Magyar Bancorp, Inc.: Form 10-Q for the period ended Dec 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, levels of uninsured deposits, 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.

Comparison of Financial Condition at December 31, 2024 and September 30, 2024

Total Assets. Total assets increased $56.5 million, or 5.9%, to $1.0 billion at December 31, 2024 from $951.9 million at September 30, 2024. The increase was attributable to higher interest-earning deposits with banks and higher balances of loans receivable.

Interest Earning Deposits. Total cash and cash equivalents increased $32.9 million, or 128.7%, to $58.5 million at December 31, 2024 from $25.6 million at September 30, 2024 resulting from higher deposits, partially offset by higher loans receivable and investments.

Loans Receivable. Total loans receivable increased $25.3 million, or 3.2%, to $805.5 million at December 31, 2024 from $780.2 million at September 30, 2024. The increase in total loans receivable during the quarter ended December 31, 2024 occurred primarily in commercial real estate loans, which increased $20.1 million, or 4.4%, to $481.4 million, or 59.7% of loans. The Company also grew in construction loans, which increased $3.3 million, and one-to four-family residential real estate loans (including home equity lines of credit), which increased $2.2 million. Partially offsetting these increases were commercial business loans, which decreased $231 thousand.

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 December 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 December 31, 2024:

December 31, 2024

(Dollars in thousands)

As of December 31, 2024 and September 30, 2024, non-owner occupied commercial real estate loans (as defined by regulatory guidance) to total risk-based capital were estimated at approximately 280% and 270%, respectively. 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 December 31, 2024 and September 30, 2024, we had $0 and $116 thousand of non-performing commercial real estate loans, respectively.

Total non-performing loans increased $107 thousand, or 46.1%, to $339 thousand at December 31, 2024 from $232 thousand at September 30, 2024. The increase was due to the addition of two loans secured by residential mortgages, partially offset by the payoff of one loan secured by commercial real estate. The ratio of non-performing loans to total loans increased to 0.04% at December 31, 2024 from 0.03% at September 30, 2024.

The allowance for credit losses increased $204 thousand to $8.2 million, or 1.02% of total loans receivable, during the three months ended December 31, 2024. Growth in loans receivable during the quarter resulted in additional provisions for credit losses totaling $101 thousand and the Company recorded $103 thousand in net loan recoveries. The Company’s allowance for on-balance sheet credit losses increased to $7.9 million at December 31, 2024 from $7.5 million at September 30, 2024 while its reserve for off-balance sheet commitments decreased to $340 thousand at December 31, 2024 from $449 thousand at September 30, 2024.

The allowance for on-balance sheet loan losses as a percentage of non-performing loans decreased to 2,318.6% at December 31, 2024 from 3,253.5% at September 30, 2024. The allowance for on-balance sheet loan losses as a percentage of total loans was 0.97% at December 31, 2024 and September 30, 2024, respectively. 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 December 31, 2024, investment securities totaled $98.0 million, reflecting an increase of $2.6 million, or 2.7%, from $95.4 million at September 30, 2024. The increase resulted from $4.9 million purchase of mortgage-backed securities, offset by principal repayments totaling $2.1 million and a $237 thousand decrease in the market value of the Company’s available-for-sale investment securities during the three months ended December 31, 2024.

Investment securities at December 31, 2024 consisted of $68.3 million in mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises, $19.0 million in U.S. government-sponsored enterprise debt securities, $7.1 million in corporate notes, $3.4 million in municipal bonds, and $187 thousand in “private-label” mortgage-backed securities. There was no allowance for credit losses for the Company’s investment securities for the three months ended December 31, 2024.

Deposits. Total deposits increased $52.2 million, or 6.5%, to $848.8 million at December 31, 2024 from $796.7 million at September 30, 2024. The inflow in deposits occurred in money market accounts, which increased $27.0 million, or 8.9%, to $331.6 million, in interest-bearing checking accounts, which increased $22.0 million, or 15.0%, to $168.8 million, in savings accounts, which increased $2.4 million, or 4.6%, to $55.3 million, and in certificates of deposit (including individual retirement accounts), which increased $2.3 million, or 1.4%, to $161.9 million. Partially offsetting these increases was a $1.6 million, or 1.2%, decrease in non-interest bearing checking accounts to $131.2 million.

Borrowed Funds. Borrowings increased $1.9 million, or 6.5%, to $30.4 million at December 31, 2024 from $28.6 million at September 30, 2024. During the three months ended December 31, 2024, the Company borrowed an additional $1.9 million from the Federal Home Loan Bank of New York under a program that provides a zero-cost advance for a three-year term.

Stockholders’ Equity. Stockholders’ equity increased $1.1 million, or 1.0%, to $111.7 million at December 31, 2024 from $110.5 million at September 30, 2024. The increase was due to the results from operations, partially offset by dividends paid totaling $0.09 per share and the repurchase of 31,737 shares during the quarter at an average share price of $13.75. The Company’s book value per share increased to $17.23 at December 31, 2024 from $16.98 at September 30, 2024.

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

The following table presents certain information regarding the Company’s financial condition and net interest income for the three months ended December 31, 2024 and 2023. The table presents the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown. We derived average balances from daily balances over the period indicated. Interest income includes fees that we consider adjustments to yields.

(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 December 31, 2024 and 2023

Net Income. Net income increased $443 thousand, or 26.2%, to $2.1 million for the three-month period ended December 31, 2024 compared with net income of $1.7 million for the three months ended December 31, 2023. The increase was due to higher net interest income, lower provisions for credit losses and higher other income, partially offset by higher other expenses.

Net Interest and Dividend Income. Net interest and dividend income increased $200 thousand, or 2.8%, to $7.4 million for the three months ended December 31, 2024 from $7.2 million for the three months ended December 31, 2023. The increase was attributable to a $44.1 million increase in the average balance of interest-earning assets between periods, partially offset by a seven-basis point decrease in the Company’s net interest margin to 3.22% for the three months ended December 31, 2024 from 3.29% for the three months ended December 31, 2023.

Interest and Dividend Income. Interest and dividend income increased $1.3 million, or 11.7%, to $12.9 million for the three months ended December 31, 2024 compared with $11.6 million for the three months ended December 31, 2023. The increase was attributable to a 33-basis point increase in the yield on earning assets to 5.59% for the three months ended December 31, 2024 from 5.26% for the three months ended December 31, 2023 as well as a $44.1 million, or 5.1%, increase in the average balance of interest-earning assets. The increase in yield on the Company’s assets was attributable to higher market interest rates on loans and investments between periods.

The average balance of loans receivable, net of allowance for credit losses, increased $82.8 million to $786.0 million during the three months ended December 31, 2024 from $703.2 million during the three months ended December 31, 2023, while the yield on loans receivable increased 30 basis points to 5.99% for the three months ended December 31, 2024 from 5.69% for the three months ended December 31, 2023 due to higher market interest rates. The higher average balance and yield accounted for a $1.8 million, or 17.7%, increase in loan interest income between periods.

Interest earned on investment securities, including interest-earning deposits and excluding FHLB stock, decreased $433 thousand, or 30.5%, to $987 thousand for the three months ended December 31, 2024 from $1.4 million for the three months ended December 31, 2023. The average yield on such assets decreased 33 basis points to 3.06% for the three months ended December 31, 2024 from 3.39% for the three months ended December 31, 2023 while the average balance of investment securities and interest-earning deposits decreased by $38.8 million, or 23.2%, to $128.2 million for the three months ended December 31, 2024 from $167.0 million for the three months ended December 31, 2023.

Interest Expense. Interest expense increased $1.2 million, or 26.6%, to $5.5 million for the three months ended December 31, 2024 from $4.3 million for the three months ended December 31, 2023. The cost of interest-bearing liabilities increased 25 basis points to 3.05% for the three months ended December 31, 2024 compared with 2.80% for the three months ended December 31, 2023 while the average balance of interest-bearing liabilities increased $99.0 million, or 16.2%, to $710.2 million.

The average balance of interest-bearing deposits increased $99.1 million, or 17.0%, to $680.7 million for the three months ended December 31, 2024 from $581.6 million for the three months ended December 31, 2023, while the average cost of such deposits increased 28 basis points to 3.06% from 2.78%. As a result, interest paid on interest-bearing deposits increased $1.2 million to $5.3 million for the three months ended December 31, 2024 compared with $4.1 million for the three months ended December 31, 2023.

Interest paid on borrowings decreased $28 thousand, or 11.9%, to $208 thousand for the three months ended December 31, 2024 from $236 thousand for the three months ended December 31, 2023. While the average balance of borrowings only decreased $48 thousand to $29.5 million for the three months ended December 31, 2024 compared to $29.6 million for the three months ended December 31, 2023, the cost of the borrowings decreased by 36 basis points to 2.80% for the three months ended December 31, 2024 from 3.16% for the three months ended December 31, 2023.

Provision for Credit Losses. The provision for credit losses decreased to $101 thousand for the three months ended December 31, 2024 compared to $481 thousand for the three months ended December 31, 2023. Provisions for on-balance sheet credit losses were $209 thousand from growth in total loans receivable during the quarter and net recoveries of previously charged-off commercial business loans totaling $103 thousand. The Company reduced its allowance for off-balance sheet credit losses by $108 thousand from the contraction in unfunded lines of credit during the quarter.

Other Income. Other income increased $347 thousand, or 57.0%, to $956 thousand during the three months ended December 31, 2024 compared to $609 thousand for the three months ended December 31, 2023. The increase was the result of higher gains on the sale of other real estate owned, which totaled $224 thousand for the three months ended December 31, 2024 compared with $0 for the three months ended December 31, 2023, and higher gains on the sale of SBA loans, which totaled $236 thousand for the three months ended December 31, 2024 compared with $129 thousand for the three months ended December 31, 2023. In addition, income on bank owned life insurance increased $72 thousand, or 75.8%, to $167 thousand from the Company’s restructure of policies totaling $7.9 million during the quarter ended September 30, 2024.

Other Expenses. Other expenses increased $389 thousand, or 7.7%, to $5.4 million during the three months ended December 31, 2024 compared to $5.0 million for the three months ended December 31, 2023. The increase was attributable to higher compensation and occupancy expenses, partially offset by lower data processing expenses.

Compensation and benefit expenses increased $234 thousand, or 8.2%, to $3.1 million due to the additions of a commercial lender and a commercial credit analyst, higher medical insurance expenses, higher incentive accruals and annual merit increases. Occupancy expenses increased $201 thousand, or 25.4%, to $991 thousand due to the opening and operation of the Bank’s new branch office in Martinsville, NJ. In addition, the Company incurred one-time lease termination expenses totaling $130,000 related to the closure of the Bank’s Bridgewater office during the three months ended December 31, 2024. The relocation of the Bank’s branch office from Bridgewater to Martinsville is expected to save the Company $225 thousand per year.

Data processing expenses decreased $49 thousand, or 35.0%, to $91 thousand for the three months ended December 31, 2024 from $140 thousand for the three months ended December 31, 2023. During the three months ended December 31, 2024, the Bank extended its core services contract, resulting in the expedited usage of existing flex credits available under the original contract term.

Income Tax Expense. The Company recorded tax expense of $805 thousand on pre-tax income of $2.9 million for the three months ended December 31, 2024, compared to tax expense of $700 thousand on pre-tax income of $2.4 million for the three months ended December 31, 2023. The Company’s effective tax rate for the three months ended December 31, 2024 was 27.9% compared with 29.8% for the three months ended December 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 December 31, 2024, we had an aggregate borrowing capacity of $135.3 million. There has been no material adverse change during the nine months ended December 31, 2024 in the ability of the Company and its subsidiaries to fund their operations.

At December 31, 2024, the Company had commitments outstanding under letters of credit totaling $735 thousand, commitments to originate loans totaling $67.6 million, and commitments to fund undisbursed balances of closed loans and unused lines of credit totaling $74.8 million. There has been no material change during the current quarter ended December 31, 2024 in any of the Company’s other contractual obligations or commitments to make future payments.

Capital Requirements

At December 31, 2024, the Bank’s Tier 1 capital as a percentage of the Bank’s total assets was 11.20%, and total qualifying capital as a percentage of risk-weighted assets was 15.65%.

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 December 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, 2024 filed with the U.S. Securities and Exchange Commission on December 19, 2024.