UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☑ QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

 

Commission File Number  000-51726

 

Magyar Bancorp, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware 20-4154978
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification Number)
   
400 Somerset Street, New Brunswick, New Jersey 08901
(Address of Principal Executive Office) (Zip Code)

 

(732) 342-7600

(Issuer’s Telephone Number including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading symbol Name of each exchange on which registered
Common Stock, $.01 per share MGYR The NASDAQ Global Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑   No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☑   No ☐

 

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

 

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 pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑

 

The number of shares outstanding of the issuer's common stock at May 1, 2020 was 5,810,746.

 

 

 

MAGYAR BANCORP, INC.

 

Form 10-Q Quarterly Report

 

Table of Contents

 

 

PART I. FINANCIAL INFORMATION

 

  Page Number
     
Item 1. Financial Statements 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 35
Item 4. Controls and Procedures 35
     
PART II. OTHER INFORMATION
     
Item 1. Legal Proceedings 36
Item 1A. Risk Factors 36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 36
Item 3. Defaults Upon Senior Securities 36
Item 4. Mine Safety Disclosures 36
Item 5. Other Information 36
Item 6. Exhibits 36
     
Signature Pages 37

 

 

 

 

Table of Contents 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

(In Thousands, Except Share and Per Share Data)

   

 

   March 31,   September 30, 
   2020   2019 
   (Unaudited)     
Assets        
Cash  $1,469   $825 
Interest earning deposits with banks   27,672    20,644 
Total cash and cash equivalents   29,141    21,469 
           
Investment securities - available for sale, at fair value   9,573    16,703 
Investment securities - held to maturity, at amortized cost (fair value of          
$30,139 and $29,344 at March 31, 2020 and September 30, 2019, respectively)   30,042    29,481 
Federal Home Loan Bank of New York stock, at cost   1,992    2,222 
Loans receivable, net of allowance for loan losses of $5,525 and $4,888          
at March 31, 2020 and September 30, 2019, respectively   541,921    518,217 
Bank owned life insurance   13,808    13,647 
Accrued interest receivable   2,150    2,133 
Premises and equipment, net   15,792    16,172 
Other real estate owned ("OREO")   6,727    7,528 
Other assets   7,014    2,756 
           
Total assets  $658,160   $630,328 
           
Liabilities and Stockholders' Equity          
Liabilities          
Deposits  $560,938   $530,075 
Escrowed funds   2,565    2,399 
Federal Home Loan Bank of New York advances   31,079    36,189 
Accrued interest payable   190    191 
Accounts payable and other liabilities   7,880    6,823 
           
Total liabilities   602,652    575,677 
           
Stockholders' equity          
Preferred stock: $.01 Par Value, 1,000,000 shares authorized; none issued        
Common stock: $.01 Par Value, 8,000,000 shares authorized;          
5,923,742 issued; 5,810,746 and 5,820,746 shares outstanding          
at March 31, 2020 and September 30, 2019, respectively, at cost   59    59 
Additional paid-in capital   26,316    26,317 
Treasury stock: 112,996 and 102,996 shares at March 31, 2020 and          
September 30, 2019, respectively, at cost   (1,242)   (1,152)
Unearned Employee Stock Ownership Plan shares   (141)   (214)
Retained earnings   31,829    30,971 
Accumulated other comprehensive loss   (1,313)   (1,330)
           
Total stockholders' equity   55,508    54,651 
           
Total liabilities and stockholders' equity  $658,160   $630,328 

 

The accompanying notes are an integral part of these consolidated financial statements.

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MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Operations

(In Thousands, Except Share and Per Share Data)

 

   For the Three Months   For the Six Months 
   Ended March 31,   Ended March 31, 
   2020   2019   2020   2019 
   (Unaudited) 
Interest and dividend income                    
Loans, including fees  $6,224   $6,226   $12,620   $12,353 
Investment securities                    
Taxable   341    546    679    1,034 
Federal Home Loan Bank of New York stock   34    37    71    82 
                     
Total interest and dividend income   6,599    6,809    13,370    13,469 
                     
Interest expense                    
Deposits   1,398    1,508    2,845    2,946 
Borrowings   169    180    365    370 
                     
Total interest expense   1,567    1,688    3,210    3,316 
                     
Net interest and dividend income   5,032    5,121    10,160    10,153 
                     
Provision for loan losses   420    106    631    307 
                     
Net interest and dividend income after                    
provision for loan losses   4,612    5,015    9,529    9,846 
                     
Other income                    
Service charges   196    279    462    600 
Income on bank owned life insurance   79    73    161    147 
Other operating income   31    30    61    61 
Gains on sales of loans       151    26    151 
Gains on sales of investment securities   68    32    68    32 
                     
Total other income   374    565    778    991 
                     
Other expenses                    
Compensation and employee benefits   2,584    2,517    5,172    4,960 
Occupancy expenses   743    744    1,486    1,484 
Professional fees   430    278    778    569 
Data processing expenses   147    154    301    307 
OREO expenses   30    214    133    261 
FDIC deposit insurance premiums   108    109    216    216 
Loan servicing expenses   86    47    136    106 
Insurance expense   47    49    99    102 
Other expenses   385    377    769    776 
Total other expenses   4,560    4,489    9,090    8,781 
                     
Income before income tax expense   426    1,091    1,217    2,056 
                     
Income tax expense   121    324    359    604 
                     
Net income  $305   $767   $858   $1,452 
                     
Net income per share-basic and diluted  $0.05   $0.13   $0.15   $0.25 
                     
Weighted average basic and diluted shares outstanding   5,819,879    5,820,746    5,820,746    5,820,746 

 

The accompanying notes are an integral part of these consolidated financial statements.

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MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

(In Thousands)

 

 

   For the Three Months   For the Six Months 
   Ended March 31,   Ended March 31, 
   2020   2019   2020   2019 
   (Unaudited) 
Net income  $305   $767   $858   $1,452 
Other comprehensive income                    
Unrealized gain on                    
securities available for sale   105    297    91    639 
Less reclassification adjustments for:                    
Net gains realized on securities                    
available for sale   (68)   (32)   (68)   (32)
Other comprehensive income, before tax   37    265    23    607 
Deferred income tax effect   (10)   (75)   (6)   (170)
Total other comprehensive income   27    190    17    437 
Total comprehensive income  $332   $957   $875   $1,889 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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 MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders' Equity

For the Three and Six Months Ended March 31, 2020 and 2019

(In Thousands, Except for Share Amounts)

 

                           Accumulated     
   Common Stock   Additional       Unearned       Other     
   Shares   Par   Paid-In   Treasury   ESOP   Retained   Comprehensive     
   Outstanding   Value   Capital   Stock   Shares   Earnings   Loss   Total 
   (Unaudited) 
Balance, September 30, 2019   5,820,746    59   $26,317   $(1,152)  $(214)  $30,971   $(1,330)  $54,651 
Net income                       553        553 
Other comprehensive income                           (10)   (10)
ESOP shares allocated           2        36            38 
Balance, December 31, 2019   5,820,746    59   $26,319   $(1,152)  $(178)  $31,524   $(1,340)  $55,232 
Net income                       305        305 
Other comprehensive income                           27    27 
Purchase of treasury stock   (10,000)           (90)               (90)
ESOP shares allocated           (3)       37            34 
Balance, March 31, 2020   5,810,746    59    26,316    (1,242)   (141)   31,829    (1,313)  $55,508 

 

 

                           Accumulated     
   Common Stock   Additional       Unearned       Other     
   Shares   Par   Paid-In   Treasury   ESOP   Retained   Comprehensive     
   Outstanding   Value   Capital   Stock   Shares   Earnings   Loss   Total 
   (Unaudited) 
Balance, September 30, 2018   5,820,746   $59   $26,310   $(1,152)  $(356)  $27,975   $(1,474)  $51,362 
Net income                       685        685 
Other comprehensive income                           246    246 
ESOP shares allocated           4        35            39 
Balance, December 31, 2018   5,820,746   $59   $26,314   $(1,152)  $(321)  $28,660   $(1,228)  $52,332 
Net income                       767        767 
Other comprehensive loss                           191    191 
ESOP shares allocated                   36            36 
Balance, March 31, 2019   5,820,746   $59   $26,314   $(1,152)  $(285)  $29,427   $(1,037)  $53,326 

 

The accompanying notes are an integral part of these consolidated financial statements.

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MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(In Thousands)

 

   For the Six Months Ended 
   March 31, 
   2020   2019 
   (Unaudited) 
Operating activities          
Net income  $858   $1,452 
Adjustment to reconcile net income to net cash (used in) provided by operating activities          
           
Depreciation expense   434    468 
Premium amortization on investment securities, net   50    56 
Provision for loan losses   631    307 
Provision for loss on other real estate owned   60    212 
Originations of SBA loans held for sale   (262)   (2,170)
Proceeds from the sales of SBA loans   288    2,321 
Gains on sale of loans receivable   (26)   (151)
Gains on sales of investment securities   (68)   (32)
Gains on the sales of other real estate owned   (16)   (35)
ESOP compensation expense   73    75 
Deferred income tax benefit   (288)   (158)
Increase in accrued interest receivable   (17)   (56)
Increase in surrender value of bank owned life insurance   (161)   (147)
Increase in other assets   (142)   (463)
(Decrease) increase in accrued interest payable   (1)   29 
Decrease in accounts payable and other liabilities   (2,778)   (120)
Net income to net cash (used in) provided by operating activities   (1,365)   1,588 
           
Investing activities          
Net increase in loans receivable   (14,266)   (11,643)
Purchases of loans receivable   (10,069)    
Proceeds from the sale of loans receivable       4,386 
Purchases of investment securities held to maturity   (3,679)   (1,645)
Purchases of investment securities available for sale   (1,516)   (3,088)
Sales of investment securities available for sale   6,073    947 
Principal repayments on investment securities held to maturity   3,093    1,338 
Principal repayments on investment securities available for sale   2,639    878 
Purchases of premises and equipment   (54)   (64)
Investment in other real estate owned       (11)
Proceeds from other real estate owned   757    862 
Redemption of Federal Home Loan Bank stock   230    133 
Net cash used in investing activities   (16,792)   (7,907)
           
Financing activities          
Net increase in deposits   30,863    41,657 
Net increase in escrowed funds   166    429 
Proceeds from long-term advances   2,591    3,975 
Repayments of long-term advances   (7,701)   (6,940)
Purchase of treasury stock   (90)    
Net cash provided by financing activities   25,829    39,121 
Net increase in cash and cash equivalents   7,672    32,802 
           
Cash and cash equivalents, beginning of year   21,469    15,368 
           
Cash and cash equivalents, end of year  $29,141   $48,170 
           
Supplemental disclosures of cash flow information          
Cash paid for          
Interest  $3,211   $3,286 
Income taxes  $1,095   $414 
Non-cash operating activities          
Initial recognition of lease liability and right-of-use asset  $3,835   $ 

 

The accompanying notes are an integral part of these consolidated financial statements.

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MAGYAR BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

 

 

NOTE A – BASIS OF PRESENTATION

 

The consolidated financial statements include the accounts of Magyar Bancorp, Inc. (the “Company”), its wholly owned subsidiary, Magyar Bank (the “Bank”), and the Bank’s wholly owned subsidiaries Magyar Service Corporation, Hungaria Urban Renewal, LLC, and MagBank Investment Company. All material intercompany transactions and balances have been eliminated. The Company prepares its financial statements on the accrual basis and in conformity with accounting principles generally accepted in the United States of America ("US GAAP"). The unaudited information furnished herein reflects all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented.

 

Operating results for the three and six months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending September 30, 2020. The September 30, 2019 information has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by US GAAP for complete consolidated financial statements.

 

The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of other real estate owned, and the assessment of realizability of deferred income tax assets.

 

The Company has evaluated events and transactions occurring subsequent to the balance sheet date of March 31, 2020 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued. The markets served by the Company have been significantly impacted by the Coronavirus/COVID-19 pandemic (“COVID-19”), which started during the first calendar quarter of 2020. Please refer to Note O- Subsequent Events for more information.

 

 

NOTE B- RECENT ACCOUNTING PRONOUNCEMENTS

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. ASU 2016-13 requires entities to report “expected” credit losses on financial instruments and other commitments to extend credit rather than the current “incurred loss” model. These expected credit losses for financial assets held at the reporting date are to be based on historical experience, current conditions, and reasonable and supportable forecasts. This ASU will also require enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements.

 

In October 2019, the FASB voted to defer the effective date of ASU 2016-13 for smaller reporting companies to fiscal years beginning after December 15, 2022 (October 1, 2023 for the Company), and interim periods within those fiscal years. The Company currently expects to continue to qualify as a smaller reporting company, based upon the current SEC definition, and as a result, will likely be able to defer implementation of the new standard for a period of time. The Company did not early adopt as of January 1, 2020, but will continue to review factors that might indicate that the full deferral time period should not be used. The Company continues to evaluate the impact the new standard will have on the accounting for credit losses, but the Company may recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, consistent with regulatory expectations set forth in interagency guidance issued at the end of 2016. The Company cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on its consolidated financial condition or results of operations.

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In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. The ASU removes the disclosures of 1) the amounts in accumulated other comprehensive income that the entity expects to recognize in net periodic benefit cost during the next fiscal year, 2) the amount and timing of plan assets expected to be returned to the employer and 3) certain related party disclosures. The ASU clarifies the disclosure requirements for the projected benefit obligation (“PBO”) and fair value of plan assets for plans with PBOs in excess of plan assets and the accumulated benefit obligation (“ABO”) and fair value of plan assets for plans with ABOs in excess of plan assets. The ASU adds disclosure requirements for the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and for an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. ASU 2018-14 is effective for public business entities in fiscal years ending after December 15, 2020 (Beginning October 1, 2021 for the Company). Early adoption is permitted. The Corporation is currently evaluating the impact this ASU will have on its consolidated financial condition or results of operations.

 

 

NOTE C - CONTINGENCIES

 

The Company, from time to time, is a party to routine litigation that arises in the normal course of business. In the opinion of management, the resolution of this litigation, if any, would not have a material adverse effect on the Company’s consolidated financial position or results of operations.

 

 

NOTE D - EARNINGS PER SHARE

 

Basic and diluted earnings per share for the three and six months ended March 31, 2020 and 2019 were calculated by dividing net income by the weighted-average number of shares outstanding for the period considering the effect of dilutive equity options and stock awards for the diluted earnings per share calculations.

 

   Three Months   Six Months 
   Ended March 31,   Ended March 31, 
   2020   2019   2020   2019 
   (In thousands except for per share data) 
                 
Income applicable to common shares  $305   $767   $858   $1,452 
Weighted average number of common shares                    
outstanding - basic   5,820    5,821    5,821    5,821 
Stock options and restricted stock                
Weighted average number of common shares                    
and common share equivalents - diluted   5,820    5,821    5,821    5,821 
                     
Basic earnings per share  $0.05   $0.13   $0.15   $0.25 
                     
Diluted earnings per share  $0.05   $0.13   $0.15   $0.25 

 

There were no outstanding stock awards or options to purchase common stock at March 31, 2020 and 2019.

 

 

NOTE E – STOCK-BASED COMPENSATION AND STOCK REPURCHASE PROGRAM

 

The Company follows FASB Accounting Standards Codification (“ASC”) Section 718, Compensation-Stock Compensation, which covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. ASC 718 requires that compensation cost relating to share-based payment transactions be recognized in consolidated financial statements. The cost is measured based on the fair value of the equity or liability instruments issued.

 

Stock options generally vest over a five-year service period and expire ten years from issuance. The fair values of all option grants were estimated using the Black-Scholes option-pricing model. Management recognizes compensation expense for the fair values of these awards, which have graded vesting, on a straight-line basis over the vesting period of the awards. Once vested, these awards are irrevocable.

 

There were no grants, vested shares or forfeitures of non-vested restricted stock awards the three and six months ended March 31, 2020 and 2019.

 

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There were no stock option and stock award expenses included with compensation expense for the three and six months ended March 31, 2020 and 2019.

 

The Company announced in November 2007 its second stock repurchase program of up to 5% of its publicly-held outstanding shares of common stock, or 129,924 shares. Through March 31, 2020, the Company had repurchased a total of 91,000 shares of its common stock at an average cost of $8.41 per share under this program, including 10,000 shares purchased at an average price of $9.03 per share during the three months ended March 31, 2020. No shares were repurchased during the three or six months ended March 31, 2019. Under the stock repurchase program, 38,924 shares of the 129,924 shares authorized remained available for repurchase as of March 31, 2020. The Company’s intended use of the repurchased shares is for general corporate purposes. The Company held 112,996 total treasury stock shares at March 31, 2020.

 

The Company has an Employee Stock Ownership Plan ("ESOP") for the benefit of employees of the Company and the Bank who meet the eligibility requirements as defined in the plan. In 2006 the ESOP trust purchased 217,863 shares of common stock in the open market using proceeds of a loan from the Company. The total cost of shares purchased by the ESOP trust was $2.3 million, reflecting an average cost per share of $10.58. The Bank makes cash contributions to the ESOP on an annual basis sufficient to enable the ESOP to make the required loan payments to the Company. The loan bears a variable interest rate that adjusts annually every January 1st to the then published Prime Rate (4.75% at January 1, 2020) with principal and interest payable annually in equal installments over thirty years. The loan is secured by shares of the Company’s stock.

 

As the debt is repaid, shares are released as collateral and allocated to qualified employees. Accordingly, the shares pledged as collateral are reported as unearned ESOP shares in the Consolidated Balance Sheets. The Company accounts for its ESOP in accordance with FASB ASC Topic 718, “Employer’s Accounting for Employee Stock Ownership Plans”. As shares are released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations.

 

At March 31, 2020, shares allocated to participants totaled 190,661. Unallocated ESOP shares held in suspense totaled 27,202 and had a fair market value of $244,818. The Company's contribution expense for the ESOP was $73,000 and $75,000 for the six months ended March 31, 2020 and 2019, respectively.

 

 

NOTE F – OTHER COMPREHENSIVE INCOME

 

The components of other comprehensive income and the related income tax effects are as follows:

 

   Three Months Ended March 31, 
   2020   2019 
       Tax   Net of       Tax   Net of 
   Before Tax   Benefit   Tax   Before Tax   Benefit   Tax 
   Amount   (Expense)   Amount   Amount   (Expense)   Amount 
   (In thousands) 
Unrealized holding gain arising                              
during period on:                              
                               
Available-for-sale investments  $105   $(29)  $76   $297   $(84)  $213 
                               
Less reclassification adjustments for:                              
Net gains realized on securities                              
available for sale (a) (b)   (68)   19    (49)   (32)   9    (23)
                               
Other comprehensive income, net  $37   $(10)  $27   $265   $(75)  $190 

 

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   Six Months Ended March 31, 
   2020   2019 
       Tax   Net of       Tax   Net of 
   Before Tax   Benefit   Tax   Before Tax   Benefit   Tax 
   Amount   (Expense)   Amount   Amount   (Expense)   Amount 
   (In thousands) 
Unrealized holding gain arising                              
during period on:                              
                               
Available-for-sale investments  $91   $(25)  $66   $639   $(179)  $460 
                               
Less reclassification adjustments for:                              
Net gains realized on securities                              
available for sale (a) (b)   (68)   19    (49)   (32)   9    (23)
                               
                               
Other comprehensive income, net  $23   $(6)  $17   $607   $(170)  $437 

 

(a)  Realized gains on securities transactions included in gains on sales of investment securities in the accompanying Consolidated Statements of Operation
(b) Tax effect included in income tax expense in the accompanying Consolidated Statements of Operation    

 

 

NOTE G – FAIR VALUE DISCLOSURES

 

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

 

In accordance with ASC 820, the Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:

 

  Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.
     
  Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.
     
  Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques. The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability.

 

The Company based its fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

The following is a description of valuation methodologies used for assets measured at fair value on a recurring basis.

 

Securities available-for-sale

The securities available-for-sale portfolio is carried at estimated fair value on a recurring basis, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income/loss in stockholders’ equity. The securities available-for-sale portfolio consists of U.S government-sponsored mortgage-backed securities and private label mortgage-backed securities. The fair values of these securities are obtained from an independent nationally recognized pricing service. An independent pricing service provides the Company with prices which are categorized as Level 2, as quoted prices in active markets for identical assets are generally not available for the securities in the Company’s portfolio. Various modeling techniques are used to determine pricing for Company’s mortgage-backed securities, including option pricing and discounted cash flow models. The inputs to these models include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data.

 

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The following tables provide the level of valuation assumptions used to determine the carrying value of the Company’s assets measured at fair value on a recurring basis.

 

   Fair Value at March 31, 2020 
   Total   Level 1   Level 2   Level 3 
   (In thousands)     
Securities available for sale:                    
Obligations of U.S. government agencies:                    
Mortgage-backed securities - residential  $468   $   $468   $ 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed securities-residential   9,105        9,105     
            Total securities available for sale  $9,573   $   $9,573   $ 

 

   Fair Value at September 30, 2019 
   Total   Level 1   Level 2   Level 3 
   (In thousands) 
Securities available for sale:                    
Obligations of U.S. government agencies:                    
Mortgage-backed securities - residential  $495   $   $495   $ 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed securities-residential   14,708        14,708     
Debt securities   1,500        1,500     
            Total securities available for sale  $16,703   $   $16,703   $ 

 

 

The following is a description of valuation methodologies used for assets measured at fair value on a non-recurring basis.

 

Mortgage Servicing Rights, net

Mortgage Servicing Rights (MSRs) are carried at the lower of cost or estimated fair value. The estimated fair value of MSR is determined through a calculation of future cash flows, incorporating estimates of assumptions market participants would use in determining fair value including market discount rates, prepayment speeds, servicing income, servicing costs, default rates and other market driven data, including the market’s perception of future interest rate movements and, as such, are classified as Level 3. The Company had MSRs totaling $20,000 and $26,000 at March 31, 2020 and September 30, 2019, respectively.

 

Impaired Loans

Loans which meet certain criteria are evaluated individually for impairment. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest and principal payments of a loan will be collected as scheduled in the loan agreement. Three impairment measurement methods are used, depending upon the collateral securing the asset: 1) the present value of expected future cash flows discounted at the loan’s effective interest rate (the rate of return implicit in the loan); 2) the asset’s observable market price; or 3) the fair value of the collateral, less anticipated selling and disposition costs, if the asset is collateral dependent. The regulatory agencies require the last method for loans from which repayment is expected to be provided solely by the underlying collateral. The Company’s impaired loans are generally collateral dependent and, as such, are carried at the estimated fair value of the collateral less estimated selling costs. Fair value is estimated through current appraisals, and adjusted by management as necessary, to reflect current market conditions and, as such, are generally classified as Level 3.

 

Appraisals of collateral securing impaired loans are conducted by approved, qualified, and independent third-party appraisers. Such appraisals are ordered via the Company’s credit administration department, independent from the lender who originated the loan, once the loan is deemed impaired, as described in the previous paragraph. Impaired loans are generally re-evaluated with an updated appraisal within one year of the last appraisal. The Company discounts the appraised “as is” value of the collateral for estimated selling and disposition costs and compares the resulting fair value of collateral to the outstanding loan amount. If the outstanding loan amount is greater than the discounted fair value, the Company requires a reduction in the outstanding loan balance or additional collateral before considering an extension to the loan. If the borrower is unwilling or unable to reduce the loan balance or increase the collateral securing the loan, it is deemed impaired and the difference between the loan amount and the fair value of collateral, net of estimated selling and disposition costs, is charged off through a reduction of the allowance for loan loss.

 

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Other Real Estate Owned

The fair value of other real estate owned is determined through current appraisals, and adjusted as necessary, by management, to reflect current market conditions and anticipated selling and disposition costs. As such, other real estate owned is generally classified as Level 3.

 

The following tables provide the level of valuation assumptions used to determine the carrying value of the Company’s assets measured at fair value on a non-recurring basis at March 31, 2020 and September 30, 2019.

 

   Fair Value at March 31, 2020 
   Total   Level 1   Level 2   Level 3 
   (In thousands) 
                 
Impaired loans  $9,480   $   $   $9,480 
Other real estate owned   6,727            6,727 
Total  $16,207   $   $   $16,207 

 

   Fair Value at September 30, 2019 
   Total   Level 1   Level 2   Level 3 
   (In thousands) 
                 
Impaired loans  $6,835   $   $   $6,835 
Other real estate owned   7,528            7,528 
Total  $14,363   $   $   $14,363 

 

 

The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Company has utilized Level 3 inputs to determine fair value:

 

Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands)
         
  Fair Value Valuation    
March 31, 2020 Estimate Techniques Unobservable Input Range (Weighted Average)
         
Impaired loans  $     9,480 Appraisal of
collateral (1)
Appraisal adjustments (2) -2.5% to -8.0% (-4.0%)
Other real estate owned  $     6,727 Appraisal of
collateral (1)
Liquidation expenses (2) -1.3% to -53.8% (-15.6%)

 

 

Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands)
         
  Fair Value Valuation    
September 30, 2019 Estimate Techniques Unobservable Input Range (Weighted Average)
         
Impaired loans  $     6,835 Appraisal of
collateral (1)
Appraisal adjustments (2) -1.9% to -67.2% (-25.0%)
Other real estate owned  $     7,528 Appraisal of
collateral (1)
Liquidation expenses (2) -9.2% to -48.5% (-19.4%)

 

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(1)Fair value is generally determined through independent appraisals for the underlying collateral, which generally include various level 3 inputs which are not identifiable.
(2)Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

 

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments carried at cost or amortized cost as of March 31, 2020 and September 30, 2019.  For short-term financial assets such as cash and cash equivalents and accrued interest receivable, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For financial liabilities such as interest-bearing demand, NOW, and money market savings deposits, the carrying amount is a reasonable estimate of fair value due to these products being payable on demand and having no stated maturity.

 

   Carrying   Fair   Fair Value Measurement Placement 
   Value   Value   (Level 1)   (Level 2)   (Level 3) 
   (In thousands) 
March 31, 2020                    
Financial instruments - assets                         
Investment securities held to maturity  $30,042   $30,139   $   $30,139   $ 
Loans   541,921    554,893            554,893 
                          
Financial instruments - liabilities                         
Certificates of deposit including retirement certificates   128,243    130,492        130,492     
Borrowings   31,079    31,998        31,998     
                          
September 30, 2019                         
Financial instruments - assets                         
Investment securities held to maturity  $29,481   $29,344   $   $29,344   $ 
Loans   518,217    527,088            527,088 
                          
Financial instruments - liabilities                         
Certificates of deposit including retirement certificates   116,776    117,730        117,730     
Borrowings   36,189    36,583        36,583     

 

There were no transfers between fair value measurement placements for the six months ended March 31, 2020.

 

 

NOTE H – LEASES

 

The Company adopted Accounting Standard Update (“ASU”) No. 2016-02, Leases (Topic 842), on October 1, 2019. Topic 842 requires lessees to recognize a lease liability and a right-of-use (“ROU”) asset, measured at the present value of the future minimum lease payments, at the lease commencement date. The Company adopted this guidance on October 1, 2019, electing the modified retrospective transition approach method that does not adjust previous periods. The Company also elected not to include short-term leases (i.e., leases with initial term of twelve months or less), or equipment leases (deemed immaterial) on the consolidated statements of condition as provided for in the guidance.

 

The Company has operating leases for five branch locations. Our leases have remaining lease terms of up to 11 years, some of which include options to extend the leases for up to 10 additional years. Operating leases are recorded as ROU assets and lease liabilities and are included within Other assets and Accounts payable and other liabilities, respectively, on our Consolidated Balance Sheets.

 

Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at lease commencement base on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate. The Company recorded a $3.8 million operating lease right-of-use asset and operating lease liability beginning October 1, 2019. The incremental borrowing rate used by the Company to value its operating leases was based on the interpolated term advance rate available from the Federal Home Loan Bank of New York, based on the remaining lease term as of October 1, 2019.

 

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At March 31, 2020, the Company’s operating lease right-of-use assets and operating lease liabilities totaled $3.5 million and $3.9 million, respectively.

 

The following table presents the balance sheet information related to our leases:

 

   March 31, 2020 
   (Dollars in thousands) 
     
Operating lease right-of-use asset  $3,538 
Operating lease liabilities  $3,943 
Weighted average remaining lease term in years   8.0 
Weighted average discount rate   2.2%

 

The following table summarizes the maturity of our remaining lease liabilities by year:

 

    March 31, 2020 
    (In thousands) 
 For the Year Ending:      
 2020   $350 
 2021    705 
 2022    595 
 2023    602 
 2024    602 
 2025 and thereafter    1,528 
 Total lease payments    4,382 
 Less imputed interest    (439)
 Present value of lease liabilities   $3,943 

 

Total lease expense recorded on the Consolidated Statements of Income within Occupancy expense were $403,000 and $392,000 for the six months ended March 31, 2020 and 2019, respectively.

 

 

NOTE I - INVESTMENT SECURITIES

 

The following tables summarize the amortized cost and fair values of securities available for sale at March 31, 2020 and September 30, 2019:

 

   March 31, 2020 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   (In thousands) 
Securities available for sale:                    
Obligations of U.S. government agencies:                    
Mortgage-backed securities - residential  $445   $23   $   $468 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed securities-residential   9,045    95    (35)   9,105 
            Total securities available for sale  $9,490   $118   $(35)  $9,573 

 

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   September 30, 2019 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   (In thousands) 
Securities available for sale:                    
Obligations of U.S. government agencies:                    
Mortgage backed securities - residential  $480   $15   $   $495 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed securities-residential   14,663    80    (35)   14,708 
Debt securities   1,500            1,500 
            Total securities available for sale  $16,643   $95   $(35)  $16,703 

 

 

The maturities of the debt securities and certain information regarding the mortgage-backed securities available for sale at March 31, 2020 are summarized in the following table:

 

   March 31, 2020 
   Amortized   Fair 
   Cost   Value 
   (In thousands) 
Due within 1 year  $   $ 
Due after 1 but within 5 years        
Due after 5 but within 10 years        
Due after 10 years        
        Total debt securities        
           
Mortgage-backed securities:          
Residential   9,490    9,573 
Commercial        
        Total  $9,490   $9,573 

 

The following tables summarize the amortized cost and fair values of securities held to maturity at March 31, 2020 and September 30, 2019:

 

   March 31, 2020 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   (In thousands) 
Securities held to maturity:                    
Obligations of U.S. government agencies:                    
Mortgage-backed securities - residential  $1,917   $30   $(37)  $1,910 
Mortgage-backed securities - commercial   810        (6)   804 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed-securities - residential   23,078    759    (9)   23,828 
Debt securities   970    30        1,000 
Private label mortgage-backed securities - residential   267        (34)   233 
Corporate securities   3,000        (636)   2,364 
            Total securities held to maturity  $30,042   $819   $(722)  $30,139 

 

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   September 30, 2019 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   (In thousands) 
Securities held to maturity:                    
Obligations of U.S. government agencies:                    
Mortgage-backed securities - residential  $445   $   $(54)  $391 
Mortgage-backed securities - commercial   842        (6)   836 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage backed securities - residential   22,363    276    (47)   22,592 
Debt securities   2,468    10        2,478 
Private label mortgage-backed securities - residential   363    7        370 
Corporate securities   3,000        (323)   2,677 
            Total securities held to maturity  $29,481   $293   $(430)  $29,344 

 

 

The maturities of the debt securities and certain information regarding the mortgage backed securities held to maturity at March 31, 2020 are summarized in the following table:

 

   March 31, 2020 
   Amortized   Fair 
   Cost   Value 
   (In  thousands) 
Due within 1 year  $   $ 
Due after 1 but within 5 years        
Due after 5 but within 10 years   3,970    3,364 
Due after 10 years        
        Total debt securities   3,970    3,364 
           
Mortgage-backed securities:          
Residential   25,262    25,971 
Commercial   810    804 
        Total  $30,042   $30,139 

 

 

NOTE J – IMPAIRMENT OF INVESTMENT SECURITIES

 

The Company recognizes credit-related other-than-temporary impairment on debt securities in earnings while noncredit-related other-than-temporary impairment on debt securities not expected to be sold are recognized in other comprehensive income.

 

The Company reviews its investment portfolio on a quarterly basis for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and the intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in the market. The Company evaluates its intent and ability to hold debt securities based upon its investment strategy for the particular type of security and its cash flow needs, liquidity position, capital adequacy and interest rate risk position. In addition, the risk of future other-than-temporary impairment may be influenced by prolonged recession in the U.S. economy, changes in real estate values and interest deferrals.

 

Investment securities with fair values less than their amortized cost contain unrealized losses. The following tables present the gross unrealized losses and fair value at March 31, 2020 and September 30, 2019 for both available for sale and held to maturity securities by investment category and time frame for which the loss has been outstanding:

 

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      March 31, 2020
      Less Than 12 Months  12 Months Or Greater  Total
   Number of  Fair  Unrealized  Fair  Unrealized  Fair  Unrealized
   Securities  Value  Losses  Value  Losses  Value  Losses
      (Dollars in thousands)
Obligations of U.S. government agencies:                                   
Mortgage-backed securities - residential   2   $   $   $380   $(37)  $380   $(37)
Mortgage-backed securities - commercial   1            804    (6)   804    (6)
Obligations of U.S. government-sponsored enterprises                                   
Mortgage-backed securities - residential   5    1,228        3,952    (44)   5,180    (44)
Private label mortgage-backed securities residential   1    233    (34)           233    (34)
Corporate securities   1            2,364    (636)   2,364    (636)
        Total   10   $1,461   $(34)  $7,500   $(723)  $8,961   $(757)

 

      September 30, 2019
      Less Than 12 Months  12 Months Or Greater  Total
   Number of  Fair  Unrealized  Fair  Unrealized  Fair  Unrealized
   Securities  Value  Losses  Value  Losses  Value  Losses
      (Dollars in thousands)
Obligations of U.S. government agencies:                     
Mortgage-backed securities - residential   2   $   $   $392   $(54)  $392   $(54)
Mortgage-backed securities - commercial   1            836    (6)   836    (6)
Obligations of U.S. government-sponsored enterprises                                   
Mortgage-backed securities - residential   13    1,219    (4)   14,429    (78)   15,648    (82)
Corporate securities   1            2,678    (323)   2,678    (323)
        Total   17   $1,219   $(4)  $18,335   $(461)  $19,554   $(465)

 

 

The Company evaluated these securities and determined that the decline in value was primarily related to fluctuations in the interest rate environment and were not related to any company or industry specific event. At March 31, 2020 and September 30, 2019, there were ten and seventeen, respectively, investment securities with unrealized losses.

 

The Company anticipates full recovery of amortized costs with respect to these securities. The Company does not intend to sell these securities and has determined that it is not more likely than not that the Company would be required to sell these securities prior to maturity or market price recovery. Management has considered factors regarding other than temporarily impaired securities and determined that there are no securities with impairment that is other than temporary as of March 31, 2020 and September 30, 2019.

 

 

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NOTE K – LOANS RECEIVABLE, NET AND RELATED ALLOWANCE FOR LOAN LOSSES

 

Loans receivable, net were comprised of the following:

 

   March 31,  September 30,
   2020  2019
   (In thousands)
       
One-to-four family residential  $204,575   $190,415 
Commercial real estate   245,860    232,544 
Construction   22,333    28,451 
Home equity lines of credit   22,170    17,832 
Commercial business   47,684    48,769 
Other   4,782    4,990 
Total loans receivable   547,404    523,001 
Net deferred loan costs   42    104 
Allowance for loan losses   (5,525)   (4,888)
           
Total loans receivable, net  $541,921   $518,217 

 

The segments of the Bank’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The residential mortgage loan segment is further disaggregated into two classes: amortizing term loans, which are primarily first liens, and home equity lines of credit, which are generally second liens.  The commercial real estate loan segment is further disaggregated into three classes: loans secured by multifamily structures, owner-occupied commercial structures, and non-owner occupied nonresidential properties.  The construction loan segment consists primarily of loans to developers or investors for the purpose of acquiring, developing and constructing residential or commercial structures and to a lesser extent one-to-four family residential construction loans made to individuals for the acquisition of and/or construction on a lot or lots on which a residential dwelling is to be built.  Construction loans to developers and investors have a higher risk profile because the ultimate buyer, once development is completed, is generally not known at the time of the loan.  The commercial business loan segment consists of loans made for the purpose of financing the activities of commercial customers and consists primarily of revolving lines of credit. The other loan segment consists primarily of stock-secured installment consumer loans, but also includes unsecured personal loans and overdraft lines of credit connected with customer deposit accounts.

 

Management evaluates individual loans in all segments for possible impairment if the loan either is in nonaccrual status, or is risk rated Substandard and is 90 days or more past due.  Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  

 

Once the determination has been made that a loan is impaired, the recorded investment in the loan is compared to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral securing the loan, less anticipated selling and disposition costs. The method is selected on a loan by loan basis, with management primarily utilizing the fair value of collateral method. If there is a shortfall between the fair value of the loan and the recorded investment in the loan, the Company charges the difference to the allowance for loan loss as a charge-off and carries the impaired loan on its books at fair value. It is the Company’s policy to evaluate impaired loans on an annual basis to ensure the recorded investment in a loan does not exceed its fair value.

 

The following tables present impaired loans by class, segregated by those for which a specific allowance was required and charged-off and those for which a specific allowance was not necessary at the dates presented:

 

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         Impaired      
         Loans with      
   Impaired Loans with  No Specific      
   Specific Allowance  Allowance  Total Impaired Loans
               Unpaid
   Recorded  Related  Recorded  Recorded  Principal
March 31, 2020  Investment  Allowance  Investment  Investment  Balance
   (In thousands)
                
One-to-four family residential  $   $   $2,177   $2,177   $2,177 
Commercial real estate   599    46    2,768    3,367    3,367 
Construction   2,306    175    2,900    5,206    5,206 
Commercial business           1,404    1,404    1,404 
Total impaired loans  $2,905   $221   $9,249   $12,154   $12,154 

 

         Impaired      
         Loans with      
   Impaired Loans with  No Specific      
   Specific Allowance  Allowance  Total Impaired Loans
               Unpaid
   Recorded  Related  Recorded  Recorded  Principal
September 30, 2019  Investment  Allowance  Investment  Investment  Balance
   (In thousands)
                
One-to-four family residential  $   $   $1,405   $1,405   $1,405 
Commercial real estate           4,593    4,593    4,593 
Construction           2,900    2,900    2,900 
Commercial business           1,456    1,456    1,456 
Total impaired loans  $   $   $10,354   $10,354   $10,354 

 

 

The average recorded investment in impaired loans was $10.3 million and $7.8 million for the six months ended March 31, 2020 and 2019, respectively. The Company’s impaired loans include delinquent non-accrual loans and performing Troubled Debt Restructurings (“TDRs”), as TDRs remain impaired loans until fully repaid. There were no TDRs during the six months ended March 31, 2020. There was one TDR during the six months ended March 31, 2019 totaling $365,000 that resulted from the restructure of a previously impaired, non-accrual loan. During the six months ended March 31, 2020 and 2019, interest income of $75,000 and $109,000, respectively, were recognized for TDR loans while no interest income was recognized for delinquent non-accrual loans.

 

The following tables present the average recorded investment in impaired loans for the periods indicated. There was no interest income recognized on impaired loans during the periods presented.

 

   Three Months   Six Months 
   Ended March 31, 2020   Ended March 31, 2020 
   (In thousands) 
         
One-to-four family residential  $1,787   $1,659 
Commercial real estate   2,995    3,528 
Construction   4,053    3,669 
Commercial business   1,441    1,446 
Average investment in impaired loans  $10,276   $10,302 

 

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   Three Months   Six Months 
   Ended March 31, 2019   Ended March 31, 2019 
   (In thousands) 
         
One-to-four family residential  $1,240   $1,204 
Commercial real estate   3,923    3,936 
Construction   2,900    1,933 
Home equity lines of credit   49    52 
Commercial business   646    667 
Average investment in impaired loans  $8,758   $7,792 

 

 

Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. All loans greater than three months past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category.

 

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight.  Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as severe delinquency, bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. The Bank’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. The Asset Review Committee performs monthly reviews of all commercial relationships internally rated 6 (“Watch”) or worse.  Confirmation of the appropriate risk grade is performed by an external loan review company that semi-annually reviews and assesses loans within the portfolio.  Generally, the external consultant reviews commercial relationships greater than $500,000 and/or criticized relationships greater than $250,000. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a monthly basis. 

 

The following tables present the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the Bank’s internal risk rating system at the dates presented:

 

       Special             
   Pass   Mention   Substandard   Doubtful   Total 
                     
   (In  thousands) 
March 31, 2020                    
One-to-four family residential  $203,308   $   $1,267   $   $204,575 
Commercial real estate   243,683    406    1,771        245,860 
Construction   17,035        5,298        22,333 
Home equity lines of credit   22,170                22,170 
Commercial business   46,435    13    1,236        47,684 
Other   4,782                4,782 
Total  $537,413   $419   $9,572   $   $547,404 

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       Special             
   Pass   Mention   Substandard   Doubtful   Total 
                     
   (In thousands) 
September 30, 2019                    
One-to-four family residential  $189,938   $   $477   $   $190,415 
Commercial real estate   228,156    1,409    2,979        232,544 
Construction   25,551        2,900        28,451 
Home equity lines of credit   17,832                17,832 
Commercial business   47,541        1,228        48,769 
Other   4,990                4,990 
Total  $514,008   $1,409   $7,584   $   $523,001 

 

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans at the dates presented:

 

       30-59   60-89                 
       Days   Days   90 Days +   Total   Non-   Total 
   Current   Past Due   Past Due   Past Due   Past Due   Accrual   Loans 
   (Dollars in  thousands) 
March 31, 2020                            
One-to-four family residential  $200,712   $2,957   $   $906   $3,863   $906   $204,575 
Commercial real estate   240,540    3,549        1,771    5,320    1,771    245,860 
Construction   17,127            5,206    5,206    5,206    22,333 
Home equity lines of credit   22,072    6    92        98        22,170 
Commercial business   45,028    1,420        1,236    2,656    1,236    47,684 
Other   4,782                        4,782 
Total  $530,261   $7,932   $92   $9,119   $17,143   $9,119   $547,404 

 

       30-59   60-89                 
       Days   Days   90 Days +   Total   Non-   Total 
   Current   Past Due   Past Due   Past Due   Past Due   Accrual   Loans 
   (In  thousands) 
September 30, 2019                            
One-to-four family residential  $190,301   $   $   $114   $114   $114   $190,415 
Commercial real estate   229,331    503    58    2,652    3,213    2,652    232,544 
Construction   25,551            2,900    2,900    2,900    28,451 
Home equity lines of credit   17,832                        17,832 
Commercial business   47,541            1,228    1,228    1,228    48,769 
Other   4,990                        4,990 
Total  $515,546   $503   $58   $6,894   $7,455   $6,894   $523,001 

 

 

An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio.  The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans (“NPLs”).

 

The Bank’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (discussed above) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance.  

 

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative and economic factors.

 

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The loans are segmented into classes based on their inherent varying degrees of risk, as described above. Management tracks the historical net charge-off activity by segment and utilizes this figure, as a percentage of the segment, as the general reserve percentage for pooled, homogenous loans that have not been deemed impaired. Typically, an average of losses incurred over a defined number of consecutive historical years is used.

 

Non-impaired credits are segregated for the application of qualitative factors. Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources include: national and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint.

 

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL.  When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL. Since loans individually evaluated for impairment are promptly written down to their fair value, typically there is no portion of the ALL for loans individually evaluated for impairment.

 

The following table summarizes the ALL by loan category and the related activity for the six months ended March 31, 2020:

  

   One-to-Four           Home Equity                 
   Family   Commercial       Lines of   Commercial             
   Residential   Real Estate   Construction   Credit   Business   Other   Unallocated   Total 
   (Dollars in  thousands) 
                                 
Balance- September 30, 2019  $731   $2,066   $511   $138   $1,184   $8   $250   $4,888 
Charge-offs                                
Recoveries   2                            2 
Provision (credit)   (26)   (147)   63    2   311    (6)   13    210 
Balance- December 31, 2019  $707   $1,919   $574   $140   $1,495   $2   $263   $5,100 
Charge-offs                                
Recoveries   5                            5 
Provision (credit)   227    457    70    42    (287)   (2)   (87)   420 
Balance- March 31, 2020  $939   $2,376   $644   $182   $1,208   $   $176   $5,525 

 

The following table summarizes the ALL by loan category and the related activity for the six months ended March 31, 2019:

 

   One-to-Four           Home Equity                 
   Family   Commercial       Lines of   Commercial             
   Residential   Real Estate   Construction   Credit   Business   Other   Unallocated   Total 
   (In  thousands) 
                                 
Balance- September 30, 2018  $687   $1,540   $493   $109   $1,151   $25   $195   $4,200 
Charge-offs                                
Recoveries               1                1 
Provision (credit)   11    50    181    11    31    (21)   (62)   201 
Balance- December 31, 2018  $698   $1,590   $674   $121   $1,182   $4   $133   $4,402 
Charge-offs                                
Recoveries   92                            92 
Provision (credit)   (80)   95    142    17    (78)   (1)   11    106 
Balance- March 31, 2019  $710   $1,685   $816   $138   $1,104   $3   $144   $4,600 

 

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The following tables summarize the ALL by loan category, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of March 31, 2020 and September 30, 2019:  

 

   One-to-Four           Home Equity                 
   Family   Commercial       Lines of   Commercial             
   Residential   Real Estate   Construction   Credit   Business   Other   Unallocated   Total 
   (Dollars in  thousands) 
Allowance for Loan Losses:                                
Balance - March 31, 2020  $939   $2,376   $644   $182   $1,208   $   $176   $5,525 
Individually evaluated                                        
for impairment       46    175                    221 
Collectively evaluated                                        
for impairment   939    2,330    469    182    1,208        176    5,304 
                                         
Loans receivable:                                        
Balance - March 31, 2020  $204,575   $245,860   $22,333   $22,170   $47,684   $4,782   $   $547,404 
Individually evaluated                                        
for impairment   2,177    3,367    5,206        1,404            12,154 
Collectively evaluated                                        
for impairment   202,398    242,493    17,127    22,170    46,280    4,782        535,250 

 

 

   One-to-Four           Home Equity                 
   Family   Commercial       Lines of   Commercial             
   Residential   Real Estate   Construction   Credit   Business   Other   Unallocated   Total 
   (In  thousands) 
Allowance for Loan Losses:                                
Balance - September 30, 2019  $731   $2,066   $511   $138   $1,184   $8   $250   $4,888 
Individually evaluated                                        
for impairment                                
Collectively evaluated                                        
for impairment   731    2,066    511    138    1,184    8    250    4,888 
                                         
Loans receivable:                                        
Balance - September 30, 2019  $190,415   $232,544   $28,451   $17,832   $48,769   $4,990   $   $523,001 
Individually evaluated                                        
for impairment   1,405    4,593    2,900        1,456            10,354 
Collectively evaluated                                        
for impairment   189,010    227,951    25,551    17,832    47,313    4,990        512,647 

 

The allowance for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that the segmentation of the loan portfolio into homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.

 

A Troubled Debt Restructuring (TDR) is a loan that has been modified whereby the Bank has agreed to make certain concessions to a borrower to meet the needs of both the borrower and the Bank to maximize the ultimate recovery of a loan. TDR occurs when a borrower is experiencing, or is expected to experience, financial difficulties and the loan is modified using a modification that would otherwise not be granted to the borrower. The types of concessions granted generally include, but are not limited to, interest rate reductions, limitations on the accrued interest charged, term extensions, and deferment of principal.

 

A default on a troubled debt restructured loan for purposes of this disclosure occurs when a borrower is 90 days past due or a foreclosure or repossession of the applicable collateral has occurred. There were no TDRs for the three and six months ended March 31, 2020 compared with one TDR of a one-to-four family residential loan for the three and six months ended March 31, 2019.

 

 

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NOTE L - DEPOSITS

 

A summary of deposits by type of account are summarized as follows:

 

   March 31,   September 30, 
   2020   2019 
   (In thousands) 
         
Demand accounts  $132,177   $106,422 
Savings accounts   70,859    70,598 
NOW accounts   42,567    48,164 
Money market accounts   187,092    188,115 
Certificates of deposit   112,374    100,016 
Retirement certificates   15,869    16,760 
Total deposits  $560,938   $530,075 

 

 

NOTE M – INCOME TAXES

 

The Company records income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities: (i) are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns; (ii) are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases; and (iii) are measured using enacted tax rates expected to apply in the years when those temporary differences are expected to be recovered or settled.

 

Where applicable, deferred tax assets are reduced by a valuation allowance for any portions determined not likely to be realized. The valuation allowance is assessed by management on a quarterly basis and adjusted, by a charge or credit to income tax expense, as changes in facts and circumstances warrant. In assessing whether it is more likely than not that some portion or all of the deferred tax assets will not be realized, management considers projections of future taxable income, the projected periods in which current temporary differences will be deductible, the availability of carry forwards, feasible and permissible tax planning strategies and existing tax laws and regulations. The Company did not have a valuation allowance against its net deferred tax assets at March 31, 2020 or September 30, 2019.

 

A reconciliation of income tax between the amounts calculated based upon pre-tax income at the Company’s federal statutory rate and the amounts reflected in the consolidated statements of operations are as follows:

 

   For the Three Months   For the Six Months 
   Ended March 31,   Ended March 31, 
   2020   2019   2020   2019 
   (In thousands) 
                 
Income tax expense at the statutory federal tax rate of 21%                    
for the three and six months ended March 31, 2020 and 2019  $77   $203   $221   $382 
State tax expense   57    125    163    236 
Other   (13)   (4)   (25)   (14)
Income tax expense  $121   $324   $359   $604 

 

 

On July 1, 2018, the State of New Jersey's Assembly signed into law a new bill, effective January 1, 2018, that imposed a temporary surtax on corporations earning New Jersey allocated income in excess of $1 million. The surtax was set at a rate of 2.5% for tax years beginning on or after January 1, 2018 through December 31, 2019, and at a rate of 1.5% for years beginning on or after January 1, 2020, through December 31, 2021. Accordingly, the Company is using an 11.5% State tax rate for the calculation of its State income tax expense for the six months ended March 31, 2020.

 

 

NOTE N - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

 

The Company occasionally uses derivative financial instruments, such as interest rate floors and collars, as part of its interest rate risk management. Interest rate caps and floors are agreements whereby one party agrees to pay or receive a floating rate of interest on a notional principal amount for a predetermined period of time if certain market interest rate thresholds are met. The Company considers the credit risk inherent in these contracts to be negligible.

 

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As of March 31, 2020 and September 30, 2019, the Company did not hold any interest rate floors or collars.

 

In the normal course of business the Bank is a party to financial instruments with off-balance-sheet risk and in only to meet the financing needs of its customers. These financial instruments are commitments to extend credit are summarized in the below table. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.

 

   March 31,   September 30, 
   2020   2019 
   (In thousands) 
Financial instruments whose contract amounts          
represent credit risk          
Letters of credit  $967   $1,315 
Unused lines of credit   51,855    56,405 
Fixed rate loan commitments   1,993    3,362 
Variable rate loan commitments   16,781    12,141 
 Total  $71,596   $73,223 

 

NOTE O – SUBSEQUENT EVENTS

 

Subsequent to our quarter end, global, national and local economies and financial markets have been negatively impacted by the effects of the worldwide COVID-19 pandemic. The Bank is closely monitoring its asset quality, liquidity, and capital positions. Management is actively working to minimize the current and future impact of this unprecedented situation, and is making adjustments to operations where appropriate or necessary to help slow the spread of the virus. As of the date of issuance of these financial statements, the impact the pandemic may have on the Bank’s financial position is not known.

 

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

When used in this filing and in future filings by the Company with the Securities and Exchange Commission, in the Company’s press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases, “anticipate,” “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “projected,” “believes”, or similar expressions are intended to identify “forward looking statements.” Forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, those risks previously disclosed by the Company in Item 1A of its Annual Report on Form 10-K as may be supplemented by Quarterly Reports on Form 10-Q filed with the SEC, general economic conditions, changes in interest rates, regulatory considerations, competition, technological developments, retention and recruitment of qualified personnel, and market acceptance of the Company’s pricing, products and services, and with respect to the loans extended by the Bank and real estate owned, the following: risks related to the economic environment in the market areas in which the Bank operates, particularly with respect to the real estate market in New Jersey; the risk that the value of the real estate securing these loans may decline in value; and the risk that significant expense may be incurred by the Company in connection with the resolution of these loans. In addition, the COVID-19 pandemic is having an adverse impact on the Company, its customers and the communities it serves. The adverse effect of the COVID-19 pandemic on the Company, its customers and the communities where it operates may adversely affect the Company’s business, results of operations and financial condition for an indefinite period of time.

 

The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and advises readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investing activities, and competitive and regulatory factors, could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated or projected.

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The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

Critical Accounting Policies

 

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. Critical accounting policies may involve complex subjective decisions or assessments. We consider the following to be our critical accounting policies.

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

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

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

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

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

 

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

 

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

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

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

 

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

 

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

 

Deferred Income Taxes. The Company records income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities: (i) are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns; (ii) are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases; and (iii) are measured using enacted tax rates expected to apply in the years when those temporary differences are expected to be recovered or settled.

 

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

 

Coronavirus/COVID-19

 

The extraordinary impact of the Coronavirus/COVID-19 (“COVID-19”) has created an unprecedented environment for consumers and businesses alike. In response to the spread of the virus, the Governor of New Jersey issued a pair of executive orders on March 21, 2020 directing residents to stay indoors and to close all non-essential businesses. Banking is considered an essential business and the Company’s Board and Executive Officers are committed to continue servicing Bank customers while protecting its valued employees. The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020,and provides over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic.

 

To protect its employees and customers from potential exposure to the virus, on March 20, 2020 all Magyar Bank lobbies were temporarily closed. Magyar Bank continues to serve its community through its drive-up lanes, online banking, mobile services, and ATMs. Magyar Bank’s electronic banking platform ensures depositors and borrowers have ongoing access to the funds they need. Operational staff are working on a rotational basis and between their primary offices and our disaster recovery location to limit their potential exposure to COVID-19 and to continue providing banking services to our customers during this challenging time.

 

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To assist its customers, Magyar Bank is offering loan payment deferrals to borrowers unable to pay due to the effects of COVID-19. The Bank has received significant numbers of requests to modify loan terms to defer principal and/or interest payments, and has agreed to such deferrals or are in the process of doing so. The banking regulatory agencies, through an Interagency Statement dated April 7, 2020, are encouraging financial institutions to work with borrowers who request loan modifications or deferrals as a result of COVID-19. Under Section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 modifications. A financial institution may temporarily suspend any determination of a loan modified as a result of COVID-19 as being a troubled debt restructuring (“TDR”), including the requirement to determine impairment for accounting purposes. Similarly, the Financial Accounting Standards Board has confirmed that short-term modifications made on a good-faith basis in response to COVID-19 to loan customers who were current prior to any relief are not TDRs.

 

As of May 8, 2020, we had modified 245 loans aggregating $145.9 million, primarily consisting of the deferral of principal and/or interest payments for a period of 90 days. Details with respect to actual loan modifications are as follows:

 

Type of Loan  Number of
Loans
   Balance   Weighted Average
Interest Rate
 
         (In  thousands)      
One- to four-family residential real estate (1)   77   $19,350    4.13% 
Commercial real estate   126    104,948    4.77% 
Construction   4    2,630    3.97% 
Home equity lines of credit   8    12,850    4.35% 
Commercial business   30    6,093    4.98% 
Total   245   $145,871    4.65% 
                
(1) Includes home equity loans.               

 

The CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”). As a qualified SBA lender, Magyar Bank was automatically authorized to originate PPP loans. An eligible business could apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly “payroll costs;” or (2) $10.0 million. PPP loans have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 75% of the loan proceeds are used for payroll expenses, with the remaining 25% of the loan proceeds used for other qualifying expenses.

 

As of May 8, 2020, we had received approximately 300 applications for up to $53.0 million in loans under the PPP. Under the PPP, the Bank receives a processing fee from the SBA based on a percentage of the PPP loan as follows: 5% for loans under $350,000, 3% for loans of $350,000 up to $1,999,900, and 1% for loans of $2,000,000 or more. The processing fees will be amortized over the expected life of the loans. The Bank expects to receive fees totaling $1.9 million. Due to the administrative efforts of these loans and the overall economic impact from COVID-19, we expect significantly lower non-PPP loan growth for the remainder of the year.

 

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

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

 

Total assets increased $27.8 million, or 4.4%, to $658.2 million at March 31, 2020 from $630.3 million at September 30, 2019. The increase was primarily attributable to a $23.7 million increase in net loans receivable, and a $4.3 million increase in other assets.

 

Cash and interest bearing deposits with banks increased $7.7 million, or 35.7%, to $29.1 million at March 31, 2020 from $21.4 million at September 30, 2019 as the result of net deposit inflows to fund loan growth during the six months ended March 31, 2020.

 

At March 31, 2020, investment securities totaled $39.6 million, reflecting a decrease of $6.6 million, or 14.2%, from $46.2 million at September 30, 2019. The Company received payments from mortgage-backed securities and bond calls totaling $5.7 million, sold five investment securities totaling $6.1 million and purchased three mortgage-backed securities totaling $5.2 million during the six months ended March 31, 2020.

 

Investment securities at March 31, 2020 consisted of $35.4 million in mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises, $970,000 in U.S. government-sponsored enterprise debt securities, $3.0 million in corporate notes, and $267,000 in “private-label” mortgage-backed securities. There were no other-than-temporary-impairment charges for the Company’s investment securities for the six months ended March 31, 2020.

 

Total loans receivable increased $24.4 million, or 4.7%, during the six months ended March 31, 2020 to $547.4 million from $523.0 million at September 30, 2019. The loan portfolio was comprised of $245.9 million (44.9%) commercial real estate loans, $204.5 million (37.4%) one-to-four family residential mortgage loans, $47.7 million (8.7%) commercial business loans, $22.3 million (4.1%) construction loans, $22.2 million (4.1%) home equity lines of credit and $4.8 million (0.8%) other loans. Expansion of the portfolio during the six months ended March 31, 2020 occurred in 1-4 family residential real estate loans (including home equity lines of credit), which increased $18.5 million, or 8.9%, and in commercial real estate loans, which increased $13.3 million, or 5.7%. Partially offsetting these increases were construction loans, which decreased $6.1 million, or 21.5%, commercial business loans, which decreased $1.1 million, or 2.2% and other loans, which decreased $208,000, or 4.2%, during the six month period.

 

Total non-performing loans increased $2.2 million, or 32.3%, to $9.1 million at March 31, 2020 from $6.9 million at September 30, 2019. The increase was primarily related to one relationship consisting of two construction loans totaling $2.3 million and three commercial loans totaling $1.0 million. Based on updated appraisals of the real estate securing the loans, net of estimated selling and disposition costs, management established $231,000 in specific reserves for three of the loans. The loans were in the process of foreclosure at March 31, 2020. Due to the COVID-19 pandemic, foreclosures of collateral securing residential real estate loans have been temporarily suspended while the foreclosure proceedings of commercial real estate is expected to slow significantly as court hearings have been postponed until further notice. The ratio of non-performing loans to total loans increased to 1.67% at March 31, 2020 from 1.32% at September 30, 2019. Year-to-date, there were no charge offs and there were $6,000 in recoveries of previously charged-off non-performing loans.

 

During the six months ended March 31, 2020, the allowance for loan losses increased $637,000 to $5.5 million. The increase was attributable to the COVID-19 pandemic’s impact on the Bank’s local economy. Management adjusted its factor affecting historical losses for a higher likelihood of economic recession in the next twelve months for all segments of its loan portfolio at March 31, 2020. The allowance for loan losses as a percentage of non-performing loans decreased to 60.6% at March 31, 2020 compared with 70.9% at September 30, 2019. At March 31, 2020, the Company’s allowance for loan losses as a percentage of total loans was 1.01% compared with 0.93% at September 30, 2019.

 

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

 

Other real estate owned decreased $801,000, or 10.6%, to $6.7 million at March 31, 2020 from $7.5 million at September 30, 2019. The decrease was the result of the two sales totaling $745,000 and valuation allowances totaling $60,000. While several of the properties were under contract of sale at March 31, 2020, it is unknown when and if the sales will occur given the COVID-19 pandemic.

 

Total deposits increased $30.8 million, or 5.8%, to $560.9 million during the six months ended March 31, 2020 from $530.1 million at September 30, 2019. The increase in deposits occurred in non-interest bearing checking accounts, which increased $25.7 million, or 24.2%, to $132.2 million, certificates of deposit (including individual retirement accounts) which increased $11.5 million, or 9.8%, to $128.2 million, and in savings accounts, which increased $261,000, or 0.4%, to $70.8 million. Offsetting these increases were decreases in interest-bearing checking accounts, which decreased $5.6 million, or 11.6%, to $42.6 million, and money market accounts, which decreased $1.0 million, or 0.5%, to $187.1 million.

 

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Included with the total deposits at March 31, 2020 and September 30, 2019 were brokered certificates of deposit totaling $6.9 million.

 

Federal Home Loan Bank of New York advances decreased $5.1 million to $31.1 million at March 31, 2020 from $36.2 million at September 30, 2019. The Company used proceeds from deposit inflows during the six months period to repay matured term borrowings.

 

Stockholders’ equity increased $857,000, or 1.6%, to $55.5 million at March 31, 2020 from $54.6 million at September 30, 2019. The Company’s book value per share increased to $9.55 at March 31, 2020 from $9.39 at September 30, 2019. The increase in stockholders’ equity was attributable to the Company’s results from operations and treasury share purchases.

 

The Company repurchased 10,000 shares of its common stock at an average price of $9.03 during the six months ended March 31, 2020. Through March 31, 2020, the Company had repurchased 91,000 shares at an average price of $8.41 pursuant to the second stock repurchase plan, which reduced outstanding shares to 5,810,746.

 

 

Average Balance Sheet for the Three and Six Months Ended March 31, 2020 and 2019

 

The following tables present certain information regarding the Company’s financial condition and net interest income for the three and six months ended March 31, 2020 and 2019. The tables present the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown. We derived average balances from daily balances over the period indicated. Interest income includes fees that we consider adjustments to yields.

 

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   For the Three Months Ended March 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  $26,632   $84    1.27%   $35,416   $206    2.35% 
Loans receivable, net   532,081    6,224    4.69%    513,472    6,226    4.92% 
Securities                              
Taxable   45,114    257    2.29%    57,287    340    2.41% 
FHLB of NY stock   1,974    34    6.97%    2,047    37    7.31% 
Total interest-earning assets   605,801    6,599    4.37%    608,222    6,809    4.54% 
Noninterest-earning assets   46,667              41,948           
Total assets  $652,468             $650,170           
                               
Interest-bearing liabilities:                              
Savings accounts (1)   $70,342    106    0.60%   $75,917    125    0.67% 
NOW accounts (2)    236,877    682    1.16%    240,205    832    1.40% 
Time deposits (3)   129,458    610    1.89%    125,426    551    1.78% 
Total interest-bearing deposits   436,677    1,398    1.28%    441,548    1,508    1.39% 
Borrowings   30,675    169    2.21%    32,935    180    2.22% 
Total interest-bearing liabilities   467,352    1,567    1.34%    474,483    1,688    1.44% 
Noninterest-bearing liabilities   130,099              123,251           
Total liabilities   597,451              597,734           
Retained earnings   55,017              52,436           
Total liabilities and retained earnings  $652,468             $650,170           
                               
Net interest and dividend income       $5,032             $5,121      
Interest rate spread             3.03%              3.10% 
Net interest-earning assets  $138,449             $133,739           
Net interest margin (4)             3.33%              3.41% 
Average interest-earning assets to                              
 average interest-bearing liabilities   129.62%              128.19%           

 

 

(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 Six Months Ended March 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  $22,736   $155    1.36%   $34,502   $359    2.08% 
Loans receivable, net   527,234    12,621    4.77%    511,187    12,353    4.85% 
Securities                              
Taxable   46,244    523    2.26%    56,920    675    2.38% 
FHLB of NY stock   2,059    71    6.91%    2,084    82    7.93% 
Total interest-earning assets   598,273    13,370    4.46%    604,693    13,469    4.47% 
Noninterest-earning assets   46,882              42,332           
Total assets  $645,155             $647,025           
                               
Interest-bearing liabilities:                              
Savings accounts (1)  $70,267   $220    0.62%   $76,766   $251    0.66% 
NOW accounts (2)   235,794    1,417    1.20%    236,522    1,590    1.35% 
Time deposits (3)   125,990    1,208    1.91%    127,148    1,105    1.74% 
Total interest-bearing deposits   432,051    2,845    1.31%    440,436    2,946    1.34% 
Borrowings   32,572    365    2.24%    33,758    370    2.20% 
Total interest-bearing liabilities   464,623    3,210    1.38%    474,194    3,316    1.40% 
Noninterest-bearing liabilities   124,985              119,861           
Total liabilities   589,608              594,055           
Retained earnings   55,547              52,970           
Total liabilities and retained earnings  $645,155             $647,025           
                               
Net interest and dividend income       $10,160             $10,153      
Interest rate spread             3.08%              3.07% 
Net interest-earning assets  $133,650             $130,499           
Net interest margin (4)             3.39%              3.37% 
Average interest-earning assets to                              
 average interest-bearing liabilities   128.77%              127.52%           

 

 

(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.

 

 

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

 

Net Income. Net income decreased $462,000, or 60.2%, to $305,000 during the three month period ended March 31, 2020 compared with net income of $767,000 for the three-month period ended March 31, 2019 due to lower net interest and dividend income, higher provisions for loan loss, lower non-interest income and higher non-interest expenses.

 

Net Interest and Dividend Income. Net interest and dividend income decreased $89,000, or 1.7%, to $5.0 million for the three months ended March 31, 2020 from $5.1 million for the three months ended March 31, 2019.

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The Company’s net interest margin decreased by eight basis points to 3.33% for the quarter ended March 31, 2020 compared to 3.41% for the quarter ended March 31, 2019. The yield on interest-earning assets decreased 17 basis points to 4.37% for the three months ended March 31, 2020 from 4.54% for the three months ended March 31, 2019 due to lower market interest rates, partially offset by higher balances of loans receivable, between the two periods. The cost of interest-bearing liabilities decreased 10 basis points to 1.34% for the three months ended March 31, 2020 from 1.44% for the three months ended March 31, 2019 due to lower market interest rates and lower average balances of interest-bearing liabilities.

 

Interest and Dividend Income. Interest and dividend income decreased $210,000, or 3.1%, to $6.6 million for the three months ended March 31, 2020 from the three months ended March 31, 2019. The decrease was attributable to a 17 basis point decrease in the yield on interest-earning assets to 4.37% as well as $2.4 million decrease in the average balance of interest-earning assets compared with the prior year period.

 

Interest earned on loans was unchanged at $6.2 million for the three months ended March 31, 2020 compared with the same period prior year. An $18.7 million increase in the average balance of loans receivable was offset by a 23 basis point decrease in the yield on loans receivable to 4.69% for the three months ended March 31, 2020 from 4.92% for the three months ended March 31, 2019. Lower market interest rates accounted for the decline in yields between periods.

 

Interest earned on investment securities, including interest earning deposits and excluding FHLB stock, decreased $205,000, or 37.5%, to $341,000 during the three months ended March 31, 2020 from $546,000 for the three months ended March 31, 2019. The decrease was due to a $21.0 million, or 22.6%, decrease in the average balance of such securities and deposits to $71.7 million for the three months ended March 31, 2020 from $92.7 million at March 31, 2019. The average yield on investment securities and interest earning deposits decreased 48 basis points to 1.91% for the three months ended March 31, 2020 from 2.39% for the three months ended March 31, 2019. The decrease in yield on interest earning deposits primarily reflected the lower interest rates paid on reserves by the Federal Reserve Bank between the comparable periods.

 

Interest Expense. Interest expense decreased $121,000, or 7.2%, to $1.6 million for the six months ended March 31, 2020 compared with $1.7 million the three months ended March 31, 2019. The average balance of interest-bearing liabilities decreased $7.1 million, or 1.5%, to $467.4 between the two periods, while the cost of such liabilities decreased 10 basis points to 1.34% for the three months ended March 31, 2020 compared with 1.44% the prior year period.

 

The average balance of interest bearing deposits decreased $4.8 million, or 1.1%, to $436.7 million at March 31, 2020 from $441.5 million at March 31, 2019, while the average cost of such deposits decreased 11 basis points to 1.28% from 1.39% between the two periods. As a result, interest paid on interest-bearing deposits decreased $110,000 to $1.4 million for the three months ended March 31, 20 compared with $1.5 million the three months ended March 31, 2019.

 

Interest paid on advances decreased $11,000 to $169,000 for the three months ended March 31, 2020 from $180,000 for the three months ended March 31, 2019, while the average balance of such borrowings decreased $2.3 million to $36.7 million from $32.9 million. In addition, the average cost of advances decreased 1 basis point to 2.21% for the three months ended March 31, 2020 from 2.22% for the three months ended March 31, 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 recorded a provision of $420,000 for the three months ended March 31, 2020 compared to a provision of $106,000 for the three months ended March 31, 2019. The Company increased its factor for likelihood of recession due to the economic impact of COVID-19, which resulted in a higher estimate of it allowance for loan loss.

 

There were no charge-offs during the three months ended March 31, 2020, while there were $4,000 in recoveries from non-performing loans previously charged-off. There were also no charge-offs during the three months ended March 31, 2019, while recoveries totaled $90,000.

 

Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Management reviews the level of the allowance on a quarterly basis, and establishes the provision for loan losses based on the factors set forth in the preceding paragraph. As management evaluates the allowance for loan losses, the increased risk associated with larger non-homogenous construction, commercial real estate and commercial business loans may result in larger additions to the allowance for loan losses in future periods.

 

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Other Income. Non-interest income decreased $191,000, or 33.8%, to $374,000 during the three months ended March 31, 2020 compared to $565,000 for the three months ended March 31, 2019. The decrease was attributable to lower service charge income and lower gains from the sales of SBA loans. Service charge income decreased $83,000 to $196,000 from the prior year period due to lower loan and deposit fees. The Company did not record any gains from sales of SBA loans, compared with $151,000 for the prior year period. Partially offsetting the decreases were higher gains from the sale of investment securities, which increased $36,000 to $68,000 for the three months ended March 31, 2020 compared with $32,000 for the three months ended March 31, 2019.

 

Other Expenses. Non-interest expenses increased $71,000, or 1.6%, to $4.6 million from the three months ended March 31, 2019. Professional fees increased $152,000 to $430,000 for the three months ended March 31, 2020 from the prior year period from higher legal expenses incurred for the collection of non-performing loans. Compensation and benefit expense increased $67,000, or 2.7%, from the prior year period due to the addition of a new Bank Secrecy Act Officer as well as annual merit increases for employees. Partially offsetting these increases was a $184,000 decline in OREO expenses to $30,000 for the three months ended March 31, 2020 from $214,000 for the prior year period due to lower valuation allowances and sales of properties between the two periods.

 

Income Tax Expense. The Company recorded tax expense of $121,000 on pre-tax income of $426,000 for the three months ended March 31, 2020, compared to $324,000 on pre-tax income of $1.1 million for the three months ended March 31, 2019. The decrease was due to a $665,000 decrease in the Company’s results from operations. The Company’s effective tax rate for the three months ended March 31, 2020 was 28.4% compared with 29.7% for the three months ended March 31, 2019.

 

 

Comparison of Operating Results for the Six Months Ended March 31, 2020 and 2019

 

Net Income. Net income decreased $594,000, or 40.9%, to $858,000 during the six month period ended March 31, 2020 compared with $1.5 million for the six month period ended March 31, 2019 due to higher provisions for loan loss, lower non-interest income and higher non-interest expense.

 

Net Interest and Dividend Income. The Company’s net interest and dividend income was unchanged at $10.2 million for the six months period ended March 31, 2020, compared with for the six months ended March 31, 2019. A 2 basis point increase in the Company’s net interest margin 3.39% was offset by a $6.4 million decrease in the average balance of interest-earning assets.

 

Interest and Dividend Income. Interest and dividend income decreased $99,000, or 0.7%, to $13.4 million for the six months ended March 31, 2020 compared to $13.5 million for the six months ended March 31, 2019. The decrease was attributable to a 1 basis point decrease in the yield on interest-earning assets to 4.46% as well as $6.4 million decrease in the average balance of interest-earning assets compared with the prior year period.

 

Interest earned on loans increased $267,000, or 2.2%, to $12.6 million for the six months ended March 31, 2020 compared with $12.3 million for the same period prior year. A $16.0 million increase in the average balance of loans receivable more than offset an 8 basis point decrease in the yield on loans receivable to 4.77% for the six months ended March 31, 2020 from 4.85% for the six months ended March 31, 2019. Lower market interest rates accounted for the decline in yields between periods.

 

Interest earned on investment securities, including interest earning deposits and excluding FHLB stock, decreased $355,000, or 34.3%, to $679,000 for the six months ended March 31, 2020 from $1.0 million for the six months ended March 31, 2019. The decrease was due to a $22.0 million, or 24.5%, decrease in the average balance of such securities and deposits to $69.0 million for the six months ended March 31, 2020 from $91.4 million at March 31, 2019. The average yield on investment securities and interest earning deposits decreased 31 basis points to 1.96% for the three months ended March 31, 2020 from 2.27% for the three months ended March 31, 2019. The decrease in yield on interest earning deposits primarily reflected the lower interest rates paid on reserves by the Federal Reserve Bank between the comparable periods.

 

Interest Expense. Interest expense decreased $106,000, or 3.2%, to $3.2 million for the six months ended March 31, 2020 from $3.3 million for the six months ended March 31, 2019. The average balance of interest-bearing liabilities decreased $9.6 million, or 2.0%, to $464.6 million from $474.2 million between the two periods, while the cost on such liabilities decreased 2 basis points to 1.38% for the three months ended March 31, 2020 compared with 1.40% the prior year period.

 

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The average balance of interest bearing deposits decreased $8.4 million, or 1.9%, to $432.0 million at March 31, 2020 from $440.4 million at March 31, 2019, while the average cost of such deposits decreased 3 basis points to 1.31% from 1.34% between the two periods. As a result, interest paid on deposits decreased $101,000 to $2.8 million for the six months ended March 31, 2020 compared with $2.9 million for the six months ended March 31, 2019.

 

Interest paid on advances decreased $5,000 to $365,000 for the six months ended March 31, 2020 from $370,000 for the six months ended March 31, 2019. A $1.2 million decrease in the average balance of such borrowings to $32.6 million for the six months ended March 31, 2020 from $33.8 million for the six months ended March 31, 2019 more than offset a 4 basis point increase in the average cost of advances to 2.24% between periods.

 

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 $631,000 for the six months ended March 31, 2020 compared to $307,000 for the six months ended March 31, 2019. The Company increased its factor for likelihood of recession due to the economic impact of COVID-19, which resulted in a higher estimate of it allowance for loan loss. Partially offsetting this increase were lower reserves for the construction loan segment of the Company’s portfolio, which declined $6.1 million, or 21.5%, from completed projects during the six months ended March 31, 2020.

 

Net recoveries were $6,000 for the six months ended March 31, 2020 compared to net recoveries of $93,000 for the six months ended March 31, 2019. There were no loan charge-offs during the six months ended March 31, 2020 or 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 in the preceding paragraph. As management evaluates the allowance for loan losses, the increased risk associated with larger non-homogenous construction, commercial real estate and commercial business loans may result in larger additions to the allowance for loan losses in future periods.

 

Other Income. Non-interest income decreased $213,000, or 21.5%, to $778,000 for the six months ended March 31, 2020 compared to the prior year period. The decrease was attributable to lower gains from the sale of loans and lower service charges.

 

The Company recorded gains totaling $26,000 from the sale of guaranteed portions of SBA loans and $68,000 from the sale of investment securities during the six months ended March 31, 2020, compared with $151,000 in loan gains and $32,000 from the sale of investment securities for the prior year period. In addition, service charges decreased $138,000, or 23.0% to $462,000 for the six months ended March 31, 2020 due to lower loan and deposit fees.

 

Other Expenses. Non-interest expenses increased $309,000, or 3.5%, to $9.1 million during the six months ended March 31, 2020 from the six months ended March 31, 2019.

 

Compensation and benefit expense increased $212,000, or 4.3%, from the prior year period due the addition of compliance positions as well as annual merit increases for employees. In addition, professional fees increased $209,000 to $778,000 for the six months ended March 31, 2020 from $569,000 for the prior year period due to higher legal expenses resulting from collection efforts of non-performing loans. Offsetting these increases were decreases in OREO expenses, which declined $128,000 to $133,000, reflecting lower valuation allowances and sales of properties between the two periods.

 

Income Tax Expense. The Company recorded tax expense of $359,000 for the six months ended March 31, 2020, compared with $604,000 for the six months ended March 31, 2019. The lower income tax resulted from a $839,000 decrease in the Company’s results from operations. The Company’s effective tax rate for the six months ended March 31, 2020 was 29.5% compared with 29.4% for the six months ended March 31, 2019.

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LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity

 

The Company’s liquidity is a measure of its ability to fund loans, pay withdrawals of deposits, and other cash outflows in an efficient, cost-effective manner. The Company’s short-term sources of liquidity include maturity, repayment and sales of assets, excess cash and cash equivalents, new deposits, other borrowings, and new advances from the Federal Home Loan Bank. There has been no material adverse change during the six months ended March 31, 2020 in the ability of the Company and its subsidiaries to fund their operations.

 

Whether through significant deposit withdrawals, reductions in interest and principal payments on loans, or the tightening of the capital markets, it is possible that the COVID-19 pandemic will have a negative effect on the liquidity and capital resources of the Company. On April 9, 2020 the Board of Governors of the Federal Reserve (“the Board”) announced the Paycheck Protection Program Lending Facility (“PPPLF”), authorized under section 13(3) of the Federal Reserve Act, to facilitate lending by eligible financial institutions to small businesses under the Paycheck Protection Program of the CARES Act. Under the PPPLF, the Federal Reserve Bank of New York provides advances to Magyar Bank on a non-recourse basis, taking PPP loans as collateral. The Company believes the PPPLF will replace a substantial amount, if not all, of the Bank’s liquidity used to fund PPP loans.

 

At March 31, 2020, the Company had commitments outstanding under letters of credit of $967,000, commitments to originate loans of $18.8 million, and commitments to fund undisbursed balances of closed loans and unused lines of credit of $51.9 million. There has been no material change during the six months ended March 31, 2020 in any of the Company’s other contractual obligations or commitments to make future payments.

 

Capital Requirements

 

At March 31, 2020, the Bank’s Tier 1 capital as a percentage of the Bank's total assets was 8.95%, and total qualifying capital as a percentage of risk-weighted assets was 12.83%.

 

Under section 1102 of the CARES Act, a PPP loan is assigned a risk weight of zero percent under the risk-based capital rules of the federal banking agencies. On April 9, 2020, the Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation issued an interim final rule to allow banking organizations to neutralize the effect of PPP loans financed under the PPPLF on Tier 1 leverage capital ratios. The Company believes the PPPLF will allow the Bank to neutralize a substantial amount, if not all, of the balance sheet growth impact on the calculation of the Bank’s Tier 1 leverage capital ratio.

 

Item 3- Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable to smaller reporting companies.

 

 

Item 4 – Controls and Procedures

Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.

 

There has been no change in the Company's internal control over financial reporting during the three months ended March 31, 2020 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1.Legal proceedings

None.

 

Item 1A.Risk Factors

Not applicable to smaller reporting companies.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
a.)Not applicable.

 

b.)Not applicable.

 

c.)The Company repurchased 10,000 shares at an average price of $9.03 during the three months ended March 31, 2020. Through March 31, 2020, the Company had repurchased 91,000 shares at an average price of $8.41 pursuant to the Company’s stock repurchase plan, which has reduced outstanding shares to 5,810,746.
Item 3.Defaults Upon Senior Securities

None

Item 4.Mine Safety Disclosures

Not applicable.

 

 

Item 5.Other Information
a.)Not applicable.

 

b.)None.

 

Item 6.Exhibits

Exhibits

31.1Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
31.2Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
32.1Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101Interactive data file containing the following financial statements formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets at March 31, 2020 and September 30, 2019; (ii) the Consolidated Statements of Operations for the three and six months ended March 31, 2020 and 2019; (iii) the Consolidated Statements of Comprehensive Income for the three and six months ended March 31, 2020 and 2019; (iv) the Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended March 31, 2020 and 2019; (v) the Consolidated Statements of Cash Flows for the six months ended March 31, 2020 and 2019; and (vi) the Notes to Consolidated Financial Statements, tagged as blocks of text.

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Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

  MAGYAR BANCORP, INC.
   (Registrant)
   
   
   
   
Date: May 14, 2020 /s/ John S. Fitzgerald
  John S. Fitzgerald
  President and Chief Executive Officer
   
   
   
Date: May 14, 2020 /s/ Jon R. Ansari
  Jon R. Ansari
  Executive Vice President and Chief Financial Officer

 

 

37 

 

 

Exhibit 31.1

CHIEF EXECUTIVE OFFICER CERTIFICATION

 

I, John S. Fitzgerald, certify that:

 

1.I have reviewed this quarterly report on Form 10-Q of Magyar Bancorp, Inc.;

 

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respect the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)designed such internal control over finance reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

 

5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

Date: May 14, 2020

 

 

/s/ John S. Fitzgerald      

John S. Fitzgerald

President and Chief Executive Officer

38 

 

Exhibit 31.2

CHIEF FINANCIAL OFFICER CERTIFICATION

 

I, Jon R. Ansari, certify that:

 

1.I have reviewed this quarterly report on Form 10-Q of Magyar Bancorp, Inc.;

 

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respect the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)designed such internal control over finance reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

 

5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

Date: May 14, 2020

 

 

/s/ Jon R. Ansari        

Jon R. Ansari

Executive Vice President and Chief Financial Officer

39 

 

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

 

 

In connection with the quarterly report of Magyar Bancorp, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John S. Fitzgerald, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

Date: May 14, 2020

 

 

/s/ John S. Fitzgerald                           

John S. Fitzgerald

President and Chief Executive Officer

 

40 

 

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

 

 

In connection with the quarterly report of Magyar Bancorp, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jon R. Ansari, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

Date: May 14, 2020

 

 

/s/ Jon R. Ansari                                                               

Jon R. Ansari

Executive Vice President and Chief Financial Officer

 

41 

 

v3.20.1
Consolidated Statements of Operations (Unaudited) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Mar. 31, 2020
Mar. 31, 2019
Interest and dividend income        
Loans, including fees $ 6,224 $ 6,226 $ 12,620 $ 12,353
Investment securities        
Taxable 341 546 679 1,034
Federal Home Loan Bank of New York stock 34 37 71 82
Total interest and dividend income 6,599 6,809 13,370 13,469
Interest expense        
Deposits 1,398 1,508 2,845 2,946
Borrowings 169 180 365 370
Total interest expense 1,567 1,688 3,210 3,316
Net interest and dividend income 5,032 5,121 10,160 10,153
Provision for loan losses 420 106 631 307
Net interest and dividend income after provision for loan losses 4,612 5,015 9,529 9,846
Other income        
Service charges 196 279 462 600
Income on bank owned life insurance 79 73 161 147
Other operating income 31 30 61 61
Gains on sales of loans 151 26 151
Gains on sales of investment securities 68 32 68 32
Total other income 374 565 778 991
Other expenses        
Compensation and employee benefits 2,584 2,517 5,172 4,960
Occupancy expenses 743 744 1,486 1,484
Professional fees 430 278 778 569
Data processing expenses 147 154 301 307
OREO expenses 30 214 133 261
FDIC deposit insurance premiums 108 109 216 216
Loan servicing expenses 86 47 136 106
Insurance expense 47 49 99 102
Other expenses 385 377 769 776
Total other expenses 4,560 4,489 9,090 8,781
Income before income tax expense 426 1,091 1,217 2,056
Income tax expense 121 324 359 604
Net income $ 305 $ 767 $ 858 $ 1,452
Net income per share-basic and diluted $ 0.05 $ 0.13 $ 0.15 $ 0.25
Weighted average basic and diluted shares outstanding 5,819,879 5,820,746 5,820,746 5,820,746