses related to being a fully public company as well as annual increases in vendor contracts. 34 Table of Contents Income Tax Expense. The Company recorded tax expense of $1.4 million on pre-tax income of $4.7 million for the six months ended March 31, 2022, compared to $1.2 million on pre-tax income of $4.1 million for the six months ended March 31, 2021. The Company’s effective tax rate for the six months ended March 31, 2022 was 28.8% compared with 30.0% for the six months ended March 31, 2021. LIQUIDITY AND CAPITAL RESOURCES Liquidity The Company’s liquidity is a measure of its ability to fund loans, pay withdrawals of deposits, and other cash outflows in an efficient, cost-effective manner. The Company’s short-term sources of liquidity include maturity, repayment and sales of assets, excess cash and cash equivalents, new deposits, other borrowings, and new advances from the Federal Home Loan Bank. There has been no material adverse change during the six months ended March 31, 2022 in the ability of the Company and its subsidiaries to fund their operations. Whether through significant deposit withdrawals, reductions in interest and principal payments on loans, or the tightening of the capital markets, it is possible that the COVID-19 pandemic will have a negative effect on the liquidity and capital resources of the Company. At March 31, 2022, the Company had commitments outstanding under letters of credit of $788,000, commitments to originate loans of $33.0 million, and commitments to fund undisbursed balances of closed loans and unused lines of credit of $67.3 million. There has been no material change during the six months ended March 31, 2022 in any of the Company’s other contractual obligations or commitments to make future payments. Capital Requirements At March 31, 2022, the Bank’s Tier 1 capital as a percentage of the Bank's total assets was 10.56%, and total qualifying capital as a percentage of risk-weighted assets was 16.13%. Under section 1102 of the CARES Act, a PPP loan is assigned a risk weight of zero percent under the risk-based capital rules of the federal banking agencies. On April 9, 2020, the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation issued an interim final rule to allow banking organizations to neutralize the effect of PPP loans financed under the PPP Liquidity Facility on Tier 1 leverage capital ratios. Item 3- Quantitative and Qualitative Disclosures about Market Risk Not applicable to smaller reporting companies.