UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended SEPTEMBER 30, 2017
-or-
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)
1834 WEST OREGON AVENUE
PHILADELPHIA, PENNSYLVANIA
(Address of Principal Executive Offices)
46-2935427
(IRS Employer Identification No.)
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
Common Stock (par value $0.01 per share)
Name of Each Exchange on Which Registered
The Nasdaq Stock Market, LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Securities registered pursuant to Section 12(g) of the Act: NONE
Act. YES NO
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 NO
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 NO
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 NO
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.
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
Non-Accelerated Filer (Do not check if a smaller reporting company)
Accelerated Filer
Smaller Reporting Company
Emerging Growth Company
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). YES
NO
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a)
of the Exchange Act. ☐
The aggregate market value of the voting stock held by non-affiliates of the Registrant based on the closing price of
$17.85 on March 31, 2017, the last business day of the Registrant's second quarter was approximately $148.9 million
(9,007,996) shares issued and outstanding less approximately 667,500 shares held by affiliates at $17.85 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 1, 2017, there were 8,988,855 shares of the Registrant's Common Stock
outstanding.
1. Portions of the Definitive Proxy Statement for the 2018 Annual Meeting of Shareholders are incorporated by reference
DOCUMENTS INCORPORATED BY REFERENCE
into Part III, Items 10-14 of this Form 10-K.
Prudential Bancorp, Inc. and Subsidiaries
FORM 10-K INDEX
For the Fiscal Year Ended September 30, 2017
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
40
51
51
53
54
54
57
58
71
72
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ................................................................................................................... 134
Item 9A. Controls and Procedures ............................................................................................................. 134
Item 9B. Other Information ....................................................................................................................... 135
PART III
Item 10. Directors, Executive Officers and Corporate Governance ........................................................ 135
Item 11. Executive Compensation ............................................................................................................ 135
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
135
Stockholder Matters ...................................................................................................................
Item 13. Certain Relationships and Related Transactions, and Director Independence ......................... 136
Item 14. Principal Accounting Fees and Services .................................................................................... 136
PART IV
Item 15. Exhibits and Financial Statement Schedules ............................................................................. 136
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 Bank (the “Bank” or “Company” and formally known as
“Prudential Savings 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.
As of January 1, 2017, the Company completed its acquisition of Polonia Bancorp, Inc. (“Polonia
Bancorp”) and Polonia Bank, Polonia’s wholly owned subsidiary. Polonia Bancorp and Polonia Bank
1
were merged with and into the Company and the Bank, respectively. Under the terms of the Merger
Agreement, shareholders of Polonia had the option to receive $11.09 per share in cash or 0.7460 of a
share of Prudential common stock for each share of Polonia common stock, subject to allocation
provisions to assure that, in the aggregate, Polonia shareholders received total merger consideration that
consists of 50% stock and 50% cash. As a result of Polonia shareholder stock and cash elections and the
related proration provisions of the Merger Agreement, Prudential Bancorp issued approximately
1,274,197 shares of its common stock and approximately $18.9 million in the merger.
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. 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, 2017, the Company, on a consolidated basis, had total assets of approximately $899.5
million, total deposits of approximately $636.0 million, and total stockholders’ equity of approximately
$136.2 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 Polonia Bank in January 2017. 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 10 additional full-service branch offices. Eight
of the banking offices are located in Philadelphia (Philadelphia County), one is in Drexel Hill, Delaware
County and one is in Huntingdon Valley, Montgomery 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. Traditionally, the Bank focused on originating long-term single-family residential
mortgage loans for portfolio, although the focus has shifted in recent years to emphasis commercial and
construction lending. Construction and land development loans increased from $11.4 million or 3.7% of
the total loan portfolio at September 30, 2013 to $145.5 million or 22.3% of the total loan portfolio at
September 30, 2017. The Company also increased its commercial real estate loans from $19.5 million or
6.3% of the total loan portfolio at September 30, 2013 to $127.6 million or 19.6% of the total loan
portfolio at September 30, 2017. See “-Asset Quality” and “-Lending Activities”.
The investment and mortgage-backed securities portfolio increased by $61.0 million to $239.7
million at September 30, 2017 from $178.7 million at September 30, 2016. This increase was primarily
due to the acquisition of the investment securities portfolio of Polonia Bank on January 1, 2017. The
2
securities were liquidated and replaced by other mortgage backed securities and corporate debt securities
at no gain or loss to the Bank. The Company recorded approximately $235,000 in gains from the sale of
investment and mortgage-backed securities during fiscal 2017. At September 30, 2017, the investment
and mortgage-backed securities had an aggregate net unrealized loss of $1.7 million compared with the
unrealized gain of $1.5 million as of September 30, 2016, which was primarily due to recent increases in
the yield on longer term U.S. Treasury bond yields which resulted in a decrease in the fair value of our
available-for-sale securities.
At September 30, 2017, the Company’s non-performing assets totaled $15.6 million or 1.7% of
total assets as compared to $16.5 million or 2.9% of total assets at September 30, 2016. Non-performing
assets at September 30, 2017 included five construction loans aggregating $8.7 million, 33 one-to-four
family residential loans aggregating $3.7 million, one single-family residential investment property loan
in the amount $1.4 million and five commercial real estate loans aggregating $1.6 million. Non-
performing assets also included at September 30, 2017 one real estate owned property consisting of a
single-family residential property with a carrying value of $192,000. At September 30, 2017, the
Company had nine loans aggregating $6.0 million that were classified as troubled debt restructurings
(“TDRs”). Three of such loans aggregating $4.9 million were designated non-performing as of September
30, 2017 and on non-accrual status; one of such loans in the amount of $1.4 million has continued to
make payments in accordance with the restructured loan terms, but management continues to have
concerns over the borrower’s ability to make future payments and as a result has determined to not return
the loan to performing status. The remaining two TDRs classified non-accrual totaling $3.5 million are a
part of a troubled borrowing relationship totaling $10.7 million (after taking into account the previously
disclosed $1.9 million write-down recognized during the quarter ending March 31, 2017 related to this
borrowing relationship). The primary project of the borrower is the subject of litigation between the Bank
and the borrower and as a result, the project currently is not proceeding. Subsequent to the
commencement of the litigation, the borrower filed for bankruptcy under Chapter 11 of the federal
bankruptcy code in June 2017. The Bank has moved the underlying litigation noted above with the
borrower and the Bank from state court to the federal bankruptcy court in which the bankruptcy
proceeding is being heard. The remaining six TDRs have performed in accordance with the terms of their
revised agreements and have been placed on accruing status. As of September 30, 2017, the Company had
reviewed $19.7 million of loans for possible impairment of which $15.0 million was classified
substandard compared to $19.4 million reviewed for possible impairment and $14.6 million of which was
classified substandard as of September 30, 2016. The allowance for loan losses totaled $4.5 million, or
0.8% of total loans and 29.0% of total non-performing loans (which included loans acquired from Polonia
Bank at their fair value) at September 30, 2017. See “-Asset Quality”.
The main office is located at 1834 West Oregon Avenue, Philadelphia, Pennsylvania and the
Company’s telephone number is (215) 755-1500.
3
Market Area and Competition
Most of Prudential Bancorp’s business activities are conducted within a few hours’ drive from
Philadelphia and include New Jersey, eastern Pennsylvania, Delaware and southern New York.
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, 2017, the net loan portfolio totaled $571.3 million or 63.5% of total
assets. The Company has changed its lending philosophy and started to increase its investment in loans
for construction and land development secured by multi-family and commercial real estate which
comprised 22.9% of the loan portfolio at September 30, 2017. 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 $351.3
million of residential real estate loans collateralized by one-to-four family, also known as “single-family”,
residential properties secured by properties located primarily 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
government, including the Federal Reserve Board, legislative tax policies and governmental budgetary
matters.
4
Loan Portfolio Composition. The following table shows the composition of the loan
portfolio by type of loan at the dates indicated.
2017
2016
September 30,
2015
2014
2013
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
Real estate loans:
One-to-four family residential (1)
$351,298
Multi-family residential
Commercial real estate
Construction and land development
Total real estate loans
Commercial business
Leases
Consumer
Total loans
Less:
Undisbursed portion of
loans in process
Deferred loan costs
Allowance for loan losses
Net loans
53.83%
3.30%
19.56%
22.29%
98.98%
0.07%
0.65%
0.30%
100.00%
$233,531
12,478
79,859
21,839
347,707
99
3,286
799
351,891
66.36%
3.55%
22.69%
6.21%
98.81%
0.03%
0.93%
0.23%
100.00%
(Dollars in Thousands)
$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%
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%
21,508
127,644
145,486
645,936
488
4,240
1,943
652,607
73,858
2,940
4,466
$571,343
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)
Includes home equity loans totaling $6.5 million, $3.8 million, $4.1 million, $5.0 million and $6.2 million as of September
30, 2017, 2016, 2015, 2014 and 2013, respectively. Also includes lines of credit totaling $14.1 million, $7.4 million, $8.5
million, $10.0 million and $9.5 million, as of September 30, 2017, 2016, 2015, 2014 and 2013, respectively.
Contractual Terms to Final Maturities. The following table shows the scheduled contractual
maturities of loans as of September 30, 2017, 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, 2017 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
$ 12,846
$ - $ 1,097 $ 69,229
9,672 7,452 5,166 41,294
4,665 983 5,988 30,663
23,247 2,821 13,363
55,580 8,958 77,325 4,300
-
58,191 945 8,142
-
187,097 349 16,563
$ -
-
-
- 488
$ 339 $ 912
946 72
1,750 66
1,205 117
- - 265
- - 88
- - 423
$ 84,423
64,602
44,115
41,241
146,428
67,366
204,432
Total
$ 351,298 $ 21,508 $ 127,644 $ 145,486 $ 488
$ 4,240 $ 1,943
$ 652,607
5
The following table shows the dollar amount of all loans due after one year from September 30,
2017, 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
Commercial business
Leases
Consumer
Total
$ 278,450
15,866
100,361
76,257
488
3,901
1,031
$ 476,354
$ 60,002
5,642
26,186
-
-
-
-
$ 91,830
$ 338,452
21,508
126,547
76,257
488
3,901
1,031
$ 568,184
_________________________________________
(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 mortgage loans are originated for sale on the secondary market in order to mitigate
interest rate risk and to increase non-interest income.
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 executive office in Huntingdon Valley, PA.
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, 2017 and September 30, 2016, 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
and construction and land development 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
6
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 typically
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, 2017, the Bank’s internal “guidance” limit is $12.5 million to one borrower as a threshold.
The Bank is permitted to exceed such limit in certain situations subject to the (i) approval of the Board of
Directors and (ii) subject to the overall legal/regulatory lending limit which was calculated to be $18.0
million at September 30, 2017. At September 30, 2017, our three largest loans to one borrower and
related entities amounted to $14.8 million, $12.6 million and $12.0 million. The largest relationship
consist of a participation interest in four construction and land development loans to construct a 212 unit
apartment building in Plainfield, New Jersey and to construct 24 townhouses in Hanover Township, New
Jersey. The second largest relationship consists of four commercial real estate loans to finance retail space
in the Philadelphia suburbs. The third largest relationship consists of a participation interest in a
commercial real estate loan to purchase a 316-unit apartment complex in East Rutherford, New Jersey.
The three relationships are all performing in accordance with contractual terms. For more information
regarding these loans, see “-Lending Activities - Construction and Land Development Lending.”
7
The following table shows our total loans originated, purchased, sold and repaid during the
periods indicated.
Year Ended September 30,
2017
2016
2015
(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 acquired from Polonia merger
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
$ 16,643
4,426
43,360
143,001
-
3,568
7,615
218,613
$ 12,269 $ 14,825
7,936 57
57,630 21,644
4,742 23,659
99 153
3,725 -
863 154
60,492
160,157 - -
60,492
581 869
53,965 67,105
67,974
(2,959) (403) (948)
$ 32,315 $ (8,430)
$ 226,398
378,770
-
149,413
149,413
87,264
54,546
87,264
__________________________________________
(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 2017 balance consisted of the $3.0 million provision for loan losses recorded to the allowance
and the $31,000 amortization of net loan fees. 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 a $735,000 provision for loan losses recorded to the allowance.
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 $270.8 million or 87.8% of
total loans at September 30, 2013 to $351.3 million, or 53.8% of total loans at September 30, 2017. The
percentage of total loans as well as the total amount of such loans represented has decreased (excluding
the effects of the acquisition of Polonia Bank) as our focus has shifted to the origination of commercial
real estate loans and construction and land development.
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 2017, the Company sold 14
single-family residential loans servicing released totaling $2.6 million for a gain $52,000. We service all
loans that we have originated and retained. We currently offer adjustable-rate mortgage and balloon loans,
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,
8
originations of such loans have been limited in recent years. At September 30, 2017, $60.0 million, or
17.7%, of our one-to-four family residential loan portfolio consisted of adjustable-rate loans, including
hybrid 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 $6.5 million and $14.1 million, respectively, at September 30, 2017. The unused
portion of home equity lines was $6.1 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.. At September 30, 2017, our construction and loan development loans amounted to $145.5
million, or 22.3% of our total loan portfolio. This amount includes $73.9 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 $3.3 million at September 30, 2017. Our construction loan
portfolio has increased substantially since September 30, 2013 when construction loans amounted to
$11.4 million or 3.7% of our total loan portfolio as compared to $145.5 million or 22.3% of our total loan
portfolio at September 30, 2017.
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
9
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 our primary lending area.
Set forth below is a brief description of the five largest construction loan or loan relationships.
The largest construction loan is in the amount of $10.0 million of which $10.0 million has been
disbursed as of September 30, 2017. This loan was originated March 2017 and is a participation interest
in a $35.1 million loan purchased from another financial institution. The proceeds were used to acquire
land and construct a 312 unit garden apartment complex in Winslow Township, New Jersey. The project
was substantially complete as of September 30, 2017. The loan is performing in accordance with
contractual terms.
The second largest construction loan is in the amount of $10.0 million of which $1.4 million has
been disbursed as of September 30, 2017. This loan was originated in January of 2017. The proceeds will
be used to construct 66 residential units and 9,000 square feet of retail space in Jersey City, New Jersey.
The project was 14.3% complete as of September 30, 2017. The loan is performing in accordance with
contractual terms.
The third largest construction loan is in the amount of $10.0 million of which $3.4 million has
been disbursed as of September 30, 2017. The loan was originated in March of 2017 and is a participation
interest in a $24.0 million loan purchased from another financial institution. The proceeds are being used
to construct a six story building with 150 apartment units and 3,500 square feet of retail space. The
project was 34.3% complete as of September 30, 2017. The loan is performing in accordance with
contractual terms.
The fourth largest construction loan is in the amount of $10.0 million of which $624,000 has been
disbursed as of September 30, 2017. The loan was originated in April 2017 and is a participation interest
in a $35.0 million loan purchased from another financial institution. The proceeds are being used to
construct a 212 unit apartment complex in Plainfield, New Jersey. The project was 6.3% complete as of
September 30, 2017.The loan is performing in accordance with contractual terms.
The fifth largest construction loan is in the amount of $8.4 million of which $6.1 million has been
disbursed as of September 30, 2017. The loan was originated July of 2017 and is a participation interest in
a $16.8 million loan purchased from another financial institution. The proceeds are being used to
10
construct a 200 unit apartment complex in Aberdeen Township, New Jersey. The project was 72.8%
complete as of September 30, 2017. The loan is performing in accordance with contractual terms.
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.
Multi-Family Residential and Commercial Real Estate Loans. At September 30, 2017, multi-
family residential and commercial real estate loans amounted in the aggregate to $149.2 million or 22.9%
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, 2017, the average commercial and multi-family real estate loan size was
approximately $932,000. The largest multi-family residential or commercial real estate loan at September
30, 2017 was a $11.9 million fixed-rate loan secured by 38-unit luxury condominium building located in
Brooklyn, New York with retail space on the first floor. The second largest multi-family residential or
commercial real estate loan at September 30, 2017 was a $6.8 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
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
11
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 for 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, 2017, $1.9 million, or 0.3% 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, 2017, commercial business consisted of one
loan that amounted to $488,000. The Bank anticipates being able to originate commercial business loans
during fiscal year 2018.
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.
The Company maintains separate loan approval committees with tiered levels of approvals.
Management Loan Committee, comprised of the Chief Operating Officer (“COO”), the Chief Lending
Officer (“CLO”), the Chief Credit Officer (“CCO”), the Chief Financial Officer (“CFO”) and the
Controller has lending approval authority up to $3.0 million. The next tier in the approval process, with
an approval range of $3.0 million to $5.0 million, is the President’s Loan committee, comprised of the
Chief Executive Officer (”CEO”) and the COO. All loans in excess of $5.0 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 into the secondary market are processed through underwriting software and are
reviewed for approval by two senior officers in the credit department
12
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.
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
13
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 $19.7 million of loans evaluated for
impairment as of September 30, 2017 (of which $10.7 million is related to one relationship), consisting of
$8.7 million of construction and land development loans, $8.3 million of one-to-four family residential
loans, $2.3 million of commercial real estate loans, $317,000 of multi-family residential loans and
$10,000 of consumer loans. Although no specific allocations were applied to these loans, there were
partial charge-offs totaling $2.0 million during fiscal 2017. As of September 30, 2017, there were nine
loans totaling $3.1 million designated as special mention loans consisting of six non-residential real estate
loans aggregating $1.5 million, one residential investment property aggregating $1.4 million, and two
single-family residential loans aggregating $275,000. As of September 30, 2016 there were five loans
totaling $2.6 million designated as special mention loans, consisting of five single-family residential loans
aggregating $1.7 million, two commercial real estate loans aggregating $943,000.
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
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.
14
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, 2017 and 2016, we had no assets
classified as “doubtful” or “loss” and $12.7 million and $14.6 million, respectively, of assets classified as
“substandard.” In addition, there were $3.1 million and $2.6 million of loans designated as “special
mention” as of September 30, 2017 and 2016, 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”. 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, 2017
September 30, 2016
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
23
-
3
-
-
2
28
$ 1,746
-
1,000
-
-
69
$ 2,815
0.49%
0.43%
$ 2,675
-
1,487
8,724
-
-
$ 12,886
21
-
4
5
-
-
30
2.26%
1.97%
$ 1,860
-
-
-
-
-
$ 1,860
8
-
-
-
-
-
8
0.54%
0.53%
$ 2,767
-
1,346
10,288
-
-
$14,401
17
-
1
5
-
-
23
4.17%
4.09%
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, 2017, all of the loans listed as 90 or more days past due in the table above were in non-
accrual status. At September 30, 2017, the Company had nine loans aggregating $6.0 million that were
classified as troubled debt restructurings (“TDRs”). As of September 30, 2017, six of the TDRs were
performing in accordance with their restructured terms. Three of such loans aggregating $4.9 million as of
September 30, 2017 were classified as non-performing of which two totaling $3.5 million are related to
one lending relationship and the remaining one for $1.4 million 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.
15
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,
2017
2016
2015
2014
2013
(Dollars in Thousands)
Non-accruing loans:
One-to-four family residential
$ 5,107
(1)
$ 4,244
(1)
$ 3,547
(1)
$ 5,002
(1)
$ 4,259
(1)
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
-
1,566
8,724
-
-
15,397
-
-
-
-
-
-
-
15,397
192
$ 15,589
2.67%
1.71%
1.73%
-
-
-
-
(1)
(1)
1,346
10,288
(1)
(1)
1,589
8,796
(1)
(1)
-
-
15,878
-
-
-
-
-
-
-
15,878
581
$ 16,459
-
-
13,932
-
-
-
-
-
-
-
13,932
869
$ 14,801
877
(1)
2,375
(1)
-
-
-
5,879
-
-
-
-
-
-
-
5,879
360
$ 6,239
-
-
-
6,634
-
-
-
-
-
-
-
6,634
406
$ 7,040
4.56%
4.21%
1.83%
2.16%
2.84%
2.86%
1.12%
1.09%
2.94%
3.04%
1.19%
1.16%
______________________________________________________
(1) Includes at: (i) September 30, 2017, $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 five commercial real estate loans aggregating $1.6 million; (ii) 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; (iii) 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; (iv) 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, and (v) 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.
(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.
16
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
$161,000 of such interest recognized during fiscal 2017 while there was $175,000 of such interest
recognized for non-accrual loans for fiscal 2016. Approximately $636,000 in additional interest income
would have been recognized during the year ended September 30, 2017 if these loans had been
performing during fiscal 2017.
At September 30, 2017, the Company’s non-performing assets totaled $15.6 million or 1.7% of
total assets as compared to $16.5 million or 2.9% of total assets at September 30, 2016. Non-performing
assets at September 30, 2017 included five construction loans aggregating $8.7 million, 33 one-to-four
family residential loans aggregating $3.7 million, one single-family residential investment property loan
in the amount $1.4 million and five commercial real estate loans aggregating $1.6 million. Non-
performing assets also included at September 30, 2017 one real estate owned property consisting of a
single-family residential property with a carrying value of $192,000. At September 30, 2017, the
Company had nine loans aggregating $6.0 million that were classified as TDRs. Three of such loans
aggregating $4.9 million were designated non-performing as of September 30, 2017 and on non-accrual
status; one of such loans in the amount of $1.4 million has continued to make payments in accordance
with the restructured loan terms, but management continues to have concerns over the borrower’s ability
to make future payments and as a result has determined to not return the loan to performing status. The
remaining two TDRs classified non-accrual totaling $3.5 million are a part of a troubled relationship
totaling $10.7 million (after taking into account the previously disclosed $1.9 million write-down
recognized during the quarter ending March 31, 2017 related to this borrowing relationship). The primary
project of the borrower is the subject of litigation between the Bank and the borrower and as a result, the
project currently is not proceeding. Subsequent to the commencement of the litigation, the borrower filed
for bankruptcy under Chapter 11 of the federal bankruptcy code in June 2017. The Bank has moved the
underlying litigation noted above with the borrower and the Bank from state court to the federal
bankruptcy court in which the bankruptcy proceeding is being heard. The remaining six TDRs totaling
$1.1 million have performed in accordance with the terms of their revised agreements and have been
placed on accruing status. As of September 30, 2017, the Company had reviewed $19.7 million of loans
for possible impairment of which $12.7 million was classified substandard compared to $19.4 million
reviewed for possible impairment and $14.6 million of which was classified substandard as of September
30, 2016.
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
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
17
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. Loans acquired from
Polonia Bancorp amounted to $160.8 million of which there is no allowance for loan loss because these
loans were recorded at fair value. A general credit mark of $2.3 million was recorded in connection with
completion of the acquisition and is being amortized over 30 years. As of September 30, 2017, our
allowance for loan losses of $4.5 million was 0.8% of total loans receivable and 29.0% of non-performing
loans.
Charge-offs on loans totaled $2.0 million and $11,000 for the years ended September 30, 2017
and 2016, respectively. The charge-offs during fiscal 2017 were primarily the result of one borrowing
relationship described in “-Non-performing Assets and Real Estate Owned” Section. 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.
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
At or For the Year Ended September 30,
2017
2016
2015
2014
2013
(Dollars in Thousands)
$ 652,607 $ 351,891 $ 330,556 $ 330,696 $ 308,395
487,999 327,877 323,398 319,126 278,582
Allowance for loan losses, beginning of period
3,269 2,930 2,424 2,353 1,881
Provision (recovery) for loan losses
2,990 225 735 240 (500)
Charge-offs:
One-to-four family residential
Multi-family residential and commercial real estate
Construction and land development
Commercial business
Consumer
Total charge-offs
-
140 11 384 215 154
- -
-
-
1,819 - - - -
-
- -
-
16 - - - -
-
1,975 11 384 215 154
Recoveries on loans previously charged off
182 125 155 46 1,126
Allowance for loan losses, end of period
$ 4,466 $ 3,269 $ 2,930 $ 2,424 $ 2,353
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.
0.78%
0.94%
0.93%
0.75%
0.77%
29.01%
20.59%
21.03%
41.24%
35.47%
0.37%
-0.03%
0.07%
0.05%
NM*
18
The following table shows how the allowance for loan losses is allocated by type of loan at each
of the dates indicated.
2017
2016
September 30,
2015
2014
2013
Amount
of
Allowance
$ 1,241
205
1,201
1,358
4
23
24
410
$ 4,466
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)
53.80% $ 1,624
66.40% $ 1,636
78.40% $ 1,663
3.30% 137
3.50% 66
1.90% 66
85.47% $ 1,384
22
2.17%
19.60% 859
22.70% 231
7.80% 122
4.87%
70
22.30% 318
6.20% 725
11.80% 323
0.10% 1
0.00% -
0.00% 15
0.70% 21
0.90% -
0.00% -
0.30% 10
0.30% 4
0.10% 4
-
299
100.10% $ 3,269
-
268
100.00% $ 2,930
-
231
100.00% $ 2,424
6.77% 653
4
0.60%
0.00% -
0.12% 2
218
-
100.00% $ 2,353
100.00%
87.81%
1.85%
6.33%
3.68%
0.19%
0.00%
0.14%
-
The aggregate allowance for loan losses increased by $1.2 million from September 30, 2016 to
September 30, 2017, due to a provision of $3.0 million, partially offset by a net charge off of $1.8 million
recorded during the period. Substantially all of the charge offs for fiscal 2017 related to one borrowing
relationship. 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, CFO 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
mortgage obligations (“CMOs”) issued or backed by securities issued by these government sponsored
agencies.
19
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, Fitch and Kroll. In purchasing these types
of securities, the Company looks for known publicly 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 cmos guaranteed by Ginnie Mae, Fannie Mae or
Freddie Mac.
The Company has portfolio municipal and government subdivisions securities which are graded
at least “A” by a national rating agency. The securities are exempt from taxation.
At September 30, 2017, the investment and mortgage-backed securities portfolio amounted to
$239.7 million or 26.6% of total assets at such date. The largest component of the securities portfolio as
of September 30, 2017 consisted of mortgage-backed securities which amounted to $125.1 million or
52.2% of the securities portfolio at September 30, 2017. 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, 2017, we had $61.3
million of investment and mortgage-backed securities classified as held to maturity, $178.4 million of
investment and mortgage-backed securities classified as available for sale and no securities classified as
trading securities.
20
The following table sets forth certain information relating to the investment and mortgage-backed
securities portfolios at the dates indicated.
2017
September 30,
2016
2015
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
State and political subdivisions
Total debt securities
FHLMC preferred stock
Total investment and
mortgage-backed securities
$ 126,459 $ 125,423 $ 97,289 $ 98,506
59,625
54,793
34,500
20,781
241,365
6
$ 69,917 $ 71,047
73,254
73,917
57,840
-
34,400
26,053 -
-
20,842 - - -
144,301
143,834
238,505
59
6
76
54,487
25,411
179,352
42
177,187
6
$ 241,371 $ 238,581 $ 177,193 $ 179,394
$ 143,840 $ 144,360
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, 2017.
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
2
2,046
867
$ 4,914
5.50% $ 9,000
2.40% 99
2.97% 29,986
2.00% 13,601
3.83% $ 52,686
2.58% $ 48,626
4.09% 126,358
3.87%
2,468
6,313
3.17%
3.47% $ 183,765
2.23% $ 59,625
2.59% 126,459
3.25% 34,500
20,781
3.09%
2.52% $ 241,365
2.39%
2.59%
3.78%
3.10%
2.75%
Bonds and other debt securities:
U.S. Government and agency
obligations
Mortgage-backed securities
Corporate debt securities
State and political subdivisions
Total
21
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,
2017
2016
2015
(Dollars in Thousands)
$ 97,289 $ 69,917
$ 54,190
24,865
48,212 49,639
-
(5,421) (11,560)
-
- -
(13,871) (10,768) (9,372)
234
250 61
$ 69,917
$ 126,459 $ 97,289
2.44%
2.38%
2.59%
___________________________
(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, 2015.
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, 2017, 38.0% 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, 2017, jumbo CDs (certificates of deposit of $100,000 or more) amounted to
$276.1 million, of which $178.5 million are scheduled to mature within twelve months subsequent to
such date. At September 30, 2017, the weighted average remaining period until maturity of the certificate
of deposit accounts was 16.5 months. During fiscal 2017, jumbo CDs from government agencies and
other financial institutions were utilized to fund growth.
22
The following table shows the distribution of, and certain other information relating to, deposits
by type of deposit, as of the dates indicated.
2017
Amount
September 30,
2016
2015
% of Total
Deposits
Amount
% of Total
Deposits
Amount
% of Total
Deposits
(Dollars in Thousands)
$ 62,523
294,860
36,942
$ 394,325
9.83% $ 111,899
28.75% $ 64,717
46.36% 98,921
25.42% 86,203
5.81% 13,117
3.37% 45,121
62.00% $ 223,937
57.54% $ 196,041
17.73%
23.61%
12.36%
53.70%
101,743
16.00% 70,924
18.22% 70,355
19.27%
9,375
54,267
76,272
$ 241,657
$ 635,982
1.47% 3,804
8.53% 34,984
0.98% 2,293
8.99% 35,649
11.99% 55,552
14.27% 60,736
38.00% $ 165,264
100.00% $ 389,201
42.46% $ 169,033
100.00% $ 365,074
0.63%
9.76%
16.64%
46.30%
100.00%
Certificate accounts:
Less than 1.00%
1.00% - 1.99%
2.00% - 2.99%
Total certificate accounts
Transaction accounts:
Savings
Checking:
Interest-bearing
Non-interest-bearing
Money market
Total transaction accounts
Total deposits
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
2017
Interest
Expense
Average Rate
Paid
Average Balance
2016
Interest
Expense
Average Rate
Paid
Average
Balance
2015
Interest
Expense
Average Rate
Paid
Year Ended September 30,
(Dollars in Thousands)
Savings
$ 97,710 $ 51
0.05%
$ 73,030 $ 83
0.11%
$ 75,203 $ 208
0.28%
Interest-bearing checking and
money market accounts
Certificate accounts
127,172
325,824
197
3,682
Total interest-bearing deposits
550,706 $ 3,930
Non-interest-bearing deposits
Total deposits
13,390
$ 564,096
0.15%
1.13%
0.71%
0.70%
92,751
211,517
165
2,613
377,298 $ 2,861
6,618
$ 383,916
0.18%
1.24%
0.76%
0.75%
100,482
207,391
323
2,899
383,076 $ 3,430
5,662
$ 388,738
0.32%
1.40%
0.90%
0.88%
23
The following table shows the deposit cash flows during the periods indicated.
Year Ended September 30,
2017
2016
2015
(In Thousands)
Deposits made
$ 678,878 $ 364,745 $ 296,394
Deposits acquired (Polonia)
172,243 - -
Withdrawals
Interest credited
(606,984) (343,535) (325,584)
2,644 2,917 3,239
Total increase (decrease) in deposits
$ 246,781 $ 24,127 $ (25,951)
The following table presents, by various interest rate categories and maturities, the amount of
certificates of deposit at September 30, 2017.
Certificates of Deposit
2018
Less than 1.00%
1.00% - 1.99%
2.00% - 2.99%
Total certificate accounts
$
57,275
177,234
1,898
236,407
$
2019
Thereafter
Maturing in the 12 Months Ending September 30,
2020
(In Thousands)
$
-
45,523
3,200
48,723
$
-
18,848
24,771
43,619
5,248
53,255
7,073
65,576
$
$
$
$
Total
$
62,523
294,860
36,942
394,325
$
The following tables show the maturities of our certificates of deposit of $100,000 or more at
September 30, 2017, by time remaining to maturity.
Quarter Ending:
Amount
Weighted
Avg Rate
(Dollars in Thousands)
December 31, 2017
March 31, 2018
June 30, 2018
September 30, 2018
After September 30, 2018
Total certificates of deposit with
balances of $100,000 or more
$ 53,614
69,139
35,607
20,149
97,579
$ 276,088
1.10%
1.31%
1.37%
1.45%
1.73%
1.44%
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
these borrowings. FHLB advances are made pursuant to several different credit programs, each of which
24
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, 2017,
the Company had $114.3 million in outstanding advances with the FHLB, and in addition had the ability
to obtain additional advances in the amount of $277.5 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 short-term borrowings at or for the dates
indicated:
At or For the Year Ended September 30,
2015
2017
2016
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)
$21,784
$20,000
$162
35,000
20,000
1.31%
0.84%
8,975
20,000
1.17%
1.23%
340
0
0.00%
0.00%
The following table shows certain information regarding long-term borrowings at or for the dates
Maturity range
to
from
weighted average
interest rate
Stated interest rate range
from
to
17-Nov-17
1-Dec-17
22-Sep-22
15-Aug-23
2.22%
1.64%
1.15%
1.16%
4.15%
1.94%
indicated:
Lomg-term FHLB advances:
Description
Fixed Rate - Advances
Fixed Rate - Amortizing
Total
Subsidiaries
2017
88,795
5,523
94,318
$
$
$
$
2016
23,745
6,893
30,638
The Company has only one direct subsidiary: Prudential Savings Bank. The Bank’s sole
subsidiary as of September 30, 2017 was PSB Delaware, Inc. (“PSB”), a Delaware-chartered corporation
established to hold investment securities. As of September 30, 2017, PSB had assets of $155.5 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, 2017, we had 80 full-time employees, and seven 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.
25
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.
The common stock of Prudential Bancorp is registered 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.
26
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:
• 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.
27
• 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 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
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
28
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 became 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
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
29
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, 2016. The new capital rules
also increased the current minimum Tier 1 capital ratio from 4.0% to 6.0% beginning on January 1, 2016.
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
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, 2017, 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 13.59%,
21.97%, 21.97% and 22.86%, 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
30
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, 2017, Prudential
Savings’ 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).
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, 2017, 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.
31
The table below sets forth the Company and the Bank’s capital position relative to its respective
regulatory capital requirements at September 30, 2017.
Actual
Amount
Ratio
Required for Capital
Adequacy Purposes(1)
Amount
(Dollars in Thousands)
Ratio
To Be
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
$
130,128
119,189
14.81 %
13.59
N/A
35,093
$
N/A
4.00 %
N/A
43,866
$
N/A
5.0 %
130,128
119,189
130,128
119,189
134,963
124,024
23.94
21.97
23.94
21.97
24.83
22.86
N/A
24,411
N/A
32,548
N/A
43,397
N/A
4.5
N/A
6.0
N/A
8.0
N/A
35,260
N/A
43,397
N/A
54,247
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, 2017
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
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
32
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, 2017, 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
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 provisions.
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
33
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
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
34
sufficient to ensure that the Federal Home Loan Bank remains in compliance with its minimum capital
requirements. At September 30, 2017, 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, 2017, 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.
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.
35
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, 2016. 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 2016, 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, 2016, Prudential Bancorp was not required to comply with the requirements
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.
36
Capital Ratio
Regulatory Minimum
Common Equity Tier 1 Capital
Tier 1 Leverage Capital
Tier 1 Risk-Based Capital
Total Risk-Based Capital
4.5%
4.0%
6.0%
8.0%
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
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
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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,
2015 with full compliance being phased in over a period ending on July 21, 2016. 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, 2017, the Bank was in compliance
with the above restrictions.
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
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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. During fiscal 2017, the
Internal Revenue Service had concluded an audit of the Company’s tax returns for the year ended
September 30, 2014 and no adverse findings were noted. The federal and state income tax returns for
taxable years through September 30, 2014 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. Any distributions made by Prudential Bancorp to its shareholders generally 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, 2017, 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
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.
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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 2017 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 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, 2017, we had total non-performing assets of $15.6 million, or 1.70% of total
assets as compared to $16.5 million or 2.94% of total assets as of September 30, 2016. 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, 2017, our allowance for
loan losses amounted to $4.5 million, or 0.8% of total loans and 29.0% of non-performing loans,
compared to $3.3 million, or 0.9% of total loans and 20.6% of non-performing loans at September 30,
2016.
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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 banking 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 0.8% of total loans and 29.0% of non-performing loans at
September 30, 2017. Our allowance for loan losses at September 30, 2017 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, 2017, $351.3 million, or 53.8 % 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.
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Our increased emphasis on originating construction and commercial real estate loans may expose
us to increased lending risks.
At September 30, 2017, $145.5 million, or 22.3%, of our loan portfolio consisted of construction
loans, including loans for the acquisition and development of property, and $127.6 million, or 19.6%, 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, the majority of our non-performing assets have related to construction loans.
At September 30, 2017, five construction loans aggregating $8.7 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 $10.7 million, all of which was deemed non-
performing as of such date. In addition, non-performing assets at September 30, 2017 included 33 one-to-
four family loans aggregating $3.7 million, five commercial real estate loans aggregating $1.6 million and
one single-family residential loan aggregating $1.4 million related to the same borrower.
Imposition of limits by the bank regulators on commercial and multi-family real estate lending
activities could curtail our growth and adversely affect our earnings.
In 2006, the FDIC, the FRB and the Office of the Comptroller of the Currency (collectively, the
“Agencies”) issued joint guidance entitled “Concentrations in Commercial Real Estate Lending, Sound
Risk Management Practices” (the “CRE Guidance”). Although the CRE Guidance did not establish
specific lending limits, it provides that a bank’s commercial real estate lending exposure could receive
increased supervisory scrutiny where total non-owner-occupied commercial real estate loans, including
loans secured by apartment buildings, investor commercial real estate, and construction and land loans,
represent 300% or more of an institution’s total risk-based capital, and the outstanding balance of the
commercial real estate loan portfolio has increased by 50% or more during the preceding 36 months. Our
level of commercial real estate and multi-family loans represents 220.2% of the Bank’s total risk-based
capital at September 30, 2017.
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In December 2015, the Agencies released a new statement on prudent risk management for
commercial real estate lending (the “2015 Statement”). In the 2015 Statement, the Agencies, among other
things, indicate the intent to continue “to pay special attention” to commercial real estate lending
activities and concentrations going forward. If the FDIC, our primary federal regulator, were to impose
restrictions on the amount of commercial real estate loans we can hold in our portfolio, for reasons noted
above or otherwise, our earnings would be adversely affected.
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
Pennsylvania, New Jersey, New York and Delaware 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 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,
2017, $269.2 million or 29.9 % of our assets was invested in investment securities, certificates of deposit,
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, 2017 was
2.67% as compared to 4.12% 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,
2017, $178.4 million, or 74.4% 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
43
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
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 raised the federal
funds rate twice to date in 2017 and may implement an additional increase as of the end of December
2017.
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, 2017, 41.7% of our loan portfolio had maturities of 10 years or more. Furthermore, at such
date, only $91.8 million or 14.1% of the loans due after September 30, 2017 bear adjustable interest rates.
44
At September 30, 2017, 38.0% of our deposits had no stated maturity date and 37.1% 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, 2017, a 200 basis point increase in interest rates would have resulted in our net
portfolio value declining by approximately $34.1 million or 2.6%. 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
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
45
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. However, in February 2017, the President issued an executive order that a policy of
his administration would be making regulation efficient, effective, and appropriately tailored, and directed
certain regulatory agencies to review and identify laws and regulations that inhibit federal regulation of
the U.S. financial system in a manner consistent with the policies stated in the executive order. Any
changes in laws or regulation as a result of this review could result in a repeal, amendment to or delayed
implementation of the Dodd-Frank Act.
Changes in tax laws and regulations may adversely affect our operations and/or increase our costs
of operations.
The Bank has deferred tax assets totaling $4.1 million and any future reduction in the federal
statutory tax rate could also cause a reduction in the economic benefit of the net operating loss and other
deferred tax assets available to us and a corresponding charge to reduce the book value of the deferred tax
asset recorded on our balance sheet. The U.S. House of Representatives and Senate have each passed tax
reform legislation which, if enacted, would reduce the corporate income tax rate to 20%, from a current
rate of 35%. At September 30, 2017, we had deferred tax assets with a net book value of $86.2 million,
based on a federal tax rate of 35%. If the federal statutory corporate income tax rate is reduced to 20%,
this asset will be revalued at the lower rate, resulting in a charge to income tax expense and a
corresponding reduction in deferred tax assets.
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, 2016, 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
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 began being phased-in
January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in
46
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, 2017.
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 2017, 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
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
47
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, 2017, the fair value of our investment securities portfolio was approximately
$238.6 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,
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.
48
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
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
49
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.
We expect that implementation of a new accounting standard could require us to increase our
allowance for loan losses and may have a material adverse effect on our financial condition and
results of operations.
The Financial Accounting Standards Board (“FASB”) has adopted a new accounting standard that
will be effective for the Bank for our first fiscal year beginning after December 15, 2019. This standard,
referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine
periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as
allowances for loan losses. This will change the current method of providing allowances for loan losses
that are probable, which we expect may require us to increase our allowance for loan losses, and to
greatly increase the data we would need to collect and review to determine the appropriate level of the
allowance for loan losses. Any increase in our allowance for loan losses, or expenses incurred to
determine the appropriate level of the allowance for loan losses, may have a material adverse effect on
our financial condition and results of operations.
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
50
financial condition. These regulatory policies could affect our ability to pay dividends, repurchase shares
of common stock or otherwise engage in capital distributions.
The integration of Polonia Bancorp as a result of its merger with the Company may be more
difficult, costly or time-consuming than expected.
Prudential Bancorp and Polonia Bancorp historically operated until the effective time of the
merger on January 1, 2017, 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.
Prudential Bancorp is integrating 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
previously operated, 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
the Company to lose current customers or cause customers of Polonia Bancorp to remove their accounts
from Polonia Bancorp or Prudential Bancorp and move their business to competing financial institutions.
Integration efforts will also divert management attention and resources. These integration matters could
have an adverse effect on the Company for an undetermined period after consummation of the merger.
Prudential Bancorp may fail to fully 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, 2017, 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.
Item 2. Properties
We currently conduct business from our main office and ten banking offices. On January 1, 2017,
the Company completed its acquisition of Polonia Bancorp and Polonia Bank, Polonia’s wholly owned
subsidiary. The acquisition added five banking offices to our existing properties. 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, 2017.
51
Description/Address
Leased/Owned
Date of
Lease
Expiration
Net Book Value
of Property and
Leasehold
Improvements
Amount of
Deposits
Main Office
1834 West Oregon Avenue
Philadelphia, PA 19145-4725
Owned
N/A
(In Thousands)
$202
$359,939
Huntingdon Valley Executive Office
Owned
N/A
3,152
43,949
3993 Huntingdon Pike
Huntingdon Valley, PA 19006
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
Alleghney Financial Center
2644-56 E Alleghney Avenue
Philadelphia, PA 19134
Spring Garden Financial Center
2133-35 Spring Garden Street
Philadelphia, PA 19130
Richmond Financial Center
4800 Richmond Street
Philadelphia, PA 19137
Frankford Financial Center
8000 Frankford Avenue
Philadelphia, PA 19136
Owned
N/A
182
38,725
Owned
N/A
23
35,886
Leased
May-19
0
10,035
Leased
Sep-21
41
26,921
Leased
Oct-22
164
16,519
Owned
N/A
837
49,176
Owned
N/A
1,477
25,504
Owned
N/A
222
3,739
Owned
N/A
414
25,589
Total
$6,714
$635,982
52
Item 3. Legal Proceedings
As previously disclosed in the Company’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2016, on March 31, 2016, Island View Properties, Inc., trading as Island View Crossing II, LP,
and Renato J. Gualtieri (collectively, the “Gualtieri Parties”) filed suit (the “Philadelphia Litigation”) in
the Court of Common Pleas, Philadelphia, Pennsylvania (the “Court”), against the Bank seeking damages
in an amount in excess of $27.0 million. The lawsuit asserts allegations related to a loan granted by the
Bank to the Gualtieri Parties to develop a 169-unit townhouse and condominium project located in Bristol
Borough in Bucks County, Pennsylvania (the “Project”).
In May 2016, the Bank filed a motion with the court seeking to dismiss the majority of claims
asserted in the Philadelphia Litigation. In August 2016, the Court dismissed a majority of the Gualtieri
Parties’ claims. The Bank has also counterclaimed against the Gualtieri Parties for failure to satisfy the
nine loans extended thereto and for failure to complete the Project. In February 2017, the Court stayed the
Philadelphia Litigation pending possible resolution of the Litigation. No resolution was obtained and the
stay has expired.
Since commencement of the Philadelphia Litigation, the Bank has filed Complaints for
Confession against the Gualtieri Parties and certain other entities affiliated with Renato J. Gualtieri
(“Gualtieri Parties and Affiliated Entities”) based on the claimed defaults under the nine loans issued by
the Bank. These actions have been stayed pending the resolution of the Philadelphia Litigation. The Bank
has also filed foreclosure actions with regard to the commercial properties collateralizing the loans issued
to the Gualtieri Parties and Affiliated Entities.
Shortly after the Court lifted the stay in the Philadelphia Litigation, the Gualtieri Parties and
Affiliated Entities filed for bankruptcy under Chapter 11. The Bank has removed the underlying
Philadelphia Litigation from state court to the federal bankruptcy court. As the Philadelphia Litigation is
in its early stages, no prediction can be made as to the outcome thereof. However, the Bank believes that
it has meritorious defenses to the remaining claims under the Philadelphia Litigation and it intends to
vigorously defend the case.
In addition, as the Chapter 11 bankruptcy is in its early stages, no prediction can be made as to
the outcome thereof. However, the Bank believes that it has meritorious challenges to the Chapter 11
bankruptcy filed by the Gualtieri Parties and Affiliated Entities. The Bank recently filed a motion in the
Federal Bankruptcy Court seeking to convert the bankruptcy to a Chapter 7 proceeding or in the
alternative to appoint a Chapter 11 trustee to preserve the assets securing the Bank’s loans with the
Gualtieri Parties and Affiliated Entities.
As previously disclosed, the Bank had reached a preliminary settlement in two putative
shareholder derivative and class action lawsuits related to the merger of Polonia Bancorp with the
Company, consolidated as Parshall v. Eugene Andruczyk et al., which were filed in the Circuit Court for
Montgomery County, Maryland (“Maryland Court”) on July 21, 2016.
The merger with Polonia Bancorp was completed effective as of January 1, 2017. On May 26,
2017, the Maryland Court entered an order providing final approval of the settlement.
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
53
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
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, 2017, there were approximately 356 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 2017 and 2016:
Quarter ended:
September 30, 2017 ......................................................
June 30, 2017 ................................................................
March 31, 2017 .............................................................
December 31, 2016 ......................................................
Quarter ended :
September 30, 2016 ......................................................
June 30, 2016 ................................................................
March 31, 2016 .............................................................
December 31, 2015 ………………………………….
Stock Price
High
Low
$18.96 $18.51
18.13
17.68
17.04
18.48
18.13
17.39
Stock Price
High
Low
$15.15 $13.95
13.80
13.83
14.29
15.42
16.20
15.60
Cash
dividends
per share
$0.03
0.03
0.03
0.03
Cash
dividends
per share
$0.03
0.03
0.03
0.03
54
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, 2012. Prices prior to October 17,
2013 are for Old Prudential Bancorp 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.
Inc
Index
Prudential Bancorp Inc.
NASDAQ Composite Index
SNL Mid-Atlantic Thrift Index
(b)
Not applicable
Period Ending
09/30/12
100.00
100.00
100.00
09/30/13
174.24
122.77
116.47
09/30/14
196.74
148.08
128.86
09/30/15
236.60
153.99
151.23
09/30/16
239.68
179.29
151.49
09/30/17
308.83
221.75
176.33
55
(c)
The Company’s repurchases of equity shares for the fourth quarter of fiscal year 2017 were
follows:
Period
July 1 - 31, 2017
August 1 - 31, 2017
September 1 - 30, 2017
Total Number
of Shares
Purchased
-
37
-
37
Average
Price Paid
Per Share
$
-
$
18.27
$
-
(2)
(2)
(2)
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs (1)
-
-
-
Maximum Number of
Shares that May Yet
Be Purchased Under
Plans or Programs (1)
188,159
188,159
188,159
(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) Shares repurchased in connection with withholding shares to meet income tax withholding
obligations upon the vesting of restricted stock awards.
56
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 before income taxes
Income tax expense
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
2017
2016
At September 30,
2015
(Dollars in Thousands)
2014
2013
$899,540
27,903
$559,480
12,440
$487,189
11,272
$525,483
45,382
$607,897
158,984
61,284
178,402
571,343
635,982
114,318
15,397
15,589
136,179
11
39,971
138,694
344,948
389,201
50,638
15,878
16,459
114,002
6
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
2017
Year Ended September 30,
2014
2015
(Dollars in Thousands, except per share data)
2016
83,732
41,781
306,517
542,748
340
6,634
7,040
59,912
7
2013
$26,343
5,266
21,077
2,990
$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)
18,087
2,198
16,566
3,719
941
$ 2,778
$0.33
$0.32
$0.12
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
3.65%
0.82
2.83
2.92
111.83
109.18
2.10
71.18
0.35
2.16
16.31
3.40%
0.80
2.60
2.75
3.38%
0.90
2.49
2.69
3.28%
0.89
2.39
2.61
3.60%
1.04
2.56
2.67
124.28
123.40
2.11
72.87
0.51
2.36
21.55
128.72
130.51
111.15
94.99
3.42
81.04
0.58
2.37
24.39
111.85
2.21
80.88
0.34
1.38
24.79
114.92
2.25
79.21
0.35
3.00
11.92
(Footnotes on next page)
57
At or For the
Year Ended September 30,
2015
2016
2014
2013
2017
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
2.67%
4.60%
4.21%
1.83%
2.16%
1.73
29.01
0.78
0.37
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
35.47
0.77
-0.35
14.81%
20.41%
23.73%
22.39%
12.54%
13.59
18.15
19.50
17.95
11.81
Tier 1 common risk-based capital ratio
Company
Bank
23.94
21.97
38.57
34.36
50.63
41.66
N/A
N/A
N/A
N/A
Tier 1 risk-based capital ratio
Company
Bank
Total risk-based capital ratio
Company
Bank
__________________
23.94
21.97
24.83
22.86
38.57
34.36
39.70
35.49
50.63
41.65
57.21
40.52
51.98
43.00
58.28
41.59
26.69
25.15
27.72
26.18
(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.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
At September 30, 2017, we had total assets of $899.5 million, including net loans of $571.3
million and $239.7 million of investment and mortgage-backed securities, total deposits of $636.0 million
and total stockholders’ equity of $136.2 million.
58
The Company conducts community banking activities by accepting deposits and making loans
secured by properties located primarily 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,
multi-family and 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.
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;
59
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
valuation, securities are classified within Level 3 of the valuation hierarchy, although there were no
securities with that classification as of September 30, 2017 or 2016.
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
60
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.
Business Combinations - At the date of acquisition the Company records the assets and liabilities
of the acquired companies on the Consolidated Statement of Financial Condition at their estimated fair
value. The results of operations for acquired companies are included in the Company’s Consolidated
Statements of Operations beginning at the acquisition date. Expenses arising from acquisition activities
are recorded in the Consolidated Statements of Operations during the period incurred. The difference
between the purchase price and the fair value of the net assets acquired (including identified intangibles)
is recorded as goodwill.
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.
61
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 its 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, 2017.
Total
Amounts
Committed
$ 1,352
7,443
73,858
45,906
$ 128,559
Letters of credit
Lines of credit (1)
Undisbursed portions of loans in process
Commitments to originate loans
Total commitments
_____________________
1-3
Years
(In Thousands)
1,231
$
-
48,051
-
$ 49,282
$
121
1,303
22,105
45,906
$ 69,435
Amount of Commitment Expiration - Per Period
After 5
Years
Less than
1 Year
3-5
Years
-
$
-
-
-
$ -
-
$
6,140
3,702
-
$ 9,842
(1)
The majority of available lines of credit consist of home equity lines of credit.
Contractual Cash Obligations
The following table summarizes our contractual cash obligations at September 30, 2017.
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)
$ -
$ 236,407 $ 114,299 $ 43,619
22,480 1,974
34,087
35,777
66,099 1,974
148,386
272,184
-
-
-
20,000
-
-
-
2,207
394
498 1,489
631
$ 294,785 $ 149,017 $ 66,597 $ 3,463
Total
$ 394,325
94,318
488,643
20,000
2,207
3,012
$ 513,862
62
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. 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.
2017
Average
Balance
Interest
Average
Yield/
Rate
Year Ended September 30,
2016
Average
Balance
Interest
(Dollars in Thousands)
Average
Yield/
Rate
2015
Average
Balance
Interest
Average
Yield/
Rate
Interest-earning assets:
Investment securities (3)
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
$60,094
151,430
487,999
22,361
721,884
65,485
$787,369
$97,710
127,172
325,824
550,706
94,816
645,522
13,390
658,912
128,457
$787,369
$76,362
$2,004
3,963
20,107
269
26,343
$51
197
3,682
3,930
1,336
5,266
3.52%
2.62%
4.12%
1.20%
3.65%
0.05%
0.15%
1.13%
0.71%
1.41%
0.82%
$57,433
114,709
327,877
13,103
513,122
21,622
$534,744
$73,030
92,751
211,517
377,298
35,585
412,883
6,618
419,501
115,243
$534,744
$100,239
$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%
0.80%
$81,110
62,321
323,398
26,471
493,300
21,078
$514,378
$75,203
100,482
207,391
383,076
162
383,238
5,662
388,900
125,478
$514,378
$110,062
$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%
0.32%
1.40%
0.90%
0.00%
0.90%
$21,077
2.83%
2.92%
$14,157
2.60%
2.75%
$13,250
2.49%
2.69%
111.83%
124.28%
128.72%
(1)
(2)
(3)
_______________________
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.
Tax exempt yields have been adjusted to a tax-equivalent basis.
63
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.
2017 vs. 2016
Increase (Decrease) Due to
2016 vs. 2015
Increase (Decrease) Due to
Total
Increase
Rate
Volume
Rate/
Volume
(Decrease)
Rate
Volume
(In Thousands)
Total
Increase
(Decrease)
Rate/
Volume
$
365
$
72
$
17
$
454
$
117
$
(603)
$
(30)
$
(516)
29
601
107
1,102
952
6,304
36
7,364
9
293
75
394
990
7,198
218
8,860
(45)
28
(13)
(30)
(23)
(223)
(291)
36
(255)
61
1,412
1,501
774
2,275
(9)
(120)
(142)
61
(81)
29
1,069
1,068
871
1,939
(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)
$
1,357
$
5,089
$
475
$
6,921
$
523
$
1,031
$
(647)
$
907
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, 2017 and September 30, 2016
At September 30, 2017, the Company had total assets of $899.5 million, as compared to $559.5
million at September 30, 2016, an increase of $340.0 million or 60.8%. The substantial majority of the
growth was attributable to the acquisition of Polonia Bancorp. In addition to the acquisition, the Company
experienced growth in the balance of net loans receivable of $67.2 million or 19.5% not related to the
acquisition when compared to the $344.9 million balance of net loans receivable as of September 30,
2016.
Total liabilities increased by $317.9 million to $763.4 million at September 30, 2017 from $445.5
million at September 30, 2016. As with the asset growth, the bulk of the liability growth resulted from the
acquisition of Polonia Bancorp. In addition to the deposits assumed, the Company assumed $56.0 million
in FHLB advances in connection with the acquisition. In addition to the deposit growth resulting from the
acquisition, the Company experienced growth in deposits of $73.3 million or 18.8% when compared the
balance outstanding at September 30, 2017 to the $389.2 million balance as of September 30, 2016.
Total stockholders’ equity increased by $22.2 million to $136.2 million at September 30, 2017
from $114.0 million at September 30, 2016. This increase was primarily due to the issuance of common
64
stock to the stockholders of Polonia Bancorp in connection with the acquisition. In addition, stockholders’
equity was affected by the termination of the Bank’s employee stock ownership plan (“ESOP”) as of
December 31, 2016. A portion of the shares of common stock held in the ESOP’s suspense account as
collateral for the loans to the ESOP was used to satisfy the ESOP’s indebtedness in full. As a result of the
ESOP termination, the Bank reduced its compensation expense by approximately $85,000 per quarter. In
addition, stockholders’ equity was affected by a $1.6 million decline in the fair value of the Company’s
available-for-sale portfolio.
Results of Operations for the Years Ended September 30, 2017, 2016 and 2015
General.
2017 vs. 2016. For the fiscal year ended September 30, 2017, the Company recognized net
income of $2.8 million, or $0.32 per diluted share, as compared to net income of $2.7 million, or $0.36
per diluted share for the fiscal year ended September 30, 2016. The fiscal year 2017 results included a
one-time $2.5 million pre-tax expense related to the Polonia Bancorp acquisition as well as a $1.9 million
non-cash pre-tax charge-off associated with a large lending relationship. Increased profitability for the
year ended September 30, 2017 was primarily attributable to an increase in net interest income.
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, 2016 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.
Net Interest Income.
2017 vs. 2016. For the year ended September 30, 2017, net interest income increased to $21.1
million as compared to $14.2 million for the same period in fiscal 2016. The increase reflected an $8.9
million, or 50.7%, increase in interest income, partially offset by a $1.9 million increase, or 58.3%, in
interest paid on deposits and borrowings. The increase in net interest income for fiscal 2017 was primarily
due to the increase in the weighted average balance of earning assets reflecting in large part the addition
of earning assets acquired as of January 1, 2017 upon completion of the Polonia acquisition. The
weighted average yield on interest earning assets increased 25 basis points to 3.65% while the cost of
funds increased only 1 basis point to 0.82%.
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
65
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.
Provision for Loan Losses.
2017 vs. 2016. The Company established provisions for loan losses of $3.0 million for the year ended
September 30, 2017 primarily due to the $1.9 million charge-off related to the borrower whose primary
project financed by the Bank involves the proposed development of 169 residential lots. The Bank and the
borrower are in litigation and no resolution of the situation has been arrived at as of the date hereof in part
due to the bankruptcy filing by the borrower effected in June 2017. In light of the status of both the
litigation as well as the progress of construction of the project, the Company recorded a $1.9 million non-
cash charge-off during the quarter ended March 31, 2017. The remaining portion of the provision
recorded during the year ended September 30, 2017 was related to the increase in the outstanding balance
of loans. The loans acquired from Polonia Bancorp initially did not have any impact on the allowance for
loan losses, because they were acquired at their fair value. Any write-downs to fair value were reflected in
the one-time merger-related charge. In the event that the credit quality of any loans acquired from Polonia
Bancorp credit should deteriorate in the future, additional provisions may be required.
The allowance for loan losses totaled $4.5 million, or 0.8% of total loans and 29.0% of total non-
performing loans (which included loans acquired from Polonia Bancorp at their fair-value) at September
30, 2017 as compared to $3.3 million, or 0.9% of total loans and 20.6% of total non-performing loans at
September 30, 2016. The Company believes that the allowance for loan losses at September 30, 2017 was
sufficient to cover all inherent and known losses associated with the loan portfolio at such date.
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.
Non-interest Income.
2017 vs. 2016. With respect to the year ended September 30, 2017, non-interest income
amounted to $2.2 million compared with $1.3 million for fiscal 2016. The increase experienced in 2017
was primarily attributable to the addition of five full-service financial centers, along with the related
customer deposit base (increased ATM fees as well as account service charges and transaction fees),
acquired from Polonia Bancorp along with an increased return on bank owned life insurance (“BOLI”) as
a result of the increase in the amount of BOLI due to the purchase of an additional $10.0 million of BOLI
in the first quarter of the fiscal year.
66
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.
Non-interest Expense.
2017 vs. 2016. For the year ended September 30, 2017, non-interest expense increased $5.3
million, to $16.6 million compared to fiscal year 2016. The primary reason for the increase for year ended
September 30, 2017 was the additional expense resulting from the Polonia Bancorp acquisition which
added five financial centers to our branch network as well as additional personnel. In addition, the
Company recorded a one-time merger related charge of approximately $2.5 million, pre-tax, during the
quarter ended March 31, 2017.
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.
Income Tax Expense.
2017 vs. 2016. For the year ended September 30, 2017, the Company recorded income tax
expense of $941,000 resulting in an effective tax rate of 25.3%, compared to $1.3 million and an
effective tax rate of 31.6% for fiscal 2016. The effective tax rate for the year ended September 30, 2017
was lower due to the increased tax free income from BOLI and tax benefits associated with the exercise
of stock options and vesting of restricted stock.
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.
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.
67
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, 2017, our cash and cash equivalents amounted to $27.9
million. In addition, our available for sale investment and mortgage-backed securities amounted to an
aggregate of $178.4 million at September 30, 2017.
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, 2017, we had certificates of deposit maturing within the next 12
months amounting to $235.8 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 those of our
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,
2017 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, 2017, the Company had $277.5 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
sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities
68
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, 2017, 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, 2017, 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 5.4% to 30.7%. The annual prepayment rate for mortgage-backed securities is assumed to
range from 0.8% to 17.9%. 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.
69
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, 2017
Cumulative interest-earning
assets as a percentage of
cumulative interest-bearing
liabilities at September 30, 2017
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)
$8,350
94,109
$16,710
84,258
$39,987
159,289
$35,823
102,196
$138,816
$239,686
131,491
25,629 - 6,251 1,355 -
$270,307
$205,527
$100,968
$139,374
$128,088
571,343
33,235
$844,264
130,544
394,325
114,318
2,207
$743,132
$52,773
$101,738
$3,881
3,485
73,886
12,915
$10,472
10,440
161,900
25,062
$17,884
17,504
114,925
33,095
$16,728
14,289
84,826
43,614 -
42,925 321
2,207 - - - -
$137,920
$183,408
$207,874
$117,556
$96,374
$31,714
($106,906)
$22,119
$21,818
$132,387
$101,132
$31,714
($75,192)
($53,073)
($31,255)
$101,132
3.53%
-8.36%
-5.90%
-3.47%
11.24%
132.91%
75.29%
89.12%
94.84%
113.61%
(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,
(3)
(4)
undisbursed loan funds, unamortized discounts and deferred loan fees.
Includes FHLB stock.
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 of many
borrowers to service their adjustable-rate loans may decrease in the event of an interest rate increase.
70
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, 2017 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)
$ 118,264 $ (49,472)
$ 133,601 $ (34,135)
$ 151,181 $ (16,555)
$ 167,736 $ -
$ 172,546 $ 4,810
$ 169,568 $ 1,832
$ 174,435 $ 6,699
-29.49%
-20.35%
-9.87%
---
2.87%
1.09%
3.99%
14.73%
16.03%
17.44%
18.62%
18.68%
18.09%
18.33%
-3.89%
-2.59%
-1.18%
---
0.06%
-0.53%
-0.29%
At September 30, 2016, the Company’s NPV was $129.7 million or 23.2% of the market value of
assets. Following a 200 basis point increase in interest rates, the Company’s “post shock” NPV would
have been $102.1 million or 20.0% of the market value of assets, a decline of approximately 21.3%. The
change in the NPV ratio or Company’s sensitivity measure was a decrease of 321 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.”
71
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Prudential Bancorp, Inc.
Philadelphia, Pennsylvania
We have audited the accompanying consolidated statements of financial condition of Prudential
Bancorp, Inc. and subsidiary as of September 30, 2017 and 2016, 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, 2017. These consolidated 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 audits 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 consolidated financial position of Prudential Bancorp, Inc. and subsidiary as of
September 30, 2017 and 2016, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended September 30, 2017, 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, 2017, based on criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission in 2013, and in our report dated December 14, 2017, we expressed an unqualified
opinion on the effectiveness of Prudential Bancorp, Inc.’s internal control over financial reporting.
Cranberry Township, Pennsylvania
December 14, 2017
72
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Prudential Bancorp, Inc.
Philadelphia, Pennsylvania
We have audited Prudential Bancorp, Inc. and subsidiary’s internal control over financial reporting
as of September 30, 2017, 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 Report on
Management’s Assessment of 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.
73
In our opinion, Prudential Bancorp, Inc. and subsidiary maintained, in all material respects,
effective internal control over financial reporting as of September 30, 2017, 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 consolidated statements of financial condition of Prudential
Bancorp, Inc. and subsidiary as of September 30, 2017 and 2016, 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, 2017, and our report dated
December 14, 2017, expressed an unqualified opinion.
Cranberry Township, Pennsylvania
December 14, 2017
74
PRUDENTIAL BANCORP, INC.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
ASSETS
Cash and amounts due from depository institutions
Interest-bearing deposits
$
2,274
25,629
$
1,965
10,475
September 30,
2017
2016
(Dollars in Thousands)
Total cash and cash equivalents
Certificates of deposit
Investment and mortgage-backed securities available for sale (amortized cost—
September 30, 2017, $180,087; September 30, 2016, $137,222)
Investment and mortgage-backed securities held to maturity (fair value—
September 30, 2017, $60,179; September 30, 2016, $40,700)
Loans receivable—net of allowance for loan losses (September 30, 2017, $4,466;
September 30, 2016, $3,269)
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
Goodwill
Core deposit intangible
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 - Long Term
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; 10,819,006 issued
and 9,008,125 outstanding at September 30, 2017; 9,544,809 issued and
8,045,544 outstanding at September 30, 2016
Additional paid-in capital
Unearned Employee Stock Ownership Plan ("ESOP") shares
Treasury stock, at cost: 1,810,881 shares at September 30, 2017 and 1,499,265 shares
at September 30, 2016
Retained earnings
Accumulated other comprehensive (loss) income
27,903
1,604
178,402
61,284
571,343
2,825
192
6,002
7,804
28,048
4,091
6,102
709
3,231
12,440
1,853
138,694
39,971
344,948
1,928
581
2,463
1,344
13,055
569
-
-
1,634
$
899,540
$
559,480
$
9,375
626,607
$
3,804
385,397
635,982
20,000
94,318
1,933
2,207
8,921
763,361
389,201
20,000
30,638
1,403
1,748
2,488
445,478
-
-
108
118,751
-
(26,707)
44,787
(760)
95
95,713
(4,550)
(21,098)
43,044
798
Total stockholders' equity
136,179
114,002
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
899,540
$
559,480
________________________________________
See notes to consolidated financial statements.
75
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
Years Ended September 30,
2017
2016
2015
(Dollars in Thousands Except Per Share Amounts)
$
20,107
2,947
3,180
109
$
12,909
2,494
1,979
101
$
12,760
1,799
2,003
118
Total interest income
26,343
17,483
16,680
Total non-interest income
2,198
1,337
INTEREST EXPENSE:
Interest on deposits
Interest on Advances from FHLB - short term
Interest on Advances from FHLB - long term
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
Gain on sale of loans
Gain on sale of office properties
Earnings from BOLI
Other
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
Core deposit amortization
Other
Total non-interest expenses
INCOME BEFORE INCOME TAXES
INCOME TAXES:
Current
Deferred expense (benefit)
Total
NET INCOME
3,930
184
1,152
5,266
21,077
2,990
2,861
95
370
3,326
14,157
225
3,430
-
-
3,430
13,250
735
18,087
13,932
12,515
655
235
52
-
677
579
464
418
11
-
333
111
7,468
697
1,433
962
553
282
162
(13)
214
2,486
112
2,210
16,566
3,719
801
140
941
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
$
2,778
$
2,720
$
2,232
BASIC EARNINGS PER SHARE
$
0.33
$
0.37
$
0.27
DILUTED EARNINGS PER SHARE
$
0.32
$
0.36
$
0.26
DIVIDENDS PER SHARE
$
0.12
$
0.12
$
0.27
See notes to consolidated financial statements.
76
PRUDENTIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income
Years Ended September 30,
2017
2016
2015
(Dollars in thousands)
$
2,778
$
2,720
$
2,232
Unrealized holding gain(loss) on available-for-sale securities
(2,830)
1,801
Tax effect
Reclassification adjustment for net gains realized in net income
Tax effect
Unrealized holding gain (loss) on interest rate swaps
Tax effect
Total Other Comprehensive (loss)Income
962
(235)
80
705
(240)
(1,558)
(612)
(418)
142
(202)
69
780
1,471
(500)
-
-
-
-
971
Comprehensive Income
$
1,220
$
3,500
$
3,203
See notes to consolidated financial statements.
77
PRUDENTIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Common
Stock
Additional
Paid-In
Capital
Unearned
ESOP
Shares
Accumulated
Other
Total
Treasury
Stock
Retained
Earnings
Comprehensive Stockholders'
Income (Loss)
Equity
(Dollars in Thousands)
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)
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)
(14,691)
410
409
91
376
2,232
(2,222)
971
2,232
971
(2,222)
(14,691)
410
409
467
BALANCE, September 30, 2015
95
95,286
(4,926)
(14,691)
Net income
Other comprehensive income
Dividends paid ($0.12 per share)
Purchase of treasury stock (445,881 shares)
Stock option expense
Recognition and Retention Plan expense
Treasury stock used for Recognition and
Retention Plan (41,800 shares)
ESOP shares committed to
be released (32,064 shares)
BALANCE, September 30, 2016
Net income
Other comprehensive loss
Dividends paid ($0.12 per share)
Issuance of common stock
Purchase of treasury stock (43,735 shares)
Terminate ESOP (303,115 shares)
Treasury stock used for Recognition and
Retention Plan (35,234 shares)
Stock option expense
Recognition and Retention Plan expense
ESOP shares committed to
be released (8,879 shares)
455
462
(640)
(7,047)
640
150
95,713
376
(4,550)
95
(21,098)
13
21,801
733
4,456
(663)
531
578
58
94
(1,083)
(5,189)
663
41,219
2,720
(895)
18
117,001
780
43,044
2,778
(1,035)
798
(1,558)
2,720
780
(895)
(7,047)
455
462
-
-
526
114,002
2,778
(1,558)
(1,035)
21,814
(1,083)
-
-
531
578
152
BALANCE, September 30, 2017
$
108
$
118,751
$
-
$
(26,707)
$
44,787
$
(760)
$
136,179
See notes to consolidated financial statements.
78
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
Amortization of intangible assets
Earnings on BOLI
(Accretion)amortization of deferred loan fees and costs
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
Share-based compensation expense
Deferred income tax expense (benefit)
Changes in assets and liabilities which provided (used) cash:
Accrued interest payable
Other, net
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 investment and mortgage-backed securities
Proceeds from sale of Polonia Bancorp Inc.'s investment portfolio acquired
Proceeds from sale of real estate owned
Acquisition, net of cash
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,
2017
2016
2015
(Dollars in Thousands)
$
2,778
$
2,720
$
2,232
225
325
(151)
-
(333)
177
526
(418)
-
(56)
(11)
461
(450)
917
(16)
112
(262)
(263)
3,503
(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)
772
(345)
(195)
1,097
83
2,712
-
(24,865)
-
67,105
14,506
6,865
(60,492)
-
-
-
852
-
-
360
-
2,259
-
(659)
5,931
2,990
553
349
112
(677)
(31)
152
(235)
-
(46)
(52)
2,686
(2,634)
1,109
140
530
(912)
(897)
5,915
(22,647)
(57,814)
(24,381)
150,561
1,255
19,228
(218,611)
498
(249)
(140)
-
20,863
67,154
438
3,966
-
(10,000)
(308)
(70,187)
79
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
Net Increase from FHLB short-term borrowings
Proceeds from FHLB long-term borrowings
Repayment of borrowing from Federal Home Loan Bank
Purchase treasury stock
Cash dividends paid
Release unallocated shares from ESOP Plan
Repayment of remaining principal balance of ESOP Loan
Increase in advances from borrowers for taxes
and insurance
Net cash provided by (used in) in financing activities
NET INCREASE (DECREASE) 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
2017
Year Ended September 30, 2016
2016
(Dollars in thousands)
2015
(21,609)
96,147
(7,000)
17,249
(3,393)
(6,272)
(1,035)
4,456
733
459
79,735
15,463
12,440
(3,548)
27,675
20,000
33,245
(2,607)
(7,047)
(895)
-
-
78
66,901
1,168
11,272
(9,353)
(16,598)
-
-
(340)
(14,691)
(2,201)
-
-
430
(42,753)
(34,110)
45,382
$
27,903
$
12,440
$
11,272
$
4,736
$
3,214
$
3,625
Income taxes paid
$
1,080
$
600
$
475
SUPPLEMENTAL DISCLOSURES OF NONCASH ITEMS:
Acquisition of noncash assets and liabilities
Real estate acquired in settlement of of loans
Assets acquired:
Investment securities
Loans
Premises
Core deposit intangible
Goodwill
Bank owned life insurance
Deferred Tax Assets
FHLB Stock
Other assets
Total assets
Liabilities assumed:
Deposits
Advances
Other liabilities
Total liabilities assumed
Net non-cash assets (liabilities) acquired
Cash acquired
See notes to consolidated financial statements.
$
-
$
581
$
869
67,154
160,785
6,702
822
6,102
4,316
3,492
3,399
2,273
255,045
$
$
172,243
57,232
7,722
237,197
17,848
22,911
$
$
80
PRUDENTIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2017 AND 2016
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 Bank (the “Bank”), a Pennsylvania-chartered,
FDIC-insured savings bank with seven full service branches in the Philadelphia area. 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, 2017 was PSB Delaware, Inc. (“PSB”), a Delaware-chartered
corporation established to hold certain investments. As of September 30, 2017, PSB had assets of $155.5
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.
On January 1, 2017, the Company completed its acquisition of Polonia Bancorp, Inc. (“Polonia Bancorp”)
and Polonia Bank, Polonia’s wholly owned subsidiary. Polonia Bancorp and Polonia Bank were merged
with and into the Company and the Bank, respectively.
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.
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, goodwill 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.
Certificates of Deposit—The Bank may purchase certificates of deposit issued by FDIC insured banks up
to $249,000 and for a period of one to three years.
81
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 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. Premiums are amortized and discounts are accreted
using the interest method over the estimated remaining term of the underlying security.
impairment —Management evaluates securities
Other-than-temporary
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 fair 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
82
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 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 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 quarterly cash
dividends and had its Aaa bond rating affirmed by Moody’s and AA+ rating affirmed by Standard and
Poor’s during 2017 and remain unchanged as of September 30, 2017.With consideration given to these
factors, management concluded that the stock was not impaired at September 30, 2017 or 2016.
83
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 office properties 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,
2017 or 2016. The Company paid $1.0 million, $895,000 and $2.2 million in cash dividends during the
years ended September 30, 2017, 2016 and 2015, respectively.
Goodwill – Goodwill represents the excess of cost over the identifiable net assets of businesses acquired.
Goodwill is recognized as an asset and is to be reviewed for impairment annually as of March 31 and
between annual tests when events and circumstances indicate that impairment may have occurred. The
Company’s goodwill and intangible assets are related to the acquisition of Polonia Bancorp on January 1,
2017.
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 approved the termination of the ESOP plan effective December 31, 2016. $102,000
of ESOP expenses were incurred in 2017 as the plan was active in first quarter 2017.
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. During the year ended September 30, 2017, the
Company repurchased 303,115 shares of common stock of unallocated shares held in a suspense account by the
Bank’s ESOP as collateral with an aggregate value of $5.2 million in order to payoff the associated loans as of
December 31, 2016 in connection with the termination of the Bank’s ESOP. In addition, 42,791 shares of common
84
stock were purchased in conjunction with the termination of the Polonia Bank ESOP as a result of the acquisition. The
remaining shares purchased were related to the Company buying shares for the benefit of the employee stock benefit.
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.
Comprehensive Income—Management presents in the consolidated statements 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, 2017,
2016 and 2015, 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, and unrealized holdings (loss) gain, net of tax,
on the fair value of interest rate swaps. 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 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 assets and
liabilities. 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
85
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.
Loans Acquired - Loans acquired including loans that have evidence of deterioration of credit quality
since origination and for which it is probable, at acquisition, that the Company will be unable to collect all
contractually required payments receivable, are initially recorded at fair value (as determined by the
present value of expected future cash flows) with no valuation allowance. Loans are evaluated individually
to determine if there is evidence of deterioration of credit quality since origination. The difference between
the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable
yield,” is recognized as interest income on a level-yield method over the life of the loan. Contractually
required payments for interest and principal that exceed the undiscounted cash flows expected at
acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment or as a loss accrual
or a valuation allowance. Increases in expected cash flows subsequent to the initial investment are
recognized prospectively through adjustment of the yield on the loan over its remaining estimated life.
Decreases in expected cash flows are recognized immediately as impairment. Any valuation allowances on
these impaired loans reflect only losses incurred after acquisition. Loans acquired with evidence of
deterioration of credit quality since origination were not material.
For purchased loans acquired that are not deemed impaired at acquisition, credit discounts representing the
principal losses expected over the life of the loan are a component of the initial fair value. Loans are
aggregated and accounted for as a pool of loans if the loans being aggregated have common risk
characteristics. Subsequent to the purchase date, the methods utilized to estimate the required allowance
for credit losses for these loans is similar to originated loans; however, the Company records a provision
for loan losses only when the required allowance exceeds any remaining credit discounts. The remaining
differences between the purchase price and the unpaid principal balance at the date of acquisition are
recorded in interest income over the life of the loans.
Business Combinations - At the date of acquisition the Company records the assets and liabilities of the
acquired companies on the Consolidated Statement of Financial Condition at their estimated fair value.
The results of operations for acquired companies are included in the Company’s Consolidated Statements
of Operations beginning at the acquisition date. Expenses arising from acquisition activities are recorded in
the Consolidated Statements of Operations during the period incurred. The difference between the
purchase price and the fair value of the net assets acquired (including identified intangibles) is recorded
as goodwill.
86
Reclassicfication of Comparative Amounts - Certain items previously reported have been reclassified to
conform to the current year’s reporting format. Such reclassifications did not affect consolidated net
statement of operations or consolidated stockholders’ equity.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from
Contracts with Customers (a new revenue recognition standard). The ASU’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 ASU specifies the accounting for certain costs to obtain or fulfill a contract with a
customer and expands disclosure requirements for revenue recognition. This ASU was to be is effective for
annual reporting periods beginning after December 15, 2016, including interim periods within that
reporting period; the effective date was deferred by a year discussed below. Because the guidance does not
apply to revenue associated with financial instruments, including loans and securities, we do not expect the
new standard, or any of the amendments, to result in a material change from our current accounting for
revenue because the majority of the Company's financial instruments are not within the scope of Topic
606. However, we do expect that the standard will result in new disclosure requirements, which are
currently being evaluated.
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 ASU 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 ASU (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 ASU 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 ASU 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 ASU 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 standard will have on the Company’s financial position and/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
87
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 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. The Company is currently assessing the practical expedients it may elect at
adoption, but does not anticipate the amendments will have a significant impact on the financial
statements. Based on the Company’s preliminary analysis of its current portfolio, the impact to the
Company’s statement of financial condition is estimated to result in less than a 1 percent increase in assets
and liabilities. The Company also anticipates additional disclosures to be provided at adoption.
In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815). The amendments in
this ASU apply to all reporting entities for which there is a change in the counterparty to a derivative
instrument that has been designated as a hedging instrument under Topic 815. The standards in this ASU
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 ASU 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 ASU 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 ASU on either a prospective basis or a modified retrospective basis. 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 2016-06, 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 Update 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, 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
88
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. We expect to
recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of
the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of
any such one-time adjustment or the overall impact of the new guidance on the consolidated financial
statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments, 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 ASU 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 ASU 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.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740), which requires recognition of
current and deferred income taxes resulting from an intra-entity transfer of any asset (excluding inventory)
when the transfer occurs. Consequently, the amendments in this ASU eliminate the exception for an intra-
entity transfer of an asset other than inventory. The amendments in this ASU are effective for public
business entities for fiscal years beginning after December 15, 2017, including interim periods within those
annual reporting periods. For all other entities, the amendments are effective for annual reporting periods
beginning after December 15, 2018, and interim reporting periods within annual periods beginning after
December 15, 2019. Early adoption is permitted for all entities as of the beginning of an annual reporting
period for which financial statements (interim or annual) have not been issued or made available for
issuance. That is, earlier adoption should be in the first interim period if an entity issues interim financial
statements. The amendments in this ASU should be applied on a modified retrospective basis through a
cumulative-effect adjustment directly to the amount of retained earnings as of the beginning of the period
of adoption. This ASU is not expected to have a significant impact on the Company’s financial statements.
In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810), which amends the
consolidation guidance on how a reporting entity that is the single decision maker of a VIE should treat
indirect interests in the entity held through related parties that are under common control with the reporting
entity when determining whether it is the primary beneficiary of that VIE. The primary beneficiary of a
VIE is the reporting entity that has a controlling financial interest in a VIE and, therefore, consolidates the
VIE. A reporting entity has an indirect interest in a VIE if it has a direct interest in a related party that, in
turn, has a direct interest in the VIE. Under the amendments, a single decision maker is not required to
consider indirect interests held through related parties that are under common control with the single
decision maker to be the equivalent of direct interests in their entirety. Instead, a single decision maker is
89
required to include those interests on a proportionate basis consistent with indirect interests held through
other related parties. This ASU is not expected to have a significant impact on the Company’s financial
statements.
In October 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), which requires
that a statement of cash flows explains the change during the period in the total of cash, cash equivalents,
and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts
generally described as restricted cash and restricted cash equivalents should be included with cash and cash
equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the
statement of cash flows. 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. The
amendments in this Update should be applied using a retrospective transition method to each period
presented. The Company is currently evaluating the impact the adoption of the standard will have on the
Company’s statement of cash flows.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the
Definition of a Business, which provides a more robust framework to use in determining when a set of
assets and activities (collectively referred to as a “set”) is a business. The screening process requires that
when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a
single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen
reduces the number of transactions that need to be further evaluated. Public business entities should apply
the amendments in this ASU to annual periods beginning after December 15, 2017, including interim
periods within those periods. All other entities should apply the amendments to annual periods beginning
after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.
The amendments in this ASU should be applied prospectively on or after the effective date. This ASU is
not expected to have a significant impact on the Company’s financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To
simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill
impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform
procedures to determine the fair value at the impairment testing date of its assets and liabilities (including
unrecognized assets and liabilities) following the procedure that would be required in determining the fair
value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments
in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the
fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge
for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss
recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public
business entity that is a U.S. Securities and Exchange Commission (“SEC”) filer should adopt the
amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years
beginning after December 15, 2019. A public business entity that is not an SEC filer should adopt the
amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years
beginning after December 15, 2020. All other entities, including not-for-profit entities, that are adopting
the amendments in this Update should do so for their annual or any interim goodwill impairment tests in
fiscal years beginning after December 15, 2021. This ASU is not expected to have a significant impact on
the Company’s financial statements.
In February 2017, the FASB issued ASU 2017-05, Other Income—Gains and Losses from the
Derecognition of Nonfinancial Assets (Subtopic 610-20). The amendments in this Update clarify what
constitutes a financial asset within the scope of Subtopic 610-20. The amendments also clarify that entities
90
should identify each distinct nonfinancial asset or in-substance nonfinancial asset that is promised to a
counterparty and to derecognize each asset when the counterparty obtains control. There is also additional
guidance provided for partial sales of a nonfinancial asset and when derecognition, and the related gain or
loss, should be recognized. The amendments in this Update are effective at the same time as the
amendments in Update 2014-09. Therefore, for public entities, the amendments are effective for annual
reporting periods beginning after December 15, 2017, including interim reporting periods within that
reporting period. For all other entities, the amendments in this Update are effective for annual reporting
periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods
beginning after December 15, 2019. The Company is currently evaluating the impact the adoption of this
standard will have on the Company’s financial position or results of operations.
In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs
(Subtopic 310-20). The amendments in this Update shorten the amortization period for certain callable debt
securities held at a premium. Specifically, the amendments require the premium to be amortized to the
earliest call date. The amendments do not require an accounting change for securities held at a discount;
the discount continues to be amortized to maturity. For public business entities, the amendments in this
Update are effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2018. For all other entities, the amendments are effective for fiscal years beginning after
December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. 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 should apply the amendments in this Update on a modified retrospective
basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period
of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in
accounting principle. 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 July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities
from Equity (Topic 480), and Derivative and Hedging (Topic 815). The amendments in Part I of this
Update change the classification analysis of certain equity-linked financial instruments (or embedded
features) with down-round features. When determining whether certain financial instruments should be
classified as liabilities or equity instruments, a down-round feature no longer precludes equity
classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments
also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding
equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a
derivative liability at fair value as a result of the existence of a down-round feature. For freestanding equity
classified financial instruments, the amendments require entities that present earnings per share (“EPS”) in
accordance with Topic 260 to recognize the effect of the down-round feature when it is triggered. That
effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS.
Convertible instruments with embedded conversion options that have down- round features are now
subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20,
Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The
amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic
480 that now are presented as pending content in the Accounting Standards Codification, to a scope
exception. Those amendments do not have an accounting effect. For public business entities, the
amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update
are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years
beginning after December 15, 2020. Early adoption is permitted for all entities, 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. The amendments in Part I
of this Update should be applied either retrospectively to outstanding financial instruments with a down-
round feature by means of a cumulative-effect adjustment to the statement of financial position as of the
91
beginning of the first fiscal year and interim period(s) in which the pending content that links to this
paragraph is effective or retrospectively to outstanding financial instruments with a down-round feature for
each prior reporting period presented in accordance with the guidance on accounting changes in paragraphs
250-10-45-5 through 45-10. The amendments in Part II of this Update do not require any transition
guidance because those amendments do not have an accounting effect. 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 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 850), the objective of
which is to improve the financial reporting of hedging relationships to better portray the economic results
of an entity’s risk management activities in its financial statements. In addition, the amendments in this
Update make certain targeted improvements to simplify the application and disclosure of the hedge
accounting guidance in current general accepted accounting principles. For public business entities, the
amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim
periods within those fiscal years. For all other entities, the amendments are effective for fiscal years
beginning after December 15, 2019, and interim periods beginning after December 15, 2020. Early
application is permitted in any period after issuance. For cash flow and net investment hedges existing at
the date of adoption, an entity should apply a cumulative-effect adjustment related to eliminating the
income with a
separate measurement of
corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year
that an entity adopts the amendments in this Update. The amended presentation and disclosure guidance is
required only prospectively. The Company is currently evaluating the impact the adoption of the standard
will have on the Company’s financial position or results of operations.
to accumulated other comprehensive
ineffectiveness
In September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from
Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC
Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of
Prior SEC Staff Announcements and Observer Comments. The SEC Observer said that the SEC staff
would not object if entities that are considered public business entities only because their financial
statements or financial information is required to be included in another entity’s SEC filing use the
effective dates for private companies when they adopt ASC 606, Revenue from Contracts with Customers,
and ASC 842, Leases. The Update also supersedes certain SEC paragraphs in the Codification related to
previous SEC staff announcements and moves other paragraphs, upon adoption of ASC 606 or ASC 842.
This Update is not expected to have a significant impact on the Company’s financial statements.
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:
2017
Year Ended September 30,
2016
2015
(Dollars in Thousands Except Per Share Data)
Basic
Diluted
Basic
Diluted
Basic
Diluted
Net income
$
2,778
$
2,778
$
2,720
$
2,720
$
2,232
$
2,232
Weighted average shares
outstanding
8,316,638
8,316,638
7,417,044
7,417,044
8,335,273
8,335,273
Effect of CSEs
-
357,871
-
217,701
-
114,817
Adjusted weighted average
shares used in earnings per share
computation
8,316,638
8,674,509
7,417,044
7,634,745
8,335,273
8,450,090
Earnings per share
$
0.33
$
0.32
$
0.37
$
0.36
$
0.27
$
0.26
As of September 30, 2017 and 2016, there were 555,185 and 554,445 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,
2017 and 2016 have exercise prices less than the then current market and are consider dilutive.
93
4. ACCUMULATED OTHER COMPREHENSIVE (LOSS)INCOME
The following table presents the changes in accumulated other comprehensive (loss)income by component net of tax:
Year Ended September 30,
2017
Unrealized gain(loss)
on AFS securities (a)
2017
Unrealized gain(loss)
on interest rate swaps
(a)
2017
Total other
comprehensive
income
2016
Unrealized
gain(loss) on AFS
securities (a)
2016
Unrealized gain(loss)
on interest rate swaps
(a)
2016
Total other
comprehensive
income
Beginning Balance
$
931
$
(133)
$
798
$
18
$
-
$
18
Other comprehensive (loss)income before reclassification
Amount reclassified from accumulated other comprehensive income
Total other comprehensive income (loss)
Ending Balance
(1,867)
(155)
(2,022)
464
-
464
(1,403)
(155)
(1,558)
1,189
(276)
913
(133)
-
(133)
1,056
(276)
780
$
(1,091)
$
331
$
(760)
$
931
$
(133)
$
798
(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 (loss)income for the year ended September 30, 2017, 2016 and 2015:
Year Ended September 30,
2017
2016
2015
Amount Reclassified Amount Reclassified
Amount Reclassified
from Accumulated
from Accumulated
from Accumulated
Other
Other
Other
Comprehensive
Comprehensive
Comprehensive
Details about other comprehensive income
Income (a)
Income (a)
Income (a)
Unrealized gains on available for sale securities:
Reclassification for net gains in net income
$
235
$
418
$
-
Tax effect
(80)
(142)
-
$
155
$
276
$
-
(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, 2017
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
FHLMC preferred stock
(Dollars in Thousands)
$
26,125
$
9
$
(335)
$
25,799
119,456
34,500
180,081
6
146
185
340
70
(1,475)
(285)
(2,095)
118,127
34,400
178,326
-
76
Total securities available for sale
$
180,087
$
410
$
(2,095)
$
178,402
Securities Held to Maturity:
U.S. government and agency obligations
State and political subdivisions
Mortgage-backed securities - U.S.
government agencies
$
33,500
20,781
$
229
165
$
(1,688)
(104)
$
32,041
20,842
7,003
304
(11)
7,296
Total securities held to maturity
$
61,284
$
698
$
(1,803)
$
60,179
95
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
(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
As of September 30, 2017 the Bank maintained $106.9 million in a 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.
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, 2017:
96
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
$
(335)
$
20,655
$
-
$
-
$
(335)
$
20,655
(1,135)
(285)
77,176
22,511
(340)
-
11,684
-
(1,475)
(285)
88,860
22,511
Securities Available for Sale:
U.S. government and agency obligations
Mortgage-backed securities -U.S.
government agencies
Corporate debt securities
Total securities available for sale
$
(1,755)
$
120,342
$
(340)
$
11,684
$
(2,095)
$
132,026
Securities Held to Maturity:
U.S. government and agency obligations
Mortgage-backed securities -U.S.s
government agencies
Corporate debt securities
State and political subdivisions
$
(1,688)
$
28,813
$
-
$
-
$
(1,688)
$
28,813
(11)
(104)
1,176
7,854
-
-
-
-
-
-
(11)
(104)
1,176
7,854
Total securities held to maturity
$
(1,803)
$
37,843
$
-
$
-
$
(1,803)
$
37,843
Total
$
(3,558)
$
158,185
$
(340)
$
11,684
$
(3,898)
$
169,869
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, 2017, 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 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 value
and the security’s remaining amortized cost is recognized in other comprehensive income (loss).
97
For the years ended September 30, 2017, 2016 and 2015, the Company determined that no OTTI had
occurred within the investment and mortgage-back securities portfolios.
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 six securities in a gross unrealized loss position for less than twelve
months having an aggregate depreciation of $335,000 or 1.3% 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, 2017.
U.S. Government agency issued mortgage-backed securities — At September 30, 2017, 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 $340,000 or 0.3% from the
Company’s amortized cost basis and consisted of nine securities. The securities in a gross unrealized loss
position experiencing a gross unrealized loss for less than 12 months was $1.1 million or 0.9% from the
Company’s amortized cost basis and consisted of 34 securities at September 30, 2017. 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, 2017.
Corporate debt securities — At September 30, 2017, the gross unrealized loss corporate debt securities in
the category of experiencing a gross unrealized loss for less than 12 months was $285,000 or 0.8% from
the Company’s amortized cost basis and consisted of 17 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,
2017.
State and political subdivision debt securities — At September 30, 2017, the gross unrealized loss state
and political subdivision debt securities in the category of experiencing a gross unrealized loss for less than
12 months was $104,000 or 0.5% from the Company’s amortized cost basis and consisted of 6 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, 2017.
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, 2016:
98
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
$
(50)
(19)
$
16,498
3,955
$
(52)
$
6,718
-
$
(102)
(19)
-
$
23,216
3,955
Securities Available for Sale:
Mortgage-backed securities -
US government agencies
Corporate debt securities
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
The amortized cost and fair value of debt securities by contractual maturity are shown below. Expected
maturities as of September 30, 2017 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.
September 30, 2016
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
$
-
2,867
22,601
28,813
-
2,953
22,479
27,451
-
6,058
25,975
28,592
$
-
6,078
25,872
28,249
(Dollars in Thousands)
$
$
Total
$
54,281
$
52,883
$
60,625
$
60,199
During the fiscal year ended September 30, 2017 and 2016, the Company recorded net realized gains of
$235,000 and $418,000, respectively, and gross proceeds from the from the sale of investment and
mortgage-backed securities of $20.9 million and $11.6 million, respectively.
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,
2017
2016
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 (fees) costs
Allowance for loan losses
$
(Dollars in Thousands)
351,298
$
21,508
127,644
145,486
488
4,240
1,943
233,531
12,478
79,859
21,839
99
3,286
799
652,607
(73,858)
(2,940)
(4,466)
351,891
(5,371)
1,697
(3,269)
Net loans
$
571,343
$
344,948
The Company originates loans to customers located primarily in its local market area. The ultimate
repayment of these loans at September 30, 2017 and 2016 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, 2017:
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
$
8,277
$
317
$
2,337
$
8,724
$
-
$
-
$
10
$
19,665
Collectively evaluated for impairment
343,021
21,191
125,307
136,762
488
4,240
1,933
632,942
Total loans
$
351,298
$
21,508
$
127,644
$
145,486
$
488
$
4,240
$
1,943
$
652,607
100
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
(Dollars in Thousands)
Leases
Consumer
Total
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
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, 2017:
One-to-four family residential
Multi-family
Commercial real estate
Construction and land development
Consumer
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
$
8,277
317
2,337
8,724
10
19,665
$
Recorded
Investment
$
8,277
317
2,337
8,724
10
19,665
$
Unpaid
Principal
Balance
$
9,245
317
2,449
11,105
10
23,126
$
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, 2016:
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
$
One-to-four family residential
Multi-family
Commercial real estate
Construction and land development
Commercial business
Total Loans
The following tables present the average investment in impaired loans and related interest income
recognized for the periods indicated:
September 30, 2017
One-to four-family residential
Multi-family residential
Commercial real estate
Construction and land development
Commercial business
Consumer
Total
Average Recorded
Investment
$
6,096
321
2,459
9,163
-
Income
Recognized on
Cash Basis
Income Recognized
on Accrual Basis
(Dollars in Thousands)
$
89
23
49
-
-
91
$
-
12
-
-
$
-
103
5
18,044
$
$
-
161
102
Average Recorded
Investment
$
5,099
344
3,565
September 30, 2016
Income Recognized
on Accrual Basis
(Dollars in Thousands)
$
Income
Recognized on
Cash Basis
129
24
96
$
101
-
12
62
9,604
-
8
18,620
$
$
-
249
$
-
175
September 30, 2015
Average Recorded
Investment
$
8,734
289
3,840
Income
Recognized on
Cash Basis
Income Recognized
on Accrual Basis
(Dollars in Thousands)
$
431
19
210
$
147
-
71
8,413
21,276
$
$
437
1,097
$
194
412
One-to four-family residential
Multi-family residential
Commercial real estate
Construction and land development
Commercial business
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, 2017
Substandard
(Dollars in Thousands)
Doubtful
Total
Loans
$
$
$
One-to-four residential
Multi-family residential
Commercial real estate
Construction and land development
Commercial business
Total Loans
$
-
21,191
125,298
136,763
488
283,740
$
1,635
-
1,449
-
-
3,084
3,878
317
888
8,723
-
13,806
-
$
-
-
-
-
$
-
5,513
21,508
127,635
145,486
488
300,630
$
$
$
Pass
Special
Mention
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
$
$
$
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, 2017
Performing
Non-
Performing
Total
Loans
One-to-four family residential
Leases
Consumer
Total Loans
One-to-four family residential
Leases
Consumer
Total Loans
(Dollars in Thousands)
$
2,764
-
-
2,764
$
343,021
4,240
1,943
349,204
$
$
345,785
4,240
1,943
351,968
$
$
September 30, 2016
Performing
Non-
Performing
Total
Loans
(Dollars in Thousands)
$
2,660
-
-
2,660
$
227,978
3,286
799
232,063
$
$
230,638
3,286
799
234,723
$
$
104
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:
September 30, 2017
30-89 Days
Past Due
90 Days +
Past Due
Total
Past Due
Total
Loans
Non-
Accrual
Current
$
$
(Dollars in Thousands)
$
$
$
346,877
21,508
125,157
136,762
488
4,240
1,874
636,906
1,746
-
1,000
-
-
-
69
2,815
2,675
-
1,487
8,724
-
-
-
12,886
4,421
-
2,487
8,724
-
-
69
15,701
351,298
21,508
127,644
145,486
488
4,240
1,943
652,607
$
5,107
-
1,566
8,724
-
-
15,397
$
$
$
$
$
$
90 Days+
Past Due
and Accruing
$
-
-
-
-
-
-
-
$
-
September 30, 2016
30-89 Days
Past Due
90 Days +
Past Due
Total
Past Due
Total
Loans
Non-
Accrual
Past Due
and Accruing
Current
(Dollars in Thousands)
$
$
$
$
$
$
228,904
12,478
78,513
11,551
99
3,286
799
335,630
1,860
-
-
-
-
-
-
1,860
2,767
-
1,346
10,288
-
-
-
14,401
4,627
-
1,346
10,288
-
-
-
16,261
233,531
12,478
79,859
21,839
99
3,286
799
351,891
4,244
-
1,346
10,288
-
-
-
15,878
$
-
-
-
-
-
-
-
$
-
$
$
$
$
$
$
One-to-four family residential
Multi-family residential
Commercial real estate
Construction and land development
Commercial business
Leases
Consumer
Total Loans
One-to-four family residential
Multi-family residential
Commercial real estate
Construction and land development
Commercial business
Leases
Consumer
Total Loans
Interest income on nonaccrual loans would have increased by approximately $636,000, $604,000, and
$279,000, during fiscal years ended September 30, 2017, 2016 and 2015, 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
105
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.
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, 2017 and 2016. Activity in the allowance is
presented for the years ended September 30, 2017 and 2016:
September 30, 2017
One- to
four-family
residential
Multi-
family
residential
Commercial
real estate
Construction
and land
development
Commercial
business
$ 1,627 $ 137 $ 859 $ 316
(In Thousands)
$ 1
Leases
Consumer Unallocated
Total
$ 21 $ 10 $ 298 $ 3,269
(140)
182
(428)
1,241
$
-
-
68
205
$
-
-
342
1,201
$
(1,819)
-
2,861
1,358
$
-
-
3
$
4
-
-
2
23
$
(16)
-
30
24
$
-
-
112
410
$
(1,975)
182
2,990
4,466
$
ALLL balance at September 30, 2016
Charge-offs
Recoveries
Provision
ALLL balance at September 30, 2017
Individually evaluated for impairment
Collectively evaluated for impairment
-
$
1,241
-
$
205
-
$
1,201
-
$
1,358
-
$
4
-
$
23
-
$
24
-
$
410
-
$
4,466
106
September 30, 2016
One- to
four-family
residential
Multi-
family
residential
Commercial
real estate
Construction
and land
development
Commercial
business
(In Thousands)
Leases
Consumer Unallocated Total
ALLL balance at September 30, 2015
Charge-offs
Recoveries
Provision
ALLL balance at September 30, 2016
$ 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
September 30, 2015
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
Loans acquired in the merger with Polonia were recorded at fair value with no carryover of the related
Allowance for Loan Losses. Management measured loan fair values based on loan file reviews, appraised
collateral values, expected cash flows, and historical loss factors of Polonia. The fair value of the loans
acquired was $160.8 million net of a $4.6 million discount. The discount is accreted to interest income
over the remaining contractual life of the loans. All loans that had a loan to value ratio of greater than 80%
were determined to have sufficient collateral to recover the carrying amount. Thus, none of the loans
acquired were considered to be purchased credit-impaired loans and any possible loss would be considered
immaterial.
Management established a provision for loan losses of $3.0 million, $225,000 and $735,000 during the
years ended September 30, 2017, 2016 and 2015, respectively. The provision for loan losses was deemed
necessary for fiscal 2017 due to the increase in the level of commercial real estate and construction loans
outstanding and charge-offs incurred during fiscal 2017. The Company believes that the allowance for loan
losses at September 30, 2017 is sufficient to cover all inherent and known losses associated with the loan
portfolio at such date. At September 30, 2017, the Company’s non-performing assets totaled $15.6
million or 1.7% of total assets as compared to $16.5 million or 2.8% of total assets at September
107
30, 2016. Non-performing assets at September 30, 2017 included five construction loans
aggregating $8.7 million, 33 one-to-four family residential loans aggregating $3.7 million, one
single-family residential investment property loan in the amount $1.4 million and five commercial
real estate loans aggregating $1.6 million. Non-performing assets also included at September 30,
2017 one real estate owned property consisting of a single-family residential property with a
carrying value of $192,000. At September 30, 2017, the Company had nine loans aggregating
$6.0 million that were classified as troubled debt restructurings (“TDRs”). Three of such loans
aggregating $4.9 million were designated non-performing as of September 30, 2017 and on non-
accrual status; one of such loans in the amount of $1.4 million has continued to make payments in
accordance with the restructured loan terms, but management continues to have concerns over the
borrower’s ability to make future payments and as a result has determined to not return the loan to
performing status. The remaining two TDRs classified non-accrual totaling $3.5 million are a part
of a troubled relationship totaling $10.7 million (after taking into account the previously disclosed
$1.9 million write-down recognized during the quarter ending March 31, 2017 related to this
borrowing relationship). The primary project of the borrower is the subject of litigation between
the Bank and the borrower and as a result, the project currently is not proceeding. Subsequent to
the commencement of the litigation, the borrower filed for bankruptcy under Chapter 11 of the
federal bankruptcy code in June 2017. The Bank has moved the underlying litigation noted above
with the borrower and the Bank from state court to the federal bankruptcy court in which the
bankruptcy proceeding is being heard. The remaining six TDRs have performed in accordance
with the terms of their revised agreements and have been placed on accruing status. As of
September 30, 2017, the Company had reviewed $19.7 million of loans for possible impairment
of which $12.7 million was classified substandard compared to $19.4 million reviewed for
possible impairment and $14.6 million of which was classified substandard as of September 30,
2016.
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 and
2015. There were no TDRs approved in 2017. All of the TDRs involved changes in the interest rates on the
loans; no debt was forgiven. At September 30, 2017, out of the 9 TDRs loans, six were performing and the
remaining three were classified as non-performing.
There were no TDRs established for the year ended September 30, 2017.
108
(amount in thousands)
One-to-four family residential
(amount in thousands)
Commerical real estate
Construction and land development
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
Number of
Loans
1
1
2
$
$
750
3,665
4,415
750
3,665
4,415
$
$
At September 30, 2017, the Company had seventeen consumer mortgages with a carrying amount of $1.9
million that are secured by residential real estate property for which foreclosure proceedings are in process
according to local jurisdictions.
109
7. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized by major classifications as follows:
Land
Buildings and improvements
Furniture and equipment
Total
Accumulated depreciation
September 30,
2017
2016
(Dollars in Thousands)
$
1,437
7,449
3,158
$
198
2,492
2,355
12,044
(4,240)
5,045
(3,701)
Total office properties and equipment,
net of accumulated depreciation
$
7,804
$
1,344
For the years ended September 30, 2017, 2016 and 2015, depreciation expense amounted to $553,000,
$325,000 and $304,000, respectively.
Lease expense was $383,000, $352,000 and $242,000 for the years ended September 30, 2017, 2016 and
2015, respectively. The Company has executed certain lease commitments is obligated to pay; $394,000
for fiscal year 2018, $369,000 for fiscal year 2019, $249,000 for fiscal year 2020, $253,000 for fiscal year
2021, $257,000 for fiscal year 2022 and $1.3 million thereafter.
8. DEPOSITS
Deposits consist of the following major classifications:
2017
Amount
September 30,
2016
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
$
9,375
54,267
76,272
101,743
154,750
239,575
1.5%
8.5%
12.0%
16.0%
24.3%
37.7%
$
3,804
34,984
55,552
70,924
97,418
126,519
0.7 %
9.3%
14.3%
18.2%
25.0%
32.5%
Total
$
635,982
100.0 %
$
389,201
100.0 %
110
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, 2017
(Dollars in Thousands)
$
236,407
65,576
48,723
12,372
31,247
$
394,325
Certificates of deposit of $250,000 or more at September 30, 2017 and 2016 totaled $28.9 million and
$17.0 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
2017
Year Ended September 30,
2016
(Dollars in Thousands)
2015
$
192
$
165
$
323
55
3,683
3,930
83
2,613
2,861
208
2,899
3,430
$
$
$
9. ADVANCES FROM FEDERAL HOME LOAN BANK – SHORT TERM
The year ended September 30, outstanding balances and related information of short-term borrowings from
the FHLB are summarized follows:
(Dollar amount in thousands)
2017
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
21,784
35,000
1.31%
0.84%
20,000
8,975
20,000
1.17%
1.23%
As of September 30, 2017 and 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 125
bps and 117 bps respectively.
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.
111
10. ADVANCES FROM FEDERAL HOME LOAN BANK – LONG TERM
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, 2017 are as follows:
Type
Maturity Date
Coupon
Call Date
Fixed Rate - Amortizing
Fixed Rate - Amortizing
Fixed Rate - Amortizing
1-Dec-17
18-Nov-19
15-Aug-23
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
17-Nov-17
4-Dec-17
19-Mar-18
19-Mar-18
20-Jun-18
25-Jun-18
27-Aug-18
15-Nov-18
16-Nov-18
26-Nov-18
3-Dec-18
16-Aug-19
9-Oct-19
26-Nov-19
22-Jun-20
24-Jun-20
27-Jul-20
17-Aug-20
9-Oct-20
27-Jul-21
28-Jul-21
29-Jul-21
19-Aug-21
7-Oct-21
12-Oct-21
6-Jun-22
6-Sep-22
22-Sep-22
1.16%
1.53%
1.94%
1.64%
1.20%
1.15%
2.53%
2.13%
1.86%
2.09%
4.15%
1.89%
1.40%
1.81%
1.54%
2.66%
2.54%
2.35%
2.60%
2.85%
1.38%
3.06%
2.92%
1.52%
1.48%
1.42%
1.55%
3.19%
3.23%
2.05%
1.94%
2.11%
2.22%
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
(a)
2016
2017
Amount
Amount
(Dollars in Thousands)
$
505
3,044
1,974
5,523
$
2,511
4,382
-
6,893
$
$
10,000
2,000
5,029
5,041
3,011
3,016
7,174
3,014
7,500
2,008
3,000
3,056
2,034
3,062
3,000
2,054
249
2,068
2,061
249
249
249
249
2,089
2,084
10,000
249
5,000
88,795
10,000
2,000
-
-
-
-
-
-
7,500
-
3,000
-
-
-
-
-
249
-
-
249
249
249
249
-
-
-
-
-
23,745
$
$
Total
$
94,318
$
30,638
112
Advances from the FHLB with coupon rates ranging from 1.15% to 4.15% are as follows.
2018
2019
2020
2021
2022
2023
$
$
37,456
20,305
13,076
3,394
19,766
321
94,318
2.21%
1.74%
2.59%
2.40%
2.31%
1.94%
2.19%
The Bank maintains a blanket collateral agreement using qualifying loans with the FHLB for future
borrowing needs. At September 30, 2017, the Bank had the ability to obtain $277.5 million of additional
FHLB advances.
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:
2017
Year Ended September 30,
2016
(Dollars in Thousands)
2015
Current:
Federal expense
Total current taxes
Deferred income tax (benefit) expense
Total income tax provision
$
801
801
140
$
941
$
1,275
1,275
(16)
$
1,259
$
461
461
(345)
$
116
113
Items that gave rise to significant portions of deferred income taxes are as follows:
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 available for sale securities
Unrealized losses on interest rate swaps
Deferred compensation
Goodwill
Purchase accounting adjustments
Other
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
Unrealized gains on interest rate swaps
481(a)Adjustment
Deferred loan fees
Total deferred tax liabilities
Net deferred tax asset
September 30,
2017
2016
(Dollars in Thousands)
$
1,675
349
12
476
98
15
569
-
1,439
148
731
254
90
5,856
(378)
5,478
$
1,289
163
13
378
96
18
-
69
-
-
-
-
434
2,460
(378)
2,082
332
-
171
-
884
1,387
4,091
$
423
500
-
12
578
1,513
569
$
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 at both September 30, 2017 and 2016. The gross deferred tax
assets related to capital loss carryforwards increased in the aggregate by $98 thousand during the year
ended September 30, 2017, primarily due to the sale of AFS investment securities acquired from the
Polonia Bancorp acquisition.
114
The income tax expense differs from that computed at the statutory federal corporate tax rate as follows:
2017
Percentage
of Pretax
Income
Amount
$
1,265
34.0 %
Year Ended September 30,
2016
Amount
Percentage
of Pretax
Income
(Dollars in Thousands)
1,353
$
34.0 %
2015
Percentage
of Pretax
Income (Loss)
Amount
$
798
34.0 %
-
(109)
80
(230)
(39)
(26)
-
(2.9)
2.1
(6.2)
(1.1)
(0.6)
(156)
-
-
(113)
151
24
(3.9)
-
-
(2.8)
3.8
0.5
(677)
-
-
(117)
126
(14)
(28.8)
-
-
(5.0)
5.4
(0.6)
Tax at statutory rate
Adjustments resulting from:
Valuation allowance
Tax exempt income
Nondeductible merger expenses
Income from bank owned life insurance
Employee benefit plans
Other
Income tax expense
$
941
25.3 %
$
1,259
31.6 %
$
116
5.0 %
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. During fiscal 2017, the Internal Revenue Service conducted an audit of the Company’s tax
returns for the year ended September 30, 2014, and no adverse findings were reported. The Company’s
federal and state income tax returns for taxable years through September 30, 2014 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, 2017 and 2016, that the
Company and the Bank met all regulatory capital adequacy requirements to which they each are subject.
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.
115
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)
To Be
Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
$
130,128
119,189
14.81 %
13.59
N/A
35,093
$
N/A
4.0 %
N/A
43,866
$
N/A
5.0 %
130,128
119,189
130,128
119,189
134,963
124,024
23.94
21.97
23.94
21.97
24.83
22.86
N/A
24,411
N/A
32,548
N/A
43,397
N/A
4.5
N/A
6.0
N/A
8.0
N/A
35,260
N/A
43,397
N/A
54,247
N/A
6.5
N/A
8.0
N/A
10.0
$
113,205
100,552
20.41 %
18.15
N/A
22,157
$
N/A
4.0 %
N/A
27,697
$
N/A
5.0 %
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
4.5
N/A
6.0
N/A
8.0
N/A
19,024
N/A
23,415
N/A
29,268
N/A
6.5
N/A
8.0
N/A
10.0
September 30, 2017:
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, 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
116
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, 2017, 2016 and 2015 was $379,000,
$256,000 and $623,000, respectively. There are no collective bargaining agreements in place that require
contributions to the plan. Additional information regarding the plan as of September 30, 2017 is noted
below:
Legal Name of Plan
Plan Employer Identification Number
The Company's Contribution for the year ended
September 30, 2017
Are Company's Contributions more than 5% of total
contributions?
Funded Status
Pentegra Defined Benefit Plan for Financial
Institutions
13-5645888
$379,000
No
95.06%
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 2016, participation in 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, 2017, 2016 and 2015.
As of December 31, 2016, the Boards of Directors of the Company and the Bank voted to terminate the
Bank’s employee stock ownership plan (“ESOP”) effective December 31, 2016. The Company has
received a determination letter from the Internal Revenue Service in connection with the termination of the
ESOP and the final allocation is anticipated to be made to the individual participants during December
2017. The Bank maintained the ESOP for substantially for the benefit all its full-time employees. The
ESOP purchased 427,057 shares of common stock for an aggregate cost of approximately $4.5 million in
fiscal 2005 in connection with the Bank’s mutual holding company reorganization. The ESOP purchased
in connection with the second-step conversion of the Bank an additional 255,564 shares during December
2013 and an additional 30,100 shares at the beginning of January 2014, of the Company’s common stock
for an aggregate cost of approximately $3.1 million. The shares were purchased with the proceeds of two
loans from the Company. 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 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 from
the suspense account, 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 upon release differs from the cost of such shares, the difference is charged or credited
to equity as additional paid-in capital. In connection with the termination of the ESOP, the ESOP was
required to repay the outstanding indebtedness the collateral held in the suspense account. As of September
30, 2017, the ESOP held 394,156 shares of which a total of 243,734 shares were allocated to participants,
303,115 shares were used to pay-off the remaining $5.2 million balance the two loans used to fund the
117
ESOP plan and released an additional 35,517 shares as of December 31, 2016. The expense relating to the
ESOP for the years ended September 30, 2017, 2016 and 2015 was $152,000, $526,000 and $467,000,
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. Shares subject to awards under the RRP generally vest at the rate of 20% per year
over five years. 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. In August 2016, the Company granted
7,473 shares under the 2008 RRP and 3,207 shares under the 2014 SIP. In March 2017, the Company
granted 17,128 shares under the 2014 SIP.
During the year ended September 30, 2017, approximately $578,000 was recognized in compensation
expense for the RRP. Tax benefits of $286,000 were recognized during the year ended September 30,
2017. Tax benefits of $219,000 were recognized during the year ended September 30, 2016. During the
year ended September 30, 2016, approximately $463,000 was recognized in compensation expense for the
RRP. At September 30, 2017, approximately $1.5 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, 2017 and
2016 is presented in the following table:
Year Ended
September 30, 2017
Number of
Shares
Weighted Average
Grant Date Fair Value
$
$
12.03
17.43
10.47
11.72
12.79
Nonvested stock awards at beginning of year
Issued
Forfeited
Vested
Nonvested stock awards at the end of the period
172,788
17,128
(1,467)
(45,855)
142,594
118
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, 2017, all of
the options had been awarded under the Option Plan. As of September 30, 2017, 544,802 options were
vested under the Option Plan. The 2014 SIP reserved up to 714,145 shares for issuance pursuant to
options. Options to purchase 605,000 shares were awarded during February 2015. During August
2016, the Company granted 18,866 shares under the Option Plan and 8,634 shares under the 2015 SIP.
In March 2017, the Company granted 22,828 shares under the 2014 SIP. In May 2017, the Company
granted 25,000 shares under the 2014 SIP.
119
A summary of the status of the Company’ stock options under the Stock Option Plan as of September
30, 2017 and 2016 and changes during the year ended September 30, 2017 and 2016 are presented
below:
Year Ended
September 30, 2017
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
921,909
47,828
(43,890)
(3,283)
922,564
554,802
$
$
$
11.70
17.92
11.41
11.84
12.04
11.47
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
Exercised
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 4.2 years for options outstanding
as of September 30, 2017.
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, $2.13 for options granted during fiscal
2016 and $3.18 for options granted during fiscal 2017. 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%. The fair value for grants made in fiscal 2017 was estimated on
the date of grant using the Black-Scholes pricing model with the following assumptions: an exercise and
120
fair value of $17.43, term of seven years, volatility rate of 14.37%, interest rate of 2.22% and a yield
rate of 0.69%.
During the year ended September 30, 2017, $531,000 was recognized in compensation expense for the
Option Plan. A tax benefit of $146,000 was recognized during the year ended September 30, 2017.
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. At
September 30, 2017, approximately $1.3 million of additional compensation expense for awarded
options remained unrecognized. The weighted average period over which this expense will be
recognized is approximately 3.0 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, 2017, is being utilized to hedge $20.0 million in floating rate debt and a
$1.1 million commercial loan. Below is a summary of the interest rate swap agreements and the terms
as of September 30, 2017.
Natinal
Amount
Pay
Rate
2017
Receive
Rate
(Dollars in thousands)
Maturity
Date
Unrealized
Gain
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-26
$
217
223
62
$
502
Natinal
Amount
Pay
Rate
2016
Receive
Rate
(Dollars in thousands)
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-26
$
(92)
(103)
(7)
$
(202)
15. COMMITMENTS AND CONTINGENT LIABILITIES
At September 30, 2017, the Company had $45.9 million in outstanding commitments to originate fixed
and variable-rate loans with market interest rates ranging from 4.75% to 5.50%. 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%. The aggregate undisbursed portion of
loans-in-process amounted to $73.9 million and $5.4 million, respectively, at September 30, 2017 and
2016.
121
The Company also had commitments under unused lines of credit of $7.4 million and $3.3 million,
respectively, and letters of credit outstanding of $1.4 million and $1.9 million, respectively, at
September 30, 2017 and 2016.
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, 2017, the
exposure, which represents a portion of credit risk associated with the sold interests, amounted to $1.8
million. 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
(See “Item#3 legal proceedings”). 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, 2017 and 2016, 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:
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.
122
Those assets as of September 30, 2017 which are to be 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
Corporate bonds
FHLMC preferred stock
Interest rate swap contracts
Total
-
$
-
-
76
-
76
$
$
$
25,799
118,127
34,400
-
502
178,828
-
$
-
-
-
-
$
-
25,799
118,127
34,400
76
502
178,904
$
$
Those assets as of September 30, 2016 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
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:
$
-
$
-
$
$
202
202
$
-
$
-
$
$
202
202
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.
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 $19.7 million and $19.4 million at September 30, 2017
and 2016, respectively.
123
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
Impaired loans
Real estate owned
Total
Impaired loans
Real estate owned
Total
Level 1
$
-
$
Level 1
$
-
$
-
-
-
-
At September 30, 2017
(Dollars in Thousands)
Level 2
$
Level 3
$
-
-
$
-
$
Total
$
19,665
192
19,857
$
19,665
192
19,857
At September 30, 2016
(Dollars in Thousands)
Level 2
$
$
-
-
-
Level 3
$
19,429
581
20,010
$
Total
$
$
19,429
581
20,010
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:
Impaired loans
Fair Value
$
19,665
Real estate owned
$
192
Impaired loans
Fair Value
$
19,429
Real estate owned
$
581
At September 30, 2017
(Dollars in Thousands)
Unobservable Input
Management discount for
selling costs, property type and
market volatility (2)
Range/
Weighted Ave.
6% to 57%
discount/ 7%
Management discount for
10% discount
selling costs, property type and
market volatility (2)
Valuation
Technique
Property
appraisals
(1) (3)
Property
appraisals
(1) (3)
At September 30, 2016
(Dollars in Thousands)
Valuation
Technique
Property
appraisals
(1) (3)
Property
appraisals
(1) (3)
Unobservable Input
Management discount for
selling costs, property type and
market volatility (2)
Management discount for
selling costs, property type and
market volatility (2)
Range/
Weighted Ave.
6% to 46%
discount 10%
10% discount
(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.
124
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.
Carrying
Amount
Fair
Value
(Level 1)
(Dollars in Thousands)
Fair Value Measurements at
September 30, 2017
(Level 2)
(Level 3)
$
27,903
1,604
$
27,903
1,604
$
27,903
1,604
-
$
-
-
$
-
178,402
61,284
571,343
2,825
6,002
502
28,048
59,956
48,797
101,743
394,325
1,933
20,000
94,318
2,207
178,402
60,179
575,876
2,825
6,002
502
28,048
59,956
48,797
-
101,743
398,078
1,933
20,000
93,579
2,207
76
-
-
2,825
6,002
-
28,048
59,956
48,797
101,743
-
1,933
20,000
-
2,207
178,326
-
60,179
-
-
-
502
-
-
-
-
-
-
-
-
-
575,876
-
-
-
-
-
-
-
398,078
-
-
93,579
-
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
Interest rate swap contracts
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
125
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
70,924
225,383
1,403
20,000
30,222
1,748
202
42
-
-
1,928
2,463
13,055
38,788
55,552
70,924
-
1,403
20,000
-
1,748
-
138,652
-
40,700
-
-
-
-
-
-
-
-
-
-
-
-
202
-
344,100
-
-
-
-
-
-
225,383
-
-
30,222
-
-
Assets:
Cash and cash equivalents
Certificates 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
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.
126
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.
17.
GOODWILL AND OTHER INTANGIBLE ASSETS
The Company’s goodwill and intangible assets are related to the acquisition of Polonia Bancorp on
January 1, 2017.
Goodwill
Core deposit intangible
Balance
October 1,
2016
$
-
-
$
-
Balance
Additions/
Adjustments Amortization
September 30, Amortization
2017
Period
$
$
6,102
822
6,924
$
-
(112)
(112)
$
$
$
6,102
710
6,812
10 years
As of September 30, 2017, the future fiscal periods amortization expense for the core deposit intangible
is:
(In thousands)
2018
2019
2020
2021
2022
Thereafter
$138
123
108
93
77
169
127
18.
BUSINESS COMBINATIONS
On January 1, 2017, the previously announced proposed acquisition (the “Merger”) of Polonia Bancorp
pursuant to the Agreement of Plan of Merger by and between Polonia Bancorp and the Company, dated as of
June 2, 2016 (the “Merger Agreement”) was completed. The shareholders of Polonia Bancorp had the option to
receive $11.09 per share in cash or 0.7460 of a share of the Company common stock for each share of Polonia
Bancorp common stock held thereby, subject to allocation provisions to assure that, in the aggregate, Polonia
Bancorp shareholders received total merger consideration that consisted of 50% stock and 50% cash. As a result
of Polonia Bancorp shareholder stock and cash elections and the related proration provisions of the Merger
Agreement, the Company issued 1,274,197 shares of its common stock and approximately $18.9 million was
paid in cash for the Merger.
In connection with the Merger, the consideration paid and the estimated fair value of identifiable assets
and liabilities assumed as of the date of the Merger are summarized in the following table:
(dollars in thousands)
Consideration paid:
Common stock issued (1,274,197 shares) at a fair value
per share of $17.12 per share.
Cash for common stock exchanged
Cash in lieu of fractional shares
Assets acquired:
Cash and due from banks
Investments available for sale
Loans
Premises and equipment
Deferred taxes
Bank-owned life insurance
Core deposit intangible
Regulatory Stock
Other assets
Total assets
Liabilities assumed:
Deposits
FHLB advances, short-term
FHLB advances, long -term
Other liabilities
Total liabilities
Net assets acquired
Goodwill resulting from the acquisition
$
21,814
18,944
1
40,759
22,911
67,154
160,785
6,702
3,492
4,316
822
3,399
2,273
271,854
172,243
7,000
50,232
7,722
237,197
34,657
6,102
$
128
The following table summarizes the fair value of the assets acquired and the liabilities assumed as of the date of
acquisition of Polonia Bancorp. The core deposit intangible will be amortized over 10 years using an accelerated
method. Goodwill will not be amortized, but instead will be evaluated for impairment.
(Dollars in thousands, except per share data)
Purchase Consideration
Polonia Common Stock:
Total shares of common stock outstanding
Common stock issued capital
Shares redeemed for cash capital
Prudential common stock issued (conversion rate 0.7460)
Prudential closing price at December 31, 2016
Cash-out rate paid per share for Polonia Bancorp common stock
Purchase consideration assigned to Polonia shares exchanged for Company Common Stock
Cash Paid to Polonia for Polonia Bancorp shares
Cash Paid for fractional shares
Net Assets Acquired
Polonia Bancorp stockholders' equity
Core deposit intangible assets
Estimated adjustments to reflect assets acquired at fair value:
Investment securities
Portfolio loans
Allowance for loan and lease losses
Premises
Other assets
Deferred taxes
Total fair value adjustment to assets acquired
Estimated adjustments to reflect liabilities assumed at fair value:
Time deposits
Borrowings
Total fair value adjustment to liabilities assumed
Total net assets acquired
Goodwill resulting from merger
3,416,311
1,708,155
1,708,156
1,274,197
17.12
$
$
11.09
$
21,814
$
18,944
$
1
$
40,759
37,101
822
(781)
(4,643)
1,002
2,850
(73)
505
(318)
(894)
(1,232)
(2,126)
34,657
6,102
$
129
Pro Forma Income Statements (unaudited)
The following pro forma income statements for the year ended September 30, 2017 and 2016 presents pro
forma results of operations of the combined institution (Polonia Bancorp and the Company) had the merger
occurred on October 1, 2015. The pro forma income statement adjustments are limited to the effects of fair
value mark amortization and accretion and intangible asset amortization. No cost savings or additional merger
expenses have been included in the pro forma results of operations for the years ended September 30, 2017 and
2016.
Actual from
acquistion date
through
September 30,
2017
$
$
3,467
-
3,467
250
2,380
1,337
455
882
8,316,638
357,871
8,674,509
0.11
0.10
$
$
(Dollars in thousands, except per share data)
Net interest income
Provision for loan and leases losses
Net interest income after provision for
loan and lease losses
Non-interest income
Non-interest expenses
Income before income taxes
Income tax expense
Net income
Per share data
Weighed average basic shares
outstanding
Dilutive shares
Adjusted weighted-average dilutive
shares
Basic earnings per common share
Dilutive earnings per common share
Twelve Months ended
September 30,
2017
2016
$
22,551
2,990
19,561
2,205
20,287
1,479
225
1,254
$
8,316,638
357,871
8,674,509
0.15
0.14
$
$
29,702
2,990
26,712
3,365
29,229
848
81
767
$
8,691,241
224,037
8,915,278
0.09
0.09
$
$
Non-recurring merger costs in the table above
3,559
723
(a) Weighted-average basis shares outstanding for both periods reflected are the Company’s weighted-
average shares plus the 1,274,197, shares that were issued as consideration for the merger. The
dilutive shares reflect the Company’s estimated diluted shares for the period
130
19.
PRUDENTIAL BANCORP, INC. (PARENT COMPANY ONLY)
STATEMENT OF FINANCIAL CONDITION
September 30,
Assets:
Cash
ESOP loan receivable
Investment in Bank
Other assets
Total assets
2017
2016
(Dollars in Thousands)
$
9,792
-
125,240
1,147
$
6,541
5,277
101,350
834
$
136,179
$
114,002
Total stockholders' equity
$
136,179
$
114,002
INCOME STATEMENT
For the year ended September 30,
2017
2016
2015
(Dollars in thousands)
Interest on ESOP loan
Equity in the undistributed earnings of the Bank
Other income
$
59
3,255
-
$
247
2,911
-
$
263
2,549
9
Total income
Professional services
Other expense
Total expense
3,314
3,158
2,821
369
413
782
161
376
537
306
447
753
Income before income taxes
2,532
2,621
2,068
Income tax benefit
(246)
(99)
(164)
Net income
$
2,778
$
2,720
$
2,232
131
CASH FLOWS
For the year ended September 30,
Operating activities:
Net income
Decrease (increase) in assets
Equity in the undistributed earnings of the Bank
2017
2016
2015
(Dollars in thousands)
$
2,778
46
(3,255)
$
2,720
(579)
(2,911)
$
2,232
88
(2,549)
Net cash used in operating activities
(431)
(770)
(229)
Investing activities:
Repayments received on ESOP loan
Acquisitions, net of cash
Net cash provided by investing activities
Financing Activities:
Purchase of treasury stock
Cash dividends paid
Net cash used in by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
5,277
3,966
9,243
(4,526)
(1,035)
(5,561)
3,251
6,541
341
-
341
325
-
325
(7,047)
(895)
(14,691)
(2,222)
(7,942)
(16,913)
(8,371)
(16,817)
14,912
31,729
Cash and cash equivalents, end of year
$
9,792
$
6,541
$
14,912
132
20. CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited quarterly financial data for the years ended September 30, 2017 and 2016 is as follows:
1st
Qtr
September 30, 2017
2nd
Qtr
3rd
Qtr
(In thousands)
September 30, 2016
4th
Qtr
1st
Qtr
2nd
Qtr
3rd
Qtr
4th
Qtr
(In thousands)
$ 4,505 $ 6,671 $ 7,430 $ 7,737
858 1,373 1,377 1,656
$ 4,056 $ 4,366 $ 4,474 $ 4,587
800 849 824 853
3,647 5,298 6,053 6,081
185 2,365 30 410
3,256 3,517 3,650 3,734
0 75 150 0
3,462 2,933 6,023 5,671
3,256 3,442 3,500 3,734
358 518 625 699
2,720 6,763 3,500 3,587
274 209 400 454
2,896 2,796 2,815 2,783
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(loss) before income tax expense
Income tax expense(benefit)
1,100 (3,312)
370 (1,171)
3,148 2,783
1,031 711
634 855 1,085 1,405
221 307 308 423
Net income
Per share:
Earnings per share - basic
Earnings per share - diluted
Dividends per share
$ 730 $ (2,141)
$ 2,117 $ 2,072
$ 413 $ 548 $ 777 $ 982
$ 0.09 $ (0.27) $ 0.25 $ 0.26
$ 0.09 $ (0.27) $ 0.25 $ 0.24
$ 0.03 $ 0.03 $ 0.03 $ 0.03
$ 0.05 $ 0.08 $ 0.10 $ 0.14
$ 0.05 $ 0.07 $ 0.10 $ 0.14
$ 0.03 $ 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(benefit)
Net income
Per share:
Earnings per share - basic
Earnings per share - diluted
Dividends per share
1st
Qtr
September 30, 2015
2nd
Qtr
3rd
Qtr
(In thousands)
4th
Qtr
$ 4,240 $ 4,304 $ 4,055 $ 4,081
901 871 851 807
3,339 3,433 3,204 3,274
75 300 210 150
3,264 3,133 2,994 3,124
350 1,988 445 225
2,926 3,511 3,432 3,306
688 1,610 7 43
217 (91)
30
(40)
$ 471 $ 1,701 $ 47 $ 13
$ 0.05 $ 0.20 $ 0.01 $ 0.01
$ 0.05 $ 0.18 $ 0.01 $ -
$ 0.03 $ 0.03 $ 0.18 $ 0.03
Due to rounding, the sum of the earnings per share in individual quarters may differ from reported amounts.
133
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, 2017.
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
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, 2017. 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
134
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 quarter of fiscal 2017 that has materially affected, or is reasonably likely to materially
affect, the internal control over financial reporting.
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 21, 2018, is expected to be which filed with the Securities and Exchange
Commission on or about January 15, 2018 ("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.prudentialbanker.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.
135
Equity Compensation Plan Information. The following table provides information as of September 30,
2017 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 a share of Company common stock for each share of Old Prudential Bancorp held
by other than the MHC.
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)
1,065,158(1)
$12.14(1)
336,229
--
1,065,158
-----
$12.14
--
336,229
Plan Category
Equity compensation plans
approved by security holders
Equity compensation plans
not approved by security
holders
Total
___________________
(1)
Includes 142,594 shares subject to restricted stock grants which were not vested as of September 30,
2017. 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 Two) – 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.
136
(3)
The following exhibits are filed as part of this Form 10-K, and this list includes the Exhibit Index.
Exhibit No.
3.1
3.2
4.0
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
31.1
31.2
32.0
101.INS
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF
Description
Articles of Incorporation of Prudential Bancorp, Inc. (1)
Bylaws of Prudential Bancorp, Inc. (1)
Form of Stock Certificate of Prudential Bancorp, Inc. (1)
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 June 1, 2017 between Jack
Rothkopf and Prudential Savings Bank (6)*
2014 Stock Incentive Plan(7)*
Severance Agreement between Prudential Savings Bank and Jack E. Rothkopf (8)*
Separation Agreement between Prudential Bancorp, Inc., Prudential Savings Bank
and Joseph R. Corrato (9)*
Amended and restated Employment Agreement between Prudential Bancorp, Inc.,
Prudential Savings Bank and Dennis Pollack (10)*
Retirement agreement between Prudential Bancorp, Inc., Prudential Savings Bank
and Thomas A. Vento (11)*
Amendment No. 1 to the Amended and Restated Employment Agreement between
Prudential Bancorp, Inc., Prudential Bank and Dennis Pollack (12)*
Employment Agreement between Prudential Bancorp, Inc., Prudential Savings
Bank and Anthony V. Migliorino (12)*
Amendment No. 1 to the Employment Agreement between Prudential Bancorp,
Inc., Prudential Bank and Anthony V. Migliorino (13)*
Split Dollar Endorsement Agreement dated June 1, 2017 between Dennis Pollack
and the Bank (6)*
Split Dollar Endorsement Agreement dated June 1, 2017 between Anthony V.
Migliorino and the Bank (6)*
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.
137
*
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
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 June 1, 2017 and filed with the SEC on June 1, 2017 (SEC File No. 000-51214).
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, Inc. 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, Inc. dated May 3,
2016 and filed with the SEC on May 3, 2016 (SEC File No. 000-55084).
Incorporated by reference from the Current Report on Form 8-K of Prudential Bancorp, Inc. dated May
16, 2016 and filed with the SEC on May 16, 2016 (SEC File No. 000-55084).
Incorporated by reference from the Quarterly Report on Form 10-K of Prudential Bancorp, Inc. for the
quarter ended December 31, 2015 filed with the SEC on February 9, 2016 (SEC File No. 000-55084).
Incorporated by reference from the Current Report on Form 8-K of Prudential Bancorp, Inc. dated
December 19, 2016 and filed with the SEC on December 22, 2016 (SEC File No. 000-55084).
Incorporated by reference from the Current Report on Form 8-K of Prudential Bancorp, Inc. dated
November 17, 2017 and filed with the SEC on November 22, 2017 (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.
138
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, 2017
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/ A. J. Fanelli
A. J. Fanelli
Director
/s/ John C. Hosier
John C. Hosier
Director
/s/ Francis V. Mulcahy
Francis V. Mulcahy
Director
/s/ Dennis Pollack
Dennis Pollack
Director, President and Chief Executive President
/s/ Jack E. Rothkopf
Jack E. Rothkopf
Senior Vice President, Chief Financial Officer, Treasurer
Chief Accounting Officer
December 14, 2017
December 14, 2017
December 14, 2017
December 14, 2017
December 14, 2017
December 14, 2017
[This Page Intentionally Left Blank]
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23.1
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, 2017,
relating to our audits of the consolidated financial statements and internal control over financial
reporting, which are incorporated in this Annual Report on Form 10-K of Prudential Bancorp,
Inc. for the year ended September 30, 2017.
/s/ SR Snodgrass, P.C.
Cranberry Township, Pennsylvania
December 14, 2017
SECTION 1350 CERTIFICATION OF THE
CHIEF EXECUTIVE OFFICER
I, Dennis Pollack, certify that:
EXHIBIT 31.1
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;
(c)
Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in
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):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control
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, 2017
/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;
(c)
Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in
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):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control
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, 2017
/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, 2017 (“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, 2017
Date: December 14, 2017
/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.