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 DECEMBER 31, 2006
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: 000-51214
PRUDENTIAL BANCORP, INC. OF PENNSYLVANIA
(Exact Name of Registrant as Specified in Its Charter)
PENNSYLVANIA 68-0593604
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1834 OREGON AVENUE
PHILADELPHIA, PENNSYLVANIA 19145
Address of Principal Executive Offices) (Zip Code)
(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 is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practical date: as of February 9, 2007, 12,017,750
shares were issued and outstanding
PRUDENTIAL BANCORP, INC. OF PENNSYLVANIA
TABLE OF CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION:
Item 1. Condensed Financial Statements
Unaudited Consolidated Statements of Financial Condition
December 31, 2006 and September 30, 2006 2
Unaudited Consolidated Statements of Income for the Three Months
Ended December 31, 2006 and 2005 3
Unaudited Consolidated Statement of Changes in Stockholders' Equity and
Comprehensive Income for the Three Months Ended December 31, 2006 and
2005 4
Unaudited Consolidated Statements of Cash Flows for the Three
Months Ended December 31, 2006 and 2005 5
Notes to Consolidated Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 28
PART II OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 1A. Risk Factors 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits 30
SIGNATURES 31
1
PRUDENTIAL BANCORP, INC. OF PENNSYLVANIA AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
--------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30,
2006 2006
------------- -------------
ASSETS
Cash and amounts due from depository institutions $ 5,005,702 $ 5,742,356
Interest-bearing deposits 8,406,511 7,685,180
------------- -------------
Total cash and cash equivalents 13,412,213 13,427,536
Investment securities held to maturity (estimated fair value--December 31, 2006,
$126,154,442; September 30, 2006, $129,593,126) 128,930,631 132,083,883
Investment securities available for sale (amortized cost--December 31, 2006,
$38,007,273;September 30, 2006, $38,007,246) 38,711,543 38,747,089
Mortgage-backed securities held to maturity (estimated fair value--
December 31, 2006, $47,654,088; September 30, 2006, $49,526,374) 48,689,701 50,359,734
Mortgage-backed securities available for sale (amortized cost--
December 31, 2006, $4,372,274; September 30, 2006, $4,534,743) 4,456,636 4,615,307
Loans receivable--net of allowance for loan losses (December 31, 2006, $677,956;
September 30, 2006, $617,956) 218,771,501 219,417,531
Accrued interest receivable:
Loans receivable 1,296,013 1,251,172
Mortgage-backed securities 227,129 236,404
Investment securities 1,950,697 1,707,547
Federal Home Loan Bank stock--at cost 2,148,400 2,217,100
Office properties and equipment--net 1,674,341 1,721,138
Prepaid expenses and other assets 6,685,773 6,596,897
------------- -------------
TOTAL ASSETS $ 466,954,578 $ 472,381,338
============= =============
LIABILITIES AND RETAINED EARNINGS
LIABILITIES:
Deposits:
Noninterest-bearing $ 4,583,929 $ 6,035,712
Interest-bearing 346,017,198 341,256,779
------------- -------------
Total deposits 350,601,127 347,292,491
Advances from Federal Home Loan Bank 24,773,685 31,783,751
Accrued interest payable 639,322 2,892,319
Advances from borrowers for taxes and insurance 1,751,773 1,230,216
Accounts payable and accrued expenses 942,067 1,117,053
Accrued dividend payable 462,618 464,481
Deferred income taxes, net 301,676 153,387
------------- -------------
Total liabilities 379,472,268 384,933,698
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued - -
Common stock, $.01 par value, 40,000,000 shares authorized, issued 12,563,750;
outstanding - 12,017,750 at December 31, 2006; 12,064,320 at September 30, 2006 125,638 125,638
Additional paid-in capital 54,818,874 54,798,121
Unearned ESOP shares (4,070,724) (4,126,501)
Treasury stock, at cost: 546,000 shares at December 31, 2006;
499,430 shares at September 30, 2006 (7,048,844) (6,422,478)
Retained earnings 43,143,911 42,538,790
Accumulated other comprehensive income 513,455 534,070
------------- -------------
Total stockholders' equity 87,482,310 87,447,640
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 466,954,578 $ 472,381,338
============= =============
See notes to unaudited consolidated financial statements.
2
PRUDENTIAL BANCORP, INC. OF PENNSYLVANIA AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------
THREE MONTHS ENDED
DECEMBER 31,
-------------------------
2006 2005
----------- -----------
INTEREST INCOME:
Interest on loans $ 3,824,889 $ 2,880,667
Interest on mortgage-backed securities 710,852 845,318
Interest and dividends on investments 2,147,405 2,060,257
----------- -----------
Total interest income 6,683,146 5,786,242
----------- -----------
INTEREST EXPENSE:
Interest on deposits 3,203,519 2,425,343
Interest on borrowings 390,368 195,090
----------- -----------
Total interest expense 3,593,887 2,620,433
----------- -----------
NET INTEREST INCOME 3,089,259 3,165,809
PROVISION FOR LOAN LOSSES 60,000 -
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,029,259 3,165,809
----------- -----------
NON-INTEREST INCOME:
Fees and other service charges 145,285 145,245
Other 164,846 25,496
----------- -----------
Total non-interest income 310,131 170,741
----------- -----------
NON-INTEREST EXPENSE:
Salaries and employee benefits 1,115,310 1,091,934
Data processing 119,427 126,794
Professional services 227,835 76,132
Office occupancy 88,135 70,467
Depreciation 62,150 61,677
Payroll taxes 66,565 62,734
Director compensation 71,087 69,150
Other 271,349 269,038
----------- -----------
Total non-interest expense 2,021,858 1,827,926
----------- -----------
INCOME BEFORE INCOME TAXES 1,317,532 1,508,624
----------- -----------
INCOME TAXES:
Current 301,962 515,258
Deferred (benefit) expense 119,809 (93,075)
----------- -----------
Total income tax 421,771 422,183
----------- -----------
NET INCOME $ 895,761 $ 1,086,441
=========== ===========
BASIC EARNINGS PER SHARE $ 0.08 $ 0.09
DILUTED EARNINGS PER SHARE $ 0.08 $ 0.09
--------------------------------------------------------------------------------
See notes to unaudited consolidated financial statements.
3
PRUDENTIAL BANCORP, INC. OF PENNSYLVANIA AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
--------------------------------------------------------------------------------
ACCUMULATED
ADDITIONAL UNEARNED OTHER
COMMON PAID-IN ESOP TREASURY RETAINED COMPREHENSIVE
STOCK CAPITAL SHARES STOCK EARNINGS INCOME
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, OCTOBER 1, 2006 $ 125,638 $ 54,798,121 $ (4,126,501) $ (6,422,478) $ 42,538,790 $ 534,070
Comprehensive income:
Net income 895,761
Net unrealized holding loss on
available for sale securities
arising during the period, net
of income tax benefit of $11,159 (20,615)
Comprehensive income
Treasury stock purchased (626,366)
Cash dividend declared
($.04 per share) (462,618)
Cumulative adjustment related to
the adoption of SAB 108 171,978
ESOP shares committed to
be released - 20,753 55,777 - - -
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 2006 $ 125,638 $ 54,818,874 $ (4,070,724) $ (7,048,844) $43,143,911 $ 513,455
============ ============ ============ ============ ============ ============
TOTAL
STOCKHOLDERS' COMPREHENSIVE
EQUITY INCOME
------------ -----------
BALANCE, OCTOBER 1, 2006 $ 87,447,640
Comprehensive income:
Net income 895,761 895,761
Net unrealized holding loss on
available for sale securities
arising during the period, net
of income tax benefit of $11,159 (20,615) (20,615)
-----------
Comprehensive income $ 875,146
===========
Treasury stock purchased (626,366)
Cash dividend declared
($.04 per share) (462,618)
Cumulative adjustment related to
the adoption of SAB 108 171,978
ESOP shares committed to
be released 76,530
------------
BALANCE, December 31, 2006 $ 87,482,310
============
ACCUMULATED
ADDITIONAL UNEARNED OTHER
COMMON PAID-IN ESOP TREASURY RETAINED COMPREHENSIVE
STOCK CAPITAL SHARES STOCK EARNINGS INCOME
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, OCTOBER 1, 2005 $ 125,638 $ 54,733,760 $ (4,349,611) $ (654,415) $ 40,594,661 $ 375,265
Comprehensive income:
Net income 1,086,441
Net unrealized holding gain on
available for sale securities
arising during the period, net
of income tax expense of $46,446 86,257
Comprehensive income
Cash dividend declared
($.04 per share) (481,806)
ESOP shares committed to
be released - 10,499 55,778 - - -
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 2005 $ 125,638 $ 54,744,259 $ (4,293,833) $ (654,415) $ 41,199,296 $ 461,522
============ ============ ============ ============ ============ ============
TOTAL
STOCKHOLDERS' COMPREHENSIVE
EQUITY INCOME
------------ -----------
BALANCE, OCTOBER 1, 2005 $ 90,825,298
Comprehensive income:
Net income 1,086,441 1,086,441
Net unrealized holding gain on
available for sale securities
arising during the period, net
of income tax expense of $46,446 86,257 86,257
-----------
Comprehensive income $ 1,172,698
===========
Cash dividend declared
($.04 per share) (481,806)
ESOP shares committed to
be released 66,277
------------
BALANCE, December 31, 2005 $ 91,582,467
============
See notes to audited financial statements.
4
PRUDENTIAL BANCORP, INC. OF PENNSYLVANIA AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
THREE MONTHS
ENDED DECEMBER 31,
----------------------------
2006 2005
------------ ------------
OPERATING ACTIVITIES:
Net income $ 895,761 $ 1,086,441
Adjustments to reconcile net income to net cash used in
operating activities:
Provision for loan losses 60,000 -
Depreciation 62,150 61,677
Net accretion of premiums/discounts (24,662) (10,970)
Net accretion of deferred loan fees and costs (97,033) (85,624)
Amortization of ESOP 76,530 66,277
Income from bank owned life insurance (55,814) -
Deferred income tax expense (benefit) 119,810 (93,075)
Changes in assets and liabilities which used cash:
Accounts payable and accrued expenses (284,001) (763,774)
Accrued interest payable (2,252,997) (1,746,842)
Prepaid expenses and other assets (33,062) (4,020,123)
Accrued interest receivable (278,716) (264,391)
------------ ------------
Net cash used in operating activities (1,812,034) (5,770,404)
------------ ------------
INVESTING ACTIVITIES:
Purchase of investment securities held to maturity (6,997,500) (3,000,000)
Loans originated or acquired (12,995,556) (20,020,467)
Principal collected on loans 13,678,619 8,954,326
Principal payments received on mortgage-backed securities:
held-to-maturity 2,007,567 3,682,909
available-for-sale 165,398 -
Proceeds from calls and maturities of investment securities held to maturity 10,155,556 -
Purchase of Federal Home Loan Bank stock (92,800) -
Proceeds from redemption of Federal Home Loan Bank stock 161,500 126,000
Purchases of equipment (15,353) (1,558)
------------ ------------
Net cash provided by (used in) investing activities 6,067,431 (10,258,790)
------------ ------------
FINANCING ACTIVITIES:
Net decrease in demand deposits, NOW accounts,
and savings accounts (2,815,055) (1,534,991)
Net increase in certificates of deposit 6,123,691 3,376,626
Repayment of advances from Federal Home Loan Bank (7,010,066) (9,825)
Increase in advances from borrowers for taxes and insurance 521,557 612,494
Cash dividend paid (464,481) (481,806)
Purchase of treasury stock (626,366) -
------------ ------------
Net cash (used in) provided by financing activities (4,270,720) 1,962,498
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (15,323) (14,066,696)
CASH AND CASH EQUIVALENTS--Beginning of period 13,427,536 26,815,017
------------ ------------
CASH AND CASH EQUIVALENTS--End of period $ 13,412,213 $ 12,748,321
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid on deposits and advances from Federal
Home Loan Bank $ 5,846,765 $ 4,367,274
============ ============
Income taxes paid $ 503,000 $ 15,000
============ ============
See notes to consolidated unaudited financial statements.
5
PRUDENTIAL BANCORP, INC. OF PENNSYLVANIA AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Prudential Bancorp, Inc. of Pennsylvania (the "Company") is a
Pennsylvania corporation, which was organized to be the mid-tier holding
company for Prudential Savings Bank (the "Bank"), which is a
Pennsylvania-chartered, FDIC-insured savings bank with six full service
branches in the Philadelphia area. The Company was organized in
conjunction with the Bank's reorganization from a mutual savings bank to
the mutual holding company structure in March 2005. The Bank is
principally in the business of attracting deposits from its community
through its branch offices and investing those deposits, together with
funds from borrowings and operations, primarily in single-family
residential loans and construction loans.
Prudential Mutual Holding Company, a Pennsylvania corporation, is the
mutual holding company parent of the Company. Prudential Mutual Holding
Company owns 57.5% (6,910,062 shares) of the Company's outstanding
common stock as of December 31, 2006 and must always own at least a
majority of the voting stock of the Company. In addition to the shares
of the Company, Prudential Mutual Holding Company was capitalized with
$100,000 in cash from the Bank in connection with the completion of the
reorganization. The consolidated financial statements of the Company
include the accounts of the Company and the Bank. In addition,
Prudential Mutual Holding Company receives dividends on the common stock
of the Company that it holds. All significant intercompany balances and
transactions have been eliminated.
Prior to the reorganization described above, the Board of Directors
approved a plan of charter conversion in May 2004 pursuant to which the
Bank would convert its charter from a Pennsylvania-chartered mutual
savings and loan association to a Pennsylvania-chartered mutual savings
bank. The conversion to a Pennsylvania-chartered mutual savings bank was
completed on August 20, 2004. As a result of the charter conversion, the
Bank's primary federal banking regulator changed from the Office of
Thrift Supervision to the Federal Deposit Insurance Corporation. The
Pennsylvania Department of Banking remains as the Bank's state banking
regulator.
In November 2005, the Bank formed PSB Delaware, Inc., a Delaware
Corporation, as a subsidiary of the Bank. In March 2006, all
mortgage-backed securities owned by the Company were transferred to PSB
Delaware, Inc. The activity of PSB Delaware, Inc. is included as part of
the consolidated financial statements.
The accompanying unaudited consolidated financial statements were
prepared in accordance with the instructions to Form 10-Q, and therefore
do not include all the information or footnotes necessary for complete
financial statements in conformity with accounting principles generally
accepted in the United States of America. 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 months ended December 31, 2006 are not necessarily
indicative of the results that may be expected for the fiscal year
ending September 30, 2007, 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
for the year ended September 30, 2006 included in the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 2006.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS--The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 and
deferred income taxes. Actual results could differ from those estimates.
6
DIVIDEND PAYABLE - On December 20, 2006, the Company's Board of
Directors declared a quarterly cash dividend of $.04 on the common stock
of the Company payable on January 31, 2007 to the shareholders of record
at the close of business on January 12, 2007 which resulted in a payable
of $462,618 at December 31, 2006. A portion of the cash dividend was
payable to Prudential Mutual Holding Company on its shares of the
Company's common stock and totaled $276,402.
EMPLOYEE STOCK OWNERSHIP PLAN - In fiscal 2005, the Company established
an employee stock ownership plan ("ESOP") for substantially all of its
full-time employees. The ESOP purchased 452,295 shares of the Company's
common stock for an aggregate cost of approximately $4.5 million. Shares
of the Company's common stock purchased by the ESOP are held in a
suspense account until released for allocation to participants. Shares
are allocated to each eligible participant based on the ratio of each
such participant's compensation, as defined in the ESOP, to the total
compensation of all eligible plan participants. As the unearned shares
are released from the suspense account, the Company recognizes
compensation expense equal to the fair value of the ESOP shares during
the periods in which they become committed to be released. To the extent
that the fair value of the ESOP shares released differs from the cost of
such shares, the difference is charged or credited to equity as
additional paid-in capital. As of December 31, 2006, the Company had
allocated a total of 39,585 shares from the suspense account to
participants. For the quarter ended December 31, 2006 recognized $76,530
in compensation expense.
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.
COMPREHENSIVE INCOME--The Company presents in the unaudited consolidated
statement of changes in stockholders' equity and comprehensive income
those amounts from transactions and other events which currently are
excluded from the statement of income and are recorded directly to
stockholders' equity. For the quarters ended December 31, 2006 and 2005
the only components of comprehensive income were net income and
unrealized holding gains and losses, net of income tax expense and
benefit, on available for sale securities. Comprehensive income totaled
$875,146 and $1,172,698 for the three months ended December 31, 2006 and
2005, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS - In March 2006, the FASB issued SFAS
No. 156, ACCOUNTING FOR SERVICING OF FINANCIAL ASSETS- AN AMENDMENT OF
FASB STATEMENT NO. 140 ("SFAS No. 140" and "SFAS No. 156"). SFAS No. 140
establishes, among other things, the accounting for all separately
recognized servicing assets and servicing liabilities. SFAS No. 156
amends SFAS No. 140 to require that all separately recognized servicing
assets and servicing liabilities be initially measured at fair value, if
practicable. SFAS No. 156 permits, but does not require, the subsequent
measurement of separately recognized servicing assets and servicing
liabilities at fair value. Under SFAS No. 156, an entity can elect
subsequent fair value measurement to account for its separately
recognized servicing assets and servicing liabilities. Adoption of SFAS
No. 156 is required as of the beginning of the first fiscal year that
begins after September 15, 2006. The Company has adopted SFAS No. 156
for the fiscal year beginning October 1, 2006 and there was not a
material impact to its financial condition or results of operations as a
result of the adoption of SFAS No. 156.
On July 13, 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48"), which is effective for fiscal
years beginning after December 15, 2006. FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in the financial statements
in accordance with FASB Statement No. 109, "Accounting for Income
Taxes." This Interpretation prescribes a comprehensive model for how a
company should recognize, measure, present and disclose in its financial
statements uncertain tax positions that the company has taken or expects
to take on a tax return. The Company is currently assessing the impact
of FIN 48 on its financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurement." SFAS No. 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. This Statement
does not require any new fair value
7
measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. The
Company is currently assessing the impact of SFAS No. 157 on its
financial statements.
In September 2006, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 158, "Employer's Accounting for Defined Benefit Pension
and Other Postretirement Plans--an amendment of FASB Statements No. 87,
88, 106, and 132(R)." SFAS No. 158 requires an employer to recognize in
its statement of financial position an asset for a plan's overfunded
status or a liability for a plan's underfunded status, measure a plan's
assets and its obligations that determine its funded status as of the
end of the employer's fiscal year, and recognize changes in the funded
status of a defined benefit postretirement plan in the year in which the
changes occur. Those changes will be reported in comprehensive income
and as a separate component of stockholders' equity. SFAS No. 158 is
effective for publicly held companies for fiscal years ending after
December 15, 2006. The Bank participates in a mutiple-employer defined
benefit plan. We do not anticipate that the implementation of SFAS No.
158 will have any impact on our financial position, results of
operations and cash flows because it is not applicable to muti-employer
defined benefit plans.
In September 2006, the Securities and Exchange Commission ("SEC") issued
SAB No. 108 expressing the SEC staff's views regarding the process of
quantifying financial statement misstatements and the build up of
improper amounts on the balance sheet. SAB No. 108 requires that
registrants quantify errors using both a balance sheet and income
statement approach and evaluate whether either approach results in a
misstated amount that, when all relevant quantitative and qualitative
factors are considered, is material. The built up misstatements, while
not considered material in the individual years in which the
misstatements were built up, may be considered material in a subsequent
year if a company were to correct those misstatements through current
period earnings. Initial application of SAB No. 108 allows registrants
to elect not to restate prior periods but to reflect the initial
application in their annual financial statements covering the first
fiscal year ending after November 15, 2006. The cumulative effect of the
initial application should be reported in the carrying amounts of assets
and liabilities as of the beginning of that fiscal year and the
offsetting adjustment, net of tax, should be made to the opening balance
of retained earnings for that year.
The Company implemented SAB No. 108 on October 1, 2006 which resulted in
an increase in mortgage-backed securities held to maturity of
approximately $321,000, an increase in income tax liabilities of
approximately $149,000 and a cumulative adjustment to increase retained
earnings as of that date by approximately $172,000. The adjustment
relates to two separate accounting entries. The first entry pertains to
the method of accounting that was utilized in past years for the
recognition of investment income on mortgage-backed securities. Prior to
fiscal 2006, the Company used the straight line method over the
contractual life of the securities rather than using the effective yield
method prescribed by SFAS No. 91, "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases". The impact of this entry was the correction of an
understatement of mortgage-backed securities by approximately $321,000
and a corresponding understatement of income tax payable of $109,000.
The second entry relates to a write off of a deferred tax asset of
approximately $40,000 that was incorrectly accounted for in prior
periods.
In prior periods, management performed a quantitative and qualitative
analysis of the differences between these two methods of accounting and
concluded that there was not a material impact on any past individual
quarter or annual reporting periods.
8
2. EARNINGS PER SHARE
Basic earnings per common share is computed based on the weighted
average number of shares outstanding. Diluted earnings per share is
computed based on the weighted average number of shares outstanding and
common share equivalents ("CSEs") that would arise from the exercise of
dilutive securities. As of December 31, 2006 the Company did not issue
and does not have outstanding any CSEs.
The calculated basic and diluted earnings per share are as follows:
FOR THE QUARTER ENDED FOR THE QUARTER ENDED
DECEMBER 31, 2006 DECEMBER 31, 2005
---------------------------- ----------------------------
BASIC DILUTED BASIC DILUTED
----------- ----------- ----------- -----------
Net income $ 895,761 $ 895,761 $ 1,086,441 $ 1,086,441
Weighted average shares outstanding used in
basic earnings per share computation 11,627,147 11,627,147 12,058,411 12,058,411
Effect of CSEs - - - -
----------- ----------- ----------- -----------
Adjusted weighted average shares used in
diluted earnings per share computation 11,627,147 11,627,147 12,058,411 12,058,411
----------- ----------- ----------- -----------
Earnings per share - basic and diluted $ 0.08 $ 0.08 $ 0.09 $ 0.09
=========== =========== =========== ===========
3. INVESTMENT SECURITIES
The amortized cost and fair value of securities, with gross unrealized
gains and losses, are as follows:
DECEMBER 31, 2006
-------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
Securities held to maturity:
Debt securities - U.S. Treasury securities
and securities of U.S. Government agencies $126,046,111 $ 10,975 $ (2,746,378) $123,310,708
Debt securities - Municipal bonds 2,884,520 3,542 (44,328) 2,843,734
------------ ------------ ------------ ------------
Total securities held to maturity $128,930,631 $ 14,517 $ (2,790,706) $126,154,442
============ ============ ============ ============
Securities available for sale:
Debt securities - U.S. Treasury securities
and securities of U.S. Government agencies $ 2,998,827 $ - $ (71,639) $ 2,927,188
FNMA stock 84 7,043 - 7,127
Mutual fund 34,982,453 - (1,000,365) 33,982,088
FHLMC preferred stock 25,909 1,769,231 - 1,795,140
------------ ------------ ------------ ------------
Total securities available for sale $ 38,007,273 $ 1,776,274 $ (1,072,004) $ 38,711,543
============ ============ ============ ============
9
SEPTEMBER 30, 2006
-------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
Securities held to maturity:
Debt securities - U.S. Treasury securities
and securities of U.S. Government agencies $129,199,382 $ - $ (2,458,930) $126,740,452
Debt securities - Municipal bonds 2,884,501 6,574 (38,401) 2,852,674
------------ ------------ ------------ ------------
Total securities held to maturity $132,083,883 $ 6,574 $ (2,497,331) $129,593,126
============ ============ ============ ============
Securities available for sale:
Debt securities - U.S. Treasury securities
and securities of U.S. Government agencies $ 2,998,800 $ - $ (64,425) $ 2,934,375
FNMA stock 84 6,625 - 6,709
Mutual fund 34,982,453 - (930,081) 34,052,372
FHLMC preferred stock 25,909 1,727,724 - 1,753,633
------------ ------------ ------------ ------------
Total securities available for sale $ 38,007,246 $ 1,734,349 $ (994,506) $ 38,747,089
============ ============ ============ ============
The following table shows the gross unrealized losses and related
estimated fair values of the Company's investment and mortgage-backed
securities, aggregated by investment category and length of time that
individual securities have been in a continuous loss position at
December 31, 2006:
LESS THAN 12 MONTHS MORE THAN 12 MONTHS
------------------------------ ------------------------------
GROSS ESTIMATED GROSS ESTIMATED
UNREALIZED FAIR UNREALIZED FAIR
LOSSES VALUE LOSSES VALUE
------------ ------------ ------------ ------------
Securities held to maturity:
U.S. Treasury and Government agencies $ 115,605 $ 8,725,410 $ 2,630,773 $112,342,330
Municipal bonds - - 44,328 1,595,192
------------ ------------ ------------ ------------
Total securities held to maturity 115,605 8,725,410 2,675,101 113,937,522
------------ ------------ ------------ ------------
Securities available for sale:
U.S. Treasury and Government agencies - - 71,639 2,927,188
Mutual fund - - 1,000,365 33,982,088
------------ ------------ ------------ ------------
Total securities available for sale - - 1,072,004 36,909,276
------------ ------------ ------------ ------------
Total $ 115,605 $ 8,725,410 $ 3,747,105 $150,846,798
============ ============ ============ ============
10
The following table shows the gross unrealized losses and related
estimated fair values of the Company's investment and mortgage-backed
securities, aggregated by investment category and length of time that
individual securities have been in a continuous loss position at
September 30, 2006:
LESS THAN 12 MONTHS MORE THAN 12 MONTHS
------------------------------ ------------------------------
GROSS ESTIMATED GROSS ESTIMATED
UNREALIZED FAIR UNREALIZED FAIR
LOSSES VALUE LOSSES VALUE
------------ ------------ ------------ ------------
Securities held to maturity:
U.S. Treasury and Government agencies 76,277 8,919,209 2,382,653 114,821,242
Municipal bonds - - 38,401 1,601,100
------------ ------------ ------------ ------------
Total securities held to maturity 76,277 8,919,209 2,421,054 116,422,342
------------ ------------ ------------ ------------
Securities available for sale:
U.S. Treasury and Government agencies - - 64,425 2,934,375
Mutual fund - - 930,081 34,052,372
------------ ------------ ------------ ------------
Total securities available for sale - - 994,506 36,986,747
------------ ------------ ------------ ------------
Total $ 76,277 $ 8,919,209 $ 3,415,560 $153,409,089
============ ============ ============ ============
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. For all securities that are in an
unrealized loss position for an extended period of time and for all
securities whose fair value is significantly below amortized cost, the
Company performs an evaluation of the specific events attributable to
the market decline of the security. The Company considers the length of
time and extent to which the security's market value has been below cost
as well as the general market conditions, industry characteristics, and
the fundamental operating results of the issuer to determine if the
decline is other-than-temporary. The Company also considers as part of
the evaluation its intent and ability to hold the security until its
market value has recovered to a level at least equal to the amortized
cost. When the Company determines that a security's unrealized loss is
other-than-temporary, a realized loss is recognized in the period in
which the decline in value is determined to be other-than-temporary. The
write-downs are measured based on public market prices of the security
at the time the Company determines the decline in value was other-than
temporary.
At December 31, 2006, securities in a gross unrealized loss position for
twelve months or longer consist of 121 securities having an aggregate
depreciation of 2.4% from the Company's amortized cost basis. Securities
in a gross unrealized loss position for less than twelve months consist
of 10 securities having an aggregate depreciation of 1.3% from the
Company's amortized cost basis. The unrealized losses disclosed above
are primarily related to movement in market interest rates. Although the
fair value will fluctuate as the market interest rates move, the
majority of the Company's investment portfolio consists of low risk
securities from U.S. government agencies or government sponsored
enterprises. If held to maturity, the contractual principal and interest
payments of such securities are expected to be received in full. As
such, no loss in value is expected over the lives of the securities.
Although not all of the securities are classified as held to maturity,
the Company has the ability to hold these securities until they mature
and does not intend to sell the securities at a loss. The Company also
has a significant investment in a mutual fund that invests in
adjustable-rate mortgage-backed securities. Management believes that the
estimated fair value of the mutual fund is also primarily dependent upon
the movement in market interest rates. Although the investment in the
mutual fund is classified as available for sale, the Company has the
intent and ability to hold the mutual fund until the fair value
increases and does not intend to sell it at a loss. Based on the above,
management believes that the unrealized losses are temporary.
11
The amortized cost and estimated 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.
DECEMBER 31, 2006
------------------------------------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
------------------------------ ------------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------ ------------ ------------ ------------
Due within one year $ 7,084,776 $ 7,063,923 $ - $ -
Due after one through five years 32,086,823 31,654,197 - -
Due after five through ten years 38,432,259 37,748,930 1,000,000 987,188
Due after ten years 51,326,773 49,687,392 1,998,827 1,940,000
------------ ------------ ------------ ------------
Total $128,930,631 $126,154,442 $ 2,998,827 $ 2,927,188
============ ============ ============ ============
SEPTEMBER 30, 2006
------------------------------------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
------------------------------ ------------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------ ------------ ------------ ------------
Due within one year $ 13,084,653 $ 13,033,970 $ - $ -
Due after one through five years 33,084,146 32,601,588 - -
Due after five through ten years 39,986,258 39,355,977 1,000,000 984,375
Due after ten years 45,928,826 44,601,591 1,998,800 1,950,000
------------ ------------ ------------ ------------
Total $132,083,883 $129,593,126 $ 2,998,800 $ 2,934,375
============ ============ ============ ============
12
4. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are summarized as follows:
DECEMBER 31, 2006
---------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ----------- ----------- -----------
Securities held to maturity
GNMA pass-through certificates $45,408,527 $ 53,981 $(1,012,909) $44,449,599
FNMA pass-through certificates 1,439,962 - (45,838) 1,394,124
FHLMC pass-through certificates 1,841,212 16 (30,863) 1,810,365
----------- ----------- ----------- -----------
Total securities held to maturity $48,689,701 $ 53,997 $(1,089,610) $47,654,088
=========== =========== =========== ===========
Securities available for sale
FNMA pass-through certificates $ 4,372,274 $ 84,362 $ - $ 4,456,636
----------- ----------- ----------- -----------
Total securities available for sale $ 4,372,274 $ 84,362 $ - $ 4,456,636
=========== =========== =========== ===========
SEPTEMBER 30, 2006
---------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ----------- ----------- -----------
Securities held to maturity
GNMA pass-through certificates $46,991,401 $ 157,936 $ (896,360) $46,252,977
FNMA pass-through certificates 1,448,326 - (52,683) 1,395,643
FHLMC pass-through certificates 1,920,007 22 (42,275) 1,877,754
----------- ----------- ----------- -----------
Total securities held to maturity $50,359,734 $ 157,958 $ (991,318) $49,526,374
=========== =========== =========== ===========
Securities available for sale
FNMA pass-through certificates $ 4,534,743 $ 80,564 $ - $ 4,615,307
----------- ----------- ----------- -----------
Total securities available for sale $ 4,534,743 $ 80,564 $ - $ 4,615,307
=========== =========== =========== ===========
13
The following table shows the gross unrealized losses and related
estimated fair values of the Company's mortgage-backed securities and
length of time that individual securities have been in a continuous loss
position at December 31, 2006:
LESS THAN 12 MONTHS MORE THAN 12 MONTHS
---------------------------- ----------------------------
GROSS ESTIMATED GROSS ESTIMATED
UNREALIZED FAIR UNREALIZED FAIR
LOSSES VALUE LOSSES VALUE
----------- ----------- ----------- -----------
Securities held to maturity:
GNMA pass-through certificates $ 562,093 $25,141,790 $ 450,816 $14,455,095
FNMA pass-through certificates - - 45,838 1,393,820
FHLMC pass-through certificates 30,863 1,809,497 - -
----------- ----------- ----------- -----------
Total $ 592,956 $26,951,287 $ 496,654 $15,848,915
=========== =========== =========== ===========
At December 31, 2006, all mortgage-backed-securities available-for-sale
were in an unrealized gain position.
The following table shows the gross unrealized losses and related
estimated fair values of the Company's mortgage-backed securities, and
length of time that individual securities have been in a continuous loss
position at September 30, 2006:
LESS THAN 12 MONTHS MORE THAN 12 MONTHS
---------------------------- ----------------------------
GROSS ESTIMATED GROSS ESTIMATED
UNREALIZED FAIR UNREALIZED FAIR
LOSSES VALUE LOSSES VALUE
----------- ----------- ----------- -----------
Securities held to maturity:
GNMA pass-through certificates $ 526,169 $25,601,666 $ 370,191 $11,199,818
FNMA pass-through certificates 52,209 1,395,273 474 369
FHLMC pass-through certificates 42,275 1,876,570 - -
----------- ----------- ----------- -----------
Total $ 620,653 $28,873,509 $ 370,665 $11,200,187
=========== =========== =========== ===========
At September 30, 2006, all mortgage-backed securities available-for-sale
were in an unrealized gain position
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. For all securities that are in an
unrealized loss position for an extended period of time and for all
securities whose fair value is significantly below amortized cost, the
Company performs an evaluation of the specific events attributable to
the market decline of the security. The Company considers the length of
time and extent to which the security's market value has been below cost
as well as the general market conditions, industry characteristics, and
the fundamental operating results of the issuer to determine if the
decline is other-than-temporary. The Company also considers as part of
the evaluation its intent and ability to hold the security until its
market value has recovered to a level at least equal to the amortized
cost. When the Company determines that a security's unrealized loss is
other-than-temporary, a realized loss is recognized in the period in
which the decline in value is determined to be other-than-temporary. The
write-downs are measured based on public market prices of the security
at the time the Company determines the decline in value was
other-than-temporary.
At December 31, 2006, mortgage-backed securities in a gross unrealized
loss position for twelve months or longer consist of 10 securities
having an aggregate depreciation of 3.0% from the Company's amortized
cost basis. Mortgage-backed securities in a gross unrealized loss
position for less than twelve months consist of 26
14
securities having an aggregate depreciation of 2.2% from the Company's
amortized cost basis. The unrealized losses disclosed above are
primarily related to movement in market interest rates. Although the
fair value will fluctuate as the market interest rates move, all of the
Company's mortgage-backed securities portfolio consists of low-risk
securities issued by U.S. government sponsored enterprises. If held to
maturity, the contractual principal and interest payments of such
securities are expected to be received in full. As such, no loss in
value is expected over the lives of the securities. The Company has the
ability to hold these securities until they mature and does not intend
to sell the securities at a loss. Based on the above, management
believes that the unrealized losses are temporary. The determination of
whether a decline in market value is temporary is necessarily a matter
of subjective judgment. The timing and amount of any realized losses
reported in the Company's financial statements could vary if conclusions
other than those made by management were to determine whether an
other-than-temporary impairment exists.
5. LOANS RECEIVABLE
Loans receivable consist of the following:
DECEMBER 31, SEPTEMBER 30,
2006 2006
------------- -------------
One-to-four family residential $ 155,890,617 $ 155,453,827
Multi-family residential 4,736,365 5,073,903
Commercial real estate 11,938,650 11,338,845
Construction and land development 77,395,043 82,800,690
Commercial business 162,427 233,979
Consumer 1,249,794 1,239,063
------------- -------------
Total loans 251,372,896 256,140,307
Undisbursed portion of loans-in-process (32,182,589) (36,257,661)
Deferred loan fees 259,150 152,841
Allowance for loan losses (677,956) (617,956)
------------- -------------
Net $ 218,771,501 $ 219,417,531
============= =============
The following schedule summarizes the changes in the allowance for loan
losses:
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
2006 2005
----------- -----------
Balance, beginning of period $ 617,956 $ 557,956
Provision for loan losses 60,000 -
Charge-offs - -
Recoveries - -
----------- -----------
Balance, end of period $ 677,956 $ 557,956
=========== ===========
Nonperforming loans (which consist of nonaccrual loans and loans in
excess of 90 days delinquent and still accruing interest) at December
31, 2006 and September 30, 2006 amounted to approximately $378,000 and
$151,000, respectively.
15
6. DEPOSITS
Deposits consist of the following major classifications:
DECEMBER 31, SEPTEMBER 30,
2006 2006
------------------------ ------------------------
AMOUNT PERCENT AMOUNT PERCENT
------------ -------- ------------ --------
Money market deposit accounts $ 64,861,446 18.5% $ 64,498,290 18.6%
NOW accounts 32,221,899 9.2 34,202,808 9.8
Passbook, club and statement savings 75,792,005 21.6 76,989,307 22.2
Certificates maturing in six months or less 89,300,431 25.5 77,904,032 22.4
Certificates maturing in more than six months 88,425,346 25.2 93,698,054 27.0
------------ -------- ------------ --------
Total $350,601,127 100.0% $347,292,491 100.0%
============ ======== ============ ========
At December 31, 2006 and September 30, 2006, the weighted average cost
of funds was 3.6% and 3.5%, respectively.
16
7. INCOME TAXES
Items that gave rise to significant portions of deferred income taxes
are as follows:
DECEMBER 31, SEPTEMBER 30,
2006 2006
--------- ---------
Deferred tax assets:
Deposit premium $ 301,818 $ 314,054
Allowance for loan losses 179,987 246,632
Other - 39,639
--------- ---------
Total 481,805 600,325
--------- ---------
Deferred tax liabilities:
Unrealized gain on available for sale securities 275,178 286,336
Property 411,900 406,834
Mortgage servicing rights 9,381 9,754
Deferred loan fees 87,022 50,788
--------- ---------
Total 783,481 753,712
--------- ---------
Net deferred tax liability $(301,676) $(153,387)
========= =========
8. COMMITMENTS AND CONTINGENT LIABILITIES
At December 31, 2006, the Company had $7,560,500 in outstanding
commitments to originate fixed and variable rate loans with market
interest rates ranging from 6.00% to 9.25%. At September 30, 2006, the
Company had $4,932,800 in outstanding commitments to originate fixed and
variable-rate loans with market interest rates ranging from 6.00% to
9.25%.
The Company also had commitments under unused lines of credit of
$5,695,204 and $6,706,481 at December 31, 2006 and September 30, 2006,
respectively, and letters of credit outstanding of $110,000 at both
December 31, 2006 and September 30, 2006.
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 December 31, 2006, the exposure, which
represents a portion of credit risk associated with the interests sold,
amounted to $64,451. This exposure is for the life of the related loans
and payables, on our proportionate share, as actual losses are incurred.
The Company is involved in various legal proceedings occurring in the
ordinary course of business. Management of the Company, based on
discussions with litigation counsel, believes that such proceedings will
not have a material adverse effect on the financial condition or
operations of the Company. There can be no assurance that any of the
outstanding legal proceedings to which the Company is a party will not
be decided adversely to the Company's interests and have a material
adverse effect on the financial condition and operations of the Company.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW. Prudential Bancorp, Inc. of Pennsylvania (the "Company") was formed by
Prudential Savings Bank (the "Bank") in connection with the Bank's
reorganization into the mutual holding company form. 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 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 and non-interest
expense. Non-interest expense principally consists of salaries and employee
benefits, office occupancy, depreciation, data processing expense, payroll taxes
and other expense. Our results of operations are also significantly affected by
general economic and competitive conditions, particularly changes in interest
rates, government policies and actions of regulatory authorities. Future changes
in applicable laws, regulations or government policies may materially impact our
financial condition and results of operations. The Bank is subject to regulation
by the Federal Deposit Insurance Corporation ("FDIC") and the Pennsylvania
Department of Banking. The Bank's main office is in Philadelphia, Pennsylvania,
with five additional banking offices located in Philadelphia and Delaware
Counties in Pennsylvania. The Bank's primary business consists of attracting
deposits from the general public and using those funds together with borrowings
to originate loans and to invest primarily in U.S. Government and agency
securities and mortgage-backed securities. In November 2005, the Bank formed PSB
Delaware, Inc., a Delaware Corporation, as a subsidiary of the Bank. In March
2006, all mortgage-backed securities owned by the Company were transferred to
PSB Delaware, Inc. The activity of PSB Delaware, Inc. is included as part of the
consolidated financial statements.
CRITICAL ACCOUNTING POLICIES. In reviewing and understanding financial
information for the Company, you are encouraged to read and understand the
significant accounting policies used in preparing our financial statements.
These policies are described in Note 2 of the Notes to Consolidated Financial
Statements included in the Annual Report filed on Form 10-K for the year ended
September 30, 2006. The accounting and financial reporting policies of the
Company conform to accounting principles generally accepted in the United States
of America and to general practices within the banking industry. The preparation
of the Company's consolidated financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses during
the reporting period. Management evaluates these estimates and assumptions on an
ongoing basis. The following accounting policies comprise those that management
believes are the most critical to aid in fully understanding and evaluating our
reported financial results. These policies require numerous estimates or
economic assumptions that may prove inaccurate or may be subject to variations
which may significantly affect our reported results and financial condition for
the period or in future periods.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established through
a provision for loan losses charged to expense. Loans are charged against the
allowance for loan losses when management believes that the collectibility of
the principal is unlikely. Subsequent recoveries are added to the allowance. The
allowance is an amount that management believes will cover known and inherent
losses in the loan portfolio, based on evaluations of the collectibility of
loans. The evaluations take into consideration such factors as changes in the
types and amount of loans in the loan portfolio, historical loss experience,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral, estimated losses relating to specifically
identified loans, and current economic conditions. 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 impacted
loans, value of collateral, estimated losses on our commercial, construction and
residential loan portfolios and general amounts for historical loss experience.
All of these estimates may be susceptible to significant change.
While management uses the best information available to make loan loss allowance
evaluations, adjustments to the allowance may be necessary based on changes in
economic and other conditions or changes in accounting guidance. Historically,
our estimates of the allowance for loan loss have not required significant
adjustments from management's initial estimates. In addition, the Pennsylvania
Department of Banking and the FDIC, as an integral
18
part of their examination processes, periodically review our allowance for loan
losses. The Pennsylvania Department of Banking and the FDIC may require the
recognition of adjustments to the allowance for loan losses based on their
judgment of information available to them at the time of their examinations. To
the extent that actual outcomes differ from management's estimates, additional
provisions to the allowance for loan losses may be required that would adversely
impact earnings in future periods.
INCOME TAXES. We make estimates and judgments to calculate some of our tax
liabilities and determine the recoverability of some of our deferred tax assets,
which arise from temporary differences between the tax and financial statement
recognition of revenues and expenses. We also estimate a reserve for deferred
tax assets if, based on the available evidence, it is more likely than not that
some portion or all of the recorded deferred tax assets will not be realized in
future periods. These estimates and judgments are inherently subjective. In the
past, our estimates and judgments to calculate our deferred tax accounts have
not required significant revision to our initial estimates.
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.
FORWARD-LOOKING STATEMENTS. In addition to historical information, this
Quarterly Report on Form 10-Q includes certain "forward-looking statements"
based on management's current expectations. The Company's actual results could
differ materially, as such term is defined in the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended, from management's
expectations. Such forward-looking statements include statements regarding
management's current intentions, beliefs or expectations as well as the
assumptions on which such statements are based. These forward-looking statements
are subject to significant business, economic and competitive uncertainties and
contingencies, many of which are not subject to the Company's control. You are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those contemplated by such forward-looking statements.
Factors that could cause future results to vary from current management
expectations include, but are not limited to, general economic conditions,
legislative and regulatory changes, monetary and fiscal policies of the federal
government, changes in tax policies, rates and regulations of federal, state and
local tax authorities, changes in interest rates, deposit flows, the cost of
funds, demand for loan products, demand for financial services, competition,
changes in the quality or composition of the Company's loan and investment
portfolios, changes in accounting principles, policies or guidelines and other
economic, competitive, governmental and technological factors affecting the
Company's operations, markets, products, services and fees.
The Company undertakes no obligation to update or revise any forward-looking
statements to reflect changed assumptions, the occurrence of unanticipated
events or changes to future operating results that occur subsequent to the date
such forward-looking statements are made.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2006 AND SEPTEMBER 30, 2006
At December 31, 2006, the Company's total assets were $467.0 million, a decrease
of $5.4 million from $472.4 million at September 30, 2006. The decrease was
primarily attributable to net repayments in the investment and mortgage-backed
security portfolios of $5.0 million. Management chose to use the proceeds from
these repayments to repay higher cost short-term advances from the Federal Home
Loan Bank ("FHLB").
Total liabilities decreased $5.5 million to $379.5 million at December 31, 2006
from $384.9 million at September 30, 2006. The decrease was primarily
attributable to the repayment of FHLB advances which decreased by $7.0 million,
from $31.8 million at September 30, 2006 to $24.8 million at December 31, 2006.
Also contributing to the decrease was a $2.3 million decrease in accrued
interest payable as interest on certificates are generally paid annually at
19
December 31. These decreases were partially offset by a $3.3 million increase in
deposits, primarily in certificates of deposit.
Stockholders' equity increased slightly, by $35,000 to $87.5 million at December
31, 2006 as compared to $87.4 million at September 30, 2006. Effective October
1, 2006, the cumulative adjustment related to the adoption of SAB 108 was
recognized for an increase in retained earnings of $172,000 primarily related to
the amortization of premiums and discounts on our mortgage-backed securities
portfolio. Also contributing to the increase was the recognition of $896,000 in
net income for quarter ended December 31, 2006 offset in part by the cost of
stock repurchased during the quarter of $626,000 and the declaration of cash
dividends of $463,000. Smaller changes were also noted in the amortization of
unearned employee stock ownership shares and other comprehensive income.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2006
AND 2005
NET INCOME. Net income was $896,000 for the quarter ended December 31, 2006 as
compared to $1.1 million for the same period in 2005, a decrease of 17.6%. The
decrease was primarily due to a $194,000 increase in non-interest expense for
the quarter ended December 31, 2006.
NET INTEREST INCOME.
Net interest income decreased $77,000 or 2.4% to $3.1 million for the three
months ended December 31, 2006 as compared to $3.2 million for the same period
in 2005. The decrease was due to a $974,000 or 37.1% increase in interest
expense partially offset by an $897,000 or 15.5% increase in interest income.
The increase in interest expense resulted primarily from an 85 basis point
increase to 3.86% in the weighted average rate paid on interest-bearing
liabilities, reflecting the increase in market rates of interest during the past
year. Also contributing to the increase in interest expense was a $24.7 million
or 7.1% increase in the average balance of interest-bearing liabilities for the
three months ended December 31, 2006, as compared to the same period in 2005.
The increase in interest income resulted primarily from a 56 basis point
increase in the weighted average yield earned on such assets to 5.89% for the
quarter ended December 31, 2006 from the comparable period in 2005 combined with
a $20.1 million or 4.6% increase in the average balance of interest-earning
assets for the three months ended December 31, 2006, as compared to the same
period in 2005.
For the quarter ended December 31, 2006, the net interest margin was 2.72%, as
compared to 2.92% for the comparable period in 2005. The compression in the net
interest margin reflected the more rapid increase in the rate paid on the
interest-bearing liabilities due to their greater interest rate sensitivity,
partially offset by an increase in rates earned on interest-earning assets
combined with an increase in the volume of interest-earning assets.
20
AVERAGE BALANCES, NET INTEREST INCOME, AND YIELDS EARNED AND RATES PAID. The
following table shows for the periods indicated the total dollar amount of
interest from average interest-earning assets and the resulting yields, as well
as the interest expense on average interest-bearing liabilities, expressed both
in dollars and rates, and the net interest margin. Tax-exempt income and yields
have not been adjusted to a tax-equivalent basis. All average balances are based
on monthly balances. Management does not believe that the monthly averages
differ significantly from what the daily averages would be.
Three Months
Ended December 31,
-----------------------------------------------------------------------
2006 2005
-----------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
-----------------------------------------------------------------------
(Dollars in Thousands)
Interest-earning assets:
Investment securities $173,251 $ 2,105 4.86% $171,465 $ 1,896 4.42%
Mortgage-backed securities 54,337 711 5.23 65,444 845 5.16
Loans receivable(1) 221,224 3,825 6.92 179,901 2,881 6.41
Other interest-earning assets 5,192 42 3.24 17,116 164 3.83
-------------------- --------------------
Total interest-earning assets 454,004 6,683 5.89 433,926 5,786 5.33
-------- --------
Cash and non-interest-bearing balances 4,389 4,501
Other non-interest-earning assets 11,437 7,400
-------- --------
Total assets $469,830 $445,827
======== ========
Interest-bearing liabilities:
Savings accounts $ 75,111 587 3.13 $ 84,803 572 2.70
Money market deposit and NOW accounts 94,210 836 3.55 102,696 734 2.86
Certificates of deposit 173,643 1,779 4.10 144,941 1,117 3.08
-------------------- --------------------
Total deposits 342,964 3,202 3.73 332,440 2,423 2.92
Advances from Federal Home Loan Bank 27,973 390 5.58 13,817 195 5.65
Advances from borrowers for taxes and
insurance 1,450 2 0.55 1,397 2 0.57
-------------------- --------------------
Total interest-bearing liabilities 372,387 3,594 3.86 347,654 2,620 3.01
-------- --------
Non-interest-bearing demand accounts 5,552 2,284
Other liabilities 4,093 4,150
-------- --------
Total liabilities 382,032 354,088
Stockholders' equity 87,798 91,739
-------- --------
Total liabilities and Stockholders' equity $469,830 $445,827
======== ========
Net interest-earning assets $ 81,617 $ 86,272
======== ========
Net interest income; interest rate spread $ 3,089 2.03% $ 3,166 2.32%
==================== ======================
Net interest margin(2) 2.72% 2.92%
======= ======
Average interest-earning assets to average
interest-bearing liabilities 121.92% 124.82%
------- -------
-------------------------------------
(1) Includes non-accrual loans. Calculated net of unamortized deferred fees,
undisbursed portion of loans-in-process and allowance for loan losses.
(2) Equals net interest income divided by average interest-earning assets.
21
PROVISIONS FOR LOAN LOSSES. Provisions for loan losses are charged to earnings
to maintain the total allowance for loan losses at a level believed by
management to cover all known and inherent losses in the loan portfolio which
are both probable and reasonably estimable. Management's analysis includes
consideration of the Company's historical experience, the volume and type of
lending conducted by the Company, the amount of the Company's classified assets,
the status of past due principal and interest payments, general economic
conditions, particularly as they relate to the Company's primary market area,
and other factors related to the collectibility of the Company's loan portfolio.
The Company established a provision for loan losses of $60,000 for the quarter
ended December 31, 2006. No provisions were made during the comparable period in
2005. The provision in the 2006 period was established due to the continued
growth in the loan portfolio experienced over the year.
At December 31, 2006, the Company's non-performing assets totaled $378,000 or
0.1% of total assets and consisted of four single-family residential real estate
loans. At such dates, the allowance for loan losses totaled $678,000, or 0.3% of
total loans and 179.2% of non-performing loans.
Management continues to review its loan portfolio to determine the extent, if
any, to which further additional loss provisions may be deemed necessary. There
can be no assurance that the allowance for losses will be adequate to cover
losses which may in fact be realized in the future and that additional
provisions for losses will not be required.
NON-INTEREST INCOME. Non-interest income increased $139,000 for the quarter
ended December 31, 2006, as compared to the same period in 2005. The increase
was primarily due a successful recovery of $88,000, which represented a portion
of our losses and legal fees related to a previously disclosed lawsuit which was
settled in 2004. Also contributing to the increase was an increase in income
from bank owned life insurance ("BOLI") of $47,000 for the quarter ended
December 31, 2006 compared to the comparable period in 2005. Income from BOLI
was minimal during the 2005 period as the BOLI was purchased during December
2005.
NON-INTEREST EXPENSES. Non-interest expense increased $194,000 for the quarter
ended December 31, 2006 compared to the same quarter in 2005. This was primarily
due to an increase in professional fees of $152,000. The preponderance of the
increase in professional fees was related to expenses associated with the
defense of a previously disclosed lawsuit commenced in October 2006 by a
shareholder, Stilwell Value Partners I, L.P., and increased costs incurred in
connection with being a public company.
INCOME TAX EXPENSE. Income tax expense for the quarters ended December 31, 2006
and 2005 was $422,000 in both periods. The effective income tax rate was 32.0%
for the quarter ended December 31, 2006 compared to 28.0% for the quarter ended
December 31, 2005. The lower effective tax rate in the 2005 period was primarily
attributable to certain tax benefits the Company realized as a result of the
adjustment of a valuation allowance during the first quarter of fiscal 2006 that
had previously been established for accrued liabilities related to prior period
tax accruals.
22
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity, represented by cash and cash equivalents, is a product
of its operating, investing and financing activities. Our primary sources of
funds are from deposits, scheduled principal and interest payments on loans,
loan prepayments and the maturity of loans, mortgage-backed securities and other
investments, and other funds provided from operations. While scheduled payments
from the amortization of loans and mortgage-backed securities and maturing
investment securities are relatively predictable sources of funds, deposit flows
and loan and securities prepayments can be greatly influenced by market rates of
interest, economic conditions and competition. We also maintain excess funds in
short-term, interest-bearing assets that provide additional liquidity. At
December 31, 2006, our cash and cash equivalents amounted to $13.4 million. In
addition, our available for sale investment and mortgage-backed securities
amounted to an aggregate of $43.2 million at such date.
We use our liquidity to fund existing and future loan commitments, to fund
maturing certificates of deposit and demand deposit withdrawals, to invest in
other interest-earning assets, and to meet operating expenses. At December 31,
2006, the Company had $7.6 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 $5.7 million and letters of credit
outstanding of $110,000 at December 31, 2006. Certificates of deposit at
December 31, 2006 maturing in one year or less totaled $136.5 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 flow 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, of which we are a member. Under terms of the collateral agreement
with the Federal Home Loan Bank, we pledge residential mortgage loans and
mortgage-backed securities as well as our stock in the Federal Home Loan Bank as
collateral for such advances. However, use of FHLB advances has been relatively
limited and the amount outstanding has remained relatively constant during the
past several years. At December 31, 2006, we had $24.8 million in outstanding
FHLB advances and we had $259.3 million in additional FHLB advances available to
us.
We anticipate that we will continue to have sufficient funds and alternative
funding sources to meet our current commitments.
23
The following table summarizes the Company and Bank's regulatory capital ratios
as of December 31, 2006 and September 30, 2005 and compares them to current
regulatory guidelines.
TO BE
WELL CAPITALIZED
REQUIRED FOR UNDER PROMPT
CAPITAL ADEQUACY CORRECTIVE ACTION
ACTUAL RATIO PURPOSES PROVISIONS
-------------- ---------------- -----------------
December 31, 2006:
Tier 1 capital (to average assets)
The Company 18.51% 4.0% N/A
The Bank 14.93% 4.0% 5.0%
Tier 1 capital (to risk weighted assets)
The Company 39.49% 4.0% N/A
The Bank 31.85% 4.0% 6.0%
Total capital (to risk weighted assets)
The Company 39.95% 8.0% N/A
The Bank 32.32% 8.0% 10.0%
September 30, 2006:
Tier 1 capital (to average assets)
The Company 18.64% 4.0% N/A
The Bank 14.74% 4.0% 5.0%
Tier 1 capital (to risk weighted assets)
The Company 39.23% 4.0% N/A
The Bank 31.12% 4.0% 6.0%
Total capital (to risk weighted assets)
The Company 39.68% 8.0% N/A
The Bank 31.56% 8.0% 10.0%
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements, accompanying notes, and related financial data of the
Company presented herein have been prepared in accordance with generally
accepted accounting principles which requires 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.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
HOW WE MANAGE MARKET RISK. Market risk is the risk of loss from adverse changes
in market prices and rates. Our market risk arises primarily from the interest
rate risk which is inherent in our lending, investment and deposit gathering
activities. To that end, management actively monitors and manages interest rate
risk exposure. In addition to market risk, our primary risk is credit risk on
our loan portfolio. We attempt to manage credit risk through our loan
underwriting and oversight policies.
The principal objective of our interest rate risk management function is to
evaluate the interest rate risk embedded in certain balance sheet accounts,
determine the level of risk appropriate given our business strategy, operating
environment, capital and liquidity requirements and performance objectives, and
manage the risk consistent with approved guidelines. We seek to manage our
exposure to risks from changes in interest rates while at the same time trying
to improve our net interest spread. We monitor interest rate risk as such risk
relates to our operating strategies. We have established an Asset/Liability
Committee which is comprised of our President and Chief Executive Officer, Chief
Financial Officer, Chief Lending Officer, Treasurer and Controller. The
Asset/Liability Committee meets on a regular basis and is responsible for
reviewing our asset/liability policies and interest rate risk position. Both the
extent and direction of shifts in interest rates are uncertainties that could
have a negative impact on future earnings.
In recent years, we primarily have utilized the following strategies in our
efforts to manage interest rate risk:
o we have increased our originations of shorter term loans and/or
loans with adjustable rates of interest, particularly
construction and land development loans;
o we have invested in securities with "step-up" rate features
providing for increased interest rates prior to maturity
according to a pre-determined schedule and formula; and
o we have maintained moderate levels of short-term liquid assets.
However, notwithstanding the foregoing steps, we remain subject to a significant
level of interest rate risk in a rising rate environment due to the high
proportion of our loan portfolio that consists of fixed-rate loans as well as
our decision to invest a significant amount of our assets in long-term,
fixed-rate investment and mortgage-backed securities designated as held to
maturity. In addition, our interest rate spread and margin have been adversely
affected due to the tightening of the yield curve. Likewise, our unwillingness
to originate long-term, fixed-rate residential mortgage loans at low rates has
resulted in borrowers in many cases refinancing loans elsewhere, requiring us to
reinvest the resulting proceeds from the loan payoffs at low current market
rates of interest. Thus, both of these strategies have increased our interest
rate risk.
GAP ANALYSIS. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a Company's interest rate sensitivity "gap." An
asset or liability is said to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
same time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to affect adversely
net interest income while a positive gap would tend to result in an increase in
net interest income. Conversely, during a period of falling interest rates, a
negative gap would tend to result in an increase in net interest income while a
positive gap would tend to affect adversely net interest income.
The following table sets forth the amounts of our interest-earning assets and
interest-bearing liabilities outstanding at December 31, 2006, 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
25
and liabilities at December 31, 2006, on the basis of contractual maturities,
anticipated prepayments, and scheduled rate adjustments within a three-month
period and subsequent selected time intervals. The loan amounts in the table
reflect principal balances expected to be redeployed and/or repriced as a result
of contractual amortization and anticipated prepayments of adjustable-rate loans
and fixed-rate loans, and as a result of contractual rate adjustments on
adjustable-rate loans. Annual prepayment rates for adjustable-rate and
fixed-rate single-family and multi-family residential and commercial mortgage
loans are assumed to range from 8.4% to 25.9%. The annual prepayment rate for
mortgage-backed securities is assumed to range from 7.74% to 22.92%. Money
market deposit accounts, savings accounts and interest-bearing checking accounts
are assumed to have annual rates of withdrawal, or "decay rates," based on
information from the FDIC. For savings accounts and checking accounts, the decay
rates are 60% in one to three years, 20% in three to five years and 20% in five
to 10 years. For money market accounts, the decay rates are 50% in three to 12
months and 50% in 13 to 36 months.
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 securities(2) $16,234 $21,964 $19,382 $18,093 $ 91,265 $166,938
Mortgage-backed securities 1,536 4,598 11,217 9,164 26,547 53,062
Loans receivable(3) 60,529 27,333 44,735 29,534 57,060 219,191
Other interest earning assets 10,555 - - - - 10,555
-------------------------------------------------------------------------
Total interest-earning assets $88,854 $53,895 $75,334 $56,791 $174,872 $449,746
==========================================================================
Interest-bearing liabilities:
Savings accounts $ 169 $ 195 $44,690 $14,897 $ 14,894 $ 74,845
Money market deposit and NOW accounts - 32,431 49,581 5,717 5,717 93,446
Certificates of deposits 52,152 84,331 24,788 16,455 - 177,726
Advances from Federal Home Loan Bank 11,018 54 149 13,156 397 24,774
Advances from borrowers for taxes and insurance - - - - 1,752 1,752
-------------------------------------------------------------------------
Total interest-bearing liabilitie $ 63,339 $117,011 $119,208 $ 50,225 $ 22,760 $372,543
=========================================================================
Interest-earning assets
less interest-bearing liabilities $ 25,515 $(63,116) $(43,874) $ 6,566 $ 152,112 $ 77,203
=========================================================================
Cumulative interest-rate sensitivity gap (4 ) $ 25,515 $(37,601) $(81,475) $(74,909) $ 77,203
=============================================================
Cumulative interest-rate gap as a
percentage of total assets at December 31,2006 5.46% -8.05% -17.45% -16.04% 16.53%
=============================================================
Cumulative interest-earning assets
as a percentage of cumulative interest-
bearing liabilities at December 31, 2006 140.28% 79.15% 72.80% 78.58% 120.72%
-------------------------------------------------------------
(1) Interest-earning assets are included in the period in which the balances
are expected to be redeployed and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments and contractual maturities.
(2) For purposes of the gap analysis, investment securities are stated at
amortized cost.
(3) For purposes of the gap analysis, loans receivable includes
non-performing loans and is gross of the allowance for loan losses, but
net of undisbursed portion of loans-in-process and unamortized deferred
loan fees.
(4) Interest-rate sensitivity gap represents the difference between net
interest-earning assets and interest-bearing liabilities.
26
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate loans, have
features which restrict changes in interest rates both on a short-term basis and
over the life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their adjustable-rate loans may 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 following table sets forth our NPV as of December 31, 2006
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 $ 60,944 $ (33,773) (35.66)% 14.74% (5.79)%
200 71,485 (23,232) (24.53)% 16.68% (3.85)%
100 82,933 (11,784) (12.44)% 18.65% (1.88)%
Static 94,717 - - 20.53% -
(100) 99,894 5,177 5.47% 21.19% 0.66%
(200) 97,181 2,464 2.60% 20.51% (0.02)%
(300) 94,913 196 0.21% 19.91% (0.62)%
As is the case with the GAP Table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling changes
in NPV require the making of certain assumptions which may or may not reflect
the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the models presented assume that the composition
of our interest sensitive assets and liabilities existing at the beginning of a
period remains constant over the period being measured and also assumes that a
particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, although the NPV model provides an indication of
interest rate risk exposure at a particular point in time, such model is not
intended to and does not provide a precise forecast of the effect of changes in
market interest rates on net interest income and will differ from actual
results.
27
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 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(e) 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.
28
PART II
ITEM 1. LEGAL PROCEEDINGS
On October 4, 2006, Stilwell Value Partners I, L.P. ("Stilwell") filed suit in
the United States District Court for the Eastern District of Pennsylvania
against Prudential Mutual Holding Company (the "MHC"), Prudential Bancorp, Inc.
of Pennsylvania (the "Company") and each of the directors of the MHC and the
Company individually seeking equitable relief including (i) enjoining the
Company and the directors from allowing the MHC to participate in any
shareholder vote to consider the adoption of proposed stock option and stock
recognition and retention plans (collectively, the "Stock Plans") and (ii)
enjoining MHC from participating in any shareholder vote to approve the Stock
Plans. In the event that the MHC and the Company are not enjoined, Stilwell is
seeking damages, the amount to be determined at trial.
Stilwell alleges that the Company's prospectus used to solicit offers to
purchase shares of the Company's common stock in connection with the mutual
holding reorganization of Prudential Savings Bank "promised" that the Stock
Plans would be submitted only for consideration by the Company's public
shareholders and not the MHC which controls a majority of the Company's issued
and outstanding shares of common stock and that Stilwell relied on such promise
in determining to invest in the common stock of the Company. Stilwell also
alleges the individual directors have violated their fiduciary duties to
Stilwell by delaying the consideration of the Stock Plans until such time that
MHC can vote its shares on the Stock Plans assuring their approval by
shareholders. The Company believes Stilwell's allegations are without merit and
intends to vigorously defend the case. On November 20, 2006, the Company, the
MHC and the director defendants filed a motion to dismiss the complaint,
asserting, among other things, that the prospectus contained no "promise,"
implied or otherwise, that the MHC would never vote on the adoption of the Stock
Plans and that the breach of fiduciary duty claim, with respect to the timing of
any such vote, is legally insufficient. Stilwell filed an opposition brief to
the Company's motion on December 20, 2006 and the Company filed its reply brief
on January 8, 2007.
Since the case is in its early stages, no prediction can be made as to the
outcome thereof.
Other than the above referenced litigation, 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
or operations of the Company. There can be no assurance that any of the
outstanding legal proceedings to which the Company is a party will not be
decided adversely to the Company's interests and have a material adverse effect
on the financial condition and operations of the Company.
ITEM 1A. RISK FACTORS
There were no material changes from the risk factors described in the Company's
annual report on Form 10-K for the year ended September 30, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Not applicable
(b) Not applicable
(c) Purchases of Equity Securities
The Company's repurchases of its common stock made during the
quarter are set forth in the following table:
29
TOTAL NUMBER
OF SHARES
PURCHASED AS
PART OF MAXIMUM NUMBER OF
PUBLICLY SHARES THAT MAY YET
TOTAL NUMBER ANNOUNCED BE PURCHASED UNDER
OF SHARES AVERAGE PRICE PLANS OR THE PLAN OR
PERIOD PURCHASED PAID PER SHARE PROGRAMS PROGRAMS(1)(2)
------------------------------- ---------------- -------------- ---------------- ------------------
October 1 - October 31, 2006 - $ - - 46,570
November 1 - November 30, 2006 46,570 13.40 46,570 -
December 1 - December 31, 2006 - - - -
---------------- ----------------
Total 46,570 $ 13.40 46,570 -
================ ============== ================ ==============
----------------------
Notes to the table
(1) On April 6, 2006, the Company announced its second stock repurchase
program to repurchase 269,000 shares or approximately 5% of the
Company's outstanding common stock held by shareholders other than
Prudential Mutual Holding Company, such program to commence upon
completion of the first program (which was completed in May 2006). The
second repurchase program was completed in November 2006.
(2) On January 17, 2007, the Company announced its third stock repurchase
program to repurchase up to 255,384 shares or approximately 5% of the
Company's outstanding common stock held by shareholders other than
Prudential Mutual Holding Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS
Exhibit No. Description
----------- -----------
10.1 Directors' Compensation - fiscal 2007
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
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRUDENTIAL BANCORP, INC. OF PENNSYLVANIA
DATE: February 14, 2007 BY: /s/ Thomas A. Vento
----------------------------------
THOMAS A. VENTO
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DATE: February 14, 2007 BY: /s/ Joseph R. Corrato
---------------------------------
JOSEPH R. CORRATO
EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
31