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 December 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)

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 þ No o

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 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	þ	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 February 1, 2020 was 5,820,746.

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	31
Item 4.	Controls and Procedures	31
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	32
Signature Pages		33

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

(In Thousands, Except Share and Per Share Data)

	December 31,			September 30,
	2019			2019
	(Unaudited)
Assets
Cash	$	1,096		$	825
Interest earning deposits with banks		18,133			20,644
Total cash and cash equivalents		19,229			21,469
Investment securities - available for sale, at fair value		17,494			16,703
Investment securities - held to maturity, at amortized cost (fair value of
$30,762 and $29,344 at December 31, 2019 and September 30, 2019, respectively)		30,917			29,481
Federal Home Loan Bank of New York stock, at cost		1,965			2,222
Loans receivable, net of allowance for loan losses of $5,100 and $4,888
at December 31, 2019 and September 30, 2019, respectively		525,431			518,217
Bank owned life insurance		13,729			13,647
Accrued interest receivable		2,099			2,133
Premises and equipment, net		15,971			16,172
Other real estate owned ("OREO")		7,462			7,528
Other assets		6,638			2,756
Total assets	$	640,935		$	630,328
Liabilities and Stockholders' Equity
Liabilities
Deposits	$	543,654		$	530,075
Escrowed funds		2,473			2,399
Federal Home Loan Bank of New York advances		30,488			36,189
Accrued interest payable		160			191
Accounts payable and other liabilities		8,928			6,823
Total liabilities		585,703			575,677
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 December 31, 2019 and September 30, 2019		59			59
Additional paid-in capital		26,319			26,317
Treasury stock: 102,996 shares
at December 31, 2019 and September 30, 2019, at cost		(1,152	)		(1,152	)
Unearned Employee Stock Ownership Plan shares		(178	)		(214	)
Retained earnings		31,524			30,971
Accumulated other comprehensive loss		(1,340	)		(1,330	)
Total stockholders' equity		55,232			54,651
Total liabilities and stockholders' equity	$	640,935		$	630,328

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
	Ended December 31,
	2019		2018
	(Unaudited)
Interest and dividend income
Loans, including fees	$	6,397	$	6,127
Investment securities
Taxable		338		488
Federal Home Loan Bank of New York stock		37		46
Total interest and dividend income		6,772		6,661
Interest expense
Deposits		1,446		1,438
Borrowings		196		190
Total interest expense		1,642		1,628
Net interest and dividend income		5,130		5,033
Provision for loan losses		210		201
Net interest and dividend income after
provision for loan losses		4,920		4,832
Other income
Service charges		265		321
Income on bank owned life insurance		82		74
Other operating income		31		31
Gains on sales of loans		26		—
Total other income		404		426
Other expenses
Compensation and employee benefits		2,589		2,444
Occupancy expenses		744		740
Professional fees		349		291
Data processing expenses		154		153
OREO expenses		103		46
FDIC deposit insurance premiums		108		108
Loan servicing expenses		50		59
Insurance expense		52		53
Other expenses		384		400
Total other expenses		4,533		4,294
Income before income tax expense		791		964
Income tax expense		238		279
Net income	$	553	$	685
Net income per share-basic and diluted	$	0.10	$	0.12
Weighted average basic and diluted shares outstanding		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
	Ended December 31,
	2019			2018
	(Unaudited)
Net income	$	553		$	685
Other comprehensive income (loss)
Unrealized gain (loss) on
securities available for sale		(14	)		343
Net gains realized on securities
available for sale		—			—
Other comprehensive income (loss), before tax		(14	)		343
Deferred income tax effect		4			(97	)
Total other comprehensive income (loss)		(10	)		246
Total comprehensive income	$	543		$	931

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 Months Ended December 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, 2019		5,820,746		59	$	26,317	$	(1,152	)	$	(214	)	$	30,971	$	(1,330	)	$	54,651
Net income		—		—		—		—			—			553		—			553
Other comprehensive income		—		—		—		—			—			—		(10	)		(10	)
ESOP shares allocated		—		—		2		—			36			—		—			38
Balance, December 31, 2019		5,820,746		59	$	26,319	$	(1,152	)	$	(178	)	$	31,524	$	(1,340	)	$	55,232

															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

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 Three Months Ended
	December 31,
	2019			2018
	(Unaudited)
Operating activities
Net income	$	553		$	685
Adjustment to reconcile net income to net cash (used in) provided by operating activities
Depreciation expense		217			250
Premium amortization on investment securities, net		28			29
Provision for loan losses		210			201
Provision for loss on other real estate owned		60			—
Originations of SBA loans held for sale		(262	)		—
Proceeds from the sales of SBA loans		288			—
Gains on sale of loans receivable		(26	)		—
Gains on the sales of other real estate owned		(11	)		(4	)
ESOP compensation expense		38			39
Deferred income tax benefit		(135	)		(26	)
Decrease in accrued interest receivable		34			101
Increase in surrender value of bank owned life insurance		(82	)		(74	)
Decrease in other assets		92			92
Decrease in accrued interest payable		(31	)		(2	)
Decrease in accounts payable and other liabilities		(1,730	)		(472	)
Net income to net cash (used in) provided by operating activities		(757	)		819
Investing activities
Net increase in loans receivable		(7,424	)		(6,318	)
Proceeds from the sale of loans receivable		—			4,386
Purchases of investment securities held to maturity		(3,679	)		(1,645	)
Purchases of investment securities available for sale		(1,516	)		—
Principal repayments on investment securities held to maturity		2,230			721
Principal repayments on investment securities available for sale		696			444
Purchases of premises and equipment		(16	)		(37	)
Investment in other real estate owned		—			(11	)
Proceeds from other real estate owned		17			408
Redemption of Federal Home Loan Bank stock		257			37
Net cash used in investing activities		(9,435	)		(2,015	)
Financing activities
Net increase in deposits		13,579			19,649
Net increase in escrowed funds		74			297
Proceeds from long-term advances		—			1,975
Repayments of long-term advances		(5,701	)		(2,800	)
Net cash provided by financing activities		7,952			19,121
Net (decrease) increase in cash and cash equivalents		(2,240	)		17,925
Cash and cash equivalents, beginning of year		21,469			15,368
Cash and cash equivalents, end of year	$	19,229		$	33,293
Supplemental disclosures of cash flow information
Cash paid for
Interest	$	1,674		$	1,629
Non-cash operating activities
Initial recognition of lease liability and right-of-use asset	$	3,835		$	—

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 months ended December 31, 2019 are not necessarily indicative of the results that may be expected for the year ending September 30, 2020. The September 30, 2019 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 December 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 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.

In October 2019, the FASB voted to defer the effective date of ASU 2016-13 for smaller reporting companies to fiscal years beginning after December 15, 2022 (October 1, 2023 for the Company), and interim periods within those fiscal years. The Company currently expects to continue to qualify as a smaller reporting company, based upon the current SEC definition, and as a result, will likely be able to defer implementation of the new standard for a period of time. The Company will not early adopt as of January 1, 2020, but will continue to review factors that might indicate that the full deferral time period should not be used. The Company continues to evaluate the impact the new standard will have on the accounting for credit losses, but the Company may recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, consistent with regulatory expectations set forth in interagency guidance issued at the end of 2016. The Company cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on its consolidated financial condition or results of operations.

In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. The ASU removes the disclosures of 1) the amounts in accumulated other comprehensive income that the entity expects to recognize in net periodic benefit cost during the next fiscal year, 2) the amount and timing of plan assets expected to be returned to the employer and 3) certain related party disclosures. The ASU clarifies the disclosure requirements for the projected benefit obligation (“PBO”) and fair value of plan assets for plans with PBOs in excess of plan assets and the accumulated benefit obligation (“ABO”) and fair value of plan assets for plans with ABOs in excess of plan assets. The ASU adds disclosure requirements for the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and for an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. ASU 2018-14 is effective for public business entities in fiscal years ending after December 15, 2020 (Beginning October 1, 2021 for the Company). Early adoption is permitted. The Corporation is currently evaluating the impact this ASU will have on its consolidated financial condition or results of operations.

6 

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 months ended December 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.

	For the Three Months Ended December 31,
	2019						2018
			Weighted		Per				Weighted		Per
			average		share				average		share
	Income		shares		Amount		Income		shares		Amount
	(In thousands, except per share data)
Basic EPS
Net income available to common shareholders	$	553		5,821	$	0.10	$	685		5,821	$	0.12
Effect of dilutive securities
Options and grants		—		—		—		—		—		—
Diluted EPS
Net income available to common shareholders plus assumed conversion	$	553		5,821	$	0.10	$	685		5,821	$	0.12

There were no outstanding stock awards or options to purchase common stock at December 31, 2019 and 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.

Stock options generally vest over a five-year service period and expire ten years from issuance. The fair values of all option grants were estimated using the Black-Scholes option-pricing model. Management recognizes compensation expense for the fair values of these awards, which have graded vesting, on a straight-line basis over the vesting period of the awards. Once vested, these awards are irrevocable.

There were no grants, vested shares or forfeitures of non-vested restricted stock awards the three months ended December 31, 2019 and 2018.

There were no stock option and stock award expenses included with compensation expense for the three months ended December 31, 2019 and 2018.

7 

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 December 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 three months ended December 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 December 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 December 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. In 2006 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 1^st 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. 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.

At December 31, 2019, shares allocated to participants totaled 190,661. Unallocated ESOP shares held in suspense totaled 27,202 and had a fair market value of $334,585. The Company's contribution expense for the ESOP was $38,000 and $39,000 for the three months ended December 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 December 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 gains arising
during period on:
Available-for-sale investments	$	(14	)	$	4	$	(10	)	$	343	$	(97	)	$	246
Other comprehensive income, net	$	(14	)	$	4	$	(10	)	$	343	$	(97	)	$	246

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.

8 

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.

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 December 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	$	469	$	—	$	469	$	—
Obligations of U.S. government-sponsored enterprises:
Mortgage-backed securities-residential		15,525		—		15,525		—
Debt securities		1,500		—		1,500		—
Total securities available for sale	$	17,494	$	—	$	17,494	$	—

	Fair Value at September 30, 2019
	Total		Level 1		Level 2		Level 3
	(In thousands)
Securities available for sale:
Obligations of U.S. government agencies:
Mortgage-backed securities - residential	$	495	$	—	$	495	$	—
Obligations of U.S. government-sponsored enterprises:
Mortgage-backed securities-residential		14,708		—		14,708		—
Debt securities		1,500		—		1,500		—
Total securities available for sale	$	16,703	$	—	$	16,703	$	—

9 

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 $23,000 and $26,000 at December 31, 2019 and September 30, 2019, 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 by management as necessary, to reflect current market conditions and, as such, are generally classified as Level 3.

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. 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 December 31, 2019 and September 30, 2019.

	Fair Value at December 31, 2019
	Total		Level 1		Level 2		Level 3
	(In thousands)
Impaired loans	$	5,645	$	—	$	—	$	5,645
Other real estate owned		7,462		—		—		7,462
Total	$	13,107	$	—	$	—	$	13,107

	Fair Value at September 30, 2019
	Total		Level 1		Level 2		Level 3
	(In thousands)
Impaired loans	$	6,835	$	—	$	—	$	6,835
Other real estate owned		7,528		—		—		7,528
Total	$	14,363	$	—	$	—	$	14,363

10 

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
December 31, 2019	Estimate	Techniques	Unobservable Input	Range (Weighted Average)
Impaired loans	$     5,645	Appraisal of collateral (1)	Appraisal adjustments (2)	-2.2% to -49.5% (-28.1%)
Other real estate owned	$     7,462	Appraisal of collateral (1)	Liquidation expenses (2)	-9.2% to -89.1% (-19.4%)

Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands)
	Fair Value	Valuation
September 30, 2019	Estimate	Techniques	Unobservable Input	Range (Weighted Average)
Impaired loans	$     6,835	Appraisal of collateral (1)	Appraisal adjustments (2)	-1.9% to -67.2% (-25.0%)
Other real estate owned	$     7,528	Appraisal of collateral (1)	Liquidation expenses (2)	-9.2% to -48.5% (-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 December 31, 2019 and September 30, 2019. 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 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.

11 

	Carrying		Fair		Fair Value Measurement Placement
	Value		Value		(Level 1)		(Level 2)		(Level 3)
	(In thousands)
December 31, 2019
Financial instruments - assets
Investment securities held to maturity	$	30,917	$	30,762	$	—	$	30,762	$	—
Loans		525,431		535,713		—		—		535,713
Financial instruments - liabilities
Certificates of deposit including retirement certificates		132,110		133,493		—		133,493		—
Borrowings		30,488		30,881		—		30,881		—
September 30, 2019
Financial instruments - assets
Investment securities held to maturity	$	29,481	$	29,344	$	—	$	29,344	$	—
Loans		518,217		527,088		—		—		527,088
Financial instruments - liabilities
Certificates of deposit including retirement certificates		116,776		117,730		—		117,730		—
Borrowings		36,189		36,583		—		36,583		—

There were no transfers between fair value measurement placements for the three months ended December 31, 2019.

NOTE H – LEASES

The Company adopted Accounting Standard Update (“ASU”) No. 2016-02, Leases (Topic 842), on October 1, 2019. Topic 842 requires lessees to recognize a lease liability and a right-of-use (“ROU”) asset, measured at the present value of the future minimum lease payments, at the lease commencement date. The Company adopted this guidance on October 1, 2019, electing the modified retrospective transition approach method that does not adjust previous periods. The Company also elected not to include short-term leases (i.e., leases with initial term of twelve months or less), or equipment leases (deemed immaterial) on the consolidated statements of condition as provided for in the guidance.

The Company has operating leases for five branch locations. Our leases have remaining lease terms of up to 11 years, some of which include options to extend the leases for up to 10 additional years. Operating leases are recorded as ROU assets and lease liabilities and are included within Other assets and Accounts payable and other liabilities, respectively, on our Consolidated Balance Sheets.

Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at lease commencement base on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate. The Company recorded a $3.8 million operating lease right-of-use asset and operating lease liability beginning October 1, 2019. The incremental borrowing rate used by the Company to value its operating leases was based on the interpolated term advance rate available from the Federal Home Loan Bank of New York, based on the remaining lease term as of October 1, 2019.

The following table presents the balance sheet information related to our leases:

	December 31, 2019
	(Dollars in thousands)
Operating lease right-of-use asset	$	3,687
Operating lease liabilities	$	4,099
Weighted average remaining lease term in years		8.0
Weighted average discount rate		2.21%

The following table summarizes the maturity of our remaining lease liabilities by year:

12 

	December 31, 2019
	(In thousands)
For the Year Ending:
2020	$	525
2021		705
2022		595
2023		602
2024		602
2025 and thereafter		1,528
Total lease payments		4,557
Less imputed interest		(458	)
Present value of lease liabilities	$	4,099

Total lease expense recorded on the Consolidated Statements of Income within Occupancy expense for the three months ended December 31, 2019 was $198,000 and $197,000 for the three months ended December 31, 2018.

NOTE I - INVESTMENT SECURITIES

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

	December 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	$	457	$	12	$	—		$	469
Obligations of U.S. government-sponsored enterprises:
Mortgage-backed securities-residential		15,491		78		(44	)		15,525
Debt securities		1,500		—		—			1,500
Total securities available for sale	$	17,448	$	90	$	(44	)	$	17,494

	September 30, 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	$	480	$	15	$	—		$	495
Obligations of U.S. government-sponsored enterprises:
Mortgage-backed securities-residential		14,663		80		(35	)		14,708
Debt securities		1,500		—		—			1,500
Total securities available for sale	$	16,643	$	95	$	(35	)	$	16,703

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

13 

	December 31, 2019
	Amortized		Fair
	Cost		Value
	(In thousands)
Due within 1 year	$	—	$	—
Due after 1 but within 5 years		1,500		1,500
Due after 5 but within 10 years		—		—
Due after 10 years		—		—
Total debt securities		1,500		1,500
Mortgage-backed securities:
Residential		15,948		15,994
Commercial		—		—
Total	$	17,448	$	17,494

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

	December 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	$	1,960	$	—	$	(63	)	$	1,897
Mortgage-backed securities - commercial		826		—		(7	)		819
Obligations of U.S. government-sponsored enterprises:
Mortgage-backed-securities - residential		23,890		224		(67	)		24,047
Debt securities		970		4		—			974
Private label mortgage-backed securities - residential		271		5		—			276
Corporate securities		3,000		—		(251	)		2,749
Total securities held to maturity	$	30,917	$	233	$	(388	)	$	30,762

	September 30, 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	$	445	$	—	$	(54	)	$	391
Mortgage-backed securities - commercial		842		—		(6	)		836
Obligations of U.S. government-sponsored enterprises:
Mortgage backed securities - residential		22,363		276		(47	)		22,592
Debt securities		2,468		10		—			2,478
Private label mortgage-backed securities - residential		363		7		—			370
Corporate securities		3,000		—		(323	)		2,677
Total securities held to maturity	$	29,481	$	293	$	(430	)	$	29,344

14 

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

	December 31, 2019
	Amortized		Fair
	Cost		Value
	(In  thousands)
Due within 1 year	$	—	$	—
Due after 1 but within 5 years		—		—
Due after 5 but within 10 years		3,970		3,723
Due after 10 years		—		—
Total debt securities		3,970		3,723
Mortgage-backed securities:
Residential		26,121		26,220
Commercial		826		819
Total	$	30,917	$	30,762

NOTE J – 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.

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 December 31, 2019 and September 30, 2019 for both available for sale and held to maturity securities by investment category and time frame for which the loss has been outstanding:

			December 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		3	$	1,522	$	(9	)	$	375	$	(54	)	$	1,897	$	(63	)
Mortgage-backed securities - commercial		1		—		—			820		(7	)		820		(7	)
Obligations of U.S. government-sponsored enterprises
Mortgage-backed securities - residential		13		3,618		(29	)		13,176		(82	)		16,794		(111	)
Debt securities		1		1,500		—			—		—			1,500		—
Corporate securities		1		—		—			2,749		(251	)		2,749		(251	)
Total		19	$	6,640	$	(38	)	$	17,120	$	(394	)	$	23,760	$	(432	)

15 

			September 30, 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	$	—	$	—		$	392	$	(54	)	$	392	$	(54	)
Mortgage-backed securities - commercial		1		—		—			836		(6	)		836		(6	)
Obligations of U.S. government-sponsored enterprises
Mortgage-backed securities - residential		13		1,219		(4	)		14,429		(78	)		15,648		(82	)
Corporate securities		1		—		—			2,678		(323	)		2,678		(323	)
Total		17	$	1,219	$	(4	)	$	18,335	$	(461	)	$	19,554	$	(465	)

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 December 31, 2019 and September 30, 2019, there were nineteen and seventeen, respectively, investment securities 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 December 31, 2019 and September 30, 2019.

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

Loans receivable, net were comprised of the following:

	December 31,			September 30,
	2019			2019
	(In thousands)
One-to-four family residential	$	195,290		$	190,415
Commercial real estate		230,964			232,544
Construction		29,777			28,451
Home equity lines of credit		19,876			17,832
Commercial business		49,729			48,769
Other		4,812			4,990
Total loans receivable		530,448			523,001
Net deferred loan costs		83			104
Allowance for loan losses		(5,100	)		(4,888	)
Total loans receivable, net	$	525,431		$	518,217

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 consumer loans, but also includes unsecured personal loans and overdraft lines of credit connected with customer deposit accounts.

16 

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 the dates presented:

					Impaired
					Loans with
	Impaired Loans with				No Specific
	Specific Allowance				Allowance		Total Impaired Loans
									Unpaid
	Recorded		Related		Recorded		Recorded		Principal
December 31, 2019	Investment		Allowance		Investment		Investment		Balance
	(In thousands)
One-to-four family residential	$	—	$	—	$	1,396	$	1,396	$	1,396
Commercial real estate		—		—		2,623		2,623		2,623
Construction		—		—		2,900		2,900		2,900
Commercial business		1,003		320		474		1,477		1,477
Total impaired loans	$	1,003	$	320	$	7,393	$	8,396	$	8,396

17 

					Impaired
					Loans with
	Impaired Loans with				No Specific
	Specific Allowance				Allowance		Total Impaired Loans
									Unpaid
	Recorded		Related		Recorded		Recorded		Principal
September 30, 2019	Investment		Allowance		Investment		Investment		Balance
	(In thousands)
One-to-four family residential	$	—	$	—	$	1,405	$	1,405	$	1,405
Commercial real estate		—		—		4,593		4,593		4,593
Construction		—		—		2,900		2,900		2,900
Commercial business		—		—		1,456		1,456		1,456
Total impaired loans	$	—	$	—	$	10,354	$	10,354	$	10,354

The average recorded investment in impaired loans was $9.4 million and $7.3 million for the three months ended December 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. During the three months ended December 31, 2019 and 2018, interest income of $40,000 and $64,000, respectively, were 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 periods indicated. There was no interest income recognized on impaired loans during the periods presented.

	Three Months
	Ended December 31, 2019
		(In thousands)
One-to-four family residential	$	1,401
Commercial real estate		3,608
Construction		2,900
Home equity lines of credit		—
Commercial business		1,467
Other		—
Average investment in impaired loans	$	9,376

	Three Months
	Ended December 31, 2018
	(In thousands)
One-to-four family residential	$	1,131
Commercial real estate		3,948
Construction		1,450
Home equity lines of credit		58
Commercial business		709
Average investment in impaired loans	$	7,296

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.

18 

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)
December 31, 2019
One-to-four family residential	$	194,814	$	—	$	476	$	—	$	195,290
Commercial real estate		228,702		544		1,718		—		230,964
Construction		24,555		—		5,222		—		29,777
Home equity lines of credit		19,876		—		—		—		19,876
Commercial business		48,478		—		1,251		—		49,729
Other		4,812		—		—		—		4,812
Total	$	521,237	$	544	$	8,667	$	—	$	530,448

			Special
	Pass		Mention		Substandard		Doubtful		Total
	(In  thousands)
September 30, 2019
One-to-four family residential	$	189,938	$	—	$	477	$	—	$	190,415
Commercial real estate		228,156		1,409		2,979		—		232,544
Construction		25,551		—		2,900		—		28,451
Home equity lines of credit		17,832		—		—		—		17,832
Commercial business		47,541		—		1,228		—		48,769
Other		4,990		—		—		—		4,990
Total	$	514,008	$	1,409	$	7,584	$	—	$	523,001

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 tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans at the dates presented:

19 

			30-59		60-89
			Days		Days		90 Days +		Total		Non-		Total
	Current		Past Due		Past Due		Past Due		Past Due		Accrual		Loans
	(In  thousands)
December 31, 2019
One-to-four family residential	$	193,707	$	1,021	$	234	$	328	$	1,583	$	328	$	195,290
Commercial real estate		226,887		2,085		974		1,018		4,077		1,018		230,964
Construction		24,555		—		2,322		2,900		5,222		2,900		29,777
Home equity lines of credit		19,783		93		—		—		93		—		19,876
Commercial business		48,382		96		48		1,203		1,347		1,203		49,729
Other		4,812		—		—		—		—		—		4,812
Total	$	518,126	$	3,295	$	3,578	$	5,449	$	12,322	$	5,449	$	530,448

			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, 2019
One-to-four family residential	$	190,301	$	—	$	—	$	114	$	114	$	114	$	190,415
Commercial real estate		229,331		503		58		2,652		3,213		2,652		232,544
Construction		25,551		—		—		2,900		2,900		2,900		28,451
Home equity lines of credit		17,832		—		—		—		—		—		17,832
Commercial business		47,541		—		—		1,228		1,228		1,228		48,769
Other		4,990		—		—		—		—		—		4,990
Total	$	515,546	$	503	$	58	$	6,894	$	7,455	$	6,894	$	523,001

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.

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.

20 

The following table summarizes the ALL by loan category and the related activity for the three months ended December 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, 2019	$	731		$	2,066		$	511	$	138	$	1,184	$	8		$	250	$	4,888
Charge-offs		—			—			—		—		—		—			—		—
Recoveries		2			—			—		—		—		—			—		2
Provision (credit)		(26	)		(147	)		63		2		311		(6	)		13		210
Balance- December 31, 2019	$	707		$	1,919		$	574	$	140	$	1,495	$	2		$	263	$	5,100

The following table summarizes the ALL by loan category and the related activity for the three months ended December 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, 2018	$	687	$	1,540	$	493	$	109	$	1,151	$	25		$	195		$	4,200
Charge-offs		—		—		—		—		—		—			—			—
Recoveries		—		—		—		1		—		—			—			1
Provision (credit)		11		50		181		11		31		(21	)		(62	)		201
Balance- December 31, 2018	$	698	$	1,590	$	674	$	121	$	1,182	$	4		$	133		$	4,402

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 December 31, 2019 and September 30, 2019:  

	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 - December 31, 2019	$	707	$	1,919	$	574	$	140	$	1,495	$	2	$	263	$	5,100
Individually evaluated
for impairment		—		—		—		—		320		—		—		320
Collectively evaluated
for impairment		707		1,919		574		140		1,175		2		263		4,780
Loans receivable:
Balance - December 31, 2019	$	195,290	$	230,964	$	29,777	$	19,876	$	49,729	$	4,812	$	—	$	530,448
Individually evaluated
for impairment		1,396		2,623		2,900		—		1,477		—		—		8,396
Collectively evaluated
for impairment		193,894		228,341		26,877		19,876		48,252		4,812		—		522,052

21 

	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, 2019	$	731	$	2,066	$	511	$	138	$	1,184	$	8	$	250	$	4,888
Individually evaluated
for impairment		—		—		—		—		—		—		—		—
Collectively evaluated
for impairment		731		2,066		511		138		1,184		8		250		4,888
Loans receivable:
Balance - September 30, 2019	$	190,415	$	232,544	$	28,451	$	17,832	$	48,769	$	4,990	$	—	$	523,001
Individually evaluated
for impairment		1,405		4,593		2,900		—		1,456		—		—		10,354
Collectively evaluated
for impairment		189,010		227,951		25,551		17,832		47,313		4,990		—		512,647

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 were no defaults on TDRs for three months ended December 31, 2019 and 2018.

NOTE L - DEPOSITS

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

	December 31,		September 30,
	2019		2019
	(In thousands)
Demand accounts	$	110,704	$	106,422
Savings accounts		69,389		70,598
NOW accounts		45,371		48,164
Money market accounts		186,080		188,115
Certificates of deposit		115,991		100,016
Retirement certificates		16,119		16,760
Total deposits	$	543,654	$	530,075

NOTE M – 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.

22 

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 December 31, 2019 or September 30, 2019.

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:

	For the Three Months
	Ended December 31,
	2019			2018
	(In thousands)
Income tax expense at the statutory federal tax rate of 21%
for the three months ended December 31, 2019 and 2018	$	144		$	179
State tax expense		106			111
Other		(12	)		(11	)
Income tax expense	$	238		$	279

On July 1, 2018, the State of New Jersey's Assembly signed into law a new bill, effective January 1, 2018, that imposed a temporary surtax on corporations earning New Jersey allocated income in excess of $1 million. The surtax was set at a rate of 2.5% for tax years beginning on or after January 1, 2018 through December 31, 2019, and at a rate of 1.5% for years beginning on or after January 1, 2020, through December 31, 2021. Accordingly, the Company is using an 11.5% State tax rate for the calculation of its State income tax expense for the three months ended December 31, 2019.

NOTE N - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Company occasionally 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 December 31, 2019 and September 30, 2019, 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.

	December 31,		September 30,
	2019		2019
	(In thousands)
Financial instruments whose contract amounts
represent credit risk
Letters of credit	$	962	$	1,315
Unused lines of credit		49,644		56,405
Fixed rate loan commitments		1,757		3,362
Variable rate loan commitments		17,370		12,141
		—
Total	$	69,733	$	73,223

23 

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.

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.

24 

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.

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 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.

25 

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.

Comparison of Financial Condition at December 31, 2019 and September 30, 2019

Total assets increased $10.6 million, or 1.7%, to $640.9 million at December 31, 2019 from $630.3 million at September 30, 2019. The increase was primarily attributable to higher loans receivable, net of allowance for loan loss and investment securities, partially offset by lower cash and interest earning deposits.

Cash and interest bearing deposits with banks decreased $2.3 million, or 10.4%, to $19.2 million at December 31, 2019 from $21.5 million at September 30, 2019 to fund loan and investment security growth during the three months ended December 31, 2019.

At December 31, 2019, investment securities totaled $48.4 million, reflecting an increase of $2.2 million, or 4.8%, from $46.2 million at September 30, 2019. The Company purchased three mortgage-backed securities totaling $5.2 million during the three months ended December 31, 2019. The Company received payments from mortgage-backed securities and bond calls totaling $2.9 million and there were no sales during the period.

Investment securities at December 31, 2019 consisted of $42.7 million in mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises, $2.5 million in U.S. government-sponsored enterprise debt securities, $3.0 million in corporate notes, and $271,000 in “private-label” mortgage-backed securities. There were no other-than-temporary-impairment charges for the Company’s investment securities for the three months ended December 31, 2019.

Total loans receivable increased $7.4 million, or 1.4%, during the three months ended December 31, 2019 to $530.4 million from $523.0 million at September 30, 2019. The loan portfolio was comprised of $230.9 million (43.5%) in commercial real estate loans, $195.3 million (36.9%) in 1-4 family residential mortgage loans, $49.7 million (9.4%) in commercial business loans, $29.8 million (5.6%) in construction loans, $19.9 million (3.7%) in home equity lines of credit, and $4.8 million (0.9%) in other loans. Expansion of the portfolio during the quarter ended December 31, 2019 occurred in 1-4 family residential real estate loans (including home equity lines of credit), which increased $6.9 million, construction loans, which increased $1.3 million, and commercial business loans, which increased $960,000. Partially offsetting these increase were commercial real estate loans, which decreased $1.6 million, and other loans, which decreased $178,000 during the quarter.

Total non-performing loans decreased by $1.5 million, or 21.0%, to $5.4 million at December 31, 2019 from $6.9 million at September 30, 2019. The decrease was primarily due to the repayment of a $1.6 million commercial real estate loan. The ratio of non-performing loans to total loans decreased to 1.03% at December 31, 2019 from 1.32% at September 30, 2019.

Non-performing loans secured by one-to four-family residential properties, including home equity lines of credit and other consumer loans, increased $214,000 to $328,000 at December 31, 2019 from one new non-performing residential mortgage loan. If the loan surpasses 120 days delinquent, foreclosure proceedings will commence. Non-performing commercial real estate loans decreased $1.6 million during the three months ended December 31, 2019 to $1.0 million at December 31, 2019 from the full repayment of one loan. Non-performing commercial business loans decreased $25,000 to $1.2 million during the three months ended December 31, 2019 from the receipt of payments during the quarter. Non-performing construction loans were unchanged during the quarter at $2.9 million. Year-to-date, there were no charge offs and there were $2,000 in recoveries of previously charged-off non-performing loans.

Included in the non-performing loan totals were five commercial loans totaling $2.2 million, two residential mortgage loans totaling $328,000 and one construction loan totaling $2.9 million.

During the three months ended December 31, 2019, the allowance for loan losses increased $212,000 to $5.1 million compared with $4.9 million at September 30, 2019. The increase was attributable to the establishment of specific reserves totaling $320,000 for two non-performing loans during the three months ended at December 31, 2019, partially offset by lower general reserves resulting from lower non-performing loans and the change in the composition of total loans receivable during the quarter.

26 

The allowance for loan losses as a percentage of non-performing loans increased to 93.6% at December 31, 2019 from 70.9% at September 30, 2019. Our allowance for loan losses as a percentage of total loans was 0.96% at December 31, 2019 compared with 0.93% September 30, 2019.

Future increases in the allowance for loan losses may be necessary based on possible future increases in non-performing loans and charge-offs, possible additional deterioration of collateral values, and the possible deterioration of the current economic environment. The Company determines the carrying value of loans secured by real estate by obtaining an updated third-party appraisal of the real estate collateral.

Other real estate owned decreased $66,000, or 0.9%, to $7.5 million at December 31, 2019. The decrease was primarily due to an increase in the valuation allowance against the other real estate portfolio. 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, leasing properties to offset maintenance costs and selling the properties.

Total deposits increased $13.6 million, or 2.6%, to $543.7 million during the three months ended December 31, 2019 from $530.1 million at September 30, 2019. The increase in deposits occurred in certificates of deposit (including individual retirement accounts), which increased $15.3 million, or 13.1%, to $132.1 million and in non-interest bearing checking accounts, which increased $4.3 million, or 4.0%, to $110.7 million. Partially offsetting these increases were interest-bearing checking accounts (NOW), which decreased $2.8 million, or 5.8%, to $45.4 million, money market accounts, which decreased $2.0 million, or 1.1%, to $186.1 million, and savings accounts, which decreased $1.2 million, or 1.7%, to $69.4 million.

Included in the total deposits were $6.9 million in brokered certificates of deposit at December 31, 2019 and September 30, 2019.

Federal Home Loan Bank of New York advances decreased $5.7 million to $30.5 million at December 31, 2019 from $36.2 million at September 30, 2019. The Company used proceeds from deposit inflows during the quarter to repay two maturing term borrowings that had a weighted average cost of 2.42%.

Stockholders’ equity increased $581,000, or 1.1%, to $55.2 million at December 31, 2019 from $54.6 million at September 30, 2019. The Company’s book value per share increased to $9.49 at December 31, 2019 from $9.39 at September 30, 2019. The increase in stockholders’ equity was attributable to the Company’s results from operations.

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

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

The table on the following page presents certain information regarding the Company’s financial condition and net interest income for the three months ended December 31, 2019 and 2018. The table presents the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the period shown. We derived average balances from daily balances over the period indicated. Interest income includes fees that we consider adjustments to yields.

27 

MAGYAR BANCORP, INC. AND SUBSIDIARY

Comparative Average Balance Sheets

(Dollars In Thousands)

	For the Three Months Ended December 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	$	18,882	$	71		1.50%	$	33,608	$	153		1.80%
Loans receivable, net		522,545		6,398		4.86%		509,057		6,127		4.77%
Securities
Taxable		47,361		266		2.23%		56,562		335		2.35%
FHLB of NY stock		2,143		37		6.86%		2,121		46		8.51%
Total interest-earning assets		590,931		6,772		4.55%		601,348		6,661		4.39%
Noninterest-earning assets		47,096						42,705
Total assets	$	638,027					$	644,053
Interest-bearing liabilities:
Savings accounts (1)	$	70,193		114		0.64%	$	77,596		126		0.65%
NOW accounts (2)		234,722		734		1.24%		232,919		759		1.29%
Time deposits (3)		122,560		598		1.93%		128,833		553		1.70%
Total interest-bearing deposits		427,475		1,446		1.34%		439,348		1,438		1.30%
Borrowings		34,447		196		2.26%		34,563		190		2.17%
Total interest-bearing liabilities		461,922		1,642		1.41%		473,911		1,628		1.36%
Noninterest-bearing liabilities		120,885						118,087
Total liabilities		582,807						591,998
Retained earnings		55,220						52,055
Total liabilities and retained earnings	$	638,027					$	644,053
Net interest and dividend income			$	5,130					$	5,033
Interest rate spread						3.14%						3.03%
Net interest-earning assets	$	129,009					$	127,437
Net interest margin (4)						3.44%						3.32%
Average interest-earning assets to
average interest-bearing liabilities		127.93%						126.89%

⁽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.  

28 

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

Net Income. Net income decreased $132,000, or 19.3%, to $553,000 during the three-month period ended December 31, 2019 compared with net income of $685,000 for the three-month period ended December 31, 2018 due to higher non-interest expenses which increased $239,000 and lower non-interest income which decreased $22,000, partially offset by higher net interest and dividend income which increased $97,000.

Net Interest and Dividend Income. Net interest and dividend income increased $97,000, or 1.9%, to $5.1 million for the three months ended December 31, 2019 from $5.0 million for the same period ended December 31, 2018. A 12 basis point increase in the Company’s net interest margin to 3.44% more than offset a $10.5 million decrease in average interest earning assets between the three months periods ended December 31, 2019 and 2018.

The yield on the Company’s interest-earning assets increased 16 basis points to 4.55% for the three months ended December 31, 2019 from 4.39% for the three months ended December 31, 2018 due to higher average balances of loans receivable, net of allowance for loan losses, which increased $13.5 million and higher yields on loans receivable, which increased 9 basis points to 4.86% for the three months ended December 31, 2019 from 4.77% for the three months ended December 31, 2018. The cost of interest-bearing liabilities increased 5 basis points to 1.41% for the three months ended December 31, 2019 from 1.36% for the three months ended December 31, 2018.

Interest and Dividend Income. Interest and dividend income increased $111,000, or 1.7%, to $6.8 million for the three months ended December 30, 2019 from $6.7 million for the three months ended December 31, 2018. The increase was attributable to a higher yield on interest-earning assets, which increased 16 basis points to 4.55% for the three months ended December 31, 2019 from 4.39% for the three months ended December 31, 2018. The higher yields more than offset lower average balances of interest-earning assets, which decreased $10.5 million between periods and primarily occurred in lower-yielding interest-earning deposits.

Interest earned on loans increased $270,000, or 4.4%, to $6.4 million for the three months ended December 31, 2019 compared with $6.1 million the same period prior year due to a $13.5 million increase in the average balance of loans receivable and higher yields on loans receivable, which increased 9 basis points to 4.86% for the three months ended December 31, 2019 from 4.77% for the three months ended December 31, 2018.

Interest earned on investment securities, including interest earning deposits and excluding FHLB stock, decreased $150,000, or 30.7%, to $338,000 at December 31, 2019 from $488,000 at December 31, 2018. The decrease was due to a $23.9 million, or 26.5%, decrease in the average balance of such securities and deposits to $66.2 million for the three months ended December 31, 2019 from $90.2 million at December 31, 2018. The average yield on investment securities and interest earning deposits decreased 13 basis points to 2.02% for the three months ended December 31, 2019 from 2.15% for the three months ended December 31, 2018. The decrease in yield on interest earning deposits reflected the lower interest rates paid on reserves by the Federal Reserve Bank between the comparable periods.

Interest Expense. Interest expense increased $14,000, or 0.9%, to $1.6 million for the three months ended December 31, 2019 compared with the three months ended December 31, 2018. The average balance of interest-bearing liabilities decreased $12.0 million, or 2.5%, between the two periods, while the cost of such liabilities increased 5 basis points to 1.41% for the three months ended December 31, 2019 compared with 1.36% the prior year period. The cost of liabilities between periods increased, despite lower market interest rates, due to competition for and retention of time deposits (including individual retirement accounts). While the Company was able to lower the average cost of its savings, interest-bearing checking and money market accounts, the cost of its time deposits rose 23 basis points to 1.93% for the three months ended December 31, 2019 from 1.70% for the three months ended December 31, 2018.

The average balance of interest bearing deposits decreased $11.8 million to $427.5 million at December 31, 2019 from $439.3 million at December 31, 2018, while the average cost of such deposits increased 4 basis points to 1.34% from 1.30% between the two periods. As a result, interest paid on interest-bearing deposits increased only $8,000 to remain $1.4 million for the three months ended December 31, 2019 compared with the three months ended December 31, 2018.

Interest paid on advances increased $6,000 to $196,000 for the three months ended December 31, 2019 from $190,000 for the same period prior year, while the average balance of such borrowings decreased $116,000 to $34.4 million at December 31, 2019 from $34.5 million at December 31, 2018. The average cost of advances increased 9 basis points to 2.26% for the three months ended December 31, 2019 from 2.17% for the three months ended December 31, 2018 as maturing advances during the year were replaced with new, higher cost advances at prevailing market interest rates.

29 

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 $210,000 for the three months ended December 31, 2019 compared to a provision of $201,000 for the three months ended December 31, 2018. The increase was attributable to the establishment of specific reserves totaling $320,000 for two non-performing loans during the three months ended at December 31, 2019, partially offset by lower general reserves resulting from lower non-performing loans and the change in the composition of total loans receivable during the quarter. There were $2,000 in net recoveries for the three months ended December 31, 2019 compared with no charge-offs or recoveries during the three months ended December 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.

Other Income. Non-interest income decreased $22,000, or 5.2%, to $404,000 during the three months ended December 31, 2019 compared to $426,000 for the three months ended December 31, 2018. The decrease in non-interest income was attributable to lower service charges, specifically loan prepayment penalties, which decreased $56,000. Partially offsetting the decline were higher gains from the sales of loans, which increased $26,000.

Other Expenses. Non-interest expenses increased $239,000, or 5.6%, to $4.5 million during the three months ended December 31, 2019 from $4.3 million during the three months ended December 31, 2018. Compensation and employee benefits expense increased $145,000, or 5.9%, for the three months ended December 31, 2019 due to new positions in the Bank’s regulatory compliance department and due to annual merit increases for employees during the year. In addition, higher legal fees related to the collection and foreclosure of non-performing loans resulted in a $58,000 increase in professional expenses and other real estate owned expenses increased $57,000 due to higher valuation allowances between the quarterly periods.

Income Tax Expense. The Company recorded tax expense of $238,000 on pre-tax income of $791,000 for the three months ended December 31, 2019, compared to $279,000 on pre-tax income of $964,000 for the three months ended December 31, 2018. The Company’s effective tax rate for the three months ended December 31, 2019 was 30.1% compared with 28.9% for the three months ended December 31, 2018.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

The Company’s liquidity is a measure of its ability to fund loans, pay withdrawals of deposits, and other cash outflows in an efficient, cost-effective manner. The Company’s short-term sources of liquidity include maturity, repayment and sales of assets, excess cash and cash equivalents, new deposits, other borrowings, and new advances from the Federal Home Loan Bank. There has been no material adverse change during the three months ended December 31, 2019 in the ability of the Company and its subsidiaries to fund their operations.

At December 31, 2019, the Company had commitments outstanding under letters of credit of $962,000, commitments to originate loans of $19.1 million, and commitments to fund undisbursed balances of closed loans and unused lines of credit of $49.6 million. There has been no material change during the three months ended December 31, 2019 in any of the Company’s other contractual obligations or commitments to make future payments.

Capital Requirements

At December 31, 2019, the Bank’s Tier 1 capital as a percentage of the Bank's total assets was 8.96%, and total qualifying capital as a percentage of risk-weighted assets was 12.97%.

30 

Item 3- Quantitative and Qualitative Disclosures about Market Risk

Not applicable to smaller reporting companies.

Item 4 – Controls and Procedures

Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.

There has been no change in the Company's internal control over financial reporting during the three months ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

31 

PART II - OTHER INFORMATION

Item 1. Legal proceedings

None.

Item 1A. Risk Factors

Not applicable to smaller reporting companies.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

a.) Not applicable.

b.) Not applicable.

c.) The Company did not repurchase shares of its common stock during the three months ended December 31, 2019. Through December 31, 2019, the Company had repurchased 81,000 shares of its common stock at an average price of $8.33, which has reduced outstanding common stock shares to 5,820,746.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

a.) Not applicable.

b.) None.

Item 6. Exhibits

Exhibits

31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)

31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)

32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101 Interactive data file containing the following financial statements formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets at December 31, 2019 and September 30, 2019; (ii) the Consolidated Statements of Operations for the three months ended December 31, 2019 and 2018; (iii) the Consolidated Statements of Comprehensive Income for the three months ended December 31, 2019 and 2018; (iv) the Consolidated Statements of Changes in Stockholders’ Equity for the three months ended December 31, 2019 and 2018; (v) the Consolidated Statements of Cash Flows for the three months ended December 31, 2019 and 2018; and (vi) the Notes to Consolidated Financial Statements, tagged as blocks of text.

32 

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	MAGYAR BANCORP, INC.
	(Registrant)
Date: February 13, 2020	/s/ John S. Fitzgerald
	John S. Fitzgerald
	President and Chief Executive Officer
Date: February 13, 2020	/s/ Jon R. Ansari
	Jon R. Ansari
	Executive Vice President and Chief Financial Officer

33