Magyar Bancorp, Inc. 10-K

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview Magyar Bancorp, Inc. (the “Company”) is a Delaware-chartered stock holding company whose most significant business activity is ownership of 100% of the common stock of Magyar Bank. Magyar Bank’s principal business is attracting retail deposits from the general public and investing those deposits, together with funds generated from operations, principal repayments on loans and securities and borrowed funds, into one-to four-family residential mortgage loans, multi-family and commercial real estate mortgage loans, home equity loans and lines of credit, commercial business loans and construction loans. Our results of operations depend primarily on our net interest income which is the difference between the interest we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our net interest income is primarily affected by the market interest rate environment, the shape of the U.S. Treasury yield curve, the timing of the placement of interest-earning assets and interest-bearing liabilities, and the prepayment rate on our mortgage-related assets. Other factors that may affect our results of operations are general and local economic and competitive conditions, government policies and actions of regulatory authorities. During the year ended September 30, 2023, the Company’s total assets grew $108.7 million, or 13.6%, to $907.3 million compared with $798.5 million at September 30, 2022. The increase was attributable to a $69.2 million increase in net loans receivable and a $41.3 million increase in interest-earning deposits with banks, offset by a $4.9 million decrease in investment securities. Total deposits increased $87.7 million, or 13.1%, to $755.5 million and stockholders’ equity increased $6.3 million, or 6.4%, to $104.8 million during the year ended September 30, 2023 The Company’s net income decreased $210,000, or 2.7%, to $7.7 million during the year ended September 30, 2023 compared with net income of $7.9 million for the year ended September 30, 2022. Throughout fiscal 2024, 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 34 allowance required for specific loans. Assumptions for appraisals and discounted cash flow valuations are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly affect the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals and discounted cash flow valuations are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans. Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. We consider a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates by management that may be susceptible to significant change based on changes in economic and real estate market conditions. The evaluation has a specific and general component. The specific component relates to loans that are delinquent or otherwise identified as impaired through the application of our loan review process and our loan grading system. All such loans are evaluated individually, with principal consideration given to the value of the collateral securing the loan and discounted cash flows. Specific impairment allowances are established as required by this analysis. However, the Bank’s Federal and State regulators generally require that the specific reserve against impaired collateral-dependent loans be charged-off, reducing the carrying balance of the loan and allowance for loan loss. The general component is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations in establishing the general portion of the reserve. This analysis establishes factors that are applied to the loan groups to determine the amount of the general component of the allowance for loan losses. Actual loan losses may be significantly greater than the allowances we have established, which could have a material negative effect on our financial results. The Company will adopt Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments on October 1, 2023, using a modified retrospective approach. The Company’s implementation process includes scoping, segmentation and the design of a methodology appropriate for each respective financial instrument. The process also includes the development of loss forecasting models as well as the incorporation of qualitative adjustments. Evaluation of technical accounting topics, updates to our allowance policy documentation, model validation, governance and reporting, processes and related internal controls, as well as overall operational readiness has been completed throughout September 30, 2023 in preparation for adoption. Based on analyses performed during the quarter ending September 30, 2023, as well as an implementation analysis utilizing exposures and forecasts of economic conditions as of September 30, 2023, the Company recorded a reduction to its allowance for credit losses on October 1, 2023 in the amount of $492,000. The reduction was comprised of a reduction in the allowance for on-balance sheet exposures, which includes held to maturity debt securities, totaling $1.0 million and an increase in the allowance for off-balance sheet exposures, which includes unfunded commitments, totaling $540,000. The impact will be reflected as a cumulative effect adjustment, net of taxes. The change in the allowance for credit losses upon adoption will not have a material effect on the Company’s capital and regulatory capital amounts and ratios. 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, 2023 and September 30, 2022 Total Assets. Total assets increased $108.7 million, or 13.6%, to $907.3 million during the year ended September 30, 2023 compared with $798.5 million at September 30, 2022. The change was attributable to a $69.2 million, or 11.2%. increase in loans receivable, net of allowance for loan loss, to $689.1 million and a $41.3 million, or 147.1%, increase in 35 interest-earning deposits with banks to $69.4 million, partially offset by a $4.9 million, or 4.9%, decrease in investment securities to $96.0 million. Loans Receivable. Total loans receivable increased $69.3 million, or 11.0%, to $698.2 million at September 30, 2023 from $628.9 million at September 30, 2022. Growth occurred in commercial real estate loans, which increased $46.3 million, or 13.5%, to $389.1 million, in one-to four-family residential mortgage loans (including home equity lines of credit), which increased $21.6 million, or 9.3%, to $254.7 million, and in construction loans, which increased $6.6 million, or 43.5%, to $21.9 million. Offsetting these increases were decreases in commercial business loans, which decreased $4.5 million, or 12.9%, to $30.2 million and in other consumer loans, which decreased $771,000, or 24.6%, to $2.3 million. Total loans receivable at September 30, 2023 were comprised of $389.1 million (55.8%) in commercial real estate loans, $237.7 million (34.1%) in one- to four- family residential mortgage loans, $30.2 million (4.3%) in commercial business loans, $21.9 million (3.1%) in construction loans, and $19.3 million (2.8%) in home equity lines of credit and other loans. For comparison, 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. Total non-performing loans increased $2.2 million, or 79.3%, to $5.1 million at September 30, 2023 from $2.8 million at September 30, 2022. The ratio of non-performing loans to total loans was 0.7% at September 30, 2023 compared to 0.5% at September 30, 2022. There were two non-performing one-to four-family residential loans totaling $386,000, at September 30, 2023 compared with none at September 30, 2022. The weighted average loan-to-value of these properties was 35% based on updated appraisals of the real estate securing the loans. During the year ended September 30, 2023, there were no charge-offs against the allowance for loan loss for one-to four-family residential real estate loans while $4,000 was recovered from prior year charge-offs. There was one non-performing commercial real estate loan totaling $2.2 million at September 30, 2023, compared with none at September 30, 2022. The loan-to-value of this property was 82% based on an updated appraisal of the real estate securing the loan. Magyar Bank had begun foreclosure proceedings on the property securing this loan and pursuing judgments against the guarantors of the loan at September 30, 2023. During the year ended September 30, 2023 there were no charge-offs against the allowance for loan loss or recoveries for commercial real estate loans. There were no non-performing commercial business loans at September 30, 2023 or 2022. During the year ended September 30, 2023 there were two charge-offs totaling $488,000 against the allowance for loan loss for commercial business loans and no recoveries from prior year charge-offs. There were two non-performing construction loans totaling $2.5 million at September 30, 2023 compared with $2.8 million at September 30, 2022. The weighted average loan-to-value of these properties was 54% based on updated appraisals of the real estate securing the loans. Magyar Bank had begun foreclosure proceedings on the properties securing these loans and pursuing judgments against the guarantors of the loans at September 30, 2023. During the year ended September 30, 2023, there were no charge-offs against the allowance for loan loss or recoveries for construction loans. The ratio of non-performing loans to total loans receivable increased to 0.73% at September 30, 2023 from 0.45% at September 30, 2022. The allowance for loan losses decreased $103,000 to $8.3 million, or 163.9% of non-performing loans at September 30, 2023 compared with $8.4 million, or 297.5% of non-performing loans at September 30, 2022. Provisions for loan loss during the year ended September 30, 2023 were $381,000 while net charge-offs were $484,000, compared with a provision of $304,000 and a net recovery of $54,000 for the prior year. The allowance for loan losses was 1.19% and 1.34% of gross loans outstanding at September 30, 2023 and 2022, respectively. The allowance for loan loss decreased in amount and as a percentage of gross loans during the year from higher balances of lower risk loans and lower balances of higher risk loans in addition to lower adjustments to the historical loss for all loan categories for improving economic conditions. Investment Securities. Investment securities decreased $4.9 million, or 4.9%, to $96.0 million at September 30, 2023 from $100.9 million at September 30, 2022. Investment securities at September 30, 2023 consisted of $65.8 million in mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises, $23.5 million in U.S. government-sponsored enterprise debt securities, $3.0 million in corporate notes, $3.5 million in municipal bonds and 36 $207,000 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, 2023. Securities available-for-sale increased $896,000, or 9.7%, to $10.1 million at September 30, 2023 from $9.2 million at September 30, 2022. The increase was attributable to purchases totaling $2.0 million, partially offset by principal repayments totaling $970,000, premium amortization of $51,000 and unrealized losses of $47,000. Securities held-to-maturity decreased $5.8 million, or 6.3%, to $85.8 million at September 30, 2023 from $91.6 million at September 30, 2022. The decrease was the attributable to principal repayments and maturities totaling $10.3 million and premium amortization of $85,000, partially offset by purchases totaling $4.6 million. Bank-Owned Life Insurance. The cash surrender value of life insurance held for directors and officers of Magyar Bank increased $370,000, or 2.7%, to $18.0 million at September 30, 2023 from $17.7 million at September 30, 2022. The change was due to an increase in the cash surrender value of the policies. The Company did not purchase any new life insurance policies during the year ended September 30, 2023. Other Real Estate Owned. OREO increased $47,000, or 16.7%, to $328,000 at September 30, 2023 from $281,000 at September 30, 2022. The change was due to the capital improvements to the one OREO property held by the Bank, which was under contract for sale at September 30, 2023. 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 businesses, seeking deposits as well as lending relationships. Total deposits increased $87.7 million, or 13.1%, to $755.5 million at September 30, 2023 from $667.7 million at September 30, 2022. The increase in deposits during the year ended September 30, 2023 occurred in money market account balances, which increased $62.7 million, or 28.2%, to $284.9 million, in certificates of deposit (including individual retirement accounts) which increased $22.1 million, or 26.7%, to $104.7 million, in interest-bearing checking account balances, which increased $16.5 million, or 16.8% to $115.2 million, and in non-interest checking account balances, which increased $6.1 million, or 3.4%, to $188.5 million. Offsetting these increases was a decline in savings account balances, which decreased $19.7 million, or 24.1%, to $62.2 million. Included in the Company’s total deposits were $13.8 million in brokered certificates of deposits. The Company held $246.4 million in municipal depositor deposits at September 30, 2023, which represents 32.6% of total deposits. Under State of New Jersey legislation, municipal deposits exceeding 70% of the Bank’s capital must be collateralized. Magyar Bank was in compliance with the State’s requirements at September 30, 2023. The FDIC provides $250,000 of deposit insurance per depositor for each account ownership category. Depositors may qualify for coverage over $250,000 if they have funds in different ownership categories and all FDIC requirements are met. Included in the Company’s total deposits at September 30, 2023 was an estimated $109.3 million that was not collateralized and exceeded the FDIC’s insurance coverage limit. The Company’s deposit strategy in 2023 focused on growing its non-interest checking account balances and managing the overall cost of its interest-bearing liabilities during a period of rapidly rising market interest rates. Borrowed Funds. Borrowings increased $13.9 million, or 88.9%, to $29.5 million at September 30, 2023 compared with $15.6 million at September 30, 2022. The Company borrowed several long-term advances from the FHLBNY during the year ended September 30, 2023 to fund its loan originations. Stockholders’ Equity. Stockholders’ equity increased $6.3 million, or 6.4%, to $104.8 million at September 30, 2023 from $98.5 million at September 30, 2022. The increase was attributable to the Company’s net income from operations totaling $7.7 million, partially offset by $1.3 million in dividends paid to shareholders and $1.2 million in treasury share repurchases. The Company’s book value per share increased to $15.70, based on total equity of $104.8 million and 6,674,184 shares outstanding at September 30, 2023 from $14.60, based on total equity of $98.5 million and 6,745,128 shares outstanding.at September 30, 2022. 37 Comparison of Operating Results for the Years Ended September 30, 2023 and 2022 Net Income. The Company’s net income decreased $210,000, or 2.7%, to $7.7 million during the year ended September 30, 2023 compared with $7.9 million for the year ended September 30, 2022 due to higher non-interest expenses, partially offset by higher net interest and dividend 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, 2023, net interest and dividend income increased $715,000, or 2.6%, to $27.7 million compared to $27.0 million for the year ended September 30, 2022. Interest and dividend income increased $8.6 million, or 29.0%, to $38.1 million at September 30, 2023 from $29.5 million at September 30, 2022, while interest expense increased $7.6 million, or 316.0%, to $10.3 million at September 30, 2023 from $2.5 million at September 30, 2022. The Company’s net interest margin decreased 11 basis points to 3.50% for the year ended September 30, 2023 from 3.61% for the year ended September 30, 2022. Average Balance Sheet. The following table presents certain information regarding our financial condition and net interest income for the years ended September 30, 2023 and 2022. The table presents the average yield on interest-earning assets and the average cost of interest-bearing liabilities. We derived the yields and costs by dividing 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. Interest income on loans includes loan fees, but such amounts were not material for the years ended September 30, 2023 or 2022. 38 Year Ended September 30, 2023 2022 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 $ 22,616 $ 1,040 4.60% $ 53,714 $ 264 0.49% Loans receivable, net (1) 668,870 35,229 5.27% 600,630 27,841 4.64% Securities Taxable 94,519 1,602 1.69% 89,001 1,279 1.44% Tax-exempt (2) 3,370 73 2.17% 2,769 52 1.89% FHLBNY stock 2,020 139 6.89% 1,547 78 5.02% Total interest-earning assets 791,395 38,083 4.81% 747,661 29,514 3.95% Noninterest-earning assets 48,514 45,960 Total assets $ 839,909 $ 793,621 Interest-bearing liabilities: Savings accounts (3) $ 71,148 $ 342 0.48% $ 85,834 $ 156 0.18% NOW accounts (4) 340,126 7,332 2.16% 288,222 1,007 0.35% Time deposits (5) 90,385 1,814 2.01% 96,442 907 0.94% Total interest-bearing deposits 501,659 9,488 1.89% 470,498 2,070 0.44% Borrowings 25,604 846 3.31% 18,399 414 2.25% Total interest-bearing liabilities 527,263 10,334 1.96% 488,897 2,484 0.51% Noninterest-bearing liabilities 207,255 200,702 Total liabilities 734,518 689,599 Retained earnings 105,391 104,022 Total liabilities and retained earnings $ 839,909 $ 793,621 Tax-equivalent basis adjustment (15 ) (11 ) Net interest and dividend income $ 27,734 $ 27,019 Interest rate spread 2.85% 3.44% Net interest-earning assets $ 264,132 $ 258,764 Net interest margin (6) 3.50% 3.61% Average interest-earning assets to average interest-bearing liabilities 150.09% 152.93% (1) The average balance of loans receivable, net includes non-accrual loans. (2) Calculated using the Company's 21% federal tax rate. (3) Includes passbook savings, money market passbook and club accounts. (4) Includes interest-bearing checking and money market accounts. (5) Includes certificates of deposits and individual retirement accounts. (6) Calculated as annualized net interest income divided by average total interest-earning assets. 39 Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the years 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. There were no out-of-period adjustments excluded from the table below September 30, 2023 vs. 2022 Increase (decrease) due to Volume Rate Net (In thousands) Interest-earning assets: Interest-earning deposits $ (235 ) $ 1,011 $ 776 Loans 3,366 4,022 7,388 Securities Taxable 85 238 323 Tax-exempt (1) 12 9 21 FHLBNY stock 27 34 61 Total interest-earning assets 3,256 5,313 8,569 Interest-bearing liabilities: Savings accounts (2) (31 ) 217 186 NOW accounts (3) 213 6,112 6,325 Time deposits (4) (60 ) 967 907 Total interest-bearing deposits 122 7,296 7,418 Borrowings 196 236 432 Total interest-bearing liabilities 318 7,532 7,850 Increase (decrease) in tax equivalent net interest income $ 2,938 $ (2,219 ) $ 719 Change in tax-equivalent basis adjustment (4 ) Increase in net interest income $ 715 (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 $8.6 million, or 29.0%, to $38.1 million for the year ended September 30, 2023 from $29.5 million for the year ended September 30, 2022. The average balance of interest-earnings assets between the two periods increased $43.7 million, or 5.8%, to $791.4 million from $747.7 million, while the yield on such assets increased 86 basis point to 4.81% for the year ended September 30, 2023 from 3.95% for the year ended September 30, 2022. Interest income on loans increased $7.4 million, or 26.5%, to $35.2 million for the year ended September 30, 2023 from $27.8 million for the year ended September 30, 2022, while the average balance of loans increased $68.2 million, or 11.4%, to $668.9 million from $600.6 million. The average yield on such loans increased 63 basis points to 5.27% at September 30, 2023 from 4.64% for the year ended September 30, 2022 from higher market interest rates. Interest earned on investment securities, including interest earned on deposits but excluding FHLBNY stock, increased $1.1 million, or 70.5%, to $2.7 million for the year ended September 30, 2023 from $1.6 million for fiscal 2022. The increase was attributable to a 115 basis point increase in the average yield on investment securities and interest earned 40 on deposits to 2.25% from 1.10%, partially offset by a $25.0 million, or 17.2%, decrease in the average balance of investment securities and interest earning deposits to $120.5 million from $145.5 million during the year ended September 30, 2022. Interest Expense. Interest expense increased $7.9 million, or 316.0%, to $10.3 million for the year ended September 30, 2023 from $2.5 million for the year ended September 30, 2022. The average balance of interest-bearing liabilities increased $38.4 million, or 7.8%, to $527.3 million from $488.9 million between the two periods while the average cost on such interest-bearing liabilities increased 145 basis points to 1.96% for the year ended September 30, 2023 from 0.51% for the year ended September 30, 2022. Higher market interest rates were primarily responsible for the increase in the cost of the Company’s interest-bearing liabilities for the year ended September 30, 2023. The average balance of interest-bearing deposits increased $31.2 million, or 6.6%, to $501.7 million for the year ended September 30, 2023 from $470.5 million for the year ended September 30, 2022 while the average cost on such interest-bearing deposits increased 145 basis points to 1.89% from 0.44%. Average expense on interest-bearing deposits increased $7.4 million, or 358.4%, to 9.5 million at September 30, 2023 compared with $2.1 million at September 30, 2022. Interest expense on advances increased $432,000, or 104.3%, to $846,000 for the year ended September 30, 2023 from $414,000 for the year ended September 30, 2022. The average cost of borrowings increased 106 basis points to 3.31% for the year ended September 30, 2023 from 2.25% for the year ended September 30, 2022 while the average balance of those borrowings increased $7.2 million to $25.6 million for the year ended September 30, 2023 from $18.4 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 increased $77,000, or 25.3%, to $381,000 for the year ended September 30, 2023 compared to $304,000 for the year ended September 30, 2022. There were $488,000 in loan charge-offs and $4,000 in loan recoveries for the year ended September 30, 2023 compared with no loan charge-offs and $54,000 in loan recoveries for the year ended September 30, 2022. Other Income. Other income decreased $33,000, or 1.2%, to $2.7 million during the year ended September 30, 2023 compared with the year ended September 30, 2022 from lower gains on the sale of SBA loans, partially offset by higher service charge income between periods. The Bank sells the guaranteed portion of the SBA 7(a) program loans it originates in the secondary market. Gains from the sale of SBA loans were $565,000 during the year ended September 30, 2023 compared with $925,000 during the year ended September 30, 2022 due to a reduction in the volume of loans sold. Service charge income increased $404,000, or 34.0%, to $1.6 million compared with $1.2 million for the prior year from higher commercial loan prepayment fees received during the current year. The Company received $423,000 in prepayment penalties during the year ended September 30, 2023, compared with $130,000 during the year ended September 30, 2022. Other Expenses. Other expenses increased $1.0 million, or 5.7%, to $19.3 million compared to $18.3 million for the year ended September 30, 2022 due primarily to higher compensation, benefit, FDIC insurance premium and occupancy expenses, partially offset by lower professional fees. Compensation and benefit expense increased $650,000, or 6.2%, to $11.1 million for the year ended September 30, 2023 from $10.5 million for the year ended September 30, 2022. Stock award and stock option expenses related to the Company’s 2022 Equity Incentive Plan accounted for a $658,000 increase in compensation expense. In addition, the Company incurred higher director fees, which increased $149,000 during the year ended September 30, 2023 from the prior year due to the addition of three new directors. 41 Deposit insurance premiums increased $125,000, or 58.1%, to $340,000 for the year ended September 30, 2023 from $215,000 for the year ended September 30, 2022 from higher insurance assessment rates implemented by the FDIC for all insured institutions effective January 1, 2023. Occupancy expenses increased $171,000, or 5.7%, to $3.2 million for the year ended September 30, 2023 from $3.0 million for the year ended September 30, 2022. The increase was attributable to additional maintenance and repairs to the Bank’s branch locations, the elimination of off-site records previously held in storage and inflationary increases in computer processing and communications. Professional fees decreased $307,000, or 28.9%, to $755,000 for the year ended September 30, 2023 from $1.1 million for the year ended September 30, 2022 from lower legal and consulting fees related to the collection and foreclosure of non-performing assets. Income Tax Expense. The Company recorded tax expense of $3.0 million on income of $10.7 million for the year ended September 30, 2023 compared with tax expense of $3.3 million on income of $11.2 million for the year ended September 30, 2022. The lower income tax expense resulted from a $428,000, or 3.8%, decrease in the Company’s results from operations. The Company’s effective tax rate for the year ended September 30, 2023 was 28.2% compared with 29.1% for the year ended September 30, 2022. 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 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, 2023, 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. 42 Change in Estimated Increase Estimated Increase Interest rates Estimated (Decrease) 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 $ 31,325 $ 391 1.26% $ 35,685 $ 1,789 5.28% Unchanged 30,934 — — 33,896 — — -200 30,273 (661 ) -2.14% 31,547 (2,349 ) -6.93% (1) Assumes an instantaneous uniform change in interest rates at all maturities. Liquidity and Capital Resources Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, FHLBNY borrowings and maturities and sales of investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs of our customers as well as unanticipated contingencies. We seek to maintain a liquidity ratio of 5.0% of assets or greater. The liquidity ratio is calculated by determining the sum of the difference between liquid assets (cash and unpledged investment securities) and short-term liabilities (estimated 30-day deposit outflows), plus our borrowing capacity from the FHLBNY and dividing the sum by total assets. At September 30, 2023, our liquidity ratio was 9.7% 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, 2023, cash and cash equivalents totaled $72.5 million compared with $30.9 million at September 30, 2022. Securities classified as available-for-sale, which provide additional sources of liquidity from sales, totaled $10.1 million at September 30, 2023 compared with $9.2 million at September 30, 2022. At September 30, 2023, we also had the ability to borrow $230.1 million from the FHLBNY compared with $138.9 million at September 30 2022. On that date, we had an aggregate of $29.5 million in advances outstanding and $80.0 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, 2023, we had $30.1 million in loan origination commitments outstanding. In addition to commitments to originate loans, we had $89.9 million in unused lines of credit to borrowers. Certificates of deposit due within one year of September 30, 2023 totaled $43.8 million, or 5.8% 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, 2024. 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 $188.5 million in loans and purchased $6.6 million of investment securities during the year ended September 30, 2023. Comparatively, we originated $159.2 million in loans and purchased $41.1 million of investment securities during the year ended September 30, 2022. Financing activities consist primarily of activity in deposit accounts and FHLBNY advances. We experienced a net increase in total deposits of $87.7 million, or 13.1%, to $755.5 million for the year ended September 30, 2023 compared with a net decrease in total deposits of $27.9 million, or 4.4%, to $667.7 million for the year ended September 30, 2022. 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. 43 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 $29.5 million and $15.6 million at September 30, 202 and 2022, 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, 2023, the Bank held $13.8 million in brokered deposits and $14.0 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, 2023, Magyar Bank’s Tier 1 capital as a percentage of the Bank’s average assets was 11.11% and the total qualifying capital as a percentage of risk-weighted assets was 16.22%. Bank-owned life insurance is a tax-advantaged financing transaction that is used to offset employee benefit plan costs. Policies are purchased insuring directors and officers of Magyar Bank using a single premium method of payment. Magyar Bank is the owner and beneficiary of the policies and records tax-free income through cash surrender value accumulation. We have minimized our credit exposure by choosing carriers that are highly rated and limiting the concentration of any one carrier. The investment in bank-owned life insurance has no significant impact on our capital and liquidity. Off-Balance Sheet Arrangements and Aggregate Contractual Obligations Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit, standby letters of credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans made by us. For additional information, see Note P, “Commitments,” and Note Q “Financial Instruments with Off-Balance-Sheet Risk” to our consolidated financial statements. Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment. ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk Not required for smaller reporting companies. 44