424B3 1 d132199d424b3.htm 424B3 424B3

Filed Pursuant to Rule 424(b)(3)
Registration No. 333-254282

 

 

Dear Fellow Stockholder:

Magyar Bancorp, Inc. (“Magyar Bancorp”), a Delaware corporation and the bank holding company of Magyar Bank, is soliciting stockholder votes regarding the mutual-to-stock conversion of Magyar Bancorp, MHC. Pursuant to a Plan of Conversion and Reorganization (the “Plan of Conversion”), our organization will convert from a partially public company to a fully public company by selling a minimum of 2,890,000 shares of our common stock.

The Proxy Vote

We must receive the approval of our stockholders before we can proceed with the transactions contemplated by the Plan of Conversion and Reorganization. Enclosed is a proxy statement/prospectus describing the proposals being presented at our special meeting of stockholders. Please vote the enclosed proxy card today. Our Board of Directors urges you to vote “FOR” approval of the Plan of Conversion and “FOR” approval to adjourn the special meeting if necessary to solicit additional votes to approve the Plan of Conversion.

The Exchange

Upon the completion of the conversion, your shares of Magyar Bancorp common stock will be exchanged for new shares of Magyar Bancorp common stock. The number of new shares that you receive will be based on an exchange ratio that is described in the proxy statement/prospectus. Shortly after the completion of the conversion, our exchange agent will send a transmittal form to each stockholder of Magyar Bancorp who holds stock certificates. The transmittal form will explain the procedure to follow to exchange your shares. Do not deliver your certificate(s) before you receive the transmittal form. Shares of Magyar Bancorp that are held in “street name” (e.g., in a brokerage account) and shares that are held in “book entry form” (i.e., electronically with the transfer agent) will be converted automatically at the completion of the conversion – no action or documentation will be required of you.

The Stock Offering

We are offering for sale shares of common stock of Magyar Bancorp at a price of $10.00 per share. The shares are first being offered in a subscription offering to eligible depositors of Magyar Bank. Magyar Bancorp public stockholders do not have priority rights to purchase shares in the subscription offering unless they are also eligible depositors of Magyar Bank. However, if we do not sell sufficient shares in the subscription offering to complete the offering, shares would be available for sale in a community offering to Magyar Bancorp public stockholders and others not eligible to subscribe for shares in the subscription offering. If you are interested in subscribing for shares of our common stock, contact our Stock Information Center at (877) 643-8198 to receive a stock order form and a prospectus. The stock offering period is expected to expire on June 18, 2021.

If you have any questions, please refer to the Questions & Answers section in this document.

Thank you for your support as a stockholder of Magyar Bancorp, Inc.

Sincerely,

 

 

 

John S. Fitzgerald

President and Chief Executive Officer

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


PROSPECTUS AND PROXY STATEMENT OF MAGYAR BANCORP, INC.

Magyar Bancorp, Inc., which we refer to as “Magyar Bancorp” in this document, is converting from the mutual holding company structure to a fully public stock holding company structure. Currently, Magyar Bank is a wholly owned subsidiary of Magyar Bancorp, and Magyar Bancorp, MHC owns 55.1% of Magyar Bancorp’s common stock. The remaining 44.9% of Magyar Bancorp’s common stock is owned by public stockholders. As a result of the conversion, Magyar Bancorp, MHC will merge with and into Magyar Bancorp and each share of Magyar Bancorp common stock owned by the public will be exchanged for between 0.9027 and 1.2213 shares of common stock of Magyar Bancorp, so that immediately after the conversion Magyar Bancorp’s public stockholders will own the same percentage of Magyar Bancorp common stock as they owned of Magyar Bancorp’s common stock immediately before the conversion, excluding any new shares purchased by them in the offering and their receipt of cash in lieu of fractional exchange shares, and reflecting certain assets held by Magyar Bancorp, MHC. The actual number of shares that you will receive will depend on the percentage of Magyar Bancorp common stock held by the public at the completion of the conversion, certain assets held by Magyar Bancorp, MHC, the final independent appraisal of Magyar Bancorp and the number of shares of Magyar Bancorp common stock sold in the offering described in the following paragraph. It will not depend on the market price of Magyar Bancorp common stock. See “Proposal 1 – Approval of the Plan of Conversion and Reorganization – Share Exchange Ratio for Current Stockholders” for a discussion of the exchange ratio. Based on the $13.30 per share closing price of Magyar Bancorp common stock as of the last trading day before the date of this proxy statement/prospectus, the initial value of the Magyar Bancorp common stock you receive in the share exchange will be less than the market value of the Magyar Bancorp common stock you currently own. See “Risk Factors – Risks Related to the Offering and the Exchange – The market value of Magyar Bancorp common stock received in the share exchange may be less than the market value of Magyar Bancorp common stock exchanged.”

Concurrently with the exchange offer, we are offering for sale up to 3,910,000 shares of common stock of Magyar Bancorp, representing the ownership interest of Magyar Bancorp, MHC in Magyar Bancorp as well as certain assets held by Magyar Bancorp, MHC. We are offering the shares of common stock to eligible depositors of Magyar Bank, to Magyar Bank’s tax qualified benefit plans and, if necessary, to the public, including Magyar Bancorp stockholders, at a price of $10.00 per share. The conversion of Magyar Bancorp, MHC and the offering and exchange of common stock by Magyar Bancorp is referred to herein as the “conversion and offering.” Once the conversion and offering are completed, Magyar Bank will continue to be a wholly owned subsidiary of Magyar Bancorp, and 100% of the common stock of Magyar Bancorp will be owned by public stockholders. As a result of the conversion and offering, Magyar Bancorp, MHC will cease to exist.

At the effective time of the conversion and as a result of the merger of Magyar Bancorp, MHC with and into Magyar Bancorp, Magyar Bancorp’s certificate of incorporation will be amended to increase the number of authorized shares of capital stock and to include a forum selection provision which, generally, requires lawsuits against or on behalf of Magyar Bancorp to be brought in federal or state court in Delaware.

Magyar Bancorp’s common stock is currently listed on the Nasdaq Global Market under the trading symbol “MGYR,” and we expect the shares of Magyar Bancorp common stock will continue to list and trade on the Nasdaq Global Market under the symbol “MGYR.”

The conversion and offering cannot be completed unless the stockholders of Magyar Bancorp approve the Plan of Conversion. Magyar Bancorp is holding a special meeting of stockholders at Ellery’s located at 701 Lincoln Blvd., Middlesex, New Jersey 08846 on June 30, 2021, at 2:00 p.m., Eastern time, to consider and vote upon the Plan of Conversion.

We must obtain the affirmative vote of (i) two-thirds of the total number of votes entitled to be cast at the special meeting by Magyar Bancorp stockholders, including votes representing shares held by Magyar Bancorp, MHC, and (ii) a majority of the total number of votes entitled to be cast at the special meeting by Magyar Bancorp stockholders other than Magyar Bancorp, MHC. Magyar Bancorp’s board of directors unanimously recommends that stockholders vote “FOR” approval of the Plan of Conversion.


This document serves as the proxy statement for the special meeting of stockholders of Magyar Bancorp and the prospectus for the shares of Magyar Bancorp common stock to be issued in exchange for shares of Magyar Bancorp common stock. We urge you to read this entire document carefully. You can also obtain information about us from documents that we have filed with the Securities and Exchange Commission and the Board of Governors of the Federal Reserve System. This document does not serve as the prospectus relating to the offering by Magyar Bancorp of its shares of common stock in the offering, which is being made pursuant to a separate prospectus. Stockholders of Magyar Bancorp are not required to participate in the stock offering.

This proxy statement/prospectus contains information that you should consider in evaluating the Plan of Conversion. In particular, you should carefully read the section captioned “Risk Factors” beginning on page 17 for a discussion of certain risk factors relating to the conversion and offering.

These securities are not deposits or savings accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Neither the Securities and Exchange Commission, the Board of Governors of the Federal Reserve System, the New Jersey Department of Banking and Insurance nor any state securities regulator has approved or disapproved of these securities or determined if this proxy statement/prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

For answers to your questions, read this proxy statement/prospectus, including the Questions and Answers section, beginning on page 1. Questions about voting on the Plan of Conversion may be directed to Laurel Hill Advisory Group, LLC, Monday through Friday from 9:00 a.m. to 5:00 p.m., Eastern time. Banks and brokers can call (516) 933-3100, and all others can call (888) 742-1305 (toll-free).

The date of this proxy statement/prospectus is May 14, 2021, and it is first being mailed to stockholders of Magyar Bancorp on or about May 24, 2021.


MAGYAR BANCORP, INC.

400 Somerset Street

New Brunswick, New Jersey 08901

(732) 342-7600

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

On June 30, 2021 at 2:00 p.m., Eastern time, Magyar Bancorp, Inc. (“Magyar Bancorp”) will hold a special meeting of stockholders at Ellery’s located at 701 Lincoln Blvd., Middlesex, New Jersey 08846.

At the meeting, stockholders will consider and act on the following:

 

  1.

The approval of a Plan of Conversion, whereby Magyar Bancorp, MHC and Magyar Bancorp will convert and reorganize from the mutual holding company structure to the stock holding company structure, including the merger of Magyar Bancorp, MHC with and into Magyar Bancorp and amendments to Magyar Bancorp’s certificate of incorporation as a result of the conversion, as more fully described in the attached proxy statement/prospectus; and

 

  2.

The approval of the adjournment of the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes at the time of the special meeting to approve the Plan of Conversion;

Such other business that may properly come before the meeting.

NOTE: The board of directors is not aware of any other business to come before the meeting.

The board of directors has fixed the close of business on May 3, 2021, as the record date for the determination of stockholders entitled to notice of and to vote at the special meeting and at any adjournment or postponement thereof.

Upon written request addressed to the Corporate Secretary of Magyar Bancorp, Inc. at the above address, stockholders may obtain an additional copy of this proxy statement/prospectus and/or a copy of the Plan of Conversion. In order to assure timely receipt of these materials, Magyar Bancorp, Inc. must receive the written request by June 16, 2021.

Complete, sign and date the enclosed proxy card, which is solicited by the board of directors, and mail it in the enclosed envelope today. Alternatively, you may vote by mobile device or Internet as described on the proxy card. Your proxy will not be used if you attend the meeting and vote in person.

BY ORDER OF THE BOARD OF DIRECTORS

 

 

Karen LeBlon

Corporate Secretary

New Brunswick, New Jersey

May 14, 2021


TABLE OF CONTENTS

 

SUMMARY

     5  

RISK FACTORS

     17  

INFORMATION ABOUT THE SPECIAL MEETING

     32  

PROPOSAL 1 – APPROVAL OF THE PLAN OF CONVERSION AND REORGANIZATION

     35  

PROPOSAL 2 – ADJOURNMENT OF THE SPECIAL MEETING

     57  

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

     58  

RECENT DEVELOPMENTS

     60  

FORWARD-LOOKING STATEMENTS

     69  

HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING

     71  

OUR DIVIDEND POLICY

     72  

MARKET FOR THE COMMON STOCK

     73  

HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE

     74  

CAPITALIZATION

     75  

PRO FORMA DATA

     76  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     81  

BUSINESS OF MAGYAR BANCORP

     99  

BUSINESS OF MAGYAR BANK

     100  

SUPERVISION AND REGULATION

     121  

TAXATION

     130  

MANAGEMENT

     131  

BENEFICIAL OWNERSHIP OF COMMON STOCK

     142  

SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS

     143  

COMPARISON OF STOCKHOLDERS’ RIGHTS FOR STOCKHOLDERS OF MAGYAR BANCORP BEFORE AND AFTER THE CONVERSION

     143  

RESTRICTIONS ON ACQUISITION OF MAGYAR BANCORP

     144  

DESCRIPTION OF CAPITAL STOCK OF MAGYAR BANCORP

     148  

TRANSFER AGENT

     149  

EXPERTS

     149  

LEGAL MATTERS

     149  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     149  

STOCKHOLDER PROPOSALS

     150  

ADVANCE NOTICE OF BUSINESS TO BE CONDUCTED AT AN ANNUAL MEETING

     150  

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SPECIAL MEETING

     150  

OTHER MATTERS

     151  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF MAGYAR BANCORP, INC. AND SUBSIDIARY

     152  


QUESTIONS AND ANSWERS

FOR STOCKHOLDERS OF MAGYAR BANCORP, INC.

REGARDING THE PLAN OF CONVERSION AND REORGANIZATION

You should read this document for more information about the conversion. We have filed an application with the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and the New Jersey Department of Banking and Insurance (“NJDOBI”) with respect to the conversion and offering. We have also filed an application with the NJDOBI with respect to amendments to Magyar Bank’s certificate of incorporation. The approvals of the Federal Reserve Board and the NJDOBI are required before we can consummate the conversion and offering. Any approval by the Federal Reserve Board or the NJDOBI does not constitute a recommendation or endorsement of the Plan of Conversion. Consummation of the conversion is also subject to approval of the Plan of Conversion by Magyar Bancorp’s stockholders, and to the satisfaction of certain other conditions.

 

Q.

WHAT ARE STOCKHOLDERS BEING ASKED TO APPROVE?

 

A.

Magyar Bancorp stockholders as of the close of business on May 3, 2021 are being asked to vote on the Plan of Conversion pursuant to which Magyar Bancorp, MHC will convert from the mutual to the stock form of organization, including the merger of Magyar Bancorp, MHC with and into Magyar Bancorp and amendments to Magyar Bancorp’s certificate of incorporation as a result of the conversion, as more fully described in the attached proxy statement/prospectus. As part of the conversion, Magyar Bancorp is offering its common stock to eligible depositors of Magyar Bank, to Magyar Bank’s tax qualified benefit plans and to the public. The shares offered represent Magyar Bancorp, MHC’s current ownership interest in Magyar Bancorp, adjusted for certain assets held by Magyar Bancorp, MHC. Your vote is very important. Without sufficient votes “FOR” approval of the Plan of Conversion, we cannot implement the Plan of Conversion and complete the stock offering.

In addition, Magyar Bancorp stockholders are being asked to approve the adjournment of the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes at the time of the special meeting to approve the Plan of Conversion.

 

Q.

WHAT ARE THE REASONS FOR THE CONVERSION AND RELATED OFFERING?

 

A.

The primary reasons for the conversion and offering are to:

 

   

enhance our regulatory capital position to support growth and build stockholder value;

 

   

transition our organization to a stock holding company structure, which gives us greater flexibility to access the capital markets compared to our existing mutual holding company structure;

 

   

improve the liquidity of our shares of common stock;

 

   

facilitate our stock holding company’s ability to pay dividends to our public stockholders; and

 

   

facilitate future mergers and acquisitions.

As a fully converted stock holding company, we will have greater flexibility in structuring mergers and acquisitions, including the form of consideration that we can use to pay for an acquisition. Our current mutual holding company structure limits our ability to offer shares of our common stock as consideration in a merger or acquisition since Magyar Bancorp, MHC is required to own a majority of Magyar Bancorp’s outstanding shares of common stock. Potential sellers often want stock for at least part of the purchase price. Our new stock holding company structure will enable us to offer stock or cash consideration, or a combination of stock and cash, and therefore will enhance our ability to compete with other bidders when acquisition opportunities arise. We currently have no arrangements or understandings regarding any specific acquisition. See “Proposal 1 – Approval of the Plan of Conversion and Reorganization – Reasons

 

1


for the Conversion” for a more complete discussion of our reasons for conducting the conversion and offering.

 

Q.

WHAT WILL STOCKHOLDERS RECEIVE FOR THEIR EXISTING MAGYAR BANCORP SHARES?

 

A.

As more fully described in “Proposal 1 – Approval of the Plan of Conversion and Reorganization – Share Exchange Ratio for Current Stockholders,” depending on the number of shares sold in the offering, each share of common stock that you own at the time of the completion of the conversion will be exchanged for between 0.9027 shares at the minimum and 1.2213 shares at the maximum of the offering range of Magyar Bancorp common stock (cash will be paid in lieu of any fractional shares). For example, if you own 100 shares of Magyar Bancorp common stock, and the exchange ratio is 1.2213 (at the maximum of the offering range), after the conversion you will receive 122 shares of Magyar Bancorp common stock and $1.30 in cash, the value of the fractional share based on the $10.00 per share purchase price of stock in the offering.

If you own shares of Magyar Bancorp common stock in a brokerage account in “street name” or electronically with our transfer agent in “book entry” form, your shares will be automatically exchanged within your account, and you do not need to take any action to exchange your shares of common stock or receive cash in lieu of fractional shares. If you own shares in the form of Magyar Bancorp stock certificates, after the completion of the conversion and offering, our exchange agent will mail to you a transmittal form with instructions to surrender your stock certificates. A statement reflecting your ownership of shares of common stock of Magyar Bancorp and a check representing cash in lieu of fractional shares will be mailed to you within five business days after the exchange agent receives a properly executed transmittal form and your existing Magyar Bancorp stock certificate(s). All shares of Magyar Bancorp common stock will be issued in book-entry form, meaning that Magyar Bancorp will not issue stock certificates. Do not submit your stock certificate(s) until you receive a transmittal form.

 

Q.

WHY WILL THE SHARES THAT I RECEIVE BE BASED ON A PRICE OF $10.00 PER SHARE RATHER THAN THE TRADING PRICE OF THE COMMON STOCK BEFORE COMPLETION OF THE CONVERSION?

 

A.

The shares will be based on a price of $10.00 per share because that is the price at which Magyar Bancorp will sell shares in its offering. The amount of common stock Magyar Bancorp will issue at $10.00 per share in the offering and the exchange is based on an independent appraisal of the estimated market value of Magyar Bancorp by RP Financial, LC., an appraisal firm experienced in the appraisal of financial institutions. RP Financial, LC. has estimated that, as of February 5, 2021, this market value was $61.7 million. Based on federal regulations, the market value forms the midpoint of a range with a minimum of $52.5 million and a maximum of $71.0 million. Based on this valuation and the valuation range, the number of shares of common stock of Magyar Bancorp that existing public stockholders of Magyar Bancorp will receive in exchange for their shares of Magyar Bancorp common stock is expected to range from 2,356,399 to 3,188,070, with a midpoint of 2,772,234 (a value of approximately $23.6 million to $31.9 million, with a midpoint of $27.7 million, based on a price of $10.00 per share). The number of shares received by the existing public stockholders of Magyar Bancorp is intended to maintain their existing ownership in our organization (excluding any new shares purchased by them in the offering and their receipt of cash in lieu of fractional exchange shares, and as adjusted to reflect certain assets held by Magyar Bancorp, MHC). The independent appraisal is based in part on Magyar Bancorp’s financial condition and results of operations, the pro forma impact of the additional capital raised by the sale of shares of common stock in the offering, and an analysis of a peer group of ten publicly traded savings and loan and bank holding companies that RP Financial, LC. considered comparable to Magyar Bancorp.

 

2


Q.

DOES THE EXCHANGE RATIO DEPEND ON THE TRADING PRICE OF MAGYAR BANCORP COMMON STOCK?

 

A.

No. The exchange ratio will not be based on the market price of Magyar Bancorp common stock. Instead, the exchange ratio will be based on the appraised value of Magyar Bancorp. The purpose of the exchange ratio is to maintain the ownership percentage of public stockholders of Magyar Bancorp (excluding any new shares purchased by them in the offering, their receipt of cash in lieu of fractional exchange shares and as adjusted to reflect certain assets held by Magyar Bancorp, MHC). Therefore, changes in the price of Magyar Bancorp common stock between now and the completion of the conversion and offering will not affect the calculation of the exchange ratio.

 

Q.

SHOULD I SUBMIT MY STOCK CERTIFICATE(S) NOW?

 

A.

No. If you hold stock certificate(s), instructions for exchanging the certificates will be sent to you by our exchange agent after the completion of the conversion and offering. If your shares are held in “street name” (e.g., in a brokerage account) or electronically with our transfer agent in “book entry” form, in either case rather than in certificate form, the share exchange will be reflected automatically in your account upon completion of the conversion.

 

Q.

HOW DO I VOTE?

 

A.

Mark, sign and date each proxy card enclosed, and return the card(s) to us in the enclosed proxy reply envelope. Alternatively, you may vote by Internet or mobile device by following the instructions on the proxy card. For information on submitting your proxy, please refer to instructions on the enclosed proxy card. YOUR VOTE IS VERY IMPORTANT. PLEASE VOTE TODAY.

 

Q.

IF MY SHARES ARE HELD IN STREET NAME, WILL MY BROKER, BANK OR OTHER NOMINEE AUTOMATICALLY VOTE ON THE PLAN ON MY BEHALF?

 

A.

No. Your broker, bank or other nominee will not be able to vote your shares without instructions from you. You should instruct your broker, bank or other nominee to vote your shares, using the directions that they provide to you.

 

Q.

WHY SHOULD I VOTE? WHAT HAPPENS IF I DON’T VOTE?

 

A.

Your vote is very important. We believe the conversion and offering are in the best interests of our stockholders. Not voting all the proxy card(s) you receive will have the same effect as voting “against” the approval of the Plan of Conversion. Without sufficient favorable votes FOR approval of the Plan of Conversion, we cannot complete the conversion and offering.

 

Q.

WHAT IF I DO NOT GIVE VOTING INSTRUCTIONS TO MY BROKER, BANK OR OTHER NOMINEE?

 

A.

Your vote is important. If you do not instruct your broker, bank or other nominee to vote your shares, the unvoted proxy will have the same effect as a vote “against” the Plan of Conversion.

 

Q.

MAY I PLACE AN ORDER TO PURCHASE SHARES IN THE COMMUNITY OFFERING, IN ADDITION TO THE SHARES THAT I WILL RECEIVE IN THE EXCHANGE?

 

A.

Yes. If you would like to receive a prospectus and stock order form, you must call our Stock Information Center at (877) 643-8198, Monday through Friday between 10:00 a.m. and 4:00 p.m., Eastern time. The Stock Information Center is closed bank holidays.

 

3


Eligible depositors of Magyar Bank have priority subscription rights allowing them to purchase common stock in a subscription offering. Shares not purchased in the subscription offering may be available for sale to the public in a community offering, as described in this document. If orders for Magyar Bancorp common stock in a community offering exceed the number of shares available for sale, shares will be allocated (to the extent shares remain available) as follows: first, to cover orders of natural persons (including trusts of natural persons) residing in the New Jersey counties of Middlesex, Somerset, Monmouth, Hunterdon and Union, and then to existing stockholders of Magyar Bancorp at the close of business on May 3, 2021 and then to the general public.

Stockholders of Magyar Bancorp are subject to an ownership limitation. Shares of common stock purchased in the offering by a stockholder and his or her associates or individuals acting in concert with the stockholder, plus any shares a stockholder and these individuals receive in the exchange for existing shares of Magyar Bancorp common stock, may not exceed 9.9% of the total shares of common stock of Magyar Bancorp to be issued and outstanding after the completion of the conversion.

Properly completed and signed stock order forms, with full payment, must be received (not postmarked) no later than 2:00 p.m., Eastern time, on June 18, 2021.

 

Q.

WILL THE CONVERSION HAVE ANY EFFECT ON DEPOSIT AND LOAN ACCOUNTS AT MAGYAR BANK?

 

A.

No. The account number, amount, interest rate and withdrawal rights of deposit accounts will remain unchanged. Deposits will continue to be federally insured by the Federal Deposit Insurance Corporation up to the legal limit. Loans and rights of borrowers will not be affected. Depositors will no longer have voting rights in Magyar Bancorp, MHC as to matters currently requiring such vote. Magyar Bancorp, MHC will cease to exist after the conversion and offering. Only stockholders of Magyar Bancorp will have voting rights after the conversion and offering.

OTHER QUESTIONS?

For answers to other questions, please read this proxy statement/prospectus. Questions about voting on the Plan of Conversion may be directed to Laurel Hill Advisory Group, LLC, Monday through Friday from 9:00 a.m. to 5:00 p.m., Eastern time. Banks and brokers can call (516) 933-3100, and all others can call (888) 742-1305 (toll-free). Questions about the stock offering may be directed to our Stock Information Center at (877) 643-8198, Monday through Friday between 10:00 a.m. and 4:00 p.m., Eastern time. The Stock Information Center is closed bank holidays.

 

4


SUMMARY

This summary highlights material information from this proxy statement/prospectus and may not contain all the information that is important to you. To understand the conversion and other proposals fully, you should read this entire document carefully, including the sections entitled “Risk Factors,” “Proposal 1 – Approval of The Plan of Conversion and Reorganization,” “Proposal 2 – Adjournment of the Special Meeting” and the consolidated financial statements and the notes to the consolidated financial statements.

The Special Meeting

Date, Time and Place. Magyar Bancorp will hold its special meeting of stockholders at Ellery’s located at 701 Lincoln Blvd., Middlesex, New Jersey 08846 on June 30, 2021, at 2:00 p.m., Eastern time.

The Proposals. Stockholders will be voting on the following proposals at the special meeting:

 

  1.

The approval of a Plan of Conversion whereby: (a) Magyar Bancorp, MHC and Magyar Bancorp will convert and reorganize from the mutual holding company structure to the stock holding company structure; (b) Magyar Bancorp, MHC will merge into Magyar Bancorp, and Magyar Bancorp’s certificate of incorporation will be amended as described in this proxy statement/prospectus; (c) the outstanding shares of Magyar Bancorp, other than those held by Magyar Bancorp, MHC, will be converted into new shares of common stock of Magyar Bancorp; and (d) Magyar Bancorp will offer shares of its common stock for sale in a subscription offering, a community offering and, if necessary, a syndicated offering. A vote to approve the Plan of Conversion includes a vote to approve the merger of Magyar Bancorp, MHC into Magyar Bancorp and the amendments to the certificate of incorporation of Magyar Bancorp;

 

  2.

The approval of the adjournment of the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes at the time of the special meeting to approve the Plan of Conversion; and

Such other business that may properly come before the meeting.

Vote Required for Approval of Proposals by the Stockholders of Magyar Bancorp

Proposal 1: Approval of the Plan of Conversion. We must obtain the affirmative vote of (i) two-thirds of the total number of votes entitled to be cast at the special meeting by Magyar Bancorp stockholders, including votes representing shares held by Magyar Bancorp, MHC, and (ii) a majority of the total number of votes entitled to be cast at the special meeting by Magyar Bancorp stockholders other than Magyar Bancorp, MHC.

Proposal 1 must also be approved by the depositors of Magyar Bank at a special meeting called for that purpose. Depositors will receive separate proxy materials from Magyar Bancorp, MHC regarding the conversion.

Proposal 2: Approval of the adjournment of the special meeting. We must obtain the affirmative vote of at least a majority of the votes cast by Magyar Bancorp stockholders at the special meeting to adjourn the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes at the time of the special meeting to approve the proposal to approve the Plan of Conversion.

Other Matters. We must obtain the affirmative vote of the majority of the votes cast by holders of outstanding shares of common stock of Magyar Bancorp. At this time, we know of no other matters that may be presented at the special meeting.



 

5


Revocability of Proxies

You may revoke your proxy at any time before the vote is taken at the special meeting. To revoke your proxy, you must advise the corporate secretary of Magyar Bancorp in writing before your common stock has been voted at the special meeting, deliver a signed, later-dated proxy or attend the special meeting and vote your shares in person. Attendance at the special meeting will not in itself constitute revocation of your proxy.

Vote by Magyar Bancorp, MHC

Management anticipates that Magyar Bancorp, MHC, our majority stockholder, will vote all of its shares of common stock in favor of all the matters set forth above. If Magyar Bancorp, MHC votes all of its shares in favor of each proposal, the approval of the adjournment of the special meeting, if necessary would be assured.

As of May 3, 2021, the directors and executive officers of Magyar Bancorp beneficially owned 218,049 shares, or approximately 3.8% of the outstanding shares of Magyar Bancorp common stock, and Magyar Bancorp, MHC owned 3,200,450 shares, or approximately 55.1% of the outstanding shares of Magyar Bancorp common stock.

Vote Recommendations

Your board of directors unanimously recommends that you vote “FOR” approval of the Plan of Conversion, which includes approval of the merger of Magyar Bancorp, MHC into Magyar Bancorp, Inc. and approval of the amendments to Magyar Bancorp’s certificate of incorporation and “FOR” approval of the adjournment of the special meeting, if necessary.

Our Business

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

Plan of Conversion and Reorganization

The boards of directors of Magyar Bancorp, MHC, Magyar Bancorp and Magyar Bank have adopted the Plan of Conversion, pursuant to which Magyar Bank will reorganize from a mutual holding company structure to a stock holding company structure. Public stockholders of Magyar Bancorp will receive new shares in Magyar Bancorp in exchange for their existing shares of Magyar Bancorp common stock based on an exchange ratio. See “– The Exchange of Existing Shares of Magyar Bancorp Common Stock.” This conversion to a stock holding company structure also includes the offering by Magyar Bancorp of shares of its common stock to eligible depositors of Magyar Bank and to the public, including Magyar Bancorp stockholders, in a subscription offering



 

6


and, if necessary, in a community offering and/or in a separate offering through a syndicate of broker-dealers, referred to in this proxy statement/prospectus as the syndicated offering. Following the conversion and offering, Magyar Bancorp, MHC will no longer exist, and Magyar Bancorp will continue to be the parent company of Magyar Bank.

The conversion and offering cannot be completed unless the stockholders of Magyar Bancorp approve the Plan of Conversion. Magyar Bancorp’s stockholders will vote on the Plan of Conversion at Magyar Bancorp’s special meeting. This document is the proxy statement used by Magyar Bancorp’s board of directors to solicit proxies for the special meeting. It is also the prospectus of Magyar Bancorp regarding the shares of Magyar Bancorp common stock to be issued to Magyar Bancorp’s stockholders in the share exchange. This document does not serve as the prospectus relating to the offering by Magyar Bancorp of its shares of common stock in the subscription offering and any community offering or syndicated community offering, which will be made pursuant to a separate prospectus.

Our Organizational Structure

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

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

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

 

 



 

7


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

 

 

Business Strategy

Our current business strategy consists of the following:

 

   

Continue to grow our loan portfolio prudently and further diversify our loan portfolio. Our loan portfolio has increased to $607.0 million at December 31, 2020 compared to $611.3 million at September 30, 2020, $523.0 million at September 30, 2019 and $512.5 million at September 30, 2018. In recent years, consistent with our business strategy, our biggest areas of loan growth have been in commercial real estate, which increased $41.0 million, or 18.7%, from September 30, 2018 to December 31, 2020, and in commercial business loans, which increased $37.9 million, or 71.1%, from September 30, 2018 to December 31, 2020. Included in the December 31, 2020 balance of commercial business loans was $46.0 million of loans originated through the SBA’s Paycheck Protection Program (“PPP”). We intend to continue to grow our loan portfolio, with a focus primarily on commercial real estate and to a lesser extent commercial business lending. Although we will continue to emphasize the origination of one- to four-family residential mortgage loans, we expect our continued emphasis on commercial real estate and commercial business lending will result in the continued diversification of our loan portfolio with a lower concentration in one- to four-family residential real estate loans.

 

   

Continue to support our customers and our local community. During the COVID-19 pandemic, as we have done during prior economic downturns, we are taking actions to support our customers and our local communities. For example, during the year ended September 30, 2020, we originated $56.0 million of small business loans under the PPP, created by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was signed into law in March 2020. As a result of our participation in the PPP, in addition to the loans originated, at December 31, 2020, we had 114 new business customers through the PPP with an aggregate balance of $14.0 million in core deposits and we believe we will retain a significant number of these customers. Furthermore, in response to the COVID-19 pandemic, we have implemented protocols and processes to help protect our employees, customers and communities, including leveraging our business continuity plans and capabilities that include critical operations teams being divided and dispersed to separate locations and, when possible, having employees work from home, while remaining open in all branch locations. In addition, we participated in the Federal Home Loan Bank of New York’s Covid-19 Small Business Recovery Grant Program and distributed $100,000 to local business and non-profits in our community. Our commitment to the communities we



 

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serve has resulted in Magyar Bank receiving a rating of “Outstanding” from the FDIC for our compliance with the Community Reinvestment Act on five consecutive examinations by the FDIC. An “Outstanding” rating is considered a benchmark for a bank’s level of care and concern for the communities it serves. Additionally, each year we support over 100 organizations through corporate donations and employees volunteering their time. Prior to the COVID-19 pandemic, our employees frequently attended events around the community, from serving meals at local soup kitchens, to providing financial education seminars and preparing first-time homebuyers in achieving homeownership. We still engage in these types of activities in a virtual format, and once the restrictions are lifted, we expect to continue to be an active civic leader in our communities through these types of engagements.

 

   

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

 

   

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

 

   

Continue to manage credit risk to maintain a low level of non-performing assets. We believe strong asset quality remains a key to our long-term financial success and is important in supporting our intended loan growth. Managing credit risk also reduces the provisions we require to maintain our allowance for loan losses, which enables us to use additional funds to support sales and marketing initiatives as well as invest in information technology systems customarily associated with a larger financial institution. Our total non-performing assets to total assets ratio was 1.63% at December 31, 2020, 1.63% at September 30, 2020 and 2.29% at September 30, 2019. Our strategy for credit risk management continues to focus on having an experienced team of credit professionals, well-defined policies and procedures, appropriate loan underwriting criteria and active credit monitoring. This includes enhanced loan monitoring of higher risk portfolio segments, higher risk individual loans and larger relationships within the portfolio, and



 

9


 

more frequent loan grade review. We will also continue more frequent communication with large borrowers and borrowers within pandemic-affected segments, such as the hospitality and restaurant industries, and we will further continue obtaining interim financial statements, when available, and monitoring past due loans, as well as loans that were deferred as a result of COVID-19 hardships and that are required to resume normal monthly payments. Furthermore, given the uncertainty surrounding the length and severity of the COVID-19 pandemic, management has established and will continue to use enhanced underwriting criteria for all loan types, with a particular focus on portfolio segments identified as having elevated risk.

Reasons for the Conversion

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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



 

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See “Proposal 1 – Approval of the Plan of Conversion and Reorganization” for a more complete discussion of our reasons for conducting the conversion and offering.

Conditions to Completion of the Conversion

We cannot complete the conversion and offering unless:

 

   

The Plan of Conversion is approved by a majority of votes eligible to be cast by the depositors of Magyar Bank as of the close of business on May 3, 2021;

 

   

The Plan of Conversion is approved by Magyar Bancorp stockholders holding at least two-thirds of the outstanding shares of common stock of Magyar Bancorp as of the close of business on May 3, 2021, including shares held by Magyar Bancorp, MHC;

 

   

The Plan of Conversion is approved by Magyar Bancorp stockholders holding a majority of the outstanding shares of common stock of Magyar Bancorp as of the close of business on May 3, 2021, excluding shares held by Magyar Bancorp, MHC;

 

   

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

 

   

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

Magyar Bancorp, MHC intends to vote its shares in favor of the Plan of Conversion. At the close of business on May 3, 2021, Magyar Bancorp, MHC owned 3,200,450 shares, or approximately 55.1%, of the outstanding shares of common stock of Magyar Bancorp. At the close of business on May 3, 2021, the directors and executive officers of Magyar Bancorp and their affiliates owned 218,049 shares of Magyar Bancorp, or 3.8% of the outstanding shares of common stock and 8.4% of the outstanding shares of common stock excluding shares held by Magyar Bancorp, MHC. They intend to vote those shares in favor of the Plan of Conversion.

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

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

 

  (i)

increase the purchase and ownership limitations; and/or

 

  (ii)

seek regulatory approval to extend the offering beyond August 2, 2021, as long as we resolicit subscribers who previously submitted subscriptions in the offering.

If we extend the offering past August 2, 2021, all subscribers will be notified and given an opportunity to confirm, change or cancel their orders. If you do not respond to the notice of extension, we will cancel your stock order and promptly return your funds with interest at 0.05% per annum for funds received in the subscription and community offering or cancel your deposit account withdrawal authorization. If one or more purchase limitations are increased, subscribers in the subscription offering who ordered the maximum amount and who indicated a desire to be resolicited on the stock order form will be given the opportunity to increase their subscriptions up to the then-applicable limit.

The Exchange of Existing Shares of Magyar Bancorp Common Stock

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



 

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Bancorp common stock owned at the completion of the conversion, depending on the number of shares of common stock issued in the offering.

 

    

 

Shares to be Sold in
The Offering

   

 

New Shares of Magyar
Bancorp to be Issued
for Shares of
Existing Magyar Bancorp

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

Minimum

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

Midpoint

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

Maximum

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

 

(1)

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

(2)

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

(3)

Cash will be paid in lieu of fractional shares.

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

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

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

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



 

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Company Name

   Ticker
Symbol
  

Headquarters

   Total Assets  
               (In millions)  

Elmira Savings Bank

   ESBK    Elmira, NY    $ 674  

ESSA Bancorp

   ESSA    Stroudsburg, PA    $ 1,894  

HMN Financial, Inc.

   HMNF    Rochester, MN    $ 898  

HV Bancorp, Inc.

   HVBC    Doylestown, PA    $ 508  

IF Bancorp, Inc.

   IROQ    Watseka, IL    $ 726  

PCSB Financial Corporation

   PCSB    Yorktown Heights, NY    $ 1,791  

Provident Bancorp, Inc.

   PVBC    Amesbury, MA    $ 1,498  

Prudential Bancorp, Inc.

   PBIP    Philadelphia, PA    $ 1,223  

Randolph Bancorp, Inc.

   RNDB    Stoughton, MA    $ 723  

Severn Bancorp, Inc.

   SVBI    Annapolis, MD    $ 939  

In applying each of the valuation methods, RP Financial, LC. considered adjustments to the pro forma market value based on a comparison of Magyar Bancorp with the peer group. RP Financial, LC. made downward adjustments for financial condition and liquidity of the shares. RP Financial, LC. made no adjustments for profitability, growth and viability of earnings, asset growth, primary market area, dividends, marketing of the issue, management, and effect of government regulations and regulatory reform. The downward adjustment applied for financial condition took into consideration Magyar Bancorp’s smaller asset size, less favorable credit quality measures and a lower pro forma return on equity in comparison to the peer group, while the downward adjustment for liquidity of the shares took into consideration Magyar Bancorp’s lower market capitalization and lower shares outstanding relative to the comparable peer group averages and medians.

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

 

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

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

       

Maximum

     28.02x        77.94     77.94

Midpoint

     23.83x        71.23     71.23

Minimum

     19.82x        63.86     63.86

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

       

Averages

     12.78x        90.10     93.40

Medians

     11.32x        89.45     92.99

 

(1)

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

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

For a more complete discussion of the amount of common stock we are offering for sale and the independent appraisal, see “Proposal 1 – Approval of the Plan of Conversion and Reorganization – Stock Pricing and Number of Shares to be Issued.”



 

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How We Intend to Use the Proceeds From the Offering

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

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

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

Our Dividend Policy

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

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

Purchases and Ownership by Officers and Directors

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

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

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

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

We intend to implement one or more new stock-based benefit plans no earlier than six months after completion of the conversion. Stockholder approval of these plans would be required. We have not determined whether we would adopt the plans within or after 12 months following the completion of the conversion. If we implement stock-based benefit plans within 12 months following the completion of the conversion, the stock-based



 

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

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

 

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

Employee stock ownership plan

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

Restricted stock awards

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

Stock options

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

 

 

    

 

 

    

 

 

     

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

     

 

 

    

 

 

 

 

(1)

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

(2)

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

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

Market for Common Stock

Existing publicly held shares of Magyar Bancorp’s common stock are listed on the Nasdaq Global Market under the symbol “MGYR.” Upon completion of the conversion, we expect the shares of common stock of Magyar Bancorp will continue to list and trade on the Nasdaq Global Market under the same symbol “MGYR.” In order to list our stock on the Nasdaq Global Market, we are required to have at least three broker-dealers who will make a market in our common stock. As of May 3, 2021, Magyar Bancorp had 18 registered market makers in its common stock.

Tax Consequences

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



 

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Changes in Stockholders’ Rights for Existing Stockholders of Magyar Bancorp

As part of the merger of Magyar Bancorp, MHC into Magyar Bancorp, Magyar Bancorp is amending its certificate of incorporation to (1) increase the number of shares of capital stock from 9,000,000 (8,000,000 shares of common stock and 1,000,000 shares of preferred stock) to 14,500,000 (14,000,000 shares of common stock and 500,000 shares of preferred stock) and (2) provide that, unless Magyar Bancorp consents in writing to the selection of an alternative forum, a state or federal court in the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of Magyar Bancorp, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of Magyar Bancorp to Magyar Bancorp or Magyar Bancorp’s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, or (iv) any action asserting a claim governed by the internal affairs doctrine, in all cases subject to the court’s having personal jurisdiction over the indispensable parties named as defendants.

Dissenters’ Rights

Stockholders of Magyar Bancorp do not have dissenters’ rights in connection with the conversion and offering.

Important Risks in Owning Magyar Bancorp’s Common Stock

Before you vote on the conversion, you should read the “Risk Factors” section beginning on page 17 of this proxy statement/prospectus.



 

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RISK FACTORS

You should consider carefully the following risk factors when deciding how to vote on the conversion.

Risks Related to the COVID-19 Pandemic

The COVID-19 pandemic has and will continue to pose risks and could harm our business, results of operations and prospects.

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

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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Risks Related to Our Market Area and Competitive Factors

A worsening of economic conditions could reduce demand for our products and services and/or result in increases in our level of non-performing loans, which could have an adverse effect on our results of operations.

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

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

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

 

   

demand for our products and services may decline;

 

   

loan delinquencies, problem assets and foreclosures may increase;

 

   

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

 

   

the value of our securities portfolio may decline; and

 

   

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

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

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

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

 

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Strong competition within our market area may limit our growth and profitability.

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

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

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

Risks Related to our Lending Activities

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

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

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

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

 

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If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.

Our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, requiring additions to our allowance, which could materially decrease our net income. The allowance for loan losses was $7.1 million at December 31, 2020 and increased $1.5 million during the year ended September 30, 2020 to $6.4 million. The increases were attributable to growth in total loans receivable and higher adjustments to the historical loss factors for economic conditions relating to the COVID-19 pandemic. Our allowance for loan losses was 1.17% of total loans and 71.0% of total non-performing loans at December 31, 2020. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. Based on this review, we believe our allowance for loan losses is adequate to absorb losses in our loan portfolio as of December 31, 2020.

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

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

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

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

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

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

Because of the short timeframe between the passing of the CARES Act and implementation of the PPP, some of the rules and guidance relating to PPP were issued after lenders began processing PPP applications. Also, there was and continues to be uncertainty in the laws, rules and guidance relating to the PPP. Since the opening of the PPP, several banks have been subject to litigation regarding the procedures used in processing PPP applications and the payment of fees to agents that assisted borrowers in obtaining PPP loans. In addition, some banks and borrowers have received negative media attention associated with PPP loans. We may be exposed to litigation risk and negative media attention related to our participation in the PPP. If any such litigation is not resolved in our

 

20


favor, it may result in significant financial liability to us or adversely affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation or media attention could have a material adverse impact on our business, financial condition, and results of operations.

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

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

Risks Related to Laws and Regulations

We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations.

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

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

Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.

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

 

21


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

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

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

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

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

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

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

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

Risks Related to Market Interest Rates

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

In recent years the Federal Reserve Board has maintained interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities. Our ability to reduce our interest expense may be limited at current interest rate levels while the average yield on our interest-earning assets may

 

22


continue to decrease. A continuation of a low interest rate environment may adversely affect our net interest income, which would have an adverse effect on our profitability.

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

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

 

   

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

 

   

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

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

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

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

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

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

Risks Related to our Business Strategy

Because we intend to continue our emphasis on the origination of commercial business loans and commercial real estate loans, our lending risk has increased in recent years and may increase in future years.

At December 31, 2020, our portfolio of commercial business and commercial real estate loans totaled $351.5 million (including $46.0 million in PPP loans), or 57.9% of our total loans, compared to $349.1 million (including $56.0 million in PPP loans), or 57.1% of our total loans at September 30, 2020, $281.3 million, or 53.8% of our total loans at September 30, 2019 and $272.7 million, or 53.2% of our total loans at September 30, 2018. It is our intent to continue to emphasize the origination of commercial business and commercial real estate loans.

 

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

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

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

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

From time to time, we may implement new lines of business or offer new products and services within existing lines of business. In addition, we will continue to invest in research, development, and marketing for new products and services. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services we may invest significant time and resources. Initial timetables for the development and introduction of new lines of business and/or new products or services may not be achieved, and price and profitability targets may not prove feasible. Furthermore, if customers do not perceive our new offerings as providing significant value, they may fail to accept our new products and services. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, the burden on management and our information technology of introducing any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on our business, financial condition and results of operations.

Acquisitions may disrupt our business and dilute stockholder value.

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

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

 

   

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

 

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

 

   

potential volatility in reported income associated with goodwill impairment losses;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

Risks Related to Operational Matters

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

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

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

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

 

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

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

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

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

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

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

Risks Related to Accounting Matters

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

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

 

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Changes in accounting standards could affect reported earnings.

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

Other Risks Related to Our Business

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

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

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

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

Risks Related to Security

System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.

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

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

 

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Risks associated with cyber-security could negatively affect our earnings.

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

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

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

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

Risks Related to the Offering and the Exchange

The market value of Magyar Bancorp common stock received in the share exchange may be less than the market value of Magyar Bancorp common stock exchanged.

The number of shares of Magyar Bancorp common stock you receive will be based on an exchange ratio that will be determined as of the date of completion of the conversion and offering. The exchange ratio will be based on the percentage of Magyar Bancorp common stock held by the public before the completion of the conversion and offering, the final independent appraisal of Magyar Bancorp common stock prepared by RP Financial, LC. and the number of shares of common stock sold in the offering. The exchange ratio will ensure that public stockholders of Magyar Bancorp common stock will own the same percentage of Magyar Bancorp common stock after the conversion and offering as they owned of Magyar Bancorp common stock immediately before completion of the conversion and offering (excluding any new shares purchased by them in the offering and their receipt of cash in lieu of fractional exchange shares, and adjusted to reflect certain assets held by Magyar Bancorp, MHC). The exchange ratio will not depend on the market price of Magyar Bancorp common stock.

The exchange ratio ranges from 0.9027 shares at the minimum and 1.2213 shares at the maximum of the offering range of Magyar Bancorp common stock per share of Magyar Bancorp common stock. Shares of Magyar Bancorp common stock issued in the share exchange will have an initial value of $10.00 per share. Depending on the exchange ratio and the market value of Magyar Bancorp common stock at the time of the exchange, the initial market value of the Magyar Bancorp common stock that you receive in the share exchange could be less than the market value of the Magyar Bancorp common stock that you currently own. Based on the most recent closing price of Magyar Bancorp common stock before the date of this proxy statement/prospectus, which was $13.30 per share, the initial value of the Magyar Bancorp common stock you receive in the share exchange will be less than the market value of the Magyar Bancorp common stock you currently own.

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

If you purchase shares of common stock in the offering, you may not be able to sell them later at or above the $10.00 purchase price. In many cases, shares of common stock issued by newly converted savings institutions or mutual holding companies have traded below the initial offering price. The aggregate purchase price of the shares of common stock sold in the offering will be based on an independent appraisal. The independent appraisal is not

 

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intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock. The independent appraisal is based on certain estimates, assumptions and projections, all of which are subject to change. After the shares begin trading, the trading price of our common stock will be determined by the marketplace, and may be influenced by many factors, including prevailing interest rates, the overall performance of the economy, changes in laws and regulations, investor perceptions of Magyar Bancorp and the outlook for the financial services industry in general. Price fluctuations in our common stock may be unrelated to our operating performance.

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

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

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

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

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

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

In addition, we will recognize expense for our employee stock ownership plan when shares are committed to be released to participants’ accounts, and we will recognize expense for restricted stock awards and stock options over the vesting period of awards made to recipients. The expense in the first year following the offering for our employee stock ownership plan and for our new stock-based benefit plans, assuming such plans had been

 

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implemented at the beginning of the year, is estimated to be approximately $665,000 ($524,000 after tax) at the maximum of the offering range as set forth in the pro forma financial information under “Pro Forma Data,” assuming the $10.00 per share purchase price as fair market value. Actual expenses, however, may be higher or lower, depending on the price of our common stock. For further discussion of our proposed stock-based plans, see “Management – Benefits to be Considered Following Completion of the Conversion.”

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

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

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

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

If we adopt stock-based benefit plans more than 12 months following the completion of the conversion, then grants of shares of common stock or stock options under our proposed stock-based benefit plans may exceed 4% and 10%, respectively, of shares of common stock sold in the offering. Stock-based benefit plans that provide for awards in excess of these amounts would increase our costs beyond the amounts estimated in “– Our stock-based benefit plans will increase our expenses and reduce our income.” Stock-based benefit plans that provide for awards in excess of these amounts could also result in dilution to stockholders in excess of that described in “– The implementation of stock-based benefit plans may dilute your ownership interest. Historically, stockholders have approved these stock-based benefit plans.” Although the implementation of stock-based benefit plans would be subject to stockholder approval, the timing of the implementation of such plans will be at the discretion of our board of directors.

Various factors may make takeover attempts more difficult to achieve.

Certain provisions of our certificate of incorporation and bylaws and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire control of Magyar Bancorp without our board of directors’ approval. Under regulations applicable to the conversion, for a period of three years following completion of the conversion, no person may offer to acquire or acquire beneficial ownership of more than 10% of our common stock without prior approval of the Federal Reserve Board. Under federal law, subject to certain exemptions, a person, entity or group must notify the Federal Reserve Board and receive the Federal Reserve Board’s non-objection before acquiring control of a bank holding company. There also are provisions in our certificate of incorporation and bylaws that we may use to delay or block a takeover attempt, including a provision that prohibits any person from voting more than 10% of our outstanding shares of common stock. Furthermore, shares of restricted stock and stock options that we may grant to employees and directors, stock ownership by our management and directors and other factors may make it more difficult for companies or persons to acquire control of Magyar Bancorp without the consent of our board of directors, and may increase the cost of an

 

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acquisition. Taken as a whole, these statutory or regulatory provisions and provisions in our certificate of incorporation and bylaws could result in our being less attractive to a potential acquirer and therefore could adversely affect the market price of our common stock. For additional information, see “Restrictions on Acquisition of Magyar Bancorp” and “Management – Benefits to be Considered Following Completion of the Conversion.”

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

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

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

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

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

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

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

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

 

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August 2, 2021, or the number of shares to be sold in the offering is increased to more than 3,910,000 shares or decreased to fewer than 2,890,000 shares.

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

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

INFORMATION ABOUT THE SPECIAL MEETING

General

This proxy statement/prospectus is being furnished to you in connection with the solicitation by the board of directors of Magyar Bancorp of proxies to be voted at the special meeting of stockholders to be held at Ellery’s located at 701 Lincoln Blvd., Middlesex, New Jersey 08846 on June 30, 2021, at 2:00 p.m., Eastern time, and any adjournment or postponement thereof.

The primary purpose of the special meeting is to consider and vote upon the Plan of Conversion.

In addition, stockholders will vote on a proposal to approve the adjournment of the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes at the time of the special meeting to approve the Plan of Conversion.

Voting for or against approval of the Plan of Conversion includes a vote for or against the conversion of Magyar Bancorp, MHC to a stock holding company as contemplated by the Plan of Conversion, including the merger of Magyar Bancorp, MHC into Magyar Bancorp and the proposed amendments to the certificate of incorporation of Magyar Bancorp. Voting in favor of the Plan of Conversion will not obligate you to purchase any shares of common stock in the offering and will not affect the balance, interest rate or federal deposit insurance of any deposits at Magyar Bank.

Who Can Vote at the Meeting

You are entitled to vote your Magyar Bancorp common stock if our records show that you held your shares as of the close of business on May 3, 2021. If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the beneficial owner of shares held in street name and these proxy materials are being forwarded to you by your broker or nominee. As the beneficial owner, you have the right to direct your broker or nominee how to vote.

As of the close of business on May 3, 2021, there were 5,810,746 shares of Magyar Bancorp common stock outstanding. Each share of common stock has one vote.

Attending the Meeting

If you are a stockholder as of the close of business on May 3, 2021, you may attend the meeting. However, if you hold your shares in street name (i.e., through a bank or broker), you will need proof of ownership to be admitted to the meeting. A recent brokerage statement or a letter from a bank or broker are examples of proof of ownership. If you want to vote your shares of Magyar Bancorp common stock held in street name in person at the meeting, you will have to get a written proxy in your name from the broker, bank or other nominee who holds your shares.

 

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Quorum; Vote Required

The special meeting will be held only if there is a quorum. A quorum exists if a majority of the outstanding shares of common stock entitled to vote, represented in person or by proxy, is present at the meeting. If you return valid proxy instructions or attend the meeting in person, your shares will be counted for purposes of determining whether there is a quorum, even if you abstain from voting. Broker non-votes also will be counted for purposes of determining the existence of a quorum. A broker non-vote occurs when a broker, bank or other nominee holding shares for a beneficial owner does not vote on a particular proposal because the nominee does not have discretionary voting power with respect to that item and has not received voting instructions from the beneficial owner.

Proposal 1: Approval of the Plan of Conversion and Reorganization. We must obtain the affirmative vote of (i) two-thirds of the votes entitled to be cast at the special meeting, including votes representing shares held by Magyar Bancorp, MHC, and (ii) a majority of the votes entitled to be cast at the special meeting, other than shares held by Magyar Bancorp, MHC.

Proposal 2: Approval of the adjournment of the special meeting. We must obtain the affirmative vote of a majority of the votes cast by Magyar Bancorp stockholders entitled to vote at the special meeting to adjourn the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes at the time of the special meeting to approve the proposal to approve the Plan of Conversion.

Other Matters. We must obtain the affirmative vote of the majority of the votes cast by holders of outstanding shares of common stock of Magyar Bancorp. At this time, we know of no other matters that may be presented at the special meeting.

Shares Held by Magyar Bancorp, MHC and Our Officers and Directors

As of May 3, 2021, Magyar Bancorp, MHC beneficially owned 3,200,450 shares of Magyar Bancorp common stock, or approximately 55.1% of our outstanding shares. We expect that Magyar Bancorp, MHC will vote all of its shares in favor of each of the proposals presented.

As of May 3, 2021, our officers and directors beneficially owned 218,049 shares of Magyar Bancorp common stock, or approximately 3.8% of our outstanding shares and 8.4% of the outstanding shares held by stockholders other than Magyar Bancorp, MHC.

Voting by Proxy

Our board of directors is sending you this proxy statement/prospectus to request that you allow your shares of Magyar Bancorp common stock to be represented at the special meeting by the persons named in the enclosed proxy card. All shares of Magyar Bancorp common stock represented at the meeting by properly executed and dated proxies will be voted according to the instructions indicated on the proxy card. If you sign, date and return a proxy card without giving voting instructions, your shares will be voted as recommended by our board of directors. Our board of directors recommends that you vote FOR approval of the Plan of Conversion and FOR approval of the adjournment of the special meeting, if necessary.

If any matters not described in this proxy statement/prospectus are properly presented at the special meeting, the board of directors will use their judgment to determine how to vote your shares. We do not know of any other matters to be presented at the special meeting.

If your Magyar Bancorp common stock is held in street name, you will receive instructions from your broker, bank or other nominee that you must follow to have your shares voted. Your broker, bank or other nominee may allow you to deliver your voting instructions via mobile device or the Internet. Refer to the instruction form provided by your broker, bank or other nominee that accompanies this proxy statement/prospectus.

 

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Revocability of Proxies

You may revoke your proxy at any time before the vote is taken at the special meeting. To revoke your proxy, you must advise the corporate secretary of Magyar Bancorp in writing before your common stock has been voted at the special meeting, deliver a signed, later-dated proxy or attend the special meeting and vote your shares in person. Attendance at the special meeting will not in itself constitute revocation of your proxy.

Solicitation of Proxies

This proxy statement/prospectus and the accompanying proxy card are being furnished to you in connection with the solicitation of proxies for the special meeting by the board of directors. Magyar Bancorp will pay the costs of soliciting proxies from its stockholders. To the extent necessary to permit approval of the Plan of Conversion and the other proposals being considered, Laurel Hill Advisory Group, LLC, our proxy solicitor, and directors, officers or employees of Magyar Bancorp and Magyar Bank may solicit proxies by mail, telephone and other forms of communication. We will reimburse such persons for their reasonable out-of-pocket expenses incurred in connection with such solicitation. For its services as information agent and stockholder proxy solicitor, we will pay Laurel Hill Advisory Group, LLC $7,000 plus out-of-pocket expenses and charges for telephone calls made and received in connection with the solicitation.

We will also reimburse banks, brokers, nominees and other fiduciaries for the expenses they incur in forwarding the proxy materials to you.

Participants in the Employee Stock Ownership Plan

If you participate in Magyar Bank Employee Stock Ownership Plan, you will receive a voting instruction form that reflects all shares you may direct the trustees to vote on your behalf under the plan. Under the terms of the Employee Stock Ownership Plan, the Employee Stock Ownership Plan trustee votes all shares held by the Employee Stock Ownership Plan, but each Employee Stock Ownership Plan participant may direct the trustee how to vote the shares of common stock allocated to his or her account. The Employee Stock Ownership Plan trustee, subject to the exercise of its fiduciary duties, will vote all unallocated shares of Magyar Bancorp common stock held by the Employee Stock Ownership Plan and allocated shares for which no voting instructions are received in the same proportion as shares for which it has received timely voting instructions. The deadline for returning your voting instructions to the plan’s trustee is June 23, 2021.

The board of directors unanimously recommends that you sign, date and mark the enclosed proxy “FOR” approval of each of the above described proposals, including the adoption of the Plan of Conversion, and return it in the enclosed envelope today. Voting the proxy card will not prevent you from voting in person at the special meeting. For information on submitting your proxy, refer to the instructions on the enclosed proxy card.

Your prompt vote is very important. Failure to vote will have the same effect as voting against the Plan of Conversion.

 

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PROPOSAL 1 – APPROVAL OF THE PLAN OF CONVERSION AND REORGANIZATION

The boards of directors of Magyar Bancorp and Magyar Bancorp, MHC have approved the Plan of Conversion. The Plan of Conversion must also be approved by the depositors of Magyar Bank and the stockholders of Magyar Bancorp, and is subject to the satisfaction of certain other conditions. Special meetings of depositors and stockholders have been called for this purpose. The approval of the Federal Reserve Board and NJDOBI is required before we can consummate the conversion and stock offering. We have also filed an application with the NJDOBI with respect to the amendments to Magyar Bank’s certificate of incorporation, and the approval of the NJDOBI is required before we can consummate the conversion and issue shares of common stock. Any approval by the Federal Reserve Board or the NJDOBI does not constitute a recommendation or endorsement of the plan of reorganization.

General

Pursuant to the Plan of Conversion, our organization will convert from the mutual holding company form of organization to the fully stock form. Magyar Bancorp, MHC will be merged into Magyar Bancorp and as a result Magyar Bancorp, MHC will cease to exist. As part of the conversion, the 55.1% ownership interest of Magyar Bancorp, MHC in Magyar Bancorp will be offered for sale in the offering. When the conversion is completed, Magyar Bancorp will continue to own all of the outstanding common stock of Magyar Bank and public stockholders will own all of the outstanding common stock of Magyar Bancorp. A diagram of our corporate structure before and after the conversion is set forth in the “Summary” section of this proxy statement/prospectus.

Under the Plan of Conversion, at the completion of the conversion and offering, each share of Magyar Bancorp common stock owned by persons other than Magyar Bancorp, MHC will be exchanged into new shares of Magyar Bancorp common stock determined pursuant to an exchange ratio. The exchange ratio will ensure that immediately after the exchange of existing shares of Magyar Bancorp for new shares of Magyar Bancorp the public stockholders will own the same aggregate percentage of shares of common stock of Magyar Bancorp that they owned in Magyar Bancorp immediately before the conversion, excluding any shares they purchased in the offering, their receipt of cash paid in lieu of fractional shares and adjusted downward to reflect certain assets held by Magyar Bancorp, MHC.

We intend to retain between $11.4 million and $15.6 million of the net proceeds of the offering and to contribute between $13.7 million and $18.8 million of the net proceeds to Magyar Bank. The conversion will be consummated only upon the issuance of at least the minimum number of shares of our common stock offered pursuant to the Plan of Conversion.

The Plan of Conversion provides that we will offer shares of common stock for sale in the subscription offering to eligible account holders, our tax-qualified employee benefit plans, including our employee stock ownership plan, supplemental account holders, and other depositors. In addition, we may offer common stock for sale in a community offering to members of the general public, with a preference given to natural persons (including trusts of natural persons) residing in Middlesex, Somerset, Monmouth, Hunterdon and Union counties, New Jersey.

We have the right to accept or reject, in whole or in part, any orders to purchase shares of the common stock received in the community offering. The community offering may begin concurrently with, during or promptly after the subscription offering and must be completed within 45 days after the completion of the subscription offering unless otherwise extended by the Federal Reserve Board. See “– Community Offering.”

We also may offer for sale shares of common stock not purchased in the subscription or community offerings in a syndicated community offering in which KBW will be sole manager. See “– Syndicated Community Offering.”

We determined the number of shares of common stock to be offered in the offering based upon an independent valuation appraisal of the estimated pro forma market value of Magyar Bancorp. All shares of common stock to be sold in the offering will be sold at $10.00 per share. Investors will not be charged a commission to purchase shares of common stock. The independent valuation will be updated and the final number of shares of common stock to be issued in the offering will be determined at the completion of the offering. See “– Stock Pricing and Number of Shares to be Issued” for more information as to the determination of the estimated pro forma market value of the common stock.

 

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The following is a brief summary of the conversion and offering and is qualified in its entirety by reference to the provisions of the Plan of Conversion. A copy of the Plan of Conversion is available for inspection at each office of Magyar Bank. The Plan of Conversion is filed as an exhibit to the registration statement we have filed with the Securities and Exchange Commission, of which this proxy statement/prospectus is a part. Copies of the registration statement may be obtained from the Securities and Exchange Commission or online at the Securities and Exchange Commission’s website (www.sec.gov). See “Where You Can Find Additional Information.”

The board of directors unanimously recommends that you vote “FOR” approval of the Plan of Conversion and Reorganization of Magyar Bancorp, MHC.

Reasons for the Conversion

Our primary reasons for converting and undertaking the offering are to:

 

   

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

 

   

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

 

   

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

 

   

Facilitate our stock holding company’s ability to pay dividends to our public stockholders. Current regulations of the Federal Reserve Board substantially restrict the ability of Magyar Bancorp, MHC to waive dividends declared by Magyar Bancorp. Accordingly, because any dividends declared and paid by Magyar Bancorp would be required to be paid to Magyar Bancorp, MHC along with all other stockholders, the amount of dividends available for all other stockholders would be been less than if Magyar Bancorp, MHC were to waive the receipt of dividends. The conversion will eliminate our mutual holding company structure and will facilitate our ability to pay dividends to all stockholders of Magyar Bancorp, subject to legal, regulatory and financial considerations applicable to all financial institutions. See “Our Dividend Policy.”

 

   

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

 

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Approvals Required

The affirmative vote of a majority of the total votes eligible to be cast by depositors of Magyar Bank is required to approve the Plan of Conversion. By their approval of the Plan of Conversion, the depositors of Magyar Bank will also be approving the merger of Magyar Bancorp, MHC with and into Magyar Bancorp. The affirmative vote of the holders of at least two-thirds of the outstanding shares of common stock of Magyar Bancorp and the affirmative vote of the holders of a majority of the outstanding shares of common stock of Magyar Bancorp held by the public stockholders of Magyar Bancorp (i.e., all stockholders other than Magyar Bancorp, MHC) also are required to approve the Plan of Conversion. By their approval of the Plan of Conversion, the public stockholders will also be approving the merger of Magyar Bancorp, MHC with and into Magyar Bancorp as well as the amendments to the certificate of incorporation of Magyar Bancorp. We have filed applications with the Federal Reserve Board and the NJDOBI with respect to the conversion. The approvals of the Federal Reserve Board and the NJDOBI are required before we can consummate the conversion and issue shares of common stock. The NJDOBI must also approve an amendment to Magyar Bank’s certificate of incorporation to establish a liquidation account. The approval of the NJDOBI is required before we can consummate the conversion and issue shares of common stock.

Share Exchange Ratio for Current Stockholders

At the completion of the conversion, each publicly held share of Magyar Bancorp common stock will be exchanged into the right to receive a number of shares of Magyar Bancorp common stock. The number of shares of common stock will be determined pursuant to the exchange ratio, which ensures that the public stockholders will own the same percentage of common stock in Magyar Bancorp after the conversion as they held in Magyar Bancorp immediately before the conversion, exclusive of their purchase of additional shares of common stock in the offering, their receipt of cash in lieu of fractional exchange shares and adjusted downward to reflect certain assets held by Magyar Bancorp, MHC. The exchange ratio will not depend on the market value of Magyar Bancorp common stock. The exchange ratio will be based on the percentage of Magyar Bancorp common stock held by the public, the independent valuation of Magyar Bancorp prepared by RP Financial, LC., and the number of shares of common stock issued in the offering. The exchange ratio is expected to range from approximately 0.9027 shares for each publicly held share of Magyar Bancorp at the minimum of the offering range to 1.2213 shares for each publicly held share of Magyar Bancorp at the maximum of the offering range.

The following table shows how the exchange ratio will adjust, based on the appraised value of Magyar Bancorp as of February 5, 2021, assuming public stockholders of Magyar Bancorp own 44.9% of the outstanding shares of Magyar Bancorp common stock and Magyar Bancorp, MHC has cash of $10,000 immediately before the completion of the conversion. The table also shows how many shares of Magyar Bancorp a hypothetical owner of Magyar Bancorp common stock would receive in the exchange for 100 shares of common stock owned at the completion of the conversion, depending on the number of shares issued in the offering.

 

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

Minimum

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

Midpoint

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

Maximum

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

 

(1)

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

(2)

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

(3)

Cash will be paid in lieu of fractional shares.

 

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Effects of Conversion

Continuity. The conversion will not affect the normal business of Magyar Bank of accepting deposits and making loans. Magyar Bank will continue to be a New Jersey-chartered savings bank and will continue to be regulated by the NJDOBI. After the conversion, Magyar Bank will continue to offer existing services to depositors, borrowers and other customers. The directors of Magyar Bancorp serving at the time of the conversion will continue to be the directors of Magyar Bancorp upon the completion of the conversion.

Effect on Deposit Accounts. Pursuant to the Plan of Conversion, each depositor of Magyar Bank at the time of the conversion will automatically continue as a depositor after the conversion, and the deposit balance, interest rate and other terms of such deposit accounts will not change as a result of the conversion. Each such account will be insured by the FDIC to the same extent as before the conversion. Depositors will continue to hold their existing certificates and other evidences of their accounts.

Effect on Loans. No loan outstanding from Magyar Bank will be affected by the conversion, and the amount, interest rate, maturity and security for each loan will remain as it was contractually fixed before the conversion.

Effect on Voting Rights of Depositors. At present, depositors of Magyar Bank have limited voting rights in Magyar Bancorp, MHC. Upon completion of the conversion, depositors will no longer have any voting rights. Upon completion of the conversion, all voting rights in Magyar Bank will be vested in Magyar Bancorp as the sole stockholder of Magyar Bank. The stockholders of Magyar Bancorp will possess exclusive voting rights with respect to Magyar Bancorp common stock.

Tax Effects. We have received an opinion of counsel with regard to the federal income tax consequences of the conversion and an opinion of our tax advisor with regard to the New Jersey income tax consequences of the conversion to the effect that the conversion will not be a taxable transaction for federal or state income tax purposes to Magyar Bancorp, MHC, Magyar Bancorp, Magyar Bank, the public stockholders of Magyar Bancorp (except for cash paid for fractional shares), eligible account holders, supplemental eligible account holders, or other depositors. See “– Material Income Tax Consequences.”

Effect on Liquidation Rights. Each depositor in Magyar Bank has both a deposit account in Magyar Bank and a pro rata ownership interest in the net worth of Magyar Bancorp, MHC based upon the deposit balance in his or her account. This ownership interest is tied to the depositor’s account and has no tangible market value separate from the deposit account. This ownership interest may only be realized in the event of a complete liquidation of Magyar Bancorp, MHC and Magyar Bank; however, there has never been a liquidation of a solvent mutual holding company. Any depositor who opens a deposit account prior to the completion of the offering receives a pro rata ownership interest in Magyar Bancorp, MHC without any additional payment beyond the amount of the deposit. A depositor who reduces or closes his or her account receives a portion or all of the balance in the deposit account but nothing for his or her ownership interest in the net worth of Magyar Bancorp, MHC, which is lost to the extent that the balance in the account is reduced or closed.

Consequently, depositors in a stock depository institution that is a subsidiary of a mutual holding company normally have no way of realizing the value of their ownership interest, which would be realizable only in the unlikely event that Magyar Bancorp, MHC and Magyar Bank are liquidated completely. If this occurs, the depositors of record at that time, as owners, would share pro rata in any residual surplus and reserves of Magyar Bancorp, MHC after other claims, including claims of depositors to the amounts of their deposits, are paid.

Under the Plan of Conversion, Eligible Account Holders (as defined below) and Supplemental Eligible Account Holders (as defined below) will receive an interest in liquidation accounts maintained by Magyar Bancorp and Magyar Bank in an aggregate amount equal to (i) Magyar Bancorp, MHC’s ownership interest in Magyar Bancorp’s total stockholders’ equity as of the date of the latest statement of financial condition included in this proxy statement/prospectus, plus (ii) the value of the net assets of Magyar Bancorp, MHC as of the date of the latest statement of financial condition of Magyar Bancorp, MHC before the consummation of the conversion (excluding its ownership of Magyar Bancorp). Magyar Bancorp and Magyar Bank will hold the liquidation accounts for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders who continue to maintain deposits in Magyar Bank after the conversion. The liquidation accounts are intended to preserve for Eligible Account

 

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Holders and Supplemental Eligible Account Holders who continue to maintain their deposit accounts with Magyar Bank a liquidation interest in the residual net worth, if any, of Magyar Bancorp or Magyar Bank (after the payment of all creditors, including depositors to the full extent of their deposit accounts) in the event of a liquidation of (a) Magyar Bancorp and Magyar Bank or (b) Magyar Bank. See “– Liquidation Rights.”

Stock Pricing and Number of Shares to be Issued

The Plan of Conversion and federal regulations require that the aggregate purchase price of the common stock sold in the offering must be based on the appraised pro forma market value of the common stock, as determined by an independent valuation. We have retained RP Financial, LC. to prepare an independent valuation appraisal. For its services in preparing the initial valuation and one valuation update, RP Financial, LC. will receive a fee of $50,000, as well as payment for reimbursable expenses. During the past three years, we have not paid any fees to RP Financial, LC. We have agreed to indemnify RP Financial, LC. and its employees and affiliates for certain costs and expenses in connection with claims or litigation relating to the appraisal and arising out of any misstatement or untrue statement of a material fact in information supplied to RP Financial, LC. by us or by an intentional omission by us to state a material fact in the information provided, except where RP Financial, LC. has been negligent or at fault.

The independent valuation was prepared by RP Financial, LC. in reliance upon the information contained in this proxy statement/prospectus, including the consolidated financial statements of Magyar Bancorp. RP Financial, LC. also considered the following factors, among others:

 

   

the present results and financial condition of Magyar Bancorp and the projected results and financial condition of Magyar Bancorp;

 

   

the economic and demographic conditions in Magyar Bancorp’s existing market area;

 

   

certain historical, financial and other information relating to Magyar Bancorp;

 

   

a comparative evaluation of the operating and financial characteristics of Magyar Bancorp with those of other publicly traded savings institutions;

 

   

the effect of the conversion and offering on Magyar Bancorp’s stockholders’ equity and earnings potential;

 

   

the proposed dividend policy of Magyar Bancorp; and

 

   

the trading market for securities of comparable institutions and general conditions in the market for such securities.

The independent valuation is also based on an analysis of a peer group of publicly traded savings and loan and bank holding companies that RP Financial, LC. considered comparable to Magyar Bancorp under regulatory guidelines applicable to the independent valuation. Under these guidelines, a minimum of ten peer group companies are selected from the universe of all publicly traded financial institutions with relatively comparable resources, strategies and financial and other operating characteristics. Such companies must also be traded on a securities exchange (such as Nasdaq or the New York Stock Exchange). The peer group companies selected for Magyar Bancorp also consisted of fully converted stock institutions that were not subject to an actual or rumored acquisition and that had been publicly traded for at least one year. In addition, RP Financial, LC. limited the peer group to companies to the following two selection criteria: (1) Mid-Atlantic and New England institutions with assets of between $500 million and $2.0 billion, tangible equity/tangible assets ratios of greater than 7.0% and positive core earnings; or (2) Midwest institutions with assets of between $500 million and $2.0 billion, tangible equity/tangible assets ratios of greater than 7.0% and positive core earnings.

The independent valuation appraisal considered the pro forma effect of the offering. Consistent with federal appraisal guidelines, the appraisal applied three primary methodologies: (i) the pro forma price-to-book value approach applied to both reported book value and tangible book value; (ii) the pro forma price-to-earnings approach applied to reported and core earnings; and (iii) the pro forma price-to-assets approach. The market value

 

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ratios applied in the three methodologies were based on the current market valuations of the peer group companies. RP Financial, LC. placed the greatest emphasis on the price-to-earnings and price-to-book approaches in estimating pro forma market value. RP Financial, LC. did not consider a pro forma price-to-assets approach to be as meaningful in preparing the appraisal, as this approach is more meaningful when a company has low equity or earnings. The price-to-assets approach is less meaningful for a company like us, as we have equity in excess of regulatory capital requirements and positive core earnings.

In applying each of the valuation methods, RP Financial, LC. considered adjustments to the pro forma market value based on a comparison of Magyar Bancorp with the peer group. RP Financial, LC. made downward adjustments for financial condition and liquidity of the shares. RP Financial, LC. made no adjustments for profitability, growth and viability of earnings, asset growth, primary market area, dividends, marketing of the issue, management, and effect of government regulations and regulatory reform. The downward adjustment applied for financial condition took into consideration Magyar Bancorp’s smaller asset size, less favorable credit quality measures and a lower pro forma return on equity in comparison to the peer group, while the downward adjustment for liquidity of the shares took into consideration Magyar Bancorp’s lower market capitalization and lower shares outstanding relative to the comparable peer group averages and medians.

Included in RP Financial, LC.’s independent valuation were certain assumptions as to the pro forma earnings of Magyar Bancorp after the conversion that were used in determining the appraised value. These assumptions included estimated expenses, an assumed after-tax rate of return of 0.25% on the net offering proceeds and purchases in the open market of 4% of the common stock issued in the offering by the stock-based benefit plan at the $10.00 per share purchase price. See “Pro Forma Data” for additional information concerning assumptions included in the independent valuation and used in preparing pro forma data. The use of different assumptions may yield different results.

The independent valuation states that as of February 5, 2021, the estimated pro forma market value of Magyar Bancorp was $61.7 million. Based on federal regulations, this market value forms the midpoint of a range with a minimum of $52.5 million and a maximum of $71.0 million. The aggregate offering price of the shares will be equal to the valuation range multiplied by the adjusted percentage of Magyar Bancorp common stock owned by Magyar Bancorp, MHC. The number of shares offered will be equal to the aggregate offering price of the shares divided by the price per share. Based on the valuation range, the adjusted percentage of Magyar Bancorp common stock owned by Magyar Bancorp, MHC, certain assets held by Magyar Bancorp, MHC and the $10.00 price per share, the minimum of the offering range is 2,890,000 shares, the midpoint of the offering range is 3,400,000 shares and the maximum of the offering range is 3,910,000 shares.

The board of directors of Magyar Bancorp reviewed the independent valuation and, in particular, considered the following:

 

   

Magyar Bancorp’s financial condition and results of operations;

 

   

a comparison of financial performance ratios of Magyar Bancorp to those of other financial institutions of similar size;

 

   

market conditions generally and in particular for financial institutions; and

 

   

the historical trading price of the publicly held shares of Magyar Bancorp common stock.

All of these factors are set forth in the independent valuation. The board of directors also reviewed the methodology and the assumptions used by RP Financial, LC. in preparing the independent valuation and believes that such assumptions were reasonable. The offering range may be amended, with the approval of the Federal Reserve Board and NJDOBI, as a result of subsequent developments in the financial condition of Magyar Bancorp or Magyar Bank or market conditions generally. If the independent valuation is updated to amend the pro forma market value of Magyar Bancorp to less than $52.5 million or more than $71.0 million, the appraisal will be filed with the Securities and Exchange Commission by means of a post-effective amendment to Magyar Bancorp’s registration statement.

 

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The following table presents a summary of selected pricing ratios for Magyar Bancorp (on a pro forma basis) at and for the twelve months ended December 31, 2020, and for the peer group companies based on earnings and other information at and for the twelve months ended December 31, 2020, with stock prices at February 5, 2021, as reflected in the appraisal report. Compared to the average pricing of the peer group, and based upon the information in the following table, our pro forma pricing ratios at the midpoint of the offering range indicated a discount of 20.9% on a price-to-book value basis, a discount of 23.7% on a price-to-tangible book value basis and a premium of 86.5% on a price-to-earnings basis. Our board of directors, in reviewing and approving the appraisal, considered the range of price-to-earnings multiples and the range of price-to-book value and price-to-tangible book value ratios at the different amounts of shares to be sold in the offering. The appraisal did not consider one valuation approach to be more important than the other. The estimated appraised value and the resulting premium/discount took into consideration the potential financial effect of the conversion and offering as well as the trading price of Magyar Bancorp’s common stock. The closing price of the common stock was $11.00 per share on February 25, 2021, the last trading day immediately preceding the announcement of the conversion, and $10.61 per share on February 5, 2021, the effective date of the appraisal.

 

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

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

       

Maximum

     28.02x        77.94     77.94

Midpoint

     23.83x        71.23     71.23

Minimum

     19.82x        63.86     63.86

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

       

Averages

     12.78x        90.10     93.40

Medians

     11.32x        89.45     92.99

 

(1)

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

The independent valuation is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing our shares of common stock. RP Financial, LC. did not independently verify our consolidated financial statements and other information that we provided to them, nor did RP Financial, LC. independently value our assets or liabilities. The independent valuation considers Magyar Bank as a going concern and should not be considered as an indication of the liquidation value of Magyar Bank. Moreover, because the valuation is necessarily based upon estimates and projections of a number of matters, all of which may change from time to time, no assurance can be given that persons purchasing our common stock in the offering will thereafter be able to sell their shares at prices at or above $10.00 per share.

If the update to the independent valuation at the conclusion of the offering results in an increase in the maximum of the valuation range to more than $71.0 million and a corresponding increase in the offering range to more than 3,910,000 shares, or a decrease in the minimum of the valuation range to less than $52.5 million and a corresponding decrease in the offering range to fewer than 2,890,000 shares, then we will promptly return, with interest at 0.05% per annum, all funds previously delivered to us to purchase shares of common stock in the subscription and community offerings and cancel deposit account withdrawal authorizations and, after consulting with the Federal Reserve Board and NJDOBI, we may terminate the Plan of Conversion. Alternatively, we may establish a new offering range, extend the offering period and commence a resolicitation of purchasers or take other actions as permitted by the Federal Reserve Board or NJDOBI to complete the offering. If we extend the offering and conduct a resolicitation due to a change in the independent valuation, we will notify subscribers of the extension of time and of the rights of subscribers to place a new stock order for a specified period of time. Any single offering extension will not exceed 90 days; aggregate extensions may not conclude beyond June 30, 2023, which is two years after the special meeting of depositors to approve the Plan of Conversion.

An increase in the number of shares to be issued in the offering would decrease both a subscriber’s ownership interest and Magyar Bancorp’s pro forma earnings and stockholders’ equity on a per share basis while increasing stockholders’ equity on an aggregate basis. A decrease in the number of shares to be issued in the

 

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offering would increase both a subscriber’s ownership interest and Magyar Bancorp’s pro forma earnings and stockholders’ equity on a per share basis, while decreasing stockholders’ equity on an aggregate basis.

Copies of the independent valuation appraisal report of RP Financial, LC. and the detailed memorandum setting forth the method and assumptions used in the appraisal report are filed as exhibits to the documents specified under “Where You Can Find Additional Information.”

Subscription Offering and Subscription Rights

In accordance with the Plan of Conversion, rights to subscribe for shares of common stock in the subscription offering have been granted in the following descending order of priority. The filling of all subscriptions that we receive will depend on the availability of common stock after satisfaction of all subscriptions of all persons having prior rights in the subscription offering and on the purchase and ownership limitations set forth in the Plan of Conversion and as described below under “– Additional Limitations on Common Stock Purchases.”

Priority 1: Eligible Account Holders. Each depositor of Magyar Bank with aggregate deposit account balances of $50.00 or more (a “Qualifying Deposit”) at the close of business on December 31, 2019 (an “Eligible Account Holder”) will receive, without payment therefor, nontransferable subscription rights to purchase, subject to the overall purchase limitations, up to the greater of $400,000 (40,000 shares) of our common stock, 0.10% of the total number of shares of common stock issued in the offering, or 15 times the product of the number of subscription shares offered multiplied by a fraction of which the numerator is the aggregate Qualifying Deposit account balances of the Eligible Account Holder and the denominator is the aggregate Qualifying Deposit account balances of all Eligible Account Holders. See “– Additional Limitations on Common Stock Purchases.” If there are not sufficient shares available to satisfy all subscriptions, shares will first be allocated so as to permit each Eligible Account Holder to purchase a number of shares sufficient to make his or her total allocation equal to the lesser of 100 shares or the number of shares for which he or she subscribed. Thereafter, any remaining unallocated shares will be allocated to each remaining Eligible Account Holder whose subscription remains unfilled in same the proportion that the amount of his or her Qualifying Deposit bears to the total amount of Qualifying Deposits of all subscribing Eligible Account Holders whose subscriptions remain unfilled. If an amount so allocated exceeds the amount subscribed for by any one or more Eligible Account Holders, the excess shall be reallocated among those Eligible Account Holders whose subscriptions are not fully satisfied until all available shares have been allocated.

To ensure proper allocation of our shares of common stock, each Eligible Account Holder must list on his or her stock order form all deposit accounts in which he or she has an ownership interest on December 31, 2019. In the event of an oversubscription, failure to list all accounts could result in fewer shares being allocated than if all accounts had been disclosed. In the event of an oversubscription, the subscription rights of Eligible Account Holders who are also directors or executive officers of Magyar Bancorp or who are associates of such persons will be subordinated to the subscription rights of other Eligible Account Holders to the extent attributable to their increased deposits in the 12 months preceding December 31, 2019.

Priority 2: Tax-Qualified Plans. Our tax-qualified employee plans, including Magyar Bank’s employee stock ownership plan and 401(k) Plan, will receive, without payment therefor, nontransferable subscription rights to purchase in the aggregate up to 10% of the shares of common stock sold in the offering, although our employee stock ownership plan intends to purchase 8% of the shares of common stock sold in the offering. If market conditions warrant, in the judgment of its trustees, the employee stock ownership plan may instead elect to purchase shares in the open market following the completion of the conversion, subject to the approval of the Federal Reserve Board and NJDOBI, as required.

Priority 3: Supplemental Eligible Account Holders. To the extent that there are sufficient shares of common stock remaining after satisfaction of subscriptions by Eligible Account Holders and by our tax-qualified employee stock benefit plans, each depositor of Magyar Bank with a Qualifying Deposit at the close of business on March 31, 2021, who is not an Eligible Account Holder (a “Supplemental Eligible Account Holder”), will receive, without payment therefor, nontransferable subscription rights to purchase up to $400,000 (40,000 shares) of common stock, subject to the overall purchase limitations. See “– Additional Limitations on Common Stock Purchases.” If there are not sufficient shares available to satisfy all subscriptions, shares will be allocated so as to permit each Supplemental Eligible Account Holder to purchase a number of shares sufficient to make his or her total allocation equal to the lesser of 100 shares of common stock or the number of shares for which he or she subscribed.

 

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Thereafter, any remaining shares will be allocated to each Supplemental Eligible Account Holder whose subscription remains unfilled in the proportion that the amount of his or her Qualifying Deposit bears to the total amount of Qualifying Deposits of all Supplemental Eligible Account Holders whose subscriptions remain unfilled. If an amount so allocated exceeds the amount subscribed for by any one or more Supplemental Eligible Account Holders, the excess shall be reallocated among those Supplemental Eligible Account Holders whose subscriptions are not fully satisfied until all available shares have been allocated.

To ensure proper allocation of common stock, each Supplemental Eligible Account Holder must list on the stock order form all deposit accounts in which he or she has an ownership interest at March 31, 2021. In the event of an oversubscription, failure to list all accounts could result in fewer shares being allocated than if all accounts had been disclosed.

Priority 4: Other Depositors. To the extent that there are shares of common stock remaining after satisfaction of subscriptions by Eligible Account Holders, by our tax-qualified employee stock benefit plans and by Supplemental Eligible Account Holders, each depositor of Magyar Bank at the close of business on May 3, 2021 who is not an Eligible Account Holder or Supplemental Eligible Account Holder (collectively, “Other Depositors”) will receive, without payment therefor, nontransferable subscription rights to purchase up to $400,000 (40,000 shares) of common stock, subject to the overall purchase limitations. See “– Additional Limitations on Common Stock Purchases.” If there are not sufficient shares available to satisfy all subscriptions, shares will be allocated so as to permit each Other Depositor to purchase a number of shares sufficient to make his or her total allocation equal to the lesser of 100 shares of common stock or the number of shares for which he or she subscribed. Thereafter, any remaining shares will be allocated in the proportion that the amount of the subscription of each Other Depositor bears to the total amount of the subscriptions of all Other Depositors whose subscriptions remain unsatisfied.

To ensure proper allocation of common stock, each Other Depositor must list on the stock order form all deposit accounts in which he or she has an ownership interest at May 3, 2021. In the event of an oversubscription, failure to list all accounts could result in fewer shares being allocated than if all accounts had been disclosed.

Expiration Date. The subscription offering will expire at 2:00 p.m., Eastern Time, on June 18, 2021, unless extended by us for up to 45 days or such additional periods with the approval of the Federal Reserve Board and NJDOBI, if necessary. Subscription rights will expire whether or not each account holder can be located. We may decide to extend the expiration date of the subscription offering for any reason, whether or not subscriptions have been received for shares at the minimum, midpoint or maximum of the offering range. Subscription rights which have not been exercised before the expiration date will become void.

We will not execute orders until at least the minimum number of shares of common stock has been sold in the offering. If at least 2,890,000 shares have not been sold in the offering by August 2, 2021 and the Federal Reserve Board and NJDOBI has not consented to an extension, all funds delivered to us to purchase shares of common stock in the offering will be returned promptly, with interest at 0.05% per annum, for funds received in the subscription and community offerings, and all deposit account withdrawal authorizations will be canceled. If the Federal Reserve Board and NJDOBI grant an extension beyond August 2, 2021, we will resolicit purchasers in the offering as described under “– Procedure for Purchasing Shares in the Subscription and Community Offerings – Expiration Date.”

Persons in Non-qualified States or Foreign Countries. We will make reasonable efforts to comply with the securities laws of all states in the United States in which persons entitled to subscribe for stock pursuant to the Plan of Conversion reside. However, we are not required to offer stock in the subscription offering to any person who resides in a foreign country.

Restrictions on Transferability of Subscription Rights. Subscription rights are non-transferable. See “– Restrictions on Transfer of Subscription Rights and Shares” below for more information.

Community Offering

To the extent that shares of common stock remain available for purchase after satisfaction of all subscriptions of Eligible Account Holders, our tax-qualified employee stock benefit plans, Supplemental Eligible Account Holder and Other Depositors, we may offer shares pursuant to the Plan of Conversion to members of the

 

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general public in a community offering. Shares would be offered in the community offering with the following preferences:

 

  (i)

Natural persons (including trusts of natural persons) residing in Middlesex, Somerset, Monmouth, Hunterdon and Union counties, New Jersey;

 

  (ii)

Magyar Bancorp’s existing stockholders at the close of business on May 3, 2021; and

 

  (iii)

Other members of the general public.

Subscribers in the community offering may purchase up to $400,000 (40,000 shares) of common stock, subject to the overall purchase limitations. See “– Additional Limitations on Common Stock Purchases.” The opportunity to purchase shares of common stock in the community offering category is subject to our right, in our sole discretion, to accept or reject any such orders in whole or in part either at the time of receipt of an order or as soon as practicable following the expiration date of the offering.

If we do not have sufficient shares of common stock available to fill the orders of natural persons residing in Middlesex, Somerset, Monmouth, Hunterdon and Union counties, New Jersey, we will allocate the available shares among those persons in a manner that permits each of them, to the extent possible, to purchase the lesser of 100 shares or the number of shares subscribed for by such person. Thereafter, unallocated shares will be allocated among natural persons (including trusts of natural persons) residing in those counties whose orders remain unsatisfied on an equal number of shares basis per order. If an oversubscription occurs due to the orders of existing stockholders of Magyar Bancorp or members of the general public, the allocation procedures described above will apply to the orders of such persons. In connection with the allocation process, orders received for shares of common stock in the community offering will first be filled up to a maximum of 2% of the shares sold in the offering, and thereafter any remaining shares will be allocated on an equal number of shares basis per order until all shares have been allocated.

The term “residing” or “resident” as used in this proxy statement/prospectus with respect to the community means any person who occupies a dwelling within the local community, has a present intent to remain within the local community for a period of time, and manifests the genuineness of that intent by establishing an ongoing physical presence within the local community together with an indication that such presence within the local community is something other than merely transitory in nature. We may utilize deposit or loan records or other evidence provided to us to determine whether a person is a resident. In all cases, however, the determination shall be in our sole discretion.

Expiration Date. The community offering may begin concurrently with, during or promptly after the subscription offering, and is currently expected to terminate at the same time as the subscription offering, and must terminate no more than 45 days following the subscription offering, unless extended. We may decide to extend the community offering for any reason and we are not required to give purchasers notice of any such extension unless such period extends beyond August 2, 2021, in which case we will resolicit purchasers.

Syndicated Community Offering

If feasible, our board of directors may decide to offer for sale shares of common stock not subscribed for or purchased in the subscription and community offerings in a syndicated community offering, subject to such terms, conditions and procedures as we may determine, in a manner that will achieve a wide distribution of our shares of common stock.

If a syndicated community offering is held, KBW will serve as sole manager. In such capacity, KBW may form a syndicate of other brokers-dealers who are member firms of the Financial Industry Regulatory Authority, Inc. (“FINRA”). Neither KBW nor any registered broker-dealer will have any obligation to take or purchase any shares of the common stock in the syndicated community offering; however, KBW has agreed to use its best efforts in the sale of shares in any syndicated community offering. We have not selected any particular broker-dealers to participate in a syndicated community offering and will not do so until before the commencement of the syndicated community offering. The shares of common stock will be sold at the same price per share ($10.00 per share) that the shares are sold in the subscription offering and the community offering.

 

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If there is a syndicated community offering, it is currently expected that investors would follow the same general procedures applicable to purchasing shares in the subscription and community offerings (the use of stock order forms and the submission of funds directly to Magyar Bancorp for the payment of the purchase price of the shares ordered) except that payment must be in immediately available funds (bank checks, money orders, deposit account withdrawals from accounts at Magyar Bank or wire transfers). See “– Procedure for Purchasing Shares in the Subscription and Community Offerings.” “Sweep” arrangements and delivery versus payment settlement will only be used in a syndicated community offering to the extent consistent with Rules 10b-9 and 15c2-4 of the Securities Exchange Act of 1934, as amended, and then-existing guidance and interpretations thereof of the Securities and Exchange Commission regarding the conduct of “min/max” offerings.

A syndicated community offering must terminate no more than 45 days following the expiration of the subscription offering, unless extended with the approval of the Federal Reserve Board and NJDOBI, if necessary.

If for any reason we cannot effect a syndicated community offering of shares of common stock not purchased in the subscription and community offerings, or if there are an insignificant number of shares remaining unsold after such offerings, we will try to make other arrangements for the sale of such unsubscribed shares. The Federal Reserve Board and the Financial Industry Regulatory Authority must approve any such arrangement.

Additional Limitations on Common Stock Purchases

The Plan of Conversion includes the following additional limitations on the number of shares of common stock that may be purchased in the offering:

 

  (i)

No person may purchase fewer than 25 shares of common stock, to the extent those shares are available for purchase;

 

  (ii)

Tax-qualified employee benefit plans, including our employee stock ownership plan, may purchase in the aggregate up to 10% of the shares of common stock issued in the offering;

 

  (iii)

Except for the employee stock ownership plan, as described above, no person or entity, together with associates or persons acting in concert with such person or entity, may purchase more than $500,000 (50,000 shares) of common stock in all categories of the offering combined;

 

  (iv)

The number of shares of common stock that an existing Magyar Bancorp public stockholder may purchase in the offering, together with associates or persons acting in concert with such stockholder, when combined with the shares that the stockholder and his or her associates will receive in exchange for existing Magyar Bancorp common stock, may not exceed 9.9% of the shares of common stock of Magyar Bancorp to be issued and outstanding at the completion of the conversion and offering; and

 

  (v)

The maximum number of shares of common stock that may be purchased in all categories of the offering by executive officers and directors of Magyar Bank and their associates, in the aggregate, when combined with shares of common stock of Magyar Bancorp issued in exchange for existing shares of Magyar Bancorp, may not exceed 25% of the total shares issued in the conversion.

Depending upon market or financial conditions, our board of directors, with regulatory approval and without further approval of depositors of Magyar Bank and stockholders of Magyar Bancorp, may decrease or increase the purchase limitations. If a purchase limitation is increased, subscribers in the subscription offering who ordered the maximum amount of shares of common stock and who indicated on their stock order forms a desire to be resolicited in the event of an increase will be given the opportunity to increase their orders up to the then applicable revised limit. The effect of this type of resolicitation will be an increase in the number of shares of common stock owned by persons who choose to increase their orders. If the maximum purchase limitation is increased to 5% of the shares sold in the offering, such limitation may be further increased to 9.99%, provided that orders for shares of common stock exceeding 5% of the shares sold in the offering may not exceed in the aggregate 10% of the total shares sold in the offering.

 

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The term “associate” of a person means:

 

  (i)

any corporation or organization (other than Magyar Bank, Magyar Bancorp or Magyar Bancorp, MHC or a majority-owned subsidiary of any of those entities) of which the person is a senior officer, partner or, directly or indirectly, 10% beneficial stockholder;

 

  (ii)

any trust or other estate in which the person has a substantial beneficial interest or serves as a trustee or in a similar fiduciary capacity; provided, however, it does not include any employee stock benefit plan in which the person has a substantial beneficial interest or serves as trustee or in a similar fiduciary capacity; and

 

  (iii)

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

The term “acting in concert” means:

 

  (i)

knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement; or

 

  (ii)

a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise.

A person or company that acts in concert with another person or company (“other party”) will also be deemed to be acting in concert with any person or company who is also acting in concert with that other party, except that any tax-qualified employee stock benefit plan will not be deemed to be acting in concert with its trustee or a person who serves in a similar capacity solely for determining whether common stock held by the trustee and common stock held by the employee stock benefit plan will be aggregated.

We have the sole discretion to determine whether prospective purchasers are “associates” or “acting in concert.” We may presume that certain persons are acting in concert based upon, among other things, joint account relationships or the fact that persons share a common address (whether or not related by blood or marriage) or may have filed joint Schedules 13D or 13G with the Securities and Exchange Commission with respect to Magyar Bancorp or other companies. Our directors are not treated as associates of each other solely because of their membership on the board of directors.

Common stock purchased in the offering will be freely transferable except for shares purchased by directors and certain officers of Magyar Bancorp or Magyar Bank and except as described below. Any purchases made by any associate of Magyar Bancorp or Magyar Bank for the explicit purpose of meeting the minimum number of shares of common stock required to be sold in order to complete the offering shall be made for investment purposes only and not with a view toward redistribution. In addition, under Financial Industry Regulatory Authority guidelines, members of the Financial Industry Regulatory Authority and their associates are subject to certain restrictions on transfer of securities purchased in accordance with subscription rights and to certain reporting requirements upon purchase of these securities. For a further discussion of limitations on purchases of our shares of common stock at the time of conversion and thereafter, see “– Certain Restrictions on Purchase or Transfer of Our Shares after the Conversion” and “Restrictions on Acquisition of Magyar Bancorp.”

Plan of Distribution; Selling Agent and Underwriter Compensation

Subscription and Community Offerings. To assist in the marketing of our shares of common stock in the subscription and community offerings, we have retained KBW, which is a broker-dealer registered with the Financial Industry Regulatory Authority. KBW will assist us on a best efforts basis in the subscription and community offerings by:

 

   

advising us on the financial and securities market implications of the conversion and the Plan of Conversion;

 

   

assisting us in structuring and marketing the offering;

 

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reviewing all offering documents, including the prospectus, stock order forms and marketing materials (it being understood that the preparation and filing of any and all such documents will be our responsibility and that of our counsel);

 

   

assisting us in scheduling and preparing meetings with potential investors and broker-dealers, if necessary;

 

   

assisting us in analyzing proposals from outside vendors in connection with the offering, as needed;

 

   

assisting us in the drafting and distribution of press releases as required or appropriate in connection with the offering;

 

   

meeting with our board of directors and/or our management to discuss any of the above services; and

 

   

providing such other financial advisory and investment banking services as may be reasonably necessary to promote the successful completion of the offering.

For these services, KBW will receive at the closing of the offering a success fee equal to 1% of the aggregate purchase price of common stock sold in the Subscription Offering and 1.5% of the aggregate purchase price of common stock sold in the Community Offering, excluding shares purchased by our officers, directors, or employees (or members of their immediate family), including any IRAs for the benefit of such persons, the ESOP, tax-qualified or stock based compensation plans or similar plan created by us for some or all of our directors or employees, subject to the payment of a minimum success fee of $315,000. In addition, if KBW is required or requested to provide significant services as a result of a resolicitation of subscribers, KBW will be entitled to additional compensation for such services, not to exceed $25,000.

Syndicated Community Offering. If shares of common stock are sold in a syndicated community offering, we will pay a fee of up to 6.0% of the aggregate dollar amount of common stock sold in the syndicated community offering to KBW and any other broker-dealers included in the syndicated community offering. The success fee to be paid to KBW for its services in the subscription and community offerings will be credited against any fee payable for services in the syndicated community offering.

Expenses. KBW also will be reimbursed for reasonable out-of-pocket expenses, not to exceed $30,000, and fees and expenses of its legal counsel not to exceed $100,000. These expenses may be increased by additional amounts not to exceed $10,000 and $25,000, respectively, if unusual circumstances arise or a delay or resolicitation occurs, including a delay in the offering that would require an update to the financial information included in this proxy statement/prospectus. In no event shall out-of-pocket expenses, including fees and expenses of legal counsel, exceed $165,000. If the Plan of Conversion is terminated or if KBW’s engagement is terminated in accordance with the provisions of the agency agreement, KBW will receive reimbursement of its reasonable out-of-pocket expenses. KBW shall have earned in full, and be entitled to be paid in full, all fees then due and payable at such date of termination.

Records Management

We have also engaged KBW as conversion and records management agent in connection with the conversion and the subscription and community offerings. In its role as conversion and records management agent, KBW will assist us in the offering by:

 

   

reviewing our deposit accounts and create a master file of depositors of Magyar Bank as of the key record dates;

 

   

assisting us in designing and preparing proxy forms and stock order forms;

 

   

tabulating proxies from depositors;

 

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acting as or supporting the inspector of election at Magyar Bancorp, MHC special meeting of depositors and Magyar Bancorp’s special meeting of stockholders;

 

   

operating and managing the Stock Information Center; and

 

   

processing stock order forms.

KBW will receive fees of $30,000 for these services, of which $10,000 has been paid as of the date of this proxy statement/prospectus. These fees can be increased by up to $10,000 if there are material changes in regulations or the Plan of Conversion, or there are delays requiring duplicate or replacement processing. KBW will also be reimbursed for its reasonable out-of-pocket expenses not to exceed $15,000.

Indemnity

We will indemnify KBW against liabilities and expenses, including legal fees, incurred in connection with certain claims or litigation arising out of or based upon untrue statements or omissions contained in the offering materials for the common stock, including liabilities under the Securities Act of 1933, as well as certain other claims and litigation arising out of KBW’s engagement with respect to the conversion.

Solicitation of Offers by Officers and Directors

Some of our directors and executive officers may participate in the solicitation of offers to purchase common stock in the subscription and community offerings. These persons will be reimbursed for their reasonable out-of-pocket expenses incurred in connection with the solicitation. Other regular employees of Magyar Bank may assist in the offering, but only in ministerial capacities, and may provide clerical work in effecting a sales transaction. No offers or sales may be made by tellers or at the teller counters. Investment-related questions of prospective purchasers will be directed to executive officers or registered representatives of KBW. Our other employees have been instructed not to solicit offers to purchase shares of common stock or provide advice regarding the purchase of common stock. We will rely on Rule 3a4-1 under the Securities Exchange Act of 1934, as amended, and sales of common stock will be conducted within the requirements of Rule 3a4-1, so as to permit officers, directors and employees to participate in the sale of common stock. None of our officers, directors or employees will be compensated in connection with their participation in the offering.

Lock-up Agreements

Each of our directors and executive officers has agreed, subject to certain exceptions, that during the period beginning on the date of this proxy statement/prospectus and ending 90 days after the closing of the offering, without the prior written consent of KBW, they will not, directly or indirectly (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of Magyar Bancorp stock or any securities convertible into or exchangeable or exercisable for Magyar Bancorp stock, (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of Magyar Bancorp stock, or (iii) announce any intention to take any of the foregoing actions, whether any such transaction is to be settled by delivery of stock or other securities, in cash or otherwise. In addition, our directors and executive officers have agreed that they will not, during the restricted period, make any demand for or exercise any right with respect to, the registration of any shares of Magyar Bancorp common stock or any security convertible into or exercisable or exchangeable for Magyar Bancorp common stock.

Procedure for Purchasing Shares in the Subscription and Community Offerings

Expiration Date. The subscription and community offerings will expire at 2:00 p.m., Eastern Time, on June 18, 2021, unless we extend one or both for up to 45 days, with the approval of Federal Reserve Board and the NJDOBI, if required. This extension may be approved by us, in our sole discretion, without notice to purchasers in the offering. Any extension of the subscription and/or community offering beyond August 2, 2021 would require the Federal Reserve Board’s approval. If the offering is so extended, all subscribers will be notified and given an opportunity to confirm, change or cancel their orders. If you do not respond to the notice of extension, we will promptly return your funds, with interest at 0.05% per annum, or cancel your deposit account withdrawal

 

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authorization. If the offering range is decreased below the minimum of the offering range or is increased above the maximum of the offering range, all subscribers’ stock orders will be cancelled, their deposit account withdrawal authorizations will be cancelled, and funds submitted to us will be returned promptly, with interest at 0.05% per annum, for funds received in the subscription and community offerings. We will then resolicit the subscribers, giving them an opportunity to place a new stock order for a period of time.

To ensure each purchaser receives a prospectus at least 48 hours before the June 18, 2021 expiration date of the offering, in accordance with Rule 15c2-8 of the Securities Exchange Act of 1934, as amended, no prospectus will be mailed any later than five days before the expiration date or hand delivered any later than two days before the expiration date. Execution of a stock order form will confirm receipt of delivery in accordance with Rule 15c2-8. Stock order forms will be distributed only with a prospectus.

We reserve the right in our sole discretion to terminate the offering at any time and for any reason, in which case we will cancel any deposit account withdrawal authorizations and promptly return all funds submitted, with interest at 0.05% per annum, from the date of receipt as described above.

Use of Order Forms in the Subscription and Community Offerings. To purchase shares of common stock in the subscription and community offerings, you must properly complete an original stock order form and remit full payment. We are not required to accept orders submitted on photocopied or facsimiled stock order forms. All stock order forms must be received (not postmarked) on or before 2:00 p.m., Eastern Time, on June 18, 2021. We are not required to accept stock order forms that are not received by that time, are not signed or are otherwise executed defectively or are received without full payment or without appropriate deposit account withdrawal instructions. We are not required to notify subscribers of incomplete or improperly executed stock order forms. We have the right to waive or permit the correction of incomplete or improperly executed stock order forms. We do not represent, however, that we will do so, and we have no affirmative duty to notify any prospective subscriber of any such defects. You may submit your original stock order form and payment by overnight delivery to the address listed on the stock order form (recommended) or by regular mail using the stock order reply envelope provided. You may also hand-deliver stock order forms to Magyar Bank’s corporate headquarters located at 400 Somerset Street, New Brunswick, New Jersey. Hand-delivered stock order forms will be accepted only at this location. We will not accept stock order forms at our other offices. Do not mail stock order forms to Magyar Bank’s offices.

Once tendered, an order form cannot be modified or revoked without our consent. We reserve the absolute right, in our sole discretion, to reject orders received in the community offering, in whole or in part, at the time of receipt or at any time before completion of the offering. If you are ordering shares in the offering, you must represent that you are purchasing shares for your own account and that you have no agreement or understanding with any person for the sale or transfer of the shares. We have the right to reject any order submitted in the offering by a person who we believe is making false representations or who we otherwise believe, either alone or acting in concert with others, is violating, evading, circumventing, or intends to violate, evade or circumvent the terms and conditions of the Plan of Conversion. Our interpretation of the terms and conditions of the Plan of Conversion and of the acceptability of the order forms will be final.

By signing the order form, you will be acknowledging that the common stock is not a deposit or savings account and is not federally insured or otherwise guaranteed by Magyar Bank, the FDIC or the federal government, and that you received a copy of this proxy statement/prospectus. However, signing the order form will not result in you waiving your rights under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

Payment for Shares. Payment for all shares of common stock must accompany all completed order forms for the purchase to be valid. Payment for shares in the subscription and community offerings may be made by:

 

  (i)

personal check, bank check or money order, made payable to Magyar Bancorp, Inc. Do not remit cash; or

 

  (ii)

authorization of withdrawal from the types of Magyar Bank deposit account(s) designated on the stock order form.

 

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Appropriate means for designating withdrawals from deposit account(s) at Magyar Bank are provided on the stock order form. The funds designated must be available in the account(s) at the time the stock order form is received. A hold will be placed on these funds, making them unavailable to the depositor. Funds authorized for withdrawal will continue to earn interest within the account at the contractual rate until the offering is completed, at which time the designated withdrawal will be made. Interest penalties for early withdrawal applicable to certificate of deposit accounts will not apply to withdrawals authorized for the purchase of shares of common stock; however, if a withdrawal results in a certificate of deposit account with a balance less than the applicable minimum balance requirement, the certificate of deposit will be canceled at the time of withdrawal without penalty and the remaining balance will earn interest at the current statement savings rate after the withdrawal. In the case of payments made by personal check, these funds must be available in the account(s). Checks and money orders received in the subscription and community offerings will be immediately cashed and placed in a segregated account at Magyar Bank and will earn interest at 0.05% per annum from the date payment is processed until the offering is completed or terminated.

You may not remit cash, any type of third-party checks (including those payable to you and endorsed over to Magyar Bancorp) or a Magyar Bank line of credit check. You may not designate on your stock order form direct withdrawal from a retirement account at Magyar Bank. See “– Using Individual Retirement Account Funds” for information on using such funds. Additionally, you may not designate on your stock order form a direct withdrawal from Magyar Bank deposit accounts with check-writing privileges. Please submit a check instead. If you request a direct withdrawal from an account with check-writing privileges, we reserve the right to interpret that as your authorization to treat those funds as if we had received a check for the designated amount, and will immediately withdraw the amount from the specified account(s). In the event we resolicit persons who subscribed for the maximum purchase amount, as described above in “– Additional Limitations on Common Stock Purchases,” such purchasers who wish to increase their purchases will not be able to use personal checks to pay for the additional shares, but instead must pay for the additional shares using immediately available funds. Wire transfers will not otherwise be accepted, except as described below.

Once we receive your executed stock order form, it may not be modified, amended or rescinded without our consent, unless the offering is not completed by August 2, 2021. If the subscription and community offerings are extended past August 2, 2021, all subscribers will be notified and given an opportunity to confirm, change or cancel their orders. If you do not respond to the notice of extension, we will promptly return your funds, with interest at 0.05% per annum, or cancel your deposit account withdrawal authorization. We may resolicit purchasers for a specified period of time.

Regulations prohibit Magyar Bank from lending funds or extending credit to any persons to purchase shares of common stock in the offering.

We have the right, in our sole discretion, to permit institutional investors to submit irrevocable orders together with the legally binding commitment for payment and to thereafter pay for the shares of common stock for which they subscribe in the community offering at any time before 48 hours before the completion of the conversion. This payment may be made by wire transfer.

If our employee stock ownership plan purchases shares in the offering, it will not be required to pay for such shares until completion of the offering, provided that there is a loan commitment from an unrelated financial institution or Magyar Bancorp to lend to the employee stock ownership plan the necessary amount to fund the purchase. In addition, if our 401(k) plan purchases shares in the offering, it will not be required to pay for such shares until completion of the offering.

Using Individual Retirement Account Funds. If you are interested in using funds in your IRA or other retirement account to purchase shares of common stock in the offering, you must do so through an account offered by a custodian that can hold common stock. By regulation, Magyar Bank’s retirement accounts are not capable of holding common stock. Therefore, if you wish to use funds that are currently in a retirement account held at Magyar Bank, you may not designate on the order form that you wish funds to be withdrawn from the account for the purchase of common stock. The funds you wish to use for the purchase of common stock will instead have to be transferred to an independent trustee or custodian, such as a brokerage firm, which offers the type of retirement accounts that can hold common stock. The purchase must be made through that account. If you do not have such an account, you will need to establish one before placing a stock order. A one-time and/or annual administrative fee

 

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may be payable to the independent trustee or custodian. There will be no early withdrawal or Internal Revenue Service interest penalties for these transfers. Individuals interested in using funds in an individual retirement account or any other retirement account, whether held at Magyar Bank or elsewhere, to purchase shares of common stock should contact our Stock Information Center for guidance as soon as possible, but in no event later than two weeks before the June 18, 2021 offering deadline. You may select the independent trustee or custodian of your choice. You may, but are under no obligation to, select KBW or one of its affiliated broker dealers, Stifel, Nicolaus & Company, Incorporated (“SN”) or Century Securities Associates (“CSA”) as your IRA or other retirement account custodian. If you do purchase shares of Magyar Bancorp common stock using funds from a KBW, SN or CSA IRA account, you acknowledge that KBW, SN or CSA, as applicable, did not recommend or give you advice regarding such purchase. Other than the standard account fees and compensation associated with all IRA accounts, KBW, SN and CSA do not receive additional fees or compensation as a result of the purchase of Magyar Bancorp common stock through a KBW, SN or CSA IRA or other retirement account. Processing these transactions takes additional time, and whether such funds can be used may depend on limitations imposed by the institutions where such funds are currently held or the independent trustee or custodian you select. We cannot guarantee that you will be able to use such funds.

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

Other Restrictions. Notwithstanding any other provision of the Plan of Conversion, no person is entitled to purchase any shares of common stock to the extent the purchase would be illegal under any federal or state law or regulation, including state “blue sky” regulations, or would violate regulations or policies of the Financial Industry Regulatory Authority, particularly those regarding free riding and withholding. We may ask for an acceptable legal opinion from any purchaser as to the legality of his or her purchase and we may refuse to honor any purchase order if an opinion is not timely furnished.

In addition, we are not required to offer shares of common stock to any person who resides in a foreign country, or in a state of the United States with respect to which any of the following apply:

 

  (i)

a small number of persons otherwise eligible to subscribe for shares under the Plan of Conversion reside in such state;

 

  (ii)

the offer or sale of shares of common stock to such persons would require us or our employees to register, under the securities laws of such state, as a broker or dealer or to register or otherwise qualify our securities for sale in such state; or

 

  (iii)

such registration or qualification would be impracticable for reasons of cost or otherwise.

Restrictions on Transfer of Subscription Rights and Shares

Applicable banking regulations prohibit any person with subscription rights, including the Eligible Account Holders, Supplemental Eligible Account Holders, and Other Depositors, from transferring or entering into any agreement or understanding to transfer the legal or beneficial ownership of the subscription rights issued under the Plan of Conversion or the shares of common stock to be issued upon their exercise. These rights may be exercised only by the person to whom they are granted and only for his or her account. When registering your stock purchase on the stock order form, you cannot add the name(s) of others for joint stock registration who do not have subscription rights or who qualify only in a lower subscription offering priority than you. Doing so may jeopardize your subscription rights. You may only add those who were eligible to purchase shares of common stock in the subscription offering at your date of eligibility. In addition, the stock order form requires that you list all deposit accounts you held at your date of eligibility,

 

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giving all names on each account and the account number at the applicable eligibility date. Failure to provide this information, or providing incomplete or incorrect information, may result in a loss of part or all of your share allocation. Each person exercising subscription rights will be required to certify that he or she is purchasing shares solely for his or her own account and that he or she has no agreement or understanding regarding the sale or transfer of such shares. The regulations also prohibit any person from offering or making an announcement of an offer or intent to make an offer to purchase subscription rights or shares of common stock to be issued upon their exercise before completion of the offering.

We will pursue any and all legal and equitable remedies in the event we become aware of the transfer of subscription rights, and we will not honor orders that we believe involve the transfer of subscription rights.

Stock Information Center

Our banking office personnel may not, by law, assist with investment-related questions about the offering. If you have any questions regarding the conversion or offering, please call our Stock Information Center at (877) 643-8198. The Stock Information Center is open Monday through Friday between 10:00 a.m. and 4:00 p.m., Eastern Time, and will be closed on bank holidays.

Liquidation Rights

Liquidation Before the Conversion. In the unlikely event that Magyar Bancorp, MHC is liquidated before the conversion, all claims of creditors of Magyar Bancorp, MHC would be paid first. Thereafter, if there were any assets of Magyar Bancorp, MHC remaining, these assets would first be distributed to depositors of Magyar Bank pro rata based on the value of their accounts at Magyar Bank.

Liquidation Following the Conversion. The Plan of Conversion provides for the establishment, upon the completion of the conversion, of a liquidation account by Magyar Bancorp for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders in an amount equal to (i) Magyar Bancorp, MHC’s ownership interest in Magyar Bancorp’s total stockholders’ equity as of the date of the latest statement of financial condition contained in this proxy statement/prospectus plus (ii) the value of the net assets of Magyar Bancorp, MHC as of the date of the latest statement of financial condition of Magyar Bancorp, MHC before the consummation of the conversion (excluding its ownership of Magyar Bancorp). The Plan of Conversion also provides for the establishment of a parallel liquidation account in Magyar Bank to support the Magyar Bancorp liquidation account if Magyar Bancorp does not have sufficient assets to fund its obligations under the Magyar Bancorp liquidation account.

In the unlikely event that Magyar Bank were to liquidate after the conversion, all claims of creditors, including those of depositors, would be paid first. However, except with respect to the liquidation account to be established in Magyar Bancorp, a depositor’s claim would be solely for the principal amount of his or her deposit accounts plus accrued interest. Depositors generally would not have an interest in the value of the assets of Magyar Bank or Magyar Bancorp above that amount.

The liquidation account established by Magyar Bancorp is intended to provide qualifying depositors of Magyar Bank with a liquidation interest (exchanged for the liquidation interests such persons had in Magyar Bancorp, MHC) after the conversion in the event of a complete liquidation of Magyar Bancorp and Magyar Bank or a liquidation solely of Magyar Bank. Specifically, in the unlikely event that either (i) Magyar Bank or (ii) Magyar Bancorp and Magyar Bank were to liquidate after the conversion, all claims of creditors, including those of depositors, would be paid first, followed by a distribution to depositors as of the close of business on December 31, 2019 and March 31, 2021 of their interests in the liquidation account maintained by Magyar Bancorp. Also, in a complete liquidation of both entities, or of Magyar Bank only, when Magyar Bancorp has insufficient assets (other than the stock of Magyar Bank) to fund the liquidation account distribution owed to Eligible Account Holders and Supplemental Eligible Account Holders, and Magyar Bank has positive net worth, then Magyar Bank shall immediately make a distribution to fund Magyar Bancorp’s remaining obligations under the liquidation account. In no event will any Eligible Account Holder or Supplemental Eligible Account Holder be entitled to a distribution that exceeds such holder’s interest in the liquidation account maintained by Magyar Bancorp as adjusted periodically pursuant to the Plan of Conversion and federal regulations. If Magyar Bancorp is completely liquidated or sold apart from a sale or liquidation of Magyar Bank, then the Magyar Bancorp liquidation account will cease to exist

 

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and Eligible Account Holders and Supplemental Eligible Account Holders will receive an equivalent interest in the Magyar Bank liquidation account, subject to the same rights and terms as the Magyar Bancorp liquidation account.

Pursuant to the Plan of Conversion, after two years from the date of conversion and upon the written request of the Federal Reserve Board and the NJDOBI, as required, Magyar Bancorp will transfer, or, upon the prior written approval of the Federal Reserve Board or NJDOBI, as required, may transfer the liquidation account and the depositors’ interests in such account to Magyar Bank and the liquidation account shall thereupon be subsumed into the liquidation account of Magyar Bank.

A post-conversion merger, consolidation, or similar combination or transaction with another depository institution or depository institution holding company in which Magyar Bancorp or Magyar Bank is not the surviving institution, would not be considered a liquidation. In such a transaction, the liquidation account would be assumed by the surviving institution or company.

Each Eligible Account Holder and Supplemental Eligible Account Holder would have an initial pro-rata interest in the liquidation account for each deposit account, including savings accounts, transaction accounts such as negotiable order of withdrawal accounts, money market deposit accounts, and certificates of deposit, with a balance of $50.00 or more held in Magyar Bank as of the close of business on December 31, 2019 or March 31, 2021, respectively, equal to the proportion that the balance of such account holder’s deposit account at the close of business on December 31, 2019 or March 31, 2021, respectively, bears to the balance of all deposit accounts of all Eligible Account Holders and Supplemental Eligible Account Holders in Magyar Bank on such dates.

If, however, on any December 31 annual closing date commencing after the effective date of the conversion, the amount in any such deposit account is less than the amount in the deposit account at the close of business on December 31, 2019 or March 31, 2021, or any other annual closing date, then the liquidation account as well as the interest in the liquidation account relating to such deposit account will be reduced by the proportion of any such reduction, and such interest will cease to exist if such deposit account is closed. In addition, no interest in the liquidation account would ever be increased despite any subsequent increase in the related deposit account. Payment pursuant to liquidation rights of Eligible Account Holders and Supplemental Eligible Account Holders would be separate and apart from the payment of any insured deposit accounts to such depositors. Any assets remaining after the above liquidation rights of Eligible Account Holders and Supplemental Eligible Account Holders are satisfied would be available for distribution to stockholders.

Material Income Tax Consequences

Completion of the conversion is subject to the prior receipt of an opinion of counsel or tax advisor with respect to the federal and state income tax consequences of the conversion to Magyar Bancorp, MHC, Magyar Bancorp, Magyar Bank, Eligible Account Holders, Supplemental Eligible Account Holders, and Other Depositors. Unlike private letter rulings, an opinion of counsel or a tax advisor is not binding on the Internal Revenue Service or any state taxing authority, and those authorities may disagree with the opinion. In the event of a disagreement, there can be no assurance that Magyar Bancorp or Magyar Bank would prevail in a judicial proceeding.

Magyar Bancorp, MHC, Magyar Bancorp and Magyar Bank have received an opinion of counsel, Luse Gorman, PC, regarding all of the material federal income tax consequences of the conversion, which include the following:

 

  1.

The merger of Magyar Bancorp, MHC with and into Magyar Bancorp will qualify as a tax-free reorganization within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code.

 

  2.

The constructive exchange of Eligible Account Holders’ and Supplemental Eligible Account Holders’ liquidation interests in Magyar Bancorp, MHC for a liquidation account in Magyar Bancorp will satisfy the continuity of interest requirement of Section 1.368-1(b) of the Federal Income Tax Regulations.

 

  3.

None of Magyar Bancorp, MHC, Magyar Bancorp, Eligible Account Holders nor Supplemental Eligible Account Holders will recognize any gain or loss on the transfer of the assets of Magyar Bancorp, MHC to Magyar Bancorp and the assumption by Magyar Bancorp of Magyar Bancorp,

 

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  MHC’s liabilities, if any, in constructive exchange for interests in a liquidation account in Magyar Bancorp.

 

  4.

The basis of the assets of Magyar Bancorp, MHC and the holding period of the assets to be received by Magyar Bancorp will be the same as the basis and holding period of such assets in Magyar Bancorp, MHC immediately before the exchange.

 

  5.

Each stockholder’s aggregate basis in shares of Magyar Bancorp common stock (including fractional share interests) received in the exchange will be the same as the aggregate basis of Magyar Bancorp common stock surrendered in the exchange.

 

  6.

Each stockholder’s holding period in its Magyar Bancorp common stock received in the exchange will include the period during which the Magyar Bancorp common stock surrendered was held, provided that the Magyar Bancorp common stock surrendered is a capital asset in the hands of the stockholder on the date of the exchange.

 

  7.

Except with respect to cash received in lieu of fractional shares, current stockholders of Magyar Bancorp will not recognize any gain or loss upon their exchange of Magyar Bancorp common stock for Magyar Bancorp common stock.

 

  8.

Cash received by any current stockholder of Magyar Bancorp in lieu of a fractional share interest in shares of Magyar Bancorp common stock will be treated as having been received as a distribution in full payment in exchange for a fractional share interest of Magyar Bancorp common stock, which the stockholder would otherwise be entitled to receive. Accordingly, a stockholder will recognize gain or loss equal to the difference between the cash received and the basis of the fractional share. If the common stock is held by the stockholder as a capital asset, the gain or loss will be capital gain or loss.

 

  9.

It is more likely than not that the fair market value of the nontransferable subscription rights to purchase Magyar Bancorp common stock is zero. Accordingly, no gain or loss will be recognized by Eligible Account Holders, Supplemental Eligible Account Holders or Other Depositors upon distribution to them of nontransferable subscription rights to purchase shares of Magyar Bancorp common stock. Eligible Account Holders, Supplemental Eligible Account Holders and Other Depositors will not realize any taxable income as the result of the exercise by them of the nontransferable subscriptions rights.

 

  10.

It is more likely than not that at the effective date of the conversion the fair market value of the benefit provided by the liquidation account of Magyar Bank supporting the payment of the Magyar Bancorp liquidation account in the event either Magyar Bank (or Magyar Bancorp and Magyar Bank) were to liquidate after the conversion (including a liquidation of Magyar Bank or Magyar Bank and Magyar Bancorp following a purchase and assumption transaction with a credit union) when Magyar Bancorp lacks sufficient net assets to pay the liquidation account distribution due is zero. Accordingly, it is more likely than not that no gain or loss will be recognized by Eligible Account Holders and Supplemental Eligible Account Holders upon the constructive distribution to them of such rights in the Magyar Bank liquidation account as of the effective date of the conversion.

 

  11.

It is more likely than not that the basis of the shares of Magyar Bancorp common stock purchased in the offering by the exercise of nontransferable subscription rights will be the purchase price. The holding period of the Magyar Bancorp common stock purchased pursuant to the exercise of nontransferable subscription rights will commence on the date the right to acquire such stock was exercised.

 

  12.

No gain or loss will be recognized by Magyar Bancorp on the receipt of money in exchange for Magyar Bancorp common stock sold in the offering.

 

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We believe that the tax opinions summarized above address the material federal income tax consequences that are generally applicable to Magyar Bancorp, MHC, Magyar Bancorp, Magyar Bank, persons receiving subscription rights, and stockholders of Magyar Bancorp. With respect to items 9 and 11 above, Luse Gorman, PC noted that the subscription rights will be granted at no cost to the recipients, are legally nontransferable and of short duration, and will provide the recipient with the right only to purchase shares of common stock at the same price to be paid by members of the general public in any community offering. Luse Gorman, PC further noted that RP Financial, LC. has issued a letter that the subscription rights have no ascertainable fair market value. Luse Gorman, PC also noted that the Internal Revenue Service has not in the past concluded that subscription rights have value. Based on the foregoing, Luse Gorman, PC believes that it is more likely than not that the nontransferable subscription rights to purchase shares of common stock have no value. However, the issue of whether or not the nontransferable subscription rights have value is based on all the facts and circumstances. If the subscription rights granted to Eligible Account Holders, Supplemental Eligible Account Holders and Other Depositors are deemed to have an ascertainable value, receipt of these rights could result in taxable gain to those Eligible Account Holders, Supplemental Eligible Account Holders and Other Depositors who exercise the subscription rights in an amount equal to the ascertainable value, and we could recognize gain on the distribution of such rights. Eligible Account Holders, Supplemental Eligible Account Holders and Other Depositors are encouraged to consult with their own tax advisors as to the tax consequences if subscription rights are deemed to have an ascertainable value.

The opinion as to item 10 above is based on the position that: (i) no holder of an interest in a liquidation account has ever received any payment attributable to liquidation of a solvent bank and/or holding company (other than as set forth below); (ii) the interests in the liquidation accounts are not transferable; (iii) the amounts due under the liquidation account with respect to each Eligible Account Holder and Supplemental Eligible Account Holder will be reduced as their deposits in Magyar Bank are reduced; (iv) holders of an interest in a liquidation account have received payments of their interests in very few instances (out of hundreds of transactions involving mergers, acquisitions and the purchase of assets and assumption of liabilities of holding companies and subsidiary banks) and these instances involved the purchase and assumption of a bank’s assets by a credit union; and (v) the Magyar Bank liquidation account payment obligation arises only if Magyar Bancorp lacks sufficient assets to fund the liquidation account or if Magyar Bank (or Magyar Bank and Magyar Bancorp) enters into a transaction to transfer Magyar Bank’s assets and liabilities to a credit union.

In addition, we have received a letter from RP Financial, LC. stating its belief that the benefit provided by the Magyar Bank liquidation account supporting the payment of the liquidation account if (i) Magyar Bancorp lacks sufficient net assets or (ii) Magyar Bank (or Magyar Bank and Magyar Bancorp) enters into a transaction to transfer Magyar Bank’s assets and liabilities to a credit union, does not have any economic value at the time of the conversion. Based on the foregoing, Luse Gorman, PC believes it is more likely than not that such rights in the Magyar Bank liquidation account have no value. If such rights are subsequently found to have an economic value as of the effective time of the conversion, income may be recognized by each Eligible Account Holder or Supplemental Eligible Account Holder in the amount of such fair market value as of the date of the conversion.

The opinion of Luse Gorman, PC, unlike a letter ruling issued by the Internal Revenue Service, is not binding on the Internal Revenue Service and the conclusions expressed therein may be challenged at a future date. The Internal Revenue Service has issued favorable rulings for transactions substantially similar to the proposed conversion and offering, but those rulings may not be cited as precedent by any taxpayer other than the taxpayer to whom a ruling is addressed. We do not plan to apply for a letter ruling concerning the transactions described herein.

We have also received an opinion from Hamilton & Babitts, Fairfield, New Jersey that the New Jersey income tax consequences are consistent with the federal income tax consequences.

The federal and state tax opinions have been filed with the Securities and Exchange Commission as exhibits to Magyar Bancorp’s registration statement.

Certain Restrictions on Purchase or Transfer of Our Shares after the Conversion

All shares of common stock purchased in the offering by a director or certain officers of Magyar Bank, Magyar Bancorp or Magyar Bancorp, MHC generally may not be sold for a period of one year following the closing of the conversion, except if the individual dies. Restricted shares will bear a legend giving notice of this restriction on transfer, and instructions will be issued to the effect that any transfer within this time period of any record

 

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ownership of the shares other than as provided above is a violation of the restriction. Any shares of common stock issued at a later date as a stock dividend, stock split, or otherwise, with respect to the restricted stock will be similarly restricted. The directors and executive officers of Magyar Bancorp also will be restricted by the insider trading rules under the Securities Exchange Act of 1934, as amended.

Purchases of shares of our common stock by any of our directors, certain officers and their associates, during the three-year period following the closing of the conversion, may be made only through a broker or dealer registered with the Securities and Exchange Commission, except with the prior written approval of the Federal Reserve Board. This restriction does not apply, however, to negotiated transactions involving more than 1% of our outstanding common stock or to purchases of our common stock by any of our tax-qualified employee stock benefit plans or non-tax-qualified employee stock benefit plans, including any stock option or restricted stock plans.

Exchange of Existing Stockholders’ Stock Certificates

The conversion of existing outstanding shares of Magyar Bancorp common stock into the right to receive shares of Magyar Bancorp common stock will occur automatically at the completion of the conversion. As soon as practicable after the completion of the conversion, our exchange agent will send a transmittal form to each public stockholder of Magyar Bancorp who holds physical stock certificates. The transmittal form will contain instructions on how to surrender certificates evidencing Magyar Bancorp common stock in exchange for shares of Magyar Bancorp common stock in book entry form, to be held electronically on the books of our transfer agent. Magyar Bancorp will not issue stock certificates. We expect that a statement reflecting your ownership of shares of common stock of Magyar Bancorp common stock will be distributed within five business days after the exchange agent receives properly executed transmittal forms, Magyar Bancorp stock certificates and other required documents. Shares held by public stockholders in street name (such as in a brokerage account) or electronically with our transfer agent in “book entry” form will be exchanged automatically upon the completion of the conversion; no transmittal forms will be mailed relating to these shares.

No fractional shares of Magyar Bancorp common stock will be issued to any public stockholder of Magyar Bancorp when the conversion is completed. For each fractional share that would otherwise be issued to a stockholder who holds a stock certificate, we will pay by check an amount equal to the product obtained by multiplying the fractional share interest to which the holder would otherwise be entitled by the $10.00 offering purchase price per share. Payment for fractional shares will be made as soon as practicable after the receipt by the exchange agent of the transmittal forms and the surrendered Magyar Bancorp stock certificates. If your shares of common stock are held in street name, you will automatically receive cash in lieu of fractional shares in your account.

Do not forward your stock certificates until you have received transmittal forms, which will include forwarding instructions. After the conversion, stockholders will not receive shares of Magyar Bancorp common stock and will not be paid dividends on the shares of Magyar Bancorp common stock until existing certificates representing shares of Magyar Bancorp common stock are surrendered for exchange in compliance with the terms of the transmittal form. When stockholders surrender their certificates, any unpaid dividends will be paid without interest. For all other purposes, however, each certificate that represents shares of Magyar Bancorp common stock outstanding at the effective date of the conversion will be considered to evidence ownership of shares of Magyar Bancorp common stock into which those shares have been converted by virtue of the conversion.

If a certificate for Magyar Bancorp common stock has been lost, stolen or destroyed, our exchange agent will issue a new stock certificate upon receipt of appropriate evidence as to the loss, theft or destruction of the certificate, appropriate evidence as to the ownership of the certificate by the claimant, and appropriate and customary indemnification, which is normally effected by the purchase of a bond from a surety company at the stockholder’s expense.

All shares of Magyar Bancorp common stock that we issue in exchange for existing shares of Magyar Bancorp common stock will be considered to have been issued in full satisfaction of all rights pertaining to such shares of common stock, subject, however, to our obligation to pay any dividends or make any other distributions with a record date before the effective date of the conversion that may have been declared by us on or before the effective date, and which remain unpaid at the effective date.

 

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Restrictions on Transfer of Subscription Rights and Shares

Applicable banking regulations prohibit any person with subscription rights, including the Eligible Account Holders, Supplemental Eligible Account Holders, and Other Depositors, from transferring or entering into any agreement or understanding to transfer the legal or beneficial ownership of the subscription rights issued under the Plan of Conversion or the shares of common stock to be issued upon their exercise. These rights may be exercised only by the person to whom they are granted and only for his or her account. When registering your stock purchase on the stock order form, you cannot add the names of others for joint or beneficial stock registration who do not have subscription rights or who qualify only in a lower subscription offering priority than you. Doing so may jeopardize your subscription rights. You may only add those who were eligible to purchase shares of common stock in the subscription offering at your date of eligibility. In addition, the stock order form requires that you list all deposit accounts you held at your date of eligibility, giving all names on each account and the account number at the applicable eligibility date. Failure to provide this information, or providing incomplete or incorrect information, may result in a loss of part or all of your share allocation. Each person exercising subscription rights will be required to certify that he or she is purchasing shares solely for his or her own account and that he or she has no agreement or understanding regarding the sale or transfer of such shares. The regulations also prohibit any person from offering or making an announcement of an offer or intent to make an offer to purchase subscription rights or shares of common stock to be issued upon their exercise before completion of the offering.

We will pursue any and all legal and equitable remedies in the event we become aware of the transfer of subscription rights, and we will not honor orders that we believe involve the transfer of subscription rights.

Stock Information Center

Our banking office personnel may not, by law, assist with investment-related questions about the offering. If you have any questions regarding the conversion or offering, please call our Stock Information Center. The telephone number is (877) 643-8198. The Stock Information Center is open Monday through Friday between 10:00 a.m. and 4:00 p.m., Eastern time. The Stock Information Center will be closed on bank holidays.

PROPOSAL 2 – ADJOURNMENT OF THE SPECIAL MEETING

If there are not sufficient votes to constitute a quorum or to approve the Plan of Conversion at the time of the special meeting, the proposal may not be approved unless the special meeting is adjourned to a later date or dates in order to permit further solicitation of proxies. In order to allow proxies that have been received by Magyar Bancorp at the time of the special meeting to be voted for an adjournment, if necessary, Magyar Bancorp has submitted the question of adjournment to its stockholders as a separate matter for their consideration. The board of directors of Magyar Bancorp recommends that stockholders vote FOR approval of the adjournment proposal. If it is necessary to adjourn the special meeting, no notice of the adjourned special meeting is required to be given to stockholders (unless the adjournment is for more than 30 days or if a new record date is fixed), other than an announcement at the special meeting of the hour, date and place to which the special meeting is adjourned.

The board of directors unanimously recommends that you vote “FOR” approval of the adjournment of the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes at the time of the special meeting to approve the Plan of Conversion.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

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

 

     At
December 31,

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

Selected Financial Condition Data:

                 

Total assets

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

Cash and cash equivalents

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

Available-for-sale securities

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

Securities held to maturity

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

Loans receivable, net

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

Premises and equipment, net

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

Bank-owned life insurance

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

FHLB stock, at cost

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

Accrued interest receivable

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

Other assets

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

Other real estate owned

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

Total liabilities

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

Deposits

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

Borrowings

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

Accounts payable and other liabilities

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

Total equity

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

 

     For the Three Months
Ended

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

Selected Data:

                    

Interest and dividend income

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

Interest expense

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

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

Provision for loan losses

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

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

Other income

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

Other expenses

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income before income tax expense

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

Income tax expense

     569        238        921        1,265        1,471        994        664  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

58


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

Selected Financial Ratios and Other Data:

              

Performance Ratios: (1)

              

Return on average assets

     0.71     0.35     0.32     0.47     0.33     0.24     0.19

Return on average equity

     9.19     4.01     3.85     5.47     3.95     2.90     2.28

Interest rate spread (2)

     3.18     3.14     3.03     3.09     3.27     3.20     3.11

Net interest margin (3)

     3.38     3.44     3.31     3.41     3.49     3.36     3.27

Efficiency ratio (4)

     71.25     85.14     85.51     80.51     83.19     87.19     90.08

Non-interest expense to average total assets

     2.51     2.84     2.65     2.75     2.84     2.80     2.80

Average interest-earning assets to average interest-bearing liabilities

     136.93     127.93     132.47     128.21     126.51     123.92     122.60

Average equity to average total assets

     7.72     8.65     8.22     8.55     8.43     8.32     8.40

Asset Quality Ratios:

              

Non-performing assets to total assets

     1.63     2.01     1.63     2.29     1.52     2.22     2.79

Non-performing loans to total loans

     1.65     1.03     1.59     1.32     0.18     0.50     0.92

Allowance for loan losses to non-performing loans

     71.01     93.60     65.76     70.90     463.58     147.37     72.64

Allowance for loan losses to total loans

     1.17     0.96     1.05     0.93     0.82     0.73     0.67

Capital Ratios:

              

Common equity Tier 1 capital to risk-weighted assets

     11.85     11.79     11.84     11.84     11.44     11.80     11.82

Total capital (to risk-weighted assets)

     13.10     12.85     13.09     12.88     12.35     12.62     12.55

Tier 1 capital (to risk-weighted assets)

     11.85     11.79     11.84     11.84     11.44     11.80     11.82

Tier 1 capital (to total assets)

     7.91     8.87     7.84     8.94     8.55     8.45     8.53

Other Data:

              

Number of full-service offices

     7       7       7       7       7       7       6  

Number of full-time equivalent employees

     95.5       103.5       101.0       105.5       102.0       102.0       97.5  

 

(1)

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

(2)

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

(3)

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

(4)

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

 

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RECENT DEVELOPMENTS

The following tables set forth selected historical financial and other data of Magyar Bancorp for the periods and at the dates indicated. This information is only a summary and it should be read in conjunction with the business and financial information contained elsewhere in this proxy statement/prospectus, including the financial statements beginning on page F-1. The information at September 30, 2020 is derived in part from, and should be read together with, the audited consolidated financial statements and notes thereto of Magyar Bancorp at page F-1 of this proxy statement/prospectus. The information at March 31, 2021 and for the three months and six months ended March 31, 2021 and 2020 is unaudited, but reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results of operations for the three months and six months ended March 31, 2021 are not necessarily indicative of the results to be achieved for the remainder of the fiscal year ending September 30, 2021 or any other period.

 

     At March 31,
2021
     At September 30,
2020
 
     (In thousands)  

Selected Financial Condition Data:

     

Total assets

   $ 758,779      $ 753,997  

Cash and cash equivalents

     43,013        61,726  

Available-for-sale securities

     14,259        14,561  

Securities held to maturity

     40,797        30,443  

Loans receivable, net

     616,975        603,110  

Premises and equipment, net

     14,543        14,746  

Bank-owned life insurance

     14,129        13,971  

FHLB stock, at cost

     1,935        1,981  

Accrued interest receivable

     3,999        4,030  

Other assets

     7,849        6,835  

Other real estate owned

     1,280        2,594  

Total liabilities

     699,294        697,147  

Deposits

     640,773        618,330  

Borrowings

     45,881        67,410  

Accounts payable and other liabilities

     12,640        11,407  

Total equity

     59,485        56,850  

 

     For the Three Months Ended
March 31,
     For the Six Months
Ended March 31,
 
         2021              2020          2021      2020  
     (In thousands)  

Selected Operating Data:

           

Interest and dividend income

   $ 7,122      $ 6,599      $ 14,124      $ 13,370  

Interest expense

     744        1,567        1,700        3,210  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     6,378        5,032        12,424        10,160  

Provision for loan losses

     467        420        1,107        631  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     5,911        4,612        11,317        9,529  

Other income

     937        374        2,162        778  

Other expenses

     4,690        4,560        9,416        9,090  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income tax expense

     2,158        426        4,063        1,217  

Income tax expense

     652        121        1,220        359  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 1,506      $ 305      $ 2,843      $ 858  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

60


     At or For the Three Months
Ended March 31, (1)
    At or For the Six Months
Ended March 31, (1)
 
         2021             2020             2021             2020      

Performance Ratios:

        

Return on average assets

     0.80     0.19     0.75     0.27

Return on average equity

     10.33     2.22     9.53     3.09

Interest rate spread (2)

     3.47     3.03     3.33     3.08

Net interest margin (3)

     3.64     3.33     3.51     3.39

Efficiency ratio (4)

     68.49     91.46     69.86     88.19

Noninterest expense to average total assets

     2.49     2.80     2.50     2.82

Average interest-earning assets to average interest-bearing liabilities

     139.59     129.62     138.21     128.77

Average equity to average total assets

     7.73     8.43     7.91     8.61

Asset Quality Ratios:

        

Non-performing assets to total assets

     1.43     2.41     1.43     2.41

Non-performing loans to total loans

     1.52     1.67     1.52     1.67

Allowance for loan losses to non-performing loans

     79.09     60.59     79.09     60.59

Allowance for loan losses to total loans

     1.21     1.01     1.21     1.01

Capital Ratios:

        

Common equity Tier 1 capital to risk-weighted assets

     11.85     11.57     11.85     11.57

Total capital (to risk-weighted assets)

     13.10     12.69     13.10     12.69

Tier 1 capital (to risk-weighted assets)

     11.85     11.57     11.85     11.57

Tier 1 capital (to total assets)

     8.10     8.71     8.10     8.71

Other:

        

Number of full-service offices

     7       7       7       7  

Number of full-time equivalent employees

     94       105.5       94       105.5  

 

(1)

Annualized where appropriate.

(2)

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

(3)

Represents net interest income as a percent of average interest-earning assets.

(4)

Represents non-interest expense divided by the sum of net interest income and non-interest income.

 

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Impact of COVID-19 Outbreak

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

To assist our loan customers, Magyar Bank has offered loan payment deferrals to borrowers unable to make their contractual payments due to COVID-19. Deferral requests are considered on a case-by-case basis and are initially approved for a three-month period for principal and interest payments or for interest-only payments depending on the borrower’s circumstances. An additional three-month period is available for businesses that remain unable to operate and for consumers unable to make their mortgage or home equity payments due to COVID-19. Additional deferrals will be considered for businesses experiencing a prolonged impact from the COVID-19 pandemic, such as the accommodation and food service industries. At March 31, 2021, Magyar Bank had 31 loans totaling $24.0 million to businesses in the accommodations and food services industries. Magyar Bank’s loan portfolio does not have a significant exposure to the travel or entertainment industry.

Through March 31, 2021, we had modified 284 loans aggregating $150.9 million for the deferral of principal and/or interest payments. Of these loans, at March 31, 2021, 247 loans aggregating $127.6 million had resumed making their contractual loan payments, 31 loans totaling $13.5 million had paid off (including their deferred payments), three loans totaling $7.8 million were currently deferred, and three loans totaling $2.0 million were past their deferral period and delinquent. Of the three delinquent deferred loans, one commercial business loan totaling $1.4 million was delinquent more than 90 days, one commercial real estate loan totaling $539,000 was delinquent 89 days and one residential loan totaling $113,000 was delinquent 58 days at March 31, 2021. Details with respect to loans modifications as of March 31, 2021 are as follows:

 

Loan Type

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

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

     83      $ 21,725        4.07

Commercial real estate

     136        105,926        4.68

Construction

     4        2,630        3.77

Home equity lines of credit

     6        896        4.33

Commercial business

     24        6,245        6.06
  

 

 

    

 

 

    

 

 

 

Total

     253      $ 137,422        4.63
  

 

 

    

 

 

    

 

 

 

 

(1)

Includes home equity loans.

Magyar Bank participated in the PPP to provide liquidity using the SBA platform to small businesses and self-employed individuals to maintain their staff and operations through the COVID-19 pandemic. This liquidity is in the form of a loan, 100% guaranteed by the SBA, that is forgivable provided the funds are used on qualifying payroll costs, and to a lesser extent, rent, utilities and interest on qualifying mortgage payments. The loans bear a fixed rate of 1.0% and loan payments are deferred for the first 10 months following the covered period, which is eight to twenty-four weeks following the date the loan is made. We originated 350 “First Draw” loans totaling $56.0 million through March 31, 2021 for which we received $2.0 million in origination fees from the SBA. These fees are being amortized over the expected life of the loans, which is two years for loans originated prior to June 4, 2020 and five years for loans originated June 5, 2020 or later. Through March 31, 2021, 214 loans totaling $30.3 million had been forgiven by the SBA.

On December 27, 2020 the Economic Aid Act was signed into law, extending the SBA’s authority to guarantee “Second Draw” PPP loans, under generally the same terms and conditions available under the First Draw program, through March 31, 2021, subsequently extended by the Paycheck Protection Program Extension Act of 2021 to May 31, 2021. In order to qualify for a Second Draw PPP loan, an applicant must have experienced a revenue reduction of at least 25% in 2020 relative to 2019. As of March 31, 2021, we had originated 185 PPP loans totaling $26.8 million under the Economic Aid Act to its eligible customers. The Economic Aid Act also expanded the eligible expenditures for which a business could use PPP proceeds and provided for a simplified forgiveness application for PPP loans of $150,000 or less. At March 31, 2021, our PPP loans totaled $52.5 million.

 

62


The Federal Reserve Board created the PPPLF to facilitate lending by eligible financial institutions to small businesses under the PPP. Under the PPPLF, the Federal Reserve Bank of New York provided advances with a fixed interest rate of 0.35% to Magyar Bank on a non-recourse basis, taking PPP loans as collateral. In addition, the Federal Deposit Insurance Corporation allows Magyar Bank to neutralize the effect of PPP loans financed under the PPPLF on Tier 1 leverage capital ratios. Magyar Bank funded its PPP loans with $36.9 million in advances from the PPPLF, $17.4 million of which was outstanding at March 31, 2021.

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

Comparison of Financial Condition at March 31, 2021 and September 30, 2020

Total Assets. Total assets increased $4.8 million, or 0.6%, to $758.8 million at March 31, 2021 compared to $754.0 million at September 30, 2020. The increase was attributable to higher balances of loans receivable and investment securities, partially offset by lower balances of cash and interest-earning deposits.

Cash and Cash Equivalents. Cash and interest-earning deposits with banks decreased $18.7 million, or 30.3% to $43.0 million at March 31, 2021 from $61.7 million at September 31, 2020. The decrease resulted primarily from loan originations and investment security purchases during the six months ended March 31, 2021.

Total Loans. Total loans receivable increased $15.1 million, or 2.5%, during the six months ended March 31, 2021 to $626.3 million at March 31, 2021 from $611.2 million at September 30, 2020. At March 31, 2021, our loans were comprised of the following: $275.7 million, or 44.0% of our loan portfolio, in commercial real estate loans, $208.7 million, or 33.3% of our total loan portfolio, in one- to four- family residential mortgage loans, $98.1 million, or 15.7% of our loan portfolio, in commercial business loans, $22.5 million, or 3.6% of our loan portfolio, in construction loans, $17.6 million, or 2.8% of our loan portfolio, in home equity lines of credit, and $3.7 million, or 0.6% of our loan portfolio, in other loans. Included with the commercial business loans were $52.5 million in PPP loans. The increase in total loans receivable at March 31, 2021 occurred in commercial real estate loans, which increased $27.5 million, or 11.1%. Partially offsetting this increase were decreases in construction loans, which decreased $5.7 million, commercial business loans, which decreased $2.9 million (PPP loans decreased $3.4 million), one- to four- family residential real estate loans (including home equity lines of credit), which decreased $3.4 million, and other loans, which decreased $411,000.

Total non-performing loans decreased $181,000, or 1.9%, to $9.5 million at March 31, 2021 from $9.7 million at September 30, 2020. The decrease was attributable to repayments of non-performing loans totaling $909,000, two foreclosed loans totaling $572,000 that were transferred to OREO, and the restructure of one loan totaling $218,000 during the six months ended March 31, 2021. Offsetting these decreases was the addition of four loans totaling $1.5 million. Due to the COVID-19 pandemic, foreclosures of collateral securing one- to four-family residential mortgage loans have been temporarily suspended while the foreclosure proceedings of commercial real estate are expected to slow significantly as court hearings have been postponed until further notice.

The ratio of non-performing loans to total loans decreased to 1.52% at March 31, 2021 from 1.59% at September 30, 2020. At March 31, 2021, included in the non-performing loan totals were seven commercial real estate loans totaling $2.5 million, two construction loans totaling $4.6 million, three commercial business loans totaling $1.5 million and two residential mortgage loans totaling $910,000. During the six months ended March 31, 2021, there was one charge-off totaling $50,000 and there were $97,000 in recoveries of previously charged-off non-performing loans.

The allowance for loan loss increased to $7.6 million at March 31, 2021 from $6.4 million at September 30, 2020, an increase of $1.2 million. The increase was attributable to $1.1 million in provisions for loan loss and $47,000 in net recoveries from loans previously charged off. The increased provision for loan losses, compared to a

 

63


provision of $631,000 for the six months ended March 31, 2020, resulted from higher adjustments to our historical loan losses due to the prolonged economic impact of the COVID-19 pandemic on our consumer and business loan portfolios. The allowance for loan losses as a percentage of non-performing loans increased to 79.1% at March 31, 2021 compared to 65.8% at September 30, 2020. At March 31, 2021, our allowance for loan losses as a percentage of total loans was 1.21% compared with 1.05% at September 30, 2020.

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

Investment Securities. Investment securities increased $10.1 million, or 22.3%, to $55.1 million at March 31, 2021 from $45.0 million at September 30, 2020. The increase resulted primarily from the purchase of nine mortgage-backed securities totaling $19.8 million and five callable U.S. government-sponsored enterprise bond totaling $10.0 million during the six months ended March 31, 2021, offset, in part, by payments from mortgage-backed securities and bond calls totaling $19.3 million during the six months ended March 31, 2021. There were no sales of investment securities during the six months ended March 31, 2021.

Investment securities at March 31, 2021 consisted of $39.3 million in mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises, $12.5 million in U.S. government-sponsored enterprise debt securities, $3.0 million in corporate notes, and $251,000 in “private-label” mortgage-backed securities. There were no other-than-temporary-impairment charges for investment securities for the six months ended March 31, 2021.

Bank-Owned Life Insurance. The cash surrender value of life insurance held for directors and officers of Magyar Bank was $14.1 million at March 31, 2021 compared with $14.0 million at September 30, 2020. During the six months ended March 31, 2021, we did not purchase any new bank-owned life insurance policies.

Other Real Estate Owned. Other real estate owned decreased $1.3 million, or 50.7%, to $1.3 million at March 31, 2021 from $2.6 million at September 30, 2020. During the six months ended March 31, 2021, the Company sold two properties totaling $1.7 million for a $79,000 gain, established valuation allowances totaling $215,000, and added two properties totaling $522,000 from the foreclosure of collateral securing non-performing loans. We are determining the proper course of action for its remaining other real estate owned, which may include holding the properties until the real estate market further improves, leasing properties to offset carrying costs and selling the properties.

Deposits. Total deposits increased $22.4 million, or 3.6%, to $640.8 million at March 31, 2021 from $618.3 million at September 30, 2020. The inflow in deposits occurred in non-interest bearing checking accounts, which increased $17.1 million, or 10.4%, to $180.6 million, in interest-bearing checking accounts (NOW), which increased $5.9 million, or 9.0%, to $71.4 million, in savings accounts, which increased $5.3 million, or 7.0%, to $80.2 million, and in money market accounts, which increased $4.5 million, or 2.4%, to $192.5 million. These increases were partially offset by a decrease in certificates of deposit (including individual retirement accounts), of $10.3 million, or 8.2%, to $116.1 million.

Brokered certificates of deposit decreased $5.0 million to $4.4 million at March 31, 2021 from $9.4 million at September 30, 2020. The decrease resulted from a $5.0 million brokered certificate of deposit which matured and was repaid from interest-earning deposits with banks during the six months ended March 31, 2021.

Borrowings. Borrowings decreased $21.5 million, or 31.9%, to $45.9 million at March 31, 2021 from $67.4 million at September 30, 2020. The decrease resulted from the repayment of $19.5 million in PPPLF advances from the Federal Reserve Bank during the six month period as the PPP loans securing the advances were forgiven by the SBA. Borrowings from the Federal Home Loan Bank of New York (the “FHLBNY”) decreased $2.0 million to $28.5 million from a matured term advance that was repaid from interest- earning deposits with banks during the six months ended March 31, 2021.

Stockholders’ Equity. Stockholders’ equity increased $2.6 million, or 4.6%, to $59.5 million at March 31, 2021 from $56.9 million at September 30, 2020. The increase in stockholders’ equity resulted primarily from net

 

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income of $2.8 million during the six months ended March 31, 2021. Book value per share of our common stock increased to $10.24 at March 31, 2021 from $9.78 at September 30, 2020.

We did not repurchase shares of our common stock during the six months ended March 31, 2021. Through March 31, 2021, we have repurchased 91,000 shares of our common stock at an average price of $8.41 pursuant to the second stock repurchase plan, which has reduced outstanding shares to 5,810,746.

Comparison of Operating Results for the Three Months Ended March 31, 2021 and 2020

Net Income. Net income increased $1.2 million, or 393.8%, to $1.5 million for the three months ended March 31, 2021 compared to net income of $305,000 for the three months ended March 31, 2020. The increase resulted from higher net interest and dividend income and non-interest income, partially offset by higher provisions for loan loss and other expenses.

Net Interest and Dividend Income. Net interest and dividend income increased $1.4 million, or 26.7%, to $6.4 million for the three months ended March 31, 2021 from $5.0 million for the three months ended March 31, 2020.

An increase of $105.3 million in average total interest-earning assets as well as a 31 basis point increase in the Company’s net interest margin to 3.64% for the three months ended March 31, 2021 compared to 3.33% for the three months ended March 31, 2020 accounted for the higher net interest and dividend income between periods.

The yield on interest-earning assets decreased 31 basis points to 4.06% for the three months ended March 31, 2021 from 4.37% for the three months ended March 31, 2020 due to lower market interest rates. The yield on investment securities decreased 80 basis points to 1.49% for the three months ended March 31, 2021 from 2.29% for the three months ended March 31, 2020 while the yield on loans receivable decreased nine basis points to 4.60% for the three months ended March 31, 2021 from 4.69% for the three months ended March 31, 2020. In addition, the yield on interest-earning deposits decreased 114 basis points to 0.13% for the three months ended March 31, 2021 from 1.27% for the three months ended March 31, 2020.

The cost of the Company’s interest-bearing liabilities decreased 75 basis points to 0.59% for the three months ended March 31, 2021 from 1.34% for the three months ended March 31, 2020 due to lower market interest rates. The cost of interest-bearing deposits decreased 77 basis points to 0.51% for the three months ended March 31, 2021 from 1.28% for the three months ended March 31, 2020 while the cost of borrowings decreased 93 basis points to 1.28% for the three months ended March 31, 2021 from 2.21% for the three months ended March 31, 2020. In addition, the average balance of non-interest bearing liabilities increased $56.7 million to $186.8 million for the three months ended March 31, 2021 from $130.1 million for the three months ended March 31, 2020.

Interest and Dividend Income. Interest and dividend income increased $523,000, or 7.9%, to $7.1 million for the three months ended March 31, 2021 compared to $6.6 million for the three months ended March 31, 2020. The increase was attributable to higher average balances of interest-earning assets, which increased $105.3 million between periods. The increase in average balances of interest-earning assets occurred in loans receivable, which increased $75.7 million, or 14.2%, in investment securities, which increased $7.3 million, or 16.1%, and in interest-earning deposits, which increased $22.4 million, or 84.0%. Growth in loans receivable was partially attributable to the origination of $82.8 million in PPP loans, of which $52.5 million were outstanding at March 31, 2021.

Interest earned on investment securities, including interest-earning deposits, and excluding FHLBNY stock, decreased $134,000, or 39.3%, to $207,000 for the three months ended March 31, 2021 from $341,000 for the three months ended March 31, 2020. The decrease resulted primarily from a 108 basis points decrease in average yield on investment securities and interest-earning deposits, to 0.83% for the three months ended March 31, 2021 from 1.91% for the three months ended March 31, 2020. The decrease in yield on interest-earning deposits reflected the lower interest rates paid on reserves by the Federal Reserve Bank as well as lower market interest rates on investment securities between the comparable periods.

Interest Expense. Interest expense decreased $823,000, or 52.5%, to $744,000 for the three months ended March 31, 2021 compared with $1.6 million for the three months ended March 31, 2020. Although the average balance of interest-bearing liabilities increased $42.0 million, or 9.0%, to $509.4 million from $467.4 million

 

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between the two periods, the cost of such liabilities decreased 75 basis points to 0.59% for the three months ended March 31, 2021 compared with 1.34% for the prior year period. Lower market interest rates accounted for the decrease in the cost of interest-bearing liabilities.

The average balance of interest-bearing deposits increased $17.5 million to $454.2 million for the quarter ended March 31, 2021 from $436.7 million for the quarter ended March 31, 2020, while the average cost of such deposits decreased 77 basis points to 0.51% from 1.28% between the two periods. As a result, interest paid on interest-bearing deposits decreased $829,000 to $569,000 for the three months ended March 31, 2021 compared with $1.4 million for the three months ended March 31, 2020.

Interest paid on borrowings increased $6,000, or 3.6%, to $175,000 for the three months ended March 31, 2021 from $169,000 for the prior year period. The increase resulted from a $24.5 million increase of in the average balance of such borrowings to $55.2 million for the three months ended March 31, 2021 from $30.7 million for the three months ended March 31, 2020, offset by a 93 basis point decrease in the average cost of borrowings to 1.28% for the three months ended March 31, 2021 from 2.21% for the three months ended March 31, 2020. Lower market interest rates contributed to the lower average cost of interest-bearing deposits while PPPLF advances contributed to the lower average cost of borrowings.

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

After an evaluation of these factors, management recorded a provision of $467,000 for the three months ended March 31, 2021 compared to $420,000 for the three months ended March 31, 2020. The increased provision for loan losses resulted from higher adjustments to our historical loan losses due to the prolonged economic impact of the COVID-19 pandemic on our consumer and business loan portfolios. In addition to the provisions, we recorded $43,000 in net charge-offs during the three months ended March 31, 2021 compared with $4,000 in net recoveries during the three months ended March 31, 2020.

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

Other Income. Other income increased $563,000, or 150.5%, to $937,000 during the three months ended March 31, 2021 compared to $374,000 for the three months ended March 31, 2020.

Other operating income increased $413,000 between periods due to $303,000 in fees earned from the Middlesex County Small Business Relief Grant program. The Company received a fee of three percent of the grants it assisted the County with processing. In addition, the Company received a $106,000 interest rate swap fee during the three months ended March 31, 2021. The Company also recorded higher gains from the sales of loans, which were $106,000 for the three months ended March 31, 2021 compared with no gains for the three months ended March 31, 2020.

Other Expenses. Other expenses increased $130,000, or 2.9%, to $4.7 million during the three months ended March 31, 2021 from $4.6 million during the three months ended March 31, 2020.

The increase in other expenses was primarily attributable to professional fees, which increased $45,000, or 10.5%, due to higher legal and consulting fees related to the collection and foreclosure of non-performing loans.

 

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Compensation and benefit expenses increased $39,000, or 1.5%, due to higher incentive plan accruals, partially offset by lower compensation from lower full-time equivalent employees between periods. In addition, loan servicing expenses increased $28,000, or 32.6%, from higher loan origination and repayment activity, and occupancy expense increased $15,000, or 2.0%, from higher snowplowing and salting costs between periods.

Income Tax Expense. We recorded tax expense of $652,000 on pre-tax income of $2.2 million for the three months ended March 31, 2021, compared to $121,000 on pre-tax income of $426,000 for the three months ended March 31, 2020. The Company’s effective tax rate for the three months ended March 31, 2021 was 30.2% compared with 28.4% for the three months ended March 31, 2020.

Comparison of Operating Results for the Six Months Ended March 31, 2021 and 2020

Net Income. Net income increased $2.0 million, or 231.4%, to $2.8 million during the six-month period ended March 31, 2021 compared with $858,000 for the six-month period ended March 31, 2020 due to higher net interest and dividend income and non-interest income, partially offset by higher provisions for loan loss and other expenses.

Net Interest and Dividend Income. Net interest and dividend income increased $2.2 million, or 22.3%, to $12.4 million for the six months ended March 31, 2021 from $10.2 million for the six months ended March 31, 2020.

An increase of $112.2 million in average total interest-earning assets as well as a 12 basis point increase in the Company’s net interest margin to 3.51% for the six months ended March 31, 2021 compared to 3.39% for the six months ended March 31, 2020 accounted for the higher net interest and dividend income between periods.

The yield on interest-earning assets decreased 47 basis points to 3.99% for the six months ended March 31, 2021 from 4.46% for the six months ended March 31, 2020 due to lower market interest rates. The yield on investment securities decreased 66 basis points to 1.60% for the six months ended March 31, 2021 from 2.26% for the six months ended March 31, 2020 while the yield on loans receivable decreased 26 basis points to 4.51% for the six months ended March 31, 2021 from 4.77% for the six months ended March 31, 2020. In addition, the yield on interest-earning deposits decreased 122 basis points to 0.14% for the six months ended March 31, 2021 from 1.36% for the six months ended March 31, 2020.

The cost of the Company’s interest-bearing liabilities decreased 72 basis points to 0.66% for the six months ended March 31, 2021 from 1.38% for the six months ended March 31, 2020 due to lower market interest rates. The cost of interest-bearing deposits decreased 72 basis points to 0.59% for the six months ended March 31, 2021 from 1.31% for the six months ended March 31, 2020 while the cost of borrowings decreased 103 basis points to 1.21% for the six months ended March 31, 2021 from 2.24% for the six months ended March 31, 2020. In addition, the average balance of non-interest bearing liabilities increased $55.2 million to $180.2 million for the six months ended March 31, 2021 from $125.0 million for the six months ended March 31, 2020.

Interest and Dividend Income. Interest and dividend income increased $754,000, or 5.6%, to $14.1 million for the six months ended March 31, 2021 from $13.4 million for the six months ended March 31, 2020. The increase was attributable to higher average balances of interest-earning assets, which increased $112.2 million between periods. The increase in average balances of interest-earning assets occurred in loans receivable, which increased $79.5 million, or 15.1%, in investment securities, which increased $3.7 million, or 8.1%, and in interest-earning deposits, which increased $29.0 million, or 127.7%. Growth in loans receivable was partially attributable to the origination of $82.8 million in PPP loans, of which $52.5 million were outstanding at March 31, 2021.

Interest earned on investment securities, including interest-earning deposits, and excluding FHLB stock, decreased $246,000, or 36.2%, to $433,000 for the six months ended March 31, 2021 from $679,000 the prior year period. The decrease resulted primarily from a 110 basis points decrease in average yield on investment securities and interest-earning deposits, to 0.86% for the six months ended March 31, 2021 from 1.96% for the six months ended March 31, 2020. The decrease in yield on interest-earning deposits reflected the lower interest rates paid on reserves by the Federal Reserve Bank as well as lower market interest rates on investment securities between the comparable periods.

 

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Interest Expense. Interest expense decreased $1.5 million, or 47.0%, to $1.7 million for the six months ended March 31, 2021 compared with the six months ended March 31, 2020. The average balance of interest-bearing liabilities increased $49.4 million, or 10.6%, between the two periods, while the cost of such liabilities decreased 72 basis points to 0.66% for the six months ended March 31, 2021 compared with the prior year period. Lower market interest rates accounted for the decrease in the cost of interest-bearing liabilities.

The average balance of interest-bearing deposits increased $21.6 million to $453.7 million for the six months ended March 31, 2021 from $432.1 million for the six months ended March 31, 2020, while the average cost of such deposits decreased 72 basis points to 0.59% from 1.31% between the two periods. As a result, interest paid on interest-bearing deposits decreased $1.5 million to $1.3 million for the six months ended March 31, 2021 compared with $2.8 million for the six months ended March 31, 2020.

Interest paid on borrowings increased $1,000, or 0.3%, to $366,000 for the six months ended March 31, 2021 from $365,000 for the prior year period. The increase resulted from an increase of $27.7 million in the average balance of such borrowings to $60.3 million for the six months ended March 31, 2021 from $32.6 million for the six months ended March 31, 2020, offset by a decrease of 103 basis points in the average cost of borrowings to 1.21% for the six months ended March 31, 2021 from 2.24% for the six months ended March 31, 2020. Lower market interest rates contributed to the lower average cost of interest-bearing deposits while PPPLF advances contributed to the lower average cost of borrowings.

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

After an evaluation of these factors, management recorded a provision of $1.1 million for the six months ended March 31, 2021 compared to $631,000 for the six months ended March 31, 2020. The increased provisions for loss resulted from higher adjustments to the Company’s historical loan losses due to the prolonged economic impact of the COVID-19 pandemic on the consumer and business loan portfolios. The Company recorded $47,000 in net recoveries during the six months ended March 31, 2021 compared with $6,000 in net recoveries during the six months ended March 31, 2020.

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

Other Income. Other income increased $1.4 million, or 177.9%, to $2.2 million during the six months ended March 31, 2021 compared to $778,000 for the six months ended March 31, 2020.

Other operating income increased $974,000 between periods due to $768,000 in fees earned from the Middlesex County Small Business Relief Grant program during the six months ended March 31, 2021. The Company received a fee of three percent of the grants it assisted the County with processing. In addition, the Company recorded $208,000 in interest rate swap fees during the six months ended March 31, 2021. The Company also recorded higher gains from the sales of loans, which were $369,000 for the six months ended March 31, 2021 compared with $26,000 for the six months ended March 31, 2020.

Other Expenses. Other expenses increased $326,000, or 3.6%, to $9.4 million during the six months ended March 31, 2021 from $9.1 million during the six months ended March 31, 2020.

 

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The increase in other expenses was primarily attributable to professional fees, which increased $225,000, or 28.9%, due to higher legal and consulting fees related to the collection and foreclosure of non-performing loans. OREO expenses increased $66,000, or 49.6%, due to higher valuation allowances recorded during the six months ended March 31, 2021 compared with the prior year period. In addition, loan servicing expenses increased $62,000, or 45.6%, from higher loan origination and repayment activity, and FDIC deposit insurance premium expense increased $40,000, or 18.5%, from our higher assessment base. Partially offsetting these increases were lower data processing, insurance and other expenses.

Income Tax Expense. We recorded tax expense of $1.2 million on pre-tax income of $4.1 million for the six months ended March 31, 2021, compared to $359,000 on pre-tax income of $1.2 million for the six months ended March 31, 2020. The Company’s effective tax rate for the six months ended March 31, 2021 was 30.0% compared with 29.5% for the six months ended March  31, 2020.

FORWARD-LOOKING STATEMENTS

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

 

   

statements of our goals, intentions and expectations;

 

   

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

 

   

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

 

   

estimates of our risks and future costs and benefits.

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

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

 

   

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

 

   

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

 

   

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

 

   

our ability to access cost-effective funding;

 

   

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

 

   

demand for loans and deposits in our market area;

 

   

our ability to implement and change our business strategies;

 

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competition among depository and other financial institutions;

 

   

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

 

   

adverse changes in the securities or secondary mortgage markets;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

changes in consumer spending, borrowing and savings habits;

 

   

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

 

   

our ability to retain key employees;

 

   

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

 

   

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

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. See “Risk Factors” beginning on page 17. Except as required by applicable law or regulation, we do not undertake, and we specifically disclaim any obligation, to release publicly the results of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

 

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HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING

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

We intend to use the net proceeds as follows:

 

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

Gross offering proceeds

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

Less: offering expenses

     1,500          1,500          1,535     
  

 

 

      

 

 

      

 

 

    

Net offering proceeds

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

 

 

      

 

 

      

 

 

    

Distribution of net proceeds:

               

To Magyar Bank

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

To fund loan to employee stock ownership plan

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

Retained by Magyar Bancorp

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

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

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

 

   

to invest in securities;

 

   

to repurchase shares of its common stock;

 

   

to pay cash dividends to stockholders;

 

   

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

 

   

for other general corporate purposes.

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

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

 

   

to fund new loans;

 

   

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

 

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to invest in securities;

 

   

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

 

   

for other general corporate purposes.

 

   

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

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

OUR DIVIDEND POLICY

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

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

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

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

 

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

MARKET FOR THE COMMON STOCK

Magyar Bancorp’s common stock is currently listed on the Nasdaq Global Market under the symbol “MGYR.” Upon completion of the conversion, we expect our common stock will continue to trade on the Nasdaq Global Market under the symbol “MGYR.” In order to list our stock on the Nasdaq Global Market, we are required to have at least three broker-dealers who will make a market in our common stock. As of May 3, 2021, Magyar Bancorp had 18 registered market makers in its common stock.

As of the close of business on May 3, 2021, there were 5,810,746 shares of common stock outstanding, including 2,610,296 publicly held shares (shares held by stockholders other than Magyar Bancorp, MHC), and approximately 371 stockholders of record.

On February 25, 2021, the business day immediately preceding the public announcement of the conversion, and on May 3, 2021, the closing prices of Magyar Bancorp common stock as reported on the Nasdaq Global Market were $11.00 per share and $13.35 per share, respectively. On the effective date of the conversion, all publicly held shares of Magyar Bancorp common stock, including shares of common stock held by our officers and directors, will be converted into new shares of Magyar Bancorp pursuant to the exchange ratio. See “Proposal 1 – Approval of the Plan of Conversion and Reorganization – Share Exchange Ratio for Current Stockholders.” See “Beneficial Ownership of Common Stock.”

 

73


HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE

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

 

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

Equity

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

 

 

      

 

 

     

 

 

     

 

 

   

Tier 1 leverage capital (1)(2)

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

Tier 1 leverage requirement

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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

Tier 1 risk-based requirement

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total risk-based capital (1)(2)

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

Total risk-based requirement

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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

Common equity tier 1 risk-based requirement

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reconciliation of capital infused into Magyar Bank:

                 

Net proceeds

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

Less: Common stock acquired by stock-based benefit plans

          (1,156       (1,360       (1,564  

Less: Common stock acquired by employee stock ownership plan

          (2,312       (2,720       (3,128  
       

 

 

     

 

 

     

 

 

   

Pro forma increase

        $ 10,232       $ 12,170       $ 14,091    
       

 

 

     

 

 

     

 

 

   

 

(1)

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

(2)

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

 

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CAPITALIZATION

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

 

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

Deposits (1)

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

Borrowed funds

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

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits and borrowed funds

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

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

        

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

     —         —         —         —    

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

     59       52       62       71  

Additional paid-in capital (2)

     26,279       53,686       58,776       63,832  

MHC capital contribution

     —         10       10       10  

Retained earnings (4)

     34,498       34,498       34,498       34,498  

Accumulated other comprehensive income

     (1,393     (1,393     (1,393     (1,393

Treasury stock, at cost

     (1,242     (1,242     (1,242     (1,242

Common stock held by employee stock ownership plan (5)

     —         (2,312     (2,720     (3,128

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

     —         (1,156     (1,360     (1,564
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

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

 

 

   

 

 

   

 

 

   

 

 

 

Pro Forma Shares Outstanding:

        

Shares offered for sale

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

Exchange shares issued

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

 

 

   

 

 

   

 

 

   

 

 

 

Total shares outstanding

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

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity as a percentage of total assets

     7.85     10.73     11.25     11.76

Tangible equity as a percentage of tangible assets

     7.85     10.73     11.25     11.76

 

(1)

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

(2)

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

(3)

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

(4)

The retained earnings of Magyar Bank will be substantially restricted after the conversion. See “Proposal 1 – Approval of the Plan of Conversion and Reorganization – Liquidation Rights” and “Supervision and Regulation – Federal Banking Regulation – Capital Distributions.”

(5)

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

(6)

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

 

75


PRO FORMA DATA

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

The net proceeds are based upon the following assumptions:

 

  (i)

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

 

  (ii)

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

 

  (iii)

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

 

  (iv)

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

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

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

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

 

   

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

 

   

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

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

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

We also have assumed that options will be granted under stock-based benefit plans to acquire shares of common stock equal to 10% of the shares of common stock sold in the offering. In preparing the tables below, we

 

76


assumed that stockholder approval was obtained, that the exercise price of the stock options and the market price of the stock at the date of grant were $10.00 per share and that the stock options had a term of ten years and vested over five years. We applied the Black-Scholes option pricing model to estimate a grant-date fair value of $3.17 for each option.

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

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

The pro forma data does not give effect to:

 

   

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

 

   

our results of operations after the offering; or

 

   

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

The following pro forma data may not be representative of the financial effects of the offering at the date on which the offering actually occurs, and should not be taken as indicative of future results of operations. Pro forma consolidated stockholders’ equity represents the difference between the stated amounts of our assets and liabilities. The pro forma stockholders’ equity is not intended to represent the fair market value of the shares of common stock and may be different than the amounts that would be available for distribution to stockholders if we liquidated. Moreover, pro forma stockholders’ equity per share does not give effect to the liquidation accounts to be established in the conversion or, in the unlikely event of a liquidation of Magyar Bank, to the tax effect of the recapture of the bad debt reserve. See “Proposal 1 – Approval of the Plan of Conversion and Reorganization – Liquidation Rights.”

 

77


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

Gross proceeds of offering

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

Market value of shares issued in the exchange

     23,564       27,722       31,881  
  

 

 

   

 

 

   

 

 

 

Pro forma market capitalization

   $ 52,464     $ 61,722     $ 70,981  
  

 

 

   

 

 

   

 

 

 

Gross proceeds of offering

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

Expenses

     (1,500     (1,500     (1,535
  

 

 

   

 

 

   

 

 

 

Estimated net proceeds

     27,400       32,500       37,565  

Common stock purchased by employee stock ownership plan

     (2,312     (2,720     (3,128

Common stock purchased by stock-based benefit plans

     (1,156     (1,360     (1,564
  

 

 

   

 

 

   

 

 

 

Estimated net proceeds, as adjusted

   $ 23,932     $ 28,420     $ 32,873  
  

 

 

   

 

 

   

 

 

 

For the Quarter Ended December 31, 2020

      

Consolidated net earnings:

      

Historical

   $ 1,337     $ 1,337     $ 1,337  

Income on adjusted net proceeds

     15       18       21  

Income on mutual holding company asset contribution

     —         —         —    

Employee stock ownership plan (1)

     (14     (16     (18

Stock awards (2)

     (41     (48     (55

Stock options (3)

     (42     (50     (57
  

 

 

   

 

 

   

 

 

 

Pro forma net income

   $ 1,256     $ 1,241     $ 1,227  
  

 

 

   

 

 

   

 

 

 

Earnings per share (4):

      

Historical

   $ 0.27     $ 0.23     $ 0.20  

Income on adjusted net proceeds

     —         —         —    

Income on mutual holding company asset contribution

     —         —         —    

Employee stock ownership plan (1)

     —         —         —    

Stock awards (2)

     (0.01     (0.01     (0.01

Stock options (3)

     (0.01     (0.01     (0.01
  

 

 

   

 

 

   

 

 

 

Pro forma earnings per share (4)

   $ 0.25     $ 0.21     $ 0.18  
  

 

 

   

 

 

   

 

 

 

Offering price to pro forma net earnings per share

     10.00     11.90     13.89

Number of shares used in earnings per share calculations

     5,017,126       5,902,501       6,787,877  

At December 31, 2020

      

Stockholders’ equity:

      

Historical

   $ 58,201     $ 58,201     $ 58,201  

Estimated net proceeds

     27,400       32,500       37,565  

Equity increase from mutual holding company

     10       10       10  

Common stock acquired by employee stock ownership plan (1)

     (2,312     (2,720     (3,128

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

     (1,156     (1,360     (1,564
  

 

 

   

 

 

   

 

 

 

Pro forma stockholders’ equity (5)

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

 

 

   

 

 

   

 

 

 

Pro forma tangible stockholders’ equity (5)

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

 

 

   

 

 

   

 

 

 

Stockholders’ equity per share (6):

      

Historical combined

   $ 11.10     $ 9.43     $ 8.19  

Estimated net proceeds

     5.22       5.27       5.29  

Equity increase from mutual holding company

     —         —         0.01  

Common stock acquired by employee stock ownership plan (1)

     (0.44     (0.44     (0.44

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

     (0.22     (0.22     (0.22
  

 

 

   

 

 

   

 

 

 

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

   $ 15.66     $ 14.04     $ 12.83  
  

 

 

   

 

 

   

 

 

 

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

   $ 15.66     $ 14.04     $ 12.83  
  

 

 

   

 

 

   

 

 

 

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

     63.86     71.23     77.94

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

     63.86     71.23     77.94

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

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

 

78


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

Gross proceeds of offering

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

Market value of shares issued in the exchange

     23,564       27,722       31,881  
  

 

 

   

 

 

   

 

 

 

Pro forma market capitalization

   $ 52,464     $ 61,722     $ 70,981  
  

 

 

   

 

 

   

 

 

 

Gross proceeds of offering

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

Expenses

     (1,500     (1,500     (1,535
  

 

 

   

 

 

   

 

 

 

Estimated net proceeds

     27,400       32,500       37,565  

Common stock purchased by employee stock ownership plan

     (2,312     (2,720     (3,128

Common stock purchased by stock-based benefit plans

     (1,156     (1,360     (1,564
  

 

 

   

 

 

   

 

 

 

Estimated net proceeds, as adjusted

   $ 23,932     $ 28,420     $ 32,873  
  

 

 

   

 

 

   

 

 

 

For the Year Ended September 30, 2020

      

Consolidated net earnings:

      

Historical

   $ 2,190     $ 2,190     $ 2,190  

Income on adjusted net proceeds

     61       72       83  

Income on mutual holding company asset contribution

     —         —         —    

Employee stock ownership plan (1)

     (54     (64     (74

Stock awards (2)

     (163     (192     (221

Stock options (3)

     (170     (200     (230
  

 

 

   

 

 

   

 

 

 

Pro forma net income

   $ 1,864     $ 1,807     $ 1,750  
  

 

 

   

 

 

   

 

 

 

Earnings per share (4):

      

Historical

   $ 0.43     $ 0.37     $ 0.32  

Income on adjusted net proceeds

     0.01       0.01       0.01  

Income on mutual holding company asset contribution

     —         —         —    

Employee stock ownership plan (1)

     (0.01     (0.01     (0.01

Stock awards (2)

     (0.03     (0.03     (0.03

Stock options (3)

     (0.03     (0.03     (0.03
  

 

 

   

 

 

   

 

 

 

Pro forma earnings per share (4)

   $ 0.37     $ 0.31     $ 0.26  
  

 

 

   

 

 

   

 

 

 

Offering price to pro forma net earnings per share

     27.03     32.26     38.46

Number of shares used in earnings per share calculations

     5,022,906       5,909,301       6,795,697  

At September 30, 2020

      

Stockholders’ equity:

      

Historical

   $ 56,850     $ 56,850     $ 56,850  

Estimated net proceeds

     27,400       32,500       37,565  

Equity increase from mutual holding company

     10       10       10  

Common stock acquired by employee stock ownership plan (1)

     (2,312     (2,720     (3,128

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

     (1,156     (1,360     (1,564
  

 

 

   

 

 

   

 

 

 

Pro forma stockholders’ equity (5)

   $ 80,792     $ 85,280     $ 89,733  
  

 

 

   

 

 

   

 

 

 

Pro forma tangible stockholders’ equity (5)

   $ 80,792     $ 85,280     $ 89,733  
  

 

 

   

 

 

   

 

 

 

Stockholders’ equity per share (6):

      

Historical combined

   $ (19.96   $ (18.43   $ (17.27

Estimated net proceeds

     5.22       5.27       5.29  

Equity increase from mutual holding company

     —         —         —    

Common stock acquired by employee stock ownership plan (1)

     (0.44     (0.44     (0.44

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

     (0.22     (0.22     (0.22
  

 

 

   

 

 

   

 

 

 

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

   $ 15.40     $ 13.82     $ 12.64  
  

 

 

   

 

 

   

 

 

 

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

   $ 15.40     $ 13.82     $ 12.64  
  

 

 

   

 

 

   

 

 

 

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

     64.94     72.36     79.11

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

     64.94     72.36     79.11

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

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

 

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(1)

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

(2)

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

(3)

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

(4)

Per share figures include publicly held shares of Magyar Bancorp common stock that will be issued in exchange for shares of Magyar Bancorp common stock in the conversion. See “Proposal 1 – Approval of the Plan of Conversion and Reorganization – Share Exchange Ratio for Current Stockholders.” Net income per share computations are determined by taking the number of shares assumed to be sold in the offering and the number of new shares assumed to be issued in exchange for publicly held shares and, in accordance with ASC 718-40, subtracting the employee stock ownership plan shares that have not been committed for release during the period. See footnote 2, above. The number of shares of common stock actually sold and the corresponding number of exchange shares may be more or less than the assumed amounts.

(5)

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

(6)

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

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

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

Overview

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

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

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

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

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

Impact of COVID-19 Outbreak

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

To assist our loan customers, Magyar Bank has offered loan payment deferrals to borrowers unable to make their contractual payments due to COVID-19. Deferral requests are considered on a case-by-case basis and are initially approved for a three-month period for principal and interest payments or for interest-only payments depending on the borrower’s circumstances. An additional three-month period is available for businesses that remain unable to operate and for consumers unable to make their mortgage or home equity payments due to COVID-19. Additional deferrals will be considered for businesses experiencing a prolonged impact from the COVID-19 pandemic, such as the accommodation and food service industries. At December 31, 2020, Magyar Bank had 33

 

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loans totaling $23.2 million to businesses in the accommodations and food services industries. Magyar Bank’s loan portfolio does not have a significant exposure to the travel or entertainment industry.

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

 

Loan Type

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

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

     89      $ 23,184        4.06

Commercial real estate

     139        109,953        4.72

Construction

     4        2,630        3.77

Home equity lines of credit

     8        1,238        4.24

Commercial business

     29        6,738        4.06
  

 

 

    

 

 

    

 

 

 

Total

     269      $ 143,743        4.56
  

 

 

    

 

 

    

 

 

 

 

(1)

Includes home equity loans.

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

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

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

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

 

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COVID-19 pandemic on the performance of our loan portfolio in future quarters is unknown, however all of these factors are likely to be affected by the COVID-19 pandemic.

Business Strategy

Our current business strategy consists of the following:

 

   

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

 

   

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

 

   

Focus on Technological Innovation. In recent years, we have increased our focus on utilizing technology to provide our customers with the most convenient and secure delivery platforms as well as improving our efficiency. We believe that recent technological improvements to our online banking and mobile application services were a critical element in allowing our customers to migrate to these delivery channels during the COVID-19 pandemic, and enabling them to safely conduct most of their banking transactions remotely. Our mobile applications allow customers to make deposits with their phones, as well as providing remote capture deposit functions for our business customers. Additionally, the addition of the Zelle online person-to-person payment feature has facilitated our customers’ ability to pay their friends and family members through a secure virtual platform. We intend to continue to utilize technology to improve our customers’

 

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banking experience and improve our efficiency. Looking ahead, technological improvements we are researching include cash recyclers for branches to reduce the time it takes to complete transactions in the branch, an online deposit application that would allow customers to open accounts remotely, and a mobile application for business accounts. We believe that our current and prospective technological enhancements will not only improve our customers’ banking experience but also will improve our efficiency and thereby ultimately reduce operating expenses.

 

   

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

 

   

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

Summary of Significant Accounting Policies

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

 

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The following represent our significant accounting policies:

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

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

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

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

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

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

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

Investment Securities. If the fair value of a security is less than its amortized cost, the security is deemed to be impaired. Management evaluates all securities with unrealized losses quarterly to determine if such impairments are “temporary” or “other-than-temporary” in accordance with applicable accounting guidance. We account for temporary impairments based upon security classification as either available-for-sale, held-to-maturity, or trading. Temporary impairments on “available-for-sale” securities are recognized, on a tax-effected basis, through accumulated other comprehensive income (“AOCI”) with offsetting entries adjusting the carrying value of the

 

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security and the balance of deferred taxes. Conversely, we do not adjust the carrying value of “held-to-maturity” securities for temporary impairments, although information concerning the amount and duration of impairments on held to maturity securities is generally disclosed in periodic financial statements. The carrying value of securities held in a trading portfolio is adjusted to their fair value through earnings on a daily basis. However, we maintained no securities in trading portfolios at or during the quarter ended December 31, 2020 or the fiscal year ended September 30, 2020.

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

 

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Average Balance Sheets

The following tables set forth certain information regarding our financial condition and net interest income for the periods indicated. For the quarters ended December 31, 2020, the table presents the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown. We derived average balances from daily balances over the periods presented. Interest income includes fees that we consider adjustments to yields.

 

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

Interest-earning assets:

              

Interest-earning deposits

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

Loans receivable, net

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

Securities

              

Taxable

     47,624       205        1.71       47,361       266        2.23  

FHLB of NY stock

     1,981       25        5.05       2,143       37        6.86  
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

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

Noninterest-earning assets

     43,502            47,096       
  

 

 

        

 

 

      

Total assets

   $ 753,679          $ 638,027       
  

 

 

        

 

 

      

Interest-bearing liabilities: