Company Quick10K Filing
Quick10K
Magyar Bancorp
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$11.60 6 $68
10-Q 2019-03-31 Quarter: 2019-03-31
10-Q 2018-12-31 Quarter: 2018-12-31
10-K 2018-09-30 Annual: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-K 2017-09-30 Annual: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-K 2016-09-30 Annual: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-K 2015-09-30 Annual: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-K 2014-09-30 Annual: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-05-23 Enter Agreement, Officers, Exhibits
8-K 2019-04-23 Earnings, Exhibits
8-K 2019-02-13 Regulation FD, Exhibits
8-K 2019-02-13 Shareholder Vote, Exhibits
8-K 2019-01-24 Earnings, Exhibits
8-K 2019-01-24 Earnings, Exhibits
8-K 2018-11-07 Earnings, Exhibits
8-K 2018-07-24 Earnings, Exhibits
8-K 2018-05-08 Accountant, Exhibits
8-K 2018-04-25 Earnings, Exhibits
8-K 2018-02-15 Shareholder Vote, Exhibits
8-K 2018-01-25 Earnings, Exhibits
GWPH GW Pharmaceuticals 5,610
CR Crane 5,130
ENR Energizer Holdings 3,040
ARNA Arena Pharmaceuticals 2,540
ANAV Alpha Network Alliance Ventures 0
OW Owens-Illinois Group 0
CASM CAS Medical Systems 0
RSO Exantas Capital 0
NOVA Nova Star Innovations 0
REAC Renewable Energy Acquisition 0
MGYR 2019-03-31
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3- Quantitative and Qualitative Disclosures About Market Risk
Item 4 - Controls and Procedures
Part II - Other Information
Item 1.Legal Proceedings
Item 1A.Risk Factors
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.Defaults Upon Senior Securities
Item 4.Mine Safety Disclosures
Item 5.Other Information
Item 6.Exhibits
EX-31.1 ex31-1.htm
EX-31.2 ex31-2.htm
EX-32.1 ex32-1.htm
EX-32.2 ex32-2.htm

Magyar Bancorp Earnings 2019-03-31

MGYR 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 form10q-22166_mgyr.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

 

Commission File Number      000-51726

 

Magyar Bancorp, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware 20-4154978
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification Number)
   
400 Somerset Street, New Brunswick, New Jersey 08901    
(Address of Principal Executive Office) (Zip Code)

 

(732) 342-7600

(Issuer’s Telephone Number including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  o   Accelerated filer   o
Non-accelerated filer   o   Smaller reporting company þ
Emerging growth company o      

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

 

The number of shares outstanding of the issuer's common stock at May 1, 2019 was 5,820,746.

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading symbol Name of each exchange on which registered
Common Stock, $.01 per share MGYR The NASDAQ Global Market

 

 

 

 

MAGYAR BANCORP, INC.

 

Form 10-Q Quarterly Report

 

Table of Contents

 

 

PART I. FINANCIAL INFORMATION

 

    Page Number
     
Item 1. Financial Statements 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 34
Item 4. Controls and Procedures 34
     
PART II. OTHER INFORMATION
     
Item 1. Legal Proceedings 35
Item 1A. Risk Factors 35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
Item 3. Defaults Upon Senior Securities 35
Item 4. Mine Safety Disclosures 35
Item 5. Other Information 35
Item 6. Exhibits 35
     
Signature Pages 36
     
     

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

(In Thousands, Except Share and Per Share Data)

 

   

   March 31,   September 30, 
   2019   2018 
Assets  (Unaudited)     
         
Cash  $1,106   $674 
Interest earning deposits with banks   47,064    14,694 
Total cash and cash equivalents   48,170    15,368 
           
Investment securities - available for sale, at fair value   24,347    22,469 
Investment securities - held to maturity, at amortized cost (fair value of          
$33,236 and $32,151 at March 31, 2019 and September 30, 2018, respectively)   33,920    33,645 
Federal Home Loan Bank of New York stock, at cost   2,031    2,164 
Loans receivable, net of allowance for loan losses of $4,600 and $4,200          
at March 31, 2019 and September 30, 2018, respectively   515,380    508,430 
Bank owned life insurance   11,990    11,843 
Accrued interest receivable   2,237    2,181 
Premises and equipment, net   16,586    16,990 
Other real estate owned ("OREO")   7,558    8,586 
Other assets   2,743    2,292 
           
Total assets  $664,962   $623,968 
           
Liabilities and Stockholders' Equity          
Liabilities          
Deposits  $571,794   $530,137 
Escrowed funds   2,714    2,285 
Federal Home Loan Bank of New York advances   32,559    35,524 
Accrued interest payable   222    193 
Accounts payable and other liabilities   4,347    4,467 
           
Total liabilities   611,636    572,606 
           
Stockholders' equity          
Preferred stock: $.01 Par Value, 1,000,000 shares authorized; none issued        
Common stock: $.01 Par Value, 8,000,000 shares authorized;          
5,923,742 issued; 5,820,746 shares outstanding          
at March 31, 2019 and September 30, 2018   59    59 
Additional paid-in capital   26,314    26,310 
Treasury stock: 102,996 shares          
at March 31, 2019 and September 30, 2018, at cost   (1,152)   (1,152)
Unearned Employee Stock Ownership Plan shares   (285)   (356)
Retained earnings   29,427    27,975 
Accumulated other comprehensive loss   (1,037)   (1,474)
           
Total stockholders' equity   53,326    51,362 
           
Total liabilities and stockholders' equity  $664,962   $623,968 

 

The accompanying notes are an integral part of these consolidated financial statements.

1 

 

MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Operations

(In Thousands, Except Share and Per Share Data)

 

   For the Three Months   For the Six Months 
   Ended March 31,   Ended March 31, 
   2019   2018   2019   2018 
   (Unaudited) 
Interest and dividend income                    
Loans, including fees  $6,226   $5,408   $12,353   $10,843 
Investment securities                    
Taxable   546    416    1,034    837 
Federal Home Loan Bank of New York stock   37    33    82    64 
                     
Total interest and dividend income   6,809    5,857    13,469    11,744 
                     
Interest expense                    
Deposits   1,508    871    2,946    1,765 
Borrowings   180    165    370    327 
                     
Total interest expense   1,688    1,036    3,316    2,092 
                     
Net interest and dividend income   5,121    4,821    10,153    9,652 
                     
Provision for loan losses   106    257    307    506 
                     
Net interest and dividend income after                    
provision for loan losses   5,015    4,564    9,846    9,146 
                     
Other income                    
Service charges   279    222    600    480 
Income on bank owned life insurance   73    74    147    146 
Other operating income   30    43    61    67 
Gains on sales of loans   151    30    151    216 
Gains on sales of investment securities   32        32    107 
                     
Total other income   565    369    991    1,016 
                     
Other expenses                    
Compensation and employee benefits   2,517    2,443    4,960    4,801 
Occupancy expenses   744    755    1,484    1,472 
Professional fees   278    255    569    484 
Data processing expenses   154    143    307    280 
OREO expenses   214    168    261    400 
FDIC deposit insurance premiums   109    95    216    205 
Loan servicing expenses   47    78    106    158 
Insurance expense   49    43    102    101 
Other expenses   377    375    776    790 
Total other expenses   4,489    4,355    8,781    8,691 
                     
Income before income tax expense   1,091    578    2,056    1,471 
                     
Income tax expense   324    182    604    746 
                     
Net income  $767   $396   $1,452   $725 
                     
Net income per share-basic and diluted  $0.13   $0.07   $0.25   $0.12 
                     
Weighted average basic and diluted shares outstanding   5,820,746    5,820,746    5,820,746    5,820,746 

 

The accompanying notes are an integral part of these consolidated financial statements.

2 

MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

(In Thousands)

               

   For the Three Months   For the Six Months 
   Ended March 31,   Ended March 31, 
   2019   2018   2019   2018 
   (Unaudited) 
Net income  $767   $396   $1,452   $725 
Other comprehensive income (loss)                    
Unrealized gain (loss) on                    
securities available for sale   297    (352)   639    (319)
Less reclassification adjustments for:                    
Net unrealized gains on securities                    
reclassified available for sale               104 
Net gains realized on securities                    
available for sale   (32)       (32)   (107)
Other comprehensive income (loss), before tax   265    (352)   607    (322)
Deferred income tax effect   (75)   88    (170)   88 
Total other comprehensive income (loss)   190    (264)   437    (234)
Total comprehensive income  $957   $132   $1,889   $491 

 

The accompanying notes are an integral part of these consolidated financial statements.

3 

 MAGYAR BANCORP, INC. AND SUBSIDIARY

 Consolidated Statements of Changes in Stockholders' Equity

 For the Three and Six Months Ended March 31, 2019 and 2018

 (In Thousands, Except for Share Amounts)

   

 

                           Accumulated     
   Common Stock   Additional       Unearned       Other     
   Shares   Par   Paid-In   Treasury   ESOP   Retained   Comprehensive     
   Outstanding   Value   Capital   Stock   Shares   Earnings   Loss   Total 
   (Unaudited) 
Balance, September 30, 2018   5,820,746   $59   $26,310   $(1,152)  $(356)  $27,975   $(1,474)  $51,362 
Net income                       685        685 
Other comprehensive income                           246    246 
ESOP shares allocated           4        35            39 
Balance, December 31, 2018   5,820,746   $59   $26,314   $(1,152)  $(321)  $28,660   $(1,228)  $52,332 
Net income                       767        767 
Other comprehensive loss                           191    191 
ESOP shares allocated                   36            36 
Balance, March 31, 2019   5,820,746   $59   $26,314   $(1,152)  $(285)  $29,427   $(1,037)  $53,326 

 

   Common Stock   Additional       Unearned       Accumulated
Other
     
   Shares   Par   Paid-In   Treasury   ESOP   Retained   Comprehensive     
   Outstanding   Value   Capital   Stock   Shares   Earnings   Loss   Total 
   (Unaudited) 
Balance, September 30, 2017   5,820,746   $59   $26,289   $(1,152)  $(492)  $25,757   $(1,004)  $49,457 
Net income                       329        329 
Other comprehensive income                           19    19 
ESOP shares allocated           6        33            39 
Balance, December 31, 2017   5,820,746   $59   $26,295   $(1,152)  $(459)  $26,086   $(985)  $49,844 
Net income                       396        396 
Other comprehensive loss                           (441)   (441)
Reclassification of the stranded tax                                        
effect related to defferred taxes for:                                        
Defined benefit pension plan*                       177        177 
Securities available-for-sale*                       11        11 
ESOP shares allocated           5        35            40 
Balance, March 31, 2018   5,820,746   $59   $26,300   $(1,152)  $(424)  $26,670   $(1,426)  $50,027 

 

(1) In January 2018, the Company adopted ASU 2018-02, as a result, the Company made a policy election to release income tax effects, as a result of the Tax Act, from AOCI to retained earnings.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4 

MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(In Thousands)

 

   For the Six Months Ended 
   March 31, 
   2019   2018 
   (Unaudited) 
Operating activities          
Net income  $1,452   $725 
Adjustment to reconcile net income to net cash provided          
by operating activities          
Depreciation expense   468    424 
Premium amortization on investment securities, net   56    76 
Provision for loan losses   307    506 
Provision for loss on other real estate owned   212    273 
Originations of SBA loans held for sale   (2,170)   (4,448)
Proceeds from the sales of SBA loans   2,321    4,664 
Gains on sale of loans receivable   (151)   (216)
Gains on sales of investment securities   (32)   (107)
Gains on the sales of other real estate owned   (35)   (30)
ESOP compensation expense   75    79 
Deferred income tax (benefit) expense   (158)   107 
Increase in accrued interest receivable   (56)   (34)
Increase in surrender value of bank owned life insurance   (147)   (146)
Increase in other assets   (463)   (121)
Increase in accrued interest payable   29    12 
(Decrease) increase in accounts payable and other liabilities   (120)   481 
Net cash provided by operating activities   1,588    2,245 
           
Investing activities          
Net increase in loans receivable   (11,643)   (14,217)
Purchases of loans receivable       (461)
Proceeds from the sale of loans receivable   4,386    1,200 
Purchases of investment securities held to maturity   (1,645)   (3,492)
Purchases of investment securities available for sale   (3,088)   (1,443)
Sales of investment securities held to maturity       3,408 
Sales of investment securities available for sale   947     
Principal repayments on investment securities held to maturity   1,338    1,817 
Principal repayments on investment securities available for sale   878    1,812 
Purchases of premises and equipment   (64)   (205)
Investment in other real estate owned   (11)   (182)
Proceeds from other real estate owned   862    845 
Redemptions (purchases) of Federal Home Loan Bank stock   133    (90)
Net cash used by investing activities   (7,907)   (11,008)
           
Financing activities          
Net increase in deposits   41,657    1,553 
Net increase in escrowed funds   429    227 
Proceeds from long-term advances   3,975     
(Repayments) proceeds of long-term advances   (6,940)   2,000 
Net cash provided by financing activities   39,121    3,780 
Net increase (decrease) in cash and cash equivalents   32,802    (4,983)
           
Cash and cash equivalents, beginning of period   15,368    22,334 
           
Cash and cash equivalents, end of period  $48,170   $17,351 
           
Supplemental disclosures of cash flow information          
Cash paid for          
Interest  $3,286   $2,081 
Income taxes  $414   $814 
Non-cash investing activities          
Investment securities transferred from held to maturity to available for sale  $   $12,619 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5 

 

MAGYAR BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

 

 

NOTE A – BASIS OF PRESENTATION

 

The consolidated financial statements include the accounts of Magyar Bancorp, Inc. (the “Company”), its wholly owned subsidiary, Magyar Bank (the “Bank”), and the Bank’s wholly owned subsidiaries Magyar Service Corporation, Hungaria Urban Renewal, LLC, and MagBank Investment Company. All material intercompany transactions and balances have been eliminated. The Company prepares its financial statements on the accrual basis and in conformity with accounting principles generally accepted in the United States of America ("US GAAP"). The unaudited information furnished herein reflects all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented.

 

Operating results for the three and six months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending September 30, 2019. The September 30, 2018 information has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by US GAAP for complete consolidated financial statements.

 

The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of other real estate owned, and the assessment of realizability of deferred income tax assets.

 

The Company has evaluated events and transactions occurring subsequent to the balance sheet date of March 31, 2019 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

 

 

NOTE B- RECENT ACCOUNTING PRONOUNCEMENTS

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which superseded the previous revenue recognition requirements in Topic 605, Revenue Recognition. ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” The Company’s main source of revenue is comprised of interest income on interest earning assets and non-interest income. The scope of the guidance explicitly excludes interest income as well as many other revenues for financial assets and liabilities including loans and investment securities.

 

Under previous U.S. GAAP, when full consideration is not expected and financing is required by the buyer to purchase the property, there were very prescriptive requirements in determining when foreclosed real estate property sold by an institution should be derecognized and a gain or loss be recognized. The new guidance that was applied to these sales is more principles based. For example, as it pertains to the criteria for determining how a contract should be accounted for under the new guidance, judgment will need to be exercised in evaluating if: (a) a commitment on the buyer’s part exists, (b) collection is probable in circumstances where the initial investment is minimal and (c) the buyer has obtained control of the asset, including the significant risks and rewards of the ownership. If there is no commitment on the buyer’s part, collection is not probable or the buyer has not obtained control of the asset, then a gain cannot be recognized under the new guidance. The initial investment requirement for the buyer along with the various methods for profit recognition are no longer applicable.

 

For deposit-related fees, considering the straightforward nature of the arrangements with the Company’s deposits customers, the Company's recognition and measurement outcomes of deposit-related fees was not significantly different under the new guidance compared to previous U.S. GAAP.

 

ASU 2014-09 was to be effective for interim and annual periods beginning after December 15, 2016 and was to be applied on either a modified retrospective or full retrospective basis. In August 2015, the FASB issued ASU 2015-14 which deferred the original effective date for all public business entities to be effective for annual reporting periods beginning after December 15, 2017 (October 1, 2018 for the Company), including interim reporting periods within that reporting period. The adoption of ASU 2014-09 did not have a significant impact on the Company’s consolidated financial statements.

 

6 

In January 2016, FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income; (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale. In addition, the amendments in this ASU require an entity to disclose the fair value of its financial instruments using the exit price notion. Exit price is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. For public entities, the guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017.  The Company has updated the fair value disclosure on Note G “Fair Value Disclosures” in this report to reflect adoption of this standard, to include using the exit price notion in the fair value disclosure of financial instruments. The Company`s adoption of the ASU did not have a significant impact on the Company's consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which will supersede the current lease requirements in Topic 840. The ASU requires lessees to recognize a right of use asset and related lease liability for all leases, with a limited exception for short-term leases. Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the statement of income. Currently, leases are classified as either capital or operating, with only capital leases recognized on the balance sheet. The reporting of lease related expenses in the statements of operations and cash flows will be generally consistent with the current guidance. The new guidance will be effective for years beginning after December 15, 2018 for public companies. Once effective, the standard will be applied using a modified retrospective transition method to the beginning of the earliest period presented. The Company is currently assessing the impacts this new standard will have on its consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. ASU 2016-13 requires entities to report “expected” credit losses on financial instruments and other commitments to extend credit rather than the current “incurred loss” model. These expected credit losses for financial assets held at the reporting date are to be based on historical experience, current conditions, and reasonable and supportable forecasts. This ASU will also require enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. For public business entities that are U.S. Securities and Exchange Commission filers, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on its consolidated financial statements.

 

In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, which clarifies that receivables arising from operating leases are not within the scope of Topic 326. In December 2018, regulators issued a final rule related to regulatory capital (Regulatory Capital Rule: Implementation and Transition of the Current Expected Credit Losses Methodology for Allowances and Related Adjustments to the Regulatory Capital Rule and Conforming Amendments to Other Regulations) which is intended to provide regulatory capital relief for entities transitioning to CECL. The Company does not plan to early adopt this guidance and will adopt this guidance on January 1, 2020.

 

In August 2017, the FASB issued the ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The purpose of this guidance is to better align a company’s financial reporting for hedging relationships with the company’s risk management activities by expanding strategies that qualify for hedge accounting, modifying the presentation of certain hedging relationships in the financial statements and simplifying the application of hedge accounting in certain situations. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted in any interim or annual period before the effective date. ASU 2017-12 was applied using a modified retrospective approach through a cumulative-effect adjustment related to the elimination of the separate measurement of ineffectiveness to the balance of accumulated other comprehensive income with a corresponding adjustment to retained earnings as of the beginning of the fiscal year in which the amendments in this update are adopted. The amended presentation and disclosure guidance is required only prospectively. Upon adoption, the ASU allows for the reclassification of debt securities eligible to be hedged under the ASU from held-to-maturity to available-for-sale. The Company adopted ASU 2017-12 during the quarter ended December 31, 2017 and reclassified ten mortgage-backed securities totaling $12.6 million from the held-to-maturity portfolio to the available-for-sale portfolio.

7 

In February 2018, the FASB issued ASU 2018-02, Income Statement- Reporting Comprehensive Income (Topic 220) – Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 allows a reclassification from accumulated other comprehensive income (loss) ("AOCI") to retained earnings for the stranded tax effects caused by the revaluation of deferred taxes resulting from the newly enacted corporate tax rate in the Tax Cuts and Jobs Act. The ASU is effective in years beginning after December 15, 2018, but permits early adoption in a period for which financial statements have not yet been issued. The Company elected to early adopt the ASU as of January 1, 2018 which resulted in a reclassification adjustment of $188,000 from AOCI to retained earnings in the consolidated statements of stockholders’ equity.

 

NOTE C - CONTINGENCIES

 

The Company, from time to time, is a party to routine litigation that arises in the normal course of business. In the opinion of management, the resolution of this litigation, if any, would not have a material adverse effect on the Company’s consolidated financial position or results of operations.

 

 

NOTE D - EARNINGS PER SHARE

 

Basic and diluted earnings per share for the three and six months ended March 31, 2019 and 2018 were calculated by dividing net income by the weighted-average number of shares outstanding for the period considering the effect of dilutive equity options and stock awards for the diluted earnings per share calculations.

 

   Three Months   Six Months 
   Ended March 31,   Ended March 31, 
   2019   2018   2019   2018 
   (In thousands except for per share data) 
                 
Income applicable to common shares  $767   $396   $1,452   $725 
Weighted average number of common shares                    
outstanding - basic   5,821    5,821    5,821    5,821 
Stock options and restricted stock                
Weighted average number of common shares                    
and common share equivalents - diluted   5,821    5,821    5,821    5,821 
                     
Basic earnings per share  $0.13   $0.07   $0.25   $0.12 
                     
Diluted earnings per share  $0.13   $0.07   $0.25   $0.12 

 

There were no outstanding options to purchase common stock at March 31, 2019 and March 31, 2018.

 

 

NOTE E – STOCK-BASED COMPENSATION AND STOCK REPURCHASE PROGRAM

 

The Company follows FASB Accounting Standards Codification (“ASC”) Section 718, Compensation-Stock Compensation, which covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. ASC 718 requires that compensation cost relating to share-based payment transactions be recognized in consolidated financial statements. The cost is measured based on the fair value of the equity or liability instruments issued.

 

8 

There were no grants, vested shares or forfeitures of non-vested restricted stock awards the three and six months ended March 31, 2019 and 2018 nor were there any stock option and stock award expenses included with compensation expense for the three and six months ended March 31, 2019 and 2018.

 

The Company announced in November 2007 its second stock repurchase program of up to 5% of its publicly-held outstanding shares of common stock, or 129,924 shares. Through March 31, 2019, the Company had repurchased a total of 81,000 shares of its common stock at an average cost of $8.33 per share under this program. No shares were repurchased during the six months ended March 31, 2019 and 2018, respectively. Under the stock repurchase program, 48,924 shares of the 129,924 shares authorized remained available for repurchase as of March 31, 2019. The Company’s intended use of the repurchased shares is for general corporate purposes. The Company held 102,996 total treasury stock shares at March 31, 2019.

 

The Company has an Employee Stock Ownership Plan ("ESOP") for the benefit of employees of the Company and the Bank who meet the eligibility requirements as defined in the plan. The ESOP trust purchased 217,863 shares of common stock in the open market using proceeds of a loan from the Company. The total cost of shares purchased by the ESOP trust was $2.3 million, reflecting an average cost per share of $10.58. The Bank makes cash contributions to the ESOP on an annual basis sufficient to enable the ESOP to make the required loan payments to the Company. The loan bears a variable interest rate that adjusts annually every January 1st to the then published Prime Rate (5.50% at January 1, 2019) with principal and interest payable annually in equal installments over thirty years. The loan is secured by shares of the Company’s stock.

 

As the debt is repaid, shares are released as collateral and allocated to qualified employees. Accordingly, the shares pledged as collateral are reported as unearned ESOP shares in the Consolidated Balance Sheets. As shares are released from collateral, the Company reports compensation expense equal to the then current market price of the shares, and the shares become outstanding for earnings per share computations.

 

At March 31, 2019, shares allocated to participants totaled 178,216. Unallocated ESOP shares held in suspense totaled 39,647 at March 31, 2019 and had a fair market value of $446,425. The Company's contribution expense for the ESOP was $75,000 and $79,000 for the six months ended March 31, 2019 and 2018, respectively.

 

 

NOTE F – OTHER COMPREHENSIVE INCOME

 

The components of other comprehensive income and the related income tax effects are as follows:

 

   Three Months Ended March 31, 
   2019   2018 
       Tax   Net of       Tax   Net of 
   Before Tax   Benefit   Tax   Before Tax   Benefit   Tax 
   Amount   (Expense)   Amount   Amount   (Expense)   Amount 
   (In thousands) 
Unrealized holding gain arising                              
during period on:                              
                               
Available-for-sale investments  $297   $(84)  $213   $(352)  $88   $(264)
                               
Less reclassification adjustments for:                              
Net gains realized on securities                              
available for sale (a) (b)   (32)   9    (23)            
                               
Other comprehensive income, net  $265   $(75)  $190   $(352)  $88   $(264)

 

9 

   Six Months Ended March 31, 
   2019   2018 
       Tax   Net of       Tax   Net of 
   Before Tax   Benefit   Tax   Before Tax   Benefit   Tax 
   Amount   (Expense)   Amount   Amount   (Expense)   Amount 
   (In thousands) 
Unrealized holding gain arising                              
during period on:                              
                               
Available-for-sale investments  $639   $(179)  $460   $(319)  $87   $(232)
                               
Less reclassification adjustments for:                              
Net unrealized gains on securities                              
reclassified available for sale               104    (32)   72 
Net gains realized on securities                              
available for sale (a) (b)   (32)   9    (23)   (107)   33    (74)
                               
                               
Other comprehensive income, net  $607   $(170)  $437   $(322)  $88   $(234)

 

(a) Realized gains on securities transactions included in gains on sales of investment securities in the accompanying Consolidated Statements of Operation.
(b) Tax effect included in income tax expense in the accompanying Consolidated Statements of Operation.    

 

 

NOTE G – FAIR VALUE DISCLOSURES

 

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets or liabilities on a non-recurring basis, such as held-to-maturity securities, mortgage servicing rights, loans receivable and other real estate owned, or OREO. These non-recurring fair value adjustments involve the application of lower-of-cost-or-market accounting or write-downs of individual assets.

 

In accordance with ASC 820, the Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:

 

  Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.
     
  Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.
     
  Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques. The results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability.

 

The Company based its fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

The following is a description of valuation methodologies used for assets measured at fair value on a recurring basis.

 

Securities available-for-sale

The securities available-for-sale portfolio is carried at estimated fair value on a recurring basis, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income/loss in stockholders’ equity. The securities available-for-sale portfolio consists of U.S government-sponsored mortgage-backed securities and private label mortgage-backed securities. The fair values of these securities are obtained from an independent nationally recognized pricing service. An independent pricing service provides the Company with prices which are categorized as Level 2, as quoted prices in active markets for identical assets are generally not available for the securities in the Company’s portfolio. Various modeling techniques are used to determine pricing for Company’s mortgage-backed securities, including option pricing and discounted cash flow models. The inputs to these models include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data.

 

10 

The following tables provide the level of valuation assumptions used to determine the carrying value of the Company’s assets measured at fair value on a recurring basis.

 

   Fair Value at March 31, 2019 
   Total   Level 1   Level 2   Level 3 
   (In thousands) 
Securities available for sale:                    
Obligations of U.S. government agencies:                    
Mortgage-backed securities - residential  $1,962   $   $1,962   $ 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed securities-residential   19,933        19,933     
Debt securities   2,452        2,452     
            Total securities available for sale  $24,347   $   $24,347   $ 

 

   Fair Value at September 30, 2018 
   Total   Level 1   Level 2   Level 3 
   (In thousands) 
Securities available for sale:                    
Obligations of U.S. government agencies:                    
Mortgage-backed securities - residential  $1,495   $   $1,495   $ 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed securities-residential   18,613        18,613     
Debt securities   2,361        2,361     
            Total securities available for sale  $22,469   $   $22,469   $ 

 

The following is a description of valuation methodologies used for assets measured at fair value on a non-recurring basis.

 

Mortgage Servicing Rights, net

Mortgage Servicing Rights (“MSRs”) are carried at the lower of cost or estimated fair value. The estimated fair value of MSR is determined through a calculation of future cash flows, incorporating estimates of assumptions market participants would use in determining fair value including market discount rates, prepayment speeds, servicing income, servicing costs, default rates and other market driven data, including the market’s perception of future interest rate movements and, as such, are classified as Level 3. The Company had MSRs totaling $37,000 and $45,000 at March 31, 2019 and September 30, 2018, respectively.

 

Impaired Loans

Loans which meet certain criteria are evaluated individually for impairment. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest and principal payments of a loan will be collected as scheduled in the loan agreement. Three impairment measurement methods are used, depending upon the collateral securing the asset: 1) the present value of expected future cash flows discounted at the loan’s effective interest rate (the rate of return implicit in the loan); 2) the asset’s observable market price; or 3) the fair value of the collateral, less anticipated selling and disposition costs, if the asset is collateral dependent. The regulatory agencies require the last method for loans from which repayment is expected to be provided solely by the underlying collateral. The Company’s impaired loans are generally collateral dependent and, as such, are carried at the estimated fair value of the collateral less estimated selling costs. Fair value is estimated through current appraisals, and adjusted as necessary, by management, to reflect current market conditions and, as such, are generally classified as Level 3.

 

11 

Appraisals of collateral securing impaired loans are conducted by approved, qualified, and independent third-party appraisers. Such appraisals are ordered via the Company’s credit administration department, independent from the lender who originated the loan, once the loan is deemed impaired, as described in the previous paragraph. Impaired loans are generally re-evaluated with an updated appraisal within one year of the last appraisal. However, the Company also obtains updated appraisals on performing construction loans that are approaching their maturity date to determine whether or not the fair value of the collateral securing the loan remains sufficient to cover the loan amount prior to considering an extension. The Company discounts the appraised “as is” value of the collateral for estimated selling and disposition costs and compares the resulting fair value of collateral to the outstanding loan amount. If the outstanding loan amount is greater than the discounted fair value, the Company requires a reduction in the outstanding loan balance or additional collateral before considering an extension to the loan. If the borrower is unwilling or unable to reduce the loan balance or increase the collateral securing the loan, it is deemed impaired and the difference between the loan amount and the fair value of collateral, net of estimated selling and disposition costs, is charged off through a reduction of the allowance for loan loss.

 

Other Real Estate Owned

The fair value of other real estate owned is determined through current appraisals, and adjusted as necessary, by management, to reflect current market conditions and anticipated selling and disposition costs. As such, other real estate owned is generally classified as Level 3.

 

The following tables provide the level of valuation assumptions used to determine the carrying value of the Company’s assets measured at fair value on a non-recurring basis at March 31, 2019 and September 30, 2018.

 

   Fair Value at March 31, 2019 
   Total   Level 1   Level 2   Level 3 
   (In thousands) 
                 
Impaired loans  $365   $   $   $365 
Other real estate owned   7,558            7,558 
Total  $7,923   $   $   $7,923 

 

  

   Fair Value at September 30, 2018 
   Total   Level 1   Level 2   Level 3 
   (In thousands) 
                 
Impaired loans  $464   $   $   $464 
Other real estate owned   8,586            8,586 
Total  $9,050   $   $   $9,050 

 

 

The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Company has utilized Level 3 inputs to determine fair value:

Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands)
         
  Fair Value Valuation    
March 31, 2019 Estimate Techniques Unobservable Input Range (Weighted Average)
         
Impaired loans  $        365 Appraisal of collateral (1) Appraisal adjustments (2)  -1.4% to -1.4% (-1.4%) 
Other real estate owned  $     7,558 Appraisal of collateral (1) Liquidation expenses (2) -7.8% to -48.5% (-18.4%)

 

12 

Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands)
         
  Fair Value Valuation    
September 30, 2018 Estimate Techniques Unobservable Input Range (Weighted Average)
         
Impaired loans  $        464 Appraisal of collateral (1) Appraisal adjustments (2) -10.2% to -32.0% (-21.3%)
Other real estate owned  $     8,586 Appraisal of collateral (1) Liquidation expenses (2) -5.6% to -48.5% (-15.4%)

 

(1)Fair value is generally determined through independent appraisals for the underlying collateral, which generally include various level 3 inputs which are not identifiable.
(2)Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

 

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments carried at cost or amortized cost as of March 31, 2019 and September 30, 2018.  This table excludes financial instruments for which the carrying amount approximates level 1 fair value.  For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization.  For financial liabilities such as interest-bearing demand, NOW, and money market savings deposits, the carrying amount is a reasonable estimate of fair value due to these products being payable on demand and having no stated maturity.

 

   Carrying   Fair   Fair Value Measurement Placement 
   Value   Value   (Level 1)   (Level 2)   (Level 3) 
   (In thousands) 
March 31, 2019                    
Financial instruments - assets                         
Investment securities held to maturity  $33,920   $33,236   $   $33,236   $ 
Loans   515,380    518,458            518,458 
                          
Financial instruments - liabilities                         
Certificates of deposit including retirement certificates   120,922    121,519        121,519     
Borrowings   32,559    32,520        32,520     
                          
September 30, 2018                         
Financial instruments - assets                         
Investment securities held to maturity  $33,645   $32,151       $32,151   $ 
Loans   508,430    505,479            505,479 
                          
Financial instruments - liabilities                         
Certificates of deposit including retirement certificates   130,343    130,813        130,813     
Borrowings   35,524    34,863        34,863     

 

There were no transfers between fair value measurement placements during the six months ended March 31, 2019.

 

 

NOTE H - INVESTMENT SECURITIES

 

The following tables summarize the amortized cost and fair values of securities available for sale at March 31, 2019 and September 30, 2018:

 

13 

   March 31, 2019 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   (In thousands) 
Securities available for sale:                    
Obligations of U.S. government agencies:                    
Mortgage-backed securities - residential  $1,937   $25   $   $1,962 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed securities-residential   20,059    49    (175)   19,933 
Debt securities   2,500        (48)   2,452 
            Total securities available for sale  $24,496   $74   $(223)  $24,347 

 

   September 30, 2018 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   (In thousands) 
Securities available for sale:                    
Obligations of U.S. government agencies:                    
Mortgage backed securities - residential  $1,463   $40   $(8)  $1,495 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed securities-residential   19,262    13    (662)   18,613 
Debt securities   2,500        (139)   2,361 
            Total securities available for sale  $23,225   $53   $(809)  $22,469 

 

The maturities of the debt securities and mortgage-backed securities available for sale at March 31, 2019 are summarized in the following table:

 

   March 31, 2019 
   Amortized   Fair 
   Cost   Value 
   (In thousands) 
Due within 1 year  $   $ 
Due after 1 but within 5 years   2,500    2,452 
Due after 5 but within 10 years        
Due after 10 years        
        Total debt securities   2,500    2,452 
           
Mortgage-backed securities:          
Residential   21,996    21,895 
Commercial        
        Total  $24,496   $24,347 

 

14 

The following tables summarize the amortized cost and fair values of securities held to maturity at March 31, 2019 and September 30, 2018:

 

   March 31, 2019 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   (In thousands) 
Securities held to maturity:                    
Obligations of U.S. government agencies:                    
Mortgage-backed securities - residential  $478   $   $(84)  $394 
Mortgage-backed securities - commercial   873        (9)   864 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed-securities - residential   26,730    44    (258)   26,516 
Debt securities   2,466    1    (33)   2,434 
Private label mortgage-backed securities - residential   373    2        375 
Corporate securities   3,000        (347)   2,653 
            Total securities held to maturity  $33,920   $47   $(731)  $33,236 

 

   September 30, 2018 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   (In thousands) 
Securities held to maturity:                    
Obligations of U.S. government agencies:                    
Mortgage-backed securities - residential  $568   $   $(93)  $475 
Mortgage-backed securities - commercial   904        (9)   895 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage backed securities - residential   26,316    4    (867)   25,453 
Debt securities   2,464        (142)   2,322 
Private label mortgage-backed securities - residential   393    1        394 
Corporate securities   3,000        (388)   2,612 
            Total securities held to maturity  $33,645   $5   $(1,499)  $32,151 

 

 

The maturities of the debt securities and the mortgage backed securities held to maturity at March 31, 2019 are summarized in the following table:

 

   March 31, 2019 
   Amortized   Fair 
   Cost   Value 
   (In  thousands) 
Due within 1 year  $   $ 
Due after 1 but within 5 years   1,499    1,500 
Due after 5 but within 10 years   3,967    3,587 
Due after 10 years        
        Total debt securities   5,466    5,087 
           
Mortgage-backed securities:          
Residential   27,581    27,285 
Commercial   873    864 
        Total  $33,920   $33,236 

 

15 

NOTE I – IMPAIRMENT OF INVESTMENT SECURITIES

 

The Company recognizes credit-related other-than-temporary impairment on debt securities in earnings while noncredit-related other-than-temporary impairment on debt securities not expected to be sold are recognized in other comprehensive income (“OCI”).

 

The Company reviews its investment portfolio on a quarterly basis for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and the intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in the market. The Company evaluates its intent and ability to hold debt securities based upon its investment strategy for the particular type of security and its cash flow needs, liquidity position, capital adequacy and interest rate risk position. In addition, the risk of future other-than-temporary impairment may be influenced by prolonged recession in the U.S. economy, changes in real estate values and interest deferrals.

 

Investment securities with fair values less than their amortized cost contain unrealized losses. The following tables present the gross unrealized losses and fair value at March 31, 2019 and September 30, 2018 for both available for sale and held to maturity securities by investment category and time frame for which the loss has been outstanding:

 

       March 31, 2019 
       Less Than 12 Months   12 Months Or Greater   Total 
   Number of   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Securities   Value   Losses   Value   Losses   Value   Losses 
       (Dollars in thousands) 
Obligations of U.S. government agencies:                            
Mortgage-backed securities - residential   2   $   $   $394   $(84)  $394   $(84)
Mortgage-backed securities - commercial   1            864    (9)   864    (9)
Obligations of U.S. government-sponsored enterprises:                                   
Mortgage-backed securities - residential   29    1,615    (6)   34,663    (427)   36,278    (433)
Debt securities   3            3,386    (81)   3,386    (81)
Private label mortgage-backed securities residential   1            91        91     
Corporate securities   1            2,653    (347)   2,653    (347)
        Total   37   $1,615   $(6)  $42,051   $(948)  $43,666   $(954)

 

       September 30, 2018 
       Less Than 12 Months   12 Months Or Greater   Total 
   Number of   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Securities   Value   Losses   Value   Losses   Value   Losses 
       (Dollars in thousands) 
Obligations of U.S. government agencies:                            
Mortgage-backed securities - residential   3   $532   $(8)  $475   $(93)  $1,007   $(101)
Mortgage-backed securities - commercial   1            895    (9)   895    (9)
Obligations of U.S. government-sponsored enterprises:                                   
Mortgage-backed securities - residential   34    11,336    (312)   30,605    (1,217)   41,941    (1,529)
Debt securities   4            4,683    (281)   4,683    (281)
Private label mortgage-backed securities residential   1            104        104     
Corporate securities   1            2,612    (388)   2,612    (388)
        Total   44   $11,868   $(320)  $39,374   $(1,988)  $51,242   $(2,308)

 

The Company evaluated these securities and determined that the decline in value was primarily related to fluctuations in the interest rate environment and were not related to any company or industry specific event. At March 31, 2019 and September 30, 2018, there were thirty-seven and forty-four investment securities, respectively, with unrealized losses.

 

The Company anticipates full recovery of amortized costs with respect to these securities. The Company does not intend to sell these securities and has determined that it is not more likely than not that the Company would be required to sell these securities prior to maturity or market price recovery. Management has considered factors regarding other than temporarily impaired securities and determined that there are no securities with impairment that is other than temporary as of March 31, 2019 and September 30, 2018.

 

16 

NOTE J – LOANS RECEIVABLE, NET AND RELATED ALLOWANCE FOR LOAN LOSSES

 

Loans receivable, net were comprised of the following:

 

   March 31,   September 30, 
   2019   2018 
   (In thousands) 
         
One-to four-family residential  $189,066   $185,287 
Commercial real estate   223,432    219,347 
Construction   33,493    30,412 
Home equity lines of credit   19,482    17,982 
Commercial business   49,225    53,320 
Other   5,178    6,150 
Total loans receivable   519,876    512,498 
Net deferred loan costs   104    132 
Allowance for loan losses   (4,600)   (4,200)
           
Total loans receivable, net  $515,380   $508,430 

 

The segments of the Bank’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The residential mortgage loan segment is further disaggregated into two classes: amortizing term loans, which are primarily first liens, and home equity lines of credit, which are generally second liens.  The commercial real estate loan segment is further disaggregated into three classes: loans secured by multifamily structures, owner-occupied commercial structures, and non-owner occupied nonresidential properties.  The construction loan segment consists primarily of loans to developers or investors for the purpose of acquiring, developing and constructing residential or commercial structures and to a lesser extent one-to-four family residential construction loans made to individuals for the acquisition of and/or construction on a lot or lots on which a residential dwelling is to be built.  Construction loans to developers and investors have a higher risk profile because the ultimate buyer, once development is completed, is generally not known at the time of the loan.  The commercial business loan segment consists of loans made for the purpose of financing the activities of commercial customers and consists primarily of revolving lines of credit. The other loan segment consists primarily of stock-secured installment loans, but also includes unsecured personal loans and overdraft lines of credit connected with customer deposit accounts.

 

Management evaluates individual loans in all segments for possible impairment if the loan either is in nonaccrual status, or is risk rated Substandard and is 90 days or more past due. Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  

 

Once the determination has been made that a loan is impaired, the recorded investment in the loan is compared to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral securing the loan, less anticipated selling and disposition costs. The method is selected on a loan by loan basis, with management primarily utilizing the fair value of collateral method. If there is a shortfall between the fair value of the loan and the recorded investment in the loan, the Company charges the difference to the allowance for loan loss as a charge-off and carries the impaired loan on its books at fair value. It is the Company’s policy to evaluate impaired loans on an annual basis to ensure the recorded investment in a loan does not exceed its fair value.

 

The following tables present impaired loans by class, segregated by those for which a specific allowance was required and charged-off and those for which a specific allowance was not necessary at six months ended March 31, 2019 and September 30, 2018:

17 

           Impaired         
           Loans with         
   Impaired Loans with   No Specific         
   Specific Allowance   Allowance   Total Impaired Loans 
                   Unpaid 
   Recorded   Related   Recorded   Recorded   Principal 
March 31, 2019  Investment   Allowance   Investment   Investment   Balance 
   (In thousands) 
                     
One-to four-family residential  $   $   $1,349   $1,349   $1,349 
Commercial real estate           3,911    3,911    3,911 
Construction           2,900    2,900    2,900 
Home equity lines of credit           39    39    39 
Commercial business           583    583    583 
Total impaired loans  $   $   $8,782   $8,782   $8,782 

 

           Impaired         
           Loans with         
   Impaired Loans with   No Specific         
   Specific Allowance   Allowance   Total Impaired Loans 
                   Unpaid 
   Recorded   Related   Recorded   Recorded   Principal 
September 30, 2018  Investment   Allowance   Investment   Investment   Balance 
   (In thousands) 
                     
One-to four-family residential  $   $   $1,132   $1,132   $1,132 
Commercial real estate           3,961    3,961    3,961 
Home equity lines of credit           58    58    58 
Commercial business           710    710    801 
Total impaired loans  $   $   $5,861   $5,861   $5,952 

 

The average recorded investment in impaired loans was $7.8 million and $6.9 million for the six months ended March 31, 2019 and 2018, respectively. The Company’s impaired loans include delinquent non-accrual loans and performing Troubled Debt Restructurings (“TDRs”), as TDRs remain impaired loans until fully repaid. There was one TDR during the six months ended March 31, 2019 totaling $365,000 that resulted from the restructure of a previously impaired, non-accrual loan. There were no TDRs during the six months ended March 31, 2018. During the six months ended March 31, 2019 and 2018, interest income of $109,000 and $157,000, respectively, was recognized for TDR loans while no interest income was recognized for delinquent non-accrual loans.

 

The following tables present the average recorded investment in impaired loans for the three and six months ended March 31, 2019 and 2018.

 

   Three Months   Six Months 
   March 31, 2019   March 31, 2019 
   (In thousands) 
         
One-to four-family residential  $1,240   $1,204 
Commercial real estate   3,923    3,936 
Construction   2,900    1,933 
Home equity lines of credit   49    52 
Commercial business   646    667 
Average investment in impaired loans  $8,758   $7,792 

18 

   Three Months   Six Months 
   March 31, 2018   March 31, 2018 
   (In thousands) 
         
One-to four-family residential  $2,531   $2,728 
Commercial real estate   3,658    3,801 
Commercial business   363    323 
Average investment in impaired loans  $6,552   $6,852 

 

Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. All loans greater than three months past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category.

 

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight.  Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as severe delinquency, bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. The Bank’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. The Asset Review Committee performs monthly reviews of all commercial relationships internally rated 6 (“Watch”) or worse.  Confirmation of the appropriate risk grade is performed by an external Loan Review Company that semi-annually reviews and assesses loans within the portfolio.  Generally, the external consultant reviews commercial relationships greater than $500,000 and/or criticized relationships greater than $250,000. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a monthly basis. 

 

The following tables present the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the Bank’s internal risk rating system at the dates presented:

 

       Special             
   Pass   Mention   Substandard   Doubtful   Total 
                     
   (In  thousands) 
March 31, 2019                    
One-to four-family residential  $188,663   $   $403   $   $189,066 
Commercial real estate   221,946    840    646        223,432 
Construction   30,593        2,900        33,493 
Home equity lines of credit   19,443        39        19,482 
Commercial business   48,873        352        49,225 
Other   5,178                5,178 
Total  $514,696   $840   $4,340   $   $519,876 

 

19 

       Special             
   Pass   Mention   Substandard   Doubtful   Total 
                     
   (In  thousands) 
September 30, 2018                    
One-to four-family residential  $185,118   $   $169   $   $185,287 
Commercial real estate   217,935    753    659        219,347 
Construction   30,412                30,412 
Home equity lines of credit   17,924        58        17,982 
Commercial business   52,845        475        53,320 
Other   6,150                6,150 
Total  $510,384   $753   $1,361   $   $512,498 

 

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans at the dates presented:

 

       30-59   60-89                 
       Days   Days   90 Days +   Total   Non-   Total 
   Current   Past Due   Past Due   Past Due   Past Due   Accrual   Loans 
   (In  thousands) 
March 31, 2019                            
One-to four-family residential  $188,055   $973   $   $38   $1,011   $38   $189,066 
Commercial real estate   220,955    2,027        450    2,477    450    223,432 
Construction   30,593            2,900    2,900    2,900    33,493 
Home equity lines of credit   19,443            39    39    39    19,482 
Commercial business   48,589    284        352    636    352    49,225 
Other   5,178                        5,178 
Total  $512,813   $3,284   $   $3,779   $7,063   $3,779   $519,876 

 

       30-59   60-89                 
       Days   Days   90 Days +   Total   Non-   Total 
   Current   Past Due   Past Due   Past Due   Past Due   Accrual   Loans 
   (In  thousands) 
September 30, 2018                            
One-to four-family residential  $185,132   $17   $   $138   $155   $138   $185,287 
Commercial real estate   218,892            455    455    455    219,347 
Construction   30,412                        30,412 
Home equity lines of credit   17,892            90    90    90    17,982 
Commercial business   52,845    252        223    475    223    53,320 
Other   6,150                        6,150 
Total  $511,323   $269   $   $906   $1,175   $906   $512,498 

 

An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio.  The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans (“NPLs”).

 

The Bank’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (discussed above) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance.  

 

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative and economic factors.

 

20 

The loans are segmented into classes based on their inherent varying degrees of risk, as described above. Management tracks the historical net charge-off activity by segment and utilizes this figure, as a percentage of the segment, as the general reserve percentage for pooled, homogenous loans that have not been deemed impaired. Typically, an average of losses incurred over a defined number of consecutive historical years is used.

 

Non-impaired credits are segregated for the application of qualitative factors. Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources include: national and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint.

 

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL.  When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL. Since loans individually evaluated for impairment are promptly written down to their fair value, typically there is no portion of the ALL for loans individually evaluated for impairment.

 

The following table summarizes the ALL by loan category and the related activity for the six months ended March 31, 2019:

  

   One-to-Four           Home Equity                 
   Family   Commercial       Lines of   Commercial             
   Residential   Real Estate   Construction   Credit   Business   Other   Unallocated   Total 
   (In  thousands) 
                                 
Balance- September 30, 2018  $687   $1,540   $493   $109   $1,151   $25   $195   $4,200 
Charge-offs                                
Recoveries               1                1 
Provision   11    50    181    11    31    (21)   (62)   201 
Balance- December 31, 2018  $698   $1,590   $674   $121   $1,182   $4   $133   $4,402 
Charge-offs                                
Recoveries   92                            92 
Provision   (80)   95    142    17    (78)   (1)   11    106 
Balance- March 31, 2019  $710   $1,685   $816   $138   $1,104   $3   $144   $4,600 

 

The following table summarizes the ALL by loan category and the related activity for the six months ended March 31, 2018:

 

   One-to-Four           Home Equity                 
   Family   Commercial       Lines of   Commercial             
   Residential   Real Estate   Construction   Credit   Business   Other   Unallocated   Total 
   (In  thousands) 
                                 
Balance-September 30, 2017  $587   $1,277   $490   $57   $956   $6   $102   $3,475 
Charge-offs   (127)               (170)           (297)
Recoveries   82    23    3        1            109 
Provision   21    (1)   (109)   74    265    (2)   2    250 
Balance-December 31, 2017  $563   $1,299   $384   $131   $1,052   $4   $104   $3,537 
Charge-offs   (25)                           (25)
Recoveries                                
Provision   (5)   119    58    (19)   106        (2)   257 
Balance- March 31, 2018  $533   $1,418   $442   $112   $1,158   $4   $102   $3,769 

 

21 

The following tables summarize the ALL by loan category, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of March 31, 2019 and September 30, 2018:  

 

                                 
   One-to-Four           Home Equity                 
   Family   Commercial       Lines of   Commercial             
   Residential   Real Estate   Construction   Credit   Business   Other   Unallocated   Total 
   (In  thousands) 
Allowance for Loan Losses:                                        
Balance - March 31, 2019  $710   $1,685   $816   $138   $1,104   $3   $144   $4,600 
Individually evaluated                                        
for impairment                                
Collectively evaluated                                        
for impairment   710    1,685    816    138    1,104    3    144    4,600 
                                         
Loans receivable:                                        
Balance - March 31, 2019  $189,066   $223,432   $33,493   $19,482   $49,225   $5,178   $   $519,876 
Individually evaluated                                        
for impairment   1,349    3,911    2,900    39    583            8,782 
Collectively evaluated                                        
for impairment   187,717    219,521    30,593    19,443    48,642    5,178        511,094 

 

   One-to- Four           Home Equity                 
   Family   Commercial       Lines of   Commercial             
   Residential   Real Estate   Construction   Credit   Business   Other   Unallocated   Total 
   (In  thousands) 
Allowance for Loan Losses:                                        
Balance - September 30, 2018  $687   $1,540   $493   $109   $1,151   $25   $195   $4,200 
Individually evaluated                                        
for impairment                                
Collectively evaluated                                        
for impairment   687    1,540    493    109    1,151    25    195    4,200 
                                         
Loans receivable:                                        
Balance - September 30, 2018  $185,287   $219,347   $30,412   $17,982   $53,320   $6,150   $   $512,498 
Individually evaluated                                        
for impairment   1,132    3,961        58    710            5,861 
Collectively evaluated                                        
for impairment   184,155    215,386    30,412    17,924    52,610    6,150        506,637 

 

The allowance for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that the segmentation of the loan portfolio into homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.

 

A Troubled Debt Restructuring (TDR) is a loan that has been modified whereby the Bank has agreed to make certain concessions to a borrower to meet the needs of both the borrower and the Bank to maximize the ultimate recovery of a loan. TDR occurs when a borrower is experiencing, or is expected to experience, financial difficulties and the loan is modified using a modification that would otherwise not be granted to the borrower. The types of concessions granted generally include, but are not limited to, interest rate reductions, limitations on the accrued interest charged, term extensions, and deferment of principal.

 

A default on a troubled debt restructured loan for purposes of this disclosure occurs when a borrower is 90 days past due or a foreclosure or repossession of the applicable collateral has occurred. There was one TDR for the three and six months ended March 31, 2019. There were no TDRs for the three and six months ended March 31, 2018.

22 

 

The following tables summarize the TDRs for the three and six months ended March 31, 2019:

 

   Three Months Ended March 31, 2019 
   Number of   Investment Before   Investment After 
   Loans   TDR Modification   TDR Modification 
   (Dollars in thousands) 
One-to four-family residential   1   $260   $365 
                
Total   1   $260   $365 

 

   Six Months Ended March 31, 2019 
   Number of   Investment Before   Investment After 
   Loans   TDR Modification   TDR Modification 
   (Dollars in thousands) 
One-to four-family residential   1   $260   $365 
                
Total   1   $260   $365 

 

 

NOTE K - DEPOSITS

 

A summary of deposits by type of account are summarized as follows:

 

   March 31,   September 30, 
   2019   2018 
   (In thousands) 
         
Demand accounts  $123,818   $104,745 
Savings accounts   74,585    81,373 
NOW accounts   47,151    46,336 
Money market accounts   205,318    167,340 
Certificates of deposit   103,612    112,014 
Retirement certificates   17,310    18,329 
Total deposits  $571,794   $530,137 

 

 

NOTE L – 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.

 

Where applicable, deferred tax assets are reduced by a valuation allowance for any portions determined not likely to be realized. The valuation allowance is assessed by management on a quarterly basis and adjusted, by a charge or credit to income tax expense, as changes in facts and circumstances warrant. In assessing whether it is more likely than not that some portion or all of the deferred tax assets will not be realized, management considers projections of future taxable income, the projected periods in which current temporary differences will be deductible, the availability of carry forwards, feasible and permissible tax planning strategies and existing tax laws and regulations. The Company did not have a valuation allowance against its net deferred tax assets at March 31, 2019 or September 30, 2018.

 

A reconciliation of income tax between the amounts calculated based upon pre-tax income at the Company’s federal statutory rate and the amounts reflected in the consolidated statements of operations are as follows:

23 

 

   For the Three Months   For the Six Months 
   Ended March 31,   Ended March 31, 
   2019   2018   2019   2018 
   (In thousands) 
                 
Income tax expense at the statutory federal tax rate                    
 of 21% and 24% for the three and six months ended                    
March 31, 2019 and 2018, respectively  $203   $138   $382   $352 
State tax expense   125    40    236    101 
Reduction of deferred tax asset from change in federal tax rate               306 
Other   (4)   4    (14)   (13)
Income tax expense  $324   $182   $604   $746 

 

On December 22, 2017, the Company revised its estimated annual effective rate to reflect a change in the United States federal corporate tax rate from 34% to 21%. The rate change was administratively effective to the beginning of our fiscal year resulting in the use of a statutory rate of 21% for the three and six months ended March 31, 2019 and a blended rate of 24% for the three and six months ended March 31, 2018. Included in the income tax expense for the six months ended March 31, 2018 was a $306,000 expense for a reduction in the Company’s net deferred tax assets resulting from the impact of the Tax Cuts and Jobs Act.

 

 

NOTE M - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

 

The Company uses derivative financial instruments, such as interest rate floors and collars, as part of its interest rate risk management. Interest rate caps and floors are agreements whereby one party agrees to pay or receive a floating rate of interest on a notional principal amount for a predetermined period of time if certain market interest rate thresholds are met. The Company considers the credit risk inherent in these contracts to be negligible.

 

As of March 31, 2019 and September 30, 2018, the Company did not hold any interest rate floors or collars.

 

In the normal course of business the Bank is a party to financial instruments with off-balance-sheet risk and in only to meet the financing needs of its customers. These financial instruments are commitments to extend credit are summarized in the below table. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.

 

   March 31,   September 30, 
   2019   2018 
   (In thousands) 
Financial instruments whose contract amounts          
represent credit risk          
Letters of credit  $1,914   $1,939 
Unused lines of credit   63,749    54,127 
Fixed rate loan commitments   3,100    4,397 
Variable rate loan commitments   13,099    12,523 
 Total  $81,862   $72,986 

 

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

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 Bank 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.

 

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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. We consider the following to be our critical accounting policies.

Allowance for Loan Losses. 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, 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. The general component is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. 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.

 

Other Real Estate Owned. Real estate acquired through foreclosure, or a deed-in-lieu of foreclosure, is recorded at fair value less estimated selling costs at the date of acquisition or transfer, and subsequently at the lower of its new cost or fair value less estimated selling costs. Adjustments to the carrying value at the date of acquisition or transfer are charged to the allowance for loan losses. The carrying value of the individual properties is subsequently adjusted to the extent it exceeds estimated fair value less estimated selling costs, at which time a provision for losses on such real estate is charged to operations.

 

25 

Appraisals are critical in determining the fair value of the other real estate owned amount. Assumptions for appraisals are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly affect the valuation of a property. The assumptions supporting such appraisals are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable.

Investment Securities. If the fair value of a security is less than its amortized cost, the security is deemed to be impaired. Management evaluates all securities with unrealized losses quarterly to determine if such impairments are “temporary” or “other-than-temporary” in accordance with applicable accounting guidance. The Company accounts for temporary impairments based upon security classification as either available-for-sale, held-to-maturity, or trading. Temporary impairments on “available-for-sale” securities are recognized, on a tax-effected basis, through accumulated other comprehensive income (“AOCI”) with offsetting entries adjusting the carrying value of the security and the balance of deferred taxes. Conversely, the Company does not adjust the carrying value of “held-to-maturity” securities for temporary impairments, although information concerning the amount and duration of impairments on held to maturity securities is generally disclosed in periodic financial statements. The carrying value of securities held in a trading portfolio is adjusted to their fair value through earnings on a daily basis. However, the Company maintained no securities in trading portfolios at or during the periods presented in these financial statements.

 

The Company accounts for other-than-temporary impairments based upon several considerations. First, other-than-temporary impairments on securities that the Company has decided to sell as of the close of a fiscal period, or will, more likely than not, be required to sell prior to the full recovery of the their fair value to a level equal to or exceeding their amortized cost, are recognized in operations. If neither of these criteria apply, then the other-than-temporary impairment is separated into credit-related and noncredit-related components. The credit-related impairment generally represents the amount by which the present value of the cash flows that are expected to be collected on an other-than-temporarily impaired security fall below its amortized cost while the noncredit-related component represents the remaining portion of the impairment not otherwise designated as credit-related. The Company recognizes credit-related, other-than-temporary impairments in earnings, while noncredit-related, other-than-temporary impairments on debt securities are recognized, net of deferred taxes, in AOCI. Management did not account for any other-than-temporary impairments at or during the periods presented in these financial statements.

 

Fair Value. We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Our securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets or liabilities on a non-recurring basis, such as held-to-maturity securities, mortgage servicing rights, loans receivable and other real estate owned. These non-recurring fair value adjustments involve the application of lower-of-cost-or-market accounting or write-downs of individual assets.

 

In accordance with ASC 820, Fair Value Measurements and Disclosures, we group our assets and liabilities at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. We base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

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.

 

Where applicable, deferred tax assets are reduced by a valuation allowance for any portions determined not likely to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period of enactment. The valuation allowance is adjusted, by a charge or credit to income tax expense, as changes in facts and circumstances warrant.

 

26 

Comparison of Financial Condition at March 31, 2019 and September 30, 2018

 

Total assets increased $41.0 million, or 6.6%, to $665.0 million at the six months ended March 31, 2019 from $624.0 million at September 30, 2018. The increase was attributable to a $32.8 million increase in cash and cash equivalent balances, a $7.0 million increase in net loans receivable, and a $2.2 million increase in investment securities, offset by a $1.0 million decrease in other real estate owned properties.

 

Cash and interest bearing deposits with banks increased $32.8 million, or 213.4%, to $48.2 million at March 31, 2019 from $15.4 million at September 30, 2018. The increase was primarily due to the net deposit inflows during the six months ended March 31, 2019.

 

At March 31, 2019, investment securities totaled $58.3 million, reflecting an increase of $2.2 million, or 3.8%, from $56.1 million at September 30, 2018. The Company purchased $4.7 million of U.S. Government-sponsored enterprise obligations, sold securities totaling $915,000 and received principal repayments totaling $2.2 million during the six months ended March 31, 2019. In addition, the mark-to-market value of the Company’s available-for-sale investment portfolio increased $607,000 during the six months ended March 31, 2019 due to price fluctuations from change in market interest rates.

 

Investment securities at March 31, 2019 consisted of $50.0 million in mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises, $4.9 million in debt securities issued by U.S. government agencies and U.S. government-sponsored enterprises, $3.0 million in corporate notes, and $373,000 in “private-label” mortgage-backed securities. There were no other-than-temporary-impairment charges for the Company’s investment securities for the six months ended March 31, 2019.

 

Total loans receivable increased $7.4 million, or 1.4%, to $519.9 million during the six months ended March 31, 2019 compared with $512.5 million at September 30, 2018. Total loans receivable were comprised of $223.4 million (43.0%) commercial real estate loans, $189.1 million (36.4%) one-to-four family residential mortgage loans, $49.2 million (9.5%) commercial business loans, $33.5 million (6.4%) construction loans, $19.5 million (3.7%) home equity lines of credit and $5.2 million (1.0%) other loans.

 

Total non-performing loans increased $2.9 million to $3.8 million at March 31, 2019 from $906,000 at September 30, 2018. Included in the non-performing loan totals were three commercial real estate loans totaling $450,000, two commercial business loan totaling $352,000, one home equity line of credit totaling $39,000, one residential mortgage loan totaling $38,000, and one construction loan totaling $2.9 million.

 

The increase in non-performing loans was due to one construction loan that ceased performing and in accordance with Company policy resulted in the initiation of foreclosure proceedings. Based on updated appraisals of the real estate securing the loan, management believes the loan is adequately secured by real estate. For the three months ended March 31, 2019 non-performing loans declined $282,000. The ratio of non-performing loans to total loans increased to 0.73% at March 31, 2019 from 0.18% at September 30, 2018.

 

During the six months ended March 31, 2019, the allowance for loan losses increased $400,000 to $4.6 million. The allowance for loan losses as a percentage of non-performing loans decreased to 122% at March 31, 2019 compared with 464% at September 30, 2018. At March 31, 2019 the Company’s allowance for loan losses as a percentage of total loans was 0.88% compared with 0.82% at September 30, 2018. Future increases in the allowance for loan losses may be necessary based on the growth of the loan portfolio, the change in composition of the loan portfolio, possible future increases in non-performing loans and charge-offs, and the possible deterioration of the current economic environment.

 

Other real estate owned decreased $1.0 million to $7.6 million at March 31, 2019 from $8.6 million at September 30, 2018. The decrease was the result of the two sales totaling $846,000 and valuation allowances totaling $212,000. The Company is determining the proper course of action for its other real estate owned, which may include holding the properties until the real estate market further improves, marketing the individual properties for sale, or selling multiple properties to a real estate investor.

 

Total deposits increased $41.7 million, or 7.9%, to $571.8 million during the six months ended March 31, 2019. The increase in deposits occurred in money market accounts, which increased $38.0 million, or 22.7%, to $205.3 million, non-interest bearing checking accounts, which increased $19.1 million, or 18.2%, to $123.8 million and in interest-bearing checking accounts, which increased $815,000, or 1.8%, to $47.2 million. Offsetting these increases were decreases in certificates of deposit (including individual retirement accounts) which decreased $9.4 million, or 7.2%, to $120.9 million, and in savings accounts, which decreased $6.8 million, or 8.3%, to $74.6 million.

 

27 

Included in the total deposits were $8.8 million in brokered certificates of deposit at March 31, 2019 and $14.8 million at September 30, 2018. Retail deposit inflows were used to repay matured brokered certificate of deposits during the six months ended March 31, 2019.

 

Federal Home Loan Bank of New York advances decreased $2.9 million to $32.6 million at March 31, 2019 from $35.5 million at September 30, 2018. During the six months ended March 31, 2019 the Company paid off three maturing long-term advances totaling $6.9 million with new advances totaling $4.0 million and retail deposit inflows.

 

Stockholders’ equity increased $1.9 million, or 3.8%, to $53.3 million at March 31, 2019 from $51.4 million at September 30, 2018. The Company’s book value per share increased to $9.16 at March 31, 2019 from $8.82 at September 30, 2018. The increase in stockholders’ equity was attributable to the Company’s results from operations for the six months ended March 31, 2019.

 

The Company did not repurchase any shares of its common stock during the six months ended March 31, 2019. Through March 31, 2019, the Company had repurchased 81,000 shares at an average price of $8.33 pursuant to the second stock repurchase plan, which reduced outstanding shares to 5,820,746.

 

 

Average Balance Sheet for the Three and Six Months Ended March 31, 2019 and 2018

 

The tables on the following pages present certain information regarding the Company’s financial condition and net interest income for the three and six months ended March 31, 2019 and 2018. 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 periods indicated. Interest income includes fees that we consider adjustments to yields.

 

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   For the Three Months Ended March 31, 
   2019   2018 
   Average
Balance
   Interest
Income/
Expense
   Yield/Cost
(Annualized)
   Average
Balance
   Interest
Income/
Expense
   Yield/Cost
(Annualized)
 
   (Dollars In Thousands) 
Interest-earning assets:                              
Interest-earning deposits  $35,416   $206    2.35%   $16,300   $62    1.53% 
Loans receivable, net   513,472    6,226    4.92%    479,464    5,408    4.57% 
Securities                              
FHLB of NY stock   2,047    37    7.31%    2,047    33    6.50% 
Total interest-earning assets   608,222    6,809    4.54%    558,722    5,857    4.25% 
Noninterest-earning assets   41,948              45,734           
Total assets  $650,170             $604,456           
                               
Interest-bearing liabilities:                              
Savings accounts (1)   $75,917    125    0.67%   $100,675    175    0.71% 
NOW accounts (2)    240,205    832    1.40%    187,284    312    0.68% 
Time deposits (3)   125,426    551    1.78%    120,772    384    1.29% 
Total interest-bearing deposits   441,548    1,508    1.39%    408,731    871    0.86% 
Borrowings   32,935    180    2.22%    32,905    165    2.03% 
Total interest-bearing liabilities   474,483    1,688    1.44%    441,636    1,036    0.95% 
Noninterest-bearing liabilities   123,251              113,062           
Total liabilities   597,734              554,698           
Retained earnings   52,436              49,758           
Total liabilities and retained earnings  $650,170             $604,456           
                               
Net interest and dividend income       $5,121             $4,821      
Interest rate spread             3.10%              3.30% 
Net interest-earning assets  $133,739             $117,086           
Net interest margin (4)             3.41%              3.50% 
Average interest-earning assets to                              
 average interest-bearing liabilities   128.19%              126.51%           

 

 

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

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

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

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

 

29 

 

   For the Six Months Ended March 31, 
   2019   2018 
   Average
Balance
   Interest
Income/
Expense
   Yield/Cost
(Annualized)
   Average
Balance
   Interest
Income/
Expense
   Yield/Cost
(Annualized)
 
   (Dollars In Thousands) 
Interest-earning assets:                              
Interest-earning deposits  $34,502   $359    2.08%   $19,162   $133    1.39% 
Loans receivable, net   511,187    12,353    4.85%    475,742    10,843    4.57% 
Securities                              
Taxable   56,920    675    2.38%    61,402    704    2.30% 
FHLB of NY stock   2,084    82    7.93%    2,025    64    6.31% 
Total interest-earning assets   604,693    13,469    4.47%    558,331    11,744    4.22% 
Noninterest-earning assets   42,332              45,858           
Total assets  $647,025             $604,189           
                               
Interest-bearing liabilities:                              
Savings accounts (1)  $76,766   $251    0.66%   $102,769   $366    0.71% 
NOW accounts (2)   236,522    1,590    1.35%    184,612    621    0.67% 
Time deposits (3)   127,148    1,105    1.74%    122,966    778    1.27% 
Total interest-bearing deposits   440,436    2,946    1.34%    410,347    1,765    0.86% 
Borrowings   33,758    370    2.20%    32,400    327    2.03% 
Total interest-bearing liabilities   474,194    3,316    1.40%    442,747    2,092    0.95% 
Noninterest-bearing liabilities   119,861              111,309           
Total liabilities   594,055              554,056           
Retained earnings   52,970              50,133           
Total liabilities and retained earnings  $647,025             $604,189           
                               
Net interest and dividend income       $10,153             $9,652      
Interest rate spread             3.07%              3.27% 
Net interest-earning assets  $130,499             $115,584           
Net interest margin (4)             3.37%              3.47% 
Average interest-earning assets to                              
 average interest-bearing liabilities   127.52%              126.11%           

 

 

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

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

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

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

 

 

Comparison of Operating Results for the Three Months Ended March 31, 2019 and 2018

 

Net Income. Net income increased $371,000, or 94.0%, to $767,000 during the three-month period ended March 31, 2019 compared with $396,000 at three-month period ended March 31, 2018 primarily due to higher net interest and dividend income and lower provisions for loan loss.

 

Net Interest and Dividend Income. Net interest and dividend income increased $300,000, or 6.2%, to $5.1 million for the three months ended March 31, 2019 from $4.8 million for the three months ended March 31, 2018. The Company’s net interest margin decreased by 9 basis points to 3.41% for the three months ended March 31, 2019 compared to 3.50% for the three months ended March 31, 2018.

 

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The yield on the Company’s interest-earning assets increased 29 basis points to 4.54% for the three months ended March 31, 2019 from 4.25% for the three months ended March 31, 2018 primarily due to higher average balances of loans receivable, net of allowance for loan losses, which increased $35.4 million, as well as higher market interest rates between periods. The average yield on loans receivable net increased 35 basis points to 4.92% for the three months ended March 31, 2019 from 4.57% for the three months ended March 31, 2018, due to higher average balances of loan receivable and higher market interest rates. The cost of interest-bearing liabilities increased 49 basis points to 1.44% for the three months ended March 31, 2019 from 0.95% for the three months ended March 31, 2018. The increase in the cost of interest-bearing liabilities was attributable to higher average balances in interest-bearing deposits and higher market interest rates.

 

Interest and Dividend Income. Interest and dividend income increased $952,000, or 16.3%, to $6.8 million for the three months ended March 31, 2019 from $5.9 million for the three months ended March 31, 2018. The increase was attributable to a $49.5 million, or 8.9%, increase in the average balance of interest-earning assets in addition to a 29 basis point increase in the yield on such assets to 4.54% for the quarter ended March 31, 2019 compared with the prior year period.

 

Interest earned on loans increased $818,000, or 15.1%, to $6.2 million for the three months ended March 31, 2019 compared with $5.4 million the same period prior year due to a $34.0 million increase in the average balance in the net loan receivable and higher market interest rates.

 

Interest earned on our investment securities, including interest earning deposits and excluding FHLB stock, increased $130,000, or 31.3%, to $546,000 at March 31, 2019 from $416,000 at March 31, 2018. The average yield on investment securities and interest earning deposits increased 21 basis points to 2.39% for the three months ended March 31, 2019 from 2.18% for the three months ended March 31, 2018.

 

Interest Expense. Interest expense increased $652,000, or 62.9%, to $1.7 million for the three months ended March 31, 2019 from $1.0 million for the three months ended March 31, 2018. The average balance of interest-bearing liabilities increased $32.8 million, or 7.4%, to $474.5 million from $441.6 million between the two periods, while the cost on such liabilities increased 49 basis points to 1.44% for the three months ended March 31, 2019 from 0.95% compared with the prior year period.

 

The average balance of interest bearing deposits increased $32.8 million, or 8.0%, to $441.5 million at March 31, 2019 from $408.7 million at March 31, 2018, while the average cost of such deposits increased 53 basis points to 1.39% from 0.86% between the two periods. As a result, interest paid on interest-bearing deposits increased $637,000, or 73.1%, to $1.5 million for the three months ended March 31, 2019 from $871,000 for the three months ended March 31, 2018. Contributing to the higher balance and cost of deposits were money market account deposit promotions paying an interest rate between 1.80% and 2.50%. The promotion was run during the Company’s first quarter and resulted in $15.1 million in new money market account balances in addition to $4.6 million in non-interest checking balances and the retention of $9.1 million in other deposits. During the Company’s second quarter deposits increased $22.0 million, $14.5 million of which was in non-interest bearing checking accounts.

 

Interest paid on advances increased $15,000, or 9.1%, to $180,000 for the three months ended March 31, 2019 from $165,000 for the same period prior year due to a higher average cost of advances, which increased 19 basis points to 2.22% for the three months ended March 31, 2019 from 2.03% for the three months ended March 31, 2018, reflecting the higher market interest rate environment. The average balance of such borrowings was unchanged at $32.9 million between periods.

 

Provision for Loan Losses. We establish provisions for loan losses, which are charged to earnings, at a level necessary to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, peer group information and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events occur.

 

After an evaluation of these factors, management recorded a provision of $106,000 for the three months ended March 31, 2019 compared to a provision of $257,000 for the three months ended March 31, 2018. The Company did not incur any charge-offs during the current period but did receive $92,000 in recoveries of loans previously charged-off. Comparatively, the Company incurred $25,000 in net charge-offs for the three months ended March 31, 2018.

 

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

 

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Other Income. Non-interest income increased $196,000, or 53.1%, to $565,000 during the three months ended March 31, 2019 compared to $369,000 for the three months ended March 31, 2018. The increase was attributable to higher service charge income, higher gains from the sale of SBA loans, and a gain from the sale of an investment security. Service charge income increased $57,000 from the prior year period due to higher loan and deposit fees. The Company recorded a gain totaling $151,000 from the sale of the guaranteed portion of a SBA loan during the three months ended March 31, 2019, compared with $30,000 in gains for the prior year period. In addition, one investment security totaling $915,000 was sold for a gain of $32,000 during the three months ended March 31, 2019 while there were no investment gains for the prior year period.

 

Other Expenses. Non-interest expenses increased $134,000, or 3.1%, to $4.5 million from the three months ended March 31, 2019. Compensation and benefit expense increased $74,000, or 3.0%, from the prior year period due to the addition of a new commercial lender as well as annual merit increases for employees. In addition, OREO expenses increased $46,000 to $214,000 for the three months ended March 31, 2019 from $168,000 for the prior year period due to higher valuation allowances resulting from updated real estate appraisals.