The Company follows FASB Accounting Standards Codification (“ASC”) Section 718, Compensation-Stock Compensation, which covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. ASC 718 requires that compensation cost relating to share-based payment transactions be recognized in financial statements. The cost is measured based on the fair value of the equity or liability instruments issued.

ASC 718 also requires the Company to realize as a financing cash flow rather than an operating cash flow, as previously required, the benefits of realized tax deductions in excess of previously recognized tax benefits on compensation expense. In accordance with SEC Staff Accounting Bulletin (“SAB”) No. 107, the Company classified share-based compensation for employees and outside directors within “compensation and employee benefits” in the Consolidated Statements of Income to correspond with the same line item as the cash compensation paid.

Stock options generally vest over a five-year service period and expire ten years from issuance. Management recognizes compensation expense for all option grants over the awards’ respective requisite service periods. The fair values of all option grants were estimated using the Black-Scholes option-pricing model. Since there was limited historical information on the volatility of the Company’s stock, management also considered the average volatilities of similar entities for an appropriate period in determining the assumed volatility rate used in the estimation of fair value. Management estimated the expected life of the options using the simplified method allowed under SAB No. 107. The 7-year Treasury yield in effect at the time of the grant provided the risk-free rate for periods within the contractual life of the option. Management recognizes compensation expense for the fair values of these awards, which have graded vesting, on a straight-line basis over the requisite service period of the awards. Management estimated a 95% retention rate for stock option recipients. Once vested, these awards are irrevocable. Shares will be obtained from either the open market or treasury stock upon share option exercise.

Restricted shares generally vest over a five-year service period on the anniversary of the grant date. Once vested, these awards are irrevocable. The product of the number of shares granted and the grant date market price of the Company’s common stock determine the fair value of restricted shares under the Company’s restricted stock plans. Management recognizes compensation expense for the fair value of restricted shares on a straight-line basis over the requisite service period.

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MAGYAR BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

September 30, 2022 and 2021

The following is a summary of the status of the Company’s stock option activity and related information for its option plan for the period ended September 30, 2022 and 2021:

	Number of Stock Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
Balance at September 30, 2021		—	$	—		—	$	—
Granted		293,200		12.58		9.98		—
Exercised		—		—		—		—
Forfeited		—		—		—		—
Expired		—		—		—		—
Balance at September 30, 2022		293,200	$	12.58		9.98		—

Exercisable at September 30, 2022		—	$	—		—	$	—

The following is a summary of the status of the Company’s non-vested restricted shares as of September 30, 2022 and 2021, and changes during those years:

	Number of Stock Awards		Weighted Average Grant Date Fair Value
Balance at September 30, 2021		—	$	—
Granted		156,400		12.63
Vested		—		—
Forfeited		—		—
Balance at September 30, 2022		156,400	$	12.63

Stock option and stock award expenses included with compensation expense were $0 and $6,000, respectively, for the year ended September 30, 2022. There was no stock option or stock award expense for the year ended September 30, 2021. The Company had no other stock-based compensation plans as of September 30, 2022 except as disclosed below.

On July 21, 2022 the Company announced its third stock repurchase program and authorized the repurchase of up to 5% of its outstanding shares of common stock, or 354,891 shares. As of September 30, 2022, 352,697 shares had been repurchased at an average price of $12.90.

The Company has an Employee Stock Ownership Plan ("ESOP") for the benefit of employees who meet certain eligibility requirements. The ESOP trust purchases shares of common stock in the open market using proceeds of a loan from the Company. The loan is secured by shares of the Company’s stock. The Bank makes cash contributions to the ESOP on an annual basis sufficient to enable the ESOP to make the required loan payments to the Company. As the debt is repaid, shares are released as collateral and allocated to qualified employees. Accordingly, the shares pledged as collateral are reported as unearned ESOP shares in the Consolidated Balance Sheets. The Company accounts for its ESOP in accordance with FASB ASC Topic 718, “Employer’s Accounting for Employee Stock Ownership Plans.” As shares are released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations.

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MAGYAR BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

September 30, 2022 and 2021

The Company’s ESOP (“2006 ESOP”) was established in 2006 as part of the Company’s initial public offering. The total cost of shares purchased by the 2006 ESOP trust was $2.3 million, reflecting an average cost per share of $10.58. The loan bore a variable interest rate that adjusted annually to Prime Rate (3.25% at January 1, 2021) with principal and interest payable annually in equal installments over thirty years. The 2006 ESOP loan was fully repaid during the year ended September 30, 2021 and the remaining shares were allocated to participants.

In connection with the Company’s second-step stock offering, the ESOP trustees subscribed for, and intended to purchase, on behalf of the ESOP, 8% of the shares of the Company common stock sold in the offering, or 312,800 shares (“2021 ESOP”). The ESOP trustees purchased 312,800 shares of the Company’s common stock in the open market through September 30, 2022 for $3.4 million, reflecting an average cost per share of $10.77. The 2021 ESOP loan bears a variable interest rate that adjusts annually to Prime Rate (3.25% at January 1, 2022) with principal and interest payable annually in equal installments over thirty years.

The following table presents the components of the ESOP shares as of September 30, 2022:

Unreleased shares at September 30, 2020	14,757
Shares released for allocation during the year ended September 30, 2021	(14,757	)
Shares purchased by ESOP trustee during the year ended September 30, 2021	304,377
Unreleased shares at September 30, 2021	304,377
Shares released for allocation during the year ended September 30, 2022	(10,427	)
Shares purchased by ESOP trustee during the year ended September 30, 2022	8,423
Unreleased shares at September 30, 2022	302,373
Total released shares	187,887

Total ESOP shares	490,260

The Company's contribution expense for the ESOP was $177,000 and $107,000 for years ended September 30, 2022 and 2021, respectively. The aggregate fair value of the unreleased ESOP shares at September 30, 2022 was approximately $3.8 million.