MAGYAR BANCORP, INC. Overview
Magyar Bancorp, Inc. (the "Company") is aDelaware -chartered stock holding company whose most significant business activity is ownership of 100% of the common stock ofMagyar Bank .Magyar Bank's principal business is attracting retail deposits from the general public and investing those deposits, together with funds generated from operations, principal repayments on loans and securities and borrowed funds, into one-to four-family residential mortgage loans, multi-family and commercial real estate mortgage loans, home equity loans and lines of credit, commercial business loans and construction loans. Our results of operations depend primarily on our net interest income which is the difference between the interest we 36
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earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our net interest income is primarily affected by the market interest rate environment, the shape of theU.S. Treasury yield curve, the timing of the placement of interest-earning assets and interest-bearing liabilities, and the prepayment rate on our mortgage-related assets. Other factors that may affect our results of operations are general and local economic and competitive conditions, government policies and actions
of regulatory authorities. During the year endedSeptember 30, 2022 , the Company's total assets grew$24.6 million , or 3.2%, to$798.5 million . The increase was attributable to a$34.5 million increase, or 5.9%, to$619.8 million in loans receivable, net of allowance of loss and a$30.3 million increase, or 42.9%, to$100.9 million in investment securities, partially offset by a$44.3 million decrease in cash
and cash equivalents. Stockholders' equity increased$861,000 , or 0.9%, to$98.5 million atSeptember 30, 2022 from$97.6 million atSeptember 30, 2021 . The increase in stockholders' equity was primarily attributable to the Company's results of operations for the year endedSeptember 30, 2022 , partially offset by stock repurchases dividends paid and other comprehensive loss. OnJuly 21, 2022 , the Company announced a stock repurchase program of up to 5% of its outstanding shares of common stock, or 354,891 shares. The Company repurchased 352,697 shares at an average price of$12.90 per share throughSeptember 30, 2022 , reducing outstanding shares to 6,745,128. In addition, during the year endedSeptember 30, 2022 , the Company paid dividends totaling$0.21 per share. Total deposits increased$27.9 million , or 4.4%, to$667.7 million during the year endedSeptember 30, 2022 from$639.8 million atSeptember 30 2021 . The growth in deposits during the twelve months endedSeptember 30, 2022 occurred in money market account balances, which increased$34.3 million , or 18.3%, to$222.2 million , in interest-bearing checking account balances, which increased$27.3 million , or 38.3% to$98.6 million , in non-interest checking account balances, which increased$442,000 , or 0.2%, to$182.4 million , and in savings account balances, which increased$126,000 , or 0.2%, to$81.9 million . Offsetting these increases was a$34.3 million , or 29.3%, decrease in certificates of deposit (including individual retirement accounts), to$82.6 million .
The Company's net income increased$1.8 million , or 29.4%, to$7.9 million during the year endedSeptember 30, 2022 compared with net income of$6.1 million for the year endedSeptember 30, 2021 . The increase in net income was due to higher net interest and dividend income, lower provisions for loan losses, and lower non-interest expenses, partially offset by lower non-interest income. Throughout fiscal 2023, we expect to continue increasing our commercial real estate and commercial business loans while managing non-interest expenses in an effort to increase profitability of the Company. 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. We consider the following to be our critical accounting policies.
Allowance for Loan Loss. The allowance for loan losses is the amount estimated by management as necessary to cover credit losses in the loan portfolio both probable and reasonably estimable at the balance sheet date. The allowance is established through the provision for loan losses which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of our most critical. Due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses, the methodology for determining the allowance for loan losses is considered a critical accounting policy by management. As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans and discounted cash flow valuations of properties are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisals and discounted cash flow valuations are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly affect the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals and discounted cash flow valuations are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans.
Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. We consider a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics,
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geographic and industry concentrations, the adequacy of the underlying
collateral, the financial strength of the borrower, results of internal loan
reviews and other relevant factors. This evaluation is inherently subjective as
it requires material estimates by management that may be susceptible to
significant change based on changes in economic and real estate market
conditions.
The evaluation has a specific and general component. The specific component
relates to loans that are delinquent or otherwise identified as impaired through
the application of our loan review process and our loan grading system. All such
loans are evaluated individually, with principal consideration given to the
value of the collateral securing the loan and discounted cash flows. Specific
impairment allowances are established as required by this analysis. However, the
Bank's Federal and State regulators generally require that the specific reserve
against impaired collateral-dependent loans be charged-off, reducing the
carrying balance of the loan and allowance for loan loss. The general component
is determined by segregating the remaining loans by type of loan, risk weighting
(if applicable) and payment history. We analyze historical loss experience,
delinquency trends, general economic conditions and geographic and industry
concentrations in establishing the general portion of the reserve. This analysis
establishes factors that are applied to the loan groups to determine the amount
of the general component of the allowance for loan losses.
Actual loan losses may be significantly greater than the allowances we have established, which could have a material negative effect on our financial results.
For the fiscal year endedSeptember 30, 2022 and through the fiscal year endingSeptember 30, 2023 , we followed and will follow the incurred loss methodology for determining our allowance for loan loss. We intend to adopt the CECL standard for determining the amount of our allowance for credit loss beginningOctober 1, 2023 .
Deferred Income Taxes. The Company records income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities: (i) are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns; (ii) are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases; and (iii) are measured using enacted tax rates expected to apply in the years when those temporary differences are expected to be recovered or settled.
Deferred tax assets are likely to be realized and therefore do not have a valuation allowance.
Comparison of Financial Condition at
Total Assets. Total assets increased$24.6 million , or 3.2%, to$798.5 million during the year endedSeptember 30, 2022 compared with$774.0 million atSeptember 30, 2021 . The change was attributable to a$34.5 million , or 5.9%, increase in loans receivable, net of allowance of loss, to$619.8 million and a$30.3 million , or 42.9%, increase in investment securities to$100.9 million , partially offset by a$44.3 million decrease in cash and cash equivalents. Stockholders' equity increased$861,000 , or 0.9%, to$98.5 million atSeptember 30, 2022 from$97.6 million atSeptember 30, 2021 . Loans Receivable. Total loan receivable increased$34.3 million , or 5.8%, to$628.9 million atSeptember 30, 2022 from$594.6 million atSeptember 30, 2021 . Growth occurred in commercial real estate loans, which increased$61.9 million , or 22.1%, to$342.8 million and in one-to four-family residential mortgage loans (including home equity lines of credit), which increased$12.1 million , or 5.5%, to$233.1 million . Offsetting these increases were decreases in commercial business loans, which decreased$34.0 million , or 49.5%, to$34.7 million , in construction loans, which decreased$5.1 million , or 25.2%, to$15.2 million and in other consumer loans, which decreased$621,000 , or 16.6%, to$3.1 million . Included in the reduction of commercial business loans were the repayment of$25.1 million in PPP loans. Total loans receivable atSeptember 30, 2022 were comprised of$342.8 million (54.5%) in commercial real estate loans,$214.4 million (34.1%) in one- to four- family residential mortgage loans,$34.7 million (5.5%) in commercial business loans,$15.2 million (2.4%) in construction loans, and$21.8 million (3.5%) in home equity lines of credit and other loans. For comparison, total loans receivable atSeptember 30, 2021 were comprised of$280.8 million (47.2%) in commercial real estate loans,$203.0 million (34.2%) in one- to four- family residential mortgage loans,$68.7 million (11.6%) in commercial business loans (including$25.1 million in PPP loans),$20.4 million (3.4%) in construction loans, and$21.7 million (3.6%) in home equity lines of credit and other loans. Total non-performing loans decreased$5.3 million , or 65.3%, to$2.8 million atSeptember 30, 2022 from$8.2 million atSeptember 30, 2021 . The ratio of non-performing loans to total loans was 0.5% atSeptember 30, 2022 compared to 1.4% atSeptember 30, 2021 . 38 Table of Contents There were no non-performing loans secured by one-to four-family residential properties, including home equity lines of credit and other consumer loans, atSeptember 30, 2022 , compared with$1.2 million atSeptember 30, 2021 . During the year endedSeptember 30, 2022 , there were no charge-offs against the allowance for loan loss for residential real estate loans while$1,000 was recovered
from prior year charge-offs.
There were no non-performing commercial real estate loans atSeptember 30, 2022 , compared with$1.1 million atSeptember 30, 2021 . During the year endedSeptember 30, 2022 there were no charge-offs against the allowance for loan loss and for commercial real estate loans while$53,000 was recovered from prior
year charge-offs. There were no non-performing commercial business loans atSeptember 30, 2022 , compared with$1.3 million atSeptember 30, 2021 . During the year endedSeptember 30, 2022 there were no charge-offs against the allowance for loan loss for commercial business loans and there were no recoveries from prior year charge-offs. Non-performing construction loans decreased$1.7 million , or 38.1%, to$2.8 million atSeptember 30, 2022 from$4.6 million atSeptember 30, 2021 .Magyar Bank had begun foreclosure proceedings on the properties securing these loans atSeptember 30, 2022 . During the year endedSeptember 30, 2022 , there were no charge-offs or recoveries on construction loans. The ratio of non-performing loans and troubled debt restructurings to total loans receivable decreased to 0.53% atSeptember 30, 2022 from 1.43% atSeptember 30, 2021 . The allowance for loan losses increased$358,000 to$8.4 million , or 297.5% of non-performing loans atSeptember 30, 2022 compared with$8.1 million , or 99.0% of non-performing loans, atSeptember 30, 2021 . Provisions for loan loss during the year endedSeptember 30, 2022 were$304,000 while net recoveries were$54,000 , compared with a provision of$1.6 million and net recoveries of$46,000 for the prior year period. The allowance for loan losses was 1.34% and 1.36% of gross loans outstanding atSeptember 30, 2022
and 2021, respectively.Investment Securities .Investment securities increased$30.3 million , or 42.9%, to$100.9 million atSeptember 30, 2022 from$70.6 million atSeptember 30, 2021 . Investment securities atSeptember 30, 2022 consisted of$64.3 million in mortgage-backed securities issued byU.S. government agencies andU.S. government-sponsored enterprises,$24.8 million inU.S. government-sponsored enterprise debt securities,$8.0 million in corporate notes,$3.5 million in municipal bonds and$224,000 in "private-label" mortgage-backed securities. There were no other-than-temporary-impairment charges for the Company's investment securities for the year endedSeptember 30, 2022 . Securities available-for-sale decreased$3.7 million , or 28.6%, to$9.2 million atSeptember 30, 2022 from$12.9 million atSeptember 30, 2021 . The decrease was attributable to$1.9 million in principal repayments and unrealized losses of$1.7 million . There were no purchases of securities available-for-sale during the year endedSeptember 30, 2022 . Securities held-to-maturity increased$34.0 million , or 58.9%, to$91.6 million atSeptember 30, 2022 from$57.7 million atSeptember 30, 2021 . The increase was the result of$41.1 million in security purchases, partially offset by$7.0 million in principal repayments and the amortization of$112,000 in net premiums paid during the year endedSeptember 30, 2022 .Bank-Owned Life Insurance .The cash surrender value of life insurance held for directors and officers ofMagyar Bank increased$3.4 million , or 23.6%, to$17.7 million atSeptember 30, 2022 from$14.3 million atSeptember 30, 2021 . The Company purchased new policies on officers of the Bank totaling$3.0 million and recorded an increase in the cash surrender value of the policies totaling$372,000 during the twelve months endedSeptember 30, 2022 . Other Real Estate Owned. OREO decreased$355,000 , or 55.8%, to$281,000 atSeptember 30, 2022 from$636,000 atSeptember 30, 2021 due to the sale of two properties during the year. The Company's OREO was reduced to one commercial real estate property totaling$281,000 that was under contract of sale atSeptember 30, 2022 . Deposits. Deposits, which include noninterest-bearing demand deposits, interest-bearing demand deposits, money market deposits, savings deposits and time deposits, are the primary source of the Company's funds. The Company offers a variety of products designed to attract and retain customers, with primary focus on building and expanding relationships. The Company continues to focus on establishing relationships with business borrowers, seeking deposits as well as lending relationships. Total deposits increased$27.9 million , or 4.4%, to$667.7 million atSeptember 30, 2022 from$639.8 million atSeptember 30, 2021 . The increase in deposits during the twelve month endedSeptember 30, 2022 occurred in money market account balances, which increased$34.3 million , or 18.3%, to$222.2 million , in interest-bearing checking account balances, which increased$27.3 million , or 38.3% to$98.6 million , in non-interest checking account balances, which increased 39 Table of Contents$442,000 , or 0.2%, to$182.4 million , and in savings account balances, which increased$126,000 , or 0.2%, to$81.9 million . Offsetting these increases was a$34.3 million , or 29.3%, decrease in certificates of deposit (including individual retirement accounts), to$82.6 million . Included in certificates of deposit were$6.0 million in brokered certificates of deposit at September
30, 2022 and 2021.
The Company's deposit strategy in 2022 focused on growing its non-interest checking account balances and reducing the overall cost of its interest-bearing liabilities to offset rising market interest rates.
Borrowed Funds. Borrowings decreased$7.7 million , or 33.1%, to$15.6 million atSeptember 30, 2022 from$23.4 million atSeptember 30, 2021 . The decrease was due to the repayment of maturing long-term FHLBNY advances. Stockholders' Equity. Stockholders' equity increased$861,000 , or 0.9%, to$98.5 million atSeptember 30, 2022 from$97.6 million atSeptember 30, 2021 . The increase was attributable to the Company's net income from operations totaling$7.9 million , partially offset by$4.5 million in share repurchases,$1.4 million in dividends paid, and$1.2 million in other comprehensive losses. The Company's book value per share increased to$14.60 atSeptember 30, 2022 from$13.76 atSeptember 30, 2021 , based on total equity of$98.5 million and 6,745,128 shares outstanding.
Comparison of Operating Results for the Years Ended
Net Income. The Company's net income increased$1.8 million , or 29.4%, to$7.9 million during the year endedSeptember 30, 2022 compared with$6.1 million for the year endedSeptember 30, 2021 due to higher net interest and dividend income, lower provisions for loan losses, and lower non-interest expenses, partially offset by lower non-interest income. Net Interest and Dividend Income. The primary source of the Company's operating income is net interest and dividend income, which is the difference between interest and dividends earned on earning assets and fees earned on loans, and interest paid on interest-bearing liabilities. The Company's net interest and dividend income is affected by regulatory, economic and competitive factors that influence interest rates, loan demand, deposit flows and levels of nonperforming assets.
During the year endedSeptember 30, 2022 , net interest and dividend income increased$1.4 million , or 5.6%, to$27.0 million compared to$25.6 million for the year endedSeptember 30, 2021 . Interest and dividend income increased$975,000 , or 3.4%, to$29.5 million atSeptember 30, 2022 from$28.5 million atSeptember 30, 2021 , while interest expense decreased$457,000 , or 15.5%, to$2.5 million atSeptember 30, 2022 from$2.9 million atSeptember 30, 2021 . The Company's net interest margin increased eight basis points to 3.61% for the year endedSeptember 30, 2022 from 3.53% for the year endedSeptember 30, 2021 .
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Average Balance Sheet. The following table presents certain information
regarding our financial condition and net interest income for the years ended
September 30, 2022 , 2021 and 2020. The table presents the annualized average
yield on interest-earning assets and the annualized average cost of
interest-bearing liabilities. We derived the yields and costs by dividing
annualized income or expense by the average balance of interest-earning assets
and interest-bearing liabilities, respectively, for the periods shown. We
derived average balances from daily balances over the periods indicated.
Interest income includes fees that we consider adjustments to yields.
For the Year Ended September 30,
2022 2021
Interest Interest
Average Income/ Yield/Cost Average Income/ Yield/Cost
Balance Expense (Annualized) Balance Expense (Annualized)
(Dollars In Thousands)
Interest-earning assets:
Interest-earning deposits $ 53,714 $ 264 0.49% $ 61,655 $ 88 0.14%
Loans receivable, net 600,630 27,841 4.64% 605,176 27,551 4.55%
Securities
Taxable 89,001 1,279 1.44% 55,487 789 1.42%
Tax-exempt (1) 2,769 52 1.89% 410 7 1.64%
FHLBNY stock 1,547 78 5.02% 1,925 95 4.94%Total interest-earning assets 747,661 29,514 3.95%
724,653 28,530 3.94%
Noninterest-earning assets 45,960 44,193
Total assets $ 793,621 $ 768,846
Interest-bearing liabilities:
Savings accounts (2) $ 85,834 156 0.18% $ 87,812 $ 155 0.18%
NOW accounts (3) 288,222 1,007 0.35% 258,261 707 0.27%
Time deposits (4) 96,442 907 0.94% 116,944 1,425 1.22%
Total interest-bearing
deposits 470,498 2,070 0.44% 463,017 2,287 0.49%
Borrowings 18,399 414 2.25% 47,220 654 1.39%
Total interest-bearing
liabilities 488,897 2,484 0.51% 510,237 2,941 0.58%
Noninterest-bearing
liabilities 200,702 188,084
Total liabilities 689,599 698,321
Retained earnings 104,022 70,525
Total liabilities and
retained earnings $ 793,621 $ 768,846
Tax-equivalent basis
adjustment (11 ) (2 )
Net interest and dividend
income $ 27,019 $ 25,587
Interest rate spread 3.44% 3.36%
Net interest-earning assets $ 258,764 $ 214,416
Net interest margin (5) 3.61% 3.53%
Average interest-earning
assets to
average interest-bearing
liabilities 152.93% 142.02%
(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.
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Rate/Volume Analysis.The following table presents the effects of changing rates
and volumes on our net interest income for the periods indicated. The rate
column shows the effects attributable to changes in rate (changes in rate
multiplied by average volume). The volume column shows the effects attributable
to changes in volume (changes in average volume multiplied by prior rate). The
net column represents the sum of the prior columns. For purposes of this table,
changes attributable to both rate and volume, which cannot be segregated, have
been allocated proportionately, based on the changes due to rate and the changes
due to volume.
September 30,
2022 vs. 2021
Increase (decrease) due to
Volume Rate Net
(In thousands)
Interest-earning assets:
Interest-earning deposits $ (13 ) $ 189 $ 176
Loans (220 ) 510 290
Securities
Taxable 479 11 490
Tax-exempt (1) 44 1 45
FHLBNY stock (19 ) 2 (17 )
Total interest-earning assets 272 712 984
Interest-bearing liabilities:
Savings accounts (2) 1 0 1
NOW accounts (3) 84 216 300
Time deposits (4) (224 ) (294 ) (518 )Total interest-bearing deposits (139 ) (78 ) (217 ) Borrowings (523 ) 283 (240 ) Total interest-bearing liabilities (661 ) 204 (457 ) Increase (decrease) in tax equivalent net interest income$ 933 $ 508 $
1,441
Change in tax-equivalent basis adjustment (9 ) Increase in net interest income$ 1,432 (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. Interest and Dividend Income.Interest and dividend income increased$975,000 , or 3.4%, to$29.5 million for the year endedSeptember 30, 2022 from$28.5 million for the year endedSeptember 30, 2021 . The average balance of interest-earnings assets between the two periods increased$23.0 million , or 3.2%, to$747.7 million from$724.6 million , while the yield on such assets increased 1 basis point to 3.95% for the year endedSeptember 30, 2022 from 3.94% for the year endedSeptember 30, 2021 . The increase in yield on the Company's assets was attributable to 1) the reinvestment of repaid Paycheck Protection Program ("PPP") loans (earning 1.0%) into higher yielding commercial real estate loans, 2) the receipt of$681,000 in prior period interest income during the year endedSeptember 30, 2022 from previously non-performing loans, and 3) higher market interest rates, which increased the yield on the Company's interest-earning deposits with banks. Offsetting these increases was a$1.2 million decrease in PPP loan fees recognized, which totaled$836,000 during the twelve months endedSeptember 30, 2022 compared with$2.0 million for the twelve months endedSeptember 30, 2021 . Interest income on loans increased$290,000 , or 1.1%, to$27.8 million for the year endedSeptember 30, 2022 from$27.5 million for the year endedSeptember 30, 2021 , while the average balance of loans decreased$4.5 million , or 0.8%, to$600.6 million from$605.2 million . The average yield on such loans increased nine basis points to 4.64% atSeptember 30, 2022 from 4.55% for the year endedSeptember 30, 2021 . 42 Table of Contents Interest earned on investment securities, including interest earned on deposits but excluding FHLBNY stock, increased$702,000 , or 79.6%, to$1.6 million for the year endedSeptember 30, 2022 from$882,000 for fiscal 2021. The increase was attributable to a 35 basis point increase in the average yield on investment securities and interest earned on deposits to 1.10% from 0.75%, and a$27.9 million , or 23.8%, increase in the average balance of investment securities and interest earning deposits to$145.5 million from$117.5 million during the
year endedSeptember 30, 2022 . Interest Expense. Interest expense decreased$457,000 , or 15.5%, to$2.5 million for the year endedSeptember 30, 2022 from$2.9 million for the year endedSeptember 30, 2021 . The average balance of interest-bearing liabilities decreased$21.3 million , or 4.2%, between the two periods while the cost of such liabilities decreased seven basis points to 0.51% for the year endedSeptember 30, 2022 compared with the prior year period. Lower market interest rates were primarily responsible for the drop in the cost of the Company's interest-bearing liabilities for the year endedSeptember 30, 2022 . The average balance of interest-bearing deposits increased$7.5 million , or 1.6%, to$470.5 million for the year endedSeptember 30, 2022 from$463.0 million for the prior year while the average cost of such deposits decreased 5 basis points to 0.44% from 0.49%. Interest expense on deposits decreased$217,000 , or 9.5%, to$2.1 million for the year endedSeptember 30, 2022 from$2.3 million for the year endedSeptember 30, 2021 . Interest expense on advances decreased$240,000 , or 36.7%, to$414,000 for the year endedSeptember 30, 2022 from$654,000 for the year endedSeptember 30, 2021 . The average cost of borrowings increased 86 basis points to 2.25% for the year endedSeptember 30, 2022 from 1.39% for the year endedSeptember 30, 2021 while the average balance of those borrowings decreased$28.8 million to$18.4 million for the year endedSeptember 30, 2022 from$47.2 million the prior year. 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. The provision for loan losses decreased$1.3 million , or 81.3%, to$304,000 for the year endedSeptember 30, 2022 compared to$1.6 million for the year endedSeptember 30, 2021 . The lower provisions resulted from lower qualitative adjustment factors to the historical loss rates in fiscal 2022 compared with the prior year as well as lower balances in higher risk segments of the loan portfolio. There were net recoveries of$54,000 during the year endedSeptember 30, 2022 compared with net recoveries of$46,000 for the year endedSeptember 30, 2021 . Other Income. Other income decreased$694,000 , or 20.4%, to$2.7 million during the twelve months endedSeptember 30, 2022 compared to$3.4 million for the twelve months endedSeptember 30, 2021 . Fees for other customer services decreased to$0 for fiscal 2022 from$777,000 for fiscal 2021, during which the Company received a fee of three percent of the Small Business Relief Grants
it assisted with processing. Higher gains from the sale of SBA loans helped offset lower interest rate swap fees between periods. The Bank sells the guaranteed portion of its SBA loans in the secondary market. During the year endedSeptember 30, 2022 ,$9.5 million in loans were sold, generating$925,000 in gains compared with sales of$6.4 million and$749,000 in gains for the twelve months endedSeptember 30, 2021 . During the twelve months endedSeptember 30, 2022 , the Company generated$76,000 in interest rate swap fees compared with$313,000 for the year endedSeptember 30, 2021 . Other Expenses. Other expenses decreased$381,000 , or 2.0%, to$18.3 million compared to$18.6 million for the year endedSeptember 30, 2021 . The decrease was primarily attributable to professional fees, which decreased$657,000 , or 38.2%, due to lower legal and consulting fees related to the collection and foreclosure of non-performing loans. Loan servicing expenses andFDIC deposit insurance premiums decreased$212,000 and$207,000 , respectively, from lower levels of non-performing loans and the Company's higher capital levels. Partially offsetting these decreases were higher compensation and marketing and business development expenses. Compensation and benefit expense increased$411,000 , or 3.9%, due to annual merit increases, fewer open positions within the Bank, and higher incentive plan accruals. Marketing and business development expenses increased$221,000 , or 97.8%, as the Bank is celebrating its 100 year anniversary with increased events and advertising, while business development opportunities increased as the COVID pandemic restrictions were lifted. 43
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Income Tax Expense.The Company recorded tax expense of$3.3 million on income of$11.2 million for the year endedSeptember 30, 2022 compared with tax expense of$2.6 million on income of$8.7 million for the year endedSeptember 30, 2021 . The higher income tax expense resulted from a$2.5 million increase in the Company's results from operations.
The Company's effective tax rate for the year ended
Management of Market Risk
General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, our Board of Directors has established anAsset and Liability Management Committee which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. Senior management monitors the level of interest rate risk on a regular basis and theAsset and Liability Committee meets at least on a quarterly basis to review our asset/liability policies and interest rate risk position. We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. As part of our ongoing asset-liability management, we seek to manage our exposure to interest rate risk by retaining in our loan portfolio fewer fixed-rate residential loans, by originating and retaining adjustable-rate loans in the residential, construction and commercial real estate loan portfolios, by using alternative funding sources, such as advances from the FHLBNY, to "match fund" longer-term residential and commercial mortgage loans, and by originating and retaining variable-rate home equity and short-term and medium-term fixed-rate commercial business loans. We also offer a commercial loan swap product that allows the Bank to receive floating-rate interest loan payments while its borrowers pay a fixed rate of interest on their loans. We have also increased money market account deposits as a percentage of our total deposits. Money market accounts offer a variable rate based on market indications. By following these strategies, we believe that we are well-positioned to react to changes in market interest rates. Net Interest Income Analysis.The table below sets forth, as ofSeptember 30, 2022 , the estimated changes in our Net Interest Income ("NII") for each of the next two years that would result from the designated instantaneous changes in interest rates. These estimates require making certain assumptions including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain and, as a result, we cannot precisely predict the impact of changes in interest rates on net interest income. Actual results may differ significantly due to timing, magnitude and frequency of interest rate changes and changes in market conditions. Further, certain shortcomings are inherent in the methodology used in the interest rate risk measurement. Modeling changes in net interest income require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. Change in Estimated Decrease Estimated Increase Interest rates Estimated in NII Year 1
Estimated (Decrease) in NII Year 2 (Basis Points)(1) NII Year 1 Amount Percentage NII Year 2 Amount
Percentage
(Dollars in thousands)
+200 $ 28,550 $ (212 ) -0.74% $ 31,968 $ 1,056 3.42%
Unchanged 28,762 - - 30,912 - -
-200 27,816 (946 ) -3.29% 28,259 (2,653 ) -8.58%
(1) Assumes an instantaneous uniform change in interest rates at all maturities.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations of a
short-term nature. Our primary sources of funds consist of deposit inflows, loan
repayments, FHLBNY borrowings and maturities and sales of investment securities.
While maturities and scheduled amortization of loans and securities are
predictable sources of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition. Our
Asset/Liability Management Committee is responsible for establishing and
monitoring our liquidity targets and strategies in
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order to ensure that sufficient liquidity exists for meeting the borrowing needs of our customers as well as unanticipated contingencies. We seek to maintain a liquidity ratio of 5.0% of assets or greater. The liquidity ratio is calculated by determining the sum of the difference between liquid assets (cash and unpledged investment securities) and short-term liabilities (estimated 30-day deposit outflows), plus our borrowing capacity from the FHLBNY and dividing the sum by total assets. AtSeptember 30, 2022 , our liquidity ratio was 16.6% of assets. We regularly adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short-and intermediate-term securities. Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. AtSeptember 30, 2022 , cash and cash equivalents totaled$30.9 million compared with$75.2 million atSeptember 30, 2021 . Securities classified as available-for-sale, which provide additional sources of liquidity from sales, totaled$9.2 million atSeptember 30, 2022 compared with$12.9 million atSeptember 30, 2021 . AtSeptember 30, 2022 , we also had the ability to borrow$138.9 million from the FHLBNY compared with$151.2 million atSeptember 30 2021 . On that date, we had an aggregate of$15.6 million in advances outstanding and$40.0 million in municipal letters of credit outstanding with the FHLBNY. Our cash flows are derived from operating activities, investing activities and financing activities as reported in our consolidated Statements of Cash Flows included in our consolidated Financial Statements. AtSeptember 30, 2022 , we had$52.5 million in loan origination commitments outstanding. In addition to commitments to originate loans, we had$73.8 million in unused lines of credit to borrowers. Certificates of deposit due within one year ofSeptember 30, 2022 totaled$44.6 million , or 6.7% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits and FHLBNY advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit (including individual retirement accounts and brokered certificate deposit accounts) due on or beforeSeptember 30, 2023 . We believe, however, that based on past experience a significant portion of our certificates of deposit (including individual retirement accounts and brokered certificate deposit accounts) will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered. Our primary investing activities are the origination of loans and the purchase of investment securities. We originated$159.2 million in loans and we purchased$41.1 million of investment securities for the year endedSeptember 30, 2022 . Comparatively, we originated$159.0 million in loans (including$35.3 million in PPP loans) and purchased$49.5 million of investment securities for the year endedSeptember 30, 2021 . Financing activities consist primarily of activity in deposit accounts and FHLBNY advances. We experienced a net increase in total deposits of$27.9 million , or 4.4%, to$667.7 million for the year endedSeptember 30, 2022 compared with a net increase in total deposits of$21.5 million , or 3.5%, to$639.8 million for the year endedSeptember 30, 2021 . Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLBNY, which provide an additional source of funds. FHLBNY advances totaled$15.6 million and$23.4 million atSeptember 30, 2022 andSeptember 30, 2021 , respectively. FHLBNY advances have primarily been used to fund loan demand. In addition to borrowings, the Bank has the ability to raise deposits on the brokered market or through deposit listing services. AtSeptember 30, 2022 , the Bank held$6.0 million in brokered deposits and$14.6 million from deposit listing services.Magyar Bank is subject to various regulatory capital requirements, (see "Supervision and Regulation-Federal Banking Regulation-Capital Requirements"). As ofSeptember 30, 2022 ,Magyar Bank's Tier 1 capital as a percentage of the Bank's average assets was 11.13% and the total qualifying capital as a percentage of risk-weighted assets was 16.47%. Bank-owned life insurance is a tax-advantaged financing transaction that is used to offset employee benefit plan costs. Policies are purchased insuring directors and officers ofMagyar Bank using a single premium method of payment.Magyar Bank is the owner and beneficiary of the policies and records tax-free income through cash surrender value accumulation. We have minimized our credit exposure by choosing carriers that are highly rated and limiting the concentration of any one carrier. The investment in bank-owned life insurance has no significant impact on our capital and liquidity. 45 Table of Contents
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit, standby letters of credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans made by us. For additional information, see Note P, "Commitments," and Note Q "Financial Instruments with Off-Balance-Sheet Risk" to our consolidated financial statements. Contractual Obligations.In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases
for premises and equipment. The following table summarizes our significant fixed and determinable contractual obligations and other funding needs by payment date atSeptember 30, 2022 . The payment amounts represent those amounts due to the recipient and do not include any unamortized premiums or discounts or other similar carrying
amount adjustments.
Payments Due by Period
Less Than One to Three to More Than
September 30, 2022 One Year Three Years Five Years Five Years Total
(In thousands)
Federal Home Loan Bank advances $ 4,741 $ 7,884 $ 3,000 $ - $ 15,625
Operating leases 738 1,270 789 1,199 3,996
Total $ 5,479 $ 9,154 $ 3,789 $ 1,199 $ 19,621 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting companies.
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