UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(cid:95)
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended SEPTEMBER 30, 2016
-or-
(cid:134)
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number: 000-55084
PRUDENTIAL BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
PENNSYLVANIA
(State or other jurisdiction of incorporation or organization)
46-2935427
(IRS Employer Identification No.)
1834 WEST OREGON AVENUE
PHILADELPHIA, PENNSYLVANIA
(Address of Principal Executive Offices)
19145
(Zip Code)
Registrant's telephone number: (including area code) (215) 755-1500
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange 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
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. YES (cid:134) NO (cid:95)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. YES (cid:134) NO (cid:95)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. YES (cid:95) NO (cid:134)
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate
website, if any, every Interactive Date 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 (cid:95) NO (cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not 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 amendment to this Form 10-K. (cid:95)
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 (cid:134)
Non-Accelerated Filer (cid:134) (Do not check if a smaller reporting company)
Accelerated Filer (cid:95)
Smaller Reporting Company (cid:134)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).
YES (cid:134) NO (cid:95)
The aggregate market value of the voting stock held by non-affiliates of the Registrant based on the closing price
of $14.32 on March 31, 2016, the last business day of the Registrant's second quarter was approximately $103.2 million
(8,060,799) shares issued and outstanding less approximately 847,000 shares held by affiliates at $14.32 per share).
Although directors and executive officers of the Registrant and certain employee benefit plans were assumed to be
"affiliates" of the Registrant for purposes of the calculation, the classification is not to be interpreted as an admission of
such status.
As of the close of business on December 6, 2016, there were 8,045,544 shares of the Registrant's Common Stock
outstanding.
1. Portions of the Definitive Proxy Statement for the 2016 Annual Meeting of Shareholders are incorporated by
reference into Part III, Items 10-14 of this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
Prudential Bancorp, Inc. and Subsidiaries
FORM 10-K INDEX
For the Fiscal Year Ended September 30, 2016
PART I
Item 1. Business ......................................................................................................................................
Item 1A. Risk Factors ................................................................................................................................
Item 1B. Unresolved Staff Comments ......................................................................................................
Item 2. Properties ....................................................................................................................................
Item 3. Legal Proceedings ......................................................................................................................
Item 4. Mine Safety Disclosures.............................................................................................................
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities ...................................................................................................
Item 6. Selected Financial Data ..............................................................................................................
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ...
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ..................................................
Item 8. Financial Statements and Supplementary Data .........................................................................
Page
1
41
51
52
53
54
55
58
60
73
74
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ................................................................................................................... 130
Item 9A. Controls and Procedures............................................................................................................. 131
Item 9B. Other Information ....................................................................................................................... 132
PART III
Item 10. Directors, Executive Officers and Corporate Governance ........................................................ 132
Item 11. Executive Compensation ............................................................................................................ 132
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
132
Stockholder Matters ...................................................................................................................
Item 13. Certain Relationships and Related Transactions, and Director Independence ......................... 133
Item 14. Principal Accounting Fees and Services .................................................................................... 133
PART IV
Item 15. Exhibits and Financial Statement Schedules ............................................................................. 133
Signatures
Forward-looking Statements.
In addition to historical information, this Annual Report on Form 10-K includes certain "forward-
looking statements" based on management's current expectations. Prudential Bancorp, Inc.’s (the
“Company” or “Prudential Bancorp”) actual results could differ materially, as such term is defined in the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, from
management's expectations. These forward looking statements are intended to be covered by the safe
harbor for forward looking statements provided by the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements include statements regarding management's current intentions, beliefs or
expectations as well as the assumptions on which such statements are based. These forward-looking
statements are subject to significant business, economic and competitive uncertainties and contingencies,
many of which are not subject to the Company’s control. You are cautioned that any such forward-
looking statements are not guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those contemplated by such forward-looking statements. Factors
that could cause future results to vary from current management expectations include, but are not limited
to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the
federal government, changes in tax policies, rates and regulations of federal, state and local tax
authorities, changes in interest rates, deposit flows, the cost of funds, demand for loan products, demand
for financial services, competition, changes in the quality or composition of the Company's loan,
investment and mortgage-backed securities portfolios, changes in accounting principles, policies or
guidelines and other economic, competitive, governmental and technological factors affecting the
Company's operations, markets, products, services and fees.
The Company undertakes no obligation to update or revise any forward-looking statements to
reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results
that occur subsequent to the date such forward-looking statements are made.
PART I
Item 1. Business
General
Prudential Bancorp is a Pennsylvania corporation that was incorporated in June 2013. It is the
successor corporation to Prudential Bancorp, Inc. of Pennsylvania (“Old Prudential Bancorp”), the former
stock holding company for Prudential Savings Bank (the “Bank” or “Prudential Savings” and conducts
business as “Prudential Bank”), a Pennsylvania-chartered, FDIC-insured savings bank, after the
completion in October 2013 of the mutual-to-stock conversion of Prudential Mutual Holding Company
(the “MHC”), the former mutual holding company for the Bank.
The mutual-to-stock conversion was completed on October 9, 2013. In connection with the
conversion, Prudential Bancorp sold 7,141,602 shares of common stock at $10.00 per share in a public
offering. In addition 2,403,207 shares were issued in exchange for the outstanding shares of common
stock of Old Prudential Bancorp held by shareholders other than the MHC. Each share of Old Prudential
Bancorp’s common stock owned by the public was exchanged for 0.9442 shares of Prudential Bancorp
common stock. Gross proceeds from the conversion and offering were approximately $71.4 million.
Upon completion of the offering and the exchange, 9,544,809 shares of common stock of Prudential
Bancorp were issued and outstanding.
1
Financial information as of and for the year ended September 30, 2013 presented in this annual
report is derived from the consolidated financial statements of Old Prudential Bancorp
Prudential Bancorp’s business activity primarily consists of the ownership of the Bank’s common
stock, and to a lesser degree the management of the offering proceeds it retained. Prudential Bancorp
does not own or lease any property. Instead, it uses the premises, equipment and other property of the
Bank. Accordingly, the information set forth in this annual report, including the consolidated financial
statements and related financial data, relates primarily to the Bank. As a bank holding company,
Prudential Bancorp is subject to the regulation of the Board of Governors of the Federal Reserve System
(“Federal Reserve Board”).
The Company’s results of operations are primarily dependent on the results of the Bank. As of
September 30, 2016, the Company, on a consolidated basis, had total assets of approximately $559.5
million, total deposits of approximately $389.2 million, and total stockholders’ equity of approximately
$114.0 million.
The Bank is a community-oriented savings bank headquartered in South Philadelphia which was
originally organized in 1886 as a Pennsylvania-chartered building and loan association known as “The
South Philadelphia Building and Loan Association No. 2.” The Bank grew through a number of mergers
with other mutual institutions with the last merger being with Continental Savings and Loan Association
in 1983. The Bank converted to a Pennsylvania-chartered savings bank in August 2004. The banking
office network currently consists of the headquarters and main office and five full-service branch offices.
Five of the banking offices are located in Philadelphia (Philadelphia County) and one is in Drexel Hill in
neighboring Delaware County, Pennsylvania. The Bank maintains ATMs at all of the banking offices.
We also provide on-line and mobile banking services.
We are primarily engaged in attracting deposits from the general public and using those funds to
invest in loans and securities. The Company’s principal sources of funds are deposits, repayments of
loans and mortgage-backed securities, maturities and calls of investment securities and interest-bearing
deposits, funds provided from operations and funds borrowed from the Federal Home Loan Bank of
Pittsburgh. These funds are primarily used for the origination of various loan types including single-
family residential mortgage loans, construction and land development loans, non-residential or
commercial real estate mortgage loans, home equity loans and lines of credit, commercial business loans
and consumer loans. We are an active originator of residential home mortgage loans in the market area,
including loans in excess of $417,000 (which are referred to as “jumbo loans”). Traditionally, the Bank
focused on originating long-term single-family residential mortgage loans for portfolio. Although we had
been involved in construction lending, beginning in fiscal 2003, we began to significantly increase our
involvement in construction and land development lending. However, due to the recession and the decline
in real estate values, we curtailed our construction lending activities starting in 2008. In view of the
modest minor improvement’s in the local economy, the Company has returned to lend locally in
construction and land development loans within its general market area. Construction and land
development loans increased from $14.9 million or 5.7% of the total loan portfolio at September 30, 2012
to $21.8 million or 6.2% of the total loan portfolio at September 30, 2016. The Company also increased
its commercial real estate loans from $19.3 million or 7.4% of the total loan portfolio at September 30,
2012 to $79.9 million or 22.7% of the total loan portfolio at September 30, 2016. See “-Asset Quality”.
The investment and mortgage-backed securities portfolio increased by $34.8 million to $178.7
million at September 30, 2016 from $143.9 million at September 30, 2015. This increase was primarily
due to the purchase of $49.6 million of mortgage-backed securities, $25.5 million in corporate debt and
$30.5 million of U.S. government agency obligations investment securities. Also contributing to the
increase was the improvement in the unrealized value of the available for sale portfolio. This increase was
2
partially offset by the $53.7 million received from called securities, $11.6 million from in sales and $4.3
million in principal payments. The Company recorded approximately $418,000 in gains from the sale of
mortgage-backed securities. At September 30, 2016, the investment and mortgage-backed securities had
an aggregate net unrealized gain of $1.5 million compared with the unrealized gain of $27,000 as of
September 30, 2015, which was primarily due to recent decreases in the yield on longer term U.S.
Treasury bond yields which resulted in an improvement in the fair value of our available-for-sale
securities.
At September 30, 2016, the Company’s non-performing assets totaled $16.5 million or 2.9% of
total assets as compared to $14.8 million or 3.0% of total assets at September 30, 2015, of which was
primarily due to the placement on non-accrual of the entire amount of the Company’s largest loan
relationship totaling $12.3 million and consisting of nine loans. Non-performing assets at September 30,
2016 included five construction loans aggregating $10.3 million, 18 one-to-four family residential loans
aggregating $3.4 million, one single-family residential investment property loan totaling $1.4 million and
three commercial real estate loans aggregating $1.5 million. At September 30, 2016, the Company had
eleven loans aggregating $8.2 million that were classified as troubled debt restructurings (“TDRs”). Three
of such loans aggregating $5.7 million as of September 30, 2016 were classified as non-performing as a
result of not achieving a sufficiently long payment history, under the restructured terms, to justify
returning the loans to performing (accrual) status. Two of these three loans totaling $4.3 million (which
are part of the Company’s largest relationship referenced above) are over 90 days past due resulting from
the discontinuation of funding by the Company due to the re-negotiation of the project’s cash flows and
the other residential loan of approximately $1.4 million has made all of its required payment to date, but
the Company has not changed the loan to a performing status. The remaining eight TDRs have performed
in accordance with the terms of their revised agreements. As of September 30, 2016, the Company had
reviewed $19.4 million of loans for possible impairment of which $14.6 million was deemed classified as
substandard compared to $16.8 million reviewed for possible impairment and $12.4 million of which was
classified substandard as of September 30, 2015. The allowance for loan losses totaled $3.2 million, or
0.9% of total loans and 20.59% of total non-performing loans at September 30, 2016. See “-Asset
Quality”.
The executive offices are located at 1834 West Oregon Avenue, Philadelphia, Pennsylvania and
the Company’s telephone number is (215) 755-1500.
Proposed Merger with Polonia Bancorp
On June 2, 2016, the Company entered into an Agreement and Plan of Merger (the “Merger
Agreement”) with Polonia Bancorp, Inc. (“Polonia Bancorp” or “Polonia”). Pursuant to the Merger
Agreement, Polonia Bancorp will merge with and into the Company (the “Merger”) and Polonia
Bancorp’s wholly owned subsidiary, Polonia Bank, a federally chartered savings bank, will merge with
and into the Bank.
At the effective time of the Merger, each outstanding share of Polonia Bancorp common stock
will be converted into the right to receive, at the election of the Polonia Bancorp shareholder (subject to
certain conditions, including conditions relating to proration): (i) 0.7591 of a share of Company common
stock (the “Exchange Ratio”) or (ii) $11.28 in cash (the “Per Share Cash Consideration” and collectively
with the Exchange Ratio, the “Merger Consideration”), subjected to adjustment as described below. The
election of shares of Company stock or cash will be subject to proration such that 50% of the issued and
outstanding shares of Polonia Bancorp common stock will be exchanged for Company common stock and
50% will be exchanged for cash. Options to purchase Polonia Bancorp common stock outstanding at the
effective time of the Merger will fully vest and be exchanged for a cash payment equal to the difference,
3
if positive, between the Per Share Cash Consideration under the Merger Agreement and the
corresponding exercise price of such option.
The Merger Consideration is subject to adjustment in certain limited situations. In the event that
Polonia Bancorp Consolidated Stockholders’ Equity, as calculated in accordance with the terms of the
Merger Agreement, is less than $37.4 million as of the Final Statement Date, as defined in the Merger
Agreement, then the Exchange Ratio and the Per Share Cash Consideration will be adjusted downward to
reflect the amount of the difference between $37.4 million and the Polonia Bancorp Consolidated
Stockholders’ Equity as of the Final Statement Date. The Merger Consideration is subject to potential
upward adjustment to reflect the after-tax impact of certain recoveries experienced by Polonia Bancorp, if
any, achieved prior to the Final Statement Date as specified in the Merger Agreement. In such situation,
the Exchange Ratio and the Per Share Cash Consideration, as they may have been adjusted downward as
noted above, will be correspondingly adjusted to reflect the amount of such after-tax recoveries.
Market Area and Competition
The primary market area is Philadelphia, in particular South Philadelphia and Center City, as well
as Delaware County. We also conduct business in Bucks, Chester and Montgomery Counties which,
along with Delaware County, comprise the suburbs of Philadelphia. We also make loans in contiguous
counties in southern New Jersey and to a lesser extent, the entire Mid-Atlantic region.
We face substantial competition from other financial institutions in our service area, especially
from many local community banks, as well as many local credit unions. Competition among financial
institutions is based upon a number of factors, including the quality of services rendered, interest rates
offered on deposit accounts, interest rates charged on loans and other credit services, service charges, the
convenience of banking facilities, locations and hours of operation and, in the case of loans to larger
commercial borrowers, applicable lending limits. Many of the financial institutions with which we
compete have greater financial resources than we do, and offer a wider range of deposit and lending
products.
We believe that an attractive niche exists serving small to medium sized business customers not
adequately served by our larger competitors, and we will seek opportunities to build commercial
relationships to complement our retail strategy. We believe small to medium-sized businesses will
continue to respond in a positive manner to the attentive and highly personalized service we provide.
Lending Activities
General. At September 30, 2016, the net loan portfolio totaled $344.9 million or 61.6% of total
assets. The Company has changed its lending philosophy and started to originate and maintain loans
secured by multi-family and commercial real estate which comprise 26.2% of the loan portfolio.
Management believes it has the expertise to underwrite these types of loans which management believes
will add to earnings while reducing interest rate risk due to the generally shorter contractual maturity of
such loans. The Company still holds $233.5 million of residential real estate loans collateralized by one-
to- four family, also known as “single-family”, homes secured by properties located, in substantially all
cases, in the Company’s market area.
The types of loans that we may originate are subject to federal and state banking laws and
regulations. Interest rates charged by us on loans are affected principally by the demand for such loans
and the supply of money available for lending purposes and the rates offered by competitors. These
factors are, in turn, affected by general and economic conditions, the monetary policy of the federal
4
government, including the Federal Reserve Board, legislative tax policies and governmental budgetary
matters.
Loan Portfolio Composition. The following table shows the composition of the loan
portfolio by type of loan at the dates indicated.
2016
2015
September 30,
2014
2013
2012
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
Real estate loans:
One- to four-family residential (1)
$233,531
Multi-family residential
Commercial real estate
Construction and land development
Total real estate loans
Commercial business
Leasses
Consumer
Total loans
Less:
Undisbursed portion of
loans in process
Deferred loan costs
Allowance for loan losses
Net loans
(Dollars in Thousands)
66.36%
3.55%
22.69%
6.21%
98.81%
0.03%
0.93%
0.23%
100.00%
$259,163
6,249
25,799
38,953
330,164
0
0
392
330,556
78.40%
1.90%
7.80%
11.78%
99.89%
0.00%
0.00%
0.11%
100.00%
$282,637
85.47%
$270,791
87.81%
$222,793
84.65%
7,174
16,113
22,397
328,321
1,976
0
399
330,696
2.17%
4.87%
6.77%
99.28%
0.60%
0.00%
0.12%
100.00%
5,716
19,506
11,356
307,369
588
0
438
308,395
1.85%
6.33%
3.68%
99.67%
0.19%
0.00%
0.14%
100.00%
5,051
19,333
14,873
262,050
632
0
523
263,205
1.92%
7.35%
5.65%
99.56%
0.24%
0.00%
0.20%
100.00%
12,478
79,859
21,839
347,707
99
3,286
799
351,891
5,371
(1,697)
3,269
$344,948
17,097
(2,104)
2,930
$312,633
9,657
(2,449)
2,425
$321,063
1,676
(2,151)
2,353
$306,517
1,629
(989)
1,881
$260,684
(1)
Includes home equity loans totaling $3.8 million, $4.1 million, $5.0 million, $6.2 million and $8.1 million as of September
30, 2016, 2015, 2014, 2013 and 2012, respectively. Also includes line of credits totaling $7.4 million, $8.5 million,, $10.0
million, $9.5 million and $11.7 million , as of September 30, 2016, 2015, 2014, 2013 and 2012, respectively .
5
Contractual Terms to Final Maturities. The following table shows the scheduled contractual
maturities of loans as of September 30, 2016, before giving effect to net items. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one
year or less. The amounts shown below do not take into account loan prepayments.
One-to-Four
Family
Residential
Multi-family
Residential
Commercial
Real Estate
Construction
and Land
Development
Commercial
Business
(In Thousands)
Leases
Consumer
Total
Amounts due after September 30, 2016 in:
One year or less
After one year through two years
After two years through three years
After three years through five years
After five years through ten years
After ten years through fifteen years
After fifteen years
$ 263 $ 102
$ - $ 2,490 $ 6,091 $ 99
$ 5,537
733 15
-
7,938
- 1,877 10,227
1,356 80
-
6,334 335 9 5,521
934 314
-
-
11,014 2,615 5,366
- - 288
-
50,624 9,300 52,363
-
- -
-
48,160 62 4,177
-
- -
-
103,924 166 13,577
$ 14,582
20,790
13,635
20,243
112,575
52,399
117,667
Total
$ 233,531 $ 12,478 $ 79,859 $ 21,839 $ 99
$ 3,286 $ 799
$ 351,891
The following table shows the dollar amount of all loans due after one year from September 30,
2016, as shown in the table above, which have fixed interest rates or which have floating or adjustable
interest rates.
Fixed-Rate
Floating or
Adjustable-Rate
(In Thousands)
Total
One- to four-family residential (1)
Multi-family residential
Commercial real estate
Construction and land development
Leases
Consumer
Total
$ 160,820
10,987
61,755
15,748
3,023
697
$ 253,030
$ 67,174
1,491
15,614
-
-
-
$ 84,279
$ 227,994
12,478
77,369
15,748
3,023
697
$ 337,309
_________________________________________
(1) Includes home equity loans and lines of credit.
The Bank originates construction and development loans and commercial real estate loans with
fixed rates and shorter contractual maturities (than is generally the case for residential mortgage loans).
To a lesser extent five, seven and 10 year hybrid adjustable-rate mortgage loans, consisting primarily
of one-to-four family residential mortgage loans are also originated for retention in the portfolio. The
interest rate is initially fixed for a specified period (five, seven or 10 years) and then converts to an
adjustable interest rate which adjusts each year thereafter for the remainder of the loan term. The seven
and 10 year adjustable-rate mortgages have artificially low initial interest rates at the date of
origination commonly known as “teaser rates.” Most of the “hybrid” loans are originated in connection
with the origination of jumbo residential mortgage loans.
6
Loan Originations. The Bank’s lending activities are subject to underwriting standards and loan
origination procedures established by our board of directors and management. Loan originations are
obtained through a variety of sources, including existing customers as well as new customers obtained
from referrals and local advertising and promotional efforts. Consumer loan applications are taken at
any of our offices while loan applications for all other types of loans, including home equity and home
equity line of credits, are taken only at our main office. All loan applications are processed and
underwritten centrally at our main office.
Single-family residential mortgage loans are generally written on standardized documents used
by the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”) and Federal National
Mortgage Association (“FNMA” or “Fannie Mae”). Property valuations of loans secured by real estate
are undertaken by independent third-party appraisers approved by the board of directors and are reviewed
internally before acceptance. At both September 30, 2016 and September 30, 2015, the Company had no
real estate loans that would be considered subprime loans, which we define as mortgage loans advanced
to borrowers who do not qualify for loans bearing market interest rates because of problems with their
credit history. The Bank does not originate and has not in the past originated subprime loans.
We also purchase participation interests in larger balance loans, typically commercial real estate
loans, from other financial institutions in our market area. Such participations are reviewed for
compliance, are underwritten independently in accordance with our underwriting criteria and are
approved before they are purchased by the Management Loan Committee and one of the following: the
President’s Committee, the Executive Committee or the full board, based upon the amount of
participation being purchased. Generally, loan purchases have been without any recourse to the seller.
However, we actively monitor the performance of such loans through the receipt of regular updates,
including inspection reports, from the lead lender regarding the loan’s performance, discussing the loan
with the lead lender on a regular basis and receiving copies of updated financial statements of the
borrower from the lead lender. These loans are subjected to regular internal reviews in accordance with
our loan policy.
The Bank typically holds a 100% interest in construction and land development loans. The Bank
has in the past and currently reserves the option to sell participation interests. We generally have sold
participation interests in loans only when a loan would exceed the Bank’s internal and/or legal loans to
one borrower limits. With respect to the sale of participation interests in such loans, we have received
commitments to purchase such participation interests prior to the time the loan is closed. See “-Lending
Activities - Construction and Land Development Lending.”
As part of the Bank’s loan policy, we are permitted, to make loans to one borrower and related
entities in an aggregate amount of up to 15% of the capital accounts of the Bank which consist of the
aggregate of its capital, surplus, undivided profits, capital securities and allowance for loan losses. At
September 30, 2016, the Bank’s internal “guidance” limit is $10.0 million to one borrower as a threshold.
The Bank is permitted to exceed in certain situations subject to the approval of the Board of Directors
subject to the overall legal/regulatory lending limit which was calculated to be $15.5 million at September
30, 2016. At September 30, 2016, our three largest loans to one borrower and related entities amounted
to $14.4 million, $12.2 million and $7.8 million. As of this date, the largest relationship of $14.4 million
consisted of five construction loans with a disbursed balance totaling $10.3 million ($2.1 million
available in loans in process), two commercial real estate loans totaling $1.3 million and three residential
mortgages totaling $711,000. The second largest relationship of $12.2 million was a participation loan to
fund the acquisition of a six-story, 38-unit condominium project with retail space on the first floor located
in Brooklyn New York. The third relationship totaling $7.8 million consists of two loans consisting of:
one loan in the amount of $6.5 million secured by a 40-unit building used for student housing and a
second loan in the amount of $1.3 million secured by a nine-unit student housing building, both located in
7
Philadelphia, Pennsylvania. For more information regarding these loans, see “-Lending Activities -
Construction and Land Development Lending.”
The following table shows our total loans originated, purchased, sold and repaid during the
periods indicated.
Year Ended September 30,
2016
2015
2014
(In Thousands)
Loan originations (1)
One- to four-family residential
Multi-family residential
Commercial real estate
Construction and land development
Commercial business
Leases
Consumer
Total loan originations
Loans purchased
Total loans originated and purchased
Loans transferred to real estate owned
Loan principal repayments
Total loans sold and principal repayments
Decrease due to other items, net (2)
Net increase (decrease) in loan portfolio
$ 39,660
$ 12,269 $ 14,825
3,272
7,936 57
5,936
57,630 21,644
17,461
4,742 23,659
99 153
2,191
3,725 - -
114
863 154
68,634
60,492
- - -
68,634
83
53,554
53,637
(403) (948) (451)
$ 14,546
$ 32,315 $ (8,430)
60,492
581 869
53,965 67,105
67,974
87,264
87,264
54,546
__________________________________________
(1) Includes loan participations with other lenders.
(2) Other items consist of the undisbursed portion of loans in process, deferred fees and the allowance for loan
losses. The 2016 balance consisted of the $225,000 provision for loan losses recorded to the allowance and
the $177,000 amortization of net loan fees. The 2015 balance consisted of the $735,000 provision for loan
losses recorded to the allowance and the $214,000 amortization of net loan fees. The 2014 balance consisted
of a $240,000 provision for loan losses recorded to the allowance and the $211,000 amortization of net loan
fees.
One-to-Four Family Residential Mortgage Lending. A prudent lending activity continues to
be the origination or purchase of loans secured by first mortgages on one-to-four family residential
properties located in the Company’s market area. Our single-family residential mortgage loans are
obtained through the lending department and branch personnel and to a lessor extend through
correspondents. The balance of such loans increased, on a dollar basis, from $222.8 million or 84.7% of
total loans at September 30, 2012 to $233.5 million, or 66.4% of total loans at September 30, 2016. The
percentage of total loans such loans represented has decreased as our focus has shifted to the origination
of commercial real estate loans.
Single-family residential mortgage loans generally are underwritten on terms and documentation
conforming to guidelines issued by Freddie Mac and Fannie Mae. We have retained for portfolio a
substantial portion of the single-family residential mortgage loans that we historically originate, including
our jumbo residential mortgage loans, only selling certain long-term, fixed-rate loans bearing interest
rates below certain levels established by the board. During fiscal year ended 2016, the Company sold five
single-family residential loans servicing released totaling $450,000 for a gain $11,000 We service all
loans that we have originated and retained. We currently offer adjustable-rate mortgage and balloon loans,
8
which are structured as shorter term fixed-rate loans (generally 10 years or less) followed by a final
payment of the full amount of the principal due at the maturity date. Due to the interest rate environment,
originations of such loans have been limited in recent years. However, in recent periods we have offered
“hybrid” adjustable-rate loans in order to increase the interest-rate sensitivity of the single-family
residential mortgage loan portfolio, which loans have been more attractive to customers than traditional
adjustable-rate loans since the initial interest rate is initially fixed for a specified period. At September 30,
2016, $67.2 million, or 29.5%, of our one-to-four family residential loan portfolio consisted of adjustable-
rate loans. We also originate fixed-rate, fully amortizing mortgage loans with maturities of 15, 20 or 30
years, for resale in the secondary market.
While continuing to operate in the historically low current interest rate environment and to assist
in the implementation of our asset/liability management policy, we have placed an emphasis on the
origination of single-family mortgage loans to be sold in the secondary markets.
We underwrite one- to-four family residential mortgage loans with loan-to-value ratios of up to
95%, provided that the borrower obtains private mortgage insurance on loans that exceed 80% of the
appraised value or sales price, whichever is less, of the secured property. We also require that title
insurance, hazard insurance and, if appropriate, flood insurance be maintained on all properties securing
real estate loans. A licensed appraiser appraises all properties securing one-to-four family first mortgage
loans. Our mortgage loans generally include due-on-sale clauses which provide us with the contractual
right to deem the loan immediately due and payable in the event the borrower transfers ownership of the
property.
Our single-family residential mortgage loans also include home equity loans and lines of credit,
which amounted to $3.8 million and $7.4 million, respectively, at September 30, 2016. The unused
portion of home equity lines was $3.5 million at such date. Our home equity loans are fully amortizing
and have terms to maturity of up to 20 years. While home equity loans also are secured by the borrower’s
residence, we generally obtain a second mortgage position on these loans. Our lending policy provides
that our home equity loans have loan-to-value ratios, when combined with any first mortgage, of 80% or
less at time of origination, although the preponderance of our home equity loans have combined loan-to-
value ratios of 75% or less at time of origination. We also offer home equity revolving lines of credit with
interest tied to the Wall Street Journal prime rate plus a stipulated margin. Generally, we have a second
mortgage on the borrower’s residence as collateral on our home equity lines. In addition, our home equity
lines generally have loan-to-value ratios (combined with any loan secured by a first mortgage) of 75% or
less at time of origination. Our customers may apply for home equity lines as well as home equity loans at
any banking office. While there has been decline in some collateral values due to the continued weak real
estate market, we believe our conservative underwriting guidelines have minimized our exposure in that
regard.
Construction and Land Development Lending. We have maintained our emphasis on
construction and land development loans originations because construction loans have shorter terms to
maturity, provide an attractive yield and generally have either higher fixed interest rates or adjustable
interest rates. We have focused our construction lending on making loans to developers and homebuilders
with whom we have long-standing relationships within our primary market area to acquire, develop and
build single-family residences or condominium projects. Our construction loans include, to a lesser
extent, loans for the construction of multi-family residential or mixed-use properties. At September 30,
2016, our construction and loan development loans amounted to $21.8 million, or 6.2% of our total loan
portfolio. This amount includes $5.4 million of undisbursed loans in process. The average size of our
construction and land development loans, excluding loans to our largest lending relationship, was
approximately $630,000 at September 30, 2016. Our construction loan portfolio has modestly increased
9
since September 30, 2012 when construction loans amounted to $14.9 million or 5.65% of our total loan
portfolio as compared to $21.8 million or 6.2% of our total loan portfolio at September 30, 2016.
Loans to finance the construction of condominium projects or single-family homes and
subdivisions are generally offered to experienced builders in our primary market area with whom we have
an established relationship. Residential construction and development loans are offered with terms of up
to 36 months although typically the terms are 12 to 24 months. The maximum loan-to-value limit
applicable to these loans is 75% of the appraised post construction value and the policy does not require
amortization of the principal during the term of the loan. We often establish interest reserves and obtain
personal and corporate guarantees as additional security on the construction loans. Interest reserves are
used to pay the monthly interest payments during the development phase of the loan and are treated as an
addition to the loan balance. Interest reserves pose an additional risk to the Company if it does not
become aware of deterioration in the borrower’s financial condition before the interest reserve is fully
utilized. In order to help monitor the risk, financial statements and tax returns are obtained from
borrowers on an annual basis. Additionally, construction loans are reviewed at least annually pursuant to
a third party loan review. Construction loan proceeds are disbursed periodically in increments as
construction progresses and as inspection by approved appraisers or loan inspectors warrants.
Construction loans are negotiated on an individual basis but typically have floating rates of interest based
upon the Wall Street Journal prime rate plus a stipulated margin. Additional fees may be charged as
funds are disbursed. In addition to interest payments during the term of the construction loan, we
typically require that payments to reduce the principal outstanding be made as units are completed and
released. Generally such principal payments must be equal to 110% of the amount attributable to the
acquisition and development of the lot plus 100% of the amount attributable to construction of the
individual home. We permit a pre-determined limited number of model homes to be constructed on an
unsold or “speculative” basis. All other units must be pre-sold before we will disburse funds for
construction. Construction loans also include loans to acquire land and loans to develop the basic
infrastructure, such as roads and sewers. The majority of the construction loans are secured by properties
located in the Philadelphia metropolitan statistical area.
Set forth below is a brief description of the two largest construction loan or loan relationships.
As of September 30, 2016, we had extended five construction and land development loans to a
local developer aggregating $10.3 million with a total exposure of $14.4 million. As a part of the workout
the Bank extended two construction loans in the amount of $5.4 million in November 2014. This loan is
being used to develop a 169 unit mixed townhome and condominium single-family residential
community. Currently 12 units are approximately 70% completed with land improvements pertaining to
these being performed. As of September 30, 2016, construction stopped, resulting from law suits filed by
both the borrower and the Company. The Company believes that the project will resume upon the
determination of the court’s and anticipates the proceeds on unit sales will be used to pay down the
borrower’s remaining obligation. As a result of the extension of the additional construction loans, the
Board determined to grant an exception to the Bank’s internal loans-to-one borrower limit. As of
September 30, 2015, a total of $1.5 million has been disbursed. A third loan is a $3.6 million construction
and land development loan to purchase land for the future development of 39 single-family residential
real estate units. The loan is a variable-rate loan indexed to the Wall Street Journal prime rate plus a
margin with a floor of 5.5%. During 2011, a new appraisal revealed that the market value of the collateral
had substantially decreased in value. The borrower subsequently agreed to provide additional collateral to
secure this loan resulting in a revised loan-to-value ratio of 73%. This loan had its maturity extended to
December 2016 and was classified as a trouble debt restructured loan. The fourth loan is a $2.4 million
construction and land development loan containing 25 residential lots and one fully constructed unit. The
loan is a variable-rate loan indexed to the Wall Street Journal prime rate plus a margin with a floor of
6.0% where the maturity date of July 2016 has passed. A foreclosure complaint is being filed. The
10
remaining construction and land development loan has an outstanding balance of $1.3 million and is
secured by the 169 residential lots in the referenced mixed town homes and condominium project noted
above. All five construction and land development loans are classified “substandard” and considered to
be in a work-out situation as part of the borrower’s total relationship.
The second largest construction loan was in the amount of $2.6 million of which $1.1 million has
been disbursed as of September 30, 2016. This loan was originated February 2016. The proceeds were
used to acquire and develop five single family residential properties located in Philadelphia,
Pennsylvania.
Construction financing 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 property’s value at completion of construction
compared to the estimated costs, including interest, of construction and other assumptions. Additionally,
if the estimate of value proves to be inaccurate, we may be confronted with a project, when completed,
having a value less than the loan amount. We have attempted to minimize these risks by generally
concentrating on residential construction loans in our market area to contractors with whom we have
established lending relationships and by selling, with respect to larger construction and land development
loans, participation interests in order to reduce our exposure.
Multi-Family Residential and Commercial Real Estate Loans. At September 30, 2016, multi-
family residential and commercial real estate loans amounted in the aggregate to $92.3 million or 26.2%
of the total loan portfolio.
The commercial real estate and multi-family residential real estate loan portfolio consists
primarily of loans secured by small office buildings, strip shopping centers, small apartment buildings
and other properties used for commercial and multi-family purposes located in the Company’s market
area. At September 30, 2016, the average commercial and multi-family real estate loan size was
approximately $888,000. The largest multi-family residential or commercial real estate loan at
September 30, 2016 was a $12.2 million fixed-rate loan secured by 38-unit luxury condominium building
located in Brooklyn, New York with retail space on the first floor. This loan recently closed and has not
been required to make its first scheduled payment. The second largest multi-family residential or
commercial real estate loan at September 30, 2016 was a $6.5 million fixed-rate loan used to develop a
nine unit apartment building for student housing located in Philadelphia, PA. Substantially all of the
properties securing the multi-family residential and commercial real estate loans are located in the
Company’s primary lending area.
Although terms for commercial real estate and multi-family loans vary, our underwriting
standards generally allow for terms up to 15 years with loan-to-value ratios of not more than 75%. Most
of the loans are structured with balloon payments of 10 years or less and amortization periods of up to 25
years. Interest rates are either fixed or adjustable, based upon designated market indices such as the Wall
Street Journal prime rate plus a margin or, with respect to our multi-family residential loans, the Average
Contract Interest Rate for previously occupied houses as reported by the Federal Housing Finance Board.
In addition, fees are charged to the borrower at the origination of the loan.
Commercial real estate and multi-family real estate lending involves different risks than single-
family residential lending. These risks include larger loans to individual borrowers and loan payments
that are dependent upon the successful operation of the project or the borrower’s business. These risks can
be affected by supply and demand conditions in the project’s market area of rental housing units, office
and retail space and other commercial space. We attempt to minimize these risks by limiting loans to
proven businesses, only considering properties with existing operating performance which can be
11
analyzed, using conservative debt coverage ratios in our underwriting, and periodically monitoring the
operation of the business or project and the physical condition of the property.
Various aspects of commercial and multi-family loan transactions are evaluated in an effort to
mitigate the additional risk in these types of loans. In our underwriting procedures, consideration is given
to the stability of the property’s cash flow history, future operating projections, current and projected
occupancy levels, location and physical condition. Generally, we impose a debt service ratio (the ratio of
net cash flows from operations before the payment of debt service to debt service) of not less than 120%.
We also evaluate the credit and financial condition of the borrower, and if applicable, the guarantor. With
respect to loan participation interests we purchase, we underwrite the loans as if we were the originating
lender. Appraisal reports prepared by independent appraisers are reviewed by us prior to the closing of
the loan.
During the past year, the Company has shifted its emphasis to originate and portfolio more multi-
family and commercial real estate loans, due to their higher yield and shorter duration. Although some
delinquencies have existed with respect to these types of loans in our portfolio, no losses have been
incurred over the past several years.
Consumer Lending Activities. We offer various types of consumer loans such as loans secured
by deposit accounts and unsecured personal loans. Consumer loans are originated primarily through
existing and walk-in customers and direct advertising. At September 30, 2016, $799,000, or 0.2% of the
total loan portfolio consisted of consumer loans.
Consumer loans generally have higher interest rates and shorter terms than residential loans.
However, consumer loans have additional credit risk due to the type of collateral securing the loan or in
some cases the absence of collateral.
Commercial Business Loans. At September 30, 2016, commercial business consisted of one
loan that amounted to $99,000. The Bank anticipates being able to originate commercial business loans
during fiscal year 2017. The Bank re-classed its one commercial business loan upon an impairment
review and prepared an impairment review as of September 30, 2016 and management has determined no
impairment was necessary.
Commercial business loans are made to small to mid-sized businesses in our market area
primarily to provide working capital. Small business loans may have adjustable or fixed rates of interest
and generally have terms of three years or less but may be as long as 15 years. Our commercial business
loans have historically been underwritten based on the creditworthiness of the borrower and generally
require a debt service coverage ratio of at least 120%. In addition, we generally obtain personal
guarantees from the principals of the borrower with respect to commercial business loans and frequently
obtain real estate as additional collateral.
Leases. The Company purchases small business equipment leases through a relationship with a
local lender specializing in originating such loans. These leases are purchased based on remaining cash
flow’s present value on agreed upon yield. This lender provides the servicing for leases purchased.
Loan Approval Procedures and Authority. Our Board of Directors establishes the Bank’s
lending policies and procedures. Our various lending policies are reviewed at least annually by our
management team and the Board in order to consider modifications as a result of market conditions,
regulatory changes and other factors.
12
The Company maintains separate loan approval committees with tiered levels of approvals.
Management Loan Committee, comprised of Chief Operating Officer (“COO”), Chief Lending Officer
(“CLO”), Chief Credit Officer (“CCO”), Chief Financial Officer (“CFO”) and the Controller has lending
approval authority up to $2.5 million. The next tier in the approval process, with an approval range of
$2.5 million to $5.0 million, is the President’s Loan committee, comprised of the Chief Executive Officer
(”CEO”) and the COO. Level three of approval authority in the range of $5.0 million to $10.0 million is
the Executive Committee, comprised of two rotating board of director members and the CEO. All loans in
excess of $10.0 million must be presented to the full board of directors for approval. All loans submitted
to the top tiers of approval must be recommended for approval by the Management Loan Committee. For
single-family residential loans originated for sale in the secondary market are processed through
underwriting software and are reviewed for approval by two senior officers in the lending department.
Asset Quality
General. One of our key objectives has been, and continues to be, maintaining a high level of
asset quality. In addition to maintaining credit standards for new originations which we believe are
prudent, we are proactive in our loan monitoring, collection and workout processes in dealing with
delinquent or problem loans. We have also retained an independent, third party to undertake periodic
reviews of the credit quality of a random sample of new loans as well as all of our major loans on at least
an annual basis.
Reports listing all delinquent accounts are generated and reviewed by management on a monthly
basis. These reports include information regarding all loans 30 days or more delinquent as to principal
and/or interest and all real estate owned properties and are provided to the Board of Directors. The
procedures we take with respect to delinquencies vary depending on the nature of the loan, period and
cause of delinquency and whether the borrower is habitually delinquent. When a borrower fails to make a
required payment on a loan, we take a number of steps to have the borrower cure the delinquency and
restore the loan to current status. We generally send the borrower a written notice of non-payment after
the loan is first past due. Our guidelines provide that telephone, written correspondence and/or face-to-
face contact will be attempted to ascertain the reasons for delinquency and the prospects of repayment.
When contact is made with the borrower at any time prior to foreclosure, we will attempt to obtain full
payment, work out a repayment schedule with the borrower to avoid foreclosure or, in some instances,
accept a deed in lieu of foreclosure. In the event payment is not then received or the loan not otherwise
satisfied, additional letters and telephone calls generally are made. If the loan is still not brought current
or satisfied and it becomes necessary for us to take legal action, which typically occurs after a loan is 90
days or more delinquent, we will commence foreclosure proceedings against any real property that
secures the loan. If a foreclosure action is instituted and the loan is not brought current, paid in full, or
refinanced before foreclosure sale, the property securing the loan generally is sold at foreclosure and, if
purchased by us, becomes real estate owned. Since there has not been a significant increase in recent
years in the one-to-four family residential loans that are 90 days past due, the Company was not adversely
impacted by any recent government programs related to the foreclosure process.
On loans where the collection of principal or interest payments is doubtful, the accrual of interest
income ceases (“non-accrual” loans). On loans 90 days or more past due as to principal and/or interest
payments, our policy is to discontinue accruing additional interest and reverse any interest previously
accrued. On occasion, this action may be taken earlier if the financial condition of the borrower raises
significant concern with regard to his/her ability to service the debt in accordance with the terms of the
loan agreement. Interest income is not accrued on these loans until the borrower’s financial condition and
payment record demonstrate an ability to service the debt.
13
Property acquired by the Bank through foreclosure is initially recorded at the lower of cost, which
is the carrying value of the loan, or fair value at the date of acquisition, which is fair value of the related
assets at the date of foreclosure, less estimated costs to sell. Thereafter, if there is a further deterioration
in value, we charge earnings for the diminution in value. The Bank’s policy is to obtain an appraisal on
real estate subject to foreclosure proceedings prior to the time of foreclosure if the property is located
outside the Company’s market area or consists of other than single-family residential property. We obtain
re-appraisals on a periodic basis, generally on at least an annual basis, on foreclosed properties. We also
conduct inspections on foreclosed properties.
We account for our impaired loans in accordance with generally accepted accounting principles.
An impaired loan generally is one for which it is more likely than not, based on current information, that
the lender will not collect all the amounts due under the contractual terms of the loan. Large groups of
smaller balance, homogeneous loans are collectively evaluated for impairment. Loans collectively
evaluated for impairment include smaller balance commercial real estate loans, residential real estate
loans and consumer loans. These loans are evaluated as a group because they have similar characteristics
and performance experience. Larger commercial real estate, construction and land development and
commercial business loans are individually evaluated for impairment on at least a quarterly basis by
management. All loans classified as substandard as part of the loan review process or due to delinquency
status are evaluated for potential impairment. There were $19.4 million of loans evaluated for
impairment as of September 30, 2016 (of which $12.3 million are related to the Bank’s largest borrower),
consisting of $10.3 million of construction and land development loans, $5.6 million of one-to-four
family residential loans, $3.2 million of commercial real estate loans, a $335,000 multi-family loan and a
$99,000 commercial business loan. Although no specific allocations were applied to these loans, there
were partial charge-offs of $311,000. As of September 30, 2016, there were five loans totaling $2.6
million designated as special mention loans consisting of three single-family residential loans aggregating
$1.7 million, and two commercial real estate loans aggregating $943,000. As of September 30, 2015 there
were eight loans totaling $3.4 million designated as special mention loans, consisting of five single-
family residential loans aggregating $2.1 million, two commercial real estate loans aggregating $965,000
and a multi-family residential loan totaling $351,000.
Federal regulations and our policies require that we utilize an internal asset classification system
as a means of reporting problem and potential problem assets. We have incorporated an internal asset
classification system, consistent with Federal banking regulations, as a part of our credit monitoring
system. We currently classify problem and potential problem assets as “special mention”, “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” that the insured institution 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
“uncollectible” and of such little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets which do not currently expose the insured institution to
sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses
are required to be designated “special mention.”
When an insured institution classifies one or more assets, or portions thereof, as “substandard” or
“doubtful,” it is required that a general valuation allowance for loan losses be established for loan losses
in accordance with established methodology. General valuation allowances represent loss allowances
which have been established to recognize the inherent losses associated with lending activities, but which,
unlike specific allocations, have not been allocated to particular problem assets. When an insured
14
institution classifies one or more assets, or portions thereof, as “loss,” it is required to charge off such
amount.
Our allowance for loan losses includes a portion which is allocated by type of loan, based
primarily upon our periodic reviews of the risk elements within the various categories of loans. The
specific components relate to certain impaired loans. The general components cover non-classified loans
and are based on historical loss experience adjusted for qualitative factors in response to changes in risk
and market conditions. Our management believes that, based on information currently available, the
allowance for loan losses is maintained at a level which covers all known and inherent losses that are both
probable and reasonably estimable at each reporting date. However, actual losses are dependent upon
future events and, as such, further additions to the level of the allowance for loan losses may become
necessary.
We review and classify assets on no less frequently than a quarterly basis and the Board of
Directors is provided with reports on our classified and criticized assets. We classify assets in accordance
with the management guidelines described above. At September 30, 2016 and 2015, we had no assets
classified as “doubtful” or “loss” and $14.6 million and $12.4 million, respectively, of assets classified as
“substandard.” In addition, there were $2.6 million and $3.4 million of loans designated as “special
mention” as of September 30, 2016 and 2015, respectively. There was one loan totaling $1.4 million
classified as non-performing included in the loans classified “special mention” as of September 30, 2016.
See –“Construction and Land Development Lending”. For a discussion of our largest lending relationship
which was classified as substandard during fiscal 2014 and designated as non-performing during fiscal
2016,”see also -“Non-Performing Loans and Real Estate Owned.”
Delinquent Loans. The following table shows the delinquencies in the loan portfolio as of the
dates indicated.
September 30, 2016
September 30, 2015
30-89
Days Overdue
90 or More Days
Overdue
30-89
Days Overdue
90 or More Days
Overdue
Number
of Loans
Principal
Balance
Number
of Loans
Principal
Balance
Number
of Loans
Principal
Balance
Number
of Loans
Principal
Balance
(Dollars in Thousands)
One- to-four family residential
Multi-family residential
Commercial real estate
Construction and land development
Commercial business
Consumer
Total delinquent loans
Delinquent loans to total net loans
Delinquent loans to total loans
8
-
-
-
-
-
8
$ 1,860
-
-
-
-
-
$ 1,860
0.54%
0.53%
17
-
1
5
-
-
23
4.17%
4.09%
$ 2,767
-
1,346
10,288
-
-
$ 14,401
$ 1,462
-
504
-
-
-
$ 1,966
7
-
2
-
-
-
9
0.63%
0.59%
$ 2,032
-
181
-
-
-
$ 2,213
13
-
1
-
-
-
14
0.71%
0.67%
Non-Performing Loans and Real Estate Owned. The following table sets forth information
regarding non-performing loans and real estate owned. The Company’s general policy is to cease
accruing interest on loans which are 90 days or more past due and to reverse all accrued interest. At
September 30, 2016, all of the loans listed as 90 or more days past due in the table above were in non-
15
accrual status. At September 30, 2016, the Company had eleven loans aggregating $8.2 million that were
classified as troubled debt restructurings (“TDRs”). As of September 30, 2016, eight of the TDRs were
performing in accordance with their restructured terms. Three of such loans aggregating $5.7 million as of
September 30, 2016 were classified as non-performing of which two totaling $5.0 million are related to
our largest lending relationship and the remaining one for $700,000 remained on non-accrual status as a
result of not achieving a sufficiently sustained payment history under the restructured terms to justify
returning the loan to performing (accrual) status.
The following table shows the amounts of non-performing assets (defined as non-accruing loans,
accruing loans 90 days or more past due as to principal or interest and real estate owned) at the dates
indicated.
September 30,
2016
2015
2014
2013
2012
(Dollars in Thousands)
Non-accruing loans:
One- to four-family residential
$ 4,244
(1)
$ 3,547
(1)
$ 5,002
(1)
$ 4,259
(1)
$ 12,904
Multi-family residential
Commercial real estate
Construction and land development
Commercial business
Consumer
Total non-accruing loans
Accruing loans 90 days or more past due:
One- to four-family residential
Multi-family residential
Commercial real estate
Construction
Commercial business
Consumer
Total accruing loans 90 days or more past due
Total non-performing loans (2)
Real estate owned, net (3)
Total non-performing assets
Total non-performing loans as a percentage
of loans,
Total non-performing loans as a percentage
of total assets
Total non-performing assets as a percentage
of total assets
(1)
(1)
-
1,346
10,288
-
-
15,878
-
-
-
-
-
-
-
15,878
581
$ 16,459
4.56%
2.84%
2.94%
-
-
-
-
1,589
(1)
877
(1)
2,375
(1)
597
8,796
-
-
13,932
-
-
-
-
-
-
-
13,932
869
$ 14,801
-
-
-
5,879
-
-
-
-
-
-
-
5,879
360
$ 6,239
-
-
-
6,634
-
-
-
-
-
-
-
6,634
406
$ 7,040
517
-
-
14,018
-
-
-
-
-
-
-
14,018
1,972
$ 15,990
4.21%
1.83%
2.16%
5.38%
2.86%
1.12%
1.09%
2.86%
3.04%
1.19%
1.16%
3.26%
16
______________________________________________________
(1)Includes at: (i) September 30, 2016, $5.7 million of troubled debt restructurings (TDRs) that were classified non-
performing consisting of a $3.6 million construction and land development loan, a $1.4 million one-to-four family loan and
a $729,000 commercial real estate loan; (ii) September 30, 2015, $5.8 million of TDRs that were classified non-performing
consisting of a $3.6 million construction and land development loan, a $1.4 million one-to-four family loan and a $737,000
commercial real estate loan; (iii) September 30, 2014, $2.4 million of TDRs that were classified non-performing consisting
of a $1.5 million one-to-four family loan and a $877,000 commercial real estate loan, (iv) at September 30, 2013, $2.1
million of TDRs consisting of a one-to-four family loan in the amount of $157,000 and five commercial real estate loans
totaling $1.9 million; and (v) September 30, 2012, $8.1 million of TDRs consisting of five loans to the same borrower
related to a 133-unit condominium project that was resolved in fiscal 2013.
(2)Non-performing loans consist of non-accruing loans plus accruing loans 90 days or more past due.
(3)Real estate owned balances are shown net of related loss allowances and consist solely of real property.
Interest income on non-accrual loans is recognized on the cash basis until either the loan is paid-
in full or the Bank determines after a significant payment history has been achieved to warrant the
involved loan being classified as a performing loan and being returned to accruing status. There was
$175,000 of such interest recognized during fiscal 2016 while there was $605,000 of such interest
recognized for non-accrual loans for fiscal 2015. Approximately $412,000 in additional interest income
would have been recognized during the year ended September 30, 2016 if these loans had been
performing during fiscal 2016.
At September 30, 2016, the Company’s non-performing assets totaled $16.5 million or 2.9% of
total assets as compared to $14.8 million or 3.0% of total assets at September 30, 2015. All of the increase
was due to the placement on non-accrual of the entire amount of the Company’s largest loan relationship
totaling $12.3 million and consisting of nine loans. Non-performing assets at September 30, 2016
included five construction loans aggregating $10.3 million, 17 one-to-four-family residential loans
aggregating $2.9 million, one single-family residential investment property loan totaling $1.4 million and
two commercial real estate loans aggregating $1.3 million. Non-performing assets also included at
September 30, 2016 two real estate properties consisting of one single-family residential property totaling
$374,000 and a commercial real estate property totaling $207,000. At September 30, 2016, the Company
had 11 loans aggregating $8.2 million that were classified as TDRs. Three of such loans aggregating $5.7
million as of September 30, 2016 were classified as non-performing as a result of not achieving a
sufficiently long payment history, under the restructured terms, to justify returning the loans to
performing (accrual) status. Two of these three loans totaling $4.3 million (which are part of the
Company’s largest relationship referenced above) are over 90 days past due resulting from the
discontinuation of funding by the Company of the development project due to the re-negotiation of the
project’s future direction to completion. The third loan, consisting of a residential loan of approximately
$1.4 million, has made all of its required payments to date, but the Company has not returned the loan to
performing status due to concerns with regard to the borrower’s ability to make remaining payments due.
The remaining eight TDRs have performed in accordance with the terms of their revised agreements. As
of September 30, 2016, the Company had reviewed $19.4 million of loans for possible impairment of
which $14.6 million was deemed classified as substandard compared to $16.8 million reviewed for
possible impairment and $12.4 million of which was classified substandard as of September 30, 2015.
Allowance for Loan Losses. The allowance for loan losses is established through a provision for
loan losses charged to expense. We maintain the allowance at a level believed, to the best of
management’s knowledge, to cover all known and inherent losses in the portfolio that are both probable
and reasonable to estimate at each reporting date. Management reviews the allowance for loan losses on
no less than a quarterly basis in order to identify those inherent losses and to assess the overall collection
probability for the loan portfolio. For each primary type of loan, we establish a loss factor reflecting an
estimate of the known and inherent losses in such loan type using both a quantitative analysis as well as
17
consideration of qualitative factors. Management’s evaluation process includes, among other things, an
analysis of delinquency trends, non-performing loan trends, the level of charge-offs and recoveries, prior
loss experience, total loans outstanding, the volume of loan originations, the type, size and geographic
concentration of our loans, the value of collateral securing the loan, the borrower’s ability to repay and
repayment performance, the number of loans requiring heightened management oversight, local economic
conditions and industry experience.
The carrying value of loans is periodically evaluated and the allowance is adjusted accordingly.
The establishment of the allowance for loan losses is significantly affected by management judgment and
uncertainties and there is a likelihood that different amounts would be reported under different conditions
or assumptions. Various regulatory agencies, as an integral part of their examination process, periodically
review the allowance for loan losses. Such agencies may require us to make additional provisions for
estimated loan losses based upon judgments that differ from those of management. As of September 30,
2016, our allowance for loan losses of $3.3 million was 0.9% of total loans receivable and 20.6% of non-
performing loans.
Charge-offs on loans totaled $11,000 and $384,000 for the years ended September 30,
2016 and 2015, respectively. The charge-offs during fiscal 2016 and 2015 were primarily the
result of the decline in the collateral value on certain collateral dependent loans which are
classified as substandard. Management took a prudent approach in writing down all substandard
loans to the net realizable value of the applicable underlying collateral.
Management will continue to monitor and modify the allowance for loan losses as conditions
dictate. No assurances can be given that the level of allowance for loan losses will cover all of the
inherent losses on our loans or that future adjustments to the allowance for loan losses will not be
necessary if economic and other conditions differ substantially from the economic and other conditions
used by management to determine the current level of the allowance for loan losses.
18
The following table shows changes in the allowance for loan losses during the periods presented.
Total loans outstanding at end of period
Average loans outstanding
2016
2015
2014
2013
2012
(Dollars in Thousands)
$ 351,891 $ 330,556 $ 330,696 $ 308,395 $ 263,205
327,877 323,398 319,126 278,582 242,781
Allowance for loan losses, beginning of period
2,930 2,424 2,353 1,881 3,364
Provision (recovery) for loan losses
225 735 240 (500)
725
Charge-offs:
One-to-four family residential
Multi-family residential and commercial real estate
Construction and land development
Commercial business
Consumer
Total charge-offs
11 384 215 154 1,905
- - - - -
- - - - 303
- - - - -
- - - - -
11 384 215 154 2,208
Recoveries on loans previously charged off
125 155 46 1,126 -
Allowance for loan losses, end of period
$ 3,269 $ 2,930 $ 2,424 $ 2,353 $ 1,881
Allowance for loan losses as a percent of
total loans
Allowance for loan losses as a percent of
non-performing loans
Ratio of net charge-offs during the period
to average loans outstanding during the
period
* Not meaningful.
0.94%
0.93%
0.75%
0.77%
0.71%
20.59%
21.03%
41.24%
35.47%
13.42%
-0.03%
0.07%
0.05%
NM*
0.91%
19
The following table shows how the allowance for loan losses is allocated by type of loan at each of
the dates indicated.
2016
2015
September 30,
2014
2013
2012
Amount
of
Allowance
$ 1,624
137
859
318
1
21
10
299
$ 3,269
One-to-four family residential
Multi-family residential
Commercial real estate
Construction and land development
Commercial business
Leases
Consumer
Unallocated
Total allowance for loan losses
Loan
Category
as a %
of Total
Loans
Loan
Category
as a %
of Total
Loans
Amount
of
Allowance
Loan
Category
as a %
of Total
Loans
Amount
of
Allowance
Loan
Category
as a %
of Total
Loans
Amount
of
Allowance
Loan
Category
as a %
of Total
Loans
Amount
of
Allowance
(Dollars in Thousands)
66.40% $ 1,636
78.40% $ 1,663
3.50% 66
1.90% 66
85.47% $ 1,384
22
2.17%
87.81% $ 830
7
1.85%
22.70% 231
7.80% 122
4.87%
70
6.33%
125
6.20% 725
11.80% 323
0.00% -
0.00% 15
0.90% -
0.00% -
0.30% 4
0.10% 4
-
268
100.00% $ 2,930
-
231
100.00% $ 2,424
6.77% 653
4
0.60%
0.00% -
0.12% 2
218
-
3.68% 745
3
0.19%
0.00% -
0.14% 1
170
-
100.00% $ 2,353
100.00% $ 1,881
100.00%
84.65%
1.92%
7.35%
5.65%
0.24%
0.00%
0.20%
0.00%
The aggregate allowance for loan losses increased by $339,000 from September 30, 2015 to
September 30, 2016, due to a provision of $225,000 and a net recovery of $114,000 recorded during the
period. During the year ended September 30, 2016, we recorded a provision in the amount of $225,000
primarily due to the increase in the level of commercial real estate loans. Fluctuations in the allowance
may occur based on management’s consideration of the known and inherent losses in the loan portfolio
that are reasonably estimable as well as current qualitative and quantitative risk factors at the time of the
analysis.
Investment Activities
General. We invest in securities in accordance with policies approved by our board of directors.
The investment policy designates the President, Chief Financial Officer and Controller as the Investment
Committee, which is authorized by the board to make the Bank’s investments consistent with the
investment policy. The Board of Directors of the Bank reviews all investment activity on a monthly
basis.
The investment policy is designed primarily to manage the interest rate sensitivity of the assets
and liabilities, to generate a favorable return without incurring undue interest rate and credit risk, to
complement the lending activities and to provide and maintain liquidity. The current investment policy
generally permits investments in debt securities issued by the U.S. government and U.S. agencies,
municipal bonds, and corporate debt obligations, as well as investments in preferred and common stock of
government agencies and government sponsored enterprises such as Fannie Mae, Freddie Mac and the
Federal Home Loan Bank of Pittsburgh (federal agency securities) and, to a lesser extent, other equity
securities. Securities in these categories are classified as “investment securities” for financial reporting
purposes. The policy also permits investments in mortgage-backed securities, including pass-through
securities issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae as well as collateralized
20
mortgage obligations (“CMOs”) issued or backed by securities issued by these government sponsored
agencies.
Ginnie Mae is a government agency within the Department of Housing and Urban Development
which is intended to help finance government-assisted housing programs. Ginnie Mae securities are
backed by loans insured by the Federal Housing Administration, or guaranteed by the Department of
Veterans Affairs. The timely payment of principal and interest on Ginnie Mae securities is guaranteed by
Ginnie Mae and backed by the full faith and credit of the U.S. Government. Freddie Mac is a private
corporation chartered by the U.S. Government. Freddie Mac issues participation certificates backed
principally by conventional mortgage loans. Freddie Mac guarantees the timely payment of interest and
the ultimate return of principal on participation certificates. Fannie Mae is a private corporation chartered
by the U.S. Congress with a mandate to establish a secondary market for mortgage loans. Fannie Mae
guarantees the timely payment of principal and interest on Fannie Mae securities. Freddie Mac and
Fannie Mae securities are not backed by the full faith and credit of the U.S. Government.
Investments in mortgage-backed securities involve the risk that actual prepayments will be
greater than 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 thereby changing
the net yield on such securities. There is also reinvestment risk associated with the cash flows from such
securities or in the event such securities are redeemed by the issuer. In addition, the market value of such
securities may be adversely affected by changes in interest rates. Further, privately issued mortgage-
backed securities and CMOs also have a higher risk of default due to adverse changes in the
creditworthiness of the issuer. Management’s practice is generally to not invest in such securities. See
further discussion in Note 5 of the Notes to Consolidated Financial Statements included in Item 8 herein.
The Company has portfolio corporate debt securities with an investment grade rating from one of
the three largest rating agencies, Standard and Poors, Moody’s and Fitch. In purchasing these types of
securities, the Company looks for known publically trading entities along with utilizing the credit
department to underwrite each issuing entity as if it were a direct commercial loan. The mortgage-backed
securities consist both of mortgage pass-through and collateralized mortgage obligations guaranteed
Ginnie Mae, Fannie Mae or Freddie Mac. At September 30, 2014, the Company had sold the remaining
portfolio of non-agency securities.
At September 30, 2016, the investment and mortgage-backed securities portfolio amounted to
$178.7 million or 31.9% of total assets at such date. The largest component of the securities portfolio as
of September 30, 2016 consisted of mortgage-backed securities which amounted to $98.0 million or
54.9% of the securities portfolio at September 30, 2016. In addition, we invest in U.S Government and
agency obligations and to a significantly lesser degree, other securities.
The securities are classified at the time of acquisition as available for sale, held to maturity or
trading. Securities classified as held to maturity must be purchased with the intent and ability to hold that
security until its final maturity, and can be sold prior to maturity only under rare circumstances. Held to
maturity securities are accounted for based upon the amortized cost of the security. Available for sale
securities can be sold at any time based upon needs or market conditions. Available for sale securities are
accounted for at fair value, with unrealized gains and losses on these securities, net of income tax
provisions, reflected as accumulated other comprehensive income. At September 30, 2016, we had $40.0
million of investment and mortgage-backed securities classified as held to maturity, $138.7 million of
investment and mortgage-backed securities classified as available for sale and no securities classified as
trading securities.
21
The following table sets forth certain information relating to the investment and mortgage-backed
securities portfolios at the dates indicated.
2016
September 30,
2015
2014
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
(In Thousands)
Mortgage-backed securities - U.S.
Government agencies
U.S. Government and agency obligations
Corporate debt securities
Total debt securities
FHLMC preferred stock
Total investment and
mortgage-backed securities
$ 97,289
54,487
25,411
177,187
6
$ 98,506
54,793
$ 71,047
73,254
$ 69,917
73,917
$ 81,994
54,845
26,053 - - - -
136,839
144,301
179,352
70
59
42
$ 85,906
54,190
143,834
6
140,096
6
$ 177,193
$ 179,394
$ 143,840
$ 144,360
$ 140,102
$ 136,909
The following tables set forth the amortized cost of investment and mortgage-backed securities
which mature during each of the periods indicated and the weighted average yields for each range of
maturities at September 30, 2016. The Company did not hold any tax-exempt bonds as of September 30,
2016.
Amounts at September 30, 2016 Which Mature In
Weighted
Average
Yield
One Year
or Less
Over One
Year
Through
Five Years
Weighted
Average
Yield
Over Five
Years
Through
Ten Years
Weighted
Average
Yield
Over
Ten
Years
Weighted
Average
Yield
Total
Weighted
Average
Yield
(Dollars in Thousands)
$ - -
- -
- -
$ - -
$ 1,999
4
2,060
$ 4,063
5.50% $ 8,000
1.89% 88
2.97% 22,361
4.21% $ 30,449
2.35% $ 44,487
4.62% 97,197
3.37%
991
3.10% $ 142,675
2.35% $ 54,487
2.38% 97,289
2.38%
25,411
2.37% $ 177,187
2.62%
2.38%
3.29%
2.59%
Bonds and other debt securities:
U.S. Government and agency
obligations
Mortgage-backed securities
Corporate debt securities
Total
22
The following table sets forth the purchases and principal repayments of our mortgage-backed
securities at amortized cost during the periods indicated.
Mortgage-backed securities at beginning of period
Purchases
Sale of mortgage-backed securities available for sale
Other than temporary impairment of securities (1)
Maturities and repayments
Amortizations of premiums and discounts, net
Mortgage-backed securities at end of period
Weighted average yield at end of period
At or For the
Year Ended September 30,
2016
2015
2014
(Dollars in Thousands)
$ 69,917 $ 54,190
$ 41,550
23,085
49,639 24,865
- (1,779)
(11,560)
-
- (16)
(10,768) (9,372) (8,936)
286
61 234
$ 54,190
$ 97,289 $ 69,917
2.67%
2.44%
2.38%
_______________________________
(1) Impairment primarily relates to non-agency mortgage-backed securities received in the redemption in kind of an
investment in a mutual fund. The Company sold the remaining mortgage-backed securities received in the redemption
in kind as of September 30, 2014.
_
Sources of Funds
General. Deposits, loan repayments and prepayments, proceeds from sales of loans, cash flows
generated from operations and FHLB advances are the primary sources of funds for use in lending,
investing and for other general purposes.
Deposits. We offer a variety of deposit accounts with a range of interest rates and terms.
Deposits consist of checking, both interest-bearing and non-interest-bearing, money market, savings and
certificate of deposit accounts. At September 30, 2016, 42.5% of the funds deposited with Prudential
Savings were in core deposits, which are deposits other than certificates of deposit.
The flow of deposits is influenced significantly by general economic conditions, changes in
money market rates, prevailing interest rates and competition. Deposits are obtained predominantly from
the areas where the branch offices are located. We have historically relied primarily on customer service
and long-standing relationships with customers to attract and retain these deposits; however, market
interest rates and rates offered by competing financial institutions significantly affect the Company’s
ability to attract and retain deposits. The interest rates offered on deposits are competitive in the market
place.
The Bank uses traditional means of advertising its deposit products, including broadcast and print
media and generally does not solicit deposits from outside its market area.
At September 30, 2016, jumbo CDs (certificate of deposit of $100,000 or more) amounted to
$88.6 million, of which $86.9 million are scheduled to mature within twelve months subsequent to such
date. At September 30, 2016, the weighted average remaining period until maturity of the certificate of
deposit accounts was 14.1 months. During fiscal 2016, jumbo CDs from government agencies and other
financial institutions were utilized to fund growth.
23
The following table shows the distribution of, and certain other information relating to, deposits
by type of deposit, as of the dates indicated.
2016
Amount
September 30,
2015
2014
% of Total
Deposits
Amount
% of Total
Deposits
Amount
% of Total
Deposits
(Dollars in Thousands)
Certificate accounts:
Less than 1.00%
1.00% - 1.99%
2.00% - 2.99%
3.00% - 3.99%
$ 111,678
98,921
13,117
28.69% $ 64,717
17.73% $ 74,146
25.42% 86,203
23.61% 79,474
3.37% 45,121
12.36% 48,105
- - - - 10,914
Total certificate accounts
$ 223,716
57.48% $ 196,041
53.70% $ 212,639
18.96%
20.33%
12.30%
2.79%
54.38%
Transaction accounts:
Savings
Checking:
Interest-bearing
Non-interest-bearing
Money market
Total transaction accounts
Total deposits
71,145
18.28% 70,355
19.27% 73,275
18.73%
3,804
34,984
55,552
$ 165,485
$ 389,201
0.98% 2,293
8.99% 35,649
0.63% 2,327
9.76% 38,119
14.27% 60,736
16.64% 64,665
42.52% $ 169,033
100.00% $ 365,074
46.30% $ 178,386
100.00% $ 391,025
0.60%
9.75%
16.54%
45.62%
100.00%
The following table shows the average balance of each type of deposit and the average rate paid
on each type of deposit for the periods indicated.
Average Balance
2016
Interest
Expense
Average Rate
Paid
Average Balance
2015
Interest
Expense
Average Rate
Paid
Average
Balance
2014
Interest
Expense
Average Rate
Paid
Year Ended September 30,
(Dollars in Thousands)
Savings
$ 73,030 $ 83
0.11%
$ 75,203 $ 208
0.28%
$ 80,432 $ 262
0.33%
Interest-bearing checking and
money market accounts
Certificate accounts
Total interest-bearing deposits
90,782
211,517
165
2,613
0.18%
1.24%
98,324
207,391
323
2,899
0.33%
1.40%
100,303
203,083
348
2,791
0.35%
1.37%
375,329 $ 2,861
0.76%
380,918 $ 3,430
0.90%
383,818 $ 3,401
0.89%
Non-interest-bearing deposits
Total deposits
2,851
$ 378,180
2,241
$ 383,159
0.76%
2,498
$ 386,316
0.90%
0.88%
24
The following table shows the deposit cash flows during the periods indicated.
Deposits made
Withdrawals
Interest credited
Year Ended September 30,
2016
2015
2014
(In Thousands)
$ 364,745 $ 296,394 $ 345,125
(343,535) (325,584) (499,938)
2,917 3,239 3,090
Total increase (decrease) in deposits
$ 24,127 $ (25,951) $ (151,723)
The following table presents, by various interest rate categories and maturities, the amount of
certificates of deposit at September 30, 2016.
Certificates of Deposit
2017
Less than 1.00%
1.00% - 1.99%
2.00% - 2.99%
Total certificate accounts
$
$
101,980
20,672
13,117
135,769
2018
Thereafter
Maturing in the 12 Months Ending September 30,
2019
(In Thousands)
$
-
20,534
-
20,534
$
-
27,789
-
27,789
5,730
33,894
-
39,624
$
$
$
$
Total
$
$
107,710
102,889
13,117
223,716
The following tables show the maturities of our certificates of deposit of $100,000 or more at
September 30, 2016, by time remaining to maturity.
Quarter Ending:
Amount
Weighted
Avg Rate
(Dollars in Thousands)
December 31, 2016
March 31, 2017
June 30, 2017
September 30, 2017
After September 30, 2017
Total certificates of deposit with
balances of $100,000 or more
$ 31,461
32,915
15,827
8,403
34,144
$ 122,750
0.81%
0.87%
0.85%
0.99%
1.62%
1.07%
Borrowings. From time to time we utilize advances from the Federal Home Loan Bank of
Pittsburgh as an alternative to retail deposits to fund the operations as part of the operating and liquidity
strategy. See “Liquidity and Capital Resources” in Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operation. These FHLB advances are collateralized primarily by
certain mortgage loans and mortgage-backed securities and secondarily by an investment in capital stock
of the Federal Home Loan Bank of Pittsburgh. There are no specific credit covenants associated with
25
these borrowings. FHLB advances are made pursuant to several different credit programs, each of which
has its own interest rate and range of maturities. The maximum amount that the Federal Home Loan
Bank of Pittsburgh will advance to member institutions, including the Bank, fluctuates from time to time
in accordance with the policies of the Federal Home Loan Bank of Pittsburgh. At September 30, 2016,
the Company had $35.6 million in outstanding advances with the FHLB, and in addition had the ability to
obtain additional advances in the amount of $180.2 million. The Bank utilized the FHLB advances to
fund an investment leverage strategy along with funding growth in the loan and investment portfolios.
The following table shows certain information regarding borrowings at or for the dates indicated:
At or For the Year Ended September 30,
2014
2016
2015
FHLB advances:
Average balance outstanding
Maximum amount outstanding at any
month-end during the period
Balance outstanding at end of period
Average interest rate during the period
Weighted average interest rate at end of period
(Dollars in Thousands)
$20,000
$162
$340
8,975
20,000
1.17%
1.23%
340
0
0.00%
0.00%
340
340
0.00%
0.00%
The Company had two FHLB interest-free advances made under a community housing program in
which matured during fiscal 2015.
26
Subsidiaries
The Company has only one direct subsidiary: Prudential Savings Bank. The Bank’s sole
subsidiary as of September 30, 2016 was PSB Delaware, Inc. (“PSB”), a Delaware-chartered corporation
established to hold investment securities. As of September 30, 2016, PSB had assets of $119.3 million
primarily consisting of mortgage-backed and investment securities. We may consider the establishment
of one or more additional subsidiaries in the future.
Employees
At September 30, 2016, we had 59 full-time employees, and four part-time employees. None of
such employees are represented by a collective bargaining group, and we believe that the Company’s
relationship with its employees is good.
General
REGULATION
Prudential Savings Bank is a Pennsylvania-chartered savings bank and is subject to extensive
regulation and examination by the Pennsylvania Department of Banking and Securities (the
“Department”) and by the Federal Deposit Insurance Corporation (“FDIC”), and is also subject to certain
requirements established by the Federal Reserve Board. The federal and state laws and regulations which
are applicable to banks regulate, among other things, the scope of their business, their investments, their
reserves against deposits, the payment of dividends, the timing of the availability of deposited funds and
the nature and amount of and collateral for certain loans. There are periodic examinations by the
Department and the FDIC to test the Bank’s compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of activities in which an institution
can engage and is intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the Department, the FDIC, the Federal Reserve Board or the
Congress could have a material adverse impact on Prudential Bancorp and the Bank and their respective
operations.
Federal law provides the federal banking regulators, including the FDIC and the Federal Reserve
Board, with substantial enforcement powers. This enforcement authority includes, among other things,
the ability to assess civil money penalties, to issue cease-and-desist or removal orders, and to initiate
injunctive actions against banking organizations and institution-affiliated parties, as defined. In general,
these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement action, including misleading
or untimely reports filed with regulatory authorities.
Prudential Bancorp is a registered as bank holding company under the Bank Holding Company
Act and is subject to regulation and supervision by the Federal Reserve Board and by the Department.
Prudential Bancorp files annually a report of its operations with, and is subject to examination by, the
Federal Reserve Board and the Department. This regulation and oversight is generally intended to ensure
that Prudential Bancorp limits its activities to those allowed by law and that it operates in a safe and
sound manner without endangering the financial health of the Bank.
In connection with the reorganization completed in October 2013, Prudential Bancorp registered
27
its common stock with the Securities and Exchange Commission (“SEC”) under the Securities Exchange
Act of 1934. Prudential Bancorp is subject to the proxy and tender offer rules, insider trading reporting
requirements and restrictions, and certain other requirements under the Securities Exchange Act of 1934.
Prudential Bancorp’s common stock is listed on the Nasdaq Global Market under the symbol “PBIP.”
The Nasdaq Stock Market listing requirements impose additional requirements on us, including, among
other things, rules relating to corporate governance and the composition and independence of our board of
directors and various committees of the board, such as the audit committee.
Certain of the regulatory requirements that are applicable to the Bank and Prudential Bancorp are
described below. This description of statutes and regulations is not intended to be a complete explanation
of such statutes and regulations and their effects on the Bank and Prudential Bancorp and is qualified in
its entirety by reference to the actual statutes and regulations.
2010 Regulatory Reform
On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and
Consumer Protection Act (“Dodd-Frank Act”). The Dodd-Frank Act imposes new restrictions and an
expanded framework of regulatory oversight for financial institutions, including depository institutions.
The law also established an independent federal consumer protection bureau within the Federal Reserve
Board. The following discussion summarizes significant aspects of the new law that may affect the Bank
and Prudential Bancorp. Not all of the regulations implementing these changes have been promulgated,
so we cannot determine the full impact on our business and operations at this time.
The following aspects of the financial reform and consumer protection act are related to the
operations of the Bank:
•
A new independent consumer financial protection bureau was established, the Consumer
Financial Protection Bureau (“CFPB”) within the Federal Reserve Board, empowered to exercise
broad regulatory, supervisory and enforcement authority with respect to both new and existing
consumer financial protection laws. Smaller financial institutions, like the Bank, are subject to the
supervision and enforcement of their primary federal banking regulator with respect to the federal
consumer financial protection laws.
Tier 1 capital treatment for “hybrid” capital items like trust preferred securities was
•
eliminated subject to various grandfathering and transition rules.
•
•
The prohibition on payment of interest on demand deposits was repealed.
Deposit insurance on most accounts increased to $250,000.
The deposit insurance assessment base calculation now equals the depository institution’s
•
total assets minus the sum of its average tangible equity during the assessment period.
•
The minimum reserve ratio of the Deposit Insurance Fund increased to 1.35 percent of
estimated annual insured deposits or assessment base; however, the FDIC is directed to “offset
the effect” of the increased reserve ratio for insured depository institutions with total consolidated
assets of less than $10 billion.
The following aspects of the financial reform and consumer protection act are related to the
operations of Prudential Bancorp:
28
The Federal Deposit Insurance Act was amended to direct federal regulators to require
•
depository institution holding companies to serve as a source of strength for their depository
institution subsidiaries.
•
The SEC is authorized to adopt rules requiring public companies to make their proxy
materials available to shareholders for nomination of their own candidates for election to the
board of directors.
Public companies are now required to provide their shareholders with a non-binding vote:
•
(i) at least once every three years on the compensation paid to executive officers, and (ii) at least
once every six years on whether they should have a “say on pay” vote every one, two or three
years.
A separate, non-binding shareholder vote is now required regarding golden parachutes for
•
named executive officers when a shareholder vote takes place on mergers, acquisitions,
dispositions or other transactions that would trigger the parachute payments.
Securities exchanges are now required to prohibit brokers from using their own discretion
•
to vote shares not beneficially owned by them for certain “significant” matters, which include
votes on the election of directors and executive compensation matters.
Stock exchanges are prohibited from listing the securities of any issuer that does not have
•
a policy providing for (i) disclosure of its policy on incentive compensation payable on the basis
of financial information reportable under the securities laws, and (ii) the recovery from current or
former executive officers, following an accounting restatement triggered by material
noncompliance with securities law reporting requirements, of any incentive compensation paid
erroneously during the three-year period preceding the date on which the restatement was
required that exceeds the amount that would have been paid on the basis of the restated financial
information.
Disclosure in annual proxy materials will be required concerning the relationship
•
between the executive compensation paid and the financial performance of the issuer.
Item 402 of Regulation S-K promulgated by the SEC will be amended to require
•
companies to disclose the ratio of the Chief Executive Officer’s annual total compensation to the
median annual total compensation of all other employees, commencing with fiscal years starting
after January 1, 2017.
Regulation of Prudential Savings Bank
Pennsylvania Banking Law. The Pennsylvania Banking Code of 1965 (the “Banking Code”)
contains detailed provisions governing the organization, location of offices, rights and responsibilities of
directors, officers, employees and members, as well as corporate powers, savings and investment
operations and other aspects of the Bank and its affairs. The Banking Code delegates extensive
rulemaking power and administrative discretion to the Department so that the supervision and regulation
of state-chartered savings banks may be flexible and readily responsive to changes in economic
conditions and in savings and lending practices.
One of the purposes of the Banking Code is to provide savings banks with the opportunity to be
competitive with each other and with other financial institutions existing under other Pennsylvania laws
and other state, federal and foreign laws. A Pennsylvania savings bank may locate or change the location
29
of its principal place of business and establish an office anywhere in Pennsylvania, with the prior
approval of the Department.
The Department generally examines each savings bank not less frequently than once every two
years. Although the Department may accept the examinations and reports of the FDIC in lieu of its own
examination, the present practice is for the Department to alternate conducting examinations with the
FDIC. The Department may order any savings bank to discontinue any violation of law or unsafe or
unsound business practice and may direct any director, trustee, officer, attorney or employee of a savings
bank engaged in an objectionable activity, after the Department has ordered the activity to be terminated,
to show cause at a hearing before the Department why such person should not be removed.
Insurance of Accounts. The deposits of the Bank are insured to the maximum extent permitted by
the Deposit Insurance Fund and are backed by the full faith and credit of the U.S. Government. The
Dodd-Frank Act increased deposit insurance on most accounts to $250,000. As insurer, the FDIC is
authorized to conduct examinations of, and to require reporting by, insured institutions. It also may
prohibit any insured institution from engaging in any activity determined by regulation or order to pose a
serious threat to the FDIC. The FDIC also has the authority to initiate enforcement actions against savings
institutions.
The Dodd Frank Act raises the minimum reserve ratio of the Deposit Insurance Fund from 1.15%
to 1.35% and requires the FDIC to offset the effect of this increase on insured institutions with assets of
less than $10 billion (small institutions). In March 2016, the FDIC adopted a rule to accomplish this by
imposing a surcharge on larger institutions commencing when the reserve ratio reaches 1.15% and ending
when it reaches 1.35%. The reserve ratio reached 1.15% effective as of June 30, 2016. This surcharge
period begin effective July 1, 2016 and is expected to end by December 31, 2018. Small institutions will
receive credits for the portion of their regular assessments that contributed to growth in the reserve ratio
between 1.15% and 1.35%. The credits will apply to reduce regular assessments by 2.0 basis points for
quarters when the reserve ratio is at least 1.38%.
Effective July 1, 2016 the FDIC adopted changes that eliminated its risk-based premium system.
The FDIC assesses deposit insurance premiums on the assessment base of a depository institution, which
is their average total asset reduced by the amount of its average tangible equity. For a small institution
(one with assets of less than $10 billion) that has been federally insured for at least five years, effective
July 1, 2016, the initial base assessment rate ranges from 3 to 30 basis points, based on the institution’s
CAMELS composite and component ratings and certain financial ratios: its leverage ratio; its ratio of net
income before taxes to total assets; its ratio of nonperforming loans and leases to gross assets; its ratio of
other real estate owned to gross assets; its brokered deposits ratio (excluding reciprocal deposits if the
institution is well capitalized and has a CAMELS composite rating of 1 or 2); its one year asset growth
ratio (which penalizes growth adjusted for mergers in excess of 10%); and its loan mix index (which
penalizes higher risk loans based on historical industry charge off rates). The initial base assessment rate
is subject to downward adjustment (not below 1.5%) based on the ratio of unsecured debt the institution
has issued to its assessment base, and to upward adjustment (which can cause the rate to exceed 30 basis
points) based on its holdings of unsecured debt issued by other insured institutions. Institutions with
assets of $10 billion or more are assessed using a scorecard method. In addition, all institutions with
deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued
by the Financing Corporation, a mixed-ownership government corporation established to recapitalize a
predecessor to the Deposit Insurance Fund. These assessments will continue until the Financing
Corporation bonds mature in 2019.
The FDIC may terminate the deposit insurance of any insured depository institution, including the
Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound
30
practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit
insurance temporarily during the hearing process for the permanent termination of insurance, if the
institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at
the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six
months to two years, as determined by the FDIC. Management is not aware of any existing circumstances
which could result in termination of the Bank’s deposit insurance.
Recent Regulatory Capital Regulations. In July of 2013 the respective U.S. federal banking
agencies issued final rules implementing Basel III and the Dodd-Frank Act capital requirements to be
fully-phased in on a global basis on January 1, 2019. The new regulations establish a new tangible
common equity capital requirement, increase the minimum requirement for the current Tier 1 risk-
weighted asset (“RWA”) ratio, phase out certain kinds of intangibles treated as capital and certain types
of instruments and change the risk weightings of certain assets used to determine required capital ratios.
The new common equity Tier 1 capital component requires capital of the highest quality – predominantly
composed of retained earnings and common stock instruments. For community banks, such as the Bank, a
common equity Tier 1 capital ratio of 4.5% became effective on January 1, 2015. The new capital rules
also increased the current minimum Tier 1 capital ratio from 4.0% to 6.0% beginning on January 1, 2015.
In addition, in order to make capital distributions and pay discretionary bonuses to executive officers
without restriction, an institution must also maintain greater than 2.5% in common equity attributable to a
capital conservation buffer to be phased in from January 1, 2016 until January 1, 2019. The new rules also
increase the risk weights for several categories of assets, including an increase from 100% to 150% for
certain acquisition, development and construction loans and more than 90-day past due exposures. The
new capital rules maintain the general structure of the prompt corrective action rules (described below),
but incorporate the new common equity Tier 1 capital requirement and the increased Tier 1 RWA
requirement into the prompt corrective action framework.
Regulatory Capital Requirements. Federally insured state-chartered non-member banks and
savings banks are required to maintain minimum levels of regulatory capital. Current FDIC capital
standards require these institutions to satisfy a common equity Tier 1 capital requirement, a leverage
capital requirement and a risk-based capital requirement. The common equity Tier 1 capital component
generally consists of retained earnings and common stock instruments and must equal at least 4.5% of
risk-weighted assets. Leverage capital, also known as “core” capital, must equal at least 3.0% of adjusted
total assets for the most highly rated state-chartered non-member banks and savings banks. Core capital
generally consists of common stockholders’ equity (including retained earnings). An additional cushion
of at least 100 basis points is required for all other savings associations, which effectively increases their
minimum Tier 1 leverage ratio to 4.0% or more. Under the FDIC’s regulations, the most highly-rated
banks are those that the FDIC determines are strong banking organization and are rated composite 1 under
the Uniform Financial Institutions Rating System. Under the risk-based capital requirement, “total”
capital (a combination of core and “supplementary” capital) must equal at least 8.0% of “risk-weighted”
assets. The FDIC also is authorized to impose capital requirements in excess of these standards on
individual institutions on a case-by-case basis.
In determining compliance with the risk-based capital requirement, a savings bank is allowed to
include both core capital and supplementary capital in its total capital, provided that the amount of
supplementary capital included does not exceed the savings bank’s core capital. Supplementary capital
generally consists of general allowances for loan losses up to a maximum of 1.25% of risk-weighted
assets, together with certain other items. In determining the required amount of risk-based capital, total
assets, including certain off-balance sheet items, are multiplied by a risk weight based on the risks
inherent in the type of assets. The risk weights range from 0% for cash and securities issued by the U.S.
Government or unconditionally backed by the full faith and credit of the U.S. Government to 100% for
31
loans (other than qualifying residential loans weighted at 80%) and repossessed assets.
Savings banks must value securities available for sale at amortized cost for regulatory capital
purposes. This means that in computing regulatory capital, savings banks should add back any unrealized
losses and deduct any unrealized gains, net of income taxes, on debt securities reported as a separate
component of capital, as defined by generally accepted accounting principles.
At September 30, 2016, the Bank exceeded all of its regulatory capital requirements, with Tier 1,
Tier 1 common equity, Tier 1 (to risk-weighted assets) and total risk-based capital ratios of 20.41%,
38.57%, 38.57% and 39.70%, respectively.
Any savings bank that fails any of the capital requirements is subject to possible enforcement
action by the FDIC. Such action could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on the institution’s operations, termination of federal deposit
insurance and the appointment of a conservator or receiver. The FDIC’s capital regulations provide that
such actions, through enforcement proceedings or otherwise, could require one or more of a variety of
corrective actions.
Department Capital Requirements. The Bank is also subject to more stringent Department capital
guidelines. Although not adopted in regulation form, the Department utilizes capital standards requiring a
minimum of 6% leverage capital and 10% risk-based capital. The components of leverage and risk-based
capital are substantially the same as those defined by the FDIC. At September 30, 2016, Prudential
Savings’s capital ratios exceeded each of its capital requirements.
Prompt Corrective Action. The following table shows the amount of capital associated with the
different capital categories set forth in the prompt corrective action regulations.
Capital Category
Well capitalized
Adequately capitalized
Undercapitalized
Significantly undercapitalized
Total
Risk-Based
Capital
10% or more
8% or more
Less than 8%
Less than 6%
Tier 1
Risk-Based
Capital
8% or more
6% or more
Less than 6%
Less than 4%
Tier 1
Common Equity
Capital
6.5% or more
4.5% or more
Less than 4.5%
Less than 3%
Tier 1
Leverage
Capital
5% or more
4% or more
Less than 4%
Less than 3%
In addition, an institution is “critically undercapitalized” if it has a ratio of tangible equity to total
assets that is equal to or less than 2.0%. Under specified circumstances, a federal banking agency may
reclassify a “well capitalized” institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in
the next lower category (except that the FDIC may not reclassify a significantly undercapitalized
institution as critically undercapitalized).
32
An institution generally must file a written capital restoration plan which meets specified
requirements within 45 days of the date that the institution receives notice or is deemed to have notice that
it is undercapitalized, significantly undercapitalized or critically undercapitalized. A federal banking
agency must provide the institution with written notice of approval or disapproval within 60 days after
receiving a capital restoration plan, subject to extensions by the agency. An institution which is required
to submit a capital restoration plan must concurrently submit a performance guaranty by each company
that controls the institution. In addition, undercapitalized institutions are subject to various regulatory
restrictions, and the appropriate federal banking agency also may take any number of discretionary
supervisory actions.
At September 30, 2016, the Bank was deemed to be a “well capitalized” institution for purposes
of the prompt corrective action regulations and as such is not subject to the above mentioned restrictions.
The table below sets forth the Company and the Bank’s capital position relative to its respective
regulatory capital requirements at September 30, 2016.
Actual
Amount
Ratio
Required for Capital
Adequacy Purposes(1)
Amount
(Dollars in Thousands)
Ratio
Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
Tier 1 capital (to average assets)
Company
Bank
Tier 1 Common (to risk-weighted assets)
Company
Bank
Tier 1 capital (to risk-weighted assets)
Company
Bank
Total capital (to risk-weighted assets)
Company
Bank
$
113,205
100,552
20.41 %
18.15
N/A
22,157
$
113,205
100,552
113,205
100,552
116,512
103,859
38.57
34.36
38.57
34.36
39.70
35.49
N/A
13,171
N/A
17,559
N/A
23,415
N/A
4.0
N/A
4.5
N/A
6.0
N/A
8.0
N/A
27,697
$
N/A
5.0 %
N/A
19,024
N/A
23,415
N/A
29,268
N/A
6.5
N/A
8.0
N/A
10.0
(1) The Company is not subject to the regulatory capital ratios imposed by Basel III on bank holding
companies because the Company was deemed to be a small bank holding company as of September
30, 2016.
Activities and Investments of Insured State-Chartered Banks and Savings Banks. The activities
and equity investments of FDIC-insured, state-chartered banks and savings banks are generally limited to
those that are permissible for national banks. Under regulations dealing with equity investments, an
insured state bank or savings bank generally may not directly or indirectly acquire or retain any equity
investment of a type, or in an amount, that is not permissible for a national bank. An insured state bank is
not prohibited from, among other things:
•
acquiring or retaining a majority interest in a subsidiary;
investing as a limited partner in a partnership the sole purpose of which is direct or
•
indirect investment in the acquisition, rehabilitation or new construction of a qualified housing
project, provided that such limited partnership investments may not exceed 2% of the bank’s total
assets;
•
acquiring up to 10% of the voting stock of a company that solely provides or reinsures
33
directors’, trustees’ and officers’ liability insurance coverage or bankers’ blanket bond group
insurance coverage for insured depository institutions; and
• acquiring or retaining the voting shares of a depository institution if certain requirements are met.
The FDIC has adopted regulations pertaining to the other activity restrictions imposed upon
insured state-chartered banks and savings banks and their subsidiaries. Pursuant to such regulations,
insured state banks and savings banks engaging in impermissible activities may seek approval from the
FDIC to continue such activities. State banks and savings banks not engaging in such activities but that
desire to engage in otherwise impermissible activities either directly or through a subsidiary may apply
for approval from the FDIC to do so; however, if such bank fails to meet the minimum capital
requirements or the activities present a significant risk to the FDIC insurance funds, such application will
not be approved by the FDIC. Pursuant to this authority, the FDIC has determined that investments in
certain majority-owned subsidiaries of insured state-chartered banks and savings banks do not represent a
significant risk to the deposit insurance funds. Investments permitted under that authority include real
estate activities and securities activities.
Restrictions on Capital Distributions. Under federal rules, an insured depository institution may
not pay any dividend if payment would cause it to become undercapitalized or if it is already
undercapitalized. In addition, federal regulators have the authority to restrict or prohibit the payment of
dividends for safety and soundness reasons. The FDIC also prohibits an insured depository institution
from paying dividends on its capital stock or interest on its capital notes or debentures (if such interest is
required to be paid only out of net profits) or distributing any of its capital assets while it remains in
default in the payment of any assessment due the FDIC. The Bank is currently not in default in any
assessment payment to the FDIC. Pennsylvania law also restricts the payment and amount of dividends,
including the requirement that dividends be paid only out of accumulated net earnings.
Incentive Compensation. Guidelines adopted by the federal banking agencies pursuant to the
FDIA prohibit excessive compensation as an unsafe and unsound practice and describe compensation as
excessive when the amounts paid are unreasonable or disproportionate to the services performed by an
executive officer, employee, director or principal stockholder.
In January 2010, the FDIC announced that it would seek public comment on whether banks with
compensation plans that encourage risky behavior should be charged higher deposit assessment rates than
such banks would otherwise be charged. The comment period ended in February 2010. As of September
30, 2016, a final rule has not been adopted.
In June 2010, the federal banking agencies issued comprehensive guidance on incentive
compensation policies (the “Incentive Compensation Guidance”) intended to ensure that the incentive
compensation policies of banking organizations do not undermine the safety and soundness of such
organizations by encouraging excessive risk-taking. The Incentive Compensation Guidance, which covers
all employees that have the ability to materially affect the risk profile of an organization, either
individually or as part of a group, is based upon the key principles that a banking organization’s incentive
compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the
organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal
controls and risk management, and (iii) be supported by strong corporate governance, including active
and effective oversight by the organization’s board of directors. Any deficiencies in compensation
practices that are identified may be incorporated into the organization’s supervisory ratings, which can
affect its ability to make acquisitions or perform other actions. The Incentive Compensation Guidance
provides that enforcement actions may be taken against a banking organization if its incentive
compensation arrangements or related risk-management control or governance processes pose a risk to
34
the organization’s safety and soundness and the organization is not taking prompt and effective measures
to correct the deficiencies.
In April 2011, the federal banking agencies and the SEC jointly published proposed rulemaking
designed to implement provisions of the Dodd-Frank Act prohibiting incentive compensation
arrangements that would encourage inappropriate risk taking. Those proposed regulations apply only to a
financial institution or its holding company with $1 billion or more of assets. In June 2016, the federal
banking agencies and the SEC published a new proposed rule to implement these provsions.
The scope and content of the U.S. banking regulators’ policies on incentive compensation are
continuing to develop. It cannot be determined at this time whether a final rule will be adopted and
whether compliance with such a final rule will adversely affect the ability of Prudential Bancorp and the
Bank to hire, retain and motivate their key employees.
Privacy Requirements. Federal law places limitations on financial institutions like the Bank
regarding the sharing of consumer financial information with unaffiliated third parties. Specifically, these
provisions require all financial institutions offering financial products or services to retail customers to
provide such customers with the financial institution’s privacy policy and provide such customers the
opportunity to “opt out” of the sharing of personal financial information with unaffiliated third parties.
The Bank currently has a privacy protection policy in place and believes such policy is in compliance
with applicable regulations.
Anti-Money Laundering. Federal anti-money laundering rules impose various requirements on
financial institutions to prevent the use of the U.S. financial system to fund terrorist activities. These
provisions include a requirement that financial institutions operating in the United States have anti-money
laundering compliance programs, due diligence policies and controls to ensure the detection and reporting
of money laundering. Such compliance programs supplement existing compliance requirements, also
applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control
Regulations. The Bank has established policies and procedures to ensure compliance with the federal anti-
money laundering provisions.
UDAP and UDAAP. Recently, banking regulatory agencies have increasingly used a general
consumer protection statute to address “unethical” or otherwise “bad” business practices that may not
necessarily fall directly under the purview of a specific banking or consumer finance law. The law of
choice for enforcement against such business practices has been Section 5 of the Federal Trade
Commission Act (the “FTC Act”), which is the primary federal law that prohibits unfair or deceptive acts
or practices, referred to as UDAP, and unfair methods of competition in or affecting commerce.
“Unjustified consumer injury” is the principal focus of the FTC Act. Prior to the Dodd- Frank Act, there
was little formal guidance to provide insight to the parameters for compliance with UDAP laws and
regulations. However, UDAP laws and regulations have been expanded under the Dodd-Frank Act to
apply to “unfair, deceptive or abusive acts or practices,” referred to as UDAAP, which have been
delegated to the CFPB for supervision. The CFPB has published its first Supervision and Examination
Manual that addresses compliance with and the examination of UDAAP. The potential reach of the
CFPB’s broad new rulemaking powers and UDAAP authority on the operations of financial institutions
offering consumer financial products or services, including the Bank is currently unknown.
Community Reinvestment Act. All insured depository institutions have a responsibility under the
Community Reinvestment Act and related regulations to help meet the credit needs of their communities,
including low- and moderate-income neighborhoods. An institution’s failure to comply with the
provisions of the Community Reinvestment Act could result in restrictions on its activities. The Bank
received a “satisfactory” Community Reinvestment Act rating in its most recently completed
35
examination.
Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank of
Pittsburgh, which is one of 11 regional Federal Home Loan Banks. Each Federal Home Loan Bank serves
as a reserve or central bank for its members within its assigned region. It is funded primarily from
proceeds from the sale of consolidated obligations of the Federal Home Loan Bank System. It makes
loans to members (i.e., advances) in accordance with policies and procedures established by the board of
directors of the Federal Home Loan Bank.
As a member, the Bank is required to purchase and maintain stock in the Federal Home Loan
Bank of Pittsburgh in an amount in accordance with the Federal Home Loan Bank’s capital plan and
sufficient to ensure that the Federal Home Loan Bank remains in compliance with its minimum capital
requirements. At September 30, 2016, the Bank was in compliance with this requirement.
Federal Reserve Board System. The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their transaction accounts, which are
primarily checking and NOW accounts, and non-personal time deposits. The balances maintained to meet
the reserve requirements imposed by the Federal Reserve Board may be used to satisfy the liquidity
requirements that are imposed by the Department. At September 30, 2016, the Bank was in compliance
with these reserve requirements.
Regulation of Prudential Bancorp
Bank Holding Company Act Activities and Other Limitations. Under the Bank Holding Company
Act, Prudential Bancorp must obtain the prior approval of the Federal Reserve Board before it may
acquire control of another bank or bank holding company, merge or consolidate with another bank
holding company, acquire all or substantially all of the assets of another bank or bank holding company,
or acquire direct or indirect ownership or control of any voting shares of any bank or bank holding
company if, after such acquisition, Prudential Bancorp would directly or indirectly own or control more
than 5% of such shares.
Federal statutes impose restrictions on the ability of a bank holding company and its nonbank
subsidiaries to obtain extensions of credit from its subsidiary bank, on the subsidiary bank’s investments
in the stock or securities of the holding company, and on the subsidiary bank’s taking of the holding
company’s stock or securities as collateral for loans to any borrower. A bank holding company and its
subsidiaries are also prevented from engaging in certain tie-in arrangements in connection with any
extension of credit, lease or sale of property, or furnishing of services by the subsidiary bank.
A bank holding company is required to serve as a source of financial and managerial strength to
its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it
has been the policy of the Federal Reserve Board that a bank holding company should stand ready to use
available resources to provide adequate capital to its subsidiary banks during periods of financial stress or
adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company’s failure to meet its obligations to
serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve
Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board
regulations, or both. The Dodd-Frank Act included a provision that directs federal regulators to require
depository institution holding companies to serve as a source of strength for their depository institution
subsidiaries. To date, no regulations have been promulgated to implement that provision.
36
Non-Banking Activities. The business activities of Prudential Bancorp, as a bank holding
company, are restricted by the Bank Holding Company Act. Under the Bank Holding Company Act and
the Federal Reserve Board’s bank holding company regulations, bank holding companies may only
engage in, or acquire or control voting securities or assets of a company engaged in:
banking or managing or controlling banks and other subsidiaries authorized under the
•
Bank Holding Company Act; and
any Bank Holding Company Act activity the Federal Reserve Board has determined to be
•
so closely related that it is incidental to banking or managing or controlling banks.
The Federal Reserve Board has determined by regulation that certain activities are closely related
to banking including operating a mortgage company, finance company, credit card company, factoring
company, trust company or savings association; performing certain data processing operations; providing
limited securities brokerage services; acting as an investment or financial advisor; acting as an insurance
agent for certain types of credit-related insurance; leasing personal property on a full-payout, non-
operating basis; providing tax planning and preparation services; operating a collection agency; and
providing certain courier services. Moreover, as discussed below, certain other activities are permissible
for a bank holding company that becomes a financial holding company.
Financial Holding Companies. Bank holding companies may also engage in a broad range of
activities under a type of financial services company known as a “financial holding company.” A
financial holding company essentially is a bank holding company with significantly expanded powers.
Financial holding companies are authorized by statute to engage in a number of financial activities
previously impermissible for bank holding companies, including securities underwriting, dealing and
market making; sponsoring mutual funds and investment companies; insurance underwriting and agency;
and merchant banking activities. The Federal Reserve Board and the Department of the Treasury are also
authorized to permit additional activities for financial holding companies if the activities are “financial in
nature” or “incidental” to financial activities. A bank holding company may become a financial holding
company if each of its subsidiary banks is well capitalized, well managed, and has at least a “satisfactory”
Community Reinvestment Act rating. A financial holding company must provide notice to the Federal
Reserve Board within 30 days after commencing activities previously determined by statute or by the
Federal Reserve Board and Department of the Treasury to be permissible. Prudential Bancorp has not
submitted notices to the Federal Reserve Board of its intent to be deemed a financial holding company.
However, it is not precluded from submitting a notice in the future should it wish to engage in activities
only permitted to financial holding companies.
Regulatory Capital Requirements. The Federal Reserve Board has adopted capital adequacy
guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank
holding company and in analyzing applications to it under the Bank Holding Company Act. The Federal
Reserve Board’s capital adequacy guidelines for bank holding company, on a consolidated basis, are
similar to those imposed on the Bank by the FDIC. See “-Regulation of Prudential Savings Bank -
Capital Requirements.” Moreover, certain of the bank holding company capital requirements promulgated
by the Federal Reserve Board in 2013 became effective as of January 1, 2015. Those requirements
establish four minimum capital ratios that Prudential Bancorp had to comply with as of that date as set
forth in the table below. However, in May 2015, amendments to the Federal Reserve Board’s small bank
holding company policy statement (the “SBHC Policy”) became effective which increased the asset
threshold to qualify to utilize the provisions of the SBHC Policy from $500 million to $1.0 billion. Bank
holding companies which are subject to the SBHC Policy are not subject to compliance with the
regulatory capital requirements set forth in the table below until they exceed $1.0 billion in assets. As a
consequence, as of June 30, 2015, Prudential Bancorp was not required to comply with the requirements
37
set forth below until such time that its consolidated total assets exceed $1.0 billion or the Federal Reserve
Board determines that Prudential Bancorp is no longer deemed to be a small bank holding company.
However, if Prudential Bancorp had been subject to the requirements, it would have been in compliance
with such requirements.
(cid:18)(cid:258)(cid:393)(cid:349)(cid:410)(cid:258)(cid:367)(cid:3)(cid:90)(cid:258)(cid:410)(cid:349)(cid:381)(cid:3)
(cid:90)(cid:286)(cid:336)(cid:437)(cid:367)(cid:258)(cid:410)(cid:381)(cid:396)(cid:455)(cid:3)(cid:68)(cid:349)(cid:374)(cid:349)(cid:373)(cid:437)(cid:373)(cid:3)
(cid:18)(cid:381)(cid:373)(cid:373)(cid:381)(cid:374)(cid:3)(cid:28)(cid:395)(cid:437)(cid:349)(cid:410)(cid:455)(cid:3)(cid:100)(cid:349)(cid:286)(cid:396)(cid:3)(cid:1005)(cid:3)(cid:18)(cid:258)(cid:393)(cid:349)(cid:410)(cid:258)(cid:367)(cid:3)
(cid:100)(cid:349)(cid:286)(cid:396)(cid:3)(cid:1005)(cid:3)(cid:62)(cid:286)(cid:448)(cid:286)(cid:396)(cid:258)(cid:336)(cid:286)(cid:3)(cid:18)(cid:258)(cid:393)(cid:349)(cid:410)(cid:258)(cid:367)(cid:3)
(cid:100)(cid:349)(cid:286)(cid:396)(cid:3)(cid:1005)(cid:3)(cid:90)(cid:349)(cid:400)(cid:364)(cid:882)(cid:17)(cid:258)(cid:400)(cid:286)(cid:282)(cid:3)(cid:18)(cid:258)(cid:393)(cid:349)(cid:410)(cid:258)(cid:367)(cid:3)
(cid:100)(cid:381)(cid:410)(cid:258)(cid:367)(cid:3)(cid:90)(cid:349)(cid:400)(cid:364)(cid:882)(cid:17)(cid:258)(cid:400)(cid:286)(cid:282)(cid:3)(cid:18)(cid:258)(cid:393)(cid:349)(cid:410)(cid:258)(cid:367)(cid:3)
(cid:1008)(cid:856)(cid:1009)(cid:1081)(cid:3)
(cid:1008)(cid:856)(cid:1004)(cid:1081)(cid:3)
(cid:1010)(cid:856)(cid:1004)(cid:1081)(cid:3)
(cid:1012)(cid:856)(cid:1004)(cid:1081)(cid:3)
The leverage capital requirement is calculated as a percentage of total assets and the other three
capital requirements are calculated as a percentage of risk-weighted assets. For a more detailed
discussion of the 2013 capital rules, see “Recent Regulatory Capital Regulations” under “Regulation of
Prudential Savings Bank” above.
Restrictions on Dividends and Repurchases. Prudential Bancorp’s ability to declare and pay
dividends may depend in part on dividends received from the Bank. The Banking Code regulates the
distribution of dividends by savings banks and states, in part, that dividends may be declared and paid out
of accumulated net earnings, provided that the bank continues to meet its surplus requirements. In
addition, dividends may not be declared or paid if the Bank is in default in payment of any assessment
due the FDIC.
A Federal Reserve Board policy statement on the payment of cash dividends states that a bank
holding company should pay cash dividends only to the extent that the holding company’s net income for
the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is
consistent with the holding company’s capital needs, asset quality and overall financial condition. The
Federal Reserve Board’s policy statement also provides that it would be inappropriate for a company
experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the federal
prompt corrective action regulations, the Federal Reserve Board may prohibit a bank holding company
from paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized.”
See “-Regulation of Prudential Savings Bank - Prompt Corrective Action” above.
Section 225.4(b)(1) of Regulation Y promulgated by the Federal Reserve Board requires that a
bank holding company that is not well capitalized or well managed, or that is subject to any unresolved
supervisory issues, provide prior notice to the Federal Reserve Board for any repurchase or redemption of
its equity securities for cash or other value that would reduce by 10 percent or more the bank holding
company’s consolidated net worth aggregated over the preceding 12-month period. The Federal Reserve
Bank may disapprove such a purchase or redemption if it determines that the proposal would constitute an
unsafe or unsound practice or would violate any law, regulation, Federal Reserve Board order or any
condition imposed by, or written agreement with, the Federal Reserve Board.
Federal Securities Laws. Prudential Bancorp’s common stock is registered with the SEC under
Section 12(b) of the Securities Exchange Act of 1934. Prudential Bancorp is subject to the proxy and
tender offer rules, insider trading reporting requirements and restrictions, and certain other requirements
under the Securities Exchange Act of 1934.
The Sarbanes-Oxley Act. As a public company, Prudential Bancorp is subject to the Sarbanes-
Oxley Act of 2002 which addresses, among other issues, corporate governance, auditing and accounting,
executive compensation, and enhanced and timely disclosure of corporate information. As directed by the
38
Sarbanes-Oxley Act, our principal executive officer and principal financial officer are required to certify
that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules
adopted by the SEC under the Sarbanes-Oxley Act have several requirements, including having these
officers certify that: they are responsible for establishing, maintaining and regularly evaluating the
effectiveness of our internal control over financial reporting; they have made certain disclosures to our
auditors and the audit committee of the Board of Directors about our internal control over financial
reporting; and they have included information in our quarterly and annual reports about their evaluation
and whether there have been changes in our internal control over financial reporting or in other factors
that could materially affect internal control over financial reporting.
Volcker Rule Regulations. Regulations adopted by the federal banking agencies to implement the
provisions of the Dodd-Frank Act commonly referred to as the Volcker Rule became effective on April 1,
2014 with full compliance being phased in over a period ending on July 21, 2015. The regulations
contain prohibitions and restrictions on the ability of financial institutions holding companies and their
affiliates to engage in proprietary trading and to hold certain interests in, or to have certain relationships
with, various types of investment funds, including hedge funds and private equity funds. Prudential
Bancorp is in compliance with the various provisions of the Volcker Rule regulations.
Limitations on Transactions with Affiliates. Transactions between insured financial institutions
and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of an
insured financial institution is any company or entity which controls, is controlled by or is under common
control with the insured financial institution. In a bank holding company context, the bank holding
company of an insured financial institution (such as Prudential Bancorp) and any companies which are
controlled by such holding company are affiliates of the insured financial institution. Generally, Section
23A limits the extent to which the insured financial institution or its subsidiaries may engage in “covered
transactions” with any one affiliate to an amount equal to 10% of such institution’s capital stock and
surplus, and contains an aggregate limit on all such transactions with all affiliates to an amount equal to
20% of such capital stock and surplus. Section 23B applies to “covered transactions” as well as certain
other transactions and requires that all transactions be on terms substantially the same, or at least as
favorable to the insured financial institution, as those provided to a non-affiliate. The term “covered
transaction” includes the making of loans to, purchase of assets from and issuance of a guarantee to an
affiliate and similar transactions. Section 23B transactions also include the provision of services and the
sale of assets by an insured financial institution to an affiliate.
In addition, Sections 22(g) and (h) of the Federal Reserve Act place restrictions on loans to
executive officers, directors and principal stockholders. Under Section 22(h), loans to a director, an
executive officer and to a greater than 10% stockholder of an insured financial institution, and certain
affiliated interests of either, may not exceed, together with all other outstanding loans to such person and
affiliated interests, the insured financial institution’s loans to one borrower limit (generally equal to 15%
of the institution’s unimpaired capital and surplus). Section 22(h) also requires that loans to directors,
executive officers and principal stockholders be made on terms substantially the same as offered in
comparable transactions to other persons unless the loans are made pursuant to a benefit or compensation
program that (i) is widely available to employees of the institution and (ii) does not give preference to any
director, executive officer or principal stockholder, or certain affiliated interests of either, over other
employees of the insured financial institution. Section 22(h) also requires prior board approval for certain
loans. In addition, the aggregate amount of extensions of credit by an insured financial institution to all
insiders cannot exceed the institution’s unimpaired capital and surplus. Furthermore, Section 22(g) places
additional restrictions on loans to executive officers. At September 30, 2016, the Bank was in compliance
with the above restrictions.
39
Federal Taxation
TAXATION
General. Prudential Bancorp and the Bank are subject to federal income taxation in the same
general manner as other corporations with some exceptions listed below. The following discussion of
federal, state and local income taxation is only intended to summarize certain pertinent income tax
matters and is not a comprehensive description of the applicable tax rules. As of September 30, 2016, the
Internal Revenue Service had concluded an audit of the Company’s tax returns for the year ended
September 30, 2010 and no adverse findings were noted. The federal and state income tax returns for
taxable years through September 30, 2013 have been closed for purposes of examination by the Internal
Revenue Service or the Pennsylvania Department of Revenue.
Prudential Bancorp files a consolidated federal income tax return with the Bank and its
subsidiary, PSB. Accordingly, any cash distributions made by Prudential Bancorp to its shareholders will
be treated as cash dividends and not as a non-taxable return of capital to shareholders for federal and state
tax purposes.
Method of Accounting. For federal income tax purposes, Prudential Bancorp and the Bank
report income and expenses on the accrual method of accounting and file their federal income tax return
on a fiscal year basis.
Bad Debt Reserves. The Small Business Job Protection Act of 1996 eliminated the use of the
reserve method of accounting for bad debt reserves by savings associations, effective for taxable years
beginning after 1995. Prior to that time, the Bank was permitted to establish a reserve for bad debts and
to make additions to the reserve. These additions could, within specified formula limits, be deducted in
arriving at taxable income. As a result of the Small Business Job Protection Act of 1996, savings
associations must use the specific charge-off method in computing their bad debt deduction beginning
with their 1996 federal tax return. In addition, federal legislation required the recapture over a six year
period of the excess of tax bad debt reserves at December 31, 1995 over those established as of December
31, 1987.
Taxable Distributions and Recapture. Prior to the Small Business Job Protection Act of 1996,
bad debt reserves created prior to January 1, 1988 were subject to recapture into taxable income if the
Bank failed to meet certain thrift asset and definitional tests. New federal legislation eliminated these
savings association related recapture rules. However, under current law, pre-1988 reserves remain subject
to recapture should the Bank make certain non-dividend distributions or cease to maintain a bank charter.
At September 30, 2016, the total federal pre-1988 reserve was approximately $6.6 million. The
reserve reflects the cumulative effects of federal tax deductions by the Bank for which no federal income
tax provisions have been made.
Alternative Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax at
a rate of 20% on a base of regular taxable income plus certain tax preferences. The alternative minimum
tax is payable to the extent such alternative minimum tax income is in excess of the regular income tax.
Net operating losses, of which the Bank has none, can offset no more than 90% of alternative minimum
taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax
liabilities in future years. The Bank has not been subject to the alternative minimum tax.
Corporate Dividends Received Deduction. Prudential Bancorp may exclude from its income
100% of dividends received from the Bank as a member of the same affiliated group of corporations. The
40
corporate dividends received deduction is 80% in the case of dividends received from corporations which
a corporate recipient owns less than 80%, but at least 20% of the distribution corporation. Corporations
which own less than 20% of the stock of a corporation distributing a dividend may deduct only 70% of
dividends received.
State and Local Taxation
Pennsylvania Taxation. Prudential Bancorp is subject to the Pennsylvania Corporate Net
Income Tax and the Capital Stock and Franchise Tax. The Corporation Net Income Tax rate for 2016 is
9.99% and is imposed on unconsolidated taxable income for federal purposes with certain adjustments.
In general, the Capital Stock and Franchise Tax is a property tax imposed on a corporation’s capital stock
value at a statutorily defined rate, such value being determined in accordance with a fixed formula based
upon average net income and net worth.
Prudential Savings is subject to tax under the Pennsylvania Mutual Thrift Institutions Tax Act, as
amended to include thrift institutions having capital stock. Pursuant to the Mutual Thrift Institutions Tax,
the tax rate is 11.50%. The Mutual Thrift Institutions Tax exempts Prudential Savings from other taxes
imposed by the Commonwealth of Pennsylvania for state income tax purposes and from all local taxation
imposed by political subdivisions, except taxes on real estate and real estate transfers. The Mutual Thrift
Institutions Tax is a tax upon net earnings, determined in accordance with generally accepted accounting
principles with certain adjustments. The Mutual Thrift Institutions Tax, in computing income according
to generally accepted accounting principles, allows for the deduction of interest earned on state and
federal obligations, while disallowing a percentage of a thrift’s interest expense deduction in the
proportion of interest income on those securities to the overall interest income of Prudential Savings. Net
operating losses, if any, thereafter can be carried forward three years for Mutual Thrift Institutions Tax
purposes.
Item 1A. Risk Factors.
In analyzing whether to make or to continue on investment in our securities, investors should consider,
among other factors, the following risk factors.
Our non-performing assets expose us to increased risk of loss
At September 30, 2016, we had total non-performing assets of $16.5 million, or 2.94% of total
assets as compared to $14.8 million or 3.04% of total assets as of September 30, 2015. Our non-
performing assets adversely affect our net income in various ways. We do not accrue interest income on
non-accrual loans and no interest income is recognized until the loan is performing and the financial
condition of the borrower supports recording interest income on a cash basis. We must reserve for
probable losses, which are established through a current period charge to income in the provision for loan
losses, and from time to time, write down the value of properties in our other real estate owned portfolio
to reflect changing market values. Additionally, there are legal fees associated with the resolution of
problem assets as well as carrying costs such as taxes, insurance and maintenance related to our other real
estate owned. Further, the resolution of non-performing assets requires the active involvement of
management, which can distract us from the overall supervision of operations and other income-
producing activities of Prudential Savings. Finally, if our estimate of the allowance for loan losses is
inaccurate, we will have to increase the allowance accordingly. At September 30, 2016, our allowance for
loan losses amounted to $3.3 million, or 0.9% of total loans and 20.6% of non-performing loans,
compared to $2.9 million, or 0.9% of total loans and 21.0% of non-performing loans at September 30,
2015.
41
Higher loan losses could require us to increase our allowance for loan losses through a charge to
earnings
When we loan money we incur the risk that our borrowers will not repay their loans. We reserve
for loan losses by establishing an allowance through a charge to earnings. The amount of this allowance is
based on our assessment of loan losses inherent in our loan portfolio. The process for determining the
amount of the allowance is critical to our financial results and condition. It requires subjective and
complex judgments about the future, including forecasts of economic or market conditions that might
impair the ability of our borrowers to repay their loans. We might underestimate the loan losses inherent
in our loan portfolio and have loan losses in excess of the amount reserved. We might increase the
allowance because of changing economic conditions. For example, in a rising interest rate environment,
borrowers with adjustable-rate loans could see their payments increase. There may be a significant
increase in the number of borrowers who are unable or unwilling to pay their loans, resulting in our
charging off more loans and increasing our allowance. In addition, when real estate values decline, the
potential severity of loss on a real estate-secured loan can increase significantly, especially in the case of
loans with high combined loan-to-value ratios. The continued weakness in the national economy and the
economies of the areas in which our loans are concentrated could result in an increase in loan
delinquencies, foreclosures or repossessions, resulting in the increased charge-off amounts and the need
for additional loan loss provisions in future periods. In addition, our determination as to the amount of our
allowance for loan losses is subject to review by our primary regulators, the Pennsylvania Department of
Banking and Securities and the Federal Deposit Insurance Corporation, as part of their examination
process, which may result in the establishment of an additional provision based upon the judgment of
such agencies after a review of the information available at the time of its examination. Our allowance for
loan losses amounted to 0.9% of total loans and 20.6% of non-performing loans at September 30, 2016.
Our allowance for loan losses at September 30, 2016 may not be sufficient to cover future loan losses. A
large loss could deplete the allowance and require an increased provision to replenish the allowance,
which would negatively affect earnings.
Our existing residential mortgage loans exposes us to lending risks, and the geographic
concentration of our loan portfolio and lending activities makes us vulnerable to a downturn in the
local economy.
At September 30, 2016, $233.5 million, or 66.4 % of our loan portfolio, was secured by one-to-
four family real estate. One-to-four family residential mortgage lending is generally sensitive to regional
and local economic conditions that significantly impact the ability of borrowers to meet their loan
payment obligations, making loss levels difficult to predict. The decline in residential real estate values as
a result of the downturn in our local housing market that occurred in recent years in many cases reduced
the value of the real estate collateral securing these types of loans. Declines in real estate values could
cause some of our residential mortgages loans to be inadequately collateralized, which would expose us to
a greater risk of loss if we seek to recover on defaulted loans by selling the real estate collateral. Real
estate values are affected by various factors, including supply and demand, changes in general or regional
economic conditions, interest rates, governmental rules or policies and natural disasters. Future weakness
in economic conditions also could result in reduced loan demand and a decline in loan originations. In
particular, a significant decline in real estate values would likely lead to a decrease in new construction,
commercial real estate and residential mortgage loan originations and increased delinquencies and
defaults in our real estate loan portfolio.
Our increased emphasis on originating construction and commercial real estate loans may expose
us to increased lending risks.
42
At September 30, 2016, $21.8 million, or 6.2%, of our loan portfolio consisted of construction
loans, including loans for the acquisition and development of property, and $80.0 million, or 22.7%, of
our loan portfolio consisted of commercial real estate loans. Construction financing is generally
considered to involve a higher degree of credit risk than long-term financing on improved, owner-
occupied residential real estate. Risk of loss on a construction loan depends largely upon the accuracy of
the initial estimate of the property’s value at completion of construction compared to the estimated costs,
including interest, of construction and other assumptions. Additionally, if the estimate of value proves to
be inaccurate, we may be confronted with a project, when completed, having a value less than the loan
amount. We have attempted to minimize these risks by generally concentrating on residential construction
loans in our market area to contractors with whom we have established lending relationships and by
selling, with respect to larger construction and land development loans, participation interests in order to
reduce our exposure. Likewise, commercial real estate loans generally expose a lender to a greater risk of
loss than one-to-four family residential loans. Repayment of commercial real estate loans generally is
dependent, in large part, on sufficient income from the property or business to cover operating expenses
and debt service. Commercial real estate loans typically involve larger loan balances to single borrowers
or groups of related borrowers compared to one-to-four family residential mortgage loans. Changes in
economic conditions that are out of the control of the borrower and lender could impact the value of the
security for the loan, the future cash flow of the involved property, or the marketability of a construction
project with respect to loans originated for the acquisition and development of property. Additionally, any
decline in real estate values may be more pronounced with respect to commercial real estate properties
than residential properties. Also, many of construction borrowers have more than one loan outstanding
with us. Consequently, an adverse development with respect to one loan or one credit relationship can
expose us to a significantly greater risk of loss compared to an adverse development with respect to a
residential mortgage loan.
In recent periods, a majority of our non-performing assets have related to construction loans. At
September 30, 2016, five construction loans aggregating $10.3 million were considered non-performing
and on non-accrual status. All of these construction loans were related to a loan relationship consisting of
nine loans with a total principal balance outstanding of $12.3 million, all of which was deemed non-
performing as of such date. In addition, non-performing assets at September 30, 2016 included two
commercial real estate loans aggregating $1.3 million and two single-family residential loans aggregating
$711,000 related to the same borrower.
We have a high concentration of loans secured by real estate in our market area; adverse economic
conditions in our market area have adversely affected, and may continue to adversely affect, our
financial condition and result of operations
Substantially all of our loans are to individuals, businesses and real estate developers in
Philadelphia and Delaware Counties, Pennsylvania and neighboring areas in southern Pennsylvania and
southern New Jersey and our business depends significantly on general economic conditions in these
market areas. Severe declines in housing prices and property values have been particularly acute in our
primary market areas in recent years. A deterioration in economic conditions or a prolonged weakness in
the economic recovery in our primary market areas could result in the following consequences, any of
which could have a material adverse effect on our business:
•
•
•
•
•
Loan delinquencies may increase;
Problem assets and foreclosures may increase;
Demand for our products and services may decline;
The carrying value of our other real estate owned may decline further; and
Collateral for loans made by us, especially real estate, may continue to decline in value, in turn
reducing a customer’s borrowing power, and reducing the value of assets and collateral associated
43
with our loans.
The Company’s credit standards and its on-going credit assessment processes might not protect it
from significant credit losses.
The Company assumes credit risk by virtue of making loans and extending loan commitments
and letters of credit. We manage our credit risk through a program of underwriting standards, the review
of certain credit decisions and a continuous quality assessment process of credit already extended. Our
exposure to credit risk is managed through the use of consistent underwriting standards that emphasize
local lending while avoiding highly leveraged transactions as well as excessive industry and other
concentrations. The Company’s credit administration function employs risk management techniques to
help ensure that problem loans and leases are promptly identified. While these procedures are designed to
provide us with the information needed to implement policy adjustments where necessary and to take
appropriate corrective actions, there can be no assurance that such measures will be effective in avoiding
undue credit risk.
A significant percentage of our assets is invested in securities which typically have a lower yield
than our loan portfolio.
Our results of operations are substantially dependent on our net interest income. At September 30,
2016, $193.0 million or 34.5 % of our assets was invested in investment securities, cash and amounts due
from banks. These investments yield substantially less than the loans we hold in our portfolio. The
weighted average yield on such assets for the year ended September 30, 2016 was 2.47% as compared to
3.93% for loans. Accordingly, our net interest margin is lower than it would have been if a higher
proportion of our interest-earning assets consisted of loans. In addition, at September 30, 2016, $138.7
million, or 77.6% of our investment securities, are classified as available for sale and reported at fair
value with unrealized gains or losses excluded from earnings and reported in other comprehensive
income, which affects our reported equity. Accordingly, given the material size of the investment
securities portfolio classified as available for sale and due to possible mark-to-market adjustments of that
portion of the portfolio resulting from market conditions, we may experience greater volatility in the
value of reported equity. Moreover, given that we actively manage our investment securities portfolio
classified as available for sale, we may sell securities which could result in a realized loss, thereby
reducing our net income.
While we intend to invest a greater proportion of our assets in loans with the goal of increasing
our net interest income, we may not be able to increase originations of loans that are acceptable to us.
Our success depends on hiring and retaining certain key personnel.
Our performance largely depends on the talents and efforts of highly skilled individuals. We rely
on key personnel to manage and operate our business, including major revenue generating functions such
as loan and deposit generation, as well as operational functions such as regulatory compliance and
information technology. The loss of key staff may adversely affect our ability to maintain and manage
these functions effectively, which could negatively affect our revenues. In addition, loss of key personnel
could result in increased recruiting and hiring expenses, which could cause a decrease in our net income.
Our continued ability to compete effectively depends on our ability to attract new employees and to retain
and motivate our existing employees.
Higher interest rates would hurt our profitability
Management is unable to predict fluctuations of market interest rates, which are affected by many
44
factors, including inflation, recession, unemployment, monetary policy, domestic and international
disorder and instability in domestic and foreign financial markets, and investor and consumer demand.
Our primary source of income is net interest income, which is the difference between the interest income
generated by our interest-earning assets (consisting primarily of single-family residential loans) and the
interest expense generated by our interest-bearing liabilities (consisting primarily of deposits). The level
of net interest income is primarily a function of the average balance of our interest-earning assets, the
average balance of our interest-bearing liabilities, and the spread between the yield on such assets and the
cost of such liabilities. These factors are influenced by both the pricing and mix of our interest-earning
assets and our interest-bearing liabilities which, in turn, are impacted by such external factors as the local
economy, competition for loans and deposits, the monetary policy of the Federal Open Market Committee
of the Federal Reserve Board (the “FOMC”), and market interest rates. The FOMC has indicated it is
likely that the federal funds rate will be increased within the next year, possibly as early as the end of
December 2016.
A sustained increase in market interest rates could adversely affect our earnings. A significant
portion of our loans have fixed interest rates (or, if adjustable, are initially fixed for periods of five to 10
years) and longer terms than our deposits and borrowings. Our net interest income could be adversely
affected if the rates we pay on deposits and borrowings increase more rapidly than the rates we earn on
loans. As a result of our historical focus on the origination of one-to-four family residential mortgage
loans, which focus has been emphasized in recent years due to asset quality issues experienced by our
construction and land development lending activities, the majority of our loans have fixed interest rates.
In addition, a large percentage of our investment securities and mortgage-backed securities have fixed
interest rates and are classified as held to maturity. As is the case with many banks and savings
institutions, our emphasis on increasing the development of core deposits, those with no stated maturity
date, has resulted in our interest-bearing liabilities having a shorter duration than our assets. As of
September 30, 2016, 48.3% of our loan portfolio had maturities of 10 years or more. Furthermore, at such
date, only $87.2 million or 25.0% of the loans due after September 30, 2016 bear adjustable interest rates.
At September 30, 2016, 42.5% of our deposits had no stated maturity date and 62.5% consisted of
certificates of deposit with maturities of one year or less. This imbalance can create significant earnings
volatility because interest rates change over time and are currently at historical low levels. As interest
rates increase, our cost of funds will increase more rapidly than the yields on the bulk of our interest-
earning assets. In addition, the market value of our fixed-rate assets for example, our investment and
mortgage-backed securities portfolios, would decline if interest rates increase. For example, we estimate
that as of September 30, 2016, a 200 basis point increase in interest rates would have resulted in our net
portfolio value declining by approximately $47.7 million or 9.1%. Net portfolio value is the difference
between incoming and outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts.
Changes in laws and regulations and the cost of regulatory compliance with new laws and
regulations may adversely affect our operations and/or increase our costs of operations.
The Company and Prudential Savings are subject to extensive regulation, supervision and
examination by the Pennsylvania Department of Banking and Securities and the FDIC. Such regulation
and supervision governs the activities in which an institution and its holding company may engage and
are intended primarily for the protection of insurance funds and the depositors and borrowers of
Prudential Savings rather than for holders of our common stock. Regulatory authorities have extensive
discretion in their supervisory and enforcement activities, including the imposition of restrictions on our
operations, the classification of our assets and determination of the level of our allowance for loan losses.
These regulations, along with the currently existing tax, accounting, securities, insurance, monetary laws,
rules, standards, policies, and interpretations control the methods by which financial institutions conduct
business, implement strategic initiatives and tax compliance, and govern financial reporting and
45
disclosures. Any change in such regulation and oversight, whether in the form of regulatory policy,
regulations, legislation or supervisory action, may have a material impact on our operations. Further,
changes in accounting standards can be both difficult to predict and involve judgment and discretion in
their interpretation by us and our independent accounting firms. These changes could materially impact,
potentially even retroactively, how we report our financial condition and results of our operations as could
our interpretation of those changes.
The Dodd-Frank Act is significantly changing the current bank regulatory structure and affects
the lending, deposit, investment, trading and operating activities of financial institutions and their holding
companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new
implementing rules and regulations, and to prepare numerous studies and reports for Congress. The
federal agencies are given significant discretion in drafting the implementing rules and regulations, and
consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for
many months or years.
The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to
supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad
rule-making authority for a wide range of consumer protection laws that apply to all banks and savings
institutions, including the authority to prohibit "unfair, deceptive or abusive" acts and practices. The
Consumer Financial Protection Bureau has examination and enforcement authority over all banks with
more than $10 billion in assets. Banks with $10 billion or less in assets continue to be examined for
compliance with the consumer laws by their primary bank regulators.
The Dodd-Frank Act requires minimum leverage (Tier 1) and risk-based capital requirements for
bank holding companies and savings and loan holding companies that are no less than those applicable to
banks, which could limit our ability to borrow at the holding company level and invest the proceeds from
such borrowings as capital in Prudential Savings Bank, and will exclude certain instruments that
previously have been eligible for inclusion by bank holding companies as Tier 1 capital, such as trust
preferred securities.
The full impact of the Dodd-Frank Act on our business will not be known until all of the
regulations implementing the statute are adopted and implemented. As a result, we cannot at this time
predict the extent to which the Dodd-Frank Act will impact our business, operations or financial
condition. However, compliance with these new laws and regulations may require us to make changes to
our business and operations and will likely result in additional costs and divert management’s time from
other business activities, any of which may adversely impact our results of operations, liquidity or
financial condition.
We have become subject to more stringent capital requirements, which may adversely impact our
return on equity, require us to raise additional capital, or constrain us from paying dividends or
repurchasing shares.
In July 2013, the federal banking agencies approved a new rule that has substantially amended
regulatory risk-based capital rules. The final rule implements the regulatory capital reforms from the
Basel Committee on Banking Supervision (“Basel III”) and changes required by the Dodd-Frank Act.
The final rule includes new minimum risk-based capital and leverage ratios, which were effective
for us on January 1, 2015, and refines the definition of what constitutes “capital” for calculating these
ratios. The new minimum capital requirements are: (i) a new common equity Tier 1 capital ratio of 4.5%;
(ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8%
(unchanged from prior rules); and (iv) a Tier 1 leverage ratio of 4%. The final rule also requires
46
unrealized gains and losses on certain “available-for-sale” securities holdings to be included for
calculating regulatory capital requirements unless a one-time opt-out is exercised. Prudential Savings
elected to opt out of the requirement under the final rule to include certain “available-for-sale” securities
holdings for calculating its regulatory capital requirements. The final rule also establishes a “capital
conservation buffer” of 2.5%, and, when fully phased in, will result in the following minimum ratios: (i) a
common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 to risk-based assets capital ratio of 8.5%, and (iii)
a total capital ratio of 10.5%. The new capital conservation buffer requirement begin being phased-in
January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in
January 2019. An institution will be subject to limitations on paying dividends, engaging in share
repurchases and paying discretionary bonuses if its capital level falls below the buffer amount. These
limitations will establish a maximum percentage of eligible retained income that can be utilized for such
actions.
We have analyzed the effects of these new capital requirements on a fully phased-in basis, and we
believe that we meet all of these new requirements, including the full 2.5% capital conservation buffer, as
if these new requirements had been in effect as of September 30, 2016.
The application of more stringent capital requirements could, among other things, result in lower
returns on equity, require the raising of additional capital, and result in regulatory actions if we were to be
unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in
connection with the implementation of Basel III could result in our having to lengthen the term of our
funding, restructure our business models, and/or increase our holdings of liquid assets. Implementation of
changes to asset risk weightings for risk-based capital calculations, items included or deducted in
calculating regulatory capital and/or additional capital conservation buffers could result in management
modifying its business strategy, and could limit our ability to make distributions, including paying
dividends or repurchasing shares. Specifically, beginning in 2016, Prudential Savings ability to pay
dividends is limited if it does not have the capital conservation buffer required by the new capital rules,
which may further limit our ability to pay dividends to stockholders.
Proposed and final regulations could restrict our ability to originate and sell loans.
The Consumer Financial Protection Bureau has issued a rule designed to clarify for lenders how
they can avoid legal liability under the Dodd-Frank Act, which would hold lenders accountable for
ensuring a borrower’s ability to repay a mortgage. Loans that meet this “qualified mortgage” definition
will be presumed to have complied with the new ability-to-repay standard. Under the Consumer Financial
Protection Bureau’s rule, a “qualified mortgage” loan must not contain certain specified features,
including:
•
•
•
•
excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide
discount points” for prime loans);
interest-only payments;
negative amortization; and
terms of longer than 30 years.
Also, to qualify as a “qualified mortgage,” a loan must be made to a borrower whose total
monthly debt-to-income ratio does not exceed 43%. Lenders must also verify and document the income
and financial resources relied upon to qualify the borrower on the loan and underwrite the loan based on a
fully amortizing payment schedule and maximum interest rate during the first five years, taking into
account all applicable taxes, insurance and assessments.
In addition, the Dodd-Frank Act requires the regulatory agencies to issue regulations that require
47
securitizes of loans to retain “not less than 5% of the credit risk for any asset that is not a qualified
residential mortgage.” The regulatory agencies have issued a final rule to implement this requirement.
The final rule provides that the definition of “qualified residential mortgage” includes loans that meet the
definition of qualified mortgage issued by the Consumer Financial Protection Bureau.
The final rule could have a significant effect on the secondary market for loans and the types of
loans we originate, and restrict our ability to make loans. Similarly, the Consumer Financial Protection
Bureau’s rule on qualified mortgages could limit our ability or desire to make certain types of loans or
loans to certain borrowers, which could limit our growth or profitability.
We are a community bank and our ability to maintain our reputation is critical to the success of
our business
We are a community bank, and our reputation is one of the most valuable components of our
business. A key component of our business strategy is to rely on our reputation for customer service and
knowledge of local markets to expand our presence by capturing new business opportunities from existing
and prospective customers in our current market and contiguous areas. As such, we strive to conduct our
business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining
employees who share our core values of being an integral part of the communities we serve, delivering
superior service to our customers and caring about our customers and associates. If our reputation is
negatively affected by the actions of our employees, by our inability to conduct our operations in a
manner that is appealing to current or prospective customers, or otherwise, our business and, therefore,
our operating results may be materially adversely affected.
Strong competition within our market area could hurt our profits and slow growth
We face intense competition in making loans, attracting deposits and hiring and retaining
experienced employees. This competition has made it more difficult for us to make new loans and attract
deposits. Price competition for loans and deposits sometimes results in us charging lower interest rates on
our loans and paying higher interest rates on our deposits, which reduces our net interest income.
Competition also makes it more difficult and costly to attract and retain qualified employees. Some of the
institutions with which we compete have substantially greater resources and lending limits than we have
and may offer services that we do not provide. We expect competition to increase in the future as a result
of legislative, regulatory and technological changes and the continuing trend of consolidation in the
financial services industry. Our profitability depends upon our continued ability to compete successfully
in our market area.
The fair value of our investment securities can fluctuate due to market conditions outside of our
control
As of September 30, 2016, the fair value of our investment securities portfolio was approximately
$179.4 million. We have historically taken a conservative investment strategy, with concentrations of
securities that are backed by government sponsored enterprises. Factors beyond our control can
significantly influence the fair value of securities in our portfolio and can cause potential adverse changes
to the fair value of these securities. These factors include, but are not limited to, rating agency actions in
respect of the securities, defaults by the issuer or with respect to the underlying securities, and changes in
market interest rates and continued instability in the capital markets. Any of these factors, among others,
could cause other-than-temporary impairments and realized and/or unrealized losses in future periods and
declines in other comprehensive income, which could have a material adverse effect on us. The process
for determining whether impairment of a security is other-than-temporary usually requires complex,
48
subjective judgments about the future financial performance and liquidity of the issuer and any collateral
underlying the security in order to assess the probability of receiving all contractual principal and interest
payments on the security.
If the Company fails to maintain an effective system of internal controls, it may not be able to
accurately report its financial results or prevent fraud. As a result, current and potential
shareholders could lose confidence in the Company’s financial reporting, which could harm its
business and the trading price of its common stock.
The Company has established a process to document and evaluate its internal controls over
financial reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002
and the related regulations, which require annual management assessments of the effectiveness of the
Company’s internal controls over financial reporting. In this regard, management has, among other
things, dedicated internal resources and engaged outside consultants to (i) assess and document the
adequacy of internal controls over financial reporting, (ii) take steps to improve control processes, where
appropriate, (iii) validate through testing that controls are functioning as documented and (iv) implement
a continuous reporting and improvement process for internal control over financial reporting. Although
the Company’s management and audit committee believe that its system of internal controls is effective,
the Company cannot be certain that these measures will ensure that the Company implements and
maintains adequate controls over its financial processes and reporting in the future. Any failure to
implement required new or improved controls, or difficulties encountered in their implementation, could
harm the Company’s operating results or cause the Company to fail to meet its reporting obligations. If
the Company fails to correct any issues in the design or operating effectiveness of internal controls over
financial reporting, or fails to prevent fraud, current and potential shareholders could lose confidence in
the Company’s financial reporting, which could harm its business and the trading price of its common
stock.
The Company is subject to a variety of operational risks, including reputational risk, legal and
compliance risk, and the risk of fraud or theft by employees or outsiders.
The Company is exposed to many types of operational risks, including reputational risk, legal and
compliance risk, the risk of fraud or theft by employees or outsiders, and unauthorized transactions by
employees or operational errors, including clerical or record-keeping errors or those resulting from faulty
or disabled computer or telecommunications systems. Negative public opinion can result from its actual
or alleged conduct in any number of activities, including lending practices, corporate governance and
acquisitions and from actions taken by government regulators and community organizations in response
to those activities. Negative public opinion can adversely affect its ability to attract and keep customers
and can expose the Company to litigation and regulatory action.
Because the nature of the financial services business involves a high volume of transactions,
certain errors may be repeated or compounded before they are discovered and successfully rectified. The
Company’s necessary dependence upon automated systems to record and process its transaction volume
may further increase the risk that technical flaws or employee tampering or manipulation of those systems
will result in losses that are difficult to detect. The Company also may be subject to disruptions of its
operating systems arising from events that are wholly or partially beyond its control (for example,
computer viruses or electrical or telecommunications outages), which may give rise to disruption of
service to customers and to financial loss or liability. The Company is further exposed to the risk that its
external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk
of fraud or operational errors by their respective employees as the Company is) and to the risk that its (or
its vendors’) business continuity and data security systems prove to be inadequate. The occurrence of any
of these risks could result in a diminished ability of the Company to operate its business, potential
49
liability to clients, reputational damage and regulatory intervention, which could adversely affect its
business, financial condition and results of operations, perhaps materially.
The Company relies on other companies to provide key components of its business infrastructure.
Third parties provide key components of the Company’s business infrastructure, for example,
system support and network access. While the Company has selected these third party vendors carefully,
it does not control their actions. Any problems caused by these third parties, including those resulting
from their failure to provide services for any reason or their poor performance of services, could
adversely affect the Company’s ability to deliver products and services to its customers and otherwise
conduct its business. Replacing these third party vendors could also entail significant delay and expense.
The Company’s operations may be adversely affected by cyber security risks.
In the ordinary course of business, the Company collects and stores sensitive data, including
proprietary business information and personally identifiable information of our customers and employees
in systems and on networks. In some cases, this confidential or proprietary information is collected
compiled, processed, transmitted or stored by third parties on our behalf. The secure processing,
maintenance and use of this information is critical to operations and our business strategy. The Company
has invested in accepted technologies, and continually reviews processes and practices that are designed
to protect our networks, computers and data from damage or unauthorized access. Despite these security
measures, the Company’s computer systems and infrastructure or those of third parties used by us to
compile, process or store such information may be vulnerable to attacks by hackers or breached due to
employee error, malfeasance, or other disruptions. A breach of any kind could compromise systems and
the information stored there could be accessed, damaged or disclosed. A breach in security could result in
legal claims, regulatory penalties, disruption in operations, and damage to the Company’s reputation,
which could adversely affect our business.
Our ability to successfully compete may be reduced if we are unable to make technological
advances.
The banking industry is experiencing rapid changes in technology. In addition to improving
customer services, effective use of technology increases efficiency and enables financial institutions to
reduce costs. As a result, our future success will depend in part on our ability to address our customers’
needs by using technology. We cannot assure you that we will be able to effectively develop new
technology-driven products and services or be successful in marketing these products to our customers.
Many of our competitors have far greater resources than we have to invest in technology.
Federal Reserve Board policy could limit our ability to pay dividends to our shareholders.
The Federal Reserve Board has issued a policy statement regarding the payment of dividends and
the repurchase of shares of common stock by bank holding companies. In general, the policy provides that
dividends should be paid only out of current earnings and only if the prospective rate of earnings retention
by the holding company appears consistent with the organization’s capital needs, asset quality and overall
financial condition. These regulatory policies could affect our ability to pay dividends, repurchase shares
of common stock or otherwise engage in capital distributions.
Combining the Prudential Bancorp and Polonia Bancorp in connection with the pending merger
may be more difficult, costly or time-consuming than expected.
Prudential Bancorp and Polonia Bancorp have historically operated and, until the effective time
50
of the merger, will continue to operate, independently. The success of the merger will depend, in part, on
the Company’s ability to successfully combine the businesses of Prudential Bancorp and Polonia
Bancorp. To realize these anticipated benefits, after the effective time of the merger, Prudential Bancorp
expects to integrate Polonia’s business into its own. It is possible that the integration process could result
in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in
standards, controls, procedures and policies that adversely affect the combined company’s ability to
maintain relationships with clients, customers, depositors and employees or to achieve the anticipated
benefits of the merger. The loss of key employees could adversely affect the Company’s ability to
successfully conduct its business in the markets in which Polonia Bancorp now operates, which could
have an adverse effect on Prudential Bancorp’s financial results and the value of its common stock. If
Prudential Bancorp experiences difficulties with the integration process, the anticipated benefits of the
merger may not be realized fully or at all, or may take longer to realize than expected. As with any merger
of financial institutions, there also may be business disruptions that cause Polonia Bancorp or the
Company to lose current customers or cause current customers to remove their accounts from Polonia
Bancorp or Prudential Bancorp and move their business to competing financial institutions. Integration
efforts between the two companies will also divert management attention and resources. These integration
matters could have an adverse effect on each of Polonia Bancorp and the Company during this transition
period and for an undetermined period after consummation of the merger.
Prudential Bancorp may fail to realize the cost savings estimated for the merger with Polonia
Bancorp.
Prudential Bancorp estimates that it will achieve cost savings from the merger when the two
companies have been fully integrated. While the Company continues to be comfortable with these
expectations as of the date of the Annual Report on Form 10-K for the year ended September 30, 2016, it
is possible that the estimates of the potential cost savings could turn out to be incorrect.
The actual integration may result in additional and unforeseen expenses, and the anticipated
benefits of the integration plan may not be realized. Actual growth and cost savings, if achieved, may be
lower than what Prudential Bancorp expects and may take longer to achieve than anticipated. If the
Company is not able to adequately address integration challenges, Prudential Bancorp may be unable to
successfully integrate the Company’s and Polonia Bancorp’s operations or to realize the anticipated
benefits of the integration of the two companies.
Item 1B. Unresolved Staff Comments.
Not applicable.
51
Item 2. Properties
We currently conduct business from our main office and five banking offices. The following
table sets forth the net book value of the land, building and leasehold improvements and certain other
information with respect to our offices at September 30, 2016.
Description/Address
Leased/Owned
Date of
Lease
Expiration
Net Book Value
of Property and
Leasehold
Improvements
Amount of
Deposits
Main Office
1834 Oregon Avenue
Philadelphia, PA 19145-4725
Broad Street Financial Center
1722 South Broad Street
Philadelphia, PA 19145-2388
Pennsport Financial Center
238A Moore Street
Philadelphia, PA 19148-1925
Old City Financial Center
28 North 3rd Street
Philadelphia, PA 19106-2108
Drexel Hill Financial Center
1270 Township Line Road
Drexel Hill, PA 19026-3105
Center City Financial Center
1500 JFk Boulevard
Philadelphia, PA 19103-5125
Owned
N/A
(In Thousands)
$236
$251,575
(cid:3)
Owned
N/A
117
41,733
(cid:3)
Owned
N/A
27
37,753
Leased
May-19
0
10,177
Leased
Sep-21
120
28,612
Leased
Oct-22
197
19,351
Total
$697
$389,201
52
Item 3. Legal Proceedings
A putative shareholder derivative and class action lawsuit, Parshall v. Eugene Andruczyk
et al., was initially filed in the Circuit Court for Montgomery County, Maryland, Case No. 423219-v, on
July 21, 2016. The lawsuit names as defendants the directors of Polonia Bancorp, Polonia Bancorp
Bancorp and Prudential Bancorp. The lawsuit alleges a breach of fiduciary duty by approving the merger
agreement for inadequate merger consideration and the inclusion of preclusive deal protection measures
in the merger agreement and that the registration statement as filed on July 22, 2016 failed to disclose
material information related to the transaction. The lawsuit also alleges that Prudential Bancorp aided and
abetted the alleged breaches of fiduciary duty. A second putative class action lawsuit captioned Baron v.
Eugene Andruczyk et al., No. V424400, was filed in the Circuit Court for Montgomery County, Maryland
on August 29, 2016. The lawsuit names as defendants the directors of Polonia Bancorp and Polonia
Bancorp. The lawsuit alleges a breach of fiduciary duty by failing to disclose material information related
to the transaction in the registration statement as filed on July 22, 2016. The relief sought includes
preliminary and permanent injunction against the consummation of the merger, rescission or rescissory
damages if the merger is completed, costs and attorney’s fees.
On October 6, 2016, solely to avoid the costs of protracted litigation and any potential delay of
the merger, Polonia Bancorp, Prudential Bancorp and the Polonia Bancorp director defendants entered
into a memorandum of understanding with the respective plaintiffs regarding the settlement of the two
lawsuits. Pursuant to the memorandum of understanding, Prudential Bancorp and Polonia Bancorp filed
with the SEC and made publicly available to shareholders of Polonia Bancorp certain supplemental
disclosures, Polonia Bancorp agreed to waive the prohibition in the nondisclosure agreements entered into
by Polonia Bancorp with potential interested parties with respect to a party subject thereto being
prohibited from asking Polonia Bancorp to waive the standstill provisions that require such party to
refrain from pursuing various actions that relate to acquisition of control of Polonia Bancorp without the
prior written consent of the Polonia Bancorp board of directors during the specified time period,
Prudential Bancorp agreed to waive the enforcement of the provision in the merger agreement prohibiting
Polonia Bancorp from waiving the foregoing restriction contained in the nondisclosure agreements, and
the parties agreed to provide each other with customary mutual releases concerning the claims related to
the merger agreement and the merger, including the initiation and the prosecution of any litigation,
subject to approval of the Circuit Court.
If the Circuit Court approves the settlement contemplated in the memorandum of understanding,
both the Parshall lawsuit and the Baron lawsuit will be dismissed with prejudice, and all claims that were
or could have been brought challenging any aspect of the merger, the merger agreement, and any
disclosure made in connection therewith will be released and barred. Under the terms of the
memorandum, counsel for the plaintiffs have reserved the right to seek an award of attorneys’ fees and
expenses. The defendants have reserved the right to contest the amount of any fee and expense petition
that plaintiffs may pursue. The amount of any fees and expense awarded, if any, will ultimately be
determined and approved by the court, and will not affect the amount of merger consideration to be paid
by Prudential Bancorp. Polonia Bancorp or its successor or insurer will pay any fees and expenses
potentially awarded by the court. In the memorandum, the parties also have agreed to negotiate in good
faith to prepare a stipulation of settlement to be filed with the court and other documentation as may be
required to effectuate the settlement. Pursuant to the memorandum of understanding, plaintiffs’ counsel is
permitted to conduct reasonable confirmatory discovery as plaintiffs’ counsel believes in good faith is
reasonably appropriate and necessary and as agreed to by the parties to confirm the fairness and
reasonableness of the terms of the Settlement. There can be no assurance that the parties ultimately will
enter into a stipulation of settlement or that the court will approve the settlement even if the parties were
to enter into such stipulation. The proposed settlement contemplated by the memorandum of
53
understanding will become void in the event that the parties do not enter into such stipulation or the
Circuit Court does not approve the settlement.
Prudential Bancorp and the other defendants deny all of the allegations in the lawsuits and believe
the disclosures previously included in the proxy statement provided to the Polonia Bancorp shareholders
and the provisions of the nondisclosure agreements and the merger agreement are appropriate under the
law. Nevertheless, Prudential Bancorp and the other defendants agreed to settle the putative class action
lawsuits in order to avoid the costs, disruptions and distraction of further litigation.
Prudential Bancorp and the other defendants have vigorously denied, and continue to vigorously
deny, that they have committed or aided and abetted in the commission of any violation of law or engaged
in any of the wrongful acts that were alleged in the lawsuits, and expressly maintain that, to the extent
applicable, they diligently and scrupulously complied with their fiduciary and other legal burdens and
entered into the memorandum of understanding solely to eliminate the burden and expense of further
litigation and to put the claims that were or could have been asserted to rest.
In addition, Prudential Bancorp is involved in various legal proceedings occurring in the ordinary
course of business. Management of the Company, based on discussions with litigation counsel, does not
believe that such proceedings will have a material adverse effect on the financial condition or operations of
Prudential Bancorp. There can be no assurance that any of the outstanding legal proceedings to which the
Company is a party will not be decided adversely to the Company's interests and have a material adverse
effect on the financial condition and operations of the Company.
Item 4. Mine Safety Disclosures
Not applicable
54
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
(a)
Our common stock is traded on the NASDAQ Global Market (NASDAQ) under the
symbol “PBIP”. At December 1, 2016, there were approximately 275 registered shareholders of record, not
including the number of persons or entities whose stock is held in nominee or "street" name through various
brokerage firms and banks.
The following table shows the quarterly high and low trading prices of our stock, reported on the
NASDAQ Stock Market, and the amount of cash dividends declared per share for each of the quarters in
fiscal 2016 and 2015:
Quarter ended:
High
September 30, 2016 ......................................................... $15.15
15.42
June 30, 2016 ...................................................................
16.20
March 31, 2016 ................................................................
15.60
December 31, 2015 .........................................................
Low
$13.95
13.80
13.83
14.29
Stock Price
Quarter ended :
High
September 30, 2015 ......................................................... $15.10
14.74
June 30, 2015 ...................................................................
12.64
March 31, 2015 ................................................................
12.49
December 31, 2014 ………………………………….
Low
$14.27
12.69
12.15
12.03
Stock Price
___________________________________
Cash
dividends
per share
$0.03
0.03
0.03
0.03
Cash
dividends
per share
$0.03
0.18
0.03
0.03
55
The following graph compares the cumulative total return of the Company common stock with the
cumulative total return of the SNL Mid-Atlantic Thrift Index and the Nasdaq Stock Market (US
Companies). The graph assumes that $100 was invested on September 30, 2011. Prices prior to October 17,
2013 are for Old Prudential Bancorp, Inc. and have been adjusted for the .9442 exchange ratio applied as
part of the mutual to-stock conversion. Cumulative total return assumes reinvestment of all dividends.
Index
Prudential Bancorp, Inc.
NASDAQ Composite
SNL Mid-Atlantic Thrift
09/30/11
100.00
100.00
100.00
09/30/12
112.60
130.53
132.45
Period Ending
09/30/13
196.18
160.26
154.27
09/30/14
221.52
193.28
170.68
09/30/15
266.40
201.01
200.31
09/30/16
269.87
234.02
220.65
(b)
Not applicable
56
(c)
follows:
The Company’s repurchases of equity shares for the fourth quarter of fiscal year 2016 were
Period
July 1 - 31, 2016
August 1 - 31, 2016
September 1 - 30, 2016
Total Number
of Shares
Purchased
15,690
1,849
7,338
24,877
Average
Price Paid
Per Share
$
14.56
$
14.42
$
14.47
(2)
(2)
(2)
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs (1)
536,239
538,088
545,426
Maximum Number of
Shares that May Yet
Be Purchased Under
Plans or Programs (1)
223,761
221,912
214,574
(1) On July 15, 2015, the Company announced the Board of Directors had approved a second stock
repurchase program authorizing the Company to repurchase up to 850,000 shares of common stock,
approximately 10% of the Company’s outstanding shares upon completion of the first repurchase program.
(2) Reflects shares repurchased directly from participants upon exercises by participants of stock
options. No other repurchases were effected.
57
Item 6. Selected Financial Data
Set forth below is selected financial and other data of Prudential Bancorp. Reference is made to
the consolidated financial statements and related notes contained in Item 8 which provide additional
information.
Selected Financial and Other Data:
Total assets
Cash and cash equivalents
Investment and mortgage-backed securities:
Held-to-maturity
Available-for-sale
Loans receivable, net
Deposits
FHLB advances
Non-performing loans
Non-performing assets
Total stockholders’ equity, substantially restricted
Banking offices
Selected Operating Data:
Total interest income
Total interest expense
Net interest income
Provision (recovery) for loan losses
Net interest income after provision (recovery) for
loan losses
Total non-interest income
Total non-interest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income
Basic earnings per share
Diluted earnings per share
Dividends paid per common share
Selected Operating Ratios(1):
Average yield earned on interest-earning assets
Average rate paid on interest-bearing liabilities
Average interest rate spread(2)
Net interest margin(2)
Average interest-earning assets to average
interest-bearing liabilities
Net interest income after provision
for loan losses to non-interest expense
Total non-interest expense to total average assets
Efficiency ratio(3)
Return on average assets
Return on average equity
Average equity to average total assets
2016
2015
At September 30,
2014
(Dollars in Thousands)
2013
2012
$559,480
12,440
$487,189
11,272
$525,483
45,382
$607,897
158,984
$490,504
81,273
39,971
138,694
344,948
389,201
50,638
15,878
16,459
114,002
6
2016
66,384
77,483
312,633
365,074
-
13,932
14,801
117,001
7
80,840
57,817
321,063
391,025
340
5,880
6,240
129,425
7
83,732
41,781
306,517
542,748
340
6,634
7,040
59,912
7
Year Ended September 30,
2013
2014
(Dollars in Thousands, except per share data)
2015
63,110
65,975
260,684
425,602
483
14,018
15,990
59,831
7
2012
$17,483
3,326
14,157
225
$16,680
3,430
13,250
735
$16,465
3,401
13,064
240
$16,773
4,344
12,429
(500)
$18,979
5,779
13,200
725
13,932
1,337
11,290
3,979
1,259
$ 2,720
$0.37
$0.36
$0.12
12,515
3,008
13,175
2,348
116
$ 2,232
$0.27
$0.27
$0.27
12,824
1,111
11,465
2,470
690
$ 1,780
$0.20
$0.19
$0.06
12,929
1,774
11,250
3,453
1,698
$ 1,755
$0.18
$0.18
0.00
12,475
3,068
11,668
3,875
1,282
$ 2,593
$0.27
$0.27
$0.00
3.40%
0.80
2.60
2.75
124.28
123.40
2.11
72.87
0.51
2.36
21.55
3.38%
0.90
2.49
2.69
128.72
94.99
3.42
81.04
0.58
2.37
24.39
3.28%
0.89
2.39
2.61
130.51
111.85
2.21
80.88
0.34
1.38
24.79
3.60%
1.04
2.56
2.67
3.96%
1.33
2.63
2.76
111.15
110.29
114.92
2.25
79.21
0.35
3.00
11.92
106.92
2.33
71.72
0.52
4.43
11.71
(Footnotes on next page)
58
At or For the
Year Ended September 30,
2014
2015
2013
2012
2016
Asset Quality Ratios(4):
Non-performing loans as a percent of
total loans receivable(5)
Non-performing assets as a percent of
total assets(5)
Allowance for loan losses as a percent of
non-performing loans
Allowance for loan losses as a percent of
total loans
Net charge-offs to average loans receivable
Capital Ratios(4):
Tier 1 leverage ratio
Company
Bank
Tier 1 common risk-based capital ratio
Company
Bank
Tier 1 risk-based capital ratio
Company
Bank
Total risk-based capital ratio
Company
Bank
__________________
4.60%
4.21%
1.83%
2.16%
5.38%
2.94
20.59
0.94
-0.03
3.04
21.03
0.93
0.07
1.19
41.24
0.75
0.05
1.16
3.26
35.47
13.42
0.77
-0.35
0.71
0.88
20.41%
23.73%
22.39%
12.54%
11.73%
18.15
19.50
17.95
11.81
10.95
38.57
34.36
38.57
34.36
39.70
35.49
50.63
41.66
N/A
N/A
N/A
N/A
N/A
N/A
50.63
41.65
57.21
40.52
51.98
43.00
58.28
41.59
26.69
25.15
27.72
26.18
27.51
25.69
28.39
26.57
(1)
(2)
(3)
(4)
(5)
With the exception of end of period ratios, all ratios are based on average monthly balances during the
indicated periods.
Average interest rate spread represents the difference between the average yield earned on interest-earning
assets and the average rate paid on interest-bearing liabilities. Net interest margin represents net interest
income as a percentage of average interest-earning assets.
The efficiency ratio represents the ratio of non-interest expense divided by the sum of net interest income
and non-interest income.
Asset quality ratios and capital ratios are end of period ratios, except for net charge-offs to average loans
receivable.
Non-performing assets generally consist of all loans on non-accrual, loans which are 90 days or more past
due as to principal or interest, and real estate acquired through foreclosure or acceptance of a deed in-lieu
of foreclosure. Non-performing assets and non-performing loans also include loans classified as troubled
debt restructurings (“TDR”) due to being recently restructured and placed on non-accrual in connection
with such restructuring. The TDRs in most cases are performing in accordance with their restructured
terms. It is the Company’s policy to cease accruing interest on all loans which are 90 days or more past due
as to interest or principal.
59
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
At September 30, 2016, we had total assets of $559.5 million, including net loans of $344.9
million and $178.7 million of investment and mortgage-backed securities, total deposits of $389.2 million
and total stockholders’ equity of $114.0 million.
The Company conducts community banking activities by accepting deposits and making loans in
our market area. Our lending products consist of residential mortgage loans, including loans for sale in the
secondary market, along with commercial real estate and multi-family and to a lesser extent construction
loans. The Company also originates commercial business and consumer loans in an effort to maintain
strong customer relationships.
Despite the challenging current market and economic conditions, the Company continues to
maintain capital substantially in excess of regulatory requirements.
This Management’s Discussion and Analysis section is intended to assist in understanding the
financial condition and results of operations of Prudential Bancorp. The results of operations of
Prudential Bancorp are primarily dependent on the results of the Bank. The information contained in this
section should be read in conjunction with our consolidated financial statements and the accompanying
notes to the consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K.
Critical Accounting Policies
In reviewing and understanding financial information for Prudential Bancorp, you are encouraged
to read and understand the significant accounting policies used in preparing our financial statements.
These policies are described in Note 2 of the notes to our consolidated financial statements included in
Item 8 hereof. The accounting and financial reporting policies of Prudential Bancorp conform to
accounting principles generally accepted in the United States of America (“U.S. GAAP”) and to general
practices within the banking industry. Accordingly, the financial statements require certain estimates,
judgments and assumptions, which are believed to be reasonable, based upon the information available.
These estimates and assumptions affect the reported amounts of assets and liabilities as well as contingent
assets and contingent liabilities at the date of the financial statements and the reported amounts of income
and expenses during the periods presented. The following accounting policies comprise those that
management believes are the most critical to aid in fully understanding and evaluating our reported
financial results. These policies require numerous estimates or economic assumptions that may prove
inaccurate or may be subject to variations which may significantly affect our reported results and
financial condition for the period or in future periods.
Allowance for Loan Losses. The allowance for loan losses is established through a provision for
loan losses charged to expense. Losses are charged against the allowance for loan losses when
management believes that the collectability in full of the principal of a loan is unlikely. Subsequent
recoveries are added to the allowance. The allowance for loan losses is maintained at a level that
management considers adequate to provide for estimated losses and impairments based upon an
evaluation of known and inherent losses in the loan portfolio that are both probable and reasonable to
estimate. Loan impairment is evaluated based on the fair value of collateral or estimated net realizable
value. It is the policy of management to provide for losses on unidentified loans in its portfolio in addition
to criticized and classified loans.
60
Management monitors its allowance for loan losses at least quarterly and makes adjustments to
the allowance through the provision for loan losses as economic conditions and other pertinent factors
indicate. The quarterly review and adjustment of the qualitative factors employed in the allowance
methodology and the updating of historic loss experience allow for timely reaction to emerging conditions
and trends. In this context, a series of qualitative factors are used in a methodology as a measurement of
how current circumstances are affecting the loan portfolio. Included in these qualitative factors are:
• Levels of past due, classified, criticized and non-accrual loans, troubled debt restructurings and
loan modifications;
• Nature and volume of loans;
• Changes in lending policies and procedures, underwriting standards, collections, charge-offs and
recoveries and for commercial loans, the level of loans being approved with exceptions to lending
policy;
• Experience, ability and depth of management and staff;
• National and local economic and business conditions, including various market segments;
• Quality of the Company’s loan review system and degree of Board oversight;
• Concentrations of credit and changes in levels of such concentrations; and
• Effect of external factors on the level of estimated credit losses in the current portfolio.
In determining the allowance for loan losses, management has established both specific and
general pooled allowances. Values assigned to the qualitative factors and those developed from historic
loss experience provide a dynamic basis for the calculation of reserve factors for both pass-rated loans
(general pooled allowance) and for criticized and classified loans. The amount of the specific allowance is
determined through a loan-by-loan analysis of certain large dollar commercial real estate loans. Loans not
individually reviewed are evaluated as a group using reserve factor percentages based on historical loss
experience and the qualitative factors described above. In determining the appropriate level of the general
pooled allowance, management makes estimates based on internal risk ratings, which take into account
such factors as debt service coverage, loan-to-value ratios and external factors. Estimates are periodically
measured against actual loss experience.
This evaluation is inherently subjective as it requires material estimates including, among others,
exposure at default, the amount and timing of expected future cash flows on impaired loans, value of
collateral, estimated losses on our commercial, construction and residential loan portfolios and historical
loss experience. All of these estimates may be susceptible to significant change.
While management uses the best information available to make loan loss allowance evaluations,
adjustments to the allowance may be necessary based on changes in economic and other conditions or
changes in accounting guidance. In addition, the Pennsylvania Department of Banking and Securities and
the FDIC, as an integral part of their examination processes, periodically review our allowance for loan
losses. The Pennsylvania Department of Banking and Securities and the FDIC may require the
recognition of adjustments to the allowance for loan losses based on their judgment of information
available to them at the time of their examinations. To the extent that actual outcomes differ from
management’s estimates, additional provisions to the allowance for loan losses may be required that
would adversely affect earnings in future periods.
Investment and Mortgage-Backed Securities Available for Sale. Where quoted prices are
available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted
market prices are not available, then fair values are estimated using quoted prices of securities with
similar characteristics or discounted cash flows and are classified within Level 2 of the fair value
hierarchy. In certain cases where there is limited activity or less transparency around inputs to the
61
valuation, securities are classified within Level 3 of the valuation hierarchy, although there were no
securities with that classification as of September 30, 2016 or 2015.
Management evaluates securities for other-than-temporary impairment at least on a quarterly
basis, and more frequently when economic or market concerns warrant such evaluation. The Company
determines whether the unrealized losses are temporary in accordance with U.S. GAAP. The evaluation
is based upon factors such as the creditworthiness of the issuers/guarantors, the underlying collateral, if
applicable, and the continuing performance of the securities. In addition the Company also considers the
likelihood that the security will be required to be sold by a regulatory agency, our internal intent not to
dispose of the security prior to maturity and whether the entire cost basis of the security is expected to be
recovered. In determining whether the cost basis will be recovered, management evaluates other facts
and circumstances that may be indicative of an other-than-temporary impairment condition. This includes,
but is not limited to, an evaluation of the type of security, length of time and extent to which the fair value
has been less than cost, and near-term prospects of the issuer.
In addition, certain assets are measured at fair value on a non-recurring basis; that is, the
instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in
certain circumstances (for example, when there is evidence of impairment). The Company measures
impaired loans, FHLB stock and properties serving as collateral for loans or bank properties transferred
into real estate owned at fair value on a non-recurring basis.
Valuation techniques and models utilized for measuring financial assets and liabilities are
reviewed and validated by the Company at least quarterly.
Income Taxes. The Company accounts for income taxes in accordance with U.S. GAAP. The
Company records deferred income taxes that reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Management exercises significant judgment in the evaluation of the amount and
timing of the recognition of the resulting tax assets and liabilities. The judgments and estimates required
for the evaluation are updated based upon changes in business factors and the tax laws. If actual results
differ from the assumptions and other considerations used in estimating the amount and timing of tax
recognized, there can be no assurance that additional expenses will not be required in future periods.
In evaluating our ability to recover deferred tax assets, we consider all available positive and
negative evidence, including our past operating results and our forecast of future taxable income. In
determining future taxable income, we make assumptions for the amount of taxable income, the reversal
of temporary differences and the implementation of feasible and prudent tax planning strategies. These
assumptions require us to make judgments about our future taxable income and are consistent with the
plans and estimates we use to manage our business. Any reduction in estimated future taxable income
may require us to record an additional valuation allowance against our deferred tax assets. An increase in
the valuation allowance would result in additional income tax expense in the period and could have a
significant impact on our future earnings.
U.S. GAAP prescribes a minimum probability threshold that a tax position must meet before a
financial statement benefit is recognized. The Company recognizes, when applicable, interest and
penalties related to unrecognized tax benefits in the provision for income taxes in the consolidated income
statement. Assessment of uncertain tax positions requires careful consideration of the technical merits of
a position based on management's analysis of tax regulations and interpretations. Significant judgment
may be involved in the assessment of the tax position.
62
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is included in Note 2 to the
Consolidated Financial Statements set forth in Item 8 hereto.
Derivative Financial Instruments, Contractual Obligations and Other Off Balance Sheet
Arrangements.
Derivative financial instruments include futures, forwards, interest rate swaps, option contracts,
and other financial instruments with similar characteristics. To remain competitive in our local lending
area and to support the Company’s asset/liability positioning, on occasion the Bank enters into interest
rate swaps contract to control it’s funding costs.
In addition, these instruments involve, to varying degrees, elements of credit and interest rate risk
in excess of the amount recognized in the consolidated statements of financial condition. Commitments
to extend credit generally have fixed expiration dates and may require additional collateral from the
borrower if deemed necessary. Commitments to extend credit are not recorded as an asset or liability by
us until the instrument is exercised.
Commitments
The following table summarizes our outstanding commitments to originate loans and to advance
additional amounts pursuant to outstanding letters of credit, lines of credit and undisbursed construction
loans at September 30, 2016.
Total
Amounts
Committed
$ 1,905
3,271
5,371
9,877
$ 20,424
Letters of credit
Lines of credit (1)
Undisbursed portions of loans in process
Commitments to originate loans
Total commitments
_____________________
1-3
Years
(In Thousands)
$
-
-
-
-
$ -
$
294
900
3,729
9,877
$ 14,800
Amount of Commitment Expiration - Per Period
After 5
Years
Less than
1 Year
3-5
Years
$
1,611
-
1,642
-
$ 3,253
$
-
2,371
-
-
$ 2,371
(1)
The majority of available lines of credit consist of home equity lines of credit.
63
Contractual Cash Obligations
The following table summarizes our contractual cash obligations at September 30, 2016.
Certificates of deposit
Advances from FHLB
Total long-term debt
Short-term borrowings, FHLB
Advances from borrowers for taxes and insurance
Operating lease obligations
Total contractual obligations
Payments Due By Period
Less than
1 Year
1-3
Years
3-5
Years
After 5
Years
(In Thousands)
$ -
$ 135,769 $ 60,158 $ 27,789
-
- 25,011 5,627
-
135,769 85,169 33,416
-
-
-
20,000
1,748
-
-
-
349 775 797 1,419
$ 157,866 $ 85,944 $ 34,213 $ 1,419
Total
$ 223,716
30,638
254,354
20,000
1,748
3,340
$ 279,442
64
Average Balances, Net Interest Income, and Yields Earned and Rates Paid. The following table shows
for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting
yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and
the net interest margin. Tax-exempt income and yields have not been adjusted to a tax-equivalent basis. All average
balances are based on monthly balances. Management does not believe that the monthly averages differ significantly
from what the daily averages would be.
2016
Average
Balance
Interest
Average
Yield/
Rate
Year Ended September 30,
2015
Average
Balance
Interest
(Dollars in Thousands)
Average
Yield/
Rate
2014
Average
Balance
Interest
Average
Yield/
Rate
Interest-earning assets:
Investment securities
Mortgage-backed securities
Loans receivable (1)
Other interest-earning assets
Total interest-earning assets
Non-interest-earning assets
Total assets
Interest-bearing liabilities:
Savings accounts
Checking and money market accounts
Certificate accounts
Total deposits
FHLB advances
Total interest-bearing liabilities
Non-interest-bearing liabilities
Total liabilities
Stockholders' Equity
Total liabilities and stockholders' equity
Net interest-earning assets
Net interest income, interest rate
spread
Net interest margin (2)
Average interest-earning assets to
average
interest-bearing liabilities
$57,433
114,709
327,877
13,103
513,122
21,622
$534,744
$73,030
90,782
211,517
375,329
35,585
410,914
6,618
417,532
115,243
$532,775
$102,208
$1,550
2,973
12,909
51
17,483
$83
165
2,613
2,861
465
3,326
2.69%
2.58%
3.93%
0.39%
3.40%
0.11%
0.18%
1.23%
0.76%
1.30%
0.81%
$81,110
62,321
323,398
26,471
493,300
21,078
$514,378
$75,203
98,324
207,391
380,918
162
381,080
5,662
386,742
125,478
$512,220
$112,220
$2,066
1,799
12,760
55
16,680
$208
323
2,899
3,430
-
3,430
2.55%
2.89%
3.95%
0.21%
3.38%
0.28%
0.33%
1.40%
0.90%
0.00%
0.90%
$87,466
46,240
319,126
48,542
501,374
18,162
$519,536
$78,364
100,303
203,083
381,750
340
382,090
6,605
388,695
128,773
$517,468
$119,284
$2,199
1,411
12,737
118
16,465
$262
348
2,791
3,401
-
3,401
2.51%
3.05%
3.99%
0.24%
3.28%
0.33%
0.35%
1.37%
0.89%
0.00%
0.89%
$14,157
2.60%
2.75%
$13,250
2.48%
2.69%
$13,064
2.39%
2.61%
124.87%
129.45%
131.22%
_______________________
(1)
Includes nonaccrual loans during the respective periods. Calculated net of deferred fees and discounts,
loans in process and allowance for loan losses.
Equals net interest income divided by average interest-earning assets.
(2)
65
Rate/Volume Analysis. The following table shows the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing liabilities affected our interest
income and expense during the periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate, which is
the change in rate multiplied by prior year volume, and (2) changes in volume, which is the change in
volume multiplied by prior year rate. The combined effect of changes in both rate and volume has been
allocated proportionately to the change due to rate and the change due to volume.
2016 vs. 2015
Increase (Decrease) Due to
2015 vs. 2014
Increase (Decrease) Due to
Total
Increase
Rate
Volume
Rate/
Volume
(Decrease)
Rate
Volume
(In Thousands)
Total
Increase
(Decrease)
Rate/
Volume
$
117
$
(603)
$
(30)
$
(516)
$
29
$
(160)
$
(2)
$
(133)
(188)
(62)
48
(85)
(119)
(147)
(344)
(610)
2
(608)
1,512
177
(28)
1,058
(150)
34
(24)
(170)
1,174
149
(4)
803
(6)
4
(121)
(25)
58
27
-
27
12
-
16
461
477
(160)
(286)
(567)
463
(104)
(76)
(146)
(17)
(210)
(45)
(18)
48
(15)
-
(15)
491
171
(54)
448
(10)
(8)
59
41
-
41
(27)
(2)
8
(23)
2
1
3
3
-
-
388
23
(63)
215
(53)
(26)
108
29
-
29
$
523
$
1,031
$
(647)
$
907
$
(195)
$
407
$
(26)
$
186
Interest income:
Investment securities
Mortgage-backed securities
Loans receivable, net
Other interest-earning assets
Total interest income
Interest expense:
Savings accounts
Checking and money
market accounts
(interest-bearing and
non-interest bearing)
Certificate accounts
Total deposits
FHLB advances
Total interest expense
Increase (decrease) in net interest income
Comparison of Financial Condition at September 30, 2016 and September 30, 2015
At September 30, 2016, the Company had total assets of $559.5 million, as compared to $487.2
million at September 30, 2015, an increase of 14.8%. At September 30, 2016, net loans receivable
increased to $344.9 million from $312.6 million at September 30, 2015. The increase in net loans
receivable was primarily due to a $60.3 million increase in commercial and multi-family real estate, the
purchase of short-term small equipment leases aggregating $3.3 million, partially offset by a $25.6
million reduction in the balance of one-to-four family loans combined with a $5.4 million reduction
related to construction and land development loans. During fiscal 2016, the Company increased its
available-for-sale investment securities portfolio by $61.2 million, while experiencing a $26.4 million
reduction in investment securities held-to-maturity, primarily due to securities being called, the proceeds
of which were primarily reinvested in available-for-sale securities.
Total liabilities increased by $75.3 million to $445.5 million at September 30, 2016, from $370.2
million at September 30, 2015. Total deposits increased $24.1 million, consisting primarily of short-term
certificates of deposit. At September 30, 2016, the Company had FHLB advances outstanding of $50.6
million with variable maturities of which $35.0 million was used to fund the Company’s investment
leverage strategy and the remaining $15.6 million was used for loan growth and purchase of investment
66
securities.
Total stockholders’ equity decreased by $3.0 million to $114.0 million at September 30,
2016 from $117.0 million at September 30, 2015. The decrease was primarily due to the $7.0 million
expended in the acquisition of treasury stock in connection with the Company’s previously announced
stock repurchase program. During fiscal year 2016, the Company repurchased 445,881 shares under its
current program with 214,574 shares remaining; however, only very limited repurchases have been
effected since early March 2016 due to the pending merger with Polonia. Also contributing to the
decrease was payment of cash dividends aggregating $895,000. These decreases were partially offset by
$2.7 million in net income earned during fiscal 2016 combined with a $780,000 after-tax increase in the
unrealized gain on the available-for-sale securities portfolio and the fair value of interest rate swaps.
General.
2016 vs. 2015. For the fiscal year ended September 30, 2016, the Company recognized net
income of $2.7 million, or $0.36 per diluted share, as compared to net income of $2.2 million, or $0.27
per diluted share for the fiscal year ended September 30, 2015. Increased profitability for the year ended
September 30, 2016 was primarily attributable to an increase in net interest income, gains recognized on
the sale of mortgage-backed securities and a reduction in the provision for loan losses recorded during the
fiscal 2016. In addition, the Company reduced its non-interest expenses by approximately $1.9 million
(including the effect of expenses related to the merger with Polonia) resulting from a comprehensive
expense reduction program which began at the beginning of the fiscal 2016. Profitability for the year
ended September 30, 2015 primarily reflected the $2.1 million aggregate gain realized on the sale of three
branch offices as well as a $138,000 gain on the sale of a SBA loan, partially offset by a provision for
loan losses of $735,000 and increased non-interest expense primarily related to salaries and benefits
expense.
2015 vs 2014. For the fiscal year ended September 30, 2015, the Company recognized net income
of $2.2 million, or $0.27 per diluted share, as compared to net income of $1.8 million, or $0.19 per
diluted share for the fiscal year ended September 30, 2014. Profitability for the year ended September 30,
2015 primarily reflected the $2.1 million aggregate gain from the sale of three branch offices as well as a
$138,000 gain on the sale of a SBA loan, partially offset by a provision for loan losses of $735,000 and
increased non-interest expense primarily related to salaries and benefits expense.
Net Interest Income.
2016 vs. 2015. For the year ended September 30, 2016, net interest income increased to $14.2
million as compared to $13.3 million for fiscal year 2015. The increase reflected an $803,000 or 4.8%
increase in interest income combined with a decrease of $104,000 or 3.0% in interest paid on deposits and
borrowings. The increase in interest income reflected the $19.8 million, or 4.8%, increase in average
interest earning assets, primarily consisting of increases of $4.5 million and $28.7 million, respectively, in
loans and investment securities available for sale. During the year ended September 30, 2016, the
Company expanded its investment strategy to include purchases of investment grade corporate bonds with
a carrying value of approximately $26.1 million as of September 30, 2016. The Company’s borrowings
from the FHLB also increased during the year ended September 30, 2016 as a result of the leverage
strategy implemented during the second quarter of fiscal 2016. The Company had an average balance of
borrowings of $35.6 million with a weighted average yield of 1.30% during the year ended September 30,
2016, an increase of $35.4 million from the level of average borrowings during the same period in 2015.
The total weighted average cost of funds decreased 10 basis points to 0.80% for the year ended September
30, 2016, from 0.90% for fiscal year 2015.
67
2015 vs. 2014. For the year ended September 30, 2015, net interest income increased $183,000 or
1.4% to $13.2 million as compared to $13.1 million for fiscal 2014. Interest income increased $215,000
or 1.3%, partially offset by a $29,000 or 0.9% increase in interest expense. The increase in interest
income resulted from a 10 basis point increase to 3.38% in the weighted average yield earned on interest-
earning assets partially offset by an $8.1 million or 1.6% decrease to $493.3 million in the average
balance of interest-earning assets for the year ended September 30, 2015 as compared to fiscal 2014. The
increase in the weighted average yield earned reflected in part the reduction of cash and cash equivalents
resulting from use of such funds for the purchase of treasury stock and to fund the outflow of higher
costing deposits as well as and the redeployment of principal repayments received on loans and
investment securities into mortgage-backed securities.
Provision for Loan Losses.
2016 vs. 2015. The Company established provisions for loan losses of $225,000 during the year
ended September 30, 2016 primarily due to the increase in the level of commercial real estate loans. For
the year ended September 30, 2015, the Company established provisions for loans losses of $735,000
during the year ended September 30, 2015 primarily due to the increase in the level of commercial real
estate and construction loans outstanding, charge-offs incurred during fiscal 2015 and the previously
disclosed classification of a $10.3 million loan workout relationship as non-performing. The Company
believes that the allowance for loan losses at September 30, 2016 was sufficient to cover all inherent and
known losses associated with the loan portfolio at such date.
The allowance for loan losses totaled $3.3 million, or 0.9% of total loans and 20.6% of total non-
performing loans at September 30, 2016 as compared to $2.9 million, or 0.9% of total loans and 21.0% of
total non-performing loans at September 30, 2015.
2015 vs. 2014. The Company established provisions for loan losses of $735,000 during the year
ended September 30, 2015 primarily due to the increase in the level of commercial real estate and
construction loans outstanding, charge-offs incurred during fiscal 2015 and the previously disclosed
classification of a $10.3 million loan workout relationship as non-performing. For the year ended
September 30, 2014, the Company established provisions for loans losses of $240,000. During the year
ended September 30, 2015, the Company recorded charge-offs totaling $384,000 and recoveries of
$155,000.
The allowance for loan losses totaled $2.9 million, or 0.9% of total loans and 21.0% of total non-
performing loans at September 30, 2015 as compared to $2.4 million, or 0.8% of total loans and 41.2% of
total non-performing loans at September 30, 2014.
Non-interest Income.
2016 vs. 2015. With respect to the year ended September 30, 2016, non-interest income
amounted to $1.3 million compared with $3.0 million for fiscal 2015. The primary reason for the
difference in non-interest income between fiscal 2016 compared to fiscal 2015 was in fiscal 2015 the
Company recorded an aggregate gain of $2.1 million from the sale of three former branch locations.
During fiscal 2016, the Company recorded a $418,000 gain from the sale of mortgage-back securities
classified available for sale (“AFS”) while there were no securities gains recognized during fiscal 2016.
2015 vs. 2014. With respect to the year ended September 30, 2015, non-interest income
amounted to $3.0 million compared with $1.1 million for fiscal 2014. The primary reason for the
difference in non-interest income between fiscal 2015 as compared to fiscal 2014 was in fiscal 2015 the
Company recorded an aggregate gain of $2.1 million from the sale of three former branch locations.
68
During fiscal 2014, the Company recorded a $416,000 gain from the sale of mortgage-back securities
classified AFS while there were no securities gains recognized during fiscal 2015.
Non-interest Expense.
2016 vs. 2015. For the year ended September 30, 2016, non-interest expense decreased $1.9
million to $11.3 million compared to fiscal 2015. The decrease for the year ended September 30, 2016
was primarily due to a cost reduction strategy that began in the beginning of this fiscal year. Major
component included in this strategy was a reduction in compensation and benefits of approximately $1.5
million, reduction in professional services of approximately $303,000, partially offset by small increases
in general administrative expenses. Also the Company recorded $300,000 of merger-related costs during
fiscal 2016.
2015 vs. 2014. For the year ended September 30, 2015, non-interest expense increased $1.7
million to $13.2 million compared to fiscal 2014. The increase for the year ended September 30, 2015
was primarily due to increases in salary and employee benefit expense in large part due to the
implementation of the shareholder-approved new equity incentive plan combined with the one-time
charges amounting to approximately $210,000 associated with a staff reduction effected in connection
with the implementation of a comprehensive plan to reduce expenses. Part of the plan included
implementation of a reorganization plan which will reduce the workforce by more than 10%.
Income Tax Expense.
2016 vs. 2015. For the year ended September 30, 2016, the Company recorded income tax
expense of $1.3 million as compared to $116,000 for fiscal 2015. The Company’s tax obligation for the
year ended September 30, 2015 was greatly reduced due its ability to utilize its prior period capital loss
carryforwards to offset the entire amount of the gains it recorded relating to the sale of its Center City,
Snyder and Drexel Hill branch offices.
2015 vs. 2014. For the year ended September 30, 2015, the Company recorded income tax
expense of $116,000 as compared to $690,000 for fiscal 2014. The Company’s tax obligation for the year
ended September 30, 2015 was greatly reduced due its ability to utilize its prior period capital loss
carryforwards to offset the entire amount of the gains it recorded relating to the sale of its of previous
mentioned branch offices.
Liquidity and Capital Resources
Liquidity is the ability to maintain cash flows that are adequate to fund operations and meet other
obligations on a timely and cost effective basis in various market conditions. The ability of the Company
to meet its current financial obligations is a function of balance sheet structure, the ability to liquidate
assets and the availability of alternative sources of funds. To meet the needs of the clients and manage the
risk of the Company, the Company engages in liquidity planning and management.
69
Our primary sources of funds are from deposits, scheduled principal and interest payments on
loans, loan prepayments and the maturity of loans, mortgage-backed securities and other investments, and
other funds provided from operations. While scheduled payments from the amortization of loans and
mortgage-backed securities and maturing investment securities are relatively predictable sources of funds,
deposit flows and loan prepayments can be greatly influenced by general interest rates, economic
conditions and competition. We also maintain excess funds in short-term, interest-bearing assets that
provide additional liquidity. At September 30, 2016, our cash and cash equivalents amounted to $12.4
million. In addition, our available for sale investment and mortgage-backed securities amounted to an
aggregate of $138.7 million at September 30, 2016.
We use our liquidity to fund existing and future loan commitments, to fund maturing certificates
of deposit and demand deposit withdrawals, to invest in other interest-earning assets, and to meet
operating expenses. At September 30, 2016, we had certificates of deposit maturing within the next 12
months amounting to $135.8 million. We anticipate that a significant portion of the maturing certificates
of deposit will be redeposited with us unless we determine to lower rates to below competition in order to
facilitate the reduction of higher cost deposits during periods when there is excess cash on hand or in
order to satisfy our asset/liability goals. There were no deposits as of September 30, 2016 requiring the
pledging of collateral.
In addition to cash flows from loan and securities payments and prepayments as well as from
sales of available for sale securities, we have significant borrowing capacity available to fund liquidity
requirements should the need arise. As of September 30, 2016, the Company had $180.2 million of
available borrowing capacity along with a line of credit has also been established with the Federal
Reserve Bank of Philadelphia. In addition, the Bank has the ability to generate brokered certificates of
deposit.
We anticipate that we will continue to have sufficient funds and alternative funding sources to
meet our current commitments.
Impact of Inflation and Changing Prices
The consolidated financial statements, accompanying notes, and related financial data of
Prudential Bancorp presented in Item 8, Financial Statements and Supplementary Data, in Part II of this
Annual Report on Form 10-K have been prepared in accordance with U.S. GAAP, which requires the
measurement of financial position and operating results in terms of historical dollars without considering
the changes in purchasing power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of operations. Most of our assets and liabilities are monetary in nature; therefore, the
impact of interest rates has a greater impact on our performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of
goods and services.
Exposure to Changes in Interest Rates
Gap Analysis. The matching of assets and liabilities may be analyzed by examining the extent to
which such assets and liabilities are “interest rate sensitive” and by monitoring the Bank’s interest rate
sensitivity “gap.” An asset or liability is said to be interest rate sensitive within a specific time period if it
will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference
between the amount of interest-earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that same time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate
70
sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap
would tend to affect adversely net interest income while a positive gap would tend to result in an increase
in net interest income. Conversely, during a period of falling interest rates, a negative gap would tend to
result in an increase in net interest income while a positive gap would tend to affect adversely net interest
income.
The table on the next page sets forth the amounts of our interest-earning assets and interest-
bearing liabilities outstanding at September 30, 2016, which we expect, based upon certain assumptions,
to reprice or mature in each of the future time periods shown (the “GAP Table”). Except as stated below,
the amounts of assets and liabilities shown which reprice or mature during a particular period were
determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or
liability. The table sets forth an approximation of the projected repricing of assets and liabilities at
September 30, 2016, on the basis of contractual maturities, anticipated prepayments, and scheduled rate
adjustments within a three-month period and subsequent selected time intervals. The loan amounts in the
table reflect principal balances expected to be redeployed and/or repriced as a result of contractual
amortization and anticipated prepayments of adjustable-rate loans and fixed-rate loans, and as a result of
contractual rate adjustments on adjustable-rate loans. Annual prepayment rates for adjustable-rate and
fixed-rate single-family and multi-family residential and commercial mortgage loans are assumed to
range from 6.5% to 28.9%. The annual prepayment rate for mortgage-backed securities is assumed to
range from 0.8% to 22.1%. Money market deposit accounts, savings accounts and interest-bearing
checking accounts are assumed to have annual rates of withdrawal, or “decay rates,” based on information
from an internal analysis of our accounts up to a maximum of ten years.
71
Interest-earning assets(1):
Investment and mortgage-backed securities
Loans receivable(2)
Other interest-earning assets (3)
Total interest-earning assets
Interest-bearing liabilities:
Savings accounts
Checking and money market accounts
Certificate accounts
Advances from Federal Home Loan Bank
Real estate tax escrow accounts
Total interest-bearing liabilities
Interest-earning assets
less interest-bearing liabilities
Cumulative interest-rate
sensitivity gap(4)
Cumulative interest-rate
gap as a percentage
of total assets at September 30, 2016
Cumulative interest-earning
assets as a percentage of
cumulative interest-bearing
liabilities at September 30, 2016
More than
More than
More than
3 Months
or Less
3 Months
to 1 Year
1 Year
to 3 Years
3 Years
to 5 Years
More than
5 Years
Total
Amount
(Dollars in Thousands)
$4,253
42,294
$13,397
45,356
$38,893
105,777
$24,222
61,211
$97,900
$178,665
90,310
12,460 498 - 1,335 -
$188,210
$144,670
$59,007
$86,768
$59,251
$1,858
3,226
49,807
778
$5,807
9,679
89,813
2,351
$9,359
16,004
60,158
26,028
$9,022
12,948
$45,099
47,903
23,938 -
21,481
1,748 - - - -
$93,002
$111,549
$107,650
$67,389
$57,417
344,948
14,293
$537,906
$71,145
89,760
223,716
50,638
1,748
$437,007
$1,590
($48,399)
$33,121
$19,379
$95,208
$100,899
$1,590
($46,809)
($13,688)
$5,691
$100,899
0.28%
-8.37%
-2.45%
1.02%
18.03%
102.77%
71.64%
95.05%
101.65%
123.09%
(1)
Interest-earning assets are included in the period in which the balances are expected to be redeployed and/or repriced as a
result of anticipated prepayments, scheduled rate adjustments and contractual maturities.
(2) For purposes of the gap analysis, loans receivable includes non-performing loans, gross of the allowance for loan losses,
undisbursed loan funds, unamortized discounts and deferred loan fees.
(3)
Includes FHLB stock.
(4)
Interest-rate sensitivity gap represents the difference between total interest-earning assets and total interest-bearing
liabilities.
Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or periods to repricing, they
may react in different degrees to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-
rate loans, have features which restrict changes in interest rates both on a short-term basis and over the
life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal
levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability
72
of many borrowers to service their adjustable-rate loans may decrease in the event of an interest rate
increase.
Net Portfolio Value Analysis. Our interest rate sensitivity also is monitored by management
through the use of a model which generates estimates of the changes in our net portfolio value (“NPV”)
over a range of interest rate scenarios. NPV is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is defined as
the NPV in that scenario divided by the market value of assets in the same scenario. The following table
sets forth our NPV as of September 30, 2016 and reflects the changes to NPV as a result of immediate
and sustained changes in interest rates as indicated.
Change in
Interest Rates
In Basis Points
(Rate Shock)
Net Portfolio Value
NPV as % of Portfolio
Value of Assets
Amount
$ Change % Change NPV Ratio Change
(Dollars in Thousands)
300
200
100
Static
(100)
(200)
(300)
$ 89,125 $ (40,563)
$ 102,112 $ (27,576)
$ 116,389 $ (13,299)
$ 129,688 $ -
$ 130,782 $ 1,094
$ 132,597 $ 2,909
$ 141,948 $ 12,260
-31.28%
-21.26%
-10.25%
---
0.84%
2.24%
9.45%
18.22%
19.98%
21.73%
23.19%
22.87%
22.76%
23.95%
-4.97%
-3.21%
-1.46%
---
-0.32%
-0.43%
0.76%
At September 30, 2015, the Company’s NPV was $131.1 million or 27.1% of the market value of
assets. Following a 200 basis point increase in interest rates, the Company’s “post shock” NPV would
have been $107.4 million or 24.3% of the market value of assets, a decline of approximately 18.1%. The
change in the NPV ratio or Company’s sensitivity measure was a decrease of 276 basis points.
As is the case with the GAP Table, certain shortcomings are inherent in the methodology used in
the above interest rate risk measurements. Modeling changes in NPV require the making of certain
assumptions which may or may not reflect the manner in which actual yields and costs respond to
changes in market interest rates. In this regard, the models presented assume that the composition of our
interest sensitive assets and liabilities existing at the beginning of a period remains constant over the
period being measured and also assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities.
Accordingly, although the NPV model provides an indication of interest rate risk exposure at a particular
point in time, such model is not intended to and does not provide a precise forecast of the effect of
changes in market interest rates on net interest income and will differ from actual results.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Exposure to Changes in Interest Rates.”
73
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Prudential Bancorp, Inc.
We have audited the accompanying consolidated statements of financial condition of Prudential
Bancorp, Inc. and subsidiary as of September 30, 2016 and 2015, and the related consolidated
statements of operations, comprehensive income, changes in stockholders' equity, and cash flows
for each of the three years in the period ended September 30, 2016. These financial statements
are the responsibility of Prudential Bancorp, Inc.’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Prudential Bancorp, Inc. and subsidiary as of
September 30, 2016 and 2015, and the results of their operations and their cash flows for each of
the three years in the period ended September 30, 2016, in conformity with U.S. generally
accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Prudential Bancorp, Inc. and subsidiary’s internal control over
financial reporting as of September 30, 2016, based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission in 2013, and our report dated December 14, 2016, we expressed an unqualified
opinion on the effectiveness of Prudential Bancorp, Inc. and subsidiary’s internal control over
financial reporting.
Cranberry Township, Pennsylvania
December 14, 2016
74
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Prudential Bancorp, Inc.
We have audited Prudential Bancorp Inc. and subsidiary’s internal control over financial
reporting as of September 30, 2016, based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) in 2013. Prudential Bancorp, Inc. and subsidiary’s management is
responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the
accompanying Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on Prudential Bancorp, Inc.'s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk.
Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies and procedures that (a)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (b) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the
company; and (c) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions or that
the degree of compliance with the policies or procedures may deteriorate.
75
In our opinion, Prudential Bancorp, Inc. and subsidiary maintained, in all material respects,
effective internal control over financial reporting as of September 30, 2016, based on criteria
established in Internal Control — Integrated Framework issued by COSO in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the accompanying consolidated statements of financial
condition of Prudential Bancorp, Inc. and subsidiary as of September 30, 2016, and the related
consolidated statements of operations, comprehensive income, changes in stockholders' equity,
and cash flows for the years then ended, and our report dated December 14, 2016, expressed an
unqualified opinion.
Cranberry Township, Pennsylvania
December 14, 2016
76
Page 20
PRUDENTIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
Cash and amounts due from depository institutions
Interest-bearing deposits
$
1,965
10,475
$
2,150
9,122
September 30,
2016
2015
(Dollars in Thousands)
Total cash and cash equivalents
Certificate of deposits
Investment and mortgage-backed securities available for sale (amortized cost—
September 30, 2016, $137,222; September 30, 2015, $77,456)
Investment and mortgage-backed securities held to maturity (fair value—
September 30, 2016, $40,700; September 30, 2015, $66,877)
Loans receivable—net of allowance for loan losses (September 30, 2016, $3,269;
September 30, 2015, $2,930)
Accrued interest receivable
Real estate owned
Federal Home Loan Bank stock—at cost
Office properties and equipment—net
Bank owned life insurance (BOLI)
Deferred income taxes, net
Prepaid expenses and other assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest-bearing
Interest-bearing
Total deposits
Advances from Federal Home Loan Bank -Short Term
Advances from Federal Home Loan Bank
Accrued interest payable
Advances from borrowers for taxes and insurance
Accounts payable and accrued expenses
Total liabilities
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares authorized; none issued
Common stock, $.01 par value, 40,000,000 shares authorized; 9,544,809 issued
and 8,045,544 outstanding at September 30, 2016; 9,544,809 issued and
8,449,625 outstanding at September 30, 2015
Additional paid-in capital
Unearned Employee Stock Ownership Plan ("ESOP") shares
Treasury stock, at cost: 1,499,265 shares at September 30, 2016 and 1,095,184 shares
at September 30, 2015
Retained earnings
Accumulated other comprehensive income
12,440
1,853
138,694
39,971
344,948
1,928
581
2,463
1,344
13,055
569
1,634
11,272
-
77,483
66,384
312,633
1,665
869
369
1,492
12,722
975
1,325
$
559,480
$
487,189
$
3,804
385,397
$
2,293
362,781
389,201
20,000
30,638
1,403
1,748
2,488
445,478
365,074
-
-
1,291
1,670
2,153
370,188
-
-
95
95,713
(4,550)
(21,098)
43,044
798
95
95,286
(4,926)
(14,691)
41,219
18
Total stockholders' equity
114,002
117,001
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
559,480
$
487,189
________________________________________
See notes to consolidated financial statements.
77
PRUDENTIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
INTEREST INCOME:
Interest and fees on loans
Interest on mortgage-backed securities
Interest and dividends on investments
Interest on interest-bearing deposits
Total interest income
INTEREST EXPENSE:
Interest on deposits
Interest on short-term borrowings
Interest on long-term borrowings
Total interest expense
NET INTEREST INCOME
PROVISION FOR LOAN LOSSES
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES
NON-INTEREST INCOME:
Fees and other service charges
Gain on sale of mortgage-backed securities available for sale
Other-than-temporary impairment losses
Gain on sale of loans
Gain on sale of office properties
Earnings from BOLI
Other
Total non-interest income
NON-INTEREST EXPENSES:
Salaries and employee benefits
Data processing
Professional services
Office occupancy
Depreciation
Director compensation
Federal Deposit Insurance Corporation premiums
Real estate owned expense
Advertising
Merger related expenses
Other
Total non-interest expenses
INCOME BEFORE INCOME TAXES
INCOME TAXES:
Current
Deferred benefit
Total
NET INCOME
Years Ended September 30,
2016
2015
2014
(Dollars in Thousands Except Per Share Amounts)
$
12,909
2,494
1,979
101
$
12,760
1,799
2,003
118
$
12,737
1,411
2,199
118
17,483
16,680
16,465
2,861
95
370
3,326
14,157
225
3,430
-
-
3,430
13,250
735
3,401
-
-
3,401
13,064
240
13,932
12,515
12,824
464
418
-
11
-
333
111
1,337
6,518
456
1,075
670
325
424
396
19
103
300
1,004
11,290
3,979
1,275
(16)
1,259
368
-
-
138
2,064
344
94
3,008
7,996
413
1,378
701
304
354
314
22
165
-
1,528
13,175
2,348
461
(345)
116
385
416
(16)
-
-
258
68
1,111
6,741
432
1,190
477
320
330
258
146
186
-
1,385
11,465
2,470
690
-
690
$
2,720
$
2,232
$
1,780
BASIC EARNINGS PER SHARE
$
0.37
$
0.27
$
0.20
DILUTED EARNINGS PER SHARE
$
0.36
$
0.26
$
0.19
DIVIDENDS PER SHARE
$
0.12
$
0.27
$
0.06
See notes to consolidated financial statements.
78
PRUDENTIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(cid:3)
(cid:3)
Years Ended September 30,
2016
2015
2014
(Dollars in thousands)
Net income
$
2,720
$
2,232
$
1,780
Unrealized holding gain on available-for-sale securities
Tax effect
Reclassification adjustment for net gains realized in net income
Tax effect
Unrealized holding gain (loss) on interest rate swaps
Tax effect
Reclassification adjustment for other than temporary impairment losses
on debt securities
Tax effect
Total Other Comprehensive Income
1,801
(612)
(418)
142
(202)
69
-
-
780
1,471
(500)
-
-
-
-
-
-
971
918
(312)
(416)
138
-
-
16
(5)
339
Comprehensive Income
$
3,500
$
3,203
$
2,119
See notes to consolidated financial statements.
79
PRUDENTIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Additional
Paid-In
Capital
Unearned
ESOP
Shares
Common
Stock
Accumulated
Other
Total
Treasury
Stock
Retained
Earnings
Comprehensive Stockholders'
Income (Loss)
Equity
(Dollars in Thousands)
BALANCE, OCTOBER 1, 2013
$
118
$
55,276
$
(2,565)
$
(31,625)
$
40,000
$
(1,292)
$
59,912
Net income
Other comprehensive income
Dividends paid ($0.06 per share)
Second-step conversion offering
Tax benefit from stock
compensation plans
Stock option expense
Recognition and Retention Plan expense
Purchase of ESOP Shares (285,664)
ESOP shares committed to
be released (32,064 shares)
(23)
38,725
31,625
1,780
(571)
339
79
138
121
(3,089)
37
352
1,780
339
(571)
70,327
79
138
121
(3,089)
389
BALANCE, September 30, 2014
95
94,376
(5,302)
-
41,209
(953)
129,425
Net income
Other comprehensive income
Dividends paid ($0.27 per share)
Tax benefit from stock
compensation plans
Purchase of treasury stock (1,095,184 shares)
Stock option expense
Recognition and Retention Plan expense
ESOP shares committed to
be released (32,064 shares)
BALANCE, September 30, 2015
Net income
Other comprehensive income
Dividends paid ($0.12 per share)
Tax benefit from stock
compensation plans
Purchase of treasury stock (445,881 shares)
Stock option expense
Recognition and Retention Plan expense
Acquired shares for Recognition and Retension
(41,800 shares)
ESOP shares committed to
be released (35,516 shares)
2,232
(2,222)
201
343
275
(14,691)
91
95,286
376
(4,926)
95
(14,691)
41,219
2,720
(895)
217
395
305
(640)
150
376
(7,047)
640
971
18
780
2,232
971
(2,222)
201
(14,691)
343
275
467
117,001
2,720
780
(895)
217
(7,047)
395
305
-
-
526
BALANCE, September 30, 2016
$
95
$
95,713
$
(4,550)
$
(21,098)
$
43,044
$
798
$
114,002
See notes to consolidated financial statements.
80
PRUDENTIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES OF CASH FLOW
OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses
Depreciation
Net accretion of premiums/discounts
Earnings on BOLI
Accretion of deferred loan fees
Compensation expense of ESOP
Gain on sale of investment and mortgage-backed securities
Gain on sale of office properties
Gain on sale of real estate owned
Gain on sale of loans
Proceeds from the sale of loans held for sale
Originations of loans held for sale
Impairment charge on investment and mortgage-backed securities
Share-based compensation expense
Deferred income tax expense
Changes in assets and liabilities which provided (used) cash:
Accounts payable and accrued expenses
Accrued interest payable
Prepaid expenses and other assets
Accrued interest receivable
Net cash provided by operating activities
INVESTING ACTIVITIES:
Purchase of investment and mortgage-backed securities held to maturity
Purchase of investment and mortgage-backed securities available for sale
Purchase of corporate debt bonds
Principal collected on loans
Principal payments received on investment and mortgage-backed securities:
Held-to-maturity
Available for sale
Loans originated or acquired
Purchase certificate of deposits
Redemption of certificates of deposits
Purchase of Federal Home Loan Bank stock
Proceeds from redemption of Federal Home Loan Bank stock
Proceeds from sale of mortgage-backed securities
Proceeds from sale of real estate owned
Proceeds from the sale of office property
Purchase of bank owned life insurance
Purchases of equipment
Net cash (used in) provided by investing activities
Years Ended September 30,
2016
2015
2014
(Dollars in Thousands)
$
2,720
$
2,232
$
1,780
225
325
(151)
(333)
177
526
(418)
-
(56)
(11)
461
(450)
-
700
(16)
335
112
(597)
(263)
3,286
(30,500)
(49,639)
(25,495)
53,965
56,988
4,348
(87,264)
(2,351)
498
(2,094)
-
11,560
925
-
-
(177)
(69,236)
735
304
(244)
(344)
214
467
-
(2,064)
-
(138)
2,538
(2,400)
-
571
(345)
186
(195)
911
83
2,511
-
(24,865)
-
67,105
14,506
6,865
(60,492)
-
-
-
852
-
360
2,259
-
(659)
5,931
240
320
(282)
(258)
211
389
(416)
-
-
-
-
-
16
259
-
216
(180)
1,338
43
3,676
(10,977)
(22,669)
-
53,554
13,922
4,543
(68,634)
-
-
(40)
-
3,237
129
-
(5,000)
(126)
(32,061)
81
PRUDENTIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES OF CASH FLOW continued.
FINANCING ACTIVITIES:
Net (decrease) increase in demand deposits, NOW accounts,
and savings accounts
Net increase (decrease) in certificates of deposit
Funds (redemption) held in escrow related to second-step offering
Net Increase from FHLB short-term borrowings
Proceeds from FHLB long-term borrowings
Repayment of borrowing from Federal Home Loan Bank
Issuance of common stock from second-step conversion
Cancellation of treasury stock
Purchase treasury stock
Cash dividends paid
Increase (decrease) increase in advances from borrowers for taxes
and insurance
Purchase of stock for ESOP
Tax benefit related to stock compensation
Net cash provided by (used in) in financing activities
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS—Beginning of year
CASH AND CASH EQUIVALENTS—End of year
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid on deposits and advances from Federal
Home Loan Bank
Year Ended September 30, 2016
2016
2015
(Dollars in thousands)
2014
(3,548)
27,675
-
20,000
33,245
(2,607)
-
-
(7,047)
(895)
78
-
217
67,118
1,168
11,272
(9,353)
(16,598)
-
-
-
(340)
-
-
(14,691)
(2,201)
430
-
201
(42,552)
(34,110)
45,382
(4,389)
(1,659)
(145,675)
-
-
-
38,702
31,625
-
(571)
(240)
(3,089)
79
(85,217)
(113,602)
158,984
$
12,440
$
11,272
$
45,382
$
3,214
$
3,625
$
3,581
Income taxes paid
$
600
$
475
$
-
SUPPLEMENTAL DISCLOSURES OF NONCASH ITEMS:
Real estate acquired in settlement of loans
$
581
$
869
$
83
See notes to consolidated financial statements.
82
PRUDENTIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2016 AND 2015
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Prudential Bancorp, Inc. (the “Company”) is a Pennsylvania corporation that was incorporated in June 2013 to be the
successor corporation of Prudential Bancorp, Inc. of Pennsylvania (“Old Prudential Bancorp”), the former stock
holding company for Prudential Savings Bank (the “Bank”), a Pennsylvania-chartered, FDIC-insured savings bank
with seven full service branches in the Philadelphia area. As of September 30, 2013, the Company was in
organization and had not commenced operations; accordingly, the financial statements included as of and for the
year ended September 30, 2013 are of Prudential Bancorp, Inc. of Pennsylvania. The Bank‘s primary federal
banking regulator is the Federal Deposit Insurance Corporation. The Bank is principally in the business of attracting
deposits from its community through its branch offices and investing those deposits, together with funds from
borrowings and operations, primarily in single-family residential loans. The Bank’s sole subsidiary as of September
30, 2015 was PSB Delaware, Inc. (“PSB”), a Delaware-chartered corporation established to hold certain
investments. As of September 30, 2016, PSB had assets of $119.4 million primarily consisting of investment and
mortgage-backed securities.
The Company’s primary market area is Philadelphia, in particular South Philadelphia and Center City, as well as
Delaware County. The Company also conducts business in Bucks, Chester and Montgomery Counties which, along
with Delaware County, comprise the suburbs of Philadelphia. We also make loans in contiguous counties in
southern New Jersey.
The second step conversion of the MHC was completed on October 9, 2013. In connection with the conversion, the
Company issued an aggregate of 9,544,809 shares of common stock through a public offering and the exchange of
Old Prudential Bancorp’s common stock owned by the public other than the MHC which was exchanged for 0.9442
shares of the Company’s common stock for each share of Old Prudential Bancorp. Share amounts and per share data
in the consolidated financial statements and notes to consolidated financial statements have been adjusted to reflect
the exchange.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation –The accompanying consolidated financial statements include the accounts of the Company and the
Bank. All significant intercompany accounts and transactions have been eliminated in consolidation(cid:17)
Use of Estimates in the Preparation of Financial Statements—The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. The most significant estimates and assumptions in the
consolidated financial statements are recorded in the allowance for loan losses, the fair value of financial
instruments, other than temporary impairment of securities and valuation of deferred tax assets. Actual results could
differ from those estimates.
Cash and Cash Equivalents—For purposes of reporting cash flows, cash and cash equivalents include cash and
amounts due from depository institutions and interest-bearing deposits with original maturities of less than 90 days.
Investment Securities and Mortgage-Backed Securities—Management classifies and accounts for debt and equity
securities as follows:
Held to Maturity—Debt securities that management has the positive intent and ability to hold until maturity are
classified as held to maturity and are carried at their remaining unpaid principal balance, net of unamortized
83
premiums or unaccreted discounts. Premiums are amortized and discounts are accreted using the interest method
over the estimated remaining term of the underlying security.
Available for Sale—Debt and equity securities that will be held for indefinite periods of time, including securities
that may be sold in response to changes in market interest or prepayment rates, needs for liquidity, and changes in
the availability and the yield of alternative investments, are classified as available for sale. These assets are carried at
fair value. Fair value is determined using public market prices, dealer quotes, and prices obtained from independent
pricing services that may be derivable from observable and unobservable market inputs. Unrealized gains and losses
are excluded from earnings and are reported net of tax as a separate component of stockholders’ equity until
realized. Realized gains or losses on the sale of investment and mortgage-backed securities are reported in earnings
as of the trade date and determined using the adjusted cost of the specific security sold.
Other-than-temporary impairment —Management evaluates securities for other-than-temporary impairment at least
on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. For all
securities that are in an unrealized loss position for an extended period of time and for all securities whose fair value
is significantly below amortized cost, Management performs an evaluation of the specific events attributable to the
market decline of the security. Management considers the length of time and extent to which the security’s market
value has been below cost as well as the general market conditions, industry characteristics, and the fundamental
operating results of the issuer to determine if the decline is other-than-temporary. Management also considers as part
of the evaluation its intention whether or not to sell the security until its market value has recovered to a level at least
equal to the amortized cost. When management determines that a security’s unrealized loss is other-than-temporary,
a realized loss is recognized in the period in which the decline in value is determined to be other-than-temporary.
The write-down is measured based on the fair value of the security at the time the Company determines the decline
in value is other-than-temporary.
Loans Receivable— Lending consists of various loan types including single-family residential mortgage loans,
construction and land development loans, non-residential or commercial real estate mortgage loans, home equity
loans and lines of credit, commercial business loans, and consumer loans and the loans are stated at their unpaid
principal balances net of unamortized net fees/costs. Loans that management has the intent and ability to hold for
the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balance adjusted
for unearned income, the allowance for loan losses and any unamortized deferred fees or costs.
Loan Origination and Commitment Fees—Management defers loan origination and commitment fees, net of certain
direct loan origination costs. The balance is accreted into income as a yield adjustment over the life of the loan using
the level-yield method.
Interest on Loans—Management recognizes interest on loans on the accrual basis. Income recognition is
discontinued when a loan becomes 90 days or more delinquent. Any interest previously accrued is deducted from
interest income. Such interest ultimately collected is credited to income when loans are no longer 90 days or more
delinquent.
Allowance for Loan Losses— The allowance for loan losses represents the amount which management estimates is
adequate to provide for probable losses inherent in its loan portfolio as of the Consolidated Statement of Financial
Condition date. The allowance method is used in providing for loan losses. Accordingly, all loan losses are charged
to the allowance, and all recoveries are credited to it. The allowance for loan losses is established through a
provision for loan losses charged to operations. The provision for loan losses is based on management’s periodic
evaluation of individual loans, economic factors, past loan loss experience, changes in the composition and volume
of the portfolio, and other relevant factors, both qualitative and quantitative. The estimates used in determining the
adequacy of the allowance for loan losses, including the amounts and timing of future cash flows expected on
impaired loans, are particularly susceptible to changes in the near term.
Impaired loans are loans for which it is not probable to collect all amounts due according to the contractual terms of
the loan agreements. Management individually evaluates such loans for impairment and does not aggregate loans by
major risk classifications. Factors considered by management in determining impairment include payment status and
collateral value. The amount of impairment for impaired loans is determined by the difference between the present
value of the expected cash flows related to the loans, using the original interest rate, and their recorded value, or as a
84
practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the
recorded amount of the loans. When foreclosure is probable, impairment is measured based on the fair value of the
collateral.
Mortgage loans and consumer loans are comprised of large groups of smaller balance homogeneous loans which are
evaluated for impairment collectively. Loans that experience insignificant payment delays, which are defined as less
than 90 days, generally are not classified as impaired. Management determines the significance of payment delays
on a case-by-case basis taking into consideration all of the circumstances surrounding the loan and the borrower
including the length of the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the
principal and interest owed.
Real Estate Owned—Real estate acquired through, or in lieu of, loan foreclosure is recorded at fair value at the date
of acquisition, less estimated selling costs, establishing a new basis. Costs related to the development and
improvement of real estate owned properties are capitalized and those relating to holding the properties are charged
to expense. After foreclosure, a valuation is periodically performed by management and a write-down is recorded, if
necessary, by a charge to operations if the carrying value of a property exceeds its estimated fair value less estimated
costs to sell.
Federal Home Loan Bank of Pittsburgh (“FHLB”) Stock – FHLB stock is classified as a restricted equity security
because ownership is restricted and there is no established market for its resale. FHLB stock is carried at cost and is
evaluated for impairment when certain conditions warrant further consideration.
The Company is a member of the Federal Home Loan Bank of Pittsburgh and as such, is required to maintain a
minimum investment in stock of the Federal Home Loan Bank that varies with the level of advances outstanding
with the Federal Home Loan Bank. The stock is bought from and sold to the Federal Home Loan Bank based upon
its $100 par value. The stock does not have a readily determinable fair value and as such is classified as restricted
stock, carried at cost and evaluated for impairment by management. The stock’s value is determined by the ultimate
recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par
value will ultimately be recovered is influenced by criteria such as the following: (a) the significance of the decline
in net assets of the Federal Home Loan Bank as compared to the capital stock amount and the length of time this
situation has persisted; (b) commitments by the Federal Home Loan Bank to make payments required by law or
regulation and the level of such payments in relation to the operating performance; (c) the impact of legislative and
regulatory changes on the customer base of the Federal Home Loan Bank; and (d) the liquidity position of the
Federal Home Loan Bank.
The Federal Home Loan Bank continues to report net income, continues to declare quarter cash dividends and had
its Aaa bond rating affirmed by Moody’s and AA+ rating affirmed by Standard and Poor’s during 2015 and remain
unchanged as of September 30, 2016.With consideration given to these factors, management concluded that the
stock was not impaired at September 30, 2016 or 2015.
Office Properties and Equipment—Land is carried at cost. Office properties and equipment are recorded at cost less
accumulated depreciation. Depreciation is computed using the straight-line method over the expected useful lives of
the assets. The costs of maintenance and repairs are expensed as they are incurred, and renewals and betterments are
capitalized and depreciated over their useful lives. The estimated useful life is generally 10-39 years for buildings
and 1-7 years for furniture and equipment.
Cash Surrender Value of Life Insurance—The Company funds the policy premiums for the lives of certain officers
and directors of the Bank. The bank owned life insurance policies (“BOLI”) provide an attractive tax-exempt return
to the Company and is being used by the Company to fund various employee benefit plans and arrangements. The
BOLI is recorded at its cash surrender value.
Dividend Payable – Upon declaration of a dividend, a payable is established with a corresponding reduction to
retained earnings at the declaration date. There was no dividend payable as of September 30, 2016 or 2015. The
Company paid $895,000, $2.2 million and $571,000 in cash dividends during the years ended September 30, 2016,
2015and 2014, respectively.
85
Employee Stock Ownership Plan – The Bank established an employee stock ownership plan (“ESOP”) for
substantially all of its full-time employees. Shares of the Company’s common stock purchased by the ESOP are
held in a suspense account until released for allocation to participants as the loans are repaid. Shares released are
allocated to each eligible participant based on the ratio of each such participant’s compensation, as defined in the
ESOP, to the total compensation of all eligible plan participants in the ESOP. As the unearned shares are released
from suspense, the Company recognizes compensation expense equal to the fair value of the ESOP shares during the
periods in which they become committed to be released. To the extent that the fair value of the ESOP shares
released differs from the cost of such shares, the difference is recorded to equity as an adjustment to additional paid-
in capital. Effective October 2016, the Board of directors have approved the termination of the ESOP plan effective
December 31, 2016.
Share-Based Compensation – The Company accounts for stock-based compensation issued to employees, directors,
and where appropriate non-employees, in accordance with U.S. GAAP. Under fair value provisions, stock-based
compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense
over the appropriate vesting period using the straight-line method. The amount of stock-based compensation
recognized at any date must at least equal the portion of the grant date fair value of the award that is vested at that
date and as a result it may be necessary to recognize the expense using a ratable method. Determining the fair value
of stock-based awards at the date of grant requires judgment, including estimating the expected term of the stock
options and the expected volatility of the Company’s stock. In addition, judgment is required in estimating the
amount of stock-based awards that are expected to be forfeited. If actual results differ significantly from these
estimates or different key assumptions were used, it could have a material effect on the Company’s Consolidated
Financial Statements. See Note 13 of the Notes to Consolidated Financial Statements for additional information
regarding stock-based compensation.
Treasury Stock – Common stock held in treasury is accounted for using the cost method, which treats stock held in
treasury as a reduction to total stockholders’ equity. On July 15, 2015, the Company approved a second stock
repurchase program covering up to 850,000 shares or approximately 10% of its issued and outstanding shares of
common stock. The Company has completed its first repurchase program of 950,000 shares covered by the program
at an average cost of $13.18. As of September 30, 2016, the Company had purchased 1,499,265 shares of common
stock at an average price of $14.07. The shares may be purchased in the open market or in privately negotiated
transactions from time to time depending upon market conditions and other factors over a one-year period or such
longer period of time as may be necessary to complete such repurchases.
(cid:3)
Comprehensive Income—Management presents in the consolidated statement of comprehensive income those
amounts arising from transactions and other events which currently are excluded from the statements of operations
and are recorded directly to stockholders’ equity. For the years ended September 30, 2016, 2015 and 2014, the
components of comprehensive income were net income, unrealized holding (loss) gain, net of income tax (benefit)
expense, on available for sale securities and reclassifications related to realized gains on sale of securities recognized
in earnings, net of tax, unrealized holdings (loss)gain, net of tax, on the fair value of interest rate swaps and realized
losses due to other than temporary impairment, net of tax. Reclassifications are made to avoid double counting in
comprehensive income items which are displayed as part of net income for the period.
Income Taxes— Management records deferred income taxes that reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Management exercises significant judgment in the evaluation of the amount and timing of the
recognition of the resulting tax assets and liabilities. The judgments and estimates required for the evaluation are
updated based upon changes in business factors and the tax laws. If actual results differ from the assumptions and
other considerations used in estimating the amount and timing of tax recognized, there can be no assurance that
additional expense will not be required in future periods.
In evaluating the Company’s ability to recover deferred tax assets, management considers all available positive and
negative evidence, including past operating results and forecast of future taxable income. In determining future
taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary
differences and the implementation of feasible and prudent tax planning strategies. These assumptions require
management to make judgments about future taxable income and are consistent with the plans and estimates the
86
Company uses to manage the business. Any reduction in estimated future taxable income may require management
to record an additional valuation allowance against the deferred tax assets. An increase in the valuation allowance
would result in additional income tax expense in the period and could have a significant impact on our future
earnings.
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—Management recognizes the
financial and servicing assets it controls and the liabilities it has incurred, and will derecognize financial assets when
control has been surrendered, and derecognize liabilities when extinguished. Servicing assets and other retained
interests in the transferred assets are measured by allocating the previous carrying amount between the assets sold, if
any, and retained interests, if any, based on their relative fair values at the date of transfer.
Interest Rate Swap Agreement-For asset/liability management purposes, the Company uses interest rate swap
agreements to hedge various exposures or to modify interest rate characteristics of the balance sheet accounts.
Interest rate swaps are contracts in which a series of interest rate flow is exchanged over a prescribed period. The
notional amount on which the interest payments are based is not exchanged. These swap agreements are derivative
instruments and generally convert a portion of the Company’s variable-rate debt to a fixed rate (cash flow hedge)
and convert a portion of its fixed rate loans to a variable rate (fair value hedge).
The gain or loss on a derivative designated and qualifying as a fair value hedging instrument, as well as the
offsetting gain or loss on the hedged item attributable to the risk being hedged, is recognized currently in earnings in
the same accounting period. The effective portion of the gain or loss on a derivative designated and qualifying as a
cash flow hedging instrument is initially reported as a component of other comprehensive income and subsequently
reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The
ineffective portion of the gain or loss on the derivative instrument, if any, is recognized currently in earnings.
For cash flow hedges, the net settlement (upon close-out or termination) that offsets changes in the value of the
hedged debt is deferred and amortized into net interest income over the life of the hedged debt. For fair value
hedges, the net settlement (upon close-out or termination) that offsets changes in the value of the loans adjusts the
basis of the loans and is deferred and amortized to loan interest income over the life of the loans. The portion, if any,
of the net settlement amount that did not offset changes in the value of the hedged asset or liability is recognized
immediately in noninterest income.
Interest rate derivative financial instruments receive hedge accounting treatment only if they are designated as a
hedge and are expected to be, and are, effective in substantially reducing interest rate risk arising from the assets and
liabilities identified as exposing the Company to risk. Those derivative financial instruments that do not meet
specified hedging criteria would be recorded at fair value, with changes in fair value recorded in income. If periodic
assessment indicates derivatives no longer provide an effective hedge, the derivative contracts would be closed out
and settled, or classified as a trading activity.
Advertising Costs—Advertising costs are expensed as incurred. Advertising expense was $103,000, $165,000 and
$186,000 for the years ended September 30, 2016, 2015 and 2014, respectively.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition
standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. In addition, this update specifies the accounting for certain costs to obtain or
fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is
effective for annual reporting periods beginning after December 15, 2016, including interim periods within that
reporting period. The Company is currently evaluating the impact the adoption of the standard will have on the
Company’s financial position or results of operations.
In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity
Transactions, Repurchase Financings, and Disclosures. The amendments in this Update change the accounting for
87
repurchase-to-maturity transactions to secured borrowing accounting. For repurchase financing arrangements, the
amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a
repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the
repurchase agreement. The amendments also require enhanced disclosures. The accounting changes in this Update
are effective for the first interim or annual period beginning after December 15, 2014. An entity is required to
present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to
retained earnings as of the beginning of the period of adoption. Earlier application is prohibited. The disclosure for
certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after
December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-
maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning
after December 15, 2014, and for interim periods beginning after March 15, 2015. The disclosures are not required to
be presented for comparative periods before the effective date. This ASU is not expected to have a significant
impact on the Company’s financial statements.
In June 2014, the FASB issued ASU 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for
Share-Based Payments when the Terms of an Award Provide that a Performance Target Could Be Achieved After
the Requisite Service Period. The amendments require that a performance target that affects vesting and that could
be achieved after the requisite service period be treated as a performance condition. The amendments in this Update
are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015.
Earlier adoption is permitted. Entities may apply the amendments in this Update either (a) prospectively to all
awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that
are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new
or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this Update as
of the beginning of the earliest annual period presented in the financial statements should be recognized as an
adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted,
an entity may use hindsight in measuring and recognizing the compensation cost. This ASU is not expected to have
a significant impact on the Company’s financial statements.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic
205-40). The amendments in this Update provide guidance in U.S, GAAP about management's responsibility to
evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide
related footnote disclosures. The amendments in this Update are effective for the annual period ending after
December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. This ASU
is not expected to have a significant impact on the Company’s financial statements.
In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the
Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (a
consensus of the FASB Emerging Issues Task Force). This Update clarifies how current U.S. GAAP should be
interpreted in subjectively evaluating the economic characteristics and risks of a host contract in a hybrid financial
instrument that is issued in the form of a share. Public business entities are required to implement the new
requirements in fiscal years and interim periods within those fiscal years beginning after December 15, 2015. This
ASU is not expected to have a significant impact on the Company’s financial statements.
In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements. The amendments in this
Update represent changes to clarify the FASB Accounting Standards Codification (“Codification”), correct
unintended application of guidance, or make minor improvements to the Codification that are not expected to have a
significant effect on current accounting practice or create a significant administrative cost to most entities. Transition
guidance varies based on the amendments in this Update. The amendments in this Update that require transition
guidance are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2015. Early adoption is permitted, including adoption in an interim period. All other amendments will
be effective upon the issuance of this Update. This ASU is not expected to have a significant impact on the
Company’s financial statements.
In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606). The
amendments in this Update defer the effective date of ASU 2014-09 for all entities by one year. Public business
88
entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09
to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that
reporting period. All other entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning
after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December
15, 2019. The Company is evaluating the effect of adopting this new accounting ASU.
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805). The amendments in this
Update require that an acquirer recognizes adjustments to provisional amounts that are identified during the
measurement period in the reporting period in which the adjustment amounts are determined. The amendments in
this Update require that the acquirer record, in the same period's financial statements, the effect on earnings of
changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional
amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this Update
require an entity to present separately on the face of the income statement or disclose in the notes the portion of the
amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods
if the adjustment to the provisional amounts had been recognized as of the acquisition date. For public business
entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2015, including
interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for fiscal
years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15,
2017. This ASU is not expected to have a significant impact on the Company’s financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition
and Measurement of Financial Assets and Financial Liabilities. This Update applies to all entities that hold
financial assets or owe financial liabilities and is intended to provide more useful information on the recognition,
measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a) requires
equity investments (except those accounted for under the equity method of accounting or those that result in
consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b)
simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a
qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial
instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the
requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the
fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet;
(e) requires public business entities to use the exit price notion when measuring the fair value of financial
instruments for disclosure purposes; (f) requires an entity to present separately in other comprehensive income the
portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk
when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial
instruments; (g) requires separate presentation of financial assets and financial liabilities by measurement category
and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying
notes to the financial statements; and (h) clarifies that an entity should evaluate the need for a valuation allowance on
a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.
For public business entities, the amendments in this Update are effective for fiscal years beginning after December
15, 2017, including interim periods within those fiscal years. For all other entities, including not-for-profit entities
and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the amendments in this
Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years
beginning after December 15, 2019. All entities that are not public business entities may adopt the amendments in
this Update earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those
fiscal years. The Company is currently evaluating the impact the adoption of the ASU will have on the Company’s
financial position or results of operations.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires lessees to recognize
the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of
financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right
to use the underlying asset for the lease term. A short-term lease is defined as one in which (a) the lease term is 12
months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to
exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line
basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after
89
December 15, 2018, and interim periods within those years. For all other entities, the amendments in this Update are
effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning
after December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using
a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual
reporting period. This ASU is not expected to have a significant impact on the Company’s financial statements.
In March 2016, the FASB issued ASU 2016-04, Liabilities – Extinguishments of Liabilities (Subtopic 405-20). The
standard provides that liabilities related to the sale of prepaid stored-value products within the scope of this Update
are financial liabilities. The amendments in the Update provide a narrow-scope exception to the guidance in
Subtopic 405-20 to require that breakage for those liabilities be accounted for consistent with the breakage guidance
in Topic 606. The amendments in this Update are effective for public business entities, certain not-for-profit entities,
and certain employee benefit plans for financial statements issued for fiscal years beginning after December 15,
2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for financial
statements issued for fiscal years beginning after December 15, 2018, and interim periods within fiscal years
beginning after December 15, 2019. Earlier application is permitted, including adoption in an interim period. This
ASU is not expected to have a significant impact on the Company’s financial statements.
In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815). The amendments in this
Update apply to all reporting entities for which there is a change in the counterparty to a derivative instrument that
has been designated as a heading instrument under Topic 815. The standards in this Update clarify that a change in
the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does
not, in and of itself, require designation of that hedging relationship provided that all other hedge accounting
criteria continue to be met. For public business entities, the amendments in this Update are effective for financial
statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years.
For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years
beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. An
entity has an option to apply the amendments in this Update on either a prospective basis or a modified retrospective
basis. Early adoption is permitted, including adoption in an interim period. This ASU not expected to have a
significant impact on the Company’s financial statements.
In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815). The amendments apply to all
entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to
have a debt host) with embedded call (put) options. The amendments in this Update clarify the requirements for
assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are
clearly and closely related to their debt host. An entity performing the assessment under the amendments in this
Update is required to assess the embedded call (put) options solely in accordance with the four-step decision
sequence. For public business entities, the amendments in this Update are effective for financial statements issued
for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For entities other
than public business entities, the amendments in this Update are effective for financial statements issued for fiscal
years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15,
2018. Early adoption is permitted, including adoption in an interim period. This ASU is not expected to have a
significant impact on the Company’s financial statements.
In March 2016, the FASB issued ASU 2016-07, Investments – Equity Method and Joint Ventures (Topic 323). The
Update affects all entities that have an investment that becomes qualified for the equity method of accounting as a
result of an increase in the level of ownership interest or degree of influence. The amendments in this Update
eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in
the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations,
and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all
previous periods that the investment had been held. The amendments require that the equity method investor add the
cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest
and adopt the equity method of accounting as of the date the investment becomes qualified for equity method
accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the
investment is required. The amendments in this Update require that an entity that has an available-for-sale equity
security that becomes qualified for the equity method of accounting recognize through earnings the unrealized
90
holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for
use of the equity method. The amendments in this Update are effective for all entities for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied
prospectively upon their effective date to increases in the level of ownership interest or degree of influence that
result in the adoption of the equity method. Earlier application is permitted. This ASU is not expected to have a
significant impact on the Company’s financial statements.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606). The
amendments in this Update affect entities with transactions included within the scope of Topic 606, which includes
entities that enter into contracts with customers to transfer goods or services (that are an output of the entity’s
ordinary activities) in exchange for consideration. The amendments in this Update do not change the core principle
of the guidance in Topic 606; they simply clarify the implementation guidance on principal versus agent
considerations. The amendments in this Update are intended to improve the operability and understandability of the
implementation guidance on principal versus agent considerations. The amendments in this Update affect the
guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The
effective date and transition requirements for the amendments in this Update are the same as the effective date and
transition requirements of Update 2014-09. ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606):
Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. The Company is currently
evaluating the impact the adoption of the standard will have on the Company’s financial position or results of
operations.
(cid:3)
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718). The(cid:3)amendments
in this Update affect all entities that issue share-based payment awards to their employees. The standards in this
Update provide simplification for several aspects of the accounting for share-based payment transactions, including
the income tax consequences, classification of awards as with equity or liabilities, and classification on the statement
of cash flows. Some of the areas for simplification apply only to nonpublic entities. In addition to those
simplifications, the amendments eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the
issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. This should not result in a change in
practice because the guidance that is being superseded was never effective. For public business entities, the
amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods
within those annual periods. For all other entities, the amendments are effective for annual periods beginning after
December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is
permitted for any entity in any interim or annual period. The Company adopted this ASU and did not have a
significant impact on the Company’s financial statements.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606). The
amendments in this Update affect entities with transactions included within the scope of Topic 606, which includes
entities that enter into contracts with customers to transfer goods or services in exchange for consideration. The
amendments in this Update do not change the core principle for revenue recognition in Topic 606. Instead, the
amendments provide (1) more detailed guidance in a few areas and (2) additional implementation guidance and
examples based on feedback the FASB received from its stakeholders. The amendments are expected to reduce the
degree of judgment necessary to comply with Topic 606, which the FASB expects will reduce the potential for
diversity arising in practice and reduce the cost and complexity of applying the guidance. The amendments in this
Update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet
effective. The effective date and transition requirements for the amendments in this Update are the same as the
effective date and transition requirements in Topic 606 (and any other Topic amended by Update 2014-09). ASU
2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective
date of Update 2014-09 by one year. The Company is currently evaluating the impact the adoption of the standard
will have on the Company’s financial position or results of operations.
In May 2016, the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivative and Hedging
(Topic 815), which rescinds SEC paragraphs pursuant to two SEC Staff Announcements at the March 3, 2016,
Emerging Issues Task Force meeting. This ASU did not have a significant impact on the Company’s financial
statements
91
In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606), which among
other things clarifies the objective of the collectability criterion in Topic 606, as well as certain narrow aspects of
Topic 606. The amendments in this Update affect the guidance in ASU 2014-09, Revenue from Contracts with
Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments
in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic
amended by Update 2014-09). ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the
Effective Date, defers the effective date of Update 2014-09 by one year. This ASU is not expected to have a
significant impact on the Company’s financial statements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses
on Financial Instruments (“ASU 2016-13”), which changes the impairment model for most financial assets. This
Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other
financial instruments held by financial institutions and other organizations. The underlying premise of the Update is
that financial assets measured at amortized cost should be presented at the net amount expected to be collected,
through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses
should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a
financial asset. The income statement will be effected for the measurement of credit losses for newly recognized
financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during
the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early
adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions,
transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of
the beginning of the first reporting period in which the guidance is adopted. The Company is currently evaluating
the impact the adoption of the standard will have on the Company’s financial position or results of operations.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain
Cash Receipts and Cash Payments (“ASU 2016-15”), which addresses eight specific cash flow issues with the
objective of reducing diversity in practice. Among these include recognizing cash payments for debt prepayment or
debt extinguishment as cash outflows for financing activities; cash proceeds received from the settlement of
insurance claims should be classified on the basis of the related insurance coverage; and cash proceeds received from
the settlement of bank-owned life insurance policies should be classified as cash inflows from investing activities
while the cash payments for premiums on bank-owned policies may be classified as cash outflows for investing
activities, operating activities, or a combination of investing and operating activities. The amendments in this
Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim
periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after
December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is
permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any
adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that
elects early adoption must adopt all of the amendments in the same period. The amendments in this Update should be
applied using a retrospective transition method to each period presented. If it is impracticable to apply the
amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively
as of the earliest date practicable. The Company is currently evaluating the impact the adoption of the standard will
have on the Company’s statement of cash flows.
92
3. EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted average number of common shares outstanding. Diluted
earnings per share is computed based on the weighted average number of common shares outstanding and common
share equivalents (“CSEs”) that would arise from the exercise of dilutive securities.
The calculated basic and diluted earnings per share are as follows:
2016
Year Ended September 30,
2015
2014
(Dollars in Thousands Except Per Share Data)
Basic
Diluted
Basic
Diluted
Basic
Diluted
Net income
$
2,720
$
2,720
$
2,232
$
2,232
$
1,780
$
1,780
Weighted average shares
outstanding
7,417,044
7,417,044
8,335,273
8,335,273
9,061,193
9,061,193
Effect of CSEs
-
217,701
-
114,817
-
216,885
Adjusted weighted average
shares used in earnings per share
computation
Earnings per share - basic and
diluted
7,417,044
7,634,745
8,335,273
8,450,090
9,061,193
9,278,078
$
0.37
$
0.36
$
0.27
$
0.26
$
0.20
$
0.19
As of September 30, 2016 and 2015, there were 554,445 and 442,756 shares of common stock, respectively, subject
to options with an exercise price less than the then current market and which were included in the computation of
diluted earnings per share. All options shares vested as of September 30, 2016 and 2015 have exercise prices
considered in the money and are consider dilutive. The weighted exercise price for the stock options representing the
383,016 anti-dilutive shares was $11.83 at September 30, 2014.
93
4. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the changes in accumulated other comprehensive income by component net of tax:
Year Ended September 30,
2016
2015
2014
Unrealized gains on
Unrealized gains on
Unrealized gains on
ASF securities and
available for sale
available for sale
interest rate swaps (a)
securities (a)
securities (a)
$
18
$
(953)
$
(1,292)
1,116
(60)
(276)
780
971
-
-
971
606
-
(267)
339
$
798
$
18
$
(953)
Beginning Balance
Other comprehensive income before reclassification unrealized gains on AFS securities.
Other comprehensive income before reclassification unrealized gains on interest rate swaps.
Amount reclassified from accumulated other comprehensive loss
Total other comprehensive income (loss)
Ending Balance
(a) All amounts are net of tax. Amounts in parentheses indicate debits.
The following table presents significant amounts reclassified out of each component of accumulated other
comprehensive income for the year ended September 30, 2016, 2015 and 2014:
Year Ended September 30,
2016
2015
2014
Amount Reclassified
Amount Reclassified
Amount Reclassified
from Accumulated
from Accumulated
from Accumulated
Affected Line Item in
Other
Other
Other
the Statement Where
Comprehensive
Comprehensive
Income (a)
Income (a)
Comprehensive
Income (a)
Net Income is
Presented
$
418
$
-
$
416
Gain on sale of mortgage-backed securities available-for-sale, net
(142)
-
-
-
-
-
(138)
(16)
5
Income taxes
Total other-than-temporary impairment losses
Income taxes
$
276
$
-
$
267
Details about other comprehensive income
Unrealized gains on available for sale securities
Reclassification for net gains in net income
Tax effect
Reclassification adjustment for other than temporary impairment losses
Tax effect
(a) Amounts in parentheses indicate debits to net income
94
5. INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost and fair value of securities, with gross unrealized gains and losses, are as follows:
September 30, 2016
Gross
Gross
Amortized Unrealized Unrealized
Gains
Losses
Cost
Fair
Value
Securities Available for Sale:
U.S. government and agency obligations
Mortgage-backed securities - U.S.
government agencies
Corporate debt securities
Total debt securities available for sale
(Dollars in Thousands)
$
20,988
$
36
$
-
$
21,024
90,817
25,411
137,216
860
661
1,557
(102)
(19)
(121)
91,575
26,053
138,652
FHLMC preferred stock
6
36
-
42
Total securities available for sale
$
137,222
$
1,593
$
(121)
$
138,694
Securities Held to Maturity:
U.S. government and agency obligations
Mortgage-backed securities - U.S.
government agencies
$
33,499
$
399
$
(129)
$
33,769
6,472
459
-
6,931
Total securities held to maturity
$
39,971
$
858
$
(129)
$
40,700
95
September 30, 2015
Gross
Gross
Amortized Unrealized Unrealized
Gains
Losses
Cost
Fair
Value
Securities Available for Sale:
U.S. government and agency obligations
Mortgage-backed securities - U.S.
government agencies
Total debt securities
FHLMC preferred stock
(Dollars in Thousands)
$
18,988
$
-
$
(276)
$
18,712
58,462
77,450
6
475
475
53
(225)
(501)
-
58,712
77,424
59
Total securities available for sale
$
77,456
$
528
$
(501)
$
77,483
Securities Held to Maturity:
U.S. government and agency obligations
Mortgage-backed securities - U.S.
government agencies
$
54,929
$
462
$
(849)
$
54,542
11,455
880
-
12,335
Total securities held to maturity
$
66,384
$
1,342
$
(849)
$
66,877
As of September 30, 2016 the Bank maintained $31.7 million a in safekeeping account at the FHLB of Pittsburgh
used for collateral as a convenience. The Bank is not required to maintain any specific collateral for its borrowings;
therefore these securities are not restricted and could be sold or transferred if needed.
96
The following table shows the gross unrealized losses and related fair values of the Company’s investment
securities, aggregated by investment category and the length of time that individual securities had been in a
continuous loss position at September 30, 2016:
Less than 12 months
Gross
Unrealized
Losses
Fair
Value
More than 12 months
Gross
Unrealized
Fair
Losses
Value
(Dollars in Thousands)
Total
Gross
Unrealized
Losses
Fair
Value
Securities Available for Sale:
Mortgage-backed securities -U.S. government agencies
Corporate debt securities
$
(50)
(19)
$
16,498
3,955
$
52
-
$
6,718
-
$
(102)
(19)
$
23,216
3,955
Total securities available for sale
$
(69)
$
20,453
$
52
$
6,718
$
(121)
$
27,171
Securities Held to Maturity:
U.S. government and agency obligations
$
(129)
$
20,371
$
-
$
-
$
(129)
$
20,371
Total securities held to maturity
$
(129)
$
20,371
$
-
$
-
$
(129)
$
20,371
Total
$
(198)
$
40,824
$
52
$
6,718
$
(250)
$
47,542
Management evaluates securities for other-than-temporary impairment (“OTTI”) at least once per quarter, and more
frequently when economic or market conditions warrant such evaluation. The evaluation is based upon factors such
as the creditworthiness of the issuers/guarantors, the underlying collateral, if applicable, and the continuing
performance of the securities. Management also evaluates other facts and circumstances that may be indicative of an
OTTI condition. This includes, but is not limited to, an evaluation of the type of security, the length of time and
extent to which the fair value of the security has been less than cost, and the near-term prospects of the issuer.
Management has reviewed its investment securities portfolios and determined that during the year ended September
30, 2016, there were no impairment required for its investment portfolio deemed other than temporarily impaired.
The Company assesses whether the credit loss existed by considering whether (1) the Company has the intent to sell
the security, (2) it is more likely than not that it will be required to sell the security before recovery, or (3) it does not
expect to recover the entire amortized cost basis of the security. The Company bifurcates the OTTI impact on
impaired securities where impairment in value was deemed to be other than temporary between the component
representing credit loss and the component representing loss related to other factors. The portion of the fair value
decline attributable to credit loss must be recognized through a charge to earnings. The credit component is
determined by comparing the present value of the cash flows expected to be collected, discounted at the rate in effect
before recognizing any OTTI with the amortized cost basis of the debt security. The Company uses the cash flow
expected to be realized from the security, which includes assumptions about interest rates, timing and severity of
defaults, estimates of potential recoveries, the cash flow distribution from the bond indenture and other factors, then
applies a discount rate equal to the effective yield of the security. The difference between the present value of the
expected cash flows and the amortized book value is considered a credit loss. The fair market value of the security is
determined using the same expected cash flows; the discount rate is a rate the Company determines from the open
market and other sources as appropriate for the security. The difference between the fair market value and the
security’s remaining amortized cost is recognized in other comprehensive income.
For both years ended September 30, 2016 and 2015, the Company determined that no OTTI had occurred within the
investment and mortgage-back securities portfolios.
97
The following is a rollforward for the year ended September 30, 2014 of the amounts recognized in earnings related
to credit losses on securities which the Company had recorded OTTI charges through earnings and other
comprehensive income.
Credit component of OTTI as of October 1, 2013
(Dollars in Thousands)
$
1,599
Additions for credit-related OTTI charges on previously unimpaired
securities
Reductions for securities liquidated
Additional losses as a result of impairment charges recognized on
investments for which an OTTI was previously recognized
-
(1,615)
16
Credit component of OTTI as of September 30, 2014
$
-
U.S. Government and agency obligations – The Company’s investments reflected in the tables above in U.S.
Government sponsored enterprise notes consist of debt obligations of the FHLB and Federal Farm Credit System
(“FFCS”). These securities are typically rated AAA by one of the internationally recognized credit rating services.
There were five securities in a gross unrealized loss position for less than twelve months having an aggregate
depreciation of $129,000 or 0.6% from the Company’s amortized cost basis. The unrealized losses on these debt
securities relates principally to the changes in market interest rates in the financial markets and are not as a result of
projected shortfall of cash flows. In addition, the Company does not intend to sell these securities and it is more
likely than not that the Company will not be required to sell the securities. As such, the Company anticipates it will
recover the entire amortized cost basis of the securities. As a result, the Company does not consider these
investments to be other-than-temporarily impaired at September 30, 2016.
U.S. Government agency issued mortgage-backed securities(cid:3031)—(cid:3031)At September 30, 2016, the gross unrealized loss
in U.S. government agency issued mortgage-backed securities in the category of experiencing a gross unrealized loss
for greater than 12 months was $52,000 or 0.8% from the Company’s amortized cost basis and consisted of five
securities. The securities in a gross unrealized loss position experiencing a gross unrealized loss for less than 12
months was $198,000 or 0.5% from the Company’s amortized cost basis and consisted of 17 securities at September
30, 2016. These securities represent asset-backed issues that are issued or guaranteed by a U.S. Government
sponsored agency or carry the full faith and credit of the United States through a government agency and are
currently rated AAA by at least one bond credit rating agency. The unrealized losses on these debt securities relates
principally to the changes in market interest rates in the financial markets and are not as a result of projected shortfall
of cash flows. The Company anticipates it will recover the entire amortized cost basis of the securities. As a result,
the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2016.
Corporate debt securities(cid:3031)—(cid:3031)At September 30, 2016, the gross unrealized loss corporate debt securities in the
category of experiencing a gross unrealized loss for less than 12 months was $19,000 or 0.5% from the Company’s
amortized cost basis and consisted of four securities. The unrealized losses on these debt securities relates principally
to the changes in market interest rates in the financial markets and are not as a result of projected shortfall of cash
flows. In addition, the Company does not intend to sell these securities and it is more likely than not that the
Company will not be required to sell the securities. As such, the Company anticipates it will recover the entire
amortized cost basis of the securities. As a result, the Company does not consider these investments to be other-
than-temporarily impaired at September 30, 2016.
98
The following table shows the gross unrealized losses and related fair values of the investment securities, aggregated
by investment category and length of time that individual securities have been in a continuous loss position at
September 30, 2015:
Less than 12 months
Gross
Unrealized
Losses
Fair
Value
More than 12 months
Gross
Fair
Unrealized
Losses
Value
(Dollars in Thousands)
Total
Gross
Unrealized
Losses
Fair
Value
Securities Available for Sale:
U.S. government and agency obligations
Mortgage-backed securities -
US government agency
$
(85)
$
4,910
$
(191)
$
13,802
$
(276)
$
18,712
(138)
22,173
(87)
$
9,206
(225)
31,379
Total securities available for sale
$
(223)
$
27,083
$
(278)
$
23,008
$
(501)
$
50,091
Securities Held to Maturity:
U.S. government and agency obligations
$
-
$
-
$
(849)
$
42,603
$
(849)
$
42,603
Total securities held to maturity
$
$
$
(849)
$
42,603
$
(849)
$
42,603
Total
$
(223)
$
27,083
$
(1,127)
$
65,611
$
(1,350)
$
92,694
The amortized cost and estimated fair value of U.S. Government and agency obligations by contractual maturity are
shown below. Expected maturities will differ from contractual maturities because of call provisions in the securities.
Mortgage-backed securities were not included as the contractual maturity is generally irrelevant due to the
borrowers’ right to prepay without pre-payment penalty which results in significant prepayments.
Held to Maturity
Available for Sale
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Due within one year
Due after one through five years
Due after five through ten years
Due after ten years
$
-
1,999
8,000
23,500
-
2,187
7,987
23,595
-
2,060
22,361
21,978
$
-
2,081
22,985
22,011
(Dollars in Thousands)
$
$
Total
$
33,499
$
33,769
$
46,399
$
47,077
During the fiscal year ended September 30, 2016 and 2014, the Company recorded realized gains of $418,000 and
$416,000, respectively, and gross proceeds from the from the sale of investment and mortgage-backed securities of
$11.6 million and $3.2 million, respectively. During the fiscal year ended September 30, 2015, the Company did not
record any gains or losses nor did it sell any securities from it’s AFS portfolio.
During the fiscal year ended September 30, 2016, the Company sold for $2.9 million mortgage-backed securities
classified as held-to-maturity for total proceeds of $3.1 million, that had a remaining balance of less than 15% of its
original par value. These sales did not taint the Company’s intent to hold the remaining portfolio.
99
6. LOANS RECEIVABLE
Loans receivable consist of the following:
September 30,
2016
2015
One-to-four family residential
Multi-family residential
Commercial real estate
Construction and land development
Commercial business
Leases
Consumer
Total loans
Undisbursed portion of loans-in-process
Deferred loan costs
Allowance for loan losses
$
(Dollars in Thousands)
233,531
$
12,478
79,859
21,839
99
3,286
799
259,163
6,249
25,799
38,953
-
-
392
351,891
(5,371)
1,697
(3,269)
330,556
(17,097)
2,104
(2,930)
Net loans
$
344,948
$
312,633
The Company originates loans to customers located primarily in its local market area. The ultimate repayment of
these loans at September 30, 2016 and 2015 is dependent, to a certain degree, on the local economy and real estate
market.
The following table summarizes the loans individually evaluated for impairment by loan segment at September 30,
2016:
One- to four-
family
residential
Multi-family
residential
Commercial real
estate
Construction and land
development
Commercial
business
Leases
Consumer
Total
(Dollars in Thousands)
Individually evaluated for impairment
$
5,553
$
335
$
3,154
$
10,288
$
99
$
-
$
-
$
19,429
Collectively evaluated for impairment
227,978
12,143
76,705
11,551
-
3,286
799
332,462
Total loans
$
233,531
$
12,478
$
79,859
$
21,839
$
99
$
3,286
$
799
$
351,891
100
The following table summarizes the loans individually evaluated for impairment by loan segment at September 30,
2015:
One- to four-
family
residential
Multi-family
residential
Commercial real
estate
Construction
and land
development
Commercial
business
Consumer
Total
(Dollars in Thousands)
Individually evaluated for impairment
$
4,206
$
-
$
3,768
$
8,796
$
-
$
-
$
16,770
Collectively evaluated for impairment
254,957
6,249
22,031
30,157
-
392
$
313,786
Total loans
$
259,163
$
6,249
$
25,799
$
38,953
$
-
$
392
$
330,556
The loan portfolio is segmented at a level that allows management to monitor risk and performance. Management
evaluates all loans classified as substandard or lower and loans delinquent 90 plus days for potential impairment.
Loans are considered to be impaired when, based on current information and events, it is probable that the Company
will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms
of the loan agreement.
Once the determination is made that a loan is impaired, the determination of whether a specific allocation of the
allowance is necessary is generally measured by comparing the recorded investment in the loan to the fair value of
the loan using one of the following three methods: (a) the present value of the expected future cash flows discounted
at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less
selling costs. Management primarily utilizes the fair value of collateral method as a practically expedient alternative.
The following table presents impaired loans by class, segregated by those for which a specific allowance was
required and those for which a specific allowance was not necessary as of September 30, 2016:
One-to-four family residential
Multi-family
Commercial real estate
Construction and land development
Commercial business
Total Loans
Impaired Loans with
Specific Allowance
Impaired
Loans with
No Specific
Allowance
(Dollars in Thousands)
Total Impaired Loans
Recorded
Investment
-
$
-
-
-
-
$
-
Related
Allowance
-
$
-
-
-
-
$
-
Recorded
Investment
5,553
$
335
3,154
10,288
99
19,429
$
Recorded
Investment
5,553
$
335
3,154
10,288
99
19,429
$
Unpaid
Principal
Balance
5,869
$
335
3,154
10,288
99
19,745
$
101
The following table presents impaired loans by class, segregated by those for which a specific allowance was
required and those for which a specific allowance was not necessary as of September 30, 2015:
Impaired Loans with
Specific Allowance
Impaired
Loans with
No Specific
Allowance
(Dollars in Thousands)
Total Impaired Loans
Recorded
Investment
$
-
-
-
$
-
Related
Allowance
$
-
-
-
$
-
Recorded
Investment
$
4,206
3,768
8,796
16,770
$
Recorded
Investment
$
4,206
3,768
8,796
16,770
$
Unpaid
Principal
Balance
$
4,550
3,768
8,796
17,114
$
One-to-four family residential
Commercial real estate
Construction and land development
Total Loans
The following tables present the average investment in impaired loans and related interest income recognized for the
periods indicated:
September 30, 2016
One-to four-family residential
Multi-family residential
Commercial real estate
Construction and land development
Commercial business
Total
Average Recorded
Investment
$
5,099
344
3,565
9,604
Income
Recognized on
Cash Basis
Income Recognized
on Accrual Basis
(Dollars in Thousands)
$
129
24
96
-
$
101
-
12
62
8
18,620
$
$
-
249
$
-
175
102
September 30, 2015
Income Recognized
on Accrual Basis
(Dollars in Thousands)
$
Income
Recognized on
Cash Basis
431
19
210
$
147
-
71
Average Recorded
Investment
$
8,734
289
3,840
8,413
21,276
$
$
437
1,097
$
194
412
September 30, 2014
Average Recorded
Investment
$
10,802
376
2,585
Income
Recognized on
Cash Basis
Income Recognized
on Accrual Basis
(Dollars in Thousands)
$
305
26
70
53
$
-
19
-
$
72
3,582
17,345
$
$
247
648
One-to four-family residential
Multi-family residential
Commercial real estate
Construction and land development
Total
One-to four-family residential
Multi-family residential
Commercial real estate
Construction and land development
Total
Federal banking regulations and our policies require that the Bank utilize an internal asset classification system as a means
of reporting problem and potential problem assets. The Bank has incorporated an internal asset classification system,
consistent with Federal banking regulations, as a part of the credit monitoring system. Management currently classifies
problem and potential problem assets as “special mention,” “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” that the
insured institution 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 “uncollectible” and of such little value that their continuance
as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the
insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated “special mention.”
The following tables present the classes of the loan portfolio in which a formal risk weighting system is utilized
summarized by the aggregate “Pass” and the criticized category of “special mention”, and the classified categories of
“substandard” and “doubtful” within the Bank’s risk rating system. The Bank had no loans classified as “loss” at the
dates presented.
103
Special
Mention
Pass
September 30, 2016
Substandard
(Dollars in Thousands)
Doubtful
Total
Loans
$
$
$
One-to-four residential
Multi-family residential
Commercial real estate
Construction and land development
Consumer
Total Loans
-
$
12,144
76,185
11,551
99
99,979
$
1,681
-
943
-
-
2,624
1,212
334
2,731
10,288
-
14,565
-
$
-
-
-
-
$
-
2,893
12,478
79,859
21,839
99
117,168
$
$
$
Pass
Special
Mention
September 30, 2015
Substandard
(Dollars in Thousands)
Doubtful
Total
Loans
$
$
$
2,107
351
965
-
3,423
751
-
2,829
8,796
12,376
-
$
-
-
-
$
-
2,858
6,249
25,799
38,953
73,859
$
$
$
One-to-four residential
Multi-family residential
Commercial real estate
Construction and land development
Total Loans
-
$
5,898
22,005
30,157
58,060
$
104
The following tables present loans in which a formal risk rating system is not utilized, but loans are segregated
between performing and non-performing based primarily on delinquency status:
September 30, 2016
Performing
Non-
Performing
Total
Loans
One-to-four family residential
Leases
Consumer
Total Loans
One-to-four family residential
Consumer
Total Loans
(Dollars in Thousands)
$
4,244
-
-
4,244
$
226,394
3,286
799
230,479
$
$
230,638
3,286
799
234,723
$
$
September 30, 2015
Performing
Non-
Performing
Total
Loans
(Dollars in Thousands)
$
3,547
-
3,547
$
252,758
392
253,150
$
$
$
$
256,305
392
256,697
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the
portfolio as determined by the length of time a recorded payment is due. The following tables present the classes of
the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans:
30-89 Days
Past Due
90 Days +
Past Due
Current
September 30, 2016
90 Days+
Past Due
and Accruing
Total
Total
Past Due
and Accruing Loans
(Dollars in Thousands)
$
233,531
12,478
79,859
21,839
99
3,286
799
351,891
$
One-to-four family residential
Multi-family residential
Commercial real estate
Construction and land development
Commercial business
Leases
Consumer
Total Loans
$
228,904
12,478
78,513
11,551
99
3,286
799
335,630
$
$
1,860
-
-
-
-
$
2,767
-
1,346
10,288
-
$
-
-
-
-
-
$
1,860
-
-
-
-
-
1,860
$
-
14,401
$
-
$
-
-
1,860
$
105
Non-
Accrual
$
4,244
-
1,346
10,288
-
-
15,878
$
30-89 Days
Past Due
90 Days +
Past Due
Current
September 30, 2015
90 Days+
Past Due
and Accruing
Total
Past Due
Total
and Accruing Loans
(Dollars in Thousands)
Non-
Accrual
$
$
$
$
$
$
255,669
6,249
25,114
38,953
-
392
326,377
1,462
-
504
-
-
-
1,966
2,032
-
181
-
-
-
2,213
$
-
-
-
-
-
-
$
-
1,462
-
504
-
-
-
1,966
259,163
6,249
25,799
38,953
-
392
330,556
3,547
-
1,589
8,796
-
-
13,932
$
$
$
$
$
$
One-to-four family residential
Multi-family residential
Commercial real estate
Construction and land development
Commercial business
Consumer
Total Loans
Interest income on nonaccrual loans would have increased by approximately $604,000, $279,000, and $187,000,
during fiscal years ended September 30, 2016, 2015 and 2014, respectively, if these loans would have performed in
accordance with their original terms.
The allowance for loan losses is established through a provision for loan losses charged to expense. Management
maintains the allowance at a level believed to cover all known and inherent losses in the portfolio that are both
probable and reasonable to estimate at each reporting date. Management reviews the allowance for loan losses no
less than quarterly in order to identify those inherent losses and to assess the overall collection probability for the
loan portfolio in view of these inherent losses. For each primary type of loan, a loss factor is established reflecting
an estimate of the known and inherent losses in such loan type using both a quantitative analysis as well as
consideration of qualitative factors. The evaluation process includes, among other things, an analysis of delinquency
trends, non-performing loan trends, the level of charge-offs and recoveries, prior loss experience, total loans
outstanding, the volume of loan originations, the type, size and geographic concentration of our loans, the value of
collateral securing the loans, the borrower’s ability to repay and repayment performance, the number of loans
requiring heightened management oversight, local economic conditions and industry experience.
Commercial real estate loans entail significant additional credit risks compared to one-to four-family residential
mortgage loans, as they generally involve large loan balances concentrated with single borrowers or groups of
related borrowers. In addition, the payment experience on loans secured by income-producing properties typically
depends on the successful operation of the related real estate project and/or business operation of the borrower who
is also the primary occupant, and thus may be subject to a greater extent to the effects of adverse conditions in the
real estate market and in the economy in general. Commercial business loans typically involve a higher risk of
default than residential loans of like duration since their repayment is generally dependent on the successful
operation of the borrower’s business and the sufficiency of collateral, if any. Land acquisition, development and
construction lending exposes us to greater credit risk than permanent mortgage financing. The repayment of land
acquisition, development and construction loans depends upon the sale of the property to third parties or the
availability of permanent financing upon completion of all improvements. These events may adversely affect the
borrower and the value of the collateral property.
106
The following tables summarize the primary segments of the allowance for loan losses, segmented into the amount
required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for
impairment as of September 30, 2016 and 2015. Activity in the allowance is presented for the years ended
September 30, 2016 and 2015:
(cid:94)(cid:286)(cid:393)(cid:410)(cid:286)(cid:373)(cid:271)(cid:286)(cid:396)(cid:3)(cid:1007)(cid:1004)(cid:853)(cid:3)(cid:1006)(cid:1004)(cid:1005)(cid:1010)
One- to
four-family
residential
Multi-
family
residential
Commercial
real estate
Construction
and land
development
Commercial
business
Leases
Consumer Unallocated
Total
ALLL balance at September 30, 2015
Charge-offs
Recoveries
Provision
ALLL balance at September 30, 2016
(In Thousands)
$ 1,636 $ 66 $ 231 $ 725 $ - $ - $ 4 $ 268 $ 2,930
(11)
105
(103)
1,627
$
-
-
71
137
$
-
-
628
859
$
-
20
(429)
316
$
-
-
1
$
1
-
-
21
21
$
-
-
6
10
$
-
-
30
298
$
(11)
125
225
3,269
$
Individually evaluated for impairment
Collectively evaluated for impairment
$
-
1,627
-
$
137
-
$
859
-
$
316
-
$
1
-
$
21
-
$
10
$
-
298
-
$
3,269
(cid:94)(cid:286)(cid:393)(cid:410)(cid:286)(cid:373)(cid:271)(cid:286)(cid:396)(cid:3)(cid:1007)(cid:1004)(cid:853)(cid:3)(cid:1006)(cid:1004)(cid:1005)(cid:1009)
One- to
four-family
residential
Multi-
family
residential
Commercial
real estate
Construction
and land
development
Commercial
business
(In Thousands)
Consumer Unallocated
Total
ALLL balance at September 30, 2014
Charge-offs
Recoveries
Provision
ALLL balance at September 30, 2015
$ 1,663 $ 67 $ 122 $ 323
$ 15 $ 4 $ 231 $ 2,425
(384)
77
280
1,636
$
(1)
-
-
66
$
-
-
109
231
$
-
78
324
725
$
-
-
(15)
$
-
-
-
-
$
4
-
-
37
268
$
(385)
155
735
2,930
$
Individually evaluated for impairment
Collectively evaluated for impairment
-
$
1,636
-
$
66
$
-
231
-
$
725
-
$
-
-
$
4
-
$
268
-
$
2,930
107
(cid:94)(cid:286)(cid:393)(cid:410)(cid:286)(cid:373)(cid:271)(cid:286)(cid:396)(cid:3)(cid:1007)(cid:1004)(cid:853)(cid:3)(cid:1006)(cid:1004)(cid:1005)(cid:1008)
One- to
four-family
residential
Multi-
family
residential
Commercial
real estate
Construction
and land
development
Commercial
business
(In Thousands)
Consumer Unallocated
Total
ALLL balance at September 30, 2013
Charge-offs
Recoveries
Provision
ALLL balance at September 30, 2014
$ 1,384 $ 22 $ 70 $ 653
$ 4 $ 2 $ 218 $ 2,353
(215)
47
447
1,663
$
-
-
45
67
$
-
-
52
122
$
-
-
(330)
323
$
-
-
11
15
$
-
-
2
$
4
-
-
13
231
$
(215)
47
240
2,425
$
Individually evaluated for impairment
Collectively evaluated for impairment
$
-
1,663
$
-
67
$
-
122
$
-
323
$
-
15
$
-
4
$
-
231
$
-
2,425
Management established a provision for loan losses of $225,000, $735,000 and $240,000 during the years ended
September 30, 2016, 2015 and 2014, respectively. The Company determined it was prudent to record a provision for
fiscal year 2016 primarily due to the increased level of commercial real estate loans offset by a reduction in single-
family residential loans. The provision for loan losses was deemed necessary for fiscal 2015 due to the increase in
the level of commercial real estate and construction loans outstanding, charge-offs incurred during fiscal 2015 and
the classification of a $10.3 million loan workout relationship as non-performing. The Company believes that the
allowance for loan losses at September 30, 2016 is sufficient to cover all inherent and known losses associated with
the loan portfolio at such date. At September 30, 2016, the Company’s non-performing assets totaled $16.5 million
or 2.9% of total assets as compared to $14.8 million or 3.0% of total assets at September 30, 2015. All of the
increase was due to the placement on non-accrual of the entire amount of the Company’s largest loan relationship
totaling $12.3 million and consisting of nine loans. Non-performing assets at September 30, 2016 included five
construction loans aggregating $10.3 million, 17 one-to-four-family residential loans aggregating $2.9 million, one
single-family residential investment property loan totaling $1.4 million and two commercial real estate loans
aggregating $1.3 million. Non-performing assets also included at September 30, 2016 two real estate properties
consisting of one single-family residential property totaling $375,000 and a commercial real estate property totaling
$206,000. At September 30, 2016, the Company had ten loans aggregating $8.2 million that were classified as
troubled debt restructurings (“TDRs”). Three of such loans aggregating $5.7 million as of September 30, 2016 were
classified as non-performing as a result of not achieving a sufficiently long payment history, under the restructured
terms, to justify returning the loans to performing (accrual) status. Two of these three loans totaling $4.3 million
(which are part of the Company’s largest relationship referenced above) are over 90 days past due resulting from the
discontinuation of funding by the Company of the development project (discussed below) due to the re-negotiation
of the project’s future direction to completion. The third loan, consisting of a residential loan of approximately $1.4
million, has made all of its required payments to date, but the Company has not returned the loan to performing
status due to concerns with regard to the borrower’s ability to make remaining payments due. The remaining eight
TDRs have performed in accordance with the terms of their revised agreements. As of September 30, 2016, the
Company had reviewed $19.4 million of loans for possible impairment of which $14.6 million was deemed
classified as substandard compared to $16.8 million reviewed for possible impairment and $12.4 million of which
was classified substandard as of September 30, 2015.
Management will continue to monitor and modify the allowance for loan losses as conditions dictate. No assurances
can be given that the level of allowance for loan losses will cover all of the inherent losses on the loans or that future
adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to determine the current level of the
allowance for loan losses.
The following tables set forth a summary of the TDRs activity for the years ended September 30, 2016, 2015 and
2014. All of the TDRs involved changes in the interest rates on the loans; no debt was forgiven. At September 30,
108
2016, out of the 11 TDRs loans, eight were performing and the remaining three were classified as non-performing,
of which one loan was performing in accordance with their modified terms:
(amount in thousands)
One-to-four family residential
As of and for the Year Ended September 30, 2016
Restructured Current Period
Post-
Modification
Outstanding
Recorded
Investment
Pre- Modification
Outstanding
Recorded
Investment
Number of
Loans
1
1
$
$
482
482
$
$
482
482
As of and for the Year Ended September 30, 2015
Restructured Current Period
Post-
Modification
Outstanding
Recorded
Investment
Pre- Modification
Outstanding
Recorded
Investment
$
$
750
3,665
4,415
750
3,665
4,415
$
$
(amount in thousands)
Commerical real estate
Construction and land development
Number of
Loans
1
1
2
109
As of and for the Year Ended September 30, 2014
(amount in thousands)
One-to four- family
Commerical real estate
Number of
Loans
1
1
2
Restructured Current Period
Post-
Modification
Outstanding
Recorded
Investment
Pre- Modification
Outstanding
Recorded
Investment
$
$
1,455
877
2,332
1,455
877
2,332
$
$
As of September 30, 2016, consist of two loans deemed to be TDRs aggregating $4.3 million, consisting of one
construction and development loan in the amount of $3.6 million and a commercial real estate loan in the amount of
$730,000, both of which were in default under their modified terms. Both loans are related to the Company’s largest
borrower.
At September 30, 2016, the Company had nine consumer mortgage with a carrying amount of $1.1 million that is
secured by residential real estate property for which foreclosure is proceedings are in process according to local
jurisdictions.
7. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized by major classifications as follows:
Land
Buildings and improvements
Furniture and equipment
Automobiles
Total
Accumulated depreciation
September 30,
2016
2015
(Dollars in Thousands)
$
198
2,492
2,355
-
$
198
2,454
2,210
96
5,045
(3,701)
4,958
(3,466)
Total office properties and equipment,
net of accumulated depreciation
$
1,344
$
1,492
For the years ended September 30, 2016, 2015 and 2014, depreciation expense amounted to $325,000, $304,000 and
$320,000, respectively.
Lease expense was $352,000, $242,000 and $77,000 for the years ended September 30, 2016, 2015 and 2014,
respectively. The Company has executed certain lease commitments is obligated to pay; $350,000 for fiscal year
2017, $394,000 for fiscal year 2018, $382,000 for fiscal year 2019 and $2.2 million thereafter.
110
8. DEPOSITS
Deposits consist of the following major classifications:
2016
Amount
September 30,
2015
Percent
(Dollars in Thousands)
Amount
Percent
Non-interest-bearing checking accounts
Interest-bearing checking accounts
Money market deposit accounts
Passbook, club and statement savings
Certificates maturing in six months or less
Certificates maturing in more than six months
$
3,804
34,984
55,552
70,924
97,418
126,519
0.7 %
9.3
14.3
18.2
25.0
32.5
$
2,293
35,649
60,736
70,355
49,857
146,184
0.6 %
9.8
16.6
19.3
13.7
40.0
Total
$
389,201
100.0 %
$
365,074
100.0 %
The amount of scheduled maturities of certificate accounts was as follows:
One year or less
One through two years
Two through three years
Three through four years
Four through five years
Total
September 30, 2016
(Dollars in Thousands)
$
139,841
39,624
20,534
14,704
9,227
$
223,930
111
Certificates of deposit of $250,000 or more at September 30, 2016 and 2015 totaled $17.0 million and $32.7 million,
respectively.
Interest expense on deposits was comprised of the following:
Checking and money market deposit accounts
Passbook, club and statement
savings accounts
Certificate accounts
Total
2016
Year Ended September 30,
2015
(Dollars in Thousands)
2014
$
165
$
323
$
348
83
2,613
2,861
$
208
2,899
3,430
$
262
2,791
3,401
$
9.
SHORT-TERM BORROWINGS
The year ended September 30, outstanding balances and related information of short-term borrowings from the
FHLB are summarized follows:
(Dollar amount in thousands)
2016
Balance at year-end
Average balance outstanding
Maximum month-end balance
Weight-average rate at year-end
Weight-average rate during the year
20,000
8,975
20,000
1.17%
1.23%
There were no short-term borrowings outstanding during the fiscal year ended 2015.
As of September 30, 2016, the $20.0 million consists of two $10.0 million 30 day FHLB advance associated with an
interest rate swap contract with a weighted average effective cost of 117 bps.
Average balances outstanding during the year represent daily average balance and interest rates represent interest
expense divided by the related average balance.
The Company maintains borrowing facilities with the FHLB and Federal Reserve Banks and the terms and interest
rate are subject to change on the date of execution.
112
10. ADVANCES FROM FEDERAL HOME LOAN BANK
Pursuant to collateral agreements with the FHLB of Pittsburgh, advances are secured by a blanket collateral of loans
held by the Company and qualifying fixed-income securities and FHLB stock. The long-term advances outstanding as
of September 30, 2016 are as follows:
Type
Maturity Date
Fixed Rate -Advance
Fixed Rate -Amortizing
Fixed Rate -Advance
Fixed Rate -Advance
Fixed Rate -Advance
Fixed Rate -Amortizing
Fixed Rate -Advance
Fixed Rate -Advance
Fixed Rate -Advance
Fixed Rate -Advance
Fixed Rate -Advance
17-Nov-17
1-Dec-17
4-Dec-17
16-Nov-18
3-Dec-18
18-Nov-19
27-Jul-20
27-Jul-21
28-Jul-21
29-Jul-21
19-Aug-21
Amount
(Dollars in Thousands)
$
10,000
2,511
2,000
7,500
3,000
4,382
249
249
249
249
249
Coupon
Call Date
1.20% Not Applicable
1.16% Not Applicable
1.15% Not Applicable
1.40% Not Applicable
1.54% Not Applicable
1.53% Not Applicable
1.38% Not Applicable
1.52% Not Applicable
1.48% Not Applicable
1.42% Not Applicable
1.55% Not Applicable
(cid:894)(cid:258)(cid:895)(cid:3)(cid:116)(cid:286)(cid:349)(cid:336)(cid:346)(cid:410)(cid:286)(cid:282)(cid:3)(cid:258)(cid:448)(cid:286)(cid:396)(cid:258)(cid:336)(cid:286)(cid:3)(cid:272)(cid:381)(cid:437)(cid:393)(cid:381)(cid:374)(cid:3)(cid:396)(cid:258)(cid:410)(cid:286)(cid:856)
$
30,638
1.34% (a)
Advances from the FHLB with coupon rates ranging from 1.15% to 1.55% are as follows.
Maturity
Amount
Weighted Average
Coupon Rate
2017
2018
2019
2020
2021
$
(Dollars in Thousands)
3,367
13,887
11,903
485
996
30,638
1.31%
1.22%
1.45%
1.45%
1.49%
1.34%
The Bank maintains a blanket collateral agreement using qualifying loans with the FHLB for future borrowing needs.
At September 30, 2016, the Bank had the ability to obtain $180.2 million of additional FHLB advances.
There were no outstanding balances at September 30, 2015.
113
11. INCOME TAXES
The Company files a consolidated federal income tax return. The Company uses the specific charge-off method for
computing reserves for bad debts. Generally this method allows the Company to deduct an annual addition to the
reserve for bad debt equal to its net charge-offs.
The provision for income taxes for the years ended September 30, consists of the following:
Current:
Federal expense
Total current taxes
Deferred income tax benefit
Total income tax provision
2016
Year Ended September 30,
2015
(Dollars in Thousands)
2014
$
1,275
1,275
(16)
$
1,259
$
461
461
(345)
$
116
$
690
690
-
$
690
Items that gave rise to significant portions of deferred income taxes are as follows:
September 30,
2016
2015
(Dollars in Thousands)
$
1,289
163
13
378
96
18
69
434
2,460
(378)
2,082
$
1,185
86
119
534
126
19
-
530
2,599
(534)
2,065
423
500
12
578
1,513
569
$
365
10
-
715
1,090
975
$
Deferred tax assets:
Allowance for loan losses
Non-accrual interest
Accrued vacation
Capital loss carryforward
Post-retirement benefit plans
Split dollar life insurance
Unrealized losses on interest rate swaps
Employee benefit plans
Total deferred tax assets
Valuation allowance
Total deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Property
Unrealized gains on available for sale securities
481(a)Adjustment
Deferred loan fees
Total deferred tax liabilities
Net deferred tax asset
114
The Company establishes a valuation allowance for deferred tax assets when management believes that the deferred
tax assets are not likely to be realized either through a carry back to taxable income in prior years, future reversals of
existing taxable temporary differences, and, to a lesser extent, future taxable income. The valuation allowance
totaled $378,000 and $534,000 at September 30, 2016 and 2015, respectively. The gross deferred tax assets related
to impairment losses and capital loss carryforwards decreased in the aggregate by $156 thousand during the year
ended September 30, 2016, primarily due to the sale of AFS investment securities.
The income tax expense differs from that computed at the statutory federal corporate tax rate as follows:
2016
Percentage
of Pretax
Income
Amount
$
1,353
34.0 %
Year Ended September 30,
2015
Amount
Percentage
of Pretax
Income
(Dollars in Thousands)
798
$
34.0 %
2014
Percentage
of Pretax
Income (Loss)
Amount
$
840
34.0 %
(156)
(113)
151
24
(3.9)
(2.8)
3.8
0.5
(677)
(117)
126
(14)
(28.8)
(5.0)
5.4
(0.6)
(144)
(87)
74
7
(5.8)
(3.5)
3.0
0.2
Tax at statutory rate
Adjustments resulting from:
Valuation allowance
Income from bank owned life insurance
Employee benefit plans
Other
Income tax expense
$
1,259
31.6 %
$
116
5.0 %
$
690
27.9 %
There is currently no liability for uncertain tax positions and no known unrecognized tax benefits. The Company
recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income
taxes in the Consolidated Statements of Operations as a component of income tax expense. As of September 30,
2016, the Internal Revenue Service conducted an audit of the Company’s tax returns for the year ended September
30, 2010, and no adverse findings were reported. The Company’s federal and state income tax returns for taxable
years through September 30, 2013 have been closed for purposes of examination by the Internal Revenue Service
and the Pennsylvania Department of Revenue.
12. REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory – and possibly
additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the
Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company’s and the Bank’s capital amounts and the Bank’s classification are also subject to
qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to
maintain minimum amounts and ratios (set forth in the table below) of Tier 1 capital (as defined in the regulations) to
average assets (as defined) and risk-weighted assets (as defined), and of total capital (as defined) to risk-weighted
assets. Management believes, as of September 30, 2016 and 2015, that the Company and the Bank met all regulatory
capital adequacy requirements to which they each are subject.
115
To be categorized as well capitalized, the Bank must maintain the minimum Tier 1 capital, Tier common equity, Tier
1 risk-based and total risk-based ratios as set forth in the table below.
The Company’s and the Bank’s actual capital amounts and ratios are also presented in the following table:
Actual
Amount
Ratio
Required for Capital
Adequacy Purposes
Ratio
Amount
(Dollars in Thousands)
September 30, 2016:
Tier 1 capital (to average assets)
Company
Bank
Tier 1 Common (to risk-weighted assets)
Company
Bank
Tier 1 capital (to risk-weighted assets)
Company
Bank
Total capital (to risk-weighted assets)
Company
Bank
September 30, 2015:
Tier 1 capital (to average assets)
Company
Bank
Tier 1 Common (to risk-weighted assets)
Company
Bank
Tier 1 capital (to risk-weighted assets)
Company
Bank
Total capital (to risk-weighted assets)
Company
Bank
$
113,205
100,552
20.41 %
18.15
N/A
22,157
$
113,205
100,552
113,205
100,552
116,512
103,859
38.57
34.36
38.57
34.36
39.70
35.49
N/A
13,171
N/A
17,559
N/A
23,415
$
116,903
96,034
23.73 %
19.50
N/A
19,699
$
116,921
96,052
116,903
96,034
120,016
99,147
50.63
41.66
50.63
41.65
51.98
43.00
N/A
10,376
N/A
13,834
N/A
18,446
N/A
4.0
N/A
4.5
N/A
6.0
N/A
8.0
N/A
4.0
N/A
4.5
N/A
6.0
N/A
8.0
To Be
Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
N/A
27,697
$
N/A
5.0 %
N/A
19,024
N/A
23,415
N/A
29,268
N/A
6.5
N/A
8.0
N/A
10.0
N/A
24,624
$
N/A
5.0 %
N/A
14,987
N/A
18,446
N/A
23,057
N/A
6.5
N/A
8.0
N/A
10.0
13. EMPLOYEE BENEFITS
The Bank is a member of a multi-employer (under the provisions of the Employee Retirement Income Security Act
of 1974 and the Internal Revenue Code of 1986) defined benefit pension plan covering all employees meeting
certain eligibility requirements. The Bank’s policy is to fund pension costs accrued. The expense relating to this plan
for the years ended September 30, 2016, 2015 and 2014 was $256,000, $623,000 and $663,000, respectively. There
are no collective bargaining agreements in place that require contributions to the plan. Additional information
regarding the plan as of September 30, 2016 is noted below:
Legal Name of Plan
Plan Employer Identification Number
The Company's Contribution for the year ended
September 30, 2016
Are Company's Contributions more than 5% of total
contributions?
Funded Status
Pentegra Defined Benefit Plan for Financial
Institutions
13-5645888
$222,000
No
95.85%
116
The Pentegra Defined Benefits Plan for Financial Institutions is a single plan under Internal Revenue Code Section
413 (c) and, as a result, all of the assets stand behind all of the liabilities. Accordingly, under the plan, contributions
made by a participating employer may be used to provide benefits to participants of other participating employers.
During November 2015, the Plan was frozen in an effort to reduce expenses on a going forward basis.
The Bank also has a defined contribution plan for employees meeting certain eligibility requirements. The defined
contribution plan may be terminated at any time at the discretion of the Bank. There was no expense relating to this
plan for the years ended September 30, 2016, 2015 and 2014. The Company eliminated the employer match in
conjunction with the establishment of the employee stock ownership plan (“ESOP”) discussed below.
The Bank maintains an ESOP for substantially all of its full-time employees meeting certain eligibility requirements.
The purchase of shares of the Company's common stock by the ESOP was funded by loans from the Company. The
loans will be repaid principally from the Bank's contributions to the ESOP. Shares of the Company's common stock
purchased by the ESOP are held in a suspense account and released for allocation to participants on a pro rata basis
as debt service payments are made on the loans. Shares released are allocated to each eligible participant based on
the ratio of each such participant's compensation, as defined in the ESOP, to the total compensation of all eligible
plan participants. As the unearned shares are released and allocated among participants, the Bank recognizes
compensation expense based on the current market price of the shares released. The ESOP purchased 712,721 shares
of the Company’s common stock for an aggregate cost of approximately $7.6 million in fiscal 2015 and fiscal 2014.
As of September 30, 2016, the Company had allocated a total of 243,734 shares from the suspense account to
participants and committed to release an additional 35,517 shares. The expense relating to the ESOP for the years
ended September 30, 2016, 2015 and 2014 was $526,000, $467,000 and $389,000, respectively.
The Company maintains the 2008 Recognition and Retention Plan (“RRP”) which is administered by a committee of
the Board of Directors of the Company. The RRP provides for the grant of shares of common stock of the Company
to officers, employees and directors of the Company. In order to fund the grant of shares under the RRP, the RRP
Trust purchased 213,528 shares (on a converted basis) of the Company’s common stock in the open market for
approximately $2.5 million, at an average purchase price per share of $11.49 as part of the RRP. The Company
made sufficient contributions to the RRP Trust to fund these purchases. During fiscal year 2016, 7,473 shares have
forfeited under RRP and were granted in August 2016. Shares subject to awards under the RRP generally vest at the
rate of 20% per year over five years. As of September 30, 2016, 195,083 of the awarded shares of the Plan had
become fully vested. During February 2015, shareholders approved the 2014 Stock Incentive Plan (the “2014 SIP”).
As part of the 2014 SIP, a maximum of 285,655 shares can be awarded as restricted stock awards or units, of which
235,500 shares were awarded during February 2015 of which 41,800 have vested and 45,000 shares have been
forfeited. In August 2016, the Company granted 3,027 shares under the 2014 SIP.
During the year ended September 30, 2016, approximately $463,000 was recognized in compensation expense for
the RRP. Tax benefits of $219,000 were recognized during the year ended September 30, 2016.Tax benefits of
$131,000 were recognized during the year ended September 30, 2015. During the year ended September 30, 2015,
approximately $387,000 was recognized in compensation expense for the RRP. At September 30, 2016,
approximately $2.9 million of additional compensation expense for the shares awarded related to the RRP remained
unrecognized.
A summary of the Company’s non-vested stock award activity for the year ended September 30, 2016 and 2015 is
presented in the following table:
117
Year Ended September
30, 2016
Number of
Shares
Weighted Average
Grant Date Fair Value
Nonvested stock awards at beginning of year
Issued
Forfeited
Vested
Nonvested stock awards at the end of the period
241,428
10,500
(30,180)
(48,960)
172,788
$
$
11.74
14.42
11.92
11.60
12.03
Year Ended September
30, 2015
Number of
Shares
Weighted Average
Grant Date Fair Value
Nonvested stock awards at beginning of year
Issued
Forfeited
Vested
Nonvested stock awards at the end of the period
38,055
235,500
(21,813)
(10,314)
241,428
$
8.07
12.23
11.85
9.07
11.74
$
The Company maintains the Stock Option Plan (the “Option Plan”) which authorizes the grant of stock options to
officers, employees and directors of the Company to acquire shares of common stock with an exercise price at
least equal to the fair market value of the common stock on the grant date. Options generally become vested and
exercisable at the rate of 20% per year over five years and are generally exercisable for a period of ten years after
the grant date. A total of 533,808 shares of common stock were approved for future issuance pursuant to the
Stock Option Plan. As of September 30, 2016, all of the options had been awarded under the Option Plan. As of
September 30, 2016, 576,354 options were vested under the Option Plan of which 126,000 options were forfeited
and are available for future grants. The 2014 SIP reserved up to 714,145 shares for issuance pursuant to options.
Options to purchase 608,737 shares were awarded during February 2015, 605,000 shares pursuant to the 2014 SIP
and the remainder pursuant to the Option Plan. During August 2016, the Company granted 18,866 shares under
the Option Plan and 8,634 shares under the 2014 SIP.
A summary of the status of the Company’ stock options under the Stock Option Plan as of September 30, 2016
and 2015 and changes during the year ended September 30, 2016 and 2015 are presented below:
118
Year Ended September
30, 2016
Number of
Shares
Weighted Average
Exercise Price
Options outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at the end of the period
Exercisable at the end of the period
1,074,430
27,500
(99,545)
(80,476)
921,909
467,397
$
$
$
11.92
14.42
11.45
11.52
11.70
11.40
Year Ended September
30, 2015
Number of
Shares
Weighted Average
Exercise Price
Options outstanding at beginning of year
Granted
Forfeited
Outstanding at the end of the period
Exercisable at the end of the period
530,084
608,737
(64,391)
1,074,430
440,976
$
$
$
11.57
12.23
11.92
11.92
11.42
The weighted average remaining contractual term was approximately 5.1 years for options outstanding as of
September 30, 2016.
The estimated fair value of options granted during fiscal 2009 was $2.98 per share, $2.92 for options granted
during fiscal 2010, $3.34 for options granted during fiscal 2013, $4.67 for the options granted during fiscal 2014,
$4.58 for options granted during fiscal 2015 and $2.13 for options granted during fiscal 2016. The fair value for
grants made in fiscal 2015 was estimated on the date of grant using the Black-Scholes pricing model with the
following assumptions: an exercise and fair value of $12.23, term of seven years, volatility rate of 38.16%,
interest rate of 1.62% and a yield rate of 0.98%. The fair value for grants made in fiscal 2016 was estimated on
the date of grant using the Black-Scholes pricing model with the following assumptions: an exercise and fair
value of $14.42, term of seven years, volatility rate of 13.82%, interest rate of 1.36% and a yield rate of 0.80%.
During the year ended September 30, 2016, $455,000 was recognized in compensation expense for the Option
Plan. A tax benefit of $155,000 was recognized during the year ended September 30, 2016. During the year
ended September 30, 2015, $387,000 was recognized in compensation expense for the Option Plan. A tax benefit
of $44,000 was recognized during the year ended September 30, 2015. At September 30, 2016, approximately
$2.0 million of additional compensation expense for awarded options remained unrecognized. The weighted
average period over which this expense will be recognized is approximately 2.3 years.
14. INTEREST RATE SWAP AGREEMENTS
The Company has contracted with a third party to engage pay-fixed interest rate swap contracts and the
outstanding at September 30, 2016, is being utilized to hedge $20.1 million in floating rate debt. Below is a
summary of the interest rate swap agreements and the terms as of September 30, 2016.
119
Natinal
Amount
Pay
Rate
2016
Receive
Rate
Maturity
Date
Unrealized
Loss
Interest rate swap contract
Interest rate swap contract
Interest rate swap contract
$
10,000
10,000
1,100
1.15%
1.18%
4.10% 1 Mth Libor +276 bp
1 Mth Libor
1 Mth Libor
6-Apr-21
13-Jun-21
1-Aug-16
$
92,000
103,000
7,000
$
202,000
15. COMMITMENTS AND CONTINGENT LIABILITIES
At September 30, 2016, the Company had $9.9 million in outstanding commitments to originate fixed and
variable-rate loans with market interest rates ranging from 3.75% to 5.25%. At September 30, 2015, the
Company had $2.7 million in outstanding commitments to originate fixed and variable-rate loans with market
interest rates ranging from 4.25% to 5.25%. The aggregate undisbursed portion of loans-in-process amounted to
$5.4 million and $17.1 million, respectively, at September 30, 2016 and 2015.
The Company also had commitments under unused lines of credit of $3.3 million and $6.1 million, respectively,
and letters of credit outstanding of $1.9 million and $2.6 million, respectively, at September 30, 2016 and 2015.
The Company is subject to various pending claims and contingent liabilities arising in the normal course of
business which are not reflected in the accompanying consolidated financial statements. Management considers
that the aggregate liability, if any, resulting from such matters will not be material.
Among the Company’s contingent liabilities are exposures to limited recourse arrangements with respect to the
Company’s sales of whole loans and participation interests. At September 30, 2016, the exposure, which
represents a portion of credit risk associated with the sold interests, amounted to $32,000. This exposure is for the
life of the related loans and payables, on the Company’s proportionate share, as actual losses are incurred.
The Company is involved in various legal proceedings occurring in the ordinary course of business. Management
of the Company, based on discussions with litigation counsel, does not believe that such proceedings will have a
material adverse effect on the financial condition or operations of the Company. There can be no assurance that
any of the outstanding legal proceedings to which the Company is party will not be decided adversely to the
Company’s interest and have a material adverse effect on the financial condition and operations of the Company.
16. FAIR VALUE MEASUREMENT
The fair value estimates presented herein are based on pertinent information available to management as of
September 30, 2016 and 2015, respectively. Although management is not aware of any factors that would
significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since that date and, therefore, current estimates of fair value may differ significantly from
the amounts presented herein.
Generally accepted accounting principles used in the United States establishes a fair value hierarchy which requires
an entity to maximize the use of observable inputs and minimizes the use of unobservable inputs when measuring
fair value. The standard describes three levels of inputs that may be used to measure fair value.
The three broad levels of hierarchy are as follows:
120
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities.
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair
value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined
using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which
the determination of fair value requires significant management judgment or estimation.
Those assets as of September 30, 2016 which are to be measured at fair value on a recurring basis are as follows:
Level 1
Level 2
Level 3
Total
(Dollars in Thousands)
Assets:
Securities available for sale:
U.S. Government and agency obligations
Mortgage-backed securities - U.S. Government agencies
Corporate bonds
FHLMC preferred stock
Total
-
$
-
-
42
42
$
$
$
21,024
91,575
26,053
-
138,652
-
$
-
-
-
$
-
21,024
91,575
26,053
42
138,694
$
$
Liabilities
Interest rate swap contracts
Total
$
-
$
-
$
$
202
202
$
-
$
-
$
$
202
202
Those assets as of September 30, 2015 which are measured at fair value on a recurring basis are as follows:
Category Used for Fair Value Measurement
Level 1
Level 2
Level 3
Total
(Dollars in Thousands)
Assets:
Securities available for sale:
U.S. Government and agency obligations
Mortgage-backed securities - U.S. Government agencies
FHLMC preferred stock
Total
-
$
-
59
59
$
$
$
18,712
58,712
-
77,424
-
$
-
-
$
-
18,712
58,712
59
77,483
$
$
Certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on
an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of
impairment). The Company measures impaired loans and real estate owned at fair value on a non-recurring basis.
121
Impaired Loans
Collateral dependent impaired loans are based on the fair value of the collateral which is based on appraisals and would be
categorized as Level 2 measurement. In some cases, adjustments are made to the appraised values for various factors
including the age of the appraisal, age of the comparable included in the appraisal, and known changes in the market and
in the collateral. These adjustments are based upon unobservable inputs, and therefore, the fair value measurement has
been categorized as a Level 3 measurement. These loans are reviewed for impairment and written down to their net
realizable value by charges against the allowance for loan losses. The collateral underlying these loans had a fair value of
$19.4 million and $16.8million at September 30, 2016 and 2015, respectively.
Real Estate Owned
Once an asset is determined to be uncollectible, the underlying collateral is generally repossessed and reclassified to
foreclosed real estate and repossessed assets. These repossessed assets are carried at the lower of cost or fair value of the
collateral, based on independent appraisals, less cost to sell and would be categorized as Level 2 measurement. In some
cases, adjustments are made to the appraised values for various factors including age of the appraisal, age of the
comparables included in the appraisal, and known changes in the market and in the collateral. Thus the evaluations are
based upon unobservable inputs, and therefore, the fair value measurement has been categorized as a Level 3
measurement.
Summary of Non-Recurring Fair Value Measurements
At September 30, 2016
(Dollars in Thousands)
Level 2
$
-
Level 3
$
Level 1
$
-
-
-
$
-
$
-
19,429
581
19,429
$
Total
$
19,429
581
20,010
$
Impaired loans
Real estate owned
Total
At September 30, 2015
(Dollars in Thousands)
Impaired loans
Real estate owned
Total
Level 1
$
-
Level 2
$
-
-
-
$
-
$
-
Level 3
$
16,770
869
16,770
$
Total
$
$
16,770
869
17,639
The following tables provide information describing the valuation processes used to determine nonrecurring fair value
measurements categorized within level 3 of the fair value hierarchy:
122
Impaired loans
Fair Value
$
19,429
Real estate owned
$
581
Impaired loans
Fair Value
$
16,770
Real estate owned
$
869
At September 30, 2016
(Dollars in Thousands)
Unobservable Input
Management discount for
selling costs, property type and
market volatility (2)
Range/
Weighted Ave.
6% to 46%
discount/ 10%
Management discount for
10% discount
selling costs, property type and
market volatility (2)
At September 30, 2015
(Dollars in Thousands)
Unobservable Input
Management discount for
selling costs, property type and
market volatility (2)
Range/
Weighted Ave.
10% discount
Management discount for
10% discount
selling costs, property type and
market volatility (2)
Valuation
Technique
Property
appraisals
(1) (3)
Property
appraisals
(1) (3)
Valuation
Technique
Property
appraisals
(1) (3)
Property
appraisals
(1) (3)
(1)
(2)
(3)
Fair value is generally determined through independent appraisals of the underlying collateral, which generally includes various Level 3 inputs, which are not
identifiable.
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.
Includes qualitative adjustments by management and estimated liquidation expenses.
The fair value amounts have been determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
123
Carrying
Amount
Fair
Value
(Level 1)
(Dollars in Thousands)
Fair Value Measurements at
September 30, 2016
(Level 2)
(Level 3)
$
12,440
1,853
$
12,440
1,853
$
12,440
1,853
$
-
-
$
-
-
138,694
39,971
344,948
1,928
2,463
13,055
38,788
55,552
70,924
223,930
1,403
20,000
30,638
1,748
202
138,694
40,700
344,100
1,928
2,463
13,055
38,788
55,552
-
71,145
225,383
1,403
20,000
30,222
1,748
202
42
-
-
1,928
2,463
13,055
38,788
55,552
71,145
-
1,403
-
-
1,748
-
138,652
-
40,700
-
-
-
-
-
-
-
-
-
-
-
202
-
344,100
-
-
-
-
-
-
225,383
-
20,000
30,222
-
-
Assets:
Cash and cash equivalents
Certificate of deposits
Investment and mortgage-backed
securities available for sale
Investment and mortgage-backed
securities held to maturity
Loans receivable, net
Accrued interest receivable
Federal Home Loan Bank stock
Bank owned life insurance
Liabilities:
Checking accounts
Money market deposit accounts
Passbook, club and statement
savings accounts
Certificates of deposit
Accrued interest payable
Advances from FHLB -short-term
Advances from FHLB -long-term
Advances from borrowers for taxes and
insurance
Interest rate swap contracts
124
Carrying
Amount
Fair
Value
(Level 1)
(Dollars in Thousands)
Fair Value Measurements at
September 30, 2015
(Level 2)
(Level 3)
$
11,272
$
11,272
$
11,272
$
-
$
-
77,483
66,384
312,633
1,665
369
12,722
37,942
60,736
70,355
196,041
1,291
1,670
77,483
66,877
312,613
1,665
369
12,722
37,942
60,736
70,355
199,639
1,291
1,670
59
-
-
1,665
369
12,722
37,942
60,736
70,355
-
1,291
1,670
77,424
66,877
-
-
-
-
-
-
-
-
-
-
-
-
312,613
-
-
-
-
-
-
199,639
-
-
Assets:
Cash and cash equivalents
Investment and mortgage-backed
securities available for sale
Investment and mortgage-backed
securities held to maturity
Loans receivable, net
Accrued interest receivable
Federal Home Loan Bank stock
Bank owned life insurance
Liabilities:
Checking accounts
Money market deposit accounts
Passbook, club and statement
savings accounts
Certificates of deposit
Accrued interest payable
Advances from borrowers for taxes and
insurance
Cash and Cash Equivalents—For cash and cash equivalents, the carrying amount is a reasonable estimate of fair
value.
Certificates of deposit—For certificates of deposit, the carrying amount is a reasonable estimate of fair value.
Investments and Mortgage-Backed Securities— The fair value of investment securities and mortgage-backed
securities is based on quoted market prices, dealer quotes, and prices obtained from independent pricing services.
Loans Receivable—The fair value of loans is estimated based on present value using the current market rates at
which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
The carrying value that fair value is compared to is net of the allowance for loan losses and other associated
premiums and discounts. Due to the significant judgment involved in evaluating credit quality, loans are classified
within level 3 of the fair value hierarchy.
Accrued Interest Receivable – For accrued interest receivable, the carrying amount is a reasonable estimate of fair
value.
Federal Home Loan Bank (FHLB) Stock—Although FHLB stock is an equity interest in an FHLB, it is carried at
cost because it does not have a readily determinable fair value as its ownership is restricted and it lacks a market.
The estimated fair value approximates the carrying amount.
Bank Owned Life Insurance—The fair value of bank owned life insurance is based on the cash surrender value
obtained from an independent advisor that are be derivable from observable market inputs.
125
Checking Accounts, Money Market Deposit Accounts, Passbook Accounts, Club Accounts, Statement Savings
Accounts, and Certificates of Deposit—The fair value of passbook accounts, club accounts, statement savings
accounts, checking accounts, and money market deposit accounts is the amount reported in the financial statements.
The fair value of certificates of deposit is based on market rates currently offered for deposits of similar remaining
maturity.
Advances from Federal Home Loan Bank (short-term)—The fair value of advances from FHLB is the amount
payable on demand at the reporting date.
Advances from Federal Home Loan Bank (long-term)—The fair value of advances from FHLB is the amount
payable on demand at the reporting date.
Accrued Interest Payable – For accrued interest payable, the carrying amount is a reasonable estimate of fair value.
Advances from borrowers for taxes and insurance – For advances from borrowers for taxes and insurance, the
carrying amount is a reasonable estimate of fair value.
Interest rate swap contracts – For interest rate swap contracts, the fair values of derivative contracts are based upon
the estimated amount the Company would receive or pay to terminate the contracts or agreements, taking into
account underlying interest rates, creditworthiness of underlying customers for credit derivatives and, when
appropriate, the creditworthiness of the counterparties.
Commitments to Extend Credit and Letters of Credit—The majority of the Bank’s commitments to extend credit
and letters of credit carry current market interest rates if converted to loans. Because commitments to extend credit
and letters of credit are generally unassignable by either the Bank or the borrower, they only have value to the Bank
and the borrower. The estimated fair value approximates the recorded deferred fee amounts, which are not
significant.
126
17.
PRUDENTIAL BANCORP, INC. (PARENT COMPANY ONLY)
STATEMENT OF FINANCIAL CONDITION
September 30,
Assets:
Cash
ESOP loan receivable
Investment in Bank
Other assets
Total assets
Stockholders' equity:
Preferred stock
Common stock
Additional paid-in-capital
Unearned ESOP shares
Treasury stock
Retained earnings
Accumulated other comprehensive (loss) income
2016
2015
(Dollars in Thousands)
$
6,541
5,277
101,350
834
$
14,912
5,618
96,132
339
$
114,002
$
117,001
(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)
(cid:882)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)
95
95,713
(4,550)
(21,098)
43,044
798
(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)
(cid:882)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)
95
95,286
(4,926)
(14,691)
41,219
18
Total stockholders' equity
114,002
117,001
Total liabilities and stockholders' equity
$
114,002
$
117,001
INCOME STATEMENT
For the year ended September 30,
Interest on ESOP loan
Equity in the undistributed earnings of the Bank
Other income
Total income
Professional services
Other expense
Total expense
2016
2015
2014
(Dollars in thousands)
247
2,911
-
3,158
161
376
537
263
2,549
9
257
2,085
-
2,821
2,342
306
447
753
288
431
719
Income before income taxes
2,621
2,068
1,623
Income tax benefit
Net income
(99)
(164)
(157)
2,720
2,232
1,780
127
CASH FLOWS
For the year ended September 30,
Operating activities:
Net income
(Decrease) increase in assets
Equity in the undistributed earnings of the Bank
2016
2015
2014
(Dollars in thousands)
$
2,720
(579)
(2,911)
$
2,232
88
(2,549)
$
1,780
(198)
(2,085)
Net cash used in operating activities
(770)
(229)
(503)
Investing activities:
Repayments received on ESOP loan
Cash advanced to subsidiary
Net cash provided by (used in) investing activities
Financing Activities:
Purchase of common stock for ESOP
Issuance of common stock
Cancellation of treasury stock
Purchase of treasury stock
Cash dividends paid
341
-
341
-
-
-
(7,047)
(895)
325
-
325
-
-
-
(14,691)
(2,222)
302
(34,800)
(34,498)
(3,089)
38,702
31,625
(571)
Net cash (used in) provided by financing activities
(7,942)
(16,913)
66,667
Net (decrease) increase in cash and cash equivalents
(8,371)
(16,817)
31,666
Cash and cash equivalents, beginning of year
14,912
31,729
63
Cash and cash equivalents, end of year
$
6,541
$
14,912
$
31,729
128
18. CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited quarterly financial data for the years ended September 30, 2016 and 2015 is as follows:
1st
Qtr
September 30, 2016
2nd
Qtr
3rd
Qtr
(In thousands)
September 30, 2015
4th
Qtr
1st
Qtr
2nd
Qtr
3rd
Qtr
4th
Qtr
(In thousands)
$ 4,056 $ 4,366 $ 4,474 $ 4,587
800 849 824 853
$ 4,240 $ 4,304 $ 4,055 $ 4,081
901 871 851 807
3,256 3,517 3,650 3,734
0 75 150 0
3,339 3,433 3,204 3,274
75 300 210 150
3,256 3,442 3,500 3,734
3,264 3,133 2,994 3,124
274 209 400 454
2,896 2,796 2,815 2,783
350 1,988 445 225
2,926 3,511 3,432 3,306
634 855 1,085 1,405
221 307 308 423
688 1,610 7 43
(40) 30
217 (91)
$ 413 $ 548 $ 777 $ 982
$ 471 $ 1,701 $ 47 $ 13
$ 0.05 $ 0.08 $ 0.10 $ 0.14
$ 0.05 $ 0.70 $ 0.10 $ 0.14
$ 0.03 $ 0.03 $ 0.03 $ 0.03
$ 0.05 $ 0.20 $ 0.01 $ 0.01
$ 0.05 $ 0.18 $ 0.01 $ -
$ 0.03 $ 0.03 $ 0.18 $ 0.03
1st
Qtr
September 30, 2014
2nd
Qtr
3rd
Qtr
(In thousands)
4th
Qtr
$ 4,069 $ 4,085 $ 4,136 $ 4,175
905 852 826 818
3,164 3,233 3,310 3,357
0 0 0 240
3,164 3,233 3,310 3,117
161 413 194 343
2,803 2,954 2,756 2,952
522 692 748 508
184 157 227 112
$ 338 $ 535 $ 521 $ 396
$ 0.04 $ 0.06 $ 0.06 $ 0.04
$ 0.04 $ 0.06 $ 0.06 $ 0.03
$ - $ - $ 0.03 $ 0.03
Interest income
Interest expense
Net interest income
(Recoveries) Provision for loan losses
Net interest income after
provision for loan losses
Non-interest income
Non-interest expense
Income before income tax expense
Income tax expense
Net income
Per share:
Earnings per share - basic
Earnings per share - diluted
Dividends per share
Interest income
Interest expense
Net interest income
(Recoveries) Provision for loan losses
Net interest income after
provision for loan losses
Non-interest income
Non-interest expense
Income before income tax expense
Income tax expense
Net income
Per share:
Earnings per share - basic
Earnings per share - diluted
Dividends per share
Due to rounding, the sum of the earnings per share in individual quarters may differ from reported amounts.
129
19. PENDING ACQUISITION
On June 2, 2016, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with
Polonia Bancorp. Pursuant to the Merger Agreement, Polonia Bancorp will merge with and into the Company (the
“Merger”) and Polonia Bancorp’s wholly owned subsidiary, Polonia Bank, a federally chartered savings bank, will merge
with and into the Bank.
Pursuant to the Merger Agreement, at the effective time of the Merger, each outstanding share of Polonia Bancorp
common stock will be converted into the right to receive, at the election of the Polonia Bancorp shareholder (subject to
certain conditions, including conditions relating to pro-ration): (i) 0.7591 of a share of Company common stock (the
“Exchange Ratio”) or (ii) $11.28 in cash (the “Per Share Cash Consideration” and collectively with the Exchange Ratio,
the “Merger Consideration”). The election of shares of Company stock or cash will be subject to pro-ration such that 50%
of the issued and outstanding shares of Polonia Bancorp common stock will be exchanged for Company common stock
and 50% will be exchanged for cash. Options to purchase Polonia Bancorp common stock outstanding at the effective
time of the Merger will fully vest and be exchanged for a cash payment equal to the difference, if positive, between the
Per Share Cash Consideration under the Merger Agreement and the corresponding exercise price of such option.
The Merger Consideration is subject to adjustment in certain limited situations. In the event that Polonia Bancorp
Consolidated Stockholders’ Equity, as calculated in accordance with the terms of the Merger Agreement, is less than
$37.4 million as of the Final Statement Date, as defined in the Merger Agreement, then the Exchange Ratio and the Per
Share Cash Consideration will be adjusted downward to reflect the amount of the difference between $37.4 million and
the Polonia Bancorp Consolidated Stockholders’ Equity. The Merger Consideration is subject to potential upward
adjustment to reflect the after-tax impact of certain recoveries experienced by Polonia Bancorp, if any, achieved prior to
the Final Statement Date as specified in the Merger Agreement. In such situation, the Exchange Ratio and the Per Share
Cash Consideration, as they may have been adjusted downward as noted above, will be correspondingly adjusted to reflect
the amount of such after-tax recoveries.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not Applicable.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Management evaluated, with the participation of the Chief
Executive Officer and Chief Financial Officer, the effectiveness of the disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of September 30, 2016. Based on such
evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and
procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under
the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in
the Securities and Exchange Commission's rules and regulations and are operating in an effective manner.
Management's Report of Internal Control over Financial Reporting. Management is responsible for
designing, implementing, documenting, and maintaining an adequate system of internal control over financial reporting,
as such term is defined in the Securities Exchange Act of 1934. An adequate system of internal control over financial
reporting encompasses the processes and procedures that have been established by management to:
•
•
•
maintain records that accurately reflect the Company's transactions;
prepare financial statement and footnote disclosures in accordance with U.S. GAAP that can be relied
upon by external users; and
prevent and detect unauthorized acquisition, use or disposition of the Company's assets that could have a
material effect on the financial statements.
Management conducted an evaluation of the effectiveness of the Company's internal control over financial
reporting based on the criteria in Internal Control-Integrated Framework issued by the Committee of Sponsoring
130
Organizations of the Treadway Commission (COSO). Based on this evaluation under the criteria in Internal Control-
Integrated Framework, management concluded that internal control over financial reporting was effective as of September
30, 2016. Furthermore, during the conduct of its assessment, management identified no material weakness in its financial
reporting control system.
The Board of Directors of Prudential Bancorp, through its Audit Committee, provides oversight to managements'
conduct of the financial reporting process. The Audit Committee, which is composed entirely of independent directors, is
also responsible for the appointment of the independent registered public accounting firm. The Audit Committee also
meets with management, the internal audit staff, and the independent registered public accounting firm throughout the
year to provide assurance as to the adequacy of the financial reporting process and to monitor the overall scope of the
work performed by the internal audit staff and the independent public accountants.
Because of its inherent limitations, the disclosure controls and procedures may not prevent or detect
misstatements. A control system, no matter how well conceived and operated, can only provide reasonable, not absolute,
assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been
detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may
deteriorate.
SR Snodgrass, P.C. a registered public accounting firm, has audited the effectiveness of the Company’s internal
controls over financial reporting as stated in their report which is included in Item 8 hereof.
/s/Dennis Pollack
Dennis Pollack
President and Chief Executive Officer
_/s/Jack E. Rothkopf _________________
Jack E. Rothkopf
Senior Vice President,
Chief Financial Officer and Treasurer
Changes in Internal Controls over Financial Reporting. No change in the internal control over financial
reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the
fourth fiscal quarter of fiscal 2016 that has materially affected, or is reasonably likely to materially affect, the internal
control over financial reporting.
131
Item 9B. Other Information
Not applicable.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required herein is incorporated by reference from the sections captioned "Information with
Respect to Nominees for Director, Continuing Directors and Executive Officers" and "Beneficial Ownership of Common
Stock by Certain Beneficial Owners and Management – Section 16(a) Beneficial Ownership Reporting Compliance" in
the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on February 23, 2017, is
expected to be which filed with the Securities and Exchange Commission on or about January17, 2017 ("Definitive Proxy
Statement").
The Company has adopted a code of ethics policy, which applies to its principal executive officer, principal
financial officer, principal accounting officer, as well as its directors and employees generally. The Company will provide
a copy of its code of ethics to any person, free of charge, upon request. Any requests for a copy should be made to the
shareholder relations administrator, Prudential Bancorp, Inc., 1834 West Oregon Avenue, Philadelphia, Pennsylvania
19145. In addition, a copy of the Code of Ethics is available at the Company’s website at
www.prudentialsavingsbank.com under the Investor Relations menu.
Item 11. Executive Compensation
The information required herein is incorporated by reference from the sections captioned "Management
Compensation" and "Compensation Committee Interlocks and Insider Participation" in the Company's Definitive Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners and Management. Information regarding security ownership of
certain beneficial owners and management is incorporated by reference to “Beneficial Ownership of Common Stock by
Certain Beneficial Owners and Management” in the Definitive Proxy Statement.
Equity Compensation Plan Information. The following table provides information as of September 30, 2016 with
respect to shares of common stock that may be issued under the existing equity compensation plans, which consist of the
2008 Stock Option Plan, the 2008 Recognition and Retention Plan and the 2014 Stock Incentive Plan, all of which were
approved by the Company’s shareholders. The share amounts set forth below with respect to the 2008 Stock Option Plan
and the 2008 Recognition and Retention Plan have been adjusted for the exchange of shares in connection with the
second-step conversion completed on October 9, 2013, at an exchange ratio of 0.9442 of Company common stock for
each share of Old Prudential Bancorp held by other than the MHC.
132
Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))
(c)
1,094,697(1)
$11.75(1)
336,229
--
1,094,697
-----
$11.75
--
336,229
Plan Category
Equity compensation plans
approved by security holders
Equity compensation plans
not approved by security
holders
Total
___________________
(1)
Includes 172,788 shares subject to restricted stock grants which were not vested as of September 30, 2016. The
weighted average exercise price excludes such restricted stock grants.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required herein is incorporated by reference from the sections captioned "Management
Compensation – Related Party Transactions" and “Information with Respect to Nominees for Director, Continuing
Directors and Executive Officers” in the Definitive Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information required herein is incorporated by reference from the section captioned "Ratification of
Appointment of Independent Registered Public Accounting Firm (Proposal Three) – Audit Fees" in the Definitive Proxy
Statement.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a)
(1)
Documents Filed as Part of this Report.
The following financial statements are incorporated by reference from Item 8 hereof:
Consolidated Statements of Financial Condition
Consolidated Statements of Operations
Consolidated Statement of Comprehensive Income (loss)
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2)
All schedules for which provision is made in the applicable accounting regulation of the SEC are omitted because of
the absence of conditions under which they are required or because the required information is included in the
consolidated financial statements and related notes thereto.
(3)
The following exhibits are filed as part of this Form 10-K, and this list includes the Exhibit Index.
Exhibit No. Description
3.1
3.2
4.0
Articles of Incorporation of Prudential Bancorp, Inc. (1)
Bylaws of Prudential Bancorp, Inc. (1)
Form of Stock Certificate of Prudential Bancorp, Inc. (1)
*
133
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
Amended and Restated Post Retirement Agreement between Prudential Savings
Bank and Joseph W. Packer, Jr. (2)*
Amended and Restated Split-Dollar Collateral Assignment with Joseph W. Packer,
Jr. and Diane B. Packer(2)*
Amended and Restated Split-Dollar Collateral Assignment with Joseph W. Packer,
Jr. (2)*
Amendment No. 1 to Split-Dollar Agreement between the Bank and Joseph W.
Packer, Jr. (2)*
Settlement Agreement, dated November 7, 2008, by and among Prudential Mutual
Holding Company, Prudential Bancorp, Inc. of Pennsylvania, Prudential Savings
Bank, Stilwell Value Partners, I, L.P., Stilwell Partners L.P., Stilwell Value LLC,
Joseph Stilwell and John Stilwell (3)
Prudential Bancorp, Inc. of Pennsylvania 2008 Stock Option Plan (4)*
Prudential Bancorp, Inc. of Pennsylvania 2008 Recognition and Retention Plan and
Trust Agreement (4)*
Amendment No.2 to Split-Dollar Agreement between the Bank and Joseph W.
Packer, Jr.*(5)
Endorsement Split Dollar Insurance Agreement, dated August 28, 2012, between
Joseph Corrato and Prudential Savings Bank (6)*
Endorsement Split Dollar Insurance Agreement dated August 29, 2012 between
Jack Rothkopf and Prudential Savings Bank (6)*
10.11
Transition Agreement by and among Prudential Bancorp, Inc. of Pennsylvania,
Prudential Savings Bank, Prudential Mutual Holding Company, PSB Delaware,
Inc. and Joseph W. Packer, Jr. dated as of April 18, 2012 (7)*
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
31.1
31.2
32.0
101.INS
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF
Employment Agreement between Prudential Savings Bank and Jack Rothkopf (8)*
Endorsement Split Dollar Insurance Agreement dated May 14, 2014 between
Jeffrey T. Hanuscin and Prudential Savings Bank (9)*
Amendment No.1 to the Amended and Restated Employment Agreement between
Prudential Savings Bank and Jack E. Rothkopf (10)*
Severance Agreement between Prudential Savings Bank and Anthony V.
Migliorino (11)*
Severance Agreement between Prudential Savings Bank and Jeffrey T. Hanuscin
(12)*
Amendment No. 1 to the Severance Agreement between Prudential Savings Bank
and Jeffrey T. Hanuscin(13)*
2014 Stock Incentive Plan(14)*
Severance Agreement between Prudential Savings Bank and Jack E. Rothkopf
(14)*
Separation Agreement between Prudential Bancorp, Inc., Prudential Savings Bank
and Joseph R. Corrato (16)*
Employment Agreement between Prudential Bancorp, Inc., Prudential Savings
Bank and Dennis Pollack (17)*
Section 1350 Certification of the Chief Executive Officer
Section 1350 Certification of the Chief Financial Officer
Section 906 Certification
XBRL Instance Document.
XBRL Taxonomy Extension Schema Document.
XBRL Taxonomy Extension Calculation Linkbase Document.
XBRL Taxonomy Extension Label Linkbase Document.
XBRL Taxonomy Extension Presentation Linkbase Document.
XBRL Taxonomy Extension Definitions Linkbase Document.
134
*
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report
on Form 10-K pursuant to Item 15(b) hereof.
Incorporated by reference from the Company's Registration Statement on Form S-1 (SEC File No. 333-189321) filed
with the SEC on June 14, 2013.
Incorporated by reference from the Current Report on Form 8-K, of Prudential Bancorp, Inc. of Pennsylvania dated
November 19, 2008 and filed with the SEC on November 25, 2008 (SEC File No. 000-51214).
Incorporated by reference from the Current Report on Form 8-K of Prudential Bancorp, Inc. of Pennsylvania, dated
November 7, 2008 and filed with the SEC on November 7, 2008 (SEC File No. 000-51214).
Incorporated by reference from Appendices A (2008 Stock Option Plan) and B (2008 Recognition and Retention
Plan and Trust Agreement”) of the definitive proxy statement of Prudential Bancorp, Inc. of Pennsylvania (SEC File
No. 000-51214) filed with the SEC on November 26, 2008.
Incorporated by reference from the Annual Report on Form 10-K of Prudential Bancorp, Inc. of Pennsylvania for the
year ended September 30, 2012 filed with the SEC on December 21,2012 (SEC File No. 000-51214)
Incorporated by reference from the Current Report on Form 8-K of Prudential Bancorp, Inc. of Pennsylvania dated
August 28, 2012 and filed with the SEC on August 31, 2012 (SEC File No. 000-51214).
Incorporated by reference from the Current Report on Form 8-K of Prudential Bancorp, Inc. of Pennsylvania dated
April 18, 2012 and filed with the SEC on April 19, 2012 (SEC File No. 000-51214).
Incorporated by reference from the Current Report on Form 8-K of Prudential Bancorp, Inc. dated June 17, 2015and
filed with the SEC on June 22, 2015 (SEC File No. 000-55089).
Incorporated by reference from Exhibit 10.1 of Quarterly Report on Form 10-Q for the quarter ended June 30, 2014
of Prudential Bancorp, Inc. filed with the SEC on August 14, 2014 (SEC File No. 000-55084).
Incorporated by reference from the Current Report on Form 8-K of Prudential Bancorp, Inc. dated November 13,
2015 and filed with the SEC on November 1, 2015 (SEC File No. 000-55089).
Incorporated by reference from the Current Report on Form 8-K of Prudential Bancorp, Inc. dated November 30,
2015 and filed with the SEC on December 1, 2015 (SEC File No. 000-55084).
Incorporated by reference from Exhibit 10.1 the Quarterly Report on Form 10-Q for the Quarter ended March 31,
2015 and filed with the SEC on May 11, 2015 (SEC File No. 000-55084).
Incorporated by reference from Exhibit 10.2 to the Annual Report on Form 10-K for year ended September 30, 2015
and file with SEC on December 14, 2015 (SEC File No. 000-55089)
Incorporated by reference from Appendix A of the definitive proxy statement of Prudential Bancorp, Inc. filed with
the SEC on December 30, 2014 (SEC File No. 000-55084).
Incorporated by reference from the Current Report on Form 8-K of Prudential Bancorp, dated December 28, 2015
and filed with the SEC on December 28, 2015 (SEC File No. 000-55084).
Incorporated by reference from the Current Report on Form 8-K of Prudential Bancorp, dated May 3, 2016 and filed
with the SEC on May 3, 2015 (SEC File No. 000-55084).
Incorporated by reference from the Current Report on Form 8-K of Prudential Bancorp, dated May 16, 2016 and
filed with the SEC on May 16, 2015 (SEC File No. 000-55084).
(b)
Exhibits
The exhibits listed under (a)(3) of this Item 15 are filed herewith.
(c)
Reference is made to (a)(2) of this Item 15.
135
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Prudential Bancorp, Inc.
December 14, 2016
By:
/S/DENNIS POLLACK
Dennis Pollack
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has
been signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
/s/ Bruce E. Miller
Bruce E. Miller
Chairman of the Board
/s/ Jerome R. Balka, Esq
Jerome R. Balka, Esq.
Director
/s/ A. J. Fanelli
A. J. Fanelli
Director
/s/ John C. Hosier
John C. Hosier
Director
/s/ Francis V. Mulcahy
Francis V. Mulcahy
December 14, 2016
December 14, 2016
December 14, 2016
December 14, 2016
December 14, 2016
/s/ Dennis Pollack
_______________________________________________________________
Dennis Pollack
Director, President and Chief Executive President
December 14, 2016
/s/ Jack E. Rothkopf
December 14, 2016
___________________________________________________________
Jack E. Rothkopf
Senior Vice President, Chief Financial Officer, Treasurer
Chief Accounting Officer
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-191694, 333-
191761, and 333-209118 on Form S-8 of Prudential Bancorp, Inc. of our reports dated December
14, 2016, relating to our audits of the consolidated financial statements and internal control over
financial reporting, which is incorporated in this Annual Report on Form 10-K of Prudential
Bancorp, Inc. for the year ended September 30, 2016.
Cranberry Township, Pennsylvania
December 14, 2016
EXHIBIT 31.1
SECTION 1350 CERTIFICATION OF THE
CHIEF EXECUTIVE OFFICER
I, Dennis Pollack, certify that:
1.
I have reviewed this annual report on Form 10-K of Prudential Bancorp, Inc. (the “Registrant”);
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this report;
The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
4.
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
Registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in
(c)
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the Registrant’s internal control over financial reporting that
occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s
internal control over financial reporting; and
The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent
5.
evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee
of the Registrant’s board of directors (or persons performing the equivalent functions):
All significant deficiencies and material weaknesses in the design or operation of internal control
(a)
over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record,
process, summarize and report financial information; and
(b)
significant role in the Registrant’s internal control over financial reporting.
Any fraud, whether or not material, that involves management or other employees who have a
Date: December 14, 2016
/s/Dennis Pollack
Dennis Pollack
President and Chief Executive Officer
SECTION 1350 CERTIFICATION OF THE
CHIEF FINANCIAL OFFICER
I, Jack E. Rothkopf, certify that:
EXHIBIT 31.2
1.
I have reviewed this annual report on Form 10-K of Prudential Bancorp, Inc. (the “Registrant”);
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this report;
The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
4.
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
Registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over
(b)
financial reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in
(c)
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the Registrant’s internal control over financial reporting that
occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s
internal control over financial reporting; and
The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent
5.
evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee
of the Registrant’s board of directors (or persons performing the equivalent functions):
All significant deficiencies and material weaknesses in the design or operation of internal control
(a)
over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record,
process, summarize and report financial information; and
(b)
significant role in the Registrant’s internal control over financial reporting.
Any fraud, whether or not material, that involves management or other employees who have a
Date: December 14, 2016
/s/ Jack E. Rothkopf
Jack E. Rothkopf
Senior Vice President, Chief Financial
Officer and Chief Accounting Officer
SECTION 906 CERTIFICATIONS
EXHIBIT 32.0
In connection with the Annual Report of Prudential Bancorp, Inc. (the “Company”) on Form 10-
K for the period ending September 30, 2016 (“the Report”) as filed with the Securities and Exchange
Commission, I, the undersigned, Dennis Pollack, President and Chief Executive Officer of the Company,
and Jack E. Rothkopf, Senior Vice President, Chief Financial Officer and Chief Accounting Officer of
the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
Date: December 14, 2016
Date: December 14, 2016
/s/ Dennis Pollack
Dennis Pollack
President and Chief Executive Officer
/s/Jack E. Rothkopf
______________________________
Jack E. Rothkopf
Senior Vice President,
Chief Financial Officer and
Chief Accounting Officer
A signed original of this written statement required by Section 906 of the Sarbanes–Oxley Act has been
provided to Prudential Bancorp, Inc. and will be retained by Prudential Bancorp, Inc. and furnished to
the Securities and Exchange Commission or its staff upon request.