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 June 30, 2024
☐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).
Yes ☑ No ☐
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 August 1, 2024 was 6,490,168
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 Nine Months Ended June 30, 2024 and 2023
(In Thousands, Except for Share and Per-Share Amounts)
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5
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 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 nine months ended June 30, 2024 are not necessarily indicative of the results that may be expected for the year ending September 30, 2024. The September 30, 2023 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 credit 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 June 30, 2024 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 Exchange Act of 1934, Securities and Exchange Commission (“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 Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326), which changed the impairment model for most financial assets. This update was intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses (“ACL”) should reflect management's current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be affected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. With certain exceptions, transition to the new requirements will be through a cumulative-effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This update is effective for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.
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The Company adopted ASU 2016-13 on October 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost, including loans, held-to-maturity debt securities and unfunded commitments. The Company recorded a cumulative effect increase to retained earnings of $492 thousand ($354 thousand net of taxes), which was comprised of a $1.0 million ($725 thousand net of tax) increase related to loans and $540 thousand ($379 thousand net of tax) decrease related to unfunded commitments. The Company determined that there was no impact to retained earnings related to held-to-maturity securities as a result of adopting this guidance. The results reported for periods beginning on or after October 1, 2023 are presented under Accounting Standards Codification (“ASC”) 326, while prior period amounts continue to be reported in accordance with previously applicable accounting standards.
The impact of the change from the incurred loss model to the current expected credit loss model is included in the following table:
Allowance for Credit Losses on Loans
The Company maintains its ACL at a level that management believes to be appropriate to absorb expected credit losses as of the date of the Consolidated Statement of Financial Condition. The Company established its allowance in accordance with the guidance included in Accounting Standards Codification 326, Financial Instruments – Credit Losses (“ASC 326”). The ACL is a valuation reserve established and maintained by charges against income. Loans, or portions thereof, are charged-off against the ACL when they are deemed uncollectible. The ACL is an estimate of expected credit losses that considers our historical loss experience, the weighted average expected lives of loans, current economic conditions and forecasts of future economic conditions. The determination of an appropriate ACL is inherently subjective and may have significant changes from period to period. The methodology for determining the ACL has two main components: evaluation of expected credit losses for certain groups of homogeneous loans that share similar risk characteristics and evaluation of loans that do not share risk characteristics with other loans. The ACL is measured on a collective (pool) basis when similar characteristics exist. The Company’s loan portfolio is segmented by loan types that have similar risk characteristics and behave similarly during economic cycles.
Historical credit loss experience is the basis for the estimate of expected credit losses. We apply our historical loss rates to pools of loans with similar risk characteristics using the Weighted-Average Remaining Maturity (“WARM”) method. The remaining contractual life of the pools of loans with similar risk characteristics is adjusted by expected scheduled payments and prepayments. After consideration of the historical loss calculation, management applies qualitative adjustments to reflect the current conditions and reasonable and supportable forecasts not already reflected in the historical loss information. Our reasonable and supportable forecast adjustment is based on a regional economic indicator obtained from the United States Government Publishing Office. The Company selected eight qualitative metrics which were correlated with the Bank and its peer group’s historical loss patterns. The eight qualitative metrics include: changes in lending policies and procedures, changes in national and local economic conditions as well as business conditions, changes in the nature, complexity, and volume of the portfolio, changes in the experience, ability, and depth of lenders and lending management, changes in the volume and severity of past due and classified loans, changes in the value of collateral securing loans, changes in or the existence of credit concentrations, and changes in the legal and/or regulatory landscape. The adjustments are weighted for relevance before applying to each pool of loans. Each quarter, management reviews the recommended adjustment factors and applies any additional adjustments based on current conditions.
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The Company has elected to exclude $4.5 million of accrued interest receivable on loans as of June 30, 2024 from the measurement of its ACL. When a loan is placed on non-accrual status, any outstanding accrued interest is reversed against interest income. Accrued interest on loans is reported in the accrued interest receivable line on the consolidated statements of financial condition.
The ACL for individual loans begins with the use of normal credit review procedures to identify whether a loan no longer shares similar risk characteristics with other pooled loans and, therefore, should be individually assessed. We individually evaluate loans that meet the following criteria: (1) when it is determined that foreclosure is probable, (2) substandard, doubtful and nonperforming loans when repayment is expected to be provided substantially through the operation or sale of the collateral, or (3) when it is determined by management that a loan does not share similar risk characteristics with other loans. Credit loss estimates are calculated based on the following three acceptable methods for measuring the ACL: (1) the present value of expected future cash flows discounted at the loan’s original effective interest rate; (2) the loan’s observable market price; or (3) the fair value of the collateral when the loan is collateral dependent. Our individual loan evaluations consist primarily of the fair value of collateral method because most of our loans are collateral dependent. Collateral values are reduced to consider expected disposition costs when appropriate. A charge-off is recorded when the estimated fair value of the loan is less than the loan balance.
Allowance for Credit Losses on Unfunded Loan Commitments
The Company estimates expected credit losses over the contractual period in which the Bank is exposed to credit risk via a contractual obligation to extend credit unless that obligation is unconditionally cancellable by the Bank. The allowance for credit losses on unfunded loan commitments is included in accounts payable and other liabilities in the Company’s Consolidated Balance Sheets and is adjusted through credit loss expense. The estimate includes consideration of the likelihood that funding will occur, the amount of funding that will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.
Allowance for Credit Losses on Held-to-Maturity Securities
The Company accounts for its held-to-maturity securities in accordance with ASC 326-20, Financial Instruments – Credit Loss – Measured at Amortized Cost, which requires that the Company measure expected credit losses on held-to-maturity debt securities on a collective basis by major security type. The estimate of expected credit losses considers historical credit loss information that is adjusted for current economic conditions and reasonable and supportable forecasts.
The Company classifies its held-to-maturity debt securities into the following major security types: obligations of U.S. government agencies, obligations of U.S. government-sponsored enterprises, private label mortgage-backed securities, obligations of state and political subdivisions and corporate securities. Credit ratings of held-to-maturity debt securities, which are a significant input in calculating the expected credit loss, are reviewed on a quarterly basis. Based on the credit ratings of our held-to-maturity securities and our historical experience of no losses, the Company determined that the expected for credit losses on its’ held-to-maturity portfolio is not significant.
Accrued interest receivable on held-to-maturity debt securities totaled $235 thousand as of June 30, 2024 and is included within accrued interest receivable on the Company’s Consolidated Balance Sheets. This amount is excluded from the estimate of expected credit losses. Generally, held-to-maturity debt securities are classified as nonaccrual when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about the further collectability of principal or interest. When held-to-maturity debt securities are placed on nonaccrual status, unpaid interest credited to income is reversed against interest income.
Allowance for Credit Losses on Available-for-Sale Securities
The Company measures expected credit losses on available-for-sale debt securities when the Bank intends to sell, or when it is not more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the amortized cost basis of the security is written down to fair value through income. For available-for-sale debt securities that do not meet the previously mentioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this evaluation indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, equal to the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
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The ACL on available-for-sale debt securities is included within the recorded balance of securities available-for-sale on the Consolidated Balance Sheets. Changes in the allowance for credit losses are recorded within provision for credit losses on the Consolidated Statements of Income. Losses are charged against the allowance when the Company believes the collectability of an available-for-sale security is in jeopardy or when either of the criteria regarding intent or requirement to sell is met.
Accrued interest receivable on available-for-sale debt securities totaled $72 thousand as of June 30, 2024 and is included within accrued interest receivable on the Company’s Consolidated Balance Sheets. This amount is excluded from the estimate of expected credit losses. Generally, available-for-sale debt securities are classified as nonaccrual when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about the further collectability of principal or interest. When available-for-sale debt securities are placed on nonaccrual status, unpaid interest credited to income is reversed against interest income.
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 as presented in this report.
NOTE D - EARNINGS PER SHARE
The following table presents a calculation of basic and diluted earnings per share for the three and nine months ended June 30, 2024 and 2023. 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 124,320 shares of restricted shares at a weighted average price of $12.63 were outstanding at June 30, 2024 but were not included in the calculation of diluted EPS because they were anti-dilutive. Options to purchase 293,200 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 June 30, 2023 but were not included in the calculation of diluted EPS because they were anti-dilutive.
NOTE E – STOCK-BASED COMPENSATION AND STOCK REPURCHASE PROGRAM
On August 25, 2022, the Company adopted the 2022 Equity Compensation Plan which provided for grants of up to 391,000 shares to be allocated between incentive and non-qualified stock options and up to 156,400 shares of restricted stock awards to officers, employees and directors of the Company and Magyar Bank. At June 30, 2024, 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 the nine months ended June 30, 2024:
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The following is a summary of the status of the Company’s non-vested restricted shares for the nine months ended June 30, 2024:
Stock option and stock award expenses included with compensation expense were $63 thousand and $98 thousand for the three months ended June 30, 2024 and $63 thousand and $98 thousand for the three months ended June 30, 2023, respectively. Stock option and stock award expenses included with compensation expense were $190 thousand and $294 thousand for the nine months ended June 30, 2024 and $196 thousand and $307 thousand for the nine months ended June 30, 2023, respectively.
At June 30, 2024, total compensation cost not yet recognized for the Company’s unvested stock options and stock awards was $2.1 million and will be recognized through September 2027. The Company had no other stock-based compensation plans as of June 30, 2024 except as disclosed below.
On December 8, 2022, the Company announced the authorization of a second 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 186,458 shares had been repurchased at an average price of $11.49 through June 30, 2024. Under this stock repurchase program, 150,688 shares of the 337,146 shares authorized remained available for repurchase as of June 30, 2024. The Company’s intended use of the repurchased shares is for general corporate purposes. The Company held treasury stock shares totaling 509,269 at June 30, 2024. 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.
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.
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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 fixed interest rate of 3.25% with principal and interest payable annually in equal installments over 30 years.
At June 30, 2024, ESOP shares allocated to participants totaled 186,940. Unallocated ESOP shares held in suspense totaled 278,163 with an aggregate fair value of $3.1 million. The Company's contribution expense for the ESOP was $34 thousand and $24 thousand for the three months ended June 30, 2024 and 2023, and $118 thousand and $98 thousand for the nine months ended June 30, 2024 and 2023, respectively.
NOTE F – OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes net income as well as certain other items which result in a change to equity during the period. The Company recorded no reclassification adjustments during the three and nine months ended June 30, 2024 and 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.
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:
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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
The 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.
Collateral Dependent Loans
Collateral dependent loans are measured and reported at fair value through specific allocations of the allowance for credit losses based on the fair value of the underlying collateral.
There were no assets measured at fair value on a non-recurring basis at June 30, 2024. The following table provides 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 September 30, 2023.
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 June 30, 2024 and September 30, 2023. 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. The Company’s bank-owned life insurance is not a marketable asset and may generally only be redeemed with the insurance company, and is therefore not included in the table below.
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NOTE H – LEASES
Accounting Standard Update ASC 842, “Leases” requires lessees to recognize a lease liability and a right-of-use (“ROU”) asset, measured at the present value of the future minimum lease payments, at the lease commencement date.
On April 1, 2024, the Bank entered into a lease agreement to rent a retail office space in Martinsville, New Jersey to increase its presence in Somerset County. The initial term of the lease is for five years, ending on March 31, 2029, but does include the option for two additional terms of five years each. In accordance with ASC 842, a lease liability and ROU asset in the amount of $180 thousand was recognized on April 1, 2024 within accounts payable and other liabilities and other assets, respectively, on our Consolidated Balance Sheets. The discount rate used to determine the lease liability was 4.22% and derived from the Federal Home Loan Bank of New York advance rate for the same term.
Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at lease commencement base on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate. The incremental borrowing rate used by the Company to value its operating leases is based on the interpolated term advance rate available from the FHLBNY, based on the remaining lease term.
The following table presents the balance sheet information related to our leases:
Total rental expense, included in occupancy expense, was approximately $602 thousand and $604 thousand for the nine months ended June 30, 2024 and 2023, respectively.
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NOTE I - INVESTMENT SECURITIES
The following table summarizes the amortized cost and fair values of securities classified as available-for-sale and held-to-maturity at June 30, 2024:
The Company monitors the credit quality of held-to-maturity debt securities, primarily through their credit ratings by nationally recognized statistical ratings organizations, on a quarterly basis. At June 30, 2024, there were no non-performing held-to-maturity debt securities and no allowance for credit losses were required. The majority of the investment securities are explicitly or implicitly guaranteed by the United States government, and any estimate of expected credit losses would be insignificant to the Company. The following table summarizes the amortized cost of held-to-maturity debt securities at June 30, 2024, aggregated by credit quality indicator:
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The contractual maturities of debt securities, municipal bonds and certain information regarding mortgage-backed securities at June 30, 2024 are summarized in the following table:
The following table summarizes the amortized cost and fair values of securities classified as available-for-sale and held-to-maturity at September 30, 2023:
As of June 30, 2024 investment securities having an estimated fair value of approximately $11.4 million were pledged to secure public deposits.
NOTE J – UNREALIZED LOSSES ON INVESTMENT SECURITIES AVAILABLE-FOR-SALE
The Company recognizes an allowance for credit losses on debt securities in earnings through a provision for credit losses while noncredit-related impairment on debt securities not expected to be sold are recognized in other comprehensive income.
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The Company reviews its investment portfolio on a quarterly basis for indications of credit losses. This review includes analyzing 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 credit losses may be influenced by prolonged recession in the U.S. economy, changes in real estate values and interest deferrals.
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 available-for-sale securities with unrealized losses at June 30, 2024 are as follows:
Prior to the adoption of ASU 2016-13, details of our entire investment portfolio were required to be disclosed. Accordingly, details of our held-to-maturity and available-for-sale investment securities with unrealized losses at September 30, 2023 were 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 credit losses and determined that no allowance for credit loss was required as of June 30, 2024.
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NOTE K – LOANS RECEIVABLE, NET AND RELATED ALLOWANCE FOR CREDIT LOSSES
Loans receivable, net were comprised of the following:
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 of revolving lines of credit and loans partially guaranteed by the U.S. Small Business Administration. 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 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 thousand and/or criticized relationships greater than $250 thousand. 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 by origination year summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful for loans subject to the Company’s internal risk rating system and by performing status for all other loans as of June 30, 2024.
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Information presented in the table above is not required for periods prior to the adoption of ASU 2016-13. The following table presents more comparable information 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 as of September 30, 2023.
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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 Bank was not accruing interest on any loans delinquent 90 days or greater as of June 30, 2024 or September 30, 2023. 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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The following tables present our non-accrual loans and the related allowance for credit loss by loan type as of June 30, 2024 and the non-accrual loans and specific reserves by loan type as of September 30, 2023.
The following table identifies our non-performing, collateral dependent loans by collateral type as of June 30, 2024:
The Company’s adoption of ASU 2016-13 eliminated the requirement to disclose impaired loans. 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 as of September 30, 2023:
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The following table presents the average recorded investment in impaired loans and the interest income recognized on impaired loans for the three and nine months ended June 30, 2023.
An allowance for credit losses is maintained to absorb losses from the loan portfolio. 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 ACL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ACL. Since loans individually evaluated for impairment are promptly written down to their fair value, typically there is no portion of the ACL for individually evaluated loans.
ASU 2016-13 requires estimated credit losses on loans to be determined based on an expected life of loan model, as compared to an incurred loss model (in effect for periods prior to October 1, 2023). Accordingly, the allowance for credit losses disclosures subsequent to October 1, 2023 are not always comparable to prior dates. In addition, certain new disclosures required under ASU 2016-13 are not applicable to prior periods. As a result, the following tables present disclosures separately for each period, where appropriate. New disclosures required under ASU 2016-13 are only shown for the current period. Please refer to Note B “Recent Accounting Pronouncements” for a summary of the impact of adopting the provisions of ASU 2016-13 on October 1, 2023.
The following tables set forth the allocation of the Bank’s allowance for credit losses by loan category at the dates indicated. The portion of the allowance for credit losses allocated to each loan category does not represent the total available for future losses which may occur within the loan category since the total allowance for credit losses is a valuation allocation applicable to the entire loan portfolio. The Company generally charges-off the collateral or discounted cash flow deficiency on all loans at 90 days past due and all loans rated substandard or worse that are 90 days past due.
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The following tables also present, by loan category, the changes in the allowance for credit losses for the three and nine months ended June 30, 2024 and the allowance for credit losses for the three and nine months ended June 30, 2023.
During the nine months ended June 30, 2024 and exclusive of the impact of the adoption of ASU 2016-13, the changes in the provision for credit losses for each portfolio of loans were primarily due to fluctuations in the outstanding balance of each segment of loans collectively evaluated for impairment. Specifically, we experienced significant growth in our commercial real estate portfolio as well as our construction and land loan commitments during the nine months ended June 30, 2024 and a corresponding increase in the provision for credit losses for these portfolios. An adjustment to the expected loss rate for one-to-four family residential loans for improving economic conditions, as measured by the U.S. unemployment rate, resulted in a reduction in the provision for credit losses for that loan category during the nine months ended June 30, 2024.
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The allowance for credit losses increased $16 thousand to $8.3 million during the nine months ended June 30, 2024. Upon adoption of ASU 2016-13 on October 1, 2023, the Company’s allowance for credit losses decreased $492 thousand. Growth in loans receivable and loan commitments during the nine months ended June 30, 2024 resulted in additional provisions for credit losses totaling $441 thousand and there were $67 thousand in loan recoveries. The Company’s allowance for on-balance sheet credit losses decreased to $7.7 million at June 30, 2024 from $8.3 million at September 30, 2023 while its reserve for off-balance sheet commitments increased to $602 thousand at June 30, 2024 from $0 at September 30, 2023.
The following table presents, 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 and September 30, 2023.
During the nine months ended June 30, 2024, there were no loans modified to borrowers experiencing financial difficulty. During the nine months ended June 30, 2023, there was one loan modified that was identified as a troubled debt restructuring (“TDR”) and there were no TDRs that subsequently defaulted within twelve months of modification. The following table presents information on TDRs:
There was one residential loans totaling $23 thousand that was in the process of foreclosure at June 30, 2024.
NOTE L - DEPOSITS
A summary of deposits by type of account are summarized as follows:
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Included in the Company’s deposits at June 30, 2024 were $21.6 million in brokered certificates of deposit and $17.7 million in certificates of deposit obtained through a national deposit listing service. At September 30, 2023 the Company had $13.8 million in brokered certificates of deposits and $14.0 million in certificates of deposits obtained through a national deposit listing service.
At June 30, 2024 and September 30, 2023, the aggregate deposits in amounts greater than $250 thousand, which is the maximum amount for federal deposit insurance, were $380.5 million and $367.4 million, respectively. The estimated amount of deposits that were neither insured nor collateralized was $122.3 million and $109.3 million at June 30, 2024 and September 30, 2023, respectively.
NOTE M - 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 June 30, 2024, 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, and was not significant to the total fair value. The Company was not required to pledge any collateral for its interest rate swaps with financial institutions at June 30, 2024 and September 30, 2023.
The following table presents summary information regarding these derivatives as of June 30, 2024 and September 30, 2023.
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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.
Upon adoption of ASU 2016-13 on October 1, 2023, the Company recorded an allowance for credit losses for its unused lines of credit and unfunded commitments totaling $540 thousand. The Company’s reserves for off-balance sheet credit losses increased to $602 thousand at June 30, 2024 from $0 at September 30, 2023.
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, levels of uninsured deposits, 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.
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, other than a change to the methodology for calculating the allowance for credit losses during the nine months ended June 30, 2024.
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The Company adopted ASU 2016-13 on October 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost, including loans, held-to-maturity debt securities, not measured at amortized cost and unfunded commitments. The Company recorded a cumulative effect increase to retained earnings of $492 thousand ($354 thousand net of taxes), which was comprised of a $1.0 million ($725 thousand net of tax) increase related to loans and $540 thousand ($379 thousand net of tax) decrease related to unfunded commitments. The Company determined that there was no impact to retained earnings related to held-to-maturity securities as a result of adopting this guidance. The results reported for periods beginning on or after October 1, 2023 are presented under Accounting Standards Codification 326, while prior period amounts continue to be reported in accordance with previously applicable accounting standards.
Comparison of Financial Condition at June 30, 2024 and September 30, 2023
Total Assets.Total assets increased $37.1 million, or 4.1%, to $944.4 million at June 30, 2024 from $907.3 million at September 30, 2023. The increase was attributable to higher balances of loans receivable, partially offset by lower interest-earning deposits with banks.
Interest Earning Deposits. Interest-earning deposits with banks decreased $23.6 million, or 34.0%, to $45.8 million at June 30, 2024 from $69.4 million at September 30, 2023 resulting primarily from deployment of these fund into loans receivable during the nine months ended June 30, 2024.
Loans Receivable.Total loans receivable increased $62.2 million, or 8.9%, to $760.4 million at June 30, 2024 from $698.2 million at September 30, 2023. The increase in total loans receivable during the nine months ended June 30, 2024 occurred in commercial real estate loans, which increased $57.9 million, one-to four-family residential real estate loans (including home equity lines of credit), which increased $8.0 million, and construction and land loans, which increased $2.2 million. Partially offsetting these increases were commercial business loans, which decreased $5.8 million and other loans, which decreased $114 thousand.
Given the significance of commercial real estate (“CRE”) loans to our total loan portfolio, the following table further disaggregates these loans by occupied status and by collateral type as of June 30, 2024:
The Company obtains an appraisal of the real estate collateral securing a CRE loan prior to originating the loan. The appraised value is used to calculate the ratio of the outstanding loan balance to the value of the real estate collateral, or loan-to-value ratio ("LTV"). The original appraisal is used to monitor the LTVs within the CRE portfolio unless an updated appraisal is received, which may happen for a variety of reasons, including but not limited to payment delinquency, additional loan requests using the same collateral, and loan modifications. The following table presents the ranges in the LTVs of our CRE loans at June 30, 2024:
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As of June 30, 2024, non-owner occupied commercial real estate loans (as defined by regulatory guidance) to total risk-based capital was estimated at approximately 262%. Management believes that Magyar Bank has implemented appropriate risk management practices, including risk assessments, board-approved underwriting policies and related procedures, which include monitoring loan portfolio performance and stressing of the commercial real estate portfolio under adverse economic conditions.
Our asset quality with respect to commercial real estate loans has remained strong despite recent economic and market conditions. As of June 30, 2024 and September 30, 2023, we had $2.8 million and $2.2 million of non-performing commercial real estate loans, respectively. Such amounts totaled 0.6% of total commercial real estate loans as of June 30, 2024 and September 30, 2023.
Total non-performing loans decreased $532 thousand, or 10.5%, to $4.6 million at June 30, 2024 from $5.1 million at September 30, 2023. The decline was attributable to the foreclosure of a residential property previously securing a $777 thousand construction loan and payments totaling $386 thousand, partially offset by a $631 thousand increase from new non-performing loans secured by three commercial real estate properties and one single family residential property. The ratio of non-performing loans to total loans decreased to 0.60% at June 30, 2024 from 0.73% at September 30, 2023.
The allowance for credit losses increased $16 thousand to $8.3 million during the nine months ended June 30, 2024. Upon adoption of ASU 2016-13 on October 1, 2023, the Company’s allowance for credit losses decreased $492 thousand. Growth in loans receivable and loan commitments during the nine months ended June 30, 2024 resulted in additional provisions for credit loss totaling $441 thousand and there were $67 thousand in loan recoveries. The allowance for on-balance sheet credit losses decreased to $7.7 million at June 30, 2024 from $8.3 million at September 30, 2023 while its reserve for off-balance sheet commitments increased to $602 thousand at June 30, 2024 from $0 at September 30, 2023.
The allowance for on-balance sheet loan losses as a percentage of non-performing loans increased to 170.1% at June 30, 2024 from 163.9% at September 30, 2023. The allowance for on-balance sheet loan losses as a percentage of total loans was 1.02% at June 30, 2024 compared with 1.19% at September 30, 2023. Future increases in the allowance for credit 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.
Investment Securities.At June 30, 2024, investment securities totaled $94.5 million, reflecting a decrease of $1.5 million, or 1.5%, from $96.0 at September 30, 2023. The decrease resulted from matured bonds totaling $6.5 million and payments from mortgage-backed securities totaling $5.4 million during the nine months ended June 30, 2024. Offsetting these decreases were purchases totaling $10.0 million and a $400 thousand increase in the market value of the Company’s available-for-sale investment securities. There were no credit losses recorded for the Company’s investment securities during the nine months ended June 30, 2024.
Investment security purchases during the nine months ended June 30, 2024 consisted of a $4.0 million corporate note issued by Provident Financial Services, Inc., a $2.0 million bond issued by the Federal Home Loan Bank of New York, a $2.0 million mortgage-backed security issued by the Federal National Mortgage Association and a $2.0 million participation certificate issued by the U.S. Small Business Administration.
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Investment securities at June 30, 2024 consisted of $64.8 million in mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises, $19.0 million in U.S. government-sponsored enterprise debt securities, $7.0 million in corporate notes, $3.5 million in municipal bonds, and $195 thousand in “private-label” mortgage-backed securities. There was no allowance for credit losses for the Company’s investment securities for the nine months ended June 30, 2024.
Deposits. Total deposits increased $33.7 million, or 4.5%, to $789.2 million at June 30, 2024 from $755.4 million at September 30, 2023.
The inflow in deposits occurred in certificates of deposit (including individual retirement accounts), which increased $38.9 million, or 37.2%, to $143.6 million, in interest-bearing checking accounts (NOW), which increased $35.2 million, or 30.6%, to $150.4 million and in money market accounts, which increased $18.7 million, or 6.6%, to $303.6 million. Partially offsetting these increases were decreases in non-interest bearing checking accounts, which decreased $51.6 million, or 27.4%, to $136.9 million and in savings accounts, which decreased $7.5 million, or 12.1%, to $54.7 million. Brokered deposits, which are included in certificates of deposit within total deposits, increased $7.8 million to $21.6 million at June 30, 2024 from $13.8 million at September 30, 2023. The Company utilized brokered deposits to extend the duration of its liabilities as part of its interest rate risk management.
Borrowed Funds. Borrowings decreased $947 thousand, or 3.2%, to $28.6 million at June 30, 2024 from $29.5 million at September 30, 2023. The Company repaid a matured long term advance totaling $4.4 million and utilized a new $3.4 million long term advance from the Federal Home Loan Bank of New York during the nine months ended June 30, 2024.
Stockholders’ Equity. Stockholders’ equity increased $4.2 million, or 4.1%, to $109.0 million at June 30, 2024 from $104.8 million at September 30, 2023. The increase was primarily due to net income of $5.2 million, followed by a $367 thousand reduction in other accumulated comprehensive loss, a $354 thousand increase for the Company’s adoption of ASU 2016-13, a $484 thousand increase from stock-based compensation and an $118 thousand increase for ESOP shares allocated for the nine months ended June 30, 2024. Partially offsetting these increases were $1.4 million in dividends ($0.21 per share) paid and 85,628 shares repurchased during the period totaling $953 thousand. As a result, the Company’s book value per share increased to $16.55 at June 30, 2024 from $15.70 at September 30, 2023.
Average Balance Sheets for the Three and Nine Months Ended June 30, 2024 and 2023
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, 2024 and 2023. 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) The average balance of loans receivable, net includes non-accrual loans.
(2) Interest income and yield are calculated using the Company's 21% federal tax rate.
(3) Includes passbook savings, money market passbook and club accounts.
(4) Includes interest-bearing checking and money market accounts.
(5) Includes certificates of deposits and individual retirement accounts.
(6) Calculated as annualized net interest income divided by average total interest-earning assets.
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Comparison of Operating Results for the Three Months Ended June 30, 2024 and 2023
Net Income. Net income decreased $227 thousand, or 11.8%, to $1.7 million for the three-month period ended June 30, 2024 compared with net income of $1.9 million for the three months ended June 30, 2023. The decrease was due to lower net interest and dividend income, lower other income and higher other expenses.
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Net Interest and Dividend Income. Net interest and dividend income decreased $106 thousand, or 1.5%, to $6.8 million for the three months ended June 30, 2024 from $6.9 million for the three months ended June 30, 2023. The decrease was attributable to a 44-basis point decrease in the Company’s net interest margin to 3.02% for the three months ended June 30, 2024 from 3.46% for the three months ended June 30, 2023, partially offset by a $100.5 million increase in the average balance of interest-earning assets between the periods.
Interest and Dividend Income. Interest and dividend income increased $2.5 million, or 26.1%, to $12.3 million for the three months ended June 30, 2024 compared with $9.8 million for the three months ended June 30, 2023. The increase was attributable to a 59-basis point increase in the yield on interest-earning assets to 5.50% for the three months ended June 30, 2024 from 4.91% for the three months ended June 30, 2023, which was attributable to higher market interest rates between periods. Also contributing to the higher interest and dividend income were higher average balances of loans and interest-earning deposits, which increased $69.9 million and $32.2 million, respectively.
The average balance of loans receivable, net of allowance for credit loss, increased $69.9 million to $744.9 million during the three months ended June 30, 2024 from $675.0 million during the three months ended June 30, 2023 while the yield on loans receivable increased 53 basis points to 5.90% for the three months ended June 30, 2024 from 5.37% for the three months ended June 30, 2023 due to higher market interest rates. The higher average balance and yield accounted for a $1.9 million, or 21.4%, increase in loan interest income between periods.
Interest earned on investment securities, including interest-earning deposits and excluding FHLB stock, increased $606 thousand, or 85.8%, to $1.3 million for the three months ended June 30, 2024 from $706 thousand for the three months ended June 30, 2023. The average yield on such assets increased 113 basis points to 3.46% for the three months ended June 30, 2024 from 2.33% for the three months ended June 30, 2023, and the average balance of investment securities and interest-earning deposits increased by $30.4 million, or 24.8%, to $152.8 million for the three months ended June 30, 2024 from $122.4 million for the three months ended June 30, 2023.
Interest Expense.Interest expense increased $2.6 million, or 92.0%, to $5.5 million for the three months ended June 30, 2024 from $2.9 million for the three months ended June 30, 2023. The cost of interest-bearing liabilities increased 105 basis points to 3.24% for the three months ended June 30, 2024 compared with 2.19% for the three months ended June 30, 2023 resulting primarily from higher market interest rates. In addition, the average balance of interest-bearing liabilities increased $157.4 million, or 29.7%, to $686.7 million from higher money market and time deposit account balances.
The average balance of interest-bearing deposits increased $156.9 million, or 31.3%, to $658.2 million for the three months ended June 30, 2024 from $501.3 million for the three months ended June 30, 2023, while the average cost of such deposits increased 113 basis points to 3.25% from 2.12%. As a result, interest paid on interest-bearing deposits increased $2.7 million to $5.3 million for the three months ended June 30, 2024 compared with $2.6 million for the three months ended June 30, 2023. The increase in the cost of deposits due to higher market interest rate environment.
Interest paid on borrowings decreased $33 thousand, or 13.8%, to $206 thousand for the three months ended June 30, 2024 from $239 thousand for the three months ended June 30, 2023, while a 53-basis point decrease in the cost of borrowings to 2.90% for the three months ended June 30, 2024 from 3.43% for the three months ended June 30, 2023. The average balance of borrowings increased $543 thousand to $28.5 million for the three months ended June 30, 2024 compared to $28.0 million for the three months ended June 30, 2023.
Provision for Credit Losses. The Company recorded a net reduction of $54 thousand in its provision for credit losses for the three months ended June 30, 2024 compared with a net reduction of $81 thousand for the three months ended June 30, 2023. The net reduction in provisions resulted from lower balances (including commitments) of construction loans and commercial lines of credit, which require higher provisions for credit loss. The Company recorded $1 thousand in net loan recoveries during the three months ended June 30, 2024 compared with $385 thousand in net loan charge-offs during the three months ended June 30, 2023.
Other Income. Other income decreased $212 thousand, or 34.1%, to $409 thousand during the three months ended June 30, 2024 compared to $621 thousand for the three months ended June 30, 2023. The decrease was due to lower loan prepayment fees, which caused service charges to decline by $110 thousand to $282 thousand from $392 thousand and lower gains from the sale of Small Business Administration 7(a) loans, which decreased by $103 thousand between the two periods.
Other Expenses. Other expenses increased $169 thousand, or 3.5%, to $5.1 million during the three months ended June 30, 2024 compared with $4.9 million for the three months ended June 30, 2023. The increase was primarily attributable to higher compensation and benefit expense, which increased $91 thousand, or 3.2%, to $2.9 million, due to the additions of a commercial lender and a commercial credit analyst, as well as annual merit increases.
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Also contributing to the higher other expenses were occupancy, professional and FDIC insurance premiums. Occupancy expenses increased $22 thousand, or 2.7%, from higher rental expense related to a new lease executed April 1, 2024 for a new branch office in Martinsville, NJ. Professional fees increased $12,000, or 6.4%, from higher legal and foreclosure expenses incurred by the Company compared with the prior year period. FDIC insurance premiums increased $10,000, or 10.4%, from deposit growth.
Income Tax Expense.The Company recorded tax expense of $501 thousand on pre-tax income of $2.2 million for the three months ended June 30, 2024, compared with $788 thousand on pre-tax income of $2.7 million for the three months ended June 30, 2023. The Company’s effective tax rate for the three months ended June 30, 2024 was 22.9% compared with 29.1% for the three months ended June 30, 2023. The decrease in income tax expense was driven by changes in deferred tax items between the periods as well as changes in the State of New Jersey’s entity consolidation rule.
Comparison of Operating Results for the Nine Months Ended June 30, 2024 and 2023
Net Income. Net income decreased $284 thousand, or 5.1%, to $5.2 million during the nine months ended June 30, 2024 compared with $5.5 million for the nine months ended June 30, 2023. The decrease was due to lower other income and higher other expenses, partially offset by higher net interest and dividend income.
Net Interest and Dividend Income. Net interest and dividend income increased $226 thousand, or 1.1%, to $21.0 million for the nine months ended June 30, 2024 from $20.7 million for the nine months ended June 30, 2023. The increase was attributable to a $106.7 million, or 13.7%, increase in the average balance of interest-earning assets between the periods, partially offset by a 39-basis point decrease in the Company’s net interest margin to 3.16% for the nine months ended June 30, 2024 from 3.55% for the nine months ended June 30, 2023.
Interest and Dividend Income. Interest and dividend income increased $8.3 million, or 30.4%, to $35.8 million for the nine months ended June 30, 2024 from $27.5 million for the nine months ended June 30, 2023. The increase was attributable to a 69-basis point increase in the yield on interest-earning assets to 5.40% from 4.71%, as well as a $63.5 million increase in the average balance of net loans receivable and a $46.1 million increase in the average balance of interest-earning deposits. The increase in yield on the Company’s assets was attributable to higher market interest rates between periods.
The average balance of loans receivable, net of allowance for credit losses, increased $63.5 million to $724.8 million during the nine months ended June 30, 2024 from $661.3 million during the nine months ended June 30, 2023. The average interest earned on loans receivable, net of allowance for credit losses, increased $6.0 million, or 23.3%, to $31.6 million for the nine months ended June 30, 2024 from $25.6 million for the same period prior year. The increase was due to higher market interest rates, which resulted in a 65-basis point increase in the yield on the average balance of loans receivable, net of allowance for credit losses to 5.83% for the nine months ended June 30, 2024 from 5.18% for the nine months ended June 30, 2023.
Interest earned on investment securities, including interest-earning deposits and excluding FHLBNY stock, increased $2.3 million, or 131.8%, to $4.1 million for the nine months ended June 30, 2024 from $1.8 million for the nine months ended June 30, 2023. The increase was attributable to a 138-basis point increase in the yield to 3.41 for the nine months ended June 30, 2024 from 2.03% for the nine months ended June 30, 2023, and the average balance of investment securities and interest-earning deposits increased by $42.9 million, or 36.9%, to $159.2 million for the nine months ended June 30, 2024 from $116.3 million for the nine months ended June 30, 2023.
Interest Expense.Interest expense increased $8.1 million, or 120.8%, to $14.9 million for the nine months ended June 30, 2024 from $6.7 million for the nine months ended June 30, 2023. The cost of interest-bearing liabilities increased 133-basis points to 3.07% for the nine months ended June 30, 2024 compared with 1.74% for the nine months ended June 30, 2023 resulting primarily from higher market interest rates between periods. In addition, the average balance of interest-bearing liabilities increased $130.6 million, or 25.3%, to $646.6 million from $516.0 million primarily due to the higher money market account and time deposit account balances.
The average balance of interest-bearing deposits increased $126.2 million, or 25.7%, to $617.7 million for the nine months ended June 30, 2024 from $491.5 million for the nine months ended March 31, 2023, while the average interest paid on the interest-bearing deposits increased 140 basis points to 3.07% for the nine months ended June 30, 2024 from 1.67% for the nine months ended June 30, 2023 due to the higher market interest rate environment. As a result, interest paid on interest-bearing deposits increased $8.1 million to $14.2 million for the nine months ended June 30, 2024 from $6.1 million for the nine months ended June 30, 2023.
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Interest expense on borrowings increased $69 thousand, or 11.6%, to $663 thousand for the nine months ended June 30, 2024 from $594 thousand for the nine months ended June 30, 2023, partially offset by an 18-basis point decrease in the cost of borrowings to 3.06% for the nine months ended June 30, 2024 from 3.24% for the nine months ended June 30, 2023. The average balance of borrowings increased $4.4 million to $28.9 million for the nine months ended June 30, 2024 from $24.5 million for the nine months ended June 30, 2023 to partially fund the growth in the Company’s loans receivable. The Company was able to lower the cost of borrowings while increasing the balance of its borrowings with zero-cost advances from the Federal Home Loan Bank of New York;
Provision for Credit Losses. The Company’s provision for credit losses was $441 thousand for the nine months ended June 30, 2024 compared with $432 thousand for the nine months ended June 30, 2023. Provisions for credit losses resulted from growth in the Company’s loan portfolio, particularly commercial real estate loans, during the nine months ended June 30, 2024. The Company recorded $67 thousand in net loan recoveries during the nine months ended June 30, 2024 compared with $487 thousand in net loan charge-offs during the nine months ended June 30, 2023.
Other Income. Other income decreased $213 thousand, or 11.5%, to $1.6 million during the nine months ended June 30, 2024 compared with $1.9 million for the nine months ended June 30, 2023. The decrease was due to lower loan prepayment fees, which declined by $79 thousand to $878 thousand from $957 thousand, and lower gains from the sale of Small Business Administration 7(a) loans, which decreased by $143 thousand between the two periods.
Other Expenses. Other expenses increased $920 thousand, or 6.4%, to $15.2 million during the nine months ended June 30, 2024 from $14.3 million during the nine months ended June 30, 2023. The increase was primarily attributable to higher compensation and benefit expense, which increased $549 thousand, or 6.7%, to $8.7 million, due to fewer open positions between periods and the additions of a commercial lender and a commercial credit analyst, as well as annual merit increases.
Also contributing to the increase were higher occupancy expenses, professional expenses, FDIC deposit insurance premiums and other expenses. Occupancy expenses increased $63 thousand, or 2.7%, from higher rental expense, furniture and equipment related to a new lease executed April 1, 2024 for a new branch office in Martinsville, NJ. Professional fees increased $33,000, or 5.8%, from higher legal and foreclosure expenses incurred by the Company compared with the prior year period. Deposit insurance premiums increased $71,000, or 29.2%, from deposit growth and higher insurance assessment rates implemented by the FDIC for all insured institutions effective January 1, 2023. Other expenses increased $237,000, or 15.4%, from higher loan origination and servicing costs, higher losses on fraudulent checks, higher recruitment costs and higher data communication costs.
Income Tax Expense.The Company recorded tax expense of $1.7 million on pre-tax income of $7.0 million for the nine months ended June 30, 2024, compared with $2.4 million on pre-tax income of $7.9 million for the nine months ended June 30, 2023. The Company’s effective tax rate for the nine months ended June 30, 2024 was 24.8% compared with 29.9% for the nine months ended June 30, 2023. The decrease in income tax expense was driven by changes in deferred tax items between the periods as well as changes in the State of New Jersey’s entity consolidation rule.
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 June 30, 2024, we had an aggregate borrowing capacity of $114.9 million. There has been no material adverse change during the nine months ended June 30, 2024 in the ability of the Company and its subsidiaries to fund their operations.
At June 30, 2024, the Company had commitments outstanding under letters of credit totaling $690 thousand, commitments to originate loans totaling $38.5 million, and commitments to fund undisbursed balances of closed loans and unused lines of credit totaling $93.1 million. There has been no material change during the current quarter ended June 30, 2024 in any of the Company’s other contractual obligations or commitments to make future payments.
Capital Requirements
At June 30, 2024, the Bank’s Tier 1 capital as a percentage of the Bank’s total assets was 10.92%, and total qualifying capital as a percentage of risk-weighted assets was 15.93%.
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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 quarter ended June 30, 2024 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, 2023 filed on December 15, 2023.
The following table reports information regarding repurchases of our common stock during the current quarter ended June 30, 2024.
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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