PRUDENTIAL BANCORP INC OF PENNSYLVANIA - FORM 10-Q

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EX-31.1 - EXHIBIT 31.1 - PRUDENTIAL BANCORP INC OF PENNSYLVANIA	ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - PRUDENTIAL BANCORP INC OF PENNSYLVANIA	ex31-2.htm
EX-32.0 - EXHIBIT 32.0 - PRUDENTIAL BANCORP INC OF PENNSYLVANIA	ex32-0.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended March 31, 2011
		OR
o		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: 000-51214

Prudential Bancorp, Inc. of Pennsylvania
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania		68-0593604
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
1834 Oregon Avenue Philadelphia, Pennsylvania		19145 Zip Code
(Address of Principal Executive Offices)
(215) 755-1500
(Registrant’s Telephone Number, Including Area Code)

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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

o Yes o No

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

Large accelerated filer o Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes x No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practical date: as of May 6, 2011, 10,023,495 shares were issued and outstanding.

PRUDENTIAL BANCORP, INC. OF PENNSYLVANIA

TABLE OF CONTENTS

			PAGE
PART I		FINANCIAL INFORMATION:

	Item 1.	Consolidated Financial Statements

		Unaudited Consolidated Statements of Financial Condition March 31, 2011 and September 30, 2010	3

		Unaudited Consolidated Statements of Operations for the Three And Six Months Ended March 31, 2011 and 2010	4

		Unaudited Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income for the Six Months Ended March 31, 2011 and 2010	5

		Unaudited Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2011 and 2010	6

		Notes to Unaudited Consolidated Financial Statements	7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42

	Item 4.	Controls and Procedures	42

PART II		OTHER INFORMATION

	Item 1.	Legal Proceedings	43

	Item 1A.	Risk Factors	43

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43

	Item 3.	Defaults Upon Senior Securities	43

	Item 4.	(Removed and Reserved)	43

	Item 5.	Other Information	43

	Item 6.	Exhibits	44

	SIGNATURES		45

PRUDENTIAL BANCORP, INC. OF PENNSYLVANIA AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	March 31,			September 30,
	2011			2010
	(Dollars in Thousands)
ASSETS

Cash and amounts due from depository institutions	$	3,712		$	3,649
Interest-bearing deposits		37,604			62,875

Total cash and cash equivalents		41,316			66,524

Investment and mortgage-backed securities available for sale (amortized cost—March 31, 2011, $73,021; September 30, 2010, $69,891)		74,162			72,425
Investment and mortgage-backed securities held to maturity (estimated fair value—March 31, 2011, $125,700; September 30, 2010, $116,594)		124,883			112,673
Loans receivable—net of allowance for loan losses (March 31, 2011, $3,155; September 30, 2010, $3,151)		243,820			255,091
Accrued interest receivable		2,483			2,669
Real estate owned		2,345			3,197
Federal Home Loan Bank stock—at cost		3,199			3,545
Office properties and equipment—net		1,954			2,069
Bank owned life insurance		6,069			5,990
Prepaid expenses and other assets		2,686			3,135
Deferred tax asset-net		3,083			1,762
TOTAL ASSETS	$	506,000		$	529,080

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES:
Deposits:
Noninterest-bearing	$	3,296		$	2,570
Interest-bearing		444,690			461,885
Total deposits		447,986			464,455
Advances from Federal Home Loan Bank		593			615
Accrued interest payable		1,119			3,361
Advances from borrowers for taxes and insurance		957			1,115
Accounts payable and accrued expenses		1,345			2,033
Accrued dividend payable		501			502

Total liabilities		452,501			472,081

COMMITMENTS AND CONTINGENCIES (Note 8)

STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued		-			-
Common stock, $.01 par value, 40,000,000 shares authorized, issued 12,563,750; outstanding - 10,023,495 at March 31, 2011; 10,031,472 at September 30, 2010		126			126
Additional paid-in capital		53,806			53,528
Unearned ESOP shares		(3,122	)		(3,234	)
Treasury stock, at cost: 2,540,255 shares at March 31, 2011; 2,532,278 shares at September 30, 2010		(31,625	)		(31,576	)
Retained earnings		33,561			36,483
Accumulated other comprehensive income		753			1,672

Total stockholders’ equity		53,499			56,999

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	506,000		$	529,080

See notes to unaudited consolidated financial statements.

PRUDENTIAL BANCORP, INC. OF PENNSYLVANIA AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended March 31,						Six Months Ended March 31,
	2011			2010			2011			2010
	(Dollars in Thousands Except Per Share Amounts)						(Dollars in Thousands Except Per Share Amounts)
INTEREST INCOME:
Interest on loans	$	3,307		$	3,719		$	6,931		$	7,470
Interest on mortgage-backed securities		1,091			1,188			2,155			2,411
Interest and dividends on investments		1,048			1,404			2,013			2,896

Total interest income		5,446			6,311			11,099			12,777

INTEREST EXPENSE:
Interest on deposits		1,815			2,086			3,835			4,357
Interest on borrowings		1			200			3			417

Total interest expense		1,816			2,286			3,838			4,774

NET INTEREST INCOME		3,630			4,025			7,261			8,003

PROVISION FOR LOAN LOSSES		3,600			250			4,180			385

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		30			3,775			3,081			7,618

NON-INTEREST INCOME:
Fees and other service charges		114			118			232			243

Total other-than-temporary impairment losses		(28	)		(43	)		(155	)		(375	)
Portion of loss recognized in other comprehensive income, before taxes		(17	)		(90	)		15			38
Net impairment losses recognized in earnings		(45	)		(133	)		(140	)		(337	)

Other		106			77			217			176
Total non-interest income		175			62			309			82

NON-INTEREST EXPENSE:
Salaries and employee benefits		1,356			1,324			2,787			2,685
Data processing		120			122			240			260
Professional services		267			167			381			334
Office occupancy		107			110			196			203
Depreciation		86			89			174			177
Payroll taxes		91			95			156			162
Director compensation		71			88			152			150
Deposit insurance		259			155			524			337
Real estate owned expense		7			58			161			74
Advertising		87			114			171			212
Other		356			339			728			622

Total non-interest expense		2,807			2,661			5,670			5,216

(LOSS) INCOME BEFORE INCOME TAXES		(2,602	)		1,176			(2,280	)		2,484

INCOME TAXES:
Current expense		418			214			523			808
Deferred (benefit) expense		(1,158	)		119			(848	)		147

Total income tax (benefit) expense		(740	)		333			(325	)		955

NET (LOSS) INCOME	$	(1,862	)	$	843		$	(1,955	)	$	1,529

BASIC (LOSS) INCOME PER SHARE	$	(0.20	)	$	0.09		$	(0.21	)	$	0.16

DILUTED (LOSS) INCOME PER SHARE	$	(0.20	)	$	0.09		$	(0.21	)	$	0.15

See notes to unaudited consolidated financial statements.

PRUDENTIAL BANCORP, INC. OF PENNSYLVANIA AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)

															Accumulated
			Additional			Unearned									Other			Total
	Common		Paid-In			ESOP			Treasury			Retained			Comprehensive			Stockholders’			Comprehensive
	Stock		Capital			Shares			Stock			Earnings			Income (Loss)			Equity			Income (Loss)
	(Dollars in Thousands except per share amounts)

BALANCE, OCTOBER 1, 2010	$	126	$	53,528		$	(3,234	)	$	(31,576	)	$	36,483		$	1,672		$	56,999

Comprehensive loss:

Net loss													(1,955	)					(1,955	)		(1,955	)

Net unrealized holding loss on available for sale securities arising during the period, net of income tax benefit of $521																(1,011	)		(1,011	)		(1,011	)

Reclassification adjustment for other than temporary impairment recognized in earnings net of tax of $48																92			92			92
Comprehensive loss																					$	(2,874	)

Cash dividend declared ($ 0.10 per share)													(967	)					(967	)

Treasury stock purchased (7,977 shares)										(49	)								(49	)

Excess tax benefit from stock compensation				19															19

Stock option expense				112															112

Recognition and Retention Plan expense				186															186

ESOP shares committed to be released (11,310 shares)		-		(39	)		112			-			-			-			73

BALANCE, March 31, 2011	$	126	$	53,806		$	(3,122	)	$	(31,625	)	$	33,561		$	753		$	53,499

															Accumulated
			Additional			Unearned									Other			Total
	Common		Paid-In			ESOP			Treasury			Retained			Comprehensive			Stockholders’			Comprehensive
	Stock		Capital			Shares			Stock			Earnings			Income (Loss)			Equity			Income (Loss)
	(Dollars in Thousands except per share amounts)

BALANCE, OCTOBER 1, 2009	$	126	$	52,938		$	(3,457	)	$	(28,652	)	$	35,293		$	(391	)	$	55,857

Comprehensive income:

Net income													1,529						1,529			1,529

Net unrealized holding gain on available for sale securities arising during the period, net of income tax of $41																79			79			79

Reclassification adjustment for other than temporary impairment recognized in earnings net of tax of $115																222			222			222
Comprehensive income																					$	1,830

Cash dividends declared ($.10 per share)													(976	)					(976	)

Treasury stock purchased (300,394 shares)										(2,924	)								(2,924	)

Excess tax benefit from stock compensation				31															31

Stock option expense				109															109

Recognition and Retention Plan expense				172															172

ESOP shares committed to be released (11,310 shares)		-		(4	)		111			-			-			-			107

BALANCE, March 31, 2010	$	126	$	53,246		$	(3,346	)	$	(31,576	)	$	35,846		$	(90	)	$	54,206

See notes to unaudited consolidated financial statements

PRUDENTIAL BANCORP, INC. OF PENNSYLVANIA AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended March 31,
	2011			2010
	(Dollars in Thousands)
OPERATING ACTIVITIES:
Net (loss) income	$	(1,955	)	$	1,529
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Provision for loan losses		4,180			385
Depreciation		174			177
Net accretion of premiums/discounts		(152	)		(154	)
Net accretion of deferred loan fees and costs		(15	)		(30	)
Impairment charge on investment and mortgage-backed securities		140			337
Share-based compensation expense		317			312
Loss on sale of real estate owned		135			-
Impairment charge on real estate owned		-			18
Compensation expense of ESOP		73			107
Income from bank owned life insurance		(79	)		(102	)
Deferred income tax (benefit) expense		(848	)		147
Excess tax benefit related to stock compensation		(19	)		(31	)
Changes in assets and liabilities which used cash:
Accrued interest receivable		186			80
Prepaid expenses and other assets		452			(2,244	)
Accrued interest payable		(2,242	)		(2,089	)
Accounts payable and accrued expenses		(688	)		(685	)
Net cash used in operating activities		(341	)		(2,243	)
INVESTING ACTIVITIES:
Purchase of investment and mortgage-backed securities held to maturity		(45,999	)		(15,990	)
Purchase of investment and mortgage-backed securities available for sale		(17,732	)		(9,909	)
Loans originated or acquired		(20,135	)		(24,224	)
Principal collected on loans		26,930			25,040
Principal payments received on investment and mortgage-backed securities:
Held-to-maturity		33,807			35,688
Available-for-sale		14,593			5,586
Proceeds from redemption of FHLB stock		346			-
Proceeds from sale of real estate owned		1,028			-
Purchases of equipment		(59	)		(166	)
Net cash (used in) provided by investing activities		(7,221	)		16,025
FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts, and savings accounts		3,215			4,946
Net decrease in certificates of deposit		(19,684	)		(1,004	)
Repayment of advances from Federal Home Loan Bank		(22	)		(6,022	)
Decreases in advances from borrowers for taxes and insurance		(158	)		(28	)
Excess tax benefit related to stock compensation		19			31
Purchase of treasury stock		(49	)		(2,924	)
Cash dividend paid		(967	)		(966	)
Net cash used in financing activities		(17,646	)		(5,967	)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(25,208	)		7,815

CASH AND CASH EQUIVALENTS—Beginning of period		66,524			13,669

CASH AND CASH EQUIVALENTS—End of period	$	41,316		$	21,484
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid on deposits and advances from Federal Home Loan Bank	$	6,081		$	6,864

Income taxes paid	$	550		$	1,431

SUPPLEMENTAL DISCLOSURES OF NONCASH ITEMS:
Real estate acquired in settlement of loans	$	311		$	1,692

See notes to unaudited consolidated financial statements.

PRUDENTIAL BANCORP, INC. OF PENNSYLVANIA AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.	SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation –The accompanying unaudited consolidated financial statements were prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim information and therefore do not include all the information or footnotes necessary for a complete presentation of financial condition, results of operations, changes in equity and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). However, all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the financial statements have been included. The results for the six months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2011, or any other period. These financial statements should be read in conjunction with the audited consolidated financial statements of Prudential Bancorp, Inc. of Pennsylvania (the “Company”) and the accompanying notes thereto for the year ended September 30, 2010 included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010.

Use of Estimates in the Preparation of Financial Statements—The preparation of financial statements in conformity with GAAP in the United States of America 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 income and expenses during the reporting period. The most significant estimates and assumptions in the Company’s consolidated financial statements are recorded in the allowance for loan losses, deferred income taxes, other than temporary impairment, and the fair value measurement for financial instruments. Actual results could differ from those estimates.

Dividend Payable – On March 16, 2011, the Company’s Board of Directors declared a quarterly cash dividend of $ 0.05 on the common stock of the Company payable on April 29, 2011 to the shareholders of record at the close of business on April 15, 2011 which resulted in a payable of $501,000 at March 31, 2011. A portion of the cash dividend was payable to Prudential Mutual Holding Company (the “MHC”) due to its ownership of shares of the Company’s common stock and totaled $374,000. In light of the need to conserve capital in view of the Company’s current financial condition and results of operations including recognition of the consolidated net loss incurred for the quarter ended March 31, 2011, the Board determined that it is not in the best interests of the Company and its shareholders to declare a quarterly dividend in June 2011 which would normally be paid in July 2011. The Board will review this matter each quarter and determine at such time the appropriateness of declaring a dividend with respect to the immediately preceding quarter and if the determination is made to declare a dividend, the amount of such dividend, taking into account the Company’s financial condition and results of operations.

Employee Stock Ownership Plan – The Company maintains an employee stock ownership plan (“ESOP”) for substantially all of its full-time employees. The ESOP in fiscal 2005 purchased 452,295 shares of the Company’s common stock for an aggregate cost of approximately $4.5 million. Shares of the Company’s common stock purchased by the ESOP are held in a suspense account until released for allocation to participants. Shares are allocated to each eligible participant based on the ratio of each such participant’s compensation, as defined in the ESOP, to the total compensation of all eligible plan participants. As the unearned shares are released from the suspense account, the Company recognizes compensation expense equal to the fair value of the ESOP shares during the periods in which they become committed to be released. To the extent that the fair value of the ESOP shares released differs from the cost of such shares, the difference is charged or credited to equity as additional paid-in capital. As of March 31, 2011, the Company had allocated a total of 130,065 shares from the suspense account to participants and committed to release an additional 5,655 shares. In addition, at such date the total number of shares of Company common stock held by the ESOP was 449,492. For the six months ended March 31, 2011, the Company recognized $61,000 in compensation expense.

Share-Based Compensation – The Company accounts for stock-based compensation issued to employees, and where appropriate, non-employees, with fair value. 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.

Dividends with respect to non-vested share awards are held by the Company’s Recognition and Retention Plan (“Plan”) Trust (the “Trust”) for the benefit of the recipients and are paid out proportionately by the Trust to the recipients of stock awards granted pursuant to the Plan as soon as practicable after the stock awards to which the dividends relate are earned.

Treasury Stock – Common stock held in treasury by the Company is accounted for using the cost method, which treats stock held in treasury as a reduction to total stockholders’ equity. The average cost per share of the approximately 2.5 million shares which have been repurchased by the Company was $12.45 for purchases through March 31, 2011. The repurchased shares held by the Company are available for general corporate purposes. As of March 31, 2011, the MHC had purchased 568,000 shares at an average cost of $10.30 per share. As of March 31, 2011, 7,478,062 shares were owned by the MHC, 2,540,255 shares had been repurchased by the Company and held as treasury stock which results in 2,545,433 shares owned by public shareholders.

Comprehensive Income (Loss) —The Company presents in the unaudited consolidated statement of changes in stockholders’ equity and 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 six months ended March 31, 2011 and 2010, the only components of comprehensive income were net income (loss), unrealized holding gains and losses, net of income tax expense and benefit, on available for sale securities and reclassifications related to realized losses due to other than temporary impairment, net of tax.

FHLB Stock – Federal Home Loan Bank (“FHLB”) stock is classified as a restricted equity security because ownership is restricted and there is not an established market for its resale. FHLB stock is carried at cost and is evaluated for impairment when certain conditions warrant further consideration. While the FHLB has recognized losses in recent periods, it is currently not probable that the Company will not realize its cost basis as the FHLB has maintained capital levels in excess of regulatory requirements. Management concluded that no impairment existed as of March 31, 2011.

Recent Accounting Pronouncements – In September, 2010, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2010-25, Plan Accounting – Defined Contribution Pension Plans. The amendments in this ASU require that participant loans be classified as notes receivable from participants, which are segregated from plan investments and measured at their unpaid principal balance plus any accrued but unpaid interest. The amendments in this update are effective for fiscal years ending after December 15, 2010 and are not expected to have a significant impact on the Company’s consolidated financial statements.

In October, 2010, the FASB issued No. ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. This ASU addresses the diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. The amendments are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2011 and are not expected to have a significant impact on the Company’s consolidated financial statements.

In December, 2010, the FASB issued ASU No. 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. This ASU modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating an impairment may exist. The qualitative factors are consistent with the existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. For nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Nonpublic entities may early adopt the amendments using the effective date for public entities. This ASU is not expected to have a significant impact on the Company’s consolidated financial statements.

In December 2010, the FASB issued ASU No. 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this Update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. This ASU is not expected to have a significant impact on the Company’s consolidated financial statements.

In January 2011, the FASB issued ASU 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments in this Update temporarily delay the effective date of the disclosures about troubled debt restructurings in Update 2010-20, enabling public-entity creditors to provide those disclosures after the FASB clarifies the guidance for determining what constitutes a troubled debt restructuring. The deferral in this Update will result in more consistent disclosures about troubled debt restructurings. This amendment does not defer the effective date of the other disclosure requirements in Update 2010-20. In the proposed Update for determining what constitutes a troubled debt restructuring, the FASB proposed that the clarifications would be effective for interim and annual periods ending after June 15, 2011. For the new disclosures about troubled debt restructurings in Update 2010-20, those clarifications would be applied retrospectively to the beginning of the fiscal year in which the proposal is adopted. The adoption of this guidance in not expected to have a significant impact on the Company’s financial statements.

In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The amendments in this Update provide additional guidance or clarification to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The amendments in this Update are effective for the first interim or annual reporting period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. This ASU is not expected to have a significant impact on the Company’s financial statements.

2. EARNINGS PER SHARE

Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding, net of any treasury shares, during the period. Diluted earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding, net of any treasury shares, after consideration of the potential dilutive effect of common stock equivalents (“CSEs”), based upon the treasury stock method using an average market price for the period.

The calculated basic and diluted earnings per share are as follows:

	Quarter Ended March 31,
	2011						2010
	Basic			Diluted			Basic		Diluted
	(Dollars in Thousands Except Per Share Data)

Net income (loss)	$	(1,862	)	$	(1,862	)	$	843	$	843
Weighted average shares outstanding		9,545,942			9,545,942			9,685,542		9,685,542
Effect of common stock equivalents		-			-			-		128,338
Adjusted weighted average shares used in earnings per share computation		9,545,942			9,545,942			9,685,542		9,813,880
Income (loss) per share - basic and diluted		(0.20	)		(0.20	)		0.09		0.09

	Six Months Ended March 31,
	2011						2010
	Basic			Diluted			Basic		Diluted
	(Dollars in Thousands Except Per Share Data)

Net income (loss)	$	(1,955	)	$	(1,955	)	$	1,529	$	1,529
Weighted average shares outstanding		9,529,811			9,529,811			9,721,744		9,721,744
Effect of common stock equivalents		-			-			-		143,599
Adjusted weighted average shares used in earnings per share computation		9,529,811			9,529,811			9,721,744		9,865,343
Income (loss) per share - basic and diluted		(0.21	)		(0.21	)		0.16		0.15

Due to the net loss recognized for the three and six month periods ended March 31, 2011, the inclusion of any CSEs would decrease the amount of net loss per share for the quarter and be antidilutive. Consequently, basic and diluted weighted average shares outstanding are equal for the quarter and six months ended March 31, 2011. Had net income been recognized for the periods ended March 31, 2011, there would have been an additional 74,167 shares used in the diluted earnings per share calculation for the quarter ended March 31, 2011, while an additional 89,317 shares would have been included for the six month period.

3.	INVESTMENT AND MORTGAGE-BACKED SECURITIES

The amortized cost and fair value of investment and mortgage-backed securities, with gross unrealized gains and losses, are as follows:

	March 31, 2011
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Securities held to maturity:	(Dollars in Thousands)

U.S. Government agency obligations	$	101,705	$	470	$	(1,368	)	$	100,807
Mortgage-backed securities - U.S. Government agencies		23,178		1,715		-			24,893

Total securities held to maturity	$	124,883	$	2,185	$	(1,368	)	$	125,700

Securities available for sale:
U.S. Government agency obligations	$	6,998	$	42	$	(73	)	$	6,967
Mortgage-backed securities - U.S. Government agencies		59,016		2,106		(537	)		60,585
Mortgage-backed securities - Non-agency		6,999		325		(724	)		6,600

Total debt securities		73,013		2,473		(1,334	)		74,152

FHLMC preferred stock		8		2		-			10

Total securities available for sale	$	73,021	$	2,475	$	(1,334	)	$	74,162

	September 30, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in Thousands)
Securities held to maturity:
U.S. Government agency obligations	$	85,983	$	1,831	$	(12	)	$	87,802
Municipal obligations		475		-		-			475
Mortgage-backed securities - U.S.
Government agencies		26,215		2,102		-			28,317

Total securities held to maturity	$	112,673	$	3,933	$	(12	)	$	116,594

Securities available for sale:
U.S. Government agency obligations	$	9,995	$	198	$	-		$	10,193
Mortgage-backed securities - U.S.
Government agencies		51,821		3,204		-			55,025
Mortgage-backed securities - Non-agency		8,067		178		(1,046	)		7,199
Total debt securities		69,883		3,580		(1,046	)		72,417

FHLMC preferred stock		8		-		-			8

Total securities available for sale	$	69,891	$	3,580	$	(1,046	)	$	72,425

The following table shows the gross unrealized losses and related fair values of the Company’s investment securities, aggregated by investment category and length of time that individual securities had been in a continuous loss position at March 31, 2011:

	Less than 12 months					More than 12 months					Total
	Gross					Gross					Gross
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
	Losses			Value		Losses			Value		Losses			Value
	(Dollars in Thousands)
Securities held to maturity:
U.S. Government agency obligations	$	(1,368	)	$	79,343	$	-		$	-	$	(1,368	)	$	79,343

Total securities held to maturity		(1,368	)		79,343		-			-		(1,368	)		79,343

Securities available for sale:
U.S. Government agency obligations		(73	)		2,927		-			-		(73	)		2,927
Mortgage-backed securities - U.S.
Government agencies		(537	)		17,718		-			-		(537	)		17,718
Mortgage-backed securities - Non-agency		(16	)		396		(708	)		3,051		(724	)		3,447

Total securities available for sale		(626	)		21,041		(708	)		3,051		(1,334	)		24,092

Total	$	(1,994	)	$	100,384	$	(708	)	$	3,051	$	(2,702	)	$	103,435

	Less than 12 months					More than 12 months					Total
	Gross					Gross					Gross
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
	Losses			Value		Losses			Value		Losses			Value
	(Dollars in Thousands)
Securities held to maturity:
U.S. Government and agency obligations	$	(12	)	$	5,988	$	-		$	-	$	(12	)	$	5,988

Total securities held to maturity		(12	)		5,988							(12	)		5,988

Securities available for sale:
Mortgage-backed securities - Non-agency		(9	)		225		(1,037	)		3,311		(1,046	)		3,536

Total securities available for sale		(9	)		225		(1,037	)		3,311		(1,046	)		3,536

Total	$	(21	)	$	6,213	$	(1,037	)	$	3,311	$	(1,058	)	$	9,524

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least once each quarter, and more frequently when economic or market concerns warrant such evaluation. The Company determines whether the unrealized losses are temporary. 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, length of time and extent to which the fair value has been less than cost, and near-term prospects of the issuer.

The Company assesses whether the credit loss existed by considering whether (1) the Company has the intent to sell the security, (2) it is more likely than not that it will be required to sell the security before recovery, or (3) it does not expect to recover the entire amortized cost basis of the security. The Company bifurcates the OTTI impact on impaired securities where impairment in value was deemed to be other than temporary between the component representing credit loss and the component representing loss related to other factors. The portion of the fair value decline attributable to credit loss must be recognized through a charge to earnings. Credit component is determined by comparing the present value of the cash flows expected to be collected, discounted at the rate in effect before recognizing any OTTI with the amortized cost basis of the debt security. The Company uses the cash flow expected to be realized from the security, which includes assumptions about interest rates, timing and severity of defaults, estimates of potential recoveries, the cash flow distribution from the bond indenture and other factors, then applies a discount rate equal to the effective yield of the security. The difference between the present value of the expected cash flows and the amortized book value is considered a credit loss. The fair market value of the security is determined using the same expected cash flows; the discount rate is a rate the Company determines from open market and other sources as appropriate for the security. The difference between the fair market value and the security’s remaining amortized cost is recognized in other comprehensive income.

The following is a rollforward for the six months ended March 31, 2011 of the amounts recognized in earnings related to credit losses on securities which the Company has recorded OTTI charges through earnings and other comprehensive income.

	(Dollars in thousands)
Credit component of OTTI as of October 1, 2010	$	3,087

Additions for credit-related OTTI charges on previously unimpaired securities		-

Additional increases as a result of impairment charges recognized on investments for which an OTTI was previously recognized		140

Credit component of OTTI as of March 31, 2011	$	3,227

U.S. Government Agency Obligations - The Company’s investments in the preceding table in United States Government sponsored enterprise notes consist of debt obligations of the Federal Home Loan Bank (“FHLB”), Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”), and Federal Farm Credit System (“FFCS”). FHLB debt securities are rated by both Moody’s and Standard & Poor’s. All long-term debt issued by the FHLB banks is rated Aaa by Moody’s and AAA by Standard and Poor’s. All short-term debt is rated “Prime-1” by Moody’s and A-1+ by Standard & Poor’s. FNMA and FHLMC senior debt securities are also currently rated “Aaa” by Moody’s , short-term debt is rated “Prime-1”, subordinated debt is rated “Aa2” and preferred stock ratings are currently “Aa3” with “Stable” outlooks. Farm Credit Designated Bonds are high credit quality, liquid and callable securities. The securities are Aaa rated by Moody’s, AAA by Standard & Poor’s, and AAA by Fitch. At March 31, 2011, securities in a gross unrealized loss for less than twelve months consist of 49 securities having an aggregate depreciation of 1.3% from the Company’s amortized cost basis. There were no securities in a gross unrealized loss for more than twelve months. The unrealized losses on these debt securities relates principally to the changes in market interest rates and a lack of liquidity currently 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 March 31, 2011.

US Agency Issued Mortgage-Backed Securities - At March 31, 2011, the gross unrealized loss in U.S. agency issued mortgage-backed securities in the category of less than 12 months was $537,000 or 2.9% from the Company’s amortized cost basis and consisted of six securities. There were no securities in a gross unrealized loss in the category of more than 12 months. 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. In September 2008, the U.S. Department of the Treasury announced the establishment of the Government-Sponsored Enterprise Credit Facility to ensure credit availability to Fannie Mae and Freddie Mac. The Treasury also entered into senior preferred stock purchase agreements, which ensure that each entity maintains a positive net worth and effectively support the holders of debt and mortgage-backed securities (“MBS”) issued or guaranteed by Fannie Mae and Freddie Mac. The Agreements enhance market stability by providing additional security to debt holders, senior and subordinated, thereby alleviating the concern of the credit driven impairment of the securities. The unrealized loss on these debt securities relates principally to the changes in market interest rates and a lack of liquidity currently in the financial markets and are not as a result of projected shortfall in cash flows. In addition, the Company does not intend to sell the securities and it is more likely than not that the Company will not be required to sell the securities. As such, the Company expects to 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 March 31, 2011.

Non-Agency Issued Mortgage-Backed Securities and Collateralized Mortgage Obligations - This portfolio was acquired through the redemption-in-kind during 2008 of an investment in a mutual fund and includes 64 collateralized mortgage obligations (“CMO”) and mortgage-backed securities issued by large commercial financial institutions. For the six months ended March 31, 2011, management recognized an OTTI charge related to a portion of the portfolio securities in the amount of $155,000 on a pre-tax basis due to the fact that, in management’s judgment, the credit quality of the collateral pool underlying such securities had deteriorated during recent periods to the point that full recovery of the entire amortized cost of the investment was considered to be uncertain. This portfolio consists primarily of securities collateralized by Alt-A loans, home equity lines of credit and other receivables as well as whole loans with more significant exposure to declining real estate markets. For the overall portfolio of the securities, there was exposure to the declining real estate markets such as California, Nevada, Arizona and Florida and consequently, an additional OTTI charge was deemed to be warranted as of March 31, 2011. Of the recorded charge, a total of $140,000 was concluded to be credit related and recognized currently in earnings and $15,000 was concluded to be attributable to other factors and recognized in other accumulated comprehensive income.

As of March 31, 2011, with the exception of securities discussed above, there are no securities for which the Company currently believes it is not probable that it will collect all amounts due according to the contractual terms of the investment. Management concluded that an other-than-temporary impairment did not exist and the decline in value was attributed to the illiquidity in the financial markets. With respect to the $724,000 in gross unrealized losses related to this portfolio, 23 securities had been in a loss position for longer than 12 months while 6 securities had been in a loss position for less than 12 months. 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 these securities.

The amortized cost and fair value of debt securities, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	March 31, 2011
	Held to Maturity				Available for Sale

	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(Dollars in Thousands)
Due within one year	$	-	$	-	$	-	$	-
Due after one through five years		14,997		14,870		-		-
Due after five through ten years		36,997		37,042		2,999		3,040
Due after ten years		49,711		48,895		3,999		3,927

Total	$	101,705	$	100,807	$	6,998	$	6,967

The maturity table above excludes mortgage-backed securities because the contractual maturities are not indicative of actual maturities due to significant prepayments.

4. LOANS RECEIVABLE

Loans receivable consist of the following:

	March 31,			September 30,
	2011			2010
	(Dollars in Thousands)
One-to-four family residential	$	192,782		$	197,164
Multi-family residential		3,900			4,006
Commercial real estate		21,066			19,710
Construction and land development		31,037			40,650
Commercial business		873			893
Consumer		619			595

Total loans		250,277			263,018

Undisbursed portion of loans-in-process		(3,852	)		(5,366	)
Deferred loan costs, net		550			590
Allowance for loan losses		(3,155	)		(3,151	)

Net loans	$	243,820		$	255,091

The following table summarizes the loans individually evaluated for impairment by loan segment at March 31, 2011:

	One- to four- family residential		Multi-family residential		Commercial real estate		Construction and land development		Commercial business		Consumer		Total
	(Dollars in Thousands)
Total loans	$	192,782	$	3,900	$	21,066	$	31,037	$	873	$	619	$	250,277
Individually evaluated for impairment	$	5,535	$	-	$	-	$	3,492	$	-	$	-	$	9,027
Collectively evaluated for impairment		187,247		3,900		21,066		27,545		873		619		241,250

The loan portfolio is segmented at a level that allows management to monitor risk and performance. Management evaluates all construction and land development loans and 90 plus day delinquent commercial real estate loans 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 for loan losses 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 March 31, 2011:

					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	$	5,535	$	2	$	-	$	5,535	$	5,535
Multi-family residential		-		-		-		-		-
Commercial real estate		-		-		-		-		-
Construction and land development		773		103		2,719		3,492		3,492
Commercial business		-		-		-		-		-
Consumer		-		-		-		-		-
Total Loans	$	6,308	$	105	$	2,719	$	9,027	$	9,027

The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated:

	Six months ended
	March 31,
	(Dollars in Thousands)
	2011		2010
Average recorded investment in impaired loans	$	7,939	$	1,340
Interest income recognized on an accrual basis on impaired loans		150		-
Interest income recognized on a cash basis on impaired loans		75		15

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 “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 table presents the classes of the loan portfolio summarized by the aggregate “Pass” and the criticized categories of “special mention”, “substandard” and “doubtful” within the Company’s risk rating system as of March 31, 2011:

			Special						Total
	Pass		Mention		Substandard		Doubtful		Loans
	(Dollars in Thousands)
Multi-family residential	$	3,900	$	-	$	-	$	-	$	3,900
Commercial real estate		20,172		-		894		-		21,066
Construction and land development		19,088		4,438		7,511		-		31,037
Commercial business		873		-		-		-		873
Total Loans	$	44,033	$	4,438	$	8,405	$	-	$	56,876

The following table represents loans in which a formal risk rating system is not utilized, but loans are segregated between performing and non-performing based on delinquency status:

				Non-		Total
	Performing		Performing			Loans
	(Dollars in Thousands)
One-to-four family residential	$	184,761		$	8,021	$	192,782
Consumer		619			-		619
Total Loans	$	185,380		$	8,021	$	193,401

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 table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of March 31, 2011:

							Total
			30-89 Days		90 Days+		Past Due		Non-		Total
	Current		Past Due		Past Due		and accruing		Accrual		Loans
	(Dollars in Thousands)
One-to-four family residential	$	183,109	$	1,932	$	19	$	1,951	$	7,722	$	192,782
Multi-family residential		3,900		-		-		-		-		3,900
Commercial real estate		20,172		-		-		-		894		21,066
Construction and land development		27,846		-		-		-		3,191		31,037
Commercial business		873		-		-		-		-		873
Consumer		619		-		-		-		-		619
Total Loans	$	236,519	$	1,932	$	19	$	1,951	$	11,807	$	250,277

The allowance for loan losses is established through a provision for loan losses. 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 our estimate of the known and inherent losses in such loan type using both a quantitative analysis as well as consideration of qualitative factors. Our evaluation process includes, among other things, an analysis of delinquency trends, non-performing loan trends, the level of charge-offs and recoveries, prior loss experience, total loans outstanding, the volume of loan originations, the type, size and geographic concentration of our loans, the value of collateral securing the loan, the borrower’s ability to repay and repayment performance, the number of loans requiring heightened management oversight, local economic conditions and industry experience.

We consider commercial real estate loans, commercial business loans, and land acquisition, development and construction loans to be riskier than one- to four-family residential mortgage loans. Commercial real estate loans entail significant additional credit risks compared to one- to four-family residential mortgage loans, as they 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 adverse conditions in the real estate market and in the general economy. Commercial business loans 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. In the event we make an acquisition loan on property that is not yet approved for the planned development, there is the risk that approvals will not be granted or will be delayed. These events may adversely affect the borrower and the collateral value of the property. Development and construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated. All of these factors are considered as part of the underwriting, structuring and pricing of the loan.

The following schedule summarizes the changes in the allowance for loan losses:

	Six Months Ended March 31,
	2011			2010
	(Dollars in Thousands)

Balance, beginning of period	$	3,151		$	2,732
Provision for loan losses		4,180			385
Charge-offs		(4,176	)		(691	)
Recoveries		-			-

Balance, end of period	$	3,155		$	2,426

The following table summarizes 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 March 31, 2011. Activity in the allowance is presented for the six months ended March 31, 2011:


	One- to four-family residential			Multi- family residential		Commercial real estate			Construction and land development			Commercial business		Consumer		Unallocated			Total
	(In Thousands)
ALL balance at September 30, 2010	$	672		$	4	$	560		$	1,909		$	3	$	1	$	2		$	3,151
Charge-offs		(750	)		-		-			(3,426	)		-		-		-			(4,176	)
Recoveries		-			-		-			-			-		-		-			-
Provision		1,041			1		(224	)		3,364			-		-		(2	)		4,180
ALL balance at March 31, 2011	$	963		$	5	$	336		$	1,847		$	3	$	1	$	-		$	3,155

Individually evaluated for impairment		2			-		-			103			-		-		-			105
Collectively evaluated for impairment		961			5		336			1,744			3		1		-			3,050

The Company established a provision for loan losses of $3.6 million for the quarter ended March 31, 2011 and $4.2 million for the six month period ended March 31, 2011 as compared to $250,000 and $385,000, respectively, for the comparable periods in 2010. The increased level of provisions in the 2011 periods reflected primarily the decrease in the value of collateral securing two construction development projects. In addition, the level of the provision reflected management’s ongoing review of the loan portfolio. As a result of the increased loss experience during the quarter, the increased level of non-performing loans and the continuing deterioration of real estate values, management determined an additional provision was appropriate. The first project involves a $4.3 million construction loan secured by a 33-unit condominium project in Philadelphia. Due to the lack of recent sales in the project combined with deterioration in real estate values in the market, in particular for condominiums, Prudential made a determination to utilize the “bulk sale” appraised value of the remaining units in the project rather than the retail value. This re-evaluation resulted in a charge-off of $2.6 million of which $1.9 million was recognized as provision expense for the quarter ended March 31, 2011. Prudential had previously established a specific reserve for this project of $788,000. The second project involves an aggregate of $1.8 million in loans securing the seven unsold units associated with a 17-unit townhouse project in Philadelphia. Based on both declines in values of the collateral securing the project and the lack of sales, Prudential determined to charge off $1.5 million of which $1.1 million was recognized as provision expense during the quarter ended March 31, 2011. Prudential had previously established a $338,000 specific reserve for this project.

We will continue to monitor and modify our allowance for loan losses as conditions dictate. No assurances can be given that our 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.

5. DEPOSITS

Deposits consist of the following major classifications:

	March 31,					September 30,
	2011					2010
	Amount		Percent			Amount		Percent
	(Dollars in Thousands)
Money market deposit accounts	$	74,956		16.7	%	$	75,822		16.3	%
Checking accounts (1)		31,057		6.9			28,642		6.2
Passbook, club and statement savings		71,566		16.0			69,901		15.1
Certificates maturing in six months or less		129,165		28.8			111,180		23.9
Certificates maturing in more than six months		141,242		31.6			178,910		38.5

Total	$	447,986		100.0	%	$	464,455		100.0	%

(1)	Includes interest and non-interest bearing checking accounts.

Certificates of $100,000 and over totaled $104.6 million as of March 31, 2011 and $113.0 million as of September 30, 2010.

6.	INCOME TAXES

Items that gave rise to significant portions of deferred income taxes are as follows:

	March 31,			September 30,
	2011			2010
Deferred tax assets:	(Dollars in Thousands)
Deposit premium	$	94		$	118
Allowance for loan losses		2,561			1,114
Real estate owned expenses		34			291
Nonaccrual interest		88			-
Accrued vacation		66			59
Capital loss carryforward		1,873			1,873
Impairment loss		1,600			1,553
Split dollar life insurance		30			33
Post-retirement benefits		169			173
Employee benefit plans		255			298

Total deferred tax assets		6,770			5,512
Valuation allowance		(2,633	)		(2,209	)
Total deferred tax assets, net of valuation allowance		4,137			3,303

Deferred tax liabilities:
Unrealized gain on available for sale securities		388			861
Property		478			478
Mortgage servicing rights		1			2
Deferred loan fees		187			200

Total deferred tax liabilities		1,054			1,541

Net deferred tax asset	$	3,083		$	1,762

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 tax deduction generated by the redemption of the shares of the mutual fund and the subsequent impairment charge on the assets acquired through the redemption in kind are considered a capital loss and can only be utilized to the extent of capital gains over a five year period, resulting in the establishment of a valuation allowance for the carryforward period which expires beginning in 2013. The valuation allowance totaled $2.6 million at March 31, 2011. The gross deferred asset related to impairment losses increased by $47,000 during the six months ended March 31, 2011 while the corresponding valuation allowance increased by $424,000, resulting in additional income tax expense of $377,000 corresponding to the decrease in value of available for sale mortgage-backed securities which may be sold in the future to generate capital gains.

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 Unaudited Consolidated Statement of Operations. During 2009, the Internal Revenue Service concluded an audit of the Company’s tax returns for the year ended September 30, 2007 in which there was no change necessary to the Company’s tax liability. The Company’s federal and state income tax returns for taxable years through September 30, 2006 have been closed for purposes of examination by the Internal Revenue Service and the Pennsylvania Department of Revenue.

7. STOCK COMPENSATION PLANS

The Company maintains a Recognition and Retention Plan (“RRP”) which is administered by a committee of the Board of Directors. The RRP provides for the grant of shares of common stock of the Company to certain officers, employees and directors of the Company. In order to fund the grant of shares under the RRP, the RRP Trust purchased 226,148 shares of the Company’s common stock in the open market for a total cost of approximately $2.5 million, at an average price per share of $10.85. The Company made sufficient contributions to the RRP Trust to fund these purchases. No additional purchases are expected to be made by the RRP Trust under this plan. As of March 31, 2011, grants covering 178,882 shares had been awarded as part of the RRP. The remaining 47,266 shares in the RRP Trust are available for future awards. Shares subject to awards under the RRP generally vest at the rate of 20% per year over five years. As of March 31, 2011, 34,656 shares had become fully vested and no shares subject to awards had been forfeited.

Compensation expense related to the shares subject to awards granted is recognized ratably over the five-year vesting period in an amount which totals the share price at the grant date multiplied by the number of shares subject to the grant. During the three months and six months ended March 31, 2011, $97,000 and $195,000, respectively, was recognized in compensation expense for the RRP. Tax expense of $26,000 was recognized during the three months ended March 31, 2011 while a $6,000 tax benefit was recognized during the six months ended March 31, 2011. During the three months and six months ended March 31, 2010, $97,000 and $192,000, respectively, was recognized in compensation expense for the RRP. Tax expense of $12,000 was recognized during the three months ended March 31, 2010 while a $20,000 tax benefit was recognized during the six months ended March 31, 2010. At March 31, 2011, approximately $1.1 million in additional compensation expense for the shares awarded related to the RRP remained unrecognized.

A summary of the Company’s non-vested stock award activity for the six months ended March 31, 2011 is presented in the following table:

	Six Months Ended March 31, 2011
	Number of Shares			Weighted Average Grant Date Fair Value

Nonvested stock awards at October 1, 2010		144,236		$	11.11
Issued		-			-
Vested		(35,776	)		11.12
Nonvested stock awards at the March 31, 2011		108,460		$	11.08

The Company also maintains a Stock Option Plan. The Stock Option Plan 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 market value of the common stock on the grant date. Options will 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 565,369 shares of common stock are available for future issuance pursuant to the Stock Option Plan. As of March 31, 2011, 315,194 incentive stock options and 127,206 non-qualified stock options had been awarded under the plan. As of March 31, 2011, 174,133 options were vested while none had been forfeited.

A summary of the status of the Company’ stock options under the Stock Option Plan as of March 31, 2011 and changes during the six month period ended March 31, 2011 are presented below:

	Six Months Ended March 31, 2011
	Number of Shares	Weighted Average Exercise Price

Outstanding at October 1, 2010	442,400	$	11.12
Granted	-		-
Exercised	-		-
Forfeited	-		-
Outstanding at March 31, 2011	442,400	$	11.12
Exercisable at March 31, 2011	174,133	$	11.14

The weighted average remaining contractual term was approximately 7.75 years for options outstanding as of March 31, 2011.

The estimated fair value of options granted during fiscal 2009 was $2.81 per share, while options granted during fiscal 2010 were estimated to have a fair value of $2.76. No grants have been made during the first six months of fiscal 2011. The fair value was estimated on the date of grant in accordance with FASB ASC Topic 718 using the Black-Scholes pricing model with the following weighted average assumptions used:

	Granted Fiscal Year Ended
	2009			2010
Dividend yield		1.79	%		2.10	%
Expected volatility		27.94	%		28.95	%
Risk-free interest rate		1.96	%		3.10	%
Expected life of options	6.5 years			6.5 years

During the three months and six months ended March 31, 2011, $61,000 and $122,000, respectively, was recognized in compensation expense. A tax benefit of $6,000 and $12,000, respectively, was recognized during the three and six months ended March 31, 2011. During the three months and six months ended March 31, 2010, $61,000 and $120,000, respectively, was recognized in compensation expense. A tax benefit of $6,000 and $11,000, respectively, was recognized during the three and six months ended March 31, 2010. At March 31, 2011, approximately $680,000 in additional compensation expense for awarded options remained unrecognized. The weighted average period over which this expense will be recognized is approximately 2.75 years.

8.	COMMITMENTS AND CONTINGENT LIABILITIES

At March 31, 2011, the Company had $5.0 million in outstanding commitments to originate fixed and variable-rate loans with market interest rates ranging from 4.875% to 7.25%. At September 30, 2010, the Company had $6.1 million in outstanding commitments to originate fixed and variable-rate loans with market interest rates ranging from 4.875% to 6.75%.

The aggregate undisbursed portion of loans-in-process amounted to $3.9 million and $5.4 million, respectively, at March 31, 2011 and September 30, 2010.

The Company also had commitments under unused lines of credit of $6.7 million and $6.9 million, respectively, at March 31, 2011 and September 30, 2010, and letters of credit outstanding of $676,000 at both March 31, 2011 and September 30, 2010.

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 March 31, 2011, the exposure, which represents a portion of credit risk associated with the interests sold, amounted to $64,000. This exposure is for the life of the related loans and payables, on our 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, believes that such proceedings will not have a material adverse effect on the financial condition, operations or cash flows of the Company. There can be no assurance that any of the outstanding legal proceedings to which the Company is a party will not be decided adversely to the Company’s interests and have a material adverse effect on the financial condition and operations of the Company.

9.	FAIR VALUE OF FINANCIAL INSTRUMENTS

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.


	March 31,				September 30
	2011				2010

	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(Dollars in Thousands)
Assets:
Cash and cash equivalents	$	41,316	$	41,316	$	66,524	$	66,524
Investment and mortgage-backed securities held to maturity		124,883		125,700		112,673		116,594
Investment and mortgage-backed securities available for sale		74,162		74,162		72,425		72,425
Loans receivable, net		243,820		258,051		255,091		262,777
Accrued interest receivable		2,483		2,483		2,669		2,669
Federal Home Loan Bank stock		3,199		3,199		3,545		3,545
Bank owned life insurance		6,069		6,069		5,990		5,990

Liabilities:
Checking accounts		31,057		31,057		28,642		28,642
Money market deposit accounts		74,956		74,956		75,822		75,822
Passbook, club and statement savings accounts		71,566		71,566		69,901		69,901
Certificates of deposit		270,407		275,564		290,090		296,087
Advances from Federal Home Loan Bank		593		604		615		614
Accrued interest payable		1,119		1,119		3,361		3,361

Cash and Cash Equivalents—For cash and cash equivalents, 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 that may be derivable from observable and unobservable market inputs.

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.

Accrued Interest Receivable – For accrued interest receivable, the carrying amount is a reasonable estimate of fair value.

Federal Home Loan Bank (FHLB) Stock—Although FHLB stock is an equity interest in an FHLB, it is carried at cost because it does not have a readily determinable fair value as its ownership is restricted and it lacks a market. The estimated fair value approximates the carrying amount.

Bank Owned Life Insurance—The fair value of bank owned life insurance is based on the cash surrender value obtained from an independent advisor that may be derivable from observable and unobservable market inputs.

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 a present value estimate using market rates currently offered for deposits of similar remaining maturity.

Advances from Federal Home Loan Bank—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.

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.

10.	FAIR VALUE MEASUREMENT

The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2011 and September 30, 2010, respectively. Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

Generally accepted accounting principles used in the United States establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.

The three broad levels of hierarchy are as follows:

Level 1	Quoted prices in active markets for identical assets or liabilities.
Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Those assets which will continue to be measured at fair value on a recurring basis as of March 31, 2011 are as follows:

	Category Used for Fair Value Measurement
	Level 1		Level 2		Level 3		Total
	(Dollars in Thousands)

Assets:
Securities available for sale:
U.S. Government and agency obligations	$	-	$	6,967	$	-	$	6,967
Mortgage-backed securities - U.S. Government agencies		-		60,585		-		60,585
Mortgage-backed securities - Non-agency		-		6,600		-		6,600
FHLMC preferred stock		10		-		-		10
Total	$	10	$	74,152	$	-	$	74,162

Those assets which will continue to be measured at fair value on a recurring basis as of September 30, 2010 are as follows:

	Category Used for Fair Value Measurement
	Level 1		Level 2		Level 3		Total
	(Dollars in Thousands)

Assets:
Securities available for sale:
U.S. Government and agency obligations	$	-	$	10,193	$	-	$	10,193
Mortgage-backed securities - U.S. Government agencies		-		55,025		-		55,025
Mortgage-backed securities - Non-agency		-		7,199		-		7,199
FHLMC preferred stock		8		-		-		8
Total	$	8	$	72,417	$	-	$	72,425

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 loans or properties collateralizing loans transferred into real estate owned at fair value on a non-recurring basis.

Impaired Loans

The Company considers loans to be impaired when it becomes probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the loan agreement. Under ASC No. 310-10-35, Receivables-Subsequent Measurement, collateral dependent impaired loans are based on the fair value of the collateral which is based on appraisals. In some cases, adjustments are made to the appraised values for various factors including age of the appraisal, age of the comparables included in the appraisal, and known changes in the market and in the collateral These adjustments are based upon observable inputs, and therefore, the fair value measurement has been categorized as a Level 2 measurement. Specific reserves were calculated for impaired loans with carrying amounts totaling $9.0 million at March 31, 2011. The collateral underlying these loans had a fair value of $8.9 million, resulting in specific reserves in the allowance for loan losses of $106,000.

Transfer of Impaired Loans into Real Estate Owned

Once an asset is determined to be uncollectible, the underlying collateral is repossessed and reclassified to foreclosed real estate and repossessed assets. These assets are carried at lower of cost or fair value of the collateral, less cost to sell. In some cases, adjustments are made to the appraised values for various factors including age of the appraisal, age of the comparables included in the appraisal, and known changes in the market and in the collateral. Impaired loans are valued based on these adjustments to appraised value, and therefore, the fair value measurement has been categorized as a Level 3 measurement. The real estate own valuation is based on the appraised value, less cost to sell and is therefore categorized as a Level 2 measurement.

Summary of Non-Recurring Fair Value Measurements

	At March 31, 2011
	(Dollars in Thousands)
	Level 1		Level 2		Level 3		Total
Impaired Loans	$	-	$	-	$	8,921	$	8,921
Real estate owned		-		2,345		-	$	2,345
Total	$	-	$	2,345	$	8,921	$	11,266

	At September 30, 2010
	(Dollars in Thousands)

	Level 1		Level 2		Level 3		Total
Impaired Loans	$	-	$	4,249	$	-		4,249
Real estate owned		-		3,197		-		3,197
Total	$	-	$	7,446	$	-	$	7,446

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our unaudited consolidated financial statements included elsewhere in this Form 10-Q and with our Annual Report on Form 10-K for the year ended September 30, 2010 (the “Form 10-K”).

Overview. Prudential Bancorp, Inc. of Pennsylvania (the “Company”) was formed by Prudential Savings Bank (the “Bank”) in connection with the Bank’s reorganization into the mutual holding company form of organization in 2005. The Company’s results of operations are primarily dependent on the results of the Bank, which is a wholly owned subsidiary of the Company. The Company’s results of operations depend to a large extent on net interest income, which primarily is the difference between the income earned on its loan and securities portfolios and the cost of funds, which is the interest paid on deposits and borrowings. Results of operations are also affected by our provisions for loan losses, non-interest income (which includes impairment charges) and non-interest expense. Non-interest expense principally consists of salaries and employee benefits, office occupancy, depreciation, data processing expense, payroll taxes and other expense. Our results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially impact our financial condition and results of operations. The Bank is subject to regulation by the Federal Deposit Insurance Corporation (“FDIC”) and the Pennsylvania Department of Banking (the “Department”). The Bank’s main office is in Philadelphia, Pennsylvania, with six additional banking offices located in Philadelphia and Delaware Counties in Pennsylvania. The Bank’s primary business consists of attracting deposits from the general public and using those funds together with borrowings to originate loans and to invest primarily in U.S. Government and agency securities and mortgage-backed securities. In November 2005, the Bank formed PSB Delaware, Inc., a Delaware corporation, as a subsidiary of the Bank. In March 2006, all mortgage-backed securities owned by the Company were transferred to PSB Delaware, Inc. PSB Delaware, Inc.’s. activities are included as part of the consolidated financial statements.

Critical Accounting Policies. In reviewing and understanding financial information for the Company, 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 Consolidated Financial Statements included in the Form 10-K . The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices within the banking industry. The preparation of the Company’s consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Management evaluates these estimates and assumptions on an ongoing basis. 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. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal 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 impairment based upon an evaluation of known and inherent loss in the loan portfolio. 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 classified loans.

Management monitors its allowance for loan losses at least quarterly and makes adjustments to the allowance through the provision for loan losses as economic conditions and other pertinent factors indicate. The quarterly review and adjustment of the qualitative factors employed in the allowance methodology and the updating of historic loss experience allow for timely reaction to emerging conditions and trends. In this context, a series of qualitative factors are used in a methodology as a measurement of how current circumstances are affecting the loan portfolio. Included in these qualitative factors are:

●	Levels of past due, classified and non-accrual loans, troubled debt restructurings and 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

●	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 those criticized and classified loans. The amount of the specific allowance is determined through a loan-by-loan analysis of certain large dollar construction and land development and commercial loans. Loans not individually reviewed are evaluated as a group using reserve factor percentages based on historic 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. Historically, our estimates of the allowance for loan loss have not required significant adjustments from management’s initial estimates. 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 impact 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.

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 GAAP. The evaluation is based upon factors such as the creditworthiness of the issuers/guarantors, the underlying collateral, if applicable, and the continuing performance of the securities. In addition the Company also considers the likelihood that the security will be required to be sold by a regulatory agency, our internal intent not to dispose of the security prior to maturity and whether the entire cost basis of the security is expected to be recovered. In determining whether the cost basis will be recovered, management evaluates other facts and circumstances that may be indicative of an other-than-temporary impairment condition. This includes, but is not limited to, an evaluation of the type of security, length of time and extent to which the fair value has been less than cost, and near-term prospects of the issuer.

In addition, certain assets are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The Company measures impaired loans, FHLB stock and loans or properties collateralizing 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.

Income Taxes. 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.

The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the consolidated income statement. Assessment of uncertain tax positions requires careful consideration of the technical merits of a position based on management’s analysis of tax regulations and interpretations. Significant judgment may be involved in the assessment of the tax position.

Forward-looking Statements. In addition to historical information, this Quarterly Report on Form 10-Q includes certain “forward-looking statements” based on management’s current expectations. The Company’s 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. 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 and investment portfolios, changes in accounting principles, policies or guidelines and other economic, competitive, governmental and technological factors affecting the Company’s operations, markets, products, services and fees.

The Company undertakes no obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results that occur subsequent to the date such forward-looking statements are made unless required by law or regulations.

Market Overview. The market dislocations experienced in the financial market beginning in 2007 have continued through 2010. One of the primary sources for the difficulties in the market is the significant declines experienced in the housing market throughout the country. While the Philadelphia area has not previously suffered wholesale declines in the value of residential real estate as have other areas of the country, this downturn has rippled through many parts of the economy, especially condominium sales, construction lending and lending to contractors. The significant deterioration in the 2011 periods necessitated large charge-offs and loan loss provision expense.

The Company continues to focus on the credit quality of its customers – closely monitoring the financial status of borrowers throughout the Company’s markets, gathering information, working on early detection of potential problems, taking pre-emptive steps where necessary and performing the analysis required to maintain adequate reserves for loan losses.

Despite the current market and economic conditions, the Company continues to maintain a strong capital position.

The following discussion provides further details on the financial condition and results of operations of the Company at and for the periods ended March 31, 2011.

COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2011 AND SEPTEMBER 30, 2010

At March 31, 2011, the Company had total assets of $506.0 million, a decrease of $23.1 million from $529.1 million at September 30, 2010. The decrease was primarily attributable to decreases of $25.2 million in cash and cash equivalents and $11.3 million in net loans during the first two quarters of fiscal 2011. These decreases were partially offset by a $13.9 million increase in the investment and mortgage-backed securities portfolio as we re-invested a portion of our cash and cash equivalents in such higher yielding assets. This decline in the loan portfolio reflected in large part the $9.6 million decline in the construction and land development portfolio due in part to Prudential’s efforts to reduce its exposure in this line of lending due to continual deterioration of the real estate market in the Philadelphia area, as well as the charge-offs taken in the March quarter.

Total liabilities decreased $19.6 million to $452.5 million at March 31, 2011 from $472.1 million at September 30, 2010. The decrease was primarily the result of a $16.5 million decrease in deposits, primarily certificates of deposit, as we have priced certificates at a level to achieve a balance between maintaining the desired level of liquidity and monitoring our interest rate spread. Also contributing to the decrease was a $2.2 million decrease in accrued interest related to certificates of deposit which generally provide for interest to be distributed at year end.

Stockholders’ equity decreased by $3.5 million to $53.5 million at March 31, 2011 from September 30, 2010. The decrease reflected the net loss of $2.0 million and the payment of dividends totaling $967,000 combined with a $919,000 decrease in the unrealized gain on available for sale securities. The decrease in the amount of the unrealized gain reflected the decline in fair value of available for sale securities as a result of increases in market rates of interest as compared to September 30, 2010.

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2011 AND 2010

Net income. The Company reported a net loss of $1.9 million for the quarter ended March 31, 2011 as compared to net income of $843,000 for the quarter ended March 31, 2010. For the six months ended March 31, 2011, the Company recognized a net loss of $2.0 million as compared to net income of $1.5 million for the comparable period in 2010. The loss incurred for the periods was due to substantially increased loan loss provisions and charge-offs as collateral values related to construction loans have declined substantially .

Net interest income. Net interest income decreased $395,000 or 9.8% to $3.6 million for the three months ended March 31, 2011 as compared to $4.0 million for the same period in 2010. The yield declined as investment securities were called or matured and the proceeds were re-invested in securities bearing lower rates consistent with the current market. The decrease reflected the effects of an $865,000 or 13.7% decrease in interest income partially offset by a $470,000 or 20.6% decrease in interest expense. The decrease in interest income resulted from an 81 basis point decrease to 4.38% in the weighted average yield earned on interest-earning assets partially offset by a $10.6 million or 2.2% increase in the average balance of interest-earning assets for the three months ended March 31, 2011, as compared to the same period in 2010. The decline in the weighted average yield was due in large part to the 54 basis point decline in the yield earned on the loan portfolio combined with a 108 basis point decline in the yield earned on investment securities, in each case reflecting the effects of the current low interest rate market on our investments and loans as they reprice downward. The decrease in interest expense resulted primarily from a 44 basis point decrease to 1.59% in the weighted average rate paid on interest-bearing liabilities, reflecting the repricing downward of interest-bearing liabilities during the year, partially offset by a $6.7 million or 1.5% increase in the average balance of interest-bearing liabilities for the three months ended March 31, 2011, as compared to the same period in 2010.

For the six months ended March 31, 2011, net interest income decreased $742,000 or 9.3% to $7.3 million as compared to $8.0 million for the same period in 2010. The decrease was due to a $1.7 million or 13.1% decrease in interest income partially offset by a $936,000 or 19.6% decrease in interest expense. The decrease in interest income resulted primarily from an 85 basis point decrease to 4.43% in the weighted average yield earned on interest-earning assets, partially offset by a $17.2 million or 3.6% increase in the average balance of interest-earning assets. The majority of the decline in the average yield reflected the 35 basis point and 103 basis point declines in yields earned on the loan and investment portfolio, respectively. The decrease in interest expense resulted from a 47 basis point decrease to 1.67% in the weighted average rate paid on interest-bearing liabilities partially offset by a $13.3 million or 3.0% increase in the average balance of interest-bearing liabilities for the six months ended March 31, 2011, as compared to the same period in 2010.

For the quarter ended March 31, 2011, the net interest margin was 2.92%, as compared to 3.31% for the same period in 2010. For the six months ended March 31, 2011, the net interest margin was 2.90%, as compared to 3.30% for the same period in 2010. The decrease in the net interest margin was primarily due to the shift in the relative composition of interest-earning assets to increased amounts of cash and cash equivalents as higher yielding investment securities were called and repaid during the later part of fiscal 2010.

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. Average yields and rates have been annualized. Tax-exempt income and yields have not been adjusted to a tax-equivalent basis. All average balances are based on monthly balances. Management does not believe that the monthly averages differ significantly from what the daily averages would be.

	Three Months
	Ended March 31,
	2011								2010
	Average					Average			Average					Average
	Balance		Interest			Yield/Rate			Balance		Interest			Yield/Rate

	(Dollars in Thousands)
Interest-earning assets:
Investment securities	$	114,341	$	1,026			3.59	%	$	120,060	$	1,401			4.67	%
Mortgage-backed securities		92,496		1,091			4.72			93,606		1,188			5.08
Loans receivable(1)		249,829		3,307			5.29			255,341		3,719			5.83
Other interest-earning assets		40,244		22			0.22			17,280		3			0.07
Total interest-earning assets		496,910		5,446			4.38			486,287		6,311			5.19
Cash and non-interest-bearing balances		3,154								1,834
Other non-interest-earning assets		17,471								20,988
Total assets	$	517,535							$	509,109
Interest-bearing liabilities:
Savings accounts	$	70,380		189			1.07		$	69,708		331			1.90
Money market deposit and NOW accounts		104,656		196			0.75			106,688		285			1.07
Certificates of deposit		278,779		1,428			2.05			248,017		1,468			2.37
Total deposits		453,815		1,813			1.60			424,413		2,084			1.96
Advances from Federal Home Loan Bank		597		1			0.67			23,196		200			3.45
Advances from borrowers for taxes and insurance		1,619		2			0.49			1,761		2			0.45
Total interest-bearing liabilities		456,031		1,816			1.59			449,370		2,286			2.03
Non-interest-bearing liabilities:
Non-interest-bearing demand accounts		3,199								1,148
Other liabilities		3,189								2,194
Total liabilities		462,419								452,712
Stockholders’ equity		55,116								56,397
Total liabilities and stockholders’ equity	$	517,535							$	509,109
Net interest-earning assets	$	40,879							$	36,917
Net interest income; interest rate spread			$	3,630			2.79	%			$	4,025			3.16	%
Net interest margin(2)							2.92	%							3.31	%

Average interest-earning assets to average interest-bearing liabilities				108.96	%							108.22	%

(1) Includes non-accrual loans. Calculated net of unamortized deferred fees, undisbursed portion of loans-in-process and allowance for loan losses.

(2) Equals net interest income divided by average interest-earning assets.

	Six Months
	Ended March 31,
	2011								2010
	Average					Average			Average					Average
	Balance		Interest			Yield/Rate			Balance		Interest			Yield/Rate

	(Dollars in Thousands)
Interest-earning assets:
Investment securities	$	106,856	$	1,958			3.66	%	$	123,298	$	2,891			4.69	%
Mortgage-backed securities		90,418		2,155			4.77			94,139		2,411			5.12
Loans receivable(1)		252,479		6,931			5.49			255,710		7,470			5.84
Other interest-earning assets		51,803		55			0.21			11,190		5			0.09
Total interest-earning assets		501,556		11,099			4.43			484,337		12,777			5.28
Cash and non-interest-bearing balances		3,157								2,922
Other non-interest-earning assets		18,046								19,583
Total assets	$	522,759							$	506,842
Interest-bearing liabilities:
Savings accounts	$	69,886		419			1.20		$	68,853		657			1.91
Money market deposit and NOW accounts		103,959		398			0.77			106,575		578			1.08
Certificates of deposit		283,053		3,015			2.13			247,108		3,119			2.52
Total deposits		456,898		3,832			1.68			422,536		4,354			2.06
Advances from Federal Home Loan Bank		603		3			1.00			21,620		417			3.86
Advances from borrowers for taxes and insurance		1,524		3			0.39			1,619		3			0.37
Total interest-bearing liabilities		459,025		3,838			1.67			445,775		4,774			2.14
Non-interest-bearing liabilities:
Non-interest-bearing demand accounts		2,984								2,098
Other liabilities		4,956								4,820
Total liabilities		466,965								452,693
Stockholders’ equity		55,794								56,149
Total liabilities and stockholders’ equity	$	522,759							$	508,842
Net interest-earning assets	$	42,531							$	38,562
Net interest income; interest rate spread			$	7,261			2.75	%			$	8,003			3.13	%
Net interest margin(2)							2.90	%							3.30	%

Average interest-earning assets to average interest-bearing liabilities				109.27	%							108.65	%

(1) Includes non-accrual loans. Calculated net of unamortized deferred fees, undisbursed portion of loans-in-process and allowance for loan losses.

(2) Equals net interest income divided by average interest-earning assets.

Provisions for loan losses. The allowance is maintained at a level sufficient to provide for estimated probable losses in the loan portfolio at each reporting date. At least quarterly, management performs an analysis to identify the inherent risk of loss in the Company’s loan portfolio. This analysis includes a qualitative evaluation of concentrations of credit, past loss experience, current economic conditions, amount and composition of the loan portfolio (including loans being specifically monitored by management), estimated fair value of underlying collateral, delinquencies, and other factors.

Our methodology for assessing the adequacy of the allowance establishes both specific and general pooled allocations of the allowance. To determine the adequacy of the allowance and the need for potential changes to the allowance, we conduct a formal analysis at least quarterly to assess the risk within the loan portfolio. This assessment includes analyses of historical performance, past due trends, the level of nonperforming loans, reviews of certain impaired loans, loan activity since the last quarter, consideration of current economic conditions, and other pertinent information. Loans are assigned ratings, either individually for larger credits or in homogeneous pools, based on an internally developed grading system. The resulting conclusions are reviewed and approved by senior management.

The Company established a provision for loan losses of $3.6 million for the quarter ended March 31, 2011 and $4.2 million for the six month period ended March 31, 2011 as compared to $250,000 and $385,000, respectively, for the comparable periods in 2010. The increased level of provisions in the 2011 periods reflected primarily the decrease in the value of collateral securing two construction development projects. In addition, the level of the provision reflected management’s ongoing review of the loan portfolio. As a result of the increased loss experience during the quarter, the increased level of non-performing loans and the continuing deterioration of real estate values, management determined an additional provision was appropriate. The first project involves a $4.3 million construction loan secured by a 33-unit condominium project in Philadelphia. Due to the lack of recent sales in the project combined with deterioration in real estate values in the market, in particular for condominiums, the Company made a determination to utilize the “bulk sale” appraised value of the remaining units in the project rather than the retail value. This re-evaluation resulted in a charge-off of $2.6 million of which $1.9 million was recognized as provision expense for the quarter ended March 31, 2011. The Company had previously established a specific reserve for this project of $788,000. The second project involves an aggregate of $1.8 million in loans securing the seven unsold units associated with a 17-unit townhouse project in Philadelphia. Based on both declines in values of the collateral securing the project and the lack of sales, Prudential determined to charge off $1.5 million of which $1.1 million was recognized as provision expense during the quarter ended March 31, 2011. The Company had previously established a $338,000 specific reserve for this project.

At March 31, 2011, the Company’s non-performing assets totaled $14.2 million or 2.8% of total assets as compared to $6.7 million or 1.4% at September 30, 2010. The non-performing assets consisted of $11.8 million in loans of which $7.7 million were one-to-four family residential loans, $3.2 million were construction and loan development loans and $894,000 were commercial real estate loans. Included in the non-performing loans were $5.5 million in troubled debt restructurings which are performing in accordance to revised contractual terms. The non-performing assets also included six one-to-four family residential real estate properties totaling $2.3 million. The allowance for loan losses totaled $3.2 million, or 1.3% of total loans and 26.7% of non-performing loans at March 31, 2011.

Non-interest income. Non-interest income amounted to $175,000 and $309,000 for the three and six month periods ended March 31, 2011, compared with $62,000 and $82,000 for the same periods in 2010. The improvement compared to the 2010 period was due to the reduced level of other than temporary impairment (“OTTI”) charges arising from the Company’s redemption in kind in June 2008 of its entire investment in a mutual fund and the receipt in such redemption of non-agency mortgage-backed securities. The decline in the amount of losses recognized between the 2010 and 2011 periods reflected the decline in the amount of the OTTI charges from $133,000 and $337,000 for the three and six months ended March 31, 2010 to $45,000 and $140,000 during the three and six months ended March 31, 2011 related to the non-agency mortgage-backed securities as the markets for such securities continued the stabilization process commenced in the 2011 periods.

Non-interest expenses. For the quarter ended March 31, 2011, non-interest expense increased $146,000 compared to the same period in the prior year, while non-interest expense increased $454,000 for the six month period ended March 31, 2011 compared to the same period in the prior year. The increase for the three month period primarily related to increases in FDIC deposit insurance premiums. The increases for the six month period were primarily due to expenses related increases in FDIC deposit insurance premiums, increases in salaries and employee benefits and increases in losses and expenses associated with real estate owned.

Income tax expense. The Company recorded an income tax benefit for the quarter and six months ended March 31, 2011 of $740,000 and $325,000, respectively, compared to income tax expense of $333,000 and $955,000, respectively, for the quarter and six months ended March 31, 2010. The tax benefit for the six month period ended March 31, 2011 was adversely impacted by the increase in the valuation allowance recognized in the first fiscal quarter of 2011 related to the $3.5 million deferred tax asset related to the capital loss carryforward created in connection with the June 2008 redemption in kind referenced above.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s liquidity, represented by cash and cash equivalents, is a product of its operating, investing and financing activities. 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 and securities prepayments can be greatly influenced by market rates of interest, economic conditions and competition. We also maintain excess funds in short-term, interest-bearing assets that provide additional liquidity. At March 31, 2011, our cash and cash equivalents amounted to $41.3 million. In addition, our available for sale investment and mortgage-backed securities amounted to an aggregate of $74.2 million at such date.

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 March 31, 2011, the Company had $6.1 million in outstanding commitments to originate fixed and variable-rate loans, not including loans in process. The Company also had commitments under unused lines of credit of $6.7 million and letters of credit outstanding of $676,000 at March 31, 2011. Certificates of deposit at March 31, 2011 maturing in one year or less totaled $166.0 million. Based upon historical experience, we anticipate that a significant portion of the maturing certificates of deposit will be redeposited with us.

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 needs should the need arise. Our borrowings consist solely of advances from the Federal Home Loan Bank of Pittsburgh (“FHLB”), of which we are a member. Under terms of the collateral agreement with the FHLB, we pledge residential mortgage loans as well as our stock in the Federal Home Loan Bank as collateral for such advances. However, our use of FHLB advances has been modest. At March 31, 2011, we had $593,000 in outstanding FHLB advances and had the ability to obtain an additional $154.3 million in FHLB advances. Additional borrowing capacity with the FHLB could be obtained pledging certain investment securities. The Company has also obtained approval to borrow from the Federal Reserve Bank discount window.

We anticipate that we will continue to have sufficient funds and alternative funding sources to meet our current commitments.

The following table summarizes the Company’s and Bank’s regulatory capital ratios as of March 31, 2011 and September 30, 2010 and compares them to current regulatory guidelines.

							To Be
							Well Capitalized
				Required for			Under Prompt
				Capital Adequacy			Corrective Action
	Actual Ratio			Purposes			Provisions
March 31, 2011:
Tier 1 capital (to average assets)
The Company		10.19	%		4.0	%		N/A
The Bank		9.37	%		4.0	%		5.0	%

Tier 1 capital (to risk weighted assets)
The Company		22.63	%		4.0	%		N/A
The Bank		20.81	%		4.0	%		6.0	%

Total capital (to risk weighted assets)
The Company		23.88	%		8.0	%		N/A
The Bank		22.06	%		8.0	%		10.0	%

September 30, 2010:
Tier 1 capital (to average assets)
Company		10.27	%		4.0	%		N/A
Bank		9.46	%		4.0	%		5.0	%

Tier 1 capital (to risk-weighted assets)
Company		23.12	%		4.0	%		N/A
Bank		21.28	%		4.0	%		6.0	%

Total capital (to risk-weighted assets)
Company		24.37	%		8.0	%		N/A
Bank		22.53	%		8.0	%		10.0	%

IMPACT OF INFLATION AND CHANGING PRICES

The financial statements, accompanying notes, and related financial data of the Company presented herein have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.

Unlike most industrial companies, substantially all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services, since such prices are affected by inflation to a larger extent than interest rates. In the current interest rate environment, liquidity and the maturity structure of the Company’s assets and liabilities are critical to the maintenance of acceptable performance levels.

How We Manage Market Risk. Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from the interest rate risk which is inherent in our lending, investment and deposit gathering activities. To that end, management actively monitors and manages interest rate risk exposure. In addition to market risk, our primary risk is credit risk on our loan portfolio. We attempt to manage credit risk through our loan underwriting and oversight policies.

The principal objective of our interest rate risk management function is to evaluate the interest rate risk embedded in certain balance sheet accounts, determine the level of risk appropriate given our business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the risk consistent with approved guidelines. We seek to manage our exposure to risks from changes in interest rates while at the same time trying to improve our net interest spread. We monitor interest rate risk as such risk relates to our operating strategies. We have established an Asset/Liability Committee which is comprised of our President and Chief Executive Officer, Chief Financial Officer, Chief Lending Officer, Treasurer and Controller. The Asset/Liability Committee meets on a regular basis and is responsible for reviewing our asset/liability policies and interest rate risk position. Both the extent and direction of shifts in interest rates are uncertainties that could have a negative impact on future earnings.

In recent years, we primarily have reduced our exposure in callable agency bonds and increased our portfolio of agency issued mortgage-backed securities. However, notwithstanding the foregoing steps, we remain subject to a significant level of interest rate risk in a low interest rate environment due to the high proportion of our loan portfolio that consists of fixed-rate loans as well as our decision to invest a significant amount of our assets in long-term, fixed-rate investment and mortgage-backed securities.

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 a Company’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 following table sets forth the amounts of our interest-earning assets and interest-bearing liabilities outstanding at March 31, 2011, 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 March 31, 2011, 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 variable-rate and fixed-rate single-family and multi-family residential and commercial mortgage loans are assumed to range from 5.5% to 23.8%. The annual prepayment rate for mortgage-backed securities is assumed to range from 0.4% to 39.0%. For savings accounts, checking accounts and money markets, the decay rates vary on annual basis over a ten year period.

				More than			More than			More than
	3 Months			3 Months			1 Year			3 Years			More than			Total
	or Less			to 1 Year			to 3 Years			to 5 Years			5 Years			Amount

							(Dollars in Thousands)
Interest-earning assets(1):
Investment and mortgage-backed securities(2)	$	9,735		$	15,784		$	29,718		$	28,882		$	113,783		$	197,902
Loans receivable(3)		36,270			47,160			79,894			39,012			44,089			246,425
Other interest-earning assets(4)		40,803															40,803
Total interest-earning assets	$	86,808		$	62,944		$	109,612		$	67,894		$	157,872		$	485,130

Interest-bearing liabilities:
Savings accounts	$	1,897		$	5,022		$	9,658		$	8,862		$	46,396		$	71,835
Money market deposit and NOW accounts		4,039			12,115			24,132			17,933			44,229			102,448
Certificates of deposit		87,427			78,598			78,352			26,030						270,407
Advances from Federal Home Loan Bank		43			127			83			340						593
Advances from borrowers for taxes and insurance		957			-			-			-			-			957
Total interest-bearing liabilities	$	94,363		$	95,862		$	112,225		$	53,165		$	90,625		$	446,240

Interest-earning assets less interest-bearing liabilities	($	7,555	)	($	32,918	)	($	2,613	)	$	14,729		$	67,247		$	38,890

Cumulative interest-rate sensitivity gap (5)	($	7,555	)	($	40,473	)	($	43,086	)	($	28,357	)	$	38,890

Cumulative interest-rate gap as a percentage of total assets at March 31, 2011		-1.49	%		-7.99	%		-8.51	%		-5.60	%		7.68	%

Cumulative interest-earning assets as a percentage of cumulative interest-bearing liabilities at March 31, 2011		91.99	%		78.72	%		85.75	%		92.03	%		108.72	%

(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, investment securities are stated at amortized cost.

(3)	For purposes of the gap analysis, loans receivable includes non-performing loans and is gross of the allowance for loan losses and unamortized deferred loan fees, but net of the undisbursed portion of loans-in-process.

(4)	Includes FHLB stock.

(5)	Cumulative interest-rate sensitivity gap represents the difference between interest-earning assets and 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 variable-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 variable-rate loans may be adversely affected in the event of an interest rate increase.

Net Portfolio Value Analysis. Our interest rate sensitivity also is monitored by management through the use of a model which generates estimates of the changes in our net portfolio value (“NPV”) over a range of interest rate scenarios. NPV is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario. The “Sensitivity Measure” is the decline in the NPV ratio, in basis points, caused by a 2% increase or decrease in rates, whichever produces a larger decline. The following table sets forth our NPV as of March 31, 2011 and reflects the changes to NPV as a result of immediate and sustained changes in interest rates as indicated.

Change in									NPV as % of Portfolio
Interest Rates	Net Portfolio Value								Value of Assets
In Basis Points
(Rate Shock)	Amount		$ Change			% Change			NPV Ratio			Change

	(Dollars in Thousands)

300	$	39,604	$	(41,026	)		(50.88	)%		8.85	%		(6.84	)%
200		52,424		(28,206	)		(34.98	)%		11.19	%		(4.50	)%
100		66,086		(14,544	)		(18.04	)%		13.48	%		(2.21	)%
Static		80,630		-			-			15.69	%		-
(100)		81,544		914			1.13	%		15.57	%		(0.12	)%
(200)		79,205		(1,425	)		(1.77	)%		14.99	%		(0.70	)%
(300)		78,960		(1,670	)		(2.07	)%		14.78	%		(0.91	)%

At March 31, 2011, the Company’s NPV was $80.6 million or 15.69% of the market value of assets. Following a 200 basis point increase in interest rates, the Company’s “post shock” NPV would be $52.4 million or 11.19% of the market value of assets. The change in the NPV ratio or Company’s sensitivity measure was a decline of 450 basis points.

At December 31, 2010, the Company’s NPV was $81.9 million or 15.43% of the market value of assets. Following a 200 basis point increase in interest rates, the Company’s “post shock” NPV would be $52.8 million or 10.83% of the market value of assets. The change in the NPV ratio or Company’s sensitivity measure was a decline of 460 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 requires the making of certain assumptions which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the models presented assume that the composition of our interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the NPV model provides an indication of interest rate risk exposure at a particular point in time, such model is not intended to and does not provide a precise forecast of the effect of changes in market interest rates on net interest income and will differ from actual results.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of the end of period covered by this report, our 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 SEC’s rules and regulations and are operating in an effective manner.

No change in our internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings

No material changes in the matters previously disclosed in Item 3 of the Company’s Annual Report on Form 10-K for the year ended September 30, 2010 has occurred.

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 a party will not be decided adversely to the Company’s interests and have a material adverse effect on the financial condition and operations of the Company.

Item 1A. Risk Factors

Not applicable

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a)	Not applicable

(b)	Not applicable

(c)

The Company’s repurchases of its common stock made during the quarter are set forth in the following table:

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet be Purchased Under the Plan or Programs
January 1 – January 31, 2011		7,977	$	6.06		—		—
February 1 – February 28, 2011		—		—		—		—
March 1 - March 31, 2011		—		—		—		—

Total		7,977	$	6.06		—		—

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. (Removed and Reserved)

Item 5. Other Information

Not applicable

Item 6. Exhibits

Exhibit No.		Description
31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.0		Section 1350 Certifications

SIGNATURES

Pursuant to the requirements 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. OF PENNSYLVANIA

Date: May 16, 2011		By: /s/ Thomas A. Vento
		Thomas A. Vento
		President and Chief Executive Officer

Date: May 16, 2011		By: /s/ Joseph R. Corrato
		Joseph R. Corrato
		Executive Vice President and Chief Financial Officer

PRUDENTIAL BANCORP INC OF PENNSYLVANIA - FORM 10-Q - May 16, 2011

Attached files

PRUDENTIAL BANCORP INC OF PENNSYLVANIA Reports