UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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 August 7, 2006: 12,129,320
PRUDENTIAL BANCORP, INC. OF PENNSYLVANIA AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION:
Item 1. Condensed Financial Statements
Unaudited Consolidated Statements of Financial Condition
as of June 30, 2006 and September 30, 2005 2
Unaudited Consolidated Statements of Income for the Three
and Nine Months Ended June 30, 2006 and 2005 3
Unaudited Consolidated Statement of Changes in Stockholders'
Equity and Comprehensive Income for the Nine Months Ended
June 30, 2006 and 2005 4
Unaudited Consolidated Statements of Cash Flows for the Nine
Months Ended June 30, 2006 and 2005 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
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 29
Item 4. Submission of Matters to a Vote of Security Holders 29
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
--------------------------------------------------------------------------------
June 30, September 30,
2006 2005
------------- -------------
ASSETS
Cash and amounts due from depository institutions $ 5,830,762 $ 5,874,475
Interest-bearing deposits 2,387,241 20,940,542
------------- -------------
Total cash and cash equivalents 8,218,003 26,815,017
Investment securities held to maturity (estimated fair value--June 30, 2006, $129,063,336;
September 30, 2005, $128,046,676) 134,079,087 129,839,512
Investment securities available for sale (amortized cost--June 30, 2006, $38,007,220;
September 30, 2005, $38,007,143) 38,293,871 38,584,474
Mortgage-backed securities held to maturity (estimated fair value--
June 30, 2006, $55,300,181; September 30, 2005, $67,123,458) 57,505,584 66,827,615
Loans receivable--net of allowance for loan losses (June 30, 2006, $587,956;
September 30, 2005, $557,956) 214,555,106 175,090,988
Accrued interest receivable:
Loans receivable 1,178,682 925,618
Mortgage-backed securities 249,363 290,650
Investment securities 1,824,432 1,583,442
Real estate owned - 360,284
Federal Home Loan Bank stock--at cost 2,487,000 1,811,500
Office properties and equipment--net 1,744,671 1,746,599
Prepaid expenses and other assets 6,589,716 2,658,636
Deferred income taxes, net 31,563 57,628
------------- -------------
TOTAL ASSETS $ 466,757,078 $ 446,591,963
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing $ 4,335,147 $ 3,440,681
Interest-bearing 339,568,933 333,027,159
------------- -------------
Total deposits 343,904,080 336,467,840
Advances from Federal Home Loan Bank 28,793,756 13,823,411
Accrued interest payable 2,099,764 1,924,883
Advances from borrowers for taxes and insurance 1,891,759 1,113,835
Accounts payable and accrued expenses 728,337 1,954,890
Accrued dividend payable 471,334 481,806
------------- -------------
Total liabilities 377,889,030 355,766,665
------------- -------------
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 - 12,236,150 at June 30, 2006 and 12,497,450 at September 30, 2005 125,638 125,638
Additional paid-in capital 54,778,607 54,733,760
Unearned ESOP shares (4,182,278) (4,349,611)
Treasury stock, at cost: 327,600 shares at June 30, 2006
and 66,300 shares at September 30, 2005 (4,130,163) (654,415)
Retained earnings 42,089,922 40,594,661
Accumulated other comprehensive income 186,322 375,265
------------- -------------
Total stockholders' equity 88,868,048 90,825,298
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 466,757,078 $ 446,591,963
============= =============
See notes to unaudited consolidated financial statements.
2
PRUDENTIAL BANCORP, INC. OF PENNSYLVANIA AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
INTEREST INCOME:
Interest and fees on loans $ 3,379,335 $ 2,570,161 $ 9,335,027 $ 7,211,401
Interest on mortgage-backed securities 769,429 910,868 2,421,208 2,915,620
Interest and dividends on investments 2,086,458 1,932,482 6,186,554 5,403,831
------------ ------------ ------------ ------------
Total interest income 6,235,222 5,413,511 17,942,789 15,530,852
------------ ------------ ------------ ------------
INTEREST EXPENSE:
Interest on deposits 2,815,659 2,091,932 7,803,961 6,231,128
Interest on borrowings 294,107 193,118 680,046 579,528
------------ ------------ ------------ ------------
Total interest expense 3,109,766 2,285,050 8,484,007 6,810,656
------------ ------------ ------------ ------------
NET INTEREST INCOME 3,125,456 3,128,461 9,458,782 8,720,196
PROVISION FOR LOAN LOSSES 30,000 - 30,000 -
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,095,456 3,128,461 9,428,782 8,720,196
------------ ------------ ------------ ------------
NON-INTEREST INCOME:
Fees and other service charges 137,077 104,511 414,991 353,461
Gain on real estate owned - - 99,553 -
Other 71,793 22,656 164,360 75,224
------------ ------------ ------------ ------------
Total non-interest income 208,870 127,167 678,904 428,685
------------ ------------ ------------ ------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 1,110,830 971,568 3,328,293 2,956,180
Data processing 113,043 116,937 354,271 365,084
Office occupancy 86,290 76,152 235,660 222,637
Depreciation 59,510 64,994 180,546 197,816
Payroll taxes 59,376 54,830 202,567 183,083
Director compensation 66,650 55,812 205,825 162,061
Professional services 174,201 76,730 401,021 161,728
Litigation expense - - - 120,000
Other 338,231 264,734 933,030 777,541
------------ ------------ ------------ ------------
Total non-interest expense 2,008,131 1,681,757 5,841,213 5,146,130
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 1,296,195 1,573,871 4,266,473 4,002,751
------------ ------------ ------------ ------------
INCOME TAXES:
Current 260,263 543,248 1,215,114 1,261,727
Deferred 153,601 23,327 127,803 142,395
------------ ------------ ------------ ------------
Total 413,864 566,575 1,342,917 1,404,122
------------ ------------ ------------ ------------
NET INCOME $ 882,331 $ 1,007,296 $ 2,923,556 $ 2,598,629
============ ============ ============ ============
BASIC EARNINGS PER SHARE (1) $ 0.07 $ 0.08 0.24 N/A
DILUTED EARNINGS PER SHARE (1) $ 0.07 $ 0.08 0.24 N/A
(1) Due to timing of the Bank's reorganization into the mutual holding company
form and the completion of the Company's initial public offering on March 29,
2005, earnings per share information for the nine month period ended June 30,
2005 is not considered meaningful and is not shown. See Note 2 to the unaudited
consolidated financial statements.
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, 2005 $ 125,638 $ 54,733,760 $ (4,349,611) $ (654,415) $ 40,594,661 $ 375,265
Comprehensive income:
Net income 2,923,556
Net unrealized holding loss on
available for sale securities
arising during the period, net
of income tax benefit of $101,739 (188,943)
Comprehensive income
Cash dividend ($.12 per share) (1,428,295)
Treasury stock purchased (3,475,748)
ESOP shares committed to
be released - 44,847 167,333 - - -
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, June 30, 2006 $ 125,638 $ 54,778,607 $ (4,182,278) $ (4,130,163) $ 42,089,922 $ 186,322
============ ============ ============ ============ ============ ============
Total
Stockholders' Comprehensive
Equity Income
------------ ------------
BALANCE, OCTOBER 1, 2005 $ 90,825,298
Comprehensive income:
Net income 2,923,556 2,923,556
Net unrealized holding loss on
available for sale securities
arising during the period, net
of income tax benefit of $101,739 (188,943) (188,943)
------------
Comprehensive income $ 2,734,613
============
Cash dividend ($.12 per share) (1,428,295)
Treasury stock purchased (3,475,748)
ESOP shares committed to
be released 212,180
------------
BALANCE, June 30, 2006 $ 88,868,048
============
Accumulated
Additional Unearned Other
Common Paid-In ESOP Treasury Retained Comprehensive
Stock Capital Shares Stock Earnings Income
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, OCTOBER 1, 2004 $ - $ - $ - $ - $ 38,266,698 $ 831,839
Comprehensive income:
Net income 2,598,629
Net unrealized holding loss on
available for sale securities
arising during the period, net
of income tax benefit of $103,324 (191,888)
Comprehensive income
Cash dividend ($.04 per share) (499,898)
Capitalization of mutual holding (100,000)
company
Issuance of common stock 125,638 54,724,693
Treasury stock purchased (654,415)
Purchase of ESOP shares (4,461,166)
ESOP shares committed to
be released - (833) 55,777 - - -
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, June 30, 2005 $ 125,638 $ 54,723,860 $ (4,405,389) $ (654,415) $ 40,265,429 $ 639,951
============ ============ ============ ============ ============ ============
Total
Stockholders' Comprehensive
Equity Income
------------ ------------
BALANCE, OCTOBER 1, 2004 $ 39,098,537
Comprehensive income:
Net income 2,598,629 2,598,629
Net unrealized holding loss on
available for sale securities
arising during the period, net
of income tax benefit of $103,324 (191,888) (191,888)
------------
Comprehensive income $ 2,406,741
============
Cash dividend ($.04 per share) (499,898)
Capitalization of mutual holding (100,000)
company
Issuance of common stock 54,850,331
Treasury stock purchased (654,415)
Purchase of ESOP shares (4,461,166)
ESOP shares committed to
be released 54,944
------------
BALANCE, June 30, 2005 $ 90,695,074
============
See notes to unaudited consolidated financial statements.
4
PRUDENTIAL BANCORP, INC. OF PENNSYLVANIA AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
Nine Months Ended
June 30,
----------------------------
2006 2005
------------ ------------
OPERATING ACTIVITIES:
Net income $ 2,923,556 $ 2,598,629
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Provision for loan losses 30,000 -
Depreciation 180,546 197,816
Net accretion of premiums/discounts (35,641) (53,793)
Net accretion of deferred loan fees and costs (242,218) (188,483)
Amortization of ESOP loan 212,180 54,439
Gain on sale of real estate owned (99,553) -
Income from bank owned life insurance (111,406) -
Deferred income tax expense 127,803 142,395
Changes in assets and liabilities which (used) provided cash:
Accounts payable and accrued expenses (1,226,553) (630,255)
Accrued interest payable 174,881 (503,110)
Prepaid expenses and other assets (3,819,674) 292,594
Accrued interest receivable (452,767) (261,123)
------------ ------------
Net cash (used in) provided by operating activities (2,338,846) 1,649,109
------------ ------------
INVESTING ACTIVITIES:
Purchase of investment securities held to maturity (6,226,562) (35,533,500)
Loans originated or acquired (71,583,050) (56,720,324)
Principal collected on loans 32,331,150 37,986,239
Principal payments received on mortgage-backed securities
held-to-maturity 9,344,581 13,777,848
Proceeds from calls/maturities of investment securities held to maturity 2,000,000 26,268,182
Proceeds from calls/sales of investment securities available for sale - 1,000,000
Purchase of Federal Home Loan Bank stock (675,500) (18,300)
Proceeds from redemption of Federal Home Loan Bank stock - 446,300
Proceeds from the sale of real estate owned 459,837 125,000
Purchases of equipment (178,618) (112,052)
------------ ------------
Net cash used in investing activities (34,528,162) (12,780,607)
------------ ------------
FINANCING ACTIVITIES:
Net decrease in demand deposits, NOW accounts,
and savings accounts (12,705,434) (6,861,019)
Net increase (decrease) in certificates of deposit 20,141,674 (9,173,288)
Advances (repayments) from Federal Home Loan Bank 14,970,345 (28,949)
Increase in advances from borrowers for taxes and insurance 777,924 699,381
Proceeds from stock issuance, net of conversion costs - 54,850,331
Capitalization of mutual holding company - (100,000)
Cash dividend paid (1,438,767) -
Purchase of stock for ESOP - (4,461,166)
Purchase of treasury stock (3,475,748) (654,415)
------------ ------------
Net cash provided by financing activities 18,269,994 34,270,875
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (18,597,014) 23,139,377
CASH AND CASH EQUIVALENTS--Beginning of year 26,815,017 10,060,761
------------ ------------
CASH AND CASH EQUIVALENTS--End of year $ 8,218,003 $ 33,200,138
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid on deposits and advances from Federal
Home Loan Bank $ 8,309,126 $ 7,313,766
============ ============
Income taxes paid $ 1,325,000 $ 1,140,711
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH ITEMS:
Commitments to purchase investment securities $ - $ 2,000,000
============ ============
See notes to unaudited consolidated financial statements.
5
PRUDENTIAL BANCORP, INC. OF PENNSYLVANIA AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED 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. Financial statements for the periods prior to the
reorganization are the financial statements of the Bank. The Bank is
principally in the business of attracting deposits from residents of its
community through its branch offices and investing those deposits, together
with funds from borrowings and operations, primarily in single-family
residential loans.
Prudential Mutual Holding Company, a Pennsylvania corporation, is the
mutual holding company parent of the Company. Prudential Mutual Holding
Company owns 56.5% (6,910,062 shares) of the Company's outstanding common
stock as of June 30, 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. All significant intercompany balances and
transactions have been eliminated.
The accompanying unaudited condensed 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
consolidated 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 consolidated financial statements have been
included. The results for the three and nine month periods ended June 30,
2006 are not necessarily indicative of the results that may be expected for
the fiscal year ending September 30, 2006, or any other period. These
consolidated 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, 2005 included
in the Company's Annual Report on Form 10-K for the year ended September
30, 2005.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS--The
preparation of consolidated 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 financial
statements are recorded in the allowance for loan losses and deferred
income taxes. Actual results could differ from those estimates.
DIVIDEND PAYABLE - On June 21, 2006, the Company's Board of Directors
declared a quarterly cash dividend of $.04 on the common stock of the
Company payable on July 31, 2006 to the shareholders of record at the close
of business on July 14, 2006, which resulted in a payable of $471,334 at
June 30, 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 approximately $4.5 million using the proceeds of a loan
from the Company. Shares of the Company's common stock purchased by the
ESOP are held in a suspense account until released for allocation to
participants as the loan is repaid. Shares are allocated to each eligible
participant based on the
6
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 June 30, 2006, the Company had allocated a total of
16,965 shares from the suspense account to participants and committed to
release an additional 11,310 shares. For the nine months ended June 30,
2006, the Company recognized $212,180 in compensation expense related to
the ESOP.
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. In April 2006, the Company announced the
commencement of its second stock repurchase program of up to an additional
269,000 shares or approximately 5% of the Company's outstanding common
stock held by other than Prudential Mutual Holding Company. The Company's
second repurchase program commenced upon completion of its first repurchase
program covering 277,000 shares. The average cost per share of the 327,600
shares which had been repurchased as of June 30, 2006 was $12.61 per share.
COMPREHENSIVE INCOME--The Company presents in the 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 retained earnings. For the
nine months ended June 30, 2006 and 2005 the only components of
comprehensive income were net income and unrealized holding losses, net of
income tax benefit, on available for sale securities. Comprehensive income
totaled $2,734,613 and $2,406,741 for the nine months ended June 30, 2006
and 2005.
RECENT ACCOUNTING PRONOUNCEMENTS - In December 2004, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 123R (revised 2004), SHARE-BASED PAYMENT,
which revises SFAS No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION, and
supersedes APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
This Statement requires an entity to recognize the cost of employee
services received in share-based payment transactions and measure the cost
on a grant-date fair value of the award. That cost will be recognized over
the period during which an employee is required to provide service in
exchange for the award. In March 2005, the Securities and Exchange
Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 107 which
expressed the views of the SEC regarding the interaction between SFAS No.
123R and certain SEC rules and regulations. SAB No. 107 provides guidance
related to the valuation of share-based payment arrangements for public
companies, including assumptions such as expected volatility and expected
term. The Company did not issue and does not have outstanding any
stock-based compensation as of June 30, 2006, other than the ESOP which is
a tax-qualified plan and is not subject to SFAS No. 123R
In May 2005, the FASB issued SFAS No. 154, ACCOUNTING CHANGES AND ERROR
CORRECTIONS- A REPLACEMENT OF APB OPINION NO. 20 AND FASB STATEMENT NO. 3.
SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes, and FASB
Statement No. 3, REPORTING ACCOUNTING CHANGES IN INTERIM FINANCIAL
STATEMENTS, and changes the accounting and reporting requirements for a
change in accounting principle. SFAS No. 154 applies to all voluntary
changes in an accounting principle, as well as to changes required by a new
accounting pronouncement in the unusual instance that the pronouncement
does not include specific transition provisions. SFAS No. 154 is effective
for accounting changes and error corrections made in fiscal years beginning
after December 15, 2005 and requires retrospective application to prior
periods' financial statements for most voluntary changes in an accounting
principle, unless it is impracticable to do so. The Company does not
anticipate any material impact to its financial condition or results of
operations as a result of the adoption of SFAS No. 154.
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
7
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. Upon adoption, the
Company will apply the requirements for recognition and initial measurement
of servicing assets and servicing liabilities prospectively to all
transactions. The Company will adopt SFAS No. 156 for the fiscal year
beginning October 1, 2006 and currently has not determined if it will adopt
SFAS No. 156 using the fair value election. The Company does not anticipate
any 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. We do not anticipate that the implementation of FIN 48 will
have a material impact on our financial position, results of operations and
cash flows.
RECLASSIFICATIONS- Certain reclassifications have been made to the
September 30, 2005 consolidated financial statements to conform to the June
30, 2006 presentation. Such reclassifications had no impact on reported net
income.
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 plus common share
equivalents ("CSEs") that would arise from the exercise or issuance of
dilutive securities. As of June 30, 2006, the Company did not issue and
does not have outstanding any CSEs. Due to the timing of the Bank's
reorganization into the mutual holding company form and the completion of
the Company's subscription offering on March 29, 2005, earnings per share
data for the nine months ended June 30, 2005 is not considered meaningful
and is not shown.
The calculated basic and diluted earnings per share are as follows:
For the Three Months Ended For the Three Months Ended
June 30, 2006 June 30, 2005
--------------------------- ---------------------------
Basic Diluted Basic Diluted
------------ ------------ ------------ ------------
Net income $ 882,331 $ 882,331 $ 1,007,296 $ 1,007,296
Weighted average shares outstanding used in
basic earnings per share computation 11,866,046 11,866,046 12,094,410 12,094,410
Effect of CSEs - - - -
------------ ------------ ------------ ------------
Adjusted weighted average shares used in
diluted earnings per share computation 11,866,046 11,866,046 12,094,410 12,094,410
------------ ------------ ------------ ------------
Earnings per share - basic and diluted $ 0.07 $ 0.07 $ 0.08 $ 0.08
============ ============ ============ ============
For the Nine Months Ended
June 30, 2006
---------------------------
Basic Diluted
------------ ------------
Net income $ 2,923,556 $ 2,923,556
Weighted average shares outstanding used in
basic earnings per share computation 11,984,754 11,984,754
Effect of CSEs - -
------------ ------------
Adjusted weighted average shares used in
diluted earnings per share computation 11,984,754 11,984,754
------------ ------------
Earnings per share - basic and diluted $ 0.24 $ 0.24
============ ============
9
3. INVESTMENT SECURITIES
The amortized cost and fair value of securities, with gross unrealized
gains and losses, are as follows:
June 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 $131,194,605 $ - $ (4,926,634) $126,267,971
Debt securities - Municipal bonds 2,884,482 367 (89,484) 2,795,365
------------ ------------ ------------ ------------
Total securities held to maturity $134,079,087 $ 367 $ (5,016,118) $129,063,336
============ ============ ============ ============
Securities Available for Sale:
Debt securities - U.S. Treasury securities
and securities of U.S. Government agencies $ 2,998,774 $ - $ (129,711) $ 2,869,063
FNMA stock 84 5,688 - 5,772
Mutual fund 34,982,453 (1,070,647) 33,911,806
FHLMC preferred stock 25,909 1,481,321 - 1,507,230
------------ ------------ ------------ ------------
Total securities available for sale $ 38,007,220 $ 1,487,009 $ (1,200,358) $ 38,293,871
============ ============ ============ ============
September 30, 2005
-----------------------------------------------------------
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 $126,955,087 $ 8,640 $ (1,764,472) $125,199,255
Debt securities - Municipal bonds 2,884,425 6,889 (43,893) 2,847,421
------------ ------------ ------------ ------------
Total securities held to maturity $129,839,512 $ 15,529 $ (1,808,365) $128,046,676
============ ============ ============ ============
Securities Available for Sale:
Debt securities - U.S. Treasury securities
and securities of U.S. Government agencies $ 2,998,697 $ - $ (34,946) $ 2,963,751
FNMA stock 84 5,294 - 5,378
Mutual fund 34,982,453 - (859,797) 34,122,656
FHLMC preferred stock 25,909 1,466,780 - 1,492,689
------------ ------------ ------------ ------------
Total securities available for sale $ 38,007,143 $ 1,472,074 $ (894,743) $ 38,584,474
============ ============ ============ ============
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 June 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:
Mortgage-backed securities $ 1,863,514 $ 44,184,648 $ 583,462 $ 6,258,246
U.S. Treasury and U.S. Government agencies 1,916,320 61,267,297 3,010,314 65,000,674
Municipal bonds 17,594 457,406 71,890 1,797,592
------------ ------------ ------------ ------------
Total securities held to maturity 3,797,428 105,909,351 3,665,666 73,056,512
------------ ------------ ------------ ------------
Securities available for sale:
U.S. Treasury and U.S. Government agencies 106,273 1,892,500 23,438 976,563
Mutual fund - - 1,070,647 33,911,806
------------ ------------ ------------ ------------
Total securities available for sale 106,273 1,892,500 1,094,085 34,888,369
------------ ------------ ------------ ------------
Total $ 3,903,701 $107,801,851 $ 4,759,751 $107,944,881
============ ============ ============ ============
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, 2005:
Less than 12 months More than 12 months
--------------------------- ---------------------------
Gross Estimated Gross Estimated
Unrealized Fair Unrealized Fair
Losses Value Losses Value
------------ ------------ ------------ ------------
Securities held to maturity:
Mortgage-backed securities $ 197,807 $ 21,001,912 $ 298,165 $ 7,012,162
U.S. Treasury and U.S. Government agencies 584,260 78,824,578 1,180,212 42,368,882
Municipal bonds 4,750 470,250 39,143 1,125,283
------------ ------------ ------------ ------------
Total securities held to maturity 786,817 100,296,740 1,517,520 50,506,327
------------ ------------ ------------ ------------
Securities available for sale:
U.S. Treasury and U.S. Government agencies 34,946 2,963,750 - -
Mutual fund - - 859,797 34,122,656
------------ ------------ ------------ ------------
Total securities available for sale 34,946 2,963,750 859,797 34,122,656
------------ ------------ ------------ ------------
Total $ 821,763 $103,260,490 $ 2,377,317 $ 84,628,983
============ ============ ============ ============
11
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 June 30, 2006, securities in a gross unrealized loss position for twelve
months or longer consist of 79 securities having an aggregate depreciation
of 4.2% from the Company's amortized cost basis. Securities in a gross
unrealized loss position for less than twelve months consist of 111
securities having an aggregate depreciation of 3.5% 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. 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 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. 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 consolidated
financial statements could vary if conclusions other than those made by
management were to determine whether an other-than-temporary impairment
exists.
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.
June 30, 2006
---------------------------------------------------------
Held to Maturity Available for Sale
--------------------------- ---------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ------------ ------------ ------------
Due within one year $ 14,084,530 $ 13,992,555 $ - $ -
Due after one through five years 34,081,468 33,192,903 - -
Due after five through ten years 39,984,702 38,609,092 1,000,000 976,563
Due after ten years 45,928,387 43,268,786 1,998,774 1,892,500
------------ ------------ ------------ ------------
Total $134,079,087 $129,063,336 $ 2,998,774 $ 2,869,063
============ ============ ============ ============
12
September 30, 2005
---------------------------------------------------------
Held to Maturity Available for Sale
--------------------------- ---------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ------------ ------------ ------------
Due within one year $ 4,000,000 $ 3,976,875 $ - $ -
Due after one through five years 40,568,573 40,172,591 - -
Due after five through ten years 41,342,845 40,907,632 1,000,000 988,125
Due after ten years 43,928,094 42,989,578 1,998,697 1,975,626
------------ ------------ ------------ ------------
Total $129,839,512 $128,046,676 $ 2,998,697 $ 2,963,751
============ ============ ============ ============
4. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities held to maturity are summarized as follows:
June 30, 2006
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
GNMA pass-through certificates $ 53,387,196 $ 236,567 $ (2,260,200) $ 51,363,563
FNMA pass-through certificates 1,730,811 910 (100,942) 1,630,779
FHLMC pass-through certificates 2,387,577 4,096 (85,834) 2,305,839
------------ ------------ ------------ ------------
Total $ 57,505,584 $ 241,573 $ (2,446,976) $ 55,300,181
============ ============ ============ ============
September 30, 2005
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
GNMA pass-through certificates $ 62,448,606 $ 775,039 $ (445,674) $ 62,777,971
FNMA pass-through certificates 1,837,531 4,618 (32,129) 1,810,020
FHLMC pass-through certificates 2,541,478 12,158 (18,169) 2,535,467
------------ ------------ ------------ ------------
Total $ 66,827,615 $ 791,815 $ (495,972) $ 67,123,458
============ ============ ============ ============
See Note 3 for information regarding the Company's mortgage-backed
securities' gross unrealized losses and related estimated fair values
aggregated by the length of time that individual securities have been in a
continuous loss position at June 30, 2006.
13
5. LOANS RECEIVABLE
Loans receivable consist of the following:
June 30, September 30,
2006 2005
------------- -------------
One-to-four family residential $ 155,690,063 $ 135,393,637
Multi-family residential 3,371,055 2,541,328
Commercial real estate 11,142,544 9,874,562
Construction and land development 76,832,916 52,093,242
Commercial business 213,241 188,429
Consumer 1,209,420 1,346,470
------------- -------------
Total loans 248,459,239 201,437,668
Undisbursed portion of loans-in-process (33,465,899) (25,823,681)
Deferred loan fees 149,722 34,957
Allowance for loan losses (587,956) (557,956)
------------- -------------
Net $ 214,555,106 $ 175,090,988
============= =============
The following schedule summarizes the changes in the allowance for loan
losses:
Nine Months Ended June 30,
--------------------------
2006 2005
---------- ----------
Balance, beginning of period $ 557,956 $ 557,956
Provision for loan losses 30,000 -
Charge-offs - -
Recoveries - -
---------- ----------
Balance, end of period $ 587,956 $ 557,956
========== ==========
Nonperforming loans (which consist of nonaccrual loans and loans in excess
of 90 days delinquent and still accruing interest) at June 30, 2006 and
September 30, 2005 amounted to approximately $103,000 and $239,000,
respectively.
14
6. DEPOSITS
Deposits consist of the following major classifications:
June 30, September 30,
2006 2005
----------------------- -----------------------
Amount Percent Amount Percent
------------ -------- ------------ --------
Money market deposit accounts $ 63,086,958 18.3% $ 59,906,583 17.8%
NOW accounts 34,472,858 10.0 44,535,148 13.2
Passbook, club and statement savings 81,885,591 23.8 87,709,111 26.1
Certificates maturing in six months or less 57,733,596 16.8 44,709,277 13.3
Certificates maturing in more than six months 106,725,077 31.1 99,607,721 29.6
------------ -------- ------------ --------
Total $343,904,080 100.0% $336,467,840 100.0%
============ ======== ============ ========
At June 30, 2006 and September 30, 2005, the weighted average cost of funds
was 3.3% and 2.7%, respectively.
15
7. INCOME TAXES
Items that gave rise to significant portions of deferred income taxes are
as follows:
June 30, September 30,
2006 2005
------------ ------------
Deferred tax assets:
Deposit premium $ 326,290 $ 362,998
Allowance for loan losses 236,976 255,030
Other 39,639 41,092
------------ ------------
Total 602,905 659,120
------------ ------------
Deferred tax liabilities:
Unrealized gain on available for sale securities 100,327 202,066
Property 410,995 363,009
Mortgage servicing rights 10,374 11,978
Deferred loan fees 49,646 10,466
Employee stock ownership plan - 13,973
------------ ------------
Total 571,342 601,492
------------ ------------
Net deferred tax asset $ 31,563 $ 57,628
============ ============
8. COMMITMENTS AND CONTINGENT LIABILITIES
At June 30, 2006, the Company had $16,456,420 in outstanding commitments to
originate fixed and variable rate loans with market interest rates ranging
from 5.875% to 9.25%. At September 30, 2005, the Company had $21,371,785 in
outstanding commitments to originate fixed and variable rate loans with
market interest rates ranging from 5.50% to 7.75%.
The Company also had commitments under unused lines of credit of $5,587,049
and $5,966,399 at June 30, 2006 and September 30, 2005, respectively, and
letters of credit outstanding of $110,000 at both June 30, 2006 and
September 30, 2005.
In fiscal 2003, a trial court issued a decision against the Bank (which was
a co-defendant with two former employees) holding the defendants liable for
amounts to be paid to the plaintiff. The Bank filed an appeal to the
Pennsylvania Superior Court. On April 7, 2004, the Superior Court upheld
the trial court's judgment order to pay the plaintiff. During fiscal 2004,
an amount from escrow of $194,322 was released and paid to the plaintiff.
Pursuant to the judgment, the Bank sustained a loss in fiscal 2005 in the
amount of $404,013, of which $150,000 was reimbursed by the Bank's fidelity
bond insurance carrier. The Bank has authorized the Bank's insurance
carrier to take steps to recover these amounts from the two other
defendants in the case. No amounts had been recovered as of June 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 both June 30, 2006 and September 30, 2005,
the exposure, which represents a portion of credit risk associated with the
sold interests, 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.
16
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 ("Department"). 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.
PSB Delaware, Inc.'s principal business is to hold certain investments of the
Bank. Beginning 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 consolidated 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, 2005. 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 consolidated 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 Department and
the FDIC, as an integral part of their examination
17
processes, periodically review our allowance for loan losses. The Department and
the FDIC may require the recognition of adjustments to the allowance for loan
losses based on their judgment of information available to them at the time of
their examinations. To the extent that actual outcomes differ from management's
estimates, additional provisions to the allowance for loan losses may be
required that could 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,
recent cumulative losses 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
securities portfolios, changes in accounting principles, policies or guidelines
and other economic, competitive, governmental and technological factors
affecting the Company's operations, markets, products, services and fees.
The Company undertakes no obligation to update or revise any forward-looking
statements to reflect changed assumptions, the occurrence of unanticipated
events or changes to future operating results that occur subsequent to the date
such forward-looking statements are made.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2006 AND SEPTEMBER 30, 2005
The Company's total assets increased by $20.2 million or 4.5% to $466.8 million
at June 30, 2006 from September 30, 2005. The increase was primarily due to
growth of the loan portfolio, partially offset by decreases in cash and cash
equivalents. The Company's net loan portfolio experienced a $39.5 million or
22.5% increase to $214.6 million as management continued its emphasis on growing
the Company's loan portfolio. The majority of the growth in the loan portfolio
was concentrated in single-family construction and residential mortgage loans.
The decrease in cash and cash equivalents of $18.6 million, or 69.4% to $8.2
million at June 30, 2006 reflected the systematic investment of funds received
in the Company's subscription offering conducted in connection with the Bank's
mutual holding company reorganization in loans and other higher yielding
investments. The Company also experienced a modest decline in the investment and
mortgage-backed securities portfolios as the Company determined to re-invest
funds from maturing investment and mortgage-backed securities into loans.
18
Total liabilities increased $22.1 million or 6.2% to $377.9 million at June 30,
2006 from $355.8 million at September 30, 2005. The primary reason for the
increase was a $15.0 million increase in FHLB advances to $28.8 million at June
30, 2006 from $13.8 million at September 30, 2005. The advances were used to
augment our deposits in order to fund the growth of our loan portfolio. Also
contributing to the increase in liabilities was an increase in deposits. At June
30, 2006, total deposits increased $7.4 million or 2.2% to $343.9 million from
$336.5 million as of September 30, 2005. The majority of the increase was due to
a $20.1 million increase in certificates of deposit, partially offset by a $10.1
million decrease in checking accounts. This increase in certificates resulted
primarily from implementation of a more aggressive deposit pricing strategy
combined with increased customer demand for attractive short-term investments in
the rising interest rate market experienced in 2006.
Stockholders' equity decreased by $2.0 million to $88.9 million at June 30, 2006
as compared to $90.8 million at September 30, 2005 primarily due to the
repurchase during the nine month period of 261,300 shares of common stock at a
total cost of $3.5 million and the payment of $1.4 million in dividends, offset
in part by $2.9 million in net income for the nine months ended June 30, 2006.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 30,
2006 AND 2005
NET INCOME. Net income for the quarter ended June 30, 2006 was $882,000, a
decrease of 12.4%, as compared to net income of $1.0 million for the same period
in 2005. The decrease was primarily due to an increase in non-interest expense
of $326,000 offset in part by increases in non-interest income of $82,000 and a
decrease in income tax expense of $153,000.
Net income for the nine months ended June 30, 2006 was $2.9 million, an increase
of $325,000, or 12.5%, as compared to net income of $2.6 million for the same
period in 2005. The increase was primarily due to a $709,000 increase in net
interest income and a 250,000 increase in non-interest income offset in part by
a $695,000 increase in non-interest expense.
NET INTEREST INCOME. Net interest income remained relatively stable at $3.1
million for the three months ended June 30, 2006 compared with the same period
in 2005; however, there were increases in both interest income and interest
expense. Interest income increased $822,000 or 15.2% to $6.2 million for the
three months ended June 30, 2006 compared with the same period in 2005. The
increase in interest income resulted from a $12.2 million or 2.8% increase in
the average balance of interest-earning assets for the three months ended June
30, 2006, as compared to the same period in 2005 combined with a 60 basis point
increase to 5.64% in the yield on such amounts for the quarter ended June 30,
2006 from the comparable period in 2005. The increase in average balance of
interest-earning assets primarily resulted from an increase in average loans of
$36.5 million offset in part by a decline in the average balance of securities
and other interest-earning assets of $24.3 million in the three months ended
June 30, 2006 as compared to the same period in 2005. The increase in interest
expense primarily resulted from an 80 basis point increase to 3.44% in the
weighted average rate of interest paid on interest-bearing liabilities. Also
contributing to the increase in interest expense was an increase in average
interest-bearing liabilities during the quarter consisting of an increase in
average deposits of $7.8 million and an increase in average FHLB advances of
$7.7 million, for an overall increase in average interest-bearing liabilities of
$15.5 million or 4.5% for the three month period ended June 30, 2006 as compared
to the same period in 2005. The increase in the yields and rates reflected the
effect of the rise in market rates of interest during the 2006 periods.
For the nine months ended June 30, 2006, net interest income increased $739,000
or 8.5% to $9.5 million as compared to $8.7 million for the same period in 2005.
The increase was primarily due to a $2.4 million or 15.5% increase in interest
income partially offset by a $1.7 million or 24.6% increase in interest expense.
The increase in interest income resulted primarily from a $22.0 million or 5.3%
increase in the average balance of interest-earning assets for the nine months
ended June 30, 2006, as compared to the same period in 2005. In addition, the
increase reflected the 49 basis point increase in the weighted average yield
earned on such assets to 5.49% for the nine month period ended June 30, 2006
from the comparable period in 2005. The increase in average balance of
interest-earning assets primarily resulted from an increase in average loans of
$30.8 million partially offset by a decrease in the average balance of
securities and other interest-earning assets of $8.9 million in the nine months
ended June 30, 2006
19
as compared to the same period in 2005. The increase in interest expense
resulted primarily from a 64 basis point increase to 3.20% in the weighted
average rate of interest paid on interest-bearing liabilities offset in part by
an $861,000, or 0.2% decrease in the average balance of interest-bearing
liabilities for the nine months ended June 30, 2006 as compared to the same
period in 2005. The increase in the yields and rates reflected the effect of the
rise in market rates of interest during the 2006 period.
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 June 30,
-------------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
-------------------------------------------------------------------------------
(Dollars in Thousands)
Interest-earning assets:
Investment securities $ 175,118 $ 2,043 4.67% $ 157,911 $ 1,708 4.33%
Mortgage-backed securities 59,188 769 5.20 70,144 911 5.20
Loans receivable(1) 204,260 3,380 6.62 167,728 2,570 6.13
Other interest-earning assets 3,452 43 4.98 34,041 225 2.64
------------------------ ------------------------
Total interest-earning assets 442,018 6,235 5.64 429,824 5,414 5.04
---------- ---------- ---------- ----------
Cash and non-interest-bearing balances 4,848 6,624
Other non-interest-earning assets 11,436 6,542
---------- ----------
Total assets $ 458,302 $ 442,990
========== ==========
Interest-bearing liabilities:
Savings accounts $ 81,167 635 3.13 $ 91,547 399 1.74
Money market deposit and NOW accounts 95,008 781 3.29 97,336 582 2.39
Certificates of deposit 161,944 1,398 3.45 141,461 1,108 3.13
------------------------ ---------- ----------
Total deposits 338,119 2,814 3.33 330,344 2,089 2.53
Advances from Federal Home Loan Bank 21,544 294 5.46 13,837 194 5.61
Advances from borrowers for taxes and
insurance 1,451 2 0.55 1,416 2 0.56
------------------------ ------------------------
Total interest-bearing liabilities 361,114 3,110 3.44 345,597 2,285 2.64
---------- ---------- ---------- ----------
Non-interest-bearing liabilities:
Non-interest-bearing demand accounts 4,146 2,985
Other liabilities 3,370 2,040
---------- ----------
Total liabilities 368,630 350,622
Stockholders' equity 89,672 92,368
---------- ----------
Total liabilities and stockholders' equity $ 458,302 $ 442,990
========== ==========
Net interest-earning assets $ 80,904 $ 84,227
========== ==========
Net interest income; interest rate spread $ 3,125 2.20% $ 3,129 2.40%
========== ========== ========== ==========
Net interest margin(2) 2.83% 2.91%
========== ==========
Average interest-earning assets to average
interest-bearing liabilities 122.40% 124.37%
========== ==========
----------
(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.
20
Nine Months Ended June 30,
-------------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
-------------------------------------------------------------------------------
(Dollars in Thousands)
Interest-earning assets:
Investment securities $ 174,001 $ 5,928 4.54% $ 153,988 $ 4,968 4.30%
Mortgage-backed securities 62,314 2,421 5.18 74,601 2,916 5.21
Loans receivable(1) 191,090 9,335 6.51 160,243 7,211 6.00
Other interest-earning assets 8,461 259 4.08 25,079 436 2.32
------------------------ ------------------------
Total interest-earning assets 435,866 17,943 5.49 413,911 15,531 5.00
---------- ---------- ---------- ----------
Cash and non-interest-bearing balances 4,696 5,882
Other non-interest-earning assets 10,011 6,713
---------- ----------
Total assets $ 450,573 $ 426,506
========== ==========
Interest-bearing liabilities:
Savings accounts $ 83,065 1,834 2.94 $ 93,058 1,330 1.91
Money market deposit and NOW accounts 99,412 2,259 3.03 101,210 1,597 2.10
Certificates of deposit 152,973 3,704 3.23 144,638 3,297 3.04
------------------------ ------------------------
Total deposits 335,450 7,797 3.10 338,906 6,224 2.45
Advances from Federal Home Loan Bank 16,389 680 5.53 13,846 580 5.59
Advances from borrowers for taxes and
insurance 1,513 7 0.62 1,461 7 0.64
------------------------ ------------------------
Total interest-bearing liabilities 353,352 8,484 3.20 354,213 6,811 2.56
---------- ---------- ---------- ----------
Non-interest-bearing liabilities:
Non-interest-bearing demand accounts 3,369 12,349
Other liabilities 3,127 2,290
---------- ----------
Total liabilities 359,848 368,852
Stockholders' equity 90,725 57,654
---------- ----------
Total liabilities and stockholders' equity $ 450,573 $ 426,506
========== ==========
Net interest-earning assets $ 82,514 $ 59,698
========== ==========
Net interest income; interest rate spread $ 9,459 2.29% $ 8,720 2.44%
========== ========== ========== ==========
Net interest margin(2) 2.89% 2.81%
========== ==========
Average interest-earning assets to average
interest-bearing liabilities 123.35% 116.85%
========== ==========
----------
(1) Includes non-accrual loans. Calculated net of unamortized deferred fees,
undisbursed portion of loans-in-process and allowance for loan losses.
(2) Equals net interest income divided by average interest-earning assets.
PROVISIONS FOR LOAN LOSSES. 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 amount of 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 $30,000
during the quarter ended June 30, 2006, thus increasing the allowance for loan
losses from $558,000 at September 30, 2005 to $588,000 at June 30, 2006. The
provision reflected the growth in the size of the loan portfolio, in particular
the growth of the single- family residential and construction and land
development portfolios. At June 30, 2006, the Company's non-
21
performing assets totaled $103,000 or .02% of total assets and consisted of one
non-performing residential mortgage loan. There were no REO properties as of
June 30, 2006.
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 $82,000 and $250,000 for the
three and nine months ended June 30, 2006, respectively, as compared to the same
periods in 2005. For the third quarter of fiscal 2006, the increase was
primarily due to increases in income from bank owned life insurance ("BOLI") of
$52,000 and income from ATM fees of $17,000 compared to the same period in 2005.
The increase for the nine month period ended June 30, 2006 was primarily due to
a pre-tax gain on the sale of a real estate owned property of $100,000, income
from BOLI of $111,000, and income from ATM fees of $62,000 in excess of the
amounts earned during the same period in 2005.
NON-INTEREST EXPENSES. Non-interest expense increased $326,000 or 19.4% during
the three months ended June 30, 2006 compared to the same period in 2005 and
increased $695,000 or 13.5% for the nine months ended June 30, 2006 as compared
to the same period in 2005. The increase for the quarter was primarily due to
increases in compensation and benefit expense of $155,000 resulting primarily
from an increase in retirement plan expenses and normal merit pay rate increases
as well as a $97,000 increase in professional services expense related primarily
to costs incurred due to operating as a public company. For the nine months
ended June 30, 2006, the increase reflected increased compensation and benefit
expense of $435,000 due primarily to an increase in retirement plan expenses and
normal merit pay rate increases, combined with an increase in professional
services expense of $239,000 reflecting the additional expenses incurred due to
operating as a public company. The increase in benefit expense for the nine
months ended June 30, 2006 was in large part due to the establishment of an
employee stock ownership plan ("ESOP") at the end of the second quarter of
fiscal 2005 in connection with the mutual holding company reorganization and
reflected the release of shares of common stock as the ESOP loan was repaid.
INCOME TAX EXPENSE. Income tax expense for the quarter and nine months ended
June 30, 2006 amounted to $414,000 and $1.3 million, respectively, compared to
$567,000 and $1.4 million, respectively, for the quarter and nine months ended
June 30, 2005. For the quarter ended June 30, 2006 the effective tax rate
decreased to 31.9% from 36.0% for the same period in 2005. For the nine month
period ended June 30, 2006, the effective tax rate decreased to 31.5% from 35.1%
for the same period in 2005. These decreases in the effective tax rates
reflected implementation of various tax strategies as well as the recognition of
certain tax benefits as a result of the adjustment of a valuation allowance
during the first fiscal quarter of 2006.
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 general
interest rates, economic conditions and competition. We also maintain excess
funds in short-term, interest-bearing assets that provide additional liquidity.
At June 30, 2006, our cash and cash equivalents amounted to $8.2 million. In
addition, our available for sale investment securities amounted to an aggregate
of $38.3 million at June 30, 2006.
We use our liquidity to fund existing and future loan commitments, to fund
maturing certificates of deposit and demand deposit withdrawals, to invest in
other interest-earning assets, and to meet operating expenses. At June 30, 2006,
the Company had $16.5 million in outstanding commitments to originate fixed and
variable rate loans, not
22
including loans in process. The Company also had commitments under unused lines
of credit of $5.6 million and letters of credit outstanding of $110,000 at June
30, 2006. Certificates of deposit at June 30, 2006 maturing in one year or less
totaled $97.2 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, only increasing materially in recent months in order to fund
loan growth. At June 30, 2006 we had $28.8 million in outstanding FHLB advances
and we had the ability to obtain up to an additional $116.9 million FHLB
advances.
We anticipate that we will continue to have sufficient funds and alternative
funding sources to meet our current commitments.
The following table summarizes the Company's and the Bank's regulatory capital
ratios at June 30, 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
-------------- --------------- -----------------
June 30, 2006:
Tier 1 capital (to average assets)
The Company 19.35% 4.0% N/A
The Bank 14.82% 4.0% 5.0%
Tier 1 capital (to risk weighted assets)
The Company 40.75% 4.0% N/A
The Bank 31.20% 4.0% 6.0%
Total capital (to risk weighted assets)
The Company 41.10% 8.0% N/A
The Bank 31.56% 8.0% 10.0%
September 30, 2005:
Tier 1 capital (to average assets)
The Company 20.98% 4.0% N/A
The Bank 14.55% 4.0% 6.0%
Tier 1 capital (to risk weighted assets)
The Company 48.54% 4.0% N/A
The Bank 34.71% 4.0% 6.0%
Total capital (to risk weighted assets)
The Company 48.98% 8.0% N/A
The Bank 35.16% 8.0% 10.0%
23
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated 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
ASSET/LIABILITY MANAGEMENT AND 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, our
Chief Financial Officer and our Chief Lending Officer, and which is responsible
for reviewing our asset/liability policies and interest rate risk position. The
Asset/Liability Committee meets on a quarterly basis. 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 our policy of paying above average interest rates on deposits
which has resulted in a greater compression of our spread and margin than we
might have otherwise experienced had we reduced the rates paid on deposits to
the same degree as our competitors. .
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 June 30, 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 and liabilities at June 30,
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
25
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 12.00% to 22.80%. The annual prepayment rate for
mortgage-backed securities is assumed to range from 6.72% to 34.08%. 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) $ 22,580 $ 23,275 $ 16,187 $ 21,085 $ 88,959 $ 172,086
Mortgage-backed securities 1,551 4,578 10,857 8,791 31,729 57,506
Loans receivable(3) 60,188 28,806 47,162 30,073 48,914 215,143
Other interest-earning assets 4,874 4,874
-------------------------------------------------------------------------------------
Total interest-earning assets $ 89,193 $ 56,659 $ 74,206 $ 59,949 $ 169,602 $ 449,609
=====================================================================================
Interest-bearing liabilities:
Savings accounts $ 582 $ 59 $ 48,569 $ 16,190 $ 16,190 $ 81,590
Money market deposit and NOW accounts - 31,543 49,804 6,087 6,087 93,521
Certificates of deposits 33,715 63,526 53,977 13,241 - 164,459
Advances from Federal Home Loan Bank 15,000 - - 13,000 794 28,794
Advances from borrowers for taxes and insurance - - - - 1,892 1,892
-------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 49,297 $ 95,128 $ 152,350 $ 48,518 $ 24,963 $ 370,256
=====================================================================================
Interest-earning assets
less interest-bearing liabilities $ 39,896 $(38,469) $(78,144) $ 11,431 $ 144,639 $ 79,353
=====================================================================================
Cumulative interest-rate sensitivity gap (4) $ 39,896 $ 1,427 $(76,717) $(65,286) $ 79,353
=======================================================================
Cumulative interest-rate gap as a
percentage of total assets at June 30, 2006 8.55% 0.31% (16.44)% (13.99)% 17.00%
=======================================================================
Cumulative interest-earning assets
as a percentage of cumulative interest-
bearing liabilities at June 30, 2006 180.93% 100.99% 74.15% 81.09% 121.43%
=======================================================================
(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 and include Federal Home Loan Bank stock.
(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.
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
26
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market rates. Additionally, certain assets, such as
adjustable-rate loans, have features which restrict changes in interest rates
both on a short-term basis and over the life of the asset. Further, in the event
of a change in interest rates, prepayment and early withdrawal levels would
likely deviate significantly from those assumed in calculating the table.
Finally, the ability of many borrowers to service their adjustable-rate loans
may decrease in the event of an interest rate increase.
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 June 30, 2006 and
reflects the changes to NPV as a result of immediate and sustained changes in
interest rates as indicated.
NPV as % of Portfolio
Change in Net Portfolio Value Value of Assets
Interest Rates -----------------------------------------------------------------------------
In Basis Points
(Rate Shock) Amount $ Change % Change NPV Ratio Change
--------------------------------------------------------------------------------------------------
(Dollars in Thousands)
300 $ 61,445 $ (33,580) (35.34)% 15.08% (5.77)%
200 71,733 (23,292) (24.51)% 16.98% (3.87)%
100 83,045 (11,980) (12.61)% 18.93% (1.92)%
Static 95,025 - - 20.85% -
(100) 103,286 8,261 8.69% 22.01% 1.16%
(200) 102,947 7,922 8.34% 21.71% 0.86%
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 recently completed 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
Not applicable.
ITEM 1A. RISK FACTORS
Not applicable.
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.
Total Number of Maximum Number of
Total Shares Purchased as Shares that May Yet
Number of Part of Publicly be Purchased Under
Shares Average Price Announced Plans or the Plan or
Period Purchased Paid per Share Programs Programs(1)
---------------------------- --------- -------------- ------------------- -------------------
April 1 - April 30, 2006 56,500 $ 13.32 56,500 288,400
May 1 - May 31, 2006 22,100 13.37 22,100 266,300
June 1 - June 30, 2006 47,900 13.16 47,900 218,400
--------- ---------
Total 126,500 $ 13.26 126,500 218,400
========= ========== ========= =========
----------------------
Notes to the table
(1) On May 11, 2005, the Company announced its first stock repurchase
program to repurchase up to 4.9% of the Company's outstanding common
stock held by other than Prudential Mutual Holding Company, or 277,000
shares. The first stock repurchase program expired in May 2006.
(2) 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).
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) Not applicable.
(b) Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Not applicable
(b) Not applicable.
(c) Not applicable.
29
(d) Not applicable.
ITEM 5. OTHER INFORMATION
(a) Not applicable.
(b) Not applicable.
ITEM 6. EXHIBITS
Exhibit No. Description
----------- -----------
31.1 Section 302 Certification of Chief Executive Officer
31.2 Section 302 Certification of Chief Financial Officer
32.0 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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: August 14, 2006 By: /s/ Thomas A. Vento
----------------------------------
Thomas A. Vento
President and Chief Executive Officer
Date: August 14, 2006 By: /s/ Joseph R. Corrato
---------------------------------
Joseph R. Corrato
Executive Vice President and Chief
Financial Officer
31