# Magyar Bancorp, Inc.: Form 10-Q for the period ended Jun 30, 2023

- Company: [Magyar Bancorp, Inc.](/companies/mgyr.md) (CIK 1337068)
- Form: 10-Q
- Filed: 2023-08-14
- Accepted by EDGAR: Aug 14, 2023, 12:01 ET
- Period: 2023-06-30
- Accession: 0001174947-23-001034
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1337068/000117494723001034/mgyr-20230630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1337068/000117494723001034/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2023-04-01 to 2023-06-30 | $2.9m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2022-10-01 to 2023-06-30 | $6.7m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-04-01 to 2023-06-30 | $788.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-10-01 to 2023-06-30 | $2.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | $1.9m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-10-01 to 2023-06-30 | $5.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.30 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-10-01 to 2023-06-30 | $0.86 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.30 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-10-01 to 2023-06-30 | $0.86 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 6,412,536 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-10-01 to 2023-06-30 | 6,426,978 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-10-01 to 2023-06-30 | $4.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2023-06-30 | $22.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2023-06-30 | $857.4m | us-gaap:Assets |
| Total liabilities | at 2023-06-30 | $754.7m | us-gaap:Liabilities |
| Current portion of debt | at 2023-06-30 | $45.5m | us-gaap:DebtCurrent |
| Shareholders' equity | at 2023-06-30 | $102.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 34,519 characters.

Forward-Looking Statements

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

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

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

### Critical Accounting Policies

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. Critical accounting policies may involve complex subjective decisions or assessments. Please refer to the Company’s Form 10-K for the Company’s critical accounting policies. There were no significant changes to the Company’s critical accounting policies during the nine months ended June 30, 2023.

### Comparison of Financial Condition at June 30, 2023 and September 30, 2022

***Total Assets.*** Total assets increased $58.9 million, or 7.4%, to $857.4 million at June 30, 2023 from $798.5 million at September 30, 2022. The increase was attributable to higher balances of loans receivable, net of allowance for loan loss, partially offset by lower interest-earning deposits with banks and investment securities.

***Cash and Interest-Earning Deposits.*** Cash and interest-earning deposits with banks decreased $8.5 million, or 27.6% to $22.4 million at June 30, 2023 from $30.9 million at September 30, 2022 resulting primarily from deployment of these funds into loans receivable during the nine months ended June 30, 2023.

***Investment Securities.*** Investment securities totaled $92.5 million at June 30, 2023, reflecting a decrease of $8.4 million, or 8.3%, from $100.9 million at September 30, 2022.

The decrease resulted from the maturity of a $5.0 million corporate note and payments from mortgage-backed securities totaling $3.7 million during the nine months while the market value of the Company’s available-for-sale investment securities increased $247,000. The Company did not purchase or sell any investment securities during the nine months ended June 30, 2023. In addition, there were no other-than-temporary-impairment charges for the Company’s investment securities for the nine months ended June 30, 2023.

***Loans Receivable.*** Total loans receivable increased $73.6 million, or 11.7%, to $702.5 million at June 30, 2023 from $628.9 million at September 30, 2022. The increase in total loans receivable during the nine months ended June 30, 2023 occurred in commercial real estate loans, which increased $59.6 million, or 17.4%, to $402.3 million, one-to four-family residential mortgage loans (including home equity lines of credit), which increased $22.3 million, or 9.6%, to $255.4 million, and in construction loans, which increased $4.0 million, or 26.4%, to $19.2 million. Partially offsetting these increases were commercial business loans, which decreased $11.5 million, or 33.3%, to $23.1 million and other loans, which decreased $697,000, or 22.3%, to $2.4 million during the nine months period.

During the three months ended June 30, 2023, the Company originated 57 loans receivable and lines of credit totaling $47.1 million at a weighted average interest rate of 7.35% The Company originated 181 loans receivable and lines of credit totaling $155.3 million at a weighted average interest rate of 7.14% during the nine months ended June 30, 2023.

Total non-performing loans increased $725,000, or 25.6%, to $3.6 million at June 30, 2023 from $2.8 million at September 30, 2022. The increase was attributable to two commercial real estate loans totaling $2.6 million and one residential mortgage loan totaling $171,000, partially offset by repayments totaling $2.1 million on a non-performing construction loan. The ratio of non-performing loans to total loans increased to 0.51% at June 30, 2023 from 0.45% at September 30, 2022.

The allowance for loan losses decreased $55,000 during the nine months ended June 30, 2023 to $8.4 million. The Company provisioned $432,000 for loan losses and recorded $487,000 in net loan charge-offs during the nine months ended June 30, 2023. Higher provisions for growth in the Company’s loan portfolio were largely offset by a lower risk profile in the loan composition (specifically lower commercial business loan and home equity line of credit balances) and improving economic data used to determine the allowance for loan losses.

The allowance for loan losses as a percentage of non-performing loans decreased to 235.3% at June 30, 2023 from 297.5% at September 30, 2022. The Company’s allowance for loan losses as a percentage of total loans was 1.19% at June 30, 2023 compared with 1.34% at September 30, 2022. Future increases in the allowance for loan losses may be necessary based on possible future increases in non-performing loans and charge-offs, the possible deterioration of collateral values, and the possible deterioration of the current economic environment.

***Bank-Owned Life Insurance.*** The Company’s carrying value of its life insurance policies held for directors and officers of Magyar Bank increased $278,000, or 1.6%, to $17.9 million at June 30, 2023 from $17.7 million at September 30, 2022. The increase was attributable to an increase in the cash surrender value of the policies during the nine months ended June 30, 2023.

***Other Real Estate Owned.*** Other real estate owned increased $10,000, or 3.6%, to $291,000 at June 30, 2023 from capital improvements to one property in order to market it for sale.

***Deposits.*** Total deposits increased $25.7 million, or 3.9%, to $693.5 million at June 30, 2023 from $667.7 million at September 30, 2022.

The increase in deposits during the nine months ended June 30, 2023 occurred in money market accounts, which increased $25.6 million, or 11.6%, to $247.9 million, in certificates of deposit (including individual retirement accounts), which increased $20.8 million, or 25.1%, to $103.4 million, and in non-interest bearing checking accounts, which increased $507,000, or 0.3%, to $182.9 million. Partially offsetting these increases were decreases in savings accounts, which decreased $16.4 million, or 20.0%, to $65.5 million and in interest-bearing checking accounts (NOW), which decreased $4.8 million, or 4.9%, to $93.8 million. Included in the Company’s total deposits was an estimated $95.4 million that exceeded the Federal Deposit Insurance Corporation’s insurance coverage limit of $250,000 at June 30, 2023 compared to $129.4 million at September 30, 2022.

***Borrowed Funds.*** Borrowings increased $29.9 million, or 191.4%, to $45.5 million at June 30, 2023 from $15.6 million at September 30, 2022. The Company borrowed $17.0 million in long term advances, borrowed $16 million in overnight line of credit advances and repaid $3.1 million in matured advances from the FHLBNY during the nine month period. Long term advances were used to fund growth in the Company’s loans receivable and overnight line of credit advances were used to replace seasonal deposit outflows that occurred in June and returned in July.

***Stockholders’ Equity.*** Stockholders’ equity increased $4.3 million, or 4.3%, to $102.8 million at June 30, 2023 from $98.5 million at September 30, 2022. The increase was due to the Company’s results from operations, partially offset by $1.1 million in dividends paid and 77,556 shares repurchased during the nine months ended June 30, 2023 at a weighted average share price of $12.12. The Company’s book value per share increased to $15.41 at June 30, 2023 from $14.60 at September 30, 2022, based on the 6,668,572 shares that were outstanding at June 30, 2023.

### Average Balance Sheet for the Three and Nine Months Ended June 30, 2023 and 2022

The following tables present certain information regarding the Company’s financial condition and net interest income for the three and nine months ended June 30, 2023 and 2022. The tables present the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown. We derived average balances from daily balances over the period indicated. Interest income includes fees that we consider adjustments to yields.

*(Dollars in thousands)*

| Interest-earning assets: | Three Months Ended June 30, 2023 Average Balance | Interest Income/ Expense | Yield/Cost (Annualized) | 2022 Average Balance | Interest Income/ Expense | Yield/Cost (Annualized) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-earning deposits | $24,976 | $294 | 4.73% | $34,574 | $67 | 0.77% |
| Loans receivable, net | 674,985 | 9,033 | 5.37% | 615,634 | 7,018 | 4.57% |
| Securities |  |  |  |  |  |  |
| Taxable | 94,049 | 398 | 1.70% | 96,452 | 361 | 1.50% |
| Tax-exempt (1) | 3,370 | 18 | 2.17% | 2,957 | 14 | 1.94% |
| FHLBNY stock | 2,204 | 38 | 6.84% | 1,466 | 19 | 5.17% |
| Total interest-earning assets | 799,584 | 9,781 | 4.91% | 751,083 | 7,479 | 3.99% |
| Noninterest-earning assets | 48,283 |  |  | 47,204 |  |  |
| Total assets | $847,867 |  |  | $798,287 |  |  |
| Interest-bearing liabilities: |  |  |  |  |  |  |
| Savings accounts (2) | $68,648 | 86 | 0.50% | $86,729 | 36 | 0.17% |
| NOW accounts (3) | 339,784 | 2,023 | 2.39% | 291,308 | 172 | 0.24% |
| Time deposits (4) | 92,855 | 539 | 2.33% | 92,152 | 212 | 0.92% |
| Total interest-bearing deposits | 501,287 | 2,648 | 2.12% | 470,189 | 420 | 0.36% |
| Borrowings | 27,967 | 239 | 3.43% | 16,136 | 92 | 2.30% |
| Total interest-bearing liabilities | 529,254 | 2,887 | 2.19% | 486,325 | 512 | 0.42% |
| Noninterest-bearing liabilities | 219,291 |  |  | 214,084 |  |  |
| Total liabilities | 748,545 |  |  | 700,409 |  |  |
| Retained earnings | 99,322 |  |  | 97,878 |  |  |
| Total liabilities and retained earnings | $847,867 |  |  | $798,287 |  |  |
| Tax-equivalent basis adjustment |  | (4) |  |  | (3) |  |
| Net interest and dividend income |  | $6,890 |  |  | $6,964 |  |
| Interest rate spread |  |  | 2.72% |  |  | 3.57% |
| Net interest-earning assets | $270,330 |  |  | $264,758 |  |  |
| Net interest margin (5) |  |  | 3.46% |  |  | 3.72% |
| Average interest-earning assets to average interest-bearing liabilities | 151.08% |  |  | 154.44% |  |  |

(1) Calculated using the Company's 21% federal tax rate.

(2) Includes passbook savings, money market passbook and club accounts.

(3) Includes interest-bearing checking and money market accounts.

(4) Includes certificates of deposits and individual retirement accounts.

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

*(Dollars In Thousands)*

| Interest-earning assets: | Nine Months Ended June 30, 2023 Average Balance | Interest Income/ Expense | Yield/Cost (Annualized) | 2022 Average Balance | Interest Income/ Expense | Yield/Cost (Annualized) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-earning deposits | $17,175 | $513 | 4.00% | $63,646 | $137 | 0.29% |
| Loans receivable, net | 661,320 | 25,610 | 5.18% | 593,248 | 20,281 | 4.57% |
| Securities |  |  |  |  |  |  |
| Taxable | 95,780 | 1,194 | 1.67% | 85,682 | 886 | 1.38% |
| Tax-exempt (1) | 3,370 | 55 | 2.17% | 2,567 | 34 | 1.77% |
| FHLBNY stock | 1,926 | 92 | 6.42% | 1,585 | 58 | 4.86% |
| Total interest-earning assets | 779,571 | 27,464 | 4.71% | 746,728 | 21,396 | 3.83% |
| Noninterest-earning assets | 48,319 |  |  | 45,729 |  |  |
| Total assets | $827,890 |  |  | $792,457 |  |  |
| Interest-bearing liabilities: |  |  |  |  |  |  |
| Savings accounts (2) | $73,798 | $258 | 0.47% | $86,244 | $109 | 0.17% |
| NOW accounts (3) | 331,024 | 4,764 | 1.92% | 281,193 | 457 | 0.22% |
| Time deposits (4) | 86,682 | 1,110 | 1.71% | 100,048 | 720 | 0.96% |
| Total interest-bearing deposits | 491,504 | 6,132 | 1.67% | 467,485 | 1,286 | 0.37% |
| Borrowings | 24,515 | 594 | 3.24% | 19,436 | 323 | 2.22% |
| Total interest-bearing liabilities | 516,019 | 6,726 | 1.74% | 486,921 | 1,609 | 0.44% |
| Noninterest-bearing liabilities | 208,451 |  |  | 203,490 |  |  |
| Total liabilities | 724,470 |  |  | 690,411 |  |  |
| Retained earnings | 103,420 |  |  | 102,046 |  |  |
| Total liabilities and retained earnings | $827,890 |  |  | $792,457 |  |  |
| Tax-equivalent basis adjustment |  | (12) |  |  | (7) |  |
| Net interest and dividend income |  | $20,726 |  |  | $19,780 |  |
| Interest rate spread |  |  | 2.97% |  |  | 3.39% |
| Net interest-earning assets | $263,552 |  |  | $259,807 |  |  |
| Net interest margin (5) |  |  | 3.55% |  |  | 3.54% |
| Average interest-earning assets toaverage interest-bearing liabilities | 151.07% |  |  | 153.36% |  |  |

(1) Calculated using the Company's 21% federal tax rate.

(2) Includes passbook savings, money market passbook and club accounts.

(3) Includes interest-bearing checking and money market accounts.

(4) Includes certificates of deposits and individual retirement accounts.

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

### Comparison of Operating Results for the Three Months Ended June 30, 2023 and 2022

***Net Income***. Net income decreased $199,000, or 9.4%, to $1.9 million for the three month period ended June 30, 2023 compared with net income of $2.1 million for the three month period ended June 30, 2022. The decrease was due to lower net interest and dividend income, lower other income, and higher other expenses, partially offset by lower provisions for loan loss.

***Net Interest and Dividend Income.*** Net interest and dividend income decreased $74,000, or 1.1%, to $6.9 million for the three months ended June 30, 2023 from $7.0 million for the three months ended June 30, 2022. The decrease was attributable to a 26 basis point decrease in the Company’s net interest margin to 3.46% for the three months ended June 30, 2023 from 3.72% for the three months ended June 30, 2022, partially offset by a $59.4 million increase in the average balance of loans receivable, net, between the periods.

***Interest and Dividend Income.*** Interest and dividend income increased $2.3 million, or 30.8%, to $9.8 million for the three months ended June 30, 2023 compared with $7.5 million for the three months ended June 30, 2022. The increase was attributable to a 92 basis point increase in the yield on interest-earning assets to 4.91% for the three months ended June 30, 2023 from 3.99% for the three months ended June 30, 2022 as well as a $48.5 million, or 6.5%, increase in the average balance of interest-earning assets. Higher balances of higher-yielding loans receivable funded with lower yielding interest-earning deposits with the Federal Reserve Bank as well as higher market interest rates contributed to the increase in the Company’s interest and dividend income between periods. Partially offsetting the increases were no Paycheck Protection Program loan fees included in interest income on loans receivable for the three months ended June 30, 2023, compared with $98,000 for the three months ended June 30, 2022.

The interest earned on loans receivable, net of allowance for loan loss, increased $2.0 million, or 28.7%, to $9.0 million for the three months ended June 30, 2023 from $7.0 million for the same period prior year. The increase resulted from an 80 basis point increase in the yield on loans receivable, net to 5.37% for the three months ended June 30, 2023 from 4.57% for the three months ended June 30, 2022 as well as a $59.4 million, or 9.6%, increase in the average balance of loans receivable to $675.0 million during the three months ended June 30, 2023 from $615.6 million during the three months ended June 30, 2022.

Interest earned on investment securities, including interest-earning deposits and excluding FHLBNY stock, increased $267,000, or 60.8%, to $706,000 for the three months ended June 30, 2023 from $439,000 for the three months ended June 30, 2022. The increase was attributable to a 101 basis point increase in the average yield on such assets to 2.33% for the three months ended June 30, 2023 from 1.32% for the three months ended June 30, 2022, partially offset by an $11.6 million, or 8.6%, decrease in the average balance of investment securities and interest-earning deposits to $122.4 million for the three months ended June 30, 2023 from $134.0 million for the three months ended June 30, 2022.

***Interest Expense.*** Interest expense increased $2.4 million, or 463.9%, to $2.9 million for the three months ended June 30, 2023 from $512,000 for the three months ended June 30, 2022. The cost of interest-bearing liabilities increased 177 basis points to 2.19% for the three months ended June 30, 2023 compared with 0.42% for the three months ended June 30, 2022 resulting primarily from higher cost interest-bearing deposits. In addition, the average balance of interest-bearing liabilities increased $42.9 million, or 8.8%, to $529.3 million during the three months ended June 30, 2023 from $485.3 during the three months ended June 30, 2022.

The cost of interest-bearing deposits increased 176 basis points to 2.12% for the quarter ended June 30, 2023 from 0.36% for the quarter ended June 30, 2022 due to the higher market interest rate environment while the average balance increased $31.1 million, or 6.6%, to $501.3 million from $470.2 million. As a result, interest paid on interest-bearing deposits increased $2.2 million to $2.6 million for the three months ended June 30, 2023 compared with $420,000 for the three months ended June 30, 2022.

Interest expense on borrowings increased $147,000, or 159.8%, to $239,000 for the three months ended June 30, 2023 from $92,000 at June 30, 2022. Higher market interest rates resulted in a 113 basis point increase in the cost of borrowings to 3.43% for the three months ended June 30, 2023 from 2.30% for the three months ended June 30, 2022. The average balance of borrowings increased $11.8 million to $28.0 million for the quarter ended June 30, 2023 from $16.1 million for the quarter ended June 30, 2022 to fund the growth in the Company’s loans receivable.

***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 consolidated 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, the Company recorded an $81,000 credit for loan losses for the three months ended June 30, 2023 compared with a $205,000 provision for loan losses for the three months ended June 30, 2022. The lower provision for loan losses resulted from improving economic conditions. The Company recorded $386,000 in loan charge-offs and $1,000 in loan recoveries during the three months ended June 30, 2023 compared with no charge-offs or recoveries during the three months ended June 30, 2022. The Company is pursuing the guarantor of the one commercial business loan totaling $386,000 that was charged-off during the quarter.

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

***Other Income.*** Other income decreased $55,000, or 8.1%, to $621,000 during the three months ended June 30, 2023 compared with $676,000 for the three months ended June 30, 2022. The Company did not record any interest rate swap fees or gains on the sale of OREO during the three months ended June 30, 2023, compared with $76,000 and $67,000, respectively, for the three months ended June 30, 2022. In addition, there were lower gains from the sale of Small Business Administration 7(a) loans, which decreased $31,000 to $103,000 for the three months ended June 30, 2023 from $134,000 for the three months ended June 30, 2022. Offsetting the decline was higher service charge income, which increased $108,000 to $392,000 for the three months ended June 30, 2023 from higher loan prepayment penalties received with the repayment of commercial loans.

***Other Expenses.*** Other expenses increased $454,000, or 10.2%, to $4.9 million during the three months ended June 30, 2023 compared with $4.4 million for the three months ended June 30, 2022. The increase was primarily attributable to higher compensation and benefit expense, which increased $265,000, or 9.8%, to $3.0 million, due to stock award and stock option expenses related to the Company’s 2022 Equity Incentive Plan and increased director fees resulting from the addition of three new directors on September 22, 2022. Higher FDIC deposit insurance premiums, loan servicing expenses, occupancy expenses and other expenses were partially offset by lower marketing and business development expenses.

***Income Tax Expense.*** The Company recorded tax expense of $788,000 on pre-tax income of $2.7 million for the three months ended June 30, 2023, compared to $886,000 on pre-tax income of $3.0 million for the three months ended June 30, 2022. The Company’s effective tax rate for the three months ended June 30, 2023 was 29.1% compared with 29.5% for the three months ended June 30, 2022.

### Comparison of Operating Results for the Nine Months Ended June 30, 2023 and 2022

***Net Income.*** Net income increased $35,000 or 0.6%, to $5.5 million during the nine month period ended June 30, 2023 compared with $5.5 million for the nine month period ended June 30, 2022. The increase was due to higher net interest and dividend income, partially offset by higher provisions for loan loss, lower other income and higher other expenses.

***Net Interest and Dividend Income.*** Net interest and dividend income increased $946,000, or 4.8%, to $20.7 million for the nine months ended June 30, 2023 from $19.8 million for the nine months ended June 30, 2022. The increase was attributable to a $68.1 million increase in the average balance of loans receivable, net, as well as a one basis point increase in the Company’s net interest margin to 3.55% for the nine months ended June 30, 2023 from 3.54% for the nine months ended June 30, 2022.

***Interest and Dividend Income.*** Interest and dividend income increased $6.1 million, or 28.3%, to $27.5 million for the nine months ended June 30, 2023 from $21.4 million for the nine months ended June 30, 2022. The increase was attributable to an 88 basis point increase in the yield on interest-earning assets, as well as a $32.8 million, or 4.4%, increase in the average balance of interest-earning assets. Higher balances of higher-yielding loans receivable funded by lower yielding interest-earning deposits with the Federal Reserve Bank as well as higher market interest rates contributed to the increase in the Company’s interest and dividend income between periods. Partially offsetting the increases were no Paycheck Protection Program loan fees included in interest income on loans receivable for the nine months ended June 30, 2023, compared with $828,000 for the nine months ended June 30, 2022.

Interest income earned on loans receivable, net of allowance for loan loss, increased $5.3 million, or 26.3%, to $25.6 million for the nine months ended June 30, 2023 from $20.3 million for the prior year period. The increase resulted from a 61 basis point increase in the yield on interest-earning assets to 5.18% for the nine months ended June 30, 2023 from 4.57% for the nine months ended June 30, 2022 as well as a $68.1 million, or 11.5%, increase in the average balance of loans receivable to $661.3 million during the nine months ended June 30, 2023 from $593.2 million during the nine months ended June 30, 2022.

Interest earned on investment securities, including interest-earning deposits and excluding FHLBNY stock, increased $700,000, or 66.7%, to $1.8 million for the nine months ended June 30, 2023 from $1.1 million for the nine months ended June 30, 2022. The increase was attributable to a 110 basis point increase in the average yield to 2.03% for the nine months ended June 30, 2023 from 0.93% for the nine months ended June 30, 2022, partially offset by a $35.6 million, or 23.4% decrease in the average balance of investment securities and interest-earning deposits to $116.3 million for the nine months ended June 30, 2023 from $151.9 million for the nine months ended June 30, 2022.

***Interest Expense.*** Interest expense increased $5.1 million, or 318.0%, to $6.7 million for the nine months ended June 30, 2023 compared with $1.6 million for the nine months ended June 30, 2022. The cost of interest-bearing liabilities increased 130 basis points to 1.74% for the nine months ended June 30, 2023 compared with 0.44% for the nine months ended June 30, 2022 resulting primarily from higher cost interest-bearing deposits. In addition, the average balance of interest-bearing liabilities increased $29.1 million, or 6.0%, to $516.0 million during the nine months ended June 30, 2023 from $486.9 million during the nine months ended June 30, 2022.

The average cost of interest-bearing deposits increased 130 basis points to 1.67% for the nine months ended June 30, 2023 from 0.37% for the nine months ended June 30, 2022 due to the higher market interest rate environment while the average balance increased $24.0 million, or 5.1%, to $491.5 million for the nine months ended June 30, 2023 from $467.5 million for the nine months ended June 30, 2022. As a result, interest paid on interest-bearing deposits increased $4.8 million to $6.1 million for the nine months ended June 30, 2023 from $1.3 million for the nine months ended June 30, 2022.

Interest expense on borrowings increased $271,000, or 83.9%, to $594,000 for the nine months ended June 30, 2023 from $323,000 for the prior year period. Higher market interest rates resulted in a 102 basis point increase in the cost of borrowings to 3.24% for the nine months ended June 30, 2023 from 2.22% for the nine months ended June 30, 2022. The average balance of borrowings increased $5.1 million to $24.5 million for the nine months ended June 30, 2023 from $19.4 million for the nine months ended June 30, 2022 to fund the growth in the Company’s loans receivable.

***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, the Company recorded a provision of $432,000 for the nine months ended June 30, 2023 compared to $376,000 for the nine months ended June 30, 2022. The higher provision for loan losses resulted from growth in the Company’s loan portfolio during the nine months ended June 30, 2023 as well as increased charge-offs. The Company recorded $487,000 in net loan charge-offs during the nine months ended June 30, 2023 compared with $54,000 in net recoveries during the nine months ended June 30, 2022. The Company charged off two commercial business loans totaling $488,000 during the nine months ended June 30, 2023 and is pursuing the guarantors on the loans for collection.

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

***Other Income.*** Other income decreased $46,000, or 2.4%, to $1.9 million during the nine months ended June 30, 2023 compared to $1.9 million for the nine months ended June 30, 2022. The Company did not record any gains on the sale of OREO during the nine months ended June 30, 2023, compared with $67,000 for the nine months ended June 30, 2022. In addition, there were lower gains from the sale of Small Business Administration 7(a) loans, which decreased $68,000 to $485,000 for the nine months ended June 30, 2023 from $553,000 for the nine months ended June 30, 2022. Offsetting the decline was higher service charge income, which increased $97,000 to $957,000 for the nine months ended June 30, 2023 from higher loan prepayment penalties received with the repayment of commercial loans.

***Other Expenses.*** Other expenses increased $701,000, or 5.2%, to $14.3 million during the nine months ended June 30, 2023 from $13.6 million during the nine months ended June 30, 2022. The increase was primarily attributable to higher compensation and benefit expense, which increased $677,000, or 8.4%, to $8.8 million, due to stock award and stock option expenses related to the Company’s 2022 Equity Incentive Plan and increased director fees resulting from the addition of three new directors on September 22, 2022. Higher occupancy expenses, FDIC deposit insurance premiums, loan servicing expenses and other expenses were partially offset by lower professional fees.

***Income Tax Expense.*** The Company recorded tax expense of $2.4 million on pre-tax income of $7.9 million for the nine months ended June 30, 2023, compared to $2.3 million on pre-tax income of $7.7 million for the nine months ended June 30, 2022. The Company’s effective tax rate for the nine months ended June 30, 2023 was 29.9% compared with 29.1% for the nine months ended June 30, 2022.

### LIQUIDITY AND CAPITAL RESOURCES

### Liquidity

The Company’s liquidity is a measure of its ability to fund loans, pay withdrawals of deposits, and other cash outflows in an efficient, cost-effective manner. The Company’s short-term sources of liquidity include maturity, repayment and sales of assets, excess cash and cash equivalents, new deposits, other borrowings, and new advances from the FHLBNY. Based on eligible loan collateral pledged to the FHLBNY at June 30, 2023, we had an aggregate borrowing capacity of $112.2 million. There has been no material adverse change during the nine months ended June 30, 2023 in the ability of the Company and its subsidiaries to fund their operations.

At June 30, 2023, the Company had commitments outstanding under letters of credit totaling $663,000, commitments to originate loans totaling $13.5 million, and commitments to fund undisbursed balances of closed loans and unused lines of credit totaling $89.2 million. There has been no material change during the nine months ended June 30, 2023 in any of the Company’s other contractual obligations or commitments to make future payments.

### Capital Requirements

At June 30, 2023, the Bank’s Tier 1 capital as a percentage of the Bank’s total assets was 11.21%, and total qualifying capital as a percentage of risk-weighted assets was 15.92%.

## Controls and procedures

As filed, 844 characters.

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

There has been no change in the Company's internal control over financial reporting during the nine months ended June 30, 2023 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

## Risk factors

As filed, 3,791 characters.

Except for the additional risk factors below, there were no material changes to the risk factors relevant to the Company’s operations as described in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022 filed on December 22, 2022.

**Adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults, or non-performance by financial institutions or transactional counterparties, could adversely affect our financial condition and results of operations.**

Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems. For example, on May 1, 2023, First Republic Bank went into receivership and its deposits and substantially all of its assets were acquired by JPMorgan Chase Bank, National Association. Similarly, on March 10, 2023, Silicon Valley Bank went into receivership, and on March 12, Signature Bank went into receivership.

Inflation and rapid increases in interest rates have led to a decline in the trading value of previously issued government securities with interest rates below current market interest rates. Although the Treasury, FDIC and Federal Reserve Board have announced a program to provide up to $25 billion of loans to financial institutions secured by certain of such government securities held by financial institutions to mitigate the risk of potential losses on the sale of such instruments, widespread demands for customer withdrawals or other liquidity needs of financial institutions for immediately liquidity may exceed the capacity of such program. Additionally, there is no guarantee that the Treasury, FDIC and Federal Reserve Board will provide access to uninsured funds in the future in the event of the closure of other banks or financial institutions, or that they would do so in a timely fashion.

**Rising Interest Rates Have Decreased the Value of the Company’s Securities Portfolio, and the Company Would Realize Losses if it Was Required to Sell Such Securities to Meet Liquidity Needs**

As a result of inflationary pressures and the resulting rapid increases in interest rates over the last year, the trading value of previously issued government and other fixed income securities has declined significantly. These securities make up a majority of the securities portfolio of most banks in the U.S., including the Company’s, resulting in unrealized losses embedded in the securities portfolios. While the Company does not currently intend to sell these securities, if the Company were required to sell such securities to meet liquidity needs, it may incur losses, which could impair the Company’s capital, financial condition, and results of operations and require the Company to raise additional capital on unfavorable terms, thereby negatively impacting its profitability. While the Company has taken actions to maximize its funding sources, there is no guarantee that such actions will be successful or sufficient in the event of sudden liquidity needs. Furthermore, while the Federal Reserve Board has announced a Bank Term Funding Program available to eligible depository institutions secured by U.S. treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral at par, to mitigate the risk of potential losses on the sale of such instruments, there is no guarantee that such programs will be effective in addressing liquidity needs as they arise.

Filed Aug 14, 2023.
Source: SEC EDGAR, the filing index for accession 0001174947-23-001034. Last ingested by Listed: Oct 24, 2026, 15:11 ET. No prices; not investment advice.