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

PROSPECTUS

 

(Holding Company for Magyar Bank)

Up to 3,910,000 Shares of Common Stock

 

 

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

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

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

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

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

The subscription offering expires at 2:00 p.m., Eastern Time, on June 18, 2021. We expect that the community offering, if held, will expire at the same time. We may extend this expiration date without notice to you until August 2, 2021. Once submitted, orders are irrevocable unless the offering is terminated or extended beyond August 2, 2021, or the number of shares of common stock to be sold is increased to more than 3,910,000 shares or decreased to less than 2,890,000 shares. If the offering is extended past 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 this notice, we will promptly return your funds with interest or cancel your deposit account withdrawal authorization. If the number of shares to be sold is increased to more than 3,910,000 shares or decreased to less than 2,890,000 shares, all funds received for the purchase of shares of common stock will be returned promptly with interest. All subscribers will be resolicited and given an opportunity to place a new stock order within a specified period of time.

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

OFFERING SUMMARY

Price: $10.00 per Share

 

		Minimum				Midpoint				Maximum
Number of shares			2,890,000				3,400,000				3,910,000
Gross offering proceeds		$	28,900,000			$	34,000,000			$	39,100,000
Estimated offering expenses, excluding selling agent fees and expenses (1)(2)		$	1,055,000			$	1,055,000			$	1,055,000
Selling agent fees and expenses (1)		$	445,000			$	445,000			$	479,720
Estimated net proceeds		$	27,400,000			$	32,500,000			$	37,565,280
Estimated net proceeds per share		$	9.48			$	9.56			$	9.61

 

(1)

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

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

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

See “Risk Factors” beginning on page 17.

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

 

 

 

 

For assistance, contact the Stock Information Center at (877) 643-8198.

The date of this prospectus is May 14, 2021.

TABLE OF CONTENTS

 

		Page
SUMMARY			1
RISK FACTORS			17
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA			32
RECENT DEVELOPMENTS			34
FORWARD-LOOKING STATEMENTS			43
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING			46
OUR DIVIDEND POLICY			47
MARKET FOR THE COMMON STOCK			48
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE			49
CAPITALIZATION			50
PRO FORMA DATA			51
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			56
BUSINESS OF MAGYAR BANCORP			74
BUSINESS OF MAGYAR BANK			75
SUPERVISION AND REGULATION			96
TAXATION			105
MANAGEMENT			107
BENEFICIAL OWNERSHIP OF COMMON STOCK			116
SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS			117
THE CONVERSION AND OFFERING			117
COMPARISON OF STOCKHOLDERS’ RIGHTS FOR STOCKHOLDERS OF MAGYAR BANCORP BEFORE AND AFTER THE CONVERSION			138
RESTRICTIONS ON ACQUISITION OF MAGYAR BANCORP			139
DESCRIPTION OF CAPITAL STOCK OF MAGYAR BANCORP UPON COMPLETION OF THE CONVERSION			142
TRANSFER AGENT			144
EXPERTS			144
LEGAL MATTERS			144
WHERE YOU CAN FIND ADDITIONAL INFORMATION			144
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF MAGYAR BANCORP, INC. AND SUBSIDIARY			145

 

 

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RISK FACTORS

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

Risks Related to the COVID-19 Pandemic

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

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

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

 

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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;

 

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

 

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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;

 

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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;

 

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

 

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

 

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

 

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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;

 

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

 

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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

 

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

Risks Related to Our Market Area and Competitive Factors

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

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

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

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

 

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demand for our products and services may decline;

 

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loan delinquencies, problem assets and foreclosures may increase;

 

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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;

 

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the value of our securities portfolio may decline; and

 

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

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

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

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

 

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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

 

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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.

 

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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

 

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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:

 

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

 

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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 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

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

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

 

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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 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.

 

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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 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

 

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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 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.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

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

 

		At December 31, 2020				At September 30,
						2020				2019				2018				2017				2016
		(In thousands)
Selected Financial Condition Data:
Total assets		$	741,784			$	753,997			$	630,328			$	623,968			$	603,044			$	584,377
Cash and cash equivalents			52,070				61,726				21,469				15,368				22,334				21,806
Available-for-sale securities			14,798				14,561				16,703				22,469				11,815				5,234
Securities held to maturity			32,493				30,443				29,481				33,645				51,368				52,934
Loans receivable, net			598,530				603,110				518,217				508,430				470,693				455,031
Premises and equipment, net			14,607				14,746				16,172				16,990				17,567				18,084
Bank-owned life insurance			14,049				13,971				13,647				11,843				11,550				11,257
FHLB stock, at cost			1,981				1,981				2,222				2,164				2,002				2,239
Accrued interest receivable			4,096				4,030				2,133				2,181				1,929				1,710
Other assets			7,088				6,835				2,756				2,292				2,730				4,000
Other real estate owned			2,072				2,594				7,528				8,586				11,056				12,082
Total liabilities			683,583				697,147				575,677				572,606				553,587				536,652
Deposits			612,064				618,330				530,075				530,137				515,201				492,650
Borrowings			60,260				67,410				36,189				35,524				31,905				36,040
Accounts payable and other liabilities			11,259				11,407				9,413				6,945				6,481				7,962
Total equity			58,201				56,850				54,651				51,362				49,457				47,725

 

		For the Three Months Ended December 31,								For the Years Ended September 30,
		2020				2019				2020				2019				2018				2017				2016
		(In thousands)
Selected Data:
Interest and dividend income		$	7,001			$	6,772			$	26,927			$	27,103			$	24,350			$	21,978			$	20,451
Interest expense			956				1,642				5,513				6,710				4,649				3,773				3,532
Net interest income			6,045				5,130				21,414				20,393				19,701				18,205				16,919
Provision for loan losses			640				210				1,666				668				997				1,343				1,366
Net interest income after provision for loan losses			5,405				4,920				19,748				19,725				18,704				16,862				15,553
Other income			1,225				404				1,716				2,136				2,121				1,999				2,145
Other expenses			4,724				4,533				18,353				17,600				17,324				16,444				15,943
Income before income tax expense			1,906				791				3,111				4,261				3,501				2,417				1,755
Income tax expense			569				238				921				1,265				1,471				994				664
Net income		$	1,337			$	553			$	2,190			$	2,996			$	2,030			$	1,423			$	1,091

 

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		At or For the Three Months Ended December 31,								At or For the Years Ended September 30,
		2020				2019				2020				2019				2018				2017				2016
Selected Financial Ratios and Other Data:
Performance Ratios: (1)
Return on average assets			0.71	%			0.35	%			0.32	%			0.47	%			0.33	%			0.24	%			0.19	%
Return on average equity			9.19	%			4.01	%			3.85	%			5.47	%			3.95	%			2.90	%			2.28	%
Interest rate spread (2)			3.18	%			3.14	%			3.03	%			3.09	%			3.27	%			3.20	%			3.11	%
Net interest margin (3)			3.38	%			3.44	%			3.31	%			3.41	%			3.49	%			3.36	%			3.27	%
Efficiency ratio (4)			71.25	%			85.14	%			85.51	%			80.51	%			83.19	%			87.19	%			90.08	%
Non-interest expense to average total assets			2.51	%			2.84	%			2.65	%			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 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 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

 

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		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.

 

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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

 

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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.

Fees for other customer services increased $303,000 for the three months ended March 31, 2021. The Company received a fee of 3.0% of the Small Business Relief Grant program it assisted Middlesex County with processing. There were no such fees recorded during the three months ended March 31, 2020.

Interest rate swap fees increased $106,000 for the three months ended March 31, 2021. The interest rate swap fees reflect the present value of mark-up fees received on back-to-back loan swap transactions. There were no such fees recorded during the three months ended March 31, 2020.

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.

 

40

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. 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

 

41

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.

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.

Fees for other customer services increased $768,000 for the six months ended March 31, 2021. The Company received a fee of 3.0% of the Small Business Relief Grant program it assisted Middlesex County with processing. There were no such fees recorded during the six months ended March 31, 2020.

 

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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. Sales of guaranteed portions of SBA 7(a) loans were $3.3 million during the six months ended March 31, 2021 compared with $262,000 for the six months ended March 31, 2020.

Interest rate swap fees increased $208,000 for the six months ended March 31, 2021. The interest rate swap fees reflect the present value of mark-up fees received on back-to-back loan swap transactions. There were no such fees recorded during the six months ended March 31, 2020.

Finally, service charges increased $139,000 to $601,000 for the six months ended March 31, 2021 from $462,000 for the six months ended March 31, 2020 due to higher loan prepayment penalties received between periods.

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.

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 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;

 

43

•

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

 

•

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

 

•

our ability to access cost-effective funding;

 

•

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

 

•

demand for loans and deposits in our market area;

 

•

our ability to implement and change our business strategies;

 

•

competition among depository and other financial institutions;

 

•

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

 

•

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

 

44

•

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;

 

•

to invest in securities;

 

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•

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.

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-

 

47

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 “The Conversion and Offering – Share Exchange Ratio for Current Stockholders.” See “Beneficial Ownership of Common Stock.”

 

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HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE

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

 

		Magyar Bank Historical at December 31, 2020								Magyar Bank Pro Forma at December 31, 2020 Based Upon the Sale in the Offering of:
										2,890,000 Shares								3,400,000 Shares								3,910,000 Shares
		Amount				Percent of Assets				Amount				Percent of Assets				Amount				Percent of Assets				Amount				Percent of Assets
		(Dollars in thousands)
Equity		$	58,763				7.92	%		$	68,995				9.13	%		$	70,933				9.36	%		$	72,854				9.58	%
Tier 1 leverage capital (1)(2)		$	60,155				8.37	%		$	70,387				9.61	%		$	72,325				9.84	%		$	74,246				10.06	%
Tier 1 leverage requirement			35,948				5.00				36,633				5.00				36,760				5.00				36,887				5.00
Excess		$	24,207				3.37	%		$	33,754				4.61	%		$	35,565				4.84	%		$	37,359				5.06	%
Tier 1 risk-based capital (1)(2)		$	60,155				11.98	%		$	70,387				13.94	%		$	72,325				14.31	%		$	74,246				14.68	%
Tier 1 risk-based requirement			40,169				8.00				40,388				8.00				40,429				8.00				40,469				8.00
Excess		$	19,986				3.98	%		$	29,999				5.94	%		$	31,896				6.31	%		$	33,777				6.68	%
Total risk-based capital (1)(2)		$	66,442				13.23	%		$	76,674				15.19	%		$	78,612				15.56	%		$	80,533				15.92	%
Total risk-based requirement			50,211				10.00				50,485				10.00				50,536				10.00				50,587				10.00
Excess		$	16,231				3.23	%		$	26,189				5.19	%		$	28,076				5.56	%		$	29,946				5.92	%
Common equity tier 1 risk-based capital (1)(2)		$	60,155				11.98	%		$	70,387				13.94	%		$	72,325				14.31	%		$	74,246				14.68	%
Common equity tier 1 risk-based requirement			32,637				6.50				32,815				6.50				32,849				6.50				32,881				6.50
Excess		$	27,518				5.48	%		$	37,572				7.44	%		$	39,476				7.81	%		$	41,365				8.18	%
Reconciliation of capital infused into Magyar Bank:
Net proceeds										$	13,700							$	16,250							$	18,783
Less: Common stock acquired by stock-based benefit plans											(1,156	)							(1,360	)							(1,564	)
Less: Common stock acquired by employee stock ownership plan											(2,312	)							(2,720	)							(3,128	)
Pro forma increase										$	10,232							$	12,170							$	14,091

 

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

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

 

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