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MGYR Magyar Bancorp

Filed: 15 Mar 21, 4:06pm
Table of Contents

As filed with the Securities and Exchange Commission on March 15, 2021

Registration No. 333-                    

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Magyar Bancorp, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware 6036 20-4154978

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

400 Somerset Street

New Brunswick, New Jersey 08901

(732) 432-7600

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

John S. Fitzgerald

President and Chief Executive Officer

400 Somerset Street

New Brunswick, New Jersey 08901

(732) 432-7600

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

 

John Gorman, Esq.

Steven Lanter, Esq.

Luse Gorman, PC

5335 Wisconsin Avenue, N.W., Suite 780

Washington, D.C. 20015

(202) 274-2000

 

Matthew Dyckman, Esq.

Goodwin Procter LLP

1900 N Street NW

Washington, D.C. 20036

(202) 346-4000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:   ☒

If this Form is filed to register additional shares for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:   ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:   ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:   ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filer   Accelerated filer 
Non-accelerated filer   Smaller reporting company 
Emerging growth company    

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 to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

 

Amount

to be

registered

 

Proposed

maximum

offering price

per share(1)

 

Proposed

maximum

aggregate

offering price(1)

 Amount of
registration fee

Common Stock, $0.01 par value per share

 7,098,070 shares $10.00 $70,980,700 $7,744

 

 

(1)

Estimated solely for purposes of calculating the amount of the registration fee in accordance with Rule 457(o) of the Securities Act of 1933, as amended.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

PROSPECTUS

[LOGO OF MAGYAR BANCORP, INC.]

(Holding Company for Magyar Bank)

Up to 3,910,000 Shares of Common Stock

Magyar Bancorp, Inc., a Delaware corporation, that we refer to as “Magyar Bancorp” throughout this prospectus, is offering up to 3,910,000 shares of common stock for sale at $10.00 per share in connection with the conversion of Magyar Bancorp, MHC from the mutual holding company to the stock holding company form of organization.

The shares we are offering represent the ownership interest in Magyar Bancorp currently owned by Magyar Bancorp, MHC. Magyar Bancorp owns all of the outstanding shares of common stock of Magyar Bank, a New Jersey stock savings bank. Magyar Bancorp’s common stock is currently listed on the Nasdaq Global Market under the symbol “MGYR” and, upon consummation of this offering, will continue to be listed and trade on the Nasdaq Global Market under the symbol “MGYR.”

The shares of common stock are first being offered for sale in a subscription offering to eligible depositors of Magyar Bank and to tax-qualified employee benefit plans of Magyar Bank. Eligible depositors and tax-qualified employee benefit plans of Magyar Bank have priority rights to buy all of the shares offered. Any shares of common stock not purchased in the subscription offering may be offered for sale to the general public in a community offering, with a preference given first to residents of the communities served by Magyar Bank and then to existing stockholders of Magyar Bancorp. Any shares of common stock not purchased in the subscription or community offerings may be offered for sale to the public through a syndicate of broker-dealers, referred to in this prospectus as the syndicated community offering. The syndicated community offering may commence before the subscription and community offerings (including any extensions) have expired. We must sell a minimum of 2,890,000 shares to complete the offering.

In addition to the shares we are selling in the offering, the shares of common stock of Magyar Bancorp currently owned by public stockholders will be converted into new shares of common stock of Magyar Bancorp based on an exchange ratio that will result in existing public stockholders owning approximately the same percentage of common stock of Magyar Bancorp as they owned of the common stock of Magyar Bancorp immediately before the completion of the conversion. The number of shares we expect to issue in the exchange ranges from 2,356,399 shares to 3,188,070 shares.    

The minimum purchase order is 25 shares. Generally, no individual or individuals acting through a single qualifying account may purchase more than 40,000 shares ($400,000) of common stock, and no person or entity, together with associates or persons acting in concert with such person or entity, may purchase more than 50,000 shares ($500,000) of common stock in all categories of the offering combined.

The subscription offering expires at 2:00 p.m., Eastern Time, on [expiration date], 2021. We expect that the community offering, if held, will expire at the same time. We may extend this expiration date without notice to you until [extension date], 2021. Once submitted, orders are irrevocable unless the offering is terminated or extended beyond [extension date], 2021, or the number of shares of common stock to be sold is increased to more than 3,910,000 shares or decreased to less than 2,890,000 shares. If the offering is extended past [extension date], 2021, all subscribers will be notified and given an opportunity to confirm, change or cancel their orders. If you do not respond to this notice, we will promptly return your funds with interest or cancel your deposit account withdrawal authorization. If the number of shares to be sold is increased to more than 3,910,000 shares or decreased to less than 2,890,000 shares, all funds received for the purchase of shares of common stock will be returned promptly with interest. All subscribers will be resolicited and given an opportunity to place a new stock order within a specified period of time.

Keefe, Bruyette & Woods, Inc. will assist us in selling the shares on a best efforts basis in the subscription offering and, if held, the community offering, and will serve as sole manager for any syndicated community offering. Keefe, Bruyette & Woods, Inc. is not required to purchase any shares of common stock that are sold in the subscription offering or, if held, the community offering.

OFFERING SUMMARY

Price: $10.00 per Share

 

   Minimum   Midpoint   Maximum 

Number of shares

   2,890,000    3,400,000    3,910,000 

Gross offering proceeds

  $28,900,000   $34,000,000   $39,100,000 

Estimated offering expenses, excluding selling agent fees and expenses (1)(2)

  $1,055,000   $1,055,000   $1,055,000 

Selling agent fees and expenses (1)

  $455,000   $455,000   $479,720 

Estimated net proceeds

  $27,400,000   $32,500,000   $37,565,280 

Estimated net proceeds per share

  $9.48   $9.56   $9.61 

 

(1)

See “The Conversion and Offering – Plan of Distribution; Selling Agent and Underwriter Compensation” for a discussion of Keefe, Bruyette & Woods, Inc.’s compensation for this offering and the compensation to be received by Keefe, Bruyette & Woods, Inc. and the other broker-dealers that may participate in the syndicated community offering.

(2)

Excludes records agent fees and expenses payable to Keefe, Bruyette & Woods, Inc., which are included in estimated offering expenses. See “The Conversion and Offering – Records Agent Services.”

This investment involves a degree of risk, including the possible loss of principal.

See “Risk Factors” beginning on page 21.

These securities are not deposits or savings accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency. Neither the Securities and Exchange Commission, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the New Jersey Department of Banking and Insurance, nor any state securities regulator has approved or disapproved these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

 

 

Keefe, Bruyette & Woods, Inc.

A Stifel Company

For assistance, contact the Stock Information Center at [stock center number].

The date of this prospectus is [Prospectus date].


Table of Contents

LOGO


Table of Contents


Table of Contents

SUMMARY

The following summary explains the significant aspects of the conversion of Magyar Bancorp, MHC to the stock holding company form or organization, which we refer to as the “conversion” throughout this prospectus, the offering of new shares of Magyar Bancorp in the subscription offering and any community offering or syndicated community offering, which we collectively refer to as the “offering” throughout this prospectus, and the exchange of existing shares of Magyar Bancorp common stock for new shares of Magyar Bancorp in connection with the conversion and offering. This summary may not contain all of the information that is important to you. Before making an investment decision, you should read this entire document carefully, including the consolidated financial statements and the related notes, and the section entitled “Risk Factors.”

Magyar Bancorp and Magyar Bancorp, MHC

Magyar Bancorp is a Delaware corporation that owns all of the outstanding shares of common stock of Magyar Bank. At December 31, 2020, Magyar Bancorp had consolidated assets of $741.8 million, deposits of $612.1 million and stockholders’ equity of $58.2 million and had 5,810,746 shares of common stock outstanding, of which 2,610,296 shares, or 44.9%, were owned by the public, including 72,242 shares held by Magyar Bank Charitable Foundation.

The remaining 3,200,450 shares of common stock of Magyar Bancorp are held by Magyar Bancorp, MHC, a New Jersey-chartered mutual holding company. The shares of common stock we are offering represent Magyar Bancorp, MHC’s ownership interest in Magyar Bancorp. Upon completion of the conversion and offering, Magyar Bancorp, MHC’s shares will be cancelled and Magyar Bancorp, MHC will no longer exist.

Magyar Bancorp’s corporate headquarters is located at 400 Somerset Street, New Brunswick, New Jersey and its telephone number at that address (732) 342-7600.

Magyar Bank

Magyar Bank is a New Jersey-chartered savings bank headquartered in New Brunswick, New Jersey that was originally founded in 1922 as a New Jersey building and loan association. In 1954, Magyar Bank converted to a New Jersey savings and loan association, before converting to a New Jersey savings bank charter in 1993 and reorganizing as a stock saving bank in the mutual holding company structure in 2006. We conduct business from our corporate headquarters located at 400 Somerset Street, New Brunswick, New Jersey, and our seven branch offices located in New Brunswick, North Brunswick, South Brunswick, Branchburg, Bridgewater, and Edison, New Jersey.

Magyar Bank’s corporate headquarters is located at 400 Somerset Street, New Brunswick, New Jersey, our telephone number at that address is (732) 342-7600, and our website is located at www.magbank.com. Information on this website is not and should not be considered to be a part of this prospectus.

Our Organizational Structure and the Proposed Conversion

We have operated in a two-tier mutual holding company structure since 2006, when Magyar Bank reorganized from a New Jersey-chartered mutual savings bank into the two-tiered mutual holding company structure and became the wholly owned stock saving bank subsidiary of Magyar Bancorp. At that time, Magyar Bancorp completed an initial public offering by selling 2,618,820 shares, or 44.2% of its outstanding common stock, to depositors of Magyar Bank and the public (including the Magyar Bank Employee Stock Ownership Plan) and contributed 104,472 shares of common stock and $500,000 in cash to the Magyar Bank Charitable Foundation.

 

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Pursuant to the terms of the plan of conversion and reorganization, which we refer to as the “plan of conversion,” we are converting from a two-tier mutual holding company corporate structure to the fully public stock holding company corporate structure. Upon completion of the conversion, Magyar Bancorp, MHC will cease to exist and Magyar Bancorp will continue to own 100% of Magyar Bank. The conversion will be accomplished by the merger of Magyar Bancorp, MHC with and into Magyar Bancorp. The shares of Magyar Bancorp common stock being offered for sale represent the majority ownership interest in Magyar Bancorp currently held by Magyar Bancorp, MHC. Public stockholders of Magyar Bancorp will receive new shares of common stock of Magyar Bancorp in exchange for their shares of Magyar Bancorp at an exchange ratio intended to preserve approximately the same aggregate ownership interest in Magyar Bancorp, adjusted downward to reflect certain assets held by Magyar Bancorp, MHC, without giving effect to new shares purchased in the offering or cash paid in lieu of any fractional shares. The shares of Magyar Bancorp common stock owned by Magyar Bancorp, MHC will be canceled.

The following diagram shows our current organizational structure, reflecting ownership percentages at December 31, 2020:

 

LOGO

Magyar Bancorp, MHC  Public Stockholders
55.1% of outstanding
common stock
  44.9% of outstanding
common stock
  Magyar Bancorp
  100% of outstanding common stock
  Magyar Bank

 

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After the conversion and offering are completed, we will be organized as a fully public stock holding company, as follows:

 

LOGO

Public stockholders
100% of outstanding common stock
Magyar Bancorp
100% of outstanding common stock
Magyar Bank

Our Business

Our principal business, which is conducted primarily through Magyar Bank, consists of attracting retail deposits from the general public in the areas surrounding our corporate headquarters in New Brunswick, New Jersey and our branch offices located in Middlesex and Somerset counties, New Jersey, and investing those deposits, together with funds generated from operations and wholesale funding, in residential mortgage loans, home equity loans, home equity lines of credit, commercial real estate loans, commercial business loans, Small Business Administration (“SBA”) loans, construction loans and investment securities. We also originate consumer loans, which consist primarily of secured demand loans. We originate loans primarily for retention in our loan portfolio. However, from time to time we have sold some of our long-term, fixed-rate residential mortgage loans into the secondary market, while retaining the servicing rights for such loans. In addition, we sell the SBA-guaranteed portion of SBA loans while retaining the servicing rights for such loans. Our revenues are derived principally from interest on loans and securities. Our investment securities consist primarily of mortgage-backed securities and U.S. Government and government-sponsored enterprise obligations. We also generate revenues from fees and service charges. Our primary sources of funds are deposits, borrowings and principal and interest payments on loans and securities. Magyar Bank is subject to comprehensive regulation and examination by the New Jersey Department of Banking and Insurance (the “NJDOBI”) and the Federal Deposit Insurance Corporation (“FDIC”) and is a member of the Federal Home Loan Bank system. Magyar Bancorp is subject to comprehensive regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).

Business Strategy

Our current business strategy consists of the following:

 

  

Continue to grow our loan portfolio prudently and further diversify our loan portfolio. Our loan portfolio has increased to $607.0 million at December 31, 2020 compared to $611.3 million at September 30, 2020, $523.0 million at September 30, 2019 and $512.5 million at September 30, 2018. In recent years, consistent with our business strategy, our

 

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biggest areas of loan growth have been in commercial real estate, which increased $41.0 million, or 18.7%, from September 30, 2018 to December 31, 2020, and in commercial business loans, which increased $37.9 million, or 71.1%, from September 30, 2018 to December 31, 2020. Included in the December 31, 2020 balance of commercial business loans was $46.0 million of loans originated through the SBA’s Paycheck Protection Program (“PPP”). We intend to continue to grow our loan portfolio, with a focus primarily on commercial real estate and to a lesser extent commercial business lending. Although we will continue to emphasize the origination of one- to four-family residential mortgage loans, we expect our continued emphasis on commercial real estate and commercial business lending will result in the continued diversification of our loan portfolio with a lower concentration in one- to four-family residential real estate loans.

 

  

Continue to support our customers and our local community. During the COVID-19 pandemic, as we have done during prior economic downturns, we are taking actions to support our customers and our local communities. For example, during the year ended September 30, 2020, we originated $56.0 million of small business loans under the PPP, created by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was signed into law in March 2020. As a result of our participation in the PPP, in addition to the loans originated, at December 31, 2020, we had 114 new business customers through the PPP with an aggregate balance of $14.0 million in core deposits and we believe we will retain a significant number of these customers. Furthermore, in response to the COVID-19 pandemic, we have implemented protocols and processes to help protect our employees, customers and communities, including leveraging our business continuity plans and capabilities that include critical operations teams being divided and dispersed to separate locations and, when possible, having employees work from home, while remaining open in all branch locations. In addition, we participated in the Federal Home Loan Bank of New York’s Covid-19 Small Business Recovery Grant Program and distributed $100,000 to local business and non-profits in our community. Our commitment to the communities we serve has resulted in Magyar Bank receiving rating of “Outstanding” from the FDIC for our compliance with the Community Reinvestment Act on five consecutive examinations by the FDIC. An “Outstanding” rating is considered a benchmark for a bank’s level of care and concern for the communities it serves. Additionally, each year we support over 100 organizations through corporate donations and employees volunteering their time. Prior to the COVID-19 pandemic, our employees frequently attended events around the community, from serving meals at local soup kitchens, to providing financial education seminars and preparing first-time homebuyers in achieving homeownership. We still engage in these types of activities in a virtual format, and once the restrictions are lifted, we expect to continue to be an active civic leader in our communities through these types of engagements.

 

  

Focus on Technological Innovation. In recent years, we have increased our focus on utilizing technology to provide our customers with the most convenient and secure delivery platforms as well as improving our efficiency. We believe that recent technological improvements to our online banking and mobile application services were a critical element in allowing our customers to migrate to these delivery channels during the COVID-19 pandemic, and enabling them to safely conduct most of their banking transactions remotely. Our mobile applications allow customers to make deposits with their phones, as well as providing remote capture deposit functions for our business

 

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customers. Additionally, the addition of the Zelle online person-to-person payment feature has facilitated our customers’ ability to pay their friends and family members through a secure virtual platform. We intend to continue to utilize technology to improve our customers’ banking experience and improve our efficiency. Looking ahead, technological improvements we are researching include cash recyclers for branches to reduce the time it takes to complete transactions in the branch, an online deposit application that would allow customers to open accounts remotely, and a mobile application for business accounts. We believe that our current and prospective technological enhancements will not only improve our customers’ banking experience but also will improve our efficiency and thereby ultimately reduce operating expenses.

 

  

Continue to grow our core deposits. We consider our core deposits to include demand accounts, savings accounts, negotiable orders of withdrawal (NOW) and money market accounts. We will continue our efforts to increase our core deposits to provide a stable source of funds to support loan growth at costs consistent with improving our interest rate spread and net interest margin. Core deposits also help us maintain loan-to-deposit ratios at levels consistent with regulatory expectations. Such deposits totaled $493.3 million, or 80.6% of total deposits, as of December 31, 2020, compared to $399.8 million, or 75.4% of total deposits, as of September 30, 2018. Core deposits have also increased as we have held the proceeds of PPP loans originated to customers and deposited with Magyar Bank, including $14.0 million of deposits from 114 new customers of Magyar Bank at December 31, 2020 as a result of the PPP. While we expect some of these deposits to decrease as businesses utilize the PPP loan proceeds, we will focus on retaining as many of these new customer relationships as possible. We intend to continue to emphasize the aggregation of core deposits by incentivizing lenders to increase loan customer deposits and continuing to provide innovative products to our customers.

 

  

Continue to manage credit risk to maintain a low level of non-performing assets. We believe strong asset quality remains a key to our long-term financial success and is important in supporting our intended loan growth. Managing credit risk also reduces the provisions we require to maintain our allowance for loan losses, which enables us to use additional funds to support sales and marketing initiatives as well as invest in information technology systems customarily associated with a larger financial institution. Our total non-performing assets to total assets ratio was 1.63% at December 31, 2020, 1.63% at September 30, 2020 and 2.29% at September 30, 2019. Our strategy for credit risk management continues to focus on having an experienced team of credit professionals, well-defined policies and procedures, appropriate loan underwriting criteria and active credit monitoring. This includes enhanced loan monitoring of higher risk portfolio segments, higher risk individual loans and larger relationships within the portfolio, and more frequent loan grade review. We will also continue more frequent communication with large borrowers and borrowers within pandemic-affected segments, such as the hospitality and restaurant industries, and we will further continue obtaining interim financial statements, when available, and monitoring past due loans, as well as loans that were deferred as a result of COVID-19 hardships and that are required to resume normal monthly payments. Furthermore, given the uncertainty surrounding the length and severity of the COVID-19 pandemic, management has established and will continue to use enhanced underwriting criteria for all loan types, with a particular focus on portfolio segments identified as having elevated risk.

 

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Impact of COVID-19 Outbreak

During the first quarter of 2020, global financial markets experienced significant volatility resulting from the spread of a novel coronavirus known as COVID-19. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. The COVID-19 pandemic has restricted the level of economic activity in our markets. In response to the pandemic, the governments of the State of New Jersey and of most other states have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential. These measures dramatically increased unemployment in the United States and have negatively impacted many businesses, and thereby threatened the repayment ability of some of our borrowers.

To address the economic impact in the United States, the CARES Act was signed into law on March 27, 2020. The CARES Act included a number of provisions that affected us, including accounting relief for troubled debt restructurings (“TDRs”), or loans for which a portion of interest or principal has been forgiven and loans modified at interest rates materially less than current market rates. The CARES Act also established the PPP, which allowed us to lend money to small businesses to maintain employee payrolls through the crisis with guarantees from the SBA. Under this program, loan amounts may be forgiven if the borrower maintains employee payrolls and meets certain other requirements.

In addition, the Federal Reserve Board took steps to bolster the economy by, among other things, reducing the federal funds rate and the discount-window borrowing rate to near zero. In response to the COVID-19 pandemic and to protect our employees and customers from potential exposure to the virus, all Magyar Bank lobbies continue to observe best practice protocols to limit exposure and/or spread of the virus.

We have implemented various consumer and commercial loan modification programs to provide our borrowers relief from the economic impacts of COVID-19. Based on guidance in the CARES Act, COVID-19 related modifications to loans that were current as of December 31, 2019 are exempt from TDR classification under accounting principles generally accepted in the United States (“U.S. GAAP”). In addition, the bank regulatory agencies issued interagency guidance stating that COVID-19 related short-term modifications (i.e., six months or less) granted to loans that were current as of the loan modification program implementation date are not TDRs.

To assist our loan customers, we have offered loan payment deferrals to borrowers unable to make their contractual payments due to COVID-19. Deferral requests are considered on a case-by-case basis and are initially approved for a three-month period for principal and interest payments or for interest-only payments depending on the borrower’s circumstances. An additional three-month period is available for businesses that remain unable to operate and for consumers unable to make their mortgage or home equity payments due to COVID-19. Additional deferrals will be considered for businesses experiencing a prolonged impact from the COVID-19 pandemic, such as the accommodation and food service industries. At December 31, 2020, Magyar Bank had 33 loans totaling $23.2 million to businesses in the accommodations and food services industries. Magyar Bank’s loan portfolio does not have a significant exposure to the travel or entertainment industry.

Through December 31, 2020, we had modified 284 loans aggregating $150.9 million for the deferral of principal and/or interest payments. Of these loans, at December 31, 2020, 258 loans aggregating $134.9 million had resumed making their contractual loan payments, 15 loans totaling $7.2 million had paid off (including their deferred payments), nine loans totaling $7.3 million were currently

 

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deferred, and two loans totaling $1.5 million were past their deferral period and delinquent. Of the two delinquent loans, one commercial business loan totaling $1.4 million was delinquent more than 90 days at December 31, 2020 and one residential loan totaling $113,000 was delinquent 30 days at December 31, 2020. Details with respect to loan modifications as of December 31, 2020 are as follows:

 

Loan Type

  Number of
Loans
   Balance   Weighted Average
Interest Rate
 
   (Dollars in thousands) 

One- to four-family residential real estate (1)

   89   $23,184    4.06

Commercial real estate

   139    109,953    4.72

Construction

   4    2,630    3.77

Home equity lines of credit

   8    1,238    4.24

Commercial business

   29    6,738    4.06
  

 

 

   

 

 

   

 

 

 

Total

   269   $143,743    4.56
  

 

 

   

 

 

   

 

 

 

 

(1)

Includes home equity loans.

Magyar Bank participated in the PPP, pursuant to which we have made loans, 100% guaranteed by the SBA, that are forgivable provided the funds are used on qualifying payroll costs, and to a lesser extent, rent, utilities and interest on qualifying mortgage payments. The loans bear a fixed rate of 1.0% and loan payments are deferred for the first 10 months following the covered period, which is eight to 24 weeks following the date the loan is made. We originated 350 “First Draw” loans totaling $56.0 million through December 31, 2020 for which we received $2.0 million in origination fees from the SBA. These fees are being amortized over the expected life of the loans, which is two years for loans originated prior to June 5, 2020 and five years for loans originated June 5, 2020 or later. Through December 31, 2020, 48 loans totaling $10.0 million had been forgiven by the SBA.

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues (“Economic Aid”) Act was signed into law. The Economic Aid Act allocated an additional $284.5 billion in funds for the PPP, expanded the eligible expenditures for which a business could use PPP proceeds, and provided for a simplified forgiveness application for PPP loans of $150,000 or less. The Economic Aid Act also provided the SBA with the authority to guarantee Second Draw PPP loans, under generally the same terms and conditions available under the First Draw program, through March 31, 2021. In order to qualify for a Second Draw PPP loan, an applicant must have experienced a revenue reduction of at least 25% in 2020 relative to 2019. We are participating in this second round of PPP and expect to provide Second Draw PPP loans to our eligible customers.

The Federal Reserve Board created the Paycheck Protection Program Lending Facility (“PPPLF”) to facilitate lending by eligible financial institutions to small businesses under the PPP. Under the PPPLF, the Federal Reserve Bank of New York provided advances with a fixed interest rate of 0.35% to Magyar Bank on a non-recourse basis, taking PPP loans as collateral. In addition, the FDIC allows Magyar Bank to neutralize the effect of PPP loans financed under the PPPLF on Tier 1 leverage capital ratios. We funded PPP loans with $36.9 million in PPPLF, $29.8 million of which was outstanding at December 31, 2020.

The health of the banking industry is highly correlated with that of the economy. The temporary and/or partial closures of non-essential businesses in our local and national economies increases the likelihood of recession, which typically results in an increased level of credit losses. Accordingly, our provisions for loan losses have increased and will be closely monitored throughout the COVID-19 pandemic. In addition to utilizing quantitative loss factors, we consider qualitative factors, such as changes in underwriting policies, current economic conditions, delinquency statistics, the adequacy of the underlying collateral, and the financial strength of the borrower. The impact of the COVID-19 pandemic on the performance of our loan portfolio in future quarters is unknown, however all of these factors are likely to be affected by the COVID-19 pandemic.

 

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Given the unprecedented uncertainty and rapidly evolving economic effects and social impacts of the COVID-19 pandemic, the future direct and indirect impact on our business, results of operations and financial condition are highly uncertain. Should current economic conditions persist or continue to deteriorate, we expect that this macroeconomic environment will have a continued adverse effect on our business and results of operations, which could include, but not be limited to: decreased demand for our products and services, protracted periods of lower interest rates, increased non-interest expenses, including operational losses, and increased credit losses due to deterioration in the financial condition of our consumer and commercial borrowers, including declining asset and collateral values, which may continue to increase our provision for credit losses and net charge-offs.

For additional information, see “Risk Factors – Risks Related to the COVID-19 Pandemic – The economic impact of the COVID-19 outbreak could adversely affect our financial condition and results of operations.”

Reasons for the Conversion and Offering

Our primary reasons for converting to the fully public stock form of ownership and undertaking the offering are to:

 

  

Enhance our regulatory capital position to support growth and build stockholder value. A strong capital position is essential to achieving our long-term objectives of growing Magyar Bank and building stockholder value. Although Magyar Bank currently exceeds all regulatory capital requirements, the proceeds from the offering will materially strengthen our capital position and enable us to support our planned growth and expansion through larger legal lending limits and reduced loan concentrations as a percentage of regulatory capital. The augmented regulatory capital will be essential to the continued implementation of our business strategy.

 

  

Transition our organization to a stock holding company structure, which gives us greater flexibility to access the capital markets compared to our existing mutual holding company structure. The stock holding company structure gives us greater flexibility to access the capital markets to support our growth through possible future equity and debt offerings. We have no current plans, agreements or understandings regarding any additional equity or debt offerings.

 

  

Improve the liquidity of our shares of common stock. We expect that the larger number of publicly traded shares that will be outstanding after completion of the conversion and offering will result in a more liquid and active market for our common stock. A more liquid and active market will make it easier for our stockholders to buy and sell our common stock and will give us greater flexibility in implementing capital management strategies.

 

  

Facilitate our stock holding company’s ability to pay dividends to our public stockholders. Current regulations of the Federal Reserve Board substantially restrict the ability of Magyar Bancorp, MHC to waive dividends declared by Magyar Bancorp.

 

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Accordingly, because any dividends declared and paid by Magyar Bancorp would have to be paid to Magyar Bancorp, MHC along with all other stockholders, the amount of dividends available for all other stockholders would be less than if Magyar Bancorp, MHC were to waive the receipt of dividends. The conversion will eliminate our mutual holding company structure and will facilitate our ability to pay dividends to all stockholders of Magyar Bancorp, subject to legal, regulatory and financial considerations applicable to all financial institutions. See “Our Dividend Policy.”

 

  

Facilitate future mergers and acquisitions. Although we do not currently have any understandings or agreements regarding any specific acquisition transaction, the stock holding company structure will give us greater flexibility to structure, and make us a more attractive and competitive bidder for, mergers and acquisitions of other financial institutions or business lines as opportunities arise. The additional capital raised in the offering also will enable us to consider larger merger transactions. In addition, although we intend to remain an independent financial institution, the stock holding company structure may make us a more attractive acquisition candidate for other institutions. Applicable regulations prohibit anyone from acquiring or offering to acquire more than 10% of our stock for three years following completion of the conversion without regulatory approval.

Terms of the Offering

We are offering for sale between 2,890,000 and 3,910,000 shares of common stock to eligible depositors of Magyar Bank and to our tax-qualified employee benefit plans and, to the extent shares remain available, we may offer shares in a community offering to the general public, with a preference given first to natural persons (including trusts of natural persons) residing in the New Jersey counties of Middlesex, Somerset, Monmouth, Hunterdon and Union. If necessary, we will also offer for sale shares to the general public in a syndicated community offering. Unless the number of shares of common stock to be offered is increased to more than 3,910,000 shares or decreased to fewer than 2,890,000 shares, or the subscription and community offerings are extended beyond [extension date], subscribers will not have the opportunity to change or cancel their stock orders once submitted. If the subscription and community offerings are extended past [extension date], all subscribers will be notified and given an opportunity to confirm, change or cancel their orders. All subscribers will be notified by mail sent to the address the subscriber provides on the stock order form they have submitted. If you do not respond to the notice of extension, your order will be cancelled, and we will promptly return your funds with interest at [interest rate]% per annum or cancel your deposit account withdrawal authorization. If the number of shares to be sold is increased to more than 3,910,000 shares or decreased to less than 2,890,000 shares, all subscribers’ stock orders will be canceled, their withdrawal authorizations will be canceled and funds delivered to us to purchase shares of common stock in the subscription and community offerings will be returned promptly with interest at [interest rate]% per annum. We will then resolicit subscribers, giving them an opportunity to place new orders for a period of time. No shares purchased in the subscription offering and community offering will be issued until the completion of any syndicated community offering, if utilized.

The purchase price of each share of common stock offered for sale in the offering is $10.00. All investors will pay the same purchase price per share, regardless of whether the shares are purchased in the subscription offering, a community offering or a syndicated community offering. Investors will not be charged a commission to purchase shares of common stock in the offering. Keefe, Bruyette & Woods, Inc., which we refer to as “KBW,” our marketing agent in the offering, will use its best efforts to assist us in selling shares of our common stock in the offering but is not obligated to purchase any shares of common stock in the offering.

 

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How We Determined the Offering Range, the Exchange Ratio and the $10.00 Per Share Purchase Price

The amount of common stock we are offering for sale and the exchange ratio for the exchange of shares of Magyar Bancorp for new shares of Magyar Bancorp are based on an independent appraisal of the estimated market value of Magyar Bancorp, assuming the offering has been completed. RP Financial, LC., our independent appraiser, has estimated that, as of February 5, 2021, this market value was $61.7 million. Based on federal regulations, this market value forms the midpoint of a valuation range with a minimum of $52.5 million and a maximum of $71.0 million. Based on this valuation range, the 55.1% ownership interest of Magyar Bancorp, MHC in Magyar Bancorp as of December 31, 2020 being sold in the offering, certain assets held by Magyar Bancorp, MHC and the $10.00 per share price, the number of shares of common stock we are offering for sale ranges from 2,890,000 shares to 3,910,000 shares. The purchase price of $10.00 per share was selected primarily because it is the price most commonly used in mutual-to-stock conversions of financial institutions. The exchange ratio ranges from 0.9027 shares at the minimum of the offering range to 1.2213 shares at the maximum of the offering range, and will generally preserve in Magyar Bancorp the percentage ownership of public stockholders in Magyar Bancorp immediately before the completion of the conversion. RP Financial, LC. will update its appraisal before we complete the conversion and offering. If our pro forma market value at that time is either below $52.5 million or above $71.0 million, then, after consulting with the Federal Reserve Board and the NJDOBI, as required, we may: terminate the offering and promptly return all funds with interest; set a new offering range and provide all subscribers the opportunity to place a new order; or take such other actions as may be permitted by the Federal Reserve Board, the NJDOBI and the Securities and Exchange Commission.

The appraisal is based in part on our financial condition and results of operations, the pro forma effect of the additional capital raised by the sale of shares of common stock in the offering, and an analysis of a peer group of 10 publicly traded savings banks and savings and loan and bank holding companies that RP Financial, LC. considers comparable to Magyar Bancorp. The appraisal peer group consists of the following companies, all of which are traded on the Nasdaq Stock Market. The peer group assets are as of September 30, 2020.

 

Company Name

  Ticker
Symbol
  Headquarters  Total Assets 
         (In millions) 

Elmira Savings Bank

  ESBK  Elmira, NY  $674 

ESSA Bancorp

  ESSA  Stroudsburg, PA  $1,894 

HMN Financial, Inc.

  HMNF  Rochester, MN  $898 

HV Bancorp, Inc.

  HVBC  Doylestown, PA  $508 

IF Bancorp, Inc.

  IROQ  Watseka, IL  $726 

PCSB Financial Corporation

  PCSB  Yorktown Heights, NY  $1,791 

Provident Bancorp, Inc.

  PVBC  Amesbury, MA  $1,498 

Prudential Bancorp, Inc.

  PBIP  Philadelphia, PA  $1,223 

Randolph Bancorp, Inc.

  RNDB  Stoughton, MA  $723 

Severn Bancorp, Inc.

  SVBI  Annapolis, MD  $939 

In applying each of the valuation methods, RP Financial, LC. considered adjustments to the pro forma market value based on a comparison of Magyar Bancorp with the peer group. RP Financial, LC. made downward adjustments for financial condition and liquidity of the shares. RP Financial, LC. made no adjustments for profitability, growth and viability of earnings, asset growth, primary market area, dividends, marketing of the issue, management, and effect of government regulations and regulatory

 

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reform. The downward adjustment applied for financial condition took into consideration Magyar Bancorp’s smaller asset size, less favorable credit quality measures and a lower pro forma return on equity in comparison to the peer group, while the downward adjustment for liquidity of the shares took into consideration Magyar Bancorp’s lower market capitalization and lower shares outstanding relative to the comparable peer group averages and medians.

The following table presents a summary of selected pricing ratios for Magyar Bancorp (on a pro forma basis) as of and for the twelve months ended December 31, 2020, and for the peer group companies based on earnings and other information as of and for the twelve months ended December 31, 2020, with stock prices as of February 5, 2021, as reflected in the appraisal report. Compared to the average pricing of the peer group, and based upon the information in the following table, our pro forma pricing ratios at the midpoint of the offering range indicated a discount of 20.9% on a price-to-book value basis, a discount of 23.7% on a price-to-tangible book value basis, and a premium of 86.5% on a price-to-earnings basis.

 

   Price-to-earnings
multiple (1)
  Price-to-book
value ratio
 Price-to-tangible
book value ratio

Magyar Bancorp (on a pro forma basis, assuming completion of the conversion)

        

Maximum

    28.02x    77.94%   77.94%

Midpoint

    23.83x    71.23%   71.23%

Minimum

    19.82x    63.86%   63.86%

Valuation of peer group companies, all of which are fully converted (on an historical basis)

        

Averages

    12.78x    90.10%   93.40%

Medians

    11.32x    89.45%   92.99%

 

(1)

Price-to-earnings multiples calculated by RP Financial, LC. in the independent appraisal are based on reported earnings. These ratios are different than those presented in “Pro Forma Data.”

The independent appraisal does not indicate trading market value. Do not assume or expect that our valuation as indicated in the appraisal means that after the conversion and offering the shares of our common stock will trade at or above the $10.00 per share purchase price. Furthermore, the pricing ratios presented in the appraisal were used by RP Financial, LC. to estimate our pro forma appraised value for regulatory purposes and not to compare the relative value of shares of our common stock with the value of the capital stock of the peer group. The value of the capital stock of a particular company may be affected by a number of factors such as financial performance, asset size and market location.

For a more complete discussion of the amount of common stock we are offering for sale and the independent appraisal, see “The Conversion and Offering – Stock Pricing and Number of Shares to be Issued.”

The Exchange of Existing Shares of Magyar Bancorp Common Stock

If you are a stockholder of Magyar Bancorp immediately before the completion of the conversion, your shares will be converted into new shares of common stock of Magyar Bancorp. The number of shares of common stock you will receive will be based on the exchange ratio, which will depend upon our final appraised value and the percentage of outstanding shares of Magyar Bancorp common stock owned by public stockholders immediately before the completion of the conversion. The table also shows the number of shares of Magyar Bancorp common stock a hypothetical owner of Magyar Bancorp common stock would receive in exchange for 100 shares of Magyar Bancorp common stock owned at the completion of the conversion, depending on the number of shares of common stock issued in the offering.

 

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   Shares to be Sold in
The Offering
  New Shares of
Magyar Bancorp to
be Issued for Shares
of Existing
Magyar Bancorp
  Total Shares
of Common
Stock to be
Issued in
Exchange and
Offering
   Exchange
Ratio
   Equivalent
Value of
Shares
Based Upon
Offering
Price (1)
   Equivalent
Pro Forma
Tangible
Book Value
Per Exchanged
Share (2)
   Whole Shares
to be
Received for
100 Existing
Shares (3)
 
   Amount   Percent  Amount   Percent 

Minimum

   2,890,000    55.1  2,356,399    44.9  5,246,399    0.9027   $9.03   $15.66    90 

Midpoint

   3,400,000    55.1  2,772,234    44.9  6,172,234    1.0620   $10.62   $14.04    106 

Maximum

   3,910,000    55.1  3,188,070    44.9  7,098,070    1.2213   $12.21   $12.83    122 

 

(1)

Represents the value of shares of Magyar Bancorp common stock to be received in the conversion by a holder of one share of Magyar Bancorp, pursuant to the exchange ratio, based upon the $10.00 per share offering price.

(2)

Represents the pro forma tangible book value per share at each level of the offering range multiplied by the respective exchange ratio. At December 31, 2020, Magyar Bancorp’s tangible book value per share was $10.02.

(3)

Cash will be paid in lieu of fractional shares.

No fractional shares of Magyar Bancorp common stock will be issued to any public stockholder of Magyar Bancorp. For each fractional share that otherwise would be issued, we will pay in cash an amount equal to the product obtained by multiplying the fractional share interest to which the holder otherwise would be entitled by the $10.00 per share offering price.

Intended Use of the Proceeds From the Offering

We intend to contribute at least 50% of the net proceeds from the offering to Magyar Bank, fund a loan to our employee stock ownership plan to finance its purchase of shares of common stock in the offering and retain the remainder of the net proceeds from the offering at Magyar Bancorp. Therefore, assuming we sell 3,400,000 shares of common stock in the offering at the midpoint of the offering range, and we have net proceeds of $32.5 million, we intend to contribute $16.3 million to Magyar Bank, loan $2.7 million to our employee stock ownership plan to fund its purchase of shares of common stock and retain the remaining $13.5 million of the net proceeds at Magyar Bancorp.

Magyar Bancorp may use the funds it retains for investment in securities, to repurchase shares of common stock, to acquire other financial institutions or financial services companies, to pay cash dividends and for other general corporate purposes. Magyar Bank may use the proceeds it receives to support increased lending, enhance existing, or support growth and the development of new, products and services, or expand its branch network by establishing or acquiring new branches or by acquiring other financial institutions or financial services companies. We do not currently have any agreements or understandings regarding any acquisition or branch transactions.

See “How We Intend to Use the Proceeds from the Offering” for additional information.

 

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Persons Who May Order Shares of Common Stock in the Offering

We are offering the shares of common stock for sale in a subscription offering in the following descending order of priority:

 

 (i)

To depositors with accounts at Magyar Bank with aggregate balances of at least $50.00 at the close of business on December 31, 2019.

 

 (ii)

To our tax-qualified employee benefit plans (including Magyar Bank’s employee stock ownership plan and 401(k) Plan), which may subscribe for, in the aggregate, up to 10% of the shares of common stock sold in the offering. We expect our employee stock ownership plan to purchase 8% of the shares of common stock sold in the offering.

 

 (iii)

To depositors with accounts at Magyar Bank with aggregate balances of at least $50.00 at the close of business on [supplemental eligibility record date].

 

 (iv)

To depositors of Magyar Bank at the close of business on [depositor record date].

Shares of common stock not purchased in the subscription offering may be offered for sale to the general public in a community offering, with a preference given first to natural persons (including trusts of natural persons) residing in the New Jersey counties of Middlesex, Somerset, Monmouth, Hunterdon and Union and then to existing stockholders of Magyar Bancorp at the close of business on [stockholder record date]. The community offering may begin concurrently with, during or promptly after the subscription offering. We also may offer for sale shares of common stock not purchased in the subscription offering and the community offering in a syndicated community offering. KBW will act as sole manager for the syndicated community offering. We have the right to accept or reject, in our sole discretion, orders received in the community offering or syndicated community offering, and our interpretation of the terms and conditions of the plan of conversion will be final. Any determination to accept or reject stock orders in the community offering or syndicated community offering will be based on the facts and circumstances available to management at the time of the determination.

If we receive orders for more shares than we are offering for sale, we may not be able to fully or partially fill your order. A detailed description of the subscription offering, the community offering and the syndicated community offering, as well as a discussion regarding allocation procedures, can be found in the section of this prospectus entitled “The Conversion and Offering.”

Limits on How Much Common Stock You May Purchase

The minimum number of shares of common stock that may be purchased is 25 shares.

Generally, no individual or individuals acting through a single qualifying account may purchase more than 40,000 shares ($400,000) of common stock. If any of the following persons purchase shares of common stock, their purchases, in all categories of the offering, when combined with your purchases, cannot exceed 50,000 shares ($500,000) of common stock:

 

  

your spouse or relatives of you or your spouse living in your house;

 

  

most companies, trusts or other entities in which you are a senior officer, partner, trustee or have a substantial beneficial interest; or

 

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other persons who may be your associates or persons acting in concert with you.

Unless we determine otherwise, persons having the same residence or mailing address and persons exercising subscription rights through qualifying accounts registered to the same address will be subject to the overall purchase limitation of 50,000 shares ($500,000).

In addition to the above purchase limitations, there is an ownership limitation for current stockholders of Magyar Bancorp other than our employee stock ownership plan. Shares of common stock that you purchase in the offering individually and together with persons described above, plus any shares you and they receive in exchange for existing shares of Magyar Bancorp common stock, may not exceed 9.9% of the total shares of common stock to be issued and outstanding after the completion of the conversion and offering. However, if, based on your current ownership level, you will own more than 9.9% of the total shares of common stock of Magyar Bancorp to be issued and outstanding after the completion of the conversion and offering following the exchange of your shares of Magyar Bancorp common stock, you will be ineligible to purchase any new shares in the offering. You will be required to obtain regulatory approval or non-objection before acquiring 10% or more of Magyar Bancorp’s common stock.

Subject to regulatory approval, we may increase or decrease the purchase and ownership limitations at any time. See the detailed description of the purchase limitations in “The Conversion and Offering – Additional Limitations on Common Stock Purchases.”

How You May Purchase Shares of Common Stock in the Subscription Offering and the Community Offering

In the subscription offering and community offering, you may pay for your shares only by:

 

 (i)

personal check, bank check or money order made payable to Magyar Bancorp, Inc.; or

 

 (ii)

authorizing us to withdraw available funds (without any early withdrawal penalty) from your Magyar Bank deposit account(s), other than checking accounts or individual retirement accounts (IRAs).

You may not use any type of third-party check to pay for shares of common stock. Do not submit cash. Wire transfers will not be accepted. Applicable regulations prohibit Magyar Bank from lending funds or extending credit to any person to purchase shares of common stock in the offering. You may not submit a Magyar Bank line of credit check. You may not designate withdrawal from Magyar Bank’s accounts with check-writing privileges; instead, please submit a check. If you request a direct withdrawal from an account with check-writing privileges, we reserve the right to interpret that as your authorization to treat those funds as if we had received a check for the designated amount, and will immediately withdraw the amount from the specified account(s). You may not authorize direct withdrawal from a Magyar Bank individual retirement account, or IRA. See “ – Using Individual Retirement Account Funds to Purchase Shares of Common Stock.”

You may subscribe for shares of common stock in the subscription and community offerings by delivering a signed and completed original stock order form, together with full payment payable to Magyar Bancorp, Inc. or authorization to withdraw funds from one or more of your Magyar Bank deposit accounts, provided that the stock order form is received (not postmarked) before 2:00 p.m., Eastern Time, on [expiration date], which is the expiration of the subscription offering period. You may submit your stock order form and payment by overnight delivery to the address listed on the stock order form

 

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(recommended) or regular mail using the stock order reply envelope provided. You may also hand-deliver stock order forms to Magyar Bank’s corporate headquarters located at 400 Somerset Street, New Brunswick, New Jersey. Hand-delivered stock order forms will be accepted only at this location. We will not accept stock order forms at our other offices. Do not mail stock order forms to Magyar Bank’s offices.

See “The Conversion and Offering – Procedure for Purchasing Shares in the Subscription and Community Offerings – Payment for Shares” for a complete description of how to purchase shares in the subscription and community offerings.

Using Individual Retirement Account Funds to Purchase Shares of Common Stock

You may be able to subscribe for shares of common stock using funds in your IRA or other retirement account. If you wish to use some or all of the funds in your Magyar Bank IRA or other retirement account, the applicable funds must be transferred to a self-directed account maintained by an independent custodian or trustee, such as a brokerage firm, and the purchase must be made through that account. If you do not have such an account, you will need to establish one before placing your stock order. An annual administrative fee may be payable to the independent custodian or trustee. Because individual circumstances differ and the processing of retirement fund orders takes additional time, we recommend that you contact our Stock Information Center promptly, as soon as possible but in no event later than two weeks before the [expiration date] offering deadline, for assistance with purchases using funds in your IRA or other retirement account you may have at Magyar Bank or elsewhere. Whether you may use such funds to purchase shares in the offering may depend on timing constraints and, possibly, limitations imposed by the institution where the funds are held.

See “The Conversion and Offering – Procedure for Purchasing Shares in the Subscription and Community Offerings – Payment for Shares” and “– Using Individual Retirement Account Funds” for a complete description of how to use IRA funds to purchase shares of common stock in the offering.

Market for Common Stock

Existing publicly held shares of Magyar Bancorp’s common stock are listed on the Nasdaq Global Market under the symbol “MGYR.” Upon completion of the conversion, we expect the shares of common stock of Magyar Bancorp will continue to list and trade on the Nasdaq Global Market under the same symbol “MGYR.” In order to list our stock on the Nasdaq Global Market, we are required to have at least three broker-dealers who will make a market in our common stock. As of [stockholder record date], Magyar Bancorp had [_____] registered market makers in its common stock.

Our Dividend Policy

Magyar Bancorp has never paid dividends. No decision has been made with respect to the amount, if any, and timing of any dividend payments following the completion of the conversion and offering. The amount of dividends to be paid, if any, will be subject to our capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. We cannot assure you that we will pay dividends in the future, or that any such dividends will not be reduced or eliminated in the future.

For information regarding our proposed dividend policy, see “Our Dividend Policy.”

 

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Purchases by Directors and Executive Officers

We expect our directors and executive officers, together with their associates, to subscribe for 90,500 shares of common stock in the offering, representing 2.7% of the shares to be sold at the midpoint of the offering range. The purchase price paid by them will be the same $10.00 per share price paid by all other persons who purchase shares of common stock in the offering. Following the conversion, our directors and executive officers, together with their associates, are expected to beneficially own 322,064 shares of common stock, or 5.2% of our total outstanding shares of common stock at the midpoint of the offering range, which includes shares they currently own in Magyar Bancorp that will be converted into new shares of Magyar Bancorp.

See “Subscriptions by Directors and Executive Officers” for more information on the proposed purchases of shares of common stock by our directors and executive officers.

Deadline for Orders of Shares of Common Stock in the Subscription and Community Offerings

The deadline for submitting orders to purchase shares of common stock in the subscription and community offerings is 2:00 p.m., Eastern Time, on [expiration date], unless we extend this deadline. If you wish to purchase shares of common stock, a properly completed and signed original stock order form, together with full payment, must be received (not postmarked) by this time.

Although we will make reasonable attempts to provide this prospectus and offering materials to holders of subscription rights, the subscription offering and all subscription rights will expire at 2:00 p.m., Eastern Time, on [expiration date], whether or not we have been able to locate each person entitled to subscription rights.

See “The Conversion and Offering – Procedure for Purchasing Shares in the Subscription and Community Offerings – Expiration Date” for a complete description of the deadline for purchasing shares in the offering.

You May Not Sell or Transfer Your Subscription Rights

Applicable regulations prohibit you from transferring your subscription rights. If you order shares of common stock in the subscription offering, you will be required to certify that you are purchasing the common stock for yourself and that you have no agreement or understanding to sell or transfer your subscription rights or the shares that you are purchasing. We intend to take legal action, including reporting persons to federal or state agencies, against anyone who we believe has sold or transferred his or her subscription rights. We will not accept your order if we have reason to believe you have sold or transferred your subscription rights. On the stock order form, you cannot add the names of others for joint stock registration who do not have subscription rights or who qualify only in a lower subscription offering priority than you. Doing so may jeopardize your subscription rights. You may only add those who were eligible to purchase shares of common stock in the subscription offering at your date of eligibility. In addition, the stock order form requires that you list all deposit accounts you held at your date of eligibility, giving all names on each account and the account number at the applicable eligibility date. Failure to provide this information, or providing incomplete or incorrect information, may result in a loss of part or all of your share allocation.

 

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Delivery of Shares of Common Stock

All shares of common stock sold will be issued in book entry form. Stock certificates will not be issued. A statement reflecting ownership of shares of common stock issued in the subscription and community offerings will be mailed by our transfer agent to the persons entitled thereto at the registration address noted by them on their stock order forms as soon as practicable following consummation of the conversion and offering. We expect trading in the stock to begin on the day of completion of the conversion and offering or the next business day. The conversion and offering are expected to be completed as soon as practicable following satisfaction of the conditions described below in “ – Conditions to Completion of the Conversion.” Until a statement reflecting your ownership of shares of common stock is available and delivered to you, you may not be able to sell the shares of common stock that you purchased in the offering, even though the common stock will have begun trading. Your ability to sell your shares of common stock before receiving your statement will depend on arrangements you may make with a brokerage firm.

Conditions to Completion of the Conversion

We cannot complete the conversion and offering unless:

 

  

The plan of conversion is approved by a majority of votes eligible to be cast by the depositors of Magyar Bank as of the close of business on [depositor record date];

 

  

The plan of conversion is approved by Magyar Bancorp stockholders holding at least two-thirds of the outstanding shares of common stock of Magyar Bancorp as of the close of business on [stockholder record date], including shares held by Magyar Bancorp, MHC;

 

  

The plan of conversion is approved by Magyar Bancorp stockholders holding a majority of the outstanding shares of common stock of Magyar Bancorp as of the close of business on [stockholder record date], excluding shares held by Magyar Bancorp, MHC;

 

  

We sell at least the minimum number of shares of common stock offered in the offering; and

 

  

We receive all required regulatory approvals to complete the conversion and offering.

Magyar Bancorp, MHC intends to vote its shares in favor of the plan of conversion. At the close of business on [stockholder record date], Magyar Bancorp, MHC owned 3,200,450 shares, or approximately 55.1%, of the outstanding shares of common stock of Magyar Bancorp. At the close of business on [stockholder record date], the directors and executive officers of Magyar Bancorp and their affiliates owned [                    ] shares of Magyar Bancorp, or [            ]% of the outstanding shares of common stock and [            ]% of the outstanding shares of common stock excluding shares held by Magyar Bancorp, MHC. They intend to vote those shares in favor of the plan of conversion.

 

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Steps We May Take if We Do Not Receive Orders for the Minimum Number of Shares

If we do not receive orders for at least 2,890,000 shares of common stock, we may take one or more steps to sell the minimum number of shares of common stock in the offering range. Specifically, we may:

 

 (i)

increase the purchase and ownership limitations; and/or

 

 (ii)

seek regulatory approval to extend the offering beyond [extension date], as long as we resolicit subscribers who previously submitted subscriptions in the offering.

If we extend the offering past [extension date], all subscribers will be notified and given an opportunity to confirm, change or cancel their orders. If you do not respond to the notice of extension, we will cancel your stock order and promptly return your funds with interest at [interest rate]% per annum for funds received in the subscription and community offering or cancel your deposit account withdrawal authorization. If one or more purchase limitations are increased, subscribers in the subscription offering who ordered the maximum amount and who indicated a desire to be resolicited on the stock order form will be given the opportunity to increase their subscriptions up to the then-applicable limit.

Possible Change in the Offering Range

RP Financial, LC. will update its appraisal before we complete the conversion and offering. If our pro forma market value at that time is either below $52.5 million or above $71.0 million, then, after consulting with our regulators, we may:

 

  

terminate the offering and promptly return all funds (with interest paid on funds received in the subscription and community offerings);

 

  

set a new offering range; or

 

  

take such other actions as may be permitted by our regulators.

If we set a new offering range, we will promptly return funds, with interest at [interest rate]% per annum, for funds received for purchases in the subscription and community offerings, and cancel any authorization to withdraw funds from deposit accounts for the purchase of shares of common stock. We will then resolicit subscribers, allowing them to place a new stock order for a period of time.

Possible Termination of the Offering

We may terminate the offering at any time before the special meeting of depositors of Magyar Bank and the special meeting of stockholders of Magyar Bancorp that have been called to vote on the conversion, and at any time after depositor and stockholder approval with regulatory approval. If we terminate the offering, we will promptly return your funds with interest at [interest rate]% per annum, and we will cancel deposit account withdrawal authorizations.

Delivery of Prospectus

To ensure that each person receives a prospectus at least 48 hours before the deadline for orders for common stock, we may not mail prospectuses any later than five days before such date or hand-

 

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deliver prospectuses later than two days before that date. Stock order forms may only be delivered if accompanied or preceded by a prospectus. We are not obligated to deliver a prospectus or stock order form by means other than U.S. mail. We will make reasonable attempts to provide a prospectus and offering materials to holders of subscription rights. The subscription offering and all subscription rights will expire at 2:00 p.m., Eastern Time, on [expiration date], whether or not we have been able to locate each person entitled to subscription rights.

Benefits to Management and Potential Dilution to Stockholders Resulting from the Conversion

We expect our employee stock ownership plan, which is a tax-qualified retirement plan operated for the benefit of Magyar Bank’s employees, to purchase up to 8% of the shares of common stock we sell in the offering. If market conditions warrant, in the judgment of its trustees, the employee stock ownership plan’s subscription order will not be filled and the employee stock ownership plan may elect to purchase shares in the open market following the completion of the conversion, subject to any required regulatory approvals.

We intend to implement one or more new stock-based benefit plans no earlier than six months after completion of the conversion. Stockholder approval of these plans would be required. We have not determined whether we would adopt the plans within or after 12 months following the completion of the conversion. If we implement stock-based benefit plans within 12 months following the completion of the conversion, the stock-based benefit plans would be limited to reserving a number of shares (i) up to 4% of the shares of common stock sold in the offering for awards of restricted stock to key employees and directors, at no cost to the recipients, and (ii) up to 10% of the shares of common stock sold in the offering for issuance pursuant to the exercise of stock options by key employees and directors. If the stock-based benefit plan is adopted more than 12 months after the completion of the conversion, it would not be subject to the percentage limitations set forth above. We have not yet determined the definitive number of shares that would be reserved for issuance under these plans. For a description of our current stock-based benefit plan, see “Management – Benefits to be Considered Following Completion of the Conversion – Stock-Based Benefit Plans.”

The following table summarizes the number of shares of common stock and the aggregate dollar value of grants that are available under one or more stock-based benefit plans if such plans reserve a number of shares of common stock equal to 4% and 10% of the shares sold in the offering for restricted stock awards and stock options, respectively. The table shows the dilution to stockholders if all such shares are issued from authorized but unissued shares, instead of shares purchased in the open market. A portion of the stock grants shown in the table below may be made to non-management employees. The table also sets forth the number of shares of common stock to be acquired by the employee stock ownership plan for allocation to all qualifying employees.

 

   Number of Shares to be Granted or
Purchased
  Dilution
Resulting
From
Issuance of
Shares for
Stock-Based
Benefit
Plans
  Value of Grants (In
Thousands) (1)
 
   At
Minimum
of
Offering
Range
   At
Maximum
of
Offering
Range
   As a
Percentage
of
Common
Stock to be
Sold in the
Offering
  At
Minimum
of
Offering
Range
   At
Maximum
of
Offering
Range
 

Employee stock ownership plan

   231,200    312,800    8.0  N/A (2)  $2,312   $3,128 

Restricted stock awards

   115,600    156,400    4.0   2.16  1,156    1,564 

Stock options

   289,000    391,000    10.0   5.22  916    1,239 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   635,800    860,200    22.0  7.16 $4,384   $5,931 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1)

The actual value of restricted stock awards will be determined based on their fair value as of the date grants are made. For purposes of this table, fair value for restricted stock awards is assumed to be the same as the offering price of $10.00 per share. The fair value of stock options has been estimated at $3.17 per option using the Black-Scholes option pricing model with the following assumptions: a grant-date share price and option exercise price of $10.00; an expected option term of ten years; no dividend yield; a risk-free rate of return of 0.93%; and expected volatility of 22.94%. The actual value of stock options granted will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used and the option pricing model ultimately adopted.

(2)

No dilution is reflected for the employee stock ownership plan because such shares are assumed to be purchased in the offering.

We may fund our stock-based benefit plans through open market purchases or new issuances of stock.

Tax Consequences

Magyar Bancorp, MHC, Magyar Bancorp and Magyar Bank have received an opinion of counsel, Luse Gorman, PC, regarding the material federal income tax consequences of the conversion, and have received an opinion of Hamilton & Babitts, Fairfield, New Jersey, regarding the material New Jersey tax consequences of the conversion. As a general matter, the conversion will not be a taxable transaction for purposes of federal or state income taxes to Magyar Bancorp, MHC, Magyar Bancorp, Magyar Bank, persons eligible to subscribe in the subscription offering, or existing stockholders of Magyar Bancorp (except as to cash paid for fractional shares). Existing stockholders of Magyar Bancorp who receive cash in lieu of fractional shares of Magyar Bancorp will recognize a gain or loss equal to the difference between the cash received and the tax basis of the fractional share.

Risk Factors

An investment in Magyar Bancorp’s common stock is subject to risk, including risks related to our business and this offering.

Specific areas of risk related to our business include those related to the COVID-19 pandemic; our lending activities; laws and regulations; market interest rates; our business strategy; economic conditions; competitive matters; operational matters; accounting matters; our reputation; our existing equity plan; and legal matters.

Specific risks related to this offering include those related to the future trading price of the common stock of Magyar Bancorp; use of the net offering proceeds; our return on equity after the completion of the offering; intended new stock-based benefit plans; anti-takeover factors; forum selection provision for certain litigation; the trading market for the common stock of Magyar Bancorp; the irrevocability of your investment decision; and potential adverse tax consequences related to subscription rights.

Before making an investment decision, you should read this entire document carefully, including the section entitled “Risk Factors” that immediately follows and that discusses the above risks in further detail.

How You Can Obtain Additional Information – Stock Information Center

Our banking personnel may not, by law, assist with investment-related questions about the offering. If you have any questions regarding the conversion or offering, call our Stock Information Center at [stock center number]. The Stock Information Center is open Monday through Friday between 10:00 a.m. and 4:00 p.m., Eastern Time, and will be closed on bank holidays.

 

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RISK FACTORS

You should consider carefully the following risk factors in evaluating an investment in the shares of common stock. In addition to these risks and the other risks and uncertainties described elsewhere in this prospectus, there may be additional risks and uncertainties that are not currently known to us or that we currently deem to be immaterial that could materially and adversely affect our business, financial condition or results of operations.

Risks Related to the COVID-19 Pandemic

The COVID-19 Pandemic Has and Will Continue to Pose Risks and Could Harm Our Business, Results of Operations and Prospects.

The COVID-19 pandemic is having an adverse impact on Magyar Bancorp and Magyar Bank, our customers and the communities we serve. Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on our business, customers, employees and third-party service providers. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened in an efficient manner. Additionally, the responses of various governmental and nongovernmental authorities to curtail business and consumer activities in an effort to mitigate the pandemic are expected to have material long-term effects on Magyar Bancorp and Magyar Bank and our customers which are difficult to quantify in the near-term or long-term.

As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we are subject to the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

 

  

risks to the capital markets that may impact the performance of our investment securities portfolio, as well as limit our access to capital markets and other funding sources;

 

  

effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating the companies’ financial reporting and internal controls;

 

  

declines in demand for loans and other banking services and products, as well as a decline in the credit quality of our loan portfolio, owing to the effects of COVID-19 in the markets we serve;

 

  

if the economy is unable to substantially reopen or reopen in an efficient manner, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

 

  

collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

 

  

allowance for loan losses may increase if borrowers experience financial difficulties, which will adversely affect net income;

 

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the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments;

 

  

as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on assets may decline to a greater extent than the decline in cost of interest-bearing liabilities, reducing net interest margin and spread and reducing net income;

 

  

cyber security risks are increased as the result of an increase in the number of employees working remotely;

 

  

decreased demand for banking services resulting from adverse impacts of the coronavirus on businesses deemed to be “non-essential” by governments in the markets we serve; and

 

  

increasing or protracted volatility in the price of our common stock.

Risks Related to Our Market Area and Competitive Factors

A Worsening of Economic Conditions Could Reduce Demand for Our Products and Services and/or Result in Increases in Our Level of Non-performing Loans, Which Could Have an Adverse Effect on Our Results of Operations.

Unlike larger financial institutions that are more geographically diversified, our profitability depends primarily on the general economic conditions in New Jersey and the greater New York metropolitan area. Local economic conditions have a significant impact on our commercial real estate and construction and consumer loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans. Almost all of our loans are to borrowers located in or secured by collateral located in New Jersey and the New York metropolitan area.

In addition, the COVID-19 pandemic is having an adverse impact on Magyar Bancorp and Magyar Bank, our customers and the communities we serve. The adverse effect of the COVID-19 pandemic on Magyar Bancorp and Magyar Bank, our customers and the communities where we operate may adversely affect our business, results of operations and financial condition for an indefinite period of time.

A deterioration in economic conditions could result in the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations:

 

  

demand for our products and services may decline;

 

  

loan delinquencies, problem assets and foreclosures may increase;

 

  

collateral for loans, especially real estate, may decline in value, in turn reducing customers’ future borrowing power, and reducing the value of assets and collateral associated with existing loans;

 

  

the value of our securities portfolio may decline; and

 

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the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.

Moreover, a significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, unemployment or other factors beyond our control could further impact these local economic conditions and could further negatively affect the financial results of our banking operations. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

The geographic concentration of our loan portfolio and lending activities make us vulnerable to a downturn in our local market area.

While there is not a single employer or industry in our market area on which a significant number of our customers are dependent, a substantial portion of our loan portfolio is comprised of loans secured by property located in central and northern New Jersey. We believe that this geographic concentration makes us vulnerable to a downturn in the local economy and real estate markets. Adverse conditions in the local economy such as unemployment, recession, a catastrophic event or other factors beyond our control could impact the ability of our borrowers to repay their loans, which could impact our net interest income. Decreases in local real estate values caused by economic conditions, recent changes in tax laws or other events could adversely affect the value of the property used as collateral for our loans, which could cause us to realize a loss in the event of a foreclosure. Further, deterioration in local economic conditions could drive the level of loan losses beyond the level we have provided for in our allowance for loan losses, which in turn could necessitate an increase in our provision for loan losses and a resulting reduction to our earnings and capital.

Strong Competition Within Our Market Area May Limit Our Growth and Profitability.

Competition in the banking and financial services industry is intense. In our market area, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Some of our competitors have substantially greater resources and lending limits than we, have greater name recognition and market presence that benefit them in attracting business, and offer certain services that we do not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively than we do. Our profitability depends upon our continued ability to successfully compete in our market area. The greater resources and deposit and loan products offered by some of our competitors may limit our ability to increase our interest-earning assets. For additional information see “Business of Magyar Bank – Competition.”

Our small size may make it more difficult for us to compete.

Our asset size may make it more difficult to compete with other financial institutions that are larger and can more easily afford to invest in the marketing and technologies needed to attract and retain customers. Accordingly, we are not always able to offer new products and services as quickly as our competitors. Lower earnings may also make it more difficult to offer competitive salaries and benefits. In addition, our smaller customer base may make it difficult to generate meaningful non-interest income from such activities as securities and insurance brokerage. Finally, as an institution smaller than many in our market area, we are disproportionately affected by the continually increasing costs of compliance with new banking and other regulations.

 

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Risks Related to our Lending Activities

We intend to increase our originations of commercial real estate and commercial loans. These loans involve credit risks that could adversely affect our financial condition and results of operations.

At December 31, 2020, commercial real estate loans totaled $260.3 million, or 42.9% of our loan portfolio, and commercial business loans (excluding PPP loans) totaled $45.2 million, or 7.4% of our loan portfolio. Given their larger balances and the complexity of the underlying collateral, commercial real estate loans and commercial business loans generally have more risk than the one- to four-family residential mortgage loans we originate. Because the repayment of commercial real estate loans and commercial business loans depends on the successful management and operation of the borrower’s properties or related businesses, repayment of such loans can be affected by adverse conditions in the local real estate market or economy. A downturn in the real estate market or the local economy could adversely impact the value of properties securing the loan or the revenues from the borrower’s business, thereby increasing the risk of non-performing loans. Further, unlike residential mortgage and commercial real estate loans, commercial business loans may be secured by collateral other than real estate, such as inventory and accounts receivable, the value of which may depreciate over time, may be more difficult to appraise and may be more susceptible to fluctuation in value at default. In addition, the physical condition of non-owner-occupied properties may be below that of owner-occupied properties due to lax property maintenance standards, which have a negative impact on the value of the collateral properties. As our commercial real estate and commercial business loan portfolios increase, the corresponding risks and potential for losses from these loans may also increase.

An increase in market interest rates may reduce our loan origination volume, particularly refinance volume which would have a material adverse effect on our profitability and results of operations.

The historically low interest rate environment in recent periods has contributed to our loan growth, particularly in one- to four-family residential mortgage loans where refinance volume has been relatively high. During the quarter ended December 31, 2020 and the year ended September 30, 2020, we originated $9.6 million and $31.3 million of one- to four-family residential mortgage loans, of which $4.3 million and $19.0 million were refinances of existing loans. An increase in market interest rates may reduce our loan origination volume, particularly refinance volume, which would have a material adverse effect on our profitability and results of operations.

If Our Allowance for Loan Losses is Not Sufficient to Cover Actual Loan Losses, Our Earnings Could Decrease.

Our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, requiring additions to our allowance, which could materially decrease our net income. The allowance for loan losses was $7.1 million at December 31, 2020 and increased $1.5 million during the year ended September 30, 2020 to $6.4 million. The increases were attributable to growth in total loans receivable and higher adjustments to the historical loss factors for economic conditions relating to the COVID-19 pandemic. Our allowance for loan losses was 1.17% of total loans and 71.0% of total non-performing loans at December 31, 2020. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other

 

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assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. Based on this review, we believe our allowance for loan losses is adequate to absorb losses in our loan portfolio as of December 31, 2020.

Bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities will have a material adverse effect on our financial condition and results of operations.

The Financial Accounting Standards Board has adopted a new accounting standard that is referred to as Current Expected Credit Loss, or CECL. The implementation of CECL has been delayed for smaller reporting companies, such as Magyar Bancorp, until January 2023. CECL will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses. This will change the current method of providing allowances for loan losses that are probable, which may require us to increase our allowance for loan losses, and to greatly increase the types of data we will need to collect and review to determine the appropriate level of the allowance for loan losses. Any increase in our allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses may have a material adverse effect on our financial condition and results of operations.

We are subject to environmental liability risk associated with lending activities or properties we own.

A significant portion of our loan portfolio is secured by real estate, and we could become subject to environmental liabilities with respect to one or more of these properties, or with respect to properties that we own in operating our business. During the ordinary course of business, we may foreclose on and take title to properties securing defaulted loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous conditions or toxic substances are found on these properties, we may be liable for remediation costs, as well as for personal injury and property damage, civil fines and criminal penalties regardless of when the hazardous conditions or toxic substances first affected any particular property. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability.

We are subject to regulatory enforcement risk, reputation risk and litigation risk regarding our participation in the PPP, and we are subject to the risk that the SBA may not fund some or all PPP loan guarantees.

The CARES Act included the PPP as a loan program administered through the SBA. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved lenders, subject to detailed qualifications and eligibility criteria.

Because of the short timeframe between the passing of the CARES Act and implementation of the PPP, some of the rules and guidance relating to PPP were issued after lenders began processing PPP applications. Also, there was and continues to be uncertainty in the laws, rules and guidance relating to the PPP. Since the opening of the PPP, several banks have been subject to litigation regarding the procedures used in processing PPP applications and the payment of fees to agents that assisted borrowers in obtaining PPP loans. In addition, some banks and borrowers have received negative media attention associated with PPP loans. We may be exposed to litigation risk and negative media attention related to

 

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our participation in the PPP. If any such litigation is not resolved in our favor, it may result in significant financial liability to us or adversely affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation or media attention could have a material adverse impact on our business, financial condition, and results of operations.

Federal and state regulators can impose or request that we consent to substantial sanctions, restrictions and requirements if they determine there are violations of laws, rules or regulations or weaknesses or failures with respect to general standards of safety and soundness, which could adversely affect our business, reputation, results of operation and financial condition, and thereby adversely affect your investment.

We also have credit risk on PPP loans if the SBA determines that there is a deficiency in the manner in which we originated, funded or serviced loans, including any issue with the eligibility of a borrower to receive a PPP loan. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which we originated, funded or serviced a PPP loan, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty or, if the SBA has already paid under the guaranty, seek recovery of any loss related to the deficiency from us.

Risks Related to Laws and Regulations

We have entered into an informal agreement with the FDIC and the NJDOBI with regard to certain regulatory matters and our failure to demonstrate compliance with its terms could results in further actions by the FDIC and the NJDOBI which could adversely affect our operations.

On July 22, 2019, Magyar Bank entered into an Informal Agreement (“Informal Agreement”) with the FDIC and the NJDOBI with regard to Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) compliance matters. Magyar Bank has agreed to (1) develop, adopt and implement a system of internal controls designed to ensure full compliance with the BSA, (2) enhance BSA and AML training, (3) conduct a comprehensive system validation of its BSA/AML system and (4) perform an initial review, and thereafter on no less than annual basis, of its BSA staffing needs. Magyar Bank also agreed to review certain transactions and accounts within a specified timeframe for BSA and AML compliance, and to provide the FDIC and the NJDOBI with quarterly progress reports with respect to the Informal Agreement.

Numerous actions have been taken or initiated by the Bank to strengthen its BSA and AML compliance practices, policies, procedures and controls, and to enhance training and staffing in this area. The Bank believes that it will be able to demonstrate substantial compliance with the terms of the Informal Agreement. However, the failure to achieve compliance with the requirements of the Informal Agreement could lead to further action by the FDIC and NJDOBI, which could adversely affect the Bank, including additional compliance expense, the costs of which are unknown and could adversely affect our future results of operations.

We Operate in a Highly Regulated Environment and May Be Adversely Affected by Changes in Laws and Regulations.

Magyar Bank is subject to extensive regulation, supervision and examination by the NJDOBI, its chartering authority, and by the FDIC, which insures Magyar Bank’s deposits. As a bank holding

 

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company, Magyar Bancorp, Inc. is subject to regulation and supervision by the Federal Reserve Board. Such regulation and supervision govern the activities in which financial institutions and their holding companies may engage and are intended primarily for the protection of the federal deposit insurance fund and depositors. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operations of financial institutions, the classification of assets by financial institutions and the adequacy of financial institutions’ allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, could have a material impact on Magyar Bank and Magyar Bancorp.

Magyar Bank’s operations are also subject to extensive regulation by other federal, state and local governmental authorities, and are subject to various laws and judicial and administrative decisions that impose requirements and restrictions on operations. These laws, rules and regulations are frequently changed by legislative and regulatory authorities. There can be no assurance that changes to existing laws, rules and regulations, or any other new laws, rules or regulations, will not be adopted in the future, which could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or prospects.

Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or Other Laws and Regulations Could Result in Fines or Sanctions.

The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions, including restrictions on conducting acquisitions or establishing new branches. During the last year, several banking institutions have received large fines for non-compliance with these laws and regulations. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, these policies and procedures may not be effective in preventing violations of these laws and regulations.

We are subject to stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or limit our ability to pay dividends or repurchase shares.

Federal regulations establish minimum capital requirements for insured depository institutions, including minimum risk-based capital and leverage ratios, and define “capital” for calculating these ratios. The minimum capital requirements are: (i) a common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. The regulations also establish a “capital conservation buffer” of 2.5%, and the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%; (ii) a Tier 1 to risk-based assets capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. An institution will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below the capital conservation buffer amount.

The application of these capital requirements could, among other things, result in lower returns on equity, and result in regulatory actions if we are unable to comply with such requirements. Specifically, following the completion of the offering, Magyar Bank’s ability to pay dividends to Magyar Bancorp will be limited if it does not maintain the capital conservation buffer required by the capital rules, which may further limit Magyar Bancorp’s ability to pay dividends to its stockholders. See “Supervision and Regulation – Federal Banking Regulation – Capital Requirements.”

 

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The Federal Reserve Board may require us to commit capital resources to support Magyar Bank.

Federal law requires that a holding company act as a source of financial and managerial strength to its subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve Board may require a holding company to make capital injections into a troubled subsidiary bank and may charge the holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide it and therefore may be required to borrow the funds or raise capital. Any loans by a holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Thus, any borrowing that must be done by Magyar Bancorp to make a required capital injection becomes more difficult and expensive and could have an adverse effect on our business, financial condition and results of operations.

Monetary policies and regulations of the Federal Reserve Board could adversely affect our business, financial condition and results of operations.

In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve Board, which regulates the money supply and credit conditions. Among the instruments used by the Federal Reserve Board to implement these objectives are open market purchases and sales of U.S. government securities, adjustments of the discount rate and changes in banks’ reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.

The monetary policies and regulations of the Federal Reserve Board have had a significant effect on the operating results of financial institutions in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted.

Risks Related to Market Interest Rates

A continuation of the historically low interest rate environment may adversely affect our net interest income and profitability.

In recent years the Federal Reserve Board has maintained interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities. Our ability to reduce our interest expense may be limited at current interest rate levels while the average yield on our interest-earning assets may continue to decrease. A continuation of a low interest rate environment may adversely affect our net interest income, which would have an adverse effect on our profitability.

 

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Future changes in interest rates could reduce our profits and asset values.

Net interest income makes up a majority of our income and is based on the difference between:

 

  

the interest income we earn on interest-earning assets, such as loans and securities; and

 

  

the interest expense we pay on interest-bearing liabilities, such as deposits and borrowings.

The rates we earn on our assets and the rates we pay on our liabilities are generally fixed for a contractual period of time. Like many savings banks, our interest-bearing liabilities generally have shorter contractual maturities than our interest-earning assets. This imbalance can create significant earnings volatility because market interest rates change over time. In a period of rising interest rates, the interest income we earn on our assets may not increase as rapidly as the interest we pay on our liabilities. In a period of declining interest rates, the interest income we earn on our assets may decrease more rapidly than the interest we pay on our liabilities, as borrowers prepay or refinance mortgage loans, and mortgage-backed securities and callable investment securities are called, requiring us to reinvest those cash flows at lower, current interest rates. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities. Furthermore, an inverted interest rate yield curve, where short-term interest rates (which are usually the rates at which financial institutions borrow funds) are higher than long-term interest rates (which are usually the rates at which financial institutions lend funds for fixed-rate loans) can reduce a financial institution’s net interest margin and create financial risk for financial institutions that originate longer-term, fixed-rate mortgage loans.

Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results of operations. Changes in the level of interest rates also may negatively affect the value of our assets and ultimately affect our earnings.

Changes in interest rates also affect the current market value of our interest-earning securities portfolio. Generally, the value of securities moves inversely with changes in interest rates. At December 31, 2020, the fair value of our total securities portfolio was $47.7 million. The unrealized net gain on securities totaled $468,000 on a pre-tax basis at December 31, 2020.

We evaluate interest rate sensitivity using models that estimate the change in Magyar Bank’s net interest income over a range of interest rate scenarios. At December 31, 2020, in the event of an immediate 200 basis point increase in interest rates, the model projects that we would experience a $120,000, or 0.5%, increase in net interest income in the first year following the change in interest rates, and a $208,000, or 0.9%, increase in net interest income in the second year following the change in interest rates. At December 31, 2020, in the event of an immediate 100 basis point decrease in interest rates, the model projects that we would experience a $636,000, or 2.6%, decrease in net interest income in the first year following the change in interest rates, and a $1.1 million, or 4.5%, decrease in net interest income in the second year following the change in interest rates.

At December 31, 2020, our available-for-sale securities portfolio totaled $14.8 million, which included $9.8 million in mortgage-backed securities and $5.0 million in callable bonds. To the extent interest rates increase and the value of our available-for-sale portfolio decreases, our stockholders’ equity will be adversely affected.

 

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Risks Related to our Business Strategy

Because We Intend to Continue our Emphasis on the Origination of Commercial Business Loans and Commercial Real Estate Loans, Our Lending Risk Has Increased in Recent Years and May Increase in Future Years.

At December 31, 2020, our portfolio of commercial business and commercial real estate loans totaled $351.5 million (including $46.0 million in PPP loans), or 57.9% of our total loans, compared to $349.1 million (including $56.0 million in PPP loans), or 57.1% of our total loans at September 30, 2020, $281.3 million, or 53.8% of our total loans at September 30, 2019 and $272.7 million, or 53.2% of our total loans at September 30, 2018. It is our intent to continue to emphasize the origination of commercial business and commercial real estate loans. Commercial business and commercial real estate loans generally have more risk than one-to four-family residential mortgage loans that we originate. At December 31, 2020, our non-performing loans increased $3.1 million to $10.0 million from $6.9 million at September 30, 2019. Because the repayment of these loans depends on the successful management and operation of the borrower’s properties or related businesses, repayment of these loans has been and may continue to be affected by adverse conditions in the real estate market or the local economy. Further, these loans typically have larger loan balances, and several of our borrowers have more than one commercial business and commercial real estate loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan. Finally, if we foreclose on a commercial business or commercial real estate loan, our holding period for the collateral, if any, typically is longer than for one- to four-family residential mortgage loans because there are fewer potential purchasers of the collateral. Because we plan to continue to emphasize the origination of these loans, it may be necessary to increase our allowance for loan losses because of the increased credit risk associated with these types of loans. Any increase to our allowance for loan losses would adversely affect our earnings.

We depend on our management team to implement our business strategy and execute successful operations and we could be harmed by the loss of their services.

We depend on the services of the members of our senior management team who direct our strategy and operations. Our executive officers and lending personnel possess substantial expertise, extensive knowledge of our markets and key business relationships, and have been integral in the restructuring of our operations, including the implementation of a more aggressive sales culture within our institution. Any one of them could be difficult to replace. Our loss of these persons, or our inability to hire additional qualified personnel, could impact our ability to implement our business strategy and could have a material adverse effect on our results of operations and our ability to compete in our markets. See “Management.”

New lines of business or new products and services may subject us to additional risks.

From time to time, we may implement new lines of business or offer new products and services within existing lines of business. In addition, we will continue to invest in research, development, and marketing for new products and services. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services we may invest significant time and resources. Initial timetables for the development and introduction of new lines of business and/or new products or services may not be achieved, and price and profitability targets may not prove feasible. Furthermore, if customers do not perceive our new offerings as providing significant value, they may fail

 

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to accept our new products and services. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, the burden on management and our information technology of introducing any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on our business, financial condition and results of operations.

Acquisitions may disrupt our business and dilute stockholder value.

We evaluate merger and acquisition opportunities with other financial institutions and financial services companies. As a result, negotiations may take place and future mergers or acquisitions with consideration consisting of cash and/or equity securities may occur at any time. We would seek acquisition partners that offer us either significant market presence or the potential to expand our market footprint and improve profitability through economies of scale or expanded services.

Acquiring other banks, businesses, or branches may have an adverse effect on our financial results and may involve various other risks commonly associated with acquisitions, including, among other things:

 

  

payment of a premium over book and market values that may dilute our tangible book value and earnings per share in the short and long term;

 

  

potential exposure to unknown or contingent liabilities of the target company, as well as potential asset quality problems of the target company;

 

  

potential volatility in reported income associated with goodwill impairment losses;

 

  

difficulty and expense of integrating the operations and personnel of the target company;

 

  

inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits of the acquisition;

 

  

potential disruption to our business and diversion of our management’s time and attention;

 

  

the possible loss of key employees and customers of the target company; and

 

  

potential changes in banking or tax laws or regulations that may affect the target company.

Risks Related to Operational Matters

We face significant operational risks because of our reliance on technology. Our information technology systems may be subject to failure, interruption or security breaches.

Information technology systems are critical to our business. Our business requires us to collect, process, transmit and store significant amounts of confidential information regarding our customers, employees and our own business, operations, plans and business strategies. We use various technology systems to manage our customer relationships, general ledger, securities investments, deposits, and loans.

 

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Our computer systems, data management and internal processes, as well as those of third parties, are integral to our performance. Our operational risks include the risk of malfeasance by employees or persons outside our company, errors relating to transaction processing and technology, systems failures or interruptions, breaches of our internal control systems and compliance requirements, and business continuation and disaster recovery. There have been increasing efforts by third parties to breach data security at financial institutions. Such attacks include computer viruses, malicious or destructive code, phishing attacks, denial of service or information or other security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other information, damages to systems, or other material disruptions to network access or business operations. Although we take protective measures and believe that we have not experienced any of the data breaches described above, the security of our computer systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber-attacks that could have an impact on information security. Because the techniques used to cause security breaches change frequently, we may be unable to proactively address these techniques or to implement adequate preventative measures.

In the event of a breakdown in our internal control systems, improper operation of systems or improper employee actions, or a breach of our security systems, including if confidential or proprietary information were to be mishandled, misused or lost, we could suffer financial loss, loss of customers and damage to our reputation, and face regulatory action or civil litigation. Any of these events could have a material adverse effect on our financial condition and results of operations. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits.

In addition, we outsource a majority of our data processing requirements to third-party providers. Accordingly, our operations are exposed to the risk that these vendors will not perform in accordance with our contractual agreements with them, or we also could be adversely affected if such an agreement is not renewed by the third-party vendor or is renewed on terms less favorable to us. If our third-party providers encounter difficulties, or if we have difficulty communicating with those service providers, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected, which could have a material adverse effect on our financial condition and results of operations. Threats to information security also exist in the processing of customer information through various other vendors and their personnel. To our knowledge, the services and programs provided to us by third parties have not experienced any material security breaches. However, the existence of cyber-attacks or security breaches at third parties with access to our data, such as vendors, may not be disclosed to us in a timely manner.

Our funding sources may prove insufficient to replace deposits at maturity and support our future growth.

We must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part of our liquidity management, we use a number of funding sources in addition to deposit growth and repayments and maturities of loans and investments. As we continue to grow, we are likely to become more dependent on these sources, which may include Federal Home Loan Bank advances, proceeds from the sale of loans, federal funds purchased and brokered certificates of deposit. Adverse operating results or changes in industry conditions could lead to difficulty or an inability to access these additional funding sources. Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. If we are required to rely more heavily on more expensive funding sources to support future

 

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growth, our revenues may not increase proportionately to cover our costs. In this case, our operating margins and profitability would be adversely affected.

We rely on municipal deposits as a source of funds for our lending and investment activities. If we are unable to retain, or are forced to pay a higher rate on, these deposits, our net income and liquidity could be adversely affected

We rely on municipal deposits, which can be price sensitive, as a source of funds for our lending and investment activities. At December 31, 2020, $125.1 million, or 20.4% of our total deposits, consisted of municipal deposits from local government entities. Several of our municipal deposits have high average balances. Given our dependence on high-average balance municipal funds deposits as a source of funds, our inability to retain such funds could significantly and adversely affect our liquidity. If we are forced to pay higher rates on our municipal accounts to retain those funds, or if we are unable to retain such funds and we are forced to resort to other sources of funds for our lending and investment activities, the interest expense associated with these other funding sources may be higher than the rates we are currently paying on our municipal deposits, which would adversely affect our net income.

Potential downgrades of U.S. government securities by one or more of the credit ratings agencies could have a material adverse effect on our operations, earnings and financial condition.

A possible future downgrade of the sovereign credit ratings of the U.S. government and a decline in the perceived creditworthiness of U.S. government-related obligations could impact our ability to obtain funding that is collateralized by affected instruments, as well as affect the pricing of that funding when it is available. A downgrade may also adversely affect the market value of such instruments. We cannot predict if, when or how any changes to the credit ratings or perceived creditworthiness of these organizations will affect economic conditions. Such ratings actions could result in a significant adverse impact on us. Among other things, a downgrade in the U.S. government’s credit rating could adversely impact the value of our securities portfolio and may trigger requirements that we post additional collateral for trades relative to these securities. A downgrade of the sovereign credit ratings of the U.S. government or the credit ratings of related institutions, agencies or instruments would significantly exacerbate the other risks to which we are subject and any related adverse effects on the business, financial condition and results of operations.

Risks Related to Accounting Matters

Changes in management’s estimates and assumptions may have a material impact on our consolidated financial statements and our financial condition or operating results.

In preparing this prospectus, as well as periodic reports we are required to file under the Securities Exchange Act of 1934, including our consolidated financial statements, our management is required under applicable rules and regulations to make estimates and assumptions as of a specified date. These estimates and assumptions are based on management’s best estimates and experience as of that date and are subject to substantial risk and uncertainty. Materially different results may occur as circumstances change and additional information becomes known. Areas requiring significant estimates and assumptions by management include our evaluation of the adequacy of our allowance for loan losses, the valuation of other real estate acquired in connection with foreclosure or in satisfaction of loans, and the valuation of deferred income taxes as deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years when temporary differences between the financial statement carrying amounts and their respective tax bases are expected to the recovered or settled.

 

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Changes in accounting standards could affect reported earnings.

The bodies responsible for establishing accounting standards, including the Financial Accounting Standards Board, the Securities and Exchange Commission and other regulatory bodies, periodically change the financial accounting and reporting guidance that governs the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply new or revised guidance retroactively.

Other Risks Related to Our Business

We are a community bank and our ability to maintain our reputation, which is critical to the success of our business, may materially adversely affect our performance.

We are a community bank, and our reputation is one of the most valuable components of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our market area and contiguous areas. Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, cybersecurity incidents and questionable or fraudulent activities of our customers. Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers and employees, costly litigation and increased governmental regulation, any or all of which could adversely affect our business and operating results.

Legal and regulatory proceedings and related matters could adversely affect us.

We have been and may in the future become involved in legal and regulatory proceedings. We consider most of the proceedings to be in the normal course of our business or typical for the industry; however, it is inherently difficult to assess the outcome of these matters, and we may not prevail in any proceedings or litigation. There could be substantial costs and management diversion in such litigation and proceedings, and any adverse determination could have a materially adverse effect on our business, reputation, or our financial condition and results of our operations.

Risks Related to Security

System Failure or Breaches of Our Network Security Could Subject Us to Increased Operating Costs as well as Litigation and Other Liabilities.

The computer systems and network infrastructure we and our third-party service providers use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures designed to prevent such damage, our security measures may not be successful. In addition, advances in computer capabilities, new discoveries in the

 

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field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on our financial condition and results of operations.

It is possible that a significant amount of time and money may be spent to rectify the harm caused by a breach or hack. While we have general liability insurance, there are limitations on coverage as well as dollar amount. Furthermore, cyber incidents carry a greater risk of injury to our reputation. Finally, depending on the type of incident, banking regulators can impose restrictions on our business and consumer laws may require reimbursement of customer loss.

Risks Associated with Cyber-Security Could Negatively Affect Our Earnings.

The financial services industry has experienced an increase in both the number and severity of reported cyber-attacks aimed at gaining unauthorized access to bank systems as a way to misappropriate assets and sensitive information, corrupt and destroy data, or cause operational disruptions. We have established policies and procedures to prevent or limit the impact of security breaches, but such events may still occur or may not be adequately addressed if they do occur. Although we rely on security safeguards to secure our data, these safeguards may not fully protect our systems from compromises or breaches.

We also rely on the integrity and security of a variety of third party processors, payment, clearing and settlement systems, as well as the various participants involved in these systems, many of which have no direct relationship with us. Failure by these participants or their systems to protect our customers’ transaction data may put us at risk for possible losses due to fraud or operational disruption.

Our customers are also the target of cyber-attacks and identity theft. Large scale identity theft could result in customers’ accounts being compromised and fraudulent activities being performed in their name. We have implemented certain safeguards against these types of activities but they may not fully protect us from fraudulent financial losses.

The occurrence of a breach of security involving our customers’ information, regardless of its origin, could damage our reputation and result in a loss of customers and business and subject us to additional regulatory scrutiny, and could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.

Risks Related to the Offering

The future price of our shares of common stock may be less than the $10.00 purchase price per share in the offering.

If you purchase shares of common stock in the offering, you may not be able to sell them later at or above the $10.00 purchase price. In many cases, shares of common stock issued by newly converted savings institutions or mutual holding companies have traded below the initial offering price. The aggregate purchase price of the shares of common stock sold in the offering will be based on an independent appraisal. The independent appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock. The independent appraisal is based on certain estimates, assumptions and projections, all of which are subject to change. After the shares begin trading, the trading price of our common stock will be determined by

 

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the marketplace, and may be influenced by many factors, including prevailing interest rates, the overall performance of the economy, changes in laws and regulations, investor perceptions of Magyar Bancorp and the outlook for the financial services industry in general. Price fluctuations in our common stock may be unrelated to our operating performance.

Our failure to effectively deploy the net proceeds may have an adverse effect on our financial performance.

We intend to contribute between $13.7 million and $18.8 million of the net proceeds of the offering to Magyar Bank. We may use the remaining net proceeds to invest in short-term investments and for general corporate purposes, including repurchasing shares of our common stock and paying dividends. We also expect to use a portion of the net proceeds we retain to fund a loan to our employee stock ownership plan to purchase shares of common stock in the offering. Magyar Bank may use the net proceeds it receives to fund new loans, expand its retail banking franchise by establishing or acquiring new branches or by acquiring other financial institutions or other financial services companies, or for other general corporate purposes. However, except for the funding the loan to the employee stock ownership plan, we have not allocated specific amounts of the net proceeds for any of these purposes, and we will have broad discretion in determining the amount of the net proceeds we apply to different uses and when we apply or reinvest such proceeds. Also, certain of these uses, such as opening new branches or acquiring other financial institutions, may require the approval of the NJDOBI or the Federal Reserve Board. We have not established a timetable for investing the net proceeds, and we cannot predict how long we will require to invest the net proceeds. Our failure to reinvest these funds effectively would reduce our profitability and may adversely affect the value of our common stock.

Our return on equity may be low following the offering. This could negatively affect the trading price of our shares of common stock.

Net income divided by average stockholders’ equity, known as “return on equity,” is a ratio many investors use to compare the performance of financial institutions. Our return on equity may be low until we are able to leverage the additional capital we receive from the offering. Our return on equity also will be negatively affected by added expenses associated with our employee stock ownership plan and the stock-based benefit plans we currently sponsor and intend to adopt. Our return on average equity was 3.85% for the year ended September 30, 2020, with consolidated equity of $56.9 million at September 30, 2020. Our pro forma consolidated equity as of December 31, 2020, assuming completion of the offering, is estimated to be between $82.1 million at the minimum of the offering range and $91.1 million at the maximum of the offering range. Until we can increase our net interest income and non-interest income and leverage the capital raised in the offering, our return on equity may be low, which may reduce the market price of our shares of common stock.

Our stock-based benefit plans will increase our expenses and reduce our income.

We intend to adopt one or more new stock-based benefit plans after the conversion, subject to stockholder approval, which will increase our annual compensation and benefit expenses related to the stock options and stock awards granted to participants. The actual amount of these new stock-related compensation and benefit expenses will depend on the number of options and stock awards granted under the plans, the fair market value of our stock or options on the date of grant, the vesting period, and other factors which we cannot predict at this time. If we adopt stock-based benefit plans within 12 months following the conversion, the shares of common stock reserved for issuance pursuant to awards of restricted stock and grants of options under such plans would be limited to 4% and 10%, respectively, of the total shares of our common stock sold in the offering. If we adopt stock-based benefit plans more than 12 months after the completion of the conversion, we may adopt plans that allow for greater amounts of awards and options and, therefore, we could award restricted shares of common stock or grant options in excess of these amounts, which would further increase costs.

 

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In addition, we will recognize expense for our employee stock ownership plan when shares are committed to be released to participants’ accounts, and we will recognize expense for restricted stock awards and stock options over the vesting period of awards made to recipients. The expense in the first year following the offering for our employee stock ownership plan and for our new stock-based benefit plans, assuming such plans had been implemented at the beginning of the year, is estimated to be approximately $665,000 ($524,000 after tax) at the maximum of the offering range as set forth in the pro forma financial information under “Pro Forma Data,” assuming the $10.00 per share purchase price as fair market value. Actual expenses, however, may be higher or lower, depending on the price of our common stock. For further discussion of our proposed stock-based plans, see “Management – Benefits to be Considered Following Completion of the Conversion.”

The implementation of stock-based benefit plans may dilute your ownership interest. Historically, stockholders have approved these stock-based benefit plans.

We intend to adopt one or more new stock-based benefit plans following the offering. These plans may be funded either through open market purchases of our common stock or from the issuance of authorized but unissued shares of common stock. Our ability to repurchase shares of our common stock to fund these plans will be subject to many factors, including applicable regulatory restrictions on stock repurchases, the availability of stock in the market, the trading price of our stock, our capital levels, alternative uses for our capital and our financial performance. While our intention is to fund the new stock-based benefit plans through open market purchases, stockholders would experience a 5.22% dilution in ownership interest if newly issued shares of our common stock are used to fund stock options in an amount equal to 10% of the shares sold in the offering, and all such stock options are exercised, and a 2.16% dilution in ownership interest if newly issued shares of our common stock are used to fund shares of restricted common stock in an amount equal to 4% of the shares sold in the offering. Such dilution would also reduce earnings per share. If we adopt the plans more than 12 months following the conversion, new stock-based benefit plans would not be subject to these size limitations and stockholders could experience even greater dilution.

Although the implementation of new stock-based benefit plans would be subject to stockholder approval, historically, the overwhelming majority of stock-based benefit plans adopted by savings institutions and their holding companies following mutual-to-stock conversions have been approved by stockholders.

We have not determined when we will adopt one or more new stock-based benefit plans. Stock-based benefit plans adopted more than 12 months following the completion of the conversion may exceed regulatory restrictions on the size of stock-based benefit plans adopted within 12 months, which would further increase our costs.

If we adopt stock-based benefit plans more than 12 months following the completion of the conversion, then grants of shares of common stock or stock options under our proposed stock-based benefit plans may exceed 4% and 10%, respectively, of shares of common stock sold in the offering. Stock-based benefit plans that provide for awards in excess of these amounts would increase our costs beyond the amounts estimated in “ – Our stock-based benefit plans will increase our expenses and reduce our income.” Stock-based benefit plans that provide for awards in excess of these amounts could also result in dilution to stockholders in excess of that described in “– The implementation of stock-based

 

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benefit plans may dilute your ownership interest. Historically, stockholders have approved these stock-based benefit plans.” Although the implementation of stock-based benefit plans would be subject to stockholder approval, the timing of the implementation of such plans will be at the discretion of our board of directors.

Various factors may make takeover attempts more difficult to achieve.

Certain provisions of our certificate of incorporation and bylaws and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire control of Magyar Bancorp without our board of directors’ approval. Under regulations applicable to the conversion, for a period of three years following completion of the conversion, no person may offer to acquire or acquire beneficial ownership of more than 10% of our common stock without prior approval of the Federal Reserve Board. Under federal law, subject to certain exemptions, a person, entity or group must notify the Federal Reserve Board and receive the Federal Reserve Board’s non-objection before acquiring control of a bank holding company. There also are provisions in our certificate of incorporation and bylaws that we may use to delay or block a takeover attempt, including a provision that prohibits any person from voting more than 10% of our outstanding shares of common stock. Furthermore, shares of restricted stock and stock options that we may grant to employees and directors, stock ownership by our management and directors and other factors may make it more difficult for companies or persons to acquire control of Magyar Bancorp without the consent of our board of directors, and may increase the cost of an acquisition. Taken as a whole, these statutory or regulatory provisions and provisions in our certificate of incorporation and bylaws could result in our being less attractive to a potential acquirer and therefore could adversely affect the market price of our common stock. For additional information, see “Restrictions on Acquisition of Magyar Bancorp” and “Management – Benefits to be Considered Following Completion of the Conversion.”

Our certificate of incorporation provide that, subject to limited exception, the Court of Chancery in the State of Delaware is the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, and other employees.

Our certificate of incorporation provides that, unless Magyar Bancorp consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of Magyar Bancorp, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of Magyar Bancorp to Magyar Bancorp or Magyar Bancorp’s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, or (iv) any action asserting a claim governed by the internal affairs doctrine will be conducted in the Chancery Court of the State of Delaware, in all cases subject to the court’s having personal jurisdiction over the indispensable parties named as defendants. This exclusive forum provision does not apply to claims arising under the federal securities laws. This exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum it finds favorable for disputes with Magyar Bancorp and its directors, officers, and other employees or may cause a stockholder to incur additional expense by having to bring a claim in a judicial forum that is distant from where the stockholder resides, or both. In addition, if a court were to find this exclusive forum provision to be inapplicable or unenforceable in a particular action, we may incur additional costs associated with resolving the action in another jurisdiction, which could have a material adverse effect on our financial condition and results of operations.

 

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There may be a limited trading market in our shares of common stock, which would hinder your ability to sell our common stock and may lower the market price of our common stock.

We expect that our common stock will be continue to be listed and trade on the Nasdaq Global Market under the symbol “MGYR” upon conclusion of the offering, subject to compliance with certain conditions, including having 300 “round lot” stockholders (stockholders owning more than 100 shares) and at least three broker-dealers making a market for our common stock. The development of an active trading market depends on the existence of willing buyers and sellers, the presence of which is not within our control, or that of any market maker. The number of active buyers and sellers of the shares of common stock at any particular time may be limited. Under such circumstances, you could have difficulty selling your shares of common stock on short notice, and, therefore, you should not view the shares of common stock as a short-term investment. Purchasers of common stock in this offering should have long-term investment intent and should recognize that there may be a limited trading market in the common stock, which could make it difficult to sell the common stock after the offering and may have an adverse impact on the price at which the common stock can be sold.

Our stock value may be negatively affected by applicable regulations that restrict stock repurchases.

Applicable regulations generally restrict us from repurchasing our shares of common stock during the first year following the offering. Stock repurchases are a capital management tool that can enhance the value of a company’s stock, and our inability to repurchase our shares of common stock during the first year following the offering may negatively affect our stock price.

You may not revoke your decision to purchase Magyar Bancorp common stock in the subscription or community offerings after you send us your order.

Funds submitted or automatic deposit withdrawals authorized to purchase shares of common stock in the subscription and community offerings will be held by us until the completion or termination of the conversion and offering. Because completion of the conversion and offering will be subject to regulatory approvals and an update of the independent appraisal prepared by RP Financial, LC., among other factors, there may be one or more delays in completing the conversion and offering. Orders submitted in the subscription and community offerings are irrevocable, and purchasers will have no access to their funds unless the offering is terminated, or extended beyond [extension date], or the number of shares to be sold in the offering is increased to more than 3,910,000 shares or decreased to fewer than 2,890,000 shares.

The distribution of subscription rights could have adverse income tax consequences.

If the subscription rights granted in connection with the offering are deemed to have an ascertainable value, receipt of such rights may be taxable in an amount equal to such value. Whether subscription rights are considered to have ascertainable value is an inherently factual determination. We have received an opinion of counsel, Luse Gorman, PC, that it is more likely than not that such rights have no value; however, such opinion is not binding on the Internal Revenue Service.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The summary information presented below at each date or for each of the periods presented is derived in part from the consolidated financial statements of Magyar Bancorp. The information at and for the years ended September 30, 2020 and 2019 was derived from the audited consolidated financial statements of Magyar Bancorp included elsewhere in this prospectus. The information at and for the years ended September 30, 2018, 2017 and 2016 was derived in part from the audited consolidated financial statements of Magyar Bancorp that are not included in this prospectus. The following information is only a summary, and should be read in conjunction with the consolidated financial statements and related notes of Magyar Bancorp beginning on page F-1 of this prospectus.

 

   At
December 31,

2020
   At September 30, 
   2020   2019   2018   2017   2016 
   (In thousands) 

Selected Financial Condition Data:

            

Total assets

  $741,784   $753,997   $630,328   $623,968   $603,044   $584,377 

Cash and cash equivalents

   52,070    61,726    21,469    15,368    22,334    21,806 

Available-for-sale securities

   14,798    14,561    16,703    22,469    11,815    5,234 

Securities held to maturity

   32,493    30,443    29,481    33,645    51,368    52,934 

Loans receivable, net

   598,530    603,110    518,217    508,430    470,693    455,031 

Premises and equipment, net

   14,607    14,746    16,172    16,990    17,567    18,084 

Bank-owned life insurance

   14,049    13,971    13,647    11,843    11,550    11,257 

FHLB stock, at cost

   1,981    1,981    2,222    2,164    2,002    2,239 

Accrued interest receivable

   4,096    4,030    2,133    2,181    1,929    1,710 

Other assets

   7,088    6,835    2,756    2,292    2,730    4,000 

Other real estate owned

   2,072    2,594    7,528    8,586    11,056    12,082 

Total liabilities

   683,583    697,147    575,677    572,606    553,587    536,652 

Deposits

   612,064    618,330    530,075    530,137    515,201    492,650 

Borrowings

   60,260    67,410    36,189    35,524    31,905    36,040 

Accounts payable and other liabilities

   11,259    11,407    9,413    6,945    6,481    7,962 

Total equity

   58,201    56,850    54,651    51,362    49,457    47,725 

 

   For the
Three Months Ended

December 31,
   For the Years Ended September 30, 
  2020   2019   2020   2019   2018   2017   2016 
   (In thousands) 

Selected Data:

              

Interest and dividend income

  $7,001   $6,772   $26,927   $27,103   $24,350   $21,978   $20,451 

Interest expense

   956    1,642    5,513    6,710    4,649    3,773    3,532 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

   6,045    5,130    21,414    20,393    19,701    18,205    16,919 

Provision for loan losses

   640    210    1,666    668    997    1,343    1,366 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

   5,405    4,920    19,748    19,725    18,704    16,862    15,553 

Other income

   1,225    404    1,716    2,136    2,121    1,999    2,145 

Other expenses

   4,724    4,533    18,353    17,600    17,324    16,444    15,943 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

   1,906    791    3,111    4,261    3,501    2,417    1,755 

Income tax expense

   569    238    921    1,265    1,471    994    664 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $1,337   $553   $2,190   $2,996   $2,030   $1,423   $1,091 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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   At or For the
Three Months Ended
December 31,
  At or For the Years Ended September 30, 
   2020  2019  2020  2019  2018  2017  2016 

Selected Financial Ratios and Other Data:

        

Performance Ratios: (1)

        

Return on average assets

   0.71  0.35  0.32  0.47  0.33  0.24  0.19

Return on average equity

   9.19  4.01  3.85  5.47  3.95  2.90  2.28

Interest rate spread (2)

   3.18  3.14  3.03  3.09  3.27  3.20  3.11

Net interest margin (3)

   3.38  3.44  3.31  3.41  3.49  3.36  3.27

Efficiency ratio (4)

   71.25  85.14  85.51  80.51  83.19  87.19  90.08

Non-interest expense to average total assets

   2.51  2.84  2.46  2.81  2.80  2.81  2.77

Average interest-earning assets to average
interest-bearing liabilities

   136.93  127.93  132.47  128.21  126.51  123.92  122.60

Average equity to average total assets

   7.72  8.65  8.22  8.55  8.43  8.32  8.40

Asset Quality Ratios:

        

Non-performing assets to total assets

   1.63  2.01  1.63  2.29  1.52  2.22  2.79

Non-performing loans to total loans

   1.65  1.03  1.59  1.32  0.18  0.50  0.92

Allowance for loan losses to non-performing loans

   71.01  93.60  65.76  70.90  463.58  147.37  72.64

Allowance for loan losses to total loans

   1.17  0.96  1.05  0.93  0.82  0.73  0.67

Capital Ratios:

        

Common equity Tier 1 capital to risk-weighted assets

   11.85  11.79  11.84  11.84  11.44  11.80  11.82

Total capital (to risk-weighted assets)

   13.10  12.85  13.09  12.88  12.35  12.62  12.55

Tier 1 capital (to risk-weighted assets)

   11.85  11.79  11.84  11.84  11.44  11.80  11.82

Tier 1 capital (to total assets)

   7.91  8.87  7.84  8.94  8.55  8.45  8.53

Other Data:

        

Number of full-service offices

   7   7   7   7   7   7   6 

Number of full-time equivalent employees

   95.5   103.5   101.0   105.5   102.0   102.0   97.5 

 

(1)

Annualized for the three-month periods ended December 31, 2020 and 2019.

(2)

Represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the year.

(3)

The net interest margin represents net interest income as a percent of average interest-earning assets for the year.

(4)

The efficiency ratio represents non-interest expense divided by the sum of net interest income and non-interest income.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “would,” “should,” “could” or “may,” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

  

statements of our goals, intentions and expectations;

 

  

statements regarding our business plans, prospects, growth and operating strategies;

 

  

statements regarding the quality of our loan and investment portfolios; and

 

  

estimates of our risks and future costs and benefits.

These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

  

conditions relating to the COVID-19 pandemic, including the severity and duration of the associated economic slowdown either nationally or in our market areas, that are worse than expected;

 

  

general economic conditions, either nationally or in our market areas, that are worse than expected;

 

  

changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;

 

  

our ability to access cost-effective funding;

 

  

fluctuations in real estate values and both residential and commercial real estate market conditions;

 

  

demand for loans and deposits in our market area;

 

  

our ability to implement and change our business strategies;

 

  

competition among depository and other financial institutions;

 

  

inflation and changes in the interest rate environment that reduce our margins and yields, the fair value of financial instruments, or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;

 

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adverse changes in the securities or secondary mortgage markets;

 

  

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees, capital requirements and insurance premiums;

 

  

changes in the quality or composition of our loan or investment portfolios;

 

  

technological changes that may be more difficult or expensive than expected;

 

  

the inability of third-party providers to perform as expected;

 

  

a failure or breach of our operational or security systems or infrastructure, including cyberattacks;

 

  

our ability to manage market risk, credit risk and operational risk;

 

  

our ability to enter new markets successfully and capitalize on growth opportunities;

 

  

our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we have acquired or may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;

 

  

changes in consumer spending, borrowing and savings habits;

 

  

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;

 

  

our ability to retain key employees;

 

  

our compensation expense associated with equity allocated or awarded to our employees; and

 

  

changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. See “Risk Factors” beginning on page 21. Except as required by applicable law or regulation, we do not undertake, and we specifically disclaim any obligation, to release publicly the results of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

 

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HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING

Although we cannot determine what the actual net proceeds from the sale of the shares of common stock in the offering will be until the offering is completed, we anticipate that the net proceeds will be between $27.4 million and $37.6 million.

We intend to use the net proceeds as follows:

 

   Based Upon the Sale at $10.00 Per Share of: 
   2,890,000 Shares  3,400,000 Shares  3,910,000 Shares 
   Amount   Percent of
Net Proceeds
  Amount   Percent of
Net Proceeds
  Amount   Percent of
Net Proceeds
 
   (Dollars in thousands) 

Gross offering proceeds

  $28,900    $34,000    $39,100   

Less: offering expenses

   1,500     1,500     1,535   
  

 

 

    

 

 

    

 

 

   

Net offering proceeds

  $27,400    100.0 $32,500    100.0 $37,565    100.0
  

 

 

    

 

 

    

 

 

   

Distribution of net proceeds:

          

To Magyar Bank

  $13,700    50.0 $16,250    50.0 $18,783    50.0

To fund loan to employee stock ownership plan

  $2,312    8.4 $2,720    8.4 $3,128    8.3

Retained by Magyar Bancorp

  $11,388    41.6 $13,530    41.6 $15,654    41.7

Payments for shares of common stock made through withdrawals from existing deposit accounts will not result in the receipt of new funds for investment but will reduce Magyar Bank’s deposits. The net proceeds may vary because total expenses relating to the offering may be more or less than our estimates. For example, our expenses would increase if all the shares offered were not sold in the subscription and community offerings and instead a portion of the shares were sold in a syndicated community offering.

Magyar Bancorp may use the proceeds it retains from the offering:

 

  

to invest in securities;

 

  

to repurchase shares of its common stock;

 

  

to pay cash dividends to stockholders;

 

  

to finance the potential acquisition of financial institutions or financial services companies, although we do not currently have any agreements or understandings regarding any specific acquisition transaction; and

 

  

for other general corporate purposes.

See “Our Dividend Policy” for a discussion of our expected dividend policy following the completion of the conversion. Under current federal regulations, we may not repurchase shares of our common stock during the first year following the completion of the conversion, except when extraordinary circumstances exist and with prior regulatory approval, or except to fund the granting of restricted stock awards (which would require notification to the Federal Reserve Board) or tax-qualified employee stock benefit plans.

 

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Magyar Bank may use the net proceeds it receives from the offering:

 

  

to fund new loans;

 

  

to enhance existing products and services, hire additional employees and support growth and the development of new products and services;

 

  

to invest in securities;

 

  

to expand its banking franchise by establishing or acquiring new branches or by acquiring other financial institutions or other financial services companies as opportunities arise, although we do not currently have any understandings or agreements to acquire a financial institution or other entity; and

 

  

for other general corporate purposes.

Initially, a substantial portion of the net proceeds will be invested in short-term investments, investment-grade debt obligations and mortgage-backed securities. We have not determined specific amounts of the net proceeds that would be used for the purposes described above. The use of the proceeds outlined above may change based on many factors, including, but not limited to, changes in interest rates, equity markets, laws and regulations affecting the financial services industry, the attractiveness of potential acquisitions to expand our operations, and overall market conditions. The use of the proceeds may also change depending on our ability to receive regulatory approval to establish new branches or acquire other financial institutions.

We expect our return on equity may be low until we are able to reinvest effectively the additional capital raised in the offering. Until we can increase our net interest income and non-interest income, our return on equity may be below the industry average, which may negatively affect the value of our common stock. See “Risk Factors – Risks Related to the Offering – Our failure to effectively deploy the net proceeds may have an adverse effect on our financial performance.”

OUR DIVIDEND POLICY

Magyar Bancorp has never paid a dividend. No decision has been made with respect to the amount, if any, and timing of any dividend payments following the completion of the conversion and offering. The board’s determination of whether to declare a dividend and the amount of any such dividend is subject to our capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. We cannot assure you that we will pay dividends in the future, or that any such dividends will not be reduced or eliminated in the future.

Magyar Bancorp will not be permitted to pay dividends on its common stock if our stockholders’ equity would be reduced below the amount of the liquidation account established in connection with the conversion. The source of dividends will depend on the net proceeds retained by Magyar Bancorp and earnings thereon, and dividends from Magyar Bank. In addition, Magyar Bancorp will be subject to state law limitations and federal bank regulatory policy on the payment of dividends. In addition, Delaware law generally limits dividends to our capital surplus or, if there is no capital surplus, our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.

After the completion of the conversion, Magyar Bank will not be permitted to pay dividends on its capital stock to Magyar Bancorp, its sole stockholder, if Magyar Bank’s stockholder’s equity would be

 

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reduced below the amount of the liquidation account established in connection with the conversion. In addition, Magyar Bank will not be permitted to make a capital distribution if, after making such distribution, it would be undercapitalized. Under New Jersey law, Magyar Bank may declare and pay a dividend on its capital stock only to the extent that the payment of the dividend would not impair Magyar Bank’s capital stock. In addition, Magyar Bank may not pay a dividend unless it would, after the payment of the dividend, have a surplus of not less than 50% of its capital stock, or alternatively, the payment of the dividend would not reduce the surplus.

Any payment of dividends by Magyar Bank to Magyar Bancorp that would be deemed to be drawn from Magyar Bank’s bad debt reserves established before 1988, if any, would require a payment of taxes at the then-current tax rate by Magyar Bank on the amount of earnings deemed to be removed from the pre-1988 bad debt reserves for such distribution. Magyar Bank does not intend to make any distribution that would create such a federal tax liability.

We will continue to file a consolidated federal tax return with Magyar Bank. Accordingly, it is anticipated that any cash distributions made by us to our stockholders would be treated as cash dividends and not as a non-taxable return of capital for federal tax purposes. Additionally, pursuant to Federal Reserve Board during the three-year period following the conversion, we will not be permitted to make any capital distribution to stockholders that would be treated by recipients as a tax-free return of capital for federal income tax purposes.

MARKET FOR THE COMMON STOCK

Magyar Bancorp’s common stock is currently listed on the Nasdaq Global Market under the symbol “MGYR.” Upon completion of the conversion, we expect our common stock will continue to trade on the Nasdaq Global Market under the symbol “MGYR.” In order to list our stock on the Nasdaq Global Market, we are required to have at least three broker-dealers who will make a market in our common stock. As of [stockholder record date], Magyar Bancorp had [______] registered market makers in its common stock.

As of the close of business on [voting record date], there were 5,810,746 shares of common stock outstanding, including 2,610,296 publicly held shares (shares held by stockholders other than Magyar Bancorp, MHC), and approximately [____] stockholders of record.

On February 25, 2021, the business day immediately preceding the public announcement of the conversion, and on [________], 2021, the closing prices of Magyar Bancorp common stock as reported on the Nasdaq Global Market were $11.00 per share and $[_____] per share, respectively. On the effective date of the conversion, all publicly held shares of Magyar Bancorp common stock, including shares of common stock held by our officers and directors, will be converted into new shares of Magyar Bancorp pursuant to the exchange ratio. See “The Conversion and Offering – Share Exchange Ratio for Current Stockholders.” See “Beneficial Ownership of Common Stock.”

 

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HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE

At December 31, 2020, Magyar Bank exceeded all of the applicable regulatory capital requirements and was considered “well capitalized.” The table below sets forth the historical equity capital and regulatory capital of Magyar Bank at December 31, 2020, and the pro forma equity capital and regulatory capital of Magyar Bank after giving effect to the sale of shares of common stock at $10.00 per share. The table also compares historical and pro forma capital levels to those required to be considered “well capitalized.” The table assumes that Magyar Bank receives 50% of the net offering proceeds. See “How We Intend to Use the Proceeds from the Offering.”

 

   Magyar Bank
Historical at

December 31, 2020
  Magyar Bank Pro Forma at December 31, 2020
Based Upon the Sale in the Offering of:
 
  2,890,000 Shares  3,400,000 Shares  3,910,000 Shares 
   Amount   Percent of
Assets
  Amount  Percent of
Assets
  Amount  Percent of
Assets
  Amount  Percent of
Assets
 
   (Dollars in thousands) 

Equity

  $58,763    7.92 $68,995   9.13 $70,933   9.36 $72,854   9.58
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Tier 1 leverage capital (1)(2)

  $60,155    8.37 $70,387   9.61 $72,325   9.84 $74,246   10.06

Tier 1 leverage requirement

   35,948    5.00   36,633   5.00   36,760   5.00   36,887   5.00 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Excess

  $24,207    3.37 $33,754   4.61 $35,565   4.84 $37,359   5.06
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Tier 1 risk-based capital (1)(2)

  $60,155    11.98 $70,387   13.94 $72,325   14.31 $74,246   14.68

Tier 1 risk-based requirement

   40,169    8.00   40,388   8.00   40,429   8.00   40,469   8.00 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Excess

  $19,986    3.98 $29,999   5.94 $31,896   6.31 $33,777   6.68
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total risk-based capital (1)(2)

  $66,442    13.23 $76,674   15.19 $78,612   15.56 $80,533   15.92

Total risk-based requirement

   50,211    10.00   50,485   10.00   50,536   10.00   50,587   10.00 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Excess

  $16,231    3.23 $26,189   5.19 $28,076   5.56 $29,946   5.92
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Common equity tier 1 risk-based capital (1)(2)

  $60,155    11.98 $70,387   13.94 $72,325   14.31 $74,246   14.68

Common equity tier 1 risk-based requirement

   32,637    6.50   32,815   6.50   32,849   6.50   32,881   6.50 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Excess

  $27,518    5.48 $37,572   7.44 $39,476   7.81 $41,365   8.18
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Reconciliation of capital infused into Magyar Bank:

 

      

Net proceeds

 

 $13,700   $16,250   $18,783  

Less: Common stock acquired by stock-based benefit plans

 

  (1,156   (1,360   (1,564 

Less: Common stock acquired by employee stock ownership plan

 

  (2,312   (2,720   (3,128 
 

 

 

   

 

 

   

 

 

  

Pro forma increase

 

 $10,232   $12,170   $14,091  
 

 

 

   

 

 

   

 

 

  

 

(1)

Tier 1 leverage capital levels are shown as a percentage of total average assets. Risk-based capital levels are shown as a percentage of risk-weighted assets.

(2)

Pro forma amounts and percentages assume net proceeds are invested in assets that carry a 20% risk weighting.

 

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CAPITALIZATION

The following table presents the historical consolidated capitalization of Magyar Bancorp at December 31, 2020 and the pro forma consolidated capitalization of Magyar Bancorp after giving effect to the conversion and offering based upon the assumptions set forth in the “Pro Forma Data” section.

 

   Magyar
Bancorp
Historical at
December 31,
2020
  Magyar Bancorp Pro Forma at
December 31, 2020 Based upon the Sale in
the Offering at $10.00 per share of:
 
  2,890,000
Shares
  3,400,000
Shares
  3,910,000
Shares
 
   (Dollars in thousands) 

Deposits (1)

  $612,064  $612,064  $612,064  $612,064 

Borrowed funds

   60,260   60,260   60,260   60,260 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total deposits and borrowed funds

  $672,324  $672,324  $672,324  $672,324 
  

 

 

  

 

 

  

 

 

  

 

 

 

Stockholders’ equity:

     

Preferred stock, $0.01 par value, 500,000 shares authorized (post-conversion) (2)

   —     —     —     —   

Common stock, $0.01 par value, 14,000,000 shares authorized (post-conversion); shares to be issued as reflected (2)(3)

   59   52   62   71 

Additional paid-in capital (2)

   26,279   53,686   58,776   63,832 

MHC capital contribution

   —     10   10   10 

Retained earnings (4)

   34,498   34,498   34,498   34,498 

Accumulated other comprehensive income

   (1,393  (1,393  (1,393  (1,393

Treasury stock, at cost

   (1,242  (1,242  (1,242  (1,242

Common stock held by employee stock ownership plan (5)

   —     (2,312  (2,720  (3,128

Common stock to be acquired by stock-based benefit plans (6)

   —     (1,156  (1,360  (1,564
  

 

 

  

 

 

  

 

 

  

 

 

 

Total stockholders’ equity

  $58,201  $82,143  $86,631  $91,084 
  

 

 

  

 

 

  

 

 

  

 

 

 

Pro Forma Shares Outstanding:

     

Shares offered for sale

   —     2,890,000   3,400,000   3,910,000 

Exchange shares issued

   —     2,356,399   2,772,234   3,188,070 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total shares outstanding

   5,810,746   5,246,399   6,172,234   7,098,070 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total stockholders’ equity as a percentage of total assets

   7.85  10.73  11.25  11.76

Tangible equity as a percentage of tangible assets

   7.85  10.73  11.25  11.76

 

(1)

Does not reflect withdrawals from deposit accounts to purchase shares of common stock in the conversion and offering. These withdrawals would reduce pro forma deposits and assets by the amount of the withdrawals.

(2)

Magyar Bancorp currently has 8,000,000 authorized shares of common stock, $0.01 par value per share, and 1,000,000 authorized shares of preferred stock, par value $0.01 per share. On a pro forma basis, common stock and additional paid-in capital have been revised to reflect the number of shares of Magyar Bancorp common stock to be outstanding.

(3)

No effect has been given to the issuance of additional shares of Magyar Bancorp common stock pursuant to the exercise of options under one or more stock-based benefit plans. If the plans are implemented within the first year after the closing of the offering, an amount up to 10% of the shares of Magyar Bancorp common stock sold in the offering will be reserved for issuance upon the exercise of options under the plans. No effect has been given to the exercise of options currently outstanding. See “Management.”

(4)

The retained earnings of Magyar Bank will be substantially restricted after the conversion. See “The Conversion and Offering – Liquidation Rights” and “Supervision and Regulation – Federal Banking Regulation – Capital Distributions.”

(footnotes continue on following page)

 

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(continued from previous page)

 

(5)

Assumes that 8% of the shares sold in the offering will be acquired by the employee stock ownership plan financed by a loan from Magyar Bancorp. The loan will be repaid principally from Magyar Bank’s contributions to the employee stock ownership plan. Since Magyar Bancorp will finance the employee stock ownership plan debt, this debt will be eliminated through consolidation and no liability will be reflected on Magyar Bancorp’s consolidated financial statements. Accordingly, the amount of shares of common stock acquired by the employee stock ownership plan is shown in this table as a reduction of total stockholders’ equity.

(6)

Assumes a number of shares of common stock equal to 4% of the shares of common stock to be sold in the offering will be purchased for grant by one or more stock-based benefit plans. The funds to be used by such plans to purchase the shares will be provided by Magyar Bancorp. The dollar amount of common stock to be purchased is based on the $10.00 per share purchase price in the offering and represents unearned compensation. This amount does not reflect possible increases or decreases in the value of common stock relative to the purchase price in the offering. Magyar Bancorp will accrue compensation expense to reflect the vesting of shares pursuant to such stock-based benefit plans and will credit capital in an amount equal to the charge to operations. Implementation of such plans will require stockholder approval.

 

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PRO FORMA DATA

The following tables summarize historical and pro forma data of Magyar Bancorp at and for the quarter ended December 31, 2020 and at and for the year ended September 30, 2020. This information is based on assumptions set forth below and in the tables, and should not be used as a basis for projections of market value of the shares of common stock following the conversion and offering.

The net proceeds are based upon the following assumptions:

 

 (i)

all of the shares of common stock will be sold in the subscription and community offerings;

 

 (ii)

our employee stock ownership plan will purchase 8% of the shares of common stock sold in the offering with a loan from Magyar Bancorp. The loan will be repaid in substantially equal payments of principal and interest (at the prime rate of interest, as may be adjusted annually) over 30 years. Interest income that we earn on the loan will offset the interest paid by Magyar Bank. The effect on earnings for the employee stock ownership plan is the cost of amortizing the loan over 30 years, net of historical expense for the period;

 

 (iii)

we will pay KBW a success fee of approximately $480,000; and

 

 (iv)

total expenses of the offering, other than the success fees and commissions to be paid to KBW and other broker-dealers, will be $1.055 million.

In addition, the expenses of the offering may vary from those estimated, and the fees paid to KBW will vary from the amounts estimated if the amount of shares of Magyar Bancorp common stock sold varies from the amounts assumed above or if any shares are sold in the syndicated community offering.

We calculated pro forma consolidated net income for each period as if the estimated net proceeds we received had been invested at the beginning of the period at an assumed interest rate of 0.36% (0.25% on an after-tax basis). This represents the yield on the five-year U.S. Treasury Note at December 31, 2020, which, in light of current market interest rates, we consider to more accurately reflect the pro forma reinvestment rate than the arithmetic average of the weighted average yield earned on our interest earning assets and the weighted average rate paid on our deposits, which is the reinvestment rate federal regulations require that we assume in presenting pro forma data.

We further believe that the reinvestment rate is factually supportable because:

 

  

the yield on the U.S. Treasury Note can be determined and/or estimated from third-party sources; and

 

  

we believe that U.S. Treasury securities are not subject to credit losses due to a U.S. Government guarantee of payment of principal and interest.

We calculated historical and pro forma per share amounts by dividing historical and pro forma amounts of consolidated net income and stockholders’ equity by the indicated number of shares of common stock. For pro forma earnings per share calculations, we adjusted these figures to give effect to the shares of common stock purchased by the employee stock ownership plan. We computed per share amounts as if the shares of common stock were outstanding at the beginning of the period, but we did not adjust per share historical or pro forma stockholders’ equity to reflect the earnings on the estimated net proceeds.

 

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The pro forma data gives effect to the implementation of one or more stock-based benefit plans. We have assumed that stock-based benefit plans will reserve for restricted stock awards a number of shares of common stock equal to 4% of the shares of common stock sold in the offering at the same price for which they were sold in the offering. We have assumed that awards of common stock granted under such plans vest over a five-year period.

We also have assumed that options will be granted under stock-based benefit plans to acquire shares of common stock equal to 10% of the shares of common stock sold in the offering. In preparing the tables below, we assumed that stockholder approval was obtained, that the exercise price of the stock options and the market price of the stock at the date of grant were $10.00 per share and that the stock options had a term of ten years and vested over five years. We applied the Black-Scholes option pricing model to estimate a grant-date fair value of $3.17 for each option.

We may grant options and award shares of common stock under one or more stock-based benefit plans in excess of 10% and 4%, respectively, of the shares of common stock sold in the offering and that vest sooner than over a five-year period if the stock-based benefit plans are adopted more than 12 months following the completion of the offering.

As discussed under “How We Intend to Use the Proceeds from the Offering,” we intend to contribute 50% of the net proceeds from the offering to Magyar Bank, and we will retain the remainder of the net proceeds from the offering. We will use a portion of the proceeds we retain to fund a loan to the employee stock ownership plan and retain the rest of the proceeds for future use.

The pro forma data does not give effect to:

 

  

withdrawals from deposit accounts to purchase shares of common stock in the offering;

 

  

our results of operations after the offering; or

 

  

changes in the market price of the shares of common stock after the offering.

The following pro forma data may not be representative of the financial effects of the offering at the date on which the offering actually occurs, and should not be taken as indicative of future results of operations. Pro forma consolidated stockholders’ equity represents the difference between the stated amounts of our assets and liabilities. The pro forma stockholders’ equity is not intended to represent the fair market value of the shares of common stock and may be different than the amounts that would be available for distribution to stockholders if we liquidated. Moreover, pro forma stockholders’ equity per share does not give effect to the liquidation accounts to be established in the conversion or, in the unlikely event of a liquidation of Magyar Bank, to the tax effect of the recapture of the bad debt reserve. See “The Conversion and Offering – Liquidation Rights.”

 

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   At or for the Quarter Ended December 31, 2020
Based upon the Sale at $10.00 Per Share of:
 
   2,890,000
Shares
  3,400,000
Shares
  3,910,000
Shares
 
   (Dollars in thousands, except per share amounts) 

Gross proceeds of offering

  $28,900  $34,000  $39,100 

Market value of shares issued in the exchange

   23,564   27,722   31,881 
  

 

 

  

 

 

  

 

 

 

Pro forma market capitalization

  $52,464  $61,722  $70,981 
  

 

 

  

 

 

  

 

 

 

Gross proceeds of offering

  $28,900  $34,000  $39,100 

Expenses

   (1,500  (1,500  (1,535
  

 

 

  

 

 

  

 

 

 

Estimated net proceeds

   27,400   32,500   37,565 

Common stock purchased by employee stock ownership plan

   (2,312  (2,720  (3,128

Common stock purchased by stock-based benefit plans

   (1,156  (1,360  (1,564
  

 

 

  

 

 

  

 

 

 

Estimated net proceeds, as adjusted

  $23,932  $28,420  $32,873 
  

 

 

  

 

 

  

 

 

 

For the Quarter Ended December 31, 2020

    

Consolidated net earnings:

    

Historical

  $1,337  $1,337  $1,337 

Income on adjusted net proceeds

   15   18   21 

Income on mutual holding company asset contribution

   —     —     —   

Employee stock ownership plan (1)

   (14  (16  (18

Stock awards (2)

   (41  (48  (55

Stock options (3)

   (42  (50  (57
  

 

 

  

 

 

  

 

 

 

Pro forma net income

  $1,256  $1,241  $1,227 
  

 

 

  

 

 

  

 

 

 

Earnings per share (4):

    

Historical

  $0.27  $0.23  $0.20 

Income on adjusted net proceeds

   —     —     —   

Income on mutual holding company asset contribution

   —     —     —   

Employee stock ownership plan (1)

   —     —     —   

Stock awards (2)

   (0.01  (0.01  (0.01

Stock options (3)

   (0.01  (0.01  (0.01
  

 

 

  

 

 

  

 

 

 

Pro forma earnings per share (4)

  $0.25  $0.21  $0.18 
  

 

 

  

 

 

  

 

 

 

Offering price to pro forma net earnings per share

   10.00x   11.90x   13.89x 

Number of shares used in earnings per share calculations

   5,017,126   5,902,501   6,787,877 

At December 31, 2020

    

Stockholders’ equity:

    

Historical

  $58,201  $58,201  $58,201 

Estimated net proceeds

   27,400   32,500   37,565 

Equity increase from mutual holding company

   10   10   10 

Common stock acquired by employee stock ownership plan (1)

   (2,312  (2,720  (3,128

Common stock acquired by stock-based benefit plans (2)

   (1,156  (1,360  (1,564
  

 

 

  

 

 

  

 

 

 

Pro forma stockholders’ equity (5)

  $82,143  $86,631  $91,084 
  

 

 

  

 

 

  

 

 

 

Pro forma tangible stockholders’ equity (5)

  $82,143  $86,631  $91,084 
  

 

 

  

 

 

  

 

 

 

Stockholders’ equity per share (6):

    

Historical combined

  $11.10  $9.43  $8.19 

Estimated net proceeds

   5.22   5.27   5.29 

Equity increase from mutual holding company

   —     —     0.01 

Common stock acquired by employee stock ownership plan (1)

   (0.44  (0.44  (0.44

Common stock acquired by stock-based benefit plans (2)

   (0.22  (0.22  (0.22
  

 

 

  

 

 

  

 

 

 

Pro forma stockholders’ equity per share (5) (6)

  $15.66  $14.04  $12.83 
  

 

 

  

 

 

  

 

 

 

Pro forma tangible stockholders’ equity per share (5) (6)

  $15.66  $14.04  $12.83 
  

 

 

  

 

 

  

 

 

 

Offering price as percentage of pro forma stockholders’ equity per share

   63.86  71.23  77.94

Offering price as percentage of pro forma tangible stockholders’ equity per share

   63.86  71.23  77.94

Number of shares outstanding for pro forma book value per share calculations

   5,246,399   6,172,234   7,098,070 

 

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   At or for the Year Ended September 30, 2020
Based upon the Sale at $10.00 Per Share of:
 
   2,890,000
Shares
  3,400,000
Shares
  3,910,000
Shares
 
   (Dollars in thousands, except per share amounts) 

Gross proceeds of offering

  $28,900  $34,000  $39,100 

Market value of shares issued in the exchange

   23,564   27,722   31,881 
  

 

 

  

 

 

  

 

 

 

Pro forma market capitalization

  $52,464  $61,722  $70,981 
  

 

 

  

 

 

  

 

 

 

Gross proceeds of offering

  $28,900  $34,000  $39,100 

Expenses

   (1,500  (1,500  (1,535
  

 

 

  

 

 

  

 

 

 

Estimated net proceeds

   27,400   32,500   37,565 

Common stock purchased by employee stock ownership plan

   (2,312  (2,720  (3,128

Common stock purchased by stock-based benefit plans

   (1,156  (1,360  (1,564
  

 

 

  

 

 

  

 

 

 

Estimated net proceeds, as adjusted

  $23,932  $28,420  $32,873 
  

 

 

  

 

 

  

 

 

 
For the Year Ended September 30, 2020    

Consolidated net earnings:

    

Historical

  $2,190  $2,190  $2,190 

Income on adjusted net proceeds

   61   72   83 

Income on mutual holding company asset contribution

   —     —     —   

Employee stock ownership plan (1)

   (54  (64  (74

Stock awards (2)

   (163  (192  (221

Stock options (3)

   (170  (200  (230
  

 

 

  

 

 

  

 

 

 

Pro forma net income

  $1,864  $1,807  $1,750 
  

 

 

  

 

 

  

 

 

 

Earnings per share (4):

    

Historical

  $0.43  $0.37  $0.32 

Income on adjusted net proceeds

   0.01   0.01   0.01 

Income on mutual holding company asset contribution

   —     —     —   

Employee stock ownership plan (1)

   (0.01  (0.01  (0.01

Stock awards (2)

   (0.03  (0.03  (0.03

Stock options (3)

   (0.03  (0.03  (0.03
  

 

 

  

 

 

  

 

 

 

Pro forma earnings per share (4)

  $0.37  $0.31  $0.26 
  

 

 

  

 

 

  

 

 

 

Offering price to pro forma net earnings per share

   27.03x   32.26x   38.46x 

Number of shares used in earnings per share calculations

   5,022,906   5,909,301   6,795,697 
At September 30, 2020    

Stockholders’ equity:

    

Historical

  $56,850  $56,850  $56,850 

Estimated net proceeds

   27,400   32,500   37,565 

Equity increase from mutual holding company

   10   10   10 

Common stock acquired by employee stock ownership plan (1)

   (2,312  (2,720  (3,128

Common stock acquired by stock-based benefit plans (2)

   (1,156  (1,360  (1,564
  

 

 

  

 

 

  

 

 

 

Pro forma stockholders’ equity (5)

  $80,792  $85,280  $89,733 
  

 

 

  

 

 

  

 

 

 

Pro forma tangible stockholders’ equity (5)

  $80,792  $85,280  $89,733 
  

 

 

  

 

 

  

 

 

 

Stockholders’ equity per share (6):

    

Historical combined

  $(19.96 $(18.43 $(17.27

Estimated net proceeds

   5.22   5.27   5.29 

Equity increase from mutual holding company

   —     —     —   

Common stock acquired by employee stock ownership plan (1)

   (0.44  (0.44  (0.44

Common stock acquired by stock-based benefit plans (2)

   (0.22  (0.22  (0.22
  

 

 

  

 

 

  

 

 

 

Pro forma stockholders’ equity per share (5) (6)

  $15.40  $13.82  $12.64 
  

 

 

  

 

 

  

 

 

 

Pro forma tangible stockholders’ equity per share (5) (6)

  $15.40  $13.82  $12.64 
  

 

 

  

 

 

  

 

 

 

Offering price as percentage of pro forma stockholders’ equity per share

   64.94  72.36  79.11

Offering price as percentage of pro forma tangible stockholders’ equity per share

   64.94  72.36  79.11

Number of shares outstanding for pro forma book value per share calculations

   5,246,399   6,172,234   7,098,070 

 

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(1)

Assumes that 8% of the shares of common stock sold in the offering will be purchased by the employee stock ownership plan. For purposes of these tables, the funds used to acquire these shares are assumed to have been borrowed by the employee stock ownership plan from Magyar Bancorp. Magyar Bank intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the required principal and interest payments on the debt. Magyar Bank’s total annual payments on the employee stock ownership plan debt are based upon 30 equal annual installments of principal and interest. Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 718-40, “Compensation – Stock Compensation – Employee Stock Ownership Plans” (“ASC 718-40”) requires that an employer record compensation expense in an amount equal to the fair value of the shares committed to be released to employees. The pro forma adjustments assume that the employee stock ownership plan shares are allocated in equal annual installments based on the number of loan repayment installments assumed to be paid by Magyar Bank, the fair value of the common stock remains equal to the subscription price and the employee stock ownership plan expense reflects an effective combined federal and state tax rate of 29.5%. The unallocated employee stock ownership plan shares are reflected as a reduction of stockholders’ equity. No reinvestment is assumed on proceeds contributed to fund the employee stock ownership plan. The pro forma net income further assumes that 1,927, 2,267 and 2,607 shares were committed to be released during the quarter ended December 31, 2020 at the minimum, midpoint and maximum of the offering range, respectively, 7,707, 9,067 and 10,427 shares were committed to be released during the year ended September 30, 2020 at the minimum, midpoint and maximum of the offering range, respectively, and in accordance with ASC 718-40, only the employee stock ownership plan shares committed to be released during the period were considered outstanding for net income per share calculations.

(2)

Assumes that one or more stock-based benefit plans reserve an aggregate number of shares of common stock equal to 4% of the shares to be sold in the offering. Stockholder approval of the plans and purchases by the plans may not occur earlier than six months after the completion of the conversion. The shares may be acquired directly from Magyar Bancorp or through open market purchases. Shares in the stock-based benefit plans are assumed to vest over a period of five years. The funds to be used to purchase the shares will be provided by Magyar Bancorp. The tables assume that (i) the stock-based benefit plan acquires the shares through open market purchases at $10.00 per share, (ii) 5% of the amount contributed to the plan is amortized as an expense during the quarter ended December 31, 2020 (iii) 20% of the amount contributed to the plan is amortized as an expense during the year ended September 30, 2020, and (iv) the plan expense reflects an effective combined federal and state tax rate of 29.5%. Assuming stockholder approval of the stock-based benefit plans and that shares of common stock (equal to 4% of the shares sold in the offering) are awarded through the use of authorized but unissued shares of common stock, stockholders would have their ownership and voting interests diluted by approximately 2.16%.

(3)

Assumes that options are granted under one or more stock-based benefit plans to acquire an aggregate number of shares of common stock equal to 10% of the shares to be sold in the offering. Stockholder approval of the plans may not occur earlier than six months after the completion of the conversion. In calculating the pro forma effect of the stock-based benefit plans, it is assumed that the exercise price of the stock options and the trading price of the common stock at the date of grant were both $10.00 per share, the estimated grant-date fair value determined using the Black-Scholes option pricing model was $3.17 for each option and that the aggregate grant-date fair value of the stock options was amortized to expense on a straight-line basis over a five-year vesting period of the options using an effective combined federal and state tax rate of 29.5%. The actual expense will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used and the option pricing model ultimately adopted. Under the above assumptions, the adoption of the stock-based benefit plans will result in no additional shares under the treasury stock method for calculating earnings per share. There can be no assurance that the actual exercise price of the stock options will be equal to the $10.00 price per share. If a portion of the shares used to satisfy the exercise of options comes from authorized but unissued shares, our net income per share and stockholders’ equity per share would decrease. The issuance of authorized but unissued shares of common stock pursuant to the exercise of options under such plan would dilute stockholders’ ownership and voting interests by approximately 5.22%.

(4)

Per share figures include publicly held shares of Magyar Bancorp common stock that will be issued in exchange for shares of Magyar Bancorp common stock in the conversion. See “The Conversion and Offering – Share Exchange Ratio for Current Stockholders.” Net income per share computations are determined by taking the number of shares assumed to be sold in the offering and the number of new shares assumed to be issued in exchange for publicly held shares and, in accordance with ASC 718-40, subtracting the employee stock ownership plan shares that have not been committed for release during the period. See footnote 2, above. The number of shares of common stock actually sold and the corresponding number of exchange shares may be more or less than the assumed amounts.

(5)

The retained earnings of Magyar Bank will be substantially restricted after the conversion. See “Our Dividend Policy,” “The Conversion and Offering – Liquidation Rights” and “Supervision and Regulation.”

 

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(6)

Per share figures include publicly held shares of Magyar Bancorp common stock that will be issued in exchange for shares of Magyar Bancorp common stock in the conversion. Stockholders’ equity per share calculations are based upon the sum of (i) the number of shares assumed to be sold in the offering and (ii) shares to be issued in exchange for publicly held shares at the minimum, midpoint and maximum of the offering range, respectively. The exchange shares reflect an exchange ratio of 0.9027, 1.0620 and 1.2213 at the minimum, midpoint and maximum of the offering range, respectively. The number of shares actually sold, and the corresponding number of exchange shares may be more or less than the assumed amounts.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information at and for the fiscal years ended September 30, 2020 and 2019 is derived in part from the audited consolidated financial statements that appear elsewhere in this prospectus. The information at and for the quarters ended December 31, 2020 and 2019 is unaudited. You should read the information in this section in conjunction with the other business and financial information contained in this prospectus, including the consolidated financial statements and related notes of Magyar Bancorp provided elsewhere in this prospectus.

Overview

Magyar Bancorp is a Delaware-chartered stock holding company whose most significant business activity is ownership of 100% of the common stock of Magyar Bank. We are currently a mid-tier holding company with 55.1% of our common stock owned by Magyar Bancorp, MHC and the remaining 44.9% of our common stock owned by public stockholders. Upon consummation of the conversion and offering, Magyar Bancorp, MHC will cease to exist and 100% of our common stock will be owned by public stockholders and we will continue to own 100% of the common stock of Magyar Bank.

Magyar Bank’s principal business is attracting retail deposits from the general public and investing those deposits, together with funds generated from operations, principal repayments on loans and securities and borrowed funds, into one-to four-family residential mortgage loans, multifamily and commercial real estate mortgage loans, home equity loans and lines of credit, commercial business loans and construction loans. Our results of operations depend primarily on our net interest income which is the difference between the interest we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our net interest income is primarily affected by the market interest rate environment, the shape of the U.S. Treasury yield curve, the timing of the placement of interest-earning assets and interest-bearing liabilities, and the prepayment rate on our mortgage-related assets. Other factors that may affect our results of operations are general and local economic and competitive conditions, government policies and actions of regulatory authorities.

At December 31, 2020, we had total assets of $741.8 million, $598.5 million of net loans, $52.1 million of cash and cash equivalents, total deposits of $612.1 million and total stockholders’ equity of $58.2 million.

We had net income of $1.3 million for the quarter ended December 31, 2020. Net income decreased $806,000, or 26.9%, to $2.2 million for the year ended September 30, 2020 compared with net income of $3.0 million for the year ended September 30, 2019. The decrease in net income between the twelve-month periods was primarily attributable to higher provisions for loan losses, which increased $998,000 and lower other non-interest income, which decreased $420,000, both of which were primarily attributable to the COVID-19 pandemic.

Throughout 2021, we expect to continue increasing our commercial real estate and commercial business loans while managing non-interest expenses in order to increase profitability.

 

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Impact of COVID-19 Outbreak

The extraordinary impact of the COVID-19 pandemic has created an unprecedented environment for consumers and businesses alike. To protect our employees and customers from potential exposure to the virus, all Magyar Bank lobbies continue to observe best practice protocols to limit exposure and/or spread of the virus.

To assist our loan customers, Magyar Bank has offered loan payment deferrals to borrowers unable to make their contractual payments due to COVID-19. Deferral requests are considered on a case-by-case basis and are initially approved for a three-month period for principal and interest payments or for interest-only payments depending on the borrower’s circumstances. An additional three-month period is available for businesses that remain unable to operate and for consumers unable to make their mortgage or home equity payments due to COVID-19. Additional deferrals will be considered for businesses experiencing a prolonged impact from the COVID-19 pandemic, such as the accommodation and food service industries. At December 31, 2020, Magyar Bank had 33 loans totaling $23.2 million to businesses in the accommodations and food services industries. Magyar Bank’s loan portfolio does not have a significant exposure to the travel or entertainment industry.

Through December 31, 2020, we had modified 284 loans aggregating $150.9 million for the deferral of principal and/or interest payments. Of these loans, at December 31, 2020, 258 loans aggregating $134.9 million had resumed making their contractual loan payments, 15 loans totaling $7.2 million had paid off (including their deferred payments), nine loans totaling $7.3 million were currently deferred, and two loans totaling $1.5 million were past their deferral period and delinquent. Of the two delinquent loans, one commercial business loan totaling $1.4 million was delinquent more than 90 days at December 31, 2020 and one residential loan totaling $113,000 was delinquent 30 days at December 31, 2020. Details with respect to loan modifications as of December 31, 2020 are as follows:

 

Loan Type

  Number of
Loans
   Balance   Weighted Average
Interest Rate
 
   (Dollars in thousands) 

One- to four-family residential real estate (1)

   89   $23,184    4.06

Commercial real estate

   139    109,953    4.72

Construction

   4    2,630    3.77

Home equity lines of credit

   8    1,238    4.24

Commercial business

   29    6,738    4.06
  

 

 

   

 

 

   

 

 

 

Total

   269   $143,743    4.56
  

 

 

   

 

 

   

 

 

 

 

(1)

Includes home equity loans.

Magyar Bank participated in the PPP to provide liquidity using the SBA platform to small businesses and self-employed individuals to maintain their staff and operations through the COVID-19 pandemic. This liquidity is in the form of a loan, 100% guaranteed by the SBA, that is forgivable provided the funds are used on qualifying payroll costs, and to a lesser extent, rent, utilities and interest on qualifying mortgage payments. The loans bear a fixed rate of 1.0% and loan payments are deferred for the first 10 months following the covered period, which is eight to twenty-four weeks following the date the loan is made. We originated 350 “First Draw” loans totaling $56.0 million through December 31, 2020 for which we received $2.0 million in origination fees from the SBA. These fees are being amortized over the expected life of the loans, which is two years for loans originated prior to June 4, 2020 and five years for loans originated June 5, 2020 or later. Through December 31, 2020, 48 loans totaling $10.0 million had been forgiven by the SBA.

 

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On December 27, 2020 the Economic Aid Act was signed into law. The Economic Aid Act allocated an additional $284.5 billion in funds for the PPP, expanded the eligible expenditures for which a business could use PPP proceeds, and provided for a simplified forgiveness application for PPP loans of $150,000 or less. The Economic Aid Act also provided the SBA with the authority to guarantee Second Draw PPP loans, under generally the same terms and conditions available under the First Draw program, through March 31, 2021. In order to qualify for a Second Draw PPP loan, an applicant must have experienced a revenue reduction of at least 25% in 2020 relative to 2019. We are participating in the second round of PPP and expect to provide Second Draw PPP loans to our eligible customers.

The Federal Reserve Board created the PPPLF to facilitate lending by eligible financial institutions to small businesses under the PPP. Under the PPPLF, the Federal Reserve Bank of New York provided advances with a fixed interest rate of 0.35% to Magyar Bank on a non-recourse basis, taking PPP loans as collateral. In addition, the FDIC allows Magyar Bank to neutralize the effect of PPP loans financed under the PPPLF on Tier 1 leverage capital ratios. The Bank funded its PPP loans with $36.9 million in PPPLF, $29.8 million of which was outstanding at December 31, 2020.

The health of the banking industry is highly correlated with that of the economy. The temporary and/or partial closures of non-essential businesses in our local and national economies increases the likelihood of recession, which typically results in an increased level of credit losses. Accordingly, our provisions for loan losses have increased and will be closely monitored throughout the pandemic. In addition to utilizing quantitative loss factors, we consider qualitative factors, such as changes in underwriting policies, current economic conditions, delinquency statistics, the adequacy of the underlying collateral, and the financial strength of the borrower. The impact of the COVID-19 pandemic on the performance of our loan portfolio in future quarters is unknown, however all of these factors are likely to be affected by the COVID-19 pandemic.

Business Strategy

Our current business strategy consists of the following:

 

  

Continue to grow our loan portfolio prudently and further diversify our loan portfolio. Our loan portfolio has increased to $607.0 million at December 31, 2020 compared to $523.0 million at September 30, 2019 and $512.5 million at September 30, 2018. In recent years, consistent with our business strategy, our biggest areas of loan growth have been in commercial real estate, which increased $41.0 million, or 18.7%, from September 30, 2018 to December 31, 2020, and in commercial business loans, which increased $37.9 million, or 71.1%, from September 30, 2018 to December 31, 2020. Included in the December 31, 2020 balance of commercial business loans was $46.0 million of loans originated through the PPP. We intend to continue to grow our loan portfolio, with a focus primarily on commercial real estate and to a lesser extent commercial business lending. Although we will continue to emphasize the origination of one- to four-family residential mortgage loans, we expect our continued emphasis on commercial real estate and commercial business lending will result in the continued diversification of our loan portfolio with a lower concentration in one- to four-family residential real estate loans.

 

  

Continue to support our customers and our local community. During the COVID-19 pandemic, as we have done during prior economic downturns, we are taking actions to support our customers and our local communities. For example, during the year ended September 30, 2020, we originated $56.0 million of small business loans

 

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under the PPP, created by the CARES Act, which was signed into law in March 2020. As a result of our participation in the PPP, in addition to the loans originated, at December 31, 2020, we had 114 new business customers through the PPP with an aggregate balance of $14.0 million in core deposits and we believe we will retain a significant number of these customers. Furthermore, in response to the COVID-19 pandemic, we have implemented protocols and processes to help protect our employees, customers and communities, including leveraging our business continuity plans and capabilities that include critical operations teams being divided and dispersed to separate locations and, when possible, having employees work from home, while remaining open in all branch locations. In addition, we participated in the Federal Home Loan Bank of New York’s Covid-19 Small Business Recovery Grant Program and distributed $100,000 to local business and non-profits in our community. Our commitment to the communities we serve has resulted in Magyar Bank receiving rating of “Outstanding” from the FDIC for our compliance with the Community Reinvestment Act on five consecutive examinations by the FDIC. An “Outstanding” rating is considered a benchmark for a bank’s level of care and concern for the communities it serves. Additionally, each year we support over 100 organizations through corporate donations and employees volunteering their time. Prior to the COVID-19 pandemic, our employees frequently attended events around the community, from serving meals at local soup kitchens, to providing financial education seminars and preparing first-time homebuyers in achieving homeownership. We still engage in these types of activities in a virtual format, and once the restrictions are lifted, we expect to continue to be an active civic leader in our communities through these types of engagements.

 

  

Focus on Technological Innovation. In recent years, we have increased our focus on utilizing technology to provide our customers with the most convenient and secure delivery platforms as well as improving our efficiency. We believe that recent technological improvements to our online banking and mobile application services were a critical element in allowing our customers to migrate to these delivery channels during the COVID-19 pandemic, and enabling them to safely conduct most of their banking transactions remotely. Our mobile applications allow customers to make deposits with their phones, as well as providing remote capture deposit functions for our business customers. Additionally, the addition of the Zelle online person-to-person payment feature has facilitated our customers’ ability to pay their friends and family members through a secure virtual platform. We intend to continue to utilize technology to improve our customers’ banking experience and improve our efficiency. Looking ahead, technological improvements we are researching include cash recyclers for branches to reduce the time it takes to complete transactions in the branch, an online deposit application that would allow customers to open accounts remotely, and a mobile application for business accounts. We believe that our current and prospective technological enhancements will not only improve our customers’ banking experience but also will improve our efficiency and thereby ultimately reduce operating expenses.

 

  

Continue to grow our core deposits. We consider our core deposits to include demand accounts, savings accounts, negotiable orders of withdrawal (NOW) and money market accounts. We will continue our efforts to increase our core deposits to provide a stable source of funds to support loan growth at costs consistent with improving our interest rate spread and net interest margin. Core deposits also help us maintain loan-to-deposit ratios at levels consistent with regulatory expectations.

 

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Such deposits totaled $493.3 million, or 80.6% of total deposits, as of December 31, 2020, compared to $399.8 million, or 75.4% of total deposits, as of September 30, 2018. Core deposits have also increased as we have held the proceeds of PPP loans originated to customers and deposited with Magyar Bank, including $14.0 million of deposits from 114 new customers of Magyar Bank at December 31, 2020 as a result of the PPP. While we expect some of these deposits to decrease as businesses utilize the PPP loan proceeds, we will focus on retaining as many of these new customer relationships as possible. We intend to continue to emphasize the aggregation of core deposits by incentivizing lenders to increase loan customer deposits and continuing to provide innovative products to our customers.

 

  

Continue to manage credit risk to maintain a low level of non-performing assets. We believe strong asset quality remains a key to our long-term financial success and is important in supporting our intended loan growth. Managing credit risk also reduces the provisions we require to maintain our allowance for loan losses, which enables us to use additional funds to support sales and marketing initiatives as well as invest in information technology systems customarily associated with a larger financial institution. Our total non-performing assets to total assets ratio was 1.63% at December 31, 2020 and 2.29% at September 30, 2019. Our strategy for credit risk management continues to focus on having an experienced team of credit professionals, well-defined policies and procedures, appropriate loan underwriting criteria and active credit monitoring. This includes enhanced loan monitoring of higher risk portfolio segments, higher risk individual loans and larger relationships within the portfolio, and more frequent loan grade review. We will also continue more frequent communication with large borrowers and borrowers within pandemic-affected segments, such as the hospitality and restaurant industries, and we will further continue obtaining interim financial statements, when available, and monitoring past due loans, as well as loans that were deferred as a result of COVID-19 hardships and that are required to resume normal monthly payments. Furthermore, given the uncertainty surrounding the length and severity of the COVID-19 pandemic, management has established and will continue to use enhanced underwriting criteria for all loan types, with a particular focus on portfolio segments identified as having elevated risk.

Summary of Significant Accounting Policies

The discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements, which are prepared in conformity with U.S. GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be significant accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.

 

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The following represent our significant accounting policies:

Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover credit losses in the loan portfolio both probable and reasonably estimable at the balance sheet date. The allowance is established through the provision for loan losses which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of our most critical. Due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses, the methodology for determining the allowance for loan losses is considered a critical accounting policy by management.

As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans and discounted cash flow valuations of properties are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisals and discounted cash flow valuations are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly affect the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals and discounted cash flow valuations are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans.

Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. We consider a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates by management that may be susceptible to significant change based on changes in economic and real estate market conditions.

The evaluation has a specific and general component. The specific component relates to loans that are delinquent or otherwise identified as impaired through the application of our loan review process and our loan grading system. All such loans are evaluated individually, with principal consideration given to the value of the collateral securing the loan and discounted cash flows. Specific impairment allowances are established as required by this analysis. The general component is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general component of the allowance for loan losses.

Actual loan losses may be significantly greater than the allowances we have established, which could have a material negative effect on our financial results.

Other Real Estate Owned. Real estate acquired through foreclosure, or a deed-in-lieu of foreclosure, is recorded at fair value less estimated selling costs at the date of acquisition or transfer, and subsequently at the lower of its new cost or fair value less estimated selling costs. Adjustments to the carrying value at the date of acquisition or transfer are charged to the allowance for loan losses. The carrying value of the individual properties is subsequently adjusted to the extent it exceeds estimated fair value less estimated selling costs, at which time a provision for losses on such real estate is charged to operations.

 

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Appraisals are critical in determining the fair value of the other real estate owned amount. Assumptions for appraisals are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly affect the valuation of a property. The assumptions supporting such appraisals are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable.

Investment Securities. If the fair value of a security is less than its amortized cost, the security is deemed to be impaired. Management evaluates all securities with unrealized losses quarterly to determine if such impairments are “temporary” or “other-than-temporary” in accordance with applicable accounting guidance. We account for temporary impairments based upon security classification as either available-for-sale, held-to-maturity, or trading. Temporary impairments on “available-for-sale” securities are recognized, on a tax-effected basis, through accumulated other comprehensive income (“AOCI”) with offsetting entries adjusting the carrying value of the security and the balance of deferred taxes. Conversely, we do not adjust the carrying value of “held-to-maturity” securities for temporary impairments, although information concerning the amount and duration of impairments on held to maturity securities is generally disclosed in periodic financial statements. The carrying value of securities held in a trading portfolio is adjusted to their fair value through earnings on a daily basis. However, we maintained no securities in trading portfolios at or during the quarter ended December 31, 2020 or the fiscal year ended September 30, 2020.

We account for other-than-temporary impairments based upon several considerations. First, other-than-temporary impairments on securities that we have decided to sell as of the close of a fiscal period, or will, more likely than not, be required to sell prior to the full recovery of their fair value to a level equal to their amortized cost, are recognized in operations. If neither of these criteria apply, then the other-than-temporary impairment is separated into credit-related and noncredit-related components. The credit-related impairment generally represents the amount by which the present value of the cash flows that are expected to be collected on an other-than-temporarily impaired security fall below its amortized cost while the noncredit-related component represents the remaining portion of the impairment not otherwise designated as credit-related. We recognize credit-related, other-than-temporary impairments in earnings, while noncredit-related, other-than-temporary impairments on debt securities are recognized, net of deferred taxes, in AOCI. Management did not account for any other-than-temporary impairments at or during the quarter ended December 31, 2020 or the fiscal year ended September 30, 2020.

Fair Value. We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Our securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets or liabilities on a non-recurring basis, such as held-to-maturity securities, mortgage servicing rights, loans receivable and other real estate owned. These non-recurring fair value adjustments involve the application of lower-of-cost-or-market accounting or write-downs of individual assets.

In accordance with ASC 820, Fair Value Measurements and Disclosures, we group our assets and liabilities at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. We base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Deferred Income Taxes. We record income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities: (i) are recognized for the expected future tax

 

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consequences of events that have been recognized in the financial statements or tax returns; (ii) are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases; and (iii) are measured using enacted tax rates expected to apply in the years when those temporary differences are expected to be recovered or settled.

Where applicable, deferred tax assets are reduced by a valuation allowance for any portions determined not likely to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period of enactment. The valuation allowance is adjusted, by a charge or credit to income tax expense, as changes in facts and circumstances warrant.

Comparison of Financial Condition at December 31, 2020 and September 30, 2019

Total Assets. Total assets decreased $12.2 million, or 1.6%, to $741.8 million at December 31, 2020 from $754.0 million at September 30, 2020. The decrease was primarily attributable to decreases in cash and interest-earning deposits and loans receivable, net of allowance for loan losses, partially offset by an increase in balances of investment securities.

Cash and Cash Equivalents. Cash and interest-earning deposits with banks decreased $9.7 million, or 15.6%, to $52.1 million at December 31, 2020 from $61.7 million at September 30, 2020, The decrease resulted primarily from the repayment of maturing borrowed funds and brokered deposits during the three months ended December 31, 2020.

Total Loans. Total loans receivable decreased $4.2 million, or 0.7%, to $607.0 million at December 31, 2020 from $611.2 million at September 30, 2020. At December 31, 2020 our loans were comprised of the following: $260.3 million, or 42.9% of our total loan portfolio, in commercial real estate loans; $208.4 million, or 34.3% of our total loan portfolio, in one- to four-family residential mortgage loans; $91.2 million, or 15.0% of our total loan portfolio, in commercial business loans; $23.4 million, or 3.9% of our total loan portfolio, in construction loans; $19.8 million, or 3.3% of our total loan portfolio, in home equity lines of credit and $3.9 million, or 0.6% of our total loan portfolio, in other loans. Included with the commercial business loans were $46.0 million in PPP loans. The decrease in total loans receivable at December 31, 2020 occurred in commercial business loans, which decreased $9.8 million (PPP loans declined $10.0 million), construction loans, which decreased $4.8 million, one- to four-family residential mortgage loans (including home equity lines of credit), which decreased $1.5 million, and other loans, which decreased $320,000. Partially offsetting these decreases were commercial real estate loans, which increased $12.2 million during the quarter.

Total non-performing loans increased $309,000, or 3.2%, to $10.0 million at December 31, 2020 from $9.7 million at September 30, 2020. The increase was attributable to the addition of four loans totaling $1.4 million, partially offset by three payoffs totaling $830,000 and the restructure of one loan totaling $218,000. Due to the COVID-19 pandemic, foreclosures of collateral securing one- to four-family residential mortgage loans have been temporarily suspended while the foreclosure proceedings of commercial real estate are expected to slow significantly as court hearings have been postponed until further notice.

The ratio of non-performing loans to total loans increased to 1.65% at December 31, 2020 from 1.59% at September 30, 2020. At December 31, 2020, included in the non-performing loan totals were nine commercial loans totaling $3.1 million, two construction loan totaling $4.6 million, two commercial business loans totaling $1.4 million and three one- to four-family residential mortgage loans totaling $944,000. During the quarter ended December 31, 2020, there were no charge-offs and there were $90,000 in recoveries of previously charged-off non-performing loans.

 

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Allowance for loan losses increased to $7.1 million at December 31, 2020 from $6.4 million at September 30, 2020, an increase of $730,000. The increase was attributable to $640,000 in provision for loan losses and $90,000 in recoveries from loans previously charged off. The increased provision for loan losses, compared to a provision of $210,000 for the quarter ended December 31, 2019, resulted from higher adjustments to our historical loan losses due to the prolonged economic impact of the COVID-19 pandemic on our consumer and business loan portfolios. The allowance for loan losses as a percentage of non-performing loans increased to 71.0% at December 31, 2020 compared to 65.8% at September 30, 2020. At December 31, 2020, our allowance for loan losses as a percentage of total loans was 1.17% compared to 1.05% at September 30, 2020.

Future increases in the allowance for loan losses may be necessary based on the growth of the loan portfolio, the change in composition of the loan portfolio, possible future increases in non-performing loans and charge-offs, and the possible deterioration of the current economic environment due to the COVID-19 pandemic.

Investment Securities. Investment securities increased $2.3 million, or 5.1%, to $47.3 million at December 31, 2020 from $45.0 million at September 30, 2020. The increase resulted primarily from the purchase of three mortgage-backed securities totaling $6.7 million and one callable U.S. government-sponsored enterprise bond totaling $2.0 million during the three months ended December 31, 2020, offset, in part, by payments from mortgage-backed securities and bond calls totaling $6.3 million during the quarter. There were no sales of investment securities during the quarter ended December 31, 2020.

Investment securities at December 31, 2020 consisted of $32.5 million in mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises, $11.5 million in U.S. government-sponsored enterprise debt securities, $3.0 million in corporate notes, and $255,000 in “private-label” mortgage-backed securities. There were no other-than-temporary-impairment charges for investment securities for the three months ended December 31, 2020.

Bank-Owned Life Insurance. The cash surrender value of life insurance held for directors and executive officers of Magyar Bank was $14.0 million at December 31, 2020 and at September 30, 2020. During the three months ended December 31, 2020, we did not purchase any new bank-owned life insurance policies.

Other Real Estate Owned. Other real estate owned decreased $522,000, or 20.1%, to $2.1 million at December 31, 2020 from $2.6 million at September 30, 2020. During the quarter ended December 31, 2020, we sold one property totaling $296,000 for a $1,000 gain, established a $150,000 valuation allowance against one property, and received non-refundable deposits totaling $75,000 during the quarter with respect to a property. We are determining the proper course of action for our remaining other real estate owned, which may include holding the properties until the real estate market further improves, leasing properties to offset carrying costs and selling the properties.

Deposits. Total deposits decreased $6.3 million, or 1.0%, to $612.1 million at December 31, 2020 from $618.3 million at September 30, 2020. The outflow in deposits occurred in money market accounts, which decreased $7.8 million, or 4.2%, to $180.2 million, in certificates of deposit (including individual retirement accounts), which decreased $7.6 million, or 6.0%, to $118.8 million and in non-interest-bearing checking accounts, which decreased $3.4 million, or 2.1%, to $160.2 million, at December 31, 2020. Partially offsetting these decreases were increases in interest-bearing checking accounts (NOW), which increased $11.5 million, or 17.6%, to $77.0 million and in savings accounts, which increased $1.0 million, or 1.3%, to $75.9 million.

 

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Brokered certificates of deposit decreased $5.0 million to $9.4 million at December 31, 2020 from $4.4 million at September 30, 2020. The decrease resulted from a $5.0 million brokered certificate of deposit which matured and was not replaced during the three months ended December 31, 2020.

Borrowings. Borrowings decreased $7.1 million, or 10.6%, to $60.3 million at December 31, 2020 from $67.4 million at September 30, 2020. The decrease resulted from the repayment of $7.1 million in PPPLF advances during the quarter as the PPP loans securing the advances were forgiven. Federal Home Loan Bank of New York (“FHLBNY”) advances were unchanged at $30.5 million at both December 31, 2020 and September 30, 2020.

Stockholders’ Equity. Stockholders’ equity increased $1.4 million, or 2.4%, to $58.2 million at December 31, 2020 from $56.9 million at September 30, 2020. The increase in stockholders’ equity resulted primarily from net income of $1.3 million during the quarter ended December 31, 2020. Book value per share of our common stock increased to $10.02 at December 31, 2020 from $9.78 at September 30, 2020.

We did not repurchase shares of our common stock during the three months ended December 31, 2020. Through December 31, 2020, we have repurchased 91,000 shares of our common stock at an average price of $8.41 pursuant to the second stock repurchase plan, which has reduced outstanding shares to 5,810,746.

Average Balance Sheets

The following tables set forth certain information regarding our financial condition and net interest income for the periods indicated. For the quarters ended December 31, 2020, the table presents 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 periods presented. Interest income includes fees that we consider adjustments to yields.

 

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   For the Three Months Ended December 31, 
   2020  2019 
   Average
Balance
  Interest
Income/
Expense
   Yield/Cost
(Annualized)
  Average
Balance
  Interest
Income/
Expense
   Yield/Cost
(Annualized)
 
   (Dollars In Thousands) 

Interest-earning assets:

         

Interest-earning deposits

  $54,463  $20    0.14 $18,882  $71    1.50

Loans receivable, net

   606,109   6,751    4.42   522,545   6,398    4.86 

Securities

         

Taxable

   47,624   205    1.71   47,361   266    2.23 

FHLB of NY stock

   1,981   25    5.05   2,143   37    6.86 
  

 

 

  

 

 

    

 

 

  

 

 

   

Total interest-earning assets

   710,177   7,001    3.91   590,931   6,772    4.55 

Noninterest-earning assets

   43,502      47,096    
  

 

 

     

 

 

    

Total assets

  $753,679     $638,027    
  

 

 

     

 

 

    

Interest-bearing liabilities:

         

Savings accounts (1)

  $75,464  $47    0.24 $70,193  $114    0.64

NOW accounts (2)

   256,876   262    0.40   234,722   734    1.24 

Time deposit (3)

   120,898   456    1.50   122,560   598    1.93 
  

 

 

  

 

 

    

 

 

  

 

 

   

Total interest-bearing deposits

   453,238   765    0.67   427,475   1,446    1.34 

Borrowings

   65,387   191    1.16   34,447   196    2.26 
  

 

 

  

 

 

    

 

 

  

 

 

   

Total interest-bearing liabilities

   518,625   956    0.73   461,922   1,642    1.41 

Noninterest-bearing liabilities

   176,867      120,885    
  

 

 

     

 

 

    

Total liabilities

   695,492      582,807    

Retained earnings

   58,187      55,220    
  

 

 

     

 

 

    

Total liabilities and retained earnings

  $753,679     $638,027    
  

 

 

     

 

 

    

Net interest and dividend income

   $6,045     $5,130   
   

 

 

     

 

 

   

Interest rate spread

      3.18     3.14
     

 

 

     

 

 

 

Net interest-earning assets

  $191,552     $129,009    
  

 

 

     

 

 

    

Net interest margin (4)

      3.38     3.44
     

 

 

     

 

 

 

Average interest-earning assets to average interest-bearing liabilities

   136.93     127.93   
  

 

 

     

 

 

    

 

(1)

Includes passbook savings, money market passbook and club accounts.

(2)

Includes interest-bearing checking and money market accounts.

(3)

Includes certificates of deposits and individual retirement accounts.

(4)

Calculated as annualized net interest income divided by average total interest-earning assets.

 

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   For the Year Ended September 30, 
   2020  2019  2018 
   Average
Balance
  Interest
Income/
Expense
   Yield/Cost
(Annualized)
  Average
Balance
  Interest
Income/
Expense
   Yield/Cost
(Annualized)
  Average
Balance
  Interest
Income/
Expense
   Yield/Cost
(Annualized)
 
   (Dollars In Thousands)           

Interest-earning assets:

             

Interest-earning deposits

  $35,612  $208    0.58 $24,525  $510    2.08 $15,606  $228    1.46

Loans receivable, net

   562,209   25,626    4.55   516,076   25,154    4.87   487,133   22,604    4.64 

Securities

             

Taxable

   45,308   965    2.13   55,133   1,290    2.34   59,579   1,384    2.32 

FHLB of NY stock

   2,018   128    6.33   2,162   149    6.88   2,218   134    6.02 
  

 

 

  

 

 

    

 

 

  

 

 

    

 

 

  

 

 

   

Total interest-earning assets

   645,147   26,927    4.16   597,896   27,103    4.53   564,536   24,350    4.31 

Noninterest-earning assets

   46,839      42,566      45,288    
  

 

 

     

 

 

     

 

 

    

Total assets

  $691,986     $640,462     $609,824    
  

 

 

     

 

 

     

 

 

    

Interest-bearing liabilities:

             

Savings accounts (1)

  $72,290  $347    0.48 $74,497  $493    0.66 $95,892  $658    0.69

NOW accounts (2)

   241,508   2,105    0.87   234,953   3,231    1.38   190,618   1,518    0.80 

Time deposit (3)

   127,576   2,318    1.81   121,706   2,197    1.81   123,010   1,720    1.40 
  

 

 

  

 

 

    

 

 

  

 

 

    

 

 

  

 

 

   

Total interest-bearing deposits

   441,374   4,770    1.08   431,156   5,921    1.37   409,520   3,896    0.95 

Borrowings

   45,647   743    1.62   35,175   789    2.24   36,710   753    2.05 
  

 

 

  

 

 

    

 

 

  

 

 

    

 

 

  

 

 

   

Total interest-bearing liabilities

   487,021   5,513    1.13   466,331   6,710    1.44   446,230   4,649    1.04 

Noninterest-bearing liabilities

   148,080      119,384      112,191    
  

 

 

     

 

 

     

 

 

    

Total liabilities

   635,101      585,715      558,421    

Retained earnings

   56,885      54,747      51,403    
  

 

 

     

 

 

     

 

 

    

Total liabilities and retained earnings

  $691,986     $640,46     $609,824    
  

 

 

     

 

 

     

 

 

    

Net interest and dividend income

   $21,414     $20,393     $19,701   
   

 

 

     

 

 

     

 

 

   

Interest rate spread

      3.03     3.09     3.27
     

 

 

     

 

 

     

 

 

 

Net interest-earning assets

  $158,126     $131,565     $118,306    
  

 

 

     

 

 

     

 

 

    

Net interest margin (4)

      3.31     3.41     3.49
     

 

 

     

 

 

     

 

 

 

Average interest-earning assets to average interest-bearing liabilities

   132.47     128.21     126.51   
  

 

 

     

 

 

     

 

 

    

 

(1)

Includes passbook savings, money market passbook and club accounts.

(2)

Includes interest-bearing checking and money market accounts.

(3)

Includes certificates of deposits and individual retirement accounts.

(4)

Calculated as annualized net interest income divided by average total interest-earning assets.

 

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Rate/Volume Analysis

Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by average volume). The volume column shows the effects attributable to changes in volume (changes in average volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

 

   For the Quarter Ended December 31,  For the Year Ended September 30, 
   2020 vs. 2019  2020 vs. 2019  2019 vs. 2018 
   Increase (decrease)
due to
  

 

  Increase (decrease)
due to
  

 

  Increase (decrease)
due to
  

 

 
   Volume  Rate  Net  Volume  Rate  Net  Volume  Rate  Net 
   (In Thousands) 

Interest-earning assets:

          

Interest-earning deposits

  $312  $(363 $(51 $167  $(469 $(302 $162  $120  $282 

Loans

   3,162   (2,809  353   2,176   (1,704  472   1,390   1,160   2,550 

Securities

          

Taxable

   10   (71  (61  (216  (109  (325  (106  12   (94

FHLB of NY stock

   (3  (9  (12  (10  (11  (21  (3  18   15 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total interest-earning assets

   3,481   (3,252  229   2,117   (2,293  (176  1,443   1,310   2,753 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Interest-bearing liabilities:

          

Savings accounts (1)

   53   (120  (67  (14  (132  (146  (138  (27  (165

NOW accounts (2)

   425   (897  (472  89   (1,215  (1,126  416   1,297   1,713 

Time deposit (3)

   (8  (134  (142  121   0   121   (19  496   477 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total interest-bearing deposits

   469   (1,150  (681  196   (1,347  (1,151  259   1,766   2,025 

Borrowings

   488   (493  (5  202   (248  (46  (32  68   36 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total interest-bearing liabilities

   958   (1,644  (686  398   (1,595  (1,197  227   1,834   2,061 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Increase in net interest income

  $2,524  $(1,609 $915 $1,719  $(698 $1,021  $1,216  $(524 $692 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1)

Includes passbook savings, money market passbook and club accounts.

(2)

Includes interest-bearing checking and money market accounts.

(3)

Includes certificates of deposits and individual retirement accounts.

 

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Comparison of Operating Results for the Three Months Ended December 31, 2020 and 2019

Net Income. Net income increased $784,000, or 141.8%, to $1.3 million for the three months ended December 31, 2020 compared to net income of $553,000 for the three months ended December 31, 2019. The increase resulted from higher net interest and dividend income and other income, partially offset by higher provisions for loan losses and other expenses.

Net Interest and Dividend Income. Net interest and dividend income increased $915,000, or 17.8%, to $6.0 million for the three months ended December 31, 2020 from $5.1 million for the three months ended December 31, 2019.

An increase of $119.2 million in average total interest-earning assets as well as a $56.0 million increase in average total noninterest-bearing liabilities more than offset a six basis point decrease in our net interest margin to 3.38% for the three months ended December 31, 2020 compared to 3.44% for the three months ended December 31, 2019. The lower net interest margin in the 2020 quarter reflected the lower market interest rate environment period to period and the origination of $56.0 million in PPP loans earning 1.0% during the 2020 quarter.

The yield on interest-earning assets decreased 64 basis points to 3.91% for the three months ended December 31, 2020 from 4.55% for the three months ended December 31, 2019 due to lower yields on loans receivable, which decreased 44 basis points to 4.42% for the three months ended December 31, 2020 from 4.86% for the three months ended December 31, 2019. This decrease in yield was offset by higher average balances of loans receivable, net of allowance for loan losses, which increased $83.6 million between periods. The cost of interest-bearing liabilities decreased 68 basis points to 0.73% for the three months ended December 31, 2020 from 1.41% for the three months ended December 31, 2019, reflecting lower market interest rates.

Interest and Dividend Income. Interest and dividend income increased $229,000, or 3.4%, to $7.0 million for the three months ended December 31, 2020 compared to $6.8 million for the three months ended December 31, 2019. The increase in interest and dividend income resulted primarily from an increase of $119.2 million in average balances of interest-earning assets, which increased to $710.2 million for the quarter ended December 31, 2020 from $590.9 million for the quarter ended December 31, 2019. Loans receivable increased $83.6 million, or 16.0%, and interest-earning deposits increased $35.6 million, or 188.4%, when comparing the 2020 and 2019 quarters. The increase in loans receivable was partially attributable to the origination of $56.0 million in PPP loans during 2020, of which $46.0 million were outstanding at December 31, 2020. The increase in average balances of loans receivable was offset in part by a decrease of 64 basis points on the yield on interest-earning assets to 3.91% for the three months ended December 31, 2020 from 4.55% for the three months ended December 31, 2019. The decrease in average yield resulted primarily from lower market interest rates during the 2020 quarter versus the 2019 quarter, and the CARES Act-mandated 1.0% interest rate on the PPP loans included in the balance of average loans during the quarter ended December 31, 2020.

Interest earned on investment securities, including interest-earning deposits, and excluding FHLB stock, decreased $113,000, or 33.4%, to $225,000 for the quarter ended December 31, 2020 from $338,000 the prior year quarter. The decrease resulted primarily from a 115 basis points decrease in average yield on investment securities and interest-earning deposits, to 0.87% for the three months ended December 31, 2020 from 2.02% for the three months ended December 31, 2019. The decrease in yield on interest-earning deposits reflected the lower interest rates paid on reserves by the Federal Reserve Bank as well as lower market interest rates on investment securities between the comparable periods.

Interest Expense Interest expense decreased $686,000, or 41.8%, to $956,000 for the three months ended December 31, 2020 compared with $1.6 million for the three months ended December 31, 2019. Although the average balance of interest-bearing liabilities increased $56.7 million, or 12.3%, to $518.6 million from $461.9 million between the two periods, the cost of such liabilities decreased 68 basis points to 0.73% for the three months ended December 31, 2020 compared with 1.41% for the prior year period.

 

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The average balance of interest-bearing deposits increased $25.8 million to $453.2 million for the quarter ended December 31, 2020 from $427.5 million for the quarter ended December 31, 2019, while the average cost of such deposits decreased 67 basis points to 0.67% from 1.34% between the two periods. As a result, interest paid on interest-bearing deposits decreased $681,000 to $765,000 for the three months ended December 31, 2020 compared with $1.4 million for the three months ended December 31, 2019.

Interest paid on borrowings decreased $5,000, or 2.6%, to $191,000 for the three months ended December 31, 2020 from $196,000 for the prior year period. The decrease resulted from a decrease of 110 basis points in the average cost of borrowings to 1.16% for the quarter ended December 31, 2020 from 2.26% for the quarter ended December 31, 2019, offset in part by an increase of $30.9 million in the average balance of such borrowings to $65.4 million for the quarter ended December 31, 2020 from $34.4 million for the quarter ended December 31, 2019. Lower market interest rates on money market and savings accounts contributed to the lower average cost of interest-bearing deposits while PPPLF advances contributed to the lower average cost of borrowings.

Provision for Loan Losses. We establish provisions for loan losses, which are charged to earnings, at a level necessary to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, peer group information and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events occur.

After an evaluation of these factors, management recorded a provision of $640,000 for the three months ended December 31, 2020 compared to a provision of $210,000 for the three months ended December 31, 2019. The increased provision for loan losses resulted from higher adjustments to our historical loan losses due to the prolonged economic impact of the COVID-19 pandemic on our consumer and business loan portfolios. In addition to the provisions, we recorded $90,000 in net recoveries for the three months ended December 31, 2020 compared with $2,000 in net recoveries during the three months ended December 31, 2019.

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 “Summary of Significant Accounting Policies – Allowance for Loan Losses.” As management evaluates the allowance for loan losses, the increased risk associated with larger non-homogenous construction, commercial real estate and commercial business loans may result in larger additions to the allowance for loan losses in future periods. In addition, the ongoing effects of the COVID-19 pandemic on our borrowers may also result in larger additions to the allowance for loan losses in future periods.

Other Income. Other income increased $821,000, or 203.2%, to $1.2 million during the three months ended December 31, 2020 compared to $404,000 for the three months ended December 31, 2019.

Other operating income increased $560,000 to $591,000 for the quarter ended December 31, 2020 from $31,000 for the quarter ended December 31, 2019. The increase resulted primarily from $464,000 in fees earned from the Middlesex County Small Business Relief Grant. We received a fee of 3.0% of the grants we assisted Middlesex County with processing. In addition, we received a $101,000 interest rate swap fee during the three months ended December 31, 2020 related to our new back-to-back interest rate swap loan product. We also recorded higher gains from the sales of SBA loans, which increased $237,000 to $263,000 for the three months ended December 31, 2020 from $26,000 for the prior year quarter.

 

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Other Expenses. Other expenses increased $191,000, or 4.2%, to $4.7 million for the three months ended December 31, 2020 from $4.5 million for the three months ended December 31, 2019.

The increase in other expenses was primarily attributable to professional fees, which increased $179,000 to $528,000 for the 2020 quarter, due to higher legal and consulting fees related to the collection and foreclosure of non-performing loans. Other real estate owned expenses increased $77,000 to $180,000 due to higher valuation allowances recorded during the three months ended December 31, 2020 compared with the prior year period.

Income Tax Expense. We recorded tax expense of $569,000 on pre-tax income of $1.9 million for the three months ended December 31, 2020, compared to tax expense of $238,000 on pre-tax income of $791,000 for the three months ended December 31, 2019. The increase was the result of higher income from operations. Our effective tax rate for the three months ended December 31, 2020 was 29.9% compared with 30.1% for the three months ended December 31, 2019.

Comparison of Operating Results for the Years Ended September 30, 2020 and 2019

Net Income. Net income decreased $806,000, or 26.9%, to $2.2 million during the year ended September 30, 2020 compared with $3.0 million for the year ended September 30, 2019. The decrease resulted primarily from an increase in our provisions for loan losses, a decrease in other income, and an increase in other expenses, partially offset by an increase in net interest and dividend income.

For the year ended September 30, 2020, the net interest margin decreased 10 basis points to 3.31% from 3.41% for the prior year period. The decrease in net interest margin resulted from the lower market interest rate environment during fiscal 2020 and the origination of $56.0 million in PPP loans earning 1.0% during the year ended September 30, 2020.

Net Interest and Dividend Income. The primary source of our operating income is net interest and dividend income, which is the difference between interest and dividends earned on interest-earning assets and fees earned on loans, and interest paid on interest-bearing liabilities. Our net interest and dividend income is affected by regulatory, economic and competitive factors that influence interest rates, loan demand, deposit flows and levels of nonperforming assets.

During the year ended September 30, 2020, net interest and dividend income increased $1.0 million, or 5.0%, to $21.4 million compared to $20.4 million for the year ended September 30, 2019. The average balance of interest-earning assets increased $47.3 million, or 7.9%, to $645.1 million during fiscal 2020 from $597.9 million during fiscal 2019, while the yield on such assets decreased 37 basis points to 4.16% for the year ended September 30, 2020 from 4.53% during the year ended September 30, 2019. The decrease in average yield on interest-earning assets resulted from originations of PPP loans during fiscal 2020 which carry a 1.0% interest rate, higher balances of interest-earning deposits and lower market interest rates during fiscal 2020. The average balance of interest-bearing liabilities increased $20.7 million, or 4.4%, while the cost of such liabilities decreased 31 basis points to 1.13% for the year ended September 30, 2020 compared to 1.44% for fiscal 2019 reflecting lower market interest rates during fiscal 2020.

Interest and Dividend Income. Interest and dividend income decreased $176,000, or 0.6%, to $26.9 million for the year ended September 30, 2020 from $27.1 million for the year ended September 30, 2019. The average balance of interest-earnings assets increased $47.3 million, or 7.9%, to $645.1 million during fiscal 2020 from $597.9 million during fiscal 2019, while the yield on such assets decreased 37 basis points to 4.16% for the year ended September 30, 2020 from 4.53% for the year ended September 30, 2019.

 

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Interest income on loans increased $472,000, or 1.9%, to $25.6 million for the year ended September 30, 2020 from $25.2 million for the year ended September 30, 2019. The average balance of loans increased $46.1 million, or 8.9%, to $562.2 million from $516.1 million year to year while the average yield on loans decreased 32 basis points to 4.55% for the year ended September 30, 2020 from 4.87% for the year ended September 30, 2019. The decrease in yield on loans reflected the lower market interest rate environment and the origination of $56.0 million in PPP loans earning 1.0% during the year ended September 30, 2020.

Interest earned on investment securities, including interest earned on deposits but excluding FHLBNY stock, decreased $627,000, or 34.8%, to $1.2 million for the year ended September 30, 2020 from $1.8 million for the year ended September 30, 2019. The decrease resulted primarily from an 81 basis point decrease in the average yield on investment securities and interest-earning deposits to 1.45% for fiscal 2020 from 2.26% for fiscal 2019, partially offset by a $1.2 million, or 1.6%, increase in the average balance of investment securities and interest-earning deposits to $80.9 million for fiscal 2020 from $79.7 million for fiscal 2019.

Interest Expense. Interest expense decreased $1.2 million, or 17.8%, to $5.5 million for the year ended September 30, 2020 from $6.7 million for the year ended September 30, 2019. The average balance of interest-bearing liabilities increased $20.7 million, or 4.4%, to $487.0 million for fiscal 2020 from $466.3 million for fiscal 2019 while the cost of such liabilities decreased 31 basis points to 1.13% for the year ended September 30, 2020 from 1.44% for year ended September 30, 2019 reflecting the lower market interest rate environment.

Interest expense on interest-bearing deposits decreased $1.1 million, or 19.4%, to $4.8 million for the year ended September 30, 2020 from $5.9 million for the year ended September 30, 2019.The average balance of interest-bearing deposits increased $10.2 million, or 2.4%, to $441.4 million for the year ended September 30, 2020 from $431.2 million for the year ended September 30, 2019 while the average cost of such deposits decreased 29 basis points to 1.08% for fiscal 2020 from 1.37% for fiscal 2019.

Interest expense on borrowings decreased $46,000, or 5.8%, to $743,000 for the year ended September 30, 2020 from $789,000 for the year ended September 30, 2019. The average balance of borrowings, which included advances and securities sold under agreements to repurchase, increased $10.5 million to $45.6 million for the year ended September 30, 2020 from $35.2 million the prior year. The average cost of borrowings decreased 62 basis points to 1.62% for the year ended September 30, 2020 from 2.24% for the year ended September 30, 2019.

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 made a provision of $1.7 million for the year ended September 30, 2020 compared with a $668,000 provision for the prior year. There were net charge-offs of $154,000 for the year ended September 30, 2020 compared with $20,000 in net recoveries for the year ended September 30, 2019. The COVID-19 pandemic and subsequent recession resulted in elevated risk factors used in determining the appropriate level of the allowance for loan losses for fiscal 2020.

Total non-performing loans increased $2.8 million to $9.7 million at September 30, 2020 from $6.9 million at September 30, 2019. At September 30, 2020, our allowance for loan losses was $6.4 million, an increase of $1.5 million, from $4.9 million at September 30, 2019.

 

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Other Income. Other income decreased $420,000, or 19.7%, to $1.7 million during the year ended September 30, 2020 compared with $2.1 million during the prior year due to lower loan and deposit service charges, which decreased $473,000. In addition to the lower loan fees, the closure of our branch lobbies during the peak of the COVID-19 pandemic and the shift in consumer behavior to debit cards from physical checks resulted in a decline in retail fee income year-over-year.

Other Expenses. Other expenses increased $753,000, or 4.3%, to $18.4 million for the year ended September 30, 2020 compared to $17.6 million for the year ended September 30, 2019.

Legal fees associated with the foreclosure and collection of non-performing loans resulted in increased professional fees of $457,000, or 41.5%, during the year ended September 30, 2020. In addition, OREO expenses increased $165,000, or 49.4%, to $499,000 for fiscal 2020 resulting from valuation allowances recorded during the year ended September 30, 2020 based on updated appraisals or executed contracts of sale.

Compensation and benefit expenses increased $150,000, or 1.5%, to $10.3 million for fiscal 2020 from $10.1 million for fiscal 2019 due to new compliance positions and annual merit increases for employees.

Income Tax Expense. We recorded tax expense of $921,000 on income of $3.1 million for the year ended September 30, 2020 compared with tax expense of $1.3 million on income of $4.3 million for the year ended September 30, 2019. The lower income tax expense for fiscal 2020 resulted from a $1.2 million decrease in pre-tax income year to year.

Our effective tax rate for the year ended September 30, 2020 was 29.6% compared with 29.7% for the year ended September 30, 2019.

Management of Market Risk

General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, our Board of Directors has established an Asset and Liability Management Committee which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. Senior management monitors the level of interest rate risk on a regular basis and the Asset and Liability Committee meets at least on a quarterly basis to review our asset/liability policies and interest rate risk position.

We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. As part of our ongoing asset-liability management, we seek to manage our exposure to interest rate risk by retaining in our loan portfolio fewer fixed-rate residential loans, by originating and retaining adjustable-rate loans in the residential, construction and commercial real estate loan portfolios, by using alternative funding sources, such as advances from the FHLBNY, to “match fund” longer-term residential and commercial mortgage loans, and by originating and retaining variable-rate home equity and short-term and medium-term fixed-rate commercial business loans. We have also increased money market account deposits as a percentage of our total deposits. Money market accounts offer a variable rate based on market indications.

 

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Beginning in our fiscal year 2021, we began offering a back-to-back interest rate swap commercial loan product. We simultaneously entered into a floating-to-fixed interest rate swap with our commercial lending customers and an offsetting fixed-to-floating interest rate swap with a third-party financial institution. At December 31, 2020, we held $6.1 million in back-to-back interest rate swaps where the borrowers’ monthly fixed-rate interest payments are exchanged via interest rate swap agreements for floating-rate interest payments, converting the loan for interest rate risk purposes from a fixed-rate loan to an adjustable-rate loan.

By following these strategies, we believe that we are well-positioned to react to changes in market interest rates.

Net Interest Income Analysis. The table below sets forth, as of December 31, 2020, the estimated changes in our Net Interest Income (“NII”) for each of the next two years that would result from the designated instantaneous changes in interest rates. These estimates require making certain assumptions including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain and, as a result, we cannot precisely predict the impact of changes in interest rates on net interest income. Actual results may differ significantly due to timing, magnitude and frequency of interest rate changes and changes in market conditions. Further, certain shortcomings are inherent in the methodology used in the interest rate risk measurement. Modeling changes in net interest income require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates.

 

Change in Interest Rates (Basis Points) (1)

  Estimated
NII Year 1
   Estimated Decrease
in NII Year 1
  Estimated
NII Year 2
   Estimated Increased
(Decrease) in NII Year 2
 
  Amount   Percent   Amount   Percent 
   (Dollars in thousands) 

+200

  $24,816   $120    0.49 $24,734   $208    0.85

Unchanged

   24,696    —      —     24,526    —      —   

-100

   24,060    (636   (2.58)%   23,414    (1,112   (4.53)% 

 

(1)

Assumes an instantaneous uniform change in interest rates at all maturities.

Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net interest income table presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates, and actual results may differ. Furthermore, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Additionally, certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates both on a short-term basis and over the life of the asset. In the event of changes in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table.

Interest rate risk calculations also may not reflect the fair values of financial instruments. For example, decreases in market interest rates can increase the fair values of our loans, deposits and borrowings.

 

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Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, FHLBNY borrowings and maturities and sales of investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs of our customers as well as unanticipated contingencies. We seek to maintain a liquidity ratio of 5.0% of assets or greater. The liquidity ratio is calculated by determining the sum of the difference between liquid assets (cash and unpledged investment securities) and short-term liabilities (estimated 30-day deposit outflows), plus our borrowing capacity from the FHLBNY and dividing the sum by total assets. At December 31, 2020, our liquidity ratio was 12.9% of assets.

We regularly adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short-and intermediate-term securities.

Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At December 31, 2020, cash and cash equivalents totaled $52.1 million compared to $61.7 million at September 30, 2020 and $21.5 million at September 30, 2019. Securities classified as available-for-sale, which provide additional sources of liquidity from sales, totaled $14.8 million at December 31, 2020 compared to $14.6 million and $16.7 million at September 30, 2020 and 2019, respectively. At December 31, 2020, we also had the ability to borrow $142.0 million from the FHLBNY. On that date, we had an aggregate of $30.5 million in advances outstanding and $55.0 million in municipal letters of credit outstanding with the FHLBNY.

Whether through significant deposit withdrawals, reductions in interest and principal payments on loans, or the tightening of the capital markets, it is possible that the COVID-19 pandemic will have a negative effect on our liquidity and capital resources. Under the PPPLF, the Federal Reserve Bank of New York provides advances to Magyar Bank on a non-recourse basis, taking PPP loans as collateral. At December 31, 2020, Magyar Bank had borrowed $29.8 million in PPPLF advances from the Federal Reserve, pledging an equal amount of PPP loans as collateral.

At December 31, 2020, we had commitments outstanding under letters of credit of $1.0 million, commitments to originate loans of $15.1 million, and commitments to fund undisbursed balances of closed loans and unused lines of credit of $80.5 million.

Certificates of deposit due within one year of December 31, 2020 totaled $78.8 million, or 12.9% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits and FHLBNY advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit (including individual retirement accounts and brokered certificate deposit accounts) due on or before December 31, 2021. We believe, however, that based on past experience a significant portion of our certificates of deposit (including individual retirement accounts and brokered certificate deposit accounts) will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Our cash flows are derived from operating activities, investing activities and financing activities as reported in our consolidated Statements of Cash Flows included in our consolidated Financial Statements.

 

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Our primary investing activities are the origination of loans and the purchase of investment securities. We originated $35.3 and $145.9 million in loans (including $56.0 million in PPP loans) and we purchased $8.7 million and $19.8 million of investment securities for quarter ended December 31, 2020 and the year ended September 30, 2020, respectively. Comparatively, we originated $74.7 million in loans and purchased $4.7 million of investment securities for the year ended September 30, 2019.

Financing activities consist primarily of activity in deposit accounts and FHLBNY advances. We experienced a net decrease in deposits of $6.3 million during the quarter ended December 31, 2020 and a net increase in total deposits of $88.3 million, or 16.6%, to $618.3 million for the year ended September 30, 2020 compared with a net decrease in total deposits of $62,000 for the year ended September 30, 2019. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors.

Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLBNY, which provide an additional source of funds. FHLBNY advances totaled $30.5 million, $30.5 million and $36.2 million at December 31, 2020, September 30, 2020 and September 30, 2019, respectively. FHLBNY advances have primarily been used to fund loan demand.

In addition to borrowings, we have the ability to raise deposits on the brokered market or through deposit listing services. At December 31, 2020, we held $4.4 million in brokered deposits and $11.7 million from deposit listing services.

Magyar Bank is subject to various regulatory capital requirements, (see “Supervision and Regulation-Federal Banking Regulation-Capital Requirements”). As of December 31, 2020, Magyar Bank’s Tier 1 capital as a percentage of its total assets was 8.37% and the total qualifying capital as a percentage of risk-weighted assets was 13.23%.

The net proceeds from the offering will significantly increase our liquidity and capital resources. Over time, the initial level of liquidity will be reduced as net proceeds from the offering are used for general corporate purposes, including funding loans. Our financial condition and results of operations will be enhanced by the net proceeds from the offering, which will increase our net interest-earning assets and net interest income. However, due to the increase in equity resulting from the net proceeds raised in the offering, as well as other factors associated with the offering, our return on equity will be adversely affected following the offering. See “Risk Factors – Risks Related to the Offering – Our return on equity may be low following the offering. This could negatively affect the trading price of our shares of common stock.”

Under section 1102 of the CARES Act, a PPP loan is assigned a risk weight of zero percent under the risk-based capital rules of the federal banking agencies. On April 9, 2020, the Federal Reserve Board, the Office of the Comptroller of the Currency, and the FDIC issued an interim final rule to allow banking organizations to neutralize the effect of PPP loans financed under the PPPLF on Tier 1 leverage capital ratios. At December 31, 2020, we used PPPLF borrowings to neutralize $29.8 million of the balance sheet growth impact on the calculation of Magyar Bank’s Tier 1 leverage capital ratio.

Bank-owned life insurance is a tax-advantaged financing transaction that is used to offset employee benefit plan costs. Policies are purchased insuring directors and officers of Magyar Bank using a single premium method of payment. Magyar Bank is the owner and beneficiary of the policies and records tax-free income through cash surrender value accumulation. We have minimized our credit exposure by choosing carriers that are highly rated and limiting the concentration of any one carrier. The investment in bank-owned life insurance has no significant impact on our capital and liquidity.

 

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Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit, standby letters of credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans made by us. For additional information, see Note P, “Commitments,” and Note Q “Financial Instruments with Off-Balance-Sheet Risk” to our consolidated financial statements.

Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment.

The following table summarizes our significant fixed and determinable contractual obligations and other funding needs by payment date at December 31, 2020. The payment amounts represent those amounts due to the recipient and do not include any unamortized premiums or discounts or other similar carrying amount adjustments.

 

   Payments Due by Period 

December 31, 2020

  Less Than
One Year
   One to
Three Years
   Three to
Five Years
   More Than
Five Years
   Total 
   (In thousands) 

Federal Home Loan Bank advances

  $7,130   $15,471   $7,884   $—     $30,485 

Federal Reserve Bank advances

   —      29,775    —      —      29,775 

Operating leases

   675    1,203    913    1,066    3,857 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $7,805   $46,449   $8,797   $1,066   $64,117 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recent Accounting Pronouncements

Please refer to Note B to the audited financial statements of Magyar Bancorp for the years ended September 30, 2020 and 2019 included with this document for a description of recent accounting pronouncements that may affect our financial condition and results of operations.

Impact of Inflation and Changing Prices

The financial statements and related data presented herein have been prepared in accordance with U.S. GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

 

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BUSINESS OF MAGYAR BANCORP

Magyar Bancorp

Magyar Bancorp is a Delaware corporation that owns all of the outstanding shares of common stock of Magyar Bank. Since being incorporated in 2006 in connection with the mutual holding company reorganization of Magyar Bank, Magyar Bancorp has not engaged in any significant business activity other than owning all of the shares of common stock of Magyar Bank. At December 31, 2020, Magyar Bancorp had consolidated assets of $741.8 million, total deposits of $612.1 million and stockholders’ equity of $58.2 million. Magyar Bancorp is subject to comprehensive regulation and examination by the Federal Reserve Board and the NJDOBI.

As part of the conversion, we will receive the cash held by Magyar Bancorp, MHC and the net proceeds we retain from the offering. A portion of the net proceeds will be used to fund a loan to the Magyar Bank Employee Stock Ownership Plan. After the conversion and offering, we will continue to have no significant liabilities and will to use the support staff and offices of Magyar Bank and will pay Magyar Bank for these services. If we expand or change our business in the future, we may hire our own employees.

Magyar Bancorp intends to invest the net proceeds of the offering as discussed under “How We Intend to Use the Proceeds From the Offering.” In the future, we may pursue other business activities, including mergers and acquisitions, investment alternatives and diversification of operations. There are, however, no current understandings or agreements for these activities.

BUSINESS OF MAGYAR BANK

Magyar Bank is a New Jersey-chartered savings bank headquartered in New Brunswick, New Jersey that was originally founded in 1922 as a New Jersey building and loan association. In 1954, Magyar Bank converted to a New Jersey savings and loan association, before converting to a New Jersey savings bank charter in 1993. We conduct business from our corporate headquarters located at 400 Somerset Street, New Brunswick, New Jersey, and our seven branch offices located in New Brunswick, North Brunswick, South Brunswick, Branchburg, Bridgewater, and Edison, New Jersey. Our market area for deposits includes the communities in which we maintain our banking office locations, and our primary lending market area is broadly defined as the Central and Northern portions of New Jersey. The telephone number at our corporate headquarters is (732) 342-7600 and our website is located at www.magbank.com. Information on this website is not and should not be considered a part of this prospectus.

General

Our principal business consists of attracting retail deposits from the general public in the areas surrounding our corporate headquarters in New Brunswick, New Jersey and our branch offices located in Middlesex and Somerset counties, New Jersey, and investing those deposits, together with funds generated from operations and wholesale funding, in residential mortgage loans, home equity loans, home equity lines of credit, commercial real estate loans, commercial business loans, SBA loans, construction loans and investment securities. We also originate consumer loans, which consist primarily of secured demand loans. We originate loans primarily for retention in our loan portfolio. However, from time to time we have sold some of our long-term, fixed-rate residential mortgage loans into the secondary market, while retaining the servicing rights for such loans. In addition, we sell the SBA-guaranteed portion of SBA loans while retaining the servicing rights for such loans. Our revenues are derived principally from interest on loans and securities, which consist primarily of mortgage-backed securities and U.S. Government and government-sponsored enterprise obligations. We also generate revenues from fees and service charges. Our primary sources of funds are deposits, borrowings and principal and interest payments on loans and securities.

 

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We offer a variety of deposit accounts, including demand accounts, NOW accounts, money market accounts, savings accounts, retirement accounts and certificates of deposit accounts. We also utilize advances from the FHLBNY for liquidity and for asset/liability management purposes.

We are subject to comprehensive regulation and examination by the NJDOBI and the FDIC.

Market Area

We are headquartered in New Brunswick, New Jersey, and our primary deposit market area is concentrated in the communities surrounding our headquarters branch and our branch offices located in Middlesex and Somerset counties, New Jersey. Our primary lending market area is broader than our deposit market area and includes all of New Jersey.

The economy of our primary market area is largely urban and suburban with a broad economic base that is typical for counties surrounding the New York metropolitan area. The median household income in Middlesex and Somerset counties ranks among the highest in the nation.

Competition

We face intense competition within our market area both in making loans and attracting deposits. Our market area has a high concentration of financial institutions including large money center and regional banks, community banks and credit unions. Some of our competitors offer products and services that we currently do not offer, such as trust services and private banking. According to the FDIC’s annual Summary of Deposit report, at June 30, 2020, the last date for which information is available, our market share of deposits was 1.22% and 0.46% in Middlesex and Somerset counties, respectively.

Our competition for loans and deposits comes principally from commercial banks, savings institutions, mortgage banking firms and credit unions. We face additional competition for deposits from short-term money market funds, brokerage firms, mutual funds and insurance companies. Our primary focus is to build and develop profitable customer relationships across all lines of business while maintaining our role as a community bank.

Lending Activities

We originate residential mortgage loans to purchase or refinance residential real property. Residential mortgage loans represented $208.4 million, or 34.3% of our total loans at December 31, 2020. Historically, we have not originated a significant number of loans for the purpose of reselling them in the secondary market. In the future, however, to help manage interest rate risk and to increase fee income, we may increase our origination and sale of residential mortgage loans. No loans were held for sale at December 31, 2020. We also originate commercial real estate, commercial business and construction loans. At December 31, 2020, these loans totaled $260.3 million, $91.2 million and $23.4 million, respectively. We also offer consumer loans, which consist primarily of home equity lines of credit and stock-secured demand loans. At December 31, 2020, home equity lines of credit totaled $19.8 million and stock-secured demand and other loans totaled $3.8 million.

 

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Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan, at the dates indicated.

 

   At December 31,  At September 30, 
   2020  2020  2019 
   Amount  Percent  Amount  Percent  Amount  Percent 
      (Dollars in thousands) 

Residential mortgage

  $208,404   34.3 $210,360   34.4 $190,415   36.4

Commercial real estate

   260,296   42.9  248,134   40.6  232,544   44.5

Construction

   23,441   3.9  28,242   4.6  28,451   5.4

Home equity lines of credit

   19,837   3.3  19,373   3.2  17,832   3.4

Commercial business

   91,215   15.0  100,993   16.5  48,769   9.3

Other consumer

   3,837   0.6  4,157   0.7  4,990   1.0
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total loans receivable

  $607,030   100.0 $611,259   100.0 $523,001   100.0

Less:

       

Deferred loan costs (fees)

   (1,370   (1,749   104  

Allowance for loan losses

   (7,130   (6,400   (4,888 
  

 

 

   

 

 

   

 

 

  

Total loans receivable, net

  $598,530   $603,110   $518,217  
  

 

 

   

 

 

   

 

 

  

 

   At September 30, 
   2018  2017  2016 
   Amount  Percent  Amount  Percent  Amount  Percent 
   (Dollars in thousands) 

Residential mortgage

  $185,287   36.2 $178,336   37.6 $173,235   37.8

Commercial real estate

   219,347   42.8  207,118   43.7  199,510   43.6

Construction

   30,412   5.9  22,622   4.8  14,939   3.3

Home equity lines of credit

   17,982   3.5  18,536   3.9  21,967   4.8

Commercial business

   53,320   10.4  41,113   8.7  38,865   8.5

Other

   6,150   1.2  6,266   1.3  9,355   2.0
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total loans receivable

  $512,498   100.0 $473,991   100.0 $457,871   100.0

Less:

       

Deferred loan costs (fees)

   132    177    216  

Allowance for loan losses

   (4,200   (3,475   (3,056 
  

 

 

   

 

 

   

 

 

  

Total loans receivable, net

  $508,430   $470,693   $455,031  
  

 

 

   

 

 

   

 

 

  

 

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Loan Portfolio Maturities. The following table summarizes the scheduled repayments of our loan portfolio at September 30, 2020. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in the year ending September 30, 2021. Maturities are based on the final contractual payment date and do not reflect the impact of prepayments and scheduled principal amortization.

 

   Residential
mortgage
   Commercial
real estate
   Construction   Home
equity lines
of credit
   Commercial
business
   Other   Total 
Due During the Years Ending September 30, 2021  $234   $16,079   $26,163   $6,895   $27,249   $3   $76,623 

2022

   2,639    3,098    1,406    1,749    56,953    7    65,852 

2023

   1,462    1,901    —      —      551    6    3,920 

2024 to 2025

   2,786    13,973    162    —      6,639    27    23,587 

2026 to 2030

   9,598    25,616    —      198    4,278    20    39,710 

2031 to 2035

   22,620    27,720    —      1,593    1,242    14    53,189 

2036 and beyond

   171,021    159,747    511    8,938    4,081    4,080    348,378 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $210,360   $248,134   $28,242   $19,373   $100,993   $4,157   $611,259 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at September 30, 2020 that are contractually due after September 30, 2021.

 

   Due After September 30, 2021 
   Fixed   Adjustable   Total 
   (In thousands) 

Residential mortgage

  $127,657   $82,469   $210,126 

Commercial real estate

   13,555    218,500    232,055 

Construction

   162    1,917    2,079 

Home equity lines of credit

   1,747    10,731    12,478 

Commercial business

   63,959    9,785    73,744 

Other

   70    4,084    4,154 
  

 

 

   

 

 

   

 

 

 

Total loans receivable

  $207,150   $327,486   $534,636 
  

 

 

   

 

 

   

 

 

 

Residential mortgage loans. We originate residential mortgage loans, most of which are secured by properties located in our primary market area and most of which we hold in portfolio. At December 31, 2020, $208.4 million, or 34.3% of our total loan portfolio, consisted of residential mortgage loans (including home equity loans). Residential mortgage loan originations are generally obtained from our in-house loan representatives, from existing or past customers, through advertising, and through referrals from local builders, real estate brokers and attorneys, and are underwritten pursuant to our policies and standards. Generally, residential mortgage loans are originated in amounts up to 80% of the lesser of the appraised value or purchase price of the property, with private mortgage insurance required on loans with a loan-to-value ratio in excess of 80%. We generally will not make residential mortgage loans with a loan-to-value ratio in excess of 95%, which is the upper limit that has been established by the Board of Directors. Historically, we have originated residential mortgage for terms of up to 30 years. We do not originate or purchase “sub-prime” loans (mortgages granted to borrowers whose credit history is not sufficient to get a conventional mortgage) or option ARM mortgage loans. At December 31, 2020, non-performing residential mortgage loans totaled $944,000, or 0.4% of the total residential loan portfolio. Interest income of $30,000 would have been recorded on non-performing residential mortgage loans for the fiscal year ended September 30, 2020, if they had been current in accordance with their original terms. During the fiscal year ended September 30, 2020, there were no charge-offs against the allowance for loan losses for impaired residential mortgage loans while $9,000 was recovered from prior year charge-offs. During the quarter ended December 31, 2020 there were no charge-offs or recoveries of residential mortgage loans.

We also originate home equity loans secured by residences located in our market area. The underwriting standards we use for home equity loans include a determination of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations, the ongoing payments on the proposed loan and the value of the collateral securing the loan. The maximum combined (first and second mortgage liens) loan-to-value ratio for home equity loans and home equity lines of credit is 80%. Home equity loans are generally offered with fixed rates of interest with the loan amount not to exceed $500,000 and with terms of up to 30 years. At December 31, 2020, there were no non-performing home equity loans and there were no charge-offs during the quarter ended December 31, 2020 or the fiscal year ended September 30, 2020.

Generally, all fixed-rate residential mortgage loans are underwritten according to Federal Home Loan Mortgage Corporation (“Freddie Mac”) guidelines, policies and procedures. Historically, we have not originated a significant number of loans for the purpose of reselling them in the secondary market. In the future we may increase our origination and sale of fixed-rate residential mortgage loans to help manage interest rate risk and to increase fee income. There were no fixed-rate residential mortgage loans sold to Freddie Mac during the quarter ended December 31, 2020 or year ended September 30, 2020 and there were no loans held for sale at either December 31, 2020 or at September 30, 2020.

 

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We generally do not purchase residential mortgage loans, except for loans to low-income borrowers to enhance our Community Reinvestment Act performance. We purchased no residential mortgages loans in the quarter ended December 31, 2020, however, we purchased $13.2 million of residential mortgage loans during the fiscal year ended September 30, 2020 to augment our in-house originations. We underwrite purchased residential mortgage loans using the same criteria as if we were originating the loans.

At December 31, 2020, we had $127.3 million of fixed-rate residential mortgage loans, which represented 61.1% of our total residential mortgage loan portfolio. At December 31, 2020, our largest fixed-rate residential mortgage loan was $1.8 million. The loan was performing in accordance with its repayment terms at December 31, 2020.

We also offer adjustable-rate residential mortgage loans with interest rates based on the weekly average yield on U.S. Treasuries or the London Interbank Offering Rate (“LIBOR”) adjusted to a constant maturity of one year, which adjusts either annually from the outset of the loan or which adjusts annually after a one-, three-, five-, seven-, and ten-year initial fixed-rate period. Our adjustable-rate residential mortgage loans generally provide for maximum rate adjustments of 2% per adjustment, with a lifetime maximum adjustment up to 5%, regardless of the initial rate. We also offer adjustable-rate residential mortgage loans with an interest rate based on the prime rate as published in The Wall Street Journal or the FHLBNY advance rates.

Adjustable-rate mortgage loans decrease the risk associated with changes in market interest rates by periodically repricing. However, these loans have other risks because, as interest rates increase, the underlying payments by the borrower increase, which increases the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. The maximum periodic and lifetime interest rate adjustments also may limit the effectiveness of adjustable-rate mortgage loans during periods of rapidly rising interest rates.

At December 31, 2020, adjustable-rate residential mortgage loans totaled $81.1 million, or 38.9% of our total residential mortgage loan portfolio. The largest adjustable-rate residential mortgage loan was for $2.5 million. The loan was performing in accordance with its repayment terms at December 31, 2020.

In an effort to provide financing for low-and moderate-income home buyers, we offer low-to-moderate income residential mortgage loans. These loans are offered with fixed rates of interest and terms of up to 40 years, and are secured by one-to four-family residential properties. All of these loans are originated using underwriting guidelines of U.S. government-sponsored enterprises such as Freddie Mac. These loans are originated with maximum loan-to-value ratios of 95%.

All residential mortgage loans we originate include “due-on-sale” clauses, which give us the right to declare a loan immediately due and payable if the borrower sells or otherwise disposes of the real property securing the mortgage loan. All borrowers are required to obtain title insurance, fire and casualty insurance and, if warranted, flood insurance on properties securing real estate loans.

Commercial Real Estate Loans. We originate commercial real estate loans, most of which are secured by properties located in our primary market area. At December 31, 2020, $260.3 million, or 42.9%, of our total loan portfolio consisted of commercial real estate loans. Commercial real estate loans are generally secured by five-or-more-unit apartment buildings, industrial properties and properties used for business purposes such as small office buildings and retail facilities. We generally originate adjustable-rate commercial real estate loans with a maximum term of 25 years with adjustable rate periods every five years. The maximum loan-to-value ratio for our commercial real estate loans is 75%, based on the appraised value of the property.

We consider a number of factors when we originate commercial real estate loans. During the underwriting process we evaluate the business qualifications and financial condition of the borrower, including credit history, profitability of the property being financed, as well as the value and condition of the mortgaged

 

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property securing the loan. When evaluating the business qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, we consider the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service) to ensure it is at least 120% of the monthly debt service. We require personal guarantees on all commercial real estate loans made to individuals. Generally, commercial real estate loans made to corporations, partnerships and other business entities require personal guarantees by the principals. All borrowers are required to obtain title, fire and casualty insurance and, if warranted, flood insurance.

Loans secured by commercial real estate generally are generally larger than residential mortgage loans and involve greater credit risk. Commercial real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Repayment of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Accordingly, the nature of these loans makes them more difficult for management to monitor and evaluate.

The maximum amount of a commercial real estate loan is limited by our board-established loans-to-one-borrower limit, which is currently 15% of Magyar Bank’s capital, or $10.0 million at December 31, 2020. At December 31, 2020, our largest commercial real estate loan was for $6.1 million to refinance a 21,000 square foot building consisting of office, retail, and storage units in Summit, New Jersey. The loan was performing in accordance with its repayment terms at December 31, 2020.

At December 31, 2020, nine commercial real estate loans totaling $3.1 million were non-performing. During the quarter ended December 31, 2020 and the fiscal year ended September 30, 2020, there were no charge-offs against the allowance for loan loss, and during the year ended September 30, 2020 there were $5,000 in recoveries from prior year charge-offs. Interest income of $87,000 would have been recorded on non-performing commercial real estate loans for the year ended September 30, 2020, if they had been current in accordance with their original terms. Interest income recognized on such loans for the year ended September 30, 2020 was $49,000. All other loans secured by commercial real estate were performing in accordance with their repayment terms.

Construction Loans. We also originate construction loans for the development of one-to four-family homes, apartment buildings and commercial properties. Construction loans are generally offered to experienced local developers operating in our primary market area and to individuals for the construction of their personal residences. At December 31, 2020, our construction loans totaled $23.4 million, or 3.9% of total loans.

At December 31, 2020, construction loans for the development of one-to four-family residential properties totaled $9.6 million. These construction loans generally have a maximum term of 24 months. At the end of the construction phase, the loan may convert to a permanent mortgage loan or the loan may be paid in full. We provide financing for land acquisition, site improvement and construction of individual homes. Land acquisition loans are limited to 50% to 75% of the sale price of the land. Site improvement loans are limited to 100% of the bonded site improvement costs. Construction loans are limited to 75% of the lesser of the contract sale price or appraised value of the property (less funds already advanced for land acquisition and site improvement).

At December 31, 2020, construction loans for the development of commercial properties totaled $7.4 million. These construction loans have a maximum term of 24 months. The maximum loan-to-value ratio limit applicable to these loans is 75% of the appraised value of the property.

 

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At December 31, 2020, construction loans for the development of town homes, condominiums and apartment buildings totaled $6.4 million. The maximum loan-to-value ratio limit applicable to these loans is 70% of the appraised value of the property. We may retain up to 10% of each loan advance until the property attains a 90% occupancy level.

The maximum amount of a construction loan is limited by our loans-to-one-borrower limit, which is currently 15% of Magyar Bank’s capital, or $10.0 million at December 31, 2020. At December 31, 2020, our largest outstanding construction loan was a $2.8 million loan to finance the construction of single-family home in Colts Neck, New Jersey. The loan has been past due greater than 90 days since we declined to renew the loan upon its maturity in January 2018. At December 31, 2020, the Bank was in the process of foreclosing on the real estate collateral securing the loan as well as pursuing the personal guarantors of the loan. At December 31, 2020, there were a total of two non-performing construction loan totaling $4.6 million. Interest income of $243,000 would have been recorded on these non-performing construction loans for the year ended September 30, 2020, if they had been current in accordance with their original terms. Interest income recognized on such loans for the year ended September 30, 2020 was $54,000. During the year ended September 30, 2020, $65,000 was charged-off against the allowance for loan losses and there were no recoveries from prior year charge-offs. During the quarter ended December 31, 2020, there were no charge-offs or recoveries of construction loans.

Before making a commitment to fund a construction loan, we require an appraisal of the property by an independent licensed appraiser. We generally also engage an outside engineering firm to review and inspect each property before disbursement of funds during the term of a construction loan. Loan proceeds are disbursed after inspection based on the percentage of completion method. We require a personal guarantee from each principal of all of our construction loan borrowers.

Construction lending is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost is inaccurate, we may be required to advance funds beyond the amount originally committed in order to protect the value of the property. Additionally, if our estimate of the value of the completed property is inaccurate, our construction loan may exceed the value of the collateral.

Commercial Business Loans. At December 31, 2020, our commercial business loans totaled $91.2 million, or 15.0% of total loans. We make commercial business loans primarily in our market area to a variety of professionals, sole proprietorships and small and mid-sized businesses. Our commercial business loans include term loans and revolving lines of credit. The maximum term of a commercial business loan is 25 years. Such loans are generally used for longer-term working capital purposes such as purchasing equipment or furniture. Commercial business loans are made with either adjustable or fixed rates of interest. The interest rates for adjustable commercial business loans are typically based on the prime rate as published in The Wall Street Journal.

Included in commercial business loans are SBA 7(a) loans, on which the SBA provides guarantees of up to 90% of the principal balance. These loans are made for the purposes of providing working capital and financing the purchase of equipment, inventory or commercial real estate, and may be made to borrowers inside or outside of our primary lending area. Generally, a borrower of an SBA 7(a) loan has a deficiency in its credit profile that would not allow the borrower to qualify for a traditional commercial loan, which is why the government guarantee of a portion of the loan makes it a more desirable product for us to offer. The deficiency may be a higher loan to value ratio, lower debt service coverage ratio or weak personal financial guarantees. In addition, many SBA 7(a) loans are for start-up businesses where there is no history of financial information. Finally, many SBA borrowers do not have an ongoing and continuous banking relationship with the Bank, but merely work with the Bank on a single transaction. The guaranteed portions of our SBA loans are generally sold in the secondary market.

 

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When making commercial business loans, we consider the financial strength of the borrower, our lending history with the borrower, the debt service capabilities of the borrower, the projected cash flows of the business and the value and type of the collateral. Commercial business loans generally are secured by a variety of collateral, primarily accounts receivable, inventory, equipment, savings instruments and readily marketable securities. In addition, we generally require the business principals to execute personal guarantees.

Commercial business loans generally have greater credit risk than the residential mortgage loans that we originate. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to repay the loan from his or her employment income, and which are secured by real property with ascertainable value, commercial business loans generally are made on the basis of the borrower’s ability to repay the loan from the cash flow of the borrower’s business. As a result, the repayment of commercial business loans may depend substantially on the success of the borrower’s business. As such, the performance of these types of loans may be particularly sensitive to local and/or national economic conditions. Further, any collateral securing commercial business loans may depreciate over time, may be difficult to appraise and may fluctuate in value. We try to minimize these risks through our underwriting standards.

We participated in the PPP to provide liquidity using the SBA’s platform to small businesses and self-employed individuals to maintain their staff and operations through the COVID-19 pandemic. This liquidity is in the form of a loan, 100% guaranteed by the SBA, that is forgivable provided the funds received by the borrower are used on qualifying payroll costs, and to a lesser extent, rent, utilities and interest on qualifying mortgage payments. The loans bear a fixed rate of 1.0% and loan payments are deferred through the date that the SBA remits the borrower’s loan forgiveness amount to the lender (or, if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness covered period). We originated 350 PPP loans totaling $56.0 million through December 31, 2020, for which we received $2.0 million in origination fees from the SBA. These fees are amortized over the expected life of the loans, which is two years for loans originated prior to June 4, 2020 and five years for loans originated June 5, 2020 or later. Through December 31, 2020, 48 loans totaling $10.0 million had been forgiven by the SBA.

The maximum amount of a commercial business loan is limited by our loans-to-one-borrower limit, which is 15% of Magyar Bank’s capital, or $10.0 million at December 31, 2020. At December 31, 2020, our largest commercial business loan was a $7.4 million loan to a company that provides janitorial services and was secured by the accounts receivable of the company. This loan was performing according to its repayment terms at December 31, 2020. At December 31, 2020, two commercial business loans totaling $1.4 million were non-performing. During the quarter ended December 31, 2020, there were no charge-offs against the allowance for loan losses and there was a $90,000 recovery from a prior year charge-off.

Home Equity Lines of Credit and Other Loans. We originate home equity lines of credit secured by residences located in our market area. At December 31, 2020, these loans totaled $19.8 million, or 3.3% of our total loan portfolio. The underwriting standards we use for home equity lines of credit include a determination of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations, the ongoing payments on the proposed loan and the value of the collateral securing the loan. The maximum combined (first and second mortgage liens) loan-to-value ratio for home equity lines of credit is 80%. Home equity lines of credit have adjustable rates of interest, indexed to the prime rate, as reported in The Wall Street Journal, with terms of up to 25 years.

The maximum amount of a home equity line of credit loan is limited by our loans-to-one-borrower limit, which is 15% of Magyar Bank’s capital, or $10.0 million at December 31, 2020. At December 31, 2020, our largest home equity line of credit loan was $2.5 million. The loan was performing according to its repayment terms at December 31, 2020. There were no non-performing home equity lines of credit at December 31, 2020. During the quarter ended December 31, 2020 there were no charge-offs or recoveries of home equity lines of credit.

 

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We also originate loans secured by the common stock of publicly traded companies, provided their shares are listed on the New York Stock Exchange or the NASDAQ Stock Market, and provided the company is not a banking company. Stock-secured loans are interest-only and are offered for terms up to twelve months and for adjustable rates of interest indexed to the prime rate, as reported in The Wall Street Journal. The loan amount is not to exceed 70% of the value of the stock securing the loan at any time.

At December 31, 2020, stock-secured loans totaled $3.8 million, or 0.6% of our total net loan portfolio. Generally, we limit the aggregate amount of loans secured by the common stock of any one corporation to 15% of Magyar Bank’s capital, with the exception of Johnson & Johnson, for which the collateral concentration limit is 150% of Magyar Bank’s capital. At December 31, 2020, loans totaling $3.7 million, or 0.6% of our loan portfolio, were secured by the common stock of Johnson & Johnson a New York Stock Exchange company that operates a number of facilities in our market area and employs a substantial number of residents. Although these loans are underwritten based on the ability of the individual borrower to repay the loan, the concentration of our portfolio secured by this stock subjects us to the risk of a decline in the market price of the stock and, therefore, a reduction in the value of the collateral securing these loans. As of December 31, 2020, the aggregate loan-to-value ratio of the stock-secured portfolio was 14.3%.

Loan Approval Procedures and Authority. Pursuant to federal law, the aggregate amount of loans that Magyar Bank is permitted to make to any one borrower or a group of related borrowers is generally limited to 15% of Magyar Bank’s unimpaired capital and surplus (25% if the amount in excess of 15% is secured by “readily marketable collateral” or 30% for certain residential development loans). At December 31, 2020, based on the 15% limitation, Magyar Bank’s loans-to-one-borrower limit was approximately $10.0 million. At December 31, 2020, Magyar Bank had no borrowers with outstanding balances in excess of this amount. At December 31, 2020, our largest loan outstanding with one borrower was approximately $7.4 million, secured by accounts receivable, and was performing in accordance with its original terms on that date.

Our lending is subject to written underwriting standards and origination procedures. Decisions on loan applications are made on the basis of detailed applications submitted by the prospective borrower, credit histories that we obtain, and property valuations (consistent with our appraisal policy) prepared by outside independent licensed appraisers approved by our board of directors as well as internal evaluations, where permitted by regulations. The loan applications are designed primarily to determine the borrower’s ability to repay the requested loan, and the more significant items on the application are verified through use of credit reports, bank statements and tax returns. For residential mortgage lending, we generally follow underwriting procedures that are consistent with Freddie Mac guidelines.

Under our loan policy, the individual sponsoring an application is responsible for ensuring that all documentation is obtained prior to the submission of the application to an independent underwriter and/or officer for approval. In addition, an underwriting and/or approving officer verifies that the application meets our underwriting guidelines described below. Also, each application file is reviewed to assure its accuracy and completeness. Our quality control process includes reviews of underwriting decisions, appraisals and documentation. We are currently using the services of an independent company to perform the underwriting quality control reviews of residential mortgages.

Generally, we require title insurance or abstracts on our mortgage loans as well as fire and extended coverage casualty insurance in amounts at least equal to the principal amount of the loan or the value of improvements on the property, depending on the type of loan. We also require flood insurance to protect the property securing its interest when the property is located in a Special Flood Hazard Area designated by the Federal Emergency Management Agency and is participating in the National Flood Insurance Program.

Our loan approval policies and limits are established by our Board of Directors. All loans are approved in accordance with the loan approval policies and limits. Lending authorities are approved annually by the Board of Directors, and Magyar Bank lending staff are authorized to approve loans up to their lending authority limits, provided the loan meets all of our underwriting guidelines.

 

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Loan requests for aggregate borrowings up to $4.0 million must be approved by Magyar Bank’s Chief Lending Officer or President. Other members of our lending staff have lesser amounts of lending authority based on their experience as lending officers. Loan requests for aggregate borrowings up to $6.0 million must be approved by Magyar Bank’s Management Loan Committee. The Management Loan Committee is comprised of the President, Chief Lending Officer and various bank officers appointed by the Board of Directors. A quorum of three members including either the President or the Chief Lending Officer is required for all Management Loan Committee meetings. The Directors Loan Committee and the Board of Directors must approve all loan requests for aggregate borrowings in excess of $6.0 million.

Loan Originations, Purchases, Participations and Servicing of Loans. Lending activities are conducted primarily by our loan personnel operating at our main and branch office locations. All loans originated by us are underwritten pursuant to our policies and procedures. We originate both adjustable-rate and fixed-rate loans. Our ability to originate fixed- or adjustable-rate loans is dependent upon the relative customer demand for such loans, which is affected by the current and expected future levels of market interest rates.

Generally, we retain in our portfolio substantially all loans that we originate. Historically, we have not originated a significant number of loans for the purpose of resale into the secondary market. In the future, however, to help manage our interest rate risk and to increase fee income, we may increase our origination and sale of fixed-rate residential mortgage loans and commercial business loans guaranteed by the SBA. All one-to four-family residential mortgage loans that we sell in the secondary market are sold with servicing rights retained pursuant to master commitments negotiated with Freddie Mac. We sell our loans to Freddie Mac without recourse. No loans were held for sale at December 31, 2020.

At December 31, 2020, we were servicing SBA-guaranteed and commercial participation loans sold in the amount of $23.4 million and $17.6 million, respectively. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans.

From time-to-time, we will also participate in loans, sometimes as the “lead lender.” Whether we are the lead lender or not, we underwrite our participation portion of the loan according to our own underwriting criteria and procedures. At December 31, 2020, we had $16.9 million of loan participation interests in which we were the lead lender, and $19.8 million in loan participations in which we were not the lead lender. There were no commercial real estate loan participations originated during the quarter ended December 31, 2020 or the fiscal year ended September 30, 2020 in which we were not the lead lender. We have entered into certain loan participations when the aggregate outstanding balance of a particular customer relationship exceeds our loan-to-one-borrower limit. All loan participations are loans secured by real estate that adhere to our loan policies. At December 31, 2020, all participation loans were performing in accordance with their terms.

During the quarter ended December 31, 2020, we originated $5.8 million of fixed-rate and adjustable-rate one-to four-family residential mortgage loans and $20.0 million of fixed-rate and adjustable-rate commercial real estate loans. The fixed-rate loans are primarily loans with terms of 30 years or less. We did not purchase any adjustable-rate one-to four-family residential mortgage loans. We also originated $1.6 million of construction loans, $4.8 million of commercial business loans and $3.1 million of home equity lines of credit and other loans.

We generally do not purchase residential mortgage loans, except for loans to low-income borrowers as part of our Community Reinvestment Act lenders program. At December 31, 2020, we had $15.2 million of one-to four-family residential mortgage loans that were serviced by other lenders.

 

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Asset Quality

We commence collection efforts when a loan becomes 15 days past due with system-generated reminder notices. Subsequent late charge and delinquent notices are issued and the account is monitored on a regular basis thereafter. Personal, direct contact with the borrower is attempted early in the collection process as a courtesy reminder and later to determine the reason for the delinquency and to safeguard our collateral. When a loan is more than 60 days past due, the credit file is reviewed and, if deemed necessary, information is updated or confirmed and collateral re-evaluated. We make every effort to contact the borrower and develop a plan of repayment to cure the delinquency. Loans are placed on non-accrual status when they are delinquent for more than three months. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received.

A summary report of all loans 30 days or more past due is provided to the board of directors on a monthly basis. If no repayment plan is in process, the file is referred to counsel for the commencement of foreclosure or other collection efforts.

Non-Performing Assets. The table below sets forth the amounts and categories of our non-performing assets at the dates indicated. The table includes TDRs for each date presented.

 

   At
December 31,
2020
  September 30, 
  2020  2019  2018  2017  2016 
   (Dollars in thousands) 

Non-accrual loans:

       

One-to four-family residential

  $944  $905  $114  $138  $1,663  $2,486 

Commercial real estate

   3,122   2,219   2,652   455   482   443 

Construction

   4,580   5,141   2,900   —     —     —   

Home equity lines of credit

   —     —     —     90   —     281 

Commercial business

   1,395   1,467   1,228   223   213   997 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total non-accrual loans

   10,041   9,732   6,894   906   2,358   4,207 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Accruing loans 90 days or more past due:

       

One-to four-family residential

   —     —     —     —     —     —   

Commercial real estate

   —     —     —     —     —     —   

Construction

   —     —     —     —     —     —   

Home equity lines of credit

   —     —     —     —     —     —   

Commercial business

   —     —     —     —     —     —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Other

   —     —     —     —     —     —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total loans 90 days or more past due

   —     —     —     —     —     —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total non-performing loans

   10,041   9,732   6,894   906   2,358   4,207 

Other real estate owned

   2,072   2,594   7,528   8,586   11,056   12,082 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total non-performing assets

   12,113   12,326   14,422   9,492   13,414   16,289 

Performing troubled debt restructurings

   218   220   363      182    
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Performing troubled debt restructurings and total non-performing assets

  $12,331  $12,546  $14,785  $9,492  $13,596  $16,289 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ratios:

       

Total non-performing loans to total loans

   1.65  1.59  1.32  0.18  0.50  0.92

Total non-performing loans and performing troubled debt restructurings to total loans

   1.69  1.63  1.39  0.18  0.54  0.92

Total non-performing assets to total assets

   1.63  1.63  2.29  1.52  2.22  2.79

Total non-performing assets and performing troubled debt restructurings to total assets

   1.66  1.66  2.35  1.52  2.25  2.79%

 

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At December 31, 2020, our portfolio of commercial business, commercial real estate and construction loans totaled $375.0 million, or 61.8% of our total loans, compared to $309.8 million, or 59.2% of our total loans, at September 30, 2019. Commercial business, commercial real estate and construction loans generally have more risk than one-to four-family residential mortgage loans. As shown in the table above, our TDRs and total non-performing assets decreased $215,000 to $12.3 million at December 31, 2020 from $12.5 million at September 30, 2020, and decreased $2.5 million from $14.8 million at September 30, 2019.

Interest income of $179,000 and $508,000 would have been recorded during the quarter ended December 31, 2020 and the fiscal year ended September 30, 2020, respectively, if the non-accrual loans summarized in the above table had performed in accordance with their original terms. We recognized $54,000 and $0 of interest income for these loans for the quarter ended December 31, 2020 and the fiscal year ended September 30, 2020.

We account for its impaired loans in accordance with generally accepted accounting principles, which require that a creditor measure impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate except that, as a practical expedient, a creditor may measure impairment based on a loan’s observable market price less estimated costs of disposal, or the fair value of the collateral less estimated costs of disposal if the loan is collateral dependent. Regardless of the measurement method, a creditor may measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable.

We record cash receipts on impaired loans that are non-performing as a reduction to principal before applying amounts to interest or late charges unless specifically directed by the Bankruptcy Court to apply payments otherwise. We generally continue to recognize interest income on impaired loans that are performing.

TDRs occur when a creditor, for economic or legal reasons related to a debtor’s financial condition, grants a concession to the debtor that it would not otherwise consider, such as a below market interest rate, extending the maturity of a loan, or a combination of both. There was one new TDR totaling $218,000 during the three months ended December 31, 2020 that was performing in accordance with its restructured terms at December 31, 2020. There was one new TDR loan totaling $220,000 during the fiscal year ended September 30, 2020 that was performing in accordance with its restructured terms at September 30, 2020, and there was one new TDR loan totaling $363,000 during the fiscal year ended September 30, 2019.

 

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Delinquent Loans. The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated. Loans delinquent more than three months are generally classified as non-accrual loans.

 

   Loans Delinquent For     
   60-89 Days   90 Days and Over   Total 
   Number   Amount   Number   Amount   Number   Amount 
   (Dollars in thousands) 

At December 31, 2020

            

One-to four-family residential

   —      —      3   $944    3   $944 

Commercial real estate

   1    397    9    3,122    10    3,519 

Construction

   —      —      2    4,580    2    4,580 

Commercial business

   1    123    2    1,395    3    1,518 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   2   $520    16   $10,041    18   $10,561 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At September 30, 2020

            

One-to four-family residential

   —      —      3   $905    3   $905 

Commercial real estate

   2   $886    8    2,219    10    3,105 

Construction

   —      —      3    5,141    3    5,141 

Commercial business

   1    129    3    1,467    4    1,596 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   3   $1,015    17   $9,732    20   $10,747 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At September 30, 2019

            

One-to four-family residential

   —      —      1   $114    1   $114 

Commercial real estate

   1   $58    4    2,652    5    2,710 

Construction

   —      —      1    2,900    1    2,900 

Commercial business

   —      —      2    1,228    2    1,228 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   1   $58    8   $6,894    9   $6,952 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At September 30, 2018

            

One-to four-family residential

   —      —      1   $138    1   $138 

Commercial real estate

   —      —      3    455    3    455 

Home equity lines of credit

   —      —      3    90    3    90 

Commercial business

   —      —      2    223    2    223 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   —      —      9   $906    9   $906 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At September 30, 2017

            

One-to four-family residential

   1   $127    8   $1,663    9   $1,790 

Commercial real estate

   —      —      3    482    3    482 

Home equity lines of credit

   1    192    —      —      1    192 

Commercial business

   1    80    1    213    2    293 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   3   $399    12   $2,358    15   $2,757 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At September 30, 2016

            

One-to four-family residential

   1   $44    10   $2,486    11   $2,530 

Commercial real estate

   1    490    3    443    4    933 

Home equity lines of credit

   —      —      3    281    3    281 

Commercial business

   1    3    1    997    2    1,000 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   3   $537    17   $4,207    20   $4,744 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Real Estate Owned. Real estate we acquire as a result of foreclosure or by deed in lieu of foreclosure is classified as other real estate owned (“OREO”) until sold. When property is acquired it is recorded at fair value less estimated cost to sell at the date of foreclosure, establishing a new cost basis. Holding costs and declines in fair value result in charges to expense after acquisition.

We held $2.1 million and $2.6 million of OREO properties at December 31, 2020 and September 30, 2020, respectively, representing a decrease of $5.4 million and $4.9 million, respectively, from $7.5 million at September 30, 2019. During the year ended September 30, 2020, we were able to dispose of seven properties with an aggregate carrying value of $4.6 million. During the quarter ended December 31, 2020, we disposed of one property with a carrying value of $297,000. There were no new properties recorded as OREO during the quarter ended December 31, 2020 or during the fiscal year ended September 30, 2020.

OREO at December 31, 2020 consisted of one residential lot totaling $66,000, one compilation of real estate lots/land totaling $490,000, and two commercial real estate properties totaling $1.5 million. The Bank is determining the proper course of action for its OREO, which may include holding the properties until the real estate market improves, marketing the properties for individual sale, or selling properties to an investor and/or developer.

 

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We recorded $150,000 and $371,000 in valuation allowances against its OREO during quarter ended December 31, 2020 and the year ended September 30, 2020 based on updated appraisals or executed contracts of sale. Further declines in real estate values may result in a charge to expense in the future. Routine holding costs are charged to expense as incurred and improvements to OREO that enhance the value of the real estate are capitalized.

Classified Assets. Federal banking regulations provide that loans and other assets of lesser quality should be classified as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” we will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “un-collectible” and of such little value their continuance as assets without the establishment of a specific loss reserve is not warranted. We classify an asset as “special mention” if the asset has a potential weakness that warrants management’s close attention. While such assets are not impaired, management has concluded that if the potential weakness in the asset is not addressed, the value of the asset may deteriorate, adversely affecting the repayment of the asset. On the basis of our review at December 31, 2020, classified assets consisted of $2.9 million in special mention loans, $11.4 million in substandard loans, and $824,000 in substandard OREO.

We are required to establish an allowance for loan losses in an amount deemed prudent by management for loans classified substandard or doubtful, as well as for other problem loans. General allowances represent loss allowances which have been established to recognize the inherent losses associated with lending activities, but which, unlike impairment allowances, have not been allocated to particular problem assets. When we classify problem assets, we are required to determine whether or not impairment exists. A loan is impaired when, based on current information and events, it is probable that Magyar Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. When it is determined that impairment exists, a specific allowance for loss is established. For collateral-dependent loans, the loan is reduced by the impairment amount via a reduction to the loan and the allowance for loan loss. Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the NJDOBI and the FDIC, which can direct us to establish additional loss allowances.

The loan portfolio is reviewed on a regular basis to determine whether any loans require classification in accordance with applicable regulations. Not all classified assets constitute non-performing assets.

Allowance for Loan Losses

Our allowance for loan losses is maintained at a level management deems necessary to absorb loan losses that are both probable and reasonably estimable. Management, in determining the allowance for loan losses, considers the losses in our loan portfolio both probable and reasonably estimable, and changes in the nature and volume of loan activities, along with the general economic and real estate market conditions. The allowance for loan losses as of December 31, 2020 was maintained at a level that represents management’s best estimate of losses in the loan portfolio both probable and reasonably estimable. However, this analysis process is inherently subjective, as it requires us to make estimates that are susceptible to revisions as more information becomes available. Although we believe we have established the allowance at levels to absorb probable and estimable losses, future additions may be necessary if economic or other conditions in the future differ from the current environment.

 

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In addition, as an integral part of their examination process, the NJDOBI and the FDIC will periodically review our allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on their judgments of information available to them at the time of their examination.

The provision for loan losses was $640,000 for the quarter ended December 31, 2020 and increased $1.0 million to $1.7 million for the year ended September 30, 2020 compared to $668,000 for the year ended September 30, 2019. The increase was attributable to growth in total loans receivable and higher adjustments to the historical loss factors for economic conditions relating to the COVID-19 pandemic.

Allowance for Loan Losses. The following table sets forth activity in our allowance for loan losses for the periods indicated.

 

   At or for the
Quarter
Ended
December 31,
  At or for the Fiscal Year Ended September 30, 
   2020  2020  2019  2018  2017  2016 
   (Dollars in thousands) 

Balance at beginning of period

  $6,400  $4,888  $4,200  $3,475  $3,056  $2,886 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Charge-offs:

       

One-to four-family residential

   —     —     —     213   295   134 

Commercial real estate

   —     —     1   —     23   61 

Construction

   —     65   —     —     —     —   

Home equity lines of credit

   —     —     —     —     —     98 

Commercial business

   —     204   100   170   672   1,118 

Other

   —     —     —     3   —     —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total charge-offs

   —     269   101   386   990   1,411 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Recoveries:

       

One-to four-family residential

   —     9   120   87   35   —   

Commercial real estate

   —     5   —     23   —     100 

Construction

   —     —     —     3   12   7 

Home equity lines of credit

   —     1   1   1   15   82 

Commercial business

   90   100   —     —     4   26 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total recoveries

   90   115   121   114   66   215 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net charge-offs

   (90  154   (20  272   924   1,196 

Provision for loan losses

   640   1,666   668   997   1,343   1,366 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at end of period

  $7,130  $6,400  $4,888  $4,200  $3,475  $3,056 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ratios:

       

Net charge-offs to average loans outstanding

   (0.01)%   0.03  0.00  0.06  0.20  0.28

Allowance for loan losses to total non-
performing loans at end of period

   71.01  65.76  70.90  463.57  147.37  72.64

Allowance for loan losses to total loans at end of period

   1.17  1.05  0.93  0.82  0.73  0.67

Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category, the percent of the allowance to the total allowance and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

 

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   Amount   % of Allowance
In Category to
Total Allowance
  % of Loans
In Category to
Total Loans
 
   (Dollars in thousands) 

At December 31, 2020

     

One-to four-family residential

  $1,155    16.2  34.3

Commercial real estate

   3,408    47.8  42.9

Construction

   470    6.6  3.9

Home equity lines of credit

   267    3.7  3.3

Commercial business

   1,716    24.1  15.0

Other

   2    0.0  0.6

Unallocated

   112    1.6  0.0
  

 

 

   

 

 

  

 

 

 

Total allowance for loan losses

  $7,130    100.00  100.00
  

 

 

   

 

 

  

 

 

 

At September 30, 2020

     

One-to four-family residential

  $1,035    16.2  34.4

Commercial real estate

   3,232    50.4  40.6

Construction

   672    10.5  4.6

Home equity lines of credit

   179    2.8  3.2

Commercial business

   1,034    16.2  16.5

Other

   1    0.0  0.7

Unallocated

   247    3.9  0.0
  

 

 

   

 

 

  

 

 

 

Total allowance for loan losses

  $6,400    100.0  100.0
  

 

 

   

 

 

  

 

 

 

At September 30, 2019

     

One-to four-family residential

  $731    14.9  36.4

Commercial real estate

   2,066    42.3  44.5

Construction

   511    10.5  5.4

Home equity lines of credit

   138    2.8  3.4

Commercial business

   1,184    24.2  9.3

Other

   8    0.2  1.0

Unallocated

   250    5.1  0.0
  

 

 

   

 

 

  

 

 

 

Total allowance for loan losses

  $4,888    100.0  100.0
  

 

 

   

 

 

  

 

 

 

At September 30, 2018

     

One-to four-family residential

  $687    16.4  36.2

Commercial real estate

   1,540    36.7  42.8

Construction

   493    11.7  5.9

Home equity lines of credit

   109    2.6  3.5

Commercial business

   1,151    27.4  10.4

Other

   25    0.6  1.2

Unallocated

   195    4.6  0.0
  

 

 

   

 

 

  

 

 

 

Total allowance for loan losses

  $4,200    100.0  100.0
  

 

 

   

 

 

  

 

 

 

At September 30, 2017

     

One-to four-family residential

  $587    16.9  37.6

Commercial real estate

   1,277    36.8  43.7

Construction

   490    14.1  4.8

Home equity lines of credit

   57    1.6  3.9

Commercial business

   956    27.5  8.7

Other

   6    0.2  1.3

Unallocated

   102    2.9  0.0
  

 

 

   

 

 

  

 

 

 

Total allowance for loan losses

  $3,475    100.0  100.0
  

 

 

   

 

 

  

 

 

 

At September 30, 2016

     

One-to four-family residential

  $542    17.7  37.8

Commercial real estate

   1,075    35.2  43.6

Construction

   361    11.8  3.3

Home equity lines of credit

   71    2.3  4.8

Commercial business

   976    32.0  8.5

Other

   9    0.3  2.0

Unallocated

   22    0.7  0.0
  

 

 

   

 

 

  

 

 

 

Total allowance for loan losses

  $3,056    100.0  100.0
  

 

 

   

 

 

  

 

 

 

 

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Investments

Our Board of Directors has adopted our Investment Policy. This policy determines the types of securities in which we may invest. The Investment Policy is reviewed annually by the Board of Directors and changes to the policy are subject to approval by our Board of Directors. While general investment strategies are developed by the Asset and Liability Committee, the execution of specific actions rests primarily with our President and our Chief Financial Officer. They are responsible for ensuring the guidelines and requirements included in the Investment Policy are followed. They are authorized to execute transactions that fall within the scope of the established Investment Policy up to $2.5 million per transaction individually or $5.0 million per transaction jointly. Investment transactions in excess of $5.0 million must be approved by the Asset and Liability Committee. Investment transactions are reviewed and ratified by the Board of Directors at their regularly scheduled meetings.

Our investments portfolio may include U.S. Treasury obligations, debt and equity securities issued by various government-sponsored enterprises, including Fannie Mae and Freddie Mac, mortgage-backed securities, certain certificates of deposit of insured financial institutions, overnight and short-term loans to other banks, investment-grade corporate debt instruments, and municipal securities. In addition, we may invest in equity securities subject to certain limitations and not in excess of Magyar Bank’s Tier 1 capital.

The Investment Policy requires that securities transactions be conducted in a safe and sound manner, and purchase and sale decisions be based upon a thorough analysis of each security to determine its quality and inherent risks and fit within our overall asset/liability management objectives. The analysis must consider the effect of an investment or sale on our risk-based capital and prospects for yield and appreciation.

At December 31, 2020, our securities portfolio totaled $47.3 million, or 6.4% of our total assets. Securities are classified as held-to-maturity or available-for-sale when purchased. At December 31, 2020, $32.5 million of our securities were classified as held-to-maturity and reported at amortized cost, and $14.8 million were classified as available-for-sale and reported at fair value. At December 31, 2020, we held no investment securities classified as held-for-trading.

U.S. Government Agency and Government-Sponsored Enterprise Obligations. At December 31, 2020, our U.S. Government Agency and Government-Sponsored Enterprise Obligations totaled $44.0 million, or 93.1% of our total securities portfolio. Of this amount, $32.5 million were mortgage-backed securities and $11.5 million were debt securities. While these securities generally provide lower yields than other securities in our securities portfolio, we hold these securities, to the extent appropriate, for liquidity purposes and as collateral for certain deposits or borrowings. We invest in these securities to achieve positive interest rate spreads with minimal administrative expense, and to lower our credit risk as a result of the guarantees provided by these issuers.

Mortgage-Backed Securities. We purchase mortgage-backed pass through and collateralized mortgage obligation (“CMO”) securities insured or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. To a lesser extent, we also invest in mortgage-backed securities issued or sponsored by private issuers. At December 31, 2020, our mortgage-backed securities, including CMOs, totaled $32.8 million, or 69.3% of our total securities portfolio. Included in this balance was $255,000 of mortgage-backed securities issued by private issuers. Our policy is to limit purchases of privately issued mortgage-backed securities to non-high risk securities rated “A” or higher by a nationally recognized credit rating agency. High risk securities generally are defined as those exhibiting significantly greater volatility of estimated average life and price due to changes in interest rates than 30-year fixed rate securities.

Mortgage-backed pass through securities are created by pooling mortgages and issuing a security with an interest rate less than the interest rate on the underlying mortgages. Mortgage-backed pass through securities represent a participation interest in a pool of single-family or multi-family mortgages. As loan payments are

 

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made by the borrowers, the principal and interest portion of the payment is passed through to the investor as received. CMOs are also backed by mortgages. However, they differ from mortgage-backed pass through securities because the principal and interest payments on the underlying mortgages are structured so that they are paid to the security holders of pre-determined classes or tranches at a faster or slower pace. The receipt of these principal and interest payments, which depends on the estimated average life for each class, is contingent on a prepayment speed assumption assigned to the underlying mortgages. Variances between the assumed payment speed and actual payments can significantly alter the average lives of such securities. Mortgage-backed securities and CMOs generally yield less than the loans that underlie such securities because of the cost of payment guarantees and credit enhancements. However, mortgage-backed securities are usually more liquid than individual mortgage loans and may be used to collateralize borrowings and other liabilities.

Mortgage-backed securities present a risk that actual prepayments may differ from estimated prepayments over the life of the security, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments that can change the net yield on the securities. There is also reinvestment risk associated with the cash flows from such securities or if the securities are redeemed by the issuer. In addition, the market value of such securities may be adversely affected by changes in interest rates.

Our mortgage-backed securities portfolio had a weighted average yield of 2.29% at December 31, 2020. The estimated fair value of our mortgage-backed securities portfolio at December 31, 2020 was $33.4 million, which was $663,000 more than the amortized cost. Mortgage-backed securities in Magyar Bank’s portfolio do not contain sub-prime mortgage loans.

Corporate and Other Securities. At December 31, 2020, we held one corporate note issued by Wells Fargo Bank at its amortized value totaling $3.0 million. Our Investment Policy allows for the purchase of such instruments and requires that corporate debt obligations be rated in one of the four highest categories by a nationally recognized rating service. We may invest up to 25% of Magyar Bank’s investment portfolio in corporate debt obligations and up to 15% of Magyar Bank’s capital in any one issuer.

Equity Securities. At December 31, 2020, we held no equity securities other than $2.0 million in FHLBNY stock. The investment in FHLBNY stock is classified as a restricted security, carried at cost and evaluated for impairment. Equity securities are not insured or guaranteed investments and are affected by market interest rates and stock market fluctuations. Such investments other than the FHLBNY are carried at their fair value and fluctuations in the fair value of such investments, including temporary declines in value, directly affect our net capital position.

 

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Securities Portfolios. The following tables set forth the composition of our securities portfolio (excluding FHLBNY common stock) at the dates indicated.

 

   At December 31, 2020   At September 30, 2020 
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
  Fair
Value
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
  Fair
Value
 

Securities available for sale:

              

Obligations of U.S. government agencies:

              

Mortgage backed securities-residential

  $275   $14   $—    $289   $350   $14   $—    $364 

Obligations of U.S. government-sponsored enterprises:

              

Mortgage-backed securities-residential

   9,455    80    (27  9,508    9,092    108    (6  9,194 

Debt securities

   5,000    1    —     5,001    5,000    3    —     5,003 
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total securities available for sale

  $14,730   $95   $(27 $14,798   $14,442   $125   $(6 $14,561 
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

 

   At September 30, 2019   At September 30, 2018 
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
  Fair
Value
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
  Fair
Value
 

Securities available for sale:

              

Obligations of U.S. government agencies:

              

Mortgage backed securities-residential

  $480   $15   $—    $495   $1,463   $40   $(8 $1,495 

Obligations of U.S. government-sponsored enterprises:

              

Mortgage-backed securities-residential

   14,663    80    (35  14,708    19,262    13    (662  18,613 

Debt securities

   1,500    —      —     1,500    2,500    —      (139  2,361 
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total securities available for sale

  $16,643   $95   $(35 $16,703   $23,225   $53   $(809 $22,469 
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

 

   At December 31, 2020   At September 30, 2020 
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
  Fair
Value
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
  Fair
Value
 

Securities held to maturity:

              

Obligations of U.S. government agencies:

              

Mortgage backed securities-residential

  $1,172    10   $(30 $1,152   $1,453    11   $(33 $1,431 

Mortgage backed securities-commercial

   757    —      —     757    775    —      —     775 

Obligations of U.S. government-sponsored enterprises:

              

Mortgage-backed securities—residential

   20,809    621    (3  21,427    20,456    697    (3  21,150 

Debt securities

   6,500    1    (1  6,500    4,500    1    (16  4,485 

Private label mortgage-backed securities-residential

   255    —      (2  253    259    —      (5  254 

Corporate securities

   3,000    —      (196  2,804    3,000    —      (196  2,804 
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total securities held to maturity

  $32,493   $632   $(232 $32,893   $30,443   $709   $(253 $30,899 
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

 

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   At September 30, 2019   At September 30, 2018 
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
  Fair
Value
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
  Fair
Value
 

Securities held to maturity:

              

Obligations of U.S. government agencies:

              

Mortgage backed securities-residential

  $445   $—     $(54  391   $568   $—     $(93 $475 

Mortgage backed securities-commercial

   842    —      (6  836    904    —      (9  895 

Obligations of U.S. government-sponsored enterprises:

              

Mortgage-backed securities-residential

   22,363    276    (47  22,592    26,316    4    (867  25,453 

Debt securities

   2,468    10    —     2,478    2,464    —      (142  2,322 

Private label mortgage-backed securities-residential

   363    7    —     370    393    1    —     394 

Corporate securities

   3,000    —      (323  2,677    3,000    —      (388  2,612 
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total securities held to maturity

  $29,481   $293   $(430 $29,344   $33,645   $5   $(1,499 $32,151 
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

At December 31, 2020, a total of 11 securities with an aggregate fair value of $11.4 million had gross unrealized losses of $259,000, or approximately 2.3% of fair value. None of these unrealized losses were considered other-than-temporary.

 

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Portfolio Maturities and Yields. The composition, maturities and weighted average yields of the investment debt securities portfolio and the mortgage-backed securities portfolio at December 31, 2020 are summarized in the following tables. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur.

 

   December 31, 2020 
   One Year or Less  Less Than
Five Years
  More Than
Five Years
Through
Ten Years
  More Than
Ten Years
  Total Securities 
   Amortized
Cost
   Yield  Amortized
Cost
   Yield  Amortized
Cost
   Yield  Amortized
Cost
   Yield  Amortized
Cost
   Yield 
   (Dollars in thousands) 

Securities available for sale:

                

Obligations of U.S. government agencies:

                

Mortgage backed securities – residential

  $—       $—       $—       $275    3.50 $275    3.50

Obligations of U.S. government-sponsored enterprises:

                

Mortgage-backed securities-residential

   —        1,075    3.00  1,768    1.76  6,612    1.97  9,455    2.05

Debt securities

   —        5,000    0.65  —        —        5,000    0.65
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

Total securities available for sale

  $—       $6,075    1.07 $1,768    1.76 $6,887    2.03 $14,730    1.60
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

 

   December 31, 2020 
   One Year or Less  Less Than
Five Years
  More Than
Five Years
Through
Ten Years
  More Than
Ten Years
  Total Securities 
   Amortized
Cost
   Yield  Amortized
Cost
   Yield  Amortized
Cost
   Yield  Amortized
Cost
   Yield  Amortized
Cost
   Yield 
   (Dollars in thousands) 

Securities held to maturity:

                

Obligations of U.S. government agencies:

                

Mortgage backed securities – residential

  $—       $—       $—       $1,172    3.15  1,172    3.15

Mortgage-backed securities – commercial

   —        —        757    0.66  —        757    0.66

Obligations of U.S. government-sponsored enterprises:

                

Mortgage-backed securities-residential

   2,840    1.79  4,141    2.35  4,040    2.48  9,788    2.51  20,809    2.37

Debt securities

   —        6,500    0.52  —        —        6,500    0.52

Private label mortgage-backed securities – residential

   —        —        —        255    3.85  255    3.85

Corporate securities

   —            3,000    0.70  —        3,000    0.70
  

 

 

       

 

 

    

 

 

    

 

 

   

Total securities available for sale

  $2,840    1.79 $10,641    1.23 $7,797    1.62 $11,215    2.60 $32,493    1.85
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

 

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Sources of Funds

General. Deposits, including certificates of deposit, demand, savings, NOW and money market accounts, have traditionally been the primary source of funds used for our lending and investment activities. We obtain certificates of deposit primarily through our branch network and to a lesser extent via the brokered CD market. We also use borrowings, primarily Federal Home Loan Bank advances, to supplement cash flow needs, to lengthen the maturities of liabilities for interest rate risk management and to manage our cost of funds. Additional sources of funds include principal and interest payments from loans and securities, loan and security prepayments and maturities, income on other earning assets and stockholders’ equity. While cash flows from loans and securities payments can be relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition.

Deposits. Our deposits are generated primarily from customers, including municipalities, within our primary market area. We offer a selection of deposit accounts, including demand accounts, NOW accounts, money market accounts, savings accounts, retirement accounts and certificates of deposit. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. We also accept brokered deposits when attractive rates and terms are available. At December 31, 2020, we had $4.4 million of brokered deposits as compared to $9.4 million and $6.9 million in brokered deposits at September 30, 2020 and 2019, respectively.

Interest rates, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. Personalized customer service, long-standing relationships with customers and an active marketing program are relied upon to attract and retain deposits.

The flow of deposits is influenced significantly by general economic conditions, changes in money market and other prevailing interest rates and competition. The variety of deposit accounts offered allows us to be competitive in obtaining funds and responding to changes in consumer demand. Based on experience, we believe that our deposits are relatively stable. However, the ability to attract and maintain deposits, and the rates paid on these deposits, has been and will continue to be significantly affected by market conditions. At December 31, 2020, $118.8 million, or 19.4% of our deposit accounts, were certificates of deposit (including individual retirement accounts).

The following table sets forth the distribution of total deposit accounts, by account type, at the dates indicated.

 

   December 31,  September 30, 
   2020  2020 

Deposit Type

  Balance   Percent  Weighted
Average
Rate
  Balance   Percent  Weighted
Average
Rate
 
   (Dollars in thousands) 

Demand accounts

  $160,190    26.2  0.00 $163,562    26.5  0.00

Savings accounts

   75,923    12.4  0.21  74,923    12.1  0.26

NOW accounts

   76,986    12.6  0.30  65,447    10.6  0.32

Money market accounts

   180,182    29.4  0.35  188,023    30.4  0.47

Certificates of deposit

   103,443    16.9  1.28  110,650    17.9  1.49

Retirement accounts

   15,340    2.5  1.44  15,725    2.5  1.51
  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Total deposits

  $612,064    100.0  0.42 $618,330    100.00  0.51
  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

 

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   September 30, 
   2019  2018 

Deposit Type

  Balance   Percent  Weighted
Average
Rate
  Balance   Percent  Weighted
Average
Rate
 
   (Dollars in thousands) 

Demand accounts

  $106,422    20.1  0.00 $104,745    19.8  0.00

Savings accounts

   70,598    13.3  0.67  81,373    15.4  0.65

NOW accounts

   48,164    9.1  0.59  46,336    8.7  0.32

Money market accounts

   188,115    35.5  1.35  167,340    31.6  1.27

Certificates of deposit

   100,016    18.9  1.97  112,014    21.1  1.66

Retirement accounts

   16,760    3.2  1.62  18,329    3.5  1.41
  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Total deposits

  $530,075    100.00  1.04 $530,137    100.00  0.93
  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Included within our deposits at December 31, 2020 and September 30, 2020 were $125.1 million and $101.7 million, respectively, of local municipal government deposits. The weighted average rate on these deposits was 0.33% and 0.68% at December 31, 2020 and September 30, 2020, respectively.

As of December 31, 2020, the aggregate amount of outstanding certificates of deposit (including retirement and brokered accounts) in amounts greater than or equal to $100,000 was $83.3 million. The following table sets forth the maturity of these certificates as of December 31, 2020 (in thousands):

 

Three months or less

  $7,144 

Over three months through six months

   19,067 

Over six months through one year

   30,255 

Over one year to three years

   25,545 

Over three years

   1,323 
  

 

 

 

Total

  $83,334 
  

 

 

 

At December 31, 2020, $78.8 million of our certificates of deposit had maturities of one year or less. We monitor activity on these accounts and, based on historical experience and our current pricing strategy, we believe we will retain a large portion of these accounts upon maturity.

The following table sets forth the interest-bearing deposit activities for the periods indicated.

 

   For the Three
Months Ended
December 31,
  For the Fiscal Year Ended September 30, 
   2020  2020   2019  2018 
   (In thousands) 

Beginning balance

  $454,768  $423,653   $425,392  $416,473 

Net deposits before interest credited

   (3,632  26,494    (7,454  5,242 

Interest credited

   738   4,621    5,715   3,677 
  

 

 

  

 

 

   

 

 

  

 

 

 

Ending balance

  $451,874  $454,768   $423,653  $425,392 
  

 

 

  

 

 

   

 

 

  

 

 

 

Borrowings. Borrowings were $60.3 million at December 31, 2020. Borrowings increased $31.2 million, or 86.3%, to $67.4 million at September 30, 2020 from $36.2 million at September 30, 2019. Magyar Bank borrowed $36.9 million in PPPLF advances from the Federal Reserve Bank during the year ended September 30, 2020 to offset the liquidity and capital impacts of the PPP loans. FHLBNY advances decreased $5.7 million to $30.5 million at September 30, 2020 from $36.2 million at September 30, 2019 as deposit inflows were used to repay maturing long-term advances. During the quarter ended December 31, 2020, PPPLF advances decreased $7.1 million to $29.8 million and FHLBNY advances were unchanged at $30.5 million.

 

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These aggregate borrowings represent 8.8% of total liabilities and had a weighted average rate of 1.23% at December 31, 2020. Based on eligible collateral pledged to the FHLBNY at December 30, 2021, we had an aggregate borrowing capacity of $142.0 million with the FHLBNY.

Repurchase agreements are recorded as financing transactions as we maintain effective control over the transferred or pledged securities. The dollar amount of the securities underlying the agreements continues to be carried in our securities portfolio while the obligations to repurchase the securities are reported as liabilities in our Consolidated Balance Sheets. The securities underlying the agreements are delivered to the party with whom each transaction is executed. Those parties agree to resell to us the identical securities we delivered to them at the maturity or call period of the agreement. The Company did not have any repurchase agreements at or during the quarter ended December 31, 2020 or at or during the year ended September 30, 2020.

Long-term FHLBNY and Federal Reserve Bank of New York advances as of December 31, 2020 mature as follows (in thousands):

 

2021

  $7,130 

2022

   40,505 

2023

   4,741 

2024

   4,384 

2025 and thereafter

   3,500 
  

 

 

 

Total

  $60,260 
  

 

 

 

Information concerning overnight line of credit advances with the FHLBNY is summarized as follows:

 

                                    
   December 31,   September 30, 
   2020   2020   2019 
   (Dollars in thousands) 

Balance at end of period

  $—     $—     $—   

Weighted average balance during the period

  $—     $—     $743 

Maximum month-end balance during the period

  $—     $—     $16,800 

Average interest rate during the period

   —      —      2.45

Subsidiary Activities

Magyar Bank is the only subsidiary of Magyar Bancorp.

Magyar Bank has the following subsidiaries:

Magyar Investment Company is a Delaware investment corporation subsidiary for the purpose of buying, selling and holding investment securities. The income earned on Magyar Investment Company’s investment securities may be subject to a lower state tax than that assessed on income earned on investment securities maintained at Magyar Bank.

Hungaria Urban Renewal, LLC is a Delaware limited-liability corporation established in 2002 as a qualified intermediary operating for the purpose of acquiring and developing Magyar Bank’s corporate headquarters. On January 24, 2006, Magyar Bank exercised a purchase option within its lease from Hungaria Urban Renewal, LLC allowing Magyar Bank to purchase the land and building from this entity. Magyar Bank acquired a 100% interest in Hungaria Urban Renewal, LLC, which has no other business other than owning Magyar Bank’s corporate headquarters site. As part of a tax abatement agreement with the City of New Brunswick, Magyar Bank’s new office will remain in Hungaria Urban Renewal, LLC’s name.

 

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Magyar Service Corp., a New Jersey corporation, is a wholly owned subsidiary of Magyar Bank. Magyar Service Corp. offers Magyar Bank customers and others a complete range of non-deposit investment products and financial planning services, including insurance products, fixed and variable annuities, and retirement planning for individual and commercial customers.

Employees and Human Capital Resources

At December 31, 2020 we employed 93 full-time employees and five part-time employees. Our employees are not represented by any collective bargaining group. Management believes that we have good relations with our employees.

We encourage and support the growth and development of our employees and, wherever possible, seek to fill positions by promotion and transfer from within the organization. Continual learning and career development are advanced through annual performance and development conversations with employees, internally developed training programs, customized corporate training engagements and seminars, conferences, and other training events employees are encouraged to attend in connection with their job duties.

The safety, health and wellness of our employees is a top priority. The COVID-19 pandemic presented a unique challenge with regard to maintaining employee safety while continuing successful operations. Through teamwork and the adaptability of our management and staff, we were able to transition during the peak of the pandemic, over a short period of time, to a rotational work schedule allowing employees to effectively work from remote locations and ensure a safely-distanced working environment for employees performing customer facing activities, at branches and operations centers. All employees are asked not to come to work when they experience signs or symptoms of a possible COVID-19 illness and have been provided paid time off to cover compensation during such absences. On an ongoing basis, we further promote the health and wellness of our employees by strongly encouraging work-life balance, offering flexible work schedules, and keeping the employee portion of health care premiums to a minimum.

Employee retention helps us operate efficiently and achieve one of our business objectives, which is being a high-level service provider. We believe our commitment to living out our core values, actively prioritizing concern for our employees’ well-being, supporting our employees’ career goals, offering competitive wages and providing valuable fringe benefits aids in retention of our top-performing employees. In addition, nearly all of our employees are stockholders of Magyar Bancorp through participation in our Employee Stock Ownership Plan, which aligns associate and stockholder interests by providing stock ownership on a tax-deferred basis at no investment cost to our associates. At December 31, 2020, 25% of our current staff had been with us for fifteen years or more.

Properties

We conduct our business through our home office in New Brunswick, New Jersey and our six additional full-service branch offices in Middlesex and Somerset counties, New Jersey. We own our corporate headquarters and one of our branch offices and lease the remaining five branch offices. At December 31, 2020, the net book value of our office properties and equipment was $14.6 million.

 

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SUPERVISION AND REGULATION

General

Magyar Bank is a New Jersey-chartered savings bank, and its deposit accounts are insured up to applicable limits by the FDIC under the Deposit Insurance Fund (“DIF”). Magyar Bank is subject to extensive regulation, examination and supervision by the NJDOBI as the issuer of its charter, and by the FDIC as deposit insurer and its primary federal regulator. Magyar Bank must file reports with the NJDOBI and the FDIC concerning its activities and financial condition, and it must obtain regulatory approval prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions and opening or acquiring branch offices. Magyar Bank must comply with consumer protection regulations issued by the Consumer Financial Protection Bureau, as enforced by the FDIC. The NJDOBI and the FDIC conduct periodic examinations to assess Magyar Bank’s compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which a savings bank can engage and is intended primarily for the protection of the deposit insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.

Magyar Bancorp is a bank holding company controlling Magyar Bank and is subject to the Bank Holding Company Act of 1956, as amended (“BHCA”), and the rules and regulations of the Federal Reserve Board under the BHCA and to the provisions of the New Jersey Banking Act of 1948 (the “New Jersey Banking Act”), and to the regulations of the NJDOBI under the New Jersey Banking Act applicable to bank holding companies. Magyar Bank and Magyar Bancorp are required to file reports with, and otherwise comply with the rules and regulations of the Federal Reserve Board and the NJDOBI. Magyar Bancorp is required to file certain reports with, and otherwise comply with, the rules and regulations of the Securities and Exchange Commission under the federal securities laws.

Any change in such laws and regulations, whether by the NJDOBI, the FDIC, the Federal Reserve Board or through legislation, could have a material adverse impact on Magyar Bank and Magyar Bancorp and their operations and stockholders.

Certain of the laws and regulations applicable to Magyar Bank and Magyar Bancorp are summarized below. These summaries do not purport to be complete and are qualified in their entirety by reference to such laws and regulations.

Informal Agreement With Regard to BSA/AML Matters

On July 22, 2019, Magyar Bank entered into the Informal Agreement with the FDIC and the NJDOBI with regard to BSA and AML compliance matters. Magyar Bank has agreed to (1) develop, adopt and implement a system of internal controls designed to ensure full compliance with the BSA, (2) enhance BSA and AML training, (3) conduct a comprehensive system validation of its BSA/AML system and (4) perform an initial review, and thereafter on no less than annual basis, of its BSA staffing needs. Magyar Bank also agreed to review certain transactions and accounts within a specified timeframe for BSA and AML compliance, and to provide the FDIC and the NJDOBI with quarterly progress reports with respect to the Informal Agreement.

Numerous actions have been taken or initiated by Magyar Bank to strengthen its BSA and AML compliance practices, policies, procedures and controls, and to enhance training and staffing in this area. The Bank believes that it will be able to demonstrate substantial compliance with the terms of the Informal Agreement. However, the failure to achieve compliance with the requirements of the Informal Agreement could lead to further action by the FDIC and NJDOBI, which could adversely affect the Bank, including additional compliance expense, the costs of which are unknown and could adversely affect our future results of operations.

 

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New Jersey Banking Regulation

Activity Powers. Magyar Bank derives its lending, investment and other activity powers primarily from the applicable provisions of the New Jersey Banking Act and its related regulations. Under these laws and regulations, savings banks, including Magyar Bank, generally may invest in:

 

  

real estate mortgages;

 

  

consumer and commercial loans;

 

  

specific types of debt securities, including certain corporate debt securities and obligations of federal, state and local governments and agencies;

 

  

certain types of corporate equity securities; and;

 

  

certain other assets.

A savings bank may also make other investments pursuant to “leeway” authority that permits investments not otherwise permitted by the New Jersey Banking Act. “Leeway” investments must comply with a number of limitations on the individual and aggregate amounts of “leeway” investments. A savings bank may also exercise trust powers upon approval of the NJDOBI. New Jersey savings banks may exercise those powers, rights, benefits or privileges authorized for national banks or out-of-state banks or for federal or out-of-state savings banks or savings associations, provided that before exercising any such power, right, benefit or privilege, prior approval by the NJDOBI by regulation or by specific authorization is required. The exercise of these lending, investment and activity powers are limited by federal law and regulations. See “Federal Banking Regulation – Activity Restrictions on State-Chartered Banks” below.

Loans-to-One-Borrower Limitations. With certain specified exceptions, a New Jersey-chartered savings bank may not make loans or extend credit to a single borrower or to entities related to the borrower in an aggregate amount that would exceed 15% of the bank’s capital funds. A savings bank may lend an additional 10% of the bank’s capital funds if secured by collateral meeting the requirements of the New Jersey Banking Act. Magyar Bank currently complies with applicable loans-to-one-borrower limitations.

Dividends. Under the New Jersey Banking Act, a stock savings bank may declare and pay a dividend on its capital stock only to the extent that the payment of the dividend would not impair the capital stock of the savings bank. In addition, a stock savings bank may not pay a dividend unless the savings bank would, after the payment of the dividend, have a surplus of not less than 50% of its capital stock, or alternatively, the payment of the dividend would not reduce the surplus. Federal law may also limit the amount of dividends that may be paid by Magyar Bank. See “Federal Banking Regulation – Prompt Corrective Action” below.

Minimum Capital Requirements. Regulations of the NJDOBI impose on New Jersey-chartered depository institutions, including Magyar Bank, minimum capital requirements similar to those imposed by the FDIC on insured state banks. See “Federal Banking Regulation – Capital Requirements.”

Examination and Enforcement. The NJDOBI may examine Magyar Bank whenever it deems an examination advisable. The NJDOBI examines Magyar Bank at least every two years. The NJDOBI may order any savings bank to discontinue any violation of law or unsafe or unsound business practice and may direct any director, officer, attorney or employee of a savings bank engaged in an objectionable activity, after the NJDOBI has ordered the activity to be terminated, to show cause at a hearing before the NJDOBI why such person should not be removed. The NJDOBI also has authority to appoint a conservator or receiver for a savings bank under certain circumstances such as insolvency or unsafe or unsound condition to transact business.

 

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Federal Banking Regulation

Capital Requirements. Federal regulations require FDIC-insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio, a Tier 1 capital to risk-based assets ratio, a total capital to risk-based assets, and a Tier 1 capital to total assets leverage ratio. The existing capital requirements were effective January 1, 2015 and are the result of a final rule implementing regulatory amendments based on recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.

The capital standards require the maintenance of common equity Tier 1 capital, Tier 1 capital and total capital to risk-weighted assets of at least 4.5%, 6% and 8%, respectively, and a leverage ratio of at least 4% Tier 1 capital. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-sale-securities). Magyar Bank has exercised this one-time opt-out and therefore does not include AOCI in its regulatory capital determinations. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.

On April 9, 2020, the Federal Reserve Board, the OCC, and the FDIC issued an interim final rule to allow banking organizations to exclude from regulatory capital measures any exposures pledged as collateral for a non-recourse loan from the Federal Reserve. Since PPPLF extensions of credit are non-recourse, PPP loans pledged to the PPPLF qualify for exclusion under the interim final rule.

In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one-to four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements.

In assessing an institution’s capital adequacy, the FDIC takes into consideration not only these numeric factors but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary.

 

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At December 31, 2020, Magyar Bank’s common equity Tier 1 capital to risk-based assets ratio was 11.98%, total capital to risk-based assets was 13.23%, and Tier 1 capital to total assets leverage ratio was 8.37%.

Legislation enacted in May 2018 required the federal banking agencies to establish an optional “community bank leverage ratio” of between 8% to 10% Tier 1 equity/consolidated assets (the “Community Bank Leverage Ratio”). The Community Bank Leverage Ratio is available to institutions with less than $10 billion of assets that meet certain other requirements. Institutions with capital meeting or exceeding the specified requirements and electing to follow the alternative regulatory capital structure will be considered to comply with the applicable regulatory capital requirements, including the risk-based requirements. The federal banking agencies adopted final regulations that set 9.0% as the minimum capital for the Community Bank Leverage Ratio, effective January 1, 2020. A qualifying institution may opt in and out of the community bank leverage ratio framework on its quarterly call report. An institution that ceases to meet any qualifying criteria is provided with a two-quarter grace period to either comply with the community bank leverage ratio requirements or comply with the general capital regulations, including the risk-based capital requirements.

Section 4012 of the CARES Act required that the community bank leverage ratio be temporarily lowered to 8%. The federal regulators issued a rule implementing the lower ratio effective April 23, 2020. The rule also established a two-quarter grace period for a qualifying institution whose leverage ratio falls below the 8% community bank leverage ratio requirement so long as the bank maintains a leverage ratio of 7% or greater. Another rule was issued to transition back to the 9% community bank leverage ratio by increasing the ratio to 8.5% for calendar year 2021 and 9% thereafter.

Prompt Corrective Action. The FDIC Improvement Act established a system of prompt corrective action to resolve the problems of undercapitalized institutions. The FDIC has adopted regulations to implement the prompt corrective action legislation. The regulations were amended to incorporate the previously mentioned increased regulatory capital standards that were effective January 1, 2015. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%. Effective March 31, 2020, qualifying community banking organizations that elect to use the Community Bank Leverage Ratio framework and that maintain a leverage ratio of greater than 9.0% will be considered to have satisfied the risk-based and leverage capital requirements to be deemed well-capitalized.

Undercapitalized institutions are subject to a variety of mandatory supervisory measures including the requirement to file a capital plan for the FDIC’s approval and dividend restrictions as well as other discretionary actions by the regulator.

The FDIC is required, with some exceptions, to appoint a receiver or conservator for an insured state bank if that bank is “critically undercapitalized.” For this purpose, “critically undercapitalized” means having a ratio of tangible capital to total assets of less than 2%. The FDIC may also appoint a conservator or receiver for a state bank on the basis of the institution’s financial condition or upon the occurrence of certain events, including:

 

  

insolvency, or when the assets of the bank are less than its liabilities to depositors and others;

 

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substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices;

 

  

existence of an unsafe or unsound condition to transact business;

 

  

likelihood that the bank will be unable to meet the demands of its depositors or to pay its obligations in the normal course of business; and

 

  

insufficient capital, or the incurring or likely incurring of losses that will deplete substantially all of the institution’s capital with no reasonable prospect of replenishment of capital without federal assistance.

Activity Restrictions on State-Chartered Banks. Federal law and FDIC regulations generally limit the activities and investments of state-chartered FDIC-insured banks and their subsidiaries to those permissible for national banks and their subsidiaries, unless such activities and investments are specifically exempted by law or consented to by the FDIC.

Before making a new investment or engaging in a new activity that is not permissible for a national bank or otherwise permissible under federal law or the FDIC regulations, a state-chartered insured bank must seek approval from the FDIC to make such investment or engage in such activity. The FDIC will not approve the activity unless the bank meets its minimum capital requirements and the FDIC determines that the activity does not present a significant risk to the DIF. Certain activities of subsidiaries that are engaged in activities permitted for national banks only through a “financial subsidiary” are subject to additional restrictions.

Federal law permits a state-chartered savings bank to engage, through financial subsidiaries, in any activity in which a national bank may engage through a financial subsidiary and on substantially the same terms and conditions. In general, the law permits a national bank that is well-capitalized and well-managed to conduct, through a financial subsidiary, any activity permitted for a financial holding company other than insurance underwriting, insurance investments, real estate investment or development or merchant banking. The total assets of all such financial subsidiaries may not exceed the lesser of 45% of the bank’s total assets or $50 million. The bank must have policies and procedures to assess the financial subsidiary’s risk and protect the bank from such risk and potential liability, must not consolidate the financial subsidiary’s assets with the bank’s and must exclude from its own assets and equity all equity investments, including retained earnings, in the financial subsidiary. State-chartered savings banks may retain subsidiaries in existence as of March 11, 2000 and may engage in activities that are not authorized under federal law. Although Magyar Bank meets all conditions necessary to establish and engage in permitted activities through financial subsidiaries, it has not yet determined to engage in such activities.

Federal Home Loan Bank System. Magyar Bank is a member of the Federal Home Loan Bank system, which consists of eleven regional federal home loan banks, each subject to supervision and regulation by the Federal Housing Finance Board. The federal home loan banks provide a central credit facility primarily for member thrift institutions as well as other entities involved in home mortgage lending. Magyar Bank, as a member of the FHLBNY, is required to purchase and hold shares of capital stock in the FHLBNY in specified amounts.

As of December 31, 2020, Magyar Bank was in compliance with these requirements.

Enforcement. The FDIC has extensive enforcement authority over insured savings banks, including Magyar Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease and desist orders and remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and to unsafe or unsound practices.

 

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Deposit Insurance. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor.

The FDIC’s assessment system is based on each institution’s total assets less tangible capital, and ranges from 1.5 to 40 basis points. Assessments for institutions of less than $10 billion of assets are based on financial measures and supervisory ratings derived from statistical modeling estimating the institution’s probability of failure over a three-year period.

On September 30, 2018, the Deposit Insurance Fund Reserve Ratio reached 1.36 percent. Because the reserve ratio has exceeded 1.35 percent, two deposit insurance assessment changes occurred under the FDIC regulations:

 

  

Surcharges on large banks (total consolidated assets of $10 billion or more) ended; the last surcharge on large banks was collected on December 28, 2018.

 

  

Small banks (total consolidated assets of less than $10 billion) were awarded assessment credits for the portion of their assessments that contributed to the growth in the reserve ratio from 1.15 percent to 1.35 percent, to be applied when the reserve ratio is at least 1.38 percent.

Magyar Bank was awarded an assessment credit of $152,000, of which $109,000 was applied to Magyar Bank’s assessments for the quarter ended September 30, 2019 and $43,000 was applied to Magyar Bank’s assessments for the quarter ended December 31, 2019.

On June 22, 2020, the FDIC issued a final rule that mitigates the deposit insurance assessment effects of participating in in certain COVID-19 liquidity facilities. Pursuant to the final rule, the FDIC will generally remove the effect of PPP lending in calculating an institution’s deposit insurance assessment. The final rule also provides an offset to an institution’s total assessment amount for the increase in its assessment base attributable to participation in the PPP.

Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Magyar Bank does not believe that it is taking or is subject to any action, condition or violation that could lead to termination of its deposit insurance.

Transactions with Affiliates of Magyar Bank. Magyar Bank’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and its implementing Regulation W promulgated by the Board of Governors of the Federal Reserve System. An affiliate is a company that controls, is controlled by, or is under common control with an insured depository institution such as Magyar Bancorp and Magyar Bancorp, MHC. In general, loan transactions between an insured depository institution and its affiliates are subject to certain quantitative and collateral requirements. In this regard, transactions between an insured depository institution and its affiliates are limited to 10% of the institution’s unimpaired capital and unimpaired surplus for transactions with any one affiliate and 20% of unimpaired capital and unimpaired surplus for transactions in the aggregate with all affiliates. Collateral of specific types and in specified amounts ranging from 100% to 130% of the amount of the transaction must usually be provided by affiliates in order to receive loans from the savings association. In addition, transactions with affiliates must be consistent with safe and sound banking practices, not involve low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates. Magyar Bank is in compliance with these requirements.

Prohibitions Against Tying Arrangements. Banks are subject to the prohibitions of 12 U.S.C. Section 1972 on certain tying arrangements. A depository institution is prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.

 

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Community Reinvestment Act and Fair Lending Laws. All FDIC-insured institutions have a responsibility under the Community Reinvestment Act (“CRA”) and related regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In connection with its examination of a state-chartered savings bank, the FDIC is required to assess the institution’s record of compliance with the CRA. Among other things, the current CRA regulations replace the prior process-based assessment factors with a new evaluation system that rates an institution based on its actual performance in meeting community needs. In particular, the current evaluation system focuses on three tests:

 

  

a lending test, to evaluate the institution’s record of making loans in its service areas;;

 

  

an investment test, to evaluate the institution’s record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and

 

  

a service test, to evaluate the institution’s delivery of services through its service channels.

An institution’s failure to comply with the provisions of the CRA could, at a minimum, result in regulatory restrictions on its activities. We received an “outstanding” CRA rating in our most recently completed federal examination, which was conducted by the FDIC in 2019.

In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the FDIC, as well as other federal regulatory agencies and the Department of Justice.

Consumer Protection. Magyar Bank and Magyar Bancorp are subject to federal and state laws designed to protect consumers and prohibit unfair, deceptive or abusive business practices, including the Equal Credit Opportunity Act, Fair Housing Act, Home Ownership Protection Act, Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”), the Gramm-Leach Bliley Act, the Truth in Lending Act (“TILA”), the CRA, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the National Flood Insurance Act and various state law counterparts. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must interact with clients when taking deposits, making loans, collecting loans and providing other services. Further, the Consumer Financial Protection Bureau also has a broad mandate to prohibit unfair or deceptive acts and practices and is specifically empowered to require certain disclosures to consumers and draft model disclosure forms. Failure to comply with consumer protection laws and regulations can subject financial institutions to enforcement actions, fines and other penalties. The failure to comply with these laws could result in enforcement actions by the federal banking agencies, as well as other federal regulatory agencies and the Department of Justice.

Mortgage Reform. The Dodd-Frank Act prescribes certain standards that mortgage lenders must consider before making a residential mortgage loan, including verifying a borrower’s ability to repay such mortgage loan, and allows borrowers to assert violations of certain provisions of TILA as a defense to foreclosure proceedings. Under the Dodd-Frank Act, prepayment penalties are prohibited for certain mortgage transactions and creditors are prohibited from financing insurance policies in connection with a residential mortgage loan or home equity line of credit. In addition, the Dodd-Frank Act prohibits mortgage originators from receiving compensation based on the terms of residential mortgage loans and generally limits the ability of a mortgage originator to be compensated by others if compensation is received from a consumer. The Dodd-Frank Act requires mortgage lenders to make additional disclosures prior to the extension of credit, and in each billing statement, for negative amortization loans and hybrid adjustable-rate mortgages. The Economic Growth Act included provisions that ease certain requirements related to mortgage transactions for certain institutions with less than $10 billion in total consolidated assets.

 

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Privacy Regulations. Federal regulations generally require that Magyar Bank disclose its privacy policy, including identifying with whom it shares a customer’s “non-public personal information,” to customers at the time of establishing the customer relationship and annually thereafter. In addition, Magyar Bank is required to provide its customers with the ability to “opt-out” of having their personal information shared with unaffiliated third parties and not to disclose account numbers or access codes to non-affiliated third parties for marketing purposes. Except as otherwise required or permitted by law, Magyar Bank is prohibited from disclosing such information. Magyar Bank currently has a privacy protection policy in place and believes that such policy is in compliance with the regulations.

Loans to a Bank’s Insiders

Federal Regulation. A bank’s loans to its executive officers, directors, any owner of 10% or more of its stock (each, an “insider”) and any of certain entities affiliated with any such person (an insider’s related interest) are subject to the conditions and limitations imposed by Section 22(h) of the Federal Reserve Act and its implementing regulations. Under these restrictions, the aggregate amount of the loans to any insider and the insider’s related interests may not exceed the loans-to-one-borrower limit applicable to national banks, which is comparable to the loans-to-one-borrower limit applicable to Magyar Bank’s loans. See “New Jersey Banking Regulation – Loans-to-One Borrower Limitations.” All loans by a bank to all insiders and insiders’ related interests in the aggregate may not exceed the bank’s unimpaired capital and unimpaired surplus. With certain exceptions, loans to an executive officer, other than loans for the education of the officer’s children and certain loans secured by the officer’s residence, may not exceed the lesser of (1) $100,000 or (2) the greater of $25,000 or 2.5% of the bank’s unimpaired capital and surplus. Federal regulation also requires that any proposed loan to an insider or a related interest of that insider be approved in advance by a majority of the board of directors of the bank, with any interested directors not participating in the voting, if such loan, when aggregated with any existing loans to that insider and the insider’s related interests, would exceed either (1) $250,000 or (2) the greater of $25,000 or 5% of the bank’s unimpaired capital and surplus. Generally, such loans must be made on substantially the same terms as, and follow credit underwriting procedures that are not less stringent than, those that are prevailing at the time for comparable transactions with other persons.

An exception is made for extensions of credit made pursuant to a benefit or compensation plan of a bank that is widely available to employees of the bank and that does not give any preference to insiders of the bank over other employees of the bank.

In addition, federal law prohibits extensions of credit to a bank’s insiders and their related interests by any other institution that has a correspondent banking relationship with the bank, unless such extension of credit is on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavorable features.

New Jersey Regulation. Provisions of the New Jersey Banking Act impose conditions and limitations on the liabilities to a savings bank of its directors and executive officers and of corporations and partnerships controlled by such persons, that are comparable in many respects to the conditions and limitations imposed on the loans and extensions of credit to insiders and their related interests under federal law, as discussed above. The New Jersey Banking Act also provides that a savings bank that is in compliance with federal law is deemed to be in compliance with such provisions of the New Jersey Banking Act.

 

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Federal Reserve System

Federal Reserve Board regulations require all depository institutions to maintain reserves at specified levels against their transaction accounts (primarily NOW and regular checking accounts). At December 31, 2020, Magyar Bank was in compliance with the Federal Reserve Board’s reserve requirements. Savings banks, such as Magyar Bank, are authorized to borrow from the Federal Reserve Bank “discount window.” Magyar Bank is deemed by the Federal Reserve Board to be generally sound and thus is eligible to obtain secondary credit from its Federal Reserve Bank. Generally, secondary credit is extended on a very short-term basis to meet the liquidity needs of the institution. Loans must be secured by acceptable collateral and carry a rate of interest above the Federal Open Market Committee’s federal funds target rate.

The USA PATRIOT Act

The USA PATRIOT Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. The USA PATRIOT Act also requires the federal banking agencies to take into consideration the effectiveness of controls designed to combat money laundering activities in determining whether to approve a merger or other acquisition application of a member institution. Accordingly, if we engage in a merger or other acquisition, our controls designed to combat money laundering would be considered as part of the application process. We have established policies, procedures and systems designed to comply with these regulations.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 is intended to improve corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. We have policies, procedures and systems designed to comply with these regulations, and we review and document such policies, procedures and systems to ensure continued compliance with these regulations.

Holding Company Regulation

Federal Regulation. Magyar Bancorp is regulated as a bank holding company. Bank holding companies are subject to examination, regulation and periodic reporting under the Bank Holding Company Act, as administered by the Federal Reserve Board. Bank holding companies are generally subject to consolidated capital requirements established by the Federal Reserve Board . The Dodd-Frank Act required the Federal Reserve Board to amend its consolidated minimum capital requirements for bank holding companies to make them no less stringent than those applicable to insured depository institutions themselves. However, legislation was enacted in December 2014 which required the Federal Reserve Board to amend its “Small Bank Holding Company” exemption from consolidated holding company capital requirements to generally extend the applicability of the exemption from $500 million to $1 billion in assets. Furthermore, the Economic Growth Act expanded the category of holding companies that may rely on the policy statement by raising the maximum amount of assets a qualifying holding company may have from $1 billion to $3 billion. Consequently, bank holding companies of under $3 billion in consolidated assets remain exempt from consolidated regulatory capital requirements, unless the Federal Reserve Board determines otherwise in particular cases.

Regulations of the Federal Reserve Board provide that a bank holding company must serve as a source of strength to any of its subsidiary banks and must not conduct its activities in an unsafe or unsound manner. The Dodd-Frank Act codified the source of strength policy and requires the promulgation of implementing regulations. Under the prompt corrective action provisions of the Act, a bank holding company parent of an undercapitalized subsidiary bank would be directed to guarantee, within limitations, the capital restoration plan that is required of such an undercapitalized bank. See “Federal Banking Regulation – Prompt Corrective Action.” If the undercapitalized bank fails to file an acceptable capital restoration plan or fails to implement an accepted plan, the Federal Reserve Board may prohibit the bank holding company parent of the undercapitalized bank from paying any dividend or making any other form of capital distribution without the prior approval of the Federal Reserve Board.

 

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As a bank holding company, Magyar Bancorp is required to obtain the prior approval of the Federal Reserve Board to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior Federal Reserve Board approval is required for Magyar Bancorp to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after giving effect to such acquisition, it would, directly or indirectly, own or control more than 5% of any class of voting shares of such bank or bank holding company.

A bank holding company is required to give the Federal Reserve Board prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, will be equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. Such notice and approval is not required for a bank holding company that would be treated as “well capitalized” under applicable regulations of the Federal Reserve Board, that has received a composite “1” or “2” rating, as well as a “satisfactory” rating for management, at its most recent bank holding company inspection by the Federal Reserve Board, and that is not the subject of any unresolved supervisory issues.

In addition, a bank holding company that does not elect to be a financial holding company under federal regulation, is generally prohibited from engaging in, or acquiring direct or indirect control of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be permissible. Some of the principal activities that the Federal Reserve Board has determined by regulation to be so closely related to banking as to be permissible are:

 

  

making or servicing loans;

 

  

performing certain data processing services;

 

  

providing discount brokerage services, or acting as fiduciary, investment or financial advisor;

 

  

leasing personal or real property;

 

  

making investments in corporations or projects designed primarily to promote community welfare; and

 

  

acquiring a savings and loan association.

Bank holding companies that elect to be a financial holding company may engage in activities that are financial in nature or incident to activities which are financial in nature, including investment banking and insurance underwriting. Magyar Bancorp has not elected to be a financial holding company, although it may seek to do so in the future. Bank holding companies may elect to become a financial holding company if:

 

  

each of its depository institution subsidiaries is “well capitalized;”

 

  

each of its depository institution subsidiaries is “well managed;”

 

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each of its depository institution subsidiaries has at least a “satisfactory” Community Reinvestment Act rating at its most recent examination; and

 

  

the bank holding company has filed a certification with the Federal Reserve Board stating that it elects to become a financial holding company.

Under federal law, depository institutions are liable to the FDIC for losses suffered or anticipated by the FDIC in connection with the default of a commonly controlled depository institution or any assistance provided by the FDIC to such an institution in danger of default. This law would be applicable potentially to Magyar Bancorp if it ever acquired as a separate subsidiary a depository institution in addition to Magyar Bank.

It has been the policy of many mutual holding companies to waive the receipt of dividends declared by its subsidiary. In connection with its approval of its mutual holding company reorganization, however, the Federal Reserve Board required Magyar Bancorp, MHC to obtain prior Federal Reserve Board approval before it may waive any dividends. As of the date hereof, Federal Reserve Board policy is to prohibit a mutual bank holding company from waiving the receipt of dividends from its holding company or bank subsidiary, and management is not aware of any instance in which the Federal Reserve Board has given its approval for a mutual bank holding company to waive dividends. It is not currently intended that Magyar Bancorp, MHC will waive dividends declared by Magyar Bancorp as long as Magyar Bancorp, MHC is regulated by the Federal Reserve Board.

New Jersey Regulation. Under the New Jersey Banking Act, a company owning or controlling a savings bank is regulated as a bank holding company. The New Jersey Banking Act defines the terms “company” and “bank holding company” as such terms are defined under the BHCA. Each bank holding company controlling a New Jersey-chartered bank or savings bank must file certain reports with the NJDOBI and is subject to examination by the NJDOBI.

Acquisition of Magyar Bancorp, Inc. Under federal law and under the New Jersey Banking Act, no person may acquire control of Magyar Bancorp without first obtaining approval of such acquisition of control by the Federal Reserve Board and the NJDOBI.

Federal Securities Laws. Magyar Bancorp common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Magyar Bancorp is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

TAXATION

General

Magyar Bancorp, MHC, Magyar Bancorp and Magyar Bank are subject to federal and state income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal and state taxation is intended only to summarize certain pertinent tax matters and is not a comprehensive description of the tax rules applicable to Magyar Bancorp or Magyar Bank. The most recent audit of Magyar Bank’s federal tax returns by the Internal Revenue Service was for the period ended September 30, 2013. The audit did not result in any material adjustments to our tax returns or financial statements.

 

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Federal Taxation

Method of Accounting. For federal income tax purposes, Magyar Bancorp reports its income and expenses on the accrual method of accounting and uses a tax year ending September 30th for filing its federal and state income tax returns.

Bad Debt Reserves. Magyar Bank uses the direct charge-off method to account for bad debt deductions for income tax purposes.

Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt reserves created prior to January 1, 1988 (pre-base year reserves) were subject to recapture into taxable income if Magyar Bank failed to meet certain thrift asset and definitional tests.

At December 31, 2020, our total federal pre-base year reserve was approximately $1.3 million. However, under current law, pre-base year reserves remain subject to recapture if Magyar Bank makes certain non-dividend distributions, repurchases any of its stock, pays dividends in excess of tax earnings and profits, or ceases to maintain a bank charter.

Corporate Dividends-Received Deduction. Magyar Bancorp generally may exclude from its federal taxable income 100% of dividends received from Magyar Bank as a wholly owned subsidiary.

State Taxation

New Jersey State Taxation. The income of savings institutions in New Jersey, which is calculated based on federal taxable income, subject to certain adjustments, is subject to New Jersey tax. Magyar Bancorp, Magyar Bank, and Magyar Bank’s subsidiaries Magyar Service Corporation and Magyar Investment Company filed separate New Jersey corporate income tax returns for their fiscal years ended September 30, 2020.

For the tax years ending after July 31, 2019, New Jersey tax law requires members of an affiliated group where there is common ownership to calculate their corporation business tax on a combined or consolidated basis. Magyar Bancorp, Magyar Bank, Magyar Service Corporation and Magyar Bancorp, MHC will file a New Jersey tax return on a consolidated basis for the year ended September 30, 2020.

Effective January 1, 2018, New Jersey law imposes a temporary surtax on corporations earning New Jersey allocated income in excess of $1 million. The surtax was set at a rate of 2.5% for tax years beginning on or after January 1, 2018 through December 31, 2019, and at a rate of 1.5% for years beginning on or after January 1, 2020, through December 31, 2021. On September 29, 2020, the State of New Jersey’s Assembly repealed the scheduled reduction in surtax and extended the temporary 2.5% surtax rate through December 31, 2023. Accordingly, Magyar Bancorp is using an 11.5% New Jersey tax rate for the calculation of its New Jersey income tax expense ended September 30, 2020.

Magyar Bancorp, Magyar Bank and Magyar Service Corp. are not currently under audit with respect to their New Jersey income tax returns. Tax returns for period ended from September 30, 2016 and later are open for examinations by the state tax authorities.

Delaware State Taxation. As a Delaware holding company not earning income in Delaware, Magyar Bancorp is exempt from Delaware corporate income tax, but is required to file annual returns and pay annual fees and a franchise tax to the State of Delaware.

 

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MANAGEMENT

Our Directors and Executive Officers

Our board of directors is comprised of seven members. Directors serve three-year staggered terms so that approximately one-third of the directors are elected at each annual meeting. The following sets forth certain information regarding the members of our board of directors, and executive officers who are not directors, including the terms of office of board members. Except as indicated herein, there are no arrangements or understandings between any director and any other person pursuant to which the director was selected. Age information is as of December 31, 2020, and term as a director includes service with Magyar Bank.

With respect to directors, the biographies contain information regarding the person’s business experience and the experiences, qualifications, attributes or skills that caused the board of directors to determine that the person should serve as a director. Each director of Magyar Bancorp is also a director of Magyar Bank and Magyar Bancorp, MHC.

All of our directors are long-time residents of the communities we serve and many of such individuals have operated, or currently operate, businesses located in such communities. As a result, each director continuing in office has significant knowledge of the businesses that operate in our market area, an understanding of the general real estate market, values and trends in such communities and an understanding of the overall demographics of such communities. As a community banking institution, we believe that the local knowledge and experience of our directors assists us in assessing the credit and banking needs of our customers, developing products and services to better serve our customers and in assessing the risks inherent in our lending operations. As local residents, our directors are also exposed to the advertising, product offerings and community development efforts of competing institutions which, in turn, assists us in structuring its marketing efforts and community outreach programs.

Directors with terms ending following the year ending September 30, 2021:

John S. Fitzgerald. Mr. Fitzgerald, age 57, was appointed President and Chief Executive Officer of Magyar Bancorp and Magyar Bank on May 27, 2010. Prior to this appointment, Mr. Fitzgerald served as the Executive Vice President and Chief Operating Officer of Magyar Bank and Magyar Bancorp since October 2007. Mr. Fitzgerald joined Magyar Bank in June 2001. Mr. Fitzgerald has over 30 years’ experience in the banking industry. As Chief Executive Officer, his experience in leading Magyar Bancorp and Magyar Bank and his responsibilities for our strategic direction and management of our day-to-day operations brings broad industry and specific institutional knowledge and experience to the Board of Directors.

Thomas Lankey. Mr. Lankey, age 60, is the Senior Vice President of Long Term Care of Hackensack Meridian Health. Mr. Lankey’s first cousin is Joseph Yelencsics, who is also a director. He has been a director of Magyar Bank since 1994 and of Magyar Bancorp since its inception in 2005. Mr. Lankey is also currently the Mayor of Edison Township. Mr. Lankey’s experience in various senior management roles and expertise in compensation and healthcare management brings to the Board valuable experience and perspective and other qualities that are beneficial to Magyar Bancorp and the Magyar Bank.

Joseph A. Yelencsics. Mr. Yelencsics, age 66, is a private investor. He was a part owner of Bristol Motors, Inc., an automobile dealership. Mr. Yelencsics is the first cousin of Thomas Lankey, who is also a director. He has been a director of Magyar Bank since 2000 and of Magyar Bancorp since its inception in 2005. Mr. Yelencsics’ experience as owner and operator of his own company brings valuable leadership and business skills that meet the Board’s objective of maintaining a membership of experienced and dedicated individuals with diverse backgrounds, perspectives, skills and other qualities that are beneficial to Magyar Bancorp.

 

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Directors with terms ending following the year ending September 30, 2022:

Edward C. Stokes, III. Mr. Stokes, age 72, is the managing partner of the law firm of Stokes and Throckmorton. He is also the General Counsel of Magyar Bank. He has been a director of Magyar Bank since 2001 and of Magyar Bancorp since its inception in 2005. As an experienced attorney, Mr. Stokes brings to the Board a unique and valuable perspective on legal and legal-related issues that may arise in the operations of Magyar Bank and Magyar Bancorp.

Directors with terms ending following the year ending September 30, 2023:

Andrew G. Hodulik, CPA. Mr. Hodulik, age 64, is a certified public accountant with the accounting firm of Hodulik & Morrison, P.A., a division of PKF O’Connor Davies. He has been a director of Magyar Bank since 1995 and of Magyar Bancorp since its inception in 2005. As a certified public accountant and partner in an accounting firm, Mr. Hodulik brings to the Board of Directors valuable experience in dealing with accounting principles, internal controls and financial reporting rules and regulations.

Martin A. Lukacs, D.M.D. Dr. Lukacs, 74, is retired. He has been a director of Magyar Bank since 2000 and of Magyar Bancorp since its inception in 2005. Dr. Lukacs’ years of experience as owner and manager of his own local practice brings valuable leadership that meets the Board’s objective of maintaining a membership of experienced and dedicated individuals with diverse backgrounds, perspectives, skills and other qualities that are beneficial to Magyar Bancorp.

Jon R. Ansari, MBA. Mr. Ansari, age 46, is the Executive Vice President and Chief Financial Officer of Magyar Bank and of Magyar Bancorp. He has been a director of Magyar Bank and of Magyar Bancorp since 2017. Mr. Ansari joined Magyar Bank in July 1999. Prior to being appointed to his current position in June 2005, Mr. Ansari held various financial positions at Magyar Bank, such as Vice President of Finance, Controller, Assistant Controller and Accountant. Mr. Ansari’s background and extensive experience in operations, finance and accounting and knowledge of local markets provides a valuable resource to the Board of Directors.

Executive Officer Who is Not a Director

Peter M. Brown. Mr. Brown, age 56, is the Senior Vice President and Chief Lending Officer of Magyar Bank and of Magyar Bancorp. Mr. Brown joined Magyar Bank in 2013 as Vice President, Commercial Lending Officer and was appointed to his current position in July 2019. Prior to joining Magyar Bank, Mr. Brown served as President/CEO of Manasquan Savings Bank and has over 30 years of banking experience.

Board Independence

The Board has determined that each member of the Board of Directors, with the exception of Messrs. Fitzgerald and Ansari, is an “independent director” within the meaning of the NASDAQ corporate governance listing standards and Magyar Bancorp’s corporate governance policies. Mr. Fitzgerald is not considered to be independent due to his role as President and Chief Executive Officer, and Mr. Ansari is not considered to be independent due to his role as Executive Vice President and Chief Financial Officer. In determining the independence of the directors, the Board of Directors considered (i) $57,171 in legal fees paid by Magyar Bank during the year ended September 30, 2020 to a law firm for which Director Stokes serves as a partner, and (ii) the loans outstanding to individual directors made in compliance with applicable banking regulations.

 

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Executive Compensation

Summary Compensation Table. The following table sets forth, for the fiscal years ended September 30, 2020 and 2019, certain information as to the total remuneration paid by Magyar Bank to its Chief Executive Officer as well as to the two most highly compensated executive officers of Magyar Bank, other than the Chief Executive Officer, who received total salary and bonus in excess of $100,000. Each of the individuals listed in the table below is referred to as a “Named Executive Officer.”

 

SUMMARY COMPENSATION TABLE 

Name and principal position

  Year   Salary ($)   Bonus
($)*
   Stock awards
($)
   Option
awards ($)
   Non-equity
incentive plan
compensation
($)