Item 7. Management’s Discussion and Analysis
ITEM 7.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Overview
Magyar Bancorp, Inc. (the “Company”)
is a Delaware-chartered stock holding company whose most significant business activity is ownership of 100% of the common stock of Magyar
Bank. Magyar Bank’s principal business is attracting retail deposits from the general public and investing those deposits, together
with funds generated from operations, principal repayments on loans and securities and borrowed funds, into one-to four-family residential
mortgage loans, multi-family and commercial real estate mortgage loans, home equity loans and lines of credit, commercial business loans
and construction loans. Our results of operations depend primarily on our net interest income which is the difference between the interest
we
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earn on our interest-earning assets and the interest
we pay on our interest-bearing liabilities. Our net interest income is primarily affected by the market interest rate environment, the
shape of the U.S. Treasury yield curve, the timing of the placement of interest-earning assets and interest-bearing liabilities, and the
prepayment rate on our mortgage-related assets. Other factors that may affect our results of operations are general and local economic
and competitive conditions, government policies and actions of regulatory authorities.
During the year ended September
30, 2022, the Company’s total assets grew $24.6 million, or 3.2%, to $798.5 million. The increase was attributable to a $34.5 million
increase, or 5.9%, to $619.8 million in loans receivable, net of allowance of loss and a $30.3 million increase, or 42.9%, to $100.9 million
in investment securities, partially offset by a $44.3 million decrease in cash and cash equivalents.
Stockholders’ equity increased
$861,000, or 0.9%, to $98.5 million at September 30, 2022 from $97.6 million at September 30, 2021. The increase in stockholders’
equity was primarily attributable to the Company’s results of operations for the year ended September 30, 2022, partially offset
by stock repurchases dividends paid and other comprehensive loss. On July 21, 2022, the Company announced a stock repurchase program of
up to 5% of its outstanding shares of common stock, or 354,891 shares. The Company repurchased 352,697 shares at an average price of $12.90
per share through September 30, 2022, reducing outstanding shares to 6,745,128. In addition, during the year ended September 30, 2022,
the Company paid dividends totaling $0.21 per share.
Total deposits increased $27.9
million, or 4.4%, to $667.7 million during the year ended September 30, 2022 from $639.8 million at September 30 2021. The growth in deposits
during the twelve months ended September 30, 2022 occurred in money market account balances, which increased $34.3 million, or 18.3%,
to $222.2 million, in interest-bearing checking account balances, which increased $27.3 million, or 38.3% to $98.6 million, in non-interest
checking account balances, which increased $442,000, or 0.2%, to $182.4 million, and in savings account balances, which increased $126,000,
or 0.2%, to $81.9 million. Offsetting these increases was a $34.3 million, or 29.3%, decrease in certificates of deposit (including individual
retirement accounts), to $82.6 million.
The Company’s net income
increased $1.8 million, or 29.4%, to $7.9 million during the year ended September 30, 2022 compared with net income of $6.1 million for
the year ended September 30, 2021. The increase in net income was due to higher net interest and dividend income, lower provisions for
loan losses, and lower non-interest expenses, partially offset by lower non-interest income.
Throughout fiscal 2023, we expect
to continue increasing our commercial real estate and commercial business loans while managing non-interest expenses in an effort to increase
profitability of the Company.
Critical Accounting Policies
Critical accounting policies
are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different
results under different assumptions and conditions. Critical accounting policies may involve complex subjective decisions or assessments.
We consider the following to be our critical accounting policies.
Allowance for Loan
Loss. The allowance for loan losses is the amount estimated by management as necessary to cover credit losses in the loan portfolio
both probable and reasonably estimable at the balance sheet date. The allowance is established through the provision for loan losses which
is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this
policy as one of our most critical. Due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the
potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses,
the methodology for determining the allowance for loan losses is considered a critical accounting policy by management.
As a substantial amount
of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans and discounted cash
flow valuations of properties are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisals
and discounted cash flow valuations are instrumental in determining the value of properties. Overly optimistic assumptions or negative
changes to assumptions could significantly affect the valuation of a property securing a loan and the related allowance determined. The
assumptions supporting such appraisals and discounted cash flow valuations are carefully reviewed by management to determine that the
resulting values reasonably reflect amounts realizable on the related loans.
Management performs a quarterly
evaluation of the adequacy of the allowance for loan losses. We consider a variety of factors in establishing this estimate including,
but not limited to, current economic conditions, delinquency statistics,
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geographic and industry concentrations, the
adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors.
This evaluation is inherently subjective as it requires material estimates by management that may be susceptible to significant change
based on changes in economic and real estate market conditions.
The evaluation has a specific
and general component. The specific component relates to loans that are delinquent or otherwise identified as impaired through the application
of our loan review process and our loan grading system. All such loans are evaluated individually, with principal consideration given
to the value of the collateral securing the loan and discounted cash flows. Specific impairment allowances are established as required
by this analysis. However, the Bank’s Federal and State regulators generally require that the specific reserve against impaired
collateral-dependent loans be charged-off, reducing the carrying balance of the loan and allowance for loan loss. The general component
is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We analyze historical
loss experience, delinquency trends, general economic conditions and geographic and industry concentrations in establishing the general
portion of the reserve. This analysis establishes factors that are applied to the loan groups to determine the amount of the general component
of the allowance for loan losses.
Actual loan losses may be significantly
greater than the allowances we have established, which could have a material negative effect on our financial results.
For the fiscal year ended September
30, 2022 and through the fiscal year ending September 30, 2023, we followed and will follow the incurred loss methodology for determining
our allowance for loan loss. We intend to adopt the CECL standard for determining the amount of our allowance for credit loss beginning
October 1, 2023.
Deferred Income Taxes. The
Company records income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities: (i) are recognized
for the expected future tax consequences of events that have been recognized in the financial statements or tax returns; (ii) are
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax
bases; and (iii) are measured using enacted tax rates expected to apply in the years when those temporary differences are expected
to be recovered or settled.
Deferred tax assets are likely
to be realized and therefore do not have a valuation allowance.
Comparison of Financial Condition
at September 30, 2022 and September 30, 2021
Total Assets. Total
assets increased $24.6 million, or 3.2%, to $798.5 million during the year ended September 30, 2022 compared with $774.0 million at September
30, 2021. The change was attributable to a $34.5 million, or 5.9%, increase in loans receivable, net of allowance of loss, to $619.8 million
and a $30.3 million, or 42.9%, increase in investment securities to $100.9 million, partially offset by a $44.3 million decrease in cash
and cash equivalents. Stockholders’ equity increased $861,000, or 0.9%, to $98.5 million at September 30, 2022 from $97.6 million
at September 30, 2021.
Loans Receivable. Total
loan receivable increased $34.3 million, or 5.8%, to $628.9 million at September 30, 2022 from $594.6 million at September 30, 2021. Growth
occurred in commercial real estate loans, which increased $61.9 million, or 22.1%, to $342.8 million and in one-to four-family residential
mortgage loans (including home equity lines of credit), which increased $12.1 million, or 5.5%, to $233.1 million. Offsetting these increases
were decreases in commercial business loans, which decreased $34.0 million, or 49.5%, to $34.7 million, in construction loans, which decreased
$5.1 million, or 25.2%, to $15.2 million and in other consumer loans, which decreased $621,000, or 16.6%, to $3.1 million. Included in
the reduction of commercial business loans were the repayment of $25.1 million in PPP loans.
Total loans receivable at September
30, 2022 were comprised of $342.8 million (54.5%) in commercial real estate loans, $214.4 million (34.1%) in one- to four- family residential
mortgage loans, $34.7 million (5.5%) in commercial business loans, $15.2 million (2.4%) in construction loans, and $21.8 million (3.5%)
in home equity lines of credit and other loans. For comparison, total loans receivable at September 30, 2021 were comprised of $280.8
million (47.2%) in commercial real estate loans, $203.0 million (34.2%) in one- to four- family residential mortgage loans, $68.7 million
(11.6%) in commercial business loans (including $25.1 million in PPP loans), $20.4 million (3.4%) in construction loans, and $21.7 million
(3.6%) in home equity lines of credit and other loans.
Total non-performing loans decreased
$5.3 million, or 65.3%, to $2.8 million at September 30, 2022 from $8.2 million at September 30, 2021. The ratio of non-performing loans
to total loans was 0.5% at September 30, 2022 compared to 1.4% at September 30, 2021.
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There were no non-performing loans
secured by one-to four-family residential properties, including home equity lines of credit and other consumer loans, at September 30,
2022, compared with $1.2 million at September 30, 2021. During the year ended September 30, 2022, there were no charge-offs against the
allowance for loan loss for residential real estate loans while $1,000 was recovered from prior year charge-offs.
There were no non-performing commercial
real estate loans at September 30, 2022, compared with $1.1 million at September 30, 2021. During the year ended September 30, 2022 there
were no charge-offs against the allowance for loan loss and for commercial real estate loans while $53,000 was recovered from prior year
charge-offs.
There were no non-performing commercial
business loans at September 30, 2022, compared with $1.3 million at September 30, 2021. During the year ended September 30, 2022 there
were no charge-offs against the allowance for loan loss for commercial business loans and there were no recoveries from prior year charge-offs.
Non-performing construction loans
decreased $1.7 million, or 38.1%, to $2.8 million at September 30, 2022 from $4.6 million at September 30, 2021. Magyar Bank had begun
foreclosure proceedings on the properties securing these loans at September 30, 2022. During the year ended September 30, 2022, there
were no charge-offs or recoveries on construction loans.
The ratio of non-performing loans
and troubled debt restructurings to total loans receivable decreased to 0.53% at September 30, 2022 from 1.43% at September 30, 2021.
The allowance for loan losses increased $358,000 to $8.4 million, or 297.5% of non-performing loans at September 30, 2022 compared with
$8.1 million, or 99.0% of non-performing loans, at September 30, 2021. Provisions for loan loss during the year ended September 30, 2022
were $304,000 while net recoveries were $54,000, compared with a provision of $1.6 million and net recoveries of $46,000 for the prior
year period. The allowance for loan losses was 1.34% and 1.36% of gross loans outstanding at September 30, 2022 and 2021, respectively.
Investment Securities.
Investment securities increased $30.3 million, or 42.9%, to $100.9 million at September 30, 2022 from $70.6 million at September 30, 2021.
Investment securities at September 30, 2022 consisted of $64.3 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, $8.0 million in corporate
notes, $3.5 million in municipal bonds and $224,000 in “private-label” mortgage-backed securities. There were no other-than-temporary-impairment
charges for the Company’s investment securities for the year ended September 30, 2022.
Securities available-for-sale
decreased $3.7 million, or 28.6%, to $9.2 million at September 30, 2022 from $12.9 million at September 30, 2021. The decrease was attributable
to $1.9 million in principal repayments and unrealized losses of $1.7 million. There were no purchases of securities available-for-sale
during the year ended September 30, 2022.
Securities held-to-maturity increased
$34.0 million, or 58.9%, to $91.6 million at September 30, 2022 from $57.7 million at September 30, 2021. The increase was the result
of $41.1 million in security purchases, partially offset by $7.0 million in principal repayments and the amortization of $112,000 in net
premiums paid during the year ended September 30, 2022.
Bank-Owned Life Insurance.
The cash surrender value of life insurance held for directors and officers of Magyar Bank increased $3.4 million, or 23.6%, to $17.7 million
at September 30, 2022 from $14.3 million at September 30, 2021. The Company purchased new policies on officers of the Bank totaling $3.0
million and recorded an increase in the cash surrender value of the policies totaling $372,000 during the twelve months ended September
30, 2022.
Other Real Estate Owned.
OREO decreased $355,000, or 55.8%, to $281,000 at September 30, 2022 from $636,000 at September 30, 2021 due to the sale of two
properties during the year. The Company’s OREO was reduced to one commercial real estate property totaling $281,000 that was under
contract of sale at September 30, 2022.
Deposits. Deposits,
which include noninterest-bearing demand deposits, interest-bearing demand deposits, money market deposits, savings deposits and time
deposits, are the primary source of the Company’s funds. The Company offers a variety of products designed to attract
and retain customers, with primary focus on building and expanding relationships. The Company continues to focus on establishing
relationships with business borrowers, seeking deposits as well as lending relationships.
Total deposits increased $27.9
million, or 4.4%, to $667.7 million at September 30, 2022 from $639.8 million at September 30, 2021. The increase in deposits during the
twelve month ended September 30, 2022 occurred in money market account balances, which increased $34.3 million, or 18.3%, to $222.2 million,
in interest-bearing checking account balances, which increased $27.3 million, or 38.3% to $98.6 million, in non-interest checking account
balances, which increased
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$442,000, or 0.2%, to $182.4 million, and in savings
account balances, which increased $126,000, or 0.2%, to $81.9 million. Offsetting these increases was a $34.3 million, or 29.3%, decrease
in certificates of deposit (including individual retirement accounts), to $82.6 million. Included in certificates of deposit were $6.0
million in brokered certificates of deposit at September 30, 2022 and 2021.
The Company’s deposit strategy
in 2022 focused on growing its non-interest checking account balances and reducing the overall cost of its interest-bearing liabilities
to offset rising market interest rates.
Borrowed Funds. Borrowings
decreased $7.7 million, or 33.1%, to $15.6 million at September 30, 2022 from $23.4 million at September 30, 2021. The decrease was due
to the repayment of maturing long-term FHLBNY advances.
Stockholders’ Equity.
Stockholders’ equity increased $861,000, or 0.9%, to $98.5 million at September 30, 2022 from $97.6 million at September
30, 2021. The increase was attributable to the Company’s net income from operations totaling $7.9 million, partially offset by $4.5
million in share repurchases, $1.4 million in dividends paid, and $1.2 million in other comprehensive losses. The Company’s book
value per share increased to $14.60 at September 30, 2022 from $13.76 at September 30, 2021, based on total equity of $98.5 million and
6,745,128 shares outstanding.
Comparison of Operating Results
for the Years Ended September 30, 2022 and 2021
Net Income. The
Company’s net income increased $1.8 million, or 29.4%, to $7.9 million during the year ended September 30, 2022 compared with $6.1
million for the year ended September 30, 2021 due to higher net interest and dividend income, lower
provisions for loan losses, and lower non-interest expenses, partially offset by lower non-interest income.
Net Interest and Dividend
Income. The primary source of the Company’s operating income is net interest and dividend income, which is the difference
between interest and dividends earned on earning assets and fees earned on loans, and interest paid on interest-bearing liabilities. The
Company’s net interest and dividend income is affected by regulatory, economic and competitive factors that influence interest rates,
loan demand, deposit flows and levels of nonperforming assets.
During the year ended September
30, 2022, net interest and dividend income increased $1.4 million, or 5.6%, to $27.0 million compared to $25.6 million for the year ended
September 30, 2021. Interest and dividend income increased $975,000, or 3.4%, to $29.5 million at September 30, 2022 from $28.5 million
at September 30, 2021, while interest expense decreased $457,000, or 15.5%, to $2.5 million at September 30, 2022 from $2.9 million at
September 30, 2021. The Company’s net interest margin increased eight basis points to 3.61% for the year ended September 30, 2022
from 3.53% for the year ended September 30, 2021.
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Average Balance Sheet. The
following table presents certain information regarding our financial condition and net interest income for the years ended September 30,
2022, 2021 and 2020. The table presents the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing
liabilities. We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets
and interest-bearing liabilities, respectively, for the periods shown. We derived average balances from daily balances over the periods
indicated. Interest income includes fees that we consider adjustments to yields.
For
the Year Ended September 30,
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
$
53,714
$
264
0.49%
$
61,655
$
88
0.14%
Loans receivable, net
600,630
27,841
4.64%
605,176
27,551
4.55%
Securities
Taxable
89,001
1,279
1.44%
55,487
789
1.42%
Tax-exempt (1)
2,769
52
1.89%
410
7
1.64%
FHLBNY stock
1,547
78
5.02%
1,925
95
4.94%
Total interest-earning assets
747,661
29,514
3.95%
724,653
28,530
3.94%
Noninterest-earning assets
45,960
44,193
Total assets
$
793,621
$
768,846
Interest-bearing liabilities:
Savings accounts (2)
$
85,834
156
0.18%
$
87,812
$
155
0.18%
NOW accounts (3)
288,222
1,007
0.35%
258,261
707
0.27%
Time deposits (4)
96,442
907
0.94%
116,944
1,425
1.22%
Total interest-bearing deposits
470,498
2,070
0.44%
463,017
2,287
0.49%
Borrowings
18,399
414
2.25%
47,220
654
1.39%
Total interest-bearing liabilities
488,897
2,484
0.51%
510,237
2,941
0.58%
Noninterest-bearing liabilities
200,702
188,084
Total liabilities
689,599
698,321
Retained earnings
104,022
70,525
Total liabilities and retained earnings
$
793,621
$
768,846
Tax-equivalent basis adjustment
(11
)
(2
)
Net interest and dividend income
$
27,019
$
25,587
Interest rate spread
3.44%
3.36%
Net interest-earning assets
$
258,764
$
214,416
Net interest margin (5)
3.61%
3.53%
Average interest-earning assets to
average interest-bearing liabilities
152.93%
142.02%
(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.
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Rate/Volume Analysis.
The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate
column shows the effects attributable to changes in rate (changes in rate multiplied by average volume). The volume column shows the effects
attributable to changes in volume (changes in average volume multiplied by prior rate). The net column represents the sum of the prior
columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately,
based on the changes due to rate and the changes due to volume.
September 30,
2022 vs. 2021
Increase (decrease) due
to
Volume
Rate
Net
(In thousands)
Interest-earning assets:
Interest-earning deposits
$
(13
)
$
189
$
176
Loans
(220
)
510
290
Securities
Taxable
479
11
490
Tax-exempt (1)
44
1
45
FHLBNY stock
(19
)
2
(17
)
Total interest-earning assets
272
712
984
Interest-bearing liabilities:
Savings accounts (2)
1
0
1
NOW accounts (3)
84
216
300
Time deposits (4)
(224
)
(294
)
(518
)
Total interest-bearing deposits
(139
)
(78
)
(217
)
Borrowings
(523
)
283
(240
)
Total interest-bearing liabilities
(661
)
204
(457
)
Increase (decrease) in tax equivalent
net interest income
$
933
$
508
$
1,441
Change in tax-equivalent basis adjustment
(9
)
Increase in net interest income
$
1,432
(1)
Calculated using the Company's 21% federal tax rate.
(2)
Includes passbook savings, money market passbook and club accounts.
(3) Includes
interest-bearing checking and money market accounts.
(4) Includes
certificates of deposits and individual retirement accounts.
Interest and Dividend Income.
Interest and dividend income increased $975,000, or 3.4%, to $29.5 million for the year ended September 30, 2022 from $28.5 million for
the year ended September 30, 2021. The average balance of interest-earnings assets between the two periods increased $23.0 million, or
3.2%, to $747.7 million from $724.6 million, while the yield on such assets increased 1 basis point to 3.95% for the year ended September
30, 2022 from 3.94% for the year ended September 30, 2021.
The increase in yield on the Company’s
assets was attributable to 1) the reinvestment of repaid Paycheck Protection Program (“PPP”) loans (earning 1.0%) into higher
yielding commercial real estate loans, 2) the receipt of $681,000 in prior period interest income during the year ended September 30,
2022 from previously non-performing loans, and 3) higher market interest rates, which increased the yield on the Company’s interest-earning
deposits with banks. Offsetting these increases was a $1.2 million decrease in PPP loan fees recognized, which totaled $836,000 during
the twelve months ended September 30, 2022 compared with $2.0 million for the twelve months ended September 30, 2021.
Interest income on loans increased
$290,000, or 1.1%, to $27.8 million for the year ended September 30, 2022 from $27.5 million for the year ended September 30, 2021, while
the average balance of loans decreased $4.5 million, or 0.8%, to $600.6 million from $605.2 million. The average yield on such loans increased
nine basis points to 4.64% at September 30, 2022 from 4.55% for the year ended September 30, 2021.
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Interest earned on investment
securities, including interest earned on deposits but excluding FHLBNY stock, increased $702,000, or 79.6%, to $1.6 million for the year
ended September 30, 2022 from $882,000 for fiscal 2021. The increase was attributable to a 35 basis point increase in the average yield
on investment securities and interest earned on deposits to 1.10% from 0.75%, and a $27.9 million, or 23.8%, increase in the average balance
of investment securities and interest earning deposits to $145.5 million from $117.5 million during the year ended September 30, 2022.
Interest Expense. Interest
expense decreased $457,000, or 15.5%, to $2.5 million for the year ended September 30, 2022 from $2.9 million for the year ended September
30, 2021. The average balance of interest-bearing liabilities decreased $21.3 million, or 4.2%, between the two periods while the cost
of such liabilities decreased seven basis points to 0.51% for the year ended September 30, 2022 compared with the prior year period. Lower
market interest rates were primarily responsible for the drop in the cost of the Company’s interest-bearing liabilities for the
year ended September 30, 2022.
The average balance of interest-bearing
deposits increased $7.5 million, or 1.6%, to $470.5 million for the year ended September 30, 2022 from $463.0 million for the prior year
while the average cost of such deposits decreased 5 basis points to 0.44% from 0.49%. Interest expense on deposits decreased $217,000,
or 9.5%, to $2.1 million for the year ended September 30, 2022 from $2.3 million for the year ended September 30, 2021.
Interest expense on advances decreased
$240,000, or 36.7%, to $414,000 for the year ended September 30, 2022 from $654,000 for the year ended September 30, 2021. The average
cost of borrowings increased 86 basis points to 2.25% for the year ended September 30, 2022 from 1.39% for the year ended September 30,
2021 while the average balance of those borrowings decreased $28.8 million to $18.4 million for the year ended September 30, 2022 from
$47.2 million the prior year.
Provision for Loan Losses.
We establish provisions for loan losses, which are charged to earnings, at a level necessary to absorb known and inherent losses that
are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan
losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations
that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, peer group information and prevailing
economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as
more information becomes available or as future events occur.
The provision for loan losses
decreased $1.3 million, or 81.3%, to $304,000 for the year ended September 30, 2022 compared to $1.6 million for the year ended September
30, 2021. The lower provisions resulted from lower qualitative adjustment factors to the historical loss rates in fiscal 2022 compared
with the prior year as well as lower balances in higher risk segments of the loan portfolio. There were net recoveries of $54,000 during
the year ended September 30, 2022 compared with net recoveries of $46,000 for the year ended September 30, 2021.
Other Income. Other
income decreased $694,000, or 20.4%, to $2.7 million during the twelve months ended September 30, 2022 compared to $3.4 million for the
twelve months ended September 30, 2021. Fees for other customer services decreased to $0 for fiscal 2022 from $777,000 for fiscal 2021,
during which the Company received a fee of three percent of the Small Business Relief Grants it assisted with processing.
Higher gains from the sale of
SBA loans helped offset lower interest rate swap fees between periods. The Bank sells the guaranteed portion of its SBA loans in the secondary
market. During the year ended September 30, 2022, $9.5 million in loans were sold, generating $925,000 in gains compared with sales of
$6.4 million and $749,000 in gains for the twelve months ended September 30, 2021. During the twelve months ended September 30, 2022,
the Company generated $76,000 in interest rate swap fees compared with $313,000 for the year ended September 30, 2021.
Other Expenses. Other
expenses decreased $381,000, or 2.0%, to $18.3 million compared to $18.6 million for the year ended September 30, 2021. The decrease was
primarily attributable to professional fees, which decreased $657,000, or 38.2%, due to lower legal and consulting fees related to the
collection and foreclosure of non-performing loans.
Loan servicing expenses and FDIC
deposit insurance premiums decreased $212,000 and $207,000, respectively, from lower levels of non-performing loans and the Company’s
higher capital levels. Partially offsetting these decreases were higher compensation and marketing and business development expenses.
Compensation and benefit expense increased $411,000, or 3.9%, due to annual merit increases, fewer open positions within the Bank, and
higher incentive plan accruals. Marketing and business development expenses increased $221,000, or 97.8%, as the Bank is celebrating its
100 year anniversary with increased events and advertising, while business development opportunities increased as the COVID pandemic restrictions
were lifted.
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Income Tax Expense.
The Company recorded tax expense of $3.3 million on income of $11.2 million for the year ended September 30, 2022 compared with tax expense
of $2.6 million on income of $8.7 million for the year ended September 30, 2021. The higher income tax expense resulted from a $2.5 million
increase in the Company’s results from operations.
The Company’s effective
tax rate for the year ended September 30, 2022 was 29.1% compared with 29.9% for the year ended September 30, 2021.
Management of Market Risk
General . The majority
of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our
assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result,
a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes
in market interest rates. Accordingly, our Board of Directors has established an Asset and Liability Management Committee which is responsible
for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given
our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with
the guidelines approved by the Board of Directors. Senior management monitors the level of interest rate risk on a regular basis and the
Asset and Liability Committee meets at least on a quarterly basis to review our asset/liability policies and interest rate risk position.
We have sought to manage
our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. As part of our ongoing
asset-liability management, we seek to manage our exposure to interest rate risk by retaining in our loan portfolio fewer fixed-rate residential
loans, by originating and retaining adjustable-rate loans in the residential, construction and commercial real estate loan portfolios,
by using alternative funding sources, such as advances from the FHLBNY, to “match fund” longer-term residential and commercial
mortgage loans, and by originating and retaining variable-rate home equity and short-term and medium-term fixed-rate commercial business
loans. We also offer a commercial loan swap product that allows the Bank to receive floating-rate interest loan payments while its borrowers
pay a fixed rate of interest on their loans. We have also increased money market account deposits as a percentage of our total deposits.
Money market accounts offer a variable rate based on market indications. By following these strategies, we believe that we are well-positioned
to react to changes in market interest rates.
Net Interest Income Analysis.
The table below sets forth, as of September 30, 2022, the estimated changes in our Net Interest Income (“NII”) for each of
the next two years that would result from the designated instantaneous changes in interest rates. These estimates require making certain
assumptions including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates.
These assumptions are inherently uncertain and, as a result, we cannot precisely predict the impact of changes in interest rates on net
interest income. Actual results may differ significantly due to timing, magnitude and frequency of interest rate changes and changes in
market conditions. Further, certain shortcomings are inherent in the methodology used in the interest rate risk measurement. Modeling
changes in net interest income require making certain assumptions that may or may not reflect the manner in which actual yields and costs
respond to changes in market interest rates.
Change in
Estimated Decrease
Estimated Increase
Interest rates
Estimated
in NII Year 1
Estimated
(Decrease) in NII Year
2
(Basis Points) (1)
NII Year 1
Amount
Percentage
NII Year 2
Amount
Percentage
(Dollars in thousands)
+200
$
28,550
$
(212
)
-0.74%
$
31,968
$
1,056
3.42%
Unchanged
28,762
—
—
30,912
—
—
-200
27,816
(946
)
-3.29%
28,259
(2,653
)
-8.58%
(1) Assumes
an instantaneous uniform change in interest rates at all maturities.
Liquidity and Capital Resources
Liquidity is the ability
to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan
repayments, FHLBNY borrowings and maturities and sales of investment securities. While maturities and scheduled amortization of loans
and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition. Our Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity
targets and strategies in
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order to ensure that sufficient liquidity
exists for meeting the borrowing needs of our customers as well as unanticipated contingencies. We seek to maintain a liquidity ratio
of 5.0% of assets or greater. The liquidity ratio is calculated by determining the sum of the difference between liquid assets (cash and
unpledged investment securities) and short-term liabilities (estimated 30-day deposit outflows), plus our borrowing capacity from the
FHLBNY and dividing the sum by total assets. At September 30, 2022, our liquidity ratio was 16.6% of assets.
We regularly adjust our
investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows, yields available on interest-earning
deposits and securities, and the objectives of our asset/liability management program. Excess liquid assets are invested generally in
interest-earning deposits and short-and intermediate-term securities.
Our most liquid assets
are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities
during any given period. At September 30, 2022, cash and cash equivalents totaled $30.9 million compared with $75.2 million at September
30, 2021. Securities classified as available-for-sale, which provide additional sources of liquidity from sales, totaled $9.2 million
at September 30, 2022 compared with $12.9 million at September 30, 2021. At September 30, 2022, we also had the ability to borrow $138.9 million
from the FHLBNY compared with $151.2 million at September 30 2021. On that date, we had an aggregate of $15.6 million in advances outstanding
and $40.0 million in municipal letters of credit outstanding with the FHLBNY. Our cash flows are derived from operating activities, investing
activities and financing activities as reported in our consolidated Statements of Cash Flows included in our consolidated Financial Statements.
At September 30, 2022,
we had $52.5 million in loan origination commitments outstanding. In addition to commitments to originate loans, we had $73.8 million
in unused lines of credit to borrowers. Certificates of deposit due within one year of September 30, 2022 totaled $44.6 million, or 6.7%
of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits
and FHLBNY advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than
we currently pay on the certificates of deposit (including individual retirement accounts and brokered certificate deposit accounts) due
on or before September 30, 2023. We believe, however, that based on past experience a significant portion of our certificates of deposit
(including individual retirement accounts and brokered certificate deposit accounts) will remain with us. We have the ability to attract
and retain deposits by adjusting the interest rates offered.
Our primary investing activities
are the origination of loans and the purchase of investment securities. We originated $159.2 million in loans and we purchased $41.1 million
of investment securities for the year ended September 30, 2022. Comparatively, we originated $159.0 million in loans (including $35.3
million in PPP loans) and purchased $49.5 million of investment securities for the year ended September 30, 2021.
Financing activities consist
primarily of activity in deposit accounts and FHLBNY advances. We experienced a net increase in total deposits of $27.9 million, or 4.4%,
to $667.7 million for the year ended September 30, 2022 compared with a net increase in total deposits of $21.5 million, or 3.5%, to $639.8
million for the year ended September 30, 2021. Deposit flows are affected by the overall level of interest rates, the interest rates and
products offered by us and our local competitors and other factors.
Liquidity management is
both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing
agreements exist with the FHLBNY, which provide an additional source of funds. FHLBNY advances totaled $15.6 million and $23.4 million
at September 30, 2022 and September 30, 2021, respectively. FHLBNY advances have primarily been used to fund loan demand.
In addition to borrowings,
the Bank has the ability to raise deposits on the brokered market or through deposit listing services. At September 30, 2022, the Bank
held $6.0 million in brokered deposits and $14.6 million from deposit listing services.
Magyar Bank is subject
to various regulatory capital requirements, (see “Supervision and Regulation-Federal Banking Regulation-Capital Requirements”).
As of September 30, 2022, Magyar Bank’s Tier 1 capital as a percentage of the Bank’s average assets was 11.13% and the total
qualifying capital as a percentage of risk-weighted assets was 16.47%.
Bank-owned life insurance is a
tax-advantaged financing transaction that is used to offset employee benefit plan costs. Policies are purchased insuring directors and
officers of Magyar Bank using a single premium method of payment. Magyar Bank is the owner and beneficiary of the policies and records
tax-free income through cash surrender value accumulation. We have minimized our credit exposure by choosing carriers that are highly
rated and limiting the concentration of any one carrier. The investment in bank-owned life insurance has no significant impact on our
capital and liquidity.
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Off-Balance Sheet Arrangements
and Aggregate Contractual Obligations
Commitments. As
a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments
to extend credit, standby letters of credit and unused lines of credit. While these contractual obligations represent our future cash
requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject
to the same credit policies and approval process accorded to loans made by us. For additional information, see Note P, “Commitments,”
and Note Q “Financial Instruments with Off-Balance-Sheet Risk” to our consolidated financial statements.
Contractual Obligations.
In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for
premises and equipment.
The following table summarizes
our significant fixed and determinable contractual obligations and other funding needs by payment date at September 30, 2022. The payment
amounts represent those amounts due to the recipient and do not include any unamortized premiums or discounts or other similar carrying
amount adjustments.
Payments Due by Period
Less Than
One to
Three to
More Than
September 30, 2022
One Year
Three Years
Five Years
Five Years
Total
(In thousands)
Federal Home Loan Bank advances
$
4,741
$
7,884
$
3,000
$
—
$
15,625
Operating leases
738
1,270
789
1,199
3,996
Total
$
5,479
$
9,154
$
3,789
$
1,199
$
19,621
ITEM 7A.
Quantitative and Qualitative Disclosures
About Market Risk
Not
required for smaller reporting companies.
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