Magyar Bancorp, Inc. 10-K

ITEM 8. Financial Statements and Supplementary Data Table of Contents Consolidated Financial Statements: Report of Independent Registered Public Accounting Firms (PCAOB IDs 74 and 49) 46 Consolidated Balance Sheets as of September 30, 2023 and 2022 50 Consolidated Statements of Income for the Years Ended September 30, 2023 and 2022 51 Consolidated Statements of Comprehensive Income for the Years Ended September 30, 2023 and 2022 52 Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended September 30, 2023 and 2022 53 Consolidated Statements of Cash Flows for the Years Ended September 30, 2023 and 2022 54 Notes to Consolidated Financial Statements 55 45 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Magyar Bancorp, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of Magyar Bancorp, Inc. and subsidiary (the “Company”) as of September 30, 2023; the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the year then ended; and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2023, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent, with respect to the Company, in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the Audit Committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involve our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter, in any way, our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Allowance for Loan Losses (ALL) – Qualitative Factors Description of the Matter The Company’s loan portfolio totaled $697.4 million as of September 30, 2023, and the associated ALL was $8.3 million. As discussed in Notes B and E to the consolidated financial statements, determining the amount of the ALL requires significant judgment about the collectability of loans, which includes an assessment of quantitative factors such as historical loss experience within each risk category of loans and testing of certain commercial loans for impairment. Management applies additional qualitative adjustments to reflect the inherent losses that exist in the loan portfolio at the balance sheet date that are not reflected in the historical loss experience. Qualitative adjustments are made based upon changes in policy and staff, economic and business conditions, nature and volume of portfolio, trends in underperforming loans, trends in collateral value, concentrations of credit, legal and regulatory landscape, and other factors. We identified these qualitative adjustments within the ALL as critical audit matters because they involve a high degree of subjectivity. In turn, auditing management’s judgments regarding the qualitative factors applied in the ALL calculation involved a high degree of subjectivity. 46 How We Addressed the Matter in Our Audit We gained an understanding of the Company’s process for establishing the ALL, including the qualitative adjustments made to the ALL. We evaluated the design and tested the operating effectiveness of controls over the Company’s ALL process, which included, among others, management’s review and approval controls designed to assess the need and level of qualitative adjustments to the ALL, as well as the reliability of the data utilized to support management’s assessment. Regarding the measurement of the qualitative adjustments, we evaluated the completeness, accuracy, and relevance of the data and inputs utilized in management’s estimate. We evaluated the reasonableness of the conclusions reached by management for both directional consistency and magnitude related to the underlying data. We also utilized internal credit review specialists with knowledge to evaluate the appropriateness of management’s risk-rating processes, to ensure that the risk ratings applied to the commercial loan portfolio were reasonable. We have served as the Company’s auditor since 2023. /s/ S.R. Snodgrass, P.C. Cranberry Township, Pennsylvania December 15, 2023 47 Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders Magyar Bancorp, Inc. and Subsidiary Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of Magyar Bancorp, Inc. and Subsidiary (the Company) as of September 30, 2022, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows, for the year then ended, and the related notes (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2022, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ( PCAOB ) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 48 Allowance for Loan Losses – Qualitative Factors The allowance for loan losses as of September 30, 2022 was $8.4 million. As described in Notes B and E to the consolidated financial statements, the allowance for loan losses is established through a provision for loan losses and represents an amount which, in management’s judgement, will be adequate to absorb losses on existing loans. The allowance consists of specific and general components in the amounts of $0.1 million and $8.3 million, respectively. The specific component relates to loans that are delinquent or otherwise identified as impaired by management. All such loans are evaluated individually, with principal consideration given to the value of the collateral securing the loan and discounted cash flows. Specific impairment allowances are established as required by this analysis. The general loan loss allocation component is determined by segregating the remaining loans by type of loan, risk weighting, and payment history. This analysis establishes historical loss factors based on a five year look back period that are applied to the loan groups adjusted for the following qualitative factors: levels of and trends in delinquency rates and non-accrual loans, volume and loan term trends, changes in the lending policy, national and local economic trends and conditions, changes in concentrations of credit from a loan type, industry and/or geographic standpoint, the experience, ability and depth of lending management, and trends in collateral value. The evaluation of the qualitative factors requires a significant amount of judgement by management and involves a high degree of subjectivity. We identified the qualitative factor component of the allowance for loan losses as a critical audit matter as auditing the underlying qualitative factors required significant auditor judgment as amounts determined by management rely on analysis that is often subjective in nature and the estimate is highly sensitive to changes in significant assumptions. Our audit procedures related to the qualitative factors of the allowance for loan losses included the following, among others: ● We obtained an understanding of how management developed the estimates and related assumptions, including: − Testing completeness and accuracy of key data inputs used in forming assumptions or calculations and testing the reliability of the underlying data on which these factors are based by comparing information to source documents and external information sources. − Evaluating the reasonableness of the qualitative factors established by management as compared to the underlying internal or external information sources. /s/ RSM US LLP We served as the Company’s auditor from 2018 to 2023. Blue Bell, Pennsylvania December 22, 2022 49 MAGYAR BANCORP, INC. AND SUBSIDIARY Consolidated Balance Sheets (In Thousands, Except Share and Per Share Data) September 30, 2023 2022 Assets Cash $ 3,179 $ 2,869 Interest earning deposits with banks 69,353 28,067 Total cash and cash equivalents 72,532 30,936 Investment securities - available-for-sale, at fair value 10,125 9,229 Investment securities - held-to-maturity, at amortized cost (fair value of $ 73,728 and $ 79,914 at September 30, 2023 and 2022, respectively) 85,835 91,646 Federal Home Loan Bank of New York stock, at cost 2,286 1,447 Loans receivable, net of allowance for loan losses of $ 8,330 and $ 8,433 at September 30, 2023 and 2022, respectively 689,070 619,843 Bank owned life insurance 18,030 17,660 Accrued interest receivable 4,337 3,478 Premises and equipment, net 13,339 13,880 Other real estate owned ("OREO") 328 281 Other assets 11,410 10,143 Total assets $ 907,292 $ 798,543 Liabilities and Stockholders' Equity Liabilities Deposits $ 755,453 $ 667,733 Escrowed funds 3,494 3,407 Borrowings 29,515 15,625 Accrued interest payable 443 85 Accounts payable and other liabilities 13,597 13,191 Total liabilities 802,502 700,041 Stockholders' equity Preferred stock: $ .01 Par Value, 500,000 shares authorized; at September 30, 2023 and 2022, none issued — — Common stock: $ .01 Par Value, 14,000,000 shares authorized; 7,097,825 shares issued; 6,674,184 and 6,745,128 shares outstanding at September 30, 2023 and 2022, respectively, at cost 71 71 Additional paid-in capital 62,801 63,734 Treasury stock: 423,641 and 465,693 shares at September 30, 2023 and 2022, respectively, at cost ( 5,362 ) ( 5,793 ) Unearned Employee Stock Ownership Plan shares ( 3,097 ) ( 3,169 ) Retained earnings 52,166 45,773 Accumulated other comprehensive loss ( 1,789 ) ( 2,114 ) Total stockholders' equity 104,790 98,502 Total liabilities and stockholders' equity $ 907,292 $ 798,543 The accompanying notes are an integral part of these consolidated financial statements. 50 MAGYAR BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Income (In Thousands, Except Share and Per Share Data) Years Ended September 30, 2023 2022 Interest and dividend income Loans, including fees $ 35,229 $ 27,841 Investment securities Taxable 2,642 1,543 Tax-exempt 58 41 Federal Home Loan Bank of New York stock 139 78 Total interest and dividend income 38,068 29,503 Interest expense Deposits 9,488 2,070 Borrowings 846 414 Total interest expense 10,334 2,484 Net interest and dividend income 27,734 27,019 Provision for loan losses 381 304 Net interest and dividend income after provision for loan losses 27,353 26,715 Other income Service charges 1,592 1,188 Income on bank owned life insurance 370 372 Interest rate swap fees 57 76 Other operating income 98 87 Gains on sales of loans 565 925 Gains on sale of OREO — 67 Total other income 2,682 2,715 Other expenses Compensation and employee benefits 11,134 10,484 Occupancy expenses 3,187 3,016 Professional fees 755 1,062 Data processing expenses 579 556 Director fees and benefits 784 546 Marketing and business development 366 447 FDIC deposit insurance premiums 340 215 Other expenses 2,149 1,935 Total other expenses 19,294 18,261 Income before income tax expense 10,741 11,169 Income tax expense 3,032 3,250 Net income $ 7,709 $ 7,919 Earnings per share - basic $ 1.20 $ 1.17 Earnings per share - diluted $ 1.20 $ 1.17 Weighted average shares outstanding - basic 6,424,796 6,781,659 Weighted average shares outstanding - diluted 6,424,796 6,781,659 The accompanying notes are an integral part of these consolidated financial statements. 51 MAGYAR BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Comprehensive Income (In Thousands) Years Ended September 30 2023 2022 Net income $ 7,709 $ 7,919 Other comprehensive income (loss) Unrealized loss on securities available for sale ( 47 ) ( 1,744 ) Defined benefit pension plan gain 516 211 Other comprehensive income (loss), before tax 469 ( 1,533 ) Deferred income tax effect ( 144 ) 366 Total other comprehensive income (loss) $ 325 $ ( 1,167 ) Total comprehensive income $ 8,034 $ 6,752 The accompanying notes are an integral part of these consolidated financial statements. 52 MAGYAR BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Changes in Stockholders' Equity For the Years Ended September 30, 2023 and 2022 (In Thousands, Except for Share and Per-Share Amounts) Accumulated Common Stock Additional Unearned Other Shares Par Paid-In Treasury ESOP Retained Comprehensive Outstanding Value Capital Stock Shares Earnings Loss Total Balance, September 30, 2021 7,097,825 $ 71 $ 63,713 $ ( 1,242 ) $ ( 3,235 ) $ 39,281 $ ( 947 ) $ 97,641 Net income — — — — — 7,919 — 7,919 Dividends paid on common stock ($ 0.21 per share) — — — — — ( 1,427 ) — ( 1,427 ) Other comprehensive loss — — — — — — ( 1,167 ) ( 1,167 ) Common stock acquired by ESOP — — — — ( 98 ) — — ( 98 ) ESOP shares allocated — — 15 — 164 — — 179 Purchase of treasury stock ( 352,697 ) — — ( 4,551 ) — — — ( 4,551 ) Stock-based compensation expense — — 6 — — — — 6 Balance, September 30, 2022 6,745,128 $ 71 $ 63,734 $ ( 5,793 ) $ ( 3,169 ) $ 45,773 $ ( 2,114 ) $ 98,502 Net income — — — — — 7,709 — 7,709 Dividends paid on common stock ($ 0.20 per share) — — — — — ( 1,315 ) — ( 1,315 ) Other comprehensive income — — — — — — 325 325 Treasury stock used for restricted stock plan 32,080 — ( 405 ) 406 — ( 1 ) — — ESOP shares allocated — — 50 — 72 — — 122 Retirement of 112,996 treasury shares — — ( 1,242 ) 1,242 — — — — Purchase of treasury stock ( 103,024 ) — — ( 1,217 ) — — — ( 1,217 ) Stock-based compensation expense — — 664 — — — — 664 Balance, September 30, 2023 6,674,184 $ 71 $ 62,801 $ ( 5,362 ) $ ( 3,097 ) $ 52,166 $ ( 1,789 ) $ 104,790 The accompanying notes are an integral part of these consolidated financial statements. 53 MAGYAR BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows (In Thousands) For the Years Ended September 30, 2023 2022 Operating activities Net income $ 7,709 $ 7,919 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 840 839 Premium amortization on investment securities, net 137 191 Provision for loan losses 381 304 Originations of SBA loans held for sale ( 6,494 ) ( 9,533 ) Proceeds from the sales of SBA loans 7,059 10,457 Gains on sale of loans ( 565 ) ( 925 ) Gains on the sales of other real estate owned — ( 67 ) Gains on the sale of premises and equipment ( 9 ) — ESOP compensation expense 122 179 Stock-based compensation expense 664 6 Deferred income tax (benefit) expense ( 615 ) 152 (Increase) decrease in accrued interest receivable ( 859 ) 55 Increase in surrender value of bank owned life insurance ( 370 ) ( 372 ) Increase in other assets ( 280 ) ( 1,555 ) Increase in accrued interest payable 358 — (Decrease) increase in accounts payable and other liabilities 406 3,551 Net cash provided by operating activities 8,484 11,201 Investing activities Net increase in loans receivable ( 56,258 ) ( 37,235 ) Purchases of loans receivable ( 13,350 ) — Proceeds from the sale of loans receivable — 2,389 Purchases of investment securities held-to-maturity ( 4,587 ) ( 41,138 ) Purchases of investment securities available-for-sale ( 1,965 ) — Principal repayments on investment securities held-to-maturity 10,313 7,040 Principal repayments on investment securities available-for-sale 970 1,875 Purchases of bank owned life insurance — ( 3,000 ) Purchases of premises and equipment ( 309 ) ( 387 ) Proceeds from the sale of premises and equipment 19 — Investment in other real estate owned ( 47 ) ( 12 ) Proceeds from other real estate owned — 434 Purchase of Federal Home Loan Bank stock ( 5,820 ) ( 466 ) Redemption of Federal Home Loan Bank stock 4,981 757 Net cash used in investing activities ( 66,053 ) ( 69,743 ) Financing activities Net increase in deposits 87,720 27,919 Purchase of common stock for ESOP — ( 98 ) Net increase in escrowed funds 87 165 Proceeds from long-term advances 18,631 3,000 Repayments of long-term advances ( 4,741 ) ( 10,731 ) Cash dividends paid on common stock ( 1,315 ) ( 1,427 ) Purchase of treasury stock ( 1,217 ) ( 4,551 ) Net cash provided by financing activities 99,165 14,277 Net increase (decrease) in cash and cash equivalents 41,596 ( 44,265 ) Cash and cash equivalents, beginning of year 30,936 75,201 Cash and cash equivalents, end of year $ 72,532 $ 30,936 Supplemental disclosures of cash flow information Cash paid for Interest $ 9,977 $ 2,485 Income taxes $ 3,255 $ 3,140 The accompanying notes are an integral part of these consolidated financial statements. 54 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 NOTE A - ORGANIZATION Magyar Bancorp, Inc. (the “Company”) is a Delaware-chartered bank holding company. The Company owns 100 % of the outstanding common stock of Magyar Bank (the “Bank”), a New Jersey-chartered stock savings bank. The Bank offers consumer and commercial banking services to individuals, businesses, and nonprofit organizations throughout the central New Jersey area through its administrative office in New Brunswick, New Jersey and seven full-service branch offices in Middlesex and Somerset Counties in New Jersey. The Company is subject to regulation and supervision by the Board of Governors of the Federal Reserve System. The Bank is supervised and regulated by the Federal Deposit Insurance Corporation (the “FDIC”) and the New Jersey Department of Banking and Insurance. Magyar Investment Company, a New Jersey investment corporation subsidiary of the Bank, was formed on August 15, 2006 for the purpose of buying, selling and holding investment securities. Magyar Service Corporation, a New Jersey corporation, is a wholly owned, non-bank subsidiary of the Bank. Magyar Service Corporation, which also operates under the name Magyar Financial Services, receives commissions from annuity and life insurance sales referred to a licensed, non-bank financial planner. Hungaria Urban Renewal, LLC is a Delaware limited-liability corporation established in 2002 as a qualified intermediary operating for the purpose of acquiring and developing the Bank’s new main office. The Bank owns a 100 % interest in Hungaria Urban Renewal, LLC, which has no other business other than owning the Bank’s main office site. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. Basis of Financial Statement Presentation The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“US GAAP”) and predominant practices within the banking industry. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, the Bank, and its wholly-owned subsidiaries Magyar Investment Company, Magyar Service Corporation, and Hungaria Urban Renewal, LLC. All intercompany balances and transactions have been eliminated in the consolidated financial statements. The Company has evaluated subsequent events and transactions occurring subsequent to the consolidated balance sheet date of September 30, 2023, for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were available to be issued. In preparing financial statements in conformity with US GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The principal estimates that are particularly susceptible to significant change in the near term relate to the allowance for loan losses and the deferred tax asset. The evaluation of the adequacy of the allowance for loan losses includes an analysis of the individual loans and overall risk characteristics and size of the different loan portfolios, and takes into consideration current economic and market conditions, the capability of specific borrowers to pay specific loan obligations, as well as current loan collateral values. However, actual losses on specific loans, which also are encompassed in the analysis, may vary from estimated losses. The Company records income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities: (i) are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns; (ii) are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases; and (iii) are measured using enacted tax rates expected to apply in the years when those temporary differences are expected to be recovered or settled. 55 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 Where applicable, deferred tax assets are reduced by a valuation allowance for any portions determined not likely to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period of enactment. The valuation allowance is adjusted, by a charge or credit to income tax expense, as changes in facts and circumstances warrant. 2. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, time deposits with original maturities less than three months and overnight deposits. 3. Investment Securities The Company classifies its investment securities into one of two portfolios: held to maturity or available for sale. Investments in debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity securities and reported at amortized cost. Debt securities not classified as held to maturity securities are classified as available for sale securities and reported at fair value, with unrealized holding gains or losses, net of deferred income taxes, reported in the accumulated other comprehensive income (“AOCI”) component of stockholders’ equity. Equity securities, with certain exceptions, are measured at fair value with changes in fair value recognized in net income. If the fair value of a security is less than its amortized cost, the security is deemed to be impaired. Management evaluates all securities with unrealized losses quarterly to determine if such impairments are “temporary” or “other-than-temporary” in accordance with applicable accounting guidance. The Company accounts for temporary impairments based upon security classification as either available for sale or held to maturity. Temporary impairments on “available for sale” securities are recognized, on a tax-effected basis, through AOCI with offsetting entries adjusting the carrying value of the security and the balance of deferred taxes. Conversely, the Company does not adjust the carrying value of “held to maturity” securities for temporary impairments, although information concerning the amount and duration of impairments on held to maturity securities is generally disclosed in periodic consolidated financial statements. The 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. Premiums and discounts on all securities are amortized or accreted to maturity by use of the level-yield method considering the impact of principal amortization and prepayments on mortgage-backed securities. Gain or loss on sales of securities is recognized on the specific identification method. 4. Regulatory Stock, at Cost Federal law requires a member institution of the Federal Home Loan Bank (“FHLB”) system to purchase and hold restricted stock of its district FHLB according to a predetermined formula. The Company invests in Federal Home Loan Bank of New York stock as required to support borrowing activities, as detailed in Note J to these consolidated financial statements. Although FHLB stock is an equity interest in a FHLB, it does not have a readily determinable fair value because its ownership is restricted and it lacks a market. FHLB stock can be sold back only at its par value of $ 100 per share and only to the FHLBs or to another member institution. Accordingly, the FHLB restricted stock is carried at cost, less any applicable impairment charges. 5. Loans and Allowance for Loan Losses Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal, adjusted for net deferred loan fees and costs, and reduced by an allowance for loan losses. Interest on loans is accrued and credited to operations based upon the principal amounts outstanding. The allowance for loan losses is established through a provision for possible loan losses charged to operations. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. 56 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 Income recognition of interest is discontinued when, in the opinion of management, the collectability of such interest becomes doubtful. A loan is generally classified as non-accrual when the scheduled payment(s) due on the loan is delinquent for more than 90 days. When a loan is placed on non-accrual, all previously accrued and unpaid interest is reversed. Loan origination fees and certain direct origination costs are deferred and amortized over the life of the related loans as an adjustment to the yield on loans receivable using the effective interest method. The allowance for loan losses is maintained at an amount management deems adequate to cover estimated losses. In determining the level to be maintained, management evaluates many factors, including current economic trends, industry experience, historical loss experience, industry loan concentrations, the borrowers’ ability to repay and repayment performance, and estimated collateral values. In the opinion of management, the present allowance is adequate to absorb reasonable, foreseeable loan losses. While management uses the best information available to make such evaluations, future adjustments to the allowance may be necessary based on changes in economic conditions or any of the other factors used in management’s determination. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for losses on loans. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Charge-offs to the allowance are made when the loan is transferred to other real estate owned or other determination of a confirmed loss. Recoveries on loans previously charged off are also recorded through the allowance. A loan is considered impaired when, based upon current information and events, it is probable that a creditor will be unable to collect all amounts due including principal and interest, according to the contractual terms of the loan agreement. The Company measures impaired loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate or as a practical expedient, at the loan’s current observable market price, or the fair value of the collateral if the loan is collateral dependent. The amount by which the recorded investment of an impaired loan exceeds the measurement value is recognized by creating a valuation allowance through a charge to the provision for loan losses. Impairment criteria generally do not apply to those smaller-balance homogeneous loans that are collectively evaluated for impairment which, for the Company, includes one- to four-family first mortgage loans and consumer loans, other than those modified in a troubled debt restructuring. The Company records cash receipts on impaired loans that are non-performing as a reduction to principal before applying amounts to interest or late charges unless specifically directed by the Bankruptcy Court to apply payments otherwise. The Company may continue to recognize interest income on impaired loans where there is no confirmed loss. 6. Premises and Equipment Premises and equipment are carried at cost less accumulated depreciation, and include capitalized expenditures for new facilities, major betterments and renewals. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method based upon the estimated useful lives of the related assets for financial reporting purposes and using the mandated methods by asset type for income tax purposes. Leasehold improvements are depreciated using the straight-line method based upon the initial term of the lease. The Company accounts for the impairment of long-lived assets in accordance with US GAAP, which requires recognition and measurement for the impairment of long-lived assets to be held and used or to be disposed of by sale. The Company had no impaired long-lived assets at September 30, 2023 and 2022. 7. Revenue Recognition The Company recognizes revenue in the consolidated statements of income as it is earned and when collectability is reasonably assured. The primary source of revenue is interest income from interest earning assets, which is recognized on the accrual basis of accounting using the effective interest method. The recognition of revenues from interest earning assets is based upon formulas from underlying loan agreements, securities contracts, or other similar contracts. Non-interest income is recognized on the accrual basis of accounting as services are provided or as transactions occur. Non-interest income includes earnings on bank-owned life insurance, deposit accounts, merchant services, ATM and debit card fees, mortgage banking activities, commercial loan prepayment penalties and other miscellaneous services and transactions. 57 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 The Company’s contracts with customers in the scope of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, “ Revenue from Contracts with Customers ” are contracts for deposit accounts and contracts for non-deposit investment accounts through a third party service provider. Both types of contracts result in non-interest income being recognized. The revenue resulting from deposit accounts, which includes fees such as insufficient funds fees, wire transfer fees and out-of-network ATM transaction fees, is included as a component of service charges on the Consolidated Statements of Income. The revenue resulting from non-deposit investment accounts is included as a component of other operating income on the Consolidated Statements of Income. Revenue from contracts with customers included in service charges was $ 1.6 million and $ 1.2 million for the years ended September 30, 2023 and 2022, respectively. Revenue from contracts with customers included in other operating income was $ 98,000 and $ 87,000 for the years ended September 30, 2023 and 2022, respectively. For our contracts with customers, we satisfy our performance obligations each day as services are rendered. For our deposit account revenue, we receive payment on a daily basis as services are rendered and for our non-deposit investment account revenue, we receive payment on a monthly basis from our third party service provider as services are rendered. 8. Other Real Estate Owned Real estate acquired through foreclosure, or a deed-in-lieu of foreclosure, is recorded at fair value less estimated selling costs at the date of acquisition or transfer, and subsequently at the lower of its net cost or fair value less estimated selling costs. Adjustments to the carrying value at the date of acquisition or transfer are charged to the allowance for loan losses. The carrying value of the individual properties is subsequently adjusted to the extent it exceeds estimated fair value less estimated selling costs, at which time a provision for losses on such real estate is charged to operations. The Company accounts for gains on sales of other real estate owned under ASC Topic 606 Revenue from Contracts with Customers , which uses a principles based methodology. As it pertains to the criteria for determining how a contract should be accounted for under the new guidance, judgment is required in evaluating if: (a) a commitment on the buyer’s part exists, (b) collection is probable in circumstances where the initial investment is minimal and (c) the buyer has obtained control of the asset, including the significant risks and rewards of the ownership. If there is no commitment on the buyer’s part, collection is not probable or the buyer has not obtained control of the asset, then a gain cannot be recognized under the new guidance. Operating expenses of holding real estate, net of related income, are charged against income as incurred. Losses on the disposition of real estate, including expenses incurred in connection with the disposition, are charged to operations. 9. Pension and Postretirement Plans The Company sponsors qualified defined benefit pension plan and supplemental executive retirement plan (“SERP”). The qualified defined benefit pension plan is funded with trust assets invested in a diversified portfolio of debt and equity securities. Accounting for pensions and other postretirement benefits involves estimating the cost of benefits to be provided well into the future and attributing that cost over the time period each employee works. This involves extensive use of assumptions about inflation, investment returns, mortality, turnover, and discount rates. Among other factors, changes in interest rates, investment returns and the market value of plan assets can (i) affect the level of plan funding; (ii) cause volatility in the net periodic pension cost; and (iii) increase our future contribution requirements. A significant decrease in investment returns or the market value of plan assets or a significant decrease in interest rates could increase our net periodic pension costs and adversely affect our results of operations. A significant increase in our contribution requirements with respect to our qualified defined benefit pension plan could have an adverse impact on our cash flow. Changes in the key actuarial assumptions would impact net periodic benefit expense and the projected benefit obligation for our defined benefit and other postretirement benefit plan. See Note L, “Pension Plan,” and Note M, “Non-Qualified Compensation Plan” for information on these plans and the assumptions used. 58 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 10 . Income Taxes The Company and its subsidiaries file consolidated federal and state income tax returns. Income taxes are allocated based on the contribution of their respective income or loss to the consolidated income tax returns. The Company records income taxes on the basis of reported income using the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. To the extent that current available evidence about the future raises doubt about the realization of a deferred tax asset, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company follows the provisions of FASB ASC Topic 740, which provides clarification on accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. At September 30, 2023 and 2022, no significant income tax uncertainties have been included in the Company’s Consolidated Balance Sheets. The Company’s policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense in the Consolidated Statements of Income. No interest and penalties were recorded during the year ended September 30, 2023 and 2022. The tax years subject to examination by the taxing authorities are the years ended September 30, 2018 and forward. 11. Advertising Costs The Company expenses advertising costs as incurred. 12. Earnings Per Share Basic income per share is calculated by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding for the period. The weighted average common shares outstanding include shares allocated to the Employee Stock Ownership Plan. Diluted income per share is calculated by adjusting the weighted average common shares outstanding to reflect the potential dilution that could occur using the treasury stock method if securities or other contracts to issue common stock, such as stock options and unvested restricted stock, were exercised and converted into common stock. The resulting shares issued would share in the earnings of the Company. Shares issued and shares reacquired during the period are weighted for the portion of the period that they were outstanding. In periods of loss, dilution is not calculated and diluted loss per share is equal to basic loss per share. The following tables illustrate the reconciliation of the numerators and denominators of the basic and diluted earnings per share (“EPS”) calculations. 59 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 Years Ended September 30, 2023 2022 (Dollars in thousands, except share and per share data) Income applicable to common shares $ 7,709 $ 7,919 Weighted average shares outstanding - basic 6,424,796 6,781,659 Potential diliutive common stock equivalents — — Weighted average shares outstanding - diluted 6,424,796 6,781,659 Earnings per share - basic $ 1.20 $ 1.17 Earnings per share - diluted $ 1.20 $ 1.17 All options were anti-dilutive at September 30, 2023 and 2022. 13. Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss) Comprehensive income (loss) includes net income as well as certain other items which result in a change to equity during the period. The other items allocated to comprehensive income (loss), as well as the related income tax effects, for the years ended September 30, 2023 and 2022 were as follows: September 30, 2023 2022 Tax Net of Tax Net of Before Tax (Benefit) Tax Before Tax (Benefit) Tax Amount Expense Amount Amount Expense Amount (In thousands) Unrealized holding gain (loss) arising during period on: Available-for-sale investments $ ( 47 ) $ 12 $ ( 35 ) $ ( 1,744 ) $ 429 $ ( 1,315 ) Defined benefit pension plan 394 ( 122 ) 272 65 ( 22 ) 43 Total unrealized holding gain (loss) arising during period 347 ( 110 ) 237 ( 1,679 ) 407 ( 1,272 ) Reclassification of pension costs 122 ( 34 ) 88 146 ( 41 ) 105 Other comprehensive income (loss), net $ 469 $ ( 144 ) $ 325 $ ( 1,533 ) $ 366 $ ( 1,167 ) (a) All amounts are net of tax. Related income tax expense or benefit calculated using an income tax rate approximating 25 % for available-for-sale investments and 28 % for pension plan. Details about the reclassification of accumulated other comprehensive income (loss) components and the affected line item in the Consolidated Statement of Income for the years ended September 30, 2023 and 2022 were as follows: 60 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 Amount Reclassified From Accumulated Other Comprehensive Loss For the Year Ended September 30, Affected Line Item in the Consolidated Statement of Income 2023 2022 (In thousands) Defined benefit pension plan (1) Amortization of net gain (loss) and prior service costs $ 122 $ 146 Compensation and employee benefits Related income tax expense ( 34 ) ( 41 ) Income taxes Net effect on accumulated other comprehensive loss 88 105 Total reclassification $ 88 $ 105 (1) For additional details related to the defined benefit pension plan see Note L - Pension Plan The components of accumulated other comprehensive loss at September 30, 2023 and 2022 were as follows: September 30, 2023 2022 (In thousands) Available-for-sale investments, net of tax $ ( 1,481 ) $ ( 1,446 ) Defined benefit pension plan, net of tax ( 308 ) ( 668 ) Total accumulated other comprehensive loss $ ( 1,789 ) $ ( 2,114 ) (a) Related income tax benefit calculated using an income tax rate approximating 25% for available-for-sale investments and 28% for pension plan. 14. Bank-Owned Life Insurance The Company has purchased Bank-Owned Life Insurance policies (“BOLI”). BOLI involves the purchasing of life insurance by the Company on directors and officers of the Bank. The proceeds are used to help defray the costs of non-qualified compensation plans. The Company is the owner and beneficiary of the policies. BOLI is recorded on the Consolidated Balance Sheets at its cash surrender value and changes in the cash surrender value are recorded in other income in the Consolidated Statements of Income. 15. Off-Balance Sheet Credit Related Financial Instruments In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under commercial lines of credit. Such financial instruments are recorded when they are funded. The Company does not engage in the use of derivative financial instruments. See Note Q, “Financial Instruments With Off-Balance Risk.” 16. Segment Reporting The Company acts as an independent, community, financial services provider, and offers traditional banking and related financial services to individual, business and government customers. The Company offers a full array of commercial and retail financial services, including the taking of time, savings and demand deposits; the making of commercial, consumer and home equity loans; and the provision of other financial services. Management does not separately allocate expenses, including the cost of funding loan demand, between the commercial and retail operations of the Company. As such, discrete financial information is not available and segment reporting would not be meaningful. 61 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 17. New Accounting Pronouncements In connection with the preparation of quarterly and annual reports in accordance with the Securities and Exchange Commission’s (“SEC”) Securities Exchange Act of 1934, SEC Staff Accounting Bulletin Topic 11.M requires the disclosure of the impact that recently issued accounting standards will have on financial statements when they are adopted in the future. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments . ASU 2016-13 requires entities to report “expected” credit losses on financial instruments and other commitments to extend credit rather than the current “incurred loss” model. These expected credit losses for financial assets held at the reporting date are to be based on historical experience, current conditions, and reasonable and supportable forecasts. This ASU will also require enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. With certain exceptions, transition to the new requirements will be through a cumulative-effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This update is effective for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Accordingly, the Company will adopt this guidance effective October 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost, including loans, available-for-sale debt securities and unfunded commitments. The Company expects to record a cumulative effect increase to retained earnings related to on-balance sheet exposures (loans receivable) and a decrease to retained earnings related to off-balance sheet exposures (unfunded loan commitments). The Company determined that there was no impact to retained earnings related to available-for-sale or held-to-maturity debt securities as a result of adopting this guidance. In January 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020 , to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls “reference rate reform” if certain criteria are met. An entity that makes this election would not have to re-measure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The sunset provision included in Topic 848 was based on the expectations of when LIBOR would cease being published. In March 2021, the UK Financial Conduct Authority announced that the intended cessation date of LIBOR would be June 30, 2023, which is beyond the established sunset date of Topic 848. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 . The amendments in this ASU provide temporary relief by deferring the sunset date provision included in Topic 848. The amendments in ASU 2022-06 defer the effective date for all entities upon issuance through December 31, 2024. These updates are not expected to have a significant impact on the Company’s financial statements. In March 2022, the FASB issued ASU 2022-02, F inancial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures . The amendments in this ASU eliminate the accounting guidance for troubled debt restructurings (TDRs) by creditors in Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinances and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, for public business entities, the amendments in this ASU require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost . For entities that have not yet adopted the amendments in Update 2016-13, which is discussed in greater detail above, the effective dates for the amendments in this update are the same as the effective dates in Update 2016-13. These updates are not expected to have a significant impact on the Company’s financial statements, other than enhanced disclosure. 62 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 18. Subsequent Events On October 30, 2023, the Company announced that its Board of Directors has approved a quarterly cash dividend of $ 0.04 per common share to shareholders of record at the close of business on November 9, 2023, payable on November 24, 2023. On November 15, 2023, the Company declared a special dividend of $ 0.07 per common share, payable on December 12, 2023, to shareholders of record at the close of business on November 28, 2023. NOTE C – STOCK-BASED COMPENSATION AND STOCK REPURCHASE PROGRAM The Company follows FASB ASC Section 718, Compensation-Stock Compensation , which covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. ASC 718 requires that compensation cost relating to share-based payment transactions be recognized in financial statements. The cost is measured based on the fair value of the equity or liability instruments issued. ASC 718 also requires the Company to realize as a financing cash flow rather than an operating cash flow, as previously required, the benefits of realized tax deductions in excess of previously recognized tax benefits on compensation expense. In accordance with SEC Staff Accounting Bulletin (“SAB”) No. 107, the Company classified share-based compensation for employees and outside directors within “compensation and employee benefits” in the Consolidated Statements of Income to correspond with the same line item as the cash compensation paid. Stock options generally vest over a five-year service period and expire ten years from issuance. Management recognizes compensation expense for all option grants over the awards’ respective requisite service periods. The fair values of all option grants were estimated using the Black-Scholes option-pricing model. Since there was limited historical information on the volatility of the Company’s stock, management also considered the average volatilities of similar entities for an appropriate period in determining the assumed volatility rate used in the estimation of fair value. Management estimated the expected life of the options using the simplified method allowed under SAB No. 107. The seven-year Treasury yield in effect at the time of the grant provided the risk-free rate for periods within the contractual life of the option. Management recognizes compensation expense for the fair values of these awards, which have graded vesting, on a straight-line basis over the requisite service period of the awards. Management estimated a 95% retention rate for stock option recipients. Once vested, these awards are irrevocable. Shares will be obtained from either the open market or treasury stock upon share option exercise. Restricted shares generally vest over a five-year service period on the anniversary of the grant date. Once vested, these awards are irrevocable. The product of the number of shares granted and the grant date market price of the Company’s common stock determine the fair value of restricted shares under the Company’s restricted stock plans. Management recognizes compensation expense for the fair value of restricted shares on a straight-line basis over the requisite service period. On August 25, 2022, the Company adopted the 2022 Equity Compensation Plan which provided for grants of up to 547,400 shares to be allocated between incentive and non-qualified stock options and restricted stock awards to officers, employees and directors of the Company and Magyar Bank. At September 30, 2023, 293,200 options and 156,400 shares of restricted stock had been awarded from the plan. The following is a summary of the status of the Company’s stock option activity and related information for its option plan for the year ended September 30, 2023: 63 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life in Years Aggregate Intrinsic Value Balance at September 30, 2022 293,200 $ 12.58 9.98 $ — Granted — — — — Exercised — — — — Forfeited — — — — Expired — — — — Balance at September 30, 2023 293,200 $ 12.58 8.98 $ — Exercisable at September 30, 2023 58,640 $ 12.58 8.98 $ — The following is a summary of the status of the Company’s non-vested restricted shares as of September 30, 2023 and 2022, and changes during those years: Shares Weighted Average Grant Date Fair Value Balance at September 30, 2022 156,400 $ 12.63 Granted — — Vested ( 32,080 ) 12.63 Forfeited — — Balance at September 30, 2023 124,320 $ 12.63 Stock option and stock award expenses included with compensation expense were $ 259,000 and $ 405,000 , respectively, for the year ended September 30, 2023. Stock option and stock award expenses included with compensation expense were $ 0 and $ 6,000 , respectively, for the year ended September 30, 2022. The Company had no other stock-based compensation plans as of September 30, 2023 except as disclosed below. The Company has an Employee Stock Ownership Plan ("ESOP") for the benefit of employees who meet certain eligibility requirements. The ESOP trust purchases shares of common stock in the open market using proceeds of a loan from the Company. The loan is secured by shares of the Company’s stock. The Bank makes cash contributions to the ESOP on an annual basis sufficient to enable the ESOP to make the required loan payments to the Company. As the debt is repaid, shares are released as collateral and allocated to qualified employees. Accordingly, the shares pledged as collateral are reported as unearned ESOP shares in the Consolidated Balance Sheets. The Company accounts for its ESOP in accordance with FASB ASC Topic 718, “ Employer’s Accounting for Employee Stock Ownership Plans .” As shares are released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations. In connection with the Company’s second-step stock offering, the ESOP trustees purchased, 8 % of the shares of the Company common stock sold in the offering, or 312,800 shares, in the open market for $ 3.4 million, reflecting an average cost per share of $ 10.77 . The ESOP loan bears a variable interest rate that adjusts annually to Prime Rate ( 7.50 % at January 1, 2023) with principal and interest payable annually in equal installments over 30 years. The following table presents the components of the ESOP shares for the years ended September 30, 2023 and 2022: 64 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 Unreleased shares at September 30, 2021 304,377 Shares released for allocation during the year ended September 30, 2022 ( 10,427 ) Shares purchased by ESOP trustee during the year ended September 30, 2022 8,423 Unreleased shares at September 30, 2022 302,373 Shares released for allocation during the year ended September 30, 2023 ( 12,060 ) Shares purchased by ESOP trustee during the year ended September 30, 2023 — Unreleased shares at September 30, 2023 290,313 Total released shares 182,485 Total ESOP shares 472,798 The Company's contribution expense for the ESOP was $ 122,000 and $ 179,000 for years ended September 30, 2023 and 2022, respectively. The aggregate fair value of the unreleased ESOP shares at September 30, 2023 was approximately $ 3.0 million. On December 8, 2022, the Company announced the completion of its third stock repurchase program, under which 354,891 shares had been repurchased at an average price of $ 12.90 . The Company announced its fourth authorization of an additional stock repurchase plan pursuant to which the Company intends to repurchase up to an additional 5 % of its outstanding shares, or up to 337,146 shares, under which 100,830 shares had been repurchased at an average price of $ 11.80 . Under this stock repurchase program, 236,316 shares of the 337,146 shares authorized remained available for repurchase as of September 30, 2023. The Company’s intended use of the repurchased shares is for general corporate purposes. The Company held treasury stock shares totaling 423,641 at September 30, 2023. The timing of the repurchases will depend on certain factors, including but not limited to, market conditions and prices, the Company’s liquidity requirements and alternative uses of capital. NOTE D - INVESTMENT SECURITIES The following table summarizes the amortized cost and fair values of securities classified as available-for-sale and held-to-maturity at September 30, 2023: 65 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 September 30, 2023 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (In thousands) Securities available-for-sale: Obligations of U.S. government agencies: Mortgage backed securities - residential $ 106 $ — $ ( 14 ) $ 92 Obligations of U.S. government-sponsored enterprises: Mortgage-backed securities-residential 11,984 — ( 1,951 ) 10,033 Total securities available-for-sale $ 12,090 $ — $ ( 1,965 ) $ 10,125 Securities held-to-maturity: Obligations of U.S. government agencies: Mortgage-backed securities - residential $ 5,070 $ — $ ( 850 ) $ 4,220 Mortgage-backed securities - commercial 2,509 — ( 16 ) 2,493 Obligations of U.S. government-sponsored enterprises: Mortgage backed securities - residential 48,086 — ( 8,480 ) 39,606 Debt securities 23,497 — ( 1,947 ) 21,550 Private label mortgage-backed securities - residential 207 — ( 12 ) 195 Obligations of state and political subdivisions 3,466 — ( 605 ) 2,861 Corporate securities 3,000 — ( 197 ) 2,803 Total securities held-to-maturity $ 85,835 $ — $ ( 12,107 ) $ 73,728 Total investment securities $ 97,925 $ — $ ( 14,072 ) $ 83,853 The following table summarizes the amortized cost and fair values of securities classified as available-for-sale and held-to-maturity at September 30, 2022: September 30, 2022 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (In thousands) Securities available-for-sale: Obligations of U.S. government agencies: Mortgage backed securities - residential $ 118 $ — $ ( 11 ) $ 107 Obligations of U.S. government-sponsored enterprises: Mortgage-backed securities-residential 11,029 — ( 1,907 ) 9,122 Total securities available-for-sale $ 11,147 $ — $ ( 1,918 ) $ 9,229 Securities held-to-maturity: Obligations of U.S. government agencies: Mortgage-backed securities - residential $ 5,525 $ — $ ( 717 ) $ 4,808 Mortgage-backed securities - commercial 631 — — 631 Obligations of U.S. government-sponsored enterprises: Mortgage backed securities - residential 48,961 12 ( 7,548 ) 41,425 Debt securities 24,821 — ( 2,395 ) 22,426 Private label mortgage-backed securities - residential 224 — ( 10 ) 214 Obligations of state and political subdivisions 3,484 — ( 638 ) 2,846 Corporate securities 8,000 — ( 436 ) 7,564 Total securities held-to-maturity $ 91,646 $ 12 $ ( 11,744 ) $ 79,914 Total investment securities $ 102,793 $ 12 $ ( 13,662 ) $ 89,143 66 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 The contractual maturities of mortgage-backed securities generally exceed 10 years, however, the effective lives are expected to be shorter due to anticipated prepayments. At September 30, 2023, the available-for-sale mortgage-backed securities-residential included obligations of U.S. government agencies issued by the Government National Mortgage Association with an amortized cost of $ 106,000 and a fair value of $ 92,000 and obligations of U.S. government-sponsored enterprises issued by Federal National Mortgage Association and Federal Home Loan Mortgage Corporation with an amortized cost of $ 12.0 million and a fair value of $ 10.0 million. At September 30, 2023, the held-to-maturity mortgage-backed securities–residential included obligations of U.S. government agencies issued by the Government National Mortgage Association with an amortized cost of $ 5.1 million and a fair value of $ 4.2 million and obligations of U.S. government-sponsored enterprises issued by Federal National Mortgage Association and Federal Home Loan Mortgage Corporation with an amortized cost of $ 48.1 million and a fair value of $ 39.6 million. The maturities of debt securities, municipal bonds and certain information regarding mortgage-backed securities held-to-maturity at September 30, 2023 are summarized in the following table: September 30, 2023 Amortized Fair Cost Value (In thousands) Due within 1 year $ 6,498 $ 6,393 Due after 1 but within 5 years 18,526 16,900 Due after 5 but within 10 years 4,939 3,921 Due after 10 years — — Total debt securities 29,963 27,214 Mortgage backed securities: Residential 53,363 44,021 Commercial 2,509 2,493 Total $ 85,835 $ 73,728 There were no sales of securities during the years ended September 30, 2023 and 2022. As of September 30, 2023 and 2022, investment securities having an estimated fair value of approximately $ 12.0 million and $ 37.7 million, respectively, were pledged to secure public deposits. Details of securities with unrealized losses at September 30, 2023 and 2022 are as follows: 67 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 Less Than 12 Months 12 Months Or Greater Total Number of Fair Unrealized Fair Unrealized Fair Unrealized Securities Value Losses Value Losses Value Losses (Dollars in thousands) September 30, 2023 Obligations of U.S. government agencies: Mortgage-backed securities - residential 6 $ — $ — $ 4,312 $ ( 864 ) $ 4,312 $ ( 864 ) Mortgage-backed securities - commercial 2 1,926 ( 14 ) 567 ( 2 ) 2,493 ( 16 ) Obligations of U.S. government-sponsored enterprises Mortgage-backed securities - residential 50 4,938 ( 49 ) 44,485 ( 10,382 ) 49,423 ( 10,431 ) Debt securities 12 — — 21,550 ( 1,947 ) 21,550 ( 1,947 ) Private label mortgage-backed securities residential 1 — — 195 ( 12 ) 195 ( 12 ) Obligations of state and political subdivisions 7 789 ( 43 ) 2,072 ( 562 ) 2,861 ( 605 ) Corporate securities 1 — — 2,803 ( 197 ) 2,803 ( 197 ) Total 79 $ 7,653 $ ( 106 ) $ 75,984 $ ( 13,966 ) $ 83,637 $ ( 14,072 ) September 30, 2022 Obligations of U.S. government agencies: Mortgage-backed securities- residential 6 $ 2,364 $ ( 140 ) $ 2,551 $ ( 588 ) $ 4,915 $ ( 728 ) Mortgage-backed securities - commercial 1 631 — — — 631 — Obligations of U.S. government-sponsored enterprises Mortgage backed securities- residential 49 21,180 ( 2,795 ) 29,088 ( 6,660 ) 50,268 ( 9,455 ) Debt securities 14 11,664 ( 660 ) 10,763 ( 1,735 ) 22,427 ( 2,395 ) Private label mortgage-backed securities- residential 1 215 ( 10 ) — — 215 ( 10 ) Obligations of state and political subdivisions 7 1,268 ( 181 ) 1,577 ( 457 ) 2,845 ( 638 ) Corporate securities 2 2,646 ( 353 ) 4,917 ( 83 ) 7,563 ( 436 ) Total 80 $ 39,968 $ ( 4,139 ) $ 48,896 $ ( 9,523 ) $ 88,864 $ ( 13,662 ) The investment securities listed above currently have fair values less than amortized cost and therefore contain unrealized losses. The Company evaluated these securities and determined that the decline in value was primarily related to fluctuations in the interest rate environment and were not related to any company or industry specific event. The Company anticipates full recovery of amortized costs with respect to these securities. The Company does not intend to sell these securities and has determined that it is not more likely than not that the Company would be required to sell these securities prior to maturity or market price recovery. Management has considered factors regarding other than temporarily impaired securities and determined that there are no securities with impairment that is other than temporary as of September 30, 2023 and 2022. NOTE E - LOANS RECEIVABLE, NET Loans receivable are comprised of the following: September 30, 2023 2022 (In thousands) One-to four-family residential $ 237,683 $ 214,377 Commercial real estate 389,134 342,791 Construction 21,853 15,230 Home equity lines of credit 16,983 18,704 Commercial business 30,194 34,672 Other 2,359 3,130 Total loans receivable 698,206 628,904 Net deferred loan costs ( 806 ) ( 628 ) Allowance for loan losses ( 8,330 ) ( 8,433 ) Total loans receivable, net $ 689,070 $ 619,843 68 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 Certain directors and executive officers of the Company have loans with the Bank. Such loans were made in the ordinary course of business at the Bank’s normal credit terms, including interest rate and collateralization, and do not represent more than a normal risk of collection. Total loans receivable from directors and executive officers, and affiliates thereof, were approximately $ 5.1 million at September 30, 2023 and $ 2.3 million at September 30, 2022. There were $ 2.9 million and $ 738,000 in new loans or advances on existing lines of credit during the year ended September 30, 2023 and 2022, respectively. Total principal repayments were approximately $ 142,000 and $ 731,000 for the year ended September 30, 2023 and 2022, respectively. At September 30, 2023 and 2022, the Company was servicing loans for others amounting to approximately $ 48.1 million and $ 43.6 million, respectively. The Company held mortgage servicing rights in the amount of $ 28,000 and $ 0 at September 30, 2023 and 2022, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors, and foreclosure processing. Loan servicing income is recorded on the cash basis and includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees. In connection with loans serviced for others, the Company held borrowers’ escrow balances of approximately $ 27,000 at September 30, 2023 and 2022. The segments of the Bank’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The residential mortgage loan segment is further disaggregated into two classes: first lien, amortizing term loans, and the combination of second lien amortizing term loans and home equity lines of credit. The commercial loan segment is further disaggregated into three classes: loans secured by multifamily structures, loans secured by owner-occupied commercial structures, and loans secured by non-owner occupied nonresidential properties. The construction loan segment consists primarily of developers or investors for the purpose of acquiring, developing and constructing residential or commercial structures and to a lesser extent one-to-four family residential construction loans made to individuals for the acquisition of and/or construction on a lot or lots on which a residential dwelling is to be built. Construction loans to developers and investors have a higher risk profile because the ultimate buyer, once development is completed, is generally not known at the time of the loan. The commercial business loan segment consists of loans made for the purpose of financing the activities of commercial customers and consists primarily of revolving lines of credit. The consumer loan segment consists primarily of stock-secured installment loans, but also includes unsecured personal loans and overdraft lines of credit connected with customer deposit accounts. Management evaluates individual loans in all segments for possible impairment if the loan either is in nonaccrual status, or is risk rated Substandard and is 90 days or more past due. Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Once the determination has been made that a loan is impaired, the recorded investment in the loan is compared to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s current observable market price; or (c) the fair value of the collateral securing the loan, less anticipated selling and disposition costs. The method is selected on a loan-by loan basis, with management primarily utilizing the fair value of collateral method. If there is a shortfall between the fair value of the loan and the recorded investment in the loan, the Company charges the difference to the allowance for loan loss as a charge-off and carries the impaired loan on its books at fair value. It is the Company’s policy to evaluate impaired loans on an annual basis to ensure the recorded investment in a loan does not exceed its fair value. The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary for the periods presented: 69 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 Impaired Loans Impaired Loans with with No Specific Specific Allowance Allowance Total Impaired Loans Unpaid At and for the year ended Recorded Related Recorded Recorded Principal September 30, 2023 Investment Allowance Investment Investment Balance (In thousands) One-to four-family residential $ — $ — $ 2,031 $ 2,031 $ 2,031 Commercial real estate — — 2,969 2,969 2,969 Construction — — 2,474 2,474 2,539 Commercial business — — 147 147 147 Total impaired loans $ — $ — $ 7,621 $ 7,621 $ 7,686 At and for the year ended September 30, 2022 One-to four-family residential $ — $ — $ 1,512 $ 1,512 $ 1,512 Commercial real estate — — 1,159 1,159 1,159 Construction 2,835 114 — 2,835 2,900 Commercial business — — 153 153 153 Total impaired loans $ 2,835 $ 114 $ 2,824 $ 5,659 $ 5,724 The average recorded investment in impaired loans was $ 5.9 million and $ 8.1 million for the years ended September 30, 2023 and 2022, respectively. During the years ended September 30, 2023 and 2022, interest income of $ 96,000 and $ 135,000 , respectively, was recognized for performing TDR loans while no interest income was recognized for delinquent non-accrual loans. Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than three months past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category. To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as severe delinquency, bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. The Bank’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. The Asset Review Committee performs monthly reviews of all commercial relationships internally rated 6 (“Watch”) or worse. Confirmation of the appropriate risk grade is performed by an external loan review company that semi-annually reviews and assesses loans within the portfolio. Generally, the external consultant reviews commercial relationships greater than $500,000 and/or criticized relationships greater than $250,000. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a monthly basis. The following tables present the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the Bank’s internal risk rating system for the periods presented: 70 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 Special Pass Mention Substandard Doubtful Total (In thousands) September 30, 2023 One-to four-family residential $ 236,876 $ — $ 807 $ — $ 237,683 Commercial real estate 386,794 116 2,224 — 389,134 Construction 19,379 — 2,474 — 21,853 Home equity lines of credit 16,983 — — — 16,983 Commercial business 30,194 — — — 30,194 Other 2,359 — — — 2,359 Total $ 692,585 $ 116 $ 5,505 $ — $ 698,206 September 30, 2022 One-to four-family residential $ 213,173 $ 980 $ 224 $ — $ 214,377 Commercial real estate 342,593 198 — — 342,791 Construction 10,652 — 4,578 — 15,230 Home equity lines of credit 18,704 — — — 18,704 Commercial business 34,672 — — — 34,672 Other 3,130 — — — 3,130 Total $ 622,924 $ 1,178 $ 4,802 $ — $ 628,904 Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans for the periods presented: 30-59 60-89 Days Days 90 Days + Total Non- Total Current Past Due Past Due Past Due Past Due Accrual Loans (In thousands) September 30, 2023 One-to four-family residential $ 236,729 $ — $ 568 $ 386 $ 954 $ 386 $ 237,683 Commercial real estate 386,794 — 116 2,224 2,340 2,224 389,134 Construction 19,379 — — 2,474 2,474 2,474 21,853 Home equity lines of credit 16,983 — — — — — 16,983 Commercial business 30,047 147 — — 147 — 30,194 Other 2,359 — — — — — 2,359 Total $ 692,291 $ 147 $ 684 $ 5,084 $ 5,915 $ 5,084 $ 698,206 30-59 60-89 Days Days 90 Days + Total Non- Total Current Past Due Past Due Past Due Past Due Accrual Loans (In thousands) September 30, 2022 One-to four-family residential $ 213,903 $ 300 $ 174 $ — $ 474 $ — $ 214,377 Commercial real estate 342,404 — 387 — 387 — 342,791 Construction 12,395 — — 2,835 2,835 2,835 15,230 Home equity lines of credit 18,704 — — — — — 18,704 Commercial business 34,672 — — — — — 34,672 Other 3,130 — — — — — 3,130 Total $ 625,208 $ 300 $ 561 $ 2,835 $ 3,696 $ 2,835 $ 628,904 71 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 The amount of interest income not recognized on non-accrual loans was approximately $ 309,000 and $ 220,000 for the years ended September 30, 2023 and 2022, respectively. At September 30, 2023 and September 30, 2022, there were no commitments to lend additional funds to borrowers whose loans are classified as non-accrual. An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans. The Bank’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (discussed above) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance. Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative and economic factors. The loans are segmented into classes based on their inherent varying degrees of risk, as described above. Management tracks the historical net charge-off activity by segment and utilizes this figure, as a percentage of the segment, as the general reserve percentage for pooled, homogenous loans that have not been deemed impaired. Typically, an average of losses incurred over five historical years is used. Non-impaired credits are segregated for the application of qualitative factors. Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: national and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint. Management maintained or increased several of these factors during the year ended September 30, 2023 due to the higher risk of credit loss resulting from the a higher likelihood of economic recession and its ongoing impact on borrowers. Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL. Since loans individually evaluated for impairment are promptly written down to their fair value, typically there is no portion of the ALL for loans individually evaluated for impairment. The following tables summarize the activity in the allowance for loan losses by loan category for the years ended September 30, 2023 and 2022: One-to Four- Home Equity Family Commercial Lines of Commercial Residential Real Estate Construction Credit Business Other Unallocated Total (In thousands) Balance-September 30, 2022 $ 1,223 $ 4,612 $ 461 $ 263 $ 1,484 $ 1 $ 389 $ 8,433 Charge-offs — — — — ( 488 ) — — ( 488 ) Recoveries 4 — — — — — — 4 Provision (credit) 32 665 11 ( 56 ) ( 57 ) 1 ( 215 ) 381 Balance-September 30, 2023 $ 1,259 $ 5,277 $ 472 $ 207 $ 939 $ 2 $ 174 $ 8,330 72 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 One-to Four- Home Equity Family Commercial Lines of Commercial Residential Real Estate Construction Credit Business Other Unallocated Total (In thousands) Balance-September 30, 2021 $ 1,136 $ 3,744 $ 594 $ 232 $ 2,046 $ 15 $ 308 $ 8,075 Charge-offs — — — — — — — — Recoveries 1 53 — — — — — 54 Provision (credit) 86 815 ( 133 ) 31 ( 562 ) ( 14 ) 81 304 Balance-September 30, 2022 $ 1,223 $ 4,612 $ 461 $ 263 $ 1,484 $ 1 $ 389 $ 8,433 The following tables summarize the allowance for loan loss by loan category, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of September 30, 2023 and September 30, 2022: One-to-Four Home Equity Family Commercial Lines of Commercial Residential Real Estate Construction Credit Business Other Unallocated Total (In thousands) Balance - September 30, 2023 $ 1,259 $ 5,277 $ 472 $ 207 $ 939 $ 2 $ 174 $ 8,330 Individually evaluated for impairment — — — — — — — — Collectively evaluated for impairment 1,259 5,277 472 207 939 2 174 8,330 Loans receivable: Balance - September 30, 2023 $ 237,683 $ 389,134 $ 21,853 $ 16,983 $ 30,194 $ 2,359 $ — $ 698,206 Individually evaluated for impairment 2,031 2,969 2,474 — 147 — — 7,621 Collectively evaluated for impairment 235,652 386,165 19,379 16,983 30,047 2,359 — 690,585 One-to- Four Home Equity Family Commercial Lines of Commercial Residential Real Estate Construction Credit Business Other Unallocated Total (In thousands) Balance - September 30, 2022 $ 1,223 $ 4,612 $ 461 $ 263 $ 1,484 $ 1 $ 389 $ 8,433 Individually evaluated for impairment — — 114 — — — — 114 Collectively evaluated for impairment 1,223 4,612 347 263 1,484 1 389 8,319 Loans receivable: Balance - September 30, 2022 $ 214,377 $ 342,791 $ 15,230 $ 18,704 $ 34,672 $ 3,130 $ — $ 628,904 Individually evaluated for impairment 1,512 1,159 2,835 — 153 — — 5,659 Collectively evaluated for impairment 212,865 341,632 12,395 18,704 34,519 3,130 — 623,245 The allowance for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that the segmentation of the loan portfolio into homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date. A TDR is a loan that has been modified whereby the Bank has agreed to make certain concessions to a borrower to meet the needs of both the borrower and the Bank to maximize the ultimate recovery of a loan. TDR occurs when a borrower is experiencing, or is expected to experience, financial difficulties and the loan is modified using a modification that would otherwise not be granted to the borrower. The types of concessions granted generally included, but are not limited to interest rate reductions, limitations on the accrued interest charged, term extensions, and deferment of principal. 73 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 A default on a troubled debt restructured loan for purposes of this disclosure occurs when a borrower is 90 days past due or a foreclosure or repossession of the applicable collateral has occurred. There was one TDR totaling $ 106,000 during the year ended September 30, 2023, compared with no TDR loans during the year ended September 30, 2022. All TDR loans were performing in accordance with their restructured terms as September 30, 2023. The following tables summarizes the TDRs during the years ended September 30 , 2023 and 2022: Number of Investment Before Investment After Loans TDR Modification TDR Modification (Dollars in thousands) September 30, 2023 One-to four-family residential 1 $ 97 $ 106 Total 1 $ 97 $ 106 September 30, 2022 Total — $ — $ — Total loans pledged as collateral against Federal Home Loan Bank of New York (“FHLBNY”) borrowings were $ 341.6 million and $ 181.2 million as of September 30, 2023 and 2022, respectively. NOTE F - PREMISES AND EQUIPMENT Premises and equipment consist of the following: Estimated September 30, Useful Lives 2023 2022 (In thousands) Land Indefinite $ 3,811 $ 3,811 Buildings and improvements 10 - 40 years 21,923 21,866 Furniture, fixtures and equipment 5 - 10 years 3,860 3,762 29,594 29,439 Less accumulated depreciation ( 16,255 ) ( 15,559 ) Premises and equipment, net $ 13,339 $ 13,880 For the years ended September 30, 2023 and 2022, depreciation expense included in occupancy expense amounted to approximately $ 840,000 and $ 839,000 , respectively. NOTE G - OTHER REAL ESTATE OWNED The Company held $ 328,000 of real estate owned properties at September 30, 2023 and $ 281,000 at September 30, 2022. The Company did not have any write-downs on these properties for the year ended September 30, 2023 and 2022. Further declines in real estate values may result in increased foreclosed real estate expense in the future. Routine holding costs are charged to expense as incurred and improvements to real estate owned that enhance the value of the real estate are capitalized. NOTE H - DEPOSITS A summary of deposits by type of account follows: 74 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 September 30, 2023 2022 (In thousands) Demand accounts $ 188,550 $ 182,417 Savings accounts 62,168 81,850 NOW accounts 115,182 98,643 Money market accounts 284,885 222,214 Certificate of deposit 92,725 69,929 Retirement accounts 11,943 12,680 Total deposits $ 755,453 $ 667,733 The current FDIC insurance limit on bank deposit accounts is $ 250,000 . The aggregate amount of deposit accounts with a denomination of $250,000 or more was approximately $ 429.9 million at September 30, 2023 compared with $ 292.4 million at September 30, 2022. The aggregate amount of certificate deposits, including individual retirement accounts with balances of $250,000 or more was $ 5.3 million at September 30, 2023 compared with $ 3.6 million at September 30, 2022. At September 30, 2023, certificates of deposit (including retirement accounts and brokered certificate deposit accounts) have contractual maturities as follows (in thousands): Year Ending September 30, 2024 $ 43,776 2025 34,328 2026 6,290 2027 1,687 2028 14,923 2029 and after 3,664 Total $ 104,668 Included with the certificates of deposit were $ 13.8 million and $ 6.0 million in brokered certificates of deposit at September 30, 2023 and 2022, respectively. NOTE I - BORROWINGS 1. Federal Home Loan Bank of New York Advances Long term FHLBNY advances at September 30, 2023 and September 30, 2022 totaled approximately $ 29.5 million and $ 15.6 million, respectively. The weighted average interest rates on advances outstanding at September 30, 2023 and 2022 were 3.27 % and 2.48 %, respectively. The advances were collateralized by unencumbered qualified assets consisting of one-to-four family residential and commercial real estate mortgage loans. Advances are made pursuant to several different credit programs offered from time to time by the FHLBNY. Long term FHLBNY advances as of September 30, 2023 mature as follows (in thousands): Year Ending September 30, 2024 $ 4,384 2025 3,500 2026 1,631 2027 6,000 2028 14,000 Thereafter — Total $ 29,515 75 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 Additionally, the Company has established an Overnight Line of Credit arrangement with the FHLBNY. The total amount available under the line of credit is based on the amount of eligible collateral pledged to the FHLBNY. At September 30, 2023 and 2022, the Company had available credit from the FHLBNY totaling $ 122.2 million and $ 83.2 million, respectively. Information concerning short-term arrangement with the FHLBNY is summarized as follows: September 30, 2023 2022 (Dollars in thousands) Balance at end of year $ — $ — Weighted average balance during the year $ 1,283 $ 33 Maximum month-end balance during the year $ 16,450 $ 2,450 Average interest rate during the year 4.65 % 2.67 % 2. Securities Sold Under Reverse Repurchase Agreements Qualifying repurchase agreements are treated as financings and are reflected as a liability in the Consolidated Balance Sheets. The Company did not have repurchase agreements outstanding at September 30, 2023 and September 30, 2022. NOTE J – SERVICING POLICY The Company originates and sells loans receivable secured by one-to four-family residential properties and commercial business loans guaranteed by the Small Business Administration (the “SBA”). The Company has sold loans on a servicing retained basis and on a servicing released basis. Loans sold with servicing retained and servicing released during the year ended September 30, 2023 were $ 6.5 million and $ 0 , respectively. Loans sold with servicing retained and servicing released during the year ended September 30, 2022 were $ 10.5 million and $ 0 , respectively. The Company accounts for sales in accordance with ASC 860, Transfers and Servicing. Upon sale, the receivables are removed from the balance sheet, mortgage servicing rights are recorded as an asset for servicing rights retained, and a gain on sale, if applicable, is recognized for the difference between the carrying value of the receivables and the sales proceeds, net of origination costs. Gains on sales of loans, representing the difference between the total sales price received for the loans and the allocated cost of the loans, are recognized when loans are sold and delivered to the purchasers. Loans are accounted for as sold when control of the loan is surrendered. Control over the loans is deemed surrendered when (1) the loans have been isolated from the Company, (2) the buyer has the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the loans and (3) the Company does not maintain effective control over the loans through either (a) an agreement that entitles and obligates the Company to repurchase or redeem the loans before maturity, or (b) the ability to unilaterally cause the buyer to return specific loans. The Company services one-to-four family residential mortgage loans and SBA 7(a) loans for investors in the secondary market, which are not included in the Consolidated Balance Sheets. The Company’s fee is a percentage of the principal balance and is recognized as income when received. At September 30, 2023 and 2022, the Company was servicing mortgage loans sold in the amount of $ 1.9 million and $ 2.1 million, respectively, and SBA loans sold in the amount of $ 35.5 million and $ 32.0 million, respectively. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans. Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing revenues and are included in other assets on the Consolidated Balance Sheets. Activity in loan servicing rights during the years ended September 30, 2023 and 2022 are summarized as follows: 76 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 September 30, 2023 2022 (In thousands) Beginning balance $ — $ 4 Origination of mortgage servicing rights 28 — Amortization — ( 4 ) Ending balance $ 28 $ — Loan servicing rights are carried at the lower of amortized cost or fair value. Fair values are estimated using discounted cash flows based on a current market interest rate. NOTE K - INCOME TAXES The Company’s income tax expense is comprised of the following components for the years ended September 30, 2023 and 2022: September 30, 2023 2022 (In thousands) Current $ 3,647 $ 3,163 Deferred ( 615 ) 87 Total income tax expense $ 3,032 $ 3,250 A reconciliation of income tax at the statutory tax rate to the effective income tax expense for the years ended September 30, 2023 and 2022 is as follows: September 30, 2023 2022 (In thousands) Income tax expense at statutory rate $ 2,256 $ 2,339 Increase (decrease) resulting from: State income taxes, net of federal income tax benefit 931 922 Tax-exempt income, net ( 90 ) ( 87 ) Nondeductible expenses 58 37 Share based compensation 54 — Employee stock ownership plan 11 3 Other, net ( 188 ) 36 Total income tax expense $ 3,032 $ 3,250 The major sources of temporary differences and their deferred tax effect at September 30, 2023 and 2022 are as follows: 77 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 September 30, 2023 2022 (In thousands) Allowance for loan losses $ 2,342 $ 2,369 Net unrealized loss, investment securities available-for-sale 483 472 Deferred loan fees 287 244 Unrealized loss, minimum pension liability 132 288 Employee benefits 265 — Allowance for transaction expense 11 — Straight line rent 72 88 Gross deferred tax asset 3,592 3,461 Depreciation ( 588 ) ( 816 ) Employee benefits — ( 122 ) Mortgage servicing rights ( 8 ) — Gross deferred tax liability ( 596 ) ( 938 ) Net deferred tax asset, included in other assets $ 2,996 $ 2,523 In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible and carry forwards are available. There were no valuation allowances for the year ended September 30, 2023 and 2022. The Company has considered future market growth, forecasted earnings, future taxable income, feasible and permissible tax planning strategies in determining the realizability of deferred tax assets. If the Company was to determine that it would not be able to realize a portion of its net deferred tax asset in the future for which there is currently no valuation allowance, an adjustment to the net deferred tax asset would be charged to earnings in the period such determination was made. The Bank’s statutory income tax rate in the State of New Jersey was 9.0 % for the years ending September 30, 2023 and 2022. The State of New Jersey has imposed a temporary surtax on corporations earning New Jersey allocated income in excess of $ 1 million. The surtax is set at a rate of 2.5 % and it currently effective through December 31, 2023. Accordingly, the Company used an 11.5 % State tax rate for the calculation of its State income tax expense the years ended September 30, 2023 and 2022. NOTE L - PENSION PLAN The Company had a noncontributory defined benefit pension plan (the “Plan”) covering all eligible employees. On January 26, 2006, the Plan was frozen and amended to eliminate future benefit accruals after February 15, 2006. Plan assets are invested in seven diversified investment funds of the Pentegra Retirement Trust, a no load series open-ended mutual fund. The long-term investment objective is to be invested 65 % in equity securities (equity mutual funds) and 35 % in debt securities (bond mutual funds). Asset rebalancing is performed at least annually, with interim adjustments made when the investment mix varies more than 5% from the target (i.e., a 10% target range). Risk/volatility is further managed by the distinct investment objectives of each of the funds and the diversification within each fund. The following table sets forth the Plan’s funded status and amounts recognized in the Company’s Consolidated Balance Sheets at September 30, 2023 and September 30, 2022. 78 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 September 30, 2023 2022 (In thousands) Actuarial present value of benefit obligations $ 3,495 $ 3,735 Change in benefit obligations Projected benefit obligation, beginning $ 3,735 $ 4,926 Interest cost 190 144 Actuarial (gain) loss ( 181 ) ( 1,071 ) Annuity payments and lump sum distributions ( 249 ) ( 264 ) Projected benefit obligation, end $ 3,495 $ 3,735 Change in plan assets Fair value of assets, beginning $ 3,886 $ 4,871 Actual return on plan assets 438 ( 721 ) Annuity payments and lump sum distributions ( 249 ) ( 264 ) Fair value of assets, end $ 4,075 $ 3,886 Funded status included with other assets $ 580 $ 151 Net pension cost for the years ended September 30, 2023 and 2022 included the following components: September 30, 2023 2022 (In thousands) Service cost benefits earned during the year $ — $ — Interest cost on projected benefit obligation 190 144 Expected return on plan assets ( 226 ) ( 285 ) Amortization of unrecognized net loss 122 146 Net pension cost $ 86 $ 5 For the year ended September 30, 2023 and 2022, the weighted average discount rate used in determining the actuarial net periodic pension cost was 5.25 % and 3.00 %, respectively. For the year ended September 30, 2023 and 2022, the weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 5.75 % and 5.25 %, respectively. The long-term rate-of-return-on-assets assumption was set based on historical returns earned by equities and fixed income securities, adjusted to reflect expectations of future returns as applied to the plan’s target allocation of asset classes. Equities and fixed income securities were assumed to earn rates of return in the ranges of 6 - 8 % and 3 - 5 %, respectively, with an assumed long-term inflation rate of 2.5 % reflected within these ranges for the year ended September 30, 2023. When these overall return expectations are applied to the plan’s target allocation, the result is an expected rate of return of 5.0 % to 7.0 %. Accordingly, the expected long-term rates of return on assets were 6.00 % for 2024 and 6.00 % for 2023. Current Asset Allocation The Plan’s weighted-average asset allocations at September 30, 2023 and 2022, by asset category are as follows: 79 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 September 30, 2023 2022 Equity securities 63 % 68 % Debt securities (bond mutual funds) 36 % 31 % Other (money market fund) 2 % 1 % Total 100 % 100 % The target asset allocation set for the assets of the Plan are in equity securities ranging from 50 % to 75 % and in debt securities ranging from 25 % to 50 %. In general, the Plan assets are investment securities that are well-diversified in terms of industry, capitalization and asset class. The Plan assets are mostly a mix of mutual funds indexed to the performance of Fortune 500 U.S. companies, debt securities held in bond funds, domestic and foreign common equity funds, and a money market fund. The Plan’s exposure to a concentration of credit risk is limited by the diversification of the investments into various investment options with multiple asset managers. Expected Contributions For the fiscal year ending September 30, 2024, the Company does not expect to make a contribution to the Plan. Estimated Future Benefit Payments The following benefit payments are expected to be paid as follows (in thousands): October 1, 2023 through September 30, 2024 $ 275 October 1, 2024 through September 30, 2025 273 October 1, 2025 through September 30, 2030 272 October 1, 2026 through September 30, 2031 270 October 1, 2027 through September 30, 2032 268 October 1, 2028 through September 30, 2033 1,258 Total $ 2,616 Included in the funded status of the Plan at September 30, 2023 and 2022, are actuarial losses of $ 440,000 and $ 956,000 , respectively. These amounts are included, net of related income tax effects of $ 132,000 and $ 288,000 , respectively, in the accumulated other comprehensive loss component of stockholders’ equity. The following table presents the Plan assets that are measured at fair value on a recurring basis by level within the fair value hierarchy under ASC Topic 820. Financial assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. See Note Q for further detail regarding fair value hierarchy. 80 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 Fair Value Measurements at Reporting Date Using: Quoted Prices Significant in Active Markets Other Significant for Identical Observable Unobservable Total Assets (Level 1) Inputs (Level 2) Inputs (Level 3) (In thousands) At September 30, 2023 Investment Type Mutual Funds - Equity Large - Cap Value $ 682 $ 682 $ — $ — Large - Cap Core 525 525 — — Mid - Cap Core 459 459 — — Small - Cap Core 429 429 — — Non - U.S. Core 465 465 — — Mutual Funds - Fixed Income Intermediate Duration 634 634 — — Short - Duration Corporate 816 816 Cash Equivalents Money Market 65 65 — — Total Investment $ 4,075 $ 4,075 $ — $ — At September 30, 2022 Investment Type Mutual Funds - Equity Large - Cap Value $ 638 $ 638 $ — $ — Large - Cap Core 633 633 — — Mid - Cap Core 407 407 — — Small - Cap Core 381 381 — — Non - U.S. Core 573 573 — — Mutual Funds - Fixed Income Intermediate Duration 433 433 — — Short - Duration Corporate 785 785 Cash Equivalents Money Market 36 36 — — Total Investment $ 3,886 $ 3,886 $ — $ — Equity and debt securities are reported at fair value in the table above utilizing exchange quoted prices in active markets for identical instruments (Level 1 inputs). NOTE M - NONQUALIFIED COMPENSATION PLAN The Company maintains a Supplemental Executive Retirement Plan (“SERP”) for the benefit of its senior officers. In addition, the Company also adopted voluntary Deferred Income and Retirement Plans on behalf of its directors. The SERP provides the Company with the opportunity to supplement the retirement income of selected officers to achieve equitable wage replacement at retirement while the Deferred Income Plan provides participating directors with an opportunity to defer all or a portion of their fees into a tax deferred accumulation account for future retirement. The Director Retirement Plan enables the Company to reward its directors for longevity of service in consideration of their availability and consultation. The SERP is based upon achieving a total retirement benefit equal to a percentage of the participants’ final annual salary. Under the Director Supplemental Retirement Income Plan (the “Plan”), directors that began service before 2002 are entitled to a benefit upon attainment of his/her benefit age. The directors will receive an annual amount in monthly installments based on his/her total Board and Committee fees in the twelve months prior to attainment of his/her benefit age. The amount will be 10% plus 2 1/2% for each year of service as a Director, with a minimum of 50%, provided the Director has served for at least five years, and a maximum of 60%. The maximum benefit increases for any Director serving as Chairman of the Board for at least five years to 75%. 81 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 The Company funds the plans through modified endowment contracts. Income recorded for the plans represents life insurance income as recorded based on the projected increases in cash surrender values of life insurance policies. As of September 30, 2023 and 2022, the Company’s life insurance contracts had cash surrender values of approximately $ 18 million and $ 17.7 million, respectively. The Company is recording benefit costs so that the cost of each participant’s retirement benefits is being expensed and accrued over the participant’s active employment so as to result in a liability at retirement date equal to the present value of the benefits expected to be provided. The total expense for nonqualified retirement benefits recorded during the year ended September 30, 2023 and 2022 was $ 375,000 and $ 424,000 , respectively. Included in accounts payable and other liabilities at September 30, 2023 and 2022 were accrued retirement benefits totaling $ 828,000 and $ 630,000 , respectively, for these plans. NOTE N - 401(K) EMPLOYEE CONTRIBUTION PLAN The Company has a defined contribution 401(k) plan covering all employees, as defined under the plan document. Employees may contribute to the plan, as defined under the plan document, and the Company can make discretionary contributions. The Company contributed $ 257,000 and $ 271,000 to the plan for the years ended September 30, 2023 and 2022, and is included in compensation and employee benefits in the accompanying Consolidated Statements of Income. NOTE O - COMMITMENTS 1. Lease Commitments Accounting Standard Update ASC 842, “ Leases ” requires lessees to recognize a lease liability and a right-of-use (“ROU”) asset, measured at the present value of the future minimum lease payments, at the lease commencement date. The Company has operating leases for five branch locations. Our leases have remaining lease terms of up to 10 years, some of which include options to extend the leases for up to 10 additional years. Operating leases are recorded as ROU assets and lease liabilities and are included within Other assets and Accounts payable and other liabilities, respectively, on our Consolidated Balance Sheets. Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at lease commencement base on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate. The incremental borrowing rate used by the Company to value its operating leases is based on the interpolated term advance rate available from the FHLBNY, based on the remaining lease term. The following table presents the balance sheet information related to our leases: September 30, September 30, 2023 2022 (Dollars in thousands) Operating lease right-of-use asset $ 2,687 $ 3,292 Operating lease liabilities $ 2,944 $ 3,605 Weighted average remaining lease term in years 6.4 7.0 Weighted average discount rate 2.2 % 2.2 % The following table summarizes the maturity of our remaining lease liabilities by year: 82 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 September 30, 2023 (In thousands) For the Year Ending: 2024 $ 747 2025 523 2026 455 2027 334 2028 300 2029 and thereafter 899 Total lease payments 3,258 Less imputed interest ( 314 ) Present value of lease liabilities $ 2,944 Total rental expense, included in occupancy expense, was approximately $ 809,000 and $ 807,000 for the years ended September 30, 2023 and 2022, respectively. 2. Contingencies The Company and its subsidiaries, from time to time, are a party to routine litigation that arises in the normal course of business. In the opinion of management, the resolution of this litigation, if any, would not have a material adverse effect on the Company’s consolidated financial position or results of operations. NOTE P - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Company may use derivative financial instruments, such as interest rate floors and collars, as part of its interest rate risk management. Interest rate caps and floors are agreements whereby one party agrees to pay or receive a floating rate of interest on a notional principal amount for a predetermined period of time if certain market interest rate thresholds are met. The Company considers the credit risk inherent in these contracts to be negligible. As of September 30, 2023 and 2022, the Company did not hold any interest rate floors or collars. The Company is a party to interest rate derivatives that are not designated as hedging instruments. Under a program, the Company executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that the Bank executes with a third-party financial institution, such that the Bank minimizes its net risk exposure resulting from such transactions. Because the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined by taking into consideration the risk rating, probability of default and loss given default for all counterparties. The Company had $0 in cash pledged for collateral on its interest rate swaps with financial institutions at September 30, 2023 and 2022. The following table presents summary information regarding these derivatives for September 30, 2023 and 2022. 83 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 Notional Amount Average Maturiy (Years) Weighted Average Fixed Rate Weighted Average Variable Rate Fair Value (Dollars in thousands) September 30, 2023 Classified in Other Assets: Customer interest rate swaps $ 36,020 4.2 4.96 % 1 Mo. BSBY + 2.44 $ 2,579 Total $ 36,020 4.2 4.96 % $ 2,579 Classified in Other Liabilities: 3rd Party interest rate swaps $ 36,020 4.2 4.96 % 1 Mo. BSBY + 2.44 $ 2,579 Total $ 36,020 4.2 4.96 % $ 2,579 September 30, 2022 Classified in Other Assets: Customer interest rate swaps (1) $ 19,512 5.9 3.63 % 1 Mo. LIBOR + 2.50 $ 2,275 6,940 4.6 6.13 % 1 Mo. BSBY + 3.00 212 Total $ 26,452 5.2 4.88 % $ 2,487 Classified in Other Liabilities: 3rd Party interest rate swaps $ 19,512 5.9 3.63 % 1 Mo. LIBOR + 2.50 $ 2,275 6,940 4.6 6.13 % 1 Mo. BSBY + 3.00 212 Total $ 26,452 5.2 4.88 % $ 2,487 (1) Derivative assets were incorrectly shown as a negative balance within the Company's Annual Report on Form 10-K for the year-ended September 30, 2022. The derivative asset balances have been corrected within the table above. The correction did not have an impact on the Company's consolidated balance sheet. At September 30, 2023 and 2022, the Company had outstanding commitments (substantially all of which expire within one year) to originate one-to four-family residential loans, construction loans, commercial real estate loans, commercial business loans and consumer loans. These commitments were comprised of fixed and variable rate loans. September 30, 2023 2022 (In thousands) Financial instruments whose contract amounts represent credit risk Letters of credit $ 1,073 $ 740 Unused lines of credit 89,933 73,825 Fixed rate loan commitments 3,578 2,550 Variable rate loan commitments 26,472 49,913 Total $ 121,056 $ 127,028 NOTE Q - FAIR VALUE DISCLOSURES The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The Company’s securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets or liabilities on a non-recurring basis, such as held-to-maturity securities, mortgage servicing rights, loans receivable and other real estate owned, or OREO. These non-recurring fair value adjustments involve the application of lower-of-cost-or-market accounting or write-downs of individual assets. 84 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 In accordance with ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), the Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are: Level 1- Valuation is based upon quoted prices for identical instruments traded in active markets. Level 2- Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market. Level 3- Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques. The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. The Company bases its fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The following is a description of valuation methodologies used for assets measured at fair value on a recurring basis. Securities available-for-sale The Company’s available-for-sale portfolio is carried at estimated fair value on a recurring basis, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income (loss) in stockholders’ equity. The securities available-for-sale portfolio consists of U.S. government and government-sponsored enterprise obligations and mortgage-backed securities. The fair values of these securities are obtained from an independent nationally recognized pricing service. An independent pricing service provides prices which are categorized as Level 2, as quoted prices in active markets for identical assets are generally not available for the securities. The following tables provide the level of valuation assumptions used to determine the carrying value of the Company’s assets measured at fair value on a recurring basis at September 30, 2023 and 2022: 85 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 September 30, 2023 Total Level 1 Level 2 Level 3 Assets: (In thousands) Securities available-for-sale: Obligations of U.S. government agencies: Mortgage-backed securities - residential $ 92 $ — $ 92 $ — Obligations of U.S. government-sponsored enterprises: Mortgage-backed securities-residential 10,033 — 10,033 — Total securities available for sale $ 10,125 $ — $ 10,125 $ — Derivative assets 2,579 — 2,579 — Total assets $ 12,704 $ — $ 12,704 $ — Liabilities: Derivative liabilities $ 2,579 $ — $ 2,579 $ — Total Liabilities $ 2,579 $ — $ 2,579 $ — September 30, 2022 Assets: Securities available-for-sale: Obligations of U.S. government agencies: Mortgage-backed securities - residential $ 107 $ — $ 107 $ — Obligations of U.S. government-sponsored enterprises: Mortgage-backed securities-residential 9,122 — 9,122 — Total securities available for sale $ 9,229 $ — $ 9,229 $ — Derivative assets (1) 2,487 — 2,487 — Total assets $ 11,716 $ — $ 11,716 $ — Liabilities: Derivative liabilities $ 2,487 $ — $ 2,487 $ — Total Liabilities $ 2,487 $ — $ 2,487 $ — (1) Derivative assets were incorrectly shown as a negative balance within the Company's Annual Report on Form 10-K for the year-ended September 30, 2022. The derivative asset balances and corresponding totals have been corrected within the table above. The correction did not have an impact on the Company's consolidated balance sheet. The following is a description of valuation methodologies used for assets measured at fair value on a non-recurring basis. Impaired Loans Loans which meet certain criteria are evaluated individually for impairment. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest and principal payments of a loan will be collected as scheduled in the loan agreement. Three impairment measurement methods are used, depending upon the collateral securing the asset: 1) the present value of expected future cash flows discounted at the loan’s effective interest rate; 2) the asset’s observable market price; or 3) the fair value of the collateral if the asset is collateral dependent. The regulatory agencies require this method for loans from which repayment is expected to be provided solely by the underlying collateral. The Company’s impaired loans are generally collateral dependent and, as such, are carried at the estimated fair value of the collateral less estimated selling and disposition costs. Fair value is estimated through current appraisals, and adjusted as necessary, by management, to reflect current market conditions and, as such, are generally classified as Level 3. Appraisals of collateral securing impaired loans are conducted by approved, qualified, and independent third-party appraisers. Such appraisals are ordered via the Bank’s credit administration department, independent from the lender who originated the loan, once the loan is deemed impaired, as described in the previous paragraph. Impaired loans are generally re-evaluated with an updated appraisal within one year of the last appraisal. However, the Company also obtains updated appraisals on performing construction loans that are approaching their maturity date to determine whether or not the fair value of the collateral securing the loan remains sufficient to cover the loan amount prior to considering an extension. The Company discounts the appraised “as is” value of the collateral for estimated selling and disposition costs and compares the resulting fair value of collateral to the outstanding loan amount. If the outstanding loan amount is greater than the discounted fair value, the Company requires a reduction in the outstanding loan balance or additional collateral before considering an extension to the loan. If the borrower is unwilling or unable to reduce the loan balance or increase the collateral securing the loan, it is deemed impaired and the difference between the loan amount and the fair value of collateral, net of estimated selling and disposition costs, is charged off through a reduction of the allowance for loan loss. 86 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 Other Real Estate Owned Other real estate owned is carried at lower of cost or estimated fair value less disposal costs. The estimated fair value of the real estate is determined through current appraisals, and adjusted as necessary, by management, to reflect current market conditions. As such, other real estate owned is generally classified as Level 3. There were no valuation write-downs for the years ended September 30, 2023 and 2022. The following tables provide the level of valuation assumptions used to determine the carrying value of our assets measured at fair value on a non-recurring basis at September 30, 2023 and 2022: Total Level 1 Level 2 Level 3 September 30, 2023 (In thousands) Impaired loans $ 777 $ — $ — $ 777 Total $ 777 $ — $ — $ 777 September 30, 2022 Impaired loans $ 5,659 $ — $ — $ 5,659 Total $ 5,659 $ — $ — $ 5,659 The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Company has utilized Level 3 inputs to determine fair value: Quantitative Information about Level 3 Fair Value Measurements (Dollars in thousands) Fair Value Valuation September 30, 2023 Estimate Techniques Unobservable Input Range (Weighted Average) Impaired loans $ 777 Appraisal of collateral (1) Appraisal adjustments (2) -50% to -8.0% (-19.4%) Fair Value Valuation September 30, 2022 Estimate Techniques Unobservable Input Range (Weighted Average) Impaired loans $ 5,659 Appraisal of collateral (1) Appraisal adjustments (2) 0% to -31.7% (-9.9%) (1) Fair value is generally determined through independent appraisals for the underlying collateral, which generally include various level 3 inputs which are not identifiable. (2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal. The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments carried at cost or amortized cost as of September 30, 2023 and September 30, 2022. This table excludes financial instruments for which the carrying amount approximates fair value, which includes cash and cash equivalents, FHLBNY stock, bank owned life insurance, accrued interest receivable, interest and non-interest bearing demand, savings deposits, and accrued interest payable. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For financial liabilities such as interest-bearing demand, NOW, and money market savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity. 87 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 Carrying Fair Fair Value Measurement Placement Amount Value (Level 1) (Level 2) (Level 3) (In thousands) September 30, 2023 Financial instruments - assets Investment securities held-to-maturity $ 85,835 $ 73,728 $ — $ 73,728 $ — Loans 689,070 664,331 — — 664,331 Financial instruments - liabilities Certificates of deposit 104,668 101,216 — 101,216 — Borrowings 29,515 28,177 — 28,177 — September 30, 2022 Financial instruments - assets Investment securities held-to-maturity $ 91,646 $ 79,914 $ — $ 79,914 $ — Loans 619,843 592,804 — — 592,804 Financial instruments - liabilities Certificates of deposit 82,609 81,289 — 81,289 — Borrowings 15,625 14,762 — 14,762 — NOTE R - REGULATORY CAPITAL The Company and Bank are required to maintain minimum amounts of capital to total “risk-weighted” assets, as defined by the banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and Bank’s assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. The “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act include a minimum common equity Tier 1 capital (“CET1”) to risk-weighted assets ratio of 4.5 % of risk-weighted assets, a minimum Tier 1 capital to risk-weighted assets of 6.0 % and a minimum leverage ratio of 4.0 %. The required minimum ratio of total capital to risk-weighted assets is 8.0 %. The regulatory banking rules also require a “capital conservation buffer” of 2.5% above the new regulatory minimum capital ratios, and resulted in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%; (ii) a Tier 1 capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations established a maximum percentage of eligible retained income that could be utilized for such actions. As of September 30, 2023, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category. The following tables set forth the Company’s and the Bank’s actual and required capital levels under those measures: 88 MAGYAR BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 2023 and 2022 To be well- capitalized under Required for capital prompt corrective At September 30, 2023 Company Bank adequacy purposes action provisions Tier 1 leverage ratio 12.12 % 11.11 % ≥ 4.00 % ≥ 5.00 % CET1 16.33 % 14.97 % ≥ 7.00 % (1) ≥ 6.50 % Tier 1 risk-based capital ratio 16.33 % 14.97 % ≥ 8.50 % (1) ≥ 8.00 % Total risk-based capital ratio 17.58 % 16.22 % ≥ 10.50 % (1) ≥ 10.00 % At September 30, 2022 Tier 1 leverage ratio 12.57 % 11.13 % ≥ 4.00 % ≥ 5.00 % CET1 17.16 % 15.22 % ≥ 7.00 % (1) ≥ 6.50 % Tier 1 risk-based capital ratio 17.16 % 15.22 % ≥ 8.50 % (1) ≥ 8.00 % Total risk-based capital ratio 18.41 % 16.47 % ≥ 10.50 % (1) ≥ 10.00 % (1) Includes 2.50% capital conservation buffer 89 ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure None.