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

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

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

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

The Company’s available-for-sale portfolio is carried at estimated fair value on a recurring basis, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income/loss in stockholders’ equity. The securities available-for-sale portfolio consists of U.S. government and government-sponsored enterprise obligations, municipal bonds, and mortgage-backed securities. The fair values of these securities are obtained from an independent nationally recognized pricing service. An independent pricing service provides prices which are categorized as Level 2, as quoted prices in active markets for identical assets are generally not available for the securities.

The following table provides the level of valuation assumptions used to determine the carrying value of the Company’s assets measured at fair value on a recurring basis at September 30, 2021 and 2020:

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MAGYAR BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

September 30, 2021 and 2020


September 30, 2021	Total		Level 1		Level 2		Level 3
Assets:	(In thousands)
Securities available for sale:
Obligations of U.S. government agencies:
Mortgage-backed securities - residential	$	186		—	$	186	$	—
Obligations of U.S. government-sponsored enterprises:
Mortgage-backed securities-residential		12,741		—		12,741		—
Total securities available for sale	$	12,927	$	—	$	12,927	$	—
Derivative assets	$	183		—	$	183		—
Total assets	$	13,110	$	—	$	13,110	$	—
Liabilities:
Derivative liabilities	$	183	$	—	$	183	$	—
Total Liabilities	$	183	$	—	$	183	$	—

September 30, 2020
Assets:
Securities available for sale:
Obligations of U.S. government agencies:
Mortgage-backed securities - residential	$	364	$	—	$	364	$	—
Obligations of U.S. government-sponsored enterprises:
Mortgage-backed securities-residential		9,194		—		9,194		—
Debt securities		5,003		—		5,003		—
Total securities available for sale	$	14,561	$	—	$	14,561	$	—
Total assets	$	14,561	$	—	$	14,561	$	—

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

Mortgage Servicing Rights

Mortgage Servicing Rights (MSR’s) are carried at the lower of amortized cost or estimated fair value. The estimated fair value of MSRs is determined through a calculation of future cash flows, incorporating estimates of assumptions market participants would use in determining fair value including market discount rates, prepayment speeds, servicing income, servicing costs, default rates and other market driven data, including the market’s perception of future interest rate movements and, as such, are classified as Level 3. No valuation write-downs were made to MSR’s during the years ended September 30, 2021 and 2020.

Impaired Loans

Loans which meet certain criteria are evaluated individually for impairment. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest and principal payments of a loan will be collected as scheduled in the loan agreement. Three impairment measurement methods are used, depending upon the collateral securing the asset: 1) the present value of expected future cash flows discounted at the loan’s effective interest rate; 2) the asset’s observable market price; or 3) the fair value of the collateral if the asset is collateral dependent. The regulatory agencies require this method for loans from which repayment is expected to be provided solely by the underlying collateral. The Company’s impaired loans are generally collateral dependent and, as such, are carried at the estimated fair value of the collateral less estimated selling and disposition costs. Fair value is estimated through current appraisals, and adjusted as necessary, by management, to reflect current market conditions and, as such, are generally classified as Level 3.

Appraisals of collateral securing impaired loans are conducted by approved, qualified, and independent third-party appraisers. Such appraisals are ordered via the Bank’s credit administration department, independent from the lender who

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MAGYAR BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

originated the loan, once the loan is deemed impaired, as described in the previous paragraph. Impaired loans are generally re-evaluated with an updated appraisal within one year of the last appraisal. However, the Company also obtains updated appraisals on performing construction loans that are approaching their maturity date to determine whether or not the fair value of the collateral securing the loan remains sufficient to cover the loan amount prior to considering an extension. The Company discounts the appraised “as is” value of the collateral for estimated selling and disposition costs and compares the resulting fair value of collateral to the outstanding loan amount. If the outstanding loan amount is greater than the discounted fair value, the Company requires a reduction in the outstanding loan balance or additional collateral before considering an extension to the loan. If the borrower is unwilling or unable to reduce the loan balance or increase the collateral securing the loan, it is deemed impaired and the difference between the loan amount and the fair value of collateral, net of estimated selling and disposition costs, is charged off through a reduction of the allowance for loan loss.

Other Real Estate Owned

Other real estate owned is carried at lower of cost or estimated fair value less disposal costs. The estimated fair value of the real estate is determined through current appraisals, and adjusted as necessary, by management, to reflect current market conditions. As such, other real estate owned is generally classified as Level 3. Valuation write-downs totaling $337,000 were made to two properties held as other real estate owned during the year ended September 30, 2021. The properties were written down based on an updated appraisal of the real estate.

The following tables provide the level of valuation assumptions used to determine the carrying value of our assets measured at fair value on a non-recurring basis at September 30, 2021 and 2020:


	Total		Level 1		Level 2		Level 3
September 30, 2021	(In thousands)

Impaired loans	$	11,134	$	—	$	—	$	11,134
Other real estate owned		636		—		—		636
Total	$	11,770	$	—	$	—	$	11,770

September 30, 2020
Impaired loans	$	11,874	$	—	$	—	$	11,874
Other real estate owned		2,594		—		—		2,594
Total	$	14,468	$	—	$	—	$	14,468

The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Company has utilized Level 3 inputs to determine fair value:

Quantitative Information about Level 3 Fair Value Measurements

(Dollars in thousands)

September 30, 2021	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)

Impaired loans	$	11,134	Appraisal of collateral ⁽¹⁾	Appraisal adjustments ⁽²⁾	0% to -42.8% (-15.3%)
Other real estate owned	$	636	Appraisal of collateral ⁽¹⁾	Liquidation expenses ⁽²⁾	-31.2% to -45.5% (-39.4%)

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MAGYAR BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

Quantitative Information about Level 3 Fair Value Measurements

(Dollars in thousands)

September 30, 2020	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)

Impaired loans	$	11,874	Appraisal of collateral ⁽¹⁾	Appraisal adjustments ⁽²⁾	0% to -50.0% (-11.6%)
Other real estate owned	$	2,594	Appraisal of collateral ⁽¹⁾	Liquidation expenses ⁽²⁾	-6.0% to -27.4% (-14.7%)


	⁽¹⁾	Fair value is generally determined through independent appraisals for the underlying collateral, which generally include various level 3 inputs which are not identifiable.

	⁽²⁾	Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments carried at cost or amortized cost as of September 30, 2021 and September 30, 2020. This table excludes financial instruments for which the carrying amount approximates fair value, which includes cash and cash equivalents, FHLBNY stock, bank owned life insurance, accrued interest receivable, interest and non-interest bearing demand, savings deposits, and accrued interest payable. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For financial liabilities such as interest-bearing demand, NOW, and money market savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.

	Carrying		Fair		Fair Value Measurement Placement
	Amount		Value		(Level 1)		(Level 2)		(Level 3)
					(In thousands)
September 30, 2021
Financial instruments - assets
Investment securities held-to-maturity	$	57,660	$	57,282	$	—	$	57,282	$	—
Loans		585,301		594,674		—		—		594,674
Financial instruments - liabilities
Certificates of deposit		116,892		118,144		—		118,144		—
Borrowings		23,356		23,753		—		23,753		—

September 30, 2020
Financial instruments - assets
Investment securities held-to-maturity	$	30,443	$	30,899	$	—	$	30,899	$	—
Loans		603,110		617,418		—		—		617,418
Financial instruments - liabilities
Certificates of deposit		112,848		128,590		—		128,590		—
Borrowings		67,410		68,386		—		68,386		—