Attached files

file filename
EX-32.0 - EXHIBIT 32.0 - PRUDENTIAL BANCORP, INC.v472397_ex32-0.htm
EX-31.2 - EXHIBIT 31.2 - PRUDENTIAL BANCORP, INC.v472397_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - PRUDENTIAL BANCORP, INC.v472397_ex31-1.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 June 30, 2017
  OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from                     to                         
  Commission file number: 000-55084

 

Prudential Bancorp, Inc.
(Exact Name of Registrant as Specified in Its Charter)

 

Pennsylvania   46-2935427
(State or Other Jurisdiction of Incorporation or Organization)   (I.R.S. Employer Identification No.)
     

1834 West 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  ¨

 

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).
x Yes ¨ No

 

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

 

Large accelerated filer ¨ Accelerated filer x
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨
    Emerging growth company ¨

  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
¨ 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 July 31, 2017, 10,819,006 shares were issued and 9,007,742 were outstanding.

 

 

 

 

 

 

PRUDENTIAL BANCORP, INC. AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

 

    Page
     
PART I FINANCIAL INFORMATION:  
     
Item 1. Consolidated Financial Statements 1
     
  Unaudited Consolidated Statements of Financial Condition June 30, 2017 and September 30, 2016 2
     
  Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2017 and 2016 3
     
  Unaudited Consolidated Statements of Comprehensive Income (Loss) for for the Three and Nine Months Ended June 30, 2017 and 2016 4
     
  Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended June 30, 2017 and 2016 5
     
  Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2017 and 2016 6
     
  Notes to Unaudited Consolidated Financial Statements 8
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 49
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 63
     
Item 4. Controls and Procedures 63
     
PART II OTHER INFORMATION  
     
Item 1. Legal Proceedings 64
     
Item 1A.   Risk Factors 64
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 65
     
Item 3. Defaults Upon Senior Securities 65
     
Item 4. Mine Safety Disclosures 65
     
Item 5. Other Information 66
     
Item 6. Exhibits 66
     
SIGNATURES 66

 

 1 

 

 

PRUDENTIAL BANCORP, INC. AND SUBSIDIARIES
 
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

   June 30,   September 30, 
   2017   2016 
   (Dollars in Thousands, except share data) 
ASSETS          
           
Cash and amounts due from depository institutions  $2,182   $1,965 
Interest-bearing deposits   20,745    10,475 
           
Total cash and cash equivalents   22,927    12,440 
           
Certificates of deposit   1,853    1,853 
Investment and mortgage-backed securities available for sale (amortized cost— June 30, 2017, $184,980; September 30, 2016, $137,222)   183,439    138,694 
Investment and mortgage-backed securities held to maturity (fair value— June 30, 2017, $58,570; September 30, 2016, $40,700)   59,654    39,971 
Loans receivable—net of allowance for loan losses (June 30, 2017, $4,058; September 30, 2016, $3,269)   544,422    344,948 
Accrued interest receivable   3,089    1,928 
Real estate owned   192    581 
Federal Home Loan Bank stock—at cost   5,767    2,463 
Office properties and equipment—net   8,076    1,344 
Bank owned life insurance   27,877    13,055 
Prepaid expenses and other assets   5,497    2,203 
Goodwill   7,163    - 
Intangible assets   747    - 
TOTAL ASSETS  $870,703   $559,480 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
LIABILITIES:          
Deposits:          
Noninterest-bearing  $9,569   $3,804 
Interest-bearing   605,277    385,397 
Total deposits   614,846    389,201 
Advances from Federal Home Loan Bank (short-term)   20,000    20,000 
Advances from Federal Home Loan Bank (long-term)   88,078    30,638 
Accrued interest payable   1,339    1,403 
Advances from borrowers for taxes and insurance   3,982    1,748 
Accounts payable and accrued expenses   8,262    2,488 
           
Total liabilities   736,507    445,478 
           
           
STOCKHOLDERS' EQUITY:          
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued   -    - 
Common stock, $.01 par value, 40,000,000 shares authorized; 10,819,006 and 9,544,809 issued and 9,007,742 and 8,045,544 outstanding at June 30, 2017 and September 30, 2016, respectively   108    95 
Additional paid-in capital   118,480    95,713 
Unearned Employee Stock Ownership Plan (ESOP) shares   -    (4,550)
Treasury stock, at cost: 1,811,264 shares at June 30, 2017 and and 1,499,265 shares at September 30, 2016   (26,692)   (21,098)
Retained earnings   42,987    43,044 
Accumulated other comprehensive (loss) income   (687)   798 
           
Total stockholders' equity   134,196    114,002 
           
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $870,703   $559,480 

 

See notes to unaudited consolidated financial statements.

 

 2 

 

 

PRUDENTIAL bancorp, inc. and subsidiarIES UNAUDITED
 
CONSOLIDATED STATEMENTS OF OPERATIONS

 

   Three Months Ended
June 30,
   Nine Months Ended
June 30,
 
   2017   2016   2017   2016 
   (Dollars in Thousands, Except Per Share Data) 
INTEREST INCOME:                    
Interest on loans  $5,647   $3,263   $14,062   $9,489 
Interest on mortgage-backed securities   802    673    2,179    1,868 
Interest and dividends on investments   926    529    2,263    1,517 
Interest on interest-bearing assets   55    9    102    22 
                     
Total interest income   7,430    4,474    18,606    12,896 
                     
INTEREST EXPENSE:                    
Interest on deposits   1,002    682    2,690    2,177 
Interest on advances from Federal Home Loan Bank   375    142    918    296 
                     
Total interest expense   1,377    824    3,608    2,473 
                     
NET INTEREST INCOME   6,053    3,650    14,998    10,423 
                     
PROVISION FOR LOAN LOSSES   30    150    2,580    225 
                     
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES   6,023    3,500    12,418    10,198 
                     
NON-INTEREST INCOME:                    
Fees and other service charges   179    142    472    371 
Gain on sale of loans, net   3    -    52    2 
Gain on the sale of investment securities (AFS)   70    161    70    161 
Gain on the sale of OREO   -    -    -    58 
Income from bank owned life insurance   229    83    506    251 
Other   144    14    400    40 
                     
Total non-interest income   625    400    1,500    883 
                     
NON-INTEREST EXPENSE:                    
Salaries and employee benefits   1,884    1,684    5,593    5,071 
Data processing   175    112    481    340 
Professional services   230    230    1,018    750 
Office occupancy   432    246    1,100    753 
Director compensation   57    123    218    351 
Deposit insurance premium   52    134    93    306 
Advertising   92    17    158    55 
Communications expense   104    42    211    121 
Furniture and fixtures   81    58    252    171 
Merger-related expense   -    -    2,663    - 
Intangible asset amortization   37    -    75    - 
Other   356    169    1,119    589 
Total non-interest expense   3,500    2,815    12,981    8,507 
                     
INCOME BEFORE INCOME TAXES   3,148    1,085    937    2,574 
                     
INCOME TAXES:                    
Current expense   941    410    769    807 
Deferred expense (benefit)   90    (102)   (539)   29 
                     
Total income tax expense   1,031    308    230    836 
                     
NET INCOME  $2,117   $777   $707   $1,738 
                     
BASIC EARNINGS PER SHARE  $0.25   $0.10   $0.08   $0.23 
                     
DILUTED EARNINGS PER SHARE  $0.25   $0.10   $0.08   $0.23 
                     
DIVIDENDS PER SHARE  $0.03   $0.03   $0.09   $0.09 

 

See notes to unaudited consolidated financial statements.

 

 3 

 

 

PRUDENTIAL bancorp, inc. and subsidiarIES
 
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

 

   Three months ended June 30,   Nine months ended June 30, 
   2017   2016   2017   2016 
   (Dollars in Thousands) 
Net income  $2,117   $777   $707   $1,738 
                     
Unrealized holding gains (losses) on available-for-sale securities   1,120    744    (2,881)   1,897 
Tax effect   (381)   (257)   979    (645)
Reclassification adjustment for net security gains realized in net income   (70)   (161)   (70)   (161)
Tax effect   24    55    24    55 
Unrealized holding (losses) gains on interest rate swaps   (91)   (351)   701    (351)
Tax effect   31    119    (238)   119 
                     
Total other comprehensive income (loss)   633    149    (1,485)   914 
                     
Comprehensive income (loss)  $2,750   $926   $(778)  $2,652 

 

See notes to unaudited consolidated financial statements.

 

 4 

 

 

PRUDENTIAL bancorp, inc. and subsidiarIES
 
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

                       Accumulated       
       Additional   Unearned           Other   Total 
   Common   Paid-In   ESOP   Treasury   Retained   Comprehensive   Stockholders' 
   Stock   Capital   Shares   Stock   Earnings   Income (Loss)   Equity 
   (Dollars in Thousands, Except Per Share Data) 
BALANCE, October 1, 2016  $95   $95,713   $(4,550)  $(21,098)  $43,044   $798   $114,002 
                                    
Net income                       707         707 
Other comprehensive loss                            (1,485)   (1,485)
Dividends paid ($0.09 per share)                       (764)        (764)
Issuance of common stock (1,274,197 shares)   13    21,801                        21,814 
Purchase of treasury stock (43,698 shares)                  (1,058)             (1,058)
Terminate ESOP (303,115 shares)        733    4,456    (5,189)             - 
Treasury stock used for Recognition and Retention Plan (34,814 shares)        (653)        653              - 
Tax benefit from stock compensation plans        195                        195 
Stock option expense        349                        349 
Recognition and Retention Plan expense        284                        284 
ESOP shares committed to be released (8,879 shares)        58    94                   152 
                                    
BALANCE, June 30, 2017  $108   $118,480   $-   $(26,692)  $42,987   $(687)  $134,196 

 

                       Accumulated       
       Additional   Unearned           Other   Total 
   Common   Paid-In   ESOP   Treasury   Retained   Comprehensive   Stockholders' 
   Stock   Capital   Shares   Stock   Earnings   Income   Equity 
   (Dollars in Thousands, Except Per Share Data)             
BALANCE, Octoober 1, 2015  $95   $95,286   $(4,926)  $(14,691)  $41,219   $18   $117,001 
                                    
Net income                       1,738         1,738 
Other comprehensive income                            914    914 
Dividends paid ($0.09 per share)                       (694)        (694)
Tax benefit from stock compensation plans        156                        156 
Purchase of treasury stock (520,546 shares)                  (7,824)             (7,824)
Issuance of treasury stock (74,665 shares)                  862              862 
Treasury stock used for Recognition and Retention Plan (41,800 shares issued)        (640)        640              - 
Stock option expense        278                        278 
Recognition and Retention Plan expense        251                        251 
ESOP shares committed to be released (26,649 shares)        102    282                   384 
                                    
BALANCE, June 30, 2016  $95   $95,433   $(4,644)  $(21,013)  $42,263   $932   $113,066 

 

See notes to unaudited consolidated financial statements.

 

 5 

 

 

PRUDENTIAL BANCORP, INC. AND SUBSIDIARIES

 
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Nine Months Ended June 30, 
   2017   2016 
OPERATING ACTIVITIES:  (Dollars in Thousands) 
Net income  $707   $1,738 
Adjustments to reconcile net income to net cash used in operating activities:          
Depreciation   399    242 
Net amortization of premiums/discounts   575    11 
Provision for loan losses   2,580    225 
Net amortization of deferred loan fees and costs   81    172 
Share-based compensation expense for stock options and awards   633    529 
Income from bank owned life insurance   (506)   (251)
Gain from sale of loans held for sale   (52)   (2)
Gain from sale of investment securities   (70)   (161)
Gain on sale of other real estate owned   (60)   (58)
Originations of loans held for sale   (2,634)   (450)
Proceeds from sale of loans held for sale   2,686    452 
Compensation expense of ESOP   139    384 
Deferred income tax (expense) benefit   (539)   29 
Changes in assets and liabilities which used cash:          
Accrued interest receivable   (1,161)   (98)
Prepaid expenses and other assets   4,846    (898)
Accrued interest payable   (64)   (276)
Accounts payable and accrued expenses   (3,140)   420 
Net cash provided by operating activities   4,420    2,008 
INVESTING ACTIVITIES:          
Purchase of investment and mortgage-backed securities available for sale   (56,970)   (67,815)
Purchase of corporate bonds available for sale   (11,714)   (20,466)
Purchase of municipal bonds held to maturity   (18,847)   - 
Loans originated   (160,085)   (59,918)
Principal collected on loans   118,107    29,488 
Principal payments received on investment and mortgage-backed securities:          
Held-to-maturity   861    3,748 
Available-for-sale   8,131    50,962 
Proceeds from the sale of investments and mortgage-backed securities AFS   10,593    25,161 
Proceeds from the sale of Polonia Bancorp Inc.'s investment portfolio acquired   42,164    - 
Redemption of FHLB Stock   163    - 
Purchase of FHLB stock   (67)   (2,018)
Proceeds from sale of real estate owned   449    927 
Acquisition, net of cash   28,956    - 
Purchase of BOLI   (10,000)   - 
Purchases of equipment   (229)   (169)
Net cash used in investing activities   (48,488)   (40,100)
FINANCING ACTIVITIES:          
Net decrease increase in demand deposits, NOW accounts, and savings accounts   (12,686)   (4,411)
Net increase in certificates of deposit   66,088    25,977 
Proceeds from FHLB advances   9,729    51,999 
Repayment of FHLB advances long-term   (9,521)   (1,772)
Increase in advances from borrowers for taxes and insurance   2,234    1,099 
Cash dividends paid   (764)   (694)
Release unallocated shares from ESOP Plan   4,550    - 
Repayment of remaining principal balance of ESOP Loan   (734)   - 
Issuance of treasury stock   -    1,502 
Purchase of treasury stock   (4,536)   (8,464)
Tax benefit related to stock compensation plans   195    156 
Net cash provided by financing activities   54,555    65,392 

 

 6 

 

 

PRUDENTIAL BANCORP, INC. AND SUBSIDIARIES
 
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS -continued

 

   Nine Months Ended June 30. 
   2017   2016 
         
NET INCREASE IN CASH AND CASH EQUIVALENTS   10,487    27,300 
           
CASH AND CASH EQUIVALENTS—Beginning of period   12,440    11,272 
           
CASH AND CASH EQUIVALENTS—End of period  $22,927   $38,572 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:          
Interest paid on deposits and advances from FHLB  $2,842   $2,749 
Income taxes paid   980    450 
SUPPLEMENTAL DISCLOSURES OF NONCASH FLOW          
Real estate acquired in settlement of of loans   -    207 
Acquisition of noncash assets and liabilities          
Assets acquired:          
Investment securities  $42,164     
Loans   160,157      
Premises   6,902      
Core deposit intangible   822      
Goodwill   7,163      
Bank owned life insurance   4,318      
Other assets   2,558      
Total assets  $224,084      
  Liabilities assumed:          
Deposits  $172,243      
Advances   57,232      
Other liabilities   8,914      
Total liabilities assumed  $238,389      
Net non-cash assets (liabilities) acquired   (14,305)     
Cash acquired  $47,901      

 

See notes to the unaudited consolidated financial statements

 

 7 

 

 

PRUDENTIAL BANCORP, INC. AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1.SIGNIFICANT ACCOUNTING POLICIES

 

Prudential Bancorp, Inc. (the “Company”) is a Pennsylvania corporation and the parent holding company for Prudential Bank (the “Bank”). The Company is a registered bank holding company.

 

The Bank is a community-oriented Pennsylvania-chartered savings bank headquartered in South Philadelphia. The banking office network currently consists of the headquarters and main office (which includes a financial center), administrative office, and 10 full-service financial centers. Nine of the branch offices are located in Philadelphia (Philadelphia County), one is in Drexel Hill, Delaware County, and one is in Huntingdon Valley, Montgomery County (both Pennsylvania counties). The Bank maintains ATMs at all 11 of the banking offices. The Bank also provides on-line and mobile banking services.

 

The Bank is subject to regulation by the Pennsylvania Department of Banking and Securities (the “Department”), as its chartering authority and primary regulator, and by the Federal Deposit Insurance Corporation (the “FDIC”), which insures the Bank’s deposits up to applicable limits. As a bank holding company, the Company is subject to the regulation of the Board of Governors of the Federal Reserve System.

 

As of January 1, 2017, the Company completed its acquisition of Polonia Bancorp, Inc. (“Polonia Bancorp”) and Polonia Bank, Polonia’s wholly owned subsidiary. Polonia Bancorp and Polonia Bank were merged with and into the Company and the Bank, respectively.

 

Basis of presentation – The accompanying unaudited consolidated financial statements were prepared pursuant to the rules and regulations of the U. S. 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, comprehensive income, 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 three and nine months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2017, or any other period. These financial statements should be read in conjunction with the audited consolidated financial statements of the Company and the accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2016.

 

Use of Estimates in the Preparation of Financial Statements - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of 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, goodwill and intangible assets, deferred income taxes, other-than-temporary impairment, and the fair value measurement for financial instruments. Actual results could differ from those estimates.

 

Share-Based Compensation – The Company accounts for stock-based compensation issued to employees, and where appropriate, non-employees, at fair value. Under fair value provisions, stock-based compensation cost is measured at the grant date based on the fair value of the award at such date 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.

 

 8 

 

 

Dividends with respect to non-vested share awards granted pursuant to the Company’s 2008 Recognition and Retention Plan (“2008 Plan”) and held in the Trust (the “Trust”) are held 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 are earned. A recipient of a share award granted under the 2014 Stock Incentive Plan will not receive any dividends declared on the common stock subject to the award prior to the date the shares are earned.

 

Treasury Stock – 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. During the nine month period ended June 30, 2017, the Company repurchased 303,115 shares of common stock of unallocated shares held in a suspense account by the Bank’s ESOP as collateral with an aggregate value of $5.2 million in order to payoff the associated loans that were terminated as of December 31, 2016 in connection with the termination of the Bank’s ESOP. In addition, 42,791 shares of common stock were purchased in conjunction with the termination of the Polonia Bank ESOP as a result of the acquisition. The remaining shares purchased were related to the Company buying shares for the benefit of the employee stock benefits plans.

 

FHLB Stock – 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. Management concluded that the FHLB stock was not impaired at June 30, 2017.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The ASU’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this ASU specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This ASU was to be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period; the effective date was deferred by a year discussed below. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities, we do not expect the new standard, or any of the amendments, to result in a material change from our current accounting for revenue because the majority of the Company's financial instruments are not within the scope of Topic 606.  However, we do expect that the standard will result in new disclosure requirements, which are currently being evaluated.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this ASU (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (g) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (h) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. All entities that are not public business entities may adopt the amendments in this ASU earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position and/or results of operations.

 

 9 

 

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet.  A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term.  A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently assessing the practical expedients it may elect at adoption, but does not anticipate the amendments will have a significant impact on the financial statements. Based on the Company’s preliminary analysis of its current portfolio, the impact to the Company’s balance sheet is estimated to result in less than a 1 percent increase in assets and liabilities. The Company also anticipates additional disclosures to be provided at adoption.

 

In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815). The amendments in this ASU apply to all reporting entities for which there is a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815. The standards in this ASU clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. For public business entities, the amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For all other entities, the amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. An entity has an option to apply the amendments in this ASU on either a prospective basis or a modified retrospective basis. Early adoption is permitted, including adoption in an interim period. This ASU is not expected to have a significant impact on the Company’s financial statements.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing diversity in practice. Among these include recognizing cash payments for debt prepayment or debt extinguishment as cash outflows for financing activities; cash proceeds received from the settlement of insurance claims should be classified on the basis of the related insurance coverage; and cash proceeds received from the settlement of bank-owned life insurance policies should be classified as cash inflows from investing activities while the cash payments for premiums on bank-owned policies may be classified as cash outflows for investing activities, operating activities, or a combination of investing and operating activities. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this ASU should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s statement of cash flows.

 

 10 

 

 

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740), which requires recognition of current and deferred income taxes resulting from an intra-entity transfer of any asset (excluding inventory) when the transfer occurs. Consequently, the amendments in this ASU eliminate the exception for an intra-entity transfer of an asset other than inventory. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those annual reporting periods. For all other entities, the amendments are effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual periods beginning after December 15, 2019. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. That is, earlier adoption should be in the first interim period if an entity issues interim financial statements. The amendments in this ASU should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to the amount of retained earnings as of the beginning of the period of adoption. This ASU is not expected to have a significant impact on the Company’s financial statements.

 

In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810), which amends the consolidation guidance on how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The primary beneficiary of a VIE is the reporting entity that has a controlling financial interest in a VIE and, therefore, consolidates the VIE. A reporting entity has an indirect interest in a VIE if it has a direct interest in a related party that, in turn, has a direct interest in the VIE. Under the amendments, a single decision maker is not required to consider indirect interests held through related parties that are under common control with the single decision maker to be the equivalent of direct interests in their entirety. Instead, a single decision maker is required to include those interests on a proportionate basis consistent with indirect interests held through other related parties. This ASU is not expected to have a significant impact on the Company’s financial statements.

 

In October 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), which requires that a statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in this Update should be applied using a retrospective transition method to each period presented. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s statement of cash flows.

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business, which provides a more robust framework to use in determining when a set of assets and activities (collectively referred to as a “set”) is a business. The screening process requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. Public business entities should apply the amendments in this ASU to annual periods beginning after December 15, 2017, including interim periods within those periods. All other entities should apply the amendments to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The amendments in this ASU should be applied prospectively on or after the effective date. This ASU is not expected to have a significant impact on the Company’s financial statements.

 

 11 

 

 

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and Exchange Commission (“SEC”) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. A public business entity that is not an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. All other entities, including not-for-profit entities, that are adopting the amendments in this Update should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. This ASU is not expected to have a significant impact on the Company’s financial statements.

 

In February 2017, the FASB issued ASU 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20). The amendments in this Update clarify what constitutes a financial asset within the scope of Subtopic 610-20. The amendments also clarify that entities should identify each distinct nonfinancial asset or in-substance nonfinancial asset that is promised to a counterparty and to derecognize each asset when the counterparty obtains control. There is also additional guidance provided for partial sales of a nonfinancial asset and when derecognition, and the related gain or loss, should be recognized. The amendments in this Update are effective at the same time as the amendments in Update 2014-09. Therefore, for public entities, the amendments are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. For all other entities, the amendments in this Update are effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company is currently evaluating the impact the adoption of this standard will have on the Company’s financial position or results of operations.

 

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

 

 12 

 

 

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivative and Hedging (Topic 815). The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down-round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down-round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down-round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (“EPS”) in accordance with Topic 260 to recognize the effect of the down-round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down- round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Accounting Standards Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in Part I of this Update should be applied either retrospectively to outstanding financial instruments with a down-round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first fiscal year and interim period(s) in which the pending content that links to this paragraph is effective or retrospectively to outstanding financial instruments with a down-round feature for each prior reporting period presented in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10. The amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

 

 13 

 

 

2.EARNINGS PER SHARE

 

Basic earnings per common share is computed by dividing net income 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 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, consisting of restricted stock and stock options 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:

 

   Three Months Ended June 30, 
   2017   2016 
   Basic   Diluted   Basic   Diluted 
   (Dollars in Thousands Except Per Share Data) 
                 
Net income  $2,117   $2,117   $777   $777 
                     
Weighted average shares outstanding   8,652,699    8,652,699    7,330,386    7,330,386 
Effect of common stock equivalents   -    656,370    -    200,986 
Adjusted weighted average shares used in earnings  per share computation   8,652,699    9,309,069    7,330,386    7,531,372 
Earnings per share - basic and diluted  $0.25   $0.25   $0.10   $0.10 

 

   Nine Months Ended June 30, 
   2017   2016 
   Basic   Diluted   Basic   Diluted 
   (Dollars in Thousands Except Per Share Data) 
                 
Net income  $707   $707   $1,738   $1,738 
                     
Weighted average shares outstanding   8,202,850    8,202,850    7,442,956    7,442,956 
Effect of common stock equivalents   -    570,792    -    210,125 
Adjusted weighted average shares used in earnings per share computation   8,202,850    8,773,642    7,442,956    7,653,081 
Earnings per share - basic and diluted  $0.08   $0.08   $0.23   $0.23 

 

All exercisable stock options outstanding as of June 30, 2017 and 2016 had exercise prices below the then current per share market price for the Company’s common stock and were considered dilutive for the earnings per share calculation.

 

 14 

 

 

3.ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

The following table presents the changes in accumulated other comprehensive (loss) income by component, net of tax:

 

   Three Months Ended June 30, 
   2017   2016 
   (Dollars in Thousands) 
   Unrealized gains (losses)   Unrealized gains (losses) 
   on available for sale   on available for sale 
   securities and interest   securities and interest 
   rate swaps (a)   rate swaps (a) 
           
Beginning Balance  $(1,320)  $783 
Unrealized gains on available for sale securities   693    255 
Unrealized losses on interest rate swaps   (60)   (106)
Total other comprehensive income   633    149 
Ending Balance  $(687)  $932 

 

(a) All amounts are net of tax. Amounts in parentheses indicate debits.

 

The following table presents the changes in accumulated other comprehensive (loss) income by component, net of tax:

 

   Nine Months Ended June 30, 
   2017   2016 
   (Dollars in Thousands) 
   Unrealized gains (losses)   Unrealized gains (losses) 
   on available for sale   on available for sale 
   securities and interest   securities and interest 
   rate swaps (a)   rate swaps (a) 
           
Beginning Balance  $798   $18 
Unrealized (loss) gains on available for sale securities   (1,948)   1,020 
Unrealized gains (losses) on interest rate swaps.   463    (106)
Total other comprehensive income (loss)   (1,485)   914 
Ending Balance  $(687)  $932 

 

(a) All amounts are net of tax. Amounts in parentheses indicate debits.

 

 15 

 

 

   Three Months Ended June 30,    
   2017   2016    
   Amount Reclassified   Amount Reclassified    
   from Accumulated   from Accumulated   Affected Line Item in
   Other   Other   the Statement Where
   Comprehensive   Comprehensive   Net Income is
Details about other comprehensive income  Income (a)   Income (a)   Presented
            
Unrealized gains on available for sale securities             
   $70   $161   Gain on sale of securities available for sale
    (24)   (55)  Income taxes
   $46   $106   Net of tax

 

(a) Amounts in parentheses indicate debits to net income

 

   Nine Months Ended June 30,    
   2017   2016    
   Amount Reclassified   Amount Reclassified    
   from Accumulated   from Accumulated   Affected Line Item in
   Other   Other   the Statement Where
   Comprehensive   Comprehensive   Net Income is
Details about other comprehensive income  Income (a)   Income (a)   Presented
              
Unrealized gains on available for sale securities             
   $70   $161   Gain on sale of securities available for sale
    (24)   (55)  Income taxes
   $46   $106   Net of tax

 

(a) Amounts in parentheses indicate debits to net income 

 

 16 

 

 

4.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:

 

   June 30, 2017 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   (Dollars in Thousands) 
Securities Available for Sale:                    
U.S. government and agency obligations  $20,989   $-   $(369)  $20,620 
Mortgage-backed securities - U.S. government agencies   126,912    152    (1,349)   125,715 
Corporate bonds   37,073    271    (299)   37,045 
Total debt securities available for sale   184,974    423    (2,017)   183,380 
                     
FHLMC preferred stock   6    53    -    59 
                     
Total securities available for sale  $184,980   $476   $(2,017)  $183,439 
                     
Securities Held to Maturity:                    
U.S. government and agency obligations  $33,500   $236   $(1,735)  $32,001 
Mortgage-backed securities - U.S. government agencies   7,387    347    (29)   7,705 
Municipal bonds   18,767    184    (87)   18,864 
                     
Total securities held to maturity  $59,654   $767   $(1,851)  $58,570 

 

 17 

 

 

   September 30, 2016 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   (Dollars in Thousands) 
Securities Available for Sale:                    
U.S. government and agency obligations  $20,988   $36   $-   $21,024 
Mortgage-backed securities - U.S. government agencies   90,817    860    (102)   91,575 
Corporate bonds   25,411    661    (19)   26,053 
Total debt securities available for sale   137,216    1,557    (121)   138,652 
                     
FHLMC preferred stock   6    36    -    42 
                     
Total securities available for sale  $137,222   $1,593   $(121)  $138,694 
                     
Securities Held to Maturity:                    
U.S. government and agency obligations   $33,499   $399   $(129)  $33,769 
Mortgage-backed securities - U.S. government agencies   6,472    459    -    6,931 
                     
Total securities held to maturity  $39,971   $858   $(129)  $40,700 

 

 18 

 

 

The following table shows the gross unrealized losses and related fair values of the Company’s investments and mortgage-backed securities, aggregated by investment category and length of time that individual securities had been in a continuous loss position at June 30, 2017:

 

   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 Available for Sale:                              
U.S. government and agency obligations  $(369)  $20,620   $-   $-   $(369)  $20,620 
Mortgage-backed securities - agency   (1,129)   81,547    (220)   11,013    (1,349)   92,560 
Corporate bonds   (299)   15,987    -   -    (299)   15,987 
                               
Total securities available for sale  $(1,797)  $118,154   $(220)  $11,013   $(2,017)  $129,167 
                               
Securities Held to Maturity:                              
U.S. government and agency obligations  $(1,735)  $28,765   $-  $-   $(1,735)  $28,765 
Mortgage-backed securities - agency   (29)   1,216    -   -    (29)   1,216 
Municipal bonds   (87)   5,836    -   -    (87)   5,836 
                               
Total securities held to maturity  $(1,851)  $35,817   $-   $-   $(1,851)  $35,817 
                               
Total  $(3,648)  $153,971   $(220)  $11,013   $(3,868)  $164,984 

 

 19 

 

 

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 September 30, 2016:

 

   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 Available for Sale:                              
Mortgage-backed securities - agency  $(50)  $16,498   $(52)  $6,718   $(102)  $23,216 
Corporate bonds   (19)   3,955    -   -    (19)   3,955 
                               
Total securities available for sale  $(69)  $20,453   $(52)  $6,718   $(121)  $27,171 
                               
Securities Held to Maturity:                              
U.S. government and agency obligations  $(129)  $20,371   $-  $-   $(129)  $20,371 
                               
Total securities held to maturity  $(129)  $20,371   $-   $-   $(129)  $20,371 
                               
Total  $(198)  $40,824   $(52)  $6,718   $(250)  $47,542 

 

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least once each quarter, and more frequently when economic or market concerns warrant such evaluation. The evaluation is based upon factors such as the creditworthiness of the issuers/guarantors, the underlying collateral, if applicable, and the continuing performance of the securities.  Management also evaluates other facts and circumstances that may be indicative of an OTTI condition. This includes, but is not limited to, an evaluation of the type of security, the length of time and extent to which the fair value of the security has been less than its cost, and the near-term prospects of the issuer.

 

The Company assesses whether a credit loss exists with respect to a security 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 has occurred, or (3) it does not expect to recover the entire amortized cost basis of the security. The Company bifurcates the OTTI impact on impaired securities where impairment in value was deemed to be other than temporary between the component representing credit loss and the component representing loss related to other factors. The portion of the fair value decline attributable to credit loss must be recognized through a charge to earnings. The credit component is determined by comparing the present value of the cash flows expected to be collected, discounted at the rate in effect before recognizing any OTTI, with the amortized cost basis of the debt security.  The Company uses the cash flows 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 security and other factors, then applies a discount rate equal to the effective yield of the security.  The difference between the present value of the expected cash flows and the amortized book value is considered a credit loss.  The fair value of the security is determined using the same expected cash flows; the discount rate is a rate the Company determines from open market and other sources as appropriate for the particular security.  The difference between the fair value and the security’s remaining amortized cost is recognized in other comprehensive income (loss).

 

For both the three and nine months ended June 30, 2017 and 2016, the Company did not record any credit losses on investment securities through earnings.

 

 20 

 

 

U.S. Government and Agency Obligations - At June 30, 2017, there were 14 securities in a gross unrealized loss position for less 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. As a result, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2017.

 

Mortgage-Backed Securities – At June 30, 2017, there were 35 mortgage-backed securities in a gross unrealized loss position for less than 12 months, while there were nine securities in a gross unrealized loss position for more than 12 months at such date. 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. As a result, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2017.

 

Corporate Bonds – At June 30, 2017, there were 15 securities in a gross unrealized loss for less than 12 months. These securities are backed by publicly traded companies and have an investment grade rating by one or more of the three following rating agencies (S&P, Moody’s or Fitch). As a result, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2017.

 

Municipal Bonds – At June 30, 2017, there were nine securities in a gross unrealized loss for less than 12 months. These securities are backed by local municipalities/school districts located in the Commonwealth of Pennsylvania and have an investment grade rating from one or more of the three following rating agencies (S&P, Moody’s or Fitch). As a result, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2017.

 

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.

 

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

 

   June 30, 2017 
   Held to Maturity   Available for Sale 
   Amortized   Fair   Amortized   Fair 
   Cost   Value   Cost   Value 
   (Dollars in Thousands) 
Due after one through five years  $2,867   $2,794   $4,048   $4,066 
Due after five through ten years   20,583    20,661    18,748    18,872 
Due after ten years   28,817    27,410    35,266    34,727 
                     
Total  $52,267   $50,865   $58,062   $57,665 

 

During both the three and nine month periods ended June 30, 2017, the Company sold two mortgage-back securities with an aggregate amortized cost of $5.1 million at an recognized aggregate gain of $18,000 (pre-tax) and a corporate bond with an amortized cost of $5.2 million for a $52,000 (pre-tax) gain. During both three and nine month periods ended June 30, 2016, the Company sold five mortgage-back securities with an aggregate amortized cost of $11.0 million at a recognized aggregate gain of $153,000 (pre-tax). Also, during the same periods the Company had an aggregate of $11.0 million of agency securities called at the stated par value which was higher than the aggregated amortized cost and recorded a gain of $8,000.

 

 21 

 

 

During the both three and nine month periods ended June 30, 2017 and 2016, the Company did not pledge any investment securities as collateral for any of its FHLB advances.

 

5.LOANS RECEIVABLE

 

Loans receivable consist of the following:

 

   June 30,   September 30, 
   2017   2016 
   (Dollars in Thousands) 
One-to-four family residential  $354,338   $233,531 
Multi-family residential   16,913    12,478 
Commercial real estate   129,846    79,859 
Construction and land development   93,671    21,839 
Commercial business   490    99 
Leases   4,922    3,286 
Consumer   1,995    799 
           
Total loans   602,175    351,891 
           
Undisbursed portion of loans-in-process   (50,792)   (5,371)
Deferred loan fees and (costs)   (2,903)   1,697 
Allowance for loan losses   (4,058)   (3,269)
           
Net loans  $544,422   $344,948 

 

The following table summarizes by loan segment the balance in the allowance for loan losses and the loans individually and collectively evaluated for impairment by loan segment at June 30, 2017:

 

   One- to-four
family
residential
   Multi-family
residential
   Commercial real
estate
   Construction
and land
development
   Commercial
Business
   Leases   Consumer   Unallocated   Total 
   (Dollars in Thousands) 
Allowance for loan losses:                                             
Individually evaluated for impairment  $-   $-   $-   $-   $-   $-   $-   $-   $- 
Collectively evaluated for impairment   1,242    158    1,224    1,011    4    27    24    368    4,058 
Total ending allowance balance  $1,242   $158   $1,224   $1,011   $4   $27   $24   $368   $4,058 
                                              
Loans:                                             
Individually evaluated for impairment  $6,679   $323   $2,377   $8,713   $-   $-   $-        $18,092 
Collectively evaluated for impairment   347,659    16,590    127,469    84,958    490    4,922    1,995         584,083 
Total loans  $354,338   $16,913   $129,846   $93,671   $490   $4,922   $1,995        $602,175 

 

 22 

 

 

The following table summarizes by loan segment the balance in the allowance for loan losses and the loans individually and collectively evaluated for impairment by loan segment at September 30, 2016:

 

   One- to-four
family
residential
   Multi-family
residential
   Commercial real
estate
   Construction
and land
development
   Commercial
business
   Leases   Consumer   Unallocated   Total 
   (Dollars in Thousands) 
Allowance for loan losses:                                             
Individually evaluated for impairment  $-   $-   $-   $-   $-   $-   $-   $-   $- 
Collectively evaluated for impairment   1,627    137    859    316    1    21    10    298    3,269 
Total ending allowance balance  $1,627   $137   $859   $316   $1   $21   $10   $298   $3,269 
                                              
Loans:                                             
Individually evaluated for impairment  $5,553   $335   $3,154   $10,288   $99   $-   $-        $19,429 
Collectively evaluated for impairment   227,978    12,143    76,705    11,551    -    3,286    799         332,462 
Total loans  $233,531   $12,478   $79,859   $21,839   $99   $3,286   $799        $351,891 

 

The loan portfolio is segmented at a level that allows management to monitor both risk and performance. Management evaluates for potential impairment all construction, multi-family, commercial real estate and commercial business loans, all loans and leases more than 90 days delinquent as to principal and/or interest. Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect in full the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.

 

Once the determination is made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is generally measured by comparing the recorded investment in the loan to the fair value of the loan using one of the following three methods: (a) the present value of the expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs. Management primarily utilizes the fair value of collateral method as a practically expedient alternative. On collateral method evaluations, any portion of the loan deemed uncollectible is charged-off against the loan loss allowance.

 

The following table presents impaired loans by class as of June 30, 2017, segregated by those for which a specific allowance was required and those for which a specific allowance was not required.

 

 23 

 

 

           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  $-   $-   $6,679   $6,679   $6,908 
Multi-family residential   -    -    323    323    323 
Commercial real estate   -    -    2,377    2,377    2,377 
Construction and land development   -    -    8,713    8,713    10,532 
Total impaired loans  $-   $-   $18,092   $18,092   $20,140 

 

The following table presents impaired loans by class as of September 30, 2016, segregated by those for which a specific allowance was required and those for which a specific allowance was not required.

 

           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  $-   $-   $5,553   $5,553   $5,869 
Multi-family residential   -    -    335    335    335 
Commercial real estate   -    -    3,154    3,154    3,154 
Construction and land development   -    -    10,288    10,288    10,288 
Commercial loans   -    -    99    99    99 
Total impaired loans  $-   $-   $19,429   $19,429   $19,745 

 

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

 

 24 

 

 

   Three Months Ended June 30, 2017 
   Average
Recorded
Investment
   Income Recognized
on Accrual Basis
   Income
Recognized on
Cash Basis
 
     (Dollars in Thousands) 
One-to-four family residential  $5,965   $12   $34 
Multi-family residential   326    6    - 
Commercial real estate   2,801    6    - 
Construction and land development   9,607    -    - 
Total impaired loans  $18,699   $24   $34 

 

   Three Months Ended June 30, 2016 
   Average
Recorded
Investment
   Income Recognized
on Accrual Basis
   Income
Recognized on
Cash Basis
 
   (Dollars in Thousands) 
One-to-four family residential  $5,052   $14   $30 
Multi-family residential   341    6    - 
Commercial real estate   3,595    35    - 
Construction and land development   9,808    -    - 
Total impaired loans  $18,796   $55   $30 

 

   Nine Months Ended June 30, 2017 
   Average
Recorded
Investment
   Income Recognized
on Accrual Basis
   Income
Recognized on
Cash Basis
 
   (Dollars in Thousands) 
One-to-four family residential  $5,280   $59   $91 
Multi-family residential   329    17    - 
Commercial real estate   2,938    41    12 
Construction and land development   10,399    -    - 
Total impaired loans  $18,946   $117   $103 

 

 25 

 

 

   Nine Months Ended June 30, 2016 
   Average
Recorded
Investment
   Income Recognized
on Accrual Basis
   Income
Recognized on
Cash Basis
 
   (Dollars in Thousands) 
One-to-four family residential  $4,978   $89   $78 
Multi-family residential   346    18    - 
Commercial real estate   3,667    74    12 
Construction and land development   9,432    -    62 
Total impaired loans  $18,423   $181   $152 

 

Federal regulations and our loan policy require that the Company utilize an internal asset classification system as a means of reporting problem and potential problem assets. The Company has incorporated an internal asset classification system, consistent with Federal banking regulations, as a part of its credit monitoring system. Management currently classifies problem and potential problem assets as “special mention”, “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the three aforementioned categories but possess weaknesses are required to be designated “special mention.”

 

The following tables present the classes of the loan portfolio in which a formal risk rating system is utilized summarized by the aggregate “Pass” and the criticized category of “special mention”, and the classified categories of “substandard”, “doubtful” and “loss” within the Company’s risk rating system as applied to the loan portfolio. The Company had no loans classified as “doubtful” or “loss” at either of the dates presented.

 

   June 30, 2017 
       Special       Total 
   Pass   Mention   Substandard   Loans 
   (Dollars in Thousands) 
One-to-four family residential  $-   $1,645   $1,951   $3,596 
Multi-family residential   16,590    -    323    16,913 
Commercial real estate   126,656    1,458    1,732    129,846 
Construction and land development   84,958    -    8,713    93,671 
Commercial business   490    -    -    490 
Total loans  $228,694   $3,103   $12,719   $244,516 

 

 26 

 

 

   September 30, 2016 
       Special       Total 
   Pass   Mention   Substandard   Loans 
   (Dollars in Thousands) 
One-to-four family residential  $-   $1,681   $1,212   $2,893 
Multi-family residential   12,144    -    334    12,478 
Commercial real estate   76,185    943    2,731    79,859 
Construction and land development   11,551    -    10,288    21,839 
Commercial business   99    -    -    99 
Total loans  $99,979   $2,624   $14,565   $117,168 

 

The Company evaluates the classification of one-to-four family residential, leases and consumer loans primarily on a pooled basis. If the Company becomes aware that adverse or distressed conditions exist that may affect a particular single-family residential or consumer loan, the loan is downgraded following the above definitions of special mention, substandard, doubtful and loss.

 

The following tables represent loans in which a formal risk rating system is not utilized, but loans are segregated between performing and non-performing based primarily on delinquency status. Non-performing loans that would be included in the tables are those loans greater than 90 days past due as to principal and/or interest that do not have a designated risk rating.

 

   June 30, 2017 
       Non-   Total 
   Performing   Performing   Loans 
   (Dollars in Thousands) 
One-to-four family residential  $344,967   $5,775   $350,742 
Leases   4,922    -    4,922 
Consumer   1,995    -    1,995 
Total residential and consumer loans  $351,884   $5,775   $357,659 

 

   September 30, 2016 
       Non-   Total 
   Performing   Performing   Loans 
   (Dollars in Thousands) 
One-to-four family residential  $226,394   $4,244   $230,638 
Leases   3,286    -    3,286 
Consumer   799    -    799 
Total residential and consumer loans  $230,479   $4,244   $234,723 

 

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 or overdue, as the case may be. The following table presents the loan categories of the loan portfolio summarized by the aging categories of performing and delinquent loans and nonaccrual loans:

 

 27 

 

 

   June 30, 2017 
               90 Days+   Total         
       30-89 Days   90 Days +   Past Due   Past Due   Total   Non- 
   Current   Past Due   Past Due   and Accruing   and Accruing   Loans   Accrual 
   (Dollars in Thousands)                     
One-to-four family residential  $349,359   $1,910   $3,069   $-   $1,910   $354,338   $5,775 
Multi-family residential   16,913    -    -    -    -    16,913      
Commercial real estate   128,035    465    1,346    -    465    129,846    1,603 
Construction and land development   84,958    -    8,714    -    -    93,671    8,714 
Commercial business   490    -    -    -    -    490    - 
Leases   4,922    -    -    -    -    4,922    - 
Consumer   1,936    59    -    -    59    1,995    - 
Total loans  $586,613   $2,434   $13,129   $-   $2,434   $602,175   $16,092 

 

   September 30, 2016 
               90 Days+   Total         
       30-89 Days   90 Days +   Past Due   Past Due   Total   Non- 
   Current   Past Due   Past Due   and Accruing   and Accruing   Loans   Accrual 
   (Dollars in Thousands)                     
One-to-four family residential  $228,904   $1,860   $2,767   $-   $1,860   $233,531   $4,244 
Multi-family residential   12,478    -    -    -    -    12,478    - 
Commercial real estate   78,513    -    1,346    -    -    79,859    1,346 
Construction and land development   11,551    -    10,288    -    -    21,839    10,288 
Commercial business   99    -    -    -    -    99    - 
Leases   3,286    -    -    -    -    3,286    - 
Consumer   799    -    -    -    -    799    - 
Total loans  $335,630   $1,860   $14,401   $-   $1,860   $351,891   $15,878 

 

The allowance for loan losses is established through a provision for loan losses charged to expense. The Company maintains the allowance at a level believed to cover all known and inherent losses in the portfolio that are both probable and reasonable to estimate at each reporting date. Management reviews the allowance for loan losses no less than quarterly in order to identify these inherent losses and to assess the overall collection probability for the loan portfolio in view of these inherent losses. For each primary type of loan, a loss factor is established reflecting an estimate of the known and inherent losses in such loan type contained in the portfolio using both a quantitative analysis as well as consideration of qualitative factors. The evaluation process includes, among other things, an analysis of delinquency trends, non-performing loan trends, the level of charge-offs and recoveries, prior loss experience, total loans outstanding, the volume of loan originations, the type, size and geographic concentration of the Company’s loans, the value of collateral securing the loans, the borrowers’ ability to repay and repayment performance, the number of loans requiring heightened management oversight, local economic conditions and industry experience.

 

 28 

 

 

Commercial real estate loans entail significant additional credit risks compared to owner-occupied one-to-four family residential mortgage loans, as they generally involve large loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties typically depends on the successful operation of the related real estate project and/or business operation of the borrower who is, in some cases, also the primary occupant, and thus may be subject to a greater extent to the effects of adverse conditions in the real estate market and in the economy in general. Commercial business loans typically involve a higher risk of default than residential loans of like duration since their repayment is generally dependent on the successful operation of the borrower’s business and the sufficiency of collateral, if any. Land acquisition, development and construction lending exposes the Company to greater credit risk than permanent mortgage financing. The repayment of land acquisition, development and construction loans depends upon the sale of the property to third parties or the availability of permanent financing upon completion of all improvements. These events may adversely affect the sale of the properties, potentially reducing both the borrower’s ability to make required payments as well as reducing the value of the collateral properties. Such lending is additionally subject to the risk that if the estimate of construction cost proves to be inaccurate, the Company potentially will be compelled to advance additional funds to allow completion of the project. In addition, if the estimate of value proves to be inaccurate, the Company may be confronted with a project, when completed, having less value than the loan amount. If the Company is forced to foreclose on a project prior to completion, there is no assurance that the Company would be able to recover the entire unpaid portion of the loan.

 

The following tables summarize the primary segments of the allowance for loan losses. Activity in the allowance is presented for the both three and nine month periods ended June 30, 2017 and 2016:

 

   Three Months Ended June 30, 2017 
   One- to
four-family
residential
   Multi-
family
residential
   Commercial
real estate
   Construction
and land
development
   Commercial
Business
   Leases   Consumer   Unallocated   Total 
   (Dollars in Thousands) 
ALLL balance at March 31, 2017  $1,350   $122   $862   $1,035   $-   $28   $135   $364   $3,896 
Charge-offs   -    -    -    -    -    -    -    -    - 
Recoveries   132    -    -    -    -    -    -    -    132 
Provision   (241)   36    362    (24)   4    (1)   (111)   5    30 
ALLL balance at June 30, 2017  $1,241   $158   $1,224   $1,011   $4   $27   $24   $369   $4,058 

 

   Nine Months Ended June 30, 2017 
   One- to
four-family
residential
   Multi-
family
residential
   Commercial
real estate
   Construction
and land
development
   Commercial
business
   Leases   Consumer   Unallocated   Total 
   (Dollars in Thousands) 
ALLL balance at September 30, 2016  $1,627   $137   $859   $316   $1   $21   $10   $298   $3,269 
Charge-offs   (113)   -    -    (1,819)   -    -    (16)   -    (1,948)
Recoveries   157    -    -    -    -    -    -    -    157 
Provision   (430)   21    365    2,514    3    6    30    71    2,580 
ALLL balance at June 30, 2017  $1,241   $158   $1,224   $1,011   $4   $27   $24   $369   $4,058 

 

 29 

 

 

   Three Months Ended June 30, 2016 
   One- to
four-family
residential
   Multi-
family
residential
   Commercial
real estate
   Construction
and land
development
   Consumer   Unallocated   Total 
   (Dollars in Thousands) 
ALLL balance at March 31, 2016  $1,511   $43   $428   $773   $7   $276   $3,038 
Charge-offs   -    -    -    -    -    -    - 
Recoveries   81    -    -    -    -    -    81 
Provision   (147)   19    236    4    2    36    150 
ALLL balance at June 30, 2016  $1,445   $62   $664   $777   $9   $312   $3,269 

 

   Nine Months Ended June 30, 2016 
   One- to
four-family
residential
   Multi-
family
residential
   Commercial
real estate
   Construction
and land
development
   Consumer   Unallocated   Total 
   (Dollars in Thousands) 
ALLL balance at September 30, 2015  $1,635   $66   $231   $724   $5   $269   $2,930 
Charge-offs   (11)   -    -    -    -    -    (11)
Recoveries   93    -    32    -    -    -    125 
Provision   (272)   (4)   401    53    4    43    225 
ALLL balance at June 30, 2016  $1,445   $62   $664   $777   $9   $312   $3,269 

 

The Company recorded a provision for loan losses in the amount of $30,000 and $2.6 million, respectively, for the three and nine months ended June 30, 2017. The level of the provision for loan losses for the nine months ended June 30, 2017 was primarily due to a $1.9 million charge-off related to a borrower (discussed below) whose primary project financed currently by the Bank involves the proposed development of 169 residential lots. The Bank and the borrower are in litigation and no resolution of the situation has been arrived at as of June 30, 2017 hereof in part due to the bankruptcy filing by the borrower effected in June 2017. In light of the status of both the litigation as well as the progress of construction of the project, the Company recorded a $1.9 million non-cash charge-off during the quarter ended March 31, 2017. The remaining portion of the provision recorded during the nine-months ended June 30, 2017 was related to an increase in the outstanding balance of loans. For both the three and nine month period ended June 30, 2017, the provision allocation was effected due to the increased balance of commercial real estate loans which generally have a slightly higher level of inherent risk, compared to single-family residential loans. The loans acquired from Polonia Bancorp initially did not have any impact on the allowance for loan losses, because they were acquired at their fair value. Any write-downs to fair value were reflected in the one-time merger-related charge. In the event that the credit quality of any loans acquired from Polonia Bancorp credit should deteriorate in the future, additional provisions may be required.

 

 30 

 

 

At June 30, 2017, the Company had nine loans aggregating $6.1 million that were classified as troubled debt restructurings (“TDRs”). Three of such loans aggregating $4.9 million were designated non-performing as of June 30, 2017; one of such loans in the amount of $1.4 million has continued to make payments in accordance with the restructured terms, but management continues to have concerns over the borrower’s ability to make future payments and as a result has determined to not return the loan to performing status. The remaining two TDRs classified non-accrual totaling $3.5 million are a part of one of the Bank’s largest borrowing relationships totaling $8.9 million (after taking into account the $1.9 million write-down recognized during the quarter ending March 31, 2017). The primary project of the borrower is the subject of litigation between the Bank and the borrower and as a result, the project is currently not proceeding. The borrower has recently filed for bankruptcy under Chapter 11. The Company has removed the underlying litigation noted above between the borrower from state court to the federal bankruptcy court. The remaining six TDRs have performed in accordance with the terms of their revised agreements and have been placed on accruing status. As of June 30, 2017, the Company had reviewed $18.1 million of loans for possible impairment of which $12.7 million was classified substandard compared to $19.4 million reviewed for possible impairment and $14.6 million of which was classified substandard as of September 30, 2016.

 

6.DEPOSITS

 

Deposits consist of the following major classifications:

 

   June 30,   September 30, 
   2017   2016 
   Amount   Percent   Amount   Percent 
   (Dollars in Thousands) 
Money market deposit accounts  $81,211    13.2%  $55,552    14.3%
Interest-bearing checking accounts   54,574    8.9    34,984    9.3 
Non interest-bearing checking accounts   9,569    1.6    3,804    0.7 
Passbook, club and statement savings   104,446    17.0    70,924    18.2 
Certificates maturing in six months or less   123,656    20.1    97,418    25.0 
Certificates maturing in more than six months   241,390    39.2    126,519    32.5 
                     
Total  $614,846    100.0%  $389,201    100.0%

 

Certificates of $250,000 and over totaled $24.6 million as of June 30, 2017 and $17.0 million as of September 30, 2016.

 

 31 

 

 

7.ADVANCES FROM FEDERAL HOME LOAN BANK

 

Short-Term

 

The following table reflects the outstanding balances and related information for short-term borrowings (less than one year) from the Federal Home Loan Bank of Pittsburgh, (“FHLB”).

 

   Three Months   Nine Months 
   Ended   Ended 
   June 30, 2017   June 30, 2017 
   (Dollars in Thousands) 
Balance at period-end  $20,000   $20,000 
Average balance outstanding   20,000    21,667 
Maximum month-end balance   20,000    35,000 
Weight-average rate at period end   1.25%   1.25%
Weight-average rate during the period   1.12%   0.80%

 

   Three Months   Nine Months 
   Ended   Ended 
   June 30, 2016   June 30, 2016 
   (Dollars in Thousands) 
Balance at period-end  $20,000   $20,000 
Average balance outstanding   20,000    20,000 
Maximum month-end balance   20,000    20,000 
Weight-average rate at period end   0.56%   0.56%
Weight-average rate during the period   0.56%   0.56%

 

As of June 30, 2017, $20.0 million of the outstanding balance is related to two $10.0 million 30 day FHLB advances associated with an interest rate swap contract with a weighted average effective cost of 117 basis points.

 

Average balances outstanding during the periods presented represent daily average balance and interest rates represent interest expense divided by the related average balance.

 

The Bank maintains borrowing facilities with the FHLB and Federal Reserve Bank of Philadelphia and the interest rate will be based on market rates that are available on the date of execution.

 

 32 

 

 

Long-Term

 

Pursuant to collateral agreement with the FHLB, advances are secured by a blanket pledge of qualifying loans held by the Bank and qualifying fixed-income securities and FHLB stock. The long-term advances outstanding as of June 30, 2017 are as follows:

 

Type  Maturity Date  Amount   Coupon   Call Date
   (Dollars in Thousands)
Fixed Rate - Advances  17-Nov-17  $10,000    1.20%  Not Applicable
Fixed Rate - Amortizing  1-Dec-17   1,009    1.16%  Not Applicable
Fixed Rate - Advances  4-Dec-17   2,000    1.15%  Not Applicable
Fixed Rate - Advances  19-Mar-18   5,045    2.53%  Not Applicable
Fixed Rate - Advances  19-Mar-18   5,031    2.13%  Not Applicable
Fixed Rate - Advances  20-Jun-18   3,015    1.86%  Not Applicable
Fixed Rate - Advances  25-Jun-18   3,022    2.09%  Not Applicable
Fixed Rate - Advances  27-Aug-18   7,223    4.15%  Not Applicable
Fixed Rate - Advances  15-Nov-18   3,017    1.89%  Not Applicable
Fixed Rate - Advances  16-Nov-18   7,500    1.40%  Not Applicable
Fixed Rate - Advances  26-Nov-18   2,010    1.81%  Not Applicable
Fixed Rate - Advances  3-Dec-18   3,000    1.54%  Not Applicable
Fixed Rate - Advances  16-Aug-19   3,063    2.66%  Not Applicable
Fixed Rate - Advances  9-Oct-19   2,038    2.53%  Not Applicable
Fixed Rate - Amortizing  18-Nov-19   3,363    1.53%  Not Applicable
Fixed Rate - Advances  26-Nov-19   3,047    2.35%  Not Applicable
Fixed Rate - Advances  22-Jun-20   3,068    2.60%  Not Applicable
Fixed Rate - Advances  24-Jun-20   2,059    2.85%  Not Applicable
Fixed Rate - Advances  27-Jul-20   249    1.38%  Not Applicable
Fixed Rate - Advances  17-Aug-20   2,073    3.06%  Not Applicable
Fixed Rate - Advances  9-Oct-20   2,066    2.92%  Not Applicable
Fixed Rate - Advances  27-Jul-21   249    1.52%  Not Applicable
Fixed Rate - Advances  28-Jul-21   249    1.48%  Not Applicable
Fixed Rate - Advances  29-Jul-21   249    1.42%  Not Applicable
Fixed Rate - Advances  19-Aug-21   249    1.55%  Not Applicable
Fixed Rate - Advances  7-Oct-21   2,095    3.19%  Not Applicable
Fixed Rate - Advances  12-Oct-21   2,089    3.23%  Not Applicable
Fixed Rate - Advances  6-Jun-22   10,000    2.05%  Not Applicable
      $88,078    2.19%  (a)

(a) Weighted average coupon rate.

 

 33 

 

 

The long-term advances outstanding as of September 30, 2016 are as follows:

 

Type  Maturity Date  Amount   Coupon   Call Date
   (Dollars in Thousands)
Fixed Rate -Advance  17-Nov-17  $10,000    1.20%  Not Applicable
Fixed Rate -Amortizing  1-Dec-17   2,511    1.16%  Not Applicable
Fixed Rate -Advance  4-Dec-17   2,000    1.15%  Not Applicable
Fixed Rate -Advance  16-Nov-18   7,500    1.40%  Not Applicable
Fixed Rate -Advance  3-Dec-18   3,000    1.54%  Not Applicable
Fixed Rate -Amortizing  18-Nov-19   4,382    1.53%  Not Applicable
Fixed Rate -Advance  27-Jul-20   249    1.38%  Not Applicable
Fixed Rate -Advance  27-Jul-21   249    1.52%  Not Applicable
Fixed Rate -Advance  28-Jul-21   249    1.48%  Not Applicable
Fixed Rate -Advance  29-Jul-21   249    1.42%  Not Applicable
Fixed Rate -Advance  19-Aug-21   249    1.55%  Not Applicable
                 
      $30,638    1.34%  (a)
                 
(a) Weighted average coupon rate.

  

8.DERIVATIVES

 

The Company has contracted with a third party to participate in pay-fixed interest rate swap contracts. The amount of swaps outstanding at June 30, 2017 is being utilized to hedge $20. million in floating-rate debt consisting solely of FHLB advances.

 

Below is a summary of the interest rate swap agreements and the terms there of as of June 30, 2017.

 

   June 30, 2017 
   Notional   Pay   Receive  Maturity  Unrealized 
   Amount   Rate   Rate  Date  Gain 
   (Dollars in Thousands) 
Interest rate swap contract  $10,000    1.15%  1 Month Libor  6-Apr-21  $214 
Interest rate swap contract   10,000    1.18%  1 Month Libor  13-Jun-21   221 
Interest rate swap contract   1,100    4.10%  1 Month Libor +276 bp  1-Aug-26   64 
                      
                   $499 

 

All three interest rate swaps are carried at fair value in accordance with FASB ASC 815 "Derivatives and Hedging."

 

Below is a summary of the interest rate swap agreements and the terms as of September 30, 2016. They are the same swap agreements that were in force as of June 30, 2017.

 

 34 

 

  

   September 30, 2016 
   Notinal
Amount
   Pay
Rate
   Receive
Rate
  Maturity
Date
  Unrealized
Loss
 
           (Dollar in Thousands)       
                   
Interest rate swap contract  $10,000    1.15%  1 Month Libor  6-Apr-21  $(92)
Interest rate swap contract   10,000    1.18%  1 Month Libor  13-Jun-21   (103)
Interest rate swap contract   1,100    4.10%  1 Month Libor +276 bp  1-Aug-26   (7)
                      
                   $(202)

 

All three interest swaps are carried at fair value in accordance with FASB ASC 815 “Derivatives and Hedging.”

 

9.INCOME TAXES

 

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

 

   June 30,   September 30, 
   2017   2016 
Deferred tax assets:   (Dollars in Thousands) 
Allowance for loan losses  $1,647   $1,289 
Nonaccrual interest   286    163 
Accrued vacation   12    13 
Capital loss carryforward   387    378 
Split dollar life insurance   18    18 
Post-retirement benefits   97    96 
Other real estate owned   3    - 
Unrealized losses on available for sale securities   524    - 
Goodwill   2,729    - 
Purchase accounting (Polonia Bancorp)   935    - 
Unrealized losses on interest rate swaps   -    69 
Employee benefit plans   327    434 
Total deferred tax assets   6,965    2,460 
Valuation allowance   (387)   (378)
Total deferred tax assets, net of valuation allowance   6,578    2,082 
           
Deferred tax liabilities:          
Property   393    423 
Unrealized gains on available for sale securities   -    500 
Section 481(a) Adjustment   -    12 
Unrealized gains on interest rate swaps   170    - 
Deferred loan fees   534    578 
           
Total deferred tax liabilities   1,097    1,513 
           
Net deferred tax assets  $5,481   $569 

 

The Company establishes a valuation allowance for deferred tax assets when management believes that the use of the deferred tax assets is not likely to be fully realized through a carry back to taxable income in prior years or future reversals of existing taxable temporary differences, and/or to a lesser extent, future taxable income. The tax deduction generated by the redemption of the shares of a mutual fund held by the Bank and the subsequent impairment charge on the assets acquired through the redemption in kind are considered capital losses and can only be utilized to the extent of capital gains recognized over a five year period, resulting in the establishment of a valuation allowance for the carryforward period. The valuation allowance totaled $387,000 at June 30, 2017 and $378,000 at September 30, 2016.

 

 35 

 

  

There is currently no liability for uncertain tax positions and no known unrecognized tax benefits. The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Consolidated Statements of Operations as a component of income tax expense. The Company’s federal and state income tax returns for taxable years through September 30, 2014 have been closed for purposes of examination by the Internal Revenue Service and the Pennsylvania Department of Revenue.

 

10.STOCK COMPENSATION PLANS

 

As of December 31, 2016, the Boards of Directors of the Company and the Bank voted to terminate the Bank’s employee stock ownership plan (“ESOP”) effective December 31, 2016. The Company has submitted the proper notices with the Internal Revenue Service and is awaiting receipt of a determination letter in connection with the termination of the ESOP before the final allocation is made to the individual participants. The Bank maintained the ESOP for substantially for the benefit all its full-time employees. The ESOP purchased 427,057 shares of common stock for an aggregate cost of approximately $4.5 million in fiscal 2005 in connection with the Bank’s mutual holding company reorganization. The ESOP purchased in connection with the second-step conversion of the Bank an additional 255,564 shares during December 2013 and an additional 30,100 shares at the beginning of January 2014, of the Company’s common stock for an aggregate cost of approximately $3.1 million. The shares were purchased with the proceeds of two loans from the Company. Shares of the Company’s common stock purchased by the ESOP are held in a suspense account until released for allocation to participants as the loans are repaid. Shares are allocated to each eligible participant based on the ratio of each such participant’s compensation, as defined in the ESOP, to the total compensation of all eligible plan participants. As the unearned shares are released from the suspense account, the Company recognizes compensation expense equal to the fair value of the ESOP shares during the periods in which they become committed to be released. To the extent that the fair value of the ESOP shares upon release differs from the cost of such shares, the difference is charged or credited to equity as additional paid-in capital. As of June 30, 2017, the ESOP held 394,156 shares of which a total of 243,734 shares were allocated to participants, 303,115 shares were used to payoff the remaining $5.2 million balance the two loans used to fund the ESOP plan and released an additional 35,517 shares as of December 31, 2016. For the nine months ended June 30, 2017 and 2016, the Company recognized $139,000 (which was recorded during the first quarter of the current period) and $384,000, respectively, in compensation expense related to the ESOP. In connection with the termination of the ESOP, the ESOP was required to repay the outstanding indebtness the collateral held in the suspense account. Approximately 115,000 unallocated shares will be allocated to eligible participants upon approval by the Internal Revenue Service.

 

The Company maintains the 2008 Recognition and Retention Plan (“2008 RRP”) which is administered by a committee of the Board of Directors of the Company. The RRP provides for the grant of shares of common stock of the Company to officers, employees and directors of the Company. In order to fund the grant of shares under the RRP, the 2008 RRP purchased 213,528 shares of the Company’s common stock in the open market for an aggregating cost of approximately $2.5 million, at an average purchase price per share of $11.49. The Company made sufficient contributions to the 2008 RRP to fund these purchases. As of June 30, 2017, all the shares had been awarded as part of the 2008 RRP. Shares subject to awards under the 2008 RRP generally vest at the rate of 20% per year over five years. During February 2015, shareholders approved the 2014 Stock Incentive Plan (the “2014 SIP”). As part of the 2014 SIP, a maximum of 285,655 shares of common stock can be awarded as restricted stock awards or units, of which 233,500 shares were awarded during February 2015 of which 53,462 shares have been forfeited as of June 30, 2017. In August 2016, the Company granted 7,473 shares under the 2008 RRP and 3,027 shares under the 2014 SIP. In March 2017, the Company granted 17,128 shares under the 2014 SIP.

 

 36 

 

 

Compensation expense related to the shares subject to restricted stock awards granted is recognized ratably over the five-year vesting period in an amount which totals the grant date fair value multiplied by the number of shares subject to the grant. During the three and nine months ended June 30, 2017, an aggregate of $149,000 and $430,000, respectively, was recognized in compensation expense for the grants pursuant to the 2008 RRP and the grants pursuant to the 2014 SIP. An income tax benefit of $51,000 and $146,000, was recognized for the three and nine months ended June 30, 2017, respectively. During the three and nine months ended June 30, 2016, $87,000 and $329,000 was recognized in compensation expense for the grants pursuant to the 2008 RRP and the grants pursuant to the 2014 SIP. An income tax benefit of $30,000 and $112,000 was recognized for the three and nine months ended June 30, 2016. At June 30, 2017, approximately $1.2 million in additional compensation expense for shares awarded related to the 2008 RRP and 2014 SIP remained unrecognized. The weighted average period over which this expense will be recognized is approximately 3.1 years.

 

A summary of the Company’s non-vested stock award activity for the nine months ended June 30, 2017 and 2016 is presented in the following tables:

 

   Nine Months Ended
June 30, 2017
 
   Number of
Shares (1)
   Weighted Average
Grant Date Fair
Value
 
         
Nonvested stock awards at October 1, 2016   172,788   $12.03 
Granted   17,128    17.43 
Forfeited   -    - 
Vested   (43,755)   11.59 
Nonvested stock awards at the June 30, 2017   146,161   $12.78 

 

   Nine Months Ended
June 30, 2016
 
   Number of
Shares
   Weighted Average
Grant Date Fair
Value
 
         
Nonvested stock awards at October 1, 2015   241,428   $11.74 
Granted   -    - 
Forfeited   (30,180)   11.55 
Vested   (55,279)   11.59 
Nonvested stock awards at the June 30, 2016   155,969   $11.83 

 

The Company maintains the 2008 Stock Option Plan (the “2008 Option Plan”) which authorizes the grant of stock options to officers, employees and directors of the Company to acquire shares of common stock with an exercise price at least equal to the fair market value of the common stock on the grant date. Options generally become vested and exercisable at the rate of 20% per year over five years and are generally exercisable for a period of ten years after the grant date. A total of 533,808 shares of common stock were approved for future issuance pursuant to the 2008 Option Plan. As of June 30, 2017, all of the options had been awarded under the 2008 Option Plan. As of June 30, 2017, 467,758 options were vested under the 2008 Option Plan. The 2014 SIP reserved up to 714,145 shares for issuance pursuant to options. Options to purchase 587,112 shares were awarded during February 2015, 608,737 shares pursuant to the 2014 SIP and the remainder pursuant to the 2008 Option Plan. During August 2016, the Company granted 18,866 shares under the 2008 Option Plan and 8,634 shares under the 2014 SIP. In March 2017, the Company granted 22,828 shares under the 2014 SIP. In May 2017, the Company granted 25,000 shares under the 2014 SIP.

 

 37 

 

  

A summary of the status of the Company’s stock options under the 2008 Option Plan and the 2014 SIP for the nine months ended June 30, 2017 and 2016 are presented below:

 

   Nine Months Ended
June 30, 2017
 
   Number of
Shares
   Weighted Average
Exercise Price
 
         
Outstanding at October 1, 2016   921,909   $11.70 
Granted   47,828    17.48 
Exercised   (40,757)   11.48 
Forfeited   -    - 
Outstanding at  June 30, 2017   928,980   $11.85 
Exercisable at June 30, 2017   552,435   $11.43 

 

   Nine Months Ended
June 30, 2016
 
   Number of
Shares
   Weighted Average
Exercise Price
 
         
Outstanding at October 1, 2015   1,074,430   $11.92 
Granted   -    - 
Exercised   (89,358)   11.61 
Forfeited   (80,476)   11.52 
Outstanding at June 30, 2016   904,596   $11.99 
Exercisable at June 30, 2016   489,679   $11.45 

 

The weighted average remaining contractual term was approximately 4.5 years for options outstanding as of June 30, 2017.

 

The estimated fair value of options granted during fiscal 2009 was $2.98 per share, $2.92 for options granted during fiscal 2010, $3.34 for options granted during fiscal 2013, $4.67 for the options granted during fiscal 2014, $4.58 for options granted during fiscal 2015, $2.13 for options granted during fiscal 2016, and $3.18 for options granted during fiscal 2017. The fair value for grants made in fiscal 2015 was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: an exercise and fair value of $12.23, expected term of seven years, volatility rate of 38.16%, interest rate of 1.62% and a yield of 0.98%. The fair value for grants made in fiscal 2016 was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: an exercise and fair value of $14.42, expected term of seven years, volatility of 13.82%, interest rate of 1.36% and a yield of 0.80%. The fair value for grants made in March and May 2017 was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: an exercise and fair value of $17.43, expected term of seven years, volatility of 14.4%, interest rate of 2.22% and a yield of 0.69%.

 

 38 

 

  

During the three and nine months ended June 30, 2017, $139,000 and $397,000, respectively, was recognized in compensation expense for options granted pursuant to the 2008 Option Plan and the 2014 SIP. A tax benefit of $17,000 and $49,000 was recognized for the three and nine months ended June 30, 2017, respectively. During the three and nine months ended June 30, 2016, $106,000 and $322,000, respectively, was recognized in compensation expense for options granted pursuant to the 2008 Option Plan and the 2014 SIP. A tax benefit of $36,000 and $44,000, respectively, was recognized for the three and nine months ended June 30, 2016.

 

At June 30, 2017, there was approximately $1.5 million in additional compensation expense to be recognized for awarded options which remained outstanding and unvested at such date. The weighted average period over which this expense will be recognized is approximately 3.2 years.

 

11.COMMITMENTS AND CONTINGENT LIABILITIES

 

At June 30, 2017, the Company had $34.7 million in outstanding commitments to originate fixed-rate and variable-rate loans with market interest rates ranging from 4.00% to 5.50%. At September 30, 2016, the Company had $9.9 million in outstanding commitments to originate fixed-rate loans with market interest rates ranging from 3.75% to 5.0%. The aggregate undisbursed portion of loans-in-process amounted to $50.8 million at June 30, 2017 and $5.4 million at September 30, 2016.

 

The Company also had commitments under unused lines of credit of $8.9 million as of June 30, 2017 and $3.3 million as of September 30, 2016 and letters of credit outstanding of $1.5 million as of June 30, 2017 and $1.9 million as of September 30, 2016.

 

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 June 30, 2017, the exposure, which represents a portion of credit risk associated with the interests sold, amounted to $1.8 million related to loans sold to the FHLB. This exposure is for the life of the related loans and payables, on our proportionate share, as actual losses are incurred. These loans are seasoned loans and remain performing.

 

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. However, 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 not have a material adverse effect on the financial condition and operations of the Company.

 

12.FAIR VALUE MEASUREMENT

 

The fair value estimates presented herein are based on pertinent information available to management as of June 30, 2017 and September 30, 2016, respectively. Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

 

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

 

The three broad levels of hierarchy are as follows:

 

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

 

 39 

 

  

Those assets as of June 30, 2017 which are to be measured at fair value on a recurring basis are as follows:

 

   Category Used for Fair Value Measurement 
   Level 1   Level 2   Level 3   Total 
   (Dollars in Thousands) 
                 
Assets:                    
Securities available for sale:                    
U.S. Government and agency obligations  $-   $20,620   $-   $20,620 
Mortgage-backed securities - U.S. Government agencies   -    125,715    -    125,715 
Corporate bonds   -    37,045    -    37,045 
FHLMC preferred stock   59    -    -    59 
Interest rate swap contracts   -    499    -    499 
Total  $59   $183,879   $-   $183,938 

 

Those assets as of September 30, 2016 which are measured at fair value on a recurring basis are as follows:

 

   Category Used for Fair Value Measurement 
   Level 1   Level 2   Level 3   Total 
   (Dollars in Thousands) 
                 
Assets:                    
Securities available for sale:                    
U.S. Government and agency obligations  $-   $21,024   $-   $21,024 
Mortgage-backed securities - U.S. Government agencies   -    91,575    -    91,575 
Corporate bonds   -    26,053    -    26,053 
FHLMC preferred stock   42    -    -    42 
Total  $42   $138,652   $-   $138,694 
                     
Liabilities:                    
Interest rate swap contracts  $-   $202   $-   $202 
Total  $-   $202   $-   $202 

 

 40 

 

  

Certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The Company measures impaired loans and real estate owned at fair value on a non-recurring basis.

 

Impaired Loans

 

The Company considers loans to be impaired when it becomes more likely than not that the Company will be unable to collect all amounts due (principle and interest) in accordance with the contractual terms of the loan agreements. Collateral dependent impaired loans are based on the fair value of the collateral which is based on appraisals and would be categorized as Level 2 measurement.  In some cases, adjustments are made to the appraised values for various factors including the age of the appraisal, age of the comparable included in the appraisal, and known changes in the market and in the collateral. These adjustments are based upon unobservable inputs, and therefore, the fair value measurement has been categorized as a Level 3 measurement. These loans are reviewed for impairment and written down to their net realizable value by charges against the allowance for loan losses. The collateral underlying these loans had a fair value in excess of $18.0 million as of June 30, 2017 and $19.4 million as of September 30, 2016

 

Real Estate Owned

 

Once an asset is determined to be uncollectible, the underlying collateral is generally repossessed and reclassified to foreclosed real estate and repossessed assets. These repossessed assets are carried at the lower of cost or fair value of the collateral, based on independent appraisals, less cost to sell and would be categorized as Level 2 measurement. In some cases, adjustments are made to the appraised values for various factors including age of the appraisal, age of the comparable included in the appraisal, and known changes in the market and in the collateral. As a result, the evaluations are based upon unobservable inputs, and therefore, the fair value measurement has been categorized as a Level 3 measurement.

 

 Summary of Non-Recurring Fair Value Measurements

 

   At June 30, 2017 
   (Dollars in Thousands) 
   Level 1   Level 2   Level 3   Total 
Impaired loans  $-   $-   $18,092   $18,092 
Real estate owned   -    -    192    192 
Total  $-   $-   $18,284   $18,284 

 

   At September 30, 2016 
   (Dollars in Thousands) 
   Level 1   Level 2   Level 3   Total 
Impaired loans  $-   $-   $19,429   $19,429 
Real estate owned   -    -    581    581 
Total  $-   $-   $20,010   $20,010 

 

 41 

 

  

The following table provides information describing the valuation processes used to determine nonrecurring fair value measurements categorized within Level 3 of the fair value hierarchy:

 

   At June 30, 2017
   (Dollars in Thousands)
       Valuation     Range/
   Fair Value   Technique  Unobservable Input  Weighted Ave.
Impaired loans  $18,092    Property appraisals (1) (3)   Management discount for selling costs, property type and market volatility (2)   6% to 10% discount/10%
Real estate owned  $581    Property appraisals (1)(3)   Management discount for selling costs, property type and market volatility (2)   10% discount

 

   At September 30, 2016
   (Dollars in Thousands)
       Valuation     Range/
   Fair Value   Technique  Unobservable Input  Weighted Ave.
Impaired loans  $19,429    Property appraisals (1) (3)   Management discount for selling costs, property type and market volatility (2)   6% to 46% discount/10%
Real estate owned  $581    Property appraisals (1)(3)   Management discount for selling costs, property type and market volatility (2)   10% discount

 

(1)Fair value is generally determined through independent appraisals of the underlying collateral, which generally includes various Level 3 inputs, which are not identifiable.
(2)Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.
(3)Includes qualitative adjustments by management and estimated liquidation expenses.

 

The fair value of financial instruments has 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.

 

 42 

 

  

           Fair Value Measurements at 
           June 30, 2017 
   Carrying   Fair             
   Amount   Value   (Level 1)   (Level 2)   (Level 3) 
   (Dollars in Thousands) 
Assets:                         
Cash and cash equivalents  $22,927   $22,927   $22,927   $-   $- 
Certificate of deposits   1,853    1,853    1,853    -    - 
Investment and mortgage-backed securities available for sale   183,439    183,439    59    183,380    - 
Investment and mortgage-backed securities held to maturity   59,654    58,570    -    58,570    - 
Loans receivable, net   544,422    548,697    -    -    548,697 
Accrued interest receivable   3,089    3,089    3,089    -    - 
Other real estate owned   192    192    192    -    - 
Federal Home Loan Bank stock   5,767    5,767    5,767    -    - 
Bank owned life insurance   27,877    27,877    27,877    -    - 
Interest rate swap contracts   499    499    -    499    - 
                          
Liabilities:                         
Checking accounts   64,143    64,143    64,143    -    - 
Money market deposit accounts   81,211    81,211    81,211    -    - 
Passbook, club and statement savings accounts   104,446    104,446    104,446    -    - 
Certificates of deposit   365,046    360,527    -    -    360,527 
Accrued interest payable   1,339    1,339    1,339    -    - 
Advances from FHLB -short-term   20,000    20,000    20,000    -    - 
Advances from FHLB -long-term   88,078    87,372    -    -    87,372 
Advances from borrowers for taxes and insurance   3,982    3,982    3,982    -    - 

 

 43 

 

  

           Fair Value Measurements at 
           September 30, 2016 
   Carrying   Fair             
   Amount   Value   (Level 1)   (Level 2)   (Level 3) 
   (Dollars in Thousands) 
Assets:                         
Cash and cash equivalents  $12,440   $12,440   $12,440   $-   $- 
Certificate of deposits   1,853    1,853    1,853    -    - 
Investment and mortgage-backed securities available for sale   138,694    138,694    42    138,652    - 
Investment and mortgage-backed securities held to maturity   39,971    40,700    -    40,700    - 
Loans receivable, net   344,948    344,100    -    -    344,100 
Accrued interest receivable   1,928    1,928    1,928    -    - 
Federal Home Loan Bank stock   2,463    2,463    2,463    -    - 
Bank owned life insurance   13,055    13,055    13,055    -    - 
                          
Liabilities:                         
Checking accounts   38,788    38,788    38,788    -    - 
Money market deposit accounts   55,552    55,552    55,552    -    - 
Passbook, club and statement savings accounts   70,924    70,924    70,924    -    - 
Certificates of deposit   223,937    225,383    -    -    225,383 
Accrued interest payable   1,403    1,403    1,403    -    - 
Advances from FHLB -short-term   20,000    20,000    20,000    -    - 
Advances from FHLB -long-term   30,638    30,222    -    -    30,222 
Advances from borrowers for taxes and insurance   1,748    1,748    1,748    -    - 
Interest rate swap contracts   202    202    -    202    - 

 

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.

 

Loans Receivable - The fair value of loans is estimated based on present value using the current market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The carrying value that fair value is compared to is net of the allowance for loan losses and other associated premiums and discounts. Due to the significant judgment involved in evaluating credit quality, loans are classified within Level 3 of the fair value hierarchy.

 

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

 

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

 

 44 

 

  

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 is derivable from observable 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 market rates currently offered for deposits of similar remaining maturity.

 

Short-term Advances from Federal Home Loan Bank - The fair value of advances from FHLB is the amount payable on demand at the reporting date.

 

Long-term 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.

 

Interest rate swaps – The fair values of the interest rate swap contracts are based upon the estimated amount the Company would receive or pay, as applicable, to terminate the contracts.

 

Advances from borrowers for taxes and insurance – For advances from borrowers for taxes and insurance, the carrying amount is a reasonable estimate of fair value.

 

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.

 

13.GOODWILL AND OTHER INTANGIBLE ASSETS

 

The Company’s goodwill and intangible assets are related to the acquisition of Polonia Bancorp on January 1, 2017.

 

   Balance           Balance    
   October 1,   Additions/       June 30,   Amortization
   2016   Adjustments   Amortization   2017   Period
                    
Goodwill  $-   $7,163   $-   $7,163    
Core deposit intangible   -    822    (75)   747   10 years
   $-   $7,985   $(75)  $7,910    

 

As of June 30, 2017, the current fiscal year and the future fiscal periods amortization expense for the core deposit intangible is:

 

(In thousands)     
2017  $37 
2018   138 
2019   123 
2020   108 
Thereafter   341 

 

 45 

 

  

14.BUSINESS COMBINATIONS

 

On January 1, 2017, the previously announced proposed acquisition (the “Merger”) of Polonia Bancorp pursuant to the Agreement of Plan of Merger by and between Polonia Bancorp and the Company, dated as of June 2, 2016 (the “ Merger Agreement”) was completed. The shareholders of Polonia Bancorp had the option to receive $11.09 per share in cash or 0.7460 of a share of the Company common stock for each share of Polonia Bancorp common stock held thereby, subject to allocation provisions to assure that, in the aggregate, Polonia Bancorp shareholders received total merger consideration that consisted of 50% stock and 50% cash. As a result of Polonia Bancorp shareholder stock and cash elections and the related proration provisions of the Merger Agreement, the Company issued 1,274,197 shares of its common stock and approximately $18.9 million was paid in cash for the Merger.

 

In connection with the Merger, the consideration paid and the estimated fair value of identifiable assets and liabilities assumed as of the date of the Merger are summarized in the following table:

 

(dollars in thousands)    
Consideration paid:     
Common stock issued (1,274,197 shares) at a fair value per share of $17.12 per share.  $21,814 
Cash for common stock exchanged   18,944 
Cash in lieu of fractional shares   1 
    40,759 
Assets acquired:     
Cash and due from banks   47,901 
Investments available for sale   42,164 
Loans   160,157 
Premises and equipment   6,902 
Deferred taxes   3,921 
Bank-owned life insurance   4,316 
Core deposit intangible   822 
Other assets   5,802 
Total assets   271,985 
      
Liabilities assumed:     
Deposits   172,243 
FHLB advances, short-term   7,000 
FHLB advances, long-term   50,232 
Other liabilities   8,914 
Total liabilities   238,389 
Net assets acquired   33,596 
Goodwill resulting from the acquisition  $7,163 

 

 46 

 

  

The following table summarizes the estimated fair value of the assets acquired and the liabilities assumed as of the date of acquisition of Polonia Bancorp. The core deposit intangible will be amortized over a 10 years using an accelerated method. Goodwill will not be amortized, but instead will be evaluated for impairment.

 

(Dollars in thousands, except per share data)    
Purchase Consideration     
      
Polonia Common Stock:     
Total shares of common stock outstanding   3,416,311 
Common stock issued cap   1,708,155 
Shares redeemed for cash cap   1,708,156 
      
Prudential common stock issued (conversion rate 0.7460)   1,274,197 
Prudential closing price at December 31, 2016  $17.12 
      
Cash-out rate paid per share for Polonia Bancorp common stock  $11.09 
      
Purchase consideration assigned to Polonia Bancorp shares exchanged for Company Common Stock  $21,814 
Cash Paid to Polonia for Polonia Bancorp shares  $18,944 
Cash Paid for fractional shares  $1 
   $40,759 
      
Net Assets Acquired     
      
Polonia Bancorp stockholders' equity   35,412 
Core deposit intangible assets   822 
Estimated adjustments to reflect assets acquired at fair value:     
Investment securities   (781)
Portfolio loans   (4,643)
Allowance for loan and lease losses   1,002 
Premises   3,049 
Other Assets   (73)
Deferred Taxes   934 
Total fair value adjustment to assets acquired   310 
Estimated adjustments to reflect liabilities assumed at fair value:     
Time deposits   894 
Borrowings   1,232 
Total fair value adjustment to liabilities assumed   2,126 
Total net assets acquired   33,596 
Goodwill resulting from merger   7,163 

 

Pro Forma Income Statements

 

The following pro forma income statements for the three and nine months ended June 30, 2017 and 2016 presents pro forma results of operations of the combined institution (Polonia Bancorp and the Company) had the merger occurred on April 1, 2017 and 2016. The pro forma income statement adjustments are limited to the effects of fair value mark amortization and accretion and intangible asset amortization. No cost savings or additional merger expenses have been included in the pro forma results of operations for the three and nine months ended June 30, 2017 and 2016.

 

 47 

 

  

   Unaudited 
   Three Months Ended 
   June 30, 
(Dollars in thousands, except per share data)   2017    2016 
Net interest income   6,053    5,681 
Provision for loan and leases losses   30    150 
Net interest income after provision for loan and lease losses   6,023    5,531 
Non-interest income   625    721 
Non-interest expenses   3,500    5,156 
Income before income taxes   3,148    1,096 
Income tax expense   1,031    318 
Net income   2,117    778 
Per share data          
Weighed average basic shares outstanding   8,652,699    8,655,077 
Dilutive shares   656,370    270,973 
Adjusted weighted-average dilutive shares   9,309,069    8,926,050 
Basic earnings per common share  $0.25   $0.09 
Dilutive earnings per common share  $0.25   $0.09 

 

(a)Weighted-average basis shares outstanding for both periods reflected are the Company’s weighted-average shares plus the 1,274,197, shares that were issued as consideration for the Merger. The dilutive shares reflect the Company’s estimated diluted shares for the period.

 

   Unaudited 
   Nine Months Ended 
   June 30, 
(Dollars in thousands, except per share data)   2017    2016 
Net interest income   14,998    17,648 
Provision for loan and leases losses   2,580    225 
Net interest income after provision for loan and lease losses   12,418    17,423 
Non-interest income   1,500    2,134 
Non-interest expenses   12,981    17,582 
Income before income taxes   937    1,975 
Income tax expense   230    704 
Net income   707    1,271 
Per share data          
Weighed average basic shares outstanding   8,202,850    8,655,077 
Dilutive shares   570,792    246,791 
Adjusted weighted-average dilutive shares   8,773,642    8,901,868 
Basic earnings per common share  $0.08   $0.10 
Dilutive earnings per common share  $0.08   $0.10 

 

(a)Weighted-average basis shares outstanding for both periods reflected are the Company’s weighted-average shares plus the 1,274,197, shares that were issued as consideration for the merger. The dilutive shares reflect the Company’s estimated diluted shares for the period

 

 48 

 

  

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, 2016 (the “Form 10-K”).

 

Overview. Prudential Bancorp, Inc. (the “Company”) was formed by Prudential Bancorp, Inc. of Pennsylvania to become the successor holding company for Prudential Bank (the “Bank”) as a result of the second-step conversion of the Bank completed in October 2013. 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 expense, 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 (the “FDIC”) and the Pennsylvania Department of Banking and Securities (the “Department”). The Bank’s main office is in Philadelphia, Pennsylvania (which includes a financial center), with ten additional financial centers located in Philadelphia, Montgomery 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 then owned by the Company’s predecessor 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 1 of the notes to our unaudited consolidated financial statements included in Item 1 hereof as well as in Note 2 to our audited 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 (“U.S. GAAP”) and to general practices within the banking industry. Accordingly, the financial statements require certain estimates, judgments and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities as well as contingent assets and contingent liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods. Effective January 1, 2017, the Company completed its acquisition of Polonia Bancorp, Inc. (“Polonia Bancorp”) and its wholly owned subsidiary, Polonia Bank, pursuant to the terms of an Agreement and Plan of Merger dated June 2, 2016.

 

Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to expense. Losses are charged against the allowance for loan losses when management believes that the collectability in full of the principal of a loan is unlikely. Subsequent recoveries are added to the allowance. The allowance for loan losses is maintained at a level that management considers adequate to provide for estimated losses and impairments based upon an evaluation of known and inherent losses in the loan portfolio that are both probable and reasonable to estimate. Loan impairment is evaluated based on the fair value of collateral or estimated net realizable value. It is the policy of management to provide for losses on unidentified loans in its portfolio in addition to criticized and classified loans.

 

 49 

 

 

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

 

·Levels of past due, classified, criticized and non-accrual loans, troubled debt restructurings and loan modifications;
·Nature and volume of loans;
·Changes in lending policies and procedures, underwriting standards, collections, charge-offs and recoveries and for commercial loans, the level of loans being approved with exceptions to the Company’s 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 the degree of Board oversight;
·Concentrations of credit and changes in levels of such concentrations; and
·Effect of external factors on the level of estimated credit losses in the current portfolio.

 

In determining the allowance for loan losses, management has established a general pooled allowance. 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 (the general pooled allowance) and those for criticized and classified loans. The amount of the specific allowance is determined through an individual loan analysis of commercial real estate loans, construction and land development loans and multi-family loans that have a risk rating of “substandard” and/or non-performing. Under most circumstances, if a specific impairment is warranted then that portion of the loan will be immediately charged-off. Loans not individually reviewed are evaluated as a group using reserve factor percentages based on historical loss experience and the qualitative factors described above. In determining the appropriate level of the general pooled allowance, management makes estimates based on internal risk ratings, which take into account such factors as debt service coverage, loan-to-value ratios and external factors. Estimates are periodically measured against actual loss experience.

 

This evaluation is inherently subjective as it requires material estimates including, among others, exposure at default, the amount and timing of expected future cash flows on impaired loans, value of collateral, estimated losses on our commercial, construction and residential loan portfolios and historical loss experience. All of these estimates may be susceptible to significant change.

 

While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. In addition, the Department and the FDIC, as an integral part of their examination processes, periodically review our allowance for loan losses. The Department and the FDIC may require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examination. To the extent that actual outcomes differ from management’s estimates, additional provisions to the allowance for loan losses may be required that would adversely affect earnings in future periods.

 

Investment and mortgage-backed securities available for sale.  Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated using quoted prices of securities with similar characteristics or discounted cash flows and are classified within Level 2 of the fair value hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. There were no securities with a Level 3 classification as of June 30, 2017 or September 30, 2016. 

 

 50 

 

 

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 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 because of regulatory concerns, our internal intent not to dispose of the security prior to maturity and whether the entire cost basis of the security is expected to be recovered. In determining whether the cost basis will be recovered, management evaluates other facts and circumstances that may be indicative of an “other-than-temporary” impairment condition. This includes, but is not limited to, an evaluation of the type of security, length of time and extent to which the fair value has been less than cost, and near-term prospects of the issuer.

 

In addition, certain assets are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The Company measures impaired loans and real estate owned, along with both available-for-sale (“AFS”) and held-to-maturity (“HTM”) securities that have deteriorated fair values or declines in credit rating that fall below investment grade, at fair value on a non-recurring basis.  

 

Valuation techniques and models utilized for measuring financial assets and liabilities are reviewed and validated by the Company at least quarterly.

 

Income Taxes. The Company accounts for income taxes in accordance with U.S. GAAP. The Company records deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Management exercises significant judgment in the evaluation of the amount and timing of the recognition of the resulting tax assets and liabilities. The judgments and estimates required for the evaluation are updated based upon changes in business factors and the tax laws. If actual results differ from the assumptions and other considerations used in estimating the amount and timing of tax recognized, there can be no assurance that additional expenses will not be required in future periods. 

 

In evaluating our ability to recover deferred tax assets, we consider all available positive and negative evidence, including our past operating results and our forecast of future taxable income. In determining future taxable income, we make assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction in estimated future taxable income may require us to record an additional valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.

 

U.S. GAAP prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the consolidated income statement.  Assessment of uncertain tax positions requires careful consideration of the technical merits of a position based on management's analysis of tax regulations and interpretations.  Significant judgment may be involved in the assessment of the tax position.

 

Forward-looking Statements. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, expectations or predictions of future financial or business performance, conditions relating to the Company, or other effects of the merger of the Company and Polonia Bancorp. These forward-looking statements include statements with respect to the Company’s beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors (some of which are beyond the Company’s control). The words “may,” “could,” “should,” “would,” “will,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar expressions are intended to identify forward-looking statements.

 

 51 

 

 

In addition to factors previously disclosed in the reports filed by the Company with the Securities and Exchange Commission (“SEC”) and those identified elsewhere in this Form 10-Q, the following factors, among others, could cause actual results to differ materially from forward looking statements or historical performance: difficulties and delays in integrating the Polonia Bancorp business or fully realizing anticipated cost savings and other benefits of the merger; business disruptions following the merger; the strength of the United States economy in general and the strength of the local economies in which the Company conducts its operations; general economic conditions; legislative and regulatory changes; monetary and fiscal policies of the federal government; changes in tax policies, rates and regulations of federal, state and local tax authorities; changes in interest rates, deposit flows, the cost of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of the Company’s loan, investment and mortgage-backed securities portfolios; changes in accounting principles, policies or guidelines and other economic, competitive, governmental and technological factors affecting the Company’s operations, markets, products, services and fees; and the success of the Company at managing the risks involved in the foregoing.

 

The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company to reflect events or circumstances occurring after the date of this Form 10-Q.

 

For a complete discussion of the assumptions, risks and uncertainties related to our business, you are encouraged to review the Company’s filings with the SEC, including the “Risk Factors” section in its most recent Annual Report on Form 10-K, as supplemented by its quarterly or other reports subsequently filed with the SEC.

 

Market Overview. The economy has shown signs of improvement during the six months of calendar 2017 and we still view the current environment as challenging. During the six months of 2017, the stock market has reached record highs and the unemployment rate fall below 5.0% along with an increase in demand for commercial real estate within the Company’s lending area. Since December 2015, the Federal Reserve Bank increased the discount rate 75 basis points. The prime rate used by most banks was impacted by a similar increase during that time frame.

 

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 capital well in excess of regulatory requirements.

 

The following discussion provides further details on the financial condition of the Company at June 30, 2017 and September 30, 2016, and the results of operations for the three and nine months ended June 30, 2017 and 2016.

 

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2017 AND SEPTEMBER 30, 2016

 

At June 30, 2017, the Company had total assets of $870.7 million, as compared to $559.5 million at September 30, 2016, an increase of $311.2 million or 55.6%. The substantial majority of the growth was attributable to the acquisition of Polonia Bancorp. In addition to the acquisition, the Company experienced growth in the balance of net loans receivable of $35.9 million or 10.4% not related to the acquisition when compared to the $344.9 million balance of net loans receivable as of September 30, 2016.

 

Total liabilities increased by $291.0 million to $736.5 million at June 30, 2017 from $445.5 million at September 30, 2016. As with the asset growth, the bulk of the liability growth resulted from the acquisition of Polonia Bancorp. In addition to the deposits assumed, the Company assumed $56.0 million in FHLB advances in addition to the $64.8 million of such borrowings the Company already held. In addition to the deposit growth resulting from the acquisition, the Company experienced growth in deposits of $54.4 million or 14.0% when compared the balance outstanding at June 30, 2017 to the $389.2 million balance as of September 30, 2016.

 

Total stockholders’ equity increased by $20.2 million to $134.2 million at June 30, 2017 from $114.0 million at September 30, 2016. This increase was primarily due to the issuance of common stock to the stockholders of Polonia Bancorp in connection with the acquisition. Another item that impacted stockholders’ equity was the termination of the Bank’s employee stock ownership plan (“ESOP”) effective as of December 31, 2016. A portion of the shares of common stock held in the ESOP’s suspense account was used to satisfy the ESOP’s indebtedness in full. In addition, stockholders’ equity was affected by a $1.5 million decline in the fair value of the Company’s available-for-sale portfolio.

 

 52 

 

 

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2017 AND 2016

 

Net income. The Company reported net income of $2.1 million, or $0.25 per basic and diluted share, for the quarter ended June 30, 2017 as compared to net income of $777,000, or $0.10 per basic and diluted share, for the same quarter in fiscal 2016. The increase in the current period reflected the beneficial effects resulting from the acquisition of Polonia Bancorp completed on January 1, 2017, that was spearheaded by our new management team, combined with the results of the implementation by our new management team of strategies to improve earnings by increasing earning assets while simultaneously controlling operating expenses. For the nine months ended June 30, 2017, the Company recognized net income of $707,000, or $0.08 per basic and diluted share, as compared to net income of $1.7 million, or $0.23 per basic and diluted share, for the same period in fiscal 2016. The nine-month period in 2017 included a one-time $2.7 million pre-tax expense related to the Polonia Bancorp acquisition as well as a $1.9 million non-cash pre-tax charge-off associated with a large lending relationship.

 

Net interest income. For the three months ended June 30, 2017, net interest income increased to $6.1 million as compared to $3.7 million for the same period in fiscal 2016. The increase reflected a $3.0 million, or 66.1%, increase in interest income, partially offset by an increase of $553,000, or 67.1%, in interest paid on deposits and borrowings. For the nine months ended June 30, 2017, net interest income increased to $15.0 million as compared to $10.4 million for the same period in fiscal 2016. The increase reflected a $5.7 million, or 44.3%, increase in interest income, partially offset by an increase of $1.1 million, or 45.9%, in interest paid on deposits and borrowings. The increase in net interest income in both periods in fiscal 2017 was primarily due to the increase in the weighted average balance of earning assets reflecting in large part the addition of earning assets acquired as of January 1, 2017 upon completion of the Polonia Bancorp acquisition. In addition, during the third quarter of fiscal 2017 the average outstanding balance of loans increased $20.1 million while the average balance of investment securities increased $21.6 million, with such growth primarily funded with an increase in deposits.

 

For the three and nine months ended June 30, 2017, the net interest margin was 2.99% and 2.83%, respectively, compared to 2.78% and 2.74% for the same periods in fiscal 2016. The margin improvements reflected in large part the increase in the weighted average balances of interest-earning assets noted above as well, to a lesser degree, the increase in the weighted average yield on earning assets which reflected primarily the effects of purchase accounting fair value adjustments on the assets acquired from Polonia Bancorp.

 

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 earned from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities and the resulting costs, expressed both in dollars and rates, the interest rate spread 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.

 

 53 

 

  

   Three Months 
   Ended June 30, 
   2017   2016 
   Average       Average   Average       Average 
   Balance   Interest   Yield/Rate (1)   Balance   Interest   Yield/Rate (1) 
                         
   (Dollars in Thousands) 
Interest-earning assets:                              
Investment securities  $123,709   $611    1.98%  $51,070   $529    2.91%
Mortgage-backed securities   132,867    1,106    3.34    129,557    673    2.62 
Loans receivable(2)   531,130    5,647    4.26    334,410    3,263    3.96 
Other interest-earning assets   24,192    66    1.09    12,450    9    0.29 
Total interest-earning assets   811,898    7,430    3.67    527,487    4,474    3.44 
Cash and non interest-bearing balances   2,392              1,781           
Other non interest-earning assets   52,538              20,950           
Total assets  $866,828             $550,218           
Interest-bearing liabilities:                              
Savings accounts  $106,801    11    0.04   $73,031    18    0.10 
Money market deposit and NOW accounts   146,843    38    0.10    91,884    34    0.15 
Certificates of deposit   362,960    952    1.05    218,857    629    1.17 
Total deposits   616,604    1,001    0.65    383,772    681    0.72 
Advances from FHLB   102,786    375    1.46    44,200    142    1.30 
Advances from borrowers for taxes and                       1      
insurance   3,253    1    0.12    2,131    1    0.19 
Total interest-bearing liabilities   722,643    1,377    0.76    430,103    824    0.78 
Non interest-bearing liabilities:                              
Non interest-bearing demand accounts   9,300              2,795           
Other liabilities   2,384              1,752           
Total liabilities   734,327              434,650           
Stockholders' equity   132,501              115,568           
Total liabilities and stockholders' equity  $866,828             $550,218           
Net interest-earning assets  $89,255             $97,384           
Net interest income; interest rate spread       $6,053    2.67%       $3,650    2.66%
Net interest margin(3)             2.99%             2.81%
                               
Average interest-earning assets to average interest-bearing liabilities        112.35%             122.64%     

 

 

(1)Yields and rates for the three month periods are annualized.
(2)Includes non-accrual loans. Calculated net of unamortized deferred fees, undisbursed portion of loans-in-process and the allowance for loan losses.
(3)Equals net interest income divided by average interest-earning assets.

 

 54 

 

  

   Nine Months 
   Ended June 30, 
   2017   2016 
   Average       Average   Average       Average 
   Balance   Interest   Yield/Rate (1)   Balance   Interest   Yield/Rate (1) 
                         
   (Dollars in Thousands) 
Interest-earning assets:                              
Investment securities  $107,488   $2,263    2.81%  $60,356   $1,517    2.69%
Mortgage-backed securities   118,085    2,179    2.47    111,126    1,868    2.59 
Loans receivable(2)   462,793    14,062    4.06    323,830    9,489    3.90 
Other interest-earning assets   21,217    102    0.64    10,511    22    0.28 
Total interest-earning assets   709,583    18,606    3.51    505,823    12,896    3.40 
Cash and non interest-bearing balances   2,380              1,887           
Other non interest-earning assets   42,797              19,929           
Total assets  $754,760             $527,639           
Interest-bearing liabilities:                              
Savings accounts  $95,614    36    0.05   $72,786    65    0.12 
Money market deposit and NOW accounts   166,923    148    0.12    93,339    129    0.19 
Certificates of deposit   262,450    2,502    1.27    203,440    1,981    1.27 
Total deposits   524,987    2,686    0.68    369,565    2,175    0.78 
Advances from FHLB   89,870    918    1.37    23,306    296    1.30 
Advances from borrowers for taxes and                              
insurance   2,607    4    0.21    1,892    2    0.14 
Total interest-bearing liabilities   617,464    3,608    0.78    394,763    2,473    0.81 
Non interest-bearing liabilities:                              
Non interest-bearing demand accounts   7,709              2,689           
Other liabilities   3,606              3,219           
Total liabilities   628,779              400,671           
Stockholders' equity   125,981              115,861           
Total liabilities and stockholders' equity  $754,760             $516,532           
Net interest-earning assets  $92,119             $111,060           
Net interest income; interest rate spread       $14,998    2.73%       $10,423    2.58%
Net interest margin(3)             2.83%             2.74%
                               
Average interest-earning assets to average interest-bearing liabilities        114.92%             125.44%     

 

 

(1)Yields and rates for the nine months periods are annualized.
(2)Includes non-accrual loans. Calculated net of unamortized deferred fees, undisbursed portion of loans-in-process and the allowance for loan losses.
(3)Equals net interest income divided by average interest-earning assets.

 

 55 

 

  

Provision for loan losses. The Company recorded a provision for loan losses in the amount of $30,000 and $2.6 million, respectively, for the three and nine months ended June 30, 2017. The provision for loan losses for the nine months ended June 30, 2017 was primarily due to a $1.9 million charge-off related to the borrower discussed below whose primary project financed currently by the Bank involves the proposed development of 169 residential lots. As noted below, the Bank and the borrower are in litigation and no resolution of the situation has been arrived at as of the date hereof in part due to the bankruptcy filing by the borrower effected in June 2017. In light of the status of both the litigation as well as the progress of construction of the project, the Company recorded a $1.9 million non-cash charge-off during the quarter ended March 31, 2017. The remaining portion of the provision recorded during the nine-months ended June 30, 2017 was related to an increase in the outstanding balance of loans. The loans acquired from Polonia Bancorp initially did not have any impact on the allowance for loan losses, because they were acquired at their fair value recorded in the quarter ended March 31, 2017. Any write-downs to fair value were reflected in the one-time merger-related charge recorded in the quarter ended March 31, 2017. In the event that the credit quality of any loans acquired from Polonia Bancorp should deteriorate in the future, additional provisions to the allowance may be required.

 

The allowance for loan losses totaled $4.1 million, or 0.7% of total loans and 25.2% of total non-performing loans (which included loans acquired from Polonia Bancorp at their fair-value) at June 30, 2017 as compared to $3.3 million, or 1.0% of total loans and 20.6% of total non-performing loans at September 30, 2016. The Company believes that the allowance for loan losses at June 30, 2017 was sufficient to cover all inherent and known losses associated with the loan portfolio at such date.

 

The Company’s methodology for assessing the adequacy of the allowance establishes both specific and general pooled allocations of the allowance.  Loans are assigned ratings, either individually for larger credits or in homogeneous pools, based on an internally developed grading system.  The resulting determinations are reviewed and approved by senior management (see the discussion in “Critical Accounting Policies - Allowance for Loan Losses” “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in PART I hereof).

 

At June 30, 2017, the Company’s non-performing assets totaled $16.1 million or 1.9% of total assets as compared to $15.9 million or 2.8% of total assets at September 30, 2016. Non-performing assets at June 30, 2017 included five construction loans aggregating $8.7 million, 33 one-to-four family residential loans aggregating $4.4 million, one single-family residential investment property loan in the amount $1.4 million and five commercial real estate loans aggregating $1.6 million. Non-performing assets also included at June 30, 2017 one real estate owned property consisting of a single-family residential property with a carrying value of $192,000. At June 30, 2017, the Company had nine loans aggregating $6.1 million that were classified as troubled debt restructurings (“TDRs”). Three of such loans aggregating $4.9 million were designated non-performing as of June 30, 2017 and on non-accrual status; one of such loans in the amount of $1.4 million has continued to make payments in accordance with the restructured loan terms, but management continues to have concerns over the borrower’s ability to make future payments and as a result has determined to not return the loan to performing status. The remaining two TDRs classified non-accrual totaling $3.5 million are a part of one of the Bank’s largest borrowing relationships totaling $8.9 million (after taking into account the $1.9 million write-down recognized during the quarter ending March 31, 2017). The primary project of the borrower is the subject of litigation between the Bank and the borrower and as a result, the project currently is not proceeding. The borrower has recently filed for bankruptcy under Chapter 11of the federal bankruptcy code. The Company has removed the underlying litigation noted above between the borrower from state court to the federal bankruptcy court in which the bankruptcy proceeding is being heard (further discussed in Item 1, Legal Proceedings, in PART II hereof). The remaining six TDRs have performed in accordance with the terms of their revised agreements and have been placed on accruing status. As of June 30, 2017, the Company had reviewed $18.1 million of loans for possible impairment of which $12.7 million was classified substandard compared to $19.4 million reviewed for possible impairment and $14.6 million of which was classified substandard as of September 30, 2016. The Company did not have any assets classified doubtful or loss as of either June 30, 2017 or September 30, 2016.

 

At June 30, 2017, the Company had $2.4 million of loans delinquent 30-89 days as to interest and/or principal. Such amount consisted of 13 one-to-four family residential loans totaling $1.9 million, one commercial real estate loan in the amount of $465,000, and one consumer loan in the amount of $60,000.

 

At June 30, 2017, we also had a total of ten loans aggregating $3.1 million that had been designated “special mention”. These loans consist of three one-to-four family residential loans totaling $1.6 million and six commercial real estate loans totaling $1.5 million. At September 30, 2016, we had a total of five loans aggregating $2.6 million designated as “special mention”, consisting of three one-to-four family residential loans totaling $1.7 million and two commercial real estate loans totaling $943,000.

 

The following table shows the amounts of non-performing assets (defined as non-accruing loans, accruing loans 90 days or more past due as to principal and/or interest and real estate owned) as of June 30, 2017 and September 30, 2016. At neither date did the Company have any accruing loans 90 days or more past due that were accruing.

 

 56 

 

  

   June 30,
 2017
   September 30,
2016
 
   (Dollars in Thousands) 
Non-accruing loans:          
One-to-four family residential  $5,775   $4,244 
Commercial real estate   1,603    1,346 
Construction and land development   8,714    10,288 
Total non-accruing loans   16,092    15,878 
Real estate owned, net:  (1)   192    581 
Total non-performing assets  $16,384   $16,459 
           
Total non-performing loans as a percentage of loans, net   2.96%   4.56%
Total non-performing loans as a percentage of total assets   1.85%   2.84%
Total non-performing assets as a percentage of total assets   1.87%   2.94%

 

(1)Real estate owned balances are shown net of related loss allowances and consist solely of real property.

 

Non-interest income. Non-interest income amounted to $625,000 and $1.5 million, respectively, for the three and nine month periods ended June 30, 2017, compared to $400,000 and $883,000, respectively, for the comparable periods in fiscal 2016. The increase experienced in both of the 2017 periods was primarily attributable to the addition of five full-service financial centers, along with the related customer deposit base (increased ATM fees and account service charges and transaction fees), acquired from Polonia Bancorp along with an increased return on bank owned life insurance (“BOLI”) as a result of the increase in the amount of BOLI due to the purchase of an additional $10.0 million of BOLI in the quarter ended December 31, 2016.

 

Non-interest expense. For the three and nine months periods ended June 30, 2017, non-interest expense increased $685,000 or 24.3% and $4.5 million or 52.6%, respectively, compared to the same periods in the prior fiscal year. The primary reason for the increase for both three and nine months periods ended June 30, 2017 was the additional expense resulting from the Polonia Bancorp acquisition which added five additional financial centers to our branch network as well as additional personnel. In addition, during the nine-month period ended June 30, 2017, the Company recorded a one-time merger related charge of approximately $2.7 million, pre-tax.

 

Income tax expense. For the three-month period ended June 30, 2017, the Company recorded income tax expense of $1.0 million resulting in an effective tax rate of 32.8%, compared to $308,000 and an effective tax rate of 28.4% for the same period in 2016. For the nine-month period ended June 30, 2017, the Company recorded income tax expense of $230,000 resulting in an effective tax rate of 24.6%, compared to $836,000 and an effective tax rate of 32.5% for the same period in 2016. The effective tax rate for the nine-month period ended June 30, 2017 was lower due to the net loss recognized during the second quarter of fiscal 2017 primarily as a result of the one-time merger-related costs incurred in connection with the acquisition of Polonia Bancorp combined with the $1.9 million write-down related to the large borrowing relationship discussed above.

 

 57 

 

  

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 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-earning assets that provide additional liquidity. At June 30, 2017, our cash and cash equivalents amounted to $22.9 million. In addition, our available-for-sale investment securities amounted to an aggregate of $183.4 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 June 30, 2017, the Company had $34.7 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 $8.9 million and letters of credit outstanding of $1.5 million at June 30, 2017. Certificates of deposit as of June 30, 2017 that are maturing in six months or less totaled $123.7 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 FHLB as collateral for such advances. At June 30, 2017, we had $108.1 million in outstanding FHLB advances and had the ability to obtain an additional $266.8 million in FHLB advances. Additional borrowing capacity with the FHLB could be obtained with the pledging of certain investment securities. The Bank has also obtained approval to borrow from the Federal Reserve Bank of Philadelphia discount window.

 

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

 

 58 

 

  

The following table summarizes the Company’s and Bank’s regulatory capital ratios as of June 30, 2017 and September 30, 2016 and compares them to current regulatory guidelines. The Company is not subject to capital ratios imposed by Basel III on bank holding companies because the Company is deemed to be a small bank holding company.

 

           To Be 
           Well Capitalized 
       Required for   Under Prompt 
       Capital Adequacy   Corrective Action 
   Actual Ratio   Purposes   Provisions 
                
June 30, 2017:               
Tier 1 capital (to average assets)               
The Company   14.76%                N/A                 N/A 
The Bank   13.44%   4.0%   5.0%
                
Tier 1 common (to risk-weighted assets)               
The Company   24.60%                N/A                 N/A 
The Bank   22.40%   5.1%(a)   6.5%
                
Tier 1 capital (to risk-weighted assets)               
The Company   24.60%                N/A                 N/A 
The Bank   22.40%   6.6%(a)   8.0%
                
Total capital (to risk-weighted assets)               
The Company   25.44%                N/A                 N/A 
The Bank   23.24%   8.6%(a)   10.0%
                
September 30, 2016:               
Tier 1 capital (to average assets)               
Company   20.41%   N/A                 N/A 
Bank   18.15%   4.0%   5.0%
                
Tier 1 common (to risk-weighted assets)               
The Company   38.57%                N/A                 N/A 
The Bank   34.36%   4.5%   6.5%
                
Tier 1 capital (to risk-weighted assets)               
Company   38.57%   N/A                 N/A 
Bank   34.36%   4.0%   6.0%
                
Total capital (to risk-weighted assets)               
Company   39.70%   N/A                 N/A 
Bank   35.49%   8.0%   10.0%

 

(a)Includes intial phase-in of capital conservation buffer.

 

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.

 

 59 

 

 

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 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 Chief Operating Officer, Chief Financial Officer, Chief Lending Officer, Chief Credit Officer, Chief Risk Officer 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, as a part of our asset/liability management strategy we primarily have reduced our investment in longer term fixed-rate callable agency bonds, increased our origination of short duration or variable rate construction and development and commercial real estate loans as well as our portfolio of step-up callable agency bonds and agency issued collateralized mortgage-backed securities (“CMOs”) with short effective lives. In addition, we implemented two interest rate swaps to reduce our funding costs for a five-year period. 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 in prior periods 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 the 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 June 30, 2017, which we expect, based upon certain assumptions, to reprice or mature in each of the future time periods shown (the “GAP Table”). Except as stated below, the amounts of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities at June 30, 2017, on the basis of contractual maturities, anticipated prepayments, and scheduled rate adjustments within a three-month period and subsequent selected time intervals. The loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and anticipated prepayments of adjustable-rate loans and fixed-rate loans, and as a result of contractual rate adjustments on adjustable-rate loans. Annual prepayment rates for variable-rate and fixed-rate single-family and multi-family residential and commercial mortgage loans are assumed to range from 5.8% to 31.6%. The annual prepayment rate for mortgage-backed securities is assumed to range from 0.5% to 17.9%. For savings accounts, checking accounts and money markets, the decay rates vary on an annual basis over a ten year period.

 

 60 

 

  

       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)  $9,712   $14,869   $39,038   $33,834   $150,640   $248,093 
Loans receivable(3)   70,442    68,607    145,745    97,366    162,262    544,422 
Other interest-earning assets(4)   29,237    -    -    1,355    -    30,592 
Total interest-earning assets  $109,391   $83,476   $184,783   $132,555   $312,902   $823,107 
                               
Interest-bearing liabilities:                              
Savings accounts  $2,919   $9,106   $14,961   $14,429   $63,031   $104,446 
Money market deposit and NOW accounts   4,815    13,600    22,950    21,189    82,801    145,355 
Certificates of deposit   58,162    147,356    117,675    41,853    -    365,046 
Advances from FHLB   935    30,365    37,533    39,245    -    108,078 
Advances from borrowers for taxes and insurance   3,982    -    -    -    -    3,982 
Total interest-bearing liabilities  $70,813   $200,427   $193,119   $116,716   $145,832   $726,907 
                               
Interest-earning assets less interest-bearing liabilities  $38,578   ($116,951)  ($8,336)  $15,839   $167,070   $96,200 
                               
Cumulative interest-rate sensitivity gap (5)  $38,578   ($78,373)  ($86,709)  ($70,870)  $96,200      
                               
Cumulative interest-rate gap as a percentage of total assets at June 30, 2017   4.43%   -9.00%   -9.96%   -8.14%   11.05%     
                              
Cumulative interest-earning assets as a percentage of cumulative interest- bearing liabilities at June 30, 2017   154.48%   71.11%   81.33%   87.80%   113.23%     

 

 

(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 reflected 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.

 

 61 

 

  

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 June 30, 2017 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  $112,487   $(54,348)   (32.58)%   14.61%   (4.53)%
200   129,495    (37,340)   (22.38)%   16.15%   (2.99)%
100   148,402    (18,433)   (11.05)%   17.74%   (1.40)%
Static   166,835    -    -    19.14%   - 
(100)   172,954    6,119    3.67%   19.31%   0.17%
(200)   169,927    3,092    1.85%   18.69%   (0.45)%
(300)   174,683    7,848    4.70%   18.91%   (0.23)%

 

At September 30, 2016, the Company’s NPV was $129.7 million or 23.2% of the market value of assets. Following a 200 basis point increase in interest rates, the Company’s “post shock” NPV would be $102.1 million or 20.0% of the market value of assets.

 

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.

 

 62 

 

  

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

At June 30, 2017, there had not been any material change to the market risk disclosure contained in the Company’s Annual Report on Form 10-K for the year ended September 30, 2016, set forth in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation –Exposure to Changes in Interest Rates.”

 

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.

 

 63 

 

 

PART II

 

Item 1. Legal Proceedings

 

As previously disclosed in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, on March 31, 2016, Island View Properties, Inc., trading as Island View Crossing II, LP, and Renato J. Gualtieri (collectively, the “Gualtieri Parties”) filed suit (the “Philadelphia Litigation”) in the Court of Common Pleas, Philadelphia, Pennsylvania (the “Court”), against the Bank seeking damages in an amount in excess of $27.0 million. The lawsuit asserts allegations related to a loan granted by the Bank to the Gualtieri Parties to develop a 169-unit townhouse and condominium project located in Bristol Borough in Bucks County, Pennsylvania (the “Project”).

 

In May 2016, the Bank filed a motion with the court seeking to dismiss the majority of claims asserted in the Philadelphia Litigation.  In August 2016, the Court dismissed a majority of the Gualtieri Parties’ claims. The Bank has also counterclaimed against the Gualtieri Parties for failure to satisfy the nine loans extended thereto and for failure to complete the Project. In February 2017, the Court stayed the Philadelphia Litigation pending possible resolution of the Litigation. No resolution was obtained and the stay has expired.

 

Since commencement of the Philadelphia Litigation, the Bank has filed Complaints for Confession against the Gualtieri Parties and certain other entities affiliated with Renato J. Gualtieri (“Gualtieri Parties and Affiliated Entities”) based on the claimed defaults under the nine loans issued by the Bank. These actions have been stayed pending the resolution of the Philadelphia Litigation. The Bank has also filed foreclosure actions with regard to the commercial properties collateralizing the loans issued to the Gualtieri Parties and Affiliated Entities.

 

Shortly after the Court lifted the stay in the Philadelphia Litigation, the Gualtieri Parties and Affiliated Entities filed for bankruptcy under Chapter 11. The Bank has removed the underlying Philadelphia Litigation from state court to the federal bankruptcy court.

 

As the Philadelphia Litigation is in its early stages, no prediction can be made as to the outcome thereof. However, the Bank believes that it has meritorious defenses to the remaining claims under the Philadelphia Litigation and it intends to vigorously defend the case.

 

In addition, as the Chapter 11 bankruptcy is in its early stages, no prediction can be made as to the outcome thereof. However, the Bank believes that it has meritorious challenges to the Chapter 11 bankruptcy filed by the Gualtieri Parties and Affiliated Entities.

 

The Bank recently filed a motion in the Federal Bankruptcy Court seeking to convert the bankruptcy to a Chapter 7 or in the alternative to appoint a Chapter 11 trustee to preserve the assets securing the Bank’s loans with the Gualtieri Parties and Affiliated Entities.

 

As previously disclosed, the Bank had reached a preliminary settlement in two putative shareholder derivative and class action lawsuits related to the Bank’s merger with Polonia Bancorp, consolidated as Parshall v. Eugene Andruczyk et al., which were filed in the Circuit Court for Montgomery County, Maryland (“Maryland Court”) on July 21, 2016 (both lawsuits are collectively referred to as the “Lawsuit”).

 

The merger with Polonia Bancorp was completed effective as of January 1, 2017.

 

On May 26, 2017, the Maryland Court entered an Order providing final approval of the settlement. 

 

In addition to the lawsuits noted above, the Company is involved in various other legal actions arising in the ordinary course of its business. All such actions in the aggregate involve amounts that are believed by management to be immaterial to the financial condition and results of operations of the Company.

 

Item 1A. Risk Factors

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended September 30, 2016, as such factors could materially affect the Company’s business, financial condition, or future results of operations. As of June 30, 2017, no material changes have occurred to the risk factors of the Company as reported in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2016. The risks described in the 2016 Annual Report on Form 10-K for the year ended September 30, 2016 are not the only risks that the Company faces. Additional risks and uncertainties not currently known to the Company, or that the Company currently deems to be immaterial, also may have a material adverse impact on the Company’s business, financial conditions, or results of operations.

 

 64 

 

  

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

 

(a) and (b) Not applicable

 

(c) The Company currently has a board approved stock repurchase plan in operation but did not repurchases any equity shares of common stock during for the quarter ended June 30, 2017 pursuant to the plan, due to the current market conditions.

 

Period  Total Number
of Shares
Purchased
   Average
Price Paid
Per Share
   Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs (1)
   Maximum Number of
Shares that May Yet
Purchased Under
Plans or Programs (1)
 
April 1 - 30, 2017   -        $-    -    188,159 
May 1 - 31, 2017   -         -    -    188,159 
June 1 - 30, 2017   254    (2)   18.16    -    188,159 
    254        $18.16           

 

(1) On July 15, 2015, the Company announced that the Board of Directors had approved a second stock repurchase program authorizing the Company to repurchase up 850,000 shares of common stock, approximately 10% of the Company's then outstanding shares.

 

(2) Shares repurchased in connection with withholding shares to meet income tax withholding obligations upon the vesting of restricted stock awards.

 

Item 3. Defaults Upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

 65 

 

  

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
     
101.INS   XBRL Instance Document.
101.SCH   XBRL Taxonomy Extension Schema Document.
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB   XBRL Taxonomy Extension Label Linkbase Document.
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF   XBRL Taxonomy Extension Definitions Linkbase Document.

 

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.

 

Date: August 9, 2017 By: /s/ Dennis Pollack
      Dennis Pollack
      President and Chief Executive Officer
       
Date: August 9, 2017 By:

/s/ Jack E. Rothkopf 

     

Jack E. Rothkopf

Senior Vice President, Chief Financial Officer and Treasurer

 

 66