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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-K

þ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended September 30, 2009
OR
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                                   to                                                  

Commission File Number: 000-51726

Magyar Bancorp, Inc.
(Exact Name of Registrant as Specified in its Charter)

Delaware
 
20-4154978
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification Number)

400 Somerset Street, New Brunswick, New Jersey
08901
(Address of Principal Executive Office)
(Zip Code)

(732) 342-7600
(Issuer’s Telephone Number including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

 
Name of Each Exchange
Title of Class
On Which Registered
   
Common Stock, par value $0.01 per share
The NASDAQ Stock Market, LLC

Securities Registered Pursuant to Section 12(g) of the Act:

None
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
Yes o No þ

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past twelve months (or for such shorter period that the Registrant was required to file reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes o No o

Indicate by check mark if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. þ

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

Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
þ
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
 


 
The aggregate value of the voting stock held by non-affiliates of the Registrant, computed by reference to the closing price of the Common Stock as of March 31, 2009 was $11.6 million. As of March 31, 2009, there were 5,923,742 shares issued and 5,767,434 outstanding of the Registrant’s Common Stock, including 3,200,450 shares owned by Magyar Bancorp, MHC, the Registrant’s mutual holding company.

DOCUMENTS INCORPORATED BY REFERENCE

 
1.
Proxy Statement for the 2010 Annual Meeting of Stockholders (Part III)
 
 
 

 
 
Magyar Bancorp, Inc.
Annual Report On Form 10-K
For The Fiscal Year Ended
September 30, 2009


Table Of Contents


PART I
   
     
ITEM 1.
2
ITEM 1A.
37
ITEM 1B.
39
ITEM 2.
40
ITEM 3.
40
ITEM 4.
40
     
PART II
   
     
ITEM 5.
40
ITEM 6.
42
ITEM 7.
42
ITEM 7A.
55
ITEM 8.
56
ITEM 9.
98
ITEM 9AT.
98
ITEM 9B.
99
     
PART III
   
     
ITEM 10.
100
ITEM 11.
100
ITEM 12.
100
ITEM 13.
100
ITEM 14.
100
ITEM 15.
101
 
102
 
 
PART I
 
ITEM 1.
Business
 
Forward Looking Statements
 
This Annual Report contains certain “forward-looking statements” which may be identified by the use of words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated” and “potential.”  Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors which could cause actual results to differ materially from these estimates and statements that are not historical in nature.  These factors include, but are not limited to, general and local economic conditions, changes in interest rates, deposit flows, demand for mortgage, and other loans, real estate values, competition, changes in accounting principles, policies, or guidelines, changes in legislation or regulation, and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services.
 
Magyar Bancorp, MHC
 
Magyar Bancorp, MHC is the New Jersey-chartered mutual holding company of Magyar Bancorp, Inc.  Magyar Bancorp, MHC’s only business is the ownership of 54.03% of the issued shares of common stock of Magyar Bancorp, Inc.  So long as Magyar Bancorp, MHC exists, it will be required to own a majority of the voting stock of Magyar Bancorp, Inc.  The executive office of Magyar Bancorp, MHC is located at 400 Somerset Street, New Brunswick, New Jersey 08903, and its telephone number is (732) 342-7600. Magyar Bancorp, MHC is subject to comprehensive regulation and examination by the Board of Governors of the Federal Reserve System and the New Jersey Department of Banking and Insurance.
 
Magyar Bancorp, Inc.
 
Magyar Bancorp, Inc. is the mid-tier stock holding company of Magyar Bank. Magyar Bancorp, Inc. is a Delaware chartered corporation and owns 100% of the outstanding shares of common stock of Magyar Bank. Magyar Bancorp, Inc. has not engaged in any significant business activity other than owning all of the shares of common stock of Magyar Bank. At September 30, 2009, Magyar Bancorp, Inc. had consolidated assets of $565.2 million, total deposits of $448.5 million and stockholders’ equity of $40.0 million. Magyar Bancorp, Inc.’s net loss for the fiscal year ended September 30, 2009 was $6.1 million. The executive offices of Magyar Bancorp, Inc. are located at 400 Somerset Street, New Brunswick, New Jersey 08903, and its telephone number is (732) 342-7600. Magyar Bancorp, Inc. is subject to comprehensive regulation and examination by the Board of Governors of the Federal Reserve System and the New Jersey Department of Banking and Insurance.
 
On January 23, 2006, Magyar Bancorp, Inc. sold 2,618,550 shares of its common stock at a price of $10.00 per share, issued an additional 3,200,450 shares of its common stock to Magyar Bancorp, MHC, and contributed 104,742 shares to MagyarBank Charitable Foundation.
 
Magyar Bank
 
Magyar Bank is a New Jersey-chartered savings bank headquartered in New Brunswick, New Jersey that was originally founded in 1922 as a New Jersey building and loan association. In 1954, Magyar Bank converted to a New Jersey savings and loan association, before converting to the New Jersey savings bank charter in 1993. We conduct business from our main office located at 400 Somerset Street, New Brunswick, New Jersey, and our five branch offices located in New Brunswick, North Brunswick, South Brunswick and Branchburg, New Jersey. The telephone number at our main office is (732) 342-7600.

 
General
 
Our principal business consists of attracting retail deposits from the general public in the areas surrounding our main office in New Brunswick, New Jersey and our branch offices located in Middlesex and Somerset Counties, New Jersey, and investing those deposits, together with funds generated from operations and wholesale funding, in residential mortgage loans, home equity loans, home equity lines of credit, commercial real estate loans, commercial business loans, construction loans and investment securities. We also originate consumer loans, which consist primarily of secured demand loans. We originate loans primarily for our loan portfolio. However, from time to time we have sold some of our long-term fixed-rate residential mortgage loans into the secondary market, while retaining the servicing rights for such loans. Our revenues are derived principally from interest on loans and securities. Our investment securities consist primarily of mortgage-backed securities and U.S. Government and government-sponsored enterprise obligations. We also generate revenues from fees and service charges. Our primary sources of funds are deposits, borrowings and principal and interest payments on loans and securities. We are subject to comprehensive regulation and examination by the New Jersey Department of Banking and Insurance and the Federal Deposit Insurance Corporation.
 
Market Area
 
We are headquartered in New Brunswick, New Jersey, and our primary deposit market area is concentrated in the communities surrounding our headquarters branch and our branch offices located in Middlesex and Somerset Counties, New Jersey.  Our primary lending market area is broader than our deposit market area and includes all of New Jersey. At September 30, 2009, 50.6% of our mortgage loan portfolio consisted of loans secured by real estate located in Middlesex and Somerset Counties in New Jersey.
 
The economy of our primary market area is diverse. It is largely urban and suburban with a broad economic base that is typical for counties surrounding the New York metropolitan area. Middlesex and Somerset Counties are projected to experience moderate population and household growth through 2010. These counties have an aging population base with the strongest growth projected in the 55-and-older age group and $50,000 or greater household income category.
 
Competition
 
We face intense competition within our market area both in making loans and attracting deposits. Our market area has a high concentration of financial institutions including large money center and regional banks, community banks and credit unions. Some of our competitors offer products and services that we currently do not offer, such as trust services and private banking. According to the Federal Deposit Insurance Corporation’s annual Summary of Deposit report, at June 30, 2009 our market share of deposits was 1.93% and 0.35% in Middlesex and Somerset Counties, respectively. Our market share of deposits was 1.91% and 0.15% at June 30, 2008.
 
Our competition for loans and deposits comes principally from commercial banks, savings institutions, mortgage banking firms and credit unions. We face additional competition for deposits from short-term money market funds, brokerage firms, mutual funds and insurance companies. Our primary focus is to build and develop profitable customer relationships across all lines of business while maintaining our role as a community bank.
 
Lending Activities
 
We originate residential mortgage loans to purchase or refinance residential real property. Residential mortgage loans represented $172.4 million, or 38.8% of our total loans at September 30, 2009. 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 interest rate risk and to increase fee income, we may increase our origination and sale of residential mortgage loans. No loans were held for sale at September 30, 2009. We also

 
originate commercial real estate, commercial business and construction loans. At September 30, 2009, these loans totaled $105.8 million, $37.4 million and $93.2 million, respectively. We also offer consumer loans, which consist primarily of home equity lines of credit and stock-secured demand loans. At September 30, 2009, home equity lines of credit and stock-secured loans totaled $22.5 million and $13.1 million, respectively.
 
Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan, at the dates indicated.

   
September 30,
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
                                                             
One-to four-family residential
  $ 172,415       38.76 %   $ 157,867       38.44 %   $ 152,474       39.54 %   $ 143,245       40.65 %   $ 126,269       46.64 %
Commercial real estate
    105,764       23.78 %     92,823       22.60 %     81,275       21.08 %     68,567       19.46 %     57,366       21.19 %
Construction
    93,217       20.96 %     92,856       22.61 %     97,150       25.20 %     90,342       25.64 %     44,418       16.41 %
Home equity lines of credit
    22,528       5.07 %     15,893       3.87 %     12,894       3.34 %     10,843       3.08 %     10,398       3.84 %
Commercial business
    37,372       8.40 %     35,995       8.76 %     26,630       6.91 %     24,510       6.96 %     17,413       6.43 %
Other
    13,484       3.03 %     15,294       3.72 %     15,159       3.93 %     14,846       4.21 %     14,862       5.49 %
                                                                                 
Total loans receivable
  $ 444,780       100.00 %   $ 410,728       100.00 %   $ 385,582       100.00 %   $ 352,353       100.00 %   $ 270,726       100.00 %
                                                                                 
Net deferred loan (fees) costs
    24               (77 )             (214 )             (492 )             (280 )        
Allowance for loan losses
    (5,807 )             (4,502 )             (3,754 )             (3,892 )             (3,129 )        
                                                                                 
Loans receivable, net
  $ 438,997             $ 406,149             $ 381,614             $ 347,969             $ 267,317          


Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at September 30, 2009.  Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.

   
One-to-Four Family
Residential
   
Commercial
Real Estate
   
Construction
   
Home Equity
Lines of Credit
 
Due During the
Fiscal Years Ending
September 30,
 
Amount
   
Weighted
Average
Rate
   
Amount
   
Weighted
Average
Rate
   
Amount
   
Weighted
Average
Rate
   
Amount
   
Weighted
Average
Rate
 
   
(Dollars in thousands)
 
                                                 
2010
  $ 1,530       3.93 %   $ 19,038       6.12 %   $ 82,011       5.91 %   $ 4,873       5.14 %
2011
    3,626       5.53 %     3,831       6.09 %     11,206       4.63 %     -       -  
2012
    3,046       5.29 %     311       10.63 %     -       -       -       -  
2013 to 2014
    7,486       6.03 %     492       6.61 %     -       -       99       3.45 %
2015 to 2019
    19,030       5.45 %     13,788       6.48 %     -       -       8       3.25 %
2020 to 2023
    14,036       5.54 %     5,834       6.94 %     -       -       140       3.26 %
2024 and beyond
    123,661       5.73 %     62,470       6.71 %     -       -       17,408       3.59 %
                                                                 
Total
  $ 172,415       5.67 %   $ 105,764       6.58 %   $ 93,217       5.75 %   $ 22,528       3.93 %
 
 
   
Commercial Business
   
Other
   
Total
 
Due During the
Fiscal Years Ending
September 30,
 
Amount
   
Weighted
Average
Rate
   
Amount
   
Weighted
Average
Rate
   
Amount
   
Weighted
Average
Rate
 
   
(Dollars in thousands)
 
                                     
2010
  $ 25,160       4.14 %   $ 12,513       2.32 %   $ 145,125       5.27 %
2011
    1,693       6.49 %     579       3.35 %     20,935       5.17 %
2012
    1,366       5.78 %     86       9.73 %     4,809       5.85 %
2013 to 2014
    2,298       6.70 %     48       6.86 %     10,423       6.19 %
2015 to 2019
    3,318       6.80 %     51       5.17 %     36,195       5.97 %
2020 to 2023
    962       7.11 %     -       -       20,972       5.99 %
2024 and beyond
    2,575       7.13 %     207       4.93 %     206,321       5.86 %
                                                 
Total
  $ 37,372       4.98 %   $ 13,484       2.48 %   $ 444,780       5.66 %

 
The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at September 30, 2009 that are contractually due after September 30, 2010.
 
   
Due After September 30, 2010
 
   
Fixed
   
Adjustable
   
Total
 
   
(Dollars in thousands)
 
                   
One-to four-family residential
  $ 119,535     $ 51,350     $ 170,885  
Commercial real estate
    12,626       74,100       86,726  
Construction
    -       11,206       11,206  
Home equity lines of credit
    -       17,655       17,655  
Commercial business
    5,432       6,780       12,212  
Other
    132       839       971  
                         
Total
  $ 137,725     $ 161,930     $ 299,655  

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, 2009, $172.4 million, or 38.8% 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 and are currently offered for terms up to 40 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, 2009, non-accrual residential mortgage loans totaled $4.6 million, or 2.65% of the total residential loan portfolio. Interest income not recorded on non-performing residential mortgage loans for the year ended September 30, 2009 was $237,000. During the year ended September 30, 2009, $39,000 had been charged-off against the allowance for loan loss for one impaired residential real estate loan.

 
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 90%. 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 2009, twenty-seven (27) loans totaling $5.6  million  were originated and sold to Freddie Mac. 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, 2009.
 
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, 2009, we had $4.7 million of purchased one-to four-family residential mortgage loans. No loans were purchased in the fiscal year ended September 30, 2009.
 
At September 30, 2009, we had $120.0 million of fixed-rate residential mortgage loans, which represented 69.6% of our total residential mortgage loan portfolio. At September 30, 2009, our largest fixed-rate residential mortgage loan was for $4.5 million. The loan was performing in accordance with its terms at September 30, 2009.
 
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, 2009, adjustable-rate residential mortgage loans totaled $52.4 million, or 30.4% of our total residential mortgage loan portfolio. Of these loans, $19.6 million were interest-only loans originated with an average original loan-to-value of 67.7%. 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, 2009, our largest adjustable-rate residential mortgage loan was for $3.3 million. The loan was performing in accordance with its terms at September 30, 2009.
 
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, 2009, $105.8 million, or 23.8%, 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, provided adjustable rate periods limit the initial payment period to no more than 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 $6.7 million. At September 30, 2009, our largest commercial real estate loan was $5.4 million and was secured by multiple office buildings. The loan was performing in accordance with its terms at September 30, 2009. At September 30, 2009, seven loans in the amount of $7.4 million were non-performing. During the year ended September 30, 2009, $1.1 million 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, 2009 was $588,000. 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, townhomes, 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.
 
At September 30, 2009, construction loans for the development of one-to four-family residential properties totaled $46.4 million, or 10.4% 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, 2009, construction loans for the development of townhomes, condominiums and apartment buildings totaled $35.5 million, or 8.0% of total loans. These construction loans also generally have a maximum term of 24 months. We generally require that a commitment for permanent financing be in place prior to closing construction loans. 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 downtown in the real estate market. Properties must maintain a debt service coverage ratio of 120%. Finally, we may retain up to 10% of each loan advance until the property attains a 90% occupancy level.
 
At September 30, 2009, construction loans for the development of commercial properties totaled $11.3 million, or 2.5% of total loans. These construction loans have a maximum term of 36 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 120%.
 
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 $6.7 million. At September 30, 2009, our largest outstanding construction loan balance was for $4.2 million. The loan was secured by a thirty-nine unit condominium project in Jersey City, New Jersey. The loan was performing according to its terms at September 30, 2009. At September 30, 2009, thirteen construction loans totaling $19.5 million (see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for details on these loans), were considered non-performing and impaired. During the year ended September 30, 2009, $4.1 million had been charged-off against the allowance for loan loss for the impaired construction loans. Interest income not recorded on non-performing construction loans for the year ended September 30, 2009 was $1.5 million.
 
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, 2009, our commercial business loans totaled $37.4 million, or 8.4% 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 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 $6.7 million currently. At September 30, 2009, our largest commercial business loan was a $2.7 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, 2009. At September 30, 2009, all of our commercial business loans were performing in accordance with their terms with the exception of six non-accrual loans totaling $879,000. Interest income not recorded on non-performing commercial business loans for the year ended September 30, 2009 was $95,000. During the year ended September 30, 2009, $963,000 had been charged-off against the allowance for loan loss for impaired commercial business loans.
 
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, 2009, these loans totaled $22.5 million, or 5.1% 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 $6.7 million currently. At September 30, 2009, our largest home equity line of credit was a non-performing $995,000 loan. This loan was secured by a first lien position on two separate 1-4 family residential properties on which the Bank was in the process of foreclosure at September 30, 2009. At September 30, 2009, all other home equity lines of credit were performing in accordance with their terms with the exception of one non-accrual loan totaling $91,000. During the year ended September 30, 2009, $724,000 had been charged-off against the allowance for loan loss for impaired home equity lines of credit. Interest income not recorded on non-performing home equity lines of credit for the year ended September 30, 2009 was $77,000.
 
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, 2009, stock-secured loans totaled $13.1 million, or 2.9% 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, 2009, $13.0 million, or 2.9% 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, 2009, the aggregate loan-to-value ratio of the stock-secured portfolio was 39.9%.
 
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. 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 without recourse. No loans were held for sale at September 30, 2009.
 
At September 30, 2009, we were servicing loans sold in the amount of $7.8 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, 2009, we had $26.4 million of loan participation interests in which we were the lead lender, and $8.8 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. We have not experienced any loan losses in our loan participations portfolio.
 
During the fiscal year ended September 30, 2009, we originated $33.1 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 $22.5 million of commercial real estate, $14.3 million of construction loans, $7.1 million of commercial business loans, and $6.1 million of home equity lines of credit and other loans during the fiscal year ended September 30, 2009.
 
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, 2009, we had $4.7 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, 2009.
 
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 $2.3 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 $2.3 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 $5.3 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 below sets forth the amounts and categories of our non-performing assets at the dates indicated. At each date presented, we had no 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).

 
   
September 30,
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
   
(Dollars in thousands)
 
Non-accrual loans:
                             
One-to four-family residential
  $ 4,565     $ 772     $ 65     $ 56     $ 188  
Commercial real estate
    7,439       3,400       1,936       -       -  
Construction
    19,515       8,224       6,008       5,135       -  
Home equity lines of credit
    1,086       731       -       -       -  
Commercial business
    879       176       21       188       387  
Other
    -       -       3       -       2  
                                         
Total
    33,484       13,303       8,033       5,379       577  
                                         
Accruing loans three months or more past due:
                                       
One-to four-family residential
    -       65       -       88       205  
Commercial real estate
    -       -       -       1,933       257  
Construction
    -       6,700       -       -       -  
Home equity lines of credit
    -       -       -       -       -  
Commercial business
    -       -       15       -       -  
Other
    -       -       -       -       1  
                                         
Total loans three months or more past due
    -       6,765       15       2,021       463  
                                         
Total non-performing loans
    33,484       20,068       8,048       7,400       1,040  
                                         
Other real estate owned
    5,562       4,666       2,238       -       -  
                                         
Total non-performing assets
    39,046       24,734       10,286       7,400       1,040  
Troubled debt restructurings
    458       -       -       -       -  
Troubled debt restructurings and
                                       
total non-performing assets
  $ 39,504     $ 24,734     $ 10,286     $ 7,400     $ 1,040  
                                         
Ratios:
                                       
Total non-performing loans to total loans
    7.53 %     4.89 %     2.09 %     2.10 %     0.38 %
Total non-performing loans to total assets
    5.92 %     3.90 %     1.70 %     1.70 %     0.29 %
Total non-performing assets and
                                       
troubled debt restructuring to total assets
    6.99 %     4.81 %     2.17 %     1.70 %     0.29 %


At September 30, 2009, our portfolio of commercial business, commercial real estate and construction loans totaled $236.4 million, or 53.1% of our total loans, compared to $221.7 million, or 54.0% of our total loans, at September 30, 2008. 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, at September 30, 2009, our troubled debt restructuring and total non-performing assets increased to $39.5 million from $24.7 million at September 30, 2008 and $10.3 million at September 30, 2007, reflecting the recent adverse economic conditions. 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 $2.5 million and $743,000 would have been recorded during the fiscal years ended September 30, 2009 and 2008, 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 general 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.

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, 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  
                                                 
At September 30, 2006
                                               
One-to four-family residential
    -     $ -       3     $ 144       3     $ 144  
Commercial real estate
    -       -       1       1,933       1       1,933  
Construction
    -       -       -       -       -       -  
Home equity lines of credit
    -       -       -       -       -       -  
Commercial business
    -       -       3       188       3       188  
Other
    -       -       1       -       1       -  
Total
    -     $ -       8     $ 2,265       8     $ 2,265  
                                                 
At September 30, 2005
                                               
One-to four-family residential
    2     $ 50       6     $ 393       8     $ 443  
Commercial real estate
    -       -       1       257       -       257  
Construction
    -       -       -       -       -       -  
Home equity lines of credit
    -       -       -       -       -       -  
Commercial business
    -       -       4       387       4       387  
Other
    1       220       4       3       3       223  
Total
    3     $ 270       15     $ 1,040       15     $ 1,310  
 
 
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 market 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 $5.6 million of real estate owned properties at September 30, 2009 and $4.7 million of real estate owned properties at September 30, 2008. During the year ended September 30, 2009, the Company completed a foreclosure of a catering facility securing a commercial real estate loan and recorded the real estate on its books for $2.2 million. In addition, the Company received a deed in lieu of foreclosure for a single family home securing a residential mortgage loan and recorded the real estate on its books for $435,000.

The Company sold one of the six lots it held in Rumson, New Jersey and accepted deposits to purchase two other lots in the amount of $1.7 million during the year ended September 30, 2009, which reduced the carrying balance in real estate owned at September 30, 2008 from $4.7 million to $2.9 million at September 30, 2009.

The Company did not incur any further write downs on properties foreclosed upon during the year ended September 30, 2009. 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, 2009, classified assets consisted of $15.9 million of special mention assets, $46.5 million of substandard assets and $141,000 of doubtful assets at September 30, 2009.
 
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, 2009 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,
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
   
(Dollars in thousands)
 
                               
Balance at beginning of period
  $ 4,502     $ 3,754     $ 3,892     $ 3,129     $ 2,341  
                                         
Charge-offs:
                                       
One-to four-family residential
    39       31       -       13       -  
Commercial real estate
    1,063       111       -       -       -  
Construction
    4,120       3,084       652       -       -  
Home equity lines of credit
    724       69       -       2       -  
Commercial business
    963       227       -       180       94  
Other
    1       3       4       3       9  
Total charge-offs
    6,910       3,525       656       198       103  
                                         
Recoveries:
                                       
One-to four-family residential
    -       13       -       -       -  
Commercial real estate
    -       -       -       -       -  
Construction
    2       -       -       -       -  
Home equity lines of credit
    -       -       -       -       -  
Commercial business
    -       -       120       -       -  
Other
    1       5       -       -       -  
Total recoveries
    3       18       120       -       -  
                                         
Net charge-offs
    6,907       3,507       536       198       103  
Provision for loan losses
    8,212       4,255       398       961       891  
                                         
Balance at end of period
  $ 5,807     $ 4,502     $ 3,754     $ 3,892     $ 3,129  
                                         
Ratios:
                                       
Net charge-offs to average loans outstanding
    1.61 %     0.88 %     0.14 %     0.06 %     0.05 %
Allowance for loan losses to
                                       
total non performing loans at end of period
    17.34 %     22.43 %     46.64 %     52.59 %  
NM(1)
 
Allowance for loan losses to
                                       
total loans at end of period
    1.31 %     1.10 %     0.97 %     1.11 %     1.16 %
 
(1)
“NM” indicates ratio is not meaningful.

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 Loans
In Category to
Total Loans
 
   
(Dollars in thousands)
 
At September 30, 2009
           
One-to four-family residential
  $ 455       38.76 %
Commercial real estate
    1,235       23.78 %
Construction
    2,967       20.96 %
Home equity lines of credit
    60       5.08 %
Commercial business
    957       8.40 %
Other
    15       3.03 %
Unallocated
    118       0.00 %
Total allowance for loan losses
  $ 5,807       100 %
At September 30, 2008
               
One-to four-family residential
  $ 429       38.44 %
Commercial real estate
    603       22.60 %
Construction
    2,846       22.61 %
Home equity lines of credit
    48       3.87 %
Commercial business
    476       8.76 %
Other
    4       3.72 %
Unallocated
    96       0.00 %
Total allowance for loan losses
  $ 4,502       100 %
At September 30, 2007
               
One-to four-family residential
  $ 473       38.37 %
Commercial real estate
    576       21.54 %
Construction
    1,982       23.72 %
Home equity lines of credit
    40       3.49 %
Commercial business
    675       8.72 %
Other
    8       4.16 %
Unallocated
    -       0.00 %
Total allowance for loan losses
  $ 3,754       100 %
At September 30, 2006
               
One-to four-family residential
  $ 327       40.65 %
Commercial real estate
    601       19.46 %
Construction
    1,519       25.64 %
Home equity lines of credit
    82       3.08 %
Commercial business
    1,153       6.96 %
Other
    210       4.21 %
Unallocated
    -       0.00 %
Total allowance for loan losses
  $ 3,892       100 %
At September 30, 2005
               
One-to four-family residential
  $ 312       46.64 %
Commercial real estate
    615       21.19 %
Construction
    845       16.41 %
Home equity lines of credit
    82       3.84 %
Commercial business
    815       6.43 %
Other
    193       5.49 %
Unallocated
    267       0.00 %
Total allowance for loan losses
  $ 3,129       100 %
 
 
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, 2009, our securities portfolio totaled $74.0 million, or 13.1% of our total assets. Securities are classified as held-to-maturity or available-for-sale when purchased. At September 30, 2009, $56.0 million of our securities were classified as held-to-maturity and reported at amortized cost, and $18.1 million were classified as available-for-sale and reported at fair value. At September 30, 2009, we held no investment securities classified as held-for-trading.
 
U.S. Government Agency and Government-Sponsored Enterprise Obligations.  At September 30, 2009, our U.S. Government Agency and Government-Sponsored Enterprise Obligations totaled $10.3 million, or 13.9% of our total securities portfolio. Of this amount, $8.3 million were debt securities issued by Fannie Mae and $2.0 million were debt securities issued by Freddie Mac. 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, 2009, our mortgage-backed securities, including CMOs, totaled $59.6 million, or 80.6% of our total securities portfolio. Included in this balance was $7.7 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 “AAA” 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 4.25% at September 30, 2009.  The estimated fair value of our mortgage-backed securities portfolio at September 30, 2009 was $59.5 million, which was $212,000 less than the amortized cost of $59.7 million. Mortgage-backed securities in Magyar Bank’s portfolio do not contain sub-prime mortgage loans.
 
Corporate and Other Securities. At September 30, 2009, we held $4.0 million in bonds issued by corporations and $122,000 in bonds issued by the State of New Jersey. They are classified as held to maturity with a total amortized cost value of $4.1 million, or 5.6% 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, 2009, we held no equity securities other than $3.2 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,
   
At September 30,
   
At September 30,
 
   
2009
   
2008
   
2007
 
   
Amortized
Cost
   
Fair
Value
   
Amortized
Cost
   
Fair
Value
   
Amortized
Cost
   
Fair
Value
 
   
(In thousands)
 
Securities available for sale:
                                   
U.S. government and government-
                                   
sponsored enterprise obligations
  $ 2,237     $ 2,243     $ 2,237     $ 2,123     $ -     $ -  
Municipal bonds
    -       -       3,211       3,104       3,214       3,216  
Mortgage-backed securities
    15,930       15,840       44,566       44,099       24,217       24,157  
                                                 
Total securities available for sale
  $ 18,167     $ 18,083     $ 50,014     $ 49,326     $ 27,431     $ 27,373  
                                                 
Securities held to maturity:
                                               
U.S. government and government-
                                               
sponsored enterprise obligations
  $ 8,020     $ 8,063     $ 99     $ 98     $ 2,133     $ 2,119  
Municipal bonds
    122       131       132       140       137       143  
Mortgage-backed securities
    43,809       43,687       9,387       9,391       15,846       15,695  
Corporate Notes
    4,000       4,116       -       -       -       -  
                                                 
Total securities held to maturity
  $ 55,951     $ 55,997     $ 9,618     $ 9,629     $ 18,116     $ 17,957  
 
At September 30, 2009, a total of 15 securities with an aggregate fair value of $24.5 million had gross unrealized losses of $735,000, or approximately 3% of fair value. None of these unrealized losses are 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, 2009 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.

 
   
One Year or Less
   
More Than One
Year Through
Five Years
   
More Than Five
Years Through
Ten Years
   
More Than
Ten Years
   
Total Securities
 
                                                             
   
Amortized
Cost
   
Yield
   
Amortized
Cost
   
Yield
   
Amortized
Cost
   
Yield
   
Amortized
Cost
   
Yield
   
Amortized
Cost
   
Yield
 
   
(Dollars in thousands)
 
Securities available for sale:
                                                           
Obligations of U.S. government-sponsored enterprises:
                                                           
Mortgage-backed securities - residential
    -       - %     792       4.50 %     -       - %     9,911       4.13 %     10,703       4.16 %
Debt securities
    -       - %     -       - %     -       - %     2,237       5.00 %     2,237       5.00 %
Private label mortgage-backed securities - residential
    -       - %     -       - %     2,273       5.25 %     2,954       5.48 %     5,227       5.38 %
Total securities available for sale
  $ -       - %   $ 792       4.50 %   $ 2,273       5.25 %   $ 15,102       4.52 %   $ 18,167       4.61 %
                                                                                 
                                                                                 
Securities held to maturity: