UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑ QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
Commission File Number 000-51726
Magyar Bancorp, Inc.
(Exact Name of Registrant as Specified in Its Charter)
(732) 342-7600
(Issuer’s Telephone Number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
The number of shares outstanding of the issuer's common stock at August 1, 2020 was 5,810,746.
MAGYAR BANCORP, INC.
Form 10-Q Quarterly Report
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MAGYAR BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated Statements of Operations
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Consolidated Statements of Comprehensive Income
(In Thousands)
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Consolidated Statements of Changes in Stockholders' Equity
For the Three and Nine Months Ended June 30, 2020 and 2019
(In Thousands, Except for Share Amounts)
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Consolidated Statements of Cash Flows
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Notes to Consolidated Financial Statements
(Unaudited)
NOTE A – BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Magyar Bancorp, Inc. (the “Company”), its wholly owned subsidiary, Magyar Bank (the “Bank”), and the Bank’s wholly owned subsidiaries Magyar Service Corporation, Hungaria Urban Renewal, LLC, and MagBank Investment Company. All material intercompany transactions and balances have been eliminated. The Company prepares its financial statements on the accrual basis and in conformity with accounting principles generally accepted in the United States of America ("US GAAP"). The unaudited information furnished herein reflects all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented.
Operating results for the three and nine months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending September 30, 2020. The September 30, 2019 information has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by US GAAP for complete consolidated financial statements.
The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of other real estate owned, and the assessment of realizability of deferred income tax assets.
The Company has evaluated events and transactions occurring subsequent to the balance sheet date of June 30, 2020 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 issued.
NOTE B- RECENT ACCOUNTING PRONOUNCEMENTS
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. 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.
In October 2019, the FASB voted to defer the effective date of ASU 2016-13 for smaller reporting companies to fiscal years beginning after December 15, 2022 (October 1, 2023 for the Company), and interim periods within those fiscal years. The Company currently expects to continue to qualify as a smaller reporting company, based upon the current SEC definition, and as a result, will likely be able to defer implementation of the new standard for a period of time. The Company did not early adopt as of January 1, 2020, but will continue to review factors that might indicate that the full deferral time period should not be used. The Company continues to evaluate the impact the new standard will have on the accounting for credit losses, but the Company may recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, consistent with regulatory expectations set forth in interagency guidance issued at the end of 2016. The Company cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on its consolidated financial condition or results of operations.
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. The ASU removes the disclosures of 1) the amounts in accumulated other comprehensive income that the entity expects to recognize in net periodic benefit cost during the next fiscal year, 2) the amount and timing of plan assets expected to be returned to the employer and 3) certain related party disclosures. The ASU clarifies the disclosure requirements for the projected benefit obligation (“PBO”) and fair value of plan assets for plans with PBOs in excess of plan assets and the accumulated benefit obligation (“ABO”) and fair value of plan assets for plans with ABOs in excess of plan assets. The ASU adds disclosure requirements for the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and for an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. ASU 2018-14 is effective for public business entities in fiscal years ending after December 15, 2020 (Beginning October 1, 2021 for the Company). Early adoption is permitted. The Corporation is currently evaluating the impact this ASU will have on its consolidated financial condition or results of operations.
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NOTE C - CONTINGENCIES
The Company, from time to time, is 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 D - EARNINGS PER SHARE
Basic and diluted earnings per share for the three and nine months ended June 30, 2020 and 2019 were calculated by dividing net income by the weighted-average number of shares outstanding for the period considering the effect of dilutive equity options and stock awards for the diluted earnings per share calculations.
There were no outstanding stock awards or options to purchase common stock at June 30, 2020 and 2019.
NOTE E – STOCK-BASED COMPENSATION AND STOCK REPURCHASE PROGRAM
The Company follows FASB Accounting Standards Codification (“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 consolidated financial statements. The cost is measured based on the fair value of the equity or liability instruments issued.
Stock options generally vest over a five-year service period and expire ten years from issuance. The fair values of all option grants were estimated using the Black-Scholes option-pricing model. Management recognizes compensation expense for the fair values of these awards, which have graded vesting, on a straight-line basis over the vesting period of the awards. Once vested, these awards are irrevocable.
There were no grants, vested shares or forfeitures of non-vested restricted stock awards the three and nine months ended June 30, 2020 and 2019.
There were no stock option and stock award expenses included with compensation expense for the three and nine months ended June 30, 2020 and 2019.
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The Company announced in November 2007 its second stock repurchase program of up to 5% of its publicly-held outstanding shares of common stock, or 129,924 shares. Through June 30, 2020, the Company had repurchased a total of 91,000 shares of its common stock at an average cost of $8.41 per share under this program, including 10,000 shares purchased at an average price of $9.03 per share during the nine months ended June 30, 2020. Under the stock repurchase program, 38,924 shares of the 129,924 shares authorized remained available for repurchase as of June 30, 2020. The Company’s intended use of the repurchased shares is for general corporate purposes. The Company held 112,996 total treasury stock shares at June 30, 2020.
The Company has an Employee Stock Ownership Plan ("ESOP") for the benefit of employees of the Company and the Bank who meet the eligibility requirements as defined in the plan. In 2006 the ESOP trust purchased 217,863 shares of common stock in the open market using proceeds of a loan from the Company. The total cost of shares purchased by the ESOP trust was $2.3 million, reflecting an average cost per share of $10.58. 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. The loan bears a variable interest rate that adjusts annually every January 1st to the then published Prime Rate (4.75% at January 1, 2020) with principal and interest payable annually in equal installments over thirty years. The loan is secured by shares of the Company’s stock.
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.
At June 30, 2020, shares allocated to participants totaled 190,661. Unallocated ESOP shares held in suspense totaled 27,202 and had a fair market value of $245,458. The Company's contribution expense for the ESOP was $101,000 and $112,000 for the nine months ended June 30, 2020 and 2019, respectively.
NOTE F – OTHER COMPREHENSIVE INCOME
The components of other comprehensive income and the related income tax effects are as follows:
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NOTE G – 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 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.
In accordance with 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:
The Company based 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 securities 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-sponsored mortgage-backed securities and private label mortgage-backed securities. The fair values of these securities are obtained from an independent nationally recognized pricing service. An independent pricing service provides the Company with prices which are categorized as Level 2, as quoted prices in active markets for identical assets are generally not available for the securities in the Company’s portfolio. Various modeling techniques are used to determine pricing for Company’s mortgage-backed securities, including option pricing and discounted cash flow models. The inputs to these models include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data.
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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.
The following is a description of valuation methodologies used for assets measured at fair value on a non-recurring basis.
Mortgage Servicing Rights, net
Mortgage Servicing Rights (MSRs) are carried at the lower of cost or estimated fair value. The estimated fair value of MSR is determined through a calculation of future cash flows, incorporating estimates of assumptions market participants would use in determining fair value including market discount rates, prepayment speeds, servicing income, servicing costs, default rates and other market driven data, including the market’s perception of future interest rate movements and, as such, are classified as Level 3. The Company had MSRs totaling $16,000 and $26,000 at June 30, 2020 and September 30, 2019, respectively.
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 (the rate of return implicit in the loan); 2) the asset’s observable market price; or 3) the fair value of the collateral, less anticipated selling and disposition costs, if the asset is collateral dependent. The regulatory agencies require the last 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 costs. Fair value is estimated through current appraisals, and adjusted by management as necessary, 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 Company’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. 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.
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Other Real Estate Owned
The fair value of other real estate owned is determined through current appraisals, and adjusted as necessary, by management, to reflect current market conditions and anticipated selling and disposition costs. As such, other real estate owned is generally classified as Level 3.
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 non-recurring basis at June 30, 2020 and September 30, 2019.
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:
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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 June 30, 2020 and September 30, 2019. For short-term financial assets such as cash and cash equivalents and accrued interest receivable, 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 being payable on demand and having no stated maturity.
There were no transfers between fair value measurement placements for the nine months ended June 30 2020.
NOTE H – LEASES
The Company adopted Accounting Standard Update (“ASU”) No. 2016-02, Leases (Topic 842), on October 1, 2019. Topic 842 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 adopted this guidance on October 1, 2019, electing the modified retrospective transition approach method that does not adjust previous periods. The Company also elected not to include short-term leases (i.e., leases with initial term of twelve months or less), or equipment leases (deemed immaterial) on the consolidated statements of condition as provided for in the guidance.
The Company has operating leases for five branch locations. Our leases have remaining lease terms of up to 11 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 Company recorded a $3.8 million operating lease right-of-use asset and operating lease liability beginning October 1, 2019. The incremental borrowing rate used by the Company to value its operating leases was based on the interpolated term advance rate available from the Federal Home Loan Bank of New York, based on the remaining lease term as of October 1, 2019.
At June 30, 2020, the Company’s operating lease right-of-use assets and operating lease liabilities totaled $3.4 million and $3.8 million, respectively.
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The following table presents the balance sheet information related to our leases:
The following table summarizes the maturity of our remaining lease liabilities by year:
Total lease expense recorded on the Consolidated Statements of Income within Occupancy expense were $606,000 and $593,000 for the nine months ended June 30, 2020 and 2019, respectively.
NOTE I - INVESTMENT SECURITIES
The following tables summarize the amortized cost and fair values of securities available for sale at June 30, 2020 and September 30, 2019:
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The maturities of the debt securities and certain information regarding the mortgage-backed securities available for sale at June 30, 2020 are summarized in the following table:
The following tables summarize the amortized cost and fair values of securities held to maturity at June 30, 2020 and September 30, 2019:
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The maturities of the debt securities and certain information regarding the mortgage backed securities held to maturity at June 30, 2020 are summarized in the following table:
NOTE J – IMPAIRMENT OF INVESTMENT SECURITIES
The Company recognizes credit-related other-than-temporary impairment on debt securities in earnings while noncredit-related other-than-temporary impairment on debt securities not expected to be sold are recognized in other comprehensive income.
The Company reviews its investment portfolio on a quarterly basis for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and the intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in the market. The Company evaluates its intent and ability to hold debt securities based upon its investment strategy for the particular type of security and its cash flow needs, liquidity position, capital adequacy and interest rate risk position. In addition, the risk of future other-than-temporary impairment may be influenced by prolonged recession in the U.S. economy, changes in real estate values and interest deferrals.
Investment securities with fair values less than their amortized cost contain unrealized losses. The following tables present the gross unrealized losses and fair value at June 30, 2020 and September 30, 2019 for both available for sale and held to maturity securities by investment category and time frame for which the loss has been outstanding:
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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. At June 30, 2020 and September 30, 2019, there were seven and seventeen, respectively, investment securities with unrealized losses.
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 June 30, 2020 and September 30, 2019.
NOTE K – LOANS RECEIVABLE, NET AND RELATED ALLOWANCE FOR LOAN LOSSES
Loans receivable, net were comprised of the following:
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The Bank participated in the Paycheck Protection Program (“PPP”), which was designed by the U.S. Treasury to provide liquidity using the SBA’s platform to small businesses and self-employed individuals to maintain their staff and operations through the COVID-19 pandemic. This liquidity is in the form of a loan, 100% guaranteed by the SBA, that is forgivable provided the funds are used on qualifying payroll costs, and to a lesser extent, rent, utilities and interest on qualifying mortgage payments. The PPP loans, which are included with the commercial business loans in the table above, bear a fixed rate of 1.0% and loan payments are deferred for the first 6 months. The Company funded 341 loans totaling $55.9 million through June 30, 2020 for which it received $2.0 million in origination fees from the SBA. These fees are being amortized over the expected lives of the loans, which ranges from two to five years.
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: amortizing term loans, which are primarily first liens, and home equity lines of credit, which are generally second liens. The commercial real estate loan segment is further disaggregated into three classes: loans secured by multifamily structures, owner-occupied commercial structures, and non-owner occupied nonresidential properties. The construction loan segment consists primarily of loans to 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 other loan segment consists primarily of stock-secured installment consumer 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 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 tables present impaired loans by class, segregated by those for which a specific allowance was required and charged-off and those for which a specific allowance was not necessary at the dates presented:
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The average recorded investment in impaired loans was $10.8 million and $8.9 million for the nine months ended June 30, 2020 and 2019, respectively. The Company’s impaired loans include delinquent non-accrual loans and performing Troubled Debt Restructurings (“TDRs”), as TDRs remain impaired loans until fully repaid. There were no TDRs during the nine months ended June 30, 2020. There was one TDR during the nine months ended June 30, 2019 totaling $365,000 that resulted from the restructure of a previously impaired, non-accrual loan. During the nine months ended June 30, 2020 and 2019, interest income of $104,000 and $179,000, respectively, were recognized for TDR loans while no interest income was recognized for delinquent non-accrual loans.
The following tables present the average recorded investment in impaired loans for the periods indicated. There was no interest income recognized on impaired loans during the periods presented.
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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. Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. 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 at the dates presented:
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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 at the dates presented:
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 (“NPLs”).
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.
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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 a defined number of consecutive 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 include: 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 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 table summarizes the ALL by loan category and the related activity for the nine months ended June 30, 2020:
The following table summarizes the ALL by loan category and the related activity for the nine months ended June 30, 2019:
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The following tables summarize the ALL 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 June 30, 2020 and September 30, 2019:
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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 Troubled Debt Restructuring (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 include, but are not limited to, interest rate reductions, limitations on the accrued interest charged, term extensions, and deferment of principal.
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 were no TDRs for the three and nine months ended June 30, 2020 compared with one TDR of a one-to-four family residential loan for the three and nine months ended June 30, 2019.
NOTE L - DEPOSITS
A summary of deposits by type of account are summarized as follows:
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NOTE M – INCOME TAXES
The Company records income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities: (i) are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns; (ii) are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases; and (iii) are measured using enacted tax rates expected to apply in the years when those temporary differences are expected to be recovered or settled.
Where applicable, deferred tax assets are reduced by a valuation allowance for any portions determined not likely to be realized. The valuation allowance is assessed by management on a quarterly basis and adjusted, by a charge or credit to income tax expense, as changes in facts and circumstances warrant. In assessing whether it is more likely than not that some portion or all of the deferred tax assets will not be realized, management considers projections of future taxable income, the projected periods in which current temporary differences will be deductible, the availability of carry forwards, feasible and permissible tax planning strategies and existing tax laws and regulations. The Company did not have a valuation allowance against its net deferred tax assets at June 30, 2020 or September 30, 2019.
A reconciliation of income tax between the amounts calculated based upon pre-tax income at the Company’s federal statutory rate and the amounts reflected in the consolidated statements of operations are as follows:
On July 1, 2018, the State of New Jersey's Assembly signed into law a new bill, effective January 1, 2018, that imposed a temporary surtax on corporations earning New Jersey allocated income in excess of $1 million. The surtax was set at a rate of 2.5% for tax years beginning on or after January 1, 2018 through December 31, 2019, and at a rate of 1.5% for years beginning on or after January 1, 2020, through December 31, 2021. Accordingly, the Company is using an 11.5% State tax rate for the calculation of its State income tax expense for the nine months ended June 30, 2020.
NOTE N - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company occasionally uses 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 June 30, 2020 and September 30, 2019, the Company did not hold any interest rate floors or collars.
In the normal course of business the Bank is a party to financial instruments with off-balance-sheet risk and in only to meet the financing needs of its customers. These financial instruments are commitments to extend credit are summarized in the below table. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
When used in this filing and in future filings by the Company with the Securities and Exchange Commission, in the Company’s press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases, “anticipate,” “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “projected,” “believes”, or similar expressions are intended to identify “forward looking statements.” Forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, those risks previously disclosed by the Company in Item 1A of its Annual Report on Form 10-K as may be supplemented by Quarterly Reports on Form 10-Q filed with the SEC, general economic conditions, changes in interest rates, regulatory considerations, competition, technological developments, retention and recruitment of qualified personnel, and market acceptance of the Company’s pricing, products and services, and with respect to the loans extended by the Bank and real estate owned, the following: risks related to the economic environment in the market areas in which the Bank operates, particularly with respect to the real estate market in New Jersey; the risk that the value of the real estate securing these loans may decline in value; and the risk that significant expense may be incurred by the Company in connection with the resolution of these loans. In addition, the COVID-19 pandemic is having an adverse impact on the Company, its customers and the communities it serves. The adverse effect of the COVID-19 pandemic on the Company, its customers and the communities where it operates may adversely affect the Company’s business, results of operations and financial condition for an indefinite period of time.
The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and advises readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investing activities, and competitive and regulatory factors, could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.
Critical Accounting Policies
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. Critical accounting policies may involve complex subjective decisions or assessments. We consider the following to be our critical accounting policies.
Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover credit losses in the loan portfolio both probable and reasonably estimable at the balance sheet date. The allowance is established through the provision for loan losses which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of our most critical. Due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses, the methodology for determining the allowance for loan losses is considered a critical accounting policy by management.
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As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans and discounted cash flow valuations of properties are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisals and discounted cash flow valuations are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly affect the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals and discounted cash flow valuations are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans.
Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. We consider a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates by management that may be susceptible to significant change based on changes in economic and real estate market conditions.
The evaluation has a specific and general component. The specific component relates to loans that are delinquent or otherwise identified as impaired through the application of our loan review process and our loan grading system. All such loans are evaluated individually, with principal consideration given to the value of the collateral securing the loan and discounted cash flows. Specific impairment allowances are established as required by this analysis. The general component is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general component of the allowance for loan losses.
Actual loan losses may be significantly greater than the allowances we have established, which could have a material negative effect on our financial results.
Other Real Estate Owned. Real estate acquired through foreclosure, or a deed-in-lieu of foreclosure, is recorded at fair value less estimated selling costs at the date of acquisition or transfer, and subsequently at the lower of its new cost or fair value less estimated selling costs. Adjustments to the carrying value at the date of acquisition or transfer are charged to the allowance for loan losses. The carrying value of the individual properties is subsequently adjusted to the extent it exceeds estimated fair value less estimated selling costs, at which time a provision for losses on such real estate is charged to operations.
Appraisals are critical in determining the fair value of the other real estate owned amount. Assumptions for appraisals are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly affect the valuation of a property. The assumptions supporting such appraisals are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable.
Investment Securities.If the fair value of a security is less than its amortized cost, the security is deemed to be impaired. Management evaluates all securities with unrealized losses quarterly to determine if such impairments are “temporary” or “other-than-temporary” in accordance with applicable accounting guidance. The Company accounts for temporary impairments based upon security classification as either available-for-sale, held-to-maturity, or trading. Temporary impairments on “available-for-sale” securities are recognized, on a tax-effected basis, through accumulated other comprehensive income (“AOCI”) with offsetting entries adjusting the carrying value of the security and the balance of deferred taxes. Conversely, the Company does not adjust the carrying value of “held-to-maturity” securities for temporary impairments, although information concerning the amount and duration of impairments on held to maturity securities is generally disclosed in periodic financial statements. The carrying value of securities held in a trading portfolio is adjusted to their fair value through earnings on a daily basis. However, the Company maintained no securities in trading portfolios at or during the periods presented in these financial statements.
The Company accounts for other-than-temporary impairments based upon several considerations. First, other-than-temporary impairments on securities that the Company has decided to sell as of the close of a fiscal period, or will, more likely than not, be required to sell prior to the full recovery of their fair value to a level equal to their amortized cost, are recognized in operations. If neither of these criteria apply, then the other-than-temporary impairment is separated into credit-related and noncredit-related components. The credit-related impairment generally represents the amount by which the present value of the cash flows that are expected to be collected on an other-than-temporarily impaired security fall below its amortized cost while the noncredit-related component represents the remaining portion of the impairment not otherwise designated as credit-related. The Company recognizes credit-related, other-than-temporary impairments in earnings, while noncredit-related, other-than-temporary impairments on debt securities are recognized, net of deferred taxes, in AOCI. Management did not account for any other-than-temporary impairments at or during the periods presented in these financial statements.
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Fair Value.We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Our securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets or liabilities on a non-recurring basis, such as held-to-maturity securities, mortgage servicing rights, loans receivable and other real estate owned. These non-recurring fair value adjustments involve the application of lower-of-cost-or-market accounting or write-downs of individual assets.
In accordance with ASC 820, Fair Value Measurements and Disclosures, we group our assets and liabilities at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. We base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Deferred Income Taxes.The Company records income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities: (i) are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns; (ii) are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases; and (iii) are measured using enacted tax rates expected to apply in the years when those temporary differences are expected to be recovered or settled.
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.
Coronavirus/COVID-19
The extraordinary impact of the Coronavirus/COVID-19 (“COVID-19”) has created an unprecedented environment for consumers and businesses alike. To protect its employees and customers from potential exposure to the virus, all Magyar Bank lobbies were closed from March 20th through June 8th. During that period the Bank continued to serve its community through its drive-up lanes, online banking, mobile services, and ATMs. Operational staff worked on a rotational basis and between their primary offices and our disaster recovery location to limit their potential exposure to COVID-19 and to continue providing banking services to our customers.
To assist its customers, Magyar Bank is offering loan payment deferrals to borrowers unable to pay due to the effects of COVID-19. The Bank has received significant numbers of requests to modify loan terms to defer principal and/or interest payments, and has agreed to such deferrals or are in the process of doing so. The banking regulatory agencies, through an Interagency Statement dated April 7, 2020, are encouraging financial institutions to work with borrowers who request loan modifications or deferrals as a result of COVID-19. Under Section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 modifications. A financial institution may temporarily suspend any determination of a loan modified as a result of COVID-19 as being a troubled debt restructuring (“TDR”), including the requirement to determine impairment for accounting purposes. Similarly, the Financial Accounting Standards Board has confirmed that short-term modifications made on a good-faith basis in response to COVID-19 to loan customers who were current prior to any relief are not TDRs.
Loan payment deferral requests are considered on a case-by-case basis and are initially approved for a 3 month period for principal and interest payments or for interest only payments depending on the borrower’s circumstances. An additional 3 month period is available for customers that remain unable to make their scheduled loan payments due to COVID-19 after the initial 3 month deferral period. As of June 30, 2020, we had modified 268 loans aggregating $158.5 million, primarily consisting of the deferral of principal and/or interest payments for a period of 90 days. Details with respect to actual loan modifications are as follows:
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The CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”). As a qualified SBA lender, Magyar Bank was automatically authorized to originate PPP loans. An eligible business could apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly “payroll costs;” or (2) $10.0 million. PPP loans have: (a) an interest rate of 1.0%, (b) a five year loan term to maturity for loans made on or after June 5, 2020 (loans made prior to June 5, 2020 have a two-year term, however borrowers and lenders may mutually agree to extend the maturity for such loans to five years); and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP.
The Bank funded 341 PPP loans totaling $55.9 million through June 30, 2020 for which it received $2.0 million in origination fees from the SBA. The Bank receives a processing fee from the SBA based on a percentage of the PPP loan as follows: 5% for loans under $350,000, 3% for loans of $350,000 up to $1,999,900, and 1% for loans of $2,000,000 or more. The processing fees are being amortized over the expected life of the loans.
On April 9, 2020 the Board of Governors of the Federal Reserve announced the Paycheck Protection Program Lending Facility (“PPPLF”), authorized under section 13(3) of the Federal Reserve Act, to facilitate lending by eligible financial institutions to small businesses under the Paycheck Protection Program of the CARES Act. Under the PPPLF, the Federal Reserve Bank of New York provides advances with a fixed interest rate of 0.35% to Magyar Bank on a non-recourse basis, taking PPP loans as collateral.
Under section 1102 of the CARES Act, a PPP Loan is assigned a risk weight of zero percent under the risk-based capital rules of the federal banking agencies. On April 9, 2020, the Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation issued an interim final rule to allow banking organizations to neutralize the effect of PPP loans financed under the PPPLF on Tier 1 leverage capital ratios. At June 30, 2020, the Bank had borrowed $36.9 million in PPPLF advances from the Federal Reserve, pledging an equal amount of PPP loans as collateral.
The health of the banking industry is highly correlated with that of the economy. The closure of non-essential businesses in our local and national economies increases the likelihood of recession, which typically results in an increased level of credit losses. Accordingly, our provisions for loan loss have increased and will be closely monitored throughout the pandemic. In addition to utilizing quantitative loss factors, the Company considers qualitative factors, such as changes in underwriting policies, current economic conditions, delinquency statistics, the adequacy of the underlying collateral, and the financial strength of the borrower. The impact of the COVID-19 pandemic on the performance of the Company’s loan portfolio in future quarters is unknown, however all of these factors are likely to be affected by the COVID-19 pandemic.
Comparison of Financial Condition at June 30, 2020 and September 30, 2019
Total assets increased $128.1 million, or 20.3%, to $758.4 million at June 30, 2020 from $630.3 million at September 30, 2019. The increase was primarily attributable to increases in total loans receivable and interest-earning deposits with banks.
Cash and interest bearing deposits with banks increased $40.5 million, or 188.8%, to $62.0 million at June 30, 2020 from $21.5 million at September 30, 2019 as deposit inflows outpaced loan originations. Interest bearing deposits with banks increased $32.8 million during the June 30, 2020 quarter, reflecting higher commercial and consumer deposit balances.
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Investment securities decreased $1.8 million to $44.4 million at June 30, 2020 from $46.2 million at September 30, 2019. The Company purchased $15.3 million of U.S. Government-sponsored enterprise obligations, sold securities totaling $6.1 million, received calls and principal repayments totaling $11.1 million, and experienced an increase of $83,000 in the mark-to-market value of its available-for-sale investment securities.
Investment securities at June 30, 2020 consisted of $36.1 million in mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises, $5.0 million in U.S. government agencies and U.S. government-sponsored enterprise debt securities, $3.0 million in corporate notes, and $263,000 in “private-label” mortgage-backed securities. There were no other-than-temporary-impairment charges for the Company’s investment securities for the nine months ended June 30, 2020.
Total loans receivable increased $89.5 million, or 17.1%, during the nine months ended June 30, 2020 to $612.5 million from $523.0 million at September 30, 2019. The loan portfolio was comprised of $249.2 million (40.7%) commercial real estate loans, $213.4 million (34.8%) one-to-four family residential mortgage loans, $101.1 million (16.5%) commercial business loans, $23.4 million (3.8%) construction loans, $20.8 million (3.4%) home equity lines of credit and $4.6 million (0.8%) other loans. Expansion of the portfolio during the nine months ended June 30, 2020 occurred in commercial business loans, which increased $52.3 million, or 107.3%, to $101.1 million (including $55.9 million in PPP loans originated during the June 30, 2020 quarter), in 1-4 family residential real estate loans (including home equity lines of credit), which increased $26.0 million, or 12.5%, to $234.2 million, and in commercial real estate loans, which increased $16.6 million, or 7.1%, to $249.2 million. Partially offsetting these increases were construction loans, which decreased $5.1 million, or 17.9%, to $23.4 million, and other loans, which decreased $336,000, or 6.7%, to $4.6 million during the nine month period.
Total non-performing loans decreased $215,000 to $8.9 million during the three months ended June 30, 2020 from payments totaling $150,000 and one $65,000 charge-off. Total non-performing loans increased $2.0 million from $6.9 million at September 30, 2019 from new non-performing loans, net of payments and charge-offs on unrelated non-performing loans during the period. Based on updated appraisals of the real estate securing the loans, management believes the new non-performing loans are adequately secured by real estate. The ratio of non-performing loans to total loans increased to 1.45% at June 30, 2020 from 1.32% at September 30, 2019. Management established $221,000 in specific reserves for three of the loans. 2020. Due to the COVID-19 pandemic, foreclosures of collateral securing residential real estate loans have been temporarily suspended while the foreclosure proceedings of commercial real estate is expected to slow significantly as court hearings have been postponed until further notice. The ratio of non-performing loans to total loans increased to 1.45% at June 30, 2020 from 1.32% at September 30, 2019. Year-to-date, there were $65,000 charge offs and there were $108,000 in recoveries of previously charged-off non-performing loans.
During the nine months ended June 30, 2020, the allowance for loan losses increased $1.1 million to $6.0 million. The increase was attributable to the COVID-19 pandemic’s impact on the Bank’s local economy. Management adjusted its factor affecting historical losses for economic conditions for all segments of its loan portfolio at June 30, 2020. The allowance for loan losses as a percentage of non-performing loans decreased to 67.4% at June 30, 2020 compared with 70.9% at September 30, 2019. At June 30, 2020, the Company’s allowance for loan losses as a percentage of total loans was 0.98% compared with 0.93% at September 30, 2019.
Future increases in the allowance for loan losses may be necessary based on the growth of the loan portfolio, the change in composition of the loan portfolio, possible future increases in non-performing loans and charge-offs, and the possible deterioration of the current economic environment due to the COVID-19 pandemic.
Other real estate owned decreased $1.3 million, or 18.1%, to $6.2 million at June 30, 2020 from $7.5 million at September 30, 2019. The decrease was due to the sale of four properties totaling $1.0 million and valuation allowances totaling $371,000 based on updated appraisals or executed contracts of sale. The four properties sold were sold above carrying value for a total gain of $34,000.
Total deposits increased $93.7 million, or 17.7%, to $623.8 million at June 30, 2020. The increase in deposits occurred in non-interest bearing checking accounts, which increased $53.5 million, or 50.3%, to $159.9 million, in certificates of deposit (including individual retirement accounts), which increased $12.7 million, or 10.9%, to $129.4 million, in interest-bearing checking accounts, which increased $12.5 million, or 26.0%, to $60.7 million, in money market accounts, which increased $9.9 million, or 5.3%, to $198.1 million, and in savings accounts, which increased $5.1 million, or 7.2%, to $75.7 million. Included with the total deposits at June 30, 2020 and September 30, 2019 were brokered certificates of deposit totaling $9.4 million and $6.9 million, respectively.
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The Bank experienced a $62.9 million increase in deposits during the three months ended June 30, 2020. Commercial and consumer deposit inflows were extraordinarily higher from PPP loan disbursements, the government stimulus programs, lower spending and customers’ preferences for liquidity during the ongoing COVID-19 pandemic.
Borrowings increased $30.7 million, or 85.0%, to $66.9 million at June 30, 2020 from $36.2 million at September 30, 2019. The Bank borrowed $36.9 million in PPPLF advances from the Federal Reserve Bank during the three months ended June 30, 2020 to offset the liquidity and capital impacts of the PPP loans. Federal Home Loan Bank of New York advances decreased $6.2 million to $30.0 million at June 30, 2020 from $36.2 million at September 30, 2019 as deposit inflows were used to repay maturing long-term advances.
Stockholders’ equity increased $1.4 million, or 2.6%, to $56.1 million at June 30, 2020 from $54.7 million at September 30, 2019. The Company’s book value per share increased to $9.65 at June 30, 2020 from $9.39 at September 30, 2019. The increase in stockholders’ equity was attributable to the Company’s results from operations and treasury share purchases.
The Company repurchased 10,000 shares of its common stock at an average price of $9.03 during the nine months ended June 30, 2020. Through June 30, 2020, the Company had repurchased 91,000 shares at an average price of $8.41 pursuant to the second stock repurchase plan, which reduced outstanding shares to 5,810,746.
Average Balance Sheet for the Three and Nine Months Ended June 30, 2020 and 2019
The following tables present certain information regarding the Company’s financial condition and net interest income for the three and nine months ended June 30, 2020 and 2019. The tables present the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown. We derived average balances from daily balances over the period indicated. Interest income includes fees that we consider adjustments to yields.
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Comparative Average Balance Sheets
(Dollars In Thousands)
(1) Includes passbook savings, money market passbook and club accounts.
(2) Includes interest-bearing checking and money market accounts.
(3) Includes certificates of deposits and individual retirement accounts.
(4) Calculated as annualized net interest income divided by average total interest-earning assets.
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Comparison of Operating Results for the Three Months Ended June 30, 2020 and 2019
Net Income. Net income decreased $217,000, or 29.9% to $509,000 for the three-month period ended June 30, 2020 compared with the three-month period ended June 30, 2019. Higher provisions for loan loss and non-interest expenses more than offset higher net interest and dividend income.
Net Interest and Dividend Income. Net interest and dividend income increased $346,000, or 6.6%, to $5.6 million for the three months ended June 30, 2020 from $5.2 million for the three months ended June 30, 2019.
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A $44.4 million increase in the average net interest-earning assets more than offset a 23 basis point decline in the Company’s net interest margin to 3.26% for the three months ended June 30, 2020 compared to 3.49% for the three months ended June 30, 2019. The lower net interest margin reflected the lower market interest rate environment and the origination of $55.9 million in PPP loans earning 1.0% during the three months ended June 30, 2020.
Interest and Dividend Income. Interest and dividend income decreased $116,000, or 1.7%, to $6.8 million for the three months ended June 30, 2020 compared to $6.9 million for the three months ended June 30, 2019. The decrease was attributable to a 65 basis point decrease in the yield on interest-earning assets to 3.97% for the three months ended June 30, 2020 from 4.62% for the three months ended June 30, 2019, partially offset by an $86.5 million increase in average interest-earning assets between periods. The decline in the yield on interest-earning assets was due to lower market interest rate environment and the origination of $55.9 million in PPP loans earning 1.0% during the three months ended June 30, 2020.
Yields on loans receivable averaging $591.8 million dropped 54 basis points to 4.40% for the three months ended June 30, 2020 compared with $523.1 million yielding 4.94% for the three months ended June 30, 2019. Securities and interest-earning deposits averaged $92.4 million with a yield of 1.14% for the three months ended June 30, 2020, reflecting an increase of $17.9 million, or 24.1% from $74.5 million with a yield of 2.33% for the three months ended June 30, 2019. Lower market interest rates and originations of PPP loans accounted for the overall decline in asset yields.
Interest Expense.Interest expense decreased $462,000, or 27.5%, to $1.2 million for the three months ended June 30, 2020 compared with $1.7 million the three months ended June 30, 2019. The cost of interest-bearing liabilities decreased 50 basis points to 0.97% for the three months ended June 30, 2020 from 1.47% for the three months ended June 30, 2019. This was attributable to a 48 basis point decline in the cost of interest-bearing deposits to 0.92% and an 85 basis point reduction in the cost of borrowings to 1.45%. In addition, the average balance of noninterest-bearing liabilities increased $46.3 million to $175.9 million between the two periods. Lower interest rates on money market and savings accounts contributed to the lower average cost of interest-bearing deposits while PPPLF advances contributed to the lower average cost of borrowings.
Provision for Loan Losses. We establish provisions for loan losses, which are charged to earnings, at a level necessary to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, peer group information and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events occur.
After an evaluation of these factors, management recorded a provision of $438,000 for the three months ended June 30, 2020 compared to $194,000 for the three months ended June 30, 2019. Several loss factors used to determine the appropriate level of the allowance for loan loss were increased during the quarter due to the ongoing COVID-19 pandemic. During the quarter there was one charge-off totaling $65,000 and three recoveries totaling $102,000 from non-performing loans previously charged-offs.
Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Management reviews the level of the allowance on a quarterly basis, and establishes the provision for loan losses based on the factors set forth in the preceding paragraph. As management evaluates the allowance for loan losses, the increased risk associated with larger non-homogenous construction, commercial real estate and commercial business loans may result in larger additions to the allowance for loan losses in future periods. In addition, the ongoing effects of the COVID-19 pandemic on the Company’s loan portfolio may also result in larger additions to the allowance for loan losses in future periods.
Other Income. Non-interest income decreased $48,000, or 11.4%, to $374,000 during the three months ended June 30, 2020 compared to $422,000 for the three months ended June 30, 2019. The decrease was attributable to lower service charges, which decreased $64,000 from the prior year period, due to lower retail fees resulting from the COVID-19 pandemic.
Other Expenses. Non-interest expenses increased $358,000, or 8.1%, to $4.8 million compared with the three months ended June 30, 2019. OREO expenses increased $323,000 to $335,000 due to $311,000 in valuation allowances recorded during the quarter. In addition, legal fees for the collection and foreclosure of collateral securing non-performing loans accounted for a $154,000 increase in professional fee expenses. Offsetting these higher expenses were lower compensation and benefit expenses, which decreased $43,000, or 1.7%, and lower other expenses, which decreased $99,000, or 23.0%, due to the ongoing effects of the COVID-19 pandemic.
Income Tax Expense.The Company recorded tax expense of $214,000 on pre-tax income of $723,000 for the three months ended June 30, 2020, compared to $301,000 on pre-tax income of $1.0 million for the three months ended June 30, 2019. The decrease was the result of lower income from operations. The effective tax rate for the three months ended June 30, 2020 was 29.6% compared with 29.3% for the three months ended June 30, 2019.
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Comparison of Operating Results for the Nine Months Ended June 30, 2020 and 2019
Net Income. Net income decreased $811,000, or 37.2%, to $1.4 million during the nine-month period ended June 30, 2020 from $2.2 million for the nine-month period ended June 30, 2019 due to higher provisions for loan loss and non-interest expenses, which more than offset higher net interest and dividend income between periods.
Net Interest and Dividend Income. The Company’s net interest and dividend income increased $354,000, or 2.3% to $15.7 million for the nine months ended June 30, 2020, compared with the nine months ended June 30, 2019.
A $16.7 million increase in the average net interest-earning assets more than offset a 7 basis point decline in the Company’s net interest margin to 3.34% for the nine months ended June 30, 2020 compared to 3.41% for the nine months ended June 30, 2019. The lower net interest margin reflected the lower market interest rate environment and the origination of $55.9 million in PPP loans earning 1.0% during the nine months ended June 30, 2020.
Interest and Dividend Income. Interest and dividend income decreased $213,000, or 1.0%, to $20.2 million for the nine months ended June 30, 2020 compared to $20.4 million for the nine months ended June 30, 2019. The decrease was attributable to a 24 basis point decrease in the yield on interest-earning assets to 4.28% for the nine months ended June 30, 2020 from 4.52% for the nine months ended June 30, 2019, partially offset by a $24.3 million increase in average interest-earning assets between periods. The decline in the yield on interest-earning assets was due to lower market interest rate environment and the origination of $55.9 million in PPP loans earning 1.0% during the nine months ended June 30, 2020.
Yields on loans receivable averaging $548.5 million dropped 24 basis points to 4.64% for the nine months ended June 30, 2020 compared with $515.1 million yielding 4.88% for the nine months ended June 30, 2019. Securities and interest-earning deposits averaged $76.8 million with a yield of 1.63% for the nine months ended June 30, 2020, reflecting a decline of $9.0 million, or 10.5% from $85.8 million with a yield of 2.29% for the nine months ended June 30, 2019. The Company used cash flows from its securities and interest-bearing deposits to fund higher yielding loans between the two periods, although lower market interest rates and the PPP loans accounted for the overall decline in asset yields.
Interest Expense.Interest expense decreased $567,000, or 11.3%, to $4.4 million for the nine months ended June 30, 2020 from $5.0 million for the nine months ended June 30, 2019. An 18 basis point reduction in the cost of interest-bearing liabilities to 1.24% for the nine months ended June 30, 2020 from 1.42% for the nine months ended June 30, 2019 more than offset a $7.6 million, or 1.6%, increase in the average balance of interest-bearing liabilities between periods.
The average balance of interest bearing deposits increased $3.3 million, or 0.8%, to $438.6 million at June 30, 2020 from $435.3 million at June 30, 2019, while the average cost of such deposits decreased 18 basis points to 1.18% from 1.36% between the two periods. As a result, interest paid on deposits decreased $544,000 to $3.9 million for the nine months ended June 30, 2020 compared with $4.4 million for the nine months ended June 30, 2019.
Interest paid on borrowings decreased $23,000 to $547,000 for the nine months ended June 30, 2020 from $570,000 for the nine months ended June 30, 2019. A 33 basis point decrease in the average cost of borrowings to 1.90% for the nine months ended June 30, 2020 from 2.23% for the nine months ended June 30, 2019 more than offset a $4.3 million increase in the average balance of such borrowings to $38.4 million from $34.1 million between periods.
After an evaluation of these factors, management recorded a provision of $1.1 million for the nine months ended June 30, 2020 compared to $501,000 for the nine months ended June 30, 2019. Several loss factors used to determine the appropriate level of the allowance for loan loss were increased during the nine months ended June 30, 2020 due to the ongoing COVID-19 pandemic.
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Recoveries were $108,000 for the nine months ended June 30, 2020 compared with $93,000 for the nine months ended June 30, 2019. There was one loan charge-off totaling $65,000 during the nine months ended June 30, 2020, compared with $101,000 for the nine months ended June 30, 2019.
Other Income. Non-interest income decreased $263,000, or 18.6%, to $1.2 million for the nine months ended June 30, 2020 compared to the prior year period. The decrease was attributable to lower service charges, which decreased $203,000 from the prior year period, due to lower retail and loan fees resulting from the COVID-19 pandemic.
Other Expenses. Non-interest expenses increased $667,000, or 5.1%, to $13.9 million compared with the nine months ended June 30, 2019. Legal fees for the collection and foreclosure of collateral securing non-performing loans accounted for a $363,000 increase in professional fee expenses while OREO expenses increased $194,000 to $467,000 due to higher valuation allowances. Compensation and benefit expense increased $168,000, or 2.2%, from the prior year period due the addition of compliance positions as well as annual merit increases for employees. Offsetting these higher expenses were lower other expenses, which decreased $105,000, or 8.7%, due to the ongoing effects of the COVID-19 pandemic.
Income Tax Expense.The Company recorded tax expense of $572,000 on pre-tax income of $2.0 million for the nine months ended June 30, 2020, compared with $905,000 on pre-tax income of $3.1 million for the nine months ended June 30, 2019. The lower income tax resulted from a $1.1 million decrease in the Company’s results from operations. The Company’s effective tax rate for the nine months ended June 30, 2020 was 29.5% compared with 29.4% for the nine months ended June 30, 2019.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The Company’s liquidity is a measure of its ability to fund loans, pay withdrawals of deposits, and other cash outflows in an efficient, cost-effective manner. The Company’s short-term sources of liquidity include maturity, repayment and sales of assets, excess cash and cash equivalents, new deposits, other borrowings, and new advances from the Federal Home Loan Bank. There has been no material adverse change during the nine months ended June 30, 2020 in the ability of the Company and its subsidiaries to fund their operations.
Whether through significant deposit withdrawals, reductions in interest and principal payments on loans, or the tightening of the capital markets, it is possible that the COVID-19 pandemic will have a negative effect on the liquidity and capital resources of the Company. Under the PPPLF, the Federal Reserve Bank of New York provides advances to Magyar Bank on a non-recourse basis, taking PPP loans as collateral. At June 30, 2020, the Bank had borrowed $36.9 million in PPPLF advances from the Federal Reserve, pledging an equal amount of PPP loans as collateral.
At June 30, 2020, the Company had commitments outstanding under letters of credit of $1.0 million, commitments to originate loans of $22.4 million, and commitments to fund undisbursed balances of closed loans and unused lines of credit of $57.3 million. There has been no material change during the nine months ended June 30, 2020 in any of the Company’s other contractual obligations or commitments to make future payments.
Capital Requirements
At June 30, 2020, the Bank’s Tier 1 capital as a percentage of the Bank's total assets was 8.22%, and total qualifying capital as a percentage of risk-weighted assets was 12.96%.
Under section 1102 of the CARES Act, a PPP loan is assigned a risk weight of zero percent under the risk-based capital rules of the federal banking agencies. On April 9, 2020, the Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation issued an interim final rule to allow banking organizations to neutralize the effect of PPP loans financed under the PPPLF on Tier 1 leverage capital ratios. At June 30, 2020, the Company used PPPLF borrowings to neutralize $36.9 million of the balance sheet growth impact on the calculation of the Bank’s Tier 1 leverage capital ratio.
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Item 3- Quantitative and Qualitative Disclosures about Market Risk
Not applicable to smaller reporting companies.
Item 4 – Controls and Procedures
Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
There has been no change in the Company's internal control over financial reporting during the nine months ended June 30, 2020 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
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PART II - OTHER INFORMATION
None.
None
Not applicable.
Exhibits
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.