Description

 INTRODUCTION

Magyar Bancorp (MGYR) is a two-step thrift conversion headquartered in New Brunswick, New Jersey. MGYR completed its first step in 2006, and then waited 15 years to do the second-step conversion on July 15, 2021.  MGYR will be eligible to be acquired by another bank in July 2024, upon the 3-year anniversary of its second step conversion.  

MGYR trades on the NASDAQ and has recently averaged daily trading volume around 4,000 shares.

Magyar Bank was founded in 1922 and serves the New Brunswick, New Jersey metro area with its 7 branch locations.  According to Wikipedia, New Brunswick is both a college town (Rutgers University, the state’s largest) and a commuter town for residents who work in New York and can navigate the 27-mile trip by train to Manhattan.  The population of New Brunswick was roughly 55,000 as of 2020.  MGYR’s branches cover the two New Jersey counties of Middlesex and Somerset, where the median household income ranks among the highest in the nation. MGYR’s market share of deposits in these counties is miniscule, at roughly 1.26% of deposits in Middlesex and less than 0.4% share in Somerset. The location of its branches and MGYR’s relatively small size will likely make it both an attractive and easily digestible acquisition candidate for a larger East Coast / New York bank.

MGYR’s second step IPO in 2021 was oversubscribed, and MGYR went public at the maximum value of their range, which was then at a P/TBV valuation of 78%.  A year following the second step IPO, MGYR began paying a small annual dividend ($0.12 per share) and has since approved three stock repurchases. The most recent stock repurchase was announced on July 21, 2022, for 5% of the shares outstanding.  

FINANCIAL ANALYSIS

The table below from the 2023 10-K (year ending September 30th) shows the asset side of the balance sheet. CRE is by far the largest category of loans, at roughly 55.8% of the loan portfolio. Residential mortgages comprised 34.1% of the total loan book, and MGYR holds its loans on its own balance sheet, historically not originating loans for the purpose of selling them to FNMA or other government mortgage buyers.  

In its residential mortgage book, MGYR does not originate or own sub-prime or option ARM mortgages.  Roughly 57% of mortgages by value at FY-end 2023 were fixed rate loans, while roughly 43% of the mortgage portfolio was comprised of conventional adjustable-rate mortgages.  MGYR’s largest residential loan was a fixed rate loan for $10M, while the largest ARM mortgage loan was for just $2.3M.

MGYR’s residential mortgage portfolio has performed well from a credit perspective, and at FY’23 year-end there were only $386K of non-performing loans and there were no charge-offs against the allowance for loss during FY2023.

As for the CRE loan portfolio, loans are generally secured by apartment buildings (5 or more units), industrial properties, and business properties such as small offices, warehouses, and retail stores. CRE loans are generally adjustable-rate loans with max terms of 25 years and adjustable rate resets every five years. MGYR’s max loan to value ratio for CRE at the time of origination is 75% based on appraised property value.  Loans to a single borrower can be no more than 15% of MGYR’s capital, which was $15.8M at FYE 2023.  The largest CRE loan was for $13.5M to a nursing and rehab center in Edison, New Jersey, which MGYR originated at 65% of the purchase price at the time. MGYR’s lending for construction, home equity, and commercial business is all quite small.

MGYR also provides loan administration services for roughly $46M of SBA-guaranteed and commercial participation loans for third party borrowers and lenders. MGYR occasionally will participate in syndicated loans, sometimes as the lead lender.  As of Sept 30, 2023, MGYR owned $21.2M of loan participation interests in which it was the lead lender, and 16.6M in which it was not the lead lender.

In addition to its loan portfolio, MGYR has a marketable securities portfolio, which was held at roughly $96M as of September 30, 2023.  Of this amount, $10.1M was classified as held for sale and carried at estimated fair value. US government agencies and GSE obligations comprised roughly 93% of the securities portfolio, of which $65.8M were MBS and $23.5M were debt securities. The MBS portfolio carried a yield of 2.24% and the fair value was $56.6M, which was $11.3M less than MGYR’s cost basis. 

MGYR’s annual report shows the fair value of its total securities portfolio at $83.9M and the unrealized loss was $14.1M as of September 30, 2023.

Funding Sources

MGYR’s funding profile looks quite solid.  As of September 30, 2023, total deposits were $755.4M, with 37% coming from money market accounts, 25% from demand accounts, 15% from NOW accounts, 14% from CDs (including those in IRA accounts), and only $13.8M were in the form of brokered deposits.  Borrowings from the FHLB of New York totaled 29.5M, though this was a large increase from the $15.6M borrowed at FY year-end 2022. The loans are used to fund originations and had a weighted average borrowing cost of 3.27% as of FY end 2023.  The table on the next page (taken from the 2023 10-K) shows MGYR’s deposit sources:

FY 2023 Results

For the fiscal year ending September 30, 2023, MGYR grew total assets $108.7 million or 13.6% to $907.3 million compared with $798.5 million as of September 30, 2022. The increase was attributable to a $69.2 million increase in net loans receivable supported by an increase in total deposits of $87.7 million, or 13.1%, to $755.5 million. This growth in deposits has come with higher deposit costs, reflecting the rising interest rate environment. Low or no interest savings and checking deposits made up 39.5% of total deposits in 2022, but these dropped to just 33% of total deposits as of year-end 2023.  Nonetheless, MGYR still has a very strong deposit base that is growing steadily.

There was a slight uptick in delinquencies and charge-offs in 2023, but net charge offs remain low at only 0.07% of total loans and MGYR only held a single residential property under the OREO line item.  MGYR’s loss provisions appear to be more than sufficient relative to these small losses.

MGYR’s net income decreased $210,000, or 2.7%, to $7.7 million during the 2023 fiscal year compared with net income of $7.9 million for the year ended September 30, 2022. This decrease was almost entirely due to higher non-interest expenses.  

MGYR has established a practice of paying special year-end dividends in addition to the normal quarterly dividend. Over the course of fiscal 2023, MGYR declared 5 dividends each paying a total of $0.20 per share. MGYR also paid a special dividend for FY2022 and paid out $0.20 in total dividends per share for FY’22 as well.

On December 8, 2022, MGYR announced the completion of its third stock repurchase program, under which 354,891 shares had been repurchased at an average price of $12.90. On the same day, the bank announced a renewed stock repurchase plan for up to an additional 5% of the outstanding stock, or 337,146 shares.  As of September 30, 2023, 100,830 shares had been repurchased at an average price of $11.80 under the latest authorization.

Management and Ownership

In the second-step IPO, bank insiders subscribed for 90,500 shares or 2.3% of the shares outstanding (at the maximum valuation range). Combined with the shares already owned, post-IPO insiders owned 322,064 shares or 4.5% of total shares outstanding. Since then, insiders have upped their ownership to 460,370 shares and decreased the total share count by 352,000 shares.    

As the table below shows, MGYR management has steadily reduced the share count since the IPO, which shares having been reduced by 6.2% in just eight quarters, while TBV has increased by 7.3%.  The result of buying back shares at a large discount to TBV while also growing book value has caused the TBV/share to increase by a healthy 14.4% in the past eight quarters.  Note that this does not include the impact of dividends, which adds 40 cents per share to shareholder return and reduces TBV by the same amount.

Significant MGYR shareholders include two specialist bank funds. M3 Partners owns roughly 15.8% of the stock, and PL Capital owns a 3.8% ownership stake. The concentrated ownership, combined with the 8% ESOP ownership stake means that MGYR is a very thinly traded stock. Insiders at MGYR have also been making additional stock purchases: (LINK )

FY2024 Q1 MGYR Results

Magyar reported Q1 ’24 results for the December quarter on January 25, 2024.  Net income decreased 8.7%, to $1,652,000 during the first quarter compared with $1,810,000 during the first quarter of 2022, due to higher provisions for loan loss and other expenses, partially offset by higher net interest income. EPS was 26 cents in Q4 ’23 versus 28 cents in Q4 ’23.

Interest and dividend income increased 35.9% to $11.6 million for the three months ended December 31, 2023, compared with $8.5 million for the three months ended December 31, 2022. The increase was attributable to an 82 bp increase in the yield on earning assets to 5.26% from 4.44% as well as a 14.8% increase in the average balance of interest-earning assets. Interest expenses increased 167.9%, to $4.3 million for the three months ended December 31, 2023. The cost of interest-bearing liabilities increased 153 basis points to 2.80% for the three months ended December 31, 2023, compared with 1.27% for the three months ended December 31, 2022, due to higher market interest rates. In addition, the average balance of interest-bearing liabilities increased 21.7%, to $611.2 million. This resulted in a 31 bp decrease in the Company’s net interest margin to 3.29% in Q4 ’23 vs. 3.60% in Q4 ‘22.

The Company’s provision for credit losses was $481,000 for the three months ended December 31, 2023, compared to $317,000 for the three months ended December 31, 2022.

Other expenses increased 9.6%, to $5.0 million during the three months ended December 31, 2023. The increase was primarily attributable to higher compensation and benefit expense which increased due to fewer open positions between periods and the addition of a commercial lender in September 2023.

Total loans receivable increased $31.3 million, or 4.5%, to $729.5 million as of December 31, 2023, from $698.2 million at September 30, 2023. The increase in total loans receivable during the quarter occurred in commercial real estate loans, which increased $19.1 million, construction loans, which increased $10.0 million, and one-to four-family residential real estate loans (including home equity lines of credit), which increased $5.4 million. Partially offsetting these increases were commercial business loans, which decreased $3.1 million.

Total non-performing loans decreased $233,000, or 4.6%, to $4.9 million on December 31, 2023, from $5.1 million on September 30, 2023. The ratio of nonperforming loans to total loans decreased to 0.66% on December 31, 2023, from 0.73% on September 30, 2023.

Total deposits increased $8.1 million, or 1.1%, to $763.5 million at December 31, 2023. The inflow in deposits occurred in money market accounts, which increased $22.0 million, or 7.7%, to $306.9 million, in certificates of deposit (including individual retirement accounts), which increased $7.8 million, or 7.4%, to $112.5 million and in interest-bearing checking accounts (NOW), which increased $4.6 million, or 4.0%, to $119.7 million. Partially offsetting these increases were decreases in noninterest bearing checking accounts, which decreased $24.1 million, or 12.8%, to $164.4 million and savings accounts, which decreased $2.2 million, or 3.5%, to $60.0 million. Included in the certificates of deposit were $13.8 million in brokered certificates of deposit at December 31, 2023, which was unchanged from September 30, 2023.

The Company’s reported tangible book value per share increased to $16.03 on December 31, 2023, from $15.70 on September 30, 2023.  The increase was due to the Company’s results from operations, partially offset by $0.11 in dividends paid and 19,232 shares repurchased during the quarter at an average share price of $9.97.  During Q4 ’23, MGYR announced that it will be raising the quarterly dividend from $0.04 per share to $0.05.

The table below is updated to include the figures for the Q1 FY24 (December) quarter.

MAGYAR BANCORP – SELECTED FINANCIAL DATA

Valuation

MGYR is a profitable enough bank that it can be valued on any of the three standard ways to look at small bank valuation: earnings multiple, book value, and core deposit premium. The company earned $1.20 per share in FY2023.  At the current stock price of $11.35, the bank trades for less than 10X earnings.  MGYR’s Q4 tangible book value was $16.03 per share. Of course, in an acquisition we’d expect an acquirer to pay a premium to TBV; given the quality of this bank and the attractiveness of its operating area, I’d expect a reasonable premium to TBV of at least 1.2X at the low end. This would imply a take-out value of $19 or so.

If we adjusted MGYR’s TBV to reflect the unrealized losses in the securities portfolio, TBV drops from $104.8M to $92.7M, or roughly $14.20 per share. With the stock currently trading at just 80% of this adjusted TBV, there is still plenty of room for appreciation in an acquisition scenario. If the buyout price was just 1.2X this adjusted TBV of $14.20, that would put the expected acquisition price at closer to $17.

We think that $17 per share is the absolute low end of a reasonable takeover bid, and we think that something closer to $20 per share is more likely.  MGYR is approaching the 3-year milestone from its second step conversion, at which it becomes eligible to be acquired.  While the current negative sentiment for banks may impact the price or appetite for an acquiring bank in the near term, we still think there is a reasonable chance that a transaction could get done in the next 6-18 months. If a transaction is not imminent, MGYR is at least a decently profitable bank that pays a modest dividend and will continue to buy back shares at prices accretive to TBV per share.

Risks and Vulnerabilities

The recent well publicized issues at NYCB have certainly raised the profile of weakness in CRE loans in the New York metropolitan area – most notably office, but also in other areas as rates reset higher and real estate owners’ ability to service debt becomes more tenuous.

MGYR has a very large exposure to CRE in its loan book (55% of the total) but this category includes a significant amount of multi-family as well as non-office CRE.  Fortunately, there have not been any significant signs of credit weakness in the loan book thus far.  Given the lumpiness of some CRE loans (including one loan of roughly 13% of equity) investors will of course want to monitor MGYR’s 10-Q filings for any signs of stress in the loan book going forward.

The other risk factor to mention is simply that the stock is thinly traded. 

Catalyst

• Acquisition
• Share repurchases