10-Q 1 mgyr-20240331.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to _________

 

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)

 

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

 

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 ☑    No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

Yes ☑    No ☐

 

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 Securities Exchange Act:

 

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

 

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 Securities Exchange Act. ☐

 

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

Yes ☐    No

 

The number of shares outstanding of the issuer's common stock at May 1, 2024 was 6,593,860

 

 

 

MAGYAR BANCORP, INC.

 

Form 10-Q Quarterly Report

 

Table of Contents

 

PART I. FINANCIAL INFORMATION

 

  Page Number
     
Item 1. Consolidated Financial Statements 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk 33
Item 4. Controls and Procedures 33
     
PART II. OTHER INFORMATION
     
Item 1. Legal Proceedings 34
Item 1A. Risk Factors 34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 34
Item 3. Defaults Upon Senior Securities 34
Item 4. Mine Safety Disclosures 34
Item 5. Other Information 34
Item 6. Exhibits 35
     
Signature Pages 36

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

 

MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

(In Thousands, Except Share and Per Share Data)

 

   March 31,   September 30, 
   2024   2023 
   (Unaudited)     
Assets        
Cash  $3,413   $3,179 
Interest earning deposits with banks   46,576    69,353 
Total cash and cash equivalents   49,989    72,532 
           
Investment securities - available for sale, at fair value   11,913    10,125 
Investment securities - at amortized cost (fair value of $74,104 and $73,728 at March 31, 2024 and September 30, 2023, respectively)   83,438    85,835 
Federal Home Loan Bank of New York stock, at cost   2,272    2,286 
Loans receivable   741,712    697,400 
Allowance for credit losses-loans   (7,694)   (8,330)
Bank owned life insurance   18,217    18,030 
Accrued interest receivable   4,752    4,337 
Premises and equipment, net   12,436    13,339 
Other real estate owned ("OREO")   1,170    328 
Other assets   10,359    11,410 
           
Total assets  $928,564   $907,292 
           
Liabilities and Stockholders' Equity          
Liabilities          
Deposits  $774,888   $755,453 
Escrowed funds   4,621    3,494 
Borrowings   28,796    29,515 
Accrued interest payable   689    443 
Accounts payable and other liabilities   11,935    13,597 
           
Total liabilities   820,929    802,502 
           
Stockholders' equity          
Preferred stock: $.01 Par Value, 500,000 shares authorized; at March 31, 2024 and September 30, 2023, none issued   
    
 
Common stock: $.01 Par Value, 14,000,000 shares authorized; 7,097,825 shares issued; 6,602,439 and 6,674,184 shares outstanding at March 31, 2024 and September 30, 2023, respectively, at cost
   71    71 
Additional paid-in capital   63,133    62,801 
Treasury stock: 495,386 and 423,641 shares at March 31, 2024 and September 30, 2023, respectively, at cost   (6,162)   (5,362)
Unearned Employee Stock Ownership Plan shares   (3,022)   (3,097)
Retained earnings   55,027    52,166 
Accumulated other comprehensive loss   (1,412)   (1,789)
           
Total stockholders' equity   107,635    104,790 
           
Total liabilities and stockholders' equity  $928,564   $907,292 

 

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

1 

 

MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Income

(In Thousands, Except Share and Per Share Data)

 

   Three Months Ended   Six Months Ended 
   March 31,   March 31, 
   2024   2023   2024   2023 
   (Unaudited) 
Interest and dividend income                    
Loans, including fees  $10,540   $8,618   $20,622   $16,577 
Investment securities                    
Taxable   1,310    512    2,716    1,015 
Tax-exempt   14    14    29    29 
Federal Home Loan Bank of New York stock   56    30    111    55 
Total interest and dividend income   11,920    9,174    23,478    17,676 
                     
Interest expense                    
Deposits   4,775    2,009    8,853    3,483 
Borrowings   222    219    457    355 
Total interest expense   4,997    2,228    9,310    3,838 
                     
Net interest and dividend income   6,923    6,946    14,168    13,838 
                     
Provision for credit losses-loans   (74)   195    407    513 
Provision for credit losses-unfunded commitments   88    
    88     
Total provision for credit losses   14    195    495    513 
Net interest and dividend income after provision for credit losses   6,909    6,751    13,673    13,325 
                     
Other income                    
Service charges   294    320    597    565 
Gains on sales of SBA loans   213    201    342    381 
Income on bank owned life insurance   91    90    186    185 
Interest rate swap fees   
            57 
Gains on sales of premises and equipment       
    60     
Other operating income   24    20    46    41 
Total other income   622    631    1,231    1,229 
                     
Other expenses                    
Compensation and employee benefits   3,008    2,774    5,855    5,396 
Occupancy expenses   803    792    1,593    1,553 
Professional fees   178    205    404    384 
Data processing expenses   147    149    287    295 
Director fees and benefits   207    209    431    410 
Marketing and business development   98    117    195    243 
FDIC deposit insurance premiums   105    94    209    148 
Other expenses   562    456    1,156    950 
Total other expenses   5,108    4,796    10,130    9,379 
Income before income tax expense   2,423    2,586    4,774    5,175 
Income tax expense   526    790    1,225    1,569 
Net income  $1,897   $1,796   $3,549   $3,606 
                     
Earnings per share - basic  $0.30   $0.28   $0.56   $0.56 
Earnings per share - diluted  $0.30   $0.28   $0.56   $0.56 
Weighted average shares outstanding - basic   6,372,034    6,431,471    6,360,801    6,431,109 
Weighted average shares outstanding - diluted   6,372,034    6,432,052    6,360,801    6,432,742 

 

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)

 

   Three Months Ended   Six Months Ended 
   March 31,   March 31, 
   2024   2023   2024   2023 
   (Unaudited) 
Net income  $1,897   $1,796   $3,549   $3,606 
Other comprehensive income (loss):                    
Unrealized gain (loss) on securities available for sale   (84)   177    500    384 
Other comprehensive income (loss), before tax   (84)   177    500    384 
Deferred income tax effect   21    (44)   (123)   (95)
Total other comprehensive income (loss)  $(63)  $133   $377   $289 
Total comprehensive income  $1,834   $1,929   $3,926   $3,895 

 

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, 2024 and 2023

 (In Thousands, Except for Share and Per-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, 2023   6,674,184   $71   $62,801   $(5,362)  $(3,097)  $52,166   $(1,789)  $104,790 
Net income       
    
    
    
    1,652    
    1,652 
Dividends paid on common stock ($0.11 per share)       
    
    
    
    (716)   
    (716)
Effect of adopting ASU 2016-13       
    
    
    
    354    
    354 
Other comprehensive income       
    
    
    
    
    440    440 
ESOP shares allocated       
    
    
    50    
    
    50 
Purchase of treasury stock   (19,232)   
    
    (192)   
    
    
    (192)
Stock-based compensation expense       
    161    
    
    
    
    161 
Balance, December 31, 2023   6,654,952   $71   $62,962   $(5,554)  $(3,047)  $53,456   $(1,349)  $106,539 
Net income       
    
    
    
    1,897    
    1,897 
Dividends paid on common stock ($0.05 per share)       
    
    
    
    (326)   
    (326)
Other comprehensive loss       
    
    
    
    
    (63)   (63)
ESOP shares allocated       
    9    
    25    
    
    34 
Purchase of treasury stock   (52,513)   
    
    (608)   
    
    
    (608)
Stock-based compensation expense       
    162    
    
    
    
    162 
Balance, March 31, 2024   6,602,439   $71   $63,133   $(6,162)  $(3,022)  $55,027   $(1,412)  $107,635 

  

                           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, 2022   6,745,128   $71   $63,734   $(5,793)  $(3,169)  $45,773   $(2,114)  $98,502 
Net income       
    
    
    
    1,810    
    1,810 
Dividends paid on common stock ($0.11 per share)       
    
    
    
    (744)   
    (744)
Other comprehensive income       
    
    
    
    
    156    156 
ESOP shares allocated       
    17    
    24    
    
    41 
Purchase of treasury stock   (2,194)   
    
    (27)   
    
    
    (27)
Stock-based compensation expense       
    180    
    
    
    
    180 
Balance, December 31, 2022   6,742,934   $71   $63,931   $(5,820)  $(3,145)  $46,839   $(1,958)  $99,918 
Net income       
    
    
    
    1,796    
    1,796 
Dividends paid on common stock ($0.03 per share)       
    
    
    
    (179)   
    (179)
Other comprehensive income       
    
    
    
    
    133    133 
Treasury stock used for restricted stock plan   1,000    
    (13)   13    
    
    
    
 
ESOP shares allocated       
    17    
    16    
    
    33 
Purchase of treasury stock   (54,144)   
    
    (697)   
    
    
    (697)
Stock-based compensation expense       
    161    
    
    
    
    161 
Balance, March 31, 2023   6,689,790   $71   $64,096   $(6,504)  $(3,129)  $48,456   $(1,825)  $101,165 

 

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, 
   2024   2023 
   (Unaudited) 
Operating activities          
Net income  $3,549   $3,606 
Adjustments to reconcile net income to net cash provided byoperating activities:          
Depreciation expense   440    415 
Premium amortization on investment securities, net   35    80 
Provision for credit losses   495    513 
Originations of SBA loans held for sale   (3,771)   (3,887)
Proceeds from the sales of SBA loans   4,113    4,268 
Gains on sale of SBA loans   (342)   (381)
Gains on the sale of premises and equipment   (60)   
 
ESOP compensation expense   84    74 
Stock-based compensation expense   323    341 
Deferred income tax expense (benefit)   103    (357)
Increase in accrued interest receivable   (415)   (491)
Income on bank owned life insurance   (186)   (185)
Decrease (increase) in other assets   825    (227)
Increase in accrued interest payable   246    151 
(Decrease) increase in accounts payable and other liabilities   (1,662)   290 
Net cash provided by operating activities   3,777    4,210 
           
Investing activities          
Net increase in loans receivable   (45,931)   (40,845)
Purchases of loans receivable   
    (7,091)
Purchases of investment securities held-to-maturity   (4,000)   
 
Purchases of investment securities available-for-sale   (1,953)   
 
Principal repayments on investment securities held-to-maturity   6,367    1,878 
Principal repayments on investment securities available-for-sale   660    421 
Purchases of premises and equipment, net   (253)   (140)
Proceeds from the sale of land   776    
 
Investment in other real estate owned   
    (11)
Purchase of Federal Home Loan Bank stock   (120)   (4,569)
Redemption of Federal Home Loan Bank stock   133    4,080 
Net cash used in investing activities   (44,321)   (46,277)
Financing activities          
Net increase in deposits   19,435    30,158 
Net increase (decrease) in escrowed funds   1,127    (1,857)
Proceeds from long-term advances   1,690    13,000 
Repayments of long-term advances   (2,409)   (3,091)
Cash dividends paid on common stock   (1,042)   (923)
Purchase of treasury stock   (800)   (724)
Net cash provided by financing activities   18,001    36,563 
Net decrease in cash and cash equivalents   (22,543)   (5,504)
Cash and cash equivalents, beginning of period   72,532    30,936 
           
Cash and cash equivalents, end of period  $49,989   $25,432 
           
Supplemental disclosures of cash flow information          
Cash paid for          
Interest  $9,064   $3,687 
Income taxes  $1,570   $1,850 
Non-cash operating activities          
Real estate acquired in full satisfaction of loans in foreclosure  $842   $
 
Adoption of ASU 2016-13  $354   $
 

 

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 Magyar Investment Company. All material intercompany transactions and balances have been eliminated. The Company prepares its consolidated 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 six months ended March 31, 2024 are not necessarily indicative of the results that may be expected for the year ending September 30, 2024. The September 30, 2023 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 credit losses, the valuation of available-for-sale investment securities, the valuation of other real estate owned (“OREO”), 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, 2024 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 connection with the preparation of quarterly and annual reports in accordance with the Securities and Exchange Commission’s (“SEC”) Securities Exchange Act of 1934, SEC Staff Accounting Bulletin Topic 11.M requires the disclosure of the impact that recently issued accounting standards will have on consolidated financial statements when they are adopted in the future.

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326), which changed the impairment model for most financial assets. This update was intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses (“ACL”) should reflect management's current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be affected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. With certain exceptions, transition to the new requirements will be through a cumulative-effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This update is effective for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

 

6

 

The Company adopted ASU 2016-13 on October 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost, including loans, held-to-maturity debt securities and unfunded commitments. The Company recorded a cumulative effect increase to retained earnings of $492 thousand ($354 thousand net of taxes), which was comprised of a $1.0 million ($725 thousand net of tax) increase related to loans and $540 thousand ($379 thousand net of tax) decrease related to unfunded commitments. The Company determined that there was no impact to retained earnings related to held-to-maturity securities as a result of adopting this guidance. The results reported for periods beginning on or after October 1, 2023 are presented under Accounting Standards Codification (“ASC”) 326, while prior period amounts continue to be reported in accordance with previously applicable accounting standards.

 

The impact of the change from the incurred loss model to the current expected credit loss model is included in the following table:

 

   October 1, 2023 
       Adoption     
   Pre-adoption   Impact   As Reported 
   (In thousands) 
Assets            
ACL on debt securities held-to-maturity  $
   $
   $
 
ACL on loans               
One-to-four family residential   1,259    7    1,266 
Commercial real estate   5,277    (589)   4,688 
Construction and land   472    (55)   417 
Home equity lines of credit   207    (87)   120 
Commercial business   939    (133)   806 
Other   176    (175)   1 
                
Liabilities               
ACL on unfunded commitments   
    540    540 
Total  $8,330   $(492)  $7,838 

 

Allowance for Credit Losses on Loans

 

The Company maintains its ACL at a level that management believes to be appropriate to absorb estimated credit losses as of the date of the Consolidated Statement of Financial Condition. The Company established its allowance in accordance with the guidance included in Accounting Standards Codification 326, Financial Instruments – Credit Losses (“ASC 326”). The ACL is a valuation reserve established and maintained by charges against income. Loans, or portions thereof, are charged-off against the ACL when they are deemed uncollectible. The ACL is an estimate of expected credit losses that considers our historical loss experience, the weighted average expected lives of loans, current economic conditions and forecasts of future economic conditions. The determination of an appropriate ACL is inherently subjective and may have significant changes from period to period. The methodology for determining the ACL has two main components: evaluation of expected credit losses for certain groups of homogeneous loans that share similar risk characteristics and evaluation of loans that do not share risk characteristics with other loans. The ACL is measured on a collective (pool) basis when similar characteristics exist. The Company’s loan portfolio is segmented by loan types that have similar risk characteristics and behave similarly during economic cycles.

 

Historical credit loss experience is the basis for the estimate of expected credit losses. We apply our historical loss rates to pools of loans with similar risk characteristics using the Weighted-Average Remaining Maturity (“WARM”) method. The remaining contractual life of the pools of loans with similar risk characteristics is adjusted by expected scheduled payments and prepayments. After consideration of the historical loss calculation, management applies qualitative adjustments to reflect the current conditions and reasonable and supportable forecasts not already reflected in the historical loss information. Our reasonable and supportable forecast adjustment is based on a regional economic indicator obtained from the United States Government Publishing Office. The Company selected eight qualitative metrics which were correlated with the Bank and its peer group’s historical loss patterns. The eight qualitative metrics include: changes in lending policies and procedures, changes in national and local economic conditions as well as business conditions, changes in the nature, complexity, and volume of the portfolio, changes in the experience, ability, and depth of lenders and lending management, changes in the volume and severity of past due and classified loans, changes in the value of collateral securing loans, changes in or the existence of credit concentrations, and changes in the legal and/or regulatory landscape. The adjustments are weighted for relevance before applying to each pool of loans. Each quarter, management reviews the recommended adjustment factors and applies any additional adjustments based on current conditions.

 

The Company has elected to exclude $4.4 million of accrued interest receivable on loans as of March 31, 2024 from the measurement of its ACL. When a loan is placed on non-accrual status, any outstanding accrued interest is reversed against interest income. Accrued interest on loans is reported in the accrued interest receivable line on the consolidated statements of financial condition.

 

7

 

The ACL for individual loans begins with the use of normal credit review procedures to identify whether a loan no longer shares similar risk characteristics with other pooled loans and, therefore, should be individually assessed. We individually evaluate loans that meet the following criteria: (1) when it is determined that foreclosure is probable, (2) substandard, doubtful and nonperforming loans when repayment is expected to be provided substantially through the operation or sale of the collateral, or (3) when it is determined by management that a loan does not share similar risk characteristics with other loans. Credit loss estimates are calculated based on the following three acceptable methods for measuring the ACL: (1) the present value of expected future cash flows discounted at the loan’s original effective interest rate; (2) the loan’s observable market price; or (3) the fair value of the collateral when the loan is collateral dependent. Our individual loan evaluations consist primarily of the fair value of collateral method because most of our loans are collateral dependent. Collateral values are reduced to consider expected disposition costs when appropriate. A charge-off is recorded when the estimated fair value of the loan is less than the loan balance.

 

Allowance for Credit Losses on Unfunded Loan Commitments

 

The Company estimates expected credit losses over the contractual period in which the Bank is exposed to credit risk via a contractual obligation to extend credit unless that obligation is unconditionally cancellable by the Bank. The allowance for credit losses on unfunded loan commitments is included in accounts payable and other liabilities in the Company’s Consolidated Balance Sheets and is adjusted through credit loss expense. The estimate includes consideration of the likelihood that funding will occur, the amount of funding that will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.

 

Allowance for Credit Losses on Held-to-Maturity Securities

 

The Company accounts for its held-to-maturity securities in accordance with Accounting Standards Codification 326-20, Financial Instruments – Credit Loss – Measured at Amortized Cost, which requires that the Company measure expected credit losses on held-to-maturity debt securities on a collective basis by major security type. The estimate of expected credit losses considers historical credit loss information that is adjusted for current economic conditions and reasonable and supportable forecasts.

 

The Company classifies its held-to-maturity debt securities into the following major security types: obligations of U.S. government agencies, obligations of U.S. government-sponsored enterprises, private label mortgage-backed securities, obligations of state and political subdivisions and corporate securities. Credit ratings of held-to-maturity debt securities, which are a significant input in calculating the expected credit loss, are reviewed on a quarterly basis. Based on the credit ratings of our held-to-maturity securities and our historical experience of no losses, the Company determined that the expected for credit losses on its’ held-to-maturity portfolio is not significant.

 

Accrued interest receivable on held-to-maturity debt securities totaled $228 thousand as of March 31, 2024 and is included within accrued interest receivable on the Company’s Consolidated Balance Sheets. This amount is excluded from the estimate of expected credit losses. Generally, held-to-maturity debt securities are classified as nonaccrual when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about the further collectability of principal or interest. When held-to-maturity debt securities are placed on nonaccrual status, unpaid interest credited to income is reversed against interest income.

 

Allowance for Credit Losses on Available-for-Sale Securities

 

The Company measures expected credit losses on available-for-sale debt securities when the Bank intends to sell, or when it is not more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the amortized cost basis of the security is written down to fair value through income. For available-for-sale debt securities that do not meet the previously mentioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this evaluation indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, equal to the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

 

8

 

The ACL on available-for-sale debt securities is included within the recorded balance of securities available-for-sale on the Consolidated Balance Sheets. Changes in the allowance for credit losses are recorded within provision for credit losses on the Consolidated Statements of Income. Losses are charged against the allowance when the Company believes the collectability of an available-for-sale security is in jeopardy or when either of the criteria regarding intent or requirement to sell is met.

 

Accrued interest receivable on available-for-sale debt securities totaled $25 thousand as of March 31, 2024 and is included within accrued interest receivable on the Company’s Consolidated Balance Sheets. This amount is excluded from the estimate of expected credit losses. Generally, available-for-sale debt securities are classified as nonaccrual when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about the further collectability of principal or interest. When available-for-sale debt securities are placed on nonaccrual status, unpaid interest credited to income is reversed against interest income.

 

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 as presented in this report.

 

NOTE D - EARNINGS PER SHARE

 

The following table presents a calculation of basic and diluted earnings per share for the three and six months ended March 31, 2024 and 2023. Basic and diluted earnings per share were calculated by dividing net income by the weighted-average number of shares outstanding for the periods.

 

   Three Months   Six Months 
   Ended March 31,   Ended March 31, 
   2024   2023   2024   2023 
   (Dollars in thousands, except share and per share data) 
                 
Income applicable to common shares  $1,897   $1,796   $3,549   $3,606 
Weighted average common shares outstanding- basic   6,372,034    6,431,471    6,360,801    6,431,109 
Weighted average common shares outstanding- diluted   6,372,034    6,432,052    6,360,801    6,432,742 
Earnings per share - basic  $0.30   $0.28   $0.56   $0.56 
Earnings per share - diluted  $0.30   $0.28   $0.56   $0.56 

 

Options to purchase 293,200 shares of common stock at a weighted average strike price of $12.58 and 124,320 shares of restricted shares at a weighted average price of $12.63 were outstanding at March 31, 2024 but were not included in the calculation of diluted EPS because they were anti-dilutive. Options to purchase 293,200 shares of common stock at a weighted average strike price of $12.58 and 156,400 shares of restricted shares at a weighted average price of $12.63 were outstanding at March 31, 2023.

 

NOTE E – STOCK-BASED COMPENSATION AND STOCK REPURCHASE PROGRAM

 

On August 25, 2022, the Company adopted the 2022 Equity Compensation Plan which provided for grants of up to 391,000 shares to be allocated between incentive and non-qualified stock options and up to 156,400 shares of restricted stock awards to officers, employees and directors of the Company and Magyar Bank. At March 31, 2024, 293,200 options and 156,400 shares of restricted stock had been awarded from the plan.

 

The following is a summary of the status of the Company’s stock option activity and related information for the six months ended March 31, 2024:

 

9

 

   Shares   Weighted
Average
Exercise Price
   Weighted
Average
Remaining
Contractual Life
in Years
   Aggregate
Intrinsic
Value
 
                 
Balance at September 30, 2023   293,200   $12.58    8.98   $
 
Granted   
    
    
    
 
Exercised   
    
    
    
 
Forfeited   
    
    
    
 
Expired   
    
    
    
 
Balance at March 31, 2024   293,200   $12.58    8.48   $
 
                     
Exercisable at March 31, 2024   58,640   $12.58    8.48   $
 

 

The following is a summary of the status of the Company’s non-vested restricted shares for the six months ended March 31, 2024:

 

   Shares   Weighted
Average Grant
Date Fair Value
 
Balance at September 30, 2023   124,320   $12.63 
Granted   
    
 
Vested   
    
 
Forfeited   
    
 
Balance at March 31, 2024   124,320   $12.63 

 

Stock option and stock award expenses included with compensation expense were $80 thousand and $81 thousand for the three months ended March 31, 2024 and $63 thousand and $98 thousand for the three months ended March 31, 2023, respectively. Stock option and stock award expenses included with compensation expense were $126 thousand and $196 thousand for the six months ended March 31, 2024 and $132 thousand and $209 thousand for the six months ended March 31, 2023, respectively.

 

At March 31, 2024, total compensation cost not yet recognized for the Company’s unvested stock options and stock awards was $2.3 million. The Company had no other stock-based compensation plans as of March 31, 2024 except as disclosed below.

 

On December 8, 2022, the Company announced the authorization of a second stock repurchase plan pursuant to which the Company intends to repurchase up to an additional 5% of its outstanding shares, or up to 337,146 shares, under which 172,575 shares had been repurchased at an average price of $11.53 through March 31, 2024. Under this stock repurchase program, 164,571 shares of the 337,146 shares authorized remained available for repurchase as of March 31, 2024. The Company’s intended use of the repurchased shares is for general corporate purposes. The Company held treasury stock shares totaling 495,386 at March 31, 2024. The timing of the repurchases will depend on certain factors, including but not limited to, market conditions and prices, the Company’s liquidity requirements and alternative uses of capital.

 

The Company has an Employee Stock Ownership Plan ("ESOP") for the benefit of employees who meet certain eligibility requirements. The ESOP trust purchases shares of common stock in the open market using proceeds of a loan from the Company. The loan is secured by shares of the Company’s stock. 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. 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. The Company accounts for its ESOP in accordance with FASB ASC Topic 718, “Employer’s Accounting for Employee Stock Ownership Plans.” As shares are released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations.

 

In connection with the Company’s second-step stock offering during its fiscal year ending September 30, 2021, the ESOP trustees purchased 312,800 shares of the Company’s common stock for $3.4 million, reflecting an average cost per share of $10.77. The ESOP loan bears a fixed interest rate of 3.25% with principal and interest payable annually in equal installments over 30 years.

 

10

 

At March 31, 2024, ESOP shares allocated to participants totaled 186,940. Unallocated ESOP shares held in suspense totaled 278,163 with an aggregate fair value of $3.1 million. The Company's contribution expense for the ESOP was $35 thousand and $33 thousand for the three months ended March 31, 2024 and 2023, and $84 thousand and $74 thousand for the six months ended March 31, 2024 and 2023, respectively.

 

NOTE F – OTHER COMPREHENSIVE INCOME (LOSS)

 

Comprehensive income (loss) includes net income as well as certain other items which result in a change to equity during the period. The Company recorded no reclassification adjustments during the three and six months ended March 31, 2024 and 2023. The components of other comprehensive income (loss) and the related income tax effects are as follows:

 

   Three Months Ended March 31, 
   2024   2023 
       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 (loss) arising during period on:                        
Available-for-sale investments  $(84)  $21   $(63)  $177   $(44)  $133 
Other comprehensive income (loss), net  $(84)  $21   $(63)  $177   $(44)  $133 

 

   Six Months Ended March 31, 
   2024   2023 
       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  $500   $(123)  $377   $384   $(95)  $289 
Other comprehensive income, net  $500   $(123)  $377   $384   $(95)  $289 

 

 

(a) All amounts are net of tax. Related income tax expense or benefit calculated using an income tax rate approximating 25% for available-for-sale investments.

 

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 and the Company’s derivative assets and liabilities 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 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.

 

11

 

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. 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.

 

Derivatives

The Bank executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. The fair values of such derivatives are based on valuation models from a third party using current market terms (including interest rates and fees), the remaining terms of the agreements and the credit worthiness of the counter party as of the measurement date (Level 2).

 

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.

 

March 31, 2024  Total   Level 1   Level 2   Level 3 
Assets:  (In thousands) 
Securities available for sale:                    
Obligations of U.S. government agencies:                    
Mortgage-backed securities - residential  $90   $
   $90   $
 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed securities-residential   11,823    
    11,823    
 
Total securities available for sale   11,913    
    11,913    
 
Derivative assets   2,011    
    2,011    
 
Total assets  $13,924   $
   $13,924   $
 
                     
Liabilities:                    
Derivative liabilities  $2,011   $
   $2,011   $
 
Total Liabilities  $2,011   $
   $2,011   $
 
                     
September 30, 2023                    
Assets:                    
Securities available for sale:                    
Obligations of U.S. government agencies:                    
Mortgage-backed securities - residential  $92   $
   $92   $
 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed securities-residential   10,033    
    10,033    
 
Total securities available for sale   10,125    
    10,125    
 
Derivative assets   2,579    
    2,579    
 
Total assets  $12,704   $
   $12,704   $
 
                     
Liabilities:                    
Derivative liabilities  $2,579   $
   $2,579   $
 
Total Liabilities  $2,579   $
   $2,579   $
 

 

12

 

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

 

Collateral Dependent Loans

Collateral dependent loans are measured and reported at fair value through specific allocations of the allowance for credit losses based on the fair value of the underlying collateral.

 

There were no assets measured at fair value on a non-recurring basis at March 31, 2024. The following table provides 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 September 30, 2023.

 

   Total   Level 1   Level 2   Level 3 
September 30, 2023  (In thousands) 
                 
Impaired loans  $777   $
   $
   $777 
Total  $777   $
   $
   $777 

 

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    
September 30, 2023 Estimate Techniques Unobservable Input Range (Weighted Average)
         
Impaired loans $ 777 Appraisal of collateral (1) Appraisal adjustments (2) -50% to -8.0% (-19.4%)

 

(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 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, 2024 and September 30, 2023.  For short-term financial assets such as cash and cash equivalents and accrued interest receivable, 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.

 

13

 

   Carrying   Fair   Fair Value Measurement Placement 
   Value   Value   (Level 1)   (Level 2)   (Level 3) 
   (In thousands) 
March 31, 2024                         
Financial instruments - assets                         
Investment securities held to maturity  $83,438   $74,104   $
   $74,104   $
 
Loan receivable net allowance for credit losses   734,018    716,318    
    
    716,318 
                          
Financial instruments - liabilities                         
Certificates of deposit including retirement certificates   134,955    132,689    
    132,689    
 
Borrowings   28,796    27,768    
    27,768    
 
                          
September 30, 2023                         
Financial instruments - assets                         
Investment securities held-to-maturity  $85,835   $73,728   $
   $73,728   $
 
Loan receivable net allowance for credit losses   689,070    664,331    
    
    664,331 
                          
Financial instruments - liabilities                         
Certificates of deposit including retirement certificates   104,668    101,216    
    101,216    
 
Borrowings   29,515    28,177    
    28,177    
 

 

NOTE H - INVESTMENT SECURITIES

 

The following table summarizes the amortized cost and fair values of securities classified as available-for-sale and held-to-maturity at March 31, 2024:

 

     
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
March 31, 2024  Cost   Gains   Losses   Value 
   (In thousands) 
Securities available-for-sale:                    
Obligations of U.S. government agencies:                    
Mortgage-backed securities - residential  $100   $
   $(10)  $90 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed securities-residential   13,277    18    (1,472)   11,823 
Total securities available-for-sale  $13,377   $18   $(1,482)  $11,913 
Securities held-to-maturity:                    
Obligations of U.S. government agencies:                    
Mortgage-backed securities - residential  $4,887   $
   $(728)  $4,159 
Mortgage-backed securities - commercial   4,425    
    (35)   4,390 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed-securities - residential   46,471    
    (6,605)   39,866 
Debt securities   20,999        (1,369)   19,630 
Private label mortgage-backed securities - residential   199    
    (10)   189 
Obligations of state and political subdivisions   3,457    2    (392)   3,067 
Corporate securities   3,000    
    (197)   2,803 
Total securities held-to-maturity  $83,438   $2   $(9,336)  $74,104 
Total investment securities  $96,815   $20   $(10,818)  $86,017 

 

The Company monitors the credit quality of held-to-maturity debt securities, primarily through their credit ratings by nationally recognized statistical ratings organizations, on a quarterly basis. At March 31, 2024, there were no non-performing held-to-maturity debt securities and no allowance for credit losses were required. The majority of the investment securities are explicitly or implicitly guaranteed by the United States government, and any estimate of expected credit losses would be insignificant to the Company. The following table summarizes the amortized cost of held-to-maturity debt securities at March 31, 2024, aggregated by credit quality indicator:

 

14

 

   Credit Rating at Amortized Cost 
   AAA/AA/A   BBB/BB/B   Non-rated 
March 31, 2024   (In thousands) 
Securities held-to-maturity:               
Obligations of U.S. government agencies:               
Mortgage-backed securities - residential  $4,887   $
   $
 
Mortgage-backed securities - commercial   4,425    
    
 
Obligations of U.S. government-sponsored enterprises:               
Mortgage backed securities - residential   46,471    
    
 
Debt securities   20,999    
    
 
Private label mortgage-backed securities - residential   
    
    199 
Obligations of state and political subdivisions   3,457    
    
 
Corporate securities   
    3,000    
 
Totals  $80,239   $3,000   $199 

 

The contractual maturities of debt securities, municipal bonds and certain information regarding mortgage-backed securities at March 31, 2024 are summarized in the following table:

 

   March 31, 2024 
   Amortized   Fair 
   Cost   Value 
   (In thousands) 
Due within 1 year  $6,499   $6,335 
Due after 1 but within 5 years   16,027    14,952 
Due after 5 but within 10 years   4,930    4,213 
Due after 10 years   
    
 
Total debt securities   27,456    25,500 
           
Mortgage backed securities:          
Residential   64,934    56,127 
Commercial   4,425    4,390 
Total  $96,815   $86,017 

 

The following table summarizes the amortized cost and fair values of securities classified as available-for-sale and held-to-maturity at September 30, 2023:

 

15

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
September 30, 2023  Cost   Gains   Losses   Value 
   (In thousands) 
Securities available-for-sale:                    
Obligations of U.S. government agencies:                    
Mortgage backed securities - residential  $106   $
   $(14)  $92 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed securities-residential   11,984    
    (1,951)   10,033 
Total securities available for sale  $12,090   $
   $(1,965)  $10,125 
Securities held-to-maturity:                    
Obligations of U.S. government agencies:                    
Mortgage-backed securities - residential  $5,070   $
   $(850)  $4,220 
Mortgage-backed securities - commercial   2,509    
    (16)   2,493 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage backed securities - residential   48,086    
    (8,480)   39,606 
Debt securities   23,497    
    (1,947)   21,550 
Private label mortgage-backed securities - residential   207    
    (12)   195 
Obligations of state and political subdivisions   3,466    
    (605)   2,861 
Corporate securities   3,000    
    (197)   2,803 
Total securities held to maturity  $85,835   $
   $(12,107)  $73,728 
Total investment securities  $97,925   $
   $(14,072)  $83,853 

 

As of March 31, 2024 investment securities having an estimated fair value of approximately $11.8 million were pledged to secure public deposits.

 

NOTE I – UNREALIZED LOSSES ON INVESTMENT SECURITIES AVAILABLE-FOR-SALE

 

The Company recognizes an allowance for credit losses on debt securities in earnings through a provision for credit losses while noncredit-related impairment on debt securities not expected to be sold are recognized in other comprehensive income.

 

The Company reviews its investment portfolio on a quarterly basis for indications of credit losses. This review includes analyzing 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 credit losses may be influenced by prolonged recession in the U.S. economy, changes in real estate values and interest deferrals.

 

Investment securities with fair values greater than their amortized cost contain unrealized gains. Investment securities with fair values less than their amortized cost contain unrealized losses. Details of available-for-sale securities with unrealized losses at March 31, 2024 are as follows:

 

       Less Than 12 Months   12 Months Or Greater   Total 
   Number of   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Securities   Value   Losses   Value   Losses   Value   Losses 
March 31, 2024      (Dollars in thousands) 
Obligations of U.S. government agencies:                            
Mortgage-backed securities - residential   1   $
   $
   $91   $(10)  $91   $(10)
Obligations of U.S. government-sponsored enterprises                                   
Mortgage-backed securities - residential   9    26    
    7,684    (1,472)   7,710    (1,472)
Total   10   $26   $
   $7,775   $(1,482)  $7,801   $(1,482)

 

16

 

Prior to the adoption of ASU 2016-13, details of our entire investment portfolio were required to be disclosed. Accordingly, details of our held-to-maturity and available-for-sale investment securities with unrealized losses at September 30, 2023 were as follows:

 

       Less Than 12 Months   12 Months Or Greater   Total 
   Number of   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Securities   Value   Losses   Value   Losses   Value   Losses 
September 30, 2023      (Dollars in thousands) 
Obligations of U.S. government agencies:                            
Mortgage-backed securities - residential   6   $
   $
   $4,312   $(864)  $4,312   $(864)
Mortgage-backed securities - commercial   2    1,926    (14)   567    (2)   2,493    (16)
Obligations of U.S. government-sponsored enterprises                                   
Mortgage-backed securities - residential   50    4,938    (49)   44,485    (10,382)   49,423    (10,431)
Debt securities   12    
    
    21,550    (1,947)   21,550    (1,947)
Private label mortgage-backed securities residential   1    
    
    195    (12)   195    (12)
Obligations of state and political subdivisions   7    789    (43)   2,072    (562)   2,861    (605)
Corporate securities   1    
    
    2,803    (197)   2,803    (197)
Total   79   $7,653   $(106)  $75,984   $(13,966)  $83,637   $(14,072)

 

The investment securities listed above currently have fair values less than amortized cost and therefore contain unrealized losses. 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.

 

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 credit losses and determined that no allowance for credit loss was required as of March 31, 2024.

 

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

 

Loans receivable, net were comprised of the following:

 

   March 31,   September 30, 
   2024   2023 
   (In thousands) 
         
One-to-four family residential  $231,945   $237,683 
Commercial real estate   429,133    389,134 
Construction and land   29,199    21,853 
Home equity loans and lines of credit   22,937    16,983 
Commercial business   26,956    30,194 
Other   2,516    2,359 
Total loans receivable   742,686    698,206 
Net deferred loan costs   (974)   (806)
Total loans receivable, net  $741,712   $697,400 

 

The segments of the Company’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: first lien, amortizing term loans, and the combination of second lien amortizing term loans and home equity lines of credit. The commercial loan segment is further disaggregated into three classes: loans secured by multifamily structures, loans secured by owner-occupied commercial structures, and loans secured by non-owner occupied nonresidential properties. The construction loan segment consists primarily of 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 of revolving lines of credit and loans partially guaranteed by the U.S. Small Business Administration. The consumer 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.

 

17

 

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 Company 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 Company’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 Company’s 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 thousand and/or criticized relationships greater than $250 thousand. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a monthly basis.

 

The following table presents the classes of the loan portfolio by origination year summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful for loans subject to the Company’s internal risk rating system and by performing status for all other loans as of March 31, 2024.

18

 

                           Revolving Loans     
   March 31, 2024   Amortized   Converted     
   Term Loans Amortized Cost Basis by Origination Fiscal Year   Cost Basis   to Term   Total 
   2024   2023   2022   2021   2020   Prior             
   (In thousands) 
One-to-four family residential                                             
Performing  $10,883   $42,985   $32,288   $27,245   $30,901   $87,129   $84   $
   $231,515 
Non-performing   
    
    282    
    23    125    
    
    430 
Total  $10,883   $42,985   $32,570   $27,245   $30,924   $87,254   $84   $
   $231,945 
Current period gross charge-offs   
    
    
    
    
    
    
    
    
 
                                              
Commercial real estate                                             
Pass  $44,337   $83,625   $68,461   $65,616   $30,241   $128,962   $5,219   $
   $426,461 
Special Mention   
    
    201    
    
    247    
    
    448 
Substandard   
    
    2,224    
    
    
    
    
    2,224 
Doubtful   
    
    
    
    
    
    
    
    
 
Total  $44,337   $83,625   $70,886   $65,616   $30,241   $129,209   $5,219   $
   $429,133 
Current period gross charge-offs   
    
    
    
    
    
    
    
    
 
                                              
Construction and land                                             
Pass  $4,564   $13,330   $2,074   $300   $1,756   $4,753   $725   $
   $27,502 
Special Mention   
    
    
    
    
    
    
    
    
 
Substandard   
    
    
    
    
    1,697    
    
    1,697 
Doubtful   
    
    
    
    
    
    
    
    
 
Total  $4,564   $13,330   $2,074   $300   $1,756   $6,450   $725   $
   $29,199 
Current period gross charge-offs   
    
    
    
    
    
    
    
    
 
                                              
Home equity loans and lines of credit                                             
Performing  $870   $1,385   $502   $274   $226   $2,904   $16,234   $306   $22,701 
Non-performing   
    
    
    
        
    236    
    236 
Total  $870   $1,385   $502   $274   $226   $2,904   $16,470   $306   $22,937 
Current period gross charge-offs   
    
    
    
    
    
    
    
    
 
                                              
Commercial business                                             
Pass  $1,401   $533   $2,631   $1,688   $914   $2,887   $16,603   $299   $26,956 
Special Mention   
    
    
    
    
    
    
    
    
 
Substandard   
    
    
    
    
    
    
    
    
 
Doubtful   
    
    
    
    
    
    
    
    
 
Total  $1,401   $533   $2,631   $1,688   $914   $2,887   $16,603   $299   $26,956 
Current period gross charge-offs   
    
    
    
    
    
    
    
    
 
                                              
Other                                             
Performing  $318   $
   $60   $1   $12   $1,783   $342   $
   $2,516 
Non-performing   
    
    
    
    
    
    
    
    
 
Total  $318   $
   $60   $1   $12   $1,783   $342   $
   $2,516 
Current period gross charge-offs   
    
    
    
    
    
    
    
    
 

 

Information presented in the table above is not required for periods prior to the adoption of ASU 2016-13. The following table presents more comparable information 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 as of September 30, 2023.

 

19

 

       Special             
   Pass   Mention   Substandard   Doubtful   Total 
                     
   (In  thousands) 
September 30, 2023                         
One-to-four family residential  $236,876   $
   $807   $
   $237,683 
Commercial real estate   386,794    116    2,224    
    389,134 
Construction and land   19,379    
    2,474    
    21,853 
Home equity lines of credit   16,983    
    
    
    16,983 
Commercial business   30,194    
    
    
    30,194 
Other   2,359    
    
    
    2,359 
Total  $692,585   $116   $5,505   $
   $698,206 

 

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 Bank was not accruing interest on any loans delinquent greater than 90 days as of March 31, 2024 or September 30, 2023. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans for the periods presented:

 

       30-59   60-89         
       Days   Days   90 Days +   Total 
   Current   Past Due   Past Due   Past Due   Loans 
   (In  thousands) 
March 31, 2024                         
One-to-four family residential  $230,780   $735   $
   $430   $231,945 
Commercial real estate   425,250    1,211    448    2,224    429,133 
Construction and land   27,502    
    
    1,697    29,199 
Home equity lines of credit   22,701    
    
    236    22,937 
Commercial business   26,044    912    
    
    26,956 
Other   2,516    
    
    
    2,516 
Total  $734,793   $2,858   $448   $4,587   $742,686 

 

 

       30-59   60-89         
       Days   Days   90 Days +   Total 
   Current   Past Due   Past Due   Past Due   Loans 
   (Iin  thousands) 
September 30, 2023                         
One-to four-family residential  $236,729   $
   $568   $386   $237,683 
Commercial real estate   386,794    
    116    2,224    389,134 
Construction and land   19,379    
    
    2,474    21,853 
Home equity lines of credit   16,983    
    
    
    16,983 
Commercial business   30,047    147    
    
    30,194 
Other   2,359    
    
    
    2,359 
Total  $692,291   $147   $684   $5,084   $698,206 

 

The following tables present our non-accrual loans and the related allowance for credit loss by loan type as of March 31, 2024 and the non-accrual loans and specific reserves by loan type as of September 30, 2023.

 

20

 

             
   Total   Non-Accrual   Non-Accrual 
   Non-Accrual   with ACL   without ACL 
   (In thousands) 
March 31, 2024               
One-to-four family residential  $430   $
   $430 
Commercial real estate   2,224    
    2,224 
Construction and land   1,697    
    1,697 
Home loans and lines of credit   236    
    236 
Total  $4,587   $
   $4,587 

 

   Total   Specific 
   Non-Accrual   Reserve 
   (In thousands) 
September 30, 2023          
One-to four-family residential  $386   $
 
Commercial real estate   2,224    
 
Construction and land   2,474    
 
Total  $5,084   $
 

 

The following table identifies our non-performing, collateral dependent loans by collateral type as of March 31, 2024:

 

   March 31, 
   2024 
   (In thousands) 
One-to-four family residential  $666 
Commercial real estate   2,224 
Construction and land   1,697 
Total  $4,587 

 

The Company’s adoption of ASU 2016-13 eliminated the requirement to disclose impaired loans. The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of September 30, 2023:

 

           Impaired         
           Loans with         
   Impaired Loans with   No Specific         
   Specific Allowance   Allowance   Total Impaired Loans 
                   Unpaid 
   Recorded   Related   Recorded   Recorded   Principal 
   Investment   Allowance   Investment   Investment   Balance 
September 30, 2023  (In thousands) 
                     
One-to four-family residential  $
   $
   $2,031   $2,031   $2,031 
Commercial real estate   
    
    2,969    2,969    2,969 
Construction and land   
    
    2,474    2,474    2,539 
Commercial business   
    
    147    147    147 
Total impaired loans  $
   $
   $7,621   $7,621   $7,686 

 

The following table presents the average recorded investment in impaired loans and the interest income recognized on impaired loans for the three and six months ended March 31, 2023.

 

21

 

   Three Months Ended   Six Months Ended 
   March 31, 2023   March 31, 2023 
   (In thousands) 
         
One-to-four family residential  $1,574   $1,553 
Commercial real estate   1,262    1,227 
Construction and land   2,835    2,835 
Commercial business   395    314 
Average investment in impaired loans  $6,066   $5,929 
           
Interest income recognized on          
an accrual basis on impaired loans  $36   $71 
Interest income recognized on          
a cash basis on impaired loans   
    
 

 

An allowance for credit losses is maintained to absorb losses from the loan portfolio. 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 ACL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ACL. Since loans individually evaluated for impairment are promptly written down to their fair value, typically there is no portion of the ACL for loans individually evaluated for impairment.

 

ASU 2016-13 requires estimated credit losses on loans to be determined based on an expected life of loan model, as compared to an incurred loss model (in effect for periods prior to October 1, 2023).  Accordingly, the allowance for credit losses disclosures subsequent to October 1, 2023 are not always comparable to prior dates. In addition, certain new disclosures required under ASU 2016-13 are not applicable to prior periods.  As a result, the following tables present disclosures separately for each period, where appropriate.  New disclosures required under ASU 2016-13 are only shown for the current period.  Please refer to Note B “Summary of Significant Accounting Policies” for a summary of the impact of adopting the provisions of ASU 2016-13 on October 1, 2023.

 

The following tables set forth the allocation of the Bank’s allowance for credit losses by loan category at the dates indicated. The portion of the credit loss allowance allocated to each loan category does not represent the total available for future losses which may occur within the loan category since the total credit loss allowance is a valuation allocation applicable to the entire loan portfolio. The Company generally charges-off the collateral or discounted cash flow deficiency on all loans at 90 days past due and all loans rated substandard or worse that are 90 days past due.

 

The following tables present, by loan category, the changes in the allowance for credit losses for the three and six months ended March 31, 2024 and the allowance for credit losses for the three and six months ended March 31, 2023.

 

   One-to-Four       Construction   Home Equity                 
   Family   Commercial   and   Lines of   Commercial