Residential Mortgage Loans. We originate residential mortgage loans, most of which are secured by properties located in our primary market area and most of which we hold in portfolio. At September 30, 2011, $159.2 million, or 41.4% of our total loan portfolio, consisted of residential mortgage loans (including home equity loans). Residential mortgage loan originations are generally obtained from our in-house loan representatives, from existing or past customers, through advertising, and through referrals from local builders, real estate brokers and attorneys, and are underwritten pursuant to Magyar Bank’s policies and standards. Generally, residential mortgage loans are originated in amounts up to 80% of the lesser of the appraised value or purchase price of the property, with private mortgage insurance required on loans with a loan-to-value ratio in excess of 80%. We generally will not make residential mortgage loans with a loan-to-value ratio in excess of 95%, which is the upper limit that has been established by the Board of Directors. Mortgage loans have been primarily originated for terms of up to 30 years. Magyar Bank has not participated in “sub-prime” (mortgages granted to borrowers whose credit history is not sufficient to get a conventional mortgage) or option ARM mortgage lending. At September 30, 2011, non-performing residential mortgage loans totaled $4.1 million, or 2.5% of the total residential loan portfolio. Interest income not recorded on non-performing residential mortgage loans for the year ended September 30, 2011 was $307,000. During the year ended September 30, 2011, $55,000 had been charged-off against the allowance for loan loss for two impaired residential real estate loans.
We also originate home equity loans secured by residences located in our market area. The underwriting standards we use for home equity loans include a determination of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations, the ongoing payments on the proposed loan and the value of the collateral securing the loan. The maximum combined (first and second mortgage liens) loan-to-value ratio for home equity loans and home equity lines of credit is 80%. Home equity loans are generally offered with fixed rates of interest with the loan amount not to exceed $500,000 and with terms of up to 30 years.
Generally, all fixed-rate residential mortgage loans are underwritten according to Federal Home Loan Mortgage Corporation (“Freddie Mac”) guidelines, policies and procedures. Historically, we have not originated a significant number of loans for the purpose of reselling them in the secondary market. However, to help manage interest rate risk and to increase fee income during fiscal year 2011, sixty-two fixed-rate loans totaling $11.0 million were sold to Freddie Mac with servicing retained. In the future we may increase our origination and sale of fixed-rate residential mortgage loans to help manage interest rate risk and to increase fee income. No loans were held for sale at September 30, 2011.
We generally do not purchase residential mortgage loans, except for loans to low-income borrowers to enhance our Community Reinvestment Act performance. At September 30, 2011, we had $2.8 million of purchased one-to four-family residential mortgage loans. No loans were purchased in the fiscal year ended September 30, 2011.
At September 30, 2011, we had $110.7 million of fixed-rate residential mortgage loans, which represented 69.5% of our total residential mortgage loan portfolio. At September 30, 2011, our largest fixed-rate residential mortgage loan was for $4.4 million. The loan was performing in accordance with its terms at September 30, 2011.
We also offer adjustable-rate residential mortgage loans with interest rates based on the weekly average yield on U.S. Treasuries or the London Interbank Offering Rate (“LIBOR”) adjusted to a constant maturity of one year, which adjusts either annually from the outset of the loan or which adjusts annually after a one-, three-, five-, seven-, and ten-year initial fixed-rate period. Our adjustable-rate mortgage loans generally provide for maximum rate adjustments of 2% per adjustment, with a lifetime maximum adjustment up to 5%, regardless of the initial rate. We also offer adjustable-rate mortgage loans with an interest rate based on the prime rate as published in The Wall Street Journal or the Federal Home Loan Bank of New York advance rates.
Adjustable-rate mortgage loans decrease the risk associated with changes in market interest rates by periodically repricing. However, these loans have other risks because, as interest rates increase, the underlying payments by the borrower increase, which increases the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. The maximum periodic and lifetime interest rate adjustments also may limit the effectiveness of adjustable-rate mortgage loans during periods of rapidly rising interest rates.
At September 30, 2011, adjustable-rate residential mortgage loans totaled $48.6 million, or 30.5% of our total residential mortgage loan portfolio. Of these loans, $17.9 million were interest-only loans originated with an average original loan-to-value ratio of 69.6%. Interest-only loans allow the borrower to make interest–only payments during an initial fixed-rate period. Following the initial period, the borrower is required to make principal and interest payments. At September 30, 2011, our largest adjustable-rate residential mortgage loan was for $3.0 million. The loan was performing in accordance with its terms at September 30, 2011.
In an effort to provide financing for low-and moderate-income home buyers, we offer low-to-moderate income residential mortgage loans. These loans are offered with fixed rates of interest and terms of up to 40 years, and are secured by one-to four-family residential properties. All of these loans are originated using underwriting guidelines of U.S. government-sponsored enterprises such as Freddie Mac or Federal National Mortgage Association (“Fannie Mae”). These loans are originated with maximum loan-to-value ratios of 95%.
All residential mortgage loans we originate include “due-on-sale” clauses, which give us the right to declare a loan immediately due and payable if the borrower sells or otherwise disposes of the real property securing the mortgage loan. All borrowers are required to obtain title insurance, fire and casualty insurance and, if warranted, flood insurance on properties securing real estate loans.
Commercial Real Estate Loans. As part of our strategy to add to and diversify our loan portfolio, we have continued our focus on increasing our originations of commercial real estate loans. At September 30, 2011, $121.0 million, or 31.4%, of our total loan portfolio consisted of these types of loans. Commercial real estate loans are generally secured by five-or-more-unit apartment buildings, industrial properties and properties used for business purposes such as small office buildings and retail facilities primarily located in our market area. We generally originate adjustable-rate commercial real estate loans with a maximum term of 25 years with adjustable rate periods every five years. The maximum loan-to-value ratio for our commercial real estate loans is 75%, based on the appraised value of the property.
We consider a number of factors when we originate commercial real estate loans. During the underwriting process we evaluate the business qualifications and financial condition of the borrower, including credit history, profitability of the property being financed, as well as the value and condition of the mortgaged property securing the loan. When evaluating the business qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, we consider the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service) to ensure it is at least 120% of the monthly debt service. We require personal guarantees on all commercial real estate loans made to individuals. Generally, commercial real estate loans made to corporations, partnerships and other business entities require personal guarantees by the principals. All borrowers are required to obtain title, fire and casualty insurance and, if warranted, flood insurance.
Loans secured by commercial real estate generally are larger than residential mortgage loans and involve greater credit risk. Commercial real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Repayment of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Accordingly, the nature of these loans makes them more difficult for management to monitor and evaluate.
The maximum amount of a commercial real estate loan is limited by our Board-established loans-to-one-borrower limit, which is currently 15% of Magyar Bank’s capital, or $6.9 million. At September 30, 2011, our largest commercial real estate loan was $5.5 million and was secured by a mixed use building currently used for retail office space and a senior living facility. The loan was performing in accordance with its terms at September 30, 2011. At September 30, 2011, nine commercial real estate loans totaling $7.6 million were non-performing. During the year ended September 30, 2011, $652,000 had been charged-off against the allowance for loan loss for three impaired commercial real estate loans. Interest income not recorded on non-performing commercial real estate loans for the year ended September 30, 2011 was $744,000. All other loans secured by commercial real estate were performing in accordance with their terms.
Construction Loans. We also originate construction loans for the development of one-to four-family homes, town homes, condominiums, apartment buildings and commercial properties. Construction loans are generally offered to experienced local developers operating in our primary market area and to individuals for the construction of their personal residences. The Bank ceased originating new construction loans for the development of non-owner occupied real estate in 2008. At September 30, 2011, our construction loans totaled $34.1 million, or 8.9% of total loans
At September 30, 2011, construction loans for the development of one-to four-family residential properties totaled $19.3 million, or 5.0% of total loans. These construction loans generally have a maximum term of 24 months. We provide financing for land acquisition, site improvement and construction of individual homes. Land acquisition funds are limited to 50% to 75% of the sale price of the land. Site improvement funds are limited to 100% of the bonded site improvement costs. Construction funds are limited to 75% of the lesser of the contract sale price or appraised value of the property (less funds already advanced for land acquisition and site improvement).
At September 30, 2011, construction loans for the development of town homes, condominiums and apartment buildings totaled $11.6 million, or 3.0% of total loans. These construction loans also generally have a maximum term of 24 months. The maximum loan-to-value ratio limit applicable to these loans has been 75% of the appraised value of the property, but was decreased to 70% in 2007 to reduce Magyar Bank’s potential exposure to a downturn in the real estate market. Properties must maintain a debt service coverage ratio of 125%. Finally, we may retain up to 10% of each loan advance until the property attains a 90% occupancy level.
At September 30, 2011, construction loans for the development of commercial properties totaled $3.2 million, or 0.8% of total loans. These construction loans have a maximum term of 24 months. The maximum loan-to-value ratio limit applicable to these loans is 75% of the appraised value of the property. In addition, the property must maintain a debt service coverage ratio of 125%.
The maximum amount of a construction loan is limited by our loans-to-one-borrower limit, which is currently 15% of Magyar Bank’s capital, or $6.9 million. At September 30, 2011, our largest outstanding construction loan balance was for $3.4 million. The loan was secured by seven four-unit residential condominium buildings to be built in Union City, NJ. Two homes are completed and the loan is in the foreclosure process. At September 30, 2011, fifteen construction loans totaling $15.5 million (see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for details on these loans), were non-performing. During the year ended September 30, 2011, $1.6 million had been charged-off against the allowance for loan loss for fourteen impaired construction loans. Interest income not recorded on non-performing construction loans for the year ended September 30, 2011 was $711,000.
Before making a commitment to fund a construction loan, we require an appraisal of the property by an independent licensed appraiser. We generally also engage an outside engineering firm to review and inspect each property before disbursement of funds during the term of a construction loan. Loan proceeds are disbursed after inspection based on the percentage of completion method. We require a personal guarantee from each principal of all of our construction loan borrowers.
Construction lending is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost is inaccurate, we may be required to advance funds beyond the amount originally committed in order to protect the value of the property. Additionally, if our estimate of the value of the completed property is inaccurate, our construction loan may exceed the value of the collateral.
Commercial Business Loans. At September 30, 2011, our commercial business loans totaled $36.2 million, or 9.4% of total loans. We make commercial business loans primarily in our market area to a variety of professionals, sole proprietorships and small and mid-sized businesses. Our commercial business loans include term loans and revolving lines of credit. The maximum term of a commercial business loan is 15 years. Such loans are generally used for longer-term working capital purposes such as purchasing equipment or furniture. Commercial business loans are made with either adjustable or fixed rates of interest. The interest rates for adjustable commercial business loans are typically based on the prime rate as published in The Wall Street Journal.
When making commercial business loans, we consider the financial strength of the borrower, our lending history with the borrower, the debt service capabilities of the borrower, the projected cash flows of the business and the value and type of the collateral. Commercial business loans generally are secured by a variety of collateral, primarily accounts receivable, inventory, equipment, savings instruments and readily marketable securities. In addition, we generally require the business principals to execute personal guarantees.
Commercial business loans generally have greater credit risk than residential mortgage loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to repay the loan from his or her employment income, and which are secured by real property with ascertainable value, commercial business loans generally are made on the basis of the borrower’s ability to repay the loan from the cash flow of the borrower’s business. As a result, the repayment of commercial business loans may depend substantially on the success of the borrower’s business. Further, any collateral securing commercial business loans may depreciate over time, may be difficult to appraise and may fluctuate in value. We try to minimize these risks through our underwriting standards.
The maximum amount of a commercial business loan is limited by our loans-to-one-borrower limit, which is 15% of Magyar Bank’s capital, or $6.9 million currently. At September 30, 2011, our largest commercial business loan was a $3.5 million loan to a company that provides janitorial services and was secured by the accounts receivable of the company. This loan was performing according to its terms at September 30, 2011. At September 30, 2011, three commercial business loans totaling $255,000 were non-performing. Interest income not recorded on non-performing commercial business loans for the year ended September 30, 2011 was $32,000. During the year ended September 30, 2011, $342,000 had been charged-off against the allowance for loan loss for impaired commercial business loans and $31,000 was recovered from a prior year charge-off.
Home Equity Lines of Credit and Other Loans. We originate home equity lines of credit secured by residences located in our market area. At September 30, 2011, these loans totaled $22.4 million, or 5.8% of our total loan portfolio. The underwriting standards we use for home equity lines of credit include a determination of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations, the ongoing payments on the proposed loan and the value of the collateral securing the loan. The maximum combined (first and second mortgage liens) loan-to-value ratio for home equity lines of credit is 80%. Home equity lines of credit have adjustable rates of interest, indexed to the prime rate, as reported in The Wall Street Journal, with terms of up to 25 years.
The maximum amount of a home equity line of credit loan is limited by our loans-to-one-borrower limit, which is 15% of Magyar Bank’s capital, or $6.9 million currently. At September 30, 2011, our largest home equity line of credit was a $1.1 million loan. The loan is performing according to its terms at September 30, 2011. At September 30, 2011, all home equity lines of credit were performing in accordance with their terms with the exception of four non-performing loans totaling $788,000. During the year ended September 30, 2011, $98,000 had been charged-off against the allowance for loan loss for one impaired home equity line of credit. Interest income not recorded on non-performing home equity lines of credit for the year ended September 30, 2011 was $23,000.
We also originate loans secured by the common stock of publicly traded companies, provided their shares are listed on the New York Stock Exchange, the American Stock Exchange or the NASDAQ Stock Market, and provided the company is not a banking company. Stock-secured loans are interest-only and are offered for terms up to twelve months and for adjustable rates of interest indexed to the prime rate, as reported in The Wall Street Journal. The loan amount is not to exceed 70% of the value of the stock securing the loan at any time.
At September 30, 2011, stock-secured loans totaled $11.5 million, or 3.0% of our total loan portfolio. Generally, we limit the aggregate amount of loans secured by the common stock of any one corporation to 15% of Magyar Bank’s capital, with the exception of Johnson & Johnson, for which the collateral concentration limit is 150% of Magyar Bank’s capital. At September 30, 2011, $11.4 million, or 3.0% of our loan portfolio, was secured by the common stock of Johnson & Johnson, a New York Stock Exchange company that operates a number of facilities in our market area and employs a substantial number of residents. Although these loans are underwritten based on the ability of the individual borrower to repay the loan, the concentration of our portfolio secured by this stock subjects us to the risk of a decline in the market price of the stock and, therefore, a reduction in the value of the collateral securing these loans. As of September 30, 2011, the aggregate loan-to-value ratio of the stock-secured portfolio was 37.2%.
Loan Originations, Purchases, Participations and Servicing of Loans. Lending activities are conducted primarily by our loan personnel operating at our main and branch office locations. All loans originated by us are underwritten pursuant to our policies and procedures. We originate both adjustable rate and fixed rate loans. Our ability to originate fixed or adjustable rate loans is dependent upon the relative customer demand for such loans, which is affected by the current and expected future levels of market interest rates.
Generally, we retain in our portfolio substantially all loans that we originate. Historically, we have not originated a significant number of loans for the purpose of reselling them in the secondary market. In the future, however, to help manage our interest rate risk and to increase fee income, we may increase our origination and sale of fixed-rate residential loans and commercial business loans guaranteed by the SBA. All one-to four-family residential mortgage loans that we sell in the secondary market are sold with servicing rights retained pursuant to master commitments negotiated with Freddie Mac. We sell our loans to Freddie Mac without recourse. No loans were held for sale at September 30, 2011.
At September 30, 2011, we were servicing loans sold to Freddie Mac in the amount of $18.2 million and SBA guaranteed loans sold in the amount of $5.8 million. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans.
From time-to-time, we will also participate in loans, sometimes as the “lead lender.” Whether we are the lead lender or not, we underwrite our participation portion of the loan according to our own underwriting criteria and procedures. At September 30, 2011, we had $17.2 million of loan participation interests in which we were the lead lender, and $5.5 million in loan participations in which we were not the lead lender. We have entered into loan participations when the aggregate outstanding balance of a particular customer relationship exceeds our loan-to-one-borrower limit. All loan participations are loans secured by real estate that adhere to our loan policies. At September 30, 2011, all participation loans were performing in accordance with their terms.
During the fiscal year ended September 30, 2011, we originated $26.1 million of fixed-rate and adjustable-rate one-to four-family residential mortgage loans. The fixed-rate loans are primarily of loans with terms of 30 years or less. We also originated $13.7 million of commercial real estate loans, $2.1 million of owner-occupied construction loans, $3.8 million of commercial business loans, and $303,000 of home equity lines of credit and other loans during the fiscal year ended September 30, 2011.
We generally do not purchase residential mortgage loans, except for loans to low-income borrowers as part of our Community Reinvestment Act lenders program. At September 30, 2011, we had $2.8 million of one-to four-family residential mortgage loans that were purchased from other lenders. No loans were purchased in the fiscal year ended September 30, 2011.
Loan Approval Procedures and Authority. Our lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by our Board of Directors. In the approval process for loans, we assess the borrower’s ability to repay the loan and the value of the property securing the loan. To assess an individual borrower’s ability to repay, we review income and expense, employment and credit history. To assess a business entity’s ability to repay, we review financial statements (including balance sheets, income statements and cash flow statements), rent rolls, other debt service, and projected income and expense.
We generally require appraisals for all real estate securing loans. Appraisals are performed by independent licensed appraisers who are approved annually by our Board of Directors. We require borrowers to obtain title, fire and casualty, general liability, and, if warranted, flood insurance in amounts at least equal to the principal amount of the loan. For construction loans, we require a detailed plan and cost review, to be reviewed by an outside engineering firm, and all construction-related state and local approvals necessary for a particular project.
Our loan approval policies and limits are established by our Board of Directors. All loans are approved in accordance with the loan approval policies and limits. Lending authorities are approved annually by the Board of Directors, and Magyar Bank lending staff members are authorized to approve loans up to their lending authority limits, provided the loan meets all of our underwriting guidelines.
Loan requests for aggregate borrowings up to $1.5 million must be approved by Magyar Bank’s Chief Lending Officer or President. Other members of our lending staff have lesser amounts of lending authority based on their experience as lending officers. Loan requests for aggregate borrowings up to 35% of Magyar Bank’s loans-to-one-borrower limit, or $2.4 million, must be approved by Magyar Bank’s Management Loan Committee. The Management Loan Committee is comprised of the President, Chief Lending Officer, Chief Financial Officer and various bank officers appointed by the Board of Directors. A quorum of three members including either the President or the Chief Lending Officer is required for all Management Loan Committee meetings. The Directors Loan Committee must approve all loan requests for aggregate borrowings in excess of 35% of Magyar Bank’s loans-to-one-borrower limit, or $2.4 million. The Board of Directors must approve all loan requests for aggregate borrowings in excess of 80% of Magyar Bank’s loans-to-one-borrower limit, or $5.5 million.
Asset Quality
We commence collection efforts when a loan becomes 15 days past due with system-generated reminder notices. Subsequent late charge and delinquent notices are issued and the account is monitored on a regular basis thereafter. Personal, direct contact with the borrower is attempted early in the collection process as a courtesy reminder and later to determine the reason for the delinquency and to safeguard our collateral. When a loan is more than 60 days past due, the credit file is reviewed and, if deemed necessary, information is updated or confirmed and collateral re-evaluated. We make every effort to contact the borrower and develop a plan of repayment to cure the delinquency. Loans are placed on non-accrual status when they are delinquent for more than three months. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received.
A summary report of all loans 30 days or more past due is provided to the Board of Directors on a monthly basis. If no repayment plan is in process, the file is referred to counsel for the commencement of foreclosure or other collection efforts.
Non-Performing Assets. The table on the following page sets forth the amounts and categories of our non-performing assets at the dates indicated. The table includes troubled debt restructurings (loans for which a portion of interest or principal has been forgiven and loans modified at interest rates materially less than current market rates) for each date presented.
| |
|
September 30,
|
|
| |
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
| |
|
(Dollars in thousands)
|
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family residential
|
|
$ |
3,523 |
|
|
$ |
2,451 |
|
|
$ |
4,565 |
|
|
$ |
772 |
|
|
$ |
65 |
|
|
Commercial real estate
|
|
|
7,156 |
|
|
|
8,228 |
|
|
|
7,439 |
|
|
|
3,400 |
|
|
|
1,936 |
|
|
Construction
|
|
|
15,464 |
|
|
|
13,969 |
|
|
|
19,515 |
|
|
|
8,224 |
|
|
|
6,008 |
|
|
Home equity lines of credit
|
|
|
788 |
|
|
|
1,304 |
|
|
|
1,086 |
|
|
|
731 |
|
|
|
— |
|
|
Commercial business
|
|
|
255 |
|
|
|
1,465 |
|
|
|
879 |
|
|
|
176 |
|
|
|
21 |
|
|
Other
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
27,186 |
|
|
|
27,417 |
|
|
|
33,484 |
|
|
|
13,303 |
|
|
|
8,033 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans three months or more past due:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family residential
|
|
|
533 |
|
|
|
— |
|
|
|
— |
|
|
|
65 |
|
|
|
— |
|
|
Commercial real estate
|
|
|
441 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Construction
|
|
|
— |
|
|
|
583 |
|
|
|
— |
|
|
|
6,700 |
|
|
|
— |
|
|
Home equity lines of credit
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Commercial business
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
15 |
|
|
Other
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans three months or more past due
|
|
|
974 |
|
|
|
583 |
|
|
|
— |
|
|
|
6,765 |
|
|
|
15 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
28,160 |
|
|
|
28,000 |
|
|
|
33,484 |
|
|
|
20,068 |
|
|
|
8,048 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
|
16,595 |
|
|
|
12,655 |
|
|
|
5,562 |
|
|
|
4,666 |
|
|
|
2,238 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
|
44,755 |
|
|
|
40,655 |
|
|
|
39,046 |
|
|
|
24,734 |
|
|
|
10,286 |
|
|
Troubled debt restructurings
|
|
|
4,744 |
|
|
|
3,610 |
|
|
|
458 |
|
|
|
— |
|
|
|
— |
|
Troubled debt restructurings and total non-performing assets
|
|
$ |
49,499 |
|
|
$ |
44,265 |
|
|
$ |
39,504 |
|
|
$ |
24,734 |
|
|
$ |
10,286 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans to total loans
|
|
|
7.32 |
% |
|
|
6.85 |
% |
|
|
7.53 |
% |
|
|
4.89 |
% |
|
|
2.09 |
% |
Total non-performing loans and troubled debt restructurings to total loans
|
|
|
8.55 |
% |
|
|
7.74 |
% |
|
|
7.63 |
% |
|
|
4.89 |
% |
|
|
2.09 |
% |
|
Total non-performing assets to total assets
|
|
|
8.54 |
% |
|
|
7.56 |
% |
|
|
6.91 |
% |
|
|
4.81 |
% |
|
|
2.17 |
% |
Total non-performing assets and troubled debt restructurings to total assets
|
|
|
9.45 |
% |
|
|
8.23 |
% |
|
|
6.99 |
% |
|
|
4.81 |
% |
|
|
2.17 |
% |
At September 30, 2011, our portfolio of commercial business, commercial real estate and construction loans totaled $191.3 million, or 49.7% of our total loans, compared to $207.0 million, or 50.7% of our total loans, at September 30, 2010. Commercial business, commercial real estate and construction loans generally have more risk than one-to four-family residential mortgage loans. As shown in the table above, our troubled debt restructuring and total non-performing assets increased $5.2 million to $49.5 million at September 30, 2011 from $44.3 million at September 30, 2010, and increased $10.0 million from $39.5 million at September 30, 2009, reflecting the adverse economic conditions affecting borrowers during the “Great Recession”. The repayment of the Company’s construction loan portfolio is dependent upon the sale of the collateral securing the loans and has been particularly impacted by the rapid deterioration in the housing market and decreased buyer demand. (See Item 7. - Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional discussion of non-performing assets).
Additional interest income of approximately $1.8 million and $2.6 million would have been recorded during the fiscal years ended September 30, 2011 and 2010, respectively, if the non-accrual loans summarized in the above table had performed in accordance with their original terms.
The Company accounts for its impaired loans in accordance with generally accepted accounting principles, which require that a creditor measure impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate except that, as a practical expedient, a creditor may measure impairment based on a loan’s observable market price less estimated costs of disposal, or the fair value of the collateral less estimated costs of disposal if the loan is collateral dependent. Regardless of the measurement method, a creditor may measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable.
The Company records cash receipts on impaired loans that are non-performing as a reduction to principal before applying amounts to interest or late charges unless specifically directed by the Bankruptcy Court to apply payments otherwise. The Company continues to recognize interest income on impaired loans that are performing.
Troubled debt restructurings (“TDRs”) occur when a creditor, for economic or legal reasons related to a debtor’s financial condition, grants a concession to the debtor that it would not otherwise consider, such as a below market interest rate, extending the maturity of a loan, or a combination of both. At September 30, 2011, there were fifteen loans totaling $4.7 million that were classified as TDRs by the Company. These loans are not included in the non-performing loan figures listed above, as they continue to perform under their modified terms.
Delinquent Loans. The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated. Loans delinquent more than three months are generally classified as non- accrual loans.
| |
|
Loans Delinquent For
|
|
|
|
|
|
|
|
| |
|
60-89 Days
|
|
|
90 Days and Over
|
|
|
Total
|
|
| |
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
| |
|
(Dollars in thousands)
|
|
|
At September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family residential
|
|
|
3 |
|
|
$ |
485 |
|
|
|
12 |
|
|
$ |
4,056 |
|
|
|
15 |
|
|
$ |
4,541 |
|
|
Commercial real estate
|
|
|
2 |
|
|
|
851 |
|
|
|
9 |
|
|
|
7,597 |
|
|
|
11 |
|
|
|
8,448 |
|
|
Construction
|
|
|
1 |
|
|
|
92 |
|
|
|
15 |
|
|
|
15,464 |
|
|
|
16 |
|
|
|
15,556 |
|
|
Home equity lines of credit
|
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
|
788 |
|
|
|
4 |
|
|
|
788 |
|
|
Commercial business
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
|
255 |
|
|
|
3 |
|
|
|
255 |
|
|
Other
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total
|
|
|
6 |
|
|
$ |
1,428 |
|
|
|
43 |
|
|
$ |
28,160 |
|
|
|
49 |
|
|
$ |
29,588 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family residential
|
|
|
4 |
|
|
$ |
721 |
|
|
|
4 |
|
|
$ |
2,451 |
|
|
|
8 |
|
|
$ |
3,172 |
|
|
Commercial real estate
|
|
|
2 |
|
|
|
2,147 |
|
|
|
6 |
|
|
|
6,081 |
|
|
|
8 |
|
|
|
8,228 |
|
|
Construction
|
|
|
— |
|
|
|
— |
|
|
|
15 |
|
|
|
14,552 |
|
|
|
15 |
|
|
|
14,552 |
|
|
Home equity lines of credit
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
|
1,304 |
|
|
|
3 |
|
|
|
1,304 |
|
|
Commercial business
|
|
|
— |
|
|
|
— |
|
|
|
5 |
|
|
|
1,465 |
|
|
|
5 |
|
|
|
1,465 |
|
|
Other
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total
|
|
|
6 |
|
|
$ |
2,868 |
|
|
|
33 |
|
|
$ |
25,853 |
|
|
|
39 |
|
|
$ |
28,721 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family residential
|
|
|
1 |
|
|
$ |
150 |
|
|
|
9 |
|
|
$ |
4,565 |
|
|
|
10 |
|
|
$ |
4,715 |
|
|
Commercial real estate
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
$ |
7,439 |
|
|
|
7 |
|
|
|
7,439 |
|
|
Construction
|
|
|
2 |
|
|
|
1,642 |
|
|
|
10 |
|
|
|
17,873 |
|
|
|
12 |
|
|
|
19,515 |
|
|
Home equity lines of credit
|
|
|
— |
|
|
|
— |
|
|
|
2 |
|
|
|
1,086 |
|
|
|
2 |
|
|
|
1,086 |
|
|
Commercial business
|
|
|
1 |
|
|
|
15 |
|
|
|
5 |
|
|
|
864 |
|
|
|
6 |
|
|
|
879 |
|
|
Other
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total
|
|
|
4 |
|
|
$ |
1,807 |
|
|
|
33 |
|
|
$ |
31,827 |
|
|
|
37 |
|
|
$ |
33,634 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family residential
|
|
|
3 |
|
|
$ |
216 |
|
|
|
4 |
|
|
$ |
837 |
|
|
|
7 |
|
|
$ |
1,053 |
|
|
Commercial real estate
|
|
|
— |
|
|
|
— |
|
|
|
2 |
|
|
|
3,400 |
|
|
|
2 |
|
|
|
3,400 |
|
|
Construction
|
|
|
3 |
|
|
|
5,476 |
|
|
|
7 |
|
|
|
9,395 |
|
|
|
10 |
|
|
|
14,871 |
|
|
Home equity lines of credit
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
731 |
|
|
|
1 |
|
|
|
731 |
|
|
Commercial business
|
|
|
1 |
|
|
|
157 |
|
|
|
1 |
|
|
|
176 |
|
|
|
2 |
|
|
|
333 |
|
|
Other
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total
|
|
|
7 |
|
|
$ |
5,849 |
|
|
|
15 |
|
|
$ |
14,539 |
|
|
|
22 |
|
|
$ |
20,388 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family residential
|
|
|
— |
|
|
$ |
— |
|
|
|
2 |
|
|
$ |
65 |
|
|
|
2 |
|
|
$ |
65 |
|
|
Commercial real estate
|
|
|
3 |
|
|
|
2,214 |
|
|
|
1 |
|
|
|
1,936 |
|
|
|
4 |
|
|
|
4,150 |
|
|
Construction
|
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
|
6,008 |
|
|
|
4 |
|
|
|
6,008 |
|
|
Home equity lines of credit
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Commercial business
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
|
36 |
|
|
|
3 |
|
|
|
36 |
|
|
Other
|
|
|
— |
|
|
|
— |
|
|
|
2 |
|
|
|
3 |
|
|
|
2 |
|
|
|
3 |
|
|
Total
|
|
|
3 |
|
|
$ |
2,214 |
|
|
|
12 |
|
|
$ |
8,048 |
|
|
|
15 |
|
|
$ |
10,262 |
|
Real Estate Owned. Real estate we acquire as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until sold. When property is acquired it is recorded at fair value at the date of foreclosure, establishing a new cost basis. Holding costs and declines in fair value result in charges to expense after acquisition.
The Company held $16.6 million of real estate owned properties at September 30, 2011 and $12.7 million of real estate owned properties at September 30, 2010. During the year ended September 30, 2011, the Company was able to successfully dispose of nine properties with an aggregate carrying value of $3.2 million for a net loss of $107,000 and the Company was able to secure the title for nine other properties totaling $6.9 million.
Other real estate owned at September 30, 2011 consisted of seven residential properties, four substantially completed condominium projects, seventeen real estate lots, and one commercial real estate building. The Bank is determining the proper course of action for its other real estate owned, which may include holding the properties until the real estate market improves, selling the properties to a developer and completing partially completed homes for either rental or sale.
The Company also incurred a $292,000 write down during the year on one property under contract of sale at September 30, 2011. The property was sold in November 2011. Further declines in real estate values may result in a charge to expense in the future. Routine holding costs are charged to expense as incurred and improvements to real estate owned that enhance the value of the real estate are capitalized.
Classified Assets. Federal banking regulations provide that loans and other assets of lesser quality should be classified as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” we will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “un-collectible” and of such little value their continuance as assets without the establishment of a specific loss reserve is not warranted. We classify an asset as “special mention” if the asset has a potential weakness that warrants management’s close attention. While such assets are not impaired, management has concluded that if the potential weakness in the asset is not addressed, the value of the asset may deteriorate, adversely affecting the repayment of the asset. On the basis of our review of assets at September 30, 2011, classified assets consisted of $22.7 million of special mention assets and $32.5 million of substandard assets.
We are required to establish an allowance for loan losses in an amount deemed prudent by management for loans classified substandard or doubtful, as well as for other problem loans. General allowances represent loss allowances which have been established to recognize the inherent losses associated with lending activities, but which, unlike impairment allowances, have not been allocated to particular problem assets. When we classify problem assets, we are required to determine whether or not impairment exists. A loan is impaired when, based on current information and events, it is probable that Magyar Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. When it is determined that impairment exists, a specific allowance for loss is established. For collateral-dependent loans, the loan is reduced by the impairment amount via a reduction to the loan and the allowance for loan loss. Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the New Jersey Department of Banking and Insurance and the Federal Deposit Insurance Corporation, which can direct us to establish additional loss allowances.
The loan portfolio is reviewed on a regular basis to determine whether any loans require classification in accordance with applicable regulations. Not all classified assets constitute non-performing assets.
Allowance for Loan Losses
Our allowance for loan losses is maintained at a level management deems necessary to absorb loan losses that are both probable and reasonably estimable. Management, in determining the allowance for loan losses, considers the losses in our loan portfolio both probable and reasonably estimable, and changes in the nature and volume of loan activities, along with the general economic and real estate market conditions. The allowance for loan losses as of September 30, 2011 was maintained at a level that represents management’s best estimate of losses in the loan portfolio both probable and reasonably estimable. However, this analysis process is inherently subjective, as it requires us to make estimates that are susceptible to revisions as more information becomes available. Although we believe we have established the allowance at levels to absorb probable and estimable losses, future additions may be necessary if economic or other conditions in the future differ from the current environment.
In addition, as an integral part of their examination process, the New Jersey Department of Banking and Insurance and the Federal Deposit Insurance Corporation will periodically review our allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on their judgments of information available to them at the time of their examination.
Allowance for Loan Losses. The following table sets forth activity in our allowance for loan losses for the periods indicated.
| |
|
September 30,
|
|
| |
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
| |
|
(Dollars in thousands)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$ |
4,766 |
|
|
$ |
5,807 |
|
|
$ |
4,502 |
|
|
$ |
3,754 |
|
|
$ |
3,892 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family residential
|
|
|
55 |
|
|
|
61 |
|
|
|
39 |
|
|
|
31 |
|
|
|
— |
|
|
Commercial real estate
|
|
|
652 |
|
|
|
321 |
|
|
|
1,063 |
|
|
|
111 |
|
|
|
— |
|
|
Construction
|
|
|
1,583 |
|
|
|
3,102 |
|
|
|
4,120 |
|
|
|
3,084 |
|
|
|
652 |
|
|
Home equity lines of credit
|
|
|
98 |
|
|
|
93 |
|
|
|
724 |
|
|
|
69 |
|
|
|
— |
|
|
Commercial business
|
|
|
342 |
|
|
|
196 |
|
|
|
963 |
|
|
|
227 |
|
|
|
— |
|
|
Other
|
|
|
3 |
|
|
|
— |
|
|
|
1 |
|
|
|
3 |
|
|
|
4 |
|
|
Total charge-offs
|
|
|
2,733 |
|
|
|
3,773 |
|
|
|
6,910 |
|
|
|
3,525 |
|
|
|
656 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family residential
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
13 |
|
|
|
— |
|
|
Commercial real estate
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Construction
|
|
|
— |
|
|
|
1 |
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
Home equity lines of credit
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Commercial business
|
|
|
31 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
120 |
|
|
Other
|
|
|
— |
|
|
|
2 |
|
|
|
1 |
|
|
|
5 |
|
|
|
— |
|
|
Total recoveries
|
|
|
31 |
|
|
|
3 |
|
|
|
3 |
|
|
|
18 |
|
|
|
120 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
2,702 |
|
|
|
3,770 |
|
|
|
6,907 |
|
|
|
3,507 |
|
|
|
536 |
|
|
Provision for loan losses
|
|
|
1,748 |
|
|
|
2,729 |
|
|
|
8,212 |
|
|
|
4,255 |
|
|
|
398 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$ |
3,812 |
|
|
$ |
4,766 |
|
|
$ |
5,807 |
|
|
$ |
4,502 |
|
|
$ |
3,754 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average loans outstanding
|
|
|
0.69 |
% |
|
|
0.89 |
% |
|
|
1.61 |
% |
|
|
0.88 |
% |
|
|
0.14 |
% |
Allowance for loan losses to total non-performing loans at end of period
|
|
|
13.54 |
% |
|
|
17.02 |
% |
|
|
17.34 |
% |
|
|
22.43 |
% |
|
|
46.64 |
% |
Allowance for loan losses to total loans at end of period
|
|
|
0.99 |
% |
|
|
1.17 |
% |
|
|
1.31 |
% |
|
|
1.10 |
% |
|
|
0.97 |
% |
Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category, the percent of the allowance to the total allowance and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
| |
|
Amount
|
|
|
Percent of Allowance
In Category to
Total Allowance
|
|
|
Percent of Loans
In Category to
Total Loans
|
|
| |
|
(Dollars in thousands)
|
|
|
At September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
One-to four-family residential
|
|
$ |
734 |
|
|
|
19.25 |
% |
|
|
41.37 |
% |
|
Commercial real estate
|
|
|
1,266 |
|
|
|
33.21 |
% |
|
|
31.44 |
% |
|
Construction
|
|
|
1,043 |
|
|
|
27.37 |
% |
|
|
8.87 |
% |
|
Home equity lines of credit
|
|
|
101 |
|
|
|
2.65 |
% |
|
|
5.81 |
% |
|
Commercial business
|
|
|
551 |
|
|
|
14.45 |
% |
|
|
9.41 |
% |
|
Other
|
|
|
13 |
|
|
|
0.34 |
% |
|
|
3.10 |
% |
|
Unallocated
|
|
|
104 |
|
|
|
2.73 |
% |
|
|
0.00 |
% |
|
Total allowance for loan losses
|
|
$ |
3,812 |
|
|
|
100.00 |
% |
|
|
100.00 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family residential
|
|
$ |
589 |
|
|
|
12.35 |
% |
|
|
40.50 |
% |
|
Commercial real estate
|
|
|
1,123 |
|
|
|
23.56 |
% |
|
|
28.45 |
% |
|
Construction
|
|
|
2,020 |
|
|
|
42.39 |
% |
|
|
13.97 |
% |
|
Home equity lines of credit
|
|
|
83 |
|
|
|
1.75 |
% |
|
|
5.59 |
% |
|
Commercial business
|
|
|
866 |
|
|
|
18.17 |
% |
|
|
8.24 |
% |
|
Other
|
|
|
11 |
|
|
|
0.23 |
% |
|
|
3.25 |
% |
|
Unallocated
|
|
|
74 |
|
|
|
1.55 |
% |
|
|
0.00 |
% |
|
Total allowance for loan losses
|
|
$ |
4,766 |
|
|
|
100.00 |
% |
|
|
100.00 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family residential
|
|
$ |
455 |
|
|
|
7.83 |
% |
|
|
38.76 |
% |
|
Commercial real estate
|
|
|
1,235 |
|
|
|
21.27 |
% |
|
|
23.78 |
% |
|
Construction
|
|
|
2,967 |
|
|
|
51.09 |
% |
|
|
20.96 |
% |
|
Home equity lines of credit
|
|
|
60 |
|
|
|
1.04 |
% |
|
|
5.08 |
% |
|
Commercial business
|
|
|
957 |
|
|
|
16.48 |
% |
|
|
8.40 |
% |
|
Other
|
|
|
15 |
|
|
|
0.26 |
% |
|
|
3.02 |
% |
|
Unallocated
|
|
|
118 |
|
|
|
2.03 |
% |
|
|
0.00 |
% |
|
Total allowance for loan losses
|
|
$ |
5,807 |
|
|
|
100.00 |
% |
|
|
100.00 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family residential
|
|
$ |
429 |
|
|
|
9.53 |
% |
|
|
38.44 |
% |
|
Commercial real estate
|
|
|
603 |
|
|
|
13.39 |
% |
|
|
22.60 |
% |
|
Construction
|
|
|
2,846 |
|
|
|
63.22 |
% |
|
|
22.61 |
% |
|
Home equity lines of credit
|
|
|
48 |
|
|
|
1.07 |
% |
|
|
3.87 |
% |
|
Commercial business
|
|
|
476 |
|
|
|
10.57 |
% |
|
|
8.76 |
% |
|
Other
|
|
|
4 |
|
|
|
0.09 |
% |
|
|
3.72 |
% |
|
Unallocated
|
|
|
96 |
|
|
|
2.13 |
% |
|
|
0.00 |
% |
|
Total allowance for loan losses
|
|
$ |
4,502 |
|
|
|
100.00 |
% |
|
|
100.00 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to four-family residential
|
|
$ |
473 |
|
|
|
12.60 |
% |
|
|
38.37 |
% |
|
Commercial real estate
|
|
|
576 |
|
|
|
15.34 |
% |
|
|
21.54 |
% |
|
Construction
|
|
|
1,982 |
|
|
|
52.80 |
% |
|
|
23.72 |
% |
|
Home equity lines of credit
|
|
|
40 |
|
|
|
1.07 |
% |
|
|
3.49 |
% |
|
Commercial business
|
|
|
675 |
|
|
|
17.98 |
% |
|
|
8.72 |
% |
|
Other
|
|
|
8 |
|
|
|
0.21 |
% |
|
|
4.16 |
% |
|
Unallocated
|
|
|
— |
|
|
|
0.00 |
% |
|
|
0.00 |
% |
|
Total allowance for loan losses
|
|
$ |
3,754 |
|
|
|
100.00 |
% |
|
|
100.00 |
% |
Investments
Our Board of Directors has adopted our Investment Policy. This policy determines the types of securities in which we may invest. The Investment Policy is reviewed annually by the Board of Directors and changes to the policy are recommended to and subject to approval by our Board of Directors. While general investment strategies are developed by the Asset and Liability Committee, the execution of specific actions rests primarily with our President and our Chief Financial Officer. They are responsible for ensuring the guidelines and requirements included in the Investment Policy are followed and only prudent securities are considered for investment. They are authorized to execute transactions that fall within the scope of the established Investment Policy up to $2.5 million per transaction individually or $5.0 million per transaction jointly. Investment transactions in excess of $5.0 million must be approved by the Asset and Liability Committee. Investment transactions are reviewed and ratified by the Board of Directors at their regularly scheduled meetings.
Our investments portfolio may include U.S. Treasury obligations, debt and equity securities issued by various government-sponsored enterprises, including Fannie Mae and Freddie Mac, mortgage-backed securities, certain certificates of deposit of insured financial institutions, overnight and short-term loans to other banks, investment-grade corporate debt instruments, and municipal securities. In addition, we may invest in equity securities subject to certain limitations and not in excess of Magyar Bank’s Tier 1 capital.
The Investment Policy requires that securities transactions be conducted in a safe and sound manner, and purchase and sale decisions be based upon a thorough analysis of each security to determine its quality and inherent risks and fit within our overall asset/liability management objectives. The analysis must consider the effect of an investment or sale on our risk-based capital and prospects for yield and appreciation.
At September 30, 2011, our securities portfolio totaled $70.3 million, or 13.4% of our total assets. Securities are classified as held-to-maturity or available-for-sale when purchased. At September 30, 2011, $45.0 million of our securities were classified as held-to-maturity and reported at amortized cost, and $25.3 million were classified as available-for-sale and reported at fair value. At September 30, 2011, we held no investment securities classified as held-for-trading.
U.S. Government Agency and Government-Sponsored Enterprise Obligations. At September 30, 2011, our U.S. Government Agency and Government-Sponsored Enterprise Obligations totaled $64.2 million, or 91.4% of our total securities portfolio. Of this amount, $55.7 million were mortgage-backed securities and $8.5 million were debt securities. While these securities generally provide lower yields than other securities in our securities portfolio, we hold these securities, to the extent appropriate, for liquidity purposes and as collateral for certain borrowings. We invest in these securities to achieve positive interest rate spreads with minimal administrative expense, and to lower our credit risk as a result of the guarantees provided by these issuers.
Mortgage-Backed Securities. We purchase mortgage-backed pass through and collateralized mortgage obligation (“CMO”) securities insured or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. To a lesser extent, we also invest in mortgage-backed securities issued or sponsored by private issuers. At September 30, 2011, our mortgage-backed securities, including CMOs, totaled $58.7 million, or 83.5% of our total securities portfolio. Included in this balance was $3.0 million of mortgage-backed securities issued by private issuers. Our policy is to limit purchases of privately issued mortgage-backed securities to non-high risk securities rated “A” or higher by a nationally recognized credit rating agency. High risk securities generally are defined as those exhibiting significantly greater volatility of estimated average life and price due to changes in interest rates than 30-year fixed rate securities.
Mortgage-backed pass through securities are created by pooling mortgages and issuing a security with an interest rate less than the interest rate on the underlying mortgages. Mortgage-backed pass through securities represent a participation interest in a pool of single-family or multi-family mortgages. As loan payments are made by the borrowers, the principal and interest portion of the payment is passed through to the investor as received. CMOs are also backed by mortgages. However they differ from mortgage-backed pass through securities because the principal and interest payments on the underlying mortgages are structured so that they are paid to the security holders of pre-determined classes or tranches at a faster or slower pace. The receipt of these principal and interest payments, which depends on the estimated average life for each class, is contingent on a prepayment speed assumption assigned to the underlying mortgages. Variances between the assumed payment speed and actual payments can significantly alter the average lives of such securities. Mortgage-backed securities and CMOs generally yield less than the loans that underlie such securities because of the cost of payment guarantees and credit enhancements. However, mortgage-backed securities are usually more liquid than individual mortgage loans and may be used to collateralize borrowings and other liabilities.
Mortgage-backed securities present a risk that actual prepayments may differ from estimated prepayments over the life of the security, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments that can change the net yield on the securities. There is also reinvestment risk associated with the cash flows from such securities or if the securities are redeemed by the issuer. In addition, the market value of such securities may be adversely affected by changes in interest rates.
Our mortgage-backed securities portfolio had a weighted average yield of 3.61% at September 30, 2011. The estimated fair value of our mortgage-backed securities portfolio at September 30, 2011 was $59.5 million, which was $1.3 million more than the amortized cost of $58.2 million. Mortgage-backed securities in Magyar Bank’s portfolio do not contain sub-prime mortgage loans.
Corporate and Other Securities. At September 30, 2011, we held fair value of $3.0 million in bonds which are classified as held to maturity and have a total amortized cost value of $3.1 million, or 4.4% of our total securities portfolio. Our Investment Policy allows for the purchase of such instruments and requires that corporate debt obligations be rated in one of the four highest categories by a nationally recognized rating service. We may invest up to 25% of Magyar Bank’s investment portfolio in corporate debt obligations and up to 15% of Magyar Bank’s capital in any one issuer.
Equity Securities. At September 30, 2011, we held no equity securities other than $2.3 million in Federal Home Loan Bank of New York stock. The investment in Federal Home Loan Bank of New York stock is classified as a restricted security, carried at cost and evaluated for impairment. Equity securities are not insured or guaranteed investments and are affected by market interest rates and stock market fluctuations. Such investments other than the Federal Home Loan Bank of New York are carried at their fair value and fluctuations in the fair value of such investments, including temporary declines in value, directly affect our net capital position.
Securities Portfolios. The following table sets forth the composition of our securities portfolio (excluding Federal Home Loan Bank of New York common stock) at the dates indicated.
| |
|
At September 30, 2011
|
|
At September 30, 2010
|
|
At September 30, 2009
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(Dollars in thousands)
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. government agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities - residential
|
|
$ |
3,310 |
|
$ |
84 |
|
$ |
— |
|
|
$ |
3,394 |
|
$ |
3,904 |
|
$ |
— |
|
$ |
(26 |
) |
|
$ |
3,878 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
$ |
— |
|
|
Obligations of U.S. government-sponsored enterprises:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
Mortgage-backed securities-residential
|
|
|
13,915 |
|
|
215 |
|
|
(42 |
) |
|
|
14,088 |
|
|
2,833 |
|
|
107 |
|
|
— |
|
|
|
2,940 |
|
|
10,703 |
|
216 |
|
|
(1 |
) |
|
|
10,918 |
|
|
Mortgage backed securities-commercial
|
|
|
4,137 |
|
|
265 |
|
|
— |
|
|
|
4,402 |
|
|
4,274 |
|
|
— |
|
|
(4 |
) |
|
|
4,270 |
|
|
— |
|
— |
|
|
— |
|
|
|
— |
|
|
Debt securities
|
|
|
2,000 |
|
|
29 |
|
|
— |
|
|
|
2,029 |
|
|
1,001 |
|
|
1 |
|
|
— |
|
|
|
1,002 |
|
|
2,237 |
|
6 |
|
|
— |
|
|
|
2,243 |
|
|
Private label mortgage-backed securities-residential
|
|
|
1,456 |
|
|
— |
|
|
(57 |
) |
|
|
1,399 |
|
|
2,362 |
|
|
— |
|
|
(265 |
) |
|
|
2,097 |
|
|
5,227 |
|
— |
|
|
(305 |
) |
|
|
4,922 |
|
|
Total securities available for sale
|
|
$ |
24,818 |
|
$ |
593 |
|
$ |
(99 |
) |
|
$ |
25,312 |
|
$ |
14,374 |
|
$ |
108 |
|
$ |
(295 |
) |
|
$ |
14,187 |
|
$ |
18,167 |
|
$ |
222 |
|
$ |
(306 |
) |
|
$ |
18,083 |
|
| |
|
At September 30, 2011
|
|
At September 30, 2010
|
|
At September 30, 2009
|
|
| |
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
| |
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
|
Fair
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
|
Fair
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
|
Fair
|
|
| |
|
Cost
|
|
Gains
|
|
Losses
|
|
|
Value
|
|
Cost
|
|
Gains
|
|
Losses
|
|
|
Value
|
|
Cost
|
|
Gains
|
|
Losses
|
|
|
Value
|
|
| |
|
(Dollars in thousands)
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. government agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities-residential
|
|
$ |
14,875 |
|
$ |
483 |
|
$ |
(11 |
) |
|
$ |
15,347 |
|
$ |
18,407 |
|
$ |
401 |
|
$ |
— |
|
|
$ |
18,808 |
|
$ |
16,258 |
|
$ |
12 |
|
$ |
(378 |
) |
|
$ |
15,892 |
|
|
Mortgage-backed securities-commercial
|
|
|
1,646 |
|
|
18 |
|
|
— |
|
|
|
1,664 |
|
|
1,725 |
|
|
22 |
|
|
— |
|
|
|
1,747 |
|
|
1,981 |
|
|
1 |
|
|
(1 |
) |
|
|
1,981 |
|
|
Obligations of U.S. government-sponsored enterprises:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities-residential
|
|
|
17,315 |
|
|
441 |
|
|
— |
|
|
|
17,756 |
|
|
17,880 |
|
|
425 |
|
|
— |
|
|
|
18,305 |
|
|
22,757 |
|
|
215 |
|
|
(50 |
) |
|
|
22,922 |
|
|
Debt securities
|
|
|
6,500 |
|
|
12 |
|
|
— |
|
|
|
6,512 |
|
|
4,499 |
|
|
35 |
|
|
— |
|
|
|
4,534 |
|
|
8,020 |
|
|
43 |
|
|
— |
|
|
|
8,063 |
|
|
Private label mortgage-backed securities-residential
|
|
|
1,592 |
|
|
14 |
|
|
(160 |
) |
|
|
1,446 |
|
|
1,871 |
|
|
101 |
|
|
(70 |
) |
|
|
1,902 |
|
|
2,813 |
|
|
79 |
|
|
— |
|
|
|
2,892 |
|
|
Obligations of state and political subdivisions
|
|
|
72 |
|
|
2 |
|
|
— |
|
|
|
74 |
|
|
97 |
|
|
5 |
|
|
— |
|
|
|
102 |
|
|
122 |
|
|
9 |
|
|
— |
|
|
|
131 |
|
|
Corporate securities
|
|
|
3,000 |
|
|
— |
|
|
(86 |
) |
|
|
2,914 |
|
|
— |
|
|
— |
|
|
— |
|
|
|
— |
|
|
4,000 |
|
|
116 |
|
|
— |
|
|
|
4,116 |
|
|
Total securities held to maturity
|
|
$ |
45,000 |
|
$ |
970 |
|
$ |
(257 |
) |
|
$ |
45,713 |
|
$ |
44,479 |
|
$ |
989 |
|
$ |
(70 |
) |
|
$ |
45,398 |
|
$ |
55,951 |
|
$ |
475 |
|
$ |
(429 |
) |
|
$ |
55,997 |
|
At September 30, 2011, a total of ten securities with an aggregate fair value of $14.3 million had gross unrealized losses of $356,000, or approximately 2.5% of fair value. None of these unrealized losses were considered other-than-temporary.
Portfolio Maturities and Yields. The composition, maturities and weighted average yields of the investment debt securities portfolio and the mortgage-backed securities portfolio at September 30, 2011 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. State and municipal bond yields have been adjusted to a tax-equivalent basis.
| |
|
More Than One
|
|
|
More Than Five
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Through
|
|
|
Years Through
|
|
|
More Than
|
|
|
|
|
|
|
| |
|
Five Years
|
|
|
Ten Years
|
|
|
Ten Years
|
|
|
Total Securities
|
|
| |
|
Amortized
Cost
|
|
Yield
|
|
|
Amortized
Cost
|
|
Yield
|
|
|
Amortized
Cost
|
|
Yield
|
|
|
Amortized
Cost
|
|
Yield
|
|
| |
|
(Dollars in thousands)
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. government agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities - residential
|
|
$ |
— |
|
|
— |
% |
|
$ |
— |
|
|
— |
% |
|
$ |
3,310 |
|
|
3.55 |
% |
|
$ |
3,310 |
|
|
3.55 |
% |
|
Obligations of U.S. government-sponsored enterprises:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities - residential
|
|
|
— |
|
|
— |
% |
|
|
4,750 |
|
|
3.41 |
% |
|
|
9,165 |
|
|
2.78 |
% |
|
|
13,915 |
|
|
3.00 |
% |
|
Mortgage backed securities - commercial
|
|
|
4,137 |
|
|
5.07 |
% |
|
|
— |
|
|
— |
% |
|
|
— |
|
|
— |
% |
|
|
4,137 |
|
|
5.07 |
% |
|
Debt securities
|
|
|
1,000 |
|
|
1.63 |
% |
|
|
1,000 |
|
|
2.20 |
% |
|
|
— |
|
|
— |
% |
|
|
2,000 |
|
|
1.91 |
% |
|
Private label mortgage-backed securities - residential
|
|
|
— |
|
|
— |
% |
|
|
— |
|
|
— |
% |
|
|
1,456 |
|
|
5.42 |
% |
|
|
1,456 |
|
|
5.42 |
% |
|
Total securities available for sale
|
|
$ |
5,137 |
|
|
4.40 |
% |
|
$ |
5,750 |
|
|
3.20 |
% |
|
$ |
13,931 |
|
|
3.24 |
% |
|
$ |
24,818 |
|
|
3.47 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. government agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities - residential
|
|
$ |
— |
|
|
— |
% |
|
$ |
— |
|
|
— |
% |
|
$ |
14,875 |
|
|
4.16 |
% |
|
$ |
14,875 |
|
|
4.16 |
% |
|
Mortgage-backed securities - commercial
|
|
|
— |
|
|
— |
% |
|
|
72 |
|
|
1.61 |
% |
|
|
1,574 |
|
|
0.66 |
% |
|
|
1,646 |
|
|
0.70 |
% |
|
Obligations of U.S. government-sponsored enterprises:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities - residential
|
|
|
329 |
|
|
4.00 |
% |
|
|
1,855 |
|
|
3.47 |
% |
|
|
15,131 |
|
|
3.40 |
% |
|
|
17,315 |
|
|
3.42 |
% |
|
Debt securities
|
|
|
— |
|
|
— |
% |
|
|
2,000 |
|
|
2.88 |
% |
|
|
4,500 |
|
|
3.39 |
% |
|
|
6,500 |
|
|
3.23 |
% |
|
Private label mortgage-backed securities - residential
|
|
|
— |
|
|
— |
% |
|
|
— |
|
|
— |
% |
|
|
1,592 |
|
|
3.46 |
% |
|
|
1,592 |
|
|
3.46 |
% |
|
Obligations of state and political subdivisions
|
|
|
72 |
|
|
6.00 |
% |
|
|
— |
|
|
— |
% |
|
|
— |
|
|
— |
% |
|
|
72 |
|
|
6.00 |
% |
|
Corporate securities
|
|
|
3,000 |
|
|
3.25 |
% |
|
|
— |
|
|
— |
% |
|
|
— |
|
|
— |
% |
|
|
3,000 |
|
|
3.25 |
% |
|
Total securities held to maturity
|
|
$ |
3,401 |
|
|
3.38 |
% |
|
$ |
3,927 |
|
|
3.13 |
% |
|
$ |
37,672 |
|
|
3.59 |
% |
|
$ |
45,000 |
|
|
3.53 |
% |
Sources of Funds
General. Deposits, primarily certificates of deposit, have traditionally been the primary source of funds used for our lending and investment activities. We obtain certificates of deposit primarily through our branch network and to a lesser extent via the brokered CD market. We also use borrowings, primarily Federal Home Loan Bank advances, to supplement cash flow needs, to lengthen the maturities of liabilities for interest rate risk management and to manage our cost of funds. Additional sources of funds include principal and interest payments from loans and securities, loan and security prepayments and maturities, income on other earning assets and stockholders’ equity. While cash flows from loans and securities payments can be relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition.
Deposits. Our deposits are generated primarily from residents within our primary market area. We offer a selection of deposit accounts, including demand accounts, NOW accounts, money market accounts, savings accounts, retirement accounts and certificates of deposit. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. Historically, we also accepted brokered deposits and did so when attractive rates were available. At September 30, 2011, we had $10.0 million in brokered deposits as compared to $14.7 million at September 30, 2010. The Company is restricted from accepting new brokered deposits or renewing its existing brokered deposits in accordance with the Consent Orders (see Supervision and Regulation- General).
Interest rates, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. Personalized customer service, long-standing relationships with customers and an active marketing program are relied upon to attract and retain deposits.
The flow of deposits is influenced significantly by general economic conditions, changes in money market and other prevailing interest rates and competition. The variety of deposit accounts offered allows us to be competitive in obtaining funds and responding to changes in consumer demand. Based on experience, we believe that our deposits are relatively stable. However, the ability to attract and maintain deposits, and the rates paid on these deposits, has been and will continue to be significantly affected by market conditions. At September 30, 2011, $175.6 million, or 41.3% of our deposit accounts, were certificates of deposit (including individual retirement accounts).
The following table sets forth the distribution of total deposit accounts, by account type, at the dates indicated.
| |
|
September 30,
|
| |
|
2011
|
|
2010
|
|
2009
|
|
Deposit Types:
|
|
Balance
|
|
|
Percent
|
|
|
|
|
Balance
|
|
|
Percent
|
|
|
|
|
Balance
|
|
|
Percent
|
|
|
|
| |
|
(Dollars in thousands)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand accounts
|
|
$ |
51,220 |
|
|
12.05 |
% |
|
0.00 |
% |
|
$ |
37,298 |
|
|
8.72 |
% |
|
0.00 |
% |
|
$ |
35,221 |
|
|
7.85 |
% |
|
0.00 |
% |
|
Savings accounts
|
|
|
60,533 |
|
|
14.24 |
% |
|
0.58 |
% |
|
|
61,867 |
|
|
14.46 |
% |
|
0.83 |
% |
|
|
57,864 |
|
|
12.90 |
% |
|
1.08 |
% |
|
NOW accounts
|
|
|
30,941 |
|
|
7.28 |
% |
|
0.28 |
% |
|
|
51,473 |
|
|
12.03 |
% |
|
1.11 |
% |
|
|
49,456 |
|
|
11.03 |
% |
|
1.16 |
% |
|
Money market accounts
|
|
|
106,689 |
|
|
25.11 |
% |
|
0.50 |
% |
|
|
89,279 |
|
|
20.86 |
% |
|
0.91 |
% |
|
|
85,535 |
|
|
19.07 |
% |
|
1.07 |
% |
|
Certificates of deposit
|
|
|
144,739 |
|
|
34.06 |
% |
|
1.73 |
% |
|
|
156,528 |
|
|
36.58 |
% |
|
1.85 |
% |
|
|
187,289 |
|
|
41.76 |
% |
|
2.45 |
% |
|
Retirement accounts
|
|
|
30,821 |
|
|
7.25 |
% |
|
2.89 |
% |
|
|
31,487 |
|
|
7.36 |
% |
|
3.02 |
% |
|
|
33,152 |
|
|
7.39 |
% |
|
3.37 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$ |
424,943 |
|
|
100.00 |
% |
|
1.03 |
% |
|
$ |
427,932 |
|
|
100.00 |
% |
|
1.34 |
% |
|
$ |
448,517 |
|
|
100.00 |
% |
|
1.74 |
% |
As of September 30, 2011, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was $86.3 million. The following table sets forth the maturity of these certificates as of September 30, 2011 (in thousands):
|
Three months or less
|
|
$ |
14,303 |
|
|
Over three months through six months
|
|
|
12,382 |
|
|
Over six months through one year
|
|
|
18,595 |
|
|
Over one year to three years
|
|
|
31,018 |
|
|
Over three years
|
|
|
10,012 |
|
| |
|
|
|
|
|
Total
|
|
$ |
86,310 |
|
At September 30, 2011, $99.8 million of our certificates of deposit had maturities of one year or less. We monitor activity on these accounts and, based on historical experience and our current pricing strategy, we believe we will retain a large portion of these accounts upon maturity.
The following table sets forth the interest-bearing deposit activities for the periods indicated.
| |
|
September 30,
|
|
| |
|
2011
|
|
|
2010
|
|
|
2009
|
|
| |
|
(Dollars in thousands)
|
|
| |
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$ |
390,634 |
|
|
$ |
413,296 |
|
|
$ |
350,861 |
|
|
Net deposits (withdrawals) before interest credited
|
|
|
(21,691 |
) |
|
|
(28,766 |
) |
|
|
53,727 |
|
|
Interest credited
|
|
|
4,780 |
|
|
|
6,104 |
|
|
|
8,708 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$ |
373,723 |
|
|
$ |
390,634 |
|
|
$ |
413,296 |
|
Borrowings. Our borrowings consist of short- and long-term advances from the Federal Home Loan Bank of New York and securities sold under agreements to repurchase with CitiGroup Global Markets Inc.
As of September 30, 2011, we had long-term advances from the Federal Home Loan Bank in the amount of $34.9 million. In addition, our repurchase agreements totaled $15.0 million at September 30, 2011. These aggregate borrowings represent 10.4% of total liabilities and had a weighted average rate of 3.97% at September 30, 2011. Based on eligible collateral pledged to the Federal Home Loan Bank of New York at September 30, 2010, we had an aggregate borrowing capacity of $79.0 million with the Federal Home Loan Bank.
Our repurchase agreements are recorded as financing transactions as we maintain effective control over the transferred or pledged securities. The dollar amount of the securities underlying the agreements continues to be carried in our securities portfolio while the obligations to repurchase the securities are reported as liabilities in our consolidated balance sheets. The securities underlying the agreements are delivered to the party with whom each transaction is executed. Those parties agree to resell to us the identical securities we delivered to them at the maturity or call period of the agreement.
Long-term Federal Home Loan Bank of New York advances as of September 30, 2011 mature as follows (in thousands):
|
Year Ending September 30,
|
|
|
|
|
2012
|
|
$ |
2,813 |
|
|
2013
|
|
|
9,143 |
|
|
2014
|
|
|
8,700 |
|
|
2015
|
|
|
5,000 |
|
|
2016
|
|
|
2,260 |
|
|
Thereafter
|
|
|
7,000 |
|
| |
|
$ |
34,916 |
|
Information concerning overnight line of credit advances with the Federal Home Loan Bank of New York is summarized as follows:
| |
|
September 30, |
|
| |
|
2011
|
|
|
2010
|
|
| |
|
(Dollars in thousands)
|
|
| |
|
|
|
|
|
|
|
Balance at end of year
|
|
$ |
— |
|
|
$ |
— |
|
|
Weighted average balance during the year
|
|
$ |
1,147 |
|
|
$ |
700 |
|
|
Weighted average interest rate at the end of year
|
|
|
N/A |
|
|
|
N/A |
|
|
Maximum month-end balance during the year
|
|
$ |
10,100 |
|
|
$ |
8,150 |
|
|
Average interest rate during the year
|
|
|
0.20 |
% |
|
|
0.37 |
% |
The outstanding securities sold under agreements to repurchase totaled $15.0 million at September 30, 2011. $10.0 million are callable by the issuer, CitiGroup Global Markets Inc., quarterly beginning July 31, 2011 and mature July 31, 2012. The interest rate is 4.92% as long as the 3 month LIBOR remains below 5.50%. Should the 3 month LIBOR increase above 5.50% on a quarterly reset date, the interest rate will be reset to the initial rate minus twice the difference between 3 month LIBOR and 5.50% for the next quarter, assuming the counter-party does not exercise its call option. $5.0 million are callable by the issuer quarterly beginning December 3, 2010 and mature December 3, 2014. The interest rate is 3.83% as long as the 3 month LIBOR remains below 5.12%. Should the 3 month LIBOR increase above 5.12% on a quarterly reset date, the interest rate will be reset to the initial rate minus twice the difference between 3 month LIBOR and 5.12% for the next quarter, assuming the counter-party does not exercise its call option.
Subsidiary Activities
Magyar Bank organized Magbank Investment Company on August 15, 2006 as a New Jersey investment corporation subsidiary for the purpose of buying, selling and holding investment securities. The income earned on Magbank Investment Company’s investment securities is subject to a significantly lower state tax than that assessed on income earned on investment securities maintained at Magyar Bank.
Hungaria Urban Renewal, LLC is a Delaware limited-liability corporation established in 2002 as a qualified intermediary operating for the purpose of acquiring and developing Magyar Bank’s new main office. On January 24, 2006, Magyar Bank exercised a purchase option within its lease from Hungaria Urban Renewal, LLC allowing Magyar Bank to purchase the land and building from this entity. Magyar Bank acquired a 100% interest in Hungaria Urban Renewal, LLC, which will have no other business other than owning Magyar Bank’s main office site. As part of a tax abatement agreement with the City of New Brunswick, Magyar Bank’s new office will remain in Hungaria Urban Renewal, LLC’s name.
Magyar Service Corp., a New Jersey corporation, is a wholly owned subsidiary of Magyar Bank. Magyar Service Corp. offers Magyar Bank customers and others a complete range of non-deposit investment products and financial planning services, including insurance products, fixed and variable annuities, and retirement planning for individual and commercial customers.
Personnel
At September 30, 2011, we employed 83 full-time employees and 13 part-time employees. Our employees are not represented by any collective bargaining group. Management believes that we have good relations with our employees.
FEDERAL AND STATE TAXATION
Federal Taxation
General. Magyar Bancorp, Inc. and Magyar Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. Magyar Bank’s federal tax returns are not currently under audit, and Magyar Bank has not been audited during the past five years. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to Magyar Bancorp, Inc. or Magyar Bank.
Method of Accounting. For federal income tax purposes, Magyar Bancorp, Inc. reports its income and expenses on the accrual method of accounting and uses a tax year ending September 30 for filing its federal and state income tax returns.
Bad Debt Reserves. Historically, Magyar Bank has been subject to special provisions in the tax law regarding allowable tax bad debt deductions and related reserves. Tax law changes were enacted in 1996, pursuant to the Small Business Protection Act of 1996 (the “1996 Act”), that eliminated the use of the percentage of taxable income method for computing tax bad debt deductions for tax years after 1995, and required recapture into taxable income over a six-year period all applicable excess bad debt reserves accumulated after 1988.
Currently, Magyar Bank uses the direct charge off method to account for bad debt deductions for income tax purposes.
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt reserves created prior to January 1, 1988 (pre-base year reserves) were subject to recapture into taxable income if Magyar Bank failed to meet certain thrift asset and definitional tests.
At September 30, 2011, our total federal pre-base year reserve was approximately $1.3 million. However, under current law, pre-base year reserves remain subject to recapture if Magyar Bank makes certain non-dividend distributions, repurchases any of its stock, pays dividends in excess of tax earnings and profits, or ceases to maintain a bank charter.
Alternative Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax (“AMT”) at a rate of 20% on a base of regular taxable income plus certain tax preferences (“alternative minimum taxable income” or “AMTI”). The AMT is payable to the extent such AMTI is in excess of an exemption amount and the AMT exceeds the regular income tax. Generally, AMT net operating losses can offset no more than 90% of AMTI. Certain payments of AMT may be used as credits against regular tax liabilities in future years. Magyar Bancorp, Inc. and Magyar Bank have been subject to the AMT in prior periods but have subsequently used most of these credits against regular tax liabilities.
Net Operating Loss Carryovers. At September 30, 2011, a financial institution was able to carry back net operating losses to the preceding five taxable years and forward to the succeeding 20 taxable years. At September 30, 2011, the Company had approximately $4.2 million of federal and $8.7 million of state net operating loss carry forwards available to offset future taxable income for tax reporting purposes. The federal net operating loss carry forwards will begin to expire in 2028, while the state net operating losses will begin to expire by 2015, if not used. Based on projections of future taxable income, the Company expects to be able to utilize all net operating loss carry forwards prior to their expiration.
Corporate Dividends-Received Deduction. Magyar Bancorp, Inc. may exclude from its federal taxable income 100% of dividends received from Magyar Bank as a wholly owned subsidiary. The corporate dividends-received deduction is 80% when the dividend is received from a corporation having at least 20% of its stock owned by the recipient corporation. A 70% dividends-received deduction is available for dividends received from corporations owned less than 20% by the recipient corporation.
State Taxation
New Jersey State Taxation. The income of savings institutions in New Jersey, which is calculated based on federal taxable income, subject to certain adjustments, is subject to New Jersey tax. Magyar Bank, Magyar Service Corporation, and MagBank Investment Company file New Jersey corporate income tax returns. Magyar Bank, Magyar Service Corporation, and MagBank Investment Company are not currently under audit with respect to their New Jersey income tax returns nor have their respective state tax returns been audited for the past five years.
New Jersey tax law does not and has not allowed for a taxpayer to file a tax return on a combined or consolidated basis with another member of the affiliated group where there is common ownership. However, under recent tax legislation, if the taxpayer cannot demonstrate by clear and convincing evidence that the tax filing discloses the true earnings of the taxpayer on its business carried on in the State of New Jersey, the New Jersey Director of the Division of Taxation may, at the director’s discretion, require the taxpayer to file a consolidated return of the entire operations of the affiliated group or controlled group, including its own operations and income.
Delaware and New Jersey State Taxation. As a Delaware holding company not earning income in Delaware, Magyar Bancorp, Inc. is exempt from Delaware corporate income tax, but is required to file annual returns and pay annual fees and a franchise tax to the State of Delaware.
Magyar Bancorp, Inc. is subject to New Jersey corporate income taxes in the same manner as described above for Magyar Bank.
SUPERVISION AND REGULATION
General
Magyar Bank is a New Jersey-chartered savings bank, and its deposit accounts are insured up to applicable limits by the Federal Deposit Insurance Corporation under the Deposit Insurance Fund (“DIF”). Magyar Bank is subject to extensive regulation, examination and supervision by the Commissioner of the New Jersey Department of Banking and Insurance (the “Commissioner”) as the issuer of its charter, and by the Federal Deposit Insurance Corporation as deposit insurer and its primary federal regulator. Magyar Bank must file reports with the Commissioner and the Federal Deposit Insurance Corporation concerning its activities and financial condition, and it must obtain regulatory approval prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions and opening or acquiring branch offices. The Commissioner and the Federal Deposit Insurance Corporation conduct periodic examinations to assess Magyar Bank’s compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which a savings bank can engage and is intended primarily for the protection of the deposit insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.
On April 22, 2010, Magyar Bank entered into agreements with the Federal Deposit Insurance Corporation and the New Jersey Department of Banking and Insurance which required the Bank to take certain measures to improve its safety and soundness. In connection with these agreements, the Bank stipulated to the issuance by the Federal Deposit Insurance Corporation and the New Jersey Department of Banking and Insurance of consent orders (the “Consent Orders”) against the Bank relating to certain findings from an examination of the Bank that occurred in 2009. Copies of the Consent Orders were attached as exhibits to a Current Report on Form 8-K, which was filed with the SEC on April 23, 2010 and which is incorporated by reference into this Annual Report on Form 10-K. In entering into the stipulation and consenting to entry of the Consent Orders, the Bank did not concede the findings or admit to any of the assertions therein. The Consent Orders impose no fines or penalties upon the Bank.
Magyar Bancorp, Inc., as a bank holding company controlling Magyar Bank, is subject to the Bank Holding Company Act of 1956, as amended (“BHCA”), and the rules and regulations of the Federal Reserve Board under the BHCA and to the provisions of the New Jersey Banking Act of 1948 (the “New Jersey Banking Act”), and to the regulations of the Commissioner under the New Jersey Banking Act applicable to bank holding companies. Magyar Bank and Magyar Bancorp, Inc. are required to file reports with, and otherwise comply with the rules and regulations of the Federal Reserve Board and the Commissioner. Magyar Bancorp, Inc. is required to file certain reports with, and otherwise comply with, the rules and regulations of the Securities and Exchange Commission under the federal securities laws.
Any change in such laws and regulations, whether by the Commissioner, the Federal Deposit Insurance Corporation, the Federal Reserve Board or through legislation, could have a material adverse impact on Magyar Bank and Magyar Bancorp, Inc. and their operations and stockholders.
Certain of the laws and regulations applicable to Magyar Bank and Magyar Bancorp, Inc. are summarized below. These summaries do not purport to be complete and are qualified in their entirety by reference to such laws and regulations.
New Federal Legislation
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as Magyar Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets, such as Magyar Bank, will be examined by their applicable bank regulators. The new legislation also weakens the federal preemption available for national banks and federal savings associations, and gives state attorneys general the ability to enforce applicable federal consumer protection laws.
The legislation also broadened the base for Federal Deposit Insurance Corporation insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2013. The Dodd-Frank Act increased stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorizing the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate and solicit votes for their own candidates using a company’s proxy materials. The legislation also directed the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not. The Dodd-Frank Act also provided for originators of certain securitized loans to retain a percentage of the risk, directed the Federal Reserve Board to regulate pricing of certain debit card interchange fees, contained a number of reforms related to mortgage originations and authorized depository institutions to pay interest on business checking accounts.
New Jersey Banking Regulation
Activity Powers. Magyar Bank derives its lending, investment and other activity powers primarily from the applicable provisions of the New Jersey Banking Act and its related regulations. Under these laws and regulations, savings banks, including Magyar Bank, generally may invest in:
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real estate mortgages;
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consumer and commercial loans;
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specific types of debt securities, including certain corporate debt securities and obligations of federal, state and local governments and agencies;
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certain types of corporate equity securities; and
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certain other assets.
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A savings bank may also make other investments pursuant to “leeway” authority that permits investments not otherwise permitted by the New Jersey Banking Act. “Leeway” investments must comply with a number of limitations on the individual and aggregate amounts of “leeway” investments. A savings bank may also exercise trust powers upon approval of the Commissioner. New Jersey savings banks may exercise those powers, rights, benefits or privileges authorized for national banks or out-of-state banks or for federal or out-of-state savings banks or savings associations, provided that before exercising any such power, right, benefit or privilege, prior approval by the Commissioner by regulation or by specific authorization is required. The exercise of these lending, investment and activity powers are limited by federal law and regulations. See “Federal Banking Regulation-Activity Restrictions on State-Chartered Banks” below.
Loans-to-One-Borrower Limitations. With certain specified exceptions, a New Jersey-chartered savings bank may not make loans or extend credit to a single borrower or to entities related to the borrower in an aggregate amount that would exceed 15% of the bank’s capital funds. A savings bank may lend an additional 10% of the bank’s capital funds if secured by collateral meeting the requirements of the New Jersey Banking Act. Magyar Bank currently complies with applicable loans-to-one-borrower limitations.
Dividends. Under the New Jersey Banking Act, a stock savings bank may declare and pay a dividend on its capital stock only to the extent that the payment of the dividend would not impair the capital stock of the savings bank. In addition, a stock savings bank may not pay a dividend unless the savings bank would, after the payment of the dividend, have a surplus of not less than 50% of its capital stock, or alternatively, the payment of the dividend would not reduce the surplus. Federal law may also limit the amount of dividends that may be paid by Magyar Bank. See “Federal Banking Regulation-Prompt Corrective Action” below.
Minimum Capital Requirements. Regulations of the Commissioner impose on New Jersey-chartered depository institutions, including Magyar Bank, minimum capital requirements similar to those imposed by the Federal Deposit Insurance Corporation on insured state banks. See “Federal Banking Regulation-Capital Requirements.”
Examination and Enforcement. The New Jersey Department of Banking and Insurance may examine Magyar Bank whenever it deems an examination advisable. The New Jersey Department of Banking and Insurance examines Magyar Bank at least every two years. The Commissioner may order any savings bank to discontinue any violation of law or unsafe or unsound business practice and may direct any director, officer, attorney or employee of a savings bank engaged in an objectionable activity, after the Commissioner has ordered the activity to be terminated, to show cause at a hearing before the Commissioner why such person should not be removed. The Commissioner also has authority to appoint a conservator or receiver for a savings bank under certain circumstances such as insolvency or unsafe or unsound condition to transact business.
Federal Banking Regulation
Capital Requirements. The Federal Deposit Insurance Corporation regulations establish a minimum leverage capital requirement for banks in the strongest financial and managerial condition, with a rating of 1 (the highest examination rating of the Federal Deposit Insurance Corporation for banks) under the Uniform Financial Institutions Rating System, of not less than a ratio of 3.0% of Tier 1 capital to total assets. For all other banks, the minimum leverage capital requirement is 4.0%, unless a higher leverage capital ratio is warranted by the particular circumstances or risk profile of the depository institution.
The Federal Deposit Insurance Corporation regulations also require that banks meet a risk-based capital standard. The risk-based capital standard requires the maintenance of a ratio of total capital, which is defined as the sum of Tier 1 capital and Tier 2 capital, to risk-weighted assets of at least 8% and a ratio of Tier 1 capital to risk-weighted assets of at least 4%. In determining the amount of risk-weighted assets, all assets, plus certain off balance sheet items, are multiplied by a risk-weight of 0% to 200%, based on the risks the Federal Deposit Insurance Corporation believes are inherent in the type of asset or item.
The federal banking agencies, including the Federal Deposit Insurance Corporation, have also adopted regulations to require an assessment of an institution’s exposure to declines in the economic value of a bank’s capital due to changes in interest rates when assessing the bank’s capital adequacy. Institutions with significant interest rate risk may be required to hold additional capital.
Among the corrective actions required in the Consent Orders were for the Bank to develop, within 30 days of the April 22, 2010 effective date of the Consent Orders, a written capital plan that details the manner in which the Bank will achieve a Tier 1 capital as a percentage of the Bank’s total assets of at least 8%, and total qualifying capital as a percentage of risk-weighted assets of at least 12%. For purposes of the Consent Orders, Tier 1 capital, qualifying total capital, total assets, and risk-weighted assets shall be calculated in accordance with Part 325 of the FDIC Rules and Regulations, 12 C.F.R Part 325.
A capital plan was submitted on a timely basis to the Federal Deposit Insurance Corporation and New Jersey Department of Banking of Insurance detailing the manner and timing in which the Bank will achieve the capital ratios. As of September 30, 2011, Magyar Bank’s Tier 1 capital as a percentage of the Bank’s total assets was 8.07% and the total qualifying capital as a percentage of risk-weighted assets was 13.21%. At September 30, 2011, both capital ratios exceeded the ratios in the submitted capital plan.
Prompt Corrective Action. The Federal Deposit Improvement Act also established a system of prompt corrective action to resolve the problems of undercapitalized institutions. The Federal Deposit Insurance Corporation, as well as the other federal banking regulators, adopted regulations governing the supervisory actions that may be taken against undercapitalized institutions. The regulations establish five categories, consisting of “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” The Federal Deposit Insurance Corporation’s regulations define the five capital categories as follows:
An institution will be treated as “well-capitalized” if:
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its ratio of total capital to risk-weighted assets is at least 10%;
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its ratio of Tier 1 capital to risk-weighted assets is at least 6%; and
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its ratio of Tier 1 capital to total assets is at least 5%, and it is not subject to any order or directive by the Federal Deposit Insurance Corporation to meet a specific capital level; and is not subject to any written agreement, order, or capital directive issued by the Federal Deposit Insurance Corporation to meet and maintain a specific capital level.
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An institution will be treated as “adequately capitalized” if:
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its ratio of total capital to risk-weighted assets is at least 8%; or
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its ratio of Tier 1 capital to risk-weighted assets is at least 4%; and
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its ratio of Tier 1 capital to total assets is at least 4% (3% if the bank receives the highest rating under the Uniform Financial Institutions Rating System) and it is not a well-capitalized institution.
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An institution will be treated as “undercapitalized” if:
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its total risk-based capital is less than 8%; or
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its Tier 1 risk-based-capital is less than 4%; and
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its leverage ratio is less than 4% (or less than 3% if the institution receives the highest rating under the Uniform Financial Institutions Rating System).
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An institution will be treated as “significantly undercapitalized” if:
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its total risk-based capital is less than 6%;
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its Tier 1 capital is less than 3%; or
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its leverage ratio is less than 3%.
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An institution that has a tangible capital to total assets ratio equal to or less than 2% would be deemed to be “critically undercapitalized.”
Undercapitalized institutions are subject to a variety of mandatory supervisory measures including the requirement to file a capital plan for the Federal Deposit Insurance Corporation’s approval and dividend restrictions as well as other discretionary actions by the regulator.
The Federal Deposit Insurance Corporation is required, with some exceptions, to appoint a receiver or conservator for an insured state bank if that bank is “critically undercapitalized.” For this purpose, “critically undercapitalized” means having a ratio of tangible capital to total assets of less than 2%. The Federal Deposit Insurance Corporation may also appoint a conservator or receiver for a state bank on the basis of the institution’s financial condition or upon the occurrence of certain events, including:
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insolvency, or when the assets of the bank are less than its liabilities to depositors and others;
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substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices;
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existence of an unsafe or unsound condition to transact business;
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likelihood that the bank will be unable to meet the demands of its depositors or to pay its obligations in the normal course of business; and
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insufficient capital, or the incurring or likely incurring of losses that will deplete substantially all of the institution’s capital with no reasonable prospect of replenishment of capital without federal assistance.
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Activity Restrictions on State-Chartered Banks. Federal law and Federal Deposit Insurance Corporation regulations generally limit the activities and investments of state-chartered Federal Deposit Insurance Corporation-insured banks and their subsidiaries to those permissible for national banks and their subsidiaries, unless such activities and investments are specifically exempted by law or consented to by the Federal Deposit Insurance Corporation.
Before making a new investment or engaging in a new activity that is not permissible for a national bank or otherwise permissible under federal law or the Federal Deposit Insurance Corporation regulations, an insured bank must seek approval from the Federal Deposit Insurance Corporation to make such investment or engage in such activity. The Federal Deposit Insurance Corporation will not approve the activity unless the bank meets its minimum capital requirements and the Federal Deposit Insurance Corporation determines that the activity does not present a significant risk to the DIF. Certain activities of subsidiaries that are engaged in activities permitted for national banks only through a “financial subsidiary” are subject to additional restrictions.
Federal law permits a state-chartered savings bank to engage, through financial subsidiaries, in any activity in which a national bank may engage through a financial subsidiary and on substantially the same terms and conditions. In general, the law permits a national bank that is well-capitalized and well-managed to conduct, through a financial subsidiary, any activity permitted for a financial holding company other than insurance underwriting, insurance investments, real estate investment or development or merchant banking. The total assets of all such financial subsidiaries may not exceed the lesser of 45% of the bank’s total assets or $50 million. The bank must have policies and procedures to assess the financial subsidiary’s risk and protect the bank from such risk and potential liability, must not consolidate the financial subsidiary’s assets with the bank’s and must exclude from its own assets and equity all equity investments, including retained earnings, in the financial subsidiary. State-chartered savings banks may retain subsidiaries in existence as of March 11, 2000 and may engage in activities that are not authorized under federal law. Although Magyar Bank meets all conditions necessary to establish and engage in permitted activities through financial subsidiaries, it has not yet determined whether or the extent to which it will seek to engage in such activities.
Federal Home Loan Bank System. Magyar Bank is a member of the Federal Home Loan Bank system, which consists of twelve regional federal home loan banks, each subject to supervision and regulation by the Federal Housing Finance Board (“FHFB”). The federal home loan banks provide a central credit facility primarily for member thrift institutions as well as other entities involved in home mortgage lending. Magyar Bank, as a member of the Federal Home Loan Bank of New York, is required to purchase and hold shares of capital stock in the Federal Home Loan Bank of New York in specified amounts.
As of September 30, 2011, Magyar Bank was in compliance with these requirements.
Enforcement. The Federal Deposit Insurance Corporation has extensive enforcement authority over insured savings banks, including Magyar Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders and to remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and to unsafe or unsound practices.
Deposit Insurance. Magyar Bank is a member of the Deposit Insurance Fund, which is administered by the Federal Deposit Insurance Corporation. Deposit accounts at Magyar Bank are insured by the Federal Deposit Insurance Corporation, generally up to a maximum of $250,000 for each separately insured depositor.
In connection with the passage of the Dodd-Frank Act, the Federal Deposit Insurance Corporation has adopted a new rule that provides full insurance coverage for all non-interest bearing transaction accounts, except NOW accounts. The new rule became effective December 31, 2010 for a two-year period.
The Federal Deposit Insurance Corporation assesses insurance premiums based on an institution’s risk. Under this assessment system, the Federal Deposit Insurance Corporation evaluates the risk of each financial institution based on its supervisory rating, financial ratios, and long-term debt issuer rating.
Effective April 1, 2011, the FDIC Board changed the assessment base from adjusted domestic deposits to a bank’s average consolidated total assets minus average Tier 1 capital, as required by the Dodd-Frank Act. The FDIC lowered assessment rates to between 2.5 and 9 basis points on the broader base for banks in the lowest risk category, and to 30 to 45 basis points for banks in the highest risk category. The final rule eliminated the adjustment to the rate paid for secured liabilities, including Federal Home Loan Bank advances, since these are now part of the new assessment base.
On November 12, 2009, the FDIC approved a final rule requiring insured depository institutions to prepay, on December 30, 2009, their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012. Estimated assessments for the fourth quarter of 2009 and for all of 2010 were based upon the assessment rate in effect on September 30, 2009, with three basis points added for the 2011 and 2012 assessment rates. In addition, a 5% annual growth in the assessment base was assumed. Prepaid assessments are to be applied against the actual quarterly assessments until exhausted, and may not be applied to any special assessments that may occur in the future. Any unused prepayments will be returned to the institution on June 30, 2013. On December 30, 2009, Magyar Bank prepaid $3.8 million in estimated assessment fees for the fourth quarter of 2009 through 2012.
The deposit insurance assessment rates are in addition to the assessments for payments on the bonds issued in the late 1980s by the Financing Corporation, or FICO, to recapitalize the now defunct Federal Savings and Loan Insurance Corporation. The FICO payments will continue until the FICO bonds mature in 2017 through 2019. Our expense for the assessment of deposit insurance and the FICO payments was $1.1 million for the year ended September 30, 2011 and $1.3 million for the year ended September 30, 2010.
Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the Federal Deposit Insurance Corporation. The Association does not believe that it is taking or is subject to any action, condition or violation that could lead to termination of its deposit insurance.
Transactions with Affiliates of Magyar Bank. Magyar Bank’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and its implementing Regulation W promulgated by the Board of Governors of the Federal Reserve System. An affiliate is a company that controls, is controlled by, or is under common control with an insured depository institution such as Magyar Bancorp, Inc. and Magyar Bancorp, MHC. In general, loan transactions between an insured depository institution and its affiliates are subject to certain quantitative and collateral requirements. In this regard, transactions between an insured depository institution and its affiliates are limited to 10% of the institution’s unimpaired capital and unimpaired surplus for transactions with any one affiliate and 20% of unimpaired capital and unimpaired surplus for transactions in the aggregate with all affiliates. Collateral of specific types and in specified amounts ranging from 100% to 130% of the amount of the transaction must usually be provided by affiliates in order to receive loans from the savings association. In addition, transactions with affiliates must be consistent with safe and sound banking practices, not involve low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates. Magyar Bank is in compliance with these requirements.
Prohibitions Against Tying Arrangements. Banks are subject to the prohibitions of 12 U.S.C. Section 1972 on certain tying arrangements. A depository institution is prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
Community Reinvestment Act and Fair Lending Laws. All Federal Deposit Insurance Corporation insured institutions have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income neighbourhoods. In connection with its examination of a state chartered savings bank, the Federal Deposit Insurance Corporation is required to assess the institution’s record of compliance with the Community Reinvestment Act. Among other things, the current Community Reinvestment Act regulations replace the prior process-based assessment factors with a new evaluation system that rates an institution based on its actual performance in meeting community needs. In particular, the current evaluation system focuses on three tests:
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a lending test, to evaluate the institution’s record of making loans in its service areas;
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an investment test, to evaluate the institution’s record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and
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a service test, to evaluate the institution’s delivery of services through its branches, ATMs and other offices.
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An institution’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in regulatory restrictions on its activities. We received an “outstanding” Community Reinvestment Act rating in our most recently completed federal examination, which was conducted by the Federal Deposit Insurance Corporation in 2010.
In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the Federal Deposit Insurance Corporation, as well as other federal regulatory agencies and the Department of Justice.
Loans to a Bank’s Insiders
Federal Regulation. A bank’s loans to its executive officers, directors, any owner of 10% or more of its stock (each, an insider) and any of certain entities affiliated with any such person (an insider’s related interest) are subject to the conditions and limitations imposed by Section 22(h) of the Federal Reserve Act and its implementing regulations. Under these restrictions, the aggregate amount of the loans to any insider and the insider’s related interests may not exceed the loans-to-one-borrower limit applicable to national banks, which is comparable to the loans-to-one-borrower limit applicable to Magyar Bank’s loans. See “New Jersey Banking Regulation—Loans-to-One Borrower Limitations.” All loans by a bank to all insiders and insiders’ related interests in the aggregate may not exceed the bank’s unimpaired capital and unimpaired surplus. With certain exceptions, loans to an executive officer, other than loans for the education of the officer’s children and certain loans secured by the officer’s residence, may not exceed the lesser of (1) $100,000 or (2) the greater of $25,000 or 2.5% of the bank’s unimpaired capital and surplus. Federal regulation also requires that any proposed loan to an insider or a related interest of that insider be approved in advance by a majority of the Board of Directors of the bank, with any interested directors not participating in the voting, if such loan, when aggregated with any existing loans to that insider and the insider’s related interests, would exceed either (1) $250,000 or (2) the greater of $25,000 or 5% of the bank’s unimpaired capital and surplus. Generally, such loans must be made on substantially the same terms as, and follow credit underwriting procedures that are not less stringent than, those that are prevailing at the time for comparable transactions with other persons.
An exception is made for extensions of credit made pursuant to a benefit or compensation plan of a bank that is widely available to employees of the bank and that does not give any preference to insiders of the bank over other employees of the bank.
In addition, federal law prohibits extensions of credit to a bank’s insiders and their related interests by any other institution that has a correspondent banking relationship with the bank, unless such extension of credit is on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavourable features.
New Jersey Regulation. Provisions of the New Jersey Banking Act impose conditions and limitations on the liabilities to a savings bank of its directors and executive officers and of corporations and partnerships controlled by such persons, that are comparable in many respects to the conditions and limitations imposed on the loans and extensions of credit to insiders and their related interests under federal law, as discussed above. The New Jersey Banking Act also provides that a savings bank that is in compliance with federal law is deemed to be in compliance with such provisions of the New Jersey Banking Act.
Federal Reserve System
Federal Reserve Board regulations require all depository institutions to maintain reserves at specified levels against their transaction accounts (primarily NOW and regular checking accounts). At September 30, 2011, Magyar Bank was in compliance with the Federal Reserve Board’s reserve requirements. Savings banks, such as Magyar Bank, are authorized to borrow from the Federal Reserve Bank “discount window.” Magyar Bank is deemed by the Federal Reserve Board to be generally sound and thus is eligible to obtain secondary credit from its Federal Reserve Bank. Generally, secondary credit is extended on a very short-term basis to meet the liquidity needs of the institution. Loans must be secured by acceptable collateral and carry a rate of interest above the Federal Open Market Committee’s federal funds target rate.
The USA PATRIOT Act
The USA PATRIOT Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. The USA PATRIOT Act also requires the federal banking agencies to take into consideration the effectiveness of controls designed to combat money laundering activities in determining whether to approve a merger or other acquisition application of a member institution. Accordingly, if we engage in a merger or other acquisition, our controls designed to combat money laundering would be considered as part of the application process. We have established policies, procedures and systems designed to comply with these regulations.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 (“SOX”) is a law that addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by Section 302(a) of Sarbanes-Oxley Act of 2002, Magyar Bancorp, Inc.’s Chief Executive Officer and Chief Financial Officer each are required to certify that its quarterly and annual reports do not contain any untrue statement of a material fact. The rules have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal controls; they have made certain disclosures to our auditors and the audit committee of the Board of Directors about our internal controls; and they have included information in our quarterly and annual reports about their evaluation and whether there have been significant changes in our internal controls or in other factors that could significantly affect internal controls. Magyar Bancorp, Inc. has existing policies, procedures and systems designed to comply with these regulations, and is further enhancing and documenting such policies, procedures and systems to ensure continued compliance with these regulations.
Section 404(b) requires independent auditors to report on management’s assessment of internal controls over financial reporting. The 2010 Dodd-Frank Act provided an exemption on compliance with Sarbanes-Oxley Act (SOX) Section 404(b) for companies with less than $75 million in market capitalization. The inclusion of the exemption in the final reform legislation permanently exempted the auditor attestation requirement and significantly reduced the anticipated compliance burdens of smaller reporting companies. Disclosure of management attestations on internal control over financial reporting will continue to be required for smaller reporting companies.
Holding Company Regulation
Federal Regulation. Magyar Bancorp, Inc. is regulated as a bank holding company. Bank holding companies are subject to examination, regulation and periodic reporting under the Bank Holding Company Act, as administered by the Federal Reserve Board. The Federal Reserve Board has adopted capital adequacy guidelines for bank holding companies on a consolidated basis substantially similar to, though somewhat more lenient, those of the Federal Deposit Insurance Corporation for Magyar Bank. As of September 30, 2011, Magyar Bancorp, Inc.’s total capital and Tier 1 capital ratios exceeded these minimum capital requirements. The Dodd-Frank Act requires that the Federal Reserve Board amend its minimum capital requirements for bank holding companies to make them no less stringent than those applicable to insured depository institutions themselves. That will require the elimination of certain instruments from tier 1 capital that are currently includable for bank holding companies.
Regulations of the Federal Reserve Board provide that a bank holding company must serve as a source of strength to any of its subsidiary banks and must not conduct its activities in an unsafe or unsound manner. The Dodd-Frank Act codified the source of strength policy and requires the promulgation of implementing regulations. Under the prompt corrective action provisions of the Federal Deposit Insurance Act, a bank holding company parent of an undercapitalized subsidiary bank would be directed to guarantee, within limitations, the capital restoration plan that is required of such an undercapitalized bank. See “Federal Banking Regulation—Prompt Corrective Action.” If the undercapitalized bank fails to file an acceptable capital restoration plan or fails to implement an accepted plan, the Federal Reserve Board may prohibit the bank holding company parent of the undercapitalized bank from paying any dividend or making any other form of capital distribution without the prior approval of the Federal Reserve Board.
As a bank holding company, Magyar Bancorp, Inc. is required to obtain the prior approval of the Federal Reserve Board to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior Federal Reserve Board approval is required for Magyar Bancorp, Inc. to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after giving effect to such acquisition, it would, directly or indirectly, own or control more than 5% of any class of voting shares of such bank or bank holding company.
A bank holding company is required to give the Federal Reserve Board prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, will be equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. Such notice and approval is not required for a bank holding company that would be treated as “well capitalized” under applicable regulations of the Federal Reserve Board, that has received a composite “1” or “2” rating, as well as a “satisfactory” rating for management, at its most recent bank holding company inspection by the Federal Reserve Board, and that is not the subject of any unresolved supervisory issues.
In addition, a bank holding company that does not elect to be a financial holding company under federal regulation, is generally prohibited from engaging in, or acquiring direct or indirect control of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be permissible. Some of the principal activities that the Federal Reserve Board has determined by regulation to be so closely related to banking as to be permissible are:
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making or servicing loans;
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performing certain data processing services;
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providing discount brokerage services, or acting as fiduciary, investment or financial advisor;
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leasing personal or real property;
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making investments in corporations or projects designed primarily to promote community welfare; and
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acquiring a savings and loan association.
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Bank holding companies that elect to be a financial holding company may engage in activities that are financial in nature or incident to activities which are financial in nature. Magyar Bancorp, Inc. has not elected to be a financial holding company, although it may seek to do so in the future. Bank holding companies may elect to become a financial holding company if:
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each of its depository institution subsidiaries is “well capitalized;”
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each of its depository institution subsidiaries is “well managed;”
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each of its depository institution subsidiaries has at least a “satisfactory” Community Reinvestment Act rating at its most recent examination; and
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the bank holding company has filed a certification with the Federal Reserve Board stating that it elects to become a financial holding company.
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Under federal law, depository institutions are liable to the Federal Deposit Insurance Corporation for losses suffered or anticipated by the Federal Deposit Insurance Corporation in connection with the default of a commonly controlled depository institution or any assistance provided by the Federal Deposit Insurance Corporation to such an institution in danger of default. This law would be applicable potentially to Magyar Bancorp, Inc. if it ever acquired as a separate subsidiary a depository institution in addition to Magyar Bank.
It has been the policy of many mutual holding companies to waive the receipt of dividends declared by its subsidiary. In connection with its approval of the reorganization, however, the Federal Reserve Board required Magyar Bancorp, MHC to obtain prior Federal Reserve Board approval before it may waive any dividends. As of the date hereof, Federal Reserve Board policy is to prohibit a mutual holding company from waiving the receipt of dividends from its holding company or bank subsidiary, and management is not aware of any instance in which the Federal Reserve Board has given its approval for a mutual holding company to waive dividends. Additionally, under Federal Deposit Insurance Corporation policy, the cumulative amount of waived dividends, if any, must not be available for distribution to public stockholders. See “Supervision and Regulation-Holding Company Regulation.” It is not currently intended that Magyar Bancorp, MHC will waive dividends declared by Magyar Bancorp, Inc. as long as Magyar Bancorp, MHC is regulated by the Federal Reserve Board.
Conversion of Magyar Bancorp, MHC to Stock Form. Magyar Bancorp, MHC is permitted to convert from the mutual form of organization to the capital stock form of organization (a “Conversion Transaction”). There can be no assurance when, if ever, a Conversion Transaction will occur, and the Board of Directors has no current intention or plan to undertake a Conversion Transaction. In a Conversion Transaction a new stock holding company may be formed as the successor to Magyar Bancorp, Inc. (the “New Holding Company”), Magyar Bancorp, MHC’s corporate existence would end, and certain depositors of Magyar Bank would receive the right to subscribe for additional shares of the New Holding Company. In a Conversion Transaction, each share of common stock held by stockholders other than Magyar Bancorp, MHC (“Minority Stockholders”) would be converted into a number of shares of common stock of the New Holding Company determined pursuant to an exchange ratio that ensures that Minority Stockholders own the same percentage of common stock in the New Holding Company as they owned in Magyar Bancorp, Inc. immediately before the Conversion Transaction, subject to any adjustment required by regulation or regulatory policy. The Federal Deposit Insurance Corporation will require that dividends waived by Magyar Bancorp, MHC be taken into account. The total number of shares held by Minority Stockholders after a Conversion Transaction also would be increased by any purchases by Minority Stockholders in the stock offering conducted as part of the Conversion Transaction.
Any Conversion Transaction would require the approval of a majority of the outstanding shares of Magyar Bancorp, Inc. common stock held by Minority Stockholders and the approval of a majority of the eligible votes of depositors of Magyar Bank.
New Jersey Regulation. Under the New Jersey Banking Act, a company owning or controlling a savings bank is regulated as a bank holding company. The New Jersey Banking Act defines the terms “company” and “bank holding company” as such terms are defined under the BHCA. Each bank holding company controlling a New Jersey-chartered bank or savings bank must file certain reports with the Commissioner and is subject to examination by the Commissioner.
Acquisition of Magyar Bancorp, Inc. Under federal law and under the New Jersey Banking Act, no person may acquire control of Magyar Bancorp, Inc. or Magyar Bank without first obtaining approval of such acquisition of control by the Federal Reserve Board and the Commissioner.
Federal Securities Laws. Magyar Bancorp, Inc. common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Magyar Bancorp, Inc. is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
The registration under the Securities Act of 1933 of shares of the common stock sold in the stock offering did not cover the resale of the shares. Shares of the common stock purchased by persons who are not affiliates of Magyar Bancorp, Inc. may be resold without registration. Shares purchased by an affiliate of Magyar Bancorp, Inc. will be subject to the resale restrictions of Rule 144 under the Securities Act of 1933. If Magyar Bancorp, Inc. meets the current public information requirements of Rule 144 under the Securities Act of 1933, each affiliate of Magyar Bancorp, Inc. who complies with the other conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three month period, the greater of 1% of the outstanding shares of Magyar Bancorp, Inc., or the average weekly volume of trading in the shares during the preceding four calendar weeks. Provision may be made in the future by Magyar Bancorp, Inc. to permit affiliates to have their shares registered for sale under the Securities Act of 1933.
Changes in Interest Rates May Hurt our Profits and Asset Values.
Our earnings largely depend on our net interest income, which could be negatively affected by changes in interest rates. Net interest income is the difference between:
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the interest income we earn on our interest-earning assets, such as loans and securities; and
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the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings.
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The rates we earn on our assets and the rates we pay on our liabilities are generally fixed for a contractual period of time. While we have taken steps to attempt to reduce our exposure to increases in interest rates, historically our liabilities generally have shorter contractual maturities than our assets. This imbalance can create significant earnings volatility, because market interest rates change over time. In a period of rising interest rates, the interest income earned on our assets may not increase as rapidly as the interest paid on our liabilities. Likewise, in a period of falling interest rates, the interest expense paid on our liabilities may not decrease as rapidly as the interest income received on our assets. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Management of Market Risk.”
In addition, changes in interest rates can affect the average life of loans and mortgage-backed securities. A reduction in interest rates causes increased prepayments of loans and mortgage-backed securities as borrowers tend to refinance their debt to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest the funds from faster prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities. Additionally, increases in interest rates may decrease loan demand and/or make it more difficult for borrowers to repay adjustable-rate loans.
Changes in interest rates also affect the current market value of our interest-earning securities portfolio. Generally, the value of securities moves inversely with changes in interest rates. At September 30, 2011, the fair value of our total securities portfolio was $71.0 million. The unrealized net gain on securities totaled $1.2 million on a pre-tax basis at September 30, 2011.
We evaluate interest rate sensitivity using models that estimate the change in Magyar Bank’s net interest income over a range of interest rate scenarios. At September 30, 2011, in the event of an immediate 200 basis point increase in interest rates, the model projects that we would experience an $270,000, or 1.8%, decrease in net interest income in the first year following the change in interest rates, and a $75,000, or 0.5%, decrease in net interest income in the second year following the change in interest rates. At September 30, 2011, in the event of an immediate 100 basis point decrease in interest rates, the model projects that we would experience an $80,000, or 0.5%, decrease in net interest income in the first year following the change in interest rates, and a $162,000, or 1.1%, decrease in net interest income in the second year following the change in interest rates.
At September 30, 2011, our available-for-sale securities portfolio totaled $25.3 million, which included $23.3 million of mortgage-backed securities. To the extent interest rates increase and the value of our available-for-sale portfolio decreases, our stockholders’ equity will be adversely affected.
Because We Intend to Continue our Emphasis on the Origination of Commercial Business Loans and Commercial Real Estate Loans, Our Lending Risk Has Increased in Recent Years and May Increase in Future Years.
At September 30, 2011, our portfolio of commercial business and commercial real estate loans totaled $157.2 million, or 40.8% of our total loans, compared to $149.9 million or 36.7% of our total loans at September 30, 2010 and $143.1 million or 32.2% of our total loans at September 30, 2009. It is our intent to continue to emphasize the origination of commercial business and commercial real estate loans. Commercial business and commercial real estate loans generally have more risk than one-to four-family residential mortgage loans. At September 30, 2011, our non-performing loans increased to $28.2 million from $28.0 million at September 30, 2010 but have decreased from $33.5 million at September 30, 2009. Because the repayment of these loans depends on the successful management and operation of the borrower’s properties or related businesses, repayment of these loans has been and may continue to be affected by adverse conditions in the real estate market or the local economy. Further, these loans typically have larger loan balances, and several of our borrowers have more than one commercial business and commercial real estate loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan. Finally, if we foreclose on a commercial business or commercial real estate loan, our holding period for the collateral, if any, typically is longer than for one- to four-family residential mortgage loans because there are fewer potential purchasers of the collateral. Because we plan to continue to emphasize the origination of these loans, it may be necessary to increase our allowance for loan losses because of the increased credit risk associated with these types of loans. Any increase to our allowance for loan losses would adversely affect our earnings.
The Financial Sector Is Experiencing An Economic Downturn. A Deterioration of Our Current Non-performing Loans or An Increase In The Number of Non-performing Loans Will Have An Adverse Effect On Our Operations.
Virtually all of our real estate loans are secured by real estate in New Jersey. At September 30, 2011, loans secured by real estate, including home equity loans and lines of credit, represented 87.5% of our total loans. Both nationally and in the State of New Jersey we are experiencing an economic downturn that is having a significant impact on the prices of real estate and related assets. The residential and commercial real estate sectors have been adversely affected by weakening economic conditions, which may negatively impact our loan portfolio. Troubled debt restructuring and total non-performing assets increased from $44.3 million at September 30, 2010 to $49.5 million at September 30, 2011. Troubled debt restructuring and total non-performing assets as a percentage of total assets increased to 9.45% at September 30, 2011 as compared to 8.23% at September 30, 2010. If loans that are currently non-performing further deteriorate or loans that are currently performing become non-performing loans, we may need to increase our allowance for loan losses, which would have an adverse impact on our financial condition and results of operations.
Our FDIC Premium Could Be Substantially Higher In The Future, Which Would Have An Adverse Effect On Our Future Earnings.
Our FDIC insurance assessment was $1.1 million for fiscal year 2011 compared to $1.3 million for fiscal year 2010. Our FDIC assessment could be higher in future periods depending on the premium rates set by the FDIC for such periods and the composite rating assigned to the Bank by the FDIC. Any increases in our FDIC premium rates will reduce future earnings.
If Our Allowance for Loan Losses is Not Sufficient to Cover Actual Loan Losses, Our Earnings Could Decrease.
Our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, requiring additions to our allowance, which could materially decrease our net income. Our allowance for loan losses was 0.99% of total loans and 13.5% of total non-performing loans at September 30, 2011. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. Based on this review, we believe our allowance for loan losses is adequate to absorb losses in our loan portfolio as of September 30, 2011.
Bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities will have a material adverse effect on our financial condition and results of operations.
Strong Competition Within Our Market Area May Limit Our Growth and Profitability.
Competition in the banking and financial services industry is intense. In our market area, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Some of our competitors have substantially greater resources and lending limits than we, have greater name recognition and market presence that benefit them in attracting business, and offer certain services that we do not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively than we do. Our profitability depends upon our continued ability to successfully compete in our market area. The greater resources and deposit and loan products offered by some of our competitors may limit our ability to increase our interest-earning assets. For additional information see “Business of Magyar Bank-Competition.”
If We Declare Dividends on Our Common Stock, Magyar Bancorp, MHC will be Prohibited From Waiving the Receipt of Dividends by Current Federal Reserve Board Policy, Which May Result in Lower Dividends for All Other Stockholders.
The Board of Directors of Magyar Bancorp, Inc. will have the authority to declare dividends on its common stock, subject to statutory and regulatory requirements. So long as Magyar Bancorp, MHC is regulated by the Federal Reserve Board, if Magyar Bancorp, Inc. pays dividends to its stockholders, it also will be required to pay dividends to Magyar Bancorp, MHC, unless Magyar Bancorp, MHC is permitted by the Federal Reserve Board to waive the receipt of dividends. The Federal Reserve Board’s current position is to not permit a mutual holding company to waive dividends declared by its subsidiary. Accordingly, because dividends will be required to be paid to Magyar Bancorp, MHC along with all other stockholders, the amount of dividends available for all other shareholders will be less than if Magyar Bancorp, MHC were permitted to waive the receipt of dividends.
Magyar Bancorp, MHC Exercises Voting Control Over Magyar Bancorp, Inc.; Public Stockholders Own a Minority Interest.
Magyar Bancorp, MHC owns a majority of Magyar Bancorp, Inc.’s common stock and, through its Board of Directors, exercises voting control over the outcome of all matters put to a vote of stock holders (including the election of directors), except for matters that require a vote greater than a majority. Public stockholders own a minority of the outstanding shares of Magyar Bancorp, Inc.’s common stock. The same directors and officers who manage Magyar Bancorp, Inc. and Magyar Bank also manage Magyar Bancorp, MHC. In addition, regulatory restrictions applicable to Magyar Bancorp, MHC prohibit the sale of Magyar Bancorp, Inc. unless the mutual holding company first undertakes a second-step conversion.
We Operate In A Highly Regulated Environment And May Be Adversely Affected By Changes In Laws And Regulations.
Magyar Bank is subject to extensive regulation, supervision and examination by the New Jersey Department of Banking and Insurance, its chartering authority, and by the Federal Deposit Insurance Corporation, which insures Magyar Bank’s deposits. As a bank holding company, Magyar Bancorp, Inc. is subject to regulation and supervision by the Federal Reserve Board. Such regulation and supervision govern the activities in which financial institutions and their holding companies may engage and are intended primarily for the protection of the federal deposit insurance fund and depositors. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operations of financial institutions, the classification of assets by financial institutions and the adequacy of financial institutions’ allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, could have a material impact on Magyar Bank and Magyar Bancorp, Inc.
Magyar Bank’s operations are also subject to extensive regulation by other federal, state and local governmental authorities, and are subject to various laws and judicial and administrative decisions that impose requirements and restrictions on operations. These laws, rules and regulations are frequently changed by legislative and regulatory authorities. There can be no assurance that changes to existing laws, rules and regulations, or any other new laws, rules or regulations, will not be adopted in the future, which could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or prospects.
We are Subject to Consent Orders, which Place Limits on our Operations, Increase our Compliance Expense and Could Result in Penalties or Further Restrictions if We Fail to Comply with Their Terms.
On April 22, 2010, Magyar Bank entered into agreements with the Federal Deposit Insurance Corporation and the New Jersey Department of Banking and Insurance that require Magyar Bank to take certain measures to improve its safety and soundness. In connection with these agreements, Magyar Bank stipulated to the issuance by the Federal Deposit Insurance Corporation and the New Jersey Department of Banking and Insurance of Consent Orders against Magyar Bank relating to findings from an examination of Magyar Bank that occurred in 2009. While the Consent Orders imposed no fines or penalties upon Magyar Bank, the Consent Orders require corrective actions, including that Magyar Bank develop a written capital plan to achieve Tier 1 capital as a percentage of total assets of at least 8%, and total qualifying capital as a percentage of risk-weighted assets of at least 12%, levels of capital greater than those required for a New Jersey savings bank to be classified as well-capitalized. Under the Consent Orders, Magyar Bank also agreed, among other things; to develop and implement a plan to reduce the bank’s delinquent and non-accrual loans and risk exposure in certain classified assets; to develop and implement a plan to reduce commercial real estate loan concentrations and the bank’s concentration of bank-owned life insurance; to make certain revisions to the bank’s loan policies and procedures and methodology for determining the allowance for loan and lease losses; to develop and implement a strategic plan, a profit plan and a liquidity and funds management plan that conform to specified requirements in the Consent Orders; and to correct and prevent all unsafe or unsound banking practices, violations of law and regulations and policies discussed in the examination report. The Consent Orders restrict Magyar Bank from declaring or paying cash dividends, soliciting, accepting or renewing brokered deposits, and extending additional credit to certain types of borrowers.
Because the Consent Orders place limitations and restrictions on our operations, including our lending and borrowing operations, the Consent Orders could adversely affect our ability to implement our business plans, including potential profitable growth strategies that we might otherwise pursue, which may adversely affect our financial performance. For example, our capital plan required by the Consent Orders states that the higher capital ratios will be achieved and maintained by September 30, 2011. The higher capital ratios may reduce our origination of loans, including attractive loans that we would otherwise make. Further, the Consent Orders require us to reduce our concentrations of commercial real estate loans, even potentially profitable ones. In addition, the Consent Orders require us to reduce classified, delinquent and nonaccrual loans within specified time frames. These time frames could result in our inability to maximize the price that we might otherwise receive for the sale of the underlying collateral. Finally, the Consent Orders’ restriction on brokered deposits may affect our ability to have sufficient liquid assets for our operations or require us to pay higher rates on retail deposits to replace our use of brokered deposits.
To comply with the Consent Orders, Magyar Bank has incurred and expects to continue to incur consulting and legal fees. Notwithstanding these fees, there can be no assurance that we will achieve full compliance with the requirements of the Consent Orders, nor can we estimate when the Consent Orders will be lifted. If we fail to comply with the provisions of the Consent Orders, we could be subject to additional restrictions or penalties, including civil money penalties on us and our directors and officers, and the removal of directors and officers from their positions with Magyar Bancorp, Inc. and Magyar Bank.
Government Responses to Economic Conditions May Adversely Affect Our Operations, Financial Condition and Earnings.
New financial reform legislation has been enacted by Congress that will change the bank regulatory framework, create an independent consumer protection bureau that will assume the consumer protection responsibilities of the various federal banking agencies, and establish more stringent capital standards for banks and bank holding companies. The legislation will also result in new regulations affecting the lending, funding, trading and investment activities of banks and bank holding companies. Bank regulatory agencies also have been responding aggressively to concerns and adverse trends identified in examinations. Ongoing uncertainty and adverse developments in the financial services industry and the domestic and international credit markets, and the effect of new legislation and regulatory actions in response to these conditions, may adversely affect our operations by restricting our business activities, including our ability to originate or sell loans, modify loan terms, or foreclose on property securing loans. These measures are likely to increase our costs of doing business and may have a significant adverse effect on our lending activities, financial performance and operating flexibility. In addition, these risks could affect the performance and value of our loan and investment securities portfolios, which also would negatively affect our financial performance.
Furthermore, the Board of Governors of the Federal Reserve System, in an attempt to help stabilize the economy, has, among other things, kept interest rates low through its targeted federal funds rate and the purchase of mortgage-backed securities. If the Federal Reserve increases the federal funds rate, overall interest rates will likely rise, which may negatively impact the housing markets and the U.S. economic recovery. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.
It is difficult to predict at this time what impact the new legislation and implementing regulations will have on community banks, including the lending and credit practices of such banks. Moreover, many of the provisions of the Dodd-Frank Act will not take effect for at least a year, and the legislation requires various federal agencies to promulgate numerous and extensive implementing regulations over the next several years. Although the substance and scope of these regulations cannot be determined at this time, it is expected that the legislation and implementing regulations, particularly those provisions relating to the new Consumer Financial Protection Bureau, will increase our operating and compliance costs.
On August 5, 2011, Standard & Poor’s downgraded the United States long-term debt rating from its AAA rating to AA+. On August 8, 2011, Standard & Poor’s downgraded the credit ratings of certain long-term debt instruments issued by Fannie Mae and Freddie Mac and other U.S. government agencies linked to long-term U.S. debt. Instruments of this nature are key assets on the balance sheets of financial institutions, including the Bank. These downgrades could adversely affect the market value of such instruments, and could adversely impact our ability to obtain funding that is collateralized by affected instruments, as well as affecting the pricing of that funding when it is available. We cannot predict if, when or how these changes to the credit ratings will affect economic conditions. These ratings downgrades could result in a significant adverse impact to the Company, and could exacerbate the other risks to which the Company is subject to.
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Unresolved Staff Comments
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Not required for smaller reporting companies.
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The following table provides certain information with respect to our six banking offices as of September 30, 2011:
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Original Year
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Year of
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Location
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Leased or Owned
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Leased or Acquired
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Lease Expiration
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Main Office:
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400 Somerset Street
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Owned
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2005
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—
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New Brunswick, New Jersey
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Full - Service Branches:
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582 Milltown Road
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Leased
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2002
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2012
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North Brunswick, New Jersey
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3050 State Route 27
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Owned
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1969
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—
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Kendall Park, New Jersey
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1000 Route 202 South
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Leased
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2006
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2031
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Branchburg, New Jersey
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475 North Bridge Street
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Leased
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2010
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2025
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Bridgewater, New Jersey
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1167 Inman Avenue
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Leased
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2011
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2026
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Edison, New Jersey
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The net book value of our premises, land and equipment was approximately $20.6 million at September 30, 2011.
For information regarding Magyar Bancorp, Inc.’s investment in mortgages and mortgage-related securities, see “Item 1. Business” herein.
From time to time, we are involved as plaintiff or defendant in various legal proceedings arising in the ordinary course of business. At September 30, 2011, we were not involved in any legal proceedings, the outcome of which would be material to our financial condition or results of operations.
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Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
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(a) Our shares of common stock are traded on the NASDAQ Global Market under the symbol “MGYR.” At September 30, 2011, Magyar Bancorp, MHC owned 3,200,450 shares, or 54.03% of the issued shares of our common stock. The approximate number of holders of record of Magyar Bancorp, Inc.’s common stock as of September 30, 2011 was 569. Certain shares of Magyar Bancorp, Inc. are held in “nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number. The following table presents quarterly market information for Magyar Bancorp, Inc. common stock for each quarter of the previous two fiscal years. Magyar Bancorp, Inc. began trading on the NASDAQ Global Market on January 24, 2006. The following information was provided by the NASDAQ Stock Market.
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Fiscal Year Ended
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Closing
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Dividends
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September 30, 2011
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High
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Low
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Price
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Declared
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Quarter ended September 30, 2011
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$ |
5.20 |
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$ |
3.15 |
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$ |
3.47 |
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$ |
— |
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Quarter ended June 30, 2011
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7.00 |
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3.60 |
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4.14 |
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— |
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Quarter ended March 31, 2011
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4.40 |
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3.83 |
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4.30 |
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— |
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Quarter ended December 31, 2010
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4.44 |
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3.02 |
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4.00 |
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— |
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Fiscal Year Ended
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Closing
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Dividends
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September 30, 2010
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High
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Low
|
|
|
Price
|
|
|
Declared
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30, 2010
|
|
$ |
5.36 |
|
|
$ |
3.01 |
|
|
$ |
3.55 |
|
|
$ |
— |
|
|
Quarter ended June 30, 2010
|
|
|
5.29 |
|
|
|
3.09 |
|
|
|
3.74 |
|
|
|
— |
|
|
Quarter ended March 31, 2010
|
|
|
4.50 |
|
|
|
3.08 |
|
|
|
4.01 |
|
|
|
— |
|
|
Quarter ended December 31, 2009
|
|
|
4.75 |
|
|
|
2.91 |
|
|
|
4.00 |
|
|
|
— |
|
Dividend payments by Magyar Bancorp, Inc. are dependent primarily on dividends it receives from Magyar Bank, because Magyar Bancorp, Inc. has no source of income other than dividends from Magyar Bank, earnings from the investment of proceeds from the sale of shares of common stock retained by Magyar Bancorp, Inc., and interest payments with respect to Magyar Bancorp, Inc.’s loan to the Employee Stock Ownership Plan. For more information on regulatory restrictions regarding the payment of dividends, see “Item 1- Business- Supervision and Regulation- New Jersey Banking Regulation- Dividends.”
Other than its employee stock ownership plan, Magyar Bancorp, Inc. does not have any equity compensation plans that were not approved by stockholders. The following table sets forth information with respect to the Magyar Bancorp’s equity compensation plans.
| |
|
Number of
securities to be
issued upon
exercise of
outstanding
options and
rights |
|
|
Weighted
average
exercise
price(1) |
|
|
Number of
securities
remaining
available for
issuance
under plan |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
188,276 |
|
|
$ |
14.61 |
|
|
|
84,053 |
|
|
Shares of restricted stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total
|
|
|
188,276 |
|
|
$ |
14.61 |
|
|
|
84,053 |
|
| |
|
|
(1) Reflects weighted average exercise price of stock options only.
|
|
(b)
|
Not applicable.
|
| |
|
|
(c)
|
Share repurchases.
|
The Company completed its first stock repurchase program of 130,927 shares in November 2007 and announced in November 2007 a second repurchase program of up to 5% of its publicly-held outstanding shares of common stock, or 129,924 shares, under which 66,970 shares had been repurchased as of September 30, 2011 at an average price of $9.39.
There were no repurchases of our common stock during the year ended September 30, 2011.
|
|
Not required for smaller reporting companies.
|
|
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Overview
Magyar Bancorp, Inc. (the “Company”) is a Delaware-chartered mid-tier stock holding company whose most significant business activity is ownership of 100% of the common stock of Magyar Bank. Magyar Bank’s principal business is attracting retail deposits from the general public and investing those deposits, together with funds generated from operations, principal repayments on loans and securities and borrowed funds, into one-to four-family residential mortgage loans, multi-family and commercial real estate mortgage loans, home equity loans and lines of credit, commercial business loans and construction loans. Our results of operations depend primarily on our net interest income which is the difference between the interest we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our net interest income is primarily affected by the market interest rate environment, the shape of the U.S. Treasury yield curve, the timing of the placement of interest-earning assets and interest-bearing liabilities, and the prepayment rate on our mortgage-related assets. Other factors that may affect our results of operations are general and local economic and competitive conditions, government policies and actions of regulatory authorities.
On April 22, 2010, the Bank entered into agreements with the Federal Deposit Insurance Corporation and the New Jersey Department of Banking and Insurance which require the Bank to take certain measures to improve its safety and soundness. In connection with these agreements, the Bank stipulated to the issuance of consent orders against the Bank (the “Consent Orders”) relating to certain findings from a recent examination of the Bank. In entering into the stipulation and consenting to entry of the Consent Orders, the Bank did not concede the findings or admit to any of the assertions therein. The Consent Orders impose no fines or penalties upon the Bank.
Among the corrective actions required were for the Bank to develop, within 30 days of the April 22, 2010 effective date of the Consent Orders, a written capital plan that details the manner in which the Bank will achieve a Tier 1 capital as a percentage of the Bank’s total assets of at least 8%, and total qualifying capital as a percentage of risk-weighted assets of at least 12%. For purposes of the Consent Orders, Tier 1 capital, qualifying total capital, total assets, and risk-weighted assets shall be calculated in accordance with Part 325 of the FDIC Rules and Regulations, 12 C.F.R Part 325. The Bank developed and filed a capital plan on a timely basis with the Federal Deposit Insurance Corporation and the New Jersey Department of Banking and Insurance. At September 30, 2011, the Bank’s Tier 1 capital as a percentage of the Bank’s total assets was 8.07%, and total qualifying capital as a percentage of risk-weighted assets was 13.21%.
During the year ended September 30, 2011, we decreased net loans $22.6 million, or 5.6%, primarily due to a $22.9 million, or 40.2%, decrease in construction loans. The contraction in the construction loan portfolio was due to the decision to cease originations of new construction loans in 2008 based on the adverse economic environment and its impact on this type of lending. Due to the difficult economic environment and the need to increase capital ratios, the repayments of these loans were used to shrink the Bank’s balance sheet by reducing higher-cost borrowings and deposits.
Borrowing decreased $10.9 million, or 17.9%, and deposits decreased $3.0 million, or 0.7%, during the year ended September 30, 2011. Balances of certificates of deposit (including individual retirement accounts) declined $12.5 million, or 6.6%, reflecting the Bank’s continued strategy of shifting funding sources from higher cost certificates of deposit and borrowings to lower cost checking and money market accounts, which increased $13.9 million, or 37.3%, and $17.4 million, or 19.5%, respectively, during the year. The shift in funding helped contribute to a $1.9 million, or 0.3%, decrease in the Company’s interest expense on its interest bearing liabilities from $9.3 million for the year ended September 30, 2010 to $7.4 million for the year ended September 30, 2011. We attribute the decrease in the average interest expense to the expansion of our commercial relationships, which tend to hold larger deposit balances, successful business development efforts by our retail branch managers, and the continued growth of the Bank’s two newest branch facilities.
We reported a net loss of $249,000 for the year ended September 30, 2011. Net income decreased $4.2 million for the year ended September 30, 2011 compared with the year ended September 30, 2010, attributable to a $3.8 million decrease in income tax benefit, a $211,000 increase in other expense and a $190,000 decrease in other income.
Loan loss provisions decreased $981,000 to $1.7 million during the year ended September 30, 2011 compared with $2.7 million for the year ended September 30, 2010 due to lower level of loan charge-offs and the decrease in the total loan receivables during the current period, specifically construction loan balances, which required higher levels of reserves.
Throughout 2012, we expect to continue the resolution of non-performing assets, diversifying our balance sheet with higher concentrations in commercial real estate and commercial business loans, and managing non-interest expenses in order to increase profitability of the Company.
Critical Accounting Policies
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. Critical accounting policies may involve complex subjective decisions or assessments. We consider the following to be our critical accounting policies.
Allowance for Loan Loss. The allowance for loan losses is the amount estimated by management as necessary to cover credit losses in the loan portfolio both probable and reasonably estimable at the balance sheet date. The allowance is established through the provision for loan losses which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of our most critical. Due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses, the methodology for determining the allowance for loan losses is considered a critical accounting policy by management.
As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans and discounted cash flow valuations of properties are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisals and discounted cash flow valuations are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly affect the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals and discounted cash flow valuations are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans.
Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. We consider a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates by management that may be susceptible to significant change based on changes in economic and real estate market conditions.
The evaluation has a specific and general component. The specific component relates to loans that are delinquent or otherwise identified as impaired through the application of our loan review process and our loan grading system. All such loans are evaluated individually, with principal consideration given to the value of the collateral securing the loan and discounted cash flows. Specific impairment allowances are established as required by this analysis. However, the Bank’s Federal and State regulators generally require that the specific reserve against impaired loans be charged-off, reducing the carrying balance of the loan and allowance for loan loss. The general component is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations in establishing the general portion of the reserve. This analysis establishes factors that are applied to the loan groups to determine the amount of the general component of the allowance for loan losses.
Actual loan losses may be significantly greater than the allowances we have established, which could have a material negative effect on our financial results.
Deferred Income Taxes. The Company records income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities: (i) are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns; (ii) are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases; and (iii) are measured using enacted tax rates expected to apply in the years when those temporary differences are expected to be recovered or settled.
Deferred tax assets have been reduced by a valuation allowance for all 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 September 30, 2011 and September 30, 2010
Total Assets. Total assets decreased $13.9 million, or 2.6%, to $524.0 million at September 30, 2011 from $537.9 million at September 30, 2010, due to reductions in loans receivable, partially offset by an increase in investment securities.
Loans Receivable. Net loans receivable decreased $22.6 million, or 5.6%, to $381.3 million at September 30, 2011 from $403.9 million at September 30, 2010. During the year ended September 30, 2011, construction loans decreased $22.9 million, or 40.2%, to $34.1 million at September 30, 2011 from $57.1 million at September 30, 2010. In addition, one-to four-family residential mortgage loans decreased $6.2 million, or 3.8%, to $159.2 million from $165.5 million, while home equity line of credit and other loans decreased $1.8 million, or 5.0%, to $34.3 million from $36.1 million. Offsetting the decreases were $4.8 million, or 4.1%, and $2.5 million, or 7.5%, increases in commercial real estate and commercial business loans to $121.0 million and $36.2 million, respectively, at September 30, 2011.
At September 30, 2011, the significant loan categories in terms of the percent of total loans were 41.4% in one-to four-family residential mortgage loans, 31.4% in commercial real estate loans, 9.4% in commercial business loans, and 8.9% in construction loans. The remaining categories were comprised of 5.8% of home equity lines of credit and 3.1% of other loans, which consisted primarily of stock-secured consumer loans.
Total non-performing and restructured loans increased $1.3 million to $32.9 million at September 30, 2011 from $31.6 million at September 30, 2010. Excluding troubled debt restructurings non-performing loans increased $160,000, or 0.6%, to $28.2 million. Non-performing loans consisted of fifteen construction loan relationships totaling $15.5 million, twelve mortgage loans secured by one-to-four family residential properties totaling $4.1 million, nine commercial real estate loans totaling $7.6 million, four home equity lines of credit totaling $788,000 and three commercial business loan totaling $255,000.
Adverse economic conditions have led to high levels of non-performing loans, particularly in the Company’s construction loan portfolio. The repayment of construction loans is typically dependent upon the sale of the collateral securing the loan, which has been negatively impacted by significant deterioration in the housing market and decreased buyer demand. As a result, construction projects have slowed and reached their maturity dates. In order for the Company to extend the loans beyond the original maturity date, the value of the collateral securing the loan must be assessed, which is typically done by obtaining an updated third-party appraisal. Given the deterioration in the economy and, specifically, the housing market, updated valuations of the collateral reflect depreciation from earlier assessments. To the extent that the current appraised value of collateral is insufficient to cover a collateral-dependent loan, the Company reduces the balance of the loan via a charge to the allowance for loan loss.
Non-performing loans secured by one-to four-family residential properties including home equity lines of credit increased $1.1 million to $4.8 million at September 30, 2011 from $3.8 million at September 30, 2010. Magyar Bank had begun foreclosure proceedings on the majority of the properties as of September 30, 2011. During the year ended September 30, 2011, Magyar Bank charged off $153,000 from non-performing loans secured by one-to four-family residential properties including home equity line of credit loans through a reduction of its allowance for loan loss. There were restructurings of five troubled loans secured by a one-to four-family residential property totaling $1.6 million during the year ended September 30, 2011 that were performing at their restructured terms at September 30, 2011. Four of these loans were previously non-performing construction loans totaling $1.1 million that have been completed and fully leased. Troubled debt restructurings increased from three loans totaling $705,000 at September 30, 2010 to eight loans totaling $2.3 million at September 30, 2011. The three loans totaling $705,000 at September 30, 2010 had been reduced to $702,000 at September 30, 2011.
Non-performing construction loans increased $912,000 to $15.5 million at September 30, 2011 from $14.6 million at September 30, 2010. The real estate securing these loans ranged from vacant and partially completed residential lots to substantially completed condominium projects in various locations in the State of New Jersey. Magyar Bank is determining the proper course of action to collect the principal outstanding on these loans including foreclosure of collateral and pursuit of personal guarantors on the loans. During the year ended September 30, 2011, Magyar Bank charged off $1.6 million in non-performing construction loan balances through a reduction of its allowance for loan loss.
Construction loans may contain interest reserves on which the interest is capitalized. At September 30, 2011, there was one performing construction loan with an interest reserve representing an outstanding balance of $290,000, an original interest reserve of $95,000, an advanced interest reserve of $1,000, and a remaining interest reserve balance of $94,000. At September 30, 2010, there were four performing construction loans with interest reserves representing outstanding balances of $13.7 million, original interest reserves of $1.1 million, advanced interest reserves of $644,000, and remaining interest reserve balances of $411,000.
Underwriting for construction loans with and without interest reserves has followed a uniform process. Construction loan progress is monitored by loan on a monthly basis by management of the Bank as well as by the Board of Directors. Each time an advance is requested, an inspection is made of the project by an outside engineer or appraiser, depending on the size and complexity of the project, to determine the amount of work completed and if the costs to date are supported adequately. The Bank’s construction loan operations personnel compare the advance request with the original budget and remaining loan funds available to ensure the project is in balance and that at all times the amount remaining on the loan is sufficient to complete the project.
A number of the Bank’s construction loans have been extended due to slower sales as a result of worsening economic conditions. In cases where updated appraisals reflect collateral values insufficient to cover the loan, additional collateral and/or a principal reduction is required to extend the loan. Some of the Bank’s loans that originally had interest reserves are non-performing. The Bank does not currently have any non-performing loans with active interest reserves. Once a loan is deemed impaired, any interest reserve is frozen and the loan is placed on non-accrual so that no future interest income is recorded on these loans. The Bank ceased originating new non-owner occupied construction loans in October 2008.
Non-performing commercial real estate loans decreased $631,000 to $7.6 million at September 30, 2011 from $8.2 million at September 30, 2010. Magyar Bank had begun foreclosure proceedings on the properties securing these loans at September 30, 2011. During the year ended September 30, 2011, Magyar Bank had charged off $652,000 in non-performing commercial real estate loan balances through a reduction of its allowance for loan loss. There were no restructurings of troubled commercial real estate loans during the year ended September 30, 2011. Of the three restructurings at September 30, 2010, two totaling $2.4 million were reduced by $33,000 and performing at their restructured terms at September 30, 2011 while one loan totaling $445,000 at September 30, 2010 was paid down to $441,000 but was non-performing at September 30, 2011.
Non-performing commercial business loans decreased $1.2 million to $255,000 at September 30, 2011 from $1.5 million at September 30, 2010. Of the three non-performing loans, one loan totaling $152,000 was secured by real estate collateral. Two loans totaling $91,000 were not secured by real estate but were being paid monthly by the borrower at September 30, 2011. Magyar Bank is determining the proper course of action to collect the principal outstanding on these loans which will include foreclosure proceedings for those loans secured by real estate. During the year ended September 30, 2011, Magyar Bank had charged off $342,000 and recovered $31,000 in non-performing commercial business loans for the year ended September 30, 2011. The restructured commercial business loan totaling $74,000 at September 30, 2010 was reduced to $73,000 and performing at its restructured terms at September 30, 2011.
The ratio of non-performing loans and troubled debt restructurings to total loans receivable increased to 8.55% at September 30, 2011 from 7.74% at September 30, 2010. The allowance for loan losses decreased $1.0 million to $3.8 million, or 13.5% of non-performing loans, at September 30, 2011 compared with $4.8 million, or 17.0% of non-performing loans, at September 30, 2010. Provisions for loan loss during the year ended September 30, 2011 were $1.7 million while net charge-offs were $2.7 million, compared with a provision of $2.7 million and net charge-offs of $3.8 million for the prior year period. The allowance for loan losses was 0.99% of gross loans outstanding at September 30, 2011 and 1.17% of gross loans outstanding at September 30, 2010.
Investment Securities. Investment securities increased $11.6 million, or 19.9%, to $70.3 million at September 30, 2011 from $58.7 million at September 30, 2010.
Securities available-for-sale increased $11.1 million, or 78.4%, to $25.3 million at September 30, 2011 from $14.2 million at September 30, 2010. The increase was the result of $26.3 million in purchases of mortgage-backed securities and U.S. government-sponsored enterprise obligations, partially offset by $12.7 million in sales and maturities and $3.0 million in principal amortization. In addition, the unrealized gain on the available-for-sale portfolio increased $681,000 to $494,000 at September 30, 2011 compared with the prior year period.
Securities held-to-maturity increased $521,000, or 1.2%, to $45.0 million at September 30, 2011 from $44.5 million at September 30, 2010. The increase was the result of $18.7 million in security purchases, offset by $8.0 million in maturities or calls and $10.0 million in principal amortization.
Bank-Owned Life Insurance. The cash surrender value of life insurance held for directors and executive officers of Magyar Bank increased $354,000, or 3.8%, to $9.7 million at September 30, 2011 from $9.3 million at September 30, 2010. The increase in bank-owned life insurance was due to the increase in the cash surrender value of the existing policies.
Other Real Estate Owned. Other real estate owned increased $3.9 million to $16.6 million at September 30, 2011 from $12.7 million at September 30, 2010.
During the year ended September 30, 2011, the Company was able to successfully dispose of nine properties with an aggregate carrying value of $3.2 million for a net loss of $107,000 and the Company was able to secure the title for nine other properties totaling $6.9 million. The Company also incurred a $292,000 write down during the year ended September 30, 2011 on one property under contract of sale expected to close next quarter. Other real estate owned at September 30, 2011 consisted of seven residential properties, four substantially completed condominium projects, seventeen real estate lots, and one commercial real estate building. The Bank is determining the proper course of action for its other real estate owned, which may include holding the properties until the real estate market improves, selling the properties to a developer and completing partially completed homes for either rental or sale.
Other Assets. Other assets decreased $1.1 million, or 14.6%, to $6.4 million at September 30, 2011 from $7.5 million at September 30, 2010. The decrease was primarily due to a reduction in the Company’s prepaid FDIC insurance assessment, which decreased $1.1 million to $1.5 million at September 30, 2011 from $2.6 million at September 30, 2010.
Deposits. Total deposits decreased $3.0 million, or 0.7%, to $424.9 million at September 30, 2011 from $427.9 million at September 30, 2010.
The Company’s deposit strategy during the year ended September 30, 2011 was focused on increasing and expanding customer relationships with Magyar Bank, including higher balance commercial deposit accounts. As a result of this strategy, the Bank was able to continue replacing higher-cost, single service time deposit account holders with lower-cost checking account balances.
The contraction in deposits during the twelve months ended September 30, 2011 occurred in certificates of deposit (including individual retirement accounts), which decreased $12.5 million, or 6.6%, to $175.6 million from $188.0 for the same period of last year. Partially offsetting this decrease was a $10.8 million, or 6.1%, increase in checking accounts (including money market accounts) to $188.9 million from $178.1 for the same period of last year. Deposits accounted for 81.1% of assets and 111.5% of net loans at September 30, 2011.
At September 30, 2011, the Company held $1.8 million in Certificate of Deposit Account Registry Service (CDARS) Reciprocal certificates of deposit and $10.0 million in brokered certificates of deposit. At September 30, 2010, the Company held $2.9 million in CDARS Reciprocal certificates of deposit and $14.7 million in brokered certificates of deposit.
Borrowed Funds. Borrowings from the FHLB decreased $10.9 million, or 23.7% to $34.9 million at September 30, 2011 from $45.8 million at September 30, 2010. Securities sold under agreements to repurchase remained unchanged at $15.0 million. Proceeds from loan repayments were used to repay Federal Home Loan Bank of New York advances.
Borrowings and securities sold under agreements to repurchase decreased to 9.5% of assets at September 30, 2011 from 11.3% at September 30, 2010.
Stockholders’ Equity. Stockholders’ equity increased $332,000, or 0.8%, to $44.5 million at September 30, 2011 from $44.2 million at September 30, 2010.
The increase in stockholders’ equity was attributable to an increase in stockholders’ equity of $456,000 related to the accounting of the Company’s equity incentive plan and Employee Stock Ownership Plan, offset by a net loss totaling $249,000 from operations for the year ended September 30, 2011. Accumulated other comprehensive loss decreased $125,000 during the period to $407,000 at September 30, 2011 from $532,000 at September 30, 2010.
During the year ended September 30, 2011, the Company did not repurchase shares of its common stock. Under the current stock repurchase program, 62,954 shares of the 129,924 shares authorized remained available for repurchase at September 30, 2011.
Comparison of Operating Results for the Years Ended September 30, 2011 and 2010
Net Income (Loss). The Company’s net income decreased $4.2 million to net loss $249,000 for the year ended September 30, 2011 from a net income of $3.9 million for the year ended September 30, 2010.
Net Interest and Dividend Income. Net interest and dividend income decreased $987,000, or 6.2%, to $14.8 million during the year ended September 30, 2011 from $15.8 million during the year ended September 30, 2010. Interest and dividend income decreased $2.9 million, or 11.5%, to $22.2 million for the year ended September 30, 2011 from $25.1 million for the year ended September 30, 2010 while interest expense decreased $1.9 million, or 20.5%, to $7.4 million for the year ended September 30, 2011 from $9.3 million for the year ended September 30, 2010
Average Balance Sheet. The following table presents certain information regarding our financial condition and net interest income for the years ended September 30, 2011 and 2010. The table presents the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown. We derived average balances from daily balances over the periods indicated. Interest income includes fees that we consider adjustments to yields.
| |
|
For the Year Ended September 30,
|
|
| |
|
2011
|
|
|
2010
|
|
|
2009
|
|
| |
|
Average Balance
|
|
Interest Income/ Expense
|
|
Yield/Cost (Annualized)
|
|
|
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
|
|
$ |
11,699 |
|
$ |
25 |
|
|
0.22 |
% |
|
$ |
2,598 |
|
$ |
8 |
|
|
0.30 |
% |
|
$ |
3,398 |
|
$ |
3 |
|
|
0.09 |
% |
|
Loans receivable, net
|
|
|
393,907 |
|
|
20,033 |
|
|
5.09 |
% |
|
|
424,554 |
|
|
22,521 |
|
|
5.30 |
% |
|
|
428,428 |
|
|
23,145 |
|
|
5.40 |
% |
|
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
68,538 |
|
|
2,021 |
|
|
2.95 |
% |
|
|
64,439 |
|
|
2,431 |
|
|
3.77 |
% |
|
|
65,962 |
|
|
3,037 |
|
|
4.60 |
% |
|
Tax-exempt (1)
|
|
|
80 |
|
|
7 |
|
|
8.93 |
% |
|
|
105 |
|
|
6 |
|
|
5.94 |
% |
|
|
1,174 |
|
|
48 |
|
|
4.09 |
% |
|
FHLB of NY stock
|
|
|
2,656 |
|
|
149 |
|
|
5.60 |
% |
|
|
3,083 |
|
|
159 |
|
|
5.16 |
% |
|
|
3,702 |
|
|
105 |
|
|
2.84 |
% |
|
Total interest-earning assets
|
|
|
476,880 |
|
|
22,235 |
|
|
4.66 |
% |
|
|
494,779 |
|
|
25,125 |
|
|
5.08 |
% |
|
|
502,664 |
|
|
26,338 |
|
|
5.24 |
% |
|
Noninterest-earning assets
|
|
|
54,503 |
|
|
|
|
|
|
|
|
|
54,192 |
|
|
|
|
|
|
|
|
|
44,721 |
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
531,383 |
|
|
|
|
|
|
|
|
$ |
548,971 |
|
|
|
|
|
|
|
|
$ |
547,385 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts (2)
|
|
$ |
61,367 |
|
$ |
373 |
|
|
0.61 |
% |
|
$ |
61,639 |
|
$ |
599 |
|
|
0.97 |
% |
|
$ |
47,682 |
|
$ |
532 |
|
|
1.11 |
% |
|
NOW accounts (3)
|
|
|
137,877 |
|
|
1,006 |
|
|
0.73 |
% |
|
|
134,667 |
|
|
1,384 |
|
|
1.03 |
% |
|
|
114,541 |
|
|
1,583 |
|
|
1.38 |
% |
|
Time deposits (4)
|
|
|
181,128 |
|
|
3,724 |
|
|
2.06 |
% |
|
|
201,124 |
|
|
4,600 |
|
|
2.29 |
% |
|
|
224,038 |
|
|
7,045 |
|
|
3.14 |
% |
|
Total interest-bearing deposits
|
|
|
380,372 |
|
|
5,103 |
|
|
1.34 |
% |
|
|
397,430 |
|
|
6,583 |
|
|
1.66 |
% |
|
|
386,261 |
|
|
9,160 |
|
|
2.37 |
% |
|
Borrowings
|
|
|
58,080 |
|
|
2,303 |
|
|
3.96 |
% |
|
|
67,800 |
|
|
2,728 |
|
|
4.02 |
% |
|
|
83,201 |
|
|
3,028 |
|
|
3.64 |
% |
|
Total interest-bearing liabilities
|
|
|
438,452 |
|
|
7,406 |
|
|
1.69 |
% |
|
|
465,230 |
|
|
9,311 |
|
|
2.00 |
% |
|
|
469,462 |
|
|
12,188 |
|
|
2.60 |
% |
|
Noninterest-bearing liabilities
|
|
|
48,830 |
|
|
|
|
|
|
|
|
|
39,768 |
|
|
|
|
|
|
|
|
|
37,836 |
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
487,282 |
|
|
|
|
|
|
|
|
|
504,998 |
|
|
|
|
|
|
|
|
|
507,298 |
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
44,101 |
|
|
|
|
|
|
|
|
|
43,973 |
|
|
|
|
|
|
|
|
|
40,087 |
|
|
|
|
|
|
|
|
Total liabilities and retained earnings
|
|
$ |
531,383 |
|
|
|
|
|
|
|
|
$ |
548,971 |
|
|
|
|
|
|
|
|
$ |
547,385 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-equivalent basis adjustment
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Net interest income
|
|
|
|
|
$ |
14,827 |
|
|
|
|
|
|
|
|
$ |
15,814 |
|
|
|
|
|
|
|
|
$ |
14,150 |
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
|
2.97 |
% |
|
|
|
|
|
|
|
|
3.08 |
% |
|
|
|
|
|
|
|
|
2.64 |
% |
|
Net interest-earning assets
|
|
$ |
38,428 |
|
|
|
|
|
|
|
|
$ |
29,549 |
|
|
|
|
|
|
|
|
$ |
33,202 |
|
|
|
|
|
|
|
|
Net interest margin (5)
|
|
|
|
|
|
|
|
|
3.11 |
% |
|
|
|
|
|
|
|
|
3.20 |
% |
|
|
|
|
|
|
|
|
2.82 |
% |
|
Average interest-earning assets to average interest-bearing liabilities
|
|
|
108.76 |
% |
|
|
|
|
|
|
|
|
106.35 |
% |
|
|
|
|
|
|
|
|
107.07 |
% |
|
|
|
|
|
|
|
(1)
|
Calculated using 34% tax rate for the twelve months ended September 30, 2011 and 0% for the twelve months ended September 30, 2010 and 2009.
|
|
(2)
|
Includes passbook savings, money market passbook and club accounts.
|
|
(3)
|
Includes interest-bearing checking and money market accounts.
|
|
(4)
|
Includes certificates of deposits and individual retirement accounts.
|
|
(5)
|
Calculated as annualized net interest income divided by average total interest-earning assets.
|