Item 7. Management’s Discussion and Analysis
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company is a Delaware-chartered
stock holding company whose most significant business activity is ownership of 100% of the common stock of Magyar Bank. Magyar Bank’s
principal business is attracting retail deposits from the general public and investing those deposits, together with funds generated from
operations, principal repayments on loans and securities and borrowed funds, into one-to four-family residential mortgage loans, multi-family
and commercial real estate mortgage loans, home equity loans and lines of credit, commercial business loans and construction loans. Our
results of operations depend primarily on our net interest income which is the difference between the interest we earn on our interest-earning
assets and the interest we pay on our interest-bearing liabilities. Our net interest income is primarily affected by the market interest
rate environment, the shape of the U.S. Treasury yield curve, the timing of the placement of interest-earning assets and interest-bearing
liabilities, and the prepayment rate on our mortgage-related assets. Other factors that may affect our results of operations are general
and local economic and competitive conditions, government policies and actions of regulatory authorities.
During the year ended September
30, 2024, the Company’s total assets grew $44.6 million, or 4.9%, to $951.9 million compared with $907.3 million at September 30,
2023. The increase was attributable to an $82.8 million increase in net loans receivable, a $5.3 million increase in bank-owned life insurance,
and a $3.4 million increase in other real estate owned. Offsetting these increases was a $46.9 million decrease in interest-earning deposits
with banks.
Total deposits increased $41.2
million, or 5.5%, to $796.7 million and stockholders’ equity increased $5.8 million, or 5.5%, to $110.5 million during the year
ended September 30, 2024.
The Company’s net income
increased $74 thousand, or 1.0%, to $7.8 million during the year ended September 30, 2024 compared with net income of $7.7 million for
the year ended September 30, 2023 from higher net interest income, lower provision for credit losses and higher other income, partially
offset by higher income tax and other expenses.
Throughout fiscal 2025, we
expect to continue increasing our commercial real estate and commercial business loans while managing non-interest expenses in an effort
to increase profitability of the Company.
Our business operations are
subject to risks and uncertainties that could materially affect our operating results. The extent of such impact will depend on future
developments, which are highly uncertain. There continues to be various other risks and uncertainties that could impact the Company’s
businesses and future results, such as changes to the U.S. economic condition, market interest rates, the Federal Reserve Board's monetary
policy, other government policies, and actions of regulatory agencies.
Comparison of Financial Condition
at September 30, 2024 and 2023
Total Assets. Total
assets increased $44.6 million, or 4.9%, to $951.9 million during the year ended September 30, 2024 compared with $907.3 million at September
30, 2023. The increase was attributable to higher loans receivable, bank-owned life insurance and other real estate owned. Partially offsetting
these increases were lower interest-earning deposits with banks, as we used cash and cash equivalents to fund loan growth.
Loans Receivable. Total
loans receivable increased $83.0 million, or 11.9%, to $781.2 million at September 30, 2024 from $698.2 million at September 30, 2023.
The growth occurred in commercial real estate loans, which increased $72.2 million, or 18.6%, to $461.3 million, in one-to four-family
residential mortgage loans (including home equity lines of credit), which increased $16.3 million, or 6.4%, to $270.9 million, and in
construction and land loans, which increased $869 thousand, or 4.0%, to $22.7 million. Offsetting these increases were declines in commercial
business loans, which decreased $6.2 million, or 20.5%, to $24.0 million and in other consumer loans, which decreased $124 thousand, or
5.3%, to $2.2 million.
Given the significance of
commercial real estate (“CRE”) loans to our total loan portfolio, the following table further disaggregates these loans by
occupied status and by collateral type as of September 30, 2024:
21
September 30
2024
Amount
Percent
(In thousands)
Owner-occupied
Retail
$ 41,718
9.0%
Hotel/Motel
42,438
9.2%
Professional
35,341
7.7%
Office
10,934
2.4%
Restaurant
18,743
4.1%
Other
28,243
6.1%
Total owner-occupied
$ 177,417
38.5%
Non-owner occupied
Retail
$ 84,435
18.3%
Multi-family
86,676
18.8%
Professional
18,972
4.1%
Office
39,064
8.5%
Restaurant
8,060
1.7%
Hotel/Motel
2,566
0.6%
Other
44,129
9.6%
Total non-owner occupied
$ 283,902
61.5%
Total commercial real estate loans
$ 461,319
100.0%
The Company obtains an appraisal
of the real estate collateral securing a CRE loan prior to originating the loan. The appraised value is used to calculate the ratio of
the outstanding loan balance to the value of the real estate collateral, or loan-to-value ratio ("LTV"). The original appraisal
is used to monitor the LTVs within the CRE portfolio unless an updated appraisal is received, which may happen for a variety of reasons
including, but not limited to, payment delinquency, additional loan requests using the same collateral, and loan modifications. The following
table presents the ranges in the LTVs of our CRE loans at September 30, 2024:
Number of
LTV range
Loans
Amount
(Dollars in thousands)
0%-25.0%
114
$ 45,522
25.01%-50.0%
120
111,699
50.01%-60.0%
71
123,684
60.01%-70.0%
94
118,379
70.01%-75.0%
32
47,611
75.01%-80.0%
7
13,188
> 80.0%
1
1,236
Totals
439
$ 461,319
As of September 30, 2024 and 2023,
non-owner occupied commercial real estate loans (as defined by regulatory guidance) to total risk-based capital were estimated at approximately
270% and 262%, respectively. Management believes that Magyar Bank has implemented appropriate risk management practices, including risk
assessments, board-approved underwriting policies and related procedures, which include monitoring loan portfolio performance and stressing
of the commercial real estate portfolio under adverse economic conditions.
Our asset quality with respect
to commercial real estate loans has remained strong despite recent economic and market conditions. As of September 30, 2024 and 2023,
we had $116 thousand and $2.2 million of non-performing commercial real estate loans, respectively. Such amounts totaled 0.03% and 0.60%
of total commercial real estate loans as of September 30, 2024 and 2023, respectively.
22
In 2024, the Company adopted
ASU 2016-13, Financial Instruments - Credit Losses , and subsequent related updates, using the modified retrospective approach for
all financial assets measured at amortized cost, including loans, held-to-maturity debt securities, and unfunded commitments. On October
1, 2023, the Company recorded a cumulative effect increase to retained earnings of $354 thousand, net of tax, which consisted of a $743
thousand reduction related to loans, and a $389 thousand increase related to unfunded commitments. There were no such charges for investment
securities held by the Company at the date of adoption.
Investment Securities.
Investment securities decreased $528 thousand, or 0.6%, to $95.4 million at September 30, 2024 from $96.0 million at September 30, 2023.
Securities available-for-sale
increased $5.5 million, or 54.2%, to $15.6 million at September 30, 2024 from $10.1 million at September 30, 2023. The increase was attributable
to purchases totaling $6.0 million, unrealized gain of $834 thousand partially offset by principal repayments totaling $1.3 million.
Securities held-to-maturity
decreased $6.0 million, or 7.0%, to $79.8 million at September 30, 2024 from $85.8 million at September 30, 2023. The decrease was the
attributable to principal repayments totaling $12.5 million and partially offset by purchases totaling $6.5 million.
Bank-Owned Life Insurance.
The cash surrender value of life insurance held for directors and executive officers of Magyar Bank increased $5.3 million, or 29.5%,
to $23.3 million at September 30, 2024 from $18.0 million at September 30, 2023.
In addition to a $433 thousand
increase in the cash surrender value of policies, the Company purchased new life insurance policies on directors and executive officers
of the Bank totaling $6.6 million and redeemed policies totaling $1.7 million during the twelve months ended September 30, 2024. The Company
was in the process of restructuring $7.9 million of its BOLI portfolio at September 30, 2024 that is expected to increase the crediting
rate on the restructured BOLI policies from 2.24% (3.20% tax-equivalent yield) to 4.93% (7.04% tax-equivalent yield). The surrender of
BOLI policies also impacted income tax expense during the year ended September 30, 2024 as discussed below.
Other Real Estate Owned.
Other real estate owned increased $3.4 million to $3.7 million for the year ended September 30, 2024. The Company acquired four
properties totaling $4.4 million and sold two properties totaling $1.0 million during the year ended September 30, 2024. Of the three
remaining properties owned at September 30, 2024, two totaling $3.3 million were under contract of sale.
Deposits. Total
deposits increased $41.2 million, or 5.5%, during the year ended September 30, 2024. The growth in deposits occurred in certificates of
deposit (including individual retirement accounts) which increased $55.0 million, or 52.5%, to $159.7 million, in interest-bearing checking
account balances, which increased $31.6 million, or 27.4% to $146.7 million, and in money market account balances, which increased $19.7
million, or 6.9%, to $304.6 million. Offsetting these increases were declines in non-interest checking account balances, which decreased
$55.7 million, or 29.6%, to $132.8 million and in savings account balances, which decreased $9.3 million, or 15.0%, to $52.9 million.
Customers sought higher-yielding deposit products during a period of increased interest rates.
Included in the Company’s
deposits were $249.9 million in municipal deposits at September 30, 2024, which represented 29.1% of total deposits. Under current State
of New Jersey legislation, municipal deposits exceeding 70% of the Bank’s capital must be collateralized. Magyar Bank was in compliance
with the State’s requirements at September 30, 2024.
The Company’s deposit
strategy in 2024 focused on retaining deposits and managing the overall cost of its interest-bearing liabilities during a period with
an inverted yield curve. In addition, the Company opened its eighth retail branch office in Martinsville, New Jersey in October 2024.
Borrowed Funds. Borrowings
decreased $947 thousand, or 3.2%, to $28.6 million at September 30, 2024 compared with $29.5 million at September 30, 2023.
Stockholders’
Equity. Stockholders’ equity increased $5.7 million, or 5.5%, to $110.5 million at September 30, 2024 from $104.8 million
at September 30, 2023. The increase was attributable to the Company’s net income from operations totaling $7.8 million, partially
offset by $1.7 million in dividends paid and $2.4 million in share repurchases. In addition, other comprehensive income, stock-based compensation
expense and the effect of adopting ASU 2016-13 increased the
23
Company’s equity by $2.1 million. The Company’s book value per
share increased to $16.98 at September 30, 2024 from $15.70 at September 30, 2023.
Comparison of Operating Results
for the Years Ended September 30, 2024 and 2023
Net Income. The
Company’s net income increased $74 thousand, or 1.0%, to $7.8 million during the year ended September 30, 2024 compared with $7.7
million for the year ended September 30, 2023 from higher net interest income, lower provision for credit losses and higher other income,
partially offset by higher income tax and other expenses. Earnings per share increased to $1.23 for the year ended September 30, 2024
from $1.20 for the year ended September 30, 2023.
Net Interest and Dividend
Income. Net interest and dividend income increased $240 thousand, or 0.9%, to $28.0 million during the year ended September 30,
2024 compared to $27.7 million for the year ended September 30, 2023.
The Company’s net interest
margin decreased 36 basis points to 3.14% for the year ended September 30, 2024 from 3.50% for the year ended September 30, 2023. Growth
in the Company’s average interest-earning assets more than offset margin compression between periods due to market interest rate
levels and the prolonged inversion to the yield curve.
Average Balance Sheet.
The following table presents certain information regarding our financial condition and net interest income for the years ended
September 30, 2024 and 2023. The table presents the average yield on interest-earning assets and the average cost of interest-bearing
liabilities. We derived the yields and costs by dividing income or expense by the average balance of interest-earning assets and interest-bearing
liabilities, respectively, for the periods shown. We derived average balances from daily balances over the periods indicated. Interest
income includes fees that we consider adjustments to yields. Interest income on loans includes loan fees, but such amounts were not material
for the years ended September 30, 2024 or 2023.
24
Years Ended September 30,
2024
2023
Average
Balance
Interest
Income/
Expense
Yield/Cost
Average
Balance
Interest
Income/
Expense
Yield/Cost
(Dollars In Thousands)
Interest-earning assets:
Interest-earning deposits
$ 58,557
$ 3,037
5.19%
$ 22,616
$ 1,040
4.60%
Loans receivable, net (1)
734,402
43,107
5.87%
668,870
35,229
5.27%
Securities
Taxable
92,147
2,149
2.33%
94,519
1,602
1.69%
Tax-exempt (2)
3,370
73
2.17%
3,370
73
2.17%
FHLBNY stock
2,306
220
9.52%
2,020
139
6.89%
Total interest-earning assets
890,782
48,586
5.45%
791,395
38,083
4.81%
Noninterest-earning assets
49,938
48,514
Total assets
$ 940,720
$ 839,909
Interest-bearing liabilities:
Savings accounts (3)
$ 57,147
$ 352
0.62%
$ 71,148
$ 342
0.48%
NOW accounts (4)
441,853
14,700
3.33%
340,126
7,332
2.16%
Time deposits (5)
130,061
4,673
3.59%
90,385
1,814
2.01%
Total interest-bearing deposits
629,061
19,725
3.14%
501,659
9,488
1.89%
Borrowings
28,871
872
3.02%
25,604
846
3.31%
Total interest-bearing liabilities
657,932
20,597
3.13%
527,263
10,334
1.96%
Noninterest-bearing liabilities
170,923
207,255
Total liabilities
828,855
734,518
Retained earnings
111,865
105,391
Total liabilities and retained earnings
$ 940,720
$ 839,909
Tax-equivalent basis adjustment
(15 )
(15 )
Net interest and dividend income
$ 27,974
$ 27,734
Interest rate spread
2.32%
2.85%
Net interest-earning assets
$ 232,850
$ 264,132
Net interest margin (6)
3.14%
3.50%
Average interest-earning assets to
average interest-bearing liabilities
135.39%
150.09%
(1) The average balance of loans receivable, net includes non-accrual loans.
(2) Interest income and yield are calculated using the Company's 21% federal tax rate.
(3) Includes passbook savings, money market passbook and club accounts.
(4) Includes interest-bearing checking and money market accounts.
(5) Includes certificates of deposits and individual retirement accounts.
(6) Calculated
as annualized net interest income divided by average total interest-earning assets.
25
Rate/Volume Analysis.
The following table presents the effects of changing rates and volumes on our net interest income for the years indicated. The rate column
shows the effects attributable to changes in rate (changes in rate multiplied by average volume). The volume column shows the effects
attributable to changes in volume (changes in average volume multiplied by prior rate). The net column represents the sum of the prior
columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately,
based on the changes due to rate and the changes due to volume. There were no out-of-period adjustments excluded from the table below
September 30,
2024 vs. 2023
Increase (decrease) due to
Volume
Rate
Net
(In thousands)
Interest-earning assets:
Interest-earning deposits
$ 1,848
$ 149
$ 1,997
Loans
3,644
4,234
7,878
Securities
Taxable
(41 )
588
547
Tax-exempt (1)
—
—
—
FHLBNY stock
22
59
81
Total interest-earning assets
5,472
5,031
10,503
Interest-bearing liabilities:
Savings accounts (2)
(76 )
86
10
NOW accounts (3)
2,620
4,748
7,368
Time deposits (4)
1,024
1,835
2,859
Total interest-bearing deposits
3,568
6,669
10,237
Borrowings
103
(77 )
26
Total interest-bearing liabilities
3,672
6,591
10,263
Increase (decrease) in tax equivalent
net interest income
$ 1,801
$ (1,561 )
$ 240
Change in tax-equivalent basis adjustment
—
Increase in net interest income
$ 240
(1) Calculated using the Company's 21% federal tax rate.
(2) Includes passbook savings, money market passbook and club accounts.
(3) Includes interest-bearing checking and money market accounts.
(4) Includes certificates of deposits and individual retirement accounts.
Interest and Dividend
Income. Interest and dividend income increased $10.5 million, or 27.6%, to $48.6 million for the year ended September 30, 2024
from $38.1 million for the year ended September 30, 2023. The average balance of interest-earnings assets between the two periods increased
$99.4 million, or 12.6%, to $890.8 million from $791.4 million, while the yield on such assets increased 64 basis point to 5.45% for the
year ended September 30, 2024 from 4.81% for the year ended September 30, 2023.
Interest income on loans increased
$7.9 million, or 22.4%, to $43.1 million for the year ended September 30, 2024 from $35.2 million for the year ended September 30, 2023,
while the average balance of loans increased $65.5 million, or 9.8%, to $734.4 million from $668.9 million. The average yield on such
loans increased 60 basis points to 5.87% at September 30, 2024 from 5.27% for the year ended September 30, 2023 from higher market interest
rates.
Interest earned on investment
securities, including interest earned on deposits but excluding FHLBNY stock, increased $2.5 million, or 94.3%, to $5.2 million for the
year ended September 30, 2024 from $2.7 million for the year ended
26
2023. The increase was attributable to a 116 basis point increase in
the average yield on investment securities and interest earned on deposits to 3.41% from 2.25%, and $33.6 million increase in the average
balance of investment securities and interest earning deposits to $154.1 million from $120.5 million during the year ended September 30,
2023.
Interest Expense. Interest
expense increased $10.3 million, or 99.3%, to $20.6 million for the year ended September 30, 2024 from $10.3 million for the year ended
September 30, 2023. The average balance of interest-bearing liabilities increased $130.7 million, or 24.8%, to $657.9 million from $527.3
million between the two periods while the average cost on such interest-bearing liabilities increased 117 basis points to 3.13% for the
year ended September 30, 2024 from 1.96% for the year ended September 30, 2023. Higher market interest rates were primarily responsible
for the increase in the cost of the Company’s interest-bearing liabilities for the year ended September 30, 2024.
The average balance of interest-bearing
deposits increased $127.4 million, or 25.4%, to $629.1 million for the year ended September 30, 2024 from $501.7 million for the year
ended September 30, 2023 while the average cost on such interest-bearing deposits increased 125 basis points to 3.14% from 1.89%. Average
expense on interest-bearing deposits increased $10.2 million, or 107.9%, to 19.7 million at September 30, 2024 compared with $9.5 million
at September 30, 2023.
Interest expense on advances
increased $26 thousand, or 3.1%, to $872 thousand for the year ended September 30, 2024 from $846 thousand for the year ended September
30, 2023. The average cost of borrowings decreased 29 basis points to 3.02% for the year ended September 30, 2024 from 3.31% for the year
ended September 30, 2023 while the average balance of those borrowings increased $3.3 million to $28.9 million for the year ended September
30, 2024 from $25.6 million the prior year.
Provision for Credit
Losses. The provision for credit losses decreased $291 thousand, or 76.4%, to $90 thousand for the year ended September 30, 2024
compared to $381 thousand for the year ended September 30, 2023. During the year ended September 30, 2024, the Company recorded $69 thousand
in net loan recoveries compared with $484 thousand in net charge-offs for the year ended September 30, 2023. In addition to lower net
charge-offs, the provision for credit losses on loans decreased in amount and as a percentage of gross loans during the year from higher
balances of lower risk loans and lower balances of higher risk loans in addition to lower adjustments to the historical loss for all loan
categories for improving economic conditions.
Other Income. Other
income increased $931 thousand, or 34.7%, to $3.6 million during the year ended September 30, 2024 compared with $2.7 million the year
ended September 30, 2023. The Company’s gains on other real estate, SBA loans and premises were $1.3 million, $599 thousand and
$60 thousand, respectively, during the year ended September 30, 2024 compared with $0, $565 thousand and $9 thousand, respectively, during
the year ended September 30, 2023. In addition, service charges decreased $457 thousand to $1.1 million during the year ended September
30, 2024 compared with $1.6 million for the year ended September 30, 2023 from lower commercial loan prepayment fees.
Other Expenses. Other
expenses increased $1.1 million, or 5.7%, to $20.4 million during the year ended September 30, 2024 compared to $19.3 million for the
year ended September 30, 2023 due primarily to higher compensation benefit expenses, which increased $689 thousand, or 6.2%, to $11.8
million for the year ended September 30, 2024 from $11.1 million for the year ended September 30, 2023. The increase was due to fewer
open positions between the two years and the additions of a commercial lender and a commercial credit analyst, as well as annual merit
increases.
Other expenses increased $202
thousand, or 9.4%, from higher recruitment costs, loan origination and servicing costs and operating expenses. In addition, deposit insurance
premiums increased $81 thousand, or 23.8%, to $421 thousand from deposit growth and higher insurance assessment rates implemented by the
FDIC for all insured institutions effective January 1, 2023.
Income Tax Expense.
Income tax expense increased $285 thousand, or 9.4%, to $3.3 million for the year ended September 30, 2024 from $3.0 million for the year
ended September 30, 2023. The increase was attributable to higher pre-tax income and a $456 thousand expense for taxable gains on surrendered
bank-owned life insurance policies during the year ended September 30, 2024. The Company’s effective income tax rate was 29.9% for
the year ended September 30, 2024 and 28.2% for the year ended September 30, 2023.
Management of Market Risk
General . The
majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate
risk. Our assets, consisting primarily of mortgage loans, have longer maturities than our
27
liabilities, consisting primarily of deposits.
As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income
to changes in market interest rates. Accordingly, our Board of Directors has established an Asset and Liability Management Committee which
is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is
appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this
risk consistent with the guidelines approved by the Board of Directors. Senior management monitors the level of interest rate risk on
a regular basis and the Asset and Liability Committee meets at least on a quarterly basis to review our asset/liability policies and interest
rate risk position.
We have sought to manage our
interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. As part of our ongoing
asset-liability management, we seek to manage our exposure to interest rate risk by originating and retaining adjustable-rate loans in
the residential, construction and commercial real estate loan portfolios, by using alternative funding sources, such as advances from
the FHLBNY, to “match fund” longer-term residential and commercial mortgage loans, and by originating and retaining variable-rate
home equity and short-term and medium-term fixed-rate commercial business loans. We also offer a commercial loan swap product that allows
the Bank to receive floating-rate interest loan payments while its borrowers pay a fixed rate of interest on their loans. We have also
increased money market account deposits as a percentage of our total deposits. Money market accounts offer a variable rate based on market
indications. By following these strategies, we believe that we are well-positioned to react to changes in market interest rates.
Net Interest Income
Analysis. The table below sets forth, as of September 30, 2024, the estimated changes in our Net Interest Income (“NII”)
for each of the next two years that would result from the designated instantaneous changes in interest rates. These estimates require
making certain assumptions including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities
and decay rates. These assumptions are inherently uncertain and, as a result, we cannot precisely predict the impact of changes in interest
rates on net interest income. Actual results may differ significantly due to timing, magnitude and frequency of interest rate changes
and changes in market conditions. Further, certain shortcomings are inherent in the methodology used in the interest rate risk measurement.
Modeling changes in net interest income require making certain assumptions that may or may not reflect the manner in which actual yields
and costs respond to changes in market interest rates.
Change in
Estimated Increase
Estimated Increase
Interest rates
Estimated
(Decrease) in NII Year 1
Estimated
(Decrease) in NII Year 2
(Basis Points) (1)
NII Year 1
Amount
Percentage
NII Year 2
Amount
Percentage
(Dollars in thousands)
+200
$ 26,550
$ (2,283 )
-7.92%
$ 30,140
$ (870 )
-2.81%
Unchanged
28,833
—
—
31,010
—
—
-200
30,583
1,750
6.07%
30,847
(163 )
-0.53%
(1) Assumes an instantaneous uniform change in interest rates at all maturities.
Liquidity and Capital Resources
Liquidity is the ability to
meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments,
FHLBNY borrowings and maturities and sales of investment securities. While maturities and scheduled amortization of loans and securities
are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions
and competition. Our Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity targets and strategies
in order to ensure that sufficient liquidity exists for meeting the borrowing needs of our customers as well as unanticipated contingencies.
We seek to maintain a liquidity ratio of 5.0% of assets or greater. The liquidity ratio is calculated by determining the sum of the difference
between liquid assets (cash and unpledged investment securities) and short-term liabilities (estimated 30-day deposit outflows), plus
our borrowing capacity from the FHLBNY and dividing the sum by total assets. At September 30, 2024, our liquidity ratio was 7.6% of assets.
We regularly adjust our investments
in liquid assets based upon our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits
and securities, and the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning
deposits and short-and intermediate-term securities.
Our most liquid assets are
cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during
any given period. At September 30, 2024, cash and cash equivalents totaled
28
$25.6 million compared with $72.5 million at September 30,
2023. Securities classified as available-for-sale, which provide additional sources of liquidity from sales, totaled $15.6 million at
September 30, 2024 compared with $10.1 million at September 30, 2023. At September 30, 2024, we also had the ability to borrow $272.3 million
from the FHLBNY compared with $230.1 million at September 30 2023. At September 30, 2024, we had an aggregate of $28.6 million in advances
outstanding and $120.0 million in municipal letters of credit outstanding with the FHLBNY leaving $164.9 million as our remaining borrowing
capacity. Our cash flows are derived from operating activities, investing activities and financing activities as reported in our consolidated
Statements of Cash Flows included in our consolidated Financial Statements.
At September 30, 2024, we
had $28.6 million in loan origination commitments outstanding. In addition to commitments to originate loans, we had $88.3 million in
unused lines of credit to borrowers. Certificates of deposit due within one year of September 30, 2024 totaled $99.2 million, or 12.45%
of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits
and FHLBNY advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than
we currently pay on the certificates of deposit (including individual retirement accounts and brokered certificate deposit accounts) due
on or before September 30, 2025. We believe, however, that based on past experience a significant portion of our certificates of deposit
(including individual retirement accounts and brokered certificate deposit accounts) will remain with us. We have the ability to attract
and retain deposits by adjusting the interest rates offered.
Our primary investing activities
are the origination of loans and the purchase of investment securities. We originated $161.1 million in loans and purchased $12.5 million
of investment securities during the year ended September 30, 2024. Comparatively, we originated $188.5 million in loans and purchased
$6.6 million of investment securities during the year ended September 30, 2023.
Financing activities consist
primarily of activity in deposit accounts and FHLBNY advances. We experienced a net increase in total deposits of $41.2 million, or 5.46%,
to $796.7 million for the year ended September 30, 2024 compared with a net increase in total deposits of $87.7 million, or 13.1%, to
$755.5 million for the year ended September 30, 2023. Deposit flows are affected by the overall level of interest rates, the interest
rates and products offered by us and our local competitors and other factors.
Liquidity management is both
a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements
exist with the FHLBNY, which provide an additional source of funds. FHLBNY advances totaled $28.6 million and $29.5 million at September
30, 2024 and 2023, respectively. FHLBNY advances have primarily been used to fund loan demand.
In addition to borrowings,
the Bank has the ability to raise deposits on the brokered market or through deposit listing services. At September 30, 2024, the Bank
held $29.6 million in brokered deposits and $20.0 million from deposit listing services.
Magyar Bank is subject to
various regulatory capital requirements, (see “Supervision and Regulation-Federal Banking Regulation-Capital Requirements”).
As of September 30, 2024, Magyar Bank’s Tier 1 capital as a percentage of the Bank’s average assets was 11.11% and the total
qualifying capital as a percentage of risk-weighted assets was 15.85%.
Bank-owned life insurance
is a tax-advantaged financing transaction that is used to offset employee benefit plan costs. Policies are purchased insuring directors
and officers of Magyar Bank using a single premium method of payment. Magyar Bank is the owner and beneficiary of the policies and records
tax-free income through cash surrender value accumulation. We have minimized our credit exposure by choosing carriers that are highly
rated and limiting the concentration of any one carrier. The investment in bank-owned life insurance has no significant impact on our
capital and liquidity.
Off-Balance Sheet Arrangements
and Aggregate Contractual Obligations
Commitments.
As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments
to extend credit, standby letters of credit and unused lines of credit. While these contractual obligations represent our future cash
requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject
to the same credit policies and approval process accorded to loans made by us. For additional information, see Note O, “Commitments,”
and Note P “Financial Instruments with Off-Balance-Sheet Risk” to our consolidated financial statements.
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Contractual Obligations.
In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for
premises and equipment.
Critical Accounting Policies
The Company’s accounting
policies are more fully described in Note B - Summary of Significant Accounting Policies in the notes to the Consolidated Financial Statements.
As disclosed in Note B, the preparation of financial statements in conformity with generally accepted accounting principles in the United
States requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ significantly from those estimates. The Company believes that the following discussion
addresses the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s
financial condition and results of operations and require management’s most difficult, subjective and complex judgments.
Allowance for Credit Losses.
The allowance for credit
losses is the amount estimated by management as necessary to cover expected credit losses in the loan portfolio at the balance sheet
date. The allowance is established through the provision for credit losses which is charged against income. In determining the
allowance for credit losses, management makes significant estimates and has identified this policy as one of our most critical. Due
to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic
environment that could result in changes to the amount of the recorded allowance for credit losses, the methodology for determining
the allowance for credit losses is considered a critical accounting policy by management.
As a substantial amount of
our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans and discounted cash
flow valuations of properties are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisals
and discounted cash flow valuations are instrumental in determining the value of properties. Overly optimistic assumptions or negative
changes to assumptions could significantly affect the valuation of a property securing a loan and the related allowance determined. The
assumptions supporting such appraisals and discounted cash flow valuations are carefully reviewed by management to determine that the
resulting values reasonably reflect amounts realizable on the related loans.
Management performs a quarterly
evaluation of the adequacy of the allowance for credit losses. We consider a variety of factors in establishing this estimate including,
but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying
collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently
subjective as it requires material estimates by management that may be susceptible to significant change based on changes in economic
and real estate market conditions.
The evaluation has a specific
and general component. The specific component relates to loans that are delinquent or otherwise identified as impaired through the application
of our loan review process and our loan grading system. All such loans are evaluated individually, with principal consideration given
to the value of the collateral securing the loan and discounted cash flows. Specific impairment allowances are established as required
by this analysis. However, the Bank’s Federal and State regulators generally require that the specific reserve against impaired
collateral-dependent loans be charged-off, reducing the carrying balance of the loan and allowance for loan loss. The general component
is determined by segregating the remaining loans into homogenous categories. We analyze the historical loss experience of each category,
delinquency trends, general economic conditions and geographic and industry concentrations in establishing the general portion of the
reserve. This analysis establishes factors that are applied to the loan groups to determine the amount of the general component of the
allowance for credit losses.
The process of determining
the level of the allowance for credit losses requires a high degree of judgment. To the extent actual outcomes differ from our estimates,
additional provision for credit and lease losses may be required that would reduce future earnings.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Not
required for smaller reporting companies.
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