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, 2018
-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
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES
NO
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
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 every Interactive Date File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit 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, a smaller
reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller
reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
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 $18.14 on March 29,
2018, the last business day of the Registrant's second quarter was approximately $156.4 million (9,007,996) shares issued and outstanding less
approximately 389,000 shares held by affiliates at $18.14 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 3, 2018, there were 8,929,129 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 into Part III,
DOCUMENTS INCORPORATED BY REFERENCE
Items 10-14 of this Form 10-K.
Prudential Bancorp, Inc. and Subsidiaries
FORM 10-K INDEX
For the Fiscal Year Ended September 30, 2018
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
55
57
59
73
74
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ...............................................................................................................
132
Item 9A. Controls and Procedures .........................................................................................................
132
Item 9B. Other Information ...................................................................................................................
133
PART III
Item 10. Directors, Executive Officers and Corporate Governance....................................................
134
Item 11. Executive Compensation ........................................................................................................
134
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
134
Stockholder Matters ...............................................................................................................
Item 13. Certain Relationships and Related Transactions, and Director Independence .....................
135
Item 14. Principal Accounting Fees and Services................................................................................
135
PART IV
Item 15. Exhibits and Financial Statement Schedules .........................................................................
135
Item 16. Form 10-K Summary .............................................................................................................
137
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, geographic concentration of our business; fluctuations in real estate values; the
adequacy of loan loss reserves; the risk that goodwill and intangibles recorded in the Company’s
financial statements will become impaired; 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.
1
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 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 consisted 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, 2014 presented in this annual
report is derived from the consolidated financial statements of 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, 2018, the Company, on a consolidated basis, had total assets of approximately $1.1 billion,
total deposits of approximately $784.3 million, and total stockholders’ equity of approximately $128.4
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 9 additional full-service branch offices. Seven 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 emphasize commercial and construction lending.
Construction and land development loans increased from $22.4 million or 6.8% of the total loan portfolio
at September 30, 2014 to $160.2 million or 24.1% of the total loan portfolio at September 30, 2018. The
Company also increased its commercial real estate loans from $16.1 million or 4.9% of the total loan
portfolio at September 30, 2014 to $119.5 million or 18.0% of the total loan portfolio at September 30,
2018. See “-Asset Quality” and “-Lending Activities”.
2
The investment and mortgage-backed securities portfolio increased by $126.3 million to $366.0
million at September 30, 2018 from $239.7 million at September 30, 2017. This increase was primarily due
to increased purchases of corporate bonds and guaranteed mortgage-backed securities. The Company
recorded approximately $376,000 in losses on sale of investment and mortgage-backed securities during
fiscal 2018. At September 30, 2018, the investment and mortgage-backed securities available for sale had
an aggregate net unrealized loss of $10.5 million compared with the unrealized loss of $1.7 million as of
September 30, 2017, 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, 2018, the Company’s non-performing assets totaled $14.4 million or 1.3% of
total assets as compared to $15.6 million or 1.7% of total assets at September 30, 2017. Non-performing
assets at September 30, 2018 included five construction loans aggregating $8.8 million, 32 one-to-four
family residential loans aggregating $2.9 million, one single-family residential investment property loan in
the amount of $156,000 and five commercial real estate loans aggregating $1.7 million. Non-performing
assets at September 30, 2018 also included real estate owned consisting of two single-family residential
properties with an aggregate carrying value of $1.0 million. At September 30, 2018, the Company had 10
loans aggregating $6.2 million that were classified as troubled debt restructurings (“TDRs”). Five of such
loans aggregating $650,000 were performing in accordance with the restructured terms as of September 30,
2018 and were accruing interest. One TDR is on non-accrual and consists of a $449,000 loan secured by a
single-family property. A second TDR is on non-accrual and consists of a $156,000 loan secured by various
commercial and residential properties. The three remaining TDRs totaling $4.9 million are also classified
as non-accrual and are a part of a lending 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 (the development of a 169-unit
townhouse project in Bristol Borough, Pennsylvania) is the subject of litigation between the Bank and the
borrower. Subsequent to the commencement of the litigation previously disclosed, the borrower filed for
bankruptcy under Chapter 11 (Reorganization) 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 state litigation is stayed pending
the resolution of the bankruptcy proceedings. As of September 30, 2018, the Company had reviewed $14.3
million of loans for possible impairment of which $13.4 million was classified substandard compared to
$19.7 million reviewed for possible impairment and $15.0 million of which was classified substandard as
of September 30, 2017. The allowance for loan losses totaled $5.2 million, or 0.9% of total loans and 38.6%
of total non-performing loans (which included loans acquired from Polonia Bank at their fair value) at
September 30, 2018. 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 eastern Pennsylvania, New Jersey, 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, 2018, the net loan portfolio totaled $602.9 million or 55.8% of total
assets. The Company has changed its lending philosophy and increased its investment in loans for
construction and land development and commercial real estate which comprised 42.0% of the loan portfolio
at September 30, 2018. 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 $324.9 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.
2018
2017
September 30,
2016
2015
2014
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
(Dollars in Thousands)
Real estate loans:
One-to-four family residential (1)
$324,865
Multi-family residential
Commercial real estate
Construction and land development
Total real estate loans
Loans to financial institutions
Commercial business
Leases
Consumer
Total loans
Less:
Undisbursed portion of
loans in process
Deferred loan costs
Allowance for loan losses
Net loans
34,355
119,511
160,228
638,959
6,000
17,792
1,687
953
665,391
$351,298
21,508
127,644
48.82%
5.16%
17.96%
24.08%
53.83%
3.30%
19.56%
22.29%
145,486
645,936
96.03%
98.98%
0.90% - -
488
0.07%
2.67%
$233,531
12,478
79,859
21,839
347,707
66.36%
3.55%
22.69%
6.21%
$259,163
6,249
25,799
38,953
330,164
78.40%
1.90%
7.80%
11.78%
$282,637
7,174
16,113
22,397
328,321
98.81%
- -
0.03%
99
99.89%
- -
0.00%
0
99.28%
- -
0.60%
1,976
85.47%
2.17%
4.87%
6.77%
0.25%
0.14%
100.00%
4,240
1,943
652,607
0.65%
0.30%
100.00%
3,286
799
351,891
0.93%
0.23%
100.00%
0
392
330,556
0.00%
0.12%
100.00%
0
399
330,696
0.00%
0.12%
100.00%
54,474
2,818
5,167
$602,932
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)
Includes home equity loans totaling $4.9 million, $6.5 million, $3.8 million, $4.1 million and $5.0 million as of September 30,
2018, 2017, 2016, 2015 and 2014, respectively. Also includes lines of credit totaling $10.2 million, $14.1 million, $7.4 million,
$8.5 million and $10.0 million, as of September 30, 2018, 2017, 2016, 2015 and 2014, respectively.
Contractual Terms to Final Maturities. The following table shows the scheduled contractual
maturities of loans as of September 30, 2018, 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
Loans to
financial
institutions
(In Thousands)
Commercial
Business
Leases
Consumer
Total
Amounts due after September 30, 2018 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
$ - $ 1,483 $ 392 $ 31
$ 13,974 $ 4,940 $ 5,113 $ 95,319
- 894 67
-
3,620 956 1,932 33,468
- 7,128 401 31
5,274 1,554 3,065 13,989
- 93
28,307 7,273 16,607
- 2,315
-
- 239
77,409 18,205 71,250 3,148 6,000 6,866
- 83
-
-
34,225 974 5,690
- 409
-
162,056 453 15,854 14,304
-
-
$ 121,252
40,937
31,442
54,595
183,117
40,972
193,076
Total
$ 324,865 $ 34,355 $ 119,511 $ 160,228 $ 6,000 $ 17,792 $ 1,687 $ 953
$ 665,391
5
The following table shows the dollar amount of all loans due after one year from September 30,
2018, 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
Loans to financial institutions
Commercial business
Leases
Consumer
Total
$ 233,962
27,140
89,693
64,909
6,000
9,174
1,295
858
$ 433,031
$ 76,929
2,275
24,705
-
-
7,135
-
64
$ 111,108
$ 310,891
29,415
114,398
64,909
6,000
16,309
1,295
922
$ 544,139
_________________________________________
(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, Pennsylvania.
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, 2018 and September 30, 2017, the Company had no
real estate loans in portfolio 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 dollar amount of the 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,
6
discussing the loan with the lead lender on a regular basis and receiving copies of updated financial
statements of the borrower from the lead lender. These loans are subjected to regular internal reviews in
accordance with our loan policy.
The Bank typically holds a 100% interest in construction and land development loans. The Bank
has in the past and currently reserves the option to sell participation interests. We generally have sold
participation interests in loans only when a loan would exceed the Bank’s internal and/or legal loans to one
borrower limits. With respect to the sale of participation interests in loans, we have typically received
commitments to purchase the participation interests offered 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, 2018, the Bank’s internal “guidance” limit is $15.0 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 $17.3
million at September 30, 2018. At September 30, 2018, our three largest loans to one borrower and related
entities amounted to $16.0 million, $14.4 million and $14.3 million. The largest relationship consists of a
participation interest in a commercial real estate loan secured by a 70 unit residential building in Westfield,
New Jersey. The second largest relationship consist of a participation interest in a $16.0 commercial line
of credit secured by commercial real estate in central and northern New Jersey. The third largest relationship
consists of a participation interest in a construction loan to construct a 30 story, 102 unit mixed-use luxury
apartment building in Manhattan, New York. 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.”
The following table shows our total loans originated, purchased, sold and repaid during the periods
indicated.
Year Ended September 30,
2018
2017
2016
(In Thousands)
Loan originations (1)
One-to-four family residential
Multi-family residential
Commercial real estate
Construction and land development
Loans to financial institutions
Commercial business
Leases
Consumer
Total loan originations
Loans acquired from Polonia Bancorp 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
$ 12,269
$ 15,366 $ 16,643
7,936
17,321 4,426
57,630
10,361 43,360
58,554 143,001
4,742
6,000 - -
99
15,950 -
3,725
- 3,568
863
56 7,615
87,264
218,613
- 160,157 -
87,264
581
53,965
54,546
(141) (2,959) (403)
$ 32,315
$ 31,589 $ 226,398
378,770
1,289 -
90,589 149,413
149,413
123,608
123,608
91,878
(Footnotes on following page)
7
__________________________________________
(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.
One-to-Four Family Residential Mortgage Lending. A primary 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 lesser extent, through correspondents. The balance
of such loans increased, on a dollar basis, from $282.6 million or 85.5% of total loans at September 30,
2014 to $324.9 million, or 48.8% of total loans at September 30, 2018. The percentage of total loans as
well as the total amount that such loans have represented of the loan portfolio 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 loans.
Single-family residential mortgage loans generally are underwritten on terms and documentation
conforming to guidelines issued by Freddie Mac and Fannie Mae. We have historically retained for
portfolio a substantial portion of the single-family residential mortgage loans that we 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. We service all loans that we have originated. 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, originations of such loans have been limited in recent
years. At September 30, 2018, $76.9 million, or 24.7%, 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 $4.9 million and $10.2 million, respectively, at September 30, 2018. The unused portion
of home equity lines was $6.2 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
8
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 this 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, 2018, our construction and loan development loans amounted to $160.2
million, or 24.1% of our total loan portfolio. This amount includes $54.4 million of undisbursed loans in
process. The average size of our construction and land development loans, excluding loans to our largest
lending relationship, was approximately $3.9 million at September 30, 2018. Our construction loan
portfolio has increased substantially since September 30, 2014 when construction loans amounted to $22.4
million or 6.8% of our total loan portfolio as compared to $160.2 million or 24.1% of our total loan portfolio
at September 30, 2018.
Loans to finance the construction of condominium projects or single-family homes and
subdivisions are generally offered to experienced builders in our primary market area with whom we have
an established relationship. Residential construction and development loans are offered with terms of up
to 36 months although typically the terms are 12 to 24 months. The maximum loan-to-value limit applicable
to these loans is 75% of the appraised post construction value and the policy does not require amortization
of the principal during the term of the loan. We often establish interest reserves and obtain personal and
corporate guarantees as additional security on the construction loans. Interest reserves are used to pay the
monthly interest payments during the development phase of the loan and are treated as an addition to the
loan balance. Interest reserves pose an additional risk to the Company if it does not become aware of
deterioration in the borrower’s financial condition before the interest reserve is fully utilized. In order to
help monitor the risk, financial statements and tax returns are obtained from borrowers on an annual basis.
Additionally, construction loans are reviewed at least annually pursuant to a third-party loan review.
Construction loan proceeds are disbursed periodically in increments as construction progresses and as
inspection by approved appraisers or loan inspector 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 loans or loan relationships.
The largest construction loan is in the amount of $14.3 million of which $1.6 million had been
disbursed as of September 30, 2018. This loan was originated in January 2018 and is a participation interest
in a $73.0 million loan purchased from another financial institution. The proceeds were used to construct a
30 story, 102-unit mixed use luxury apartment building in Manhattan, New York. The project was 11.5%
complete as of September 30, 2018. The loan is performing in accordance with its contractual terms.
The second largest construction loan is in the amount of $10.0 million of which $10.0 million had
been disbursed as of September 30, 2018. This loan was originated in March 2017 and is a participation
9
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 located in Winslow Township, New Jersey.
The project was complete as of September 30, 2018. The loan is performing in accordance with its
contractual terms.
The third largest construction loan is in the amount of $10.0 million of which $9.5 million had been
disbursed as of September 30, 2018. This loan was originated in January of 2017. The proceeds are being
used to construct 66 residential units and 9,000 square feet of retail space in Jersey City, New Jersey. The
project was 99.0% complete as of September 30, 2018. The loan is performing in accordance with its
contractual terms.
The fourth largest construction loan is in the amount of $10.0 million of which $9.0 million had
been disbursed as of September 30, 2018. 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 in East
Orange, New Jersey. The project was 83.3% complete as of September 30, 2018. The loan is performing in
accordance with its contractual terms.
The fifth largest construction loan is in the amount of $9.0 million of which $8.2 million had been
disbursed as of September 30, 2018. The loan was originated in March 2017 and is a participation interest
in a $18.8 million loan purchased from another financial institution. The proceeds are being used to
construct 89 multi-family rental units and seven retail/office units in Newark, New Jersey. The project was
91.0% complete as of September 30, 2018. 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, 2018, multi-
family residential and commercial real estate loans amounted in the aggregate to $153.9 million or 23.1%
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, 2018, the average commercial and multi-family real estate loan size was approximately
$956,000. The largest relationship consist of a participation interest in a $16.0 million commercial real
estate loan secured by a 70 unit residential building located in Westfield, New Jersey. The second largest
multi-family residential or commercial real estate loan at September 30, 2018 was a $11.7 million fixed-
rate loan secured by 38 unit luxury condominium building located in Brooklyn, New York with retail space
on the first floor. 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 residential 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
10
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 residential 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 for 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
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 residential 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, 2018, $953,000, or 0.1% 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, 2018, commercial business loans amounted to
$17.8 million, or 2.7% of our loan portfolio.
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.
11
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”), the Compliance
Risk Officer (“CRO”) 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 $7.5 million, is the President’s Loan
committee, comprised of the Chief Executive Officer (“CEO”) and the COO. All loans in excess of $7.5
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.
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
12
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
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 $16.0 million of loans evaluated for impairment
as of September 30, 2018 (of which $10.7 million is related to one relationship), consisting of $8.7 million
of construction and land development loans, $3.3 million of one-to-four family residential loans, $1.9
million of commercial real estate loans and $298,000 of multi-family residential loans. Although no specific
allocations were applied to these loans, there were partial charge-offs totaling $137,000 during fiscal 2018.
As of September 30, 2018, there were twenty-six loans totaling $4.7 million designated as special mention
loans consisting of eight non-residential real estate loans aggregating $1.9 million and eighteen single-
family residential loans aggregating $2.8 million. 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.
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
13
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.
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, 2018 and 2017, we had no assets classified as
“doubtful” or “loss” and $16.0 million and $16.6 million, respectively, of assets classified as “substandard.”
In addition, there were $4.7 million and $3.1 million of loans designated as “special mention” as of
September 30, 2018 and 2017, respectively.
Delinquent Loans. The following table shows the delinquencies in the loan portfolio as of the
dates indicated.
September 30, 2018
September 30, 2017
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
10
-
1
-
-
4
15
$ 1,037
-
722
-
-
116
$ 1,875
0.31%
0.28%
$ 2,079
-
1,454
8,750
-
-
$ 12,283
32
-
5
5
-
-
42
2.04%
1.85%
$ 1,746
-
1,000
-
-
69
$ 2,815
23
-
3
-
-
2
28
0.49%
0.43%
$ 2,675
-
1,487
8,724
-
-
$12,886
21
-
4
5
-
-
30
2.26%
1.97%
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,
2018, all of the loans listed as 90 or more days past due in the table above were in non-accrual status. At
September 30, 2018, the Company had ten loans aggregating $6.2 million that were classified as TDRs. As
of September 30, 2018, five of the TDRs were performing in accordance with their restructured terms.
Three of such loans aggregating $4.9 million as of September 30, 2018 were classified as non-performing
and are related to one lending relationship. One TDR is on non-accrual and consists of a $449,000 loan
14
secured by a single-family property. The remaining TDR is on non-accrual and consists of a $156,000 loan
secured by various commercial and residential properties.
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.
2018
2017
September 30,
2016
2015
2014
(Dollars in Thousands)
Non-accruing loans:
One-to-four family residential
$ 3,012
(1)
$ 5,107
(1)
$ 4,244
(1)
$ 3,547
(1)
$ 5,002
(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
-
1,627
8,750
-
-
13,389
-
-
-
-
-
-
-
13,389
1,026
$ 14,415
2.22%
1.24%
1.33%
-
-
-
-
(1)
(1)
1,566
8,724
(1)
(1)
1,346
10,288
(1)
(1)
-
-
15,397
-
-
-
-
-
-
-
15,397
192
$ 15,589
-
-
15,878
-
-
-
-
-
-
-
15,878
581
$ 16,459
1,589
(1)
877
(1)
8,796
-
-
13,932
-
-
-
-
-
-
-
13,932
869
$ 14,801
-
-
-
5,879
-
-
-
-
-
-
-
5,879
360
$ 6,239
2.69%
4.56%
4.21%
1.83%
1.71%
2.84%
2.86%
1.12%
1.73%
2.94%
3.04%
1.19%
______________________________________________________
(1) Includes at: (i) September 30, 2018, $5.5 million of TDRs that were classified non-performing consisting of two
construction and land development loans aggregating $4.2 million, two one-to-four family loans aggregating $606,000 and
one commercial real estate loans aggregating $712,000; (ii) September 30, 2017, $5.7 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
15
and five commercial real estate loans aggregating $1.6 million; (iii) September 30, 2016, $5.7 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 $729,000 commercial real estate loan; (iv) 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; and (v) 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.
(2)Non-performing loans consist of non-accruing loans plus accruing loans 90 days or more past due.
(3)Real estate owned balances are shown net of related loss allowances and consist solely of real property.
Interest income on non-accrual loans is recognized on the cash basis until either the loan is paid-in
full or the Bank determines after a significant payment history has been achieved to warrant the involved
loan being classified as a performing loan and being returned to accruing status. There was $85,000 of such
interest recognized during fiscal 2018 while there was $161,000 and $175,000 of such interest recognized
for non-accrual loans for fiscal 2017 and fiscal 2016, respectively. Approximately $744,000 in additional
interest income would have been recognized during the year ended September 30, 2018 if these loans had
been performing during fiscal 2018.
At September 30, 2018, the Company’s non-performing assets totaled $14.4 million or 1.3% of
total assets as compared to $15.6 million or 1.7% of total assets at September 30, 2017. Non-performing
assets at September 30, 2018 included five construction loans aggregating $8.7 million, 32 one-to-four
family residential loans aggregating $2.9 million, one single-family residential investment property loan in
the amount of $156,000 and five commercial real estate loans aggregating $1.6 million. Non-performing
assets at September 30, 2018 also included real estate owned consisting of two single-family residential
properties with an aggregate carrying value of $1.0 million. At September 30, 2018, the Company had 10
loans aggregating $6.2 million that were classified as TDRs. Five of such loans aggregating $650,000 were
performing in accordance with the restructured terms as of September 30, 2018 and were accruing interest.
One TDR is on non-accrual and consists of a $449,000 loan secured by a single-family property. A second
TDR is on non-accrual and consists of a $156,000 loan secured by various commercial and residential
properties. The three remaining TDRs totaling $4.9 million are also classified as non-accrual and are a part
of a lending 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 (the development of a 169 unit townhouse project in
Bristol Borough, Pennsylvania) is the subject of litigation between the Bank and the borrower. Subsequent
to the commencement of the litigation previously disclosed, the borrower filed for bankruptcy under
Chapter 11 (Reorganization) 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 state litigation is stayed pending the resolution
of the bankruptcy proceedings. As of September 30, 2018, the Company had reviewed $16.0 million of
loans for possible impairment compared to $19.7 million reviewed for possible impairment as of September
30, 2017.
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
16
repayment performance, the number of loans requiring heightened management oversight, local economic
conditions and industry experience.
The carrying value of loans is periodically evaluated and the allowance is adjusted accordingly.
The establishment of the allowance for loan losses is significantly affected by management judgment and
uncertainties and there is a likelihood that different amounts would be reported under different conditions
or assumptions. Various regulatory agencies, as an integral part of their examination process, periodically
review the allowance for loan losses. Such agencies may require us to make additional provisions for
estimated loan losses based upon judgments that differ from those of management. Loans acquired from
Polonia Bancorp amounted to $160.8 million of which there is no allowance for loan losses because these
loans were recorded at fair value upon completion of the merger. 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, 2018, our allowance for loan losses of $5.2 million was 0.9% of total loans receivable and
38.6% of non-performing loans.
Charge-offs on loans totaled $137,000 and $2.0 million for the years ended September 30, 2018
and 2017, 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.
17
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,
2018
2017
2016
2015
2014
(Dollars in Thousands)
$ 665,391 $ 652,607 $ 351,891 $ 330,556 $ 330,696
588,493 487,999 327,877 323,398 319,126
Allowance for loan losses, beginning of period
4,466 3,269 2,930 2,424 2,353
Provision for loan losses
Charge-offs:
One-to-four family residential
Multi-family residential and commercial real estate
Construction and land development
Commercial business
Consumer
Total charge-offs
810 2,990 225 735 240
-
114 140 11 384 215
-
- - -
12 1,819 - - -
-
- - -
11 16 - - -
-
137 1,975 11 384 215
Recoveries on loans previously charged off
28 182 125 155 46
Allowance for loan losses, end of period
$ 5,167 $ 4,466 $ 3,269 $ 2,930 $ 2,424
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
0.85%
0.78%
0.94%
0.93%
0.75%
38.59%
29.01%
20.59%
21.03%
41.24%
0.02%
0.37%
-0.03%
0.07%
0.05%
The following table shows how the allowance for loan losses is allocated by type of loan at each of the
dates indicated.
18
2018
2017
September 30,
2016
2015
2014
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
Amount
of
Allowance
Loan
Category
as a %
of Total
Loans
(Dollars in Thousands)
48.80% $ 1,241
53.80% $ 1,624
66.40% $ 1,636
78.40% $ 1,663
85.47%
5.20% 205
3.30% 137
3.50% 66
1.90% 66
18.00% 1,201
19.60% 859
22.70% 231
7.80% 122
24.10% 1,358
22.20% 318
6.20% 725
11.80% 323
2.70% 4
0.10% 1
0.00% -
0.00% 15
0.90% -
0.00% -
0.00% -
0.00% -
0.20% 23
0.70% 21
0.90% -
0.00% -
0.10% 24
0.30% 10
0.30% 4
0.10% 4
-
410
100.00% $ 4,466
-
299
100.00% $ 3,269
-
268
100.00% $ 2,930
-
231
100.00% $ 2,424
2.17%
4.87%
6.77%
0.60%
0.00%
0.00%
0.12%
-
100.00%
Amount
of
Allowance
$ 1,325
347
1,154
1,554
187
64
18
17
501
$ 5,167
One-to-four family residential
Multi-family residential
Commercial real estate
Construction and land development
Commercial business
Loans to financial institutions
Leases
Consumer
Unallocated
Total allowance for loan losses
The aggregate allowance for loan losses increased by $701,000 from September 30, 2017 to
September 30, 2018, due to a provision of $810,000, partially offset by a net charge off of $109,000
recorded during the period. 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. 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, COO, 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.
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
19
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 a portfolio of corporate debt securities with an investment grade rating from at
least one national rating agency: Standard and Poors, Moody’s, Fitch and/or 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 at least one national rating agency. The securities are exempt from taxation.
At September 30, 2018, the investment and mortgage-backed securities portfolio amounted to
$366.0 million or 33.9% of total assets at such date. The largest component of the securities portfolio as of
September 30, 2018 consisted of mortgage-backed securities which amounted to $193.1 million or 52.8%
of the securities portfolio at September 30, 2018. In addition, we invest in corporate debt, state and political
subdivisions, 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, 2018, we had $59.9 million of
investment and mortgage-backed securities classified as held to maturity, $306.2 million of investment and
mortgage-backed securities classified as available for sale and no securities classified as trading securities.
At September 30, 2018, we had no investments in a single issuer other than securities issued by U.S.
Government agencies or U.S. Government sponsored enterprises, which had an aggregate book value in
excess of 10% of the Company’s stockholders equity.
20
The following table sets forth certain information relating to the investment and mortgage-backed
securities portfolios at the dates indicated.
2018
September 30,
2017
2016
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
$ 98,506
$ 97,289
$ 199,229 $ 193,133 $ 126,459 $ 125,423
54,793
54,487
57,840
59,062
34,400
75,622
26,053
25,411
20,842 - -
42,652
179,352
177,187
238,505
376,565
42
6
76
6
54,445
73,083
41,416
362,077
37
59,625
34,500
20,781
241,365
6
$ 376,571 $ 362,114 $ 241,371 $ 238,581
$ 177,193
$ 179,394
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, 2018.
Weighted
One Year Average
Yield
or Less
Over One
Year
Through
Five Years
Amounts at September 30, 2018 Which Mature In
Over Five
Weighted
Average
Yield
Years Weighted
Average
Through
Yield
Ten Years
Over
Ten
Years
Weighted
Average
Yield
Total
Weighted
Average
Yield
(Dollars in Thousands)
Bonds and other debt securities:
U.S. Government and agency
obligations
Mortgage-backed securities
Corporate debt securities
State and political subdivisions
5.43% $ - -
$ 2,000
- -
1,002
2
1.74% 7,541
$ 11,000
2.40% 171
3.47% 63,073
2.57% $ 46,062
4.09% 199,056
4,006
3.98%
2.51% $ 59,062
2.97% 199,229
5.63% 75,622
Total
- -
$ 3,002 -
- -
$ 7,543
14,483
3.47% $ 88,727
2.86%
28,169
3.62% $ 277,293
4.05%
42,652
3.04% $ 376,565
21
2.63%
2.97%
3.99%
3.64%
3.20%
The following table sets forth the purchases and principal repayments of our mortgage-backed
securities at amortized cost during the periods indicated.
At or For the
Year Ended September 30,
2018
2017
(Dollars in Thousands)
2016
Mortgage-backed securities at beginning of period
$ 126,459 $ 97,289
$ 69,917
Purchases of mortgage-backed securities available for sale 98,128 48,212
(4,840) (5,421)
Sale of mortgage-backed securities available for sale
(20,411) (13,871)
Maturities and repayments
Amortizations of premiums and discounts, net
250
(107)
$ 199,229 $ 126,459
Mortgage-backed securities at end of period
2.59%
Weighted average yield at end of period
2.97%
49,639
(11,560)
(10,768)
61
$ 97,289
2.38%
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, 2018, 28.1% of the funds deposited with the Bank 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, 2018, jumbo CDs (certificates of deposit of $100,000 or more) amounted to
$444.4 million, of which $345.5 million are scheduled to mature within twelve months subsequent to such
date. At September 30, 2018, the weighted average remaining period until maturity of the certificate of
deposit accounts was 8.2 months. During fiscal 2018, jumbo CDs from government agencies and other
financial institutions and to a lesser extent, brokered deposits, 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.
2018
Amount
September 30,
2017
2016
% of Total
Deposits
Amount
% of Total
Deposits
Amount
% of Total
Deposits
(Dollars in Thousands)
$ 57,843
264,535
222,617
18,825
$ 563,820
7.38% $ 62,523
9.83% $ 111,899
33.73% 294,860
46.36% 98,921
28.39% 36,942
2.40% -
5.81% 13,117
0.00% -
71.90% $ 394,325
62.00% $ 223,937
28.75%
25.42%
3.37%
0.00%
57.54%
91,489
11.67% 101,743
16.00% 70,924
18.22%
13,620
49,209
66,120
$ 220,438
$ 784,258
1.74% 9,375
6.27% 54,267
1.47% 3,804
8.53% 34,984
8.43% 76,272
11.99% 55,552
28.10% $ 241,657
100.00% $ 635,982
38.00% $ 165,264
100.00% $ 389,201
0.98%
8.99%
14.27%
42.46%
100.00%
Certificate accounts:
Less than 1.00%
1.00% - 1.99%
2.00% - 2.99%
3.00% - 3.99%
Total certificate accounts
Transaction accounts:
Savings
Checking:
Non-Interest-bearing
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
2018
Interest
Expense
Average Rate
Paid
Year Ended September 30,
2017
Average Balance
Interest
Expense
(Dollars in Thousands)
Average Rate
Paid
Average
Balance
2016
Interest
Expense
Average Rate
Paid
Savings
$ 105,665 $ 66
0.06%
$ 97,710 $ 51
0.05%
$ 73,030 $ 83
0.11%
Interest-bearing checking and
money market accounts
Certificate accounts
121,954
454,554
247
7,073
Total interest-bearing deposits
682,173 $ 7,386
Non-interest-bearing deposits
Total deposits
12,416
$ 694,589
0.20%
1.56%
1.08%
1.06%
127,172
325,824
197
3,682
550,706 $ 3,930
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%
23
The following table shows the deposit cash flows during the periods indicated.
Year Ended September 30,
2018
2017
2016
(In Thousands)
Deposits made
$ 894,105 $ 678,878 $ 364,745
Deposits acquired (Polonia Bank)
- 172,243 -
Withdrawals
Interest credited
(749,331) (606,984) (343,535)
3,502 2,644 2,917
Total increase in deposits
$ 148,276 $ 246,781 $ 24,127
The following table presents, by various interest rate categories and maturities, the amount of
certificates of deposit at September 30, 2018.
Certificates of Deposit
2019
Less than 1.00%
1.00% - 1.99%
2.00% - 2.99%
3.00% - 3.40%
Total certificate accounts
2020
$
Thereafter
Maturing in the 12 Months Ending September 30,
2021
(In Thousands)
$
-
9,379
9,439
1,058
19,876
-
$
12,595
27,680
16,260
56,535
2,068
47,832
25,071
450
75,421
$
$
$
55,775
194,729
160,427
1,057
411,988
Total
$
57,843
264,535
222,617
18,825
563,820
$
$
$
The following tables show the maturities of our certificates of deposit of $100,000 or more at
September 30, 2018, by time remaining to maturity.
Quarter Ending:
Amount
Weighted
Avg Rate
(Dollars in Thousands)
December 31, 2018
March 31, 2019
June 30, 2019
September 30, 2019
After September 30, 2019
Total certificates of deposit with
balances of $100,000 or more
1.62%
1.82%
2.04%
2.05%
2.12%
1.86%
$ 150,162
110,825
48,828
35,674
98,872
$ 444,361
24
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 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, 2018, the
Company had $154.7 million in outstanding advances with the FHLB, and in addition had the ability to
obtain additional advances in the amount of $265.7 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 (one year or less)
at or for the dates indicated:
At or For the Year Ended September 30,
2016
2017
2018
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)
$18,933
$21,784
$20,000
30,200
10,000
2.31%
1.81%
35,000
20,000
1.31%
0.84%
8,975
20,000
1.17%
1.23%
The following table shows certain information regarding long-term borrowings at or for the dates
indicated:
Lomg-term FHLB advances:
Description
Maturity range
to
from
weighted average
interest rate
Stated interest rate range
from
to
Fixed Rate - Advances
Fixed Rate - Amortizing
Total
15-Nov-18
18-Nov-19
9-May-24
15-Aug-23
2.43%
2.71%
1.38%
1.53%
3.23%
3.11%
2018
2017
(Dollars in Thousands)
$
$
99,358
45,325
144,683
$
$
88,795
5,523
94,318
Subsidiaries
The Company has only one direct subsidiary: Prudential Bank. The Bank’s sole subsidiary as of
September 30, 2018 was PSB Delaware, Inc. (“PSB”), a Delaware-chartered corporation established to hold
investment securities. As of September 30, 2018, PSB had assets of $155.9 million primarily consisting of
mortgage-backed and investment securities. We may consider the establishment of one or more additional
subsidiaries in the future.
25
Employees
At September 30, 2018, we had 79 full-time employees, and four part-time employees. None of
such employees are represented by a collective bargaining group, and we believe that the Company’s
relationship with its employees is good.
General
REGULATION
The 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 ( the “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.
26
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.
2018 Regulatory Reform
In May 2018 the Economic Growth, Regulatory Relief and Consumer Protection Act (the “2018
Act”), was enacted to modify or remove certain financial reform rules and regulations, including some of
those implemented under the Dodd-Frank Act. While the Act maintains most of the regulatory structure
established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small
depository institutions with assets of less than $10 billion and for large banks with assets of more than $50
billion. Many of these changes could result in meaningful regulatory relief for community banks such as
Home Federal Bank.
The 2018 Act, among other matters, expands the definition of qualified mortgages which may be
held by a financial institution and simplifies the regulatory capital rules for financial institutions and their
holding companies with total consolidated assets of less than $10 billion by instructing the federal banking
regulators to establish a single “Community Bank Leverage Ratio” of between 8 and 10 percent to replace
the leverage and risk-based regulatory capital ratios. The Act also expands the category of holding
companies that may rely on the “Small Bank Holding Company and Savings and Loan Holding Company
Policy Statement” (the “SBHC Policy”) by raising the maximum amount of assets a qualifying holding
company may have from $1 billion to $3 billion. This expansion also excludes such holding companies
from the minimum capital requirements of the Dodd-Frank Act. In addition, the 2018 Act includes
regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker
Rule (proprietary trading prohibitions), mortgage disclosures and risk weights for certain high-risk
commercial real estate loans.
It is difficult at this time to predict when or how any new standards under the 2018 Act will
ultimately be applied to us or what specific impact the 2018 Act and the yet-to-be-written implementing
rules and regulations will have on community banks.
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 law that may affect the Bank and Prudential
Bancorp. Many 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
27
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.
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.
28
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 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
29
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 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
30
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 non-member banks and savings banks, 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, 2018, 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 11.86%,
18.73%, 18.73% and 19.56%, respectively.
Any savings bank that fails any of the capital requirements is subject to possible enforcement action
by the FDIC. Such action could include a capital directive, a cease and desist order, civil money penalties,
the establishment of restrictions on the institution’s operations, termination of federal deposit insurance and
the appointment of a conservator or receiver. The FDIC’s capital regulations provide that such actions,
through enforcement proceedings or otherwise, could require one or more of a variety of corrective actions.
Department Capital Requirements. The Bank is also subject to more stringent Department capital
guidelines. Although not adopted in regulation form, the Department utilizes capital standards requiring a
minimum of 6% leverage capital and 10% risk-based capital. The components of leverage and risk-based
capital are substantially the same as those defined by the FDIC. At September 30, 2018, the Bank’s capital
ratios exceeded each of its capital requirements.
Prompt Corrective Action. The following table shows the amount of capital associated with the
different capital categories set forth in the prompt corrective action regulations.
31
Capital Category
Well capitalized
Adequately capitalized
Undercapitalized
Significantly undercapitalized
Tier 1
Total
Risk-Based
Risk-Based
Capital
Capital
8% or more
10% or more
8% or more
6% or more
Less than 8% Less than 6%
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, 2018, the Bank was deemed to be a “well capitalized” institution for purposes of
the prompt corrective action regulations and as such is not subject to the above mentioned restrictions.
The table below sets forth the Company and the Bank’s capital position relative to its respective
regulatory capital requirements at September 30, 2018.
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
$
129,890
123,199
12.51 %
11.86
N/A
41,542
$
N/A
4.00 %
N/A
51,928
$
N/A
5.0 %
129,890
123,199
129,890
123,199
135,374
128,683
19.74
18.73
19.74
18.73
20.58
19.56
N/A
29,603
N/A
26,313
N/A
52,627
N/A
4.5
N/A
6.0
N/A
8.0
N/A
42,759
N/A
39,470
N/A
65,783
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,
2018.
32
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 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, 2018, a final rule has not been adopted.
33
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 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
34
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 sufficient
to ensure that the Federal Home Loan Bank remains in compliance with its minimum capital requirements.
At September 30, 2018, 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, 2018, 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.
35
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.
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
36
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 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. Subsequently, as part of the 2018 Act, the threshold was increased to $3.0 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 $3.0 billion in assets. As a
consequence, as of September 30, 2018, Prudential Bancorp was not required to comply with the
requirements set forth below until such time that its consolidated total assets exceed $3.0 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.
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
37
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
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,
38
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, 2018, 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
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 2018, 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 and 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, 2018, 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.
39
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.
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 2018 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 the Bank. 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, 2018, we had total non-performing assets of $14.4 million, or 1.33% of total
assets as compared to $15.6 million or 1.70% of total assets as of September 30, 2017. 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
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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 the Bank. Finally, if our estimate
of the allowance for loan losses is inaccurate, we will have to increase the allowance accordingly. At
September 30, 2018, our allowance for loan losses amounted to $5.2 million, or 0.9% of total loans and
38.6% of non-performing loans, compared to $4.5 million, or 0.8% of total loans and 29.0% of non-
performing loans at September 30, 2017.
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 Department and the FDIC, as part of their examination process,
which may result in the establishment of an additional provision based upon the judgment of such agencies
after a review of the information available at the time of its examination. Our allowance for loan losses
amounted to 0.9% of total loans and 38.6% of non-performing loans at September 30, 2018. Our allowance
for loan losses at September 30, 2018 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, 2018, $324.9 million, or 48.8 % 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, 2018, $160.2 million, or 24.1%, of our loan portfolio consisted of construction
loans, including loans for the acquisition and development of property, and $119.5 million, or 18.0%, 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, 2018, 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 were deemed non-performing
as of such date. In addition, non-performing assets at September 30, 2018 included 33 one-to-four family
loans aggregating $3.0 million, five commercial real estate loans aggregating $1.7 million and real estate
owned of $1.0 million.
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 217.4% of the Bank’s total risk-based capital at September 30,
2018.
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
42
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,
2018, $415.8 million or 38.5 % 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, 2018 was 2.83% as
compared to 4.31% 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, 2018,
$306.2 million, or 83.6% of our investment securities, are classified as available for sale and reported at
fair value with unrealized gains or losses excluded from earnings and reported in other comprehensive
income, which affects our reported equity. Accordingly, given the material size of the investment securities
portfolio classified as available for sale and due to possible mark-to-market adjustments of that portion of
the portfolio resulting from market conditions, we may experience greater volatility in the value of reported
43
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
three times to date in 2018 and may implement an additional increase as of the end of December 2018.
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, 2018, 35.2% of our loan
portfolio had maturities of 10 years or more. Furthermore, at such date, only $113.9 million or 17.1% of
the loans due after September 30, 2017 bear adjustable interest rates. At September 30, 2018, 28.1% of our
deposits had no stated maturity date and 73.1% 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
44
interest rates increase. For example, we estimate that as of September 30, 2018, a 200 basis point increase
in interest rates would have resulted in our net portfolio value declining by approximately $40.1 million or
2.9%. 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 the Bank are subject to extensive regulation, supervision and examination by
the PA Department 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 the Bank 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 the Bank, and will exclude certain instruments that previously have been
eligible for inclusion by bank holding companies as Tier 1 capital, such as trust preferred securities.
The full impact of the Dodd-Frank Act on our business will not be known until all of the regulations
implementing the statute are adopted and implemented. As a result, we cannot at this time predict the extent
to which the Dodd-Frank Act will impact our business, operations or financial condition. However,
compliance with these new laws and regulations may require us to make changes to our business and
operations and will likely result in additional costs and divert management’s time from other business
45
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.
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 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, 2018.
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, the Bank’s 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.
46
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
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.
47
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.
We are subject to environmental liability risk associated with the Bank’s lending activities.
A significant portion of our loan portfolio is secured by real estate, and we could become subject
to environmental liabilities with respect to one or more of these properties. During the ordinary course of
business, we may foreclose on and take title to properties securing defaulted loans. In doing so, there is a
risk that hazardous or toxic substances could be found on these properties. If hazardous conditions or toxic
substances are found on these properties, we may be liable for remediation costs, as well as for personal
injury and property damage, civil fines and criminal penalties regardless of when the hazardous conditions
or toxic substances first affected any particular property. Environmental laws may require us to incur
substantial expenses to address unknown liabilities and may materially reduce the affected property’s value
or limit our ability to use or sell the affected property. In addition, future laws or more stringent
interpretations or enforcement policies with respect to existing laws may increase our exposure to
environmental liability. Although we have policies and procedures to perform an environmental review
before initiating any foreclosure on nonresidential real property, these reviews may not be sufficient to
detect all potential environmental hazards. The remediation costs and any other financial liabilities
associated with an environmental hazard could have a material adverse effect on us.
The fair value of our investment securities can fluctuate due to market conditions outside of our
control.
As of September 30, 2018, the fair value of our investment securities portfolio was approximately
$362.1 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.
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
48
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 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.
49
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.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
We currently conduct business from our main office and nine banking offices. On January 1, 2017,
the Company completed its acquisition of Polonia Bancorp and Polonia Bank, Polonia Bancorp’s wholly
owned subsidiary. The acquisition added five banking offices to our existing properties. The financial center
at our Old City location was closed on March 31, 2018. 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, 2018.
51
Description/Address
Leased/Owned
Net Book Value
Date of
Lease
Expiration
of Property and
Leasehold
Improvements
Amount of
Deposits
Main Office
1834 West Oregon Avenue
Philadelphia, PA 19145
Huntingdon Valley Executive Office
3993 Huntingdon Pike
Huntingdon Valley, PA 19006
Broad Street Financial Center
1722 South Broad Street
Philadelphia, PA 19145
Pennsport Financial Center
238A Moore Street
Philadelphia, PA 19148
Drexel Hill Financial Center
1270 Township Line Road
Drexel Hill, PA 19026
Center City Financial Center
1500 JFk Boulevard
Philadelphia, PA 19103
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
(In Thousands)
$168
$501,549
Owned
N/A
3,088
41,957
Owned
N/A
176
50,644
Owned
N/A
20
39,759
Leased
Sep-21
32
27,132
Leased
Oct-22
131
15,619
Owned
N/A
820
48,861
Owned
N/A
1,447
28,228
Owned
N/A
217
4,437
Owned
N/A
406
26,072
Total
$6,505
$784,258
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
(“Island View Crossing”), 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.
Within the bankruptcy, Island View Crossing, as the debtor and the Chapter 11 Trustee, filed a
separate adversary proceeding against the Bank seeking to avoid certain collateral mortgages made by
Island View Crossing as well as seeking to avoid certain loans made to Island View Crossing including,
but not limited to, a $1.4 million loan and a $5.5 million loan. The complaint was filed on or about
December 3, 2018. The Company is evaluating the matter. Given the relatively early stages of the case and
the complaint just being filed, we are unable to determine the likelihood of an unfavorable outcome at this
time. The Company, however, intends to vigorously defend against the claim.
Prudential Bancorp is involved in various legal proceedings occurring in the ordinary course of
business. Management of the Company, based on discussions with litigation counsel, does not believe that
such proceedings will have a material adverse effect on the financial condition or operations of Prudential
Bancorp. There can be no assurance that any of the outstanding legal proceedings to which the Company is a
53
party will not be decided adversely to the Company's interests and have a material adverse effect on the
financial condition and operations of the Company.
Item 4. Mine Safety Disclosures
Not applicable
54
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
(a) Our common stock is traded on the NASDAQ Global Market (NASDAQ) under the symbol “PBIP”.
At December 1, 2018, there were approximately 357 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
2018 and 2017:
Quarter ended:
September 30, 2018 ......................................................
June 30, 2018................................................................
March 31, 2018 .............................................................
December 31, 2017 .....................................................
Stock Price
Low
$16.84
16.86
16.04
17.23
High
$19.84
19.87
18.75
18.96
Cash
dividends
per share
$0.40
0.05
0.05
0.20
Quarter ended :
September 30, 2017 ......................................................
June 30, 2017................................................................
March 31, 2017 .............................................................
December 31, 2016………………………………….
Stock Price
High
$18.96
18.48
18.13
17.39
Low
$18.51
18.13
17.68
17.04
Cash
dividends
per share
$0.03
0.03
0.03
0.03
(b)
(c)
Not applicable
The Company’s repurchases of equity shares for the fourth quarter of fiscal year 2018 were
as follows:
55
Period
July 1 - 31, 2018
August 1 - 31, 2018
September 1 - 30, 2018
Total
Number of
Shares
Purchased
-
31
62,388
62,419
Average
Price Paid
Per Share
$
-
$
18.48
$
17.89
(2)
(1)
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)
127,529
127,529
64,871
(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
2018
2017
At September 30,
2016
(Dollars in Thousands)
2015
2014
$1,081,170
48,171
$899,540
27,903
$559,480
12,440
$487,189
11,272
$525,483
45,382
59,852
306,187
602,932
784,258
154,683
13,389
14,415
128,409
10
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
66,384
77,483
312,633
365,074
-
13,932
14,801
117,001
80,840
57,817
321,063
391,025
340
5,880
6,240
129,425
6
7
7
Selected Operating Data:
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision 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):
2018
Year Ended September 30,
2015
2016
(Dollars in Thousands, except per share data)
2017
2014
$34,851
10,137
24,714
810
$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
23,904
2,500
15,639
10,765
3,701
$ 7,064
$0.80
$0.78
$0.70
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
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
3.77%
1.23
2.55
2.68
111.81
152.85
1.60
57.47
0.72
5.45
13.28
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
124.28
123.40
2.11
72.87
0.51
2.36
21.55
3.38%
0.90
2.49
2.69
3.28%
0.89
2.39
2.61
128.72
130.51
94.99
3.42
81.04
0.58
2.37
24.39
111.85
2.21
80.88
0.34
1.38
24.79
(Footnotes on next page)
57
At or For the
Year Ended September 30,
2016
2017
2015
2014
2018
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
2.22%
2.67%
4.60%
4.21%
1.83%
1.33
38.59
0.85
0.02
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
12.51%
11.86
14.81%
13.59
20.41%
23.73%
22.39%
18.15
19.50
17.95
Tier 1 common risk-based capital ratio
Company
Bank
19.74
18.73
23.94
21.97
38.57
34.36
50.63
41.66
N/A
N/A
Tier 1 risk-based capital ratio
Company
Bank
Total risk-based capital ratio
Company
Bank
__________________
19.74
18.73
20.58
19.56
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
(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 TDRs 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 and/or principal.
58
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
At September 30, 2018, we had total assets of $1.1 billion, including net loans of $602.9 million
and $366.0 million of investment and mortgage-backed securities, total deposits of $784.3 million and total
stockholders’ equity of $128.4 million.
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 residential 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.
59
The quarterly review and adjustment of the qualitative factors employed in the allowance methodology and
the updating of historic loss experience allow for timely reaction to emerging conditions and trends. In this
context, a series of qualitative factors are used in a methodology as a measurement of how current
circumstances are affecting the loan portfolio. Included in these qualitative factors are:
Levels of past due, classified, criticized and non-accrual loans, troubled debt restructurings and
loan modifications;
Nature and volume of loans;
Changes in lending policies and procedures, underwriting standards, collections, charge-offs and
recoveries and for commercial loans, the level of loans being approved with exceptions to lending
policy;
Experience, ability and depth of management and staff;
National and local economic and business conditions, including various market segments;
Quality of the Company’s loan review system and degree of Board oversight;
Concentrations of credit and changes in levels of such concentrations; and
Effect of external factors on the level of estimated credit losses in the current portfolio.
In determining the allowance for loan losses, management has established both specific and general
pooled allowances. Values assigned to the qualitative factors and those developed from historic loss
experience provide a dynamic basis for the calculation of reserve factors for both pass-rated loans (general
pooled allowance) and for criticized and classified loans. The amount of the specific allowance is
determined through a loan-by-loan analysis of certain large dollar commercial real estate loans. Loans not
individually reviewed are evaluated as a group using reserve factor percentages based on historical loss
experience and the qualitative factors described above. In determining the appropriate level of the general
pooled allowance, management makes estimates based on internal risk ratings, which take into account
such factors as debt service coverage, loan-to-value ratios and external factors. Estimates are periodically
measured against actual loss experience.
This evaluation is inherently subjective as it requires material estimates including, among others,
exposure at default, the amount and timing of expected future cash flows on impaired loans, value of
collateral, estimated losses on our commercial, construction and residential loan portfolios and historical
loss experience. All of these estimates may be susceptible to significant change.
While management uses the best information available to make loan loss allowance evaluations,
adjustments to the allowance may be necessary based on changes in economic and other conditions or
changes in accounting guidance. In addition, the Department and the FDIC, as an integral part of their
examination processes, periodically review our allowance for loan losses. The Department 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, 2018 or 2017.
60
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis,
and more frequently when economic or market concerns warrant such evaluation. The Company
determines whether the unrealized losses are temporary in accordance with U.S. GAAP. The evaluation is
based upon factors such as the creditworthiness of the issuers/guarantors, the underlying collateral, if
applicable, and the continuing performance of the securities. In addition, the Company also considers the
likelihood that the security will be required to be sold by a regulatory agency, our internal intent not to
dispose of the security prior to maturity and whether the entire cost basis of the security is expected to be
recovered. In determining whether the cost basis will be recovered, management evaluates other facts and
circumstances that may be indicative of an other-than-temporary impairment condition. This includes, but
is not limited to, an evaluation of the type of security, length of time and extent to which the fair value has
been less than cost, and near-term prospects of the issuer.
In addition, certain assets are measured at fair value on a non-recurring basis; that is, the instruments
are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain
circumstances (for example, when there is evidence of impairment). The Company measures impaired loans
and loans 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
61
position based on management's analysis of tax regulations and interpretations. Significant judgment may
be involved in the assessment of the tax position.
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
swap contracts 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, 2018.
Amount of Commitment Expiration - Per Period
After 5
Years
Less than
1 Year
3-5
Years
1-3
Years
(In Thousands)
$
1,232
431
17,821
-
$ 19,484
$
410
4,526
21,770
37,505
$ 64,211
$
-
17,108
1,974
2,928
$ 22,010
$
-
29,779
12,909
-
$ 42,688
Letters of credit
Lines of credit
Undisbursed portions of loans in process
Commitments to originate loans
Total commitments
Total
Amounts
Committed
$ 1,642
51,844
54,474
40,433
$ 148,393
62
Contractual Cash Obligations
The following table summarizes our contractual cash obligations at September 30, 2018.
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
Total
$ 563,820
144,683
708,503
10,000
2,083
2,324
$ 722,910
Less than
1 Year
1-3
Years
3-5
Years
After 5
Years
(In Thousands)
$ -
$ 411,988 $ 95,297 $ 56,535
38,738 80,778 5,000
20,167
134,035 137,313 5,000
432,155
-
-
-
10,000
-
-
-
2,083
503 516 984
321
$ 444,559 $ 134,538 $ 137,829 $ 5,984
63
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
the daily averages would be.
believe
the monthly averages differ significantly from what
that
2018
Average
Balance
Interest
Average
Yield/
Rate
Year Ended September 30,
2017
Average
Balance
Interest
(Dollars in Thousands)
Average
Yield/
Rate
2016
Average
Balance
Interest
Average
Yield/
Rate
Interest-earning assets:
Investment securities (1)
Mortgage-backed securities
Loans receivable (2)
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 (3)
Average interest-earning assets to
average
interest-bearing liabilities
$155,154
153,056
588,493
26,963
923,666
51,683
$975,349
$105,665
121,954
454,554
682,173
143,913
826,086
19,702
845,788
129,561
$975,349
$97,580
$4,862
4,078
25,367
544
34,851
$66
247
7,073
7,386
2,751
10,137
3.23%
2.66%
4.31%
2.02%
3.77%
0.06%
0.20%
1.56%
1.08%
1.91%
1.23%
$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
2.70%
2.59%
3.94%
0.39%
3.41%
0.11%
0.18%
1.24%
0.76%
1.31%
0.81%
$24,714
2.55%
2.68%
$21,077
2.83%
2.92%
$14,157
2.60%
2.76%
111.81%
111.83%
124.28%
_______________________
(1)
(2)
(3)
Tax exempt yields have been adjusted to a tax-equivalent basis.
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.
64
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.
2018 vs. 2017
2017 vs. 2016
Increase (Decrease) Due to
Increase (Decrease) Due to
Rate
Volume
Rate/
Volume
Total
Increase
(Decrease)
Rate
Volume
Rate/
Volume
Total
Increase
(Decrease)
(In Thousands)
$
(175)
$
3,351
$
(318)
$
2,858
$
365
$
72
$
17
$
454
72
928
182
1,007
43
4,141
55
7,590
1
191
37
(89)
116
5,260
274
8,508
29
601
107
1,102
952
6,304
36
7,364
9
293
75
394
990
7,198
218
8,860
5
5
-
10
(45)
28
(13)
(30)
65
1,388
1,458
476
1,934
(7)
1,455
1,453
692
2,145
(3)
548
545
247
792
55
3,391
3,456
1,415
4,871
(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
$
(927)
$
5,445
$
(881)
$
3,637
$
1,357
$
5,089
$
475
$
6,921
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, 2018, the Company had total assets of $1.1 billion, as compared to $899.5 million
at September 30, 2017, an increase of $181.6 million or 20.2%. At September 30, 2018, the investment
securities portfolio increased by $126.4 million to $367.6 million as compared to September 30, 2017
primarily as a result of the purchase of investment grade corporate bonds and U.S. government agency
mortgage-backed securities. Net loans receivable increased $31.6 million to $602.9 million at September
30, 2018 from $571.3 million at September 30, 2017. The increase was primarily due to increases in
commercial real estate and construction loans, reflecting our continued emphasis of increasing our
investment in such loans. Cash and cash equivalents increased $20.3 million to $48.2 million.
Total liabilities increased by $189.4 million to $952.8 million at September 30, 2018 from $763.4
million at September 30, 2017. Total deposits increased $148.3 million, consisting primarily of certificates
of deposit, which were used to fund asset growth as well as meet short-term liquidity needs. At September
30, 2018, the Company had FHLB advances outstanding of $154.7 million, as compared to $114.3 million
at September 30, 2017. The increase in the level of borrowings was primarily due to match funding of loan
65
originations as well as to funding purchases of investment securities in order to lock in the yield with
minimal interest rate risk as part of the Company’s asset/liability management strategy. All of the
borrowings had maturities of less than six years.
Total stockholders’ equity decreased by $7.8 million to $128.4 million at September 30, 2018 from
$136.2 million at September 30, 2017. The decrease was primarily due to a reduction in the fair market
value of available for sale securities as of September 30, 2018 due to rising market rates which resulted in
a substantial increase in the Company’s accumulated other comprehensive loss. Also contributing to the
decrease were dividend payments totaling $6.3 million consisting of both regular quarterly dividends
totaling $0.20 per share for fiscal 2018 as well as special dividends of $0.15 and $0.35 per share declared
in the first and fourth quarters, respectively, of fiscal 2018.
Results of Operations for the Years Ended September 30, 2018, 2017 and 2016
General.
2018 vs. 2017. For the fiscal year ended September 30, 2018, the Company recognized net income
of $7.1 million, or $0.78 per diluted share, as compared to net income of $2.8 million, or $0.32 per diluted
share for the fiscal year ended September 30, 2017. Both fiscal year periods included significant one-time
charges. Fiscal year 2017 results included a one-time $2.5 million pre-tax expense related to the acquisition
of Polonia Bancorp which was completed as of January 1, 2017 as well as a $1.9 million non-cash pre-tax
charge-off associated with a large lending relationship. Fiscal year 2018 results reflected the effect of a $1.8
million non-cash charge in the first quarter of the fiscal year related to the revaluation of the Company’s
deferred tax assets due to the enactment of the Tax Cuts and Jobs Act in December 2017 which significantly
reduced the corporate income tax rate applicable to the Company.
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 $2.5 million, or $0.36 per diluted
share for the fiscal year ended September 30, 2016. The fiscal year 2017 results included a one-time $2.7
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.
Net Interest Income.
2018 vs. 2017. For the year ended September 30, 2018, net interest income increased to $24.7
million as compared to $21.1 million for fiscal 2017. The increase reflected an $8.5 million, or 32.3%,
increase in interest income, partially offset by a $4.9 million increase, or 92.5%, in interest paid on deposits
and borrowings. The increase in interest income for the year ended September 30, 2018 was primarily due
to the increase in the weighted average balances of earning assets combined with the increasing aggregate
balance of commercial and construction loans in the loan portfolio as well as the rising interest rate
environment. The average balance of interest-earning assets increased by $201.8 million, or 28.0%, to
$ 923.7 million for the year ended September 30, 2018 from $721.9 million for the year ended September
30, 2017. The yield on interest-earning assets increased by 12 basis points to 3.77% for the year ended
September 30, 2018 as compared to 3.65% for fiscal 2017. However, the weighted average cost of
borrowings and deposits increased to 1.23% during the year ended September 30, 2018 from 0.82% for
fiscal year 2017 due to significant growth in the balance of both our certificates of deposit and FHLB
borrowings in order to fund our asset growth combined with increases in market rates of interest. As a
result, our net interest margin declined to 2.68% for the year ended September 30, 2018 from
2.92% for fiscal year 2017.
66
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 Bancorp 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%.
Provision for Loan Losses.
2018 vs. 2017. The Company established a provision for loan losses of $810,000 for the year ended
September 30, 2018 primarily due to the increase in commercial and construction loans. For the year ended
September 30, 2017, the Company established a provision for loan losses of $3.0 million. The large
provision during the year ended September 30, 2017 was primarily due to the $1.9 million non-cash charge-
off incurred in the quarter ended March 31, 2017 related to the lending relationship which involved the
planned 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. See “Item 3. Legal Proceedings”
The allowance for loan losses totaled $5.2 million, or 0.9% of total loans and 38.6% of total non-
performing loans (which included loans acquired from Polonia Bank at their fair value) at September 30,
2018 as compared to $4.5 million, or 0.8% of total loans and 29.0% of total non-performing loans at
September 30, 2017. The Company believes that the allowance for loan losses at September 30, 2018 was
sufficient to cover all known and inherent losses associated with the loan portfolio at such date.
2017 vs. 2016. The Company established a provision for loan losses of $3.0 million for the year
ended September 30, 2017 primarily due to the aforementioned $1.9 million charge-off as compared to
$325,000 for fiscal year 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 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.
Non-interest Income.
2018 vs. 2017. With respect to the year ended September 30, 2018, non-interest income amounted
to $2.5 million compared with $2.2 million for fiscal 2017. The increase experienced in fiscal 2108 was
primarily attributable to the recognition of $808,000 in gains during the third quarter of fiscal 2018
associated with the unwinding of two cash flow hedges. The hedges were unwound to lock in the embedded
gains of the hedge instruments. These gains were partially offset by losses incurred on the sale of securities
yielding below current market yields in order to better position the securities portfolio in a rising rate
environment. The proceeds from the sales were used to invest in higher yielding loan and investment
products.
67
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.
Non-interest Expense.
2018 vs. 2017. For the year ended September 30, 2018, non-interest expense decreased $927,000,
to $15.6 million compared to $16.6 million for fiscal year 2017. The primary reason for the higher level of
non-interest expense experienced during the year ended September 30, 2017, as compared to fiscal year
2018, was the one-time merger-related charge in the 2017 period of approximately $2.5 million, pre-tax,
incurred in connection with the completion of the Polonia Bancorp acquisition in January 2017, the decline
being partially offset primarily by increases in employee expenses and professional services.
2017 vs. 2016. For the year ended September 30, 2017, non-interest expense increased $5.3 million,
to $16.6 million compared to $11.3 million for fiscal year 2016. The primary reason for the increase for
year ended September 30, 2017 as compared to fiscal year 2016 was the additional operating 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.
Income Tax Expense.
2018 vs. 2017. For the year ended September 30, 2018, the Company recorded income tax expense
of $3.7 million, compared to $941,000 for fiscal 2017. The $3.7 million tax expense for the year ended
September 30, 2018 included a one-time non-cash charge of $1.8 million related to a revaluation of the
Company’s deferred tax assets due to the Tax Cuts and Jobs Act legislation enacted in December 2017 that
reduced the statutory corporate income tax rate from 35% to 21%. During fiscal 2018, commencing with
the quarter ended December 31, 2017, the Company’s statutory corporate income tax rate was reduced to
24.25% as compared to companies which are calendar year tax reporting companies whose statutory rate
decreased to 21% starting January 1, 2018. Effective October 1, 2018, the Company’s statutory tax rate was
reduced to 21%. The Company’s tax obligation for the year ended September 30, 2017 was reduced
significantly due to the one-time merger-related charge related to the Polonia Bancorp acquisition and a
one-time loan write-down described previously, both of which were recorded during the three months ended
March 31, 2017.
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 combined with tax benefits associated with the
exercise of stock options and the vesting of restricted stock awards.
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
68
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.
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, 2018, our cash and cash equivalents amounted to $48.2 million. In addition,
our available for sale investment and mortgage-backed securities amounted to an aggregate of $306.2
million at September 30, 2018.
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, 2018, we had certificates of deposit maturing within the next 12 months
amounting to $412.0 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, 2018 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, 2018, the Bank had $265.7 million of available
borrowing capacity along with a line of credit that has been established with the Federal Reserve Bank of
Philadelphia and a $12.5 million line of credit with Atlantic Community Bankers Bank. In addition, the
Bank has the ability to generate brokered certificates of deposit (and has used on occasion, including in
fiscal 2018).
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.
69
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
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, 2018, 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, 2018,
on the basis of contractual maturities, anticipated prepayments, and scheduled rate adjustments within a
three-month period and subsequent selected time intervals. The loan amounts in the table reflect principal
balances expected to be redeployed and/or repriced as a result of contractual amortization and anticipated
prepayments of adjustable-rate loans and fixed-rate loans, and as a result of contractual rate adjustments on
adjustable-rate loans. Annual prepayment rates for adjustable-rate and fixed-rate single-family and multi-
family residential and commercial mortgage loans are assumed to range from 6.4% to 30.7%. The annual
prepayment rate for mortgage-backed securities is assumed to range from 0.9% to 17.3%. 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.
70
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, 2018
Cumulative interest-earning
assets as a percentage of
cumulative interest-bearing
liabilities at September 30, 2018
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)
$5,317
145,628
$31,320
89,907
$40,965
148,286
$77,378
$211,059
$366,039
95,747
123,364
602,932
45,714 - 8,940 249 -
$334,423
$198,191
$121,227
$173,374
$196,659
$3,007
3,724
171,281
3,725
$8,049
11,172
240,708
13,187
$13,606
18,428
95,296
36,852
$13,131
14,886
$59,073
61,685
56,535 -
65,863 35,056
2,083 - - - -
$155,814
$164,182
$273,116
$150,415
$183,820
54,903
$1,023,874
$96,866
109,895
563,820
154,683
2,083
$927,347
$12,839
($151,889)
$34,009
$22,959
$178,609
$96,527
$12,839
($139,050)
($105,041)
($82,082)
$96,527
1.19%
-12.86%
-9.72%
-7.59%
8.93%
106.98%
69.57%
83.09%
89.36%
110.41%
(1)
Interest-earning assets are included in the period in which the balances are expected to be redeployed and/or repriced as a
result of anticipated prepayments, scheduled rate adjustments and contractual maturities.
(2) For purposes of the gap analysis, loans receivable includes non-performing loans, gross of the allowance for loan losses,
undisbursed loan funds, unamortized discounts and deferred loan fees.
(3) Includes restricted stock in FHLB and ACBB.
(4)
Interest-rate sensitivity gap represents the difference between total interest-earning assets and total interest-bearing liabilities.
Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or periods to repricing, they
may react in different degrees to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on
other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate
loans, have features which restrict changes in interest rates both on a short-term basis and over the life of
the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would
likely deviate significantly from those assumed in calculating the table. Finally, the ability of many
borrowers to service their adjustable-rate loans may decrease in the event of an interest rate increase.
71
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, 2018 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
(Dollars in Thousands)
Change
300
200
100
Static
(100)
(200)
(300)
$ 105,350 $ (58,209)
$ 122,951 $ (40,608)
$ 140,741 $ (22,818)
$ 163,559 $ -
$ 176,893 $ 13,334
$ 178,019 $ 14,460
$ 176,144 $ 12,585
-35.59%
-24.83%
-13.95%
-
8.15%
8.84%
7.69%
10.91%
12.29%
13.59%
15.18%
15.91%
15.69%
15.28%
-4.27%
-2.89%
-1.59%
-
0.73%
0.51%
0.10%
At September 30, 2017, the Company’s NPV was $167.7 million or 18.6% of the market value of
assets. Following a 200 basis point increase in interest rates, the Company’s “post shock” NPV would have
been $133.6 million or 16.0% of the market value of assets, a decline of approximately 20.4%. The change
in the NPV ratio or Company’s sensitivity measure was a decrease of 259 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.
72
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Exposure to Changes in Interest Rates.”
73
Item 8. Financial Statements and Supplementary Data
74
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Prudential Bancorp, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Prudential
Bancorp, Inc. and subsidiary (the “Company”) as of September 30, 2018 and 2017, and the related
consolidated statements of operations, comprehensive income, changes in stockholders' equity, and
changes of cash flow for each of the three years in the period ended September 30, 2018, and the
related notes to the consolidated financial statements (collectively, the financial statements). In our
opinion, the financial statements present fairly, in all material respects, the financial position of the
Company as of September 30, 2018 and 2017, and the results of its operations and its cash flows
for each of the three years in the period ended September 30, 2018, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting
as of September 30, 2018, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
in 2013, and our report dated December 14, 2018, expressed an unqualified opinion on the
effectiveness of the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on the Company’s financial statements based on our audits. We are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2009.
Cranberry Township, Pennsylvania
December 14, 2018
75
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Prudential Bancorp, Inc.
Opinion on the Internal Control over Financial Reporting
We have audited Prudential Bancorp, Inc.'s (the “Company”) internal control over financial
reporting as of September 30, 2018, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
in 2013. In our opinion, the Company maintained, in all material respects, effective internal control
over financial reporting as of September 30, 2018, based on criteria established in Internal Control
— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States) (PCAOB), the consolidated statements of financial condition of
the Company as of September 30, 2018 and 2017, 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, 2018, of the Company and our report dated December
14, 2018, expressed an unqualified opinion.
Basis for Opinion
The Company’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 in
the accompanying Report on Management’s Report of Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
76
Definition and Limitations of Internal Control over Financial Reporting
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 (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) 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 (3)
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.
Cranberry Township, Pennsylvania
December 14, 2018
77
PRUDENTIAL BANCORP, INC.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
ASSETS
Cash and amounts due from depository institutions
Interest-bearing deposits
$
2,457
45,714
$
2,274
25,629
September 30,
2018
2017
(Dollars in Thousands)
Total cash and cash equivalents
Certificates of deposit
Investment and mortgage-backed securities available for sale (amortized cost—
September 30, 2018, $316,719; September 30, 2017, $180,087)
Investment and mortgage-backed securities held to maturity (fair value—
September 30, 2018, $55,927; September 30, 2017, $60,179)
Loans receivable—net of allowance for loan losses (September 30, 2018, $5,167;
September 30, 2017, $4,466)
Accrued interest receivable
Real estate owned
Restricted 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 8,987,356 outstanding at September 30, 2018; 10,819,006 issued and
9,008,125 outstanding at September 30, 2017
Additional paid-in capital
Treasury stock, at cost: 1,831,650 shares at September 30, 2018 and 1,810,881 shares
at September 30, 2017
Retained earnings
Accumulated other comprehensive loss
48,171
1,604
306,187
59,852
602,932
3,825
1,026
7,585
7,439
28,691
4,655
6,102
571
2,530
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
$
1,081,170
$
899,540
$
13,677
770,581
$
9,375
626,607
784,258
10,000
144,683
3,232
2,083
8,505
952,761
635,982
20,000
94,318
1,933
2,207
8,921
763,361
-
-
108
118,345
(27,744)
45,854
(8,154)
108
118,751
(26,707)
44,787
(760)
Total stockholders' equity
128,409
136,179
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
1,081,170
$
899,540
________________________________________
See notes to consolidated financial statements.
78
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,
2018
2017
2016
(Dollars in Thousands Except Per Share Amounts)
$
25,367
4,077
5,015
392
$
20,107
2,947
3,180
109
$
12,909
2,494
1,979
101
Total interest income
34,851
26,343
17,483
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
Swap income
Earnings from BOLI
Other
Total non-interest income
NON-INTEREST EXPENSES:
Salaries and employee benefits
Data processing
Professional services
Office occupancy
Depreciation
Director compensation
Federal Deposit Insurance Corporation premiums
Real estate owned expense
Advertising
Merger related expenses
Core deposit amortization
Other
Total non-interest expenses
INCOME BEFORE INCOME TAXES
INCOME TAXES:
Current
Deferred expense (benefit)
Total
NET INCOME
7,386
347
2,404
10,137
24,714
810
3,930
184
1,152
5,266
21,077
2,990
2,861
95
370
3,326
14,157
225
23,904
18,087
13,932
668
(376)
-
1,122
639
447
2,500
8,273
733
1,866
1,079
625
234
278
176
246
-
138
1,991
15,639
10,765
2,429
1,272
3,701
655
235
52
-
677
579
2,198
7,468
697
1,433
962
553
282
162
(13)
214
2,486
112
2,210
16,566
3,719
801
140
941
464
418
11
-
333
111
1,337
6,518
456
1,075
670
325
424
396
19
103
300
-
1,004
11,290
3,979
1,275
(16)
1,259
$
7,064
$
2,778
$
2,720
BASIC EARNINGS PER SHARE
$
0.80
$
0.33
$
0.37
DILUTED EARNINGS PER SHARE
$
0.78
$
0.32
$
0.36
DIVIDENDS PER SHARE
$
0.70
$
0.12
$
0.12
See notes to consolidated financial statements.
79
PRUDENTIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
Net income
Years Ended S eptember 30,
2018
2017
2016
(Dollars in thousands)
$
7,064
$
2,778
$
2,720
(612)
(418)
142
(202)
69
-
-
780
(2,830)
1,801
Unrealized holding (loss) gain on available-for-sale securities
Tax effect
Reclassification adjustment for net (losses) gains realized in net income
Tax effect
Unrealized holding gain (loss) on interest rate swaps
Tax effect
Reclassification adjustment for gain on interest rate swap
Tax effect
(9,077)
1,906
310
(65)
599
(126)
(808)
170
962
(235)
80
705
(240)
-
-
Total other comprehensive (loss) income
(7,091)
(1,558)
Comprehensive (loss) income
$
(27)
$
1,220
$
3,500
See notes to consolidated financial statements
80
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, 2015
$
95
$
95,286
$
(4,926)
$
(14,691)
$
41,219
$
18
$
117,001
Net income
Other comprehensive income
Dividends paid ($0.12 per share)
Purchase of treasury stock (445,881 shares)
Stock option expense
Restricted shares award expense
Treasury stock used for employee
benefit plan (41,800 shares)
ESOP shares committed to
be released (32,064 shares)
(7,047)
640
455
462
(640)
150
376
2,720
(895)
780
2,720
780
(895)
(7,047)
455
462
-
-
526
BALANCE, September 30, 2016
95
95,713
(4,550)
(21,098)
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 employee
benefit plan (35,234 shares)
Stock option expense
Restricted shares award expense
ESOP shares committed to
be released (8,879 shares)
BALANCE, September 30, 2017
Net income
Other comprehensive loss
Dividends paid ($0.70 per share)
Purchase of treasury stock (223,520 shares)
Treasury stock used for employee
benefit plan (202,751 shares)
Stock option expense
Restricted shares award expense
Reclassification due to change in federal tax rate
13
21,801
733
4,456
(663)
531
578
(1,083)
(5,189)
663
58
118,751
108
94
-
(26,707)
(4,037)
3,000
(1,511)
540
565
43,044
2,778
(1,035)
798
114,002
(1,558)
2,778
(1,558)
(1,035)
21,814
(1,083)
-
-
531
578
152
136,179
7,064
(7,091)
(6,300)
(4,037)
1,489
540
565
-
44,787
7,064
(6,300)
(760)
(7,091)
303
(303)
BALANCE, September 30, 2018
$
108
$
118,345
$
-
$
(27,744)
$
45,854
$
(8,154)
$
128,409
See notes to consolidated financial statements.
81
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 (amortization) accretion of premiums/discounts
Amortization of core deposit premium
Earnings on BOLI
(Accretion) amortization of deferred loan fees and costs
Compensation expense of ESOP
Loss (gain) on sale of investment and mortgage-backed securities
Writedown of real estate owned
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 of certificates of deposit
Redemption of certificates of deposit
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
Purchase of bank owned life insurance
Purchases of equipment
Net cash used in investing activities
Years Ended September 30,
2018
2017
2016
(Dollars in Thousands)
$
7,064
$
2,778
$
2,720
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)
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)
810
625
(633)
138
(639)
(72)
-
376
175
(45)
-
-
-
1,105
1,272
1,299
(172)
(1,000)
10,303
(4,480)
(115,555)
(43,299)
90,589
1,254
15,015
(123,608)
-
-
(6,780)
5,197
11,052
-
407
-
-
(260)
(170,468)
82
PRUDENTIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES OF CASH FLOW (continued)
FINANCING ACTIVITIES:
Net decrease in demand deposits, NOW accounts,
and savings accounts
Net increase in certificates of deposit
Net (decrease) increase in 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
Repayment of remaining principal balance of ESOP loan
(Decrease) increase in advances from borrowers for taxes
and insurance
Net cash provided by financing activities
NET INCREASE IN CASH AND
CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS—Beginning of year
CASH AND CASH EQUIVALENTS—End of year
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid on deposits and advances from Federal
Home Loan Bank
2018
Year Ended September 30,
2017
(Dollars in thousands)
2016
(21,241)
169,821
(10,000)
93,300
(42,475)
(2,548)
(6,300)
-
-
(124)
180,433
20,268
27,903
(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
$
48,171
$
27,903
$
12,440
$
9,601
$
4,736
$
3,214
Income taxes paid
$
2,700
$
1,080
$
600
SUPPLEMENTAL DISCLOSURES OF NONCASH ITEMS:
Real estate acquired in settlement of loans
Acquisition of noncash assets and liabilities :
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 acquired
Cash acquired
See notes to consolidated financial statements.
$
1,373
$
-
$
581
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
$
$
$
83
PRUDENTIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2018 AND 2017
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 ten
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, 2018 was PSB Delaware, Inc. (“PSB”), a
Delaware-chartered corporation established to hold certain investments. As of September 30, 2018, PSB had assets
of $156.7 million primarily consisting of investment and mortgage-backed securities.
Most of the Company’s business activities are conducted within a few hours’ drive from Philadelphia and include
eastern Pennsylvania, Delaware, New Jersey and southern New York.
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 in amounts of
up to $249,000 and with maturities of between one to five years.
Investment Securities and Mortgage-Backed Securities—Management classifies and accounts for debt 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
84
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.
Other-than-temporary impairment —Management evaluates securities for other-than-temporary impairment at least
on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. For all
securities that are in an unrealized loss position for an extended period of time and for all securities whose fair value
is significantly below amortized cost, management performs an evaluation of the specific events attributable to the
market decline of the security. Management considers the length of time and extent to which the security’s 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 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
85
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.
Restricted Bank Stock – Restricted bank stock includes Federal Home Loan Bank (“FHLB”) and Atlantic Community
Bankers Bank (“ACBB”) stock and is classified as a restricted equity security because ownership is restricted and
there is no established market for its resale. FHLB and ACBB stock is carried at cost and is evaluated for impairment
when certain conditions warrant further consideration.
The Bank 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 of Pittsburgh 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
2018 and remained unchanged as of September 30, 2018.With consideration given to these factors, management
concluded that the stock was not impaired at September 30, 2018 or 2017.
In 2018 the Bank purchased $90,000 of stock in ACBB to support a $12.5 million line of credit. The line has not been
drawn on.
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 life insurance covering 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, 2018 or 2017. The Company
paid $6.3 million, $1.0 million and $895,000 in cash dividends during the years ended September 30, 2018, 2017 and
2016, 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.
86
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, 2018, the Company
repurchased 223,520 shares of common stock at an average price per share of $18.08. 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, 2018, 2017 and 2016, 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
87
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).
For the fair value hedges, changes in the fair value of the interest rate swap are expected to be “perfectly effective” in
offsetting changes in the fair value of the hedged item, thus no portion of the change in market value is anticipated to
be recognized 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.
Reclassification 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.
88
Recently Adopted Accounting Pronouncements
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 separate measurement of ineffectiveness to accumulated other comprehensive income with a 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 early adopted the ASU during the quarter ended June 30, 2018. There was not a significant impact on the
Company’s financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220),
to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects
resulting from the Tax Cuts and Jobs Act. The amendments eliminate the stranded tax effects resulting from the Tax
Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. The
amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim
periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption
in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet
been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made
available for issuance. The amendments in this Update should be applied either in the period of adoption or
retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax
rate in the Tax Cuts and Jobs Act is recognized. On January 1, 2018, the Company adopted this standard which
resulted in a reclassification of $303,000 between accumulated other comprehensive income (loss) and retained
earnings on the consolidated statement of financial condition.
Recent Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition
standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services. In addition, this Update specifies the accounting for certain costs to obtain or fulfill a
contract with a customer and expands disclosure requirements for revenue recognition. In August 2015, the FASB
issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606) deferring the effective date of ASU 2014-
09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit
plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017,
including interim reporting periods within that reporting period. Since the guidance scopes out revenue associated with
financial instruments, including loan receivables and investment securities, we do not expect the adoption of 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 revenue is 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 Update applies to all entities that hold financial
assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement,
presentation, and disclosure of financial instruments. Among other things, this Update (a) requires equity investments
(except those accounted for under the equity method of accounting or those that result in consolidation of the investee)
to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment
assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to
identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at
89
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
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 (g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to
available-for-sale securities in combination with the entity’s other deferred tax assets. For public business entities, the
amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods
within those fiscal years. The update is not expected to have a significant impact on the Company’s financial
statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires lessees to recognize the
assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial
position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the
underlying asset for the lease term. A short-term lease is defined as one in which (a) the lease term is 12 months or
less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For
short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public
business entities, the amendments in this Update are effective for fiscal years beginning after 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 balance sheet is estimated to result in less than a one percent increase in assets
and liabilities. The Company also anticipates additional disclosures to be provided at adoption.
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 affected for the measurement of credit losses for newly recognized financial assets, as
well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU
2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted
for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new
requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the
first reporting period in which the guidance is adopted. 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 Update are effective for public business
entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early
adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim
90
period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An
entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this update
should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the
amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively
as of the earliest date practicable. The update is not expected to have a significant impact on the Company’s financial
statements.
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 screening process reduces the number of transactions that need to be
further evaluated. Public business entities should apply the amendments in this update to annual periods beginning
after December 15, 2017, including interim periods within those periods. The amendments in this update should be
applied prospectively on or after the effective date. This Update 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. This update 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 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. The update is not expected to have a significant impact on the Company’s financial statements.
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. 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 and results of operations.
In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718), which affects any
entity that changes the terms or conditions of a share-based payment award. This Update amends the definition of
modification by qualifying that modification accounting does not apply to changes to outstanding share-based payment
awards that do not affect the total fair value, vesting requirements, or equity/liability classification of the awards. The
91
amendments in this Update are effective for all entities for annual periods, and interim periods within those annual
periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for
(1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all
other entities for reporting periods for which financial statements have not yet been made available for issuance. The
amendments in this Update should be applied prospectively to an award modified on or after the adoption date. This
update is not expected to have a significant impact on the Company’s financial statements.
In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial
Instruments—Overall (Subtopic 825-10), to clarify certain aspects of the guidance issued in ASU 2016-01. (1) An
entity measuring an equity security using the measurement alternative may change its measurement approach to a fair
value method in accordance with Topic 820, Fair Value Measurement, through an irrevocable election that would
apply to that security and all identical or similar investments of the same issuer. Once an entity makes this election,
the entity should measure all future purchases of identical or similar investments of the same issuer using a fair value
method in accordance with Topic 820. (2) Adjustments made under the measurement alternative are intended to reflect
the fair value of the security as of the date that the observable transaction for a similar security took place. (3)
Remeasuring the entire value of forward contracts and purchased options is required when observable transactions
occur on the underlying equity securities. (4) When the fair value option is elected for a financial liability, the guidance
in paragraph 825-10- 45-5 should be applied, regardless of whether the fair value option was elected under either
Subtopic 815-15, Derivatives and Hedging—Embedded Derivatives, or 825-10, Financial Instruments—Overall. (5)
Financial liabilities for which the fair value option is elected, the amount of change in fair value that relates to the
instrument specific credit risk should first be measured in the currency of denomination when presented separately
from the total change in fair value of the financial liability. Then, both components of the change in the fair value of
the liability should be remeasured into the functional currency of the reporting entity using end-of-period spot rates.
(6) The prospective transition approach for equity securities without a readily determinable fair value in the
amendments in Update 2016-01 is meant only for instances in which the measurement alternative is applied. For public
business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, and
interim periods within those fiscal years beginning after June 15, 2018. All entities may early adopt these amendments
for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they
have adopted Update 2016-01. The update is not expected to have a significant impact on the Company’s financial
statements.
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718), which simplified the
accounting for nonemployee share-based payment transactions. The amendments in this update expand the scope of
Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The
amendments in this Update improve the following areas of nonemployee share-based payment accounting; (a) the
overall measurement objective, (b) the measurement date, (c) awards with performance conditions, (d) classification
reassessment of certain equity-classified awards, (e) calculated value (nonpublic entities only), and (f) intrinsic value
(nonpublic entities only). The amendments in this Update are effective for public business entities for fiscal years
beginning after December 15, 2018, including interim periods within that fiscal year. 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. 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 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework –
Changes the Disclosure Requirements for Fair Value Measurements. The Update removes the requirement to disclose
the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy; the policy for timing
of transfers between levels; and the valuation processes for Level III fair value measurements. The Update requires
disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for
recurring Level III fair value measurements held at the end of the reporting period and the range and weighted average
of significant unobservable inputs used to develop Level III fair value measurements. This Update is effective for all
entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The
Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position
or results of operations.
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:
Year Ended September 30,
2018
2017
2016
(Dollars in Thousands Except Per Share Data)
Basic
Diluted
Basic
Diluted
Basic
Diluted
Net income
$
7,064
$
7,064
$
2,778
$
2,778
$
2,720
$
2,720
Weighted average common
shares outstanding
8,855,938
8,855,938
8,316,638
8,316,638
7,417,044
7,417,044
Effect of CSEs
-
204,175
-
357,871
-
217,701
Adjusted weighted average
common shares used in earnings
per share computation
8,855,938
9,060,113
8,316,638
8,674,509
7,417,044
7,634,745
Earnings per share
$
0.80
$
0.78
$
0.33
$
0.32
$
0.37
$
0.36
As of September 30, 2018, 2017, and 2016, there were 666,526, 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. At September 30, 2018, 2017 and 2016 there were 202,500, 367,379 and
367,464 shares that had exercise prices greater than the current market value and are considered anti-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,
2018
2018
2018
2017
2017
2017
(Dollars in Thousands)
Unrealized gain
(loss) on AFS
securities (a)
Unrealized gain (loss)
on interest rate swaps
(a)
Total other
comprehensive
loss
Unrealized gain
(loss) on AFS
securities (a)
Unrealized gain (loss)
on interest rate
swaps (a)
Total other
comprehensive
loss
Beginning Balance
$
(1,091)
$
331
$
(760)
$
931
$
(133)
$
798
Other comprehensive (loss) income before reclassification
Amount reclassified from accumulated other comprehensive income
Total other comprehensive income (loss)
Recassification due to change in federal income tax rate
(7,171)
245
(6,926)
(303)
473
(638)
(165)
-
(6,698)
(393)
(7,091)
(303)
(1,867)
(155)
(2,022)
-
464
-
464
-
(1,403)
(155)
(1,558)
-
Ending Balance
$
(8,320)
$
166
$
(8,154)
$
(1,091)
$
331
$
(760)
(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 othercomprehensive (loss) income for the years ended September 30, 2018 and 2017:
2018
Securities
2018
Swaps
Year Ended September 30,
2018
2017
(Dollars in Thousands)
Total
Securities
2017
Swaps
2017
Total
$
(310)
(1)
$
808
(2)
$
498
$
235
(1)
$
-
$
235
65
(3)
(170)
(3)
(105)
(80)
(3)
-
(80)
$
(245)
$
638
$
393
$
155
$
-
$
155
Unrealized (losses) gain
Income taxes
(1) Recorded as a loss on the sale of investment securities
(2) Recorded as swap income
(3) Recorded as income tax benefit (expense)
94
5. INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost and fair value of securities, with gross unrealized gains and losses, are as follows:
Amortized
Cost
September 30, 2018
Gross
Gross
Unrealized
Unrealized
Losses
Gains
(Dollars in Thousands)
Fair
Value
$
25,562
22,078
$
-
-
$
(1,391)
(542)
$
24,171
21,536
193,451
75,622
316,713
6
77
-
77
31
(6,168)
(2,539)
(10,640)
187,360
73,083
306,150
-
37
Securities Available for Sale:
U.S. government and agency obligations
State and political subdivisions
Mortgage-backed securities - U.S.
government agencies
Corporate debt securities
Total debt securities available for sale
FHLMC preferred stock
Total securities available for sale
$
316,719
$
108
$
(10,640)
$
306,187
Securities Held to Maturity:
U.S. government and agency obligations
State and political subdivisions
Mortgage-backed securities - U.S.
government agencies
$
33,500
20,574
$
85
2
$
(3,311)
(696)
$
30,274
19,880
5,778
148
(153)
5,773
Total securities held to maturity
$
59,852
$
235
$
(4,160)
$
55,927
95
Securities Available for Sale:
U.S. government and agency obligations
Mortgage-backed securities - U.S.
government agencies
Corporate debt securities
Total debt securities
FHLMC preferred stock
September 30, 2017
Gross
Gross
Amortized
Cost
Unrealized Unrealized
Gains
Losses
Fair
Value
(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
As of September 30, 2018, the Bank maintained $130.5 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, 2018:
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
$
(89)
(542)
$
4,479
21,536
$
(1,302)
-
$
19,692
-
$
(1,391)
(542)
$
24,171
21,536
(1,821)
(1,719)
92,851
58,753
(4,347)
(820)
86,268
14,330
(6,168)
(2,539)
179,119
73,083
Securities Available for Sale:
U.S. government and agency obligations
State and political subdivisions
Mortgage-backed securities -U.S.
government agencies
Corporate debt securities
Total securities available for sale
$
(4,171)
$
177,619
$
(6,469)
$
120,290
$
(10,640)
$
297,909
Securities Held to Maturity:
U.S. government and agency obligations
Mortgage-backed securities -U.S.s
government agencies
State and political subdivisions
$
-
$
-
$
(3,311)
$
27,190
$
(3,311)
$
27,190
(106)
(234)
2,630
11,238
(46)
(463)
930
6,618
(152)
(697)
3,560
17,856
Total securities held to maturity
$
(340)
$
13,868
$
(3,820)
$
34,738
$
(4,160)
$
48,606
Total
$
(4,511)
$
191,487
$
(10,289)
$
155,028
$
(14,800)
$
346,515
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.
The Company assesses the credit loss 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).
For the years ended September 30, 2018, 2017 and 2016, the Company determined that no OTTI had occurred
within the investment and mortgage-back securities portfolios.
97
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 seven securities in a gross unrealized loss position having an aggregate depreciation of $1.4 million or
5.4% from the Company’s amortized cost basis. The unrealized losses on these debt securities relate 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, 2018.
U.S. Government agency issued mortgage-backed securities — At September 30, 2018, the gross unrealized loss
in U.S. government agency issued mortgage-backed securities in the category of experiencing a gross unrealized loss
was $6.3 million or 3.2% from the Company’s amortized cost basis and consisted of 87 securities. 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 relate 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, 2018.
Corporate debt securities — At September 30, 2018, the gross unrealized loss corporate debt securities in the
category of experiencing a gross unrealized loss was $2.5 million or 3.4% from the Company’s amortized cost basis
and consisted of 37 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,
2018.
State and political subdivision debt securities — At September 30, 2018, the gross unrealized loss state and political
subdivision debt securities was $1.2 million or 2.9% from the Company’s amortized cost basis and consisted of seven
securities. The unrealized losses on these debt securities relate 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, 2018.
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, 2017:
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
$
(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:
US government and agency obligations
Mortgage-backed securities -
US 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 -
US government agencies
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
The amortized cost and fair value of debt securities by contractual maturity are shown below. Expected maturities as
of September 30, 2018 will differ from contractual maturities because of call provisions in the securities. Mortgage-
backed securities were not included as the contractual maturity is generally irrelevant due to the borrowers’ right to
prepay without pre-payment penalty which results in significant prepayments.
Held to Maturity
Available for Sale
September 30, 2018
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
2,000
$
-
25,484
26,590
$
$
(Dollars in Thousands)
2,004
-
24,296
23,854
1,002
7,541
63,079
51,640
$
994
7,287
60,807
49,702
Total
$
54,074
$
50,154
$
123,262
$
118,790
During the fiscal years ended September 30, 2018 and 2017, the Company recorded realized gross losses of ($376,000)
and gross gains of $235,000, respectively, and gross proceeds from the from the sale of investment and mortgage-
backed securities of $11.1 million and $20.9 million, respectively.
99
6. LOANS RECEIVABLE
Loans receivable consist of the following:
September 30,
2018
2017
One-to-four family residential
Multi-family residential
Commercial real estate
Construction and land development
Loans to financial institutions
Commercial business
Leases
Consumer
Total loans
Undisbursed portion of loans-in-process
Deferred loan fees
Allowance for loan losses
$
(Dollars in Thousands)
324,865
$
34,355
119,511
160,228
6,000
17,792
1,687
953
351,298
21,508
127,644
145,486
-
488
4,240
1,943
665,391
(54,474)
(2,818)
(5,167)
652,607
(73,858)
(2,940)
(4,466)
Net loans
$
602,932
$
571,343
The Company originates loans to customers located primarily in its market area of eastern Pennsylvania, Delaware,
New Jersey and southern New York. The ultimate repayment of these loans at September 30, 2018 is dependent, to a
certain degree, on the state of the local economy and real estate market.
The following table summarizes the loans individually and collectively evaluated for impairment by loan segment at
September 30, 2018:
One- to four-
family
residential
Multi-family
residential
Commercial
real estate
Construction and
land development
Loans to
financial
institutions
Commercial
business
Leases
Consumer
Total
(Dollars in Thousands)
Individually evaluated for impairment
$
5,081
$
298
$
1,919
$
8,750
$
-
$
-
$
-
$
-
$
16,048
Collectively evaluated for impairment
319,784
34,057
117,592
151,478
6,000
17,792
1,687
953
649,343
Total loans
$
324,865
$
34,355
$
119,511
$
160,228
$
6,000
$
17,792
$
1,687
$
953
$
665,391
The following table summarizes the loans individually and collectively evaluated for impairment by loan segment at
September 30, 2017:
100
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
$
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
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 or more 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, 2018:
Impaired
Loans with
Impaired Loans with
No Specific
Specific Allowance
Allowance
Total Impaired Loans
(Dollars in Thousands)
Unpaid
Recorded
Related
Recorded
Recorded
Principal
Investment Allowance
Investment
Investment
Balance
One-to-four family residential
$
-
$
-
$
5,081
$
5,081
$
5,432
Multi-family residential
Commercial real estate
Construction and land development
Consumer
Total
-
-
-
-
-
-
-
-
298
1,919
8,750
-
298
1,919
8,750
-
298
2,057
11,131
-
$
-
$
-
$
16,048
$
16,048
$
18,918
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:
101
Impaired
Loans with
Impaired Loans with
No Specific
Specific Allowance
Allowance
Total Impaired Loans
(Dollars in Thousands)
Recorded
Related
Recorded
Recorded
Investment Allowance
Investment
Investment
Unpaid
Principal
Balance
One-to-four family residential
$
-
$
-
$
8,277
$
8,277
$
9,245
Multi-family residential
Commercial real estate
Construction and land development
Commercial business
Total
-
-
-
-
-
-
-
-
317
2,337
8,724
10
317
2,337
8,724
10
317
2,449
11,105
10
$
-
$
-
$
19,665
$
19,665
$
23,126
The following tables present the average investment in impaired loans and related interest income recognized for the
periods indicated:
September 30, 2018
Average
Recorded
Investment
Income Recognized
on Accrual Basis
(Dollars in Thousands)
Income
Recognized on
Cash Basis
$
5,741
$
24
$
59
306
2,557
8,743
-
-
21
40
-
-
-
7
-
-
-
-
$
17,347
$
85
$
66
One-to-four family residential
Multi-family residential
Commercial real estate
Construction and land development
Commercial business
Consumer
Total
102
September 30, 2017
Average
Recorded
Investment
Income Recognized
on Accrual Basis
(Dollars in Thousands)
Income
Recognized on
Cash Basis
$
6,096
$
89
$
91
321
2,459
9,163
-
5
23
49
-
-
-
-
12
-
-
-
$
18,044
$
161
$
103
September 30, 2016
Average
Recorded
Investment
Income Recognized
on Accrual Basis
(Dollars in Thousands)
Income
Recognized on
Cash Basis
$
5,099
$
129
$
101
344
3,565
9,604
8
24
96
-
-
-
12
62
-
$
18,620
$
249
$
175
One-to-four family residential
Multi-family residential
Commercial real estate
Construction and land development
Commercial business
Consumer
Total
One-to-four family residential
Multi-family residential
Commercial real estate
Construction and land development
Commercial business
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
One-to-four residential
Multi-family residential
Commercial real estate
Construction and land development
Loans to financial institutions
Commercial business
September 30, 2018
Special
Pass
Mention
Substandard
Doubtful
(Dollars in Thousands)
Total
Loans
$
317,033
$
2,751
$
5,081
$
-
$
324,865
34,057
115,670
151,478
6,000
17,792
-
1,922
-
-
-
298
1,919
8,750
-
-
-
-
-
-
-
34,355
119,511
160,228
6,000
17,792
Total
$
642,030
$
4,673
$
16,048
$
-
$
662,751
One-to-four residential
Multi-family residential
Commercial real estate
Construction and land development
Commercial business
Total
September 30, 2017
Special
Pass
Mention
Substandard
Doubtful
(Dollars in Thousands)
Total
Loans
$
343,021
$
1,635
$
6,642
$
-
$
351,298
21,191
125,307
136,762
488
-
1,449
-
-
317
888
8,724
-
-
-
-
-
21,508
127,644
145,486
488
$
626,769
$
3,084
$
16,571
$
-
$
646,424
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:
104
September 30, 2018
Non-
Performing
Performing
(Dollars in Thousands)
Total
Loans
One-to-four family residential
$
321,853
$
3,012
$
324,865
Leases
Consumer
Total
1,687
953
-
-
1,687
953
$
324,493
$
3,012
$
327,505
September 30, 2017
Non-
Performing
Performing
(Dollars in Thousands)
Total
Loans
One-to-four family residential
$
346,191
$
5,107
$
351,298
Leases
Consumer
Total
4,240
1,943
-
-
4,240
1,943
$
352,374
$
5,107
$
357,481
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, 2018
Current
30-89 Days 90 Days +
Past Due
Past Due
Total
Past Due
(Dollars in Thousands)
Total
Loans
Non-
Accrual
$
$
$
$
$
321,749
34,355
117,335
151,478
17,792
6,000
1,687
837
651,233
1,037
-
722
-
-
-
-
116
1,875
2,079
-
1,454
8,750
-
-
-
-
12,283
3,116
-
2,176
8,750
-
-
-
116
14,158
324,865
34,355
119,511
160,228
17,792
6,000
1,687
953
665,391
$
3,012
-
1,627
8,750
-
-
-
13,389
$
$
$
$
$
$
90 Days+
Past Due
and Accruing
$
-
-
-
-
-
-
-
-
$
-
One-to-four family residential
Multi-family residential
Commercial real estate
Construction and land development
Commercial business
Loans to financial institutions
Leases
Consumer
Total Loans
105
September 30, 2017
30-89 Days 90 Days +
Total
Current
Past Due
Past Due
Past Due
(Dollars in Thousands)
90 Days+
Past Due
Non-
Accrual
and Accruing
Total
Loans
One-to-four family residential
$
346,877
$
1,746
$
2,675
$
4,421
$
351,298
$
5,107
$
-
Multi-family residential
Commercial real estate
Construction and land development
Commercial business
Leases
Consumer
Total Loans
21,508
125,157
136,762
488
4,240
1,874
-
1,000
-
-
-
69
-
1,487
8,724
-
-
-
-
2,487
8,724
-
-
69
21,508
127,644
145,486
488
4,240
1,943
-
1,566
8,724
-
-
-
-
-
-
-
-
-
$
636,906
$
2,815
$
12,886
$
15,701
$
652,607
$
15,397
$
-
Interest income on nonaccrual loans would have increased by approximately $744,000, $636,000, and $604,000,
during fiscal years ended September 30, 2018, 2017, and 2016, respectively, if these loans would have performed in
accordance with their original terms.
The allowance for loan losses is established through a provision for loan losses charged to expense. Management
maintains the allowance at a level believed to cover all known and inherent losses in the portfolio that are both probable
and reasonable to estimate at each reporting date. Management reviews the allowance for loan losses no less than
quarterly in order to identify those inherent losses and to assess the overall collection probability for the loan portfolio
in view of these inherent losses. For each primary type of loan, a loss factor is established reflecting an estimate of
the known and inherent losses in such loan type using both a quantitative analysis as well as consideration of qualitative
factors. The evaluation process includes, among other things, an analysis of delinquency trends, non-performing loan
trends, the level of charge-offs and recoveries, prior loss experience, total loans outstanding, the volume of loan
originations, the type, size and geographic concentration of our loans, the value of collateral securing the loans, the
borrower’s ability to repay and repayment performance, the number of loans requiring heightened management
oversight, local economic conditions and industry experience.
Commercial real estate loans entail significant additional credit risks compared to one-to-four family residential
mortgage loans, as they generally involve large loan balances concentrated with single borrowers or groups of related
borrowers. In addition, the payment experience on loans secured by income-producing properties typically depends
on the successful operation of the related real estate project and/or business operation of the borrower who is also the
primary occupant, and thus may be subject to a greater extent to the effects of adverse conditions in the real estate
market and in the economy in general. Commercial business loans typically involve a higher risk of default than
residential loans of like duration since their repayment is generally dependent on the successful operation of the
borrower’s business and the sufficiency of collateral, if any. Land acquisition, development and construction lending
exposes us to greater credit risk than permanent mortgage financing. The repayment of land acquisition, development
and construction loans depends upon the sale of the property to third parties or the availability of permanent financing
upon completion of all improvements. These events may adversely affect the borrower and the value of the collateral
property.
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, 2018, 2017 and 2016. Activity in the allowance is presented for the years ended
September 30, 2018, 2017, and 2016:
106
September 30, 2018
One- to
four-family
residential
Multi-
family
residential
Commercial
real estate
Construction
and land
development
Commercial
business
Loans to
financial
institutions
(In Thousands)
Leases
Consumer Unallocated
Total
ALLL balance at September 30, 2017
$ 1,241
$ 205
$ 1,201 $ 1,358 $ 4 $ - $ 23
$ 24 $ 410
$ 4,466
Charge-offs
Recoveries
Provision
(114)
28
188
-
-
142
-
-
(47)
(12)
-
208
-
-
183
-
-
64
-
-
(5)
(11)
-
5
-
-
72
(137)
28
810
ALLL balance at September 30, 2018
$
1,343
$
347
$
1,154
$
1,554
$
187
$
64
$
18
$
18
$
482
$
5,167
Individually evaluated for impairment
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Collectively evaluated for impairment
1,343
347
1,154
1,554
187
64
18
18
482
5,167
September 30, 2017
One- to
four-family
residential
Multi-
family
residential
Commercial
real estate
Construction
and land
development
Commercial
business
Leases
Consumer Unallocated Total
ALLL balance at September 30, 2016 $ 1,627
$ 137
$ 859
(In Thousands)
$ 316 $ 1
$ 21
$ 10 $ 298 $ 3,269
Charge-offs
Recoveries
Provision
(140)
182
(428)
-
-
68
-
-
342
(1,819)
-
2,861
-
-
3
-
-
2
(16)
-
30
-
-
112
(1,975)
182
2,990
ALLL balance at September 30, 2017
$
1,241
$
205
$
1,201
$
1,358
$
4
$
23
$
24
$
410
$
4,466
Individually evaluated for impairment
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Collectively evaluated for impairment
1,241
205
1,201
1,358
4
23
24
410
4,466
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
$ 1,636
$ 66
$ 231 $ 725 $ - $ -
$ 4 $ 268
$ 2,930
Charge-offs
Recoveries
Provision
(11)
105
(103)
-
-
71
-
-
628
-
20
(429)
-
-
1
-
-
21
-
-
6
-
-
30
(11)
125
225
ALLL balance at September 30, 2016
$
1,627
$
137
$
859
$
316
$
1
$
21
$
10
$
298
$
3,269
Individually evaluated for impairment
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Collectively evaluated for impairment
1,627
137
859
316
1
21
10
298
3,269
Loans acquired in the merger with Polonia Bancorp 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 Bank. The fair value of the loans acquired was
107
$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 $810,000, $3.0 million and $225,000 during the years ended
September 30, 2018, 2017 and 2016, respectively. The provision for loan losses was deemed necessary for fiscal 2018
due to the increase in the aggregate level of commercial and construction loans outstanding and the level of charge-
offs incurred during fiscal 2018. The Company believes that the allowance for loan losses at September 30, 2018 was
sufficient to cover all inherent and known losses associated with the loan portfolio at such date. At September 30,
2018, the Company’s non-performing assets totaled $14.4 million or 1.3% of total assets as compared to $15.6 million
or 1.7% of total assets at September 30, 2017. Non-performing assets at September 30, 2018 included five construction
loans aggregating $8.7 million, 32 one-to-four family residential loans aggregating $2.9 million, one single-family
residential investment property loan in the amount of $156,000 and five commercial real estate loans aggregating $1.6
million. Non-performing assets at September 30, 2018 also included real estate owned consisting of two single-family
residential properties with an aggregate carrying value of $1.0 million. At September 30, 2018, the Company had 10
loans aggregating $6.2 million that were classified as troubled debt restructurings (“TDRs”). Five of such loans
aggregating $650,000 were performing in accordance with the restructured terms as of September 30, 2018 and were
accruing interest. One TDR is on non-accrual and consists of a $449,000 loan secured by a single-family property.
One TDR is on non-accrual and consists of a $156,000 loan secured by various commercial and residential properties.
The three remaining TDRs totaling $4.9 million are also classified as non-accrual and are a part of a lending
relationship totaling $10.6 million (after taking into account a $1.9 million write-down recognized during the quarter
ending March 31, 2017 related to this borrowing relationship). The primary project of the borrower (the development
of a 169-unit townhouse project in Bristol Borough, Pennsylvania) is the subject of litigation between the Bank and
the borrower. Subsequent to the commencement of the litigation, the borrower filed for bankruptcy under Chapter 11
(Reorganization) 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 state litigation is stayed pending the resolution of the bankruptcy proceedings. As of
September 30, 2018, the Company had reviewed $19.2 million of loans for possible impairment of which $14.3 million
was classified substandard compared to $19.7 million reviewed for possible impairment and $12.7 million of which
was classified substandard as of September 30, 2017.
Management will continue to monitor and modify the allowance for loan losses as conditions dictate. No assurances
can be given that the level of the 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, in part the current level of
the allowance for loan losses.
The following tables set forth a summary of the TDRs activity for the year ended September 30, 2016. There were no
TDRs approved in 2018 or 2017. All of the TDRs involved changes in the interest rates on the loans; no debt was
forgiven. At September 30, 2018, out of the 10 then existing TDR loans, five were performing and the remaining five
were classified as non-performing.
There were no TDRs established during the years ended September 30, 2018 or 2017.
108
(Dollar Amounts in Thousands)
One-to-four family residential
As of and for the Year Ended September 30, 2016
Restructured Current Period
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Number of
Loans
1
1
$
482
$
482
$
482
$
482
At September 30, 2018, the Company had twenty-three consumer mortgages with a carrying amount of $1.4 million
that are secured by residential real estate property for which foreclosure proceedings are in process according to local
jurisdictions.
7. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized by major classifications as follows:
Land
Buildings and improvements
Furniture and equipment
Total
Accumulated depreciation
September 30,
2018
2017
(Dollars in Thousands)
$
1,437
7,449
3,417
$
1,437
7,449
3,158
12,303
(4,864)
12,044
(4,240)
Total office properties and equipment,
net of accumulated depreciation
$
7,439
$
7,804
For the years ended September 30, 2018, 2017 and 2016, depreciation expense amounted to $625,000, $553,000 and
$325,000, respectively.
Lease expense was $360,000, $383,000 and $352,000 for the years ended September 30, 2018, 2017 and 2016,
respectively. The Company has executed certain lease commitments is obligated to pay: $321,000 for fiscal year
2019, $250,000 for fiscal year 2020, $253,000 for fiscal year 2021, $256,000 for fiscal year 2022, $260,000 for fiscal
year 2023 and $984,000 thereafter.
109
8. DEPOSITS
Deposits consist of the following major classifications:
2018
Amount
September 30,
2017
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
$
13,620
49,209
66,120
91,489
301,184
262,636
1.7%
6.3%
8.4%
11.7%
38.4%
33.5%
$
9,375
54,267
76,272
101,743
154,750
239,575
1.5 %
8.5%
12.0%
16.0%
24.3%
37.7%
Total
$
784,258
100.0 %
$
635,982
100.0 %
The amount of scheduled maturities of certificate accounts was as follows:
One year or less
One through two years
Two through three years
Three through four years
Four through five years
Total
September 30, 2018
(Dollars in Thousands)
$
411,988
75,421
19,876
29,059
27,476
$
563,820
Certificates of deposit of $250,000 or more at September 30, 2018 and 2017 totaled $81.9 million and $28.9 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
2018
Year Ended September 30,
2017
(Dollars in Thousands)
2016
$
247
$
192
$
165
66
7,073
7,386
$
55
3,683
3,930
$
83
2,613
2,861
$
110
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 Amounts in Thousands)
2018
2017
Balance at year-end
Average balance outstanding
Maximum month-end balance
Weight-average rate at year-end
Weight-average rate during the year
$
$
$
10,000
18,933
30,200
2.31%
1.81%
$
$
$
20,000
21,784
35,000
1.31%
0.84%
As of September 30, 2018, the borrowing consisted of one $10.0 million 30 day FHLB advance associated with an
interest rate swap contract with a weighted average effective cost of 270 basis points.
As of September 30, 2017, the $20.0 million consisted of two $10.0 million 30 day FHLB advances associated with an
interest rate swap contract with a weighted average effective cost of 125 basis points.
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, ACBB and Federal Reserve Bank and the terms and
interest rate are subject to change on the date of execution.
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 Bank and qualifying fixed-income securities and FHLB stock. The long-term advances outstanding as of
September 30, 2018 are as follows:
Lomg-te rm FHLB
advance s:
De scription
We ighte d
ave rage inte re st
rate
Maturity range
to
State d inte re st rate range
from
from
2018
to
2017
Fixed Rate - Amortizing
Fixed Rate - Amortizing
Fixed Rate - Amortizing
Fixed Rate - Amortizing
T otal
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
Fixed Rate - Advances
T otal
1-Oct-18
1-Oct-20
1-Oct-21
1-Oct-22
30-Sep-19
30-Sep-21
30-Sep-22
30-Sep-23
1-Oct-17
1-Oct-18
1-Oct-19
1-Oct-20
1-Oct-21
1-Oct-22
1-Oct-23
30-Sep-18
30-Sep-19
30-Sep-20
30-Sep-21
30-Sep-22
30-Sep-23
30-Sep-24
1.53%
1.94%
1.99%
1.94%
1.40%
1.38%
1.42%
1.94%
2.18%
3.20%
1.53%
2.68%
2.80%
2.88%
2.71%
1.75%
2.62%
2.45%
2.28%
2.70%
3.20%
2.43%
2.52%
111
1.53%
2.83%
3.05%
3.11%
2.66%
3.06%
2.92%
3.23%
3.15%
3.20%
(Dollars in T housands)
$
$
$
$
$
$
1,639
23,288
11,848
8,550
45,325
18,528
12,413
3,037
23,380
37,000
5,000
99,358
3,549
-
-
1,974
5,523
35,271
18,578
12,467
3,057
19,422
-
-
88,795
$
$
Total
$
144,683
$
94,318
Advances from the FHLB with coupon rates ranging from 1.38% to 3.23% are as follows.
Maturity
Amount
Weighted Average
Coupon Rate
(Dollars in Thousands)
2019
2020
2021
2022
2023
2024
$
33,819
26,772
13,096
27,310
38,686
5,000
$
144,683
2.13%
2.66%
2.71%
2.37%
2.71%
3.20%
2.52%
The Bank maintains a blanket collateral agreement using qualifying loans with the FHLB for future borrowing needs.
At September 30, 2018, the Bank had the ability to obtain $265.7 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 fiscal years ended September 30, consists of the following:
2018
Year Ended S eptember 30,
2017
(Dollars in Thousands)
2016
Current:
Federal expense
Total current taxes
Change in corporate tax rate
Deferred income tax expense (benefit)
Total income tax provision
$
2,429
2,429
1,756
(484)
$
3,701
$
801
801
$
1,275
1,275
-
140
-
(16)
$
941
$
1,259
112
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
Deferred compensation
Goodwill
Purchase accounting adjustments
Employee benefit plans
Other
Total deferred tax assets
Valuation allowance
Total deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Property
Unrealized gains on interest rate swaps
Purchase accounting adjustments
Deferred loan fees
Total deferred tax liabilities
Net deferred tax asset
September 30,
2018
(Dollars in Thousands)
2017
$
1,445
312
29
356
85
10
2,212
838
80
-
239
55
5,661
$
1,675
349
12
476
98
15
569
1,439
148
731
90
254
5,856
(356)
5,305
(378)
5,478
179
44
59
368
650
4,655
$
332
171
-
884
1,387
4,091
$
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
$356,000 and $378,000 at September 30, 2018 and 2017, respectively.
113
The income tax expense differs from that computed at the statutory federal corporate tax rate as follows:
2018
Percentage
of Pretax
Income
Amount
$
2,611
24.3 %
2017
Amount
Percentage
of Pretax
Income
(Dollars in Thousands)
1,265
$
34.0 %
2016
Percentage
of Pretax
Income (Loss)
Amount
$
1,353
34.0 %
1,756
-
(77)
-
(155)
(134)
(300)
16.2
-
(0.7)
-
(1.4)
(1.2)
(2.9)
-
-
(109)
80
(230)
(39)
(26)
-
-
(2.9)
2.1
(6.2)
(1.1)
(0.6)
(156)
(156)
-
-
(113)
151
24
(3.9)
(3.9)
-
-
(2.8)
3.8
0.5
Tax at statutory rate
Adjustments resulting from:
Change in corporate tax rate
Valuation allowance
Tax exempt income
Nondeductible merger expenses
Income from bank owned life insurance
Employee benefit plans
Other
Income tax expense
$
3,701
34.3 %
$
941
25.3 %
$
1,103
31.6 %
On December 22, 2017, federal tax reform legislation, commonly referred to as the Tax Cuts and Jobs Act of 2017
(the “Tax Act”), was enacted. The Tax Act makes broad and complex changes to the U.S. tax code that affected our
income tax rate in fiscal 2018. The Tax Act reduced the U.S. federal corporate tax rate from 34% to 21%. As a result,
the Company was required to re-measure, through income tax expense, the deferred tax assets and liabilities using the
enacted rate at which they are expected to be recovered or settled. The re-valuation of the net deferred tax asset resulted
in additional income tax expense of $1.8 million for the year ended September 30, 2018.
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, 2018 and 2017, that the Company and the Bank met all regulatory
capital adequacy requirements to which they each are subject.
114
To be categorized as well capitalized, the Bank must maintain the minimum Tier 1 capital, Tier 1 common equity,
Tier 1 risk-based and total risk-based ratios as set forth in the table below.
The Company’s and the Bank’s actual capital amounts and ratios are also presented in the following table:
Actual
Amount
Ratio
Required for Capital
Adequacy Purposes
Amount
Ratio
(Dollars in Thousands)
To Be
Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
$
129,890
123,199
12.51 %
11.86
N/A
41,542
$
N/A
4.0 %
N/A
51,928
$
N/A
5.0 %
129,890
123,199
129,890
123,199
135,374
128,683
19.74
18.73
19.74
18.73
20.58
19.56
N/A
29,603
N/A
26,313
N/A
52,627
N/A
4.5
N/A
6.0
N/A
8.0
N/A
42,759
N/A
39,470
N/A
65,783
N/A
6.5
N/A
8.0
N/A
10.0
$
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
September 30, 2018:
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, 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
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, 2018, 2017 and 2016 was $441,000, $379,000 and $256,000, respectively. There are no
collective bargaining agreements in place that require contributions to the plan. Additional information regarding the
plan as of September 30, 2018 is noted below:
Legal Name of Plan
Plan Employer Identification Number
The Company's Contribution for the year ended
September 30, 2018
Are Company's Contributions more than 5% of total
contributions?
Funded Status
Pentegra Defined Benefit Plan for Financial
Institutions
13-5645888
$379,000
No
88.80%
115
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 by Bank employees 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 an expense of $102,000
relating to this plan for the year ended September 30, 2018. There was no expense relating to the plan for 2017 and
2016.
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 final allocation was made to the
individual participants during December 2017. The expense relating to the ESOP for the years ended September 30,
2018, 2017 and 2016 was $-0-, $152,000 and $526,000, 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 2008
RRP purchased 213,528 shares (on a converted basis) of the Company’s common stock in the open market for an
aggregating cost of approximately $2.5 million, at an average purchase price per share of $11.49. The Company made
sufficient contributions to the 2008 RRP to fund these purchases. 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 of common stock
can be awarded as restricted stock awards or units, of which 233,500 shares were awarded during February 2015. In
August 2016, the Company granted 7,473 shares under the 2008 RRP and 3,027 shares under the 2014 SIP. In March
2017, the Company granted 17,128 shares under the 2014 SIP. In March 2018, the Company granted 8,209 shares
under the 2008 RRP and 18,291 shares under the 2014 SIP. Shares subject to awards under either plan generally vest
at the rate of 20% per year over five years.
During the year ended September 30, 2018, approximately $565,000 was recognized in compensation expense for the
RRP. Tax benefits of $200,000 were recognized during the year ended September 30, 2018. 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. During the year ended September 30, 2016,
approximately $463,000 was recognized in compensation expense for the RRP. Tax benefits of $219,000 were
recognized during the year ended September 30, 2016. At September 30, 2018, approximately $1.3 million of
additional compensation expense for the shares awarded related to the RRP remained unrecognized. The weighted
average period over which this expense will be recognized is 2.3 years.
A summary of the Company’s non-vested stock award activity for the years ended September 30, 2018 and 2017 is
presented in the following table:
Year Ended
September 30, 2018
Number of
Shares
Weighted Average
Grant Date Fair Value
Non-vested stock awards at beginning of year
Issued
Forfeited
Vested
Non-vested stock awards at the end of the period
142,594
26,500
(5,243)
(46,935)
116,916
116
$
$
12.79
18.46
11.91
12.16
14.36
Year Ended
September 30, 2017
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
172,788
17,128
(1,467)
(45,855)
142,594
$
$
12.03
17.43
10.47
11.72
12.79
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
The Company maintains the 2008 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 (on a converted basis) shares of common stock were approved for future issuance
pursuant to the Option Plan. As of September 30, 2018, all of the options had been awarded 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 pursuant to the 2014 SIP. During August 2016, the Company granted 18,866
shares under the Option Plan and 8,634 shares under the 2014 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 and 283 shares
under the Option Plan. In March 2018, the Company granted 159,265 shares under the 2014 SIP and 18,235 shares
under the Option Plan.
A summary of the status of the Company’ stock options under the Option Plan and the 2014 SIP as of September
30, 2018, 2017, and 2016 and changes during the years ended September 30, 2018, 2017, and 2016 are presented
below:
Year Ended
September 30, 2018
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
922,564
177,500
(216,796)
(14,242)
869,026
451,899
117
$
$
12.04
18.46
11.76
11.90
13.32
11.45
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
The weighted average remaining contractual term of the outstanding options was approximately 6.5 years for
options outstanding as of September 30, 2018.
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, $3.18 for options granted during
fiscal 2017 and $3.63 for options granted to date in fiscal 2018. The fair value for grants made in fiscal 2018 was
estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: an exercise
and 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%. The fair value for grants made in fiscal 2018 was estimated on the date of grant using the Black-Scholes
pricing model with the following assumptions: an exercise and fair value of $18.46, term of seven years, volatility
rate of 15.90%, interest rate of 2.82% and a yield rate of 1.08%.
During the year ended September 30, 2018, $540,000 was recognized in compensation expense for the Option Plan
and the 2014 SIP. A tax benefit of $137,000 was recognized during the year ended September 30, 2018. During
the year ended September 30, 2017, $531,000 was recognized in aggregate compensation expense for the Option
Plan and the 2014 SIP. 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 aggregate compensation expense for the Option
Plan and the 2014 SIP. A tax benefit of $155,000 was recognized during the year ended September 30, 2016. At
September 30, 2018, 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 2.2 years.
14. INTEREST RATE SWAP AGREEMENTS
The Company has contracted with a third party to participate in interest rate swap contracts. One of the swaps is a
cash flow hedge associated with a $10.0 million FHLB advance at September 30, 2018. There were two cash flow
118
hedges associated with $20.0 million of FHLB advances at September 30, 2017. These interest rate swaps involve
the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed payments.
During the year ended September 30, 2018, $48,000 of income was recognized as ineffectiveness through interest
income, while none was recognized as ineffectiveness through earnings during the year ended September 30, 2017.
The two cash flow hedge interest rate swaps from the 2017 period were unwound during June 2018 at a pre-tax gain
of $808,000. There were nine interest rate swaps designated as fair value hedges involving the receipt of variable-
rate payments from a counterparty in exchange for the Company making fixed-rate payments over the life of the
agreements that were applicable to two loans and seven investment securities as of September 30, 2018. The fair
value is recorded in the other assets section of the balance sheet.
Below is a summary of the interest rate swap agreements and the terms as of September 30, 2018 and 2017.
2018
Hedged
Item
Notional
Amount
Pay
Rate
Receive
Rate
(Dollars in thousands)
Maturity Unrealized
Gain (Loss)
Date
Interest rate swap contract
Interest rate swap contract
Interest rate swap contract
Interest rate swap contract
Interest rate swap contract
Interest rate swap contract
Interest rate swap contract
Interest rate swap contract
Interest rate swap contract
Interest rate swap contract
FHLB Advance
State and political subdivision
State and political subdivision
State and political subdivision
State and political subdivision
State and political subdivision
State and political subdivision
State and political subdivision
Commercial loan
Commercial loan
$
10,000
1,705
2,825
5,000
1,235
4,500
3,305
3,000
8,300
1,100
2.70%
3.06%
3.06%
3.07%
3.07%
3.07%
3.05%
3.06%
5.74%
4.10%
1 Mth Libor
3 Mth Libor
3 Mth Libor
3 Mth Libor
3 Mth Libor
3 Mth Libor
3 Mth Libor
3 Mth Libor
1 Mth Libor +250 bp
1 Mth Libor +276 bp
10-Apr-25
15-Feb-27
1-Apr-27
1-Jan-28
1-Mar-28
1-May-28
1-Feb-27
15-Oct-27
13-Jun-25
1-Aug-26
$
35
(19)
(31)
(57)
(14)
(52)
(32)
(32)
-
-
$
(202)
Hedged
Item
Notional
Amount
Pay
Rate
2017
Receive
Rate
(Dollars in Thousands)
Maturity Unrealized
Date
Gain
Interest rate swap contract
Interest rate swap contract
Interest rate swap contract
FHLB advances
FHLB advances
Commercial loan
$
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
119
15. COMMITMENTS AND CONTINGENT LIABILITIES
At September 30, 2018, the Company had $40.4 million in outstanding commitments to originate fixed and variable-
rate loans with market interest rates ranging from 4.25% to 6.25%. 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%. The aggregate undisbursed portion of loans-in-process amounted to $54.5 million and $73.9
million, respectively, at September 30, 2018 and 2017.
The Company also had commitments under unused lines of credit of $51.9 million as of September 30, 2018 and
$7.4 million as of September 30, 2017 and letters of credit outstanding of $1.6 million as of September 30, 2018
and $1.4 million as of September 30, 2017. The increase in unused commitments as of September 30, 2018 was
primarily the result of five loans with unused commitments totaling $37.0 million, as of such date.
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, 2018, the exposure, which represents
a portion of credit risk associated with the sold interests, amounted to $1.5 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. 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, 2018 and 2017, 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 establish 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.
Those assets as of September 30, 2018 which are to be measured at fair value on a recurring basis are as follows:
120
Category Used for Fair Value Measurement
Level 1
Level 2
(Dollars in Thousands)
Level 3
Total
Assets:
Securities available for sale:
U.S. Government and agency obligations
State and political subdivisions
Mortgage-backed securities - U.S. Government agencies
Corporate bonds
FHLMC preferred stock
Interest rate swap contracts
Total
-
$
-
-
-
37
-
37
$
$
$
24,171
21,536
187,360
73,083
-
225
306,375
-
$
-
-
-
-
-
$
-
24,171
21,536
187,360
73,083
37
225
306,412
$
$
Those assets as of September 30, 2017 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
(Dollars in Thousands)
Total
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
$
$
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 $14.3
million and $19.7 million at September 30, 2018 and 2017, respectively.
Real Estate Owned
Once an asset is determined to be uncollectible, the underlying collateral is generally repossessed and reclassified to
foreclosed real estate and repossessed assets. These repossessed assets are carried at the lower of cost or fair value of the
collateral, based on independent appraisals, less cost to sell and would be categorized as Level 2 measurement. In some
cases, adjustments are made to the appraised values for various factors including the age of the appraisal, the 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.
121
Summary of Non-Recurring Fair Value Measurements
At September 30, 2018
(Dollars in Thousands)
Level 2
$
-
Level 3
$
Level 1
$
-
-
-
$
-
$
-
$
16,048
1,026
17,074
At September 30, 2017
(Dollars in Thousands)
Level 2
$
-
Level 3
$
Level 1
$
-
-
-
$
-
$
-
$
19,665
192
19,857
Total
$
16,048
1,026
17,074
$
Total
$
19,665
192
19,857
$
Impaired loans
Real estate owned
Total
Impaired loans
Real estate owned
Total
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
$
16,048
Real estate owned
$
1,026
Impaired loans
Fair Value
$
19,665
Real estate owned
$
192
At September 30, 2018
(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)
Range/
Weighted Ave.
6% to 8%
discount / 6%
Management discount for
18% discount
selling costs, property type and
market volatility (2)
At September 30, 2017
(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)
Range/
Weighted Ave.
6% to 57%
discount / 7%
Management discount for
10% discount
selling costs, property type and
market volatility (2)
(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.
122
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.
Fair Value Measurements at
September 30, 2018
Carrying
Amount
Fair
Value
(Level 1)
(Dollars in Thousands)
(Level 2)
(Level 3)
$
48,171
1,604
$
48,171
1,604
$
48,171
1,604
-
$
-
-
$
-
306,187
59,852
602,932
3,825
7,585
225
28,691
62,886
60,686
96,866
563,820
3,232
10,000
144,683
2,083
306,187
55,927
598,596
3,825
7,585
225
28,691
62,886
60,686
-
96,866
569,375
3,232
10,000
141,116
2,083
37
-
-
3,825
7,585
-
28,691
62,886
60,686
96,866
-
3,232
10,000
-
2,083
306,150
-
55,927
-
-
-
225
-
-
-
-
-
-
-
-
-
598,596
-
-
-
-
-
-
-
569,375
-
-
141,116
-
Assets:
Cash and cash equivalents
Certificates of deposit
Investment and mortgage-backed
securities available for sale
Investment and mortgage-backed
securities held to maturity
Loans receivable, net
Accrued interest receivable
Restricted 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
123
Fair Value Measurements at
September 30, 2017
Carrying
Amount
Fair
Value
(Level 1)
(Dollars in Thousands)
(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
63,642
76,272
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
63,642
76,272
101,743
398,078
1,933
20,000
93,579
2,207
76
-
-
2,825
6,002
-
28,048
63,642
76,272
101,743
-
1,933
20,000
-
2,207
178,326
-
60,179
-
-
-
502
-
-
-
-
-
-
-
-
-
-
575,876
-
-
-
-
-
-
-
398,078
-
-
93,579
-
Assets:
Cash and cash equivalents
Certificates of deposit
Investment and mortgage-backed
securities available for sale
Investment and mortgage-backed
securities held to maturity
Loans receivable, net
Accrued interest receivable
Restricted 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
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.
Restricted Stock—The carrying amount of restricted stock approximates fair value, and considers the limited
marketability of such securities. Restricted stock is classified within level 2 of the fair value hierarchy.
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.
124
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.
Balance
October 1,
2017
Balance
Additions/
September 30, Amortization
Adjustments Amortization
2018
Period
(Dollars in Thousands)
Goodwill
Core deposit intangible
$
$
6,102
709
6,811
-
$
-
$
-
-
$
(138)
(138)
$
$
$
6,102
571
6,673
10 years
As of September 30, 2018, the future fiscal periods amortization expense for the core deposit intangible is:
2019
2020
2021
2022
2023
Thereafter
(In Thousands)
$ 123
108
93
78
64
105
$ 571
125
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 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
$
21,814
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
Restricted stock
Other assets
Total assets
Liabilities assumed:
Deposits
FHLB advances, short-term
FHLB advances, long -term
Other liabilities
Total liabilities
Net assets acquired
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
Goodwill resulting from the acquisition
$
6,102
126
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 is being amortized over 10 years using an accelerated method. Goodwill
is not amortized, but instead is evaluated annually for impairment.
(Dollars in Thousands, Except Per Share Data)
Purchase Consideration
Polonia Bancorp 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 Bancorp shares exchanged for Company common stock
Cash paid to Polonia Bancorp shareholders for Polonia Bancorp shares
Cash paid for fractional shares
Net Assets Acquired
Polonia Bancorp stockholders' equity
Core deposit intangible asset
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
127
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.
Acquistion date
through
September 30,
2017
Twe lve Months e nde d
Se pte mbe r 30,
2017
2016
(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 expense
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
$
3,467
-
$
22,551
2,990
$
29,702
2,990
3,467
250
2,380
1,337
455
882
$
8,316,638
357,871
8,674,509
0.11
0.10
$
$
19,561
2,205
20,287
1,479
225
1,254
$
8,316,638
357,871
8,674,509
0.15
0.14
$
$
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 included 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
128
19.
PRUDENTIAL BANCORP, INC. (PARENT COMPANY ONLY)
STATEMENT OF FINANCIAL CONDITION
September 30,
Assets:
Cash
Investment in Bank
Other assets
Total assets
Stockholders' equity:
Preferred stock
Common stock
Additional paid-in-capital
Treasury stock
Retained earnings
Accumulated other comprehensive loss
2018
2017
(Dollars in Thousands)
$
5,435
$
9,792
121,718
1,256
125,240
1,147
$
128,409
$
136,179
‐
108
118,345
(27,744)
45,854
(8,154)
‐
108
118,751
(26,707)
44,787
(760)
Total stockholders' equity
$
128,409
$
136,179
INCOME STATEMENT
For the year ended September 30,
2018
2017
2016
(Dollars in Thousands)
Interest on ESOP loan
$
-
$
59
$
247
Equity in the undistributed earnings of the Bank
Other income
Total income
Professional services
Other expense
Total expense
7,465
-
7,465
168
362
530
3,255
-
2,911
-
3,314
3,158
369
413
782
161
376
537
Income before income taxes
6,936
2,532
2,621
Income tax benefit
(128)
(246)
(99)
Net income
$
7,064
$
2,778
$
2,720
129
CASH FLOWS
For the year ended September 30,
Operating activities:
Net income
Other, net
Equity in the undistributed earnings of the Bank
2018
2017
2016
(Dollars in Thousands)
$
7,064
$
2,778
$
2,720
(204)
(7,465)
46
(3,255)
(579)
(2,911)
Net cash used in operating activities
(605)
(431)
(770)
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 financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
-
-
-
2,548
(6,300)
(3,752)
(4,357)
9,792
5,277
3,966
9,243
341
-
341
(4,526)
(1,035)
(7,047)
(895)
(5,561)
(7,942)
3,251
6,541
(8,371)
14,912
Cash and cash equivalents, end of year
$
5,435
$
9,792
$
6,541
130
20. CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited quarterly financial data for the years ended September 30, 2018, 2017, and 2016 is as follows:
September 30, 2018
September 30, 2017
1st
Qtr
2nd
Qtr
3rd
Qtr
4th
Qtr
1st
Qtr
2nd
Qtr
3rd
Qtr
4th
Qtr
(Dollars in Thousands, Except Per Share Data)
$ 8,036 $ 8,355 $ 8,931 $ 9,529
1,900 2,127 2,709 3,401
$ 4,505 $ 6,671 $ 7,430 $ 7,737
858 1,373 1,377 1,656
6,136 6,228 6,222 6,128
210 150 325 125
3,647 5,298 6,053 6,081
185 2,365 30 410
5,926 6,078 5,897 6,003
3,462 2,933 6,023 5,671
415 567 985 533
4,043 3,869 3,770 3,957
358 518 625 699
2,720 6,763 3,500 3,587
Interest income
Interest expense
Net interest income
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)
2,298 2,776 3,112 2,579
2,264 619 676 142
1,100 (3,312)
370 (1,171)
3,148 2,783
1,031 711
Net income
Per share:
Earnings (loss) per share - basic
Earnings (loss) per share - diluted
Dividends per share
$ 34 $ 2,157 $ 2,436 $ 2,437
$ 730 $ (2,141)
$ 2,117 $ 2,072
$ 0.00 $ 0.24 $ 0.28 $ 0.27
$ 0.00 $ 0.24 $ 0.26 $ 0.26
$ 0.20 $ 0.05 $ 0.05 $ 0.40
$ 0.09 $ (0.27) $ 0.25 $ 0.26
$ 0.09 $ (0.27) $ 0.25 $ 0.24
$ 0.03 $ 0.03 $ 0.03 $ 0.03
Interest income
Interest expense
Net interest income
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
September 30, 2016
1st
Qtr
2nd
Qtr
3rd
Qtr
4th
Qtr
(Dollars in Thousands, Except Per Share Data)
$ 4,056 $ 4,366 $ 4,474 $ 4,587
800 849 824 853
3,256 3,517 3,650 3,734
0 75 150 0
3,256 3,442 3,500 3,734
274 209 400 454
2,896 2,796 2,815 2,783
634 855 1,085 1,405
221 307 308 423
$ 413 $ 548 $ 777 $ 982
$ 0.05 $ 0.08 $ 0.10 $ 0.14
$ 0.05 $ 0.07 $ 0.10 $ 0.14
$ 0.03 $ 0.03 $ 0.03 $ 0.03
Due to rounding, the sum of the earnings per share in individual quarters may differ from reported amounts.
131
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, 2018. 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, 2018. 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 management’s
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
132
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 2018 that has materially affected, or is reasonably likely to materially affect, the internal control over financial
reporting.
Item 9B. Other Information
Not applicable.
133
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 20, 2019, is expected
to be which filed with the Securities and Exchange Commission on or about January18, 2019 ("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.
Equity Compensation Plan Information. The following table provides information as of September 30, 2018 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 Prudential Mutual Holding Company.
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)
985,942(1)
$13.44(1)
336,229
--
985,942
--
$13.44
--
336,229
Plan Category
Equity compensation plans
approved by security holders
Equity compensation plans
not approved by security
holders
Total
___________________
(1)
Includes 116,916 shares subject to restricted stock grants which were not vested as of September 30, 2018. The
weighted average exercise price excludes such restricted stock grants.
134
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.
Item 15. Exhibits, Financial Statement Schedules
PART IV
(a)
(1)
Documents Filed as Part of this Report.
The following financial statements are incorporated by reference from Item 8 hereof:
Consolidated Statements of Financial Condition
Consolidated Statements of Operations
Consolidated Statement of Comprehensive Income (Loss)
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2)
All schedules for which provision is made in the applicable accounting regulation of the SEC are omitted because of
the absence of conditions under which they are required or because the required information is included in the
consolidated financial statements and related notes thereto.
(3)
The following exhibits are filed as part of this Form 10-K, and this list includes the Exhibit Index.
Exhibit No.
3.1
3.2
4.0
10.1
10.2
10.3
10.4
10.5
10.6
10.7
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)*
135
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
31.1
31.2
32.0
101.INS
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF
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 (12)*
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 (13)*
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)*
Amendment No. 2 to the Employment Agreement between Prudential Bancorp,
Inc., Prudential Bank and Anthony V. Migliorino (14)*
Severance Agreement between Prudential Savings Bank and Kevin Gallagher (15)*
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.
*
(1)
(2)
(3)
(4)
(5)
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)
(6)
Incorporated by reference from the Current Report on Form 8-K of Prudential Bancorp, Inc. of Pennsylvania dated
136
June 1, 2017 and filed with the SEC on June 1, 2017 (SEC File No. 000-51214).
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
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).
Incorporated by reference from the Current Report on Form 8-K of Prudential Bancorp, Inc. dated August 15, 2018
and filed with the SEC on August 15, 2018 (SEC File No. 000-55084).
Incorporated by reference from the Current Report on Form 8-K of Prudential Bancorp, Inc. dated March 26, 2018 and
filed with the SEC on March 30, 2018 (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.
Item 16. Form 10-K Summary
None
137
(This page has been left blank intentionally)
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, 2018
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
December 14, 2018
Bruce E. Miller
Chairman of the Board
/s/ A. J. Fanelli
A. J. Fanelli
Director
/s/ John C. Hosier
John C. Hosier
Director
December 14, 2018
December 14, 2018
/s/ Francis V. Mulcahy
December 14, 2018
Francis V. Mulcahy
Director
/s/ Dennis Pollack
Dennis Pollack
Director, President and Chief Executive President
December 14, 2018
/s/ Jack E. Rothkopf
December 14, 2018
Jack E. Rothkopf
Senior Vice President, Chief Financial Officer, Treasurer
Chief Accounting Officer
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, 2018,
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, 2018.
/s/ SR Snodgrass, P.C.
Cranberry Township, Pennsylvania
December 14, 2018
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 evaluation
5.
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, 2018
/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 evaluation
5.
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, 2018
/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, 2018 (“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, 2018
Date: December 14, 2018
/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.