Magyar Bancorp, Inc.: Form 10-Q for the period ended Mar 31, 2024

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, other than a change to the methodology for calculating the allowance for credit losses during the six months ended March 31, 2024.

The Company adopted ASU 2016-13 on October 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost, including loans, held-to-maturity debt securities, not measured at amortized cost and unfunded commitments. The Company recorded a cumulative effect increase to retained earnings of $492 thousand ($354 thousand net of taxes), which was comprised of a $1.0 million ($725 thousand net of tax) increase related to loans and $540 thousand ($379 thousand net of tax) decrease related to unfunded commitments. The Company determined that there was no impact to retained earnings related to held-to-maturity securities as a result of adopting this guidance. The results reported for periods beginning on or after October 1, 2023 are presented under Accounting Standards Codification 326, while prior period amounts continue to be reported in accordance with previously applicable accounting standards.

Comparison of Financial Condition at March 31, 2024 and September 30, 2023

Total Assets. Total assets increased $21.3 million, or 2.3%, to $928.6 million at March 31, 2024 from $907.3 million at September 30, 2023. The increase was attributable to higher balances of loans receivable, partially offset by lower interest-earning deposits with banks.

Interest Earning Deposits. Interest-earning deposits with banks decreased $22.5 million, or 31.1%, to $50.0 million at March 31, 2024 from $72.5 million at September 30, 2023 resulting primarily from deployment of these fund into loans receivable during the six months ended March 31, 2024.

Loans Receivable. Total loans receivable increased $44.3 million, or 6.4%, to $741.7 million at March 31, 2024 from $698.2 million at September 30, 2023. The increase in total loans receivable during the six months ended March 31, 2024 occurred in commercial real estate loans, which increased $40.0 million, or 10.3%, to $429.1 million, construction and land loans, which increased $7.3 million, or 33.6%, to $29.2 million and one-to four-family residential real estate loans (including home equity loans and lines of credit), which increased $216 thousand, or 0.1%, to $254.9 million and other loans, which increased $157 thousand, or 6.7%, to $25.0 million. Partially offsetting these increases were commercial business loans, which decreased $3.2 million, or 10.7%, to $27.0 million during the six months period.

Given the significance of commercial real estate (“CRE”) loans to our total loan portfolio, the following table further disaggregates these loans by occupied status and by collateral type as of March 31, 2024:

(In thousands)

The Company obtains an appraisal of the real estate collateral securing a CRE loan prior to originating the loan. The appraised value is used to calculate the ratio of the outstanding loan balance to the value of the real estate collateral, or loan-to-value ratio ("LTV"). The original appraisal is used to monitor the LTVs within the CRE portfolio unless an updated appraisal is received, which may happen for a variety of reasons, including but not limited to payment delinquency, additional loan requests using the same collateral, and loan modifications. The following table presents the ranges in the LTVs of our CRE loans at March 31, 2024:

(Dollars in thousands)

As of March 31, 2024, non-owner occupied commercial real estate loans (as defined by regulatory guidance) to total risk-based capital was estimated at approximately 256%. Management believes that Magyar Bank has implemented appropriate risk management practices, including risk assessments, board-approved underwriting policies and related procedures, which include monitoring loan portfolio performance and stressing of the commercial real estate portfolio under adverse economic conditions.

Our asset quality with respect to commercial real estate loans has remained strong despite recent economic and market conditions. As of each of March 31, 2024 and September 30, 2023, we had $2.2 million of non-performing commercial real estate loans. Such amounts totaled 0.5% and 0.6% of total commercial real estate loans as of those dates, respectively.

Total non-performing loans decreased $497 thousand, or 9.8%, to $4.6 million at March 31, 2024 from $5.1 million at September 30, 2023. The decline was attributable to the foreclosure of a single-family residential property previously securing a $777 thousand construction loan and payments totaling $4 thousand, partially offset by a $284 thousand increase in non-performing loans secured by single family residential properties. The ratio of non-performing loans to total loans decreased to 0.62% at March 31, 2024 from 0.73% at September 30, 2023.

The allowance for credit losses increased $69 thousand to $8.4 million during the six months ended March 31, 2024. Upon adoption of ASU 2016-13 on October 1, 2024, the Company’s allowance for credit losses decreased $492 thousand. Growth in loans receivable and loan commitments during the six months ended March 31, 2024 resulted in additional provisions for credit loss totaling $495 thousand and there were $66 thousand in loan recoveries. The Company’s allowance for on-balance sheet credit losses decreased to $7.7 million at March 31, 2024 from $8.3 million at September 30, 2023 while its reserve for off-balance sheet commitments increased to $705 thousand at March 31, 2024 from $0 at September 30, 2023.

The allowance for on-balance sheet loan losses as a percentage of non-performing loans increased to 167.7% at March 31, 2024 from 163.9% at September 30, 2023. The Company’s allowance for on-balance sheet loan losses as a percentage of total loans was 1.04% at March 31, 2024 compared with 1.19% at September 30, 2023. Future increases in the allowance for credit 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.

Investment Securities. At March 31, 2024, investment securities totaled $95.4 million, reflecting a decrease of $609 thousand, or 0.6%, from $96.0 at September 30, 2023. The decrease resulted from matured bonds totaling $4.5 million and payments from mortgage-backed securities totaling $2.6 million during the six months ended March 31, 2024. Offsetting these decreases were purchases totaling $6.0 million and a $500 thousand increase in the market value of the Company’s available-for-sale investment securities.

Investment securities at March 31, 2024 consisted of $67.7 million in mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises, $21.0 million in U.S. government-sponsored enterprise debt securities, $3.0 million in corporate notes, $3.5 million in municipal bonds, and $199 thousand in “private-label” mortgage-backed securities. There was no allowance for credit losses for the Company’s investment securities for the six months ended March 31, 2024.

Deposits. Total deposits increased $19.4 million, or 2.6%, to $774.9 million at March 31, 2024 from $755.4 million at September 30, 2023.

The inflow in deposits occurred in certificates of deposit (including individual retirement accounts), which increased $30.3 million, or 28.9%, to $135.0 million and in money market accounts, which increased $15.4 million, or 5.4%, to $300.3 million. Partially offsetting these increases were decreases in non-interest bearing checking accounts, which decreased $19.9 million, or 10.6%, to $168.6 million, in savings accounts, which decreased $4.6 million, or 7.4%, to $57.5 million and in interest-bearing checking accounts (NOW), which decreased $1.7 million, or 1.5%, to $113.5 million.

Borrowed Funds. Borrowings decreased $719 thousand, or 2.4%, to $28.8 million at March 31, 2024 from $29.5 million at September 30, 2023. The Company repaid a matured long term advance totaling $2.4 million and utilized a new $1.7 million long term advance from the Federal Home Loan Bank of New York during the six months ended March 31, 2024.

Stockholders’ Equity. Stockholders’ equity increased $2.8 million, or 2.7%, to $107.6 million at March 31, 2024 from $104.8 million at September 30, 2023. The increase was primarily due to net income of $3.5 million, followed by a $377 thousand reduction in other accumulated comprehensive loss, a $354 thousand increase for the Company’s adoption of ASU 2016-13, a $323 thousand increase from stock-based compensation and an $84 thousand increase for ESOP shares allocated for the six months ended March 31, 2024. Partially offsetting these increases were $1.0 million in dividends ($0.16 per share) paid and 71,745 shares repurchased during the period totaling $800 thousand. As a result, the Company’s book value per share increased to $16.30 at March 31, 2024 from $15.70 at September 30, 2023.

Average Balance Sheets for the Three and Six Months Ended March 31, 2024 and 2023

The following tables present certain information regarding the Company’s financial condition and net interest income for the three and six months ended March 31, 2024 and 2023. 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.

Comparative Average Balance Sheets

(Dollars In Thousands)

(Dollars in thousands)

(1) The average balance of loans receivable, net includes non-accrual loans.

(2) Interest income and yield are calculated using the Company's 21% federal tax rate.

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

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

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

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

(Dollars In Thousands)

(1) The average balance of loans receivable, net includes non-accrual loans.

(2) Interest income and yield are calculated using the Company's 21% federal tax rate.

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

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

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

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

Comparison of Operating Results for the Three Months Ended March 31, 2024 and 2023

Net Income. Net income increased $101 thousand, or 5.6%, to $1.9 million for the three-month period ended March 31, 2024 compared with net income of $1.8 million for the three month period ended March 31, 2023. The increase was due to lower provisions for credit loss and lower income tax expense, partially offset by higher other expenses.

Net Interest and Dividend Income. Net interest and dividend income decreased $23 thousand, or 0.3%, and was $6.9 million for each of the three months ended March 31, 2024 and 2023. The decrease was attributable to a 44-basis point decrease in the Company’s net interest margin to 3.17% for the three months ended March 31, 2024 from 3.61% for the three months ended March 31, 2023, partially offset by a $107.5 million increase in the average balance of interest-earning assets between the periods.

Interest and Dividend Income. Interest and dividend income increased $2.7 million, or 29.9%, to $11.9 million for the three months ended March 31, 2024 compared with $9.2 million for the three months ended March 31, 2023. The increase was attributable to a 67-basis point increase in the yield on interest-earning assets to 5.45% for the three months ended March 31, 2024 from 4.78% for the three months ended March 31, 2023, which was attributable to higher market interest rates between periods. Also contributing to the higher interest and dividend income were higher average balances of loans and interest-earning deposits, which increased $60.5 million and $50.1 million, respectively.

The average balance of loans receivable, net of allowance for credit loss, increased $60.5 million to $726.8 million during the three months ended March 31, 2024 from $666.3 million during the three months ended March 31, 2023 while the yield on loans receivable increased 63 basis points to 5.88% for the three months ended March 31, 2024 from 5.25% for the three months ended March 31, 2023 due to higher market interest rates. The higher average balance and yield accounted for a $1.9 million, or 22.3%, increase in loan interest income between periods.

Interest earned on investment securities, including interest-earning deposits and excluding FHLB stock, increased $798 thousand, or 151.7%, to $1.3 million for the three months ended March 31, 2024 from $526 thousand for the three months ended March 31, 2023. The yield on such assets increased 148 basis points to 3.41% for the three months ended March 31, 2024 from 1.93% for the three months ended March 31, 2023, and the average balance of investment securities and interest-earning deposits increased by $46.7 million, or 42.0%, to $157.7 million for the three months ended March 31, 2024 from $111.1 million for the three months ended March 31, 2023.

Interest Expense. Interest expense increased $2.8 million, or 124.3%, to $5.0 million for the three months ended March 31, 2024 from $2.2 million for the three months ended March 31, 2023. The cost of interest-bearing liabilities increased 140 basis points to 3.15% for the three months ended March 31, 2024 compared with 1.75% for the three months ended March 31, 2023 resulting primarily from higher market interest rates. In addition, the average balance of interest-bearing liabilities increased $125.7 million, or 24.3%, to $642.5 million from $516.8 million for the three months ended March 31, 2023.

The average balance of interest-bearing deposits increased $123.5 million, or 25.2%, to $613.7 million for the three months ended March 31, 2024 from $490.2 million for the three months ended March 31, 2023, while the average cost of such deposits increased 150 basis points to 3.16% from 1.66%. As a result, interest paid on interest-bearing deposits increased $2.8 million to $4.8 million for the three months ended March 31, 2024 compared with $2.0 million for the three months ended March 31, 2023, with the increase in the cost of deposits due to higher market interest rate environment.

Interest paid on borrowings increased $3 thousand, or 1.4%, to $222 thousand for the three months ended March 31, 2024 from $219 thousand for the prior year period, while a 22-basis point decrease in the cost of borrowings to 3.12% for the three months ended March 31, 2024 from 3.34% for the three months ended March 31, 2023. Average balance of borrowings increased $2.2 million to $28.8 million for the three months ended March 31, 2024 compared to $26.6 million for the three months ended March 31, 2023.

Provision for Credit Losses. The Company recorded a provision for credit losses of $14 thousand for the three months ended March 31, 2024 compared to $195 thousand for the three months ended March 31, 2024. The lower provision for credit losses resulted from lower net charge-offs as well as a decrease in construction loan balances, which require higher provisions for credit loss, as well as changes in factors driven by low unemployment rates. The Company recorded $65 thousand in net loan recoveries during the three months ended March 31, 2024 compared with $102 thousand in net loan charge-offs during the three months ended March 31, 2023.

Other Income. Other income decreased $9 thousand, or 1.4%, to $622 thousand during the three months ended March 31, 2024 compared to $631 thousand for the three months ended March 31, 2023. The decrease was due to lower loan prepayment fees, partially offset by higher gains from the sale of Small Business Administration 7(a) loans, which increased $12 thousand to $213 thousand for the three months ended March 31, 2024 from $201 thousand for the three months ended March 31, 2023.

Other Expenses. Other expenses increased $312 thousand, or 6.5%, to $5.1 million during the three months ended March 31, 2024 compared with $4.8 million for the three months ended March 31, 2023. The increase was primarily attributable to higher compensation and benefit expense, which increased $234 thousand, or 8.4%, to $3.0 million, due to fewer open positions between periods and the additions of a commercial lender and a commercial credit analyst. Other expenses increased $106 thousand, or 23.2%, from higher recruitment costs, loan origination and servicing costs, OREO expenses and operating expenses.

Income Tax Expense. The Company recorded tax expense of $526 thousand on pre-tax income of $2.4 million for the three months ended March 31, 2024, compared to $790 thousand on pre-tax income of $2.6 million for the three months ended March 31, 2023. The decrease in income tax expense was primarily driven by changes in deferred tax items during the period. The Company’s effective tax rate for the three months ended March 31, 2024 was 21.7% compared with 30.5% for the three months ended March 31, 2023.

Comparison of Operating Results for the Six Months Ended March 31, 2024 and 2023

Net Income. Net income decreased $57 thousand, or 1.6%, to $3.5 million during the six-month period ended March 31, 2024 compared with $3.6 million for the six-month period ended March 31, 2023. The decrease was due to higher other expenses which increased $751 thousand, or 8.0%, to $10.01 million from $9.3 million, partially offset by higher net interest and dividend income.

Net Interest and Dividend Income. Net interest and dividend income increased $330 thousand, or 2.4%, to $14.2 million for the six months ended March 31, 2024 from $13.8 million for the six months ended March 31, 2023. The increase was attributable to a $109.9 million, or 14.3%, increase in the average balance of interest-earning assets between the periods, partially offset by a 38-basis point decrease in the Company’s net interest margin to 3.23% for the six months ended March 31, 2024 from 3.61% for the six months ended March 31, 2023.

Interest and Dividend Income. Interest and dividend income increased $5.8 million, or 32.8%, to $23.5 million for the six months ended March 31, 2024 from $17.7 million for the six months ended March 31, 2023. The increase was attributable to a 74-basis point increase in the yield on interest-earning assets to 5.35% for the six months ended March 31, 2024 from 4.61% for the prior period, as well as a $60.3 million, or 9.2%, increase in the average balance of net loans receivable to $714.9 million from $654.6 million between the two periods and a $53.0 million increase in the average balance of interest-earning deposits. The increase in yield on the Company’s assets was attributable to higher market interest rates between periods.

The average balance of loans receivable, net of allowance for credit losses, increased $60.3 million to $714.9 million during the six months ended March 31, 2024 from $654.6 million during the six months ended March 31, 2023. The average interest earned on loans receivable, net of allowance for credit losses, increased $4.0 million, or 24.4%, to $20.6 million for the six months ended March 31, 2024 from $16.6 million for the same period prior year. The increase was due to higher market interest rates, which resulted in a 71-basis point increase in the yield on the average balance of loans receivable, net of allowance for credit losses to 5.79% for the six months ended March 31, 2024 from 5.08% for the six months ended March 31, 2023.

Interest earned on investment securities, including interest-earning deposits and excluding FHLBNY stock, increased $1.7 million, or 162.9%, to $2.7 million for the six months ended March 31, 2024 from $1.0 million for the six months ended March 31, 2023. The increase was attributable to a 154-basis point increase in the yield to 3.40% for the six months ended March 31, 2024 from 1.86% for the six months ended March 31, 2023, and the average balance of investment securities and interest-earning deposits increased by $49.1 million, or 43.4%, to $162.4 million for the six months ended March 31, 2024 from $113.3 million for the six months ended March 31, 2023.

Interest Expense. Interest expense increased $5.5 million, or 142.6%, to $9.3 million for the six months ended March 31, 2024 compared with $3.8 million for the six months ended March 31, 2023. The cost of interest-bearing liabilities increased 147 basis points to 2.98% for the six months ended March 31, 2024 compared with 1.51% for the six months ended March 31, 2023 resulting primarily from higher market interest rates between periods. In addition, the average balance of interest-bearing liabilities increased $117.3 million, or 23.0%, to $626.8 million from higher money market account and time deposit account balances.

Average interest paid on interest-bearing deposits increased 153 basis points increase to 2.97% for the six months ended March 31, 202 from 1.44% for the six months ended March 31, 2023 due to the higher market interest rate environment while the average balance increased $110.9 million, or 22.8%, to $597.5 million for the six months ended March 31, 2024 from $486.6 million for the six months ended March 31, 2023. As a result, interest paid on interest-bearing deposits increased $5.4 million to $8.9 million for the six months ended March 31, 2024 from $3.5 million for the six months ended March 31, 2023.

Interest expense on borrowings increased $102 thousand, or 28.7%, to $457 thousand for the six months ended March 31, 2024 from $355 thousand for the six months ended March 31, 2023. Higher market interest rates resulted in a 2-basis point increase in the cost of borrowings to 3.14% for the six months ended March 31, 2024 from 3.12% for the six months ended March 31, 2023. The average balance of borrowings increased $6.4 million to $29.2 million for the six months ended March 31, 2024 from $22.8 million for the six months ended March 31, 2023 to partially fund the growth in the Company’s loans receivable.

Provision for Credit Losses. The Company recorded a provision for credit losses of $495 thousand for the six months ended March 31, 2024 compared to $513 thousand for the six months ended March 31, 2023. Provisions for credit losses resulted from growth in the Company’s loan portfolio, particularly construction and commercial real estate loans, during the six months ended March 31, 2024. The Company recorded $66 thousand in net loan recoveries during the six months ended March 31, 2024 compared with $102 thousand in net loan charge-offs during the six months ended March 31, 2023.

Other Income. Other income increased $2 thousand, or 0.2%, to $1.2 million during the six months ended March 31, 2024 compared to $1.2 million for the six months ended March 31, 2023. The increase was due to the $60 thousand gains on sales of premises and equipment, $32 thousand increase in loan prepayment fees, $5 thousand increased in other operating incomes and $1 thousand increase in bank owned life insurance incomes, partially offset by a $57 thousand decrease in interest rate swap fees and lower gains from the sale of Small Business Administration loans, which decreased $39 thousand to $342 thousand for the six months ended March 31, 2024 from $381 thousand for the six months ended March 31, 2023.

Other Expenses. Other expenses increased $751 thousand, or 8.0%, to $10.1 million during the six months ended March 31, 2024 from $9.4 million during the six months ended March 31, 2023. The increase was primarily attributable to higher compensation and benefit expense, which increased $459 thousand, or 8.5%, to $5.9 million, due to annual merit increases as well as fewer open positions between periods and the additions of a commercial lender and a commercial credit analyst. Other expenses increased $206 thousand, or 21.7%, from higher recruitment costs, loan origination and servicing costs, OREO expenses and operating expenses.

Income Tax Expense. The Company recorded tax expense of $1.2 million on pre-tax income of $4.8 million for the six months ended March 31, 2024, compared to $1.6 million on pre-tax income of $5.2 million for the six months ended March 31, 2023. The decrease in income tax expense was primarily driven by changes in deferred tax items during the period. The Company’s effective tax rate for the six months ended March 31, 2024 was 25.7% compared with 30.3% for the six months ended March 31, 2023.

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 March 31, 2024, we had an aggregate borrowing capacity of $117.8 million. There has been no material adverse change during the six months ended March 31, 2024 in the ability of the Company and its subsidiaries to fund their operations.

At March 31, 2024, the Company had commitments outstanding under letters of credit totaling $860 thousand, commitments to originate loans totaling $35.0 million, and commitments to fund undisbursed balances of closed loans and unused lines of credit totaling $93.4 million. There has been no material change during the three months ended March 31, 2024 in any of the Company’s other contractual obligations or commitments to make future payments.

Capital Requirements

At March 31, 2024, the Bank’s Tier 1 capital as a percentage of the Bank’s total assets was 10.88%, and total qualifying capital as a percentage of risk-weighted assets was 15.88%.

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 quarter ended March 31, 2024 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

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, 2023 filed on December 15, 2023.