UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
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 Securities 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 Securities 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 May 1, 2023 was 6,688,790.
MAGYAR BANCORP, INC.
Form 10-Q Quarterly Report
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Consolidated 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 Income
2
Consolidated Statements of Comprehensive Income
(In Thousands)
3
Consolidated Statements of Changes in Stockholders' Equity
For the Three and Six Months Ended March 31, 2023 and 2022
(In Thousands, Except for Share and Per-Share Amounts)
4
Consolidated Statements of Cash Flows
5
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 Magyar Investment Company. All material intercompany transactions and balances have been eliminated. The Company prepares its consolidated 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 six months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending September 30, 2023. The September 30, 2022 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 available-for-sale investment securities, the valuation of other real estate owned (“OREO”), 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 March 31, 2023 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.
NOTE B - RECENT ACCOUNTING PRONOUNCEMENTS
In connection with the preparation of quarterly and annual reports in accordance with the Securities and Exchange Commission’s (“SEC”) Securities Exchange Act of 1934, SEC Staff Accounting Bulletin Topic 11.M requires the disclosure of the impact that recently issued accounting standards will have on consolidated financial statements when they are adopted in the future.
In June 2016, the FASB issued Accounting Standards Update (“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 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.
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In March 2022, the FASB issued ASU 2022-02, Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures as an update to Financial Instruments—Credit Losses (Topic 326). The amendments in this ASU eliminate the TDR recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. In addition, ASU 2022-02 requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost. The amendments in ASU 2022-02 will be effective for the Company with its adoption of ASU 2016-13.
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
The following table presents a calculation of basic and diluted earnings per share for the three and six months ended March 31, 2023 and 2022. Basic and diluted earnings per share were calculated by dividing net income by the weighted-average number of shares outstanding for the periods.
Options to purchase293,200 shares of common stock at a weighted average strike price of $12.58 and 156,400 shares of restricted shares at a weighted average price of $12.63 were outstanding at March 31, 2023. There were no outstanding stock awards or options to purchase common stock at March 31, 2022.
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.
ASC 718 also requires the Company to realize as a financing cash flow rather than an operating cash flow, as previously required, the benefits of realized tax deductions in excess of previously recognized tax benefits on compensation expense. In accordance with SEC Staff Accounting Bulletin (“SAB”) No. 107, the Company classified share-based compensation for employees and outside directors within “compensation and employee benefits” in the Consolidated Statements of Income to correspond with the same line item as the cash compensation paid.
Stock options generally vest over a five-year service period and expire ten years from issuance. Management recognizes compensation expense for all option grants over the awards’ respective requisite service periods. The fair values of all option grants were estimated using the Black-Scholes option-pricing model. Management considered historical information on the volatility of the Company’s stock in determining the assumed volatility rate used in the estimation of fair value. Management estimated the expected life of the options using the simplified method allowed under SAB No. 107. The 7-year Treasury yield in effect at the time of the grant provided the risk-free rate for periods within the contractual life of the option. Management recognizes compensation expense for the fair values of these awards, which have graded vesting, on a straight-line basis over the requisite service period of the awards. Management estimated a 95% retention rate for stock option recipients. Once vested, these awards are irrevocable. Shares will be obtained from either the open market or treasury stock upon share option exercise.
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Restricted shares generally vest over a five-year service period on the anniversary of the grant date. Once vested, these awards are irrevocable. The product of the number of shares granted and the grant date market price of the Company’s common stock determine the fair value of restricted shares under the Company’s restricted stock plans. Management recognizes compensation expense for the fair value of restricted shares on a straight-line basis over the requisite service period.
On August 25, 2022, the Company adopted the 2022 Equity Compensation Plan which provided for grants of up to 547,400 shares to be allocated between incentive and non-qualified stock options and restricted stock awards to officers, employees and directors of the Company and Magyar Bank. At March 31, 2023, 293,200 options and 156,400 shares of restricted stock had been awarded from the plan.
The following is a summary of the status of the Company’s stock option activity and related information for its option plan for the six months ended March 31, 2023:
The following is a summary of the status of the Company’s non-vested restricted shares for the six months ended March 31, 2023:
Stock option and stock award expenses included with compensation expense were $132,000 and $209,000, respectively, for the six months ended March 31, 2023. There was no stock option or stock award expense for the six months ended March 31, 2022. The Company had no other stock-based compensation plans as of March 31, 2023 except as disclosed below.
On December 8, 2022, the Company announced the completion of its third stock repurchase program, under which 354,891 shares had been repurchased at an average price of $12.90. The Company also announced the authorization of an additional stock repurchase plan pursuant to which the Company intends to repurchase up to an additional 5% of its outstanding shares, or up to 337,146 shares, under which 54,144 shares had been repurchased at an average price of $12.87. Under this stock repurchase program, 283,002 shares of the 337,146 shares authorized remained available for repurchase as of March 31, 2023. The Company’s intended use of the repurchased shares is for general corporate purposes. The Company held treasury stock shares totaling 522,031 at March 31, 2023. The timing of the repurchases will depend on certain factors, including but not limited to, market conditions and prices, the Company’s liquidity requirements and alternative uses of capital.
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The Company has an Employee Stock Ownership Plan ("ESOP") for the benefit of employees who meet certain eligibility requirements. The ESOP trust purchases shares of common stock in the open market using proceeds of a loan from the Company. The loan is secured by shares of the Company’s stock. The Bank makes cash contributions to the ESOP on an annual basis sufficient to enable the ESOP to make the required loan payments to the Company. As the debt is repaid, shares are released as collateral and allocated to qualified employees. Accordingly, the shares pledged as collateral are reported as unearned ESOP shares in the Consolidated Balance Sheets. The Company accounts for its ESOP in accordance with FASB ASC Topic 718, “Employer’s Accounting for Employee Stock Ownership Plans.” As shares are released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations.
In connection with the Company’s second-step stock offering during its fiscal year ending September 30, 2021, the ESOP trustees purchased 312,800 shares of the Company’s common stock for $3.4 million, reflecting an average cost per share of $10.77. The ESOP loan bears a variable interest rate that adjusts annually to Prime Rate (7.50% on January 1, 2023) with principal and interest payable annually in equal installments over thirty years.
At March 31, 2023, ESOP shares allocated to participants totaled 22,487. Unallocated ESOP shares held in suspense totaled 290,313 at March 31, 2023 and the aggregate fair value was $3.1 million. The Company's contribution expense for the ESOP was $74,000 and $99,000 for the six months ended March 31, 2023 and 2022, respectively.
NOTE F – OTHER COMPREHENSIVE INCOME (LOSS)
The Company recorded no reclassification adjustments during the three and six month periods ending March 31, 2023. The components of other comprehensive income (loss) and the related income tax effects are as follows:
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 and the Company’s derivative assets and liabilities 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 OREO. These non-recurring fair value adjustments involve the application of lower-of-cost-or-market accounting or write-downs of individual assets.
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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. 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.
Derivatives
Magyar Bank executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. The fair values of such derivatives are based on valuation models from a third party using current market terms (including interest rates and fees), the remaining terms of the agreements and the credit worthiness of the counter party as of the measurement date (Level 2).
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.
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The following is a description of valuation methodologies used for assets measured at fair value on a non-recurring basis.
Impaired Loans
Loans which meet certain criteria are evaluated individually for impairment. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest and principal payments of a loan will be collected as scheduled in the loan agreement. Three impairment measurement methods are used, depending upon the collateral securing the asset: 1) the present value of expected future cash flows discounted at the loan’s effective interest rate (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.
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 March 31, 2023 and September 30, 2022.
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The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Company has utilized Level 3 inputs to determine fair value:
Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands)
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 March 31, 2023 and September 30, 2022. 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.
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NOTE H - INVESTMENT SECURITIES
The following table summarizes the amortized cost and fair values of securities classified as available-for-sale and held-to-maturity at March 31, 2023:
The contractual maturities of the debt securities, municipal bonds and certain information regarding to the mortgage-backed securities available-for-sale at March 31, 2023 are summarized in the following table:
The contractual maturities of the debt securities, municipal bonds and certain information regarding to the mortgage-backed securities held-to-maturity at March 31, 2023 are summarized in the following table:
13
The following table summarizes the amortized cost and fair values of securities classified as available-for-sale and held-to-maturity at September 30, 2022:
As of March 31, 2023 investment securities having an estimated fair value of approximately $49.5 million were pledged to secure public deposits.
NOTE I – 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.
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Investment securities with fair values greater than their amortized cost contain unrealized gains. Investment securities with fair values less than their amortized cost contain unrealized losses. Details of securities with unrealized losses at March 31, 2023 and September 30, 2022 are as follows:
The investment securities listed above currently have fair values less than amortized cost and therefore contain unrealized losses. The Company evaluated these securities and determined that the decline in value was primarily related to fluctuations in the interest rate environment and were not related to any company or industry specific event.
The Company anticipates full recovery of amortized costs with respect to these securities. The Company does not intend to sell these securities and has determined that it is not more likely than not that the Company would be required to sell these securities prior to maturity or market price recovery. Management has considered factors regarding other than temporarily impaired securities and determined that there are no securities with impairment that is other than temporary as of March 31, 2023 and September 30, 2022.
NOTE J – LOANS RECEIVABLE, NET AND RELATED ALLOWANCE FOR LOAN LOSSES
Loans receivable, net were comprised of the following:
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The segments of the Company’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The residential mortgage loan segment is further disaggregated into two classes: first lien, amortizing term loans, and the combination of second lien amortizing term loans and home equity lines of credit. The commercial loan segment is further disaggregated into three classes: loans secured by multifamily structures, loans secured by owner-occupied commercial structures, and loans secured by non-owner occupied nonresidential properties. The construction loan segment consists primarily of developers or investors for the purpose of acquiring, developing and constructing residential or commercial structures and to a lesser extent one-to-four family residential construction loans made to individuals for the acquisition of and/or construction on a lot or lots on which a residential dwelling is to be built. Construction loans to developers and investors have a higher risk profile because the ultimate buyer, once development is completed, is generally not known at the time of the loan. The commercial business loan segment consists of loans made for the purpose of financing the activities of commercial customers and consists primarily of revolving lines of credit. The consumer loan segment consists primarily of stock-secured installment loans, but also includes unsecured personal loans and overdraft lines of credit connected with customer deposit accounts.
Management evaluates individual loans in all segments for possible impairment if the loan either is in nonaccrual status, or is risk rated Substandard and is 90 days or more past due. Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Once the determination has been made that a loan is impaired, the recorded investment in the loan is compared to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s current observable market price; or (c) the fair value of the collateral securing the loan, less anticipated selling and disposition costs. The method is selected on a loan-by loan basis, with management primarily utilizing the fair value of collateral method. If there is a shortfall between the fair value of the loan and the recorded investment in the loan, the Company charges the difference to the allowance for loan loss as a charge-off and carries the impaired loan on its books at fair value. It is the Company’s policy to evaluate impaired loans on an annual basis to ensure the recorded investment in a loan does not exceed its fair value.
The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary for the periods presented:
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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 was one TDR loan totaling $107,000 during the six months ended March 31, 2023 and there were no TDRs during the six months ended March 31, 2022.
The following tables present the average recorded investment in impaired loans and the interest income recognized on impaired loans for the three and six months ended March 31, 2023 and 2022.
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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 Company 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 Company’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 Company’s 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 table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the Company’s internal risk rating system for the periods presented:
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 table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans for the periods presented:
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An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.
The Company’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (discussed above) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance.
Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative and economic factors.
The loans are segmented into classes based on their inherent varying degrees of risk, as described above. Management tracks the historical net charge-off activity by segment and utilizes this figure, as a percentage of the segment, as the general reserve percentage for pooled, homogenous loans that have not been deemed impaired. Typically, an average of losses incurred over five historical years is used.
Non-impaired credits are segregated for the application of qualitative factors. Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources 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 six months ended March 31, 2023 and 2022:
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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 March 31, 2023 and September 30, 2022:
20
The allowance for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that the segmentation of the loan portfolio into homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.
A TDR is a loan that has been modified whereby the Bank has agreed to make certain concessions to a borrower to meet the needs of both the borrower and the Bank to maximize the ultimate recovery of a loan. TDR occurs when a borrower is experiencing, or is expected to experience, financial difficulties and the loan is modified using a modification that would otherwise not be granted to the borrower. The types of concessions granted generally 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 TDR 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 within twelve months of the restructure. The Company did not have any TDRs default during the three or six months ended March 31, 2023.
During the six months ended March 31, 2023 there was one new TDR loan totaling $107,000 and there were no new TDRs during the six months ended March 31, 2022. Information on the new TDR is summarized as follows:
There no residential mortgage loans in the process of foreclosure at March 31, 2023 and September 30, 2022.
NOTE K - DEPOSITS
A summary of deposits by type of account are summarized as follows:
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Included in Company’s deposits at March 31, 2023 were $11.4 million in brokered certificates of deposits and $13.6 million in certificate of deposits through a national deposit listing service. At September 30, 2022 the Company had $6.0 million in brokered certificates of deposits and $14.6million in certificate of deposits obtained from a national deposit listing service.
The current FDIC insurance limit on bank deposit accounts is $250,000. The aggregate amount of deposit accounts with a denomination of $250,000 or more was approximately $399.8 million at March 31, 2023 compared with $399.9 million at September 30, 2022.
The aggregate amount of deposit accounts of State and local municipalities was $201.6 million at March 31, 2023 compared with $140.6 million at September 30, 2022. The largest municipal depositor held $101.4 million at March 31, 2023 compared with $50.6 million at September 30, 2022. State and local municipality deposits in excess of $250,000 are collateralized by investment securities and municipal lines of credit with the Federal Home Loan Bank of New York (FHLBNY”).
NOTE L - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company may use derivative financial instruments, such as interest rate swaps and interest rate floors and caps, 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 March 31, 2023, the Company did not hold any interest rate floors or collars.
The Company is a party to interest rate derivatives that are not designated as hedging instruments. Under a program, the Company executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that the Company executes with a third-party financial institution, such that the Company minimizes its net risk exposure resulting from such transactions. Because the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined by taking into consideration the risk rating, probability of default and loss given default for all counterparties. The Company was not required to pledge any collateral for its interest rate swaps with financial institutions at March 31, 2023 and September 30, 2022.
The following table presents summary information regarding these derivatives as of March 31, 2023 and September 30, 2022.
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The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are commitments to extend credit and 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.
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 Company 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.
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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. Please refer to the Company’s Form 10-K for the Company’s critical accounting policies. There were no significant changes to the Company’s critical accounting policies during the six months ended March 31, 2023.
Comparison of Financial Condition at March 31, 2023 and September 30, 2022
Total Assets. Total assets increased $41.3 million, or 5.2%, to $839.9 million at March 31, 2023 from $798.5 million at September 30, 2022. The increase was attributable to higher balances of loans receivable, net of allowance for loan loss, partially offset by lower interest-earning deposits with banks and investment securities.
Cash and Interest-Earning Deposits. Cash and interest-earning deposits with banks decreased $5.5 million, or 17.8% to $25.4 million at March 31, 2023 from $30.9 million at September 30, 2022 resulting primarily from deployment of these funds into loans receivable during the six months ended March 31, 2023.
Investment Securities.At March 31, 2023, investment securities decreased $2.0 million, or 2.0 %, to $98.9 million from $100.9 million at September 30, 2022.
The Company did not purchase or sell any investment securities during the six months ended March 31, 2023. The decrease resulted from payments from mortgage-backed securities totaling $2.3 million during the six months ended March 31, 2023 that were used to fund new loan originations. Investment securities at March 31, 2023 consisted of $62.4 million in mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises, $24.8 million in U.S. government-sponsored enterprise debt securities, $8.0 million in corporate notes, $3.5 million in municipal bonds, and $216,000 in private-label mortgage-backed securities. There were no other-than-temporary-impairment charges for the Company’s investment securities for the six months ended March 31, 2023.
Loans Receivable. Total loans receivable increased $48.0 million, or 7.6%, to $676.9 million at March 31, 2023 from $628.9 million at September 30, 2022. The increase in total loans receivable during the six months ended March 31, 2023 occurred in commercial real estate loans, which increased $49.5 million, or 14.4%, to $392.2 million, one-to four-family residential mortgage loans (including home equity lines of credit), which increased $7.6 million, or 3.3%, to $240.7 million, and in construction loans, which increased $4.2 million, or 27.7%, to $19.5 million. Partially offsetting these increases were commercial business loans, which decreased $12.7 million, or 36.6%, to $22.0 million and other loans, which decreased $562,000, or 18.0%, to $2.6 million during the six months period.
Total loans receivable at March 31, 2023 were comprised of $392.2 million (58.0%) in commercial real estate loans, $223.0 million (32.9%) in one-to four-family residential mortgage loans, $22.0 million (3.2%) in commercial business loans, $19.5 million (2.9%) in construction loans, $17.6 million (2.6%) in home equity lines of credit, and $2.6 million (0.4%) in other loans. For comparison, total loans receivable at September 30, 2022 were comprised of $342.8 million (54.5%) in commercial real estate loans, $214.4 million (34.1%) in one- to four- family residential mortgage loans, $34.7 million (5.5%) in commercial business loans, $15.2 million (2.4%) in construction loans, and $21.8 million (3.5%) in home equity lines of credit and other loans.
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Total non-performing loans increased $560,000, or 19.8%, to $3.4 million at March 31, 2023 from $2.8 million at September 30, 2022. The addition of one commercial real estate loan totaling $388,000 and one residential mortgage loans totaling $172,000 accounted for the increase in non-performing loans during the six months ended March 31, 2023. The ratio of non-performing loans to total loans increased to 0.50% at March 31, 2023 from 0.45% at September 30, 2022.
The allowance for loan losses increased $411,000 during the six months ended March 31, 2023 to $8.8 million. Growth in the Company’s loan portfolio and an increase in delinquent and non-performing loans accounted for the increase in the Company’s allowance for loan loss.
The allowance for loan losses as a percentage of non-performing loans decreased to 260.5% at March 31, 2023 from 297.5% at September 30, 2022. Our allowance for loan losses as a percentage of total loans was 1.31% at March 31, 2023 compared with 1.34% at September 30, 2022. Future increases in the allowance for loan losses may be necessary based on possible future increases in non-performing loans and charge-offs, the possible deterioration of collateral values, and the possible deterioration of the current economic environment as well as our adoption of ASU 2016-13.
Bank-Owned Life Insurance.The Company’s carrying value of its life insurance policies held for directors and officers of Magyar Bank increased $185,000, or 1.0%, to $17.8 million at March 31, 2023 from $17.7 million at September 30, 2022. The increase was attributable to an increase in the cash surrender value of the policies during the six months ended March 31, 2023.
Other Real Estate Owned.Other real estate owned increased $10,000, or 3.6%, to $291,000 at March 31, 2023 from capital improvements to one property in order to market it for sale. The property was under contract for sale at March 31, 2023.
Deposits. Total deposits increased $30.2 million, or 4.5%, to $697.9 million at March 31, 2023 from $667.7 million at September 30, 2022. The increase in deposits during the six months ended March 31, 2023 occurred in money market accounts, which increased $20.2 million, or 9.1%, to $242.4 million, in non-interest bearing checking accounts, which increased $15.6 million, or 8.6%, to $198.0 million, and in certificates of deposit (including individual retirement accounts), which increased $7.1 million, or 8.6%, to $89.7 million. Partially offsetting these increases were decreases in savings accounts, which decreased $9.4 million, or 11.5%, to $72.4 million and in interest-bearing checking accounts (NOW), which decreased $3.3 million, or 3.4%, to $95.3 million. Included in the Company’s total deposits was an estimated $101.4 million that exceeded the Federal Deposit Insurance Corporation’s insurance coverage limit of $250,000.
The aggregate amount of deposit accounts of State and local municipalities was $201.6 million at March 31, 2023 compared with $140.6 million at September 30, 2022. The aggregate deposits of the Company’s largest municipal depositor was $101.4 million at March 31, 2023 compared with $50.6 million at September 30, 2022. State and local municipality deposits in excess of the $250,000 FDIC insurance limit are collateralized by investment securities and municipal lines of credit with the FHLBNY.
Borrowed Funds. Borrowings increased $9.9 million, or 63.4%, to $25.5 million at March 31, 2023 from $15.6 million at September 30, 2022. The Company borrowed $13.0 million in term advances and repaid $3.1 million in matured advances from the FHLBNY during the six months period to fund the growth in loans receivable.
Stockholders’ Equity.Stockholders’ equity increased $2.7 million, or 2.7%, to $101.2 million at March 31, 2023 from $98.5 million at September 30, 2022. The increase was due to the Company’s results from operations, partially offset by $923,000 in dividends paid and 56,338 shares repurchased during the six months ended March 31, 2023 at a weighted average share price of $12.86. The Company’s book value per share increased to $15.12 at March 31, 2023 from $14.60 at September 30, 2022, based on the 6,688,790 shares that were outstanding at March 31, 2023.
Average Balance Sheet for the Three and Six Months Ended March 31, 2023 and 2022
The following tables present certain information regarding the Company’s financial condition and net interest income for the three and six months ended March 31, 2023 and 2022. 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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(1) Includes balance of loans on non-accrual.
(2) Calculated using the Company's 21% federal tax rate.
(3) Includes passbook savings, money market passbook and club accounts.
(4) Includes interest-bearing checking and money market accounts.
(5) Includes certificates of deposits and individual retirement accounts.
(6) Calculated as annualized net interest income divided by average total interest-earning assets.
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Comparison of Operating Results for the Three Months Ended March 31, 2023 and 2022
Net Income. Net income increased $117,000, or 7.0% to $1.8 million for the three-month period ended March 31, 2023 compared with net income of $1.7 million for the three month period ended March 31, 2022. The increase was due to higher net interest and dividend income and other income, partially offset by higher provision for loan loss and higher other expenses.
Net Interest and Dividend Income. Net interest and dividend income increased $569,000, or 8.9%, to $6.9 million for the three months ended March 31, 2023 from $6.4 million for the three months ended March 31, 2022. The increase was attributable to a 24 basis point increase in the Company’s net interest margin to 3.61% for the three months ended March 31, 2023 from 3.37% for the three months ended March 31, 2022, as well as an $81.1 million increase in the average balance of loans receivable, net allowance for loan loss between the periods.
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Interest and Dividend Income.Interest and dividend income increased $2.3 million, or 32.9%, to $9.2 million for the three months ended March 31, 2023 compared with $6.9 million for the three months ended March 31, 2022. The increase was attributable to a 113 basis point increase in the yield on interest-earning assets to 4.78% for the three months ended March 31, 2023 from 3.65% for the three months ended March 31, 2022 as well as a $29.0 million, or 3.9%, increase in the average balance of interest-earning assets to $779.3 million from $750.3 million. Higher balances of higher yielding loans receivable funded by lower yielding interest-earning deposits with the Federal Reserve Bank as well as higher market interest rates contributed to the increase in the Company’s interest and dividend income between periods. Partially offsetting the increases were no Paycheck Protection Program loan fees included in interest income on loans receivable for the three months ended March 31, 2023, compared with $322,000 for the three months ended March 31, 2022.
The average interest earned on loans receivable, net of allowance for loan loss, increased $2.1 million, or 31.7%, to $8.6 million for the three months ended March 31, 2023 from $6.5 million for the same period prior year. The increase resulted from an 81 basis point increase in the yield on interest-earning assets to 5.25% for the three months ended March 31, 2023 from 4.44% for the three months ended March 31, 2022 as well as an $81.1 million, or 13.9%, increase in the average balance of loans receivable to $666.3 million during the three months ended March 31, 2023 from $585.2 million during the three months ended March 31, 2022.
Interest earned on investment securities, including interest-earning deposits and excluding FHLBNY stock, increased $184,000, or 53.8%, to $526,000 for the three months ended March 31, 2023 from $342,000 for the three months ended March 31, 2022. The increase was attributable to a 110 basis point increase in the yield on such assets to 1.93% for the three months ended March 31, 2023 from 0.83% for the three months ended March 31, 2022, partially offset by a $52.5 million, or 32.1% decrease in the average balance of investment securities and interest-earning deposits to $111.0 million for the three months ended March 31, 2023 from $163.5 million for the three months ended March 31, 2022.
Interest Expense.Interest expense increased $1.7 million, or 323.6%, to $2.2 million for the three months ended March 31, 2023 from $526,000 for the three months ended March 31, 2022. The cost of interest-bearing liabilities increased 133 basis points to 1.75% for the three months ended March 31, 2023 compared with 0.42% for the three months ended March 31, 2022 resulting primarily from higher cost interest bearing deposits. In addition, the average balance of interest-bearing liabilities increased $24.2 million, or 4.9%, to $516.8 million during the three months ended March 31, 2023 from $487.2 during the three months ended March 31, 2022.
The cost of interest-bearing deposits increased 131 basis points to 1.66% for the quarter ended March 31, 2023 from 0.35% for the quarter ended March 31, 2022 due to the higher market interest rate environment while the average balance increased $17.9 million, or 3.8%, to $490.2 million from $472.3 million. As a result, interest paid on interest-bearing deposits increased $1.6 million to $2.0 million for the three months ended March 31, 2023 compared with $415,000 for the three months ended March 31, 2022.
Interest expense on borrowings increased $108,000, or 97.3%, to $219,000 for the three months ended March 31, 2023 from $111,000 at March 31, 2022. Higher market interest rates resulted in a 117 basis point increase in the cost of borrowings to 3.34% for the three months ended March 31, 2023 from 2.17% for the three months ended March 31, 2022. The average balance of borrowings increased $6.3 million to $26.6 million for the quarter ended March 31, 2023 from $20.3 million for the quarter ended March 31, 2022 to partially fund the growth in the Company’s loans receivable.
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 consolidated 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 $195,000 for the three months ended March 31, 2023 compared to $71,000 for the three months ended March 31, 2022. The higher provision for loan losses resulted from growth in the Company’s loan portfolio and an increase in delinquent loans during the three months ended March 31, 2023. The Company recorded $102,000 in net loan charge-offs during the three months ended March 31, 2023 compared with $1,000 in net recoveries during the three months ended March 31, 2022.
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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.
Other Income. Other income increased $59,000, or 10.3%, to $631,000 during the three months ended March 31, 2023 compared to $572,000 for the three months ended March 31, 2022. The increase was due to higher gains from the sale of Small Business Administration 7(a) loans, which increased $62,000 to $201,000 for the three months ended March 31, 2023 from $139,000 for the three months ended March 31, 2022.
Other Expenses. Other expenses increased $287,000, or 6.4%, to $4.8 million during the three months ended March 31, 2023 compared to $4.5 million at March 31, 2022.
The increase in other expenses was primarily attributable to higher compensation and benefit expense, which increased $289,000, or 10.7%, to $3.0 million at three months ended March 31, 2023 from $2.7 million at March 31, 2022, due to stock award and stock option expenses related to the Company’s 2022 Equity Incentive Plan and increased director fees resulting from the addition of three new directors on September 22, 2022. Higher FDIC deposit insurance premiums, marketing, business development, and occupancy expenses were offset by lower professional fees and other expenses.
Income Tax Expense.The Company recorded tax expense of $790,000 on pre-tax income of $2.6 million for the three months ended March 31, 2023, compared to $690,000 on pre-tax income of $2.4 million for the three months ended March 31, 2022. The Company’s effective tax rate for the three months ended March 31, 2023 was 30.5% compared with 29.1% for the three months ended March 31, 2022.
Comparison of Operating Results for the Six Months Ended March 31, 2023 and 2022
Net Income. Net income increased $234,000 or 6.9%, to $3.6 million during the six month period ended March 31, 2023 compared with $3.4 million for the six-month period ended March 31, 2022. The increase was due to higher net interest and dividend income and other income, partially offset by higher provisions for loan loss and higher other expenses.
Net Interest and Dividend Income. Net interest and dividend income increased $1.0 million, or 8.0%, to $13.8 million for the six months ended March 31, 2023 from $12.8 million for the six months ended March 31, 2022. The increase was attributable to a 16 basis point increase in the Company’s net interest margin to 3.61% for the six months ended March 31, 2023 from 3.45% for the six months ended March 31, 2022 as well as a $72.5 million increase in the average balance of loans receivable, net allowance for loan loss between the periods.
Interest and Dividend Income.Interest and dividend income increased $3.8 million, or 27.1%, to $17.7 million for the six months ended March 31, 2023 from $13.9 million for the six months ended March 31, 2022. The increase was attributable to an 86 basis point increase in the yield to 4.61% for the six months ended March 31, 2023 from 3.75% for the prior year period, as well as a $25.0 million, or 3.4%, increase in the average balance of interest-earning assets to $769.6 million from $744.6 million. Higher balances of higher yielding loans receivable funded by lower yielding interest-earning deposits with the Federal Reserve Bank as well as higher market interest rates contributed to the increase in the Company’s interest and dividend income between periods. Partially offsetting the increases were no Paycheck Protection Program loan fees included in interest income on loans receivable for the six months ended March 31, 2023, compared with $730,000 for the six months ended March 31, 2022.
The average interest earned on loans receivable, net of allowance for loan loss, increased $3.3 million, or 25.0%, to $16.6 million for the six months ended March 31, 2023 from $13.3 million for the same period prior year. The increase resulted from an 51 basis point increase in the yield on interest-earning assets to 5.08% for the six months ended March 31, 2023 from 4.57% for the six months ended March 31, 2022 as well as a $72.5 million, or 12.4%, increase in the average balance of loans receivable to $654.6 million during the six months ended March 31, 2023 from $582.1 million during the six months ended March 31, 2022.
Interest earned on investment securities, including interest-earning deposits and excluding FHLBNY stock, increased $434,000, or 71.1%, to $1.0 million for the six months ended March 31, 2023 from $610,000 for the six months ended March 31, 2022. The increase was attributable to a 109 basis point increase in the yield to 1.86% for the six months ended March 31, 2023 from 0.77% for the six months ended March 31, 2022, partially offset by a $47.6 million, or 29.6% decrease in the average balance of investment securities and interest-earning deposits to $113.3 million for the six months ended March 31, 2023 from $160.9 million for the six months ended March 31, 2022.
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Interest Expense.Interest expense increased $2.7 million, or 249.9%, to $3.8 million for the six months ended March 31, 2023 compared with $1.1 million for the six months ended March 31, 2022. The cost of interest-bearing liabilities increased 106 basis points to 1.751% for the six months ended March 31, 2023 compared with 0.45% for the six months ended March 31, 2022 resulting primarily from higher cost interest bearing deposits. In addition, the average balance of interest-bearing liabilities increased $22.2 million, or 4.6%, to $509.4 million during the six months ended March 31, 2023 from $487.2 million during the six months ended March 31, 2022.
The cost of interest-bearing deposits increased 107 basis points increase in the average cost to 1.44% for the six months ended March 31, 2023 from 0.37% for the six months ended March 31, 2022 due to the higher market interest rate environment while the average balance increased $20.6 million, or 4.4%, to $486.6 million for the six months ended March 31, 2023 from $466.1 million for the six months ended March 31, 2022. As a result, interest paid on interest-bearing deposits increased $2.6 million to $3.5 million for the six months ended March 31, 2023 from $867,000 for the six months ended March 31, 2022.
Interest expense on borrowings increased $125,000, or 54.3%, to $355,000 for the six months ended March 31, 2023 from $230,000 for the prior year period. Higher market interest rates resulted in a 93 basis point increase in the cost of borrowings to 3.12% for the six months ended March 31, 2023 from 2.19% for the six months ended March 31, 2022. The average balance of borrowings increased $1.7 million to $22.8 million for the six months ended March 31, 2023 from $21.1 million for the six months ended March 31, 2022 to partially fund the growth in the Company’s loans receivable.
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 $513,000 for the six months ended March 31, 2023 compared to $171,000 for the six months ended March 31, 2022. The higher provision for loan losses resulted from growth in the Company’s loan portfolio and an increase in delinquent loans during the six months ended March 31, 2023. The Company recorded $102,000 in net loan charge-offs during the six months ended March 31, 2023 compared with $54,000 in net recoveries during the six months ended March 31, 2022.
Other Income. Other income increased $7,000, or 0.6%, to $1.2 million during the six months ended March 31, 2023 compared to $1.2 million for the six months ended March 31, 2022. Higher interest rate swap fees during the six months ended March 31, 2023 were offset by lower gains on the sale of Small Business Administration 7(a) loans and lower service charge income.
Other Expenses. Other expenses increased $249,000, or 2.7%, to $9.4 million during the six months ended March 31, 2023 from $9.1 million during the six months ended March 31, 2022.
The increase in other expenses was primarily attributable to higher compensation and benefit expense, which increased $411,000, or 7.6%, to $5.8 million for the six months ended March 31, 2023 from $5.4 million, due to stock award and stock option expenses related to the Company’s 2022 Equity Incentive Plan and increased director fees resulting from the addition of three new directors on September 22, 2022. Higher occupancy expenses, FDIC deposit insurance premiums, marketing, and business development expenses were more than offset by lower professional fees. Professional fees decreased from lower legal and consulting fees related to the collection and foreclosure of non-performing loans.
Income Tax Expense.The Company recorded tax expense of $1.6 million on pre-tax income of $5.2 million for the six months ended March 31, 2023, compared to $1.4 million on pre-tax income of $4.7 million for the six months ended March 31, 2022. The Company’s effective tax rate for the six months ended March 31, 2023 was 30.3% compared with 28.8% for the six months ended March 31, 2022.
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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 FHLBNY. Based on eligible loan collateral pledged to the FHLBNY at March 31, 2023, we had an aggregate borrowing capacity of $102.7 million. There has been no material adverse change during the six months ended March 31, 2023 in the ability of the Company and its subsidiaries to fund their operations.
At March 31, 2023, the Company had commitments outstanding under letters of credit totaling $939,000, commitments to originate loans totaling $24.5 million, and commitments to fund undisbursed balances of closed loans and unused lines of credit totaling $94.8 million. There has been no material change during the six months ended March 31, 2023 in any of the Company’s other contractual obligations or commitments to make future payments.
Capital Requirements
At March 31, 2023, the Bank’s Tier 1 capital as a percentage of the Bank’s total assets was 11.21%, and total qualifying capital as a percentage of risk-weighted assets was 15.87%.
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 six months ended March 31, 2023 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.
There were no material changes to the risk factors relevant to the Company’s operations as described in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022 filed on December 22, 2022.
Recent Negative Developments Affecting the Banking Industry, and Resulting Media Coverage, Have Eroded Customer Confidence in the Banking System
The recent high-profile bank failures have generated significant market volatility among publicly traded bank holding companies. These market developments have negatively impacted customer confidence in the safety and soundness of regional banks. As a result, customers may choose to maintain deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact the Company’s liquidity, loan funding capacity, net interest margin, capital and results of operations. While the Department of the Treasury, the Federal Reserve, and the FDIC have made statements ensuring that depositors of these recently failed banks would have access to their deposits, including uninsured deposit accounts, there is no guarantee that such actions will be successful in restoring customer confidence in regional banks and the banking system more broadly.
Rising Interest Rates Have Decreased the Value of the Company’s Securities Portfolio, and the Company Would Realize Losses if it Was Required to Sell Such Securities to Meet Liquidity Needs
As a result of inflationary pressures and the resulting rapid increases in interest rates over the last year, the trading value of previously issued government and other fixed income securities has declined significantly. These securities make up a majority of the securities portfolio of most banks in the U.S., including the Company’s, resulting in unrealized losses embedded in the securities portfolios. While the Company does not currently intend to sell these securities, if the Company were required to sell such securities to meet liquidity needs, it may incur losses, which could impair the Company’s capital, financial condition, and results of operations and require the Company to raise additional capital on unfavorable terms, thereby negatively impacting its profitability. While the Company has taken actions to maximize its funding sources, there is no guarantee that such actions will be successful or sufficient in the event of sudden liquidity needs. Furthermore, while the Federal Reserve Board has announced a Bank Term Funding Program available to eligible depository institutions secured by U.S. treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral at par, to mitigate the risk of potential losses on the sale of such instruments, there is no guarantee that such programs will be effective in addressing liquidity needs as they arise.
The following table reports information regarding repurchases of our common stock during the three months ended March 31, 2023.
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None
Not applicable.
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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.
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