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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, 2017

 

Commission File Number 000-51726

 

Magyar Bancorp, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

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

 

(732) 342-7600

(Issuer’s Telephone Number including area code)

 

 

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

Yes þ       No o

 

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

Yes þ       No o

 

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

 

Large accelerated filer  o   Accelerated filer  o
Non-accelerated filer    o   Smaller reporting company þ
(Do not check if a smaller reporting company) 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

 

State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 

Class Outstanding at February 1, 2018
Common Stock, $0.01 Par Value 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 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
Item 4. Controls and Procedures 32
     
PART II. OTHER INFORMATION
     
Item 1. Legal Proceedings 33
Item 1A. Risk Factors 33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
Item 3. Defaults Upon Senior Securities 33
Item 4. Mine Safety Disclosures 33
Item 5. Other Information 33
Item 6. Exhibits 33
     
Signature Pages 34

 

 

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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, 
   2017   2017 
Assets  (Unaudited)     
Cash  $1,054   $871 
Interest earning deposits with banks   13,760    21,463 
Total cash and cash equivalents   14,814    22,334 
           
Investment securities - available for sale, at fair value   23,071    11,815 
Investment securities - held to maturity, at amortized cost (fair value of          
$33,787 and $51,241 at December 31, 2017 and September 30, 2017, respectively)   34,510    51,368 
Federal Home Loan Bank of New York stock, at cost   2,002    2,002 
Loans receivable, net of allowance for loan losses of $3,537 and $3,475          
at December 31, 2017 and September 30, 2017, respectively   478,201    470,693 
Bank owned life insurance   11,621    11,550 
Accrued interest receivable   2,027    1,929 
Premises and equipment, net   17,457    17,567 
Other real estate owned ("OREO")   10,744    11,056 
Other assets   2,313    2,730 
           
Total assets  $596,760   $603,044 
           
Liabilities and Stockholders' Equity          
Liabilities          
Deposits  $507,454   $515,201 
Escrowed funds   2,075    1,937 
Federal Home Loan Bank of New York advances   31,905    31,905 
Accrued interest payable   135    105 
Accounts payable and other liabilities   5,347    4,439 
           
Total liabilities   546,916    553,587 
           
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, 2017 and September 30, 2017   59    59 
Additional paid-in capital   26,295    26,289 
Treasury stock: 102,996 shares          
at December 31, 2017 and September 30, 2017, at cost   (1,152)   (1,152)
Unearned Employee Stock Ownership Plan shares   (459)   (492)
Retained earnings   26,086    25,757 
Accumulated other comprehensive loss   (985)   (1,004)
           
Total stockholders' equity   49,844    49,457 
           
Total liabilities and stockholders' equity  $596,760   $603,044 
           

 

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

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MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Operations

(In Thousands, Except Per Share Data)

   

   For the Three Months 
   Ended December 31, 
   2017   2016 
   (Unaudited) 
Interest and dividend income          
Loans, including fees  $5,435   $4,998 
Investment securities          
Taxable   422    379 
Federal Home Loan Bank of New York stock   31    30 
           
Total interest and dividend income   5,888    5,407 
           
Interest expense          
Deposits   894    729 
Borrowings   162    192 
           
Total interest expense   1,056    921 
           
Net interest and dividend income   4,832    4,486 
           
Provision for loan losses   250    330 
           
Net interest and dividend income after          
provision for loan losses   4,582    4,156 
           
Other income          
Service charges   258    272 
Income on bank owned life insurance   71    72 
Other operating income   25    34 
Gains on sales of loans   187    87 
Gains on sales of investment securities   107     
           
Total other income   648    465 
           
Other expenses          
Compensation and employee benefits   2,358    2,222 
Occupancy expenses   718    687 
Professional fees   230    241 
Data processing expenses   137    132 
OREO expenses   232    179 
FDIC deposit insurance premiums   109    130 
Loan servicing expenses   80    48 
Insurance expense   59    66 
Other expenses   414    329 
Total other expenses   4,337    4,034 
           
Income before income tax expense   893    587 
           
Income tax expense   564    240 
           
Net income  $329   $347 
           
Net income per share-basic and diluted  $0.06   $0.06 

 

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

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MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

(In Thousands)

   

 

   For the Three Months 
   Ended December 31, 
   2017   2016 
   (Unaudited) 
Net income  $329   $347 
Other comprehensive income (loss)          
Unrealized gain (loss) on          
securities available for sale   33    (311)
Less reclassification adjustments for:          
Net unrealized gains on securities          
reclassified available for sale   104     
Net gains realized on securities          
available for sale   (107)    
Other comprehensive income (loss), before tax   30    (311)
Deferred income tax effect   (11)   113 
Total other comprehensive income (loss)   19    (198)
Total comprehensive income  $348   $149 

 

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

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 MAGYAR BANCORP, INC. AND SUBSIDIARY

 Consolidated Statements of Changes in Stockholders' Equity

 For the Three Months Ended December 31, 2017 and 2016

 (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, 2017   5,820,746   $59   $26,289   $(1,152)  $(492)  $25,757   $(1,004)  $49,457 
Net income                       329        329 
Other comprehensive income                           19    19 
ESOP shares allocated           6        33            39 
Balance, December 31, 2017   5,820,746   $59   $26,295   $(1,152)  $(459)  $26,086   $(985)  $49,844 

 

 

                           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, 2016   5,820,746   $59   $26,270   $(1,152)  $(627)  $24,334   $(1,159)  $47,725 
Net income                       347        347 
Other comprehensive loss                           (198)   (198)
ESOP shares allocated                   35            35 
Balance, December 31, 2016   5,820,746   $59   $26,270   $(1,152)  $(592)  $24,681   $(1,357)  $47,909 

 

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

 

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MAGYAR BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(In Thousands)

 

   For the Three Months Ended 
   December 31, 
   2017   2016 
   (Unaudited) 
Operating activities          
Net income  $329   $347 
Adjustment to reconcile net income to net cash provided          
by operating activities          
Depreciation expense   209    201 
Premium amortization on investment securities, net   46    48 
Provision for loan losses   250    330 
Provision for loss on other real estate owned   157    110 
Originations of loans held for sale   (4,106)   (1,270)
Proceeds from the sales of loans receivable   4,293    1,357 
Gains on sale of loans receivable   (187)   (87)
Gains on sales of investment securities   (107)    
Gains on the sales of other real estate owned   (6)    
ESOP compensation expense   39    35 
Deferred income tax expense   107    288 
Increase in accrued interest receivable   (98)   (142)
Increase in surrender value bank owned life insurance   (71)   (72)
Decrease in other assets   300    281 
Increase in accrued interest payable   30    29 
Increase (decrease) in accounts payable and other liabilities   908    (2,185)
Net cash provided (used) by operating activities   2,093    (730)
           
Investing activities          
Net increase in loans receivable   (8,958)   (6,996)
Proceeds from the sale of loans receivable   1,200     
Purchases of investment securities held to maturity       (2,476)
Purchases of investment securities available for sale       (6,079)
Sales of investment securities held to maturity   3,408     
Principal repayments on investment securities held to maturity   912    3,334 
Principal repayments on investment securities available for sale   1,373    364 
Purchases of premises and equipment   (99)   (15)
Investment in other real estate owned   (167)   (22)
Proceeds from other real estate owned   327    31 
Redemptions of Federal Home Loan Bank stock       90 
Net cash used by investing activities   (2,004)   (11,769)
           
Financing activities          
Net (decrease) increase in deposits   (7,747)   7,174 
Net increase in escrowed funds   138    114 
Repayments of long-term advances       (2,000)
Net cash (used) provided by financing activities   (7,609)   5,288 
Net decrease in cash and cash equivalents   (7,520)   (7,211)
           
Cash and cash equivalents, beginning of period   22,334    21,806 
           
Cash and cash equivalents, end of period  $14,814   $14,595 
           
Supplemental disclosures of cash flow information          
Cash paid for          
Interest  $1,027   $891 
Income taxes  $   $32 
Non-cash investing activities          
Investment securities transferred from held to maturity to available for sale  $12,619   $ 

 

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

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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, 2017 are not necessarily indicative of the results that may be expected for the year ending September 30, 2018. The September 30, 2017 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, 2017 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

 

 

NOTE B- RECENT ACCOUNTING PRONOUNCEMENTS

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which will supersede the current revenue recognition requirements in Topic 605, Revenue Recognition. The ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU 2015-14 which deferred the effective date of ASU 2014-09 by one year. The new guidance is effective for public companies for periods beginning after December 15, 2017. The ASU permits application of the new revenue recognition guidance to be applied using one of two retrospective application methods.

Based on our evaluation under the current guidance, we estimated that substantially all of our interest income and non-interest income will not be impacted by the adoption of ASU 2014-09 because either the revenue from those contracts with customers is covered by other guidance in US GAAP or the revenue recognition outcomes anticipated with the adoption of ASU 2014-09 will likely be similar to our current revenue recognition practices. The Company evaluated certain noninterest revenue streams, including, deposit related fees, service and interchange fees, and merchant income to determine the potential impact of the guidance on the Company’s consolidated financial statements. The Company expects additional financial statement disclosures of non-interest income revenue streams with the adoption of this ASU. In addition, we are reviewing our business processes, systems and controls to support recognition and disclosures under the new standard. The Company is expected to use the modified retrospective method for transition in which the cumulative effect will be recognized at the date of adoption with no restatement of comparative periods presented. The adoption of the ASU is not expected to have a material effect on the Company’s consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which will supersede the current lease requirements in Topic 840. The ASU requires lessees to recognize a right of use asset and related lease liability for all

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leases, with a limited exception for short-term leases. Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the statement of income. Currently, leases are classified as either capital or operating, with only capital leases recognized on the balance sheet. The reporting of lease related expenses in the statements of operations and cash flows will be generally consistent with the current guidance. The new guidance will be effective for years beginning after December 15, 2018 for public companies. Once effective, the standard will be applied using a modified retrospective transition method to the beginning of the earliest period presented. The Company is currently assessing the impacts this new standard will have on its consolidated financial statements.

 

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

 

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

 

 

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, 2017 and 2016 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.

 

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   For the Three Months Ended December 31, 
   2017   2016 
       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  $329    5,821   $0.06   $347    5,821   $0.06 
                               
Effect of dilutive securities                              
Options and grants                        
                               
Diluted EPS                              
Net income available to common shareholders
plus assumed conversion
  $329    5,821   $0.06   $347    5,821   $0.06 

 

There were no outstanding options to purchase common stock at December 31, 2017.

 

Options to purchase 188,276 shares of common stock at a weighted average price of $14.61 were outstanding and not included in the computation of diluted earnings per share for the three months ended December 31, 2016 because the grant (or option strike) price was greater than the average market price of the common shares during the period and are thus anti-dilutive.

 

 

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. The Company 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.

 

The following is a summary of the status of the Company’s stock option activity and related information for its option plan for the three months ended December 31, 2017 and 2016, respectively:

 

           Weighted    
       Weighted   Average  Aggregate 
   Number of   Average   Remaining  Intrinsic 
   Stock Options   Exercise Price   Contractual Life  Value 
                
Balance at September 30, 2017      $     $ 
Granted                
Exercised                
Forfeited                
Balance at December 31, 2017      $     $ 
                   
Exercisable at December 31, 2017      $     $ 

 

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           Weighted    
       Weighted   Average  Aggregate 
   Number of   Average   Remaining  Intrinsic 
   Stock Options   Exercise Price   Contractual Life  Value 
                
Balance at September 30, 2016   188,276   $14.61    0.4 years     
Granted                
Exercised                
Forfeited                
Balance at December 31, 2016   188,276   $14.61    0.2 years  $ 
                   
Exercisable at December 31, 2016   188,276   $14.61    0.2 years  $ 

 

There were no grants, vested shares or forfeitures of non-vested restricted stock awards as of or during the three months ended December 31, 2017 or December 31, 2016.

 

There were no stock option and stock award expenses included with compensation expense for the three months ended December 31, 2017.

 

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, 2017, 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, 2017 and 2016, respectively. Under the stock repurchase program, 48,924 shares of the 129,924 shares authorized remained available for repurchase as of December 31, 2017. 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, 2017, of which 81,000 were from repurchases under this program.

 

The Company has an Employee Stock Ownership Plan ("ESOP") for the benefit of employees of the Company and the Bank who meet the eligibility requirements as defined in the plan. The ESOP trust purchased 217,863 shares of common stock in the open market using proceeds of a loan from the Company. The total cost of shares purchased by the ESOP trust was $2.3 million, reflecting an average cost per share of $10.58. The Bank will make cash contributions to the ESOP on an annual basis sufficient to enable the ESOP to make the required loan payments to the Company. The loan bears a variable interest rate that adjusts annually every January 1st to the then published Prime Rate (4.50% at January 1, 2018) with principal and interest payable annually in equal installments over thirty years. The loan is secured by shares of the Company’s stock.

 

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

 

At December 31, 2017, shares allocated to participants totaled 165,771. Unallocated ESOP shares held in suspense totaled 52,092 at December 31, 2017 and had a fair market value of $666,778. The Company's contribution expense for the ESOP was $39,000 and $35,000 for the three months ended December 31, 2017 and 2016, respectively.

 

 

NOTE F – OTHER COMPREHENSIVE INCOME (LOSS)

 

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

 

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   Three Months Ended December 31, 
   2017   2016 
       Tax   Net of       Tax   Net of 
   Before Tax   Benefit   Tax   Before Tax   Benefit   Tax 
   Amount   (Expense)   Amount   Amount   (Expense)   Amount 
   (Dollars in thousands) 
Unrealized holding gain (loss) arising                              
during period on:                              
                               
Available-for-sale investments  $33   $(12)  $21   $(311)  $113   $(198)
                               
Less reclassification adjustments for:                              
Net unrealized gains on securities                              
reclassified available for sale   104    (32)   72                
Net gains realized on securities                              
available for sale (a) (b)   (107)   33    (74)            
                               
Other comprehensive (loss) income, net  $30   $(11)  $19   $(311)  $113   $(198)

 

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

 

NOTE G – FAIR VALUE DISCLOSURES

 

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

 

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

 

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

 

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

 

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

 

Securities available-for-sale

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

 

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

 

   Fair Value at December 31, 2017 
   Total   Level 1   Level 2   Level 3 
   (Dollars in thousands) 
Securities available for sale:                    
Obligations of U.S. government agencies:                    
Mortgage-backed securities - residential  $1,626   $   $1,626   $ 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed securities-residential   18,993        18,993     
Debt securities   2,426        2,426     
Private label mortgage-backed securities-residential   26        26     
            Total securities available for sale  $23,071   $   $23,071   $ 

 

   Fair Value at September 30, 2017 
   Total   Level 1   Level 2   Level 3 
   (Dollars in thousands) 
Securities available for sale:                    
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed securities-residential  $9,326   $   $9,326   $ 
Debt securities   2,449        2,449     
Private label mortgage-backed securities-residential   40        40     
            Total securities available for sale  $11,815   $   $11,815   $ 

 

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 $61,000 and $69,000 at December 31, 2017 and September 30, 2017, 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.

 

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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 table provides the level of valuation assumptions used to determine the carrying value of the Company’s assets measured at fair value on a non-recurring basis at December 31, 2017 and September 30, 2017.

 

   Fair Value at December 31, 2017 
   Total   Level 1   Level 2   Level 3 
   (Dollars in thousands) 
                 
Impaired loans  $973   $   $   $973 
Other real estate owned   10,744            10,744 
   $11,717   $   $   $11,717 

 

   Fair Value at September 30, 2017 
   Total   Level 1   Level 2   Level 3 
   (Dollars in thousands) 
                 
Impaired loans  $909   $   $   $909 
Other real estate owned   11,056            11,056 
   $11,965   $   $   $11,965 

 

The following table presents 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, 2017 Estimate Techniques Unobservable Input Range (Weighted Average)
         
Impaired loans  $        973 Appraisal of
collateral (1)
Appraisal adjustments (2) -8.0% to -20.9% (-12.3%)
Other real estate owned  $   10,744 Appraisal of
collateral (1)
Liquidation expenses (2) -3.1% to -75.8% (-14.8%)

 

 

  Fair Value Valuation    
September 30, 2017 Estimate Techniques Unobservable Input Range (Weighted Average)
         
Impaired loans  $        909 Appraisal of
collateral (1)
Appraisal adjustments (2) -7.9% to -35.2% (-22.3%)
Other real estate owned  $   11,056 Appraisal of
collateral (1)
Liquidation expenses (2) -8.0% to -55.4% (-25.0%)

 

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(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 methods and assumptions were used to estimate the fair value of each class of financial instruments not already disclosed above for which it is practicable to estimate fair value:

 

Cash and interest earning deposits with banks: The carrying amounts are a reasonable estimate of fair value.

 

Held to maturity securities: The fair values of held to maturity 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 Company’s portfolio.

 

Loans receivable: Fair value for the loan portfolio, excluding impaired loans with specific loss allowances, is estimated based on discounted cash flow analysis using interest rates currently offered for loans with similar terms to borrowers of similar credit quality.

 

Federal Home Loan Bank of New York (“FHLB”) stock: The carrying amount of FHLB stock approximates fair value and considers the limited marketability of the investment.

 

Bank-owned life insurance: The carrying amounts are based on the cash surrender values of the individual policies, which is a reasonable estimate of fair value.

 

Deposits: The fair value of deposits with no stated maturity, such as money market deposit accounts, interest-bearing checking accounts and savings accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is equivalent to current market rates for deposits of similar size, type and maturity.

 

Accrued interest receivable and payable: For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

 

FHLB advances: The fair value of borrowings is based on the discounted value of contractual cash flows. The discount rate is equivalent to the rate currently offered by the FHLB for borrowings of similar maturity and terms.

 

The fair value of commitments to extend credit is estimated based on the amount of unamortized deferred loan commitment fees. The fair value of letters of credit is based on the amount of unearned fees plus the estimated cost to terminate the letters of credit. Fair values of unrecognized financial instruments including commitments to extend credit and the fair value of letters of credit are considered immaterial.

 

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, 2017 and September 30, 2017. 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.

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   Carrying   Fair   Fair Value Measurement Placement 
   Value   Value   (Level 1)   (Level 2)   (Level 3) 
   (Dollars in thousands) 
December 31, 2017                         
Financial instruments - assets                         
Investment securities held to maturity  $34,510   $33,787   $   $33,787   $ 
Loans   478,201    479,001            479,001 
                          
Financial instruments - liabilities                         
Certificates of deposit including retirement certificates   123,352    123,939        123,939     
Borrowings   31,905    31,623        31,623     
                          
September 30, 2017                         
Financial instruments - assets                         
Investment securities held to maturity  $51,368   $51,241   $   $51,241   $ 
Loans   470,693    473,538            473,538 
                          
Financial instruments - liabilities                         
Certificates of deposit including retirement certificates   128,028    128,750        128,750     
Borrowings   31,905    31,865        31,865     

 

There were no transfers between fair value measurement placements for the three months ended December 31, 2017.

 

 

NOTE H - INVESTMENT SECURITIES

 

The following tables summarize the amortized cost and fair values of securities available for sale at December 31, 2017 and September 30, 2017:

 

   December 31, 2017 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   (Dollars in thousands) 
Securities available for sale:                    
Obligations of U.S. government agencies:                    
Mortgage-backed securities - residential  $1,559   $67   $   $1,626 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed securities-residential   19,123    85    (215)   18,993 
Debt securities   2,500        (74)   2,426 
Private label mortgage-backed securities-residential   26            26 
            Total securities available for sale  $23,208   $152   $(289)  $23,071 

 

   September 30, 2017 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   (Dollars in thousands) 
Securities available for sale:                    
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed securities-residential  $9,442   $9   $(125)  $9,326 
Debt securities   2,500        (51)   2,449 
Private label mortgage-backed securities-residential   40            40 
            Total securities available for sale  $11,982   $9   $(176)  $11,815 

 

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The maturities of the debt securities and mortgage-backed securities available for sale at December 31, 2017 are summarized in the following table:

 

   December 31, 2017 
   Amortized   Fair 
   Cost   Value 
   (Dollars in thousands) 
Due within 1 year  $   $ 
Due after 1 but within 5 years   1,500    1,435 
Due after 5 but within 10 years   1,000    991 
Due after 10 years        
        Total debt securities   2,500    2,426 
           
Mortgage-backed securities:          
Residential   20,708    20,645 
Commercial        
        Total  $23,208   $23,071 

 

The Company adopted ASU 2017-12 during the three months ended December 31, 2017 and reclassified ten mortgage-backed securities totaling $12.6 million from the held-to-maturity portfolio to the available-for-sale portfolio that are eligible to be hedged under the last-of-layer method established by the ASU. These securities had unrealized gains of $104,000 at December 31, 2017.

 

The following tables summarize the amortized cost and fair values of securities held to maturity at December 31, 2017 and September 30, 2017:

 

   December 31, 2017 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   (Dollars in thousands) 
Securities held to maturity:                    
Obligations of U.S. government agencies:                    
Mortgage-backed securities - residential  $631   $   $(97)  $534 
Mortgage-backed securities - commercial   951        (9)   942 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage-backed-securities - residential   25,014    43    (334)   24,723 
Debt securities   4,462        (34)   4,428 
Private label mortgage-backed securities - residential   452        (2)   450 
Corporate securities   3,000        (290)   2,710 
            Total securities held to maturity  $34,510   $43   $(766)  $33,787 

 

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   September 30, 2017 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   (Dollars in thousands) 
Securities held to maturity:                    
Obligations of U.S. government agencies:                    
Mortgage-backed securities - residential  $3,466   $123   $(96)  $3,493 
Mortgage-backed securities - commercial   968        (10)   958 
Obligations of U.S. government-sponsored enterprises:                    
Mortgage backed securities - residential   39,016    349    (251)   39,114 
Debt securities   4,461        (24)   4,437 
Private label mortgage-backed securities - residential   457        (2)   455 
Corporate securities   3,000        (216)   2,784 
            Total securities held to maturity  $51,368   $472   $(599)  $51,241 

 

 

The maturities of the debt securities and the mortgage backed securities held to maturity at December 31, 2017 are summarized in the following table:

 

   December 31, 2017 
   Amortized   Fair 
   Cost   Value 
   (Dollars in  thousands) 
Due within 1 year  $2,000   $1,997 
Due after 1 but within 5 years        
Due after 5 but within 10 years   4,499    4,204 
Due after 10 years   963    937 
        Total debt securities   7,462    7,138 
           
Mortgage-backed securities:          
Residential   26,097    25,707 
Commercial   951    942 
        Total  $34,510   $33,787 

 

There were $3.3 million in sales of mortgage-backed securities from the held to maturity portfolio during the three months ended December 31, 2017. In accordance with ASC 320 “Investments- Debt and Equity Securities”, sales from the held to maturity portfolio occurred after the Company had already collected a substantial portion (at least 85 percent) of the principal outstanding at acquisition due to prepayments on the debt security. The net gain from the sales of these securities totaled $107,000.

 

 

NOTE I – IMPAIRMENT OF INVESTMENT SECURITIES

 

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

 

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.

 

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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, 2017 and September 30, 2017 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, 2017 
       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   $   $   $534   $(97)  $534   $(97)
Mortgage-backed securities - commercial   1    942    (9)           942    (9)
Obligations of U.S. government-sponsored enterprises                                   
Mortgage-backed securities - residential   24    10,068    (82)   23,367    (467)   33,435    (549)
Debt securities   5    1,495    (4)   5,359    (104)   6,854    (108)
Private label mortgage-backed securities residential   2            177    (2)   177    (2)
Corporate securities   1            2,710    (290)   2,710    (290)
        Total   35   $12,505   $(95)  $32,147   $(960)  $44,652   $(1,055)

 

 

       September 30, 2017 
       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   $   $   $605   $(96)  $605   $(96)
Mortgage-backed securities - commercial   1    958    (10)           958    (10)
Obligations of U.S. government-sponsored enterprises                                   
Mortgage-backed securities - residential   20    6,582    (92)   21,713    (284)   28,295    (376)
Debt securities   5    4,890    (71)   1,996    (4)   6,886    (75)
Private label mortgage-backed securities residential   2            193    (2)   193    (2)
Corporate securities   1            2,784    (216)   2,784    (216)
        Total   31   $12,430   $(173)  $27,291   $(602)  $39,721   $(775)

 

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, 2017 and September 30, 2017, there were thirty-five and thirty-one, 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, 2017 and September 30, 2017.

 

 

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

 

Loans receivable, net were comprised of the following:

 

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   December 31,   September 30, 
   2017   2017 
   (Dollars in thousands) 
         
One-to four-family residential  $175,461   $178,336 
Commercial real estate   210,081    207,118 
Construction   22,811    22,622 
Home equity lines of credit   20,586    18,536 
Commercial business   46,595    41,113 
Other   6,039    6,266 
Total loans receivable   481,573    473,991 
Net deferred loan costs   165    177 
Allowance for loan losses   (3,537)   (3,475)
           
Total loans receivable, net  $478,201   $470,693 

  

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: commercial real estate loans include 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.

 

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 greater than 90 days 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:

 

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           Impaired         
           Loans with         
   Impaired Loans with   No Specific         
   Specific Allowance   Allowance   Total Impaired Loans 
                   Unpaid 
   Recorded   Related   Recorded   Recorded   Principal 
At December 31, 2017  Investment   Allowance   Investment   Investment   Balance 
   (Dollars in thousands) 
                     
One-to four-family residential  $208   $60   $2,350   $2,558   $2,683 
Commercial real estate           3,673    3,673    3,673 
Commercial business           363    363    454 
Total impaired loans  $208   $60   $6,386   $6,594   $6,810 

 

           Impaired         
           Loans with         
   Impaired Loans with   No Specific         
   Specific Allowance   Allowance   Total Impaired Loans 
                   Unpaid 
   Recorded   Related   Recorded   Recorded   Principal 
At September 30, 2017  Investment   Allowance   Investment   Investment   Balance 
   (Dollars in thousands) 
                     
One-to four-family residential  $   $   $3,124   $3,124   $3,436 
Commercial real estate           4,088    4,088    4,110 
Commercial business           243    243    243 
Total impaired loans  $   $   $7,455   $7,455   $7,789 

 

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, 2017 
   (Dollars in thousands) 
     
One-to four-family residential  $2,841 
Commercial real estate   3,881 
Commercial business   303 
Average investment in impaired loans  $7,025 

 

   Three Months 
   Ended December 31, 2016 
   (Dollars in thousands) 
     
One-to four-family residential  $3,914 
Commercial real estate   3,823 
Home equity lines of credit   91 
Commercial business   1,162 
Other   4 
Average investment in impaired loans  $8,994 

 

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.

 

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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 table presents 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 
                     
   (Dollars in  thousands) 
December 31, 2017                         
One-to four-family residential  $174,099   $   $1,362   $   $175,461 
Commercial real estate   207,804        2,277        210,081 
Construction   20,396        2,415        22,811 
Home equity lines of credit   20,586                20,586 
Commercial business   46,472        123        46,595 
Other   6,039                6,039 
Total  $475,396   $   $6,177   $   $481,573 

 

 

       Special             
   Pass   Mention   Substandard   Doubtful   Total 
                     
   (Dollars in  thousands) 
September 30, 2017                    
One-to four-family residential  $176,285   $127   $1,924   $   $178,336 
Commercial real estate   204,435        2,683        207,118 
Construction   20,194        2,428        22,622 
Home equity lines of credit   18,536                18,536 
Commercial business   40,820    293            41,113 
Other   6,266                6,266 
Total  $466,536   $420   $7,035   $   $473,991 

 

 

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

 

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       30-59   60-89                 
       Days   Days   90 Days +   Total   Non-   Total 
   Current   Past Due   Past Due   Past Due   Past Due   Accrual   Loans 
   (Dollars in  thousands) 
December 31, 2017                            
One-to four-family residential  $170,310   $4,241   $   $910   $5,151   $910   $175,461 
Commercial real estate   203,710    6,102    178    91    6,371    91    210,081 
Construction   22,811                        22,811 
Home equity lines of credit   20,355        39    192    231    192    20,586 
Commercial business   46,357    115        123    238    123    46,595 
Other   6,039                        6,039 
Total  $469,582   $10,458   $217   $1,316   $11,991   $1,316   $481,573 

 

 

       30-59   60-89                 
       Days   Days   90 Days +   Total   Non-   Total 
   Current   Past Due   Past Due   Past Due   Past Due   Accrual   Loans 
   (Dollars in  thousands) 
September 30, 2017                            
One-to four-family residential  $176,546   $   $127   $1,663   $1,790   $1,663   $178,336 
Commercial real estate   206,218    418        482    900    482    207,118 
Construction   22,622                        22,622 
Home equity lines of credit   18,344        192        192        18,536 
Commercial business   40,420    400    80    213    693    213    41,113 
Other   6,266                        6,266 
Total  $470,416   $818   $399   $2,358   $3,575   $2,358   $473,991 

 

 

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.

 

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The following table summarizes the ALL by loan category and the related activity for the three months ended December 31, 2017:

  

   One-to-Four           Home Equity                 
   Family   Commercial       Lines of   Commercial             
   Residential   Real Estate   Construction   Credit   Business   Other   Unallocated   Total 
   (Dollars in  thousands) 
                                 
Balance- September 30, 2017  $587   $1,277   $490   $57   $956   $6   $102   $3,475 
Charge-offs   (127)               (170)           (297)
Recoveries   82    23    3        1            109 
Provision   21    (1)   (109)   74    265    (2)   2    250 
Balance- December 31, 2017  $563   $1,299   $384   $131   $1,052   $4   $104   $3,537 

 

The following table summarizes the ALL by loan category and the related activity for the three months ended December 31, 2016:

 

   One-to-Four           Home Equity                 
   Family   Commercial       Lines of   Commercial             
   Residential   Real Estate   Construction   Credit   Business   Other   Unallocated   Total 
   (Dollars in  thousands) 
                                 
Balance-September 30, 2016  $542   $1,075   $361   $71   $976   $9   $22   $3,056 
Charge-offs   (18)               (237)           (255)
Recoveries   35        3        1            39 
Provision   (35)   77    4        174    (2)   112    330 
Balance-December 31, 2016  $524   $1,152   $368   $71   $914   $7   $134   $3,170 

 

The following table summarizes 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, 2017 and September 30, 2017:  

 

   One-to-Four           Home Equity                 
   Family   Commercial       Lines of   Commercial             
   Residential   Real Estate   Construction   Credit   Business   Other   Unallocated   Total 
   (Dollars in  thousands) 
Allowance for Loan Losses:                                        
Balance - December 31, 2017  $563   $1,299   $384   $131   $1,052   $4   $104   $3,537 
Individually evaluated                                        
for impairment   60                            60 
Collectively evaluated                                        
for impairment   503    1,299    384    131    1,052    4    104    3,477 
                                         
Loans receivable:                                        
Balance - December 31, 2017  $175,461   $210,081   $22,811   $20,586   $46,595   $6,039   $   $481,573 
Individually evaluated                                        
for impairment   2,558    3,673            363            6,594 
Collectively evaluated                                        
for impairment   172,903    206,408    22,811    20,586    46,232    6,039        474,979 

 

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   One-to- Four           Home Equity                 
   Family   Commercial       Lines of   Commercial             
   Residential   Real Estate   Construction   Credit   Business   Other   Unallocated   Total 
   (Dollars in  thousands) 
Allowance for Loan Losses:                                
Balance - September 30, 2017  $587   $1,277   $490   $57   $956   $6   $102   $3,475 
Individually evaluated                                        
for impairment                                
Collectively evaluated                                        
for impairment   587    1,277    490    57    956    6    102    3,475 
                                         
Loans receivable:                                        
Balance - September 30, 2017  $178,336   $207,118   $22,622   $18,536   $41,113   $6,266   $   $473,991 
Individually evaluated                                        
for impairment   3,124    4,088            243             7,455 
Collectively evaluated                                        
for impairment   175,212    203,030    22,622    18,536    40,870    6,266         466,536 

 

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.

 

The Bank has adopted FASB ASU No. 2011-02 on the determination of whether a loan restructuring is considered to be a Troubled Debt Restructuring (“TDR”). A TDR is a loan that has been modified whereby the Bank has agreed to make certain concessions to a borrower to meet the needs of both the borrower and the Bank to maximize the ultimate recovery of a loan. TDR occurs when a borrower is experiencing, or is expected to experience, financial difficulties and the loan is modified using a modification that would otherwise not be granted to the borrower. The types of concessions granted generally include, but are not limited to, interest rate reductions, limitations on the accrued interest charged, term extensions, and deferment of principal.

 

A default on a troubled debt restructured loan for purposes of this disclosure occurs when a borrower is 90 days past due or a foreclosure or repossession of the applicable collateral has occurred. There was no TDRs for three months ended December 31, 2017 and 2016.

 

There were no foreclosed residential real estate loans for the three months ended December 31, 2017. There were $703,000 of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure at December 31, 2017.

 

 

NOTE K - DEPOSITS

 

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

 

   2017 
   December 31   September 30 
   (Dollars in thousands) 
         
Demand accounts  $99,507   $98,728 
Savings accounts   102,738    107,362 
NOW accounts   44,066    43,556 
Money market accounts   137,791    137,527 
Certificates of deposit   104,452    108,740 
Retirement certificates   18,900    19,288 
   $507,454   $515,201 

 

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NOTE L – INCOME TAXES

 

In the first quarter, the Company revised its estimated annual effective rate to reflect a change in the United States federal corporate tax rate from 34% to 21%, resulting from legislation that was enacted on December 22, 2017. The rate change is administratively effective at the beginning of our fiscal year resulting in the use of a blended rate for the annual period. As a result, the blended statutory federal tax rate for the Company’s year ended September 30, 2018 is 24.0%.

 

In addition, we recognized a tax expense in our tax provision for the period ended December 31, 2017 related to the adjustment of our net deferred tax asset to reflect the new corporate tax rate. As a result, income tax expense reported for the first three months was adjusted to reflect the effects of the change in the tax law and resulted in an increase in income tax expense of $207,000 during the quarter ended December 31, 2017. This amount comprises a reduction of $99,000 in income tax expense for the three-month period ended December 31, 2017 related to the lower federal income tax rate and $306,000 from the application of the newly enacted rates to existing deferred tax asset balances.

 

The Company records income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities: (i) are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns; (ii) are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases; and (iii) are measured using enacted tax rates expected to apply in the years when those temporary differences are expected to be recovered or settled.

 

Where applicable, deferred tax assets are reduced by a valuation allowance for any portions determined not likely to be realized. The valuation allowance is assessed by management on a quarterly basis and adjusted, by a charge or credit to income tax expense, as changes in facts and circumstances warrant. In assessing whether it is more likely than not that some portion or all of the deferred tax assets will not be realized, management considers projections of future taxable income, the projected periods in which current temporary differences will be deductible, the availability of carry forwards, feasible and permissible tax planning strategies and existing tax laws and regulations. The Company did not have a valuation allowance against its net deferred tax assets at December 31, 2017 or September 30, 2017.

 

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, 
   2017   2016 
   (in thousands) 
         
Income tax expense at the statutory federal tax rate of 24% and 34%          
for the three months ended December 31, 2017 and 2016  $214   $200 
State tax expense   61    32 
Reduction of deferred tax asset from tax legislation   306     
Other   (17)   8 
Income tax expense  $564   $240 

 

 

NOTE M - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

 

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

 

As of December 31, 2017 and September 30, 2017, 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.

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   2017 
   December 31   September 30 
   (Dollars in thousands) 
Financial instruments whose contract amounts          
represent credit risk          
Letters of credit  $808   $633 
Unused lines of credit   61,502    64,220 
Fixed rate loan commitments   2,773    2,429 
Variable rate loan commitments   6,979    3,952 
           
   $72,062   $71,234 

 

 

 

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.

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Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. We consider a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates by management that may be susceptible to significant change based on changes in economic and real estate market conditions.

The evaluation has a specific and general component. The specific component relates to loans that are delinquent or otherwise identified as impaired through the application of our loan review process and our loan grading system. All such loans are evaluated individually, with principal consideration given to the value of the collateral securing the loan and discounted cash flows. Specific impairment allowances are established as required by this analysis. The general component is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general component of the allowance for loan losses.

Actual loan losses may be significantly greater than the allowances we have established, which could have a material negative effect on our financial results.

 

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

 

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

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

 

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

 

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

 

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

 

Deferred Income Taxes. The Company records income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities: (i) are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns; (ii) are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases; and (iii) are measured using enacted tax rates expected to apply in the years when those temporary differences are expected to be recovered or settled.

 

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

 

Comparison of Financial Condition at December 31, 2017 and September 30, 2017

 

Total assets decreased $6.3 million, or 1.0%, to $596.8 million during the three months ended December 31, 2017 from $603.0 million at September 30, 2017. The decrease was primarily attributable to lower interest earning deposits with banks and investments, partially offset by higher loans receivable.

 

Cash and interest bearing deposits with banks decreased $7.5 million, or 33.7%, to $14.8 million at December 31, 2017 from $22.3 million at September 30, 2017 due to net deposit outflows and an increase in loans receivable during the three months ended December 31, 2017.

 

At December 31, 2017, investment securities totaled $57.6 million, reflecting a decrease of $5.6 million, or 8.9%, from September 30, 2017. The Company sold twenty-three U.S. government-sponsored enterprise mortgage-backed securities totaling $3.3 million and received payments from mortgage-backed securities totaling $2.3 million during the quarter. The securities were sold for a gain of $107,000 from the held to maturity portfolio as they had paid down to less than 85% of their original par. There were no purchases during the three months ended December 31, 2017.

 

Investment securities at December 31, 2017 consisted of $47.2 million in mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises, $6.9 million in U.S. government-sponsored enterprise debt securities, $3.0 million in corporate notes, and $478,000 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, 2017.

 

Total loans receivable increased $7.6 million during the three months ended December 31, 2017 to $481.6 million and were comprised of $210.1 million (43.6%) in commercial real estate loans, $175.5 million (36.4%) in one-to-four family residential mortgage loans, $46.6 million (9.7%) in commercial business loans, $22.8 million (4.7%) in construction loans, $20.6 million (4.3%) in home equity lines of credit, and $6.0 million (1.3%) in other loans. Expansion of the portfolio during the three months ended December 31, 2017 occurred primarily in commercial business loans, which increased $5.5 million, commercial real estate loans, which increased $3.0 million, and home equity lines of credit, which increased $2.1 million.

 

Total non-performing loans decreased by $1.0 million, or 44.2%, to $1.3 million at December 31, 2017 from $2.4 million at September 30, 2017. The ratio of non-performing loans to total loans declined to 0.27% at December 31, 2017 from 0.50% at September 30, 2017.

 

Non-performing loans secured by one-to four-family residential properties, including home equity lines of credit and other consumer loans, decreased $561,000 to $1.1 million at December 31, 2017 from $1.7 million at September 30, 2017. These loans remained in varying stages of foreclosure at December 31, 2017. Year-to-date, Magyar Bank charged off $127,000 in non-performing residential mortgage loans through a reduction in its allowance for loan loss and received recoveries totaling $82,000 from previously charged-off non-performing residential and home equity line of credit loans.

 

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Non-performing commercial real estate loans decreased $391,000 to $91,000 at December 31, 2017 from $482,000 at September 30, 2017. This non-accrual loan was in foreclosure at December 31, 2017. Year-to-date, there were no charge offs and $23,000 in recoveries of previously charged-off non-performing commercial real estate loans.

 

Non-performing commercial business loans decreased $90,000 to $123,000 during the three months period ended December 31, 2017. Year-to-date, Magyar Bank charged off $170,000 in non-performing commercial business loans through a reduction in its allowance for loan loss and received recoveries totaling $1,000 from a previously charged-off non-performing commercial business loan.

 

All construction loans were performing at December 31, 2017. Year-to-date, Magyar Bank received recoveries totaling $3,000 from a previously charged-off non-performing construction loan.

 

During the three months ended December 31, 2017, the allowance for loan losses increased $62,000 to $3,537,000 compared with $3,475,000 at September 30, 2017. The increase was attributable to growth in total loans receivable during the quarter. The allowance for loan losses as a percentage of non-performing loans increased to 268.8% at December 31, 2017 from 147.4% at September 30, 2017. Our allowance for loan losses as a percentage of total loans was 0.73% at December 31, 2017 and September 30, 2017.

 

Future increases in the allowance for loan losses may be necessary based on the growth of the loan portfolio, the change in composition of the loan portfolio, possible future increases in non-performing loans and charge-offs, possible additional deterioration of collateral values, and the possible deterioration of the 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 $312,000, or 2.8%, to $10.7 million at December 31, 2017 from $11.1 million at September 30, 2017. The decrease was due to two sales totaling $309,000 and valuation allowances totaling $157,000 recorded for properties under contract of sale. Partially offsetting the decline were investment and acquisitions costs totaling $167,000. The Company is determining the proper course of action for its other real estate owned, which may include holding the properties until the real estate market further improves, leasing properties to offset maintenance costs and selling the properties.

 

Total deposits decreased $7.7 million, or 1.5%, to $507.5 million during the three months ended December 31, 2017. The decrease in deposits occurred in certificates of deposit (including individual retirement accounts), which decreased $4.7 million, or 3.7%, to $123.4 million and savings accounts, which decreased $4.6 million, or 4.3%, to $102.7 million. Partially offsetting these decreases were non-interest checking accounts, which increased $779,000, or 0.8%, to $99.5 million, interest-bearing checking accounts, which increased $510,000, or 1.2%, to $44.1 million, and money market accounts, which increased $264,000, or 0.2%, to $137.8 million.

 

Included with the total deposits at December 31, 2017 and September 30, 2017 were $10.3 million in brokered certificates of deposit.

 

Federal Home Loan Bank of New York advances and securities sold under agreements to repurchase were $31.9 million at December 31, 2017 and September 30, 2017.

 

Stockholders’ equity increased $387,000, or 0.8%, to $49.8 million at December 31, 2017 from $49.5 million at September 30, 2017. The Company’s book value per share increased to $8.56 at December 31, 2017 from $8.50 at September 30, 2017. 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, 2017. Through December 31, 2017, 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, 2017 and 2016

 

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, 2017 and 2016. 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.

 

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   For the Three Months Ended December 31, 
   2017   2016 
   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  $21,961   $71    1.29%   $16,687   $39    0.93% 
Loans receivable, net   472,105    5,435    4.57%    458,812    4,998    4.32% 
Securities                              
Taxable   61,882    351    2.25%    61,124    340    2.21% 
FHLB of NY stock   2,002    31    6.12%    2,208    30    5.35% 
Total interest-earning assets   557,950    5,888    4.19%    538,831    5,407    3.98% 
Noninterest-earning assets   45,983              48,851           
Total assets  $603,933             $587,682           
                               
Interest-bearing liabilities:                              
Savings accounts (1)   $104,818    191    0.72%   $104,879    194    0.73% 
NOW accounts (2)    181,999    309    0.67%    161,912    143    0.35% 
Time deposits (3)   125,112    394    1.25%    132,419    392    1.18% 
Total interest-bearing deposits   411,929    894    0.86%    399,210    729    0.72% 
Borrowings   31,905    162    2.02%    35,348    192    2.15% 
Total interest-bearing liabilities   443,834    1,056    0.94%    434,558    921    0.84% 
Noninterest-bearing liabilities   110,317              105,119           
Total liabilities   554,151              539,677           
Retained earnings   49,782              48,005           
Total liabilities and retained earnings  $603,933             $587,682           
                               
Net interest and dividend income       $4,832             $4,486      
Interest rate spread             3.25%              3.14% 
Net interest-earning assets  $114,116             $104,273           
Net interest margin (4)             3.44%              3.30% 
Average interest-earning assets to                              
 average interest-bearing liabilities   125.71%              124.00%           

 

 

(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.  

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Comparison of Operating Results for the Three Months Ended December 31, 2017 and 2016

 

Net Income. Net income decreased $18,000, or 5.2%, to $329,000 during the three-month period ended December 31, 2017 compared with $347,000 the three-month period ended December 31, 2016 due to higher income tax expense resulting from the Tax Cuts and Jobs Act (the “Act”) signed into law on December 22, 2017. The Act lowered the Company’s Federal tax rate from 34% to 21%. In accordance with generally accepted accounting principles, the Company revalued its net deferred tax assets using the lower income tax rate, resulting in a write-down of approximately $306,000. The write-down offset a 52%, or $306,000, increase in the Company’s pre-tax earnings, which resulted from higher net interest and dividend income.

 

Net Interest and Dividend Income. Net interest and dividend income increased $346,000, or 7.7%, to $4.8 million for the quarter ended December 31, 2017 from $4.5 million for the quarter ended December 31, 2016. The Company’s net interest margin increased 14 basis points to 3.44% for the quarter ended December 31, 2017 compared to 3.30% for the quarter ended December 31, 2016.

 

The yield on the Company’s interest-earning assets increased 21 basis points to 4.19% for the three months ended December 31, 2017 from 3.98% for the three months ended December 31, 2016 due to higher average balances of loans receivable, net of allowance for loan losses, which increased $13.3 million between periods and higher yields on loans receivable, which increased 25 basis points to 4.57% for the three months ended December 31, 2017 from 4.32% for the three months ended December 31, 2016. Contributing to the higher yield on loans were three non-performing loans that paid-off during the quarter, which included the receipt of $81,000 in non-accrued interest. The cost of interest-bearing liabilities increased 10 basis of point to 0.94% for the three months ended December 31, 2017 from 0.84% for the three months ended December 31, 2016 due to higher market interest rates.

 

Interest and Dividend Income. Interest and dividend income increased $481,000, or 8.9%, to $5.9 million for the three months ended December 30, 2017 from $5.4 million for the three months ended December 31, 2016. The increase was attributable to higher average balances of interest-earning assets, which increased $19.1 million, or 3.5%, and a higher yield on interest-earning assets, which increased 21 basis points to 4.19% for the quarter ended December 31, 2017 compared with the prior year period.

 

Interest earned on loans increased $437,000, or 8.7%, to $5.4 million for the three months ended December 31, 2017 compared with $5.0 million the same period prior year due to a $13.3 million increase in the average balance of loans receivable, net.

 

Interest earned on our investment securities, including interest earning deposits and excluding FHLB stock, increased $43,000, or 11.3%, to $422,000 at December 31, 2017 from $379,000 at December 31, 2016. The increase was due to a $6.0 million, or 7.8%, increase in the average balance of such securities and deposits to $83.8 million for the three months ended December 31, 2017 from $77.8 million at December 31, 2016. The average yield on investment securities and interest earning deposits increased six basis points to 2.00% for the three months ended December 31, 2017 from 1.94% for the three months ended December 31, 2016.

 

Interest Expense. Interest expense increased $135,000, or 14.7%, to $1.1 million for the three months ended December 31, 2017 from $921,000 for the three months ended December 31, 2016. The average balance of interest-bearing liabilities increased $9.3 million, or 2.1%, between the two periods, while the cost of such liabilities increased 10 basis points to 0.94% for the quarter ended December 31, 2017 compared with the prior year period.

 

The average balance of interest bearing deposits increased $12.7 million to $411.9 million at December 31, 2017 from $399.2 million at December 31, 2016, while the average cost of such deposits increased fourteen basis points to 0.86% from 0.72% between the two periods. As a result, interest paid on interest-bearing deposits increased $165,000 to $894,000 for the three months ended December 31, 2017 from $729,000 for the three months ended December 31, 2016.

 

Interest paid on advances and securities sold under agreements to repurchase decreased $30,000 to $162,000 for the three months ended December 31, 2017 from $192,000 for the same period prior year, while the average balance of such borrowings decreased $3.4 million to $31.9 million at December 31, 2017 from $35.3 million at December 31, 2016. The average cost of advances and securities sold under agreements to repurchase decreased thirteen basis points to 2.02% for the three months ended December 31, 2017 from 2.15% for the same period of December 31, 2016, reflecting the maturity of long-term, higher cost borrowings during the past year.

 

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

 

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After an evaluation of these factors, management recorded a provision of $250,000 for the three months ended December 31, 2017 compared to a provision of $330,000 for the three months ended December 31, 2016. The provision for loan losses decreased due in part to lower net charge offs, which were $188,000 for the three months ended December 31, 2017 compared to net charge offs of $216,000 for the three months ended December 31, 2016.

 

During the three months ended December 31, 2017, the Bank reduced the carrying balance on three loans totaling $420,000 by $297,000 to the estimated fair value of collateral, net of estimated disposition costs, securing the loans. Offsetting these charge-offs were five partial recoveries of loans previously charged-off totaling $109,000 during the quarter.

 

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 increased $183,000, or 39.4%, to $648,000 during the three months ended December 31, 2017 compared to $465,000 for the three months ended December 31, 2016. The increase in non-interest income was attributable to higher gains from the sales of assets. Gains from the sales of loans increased $100,000 while gains on the sale of investment securities increased $107,000.

 

Other Expenses. Non-interest expenses increased $303,000, or 7.5%, to $4.3 million during the three months ended December 31, 2017. Compensation and employee benefit expenses increased $136,000 between the quarterly periods due to the opening of the Bank’s seventh branch location in June of 2017 as well as annual merit increases for employees. The opening of the Bank’s Edison branch also contributed to an $85,000 increase in other expenses between periods. Finally, other real estate owned (“OREO”) expenses increased $53,000 between the quarterly periods due to higher valuation allowances on properties under contract of sale at December 31, 2017.

 

Income Tax Expense. The Company recorded tax expense of $564,000 on income of $893,000 for the three months ended December 31, 2017, compared with $240,000 on income of $587,000 for the three months ended December 31, 2016. The income expense increase was the result of higher income from operations and a $306,000 charge resulting from the write-down of deferred tax assets due to the enactment of the Tax Cuts and Jobs Act on December 22, 2017, which lowered the Company’s federal income tax rate from 34% to 21%.

 

The Company recognized additional tax expense in our tax provision for the period ended December 31, 2017 related to adjustment of our net deferred tax asset to reflect the new corporate tax rate. As a result, income tax expense reported for the first three months was adjusted to reflect the effects of the change in the tax law and resulted in an increase in income tax expense of $207,000 during the quarter ended December 31, 2017. This amount comprises a reduction of $99,000 in income tax expense for the three-month period ended December 31, 2017 related to the lower corporate income tax rate and $306,000 from the application of the newly enacted rates to existing deferred tax asset balances.

 

The federal income tax rate change is administratively effective at the beginning of our fiscal year resulting in the use of a blended rate for the annual period. As a result, the blended statutory federal tax rate for the Company for the year ending September 30, 2018 is 24.0%. The Company utilized an effective combined federal and state tax rate of 30.8% and 39.9% for the three months ended December 31, 2017 and December 31, 2016, respectively.

 

 

 

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, 2017 in the ability of the Company and its subsidiaries to fund their operations.

 

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At December 31, 2017, the Company had commitments outstanding under letters of credit of $808,000, commitments to originate loans of $9.8 million, and commitments to fund undisbursed balances of closed loans and unused lines of credit of $61.5 million. There has been no material change during the three months ended December 31, 2017 in any of the Company’s other contractual obligations or commitments to make future payments.

 

Capital Requirements

 

At December 31, 2017, the Bank’s Tier 1 capital as a percentage of the Bank's total assets was 8.46%, and total qualifying capital as a percentage of risk-weighted assets was 12.60%.

 

 

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, 2017 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

 

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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, 2017. Through December 31, 2017, the Company had repurchased 81,000 shares of its common stock at an average price of $8.33.
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

31.1Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
31.2Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
32.1Certification 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.
32.2Certification 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.
101Interactive data file containing the following financial statements formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets at December 31, 2017 and September 30, 2017; (ii) the Consolidated Statements of Operations for the three months ended December 31, 2017 and 2016; (iii) the Consolidated Statements of Comprehensive Income for the three months ended December 31, 2017 and 2016; (iv) the Consolidated Statements of Changes in Stockholders’ Equity for the three months ended December 31, 2017 and 2016; (v) the Consolidated Statements of Cash Flows for the three months ended December 31, 2017 and 2016; and (vi) the Notes to Consolidated Financial Statements, tagged as blocks of text.

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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 12, 2018 /s/ John S. Fitzgerald
  John S. Fitzgerald
  President and Chief Executive Officer
   
   
   
Date: February 12, 2018 /s/ Jon R. Ansari
  Jon R. Ansari
  Executive Vice President and Chief Financial Officer
   

 

 

 

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