UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 (I.R.S. Employer
of Incorporation or Organization) Identification No.)
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 |X| No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 10, 2006: 12,301,050
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 March 31, 2006 and September 30, 2005 2
Unaudited Consolidated Statements of Income for the Three
and Six Months Ended March 31, 2006 and 2005 3
Unaudited Consolidated Statement of Changes in Stockholders'
Equity and Comprehensive Income for the Six Months Ended
March 31, 2006 and 2005 4
Unaudited Consolidated Statements of Cash Flows for the Six
Months Ended March 31, 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 24
Item 4. Controls and Procedures 27
PART II OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 1A. Risk Factors 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 29
Item 6. Exhibits 29
SIGNATURES 30
1
PRUDENTIAL BANCORP, INC. OF PENNSYLVANIA AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
-------------------------------------------------------------------------------
MARCH 31, SEPTEMBER 30,
2006 2005
------------- -------------
ASSETS
Cash and amounts due from depository institutions $ 5,655,261 $ 5,874,475
Interest-bearing deposits 3,311,787 20,940,542
------------- -------------
Total cash and cash equivalents 8,967,048 26,815,017
Investment securities held to maturity (estimated fair value--March 31, 2006, $131,078,893;
September 30, 2005, $128,046,676) 135,074,292 129,839,512
Investment securities available for sale (amortized cost--March 31, 2006, $38,007,194;
September 30, 2005, $38,007,143) 38,494,725 38,584,474
Mortgage-backed securities held to maturity (estimated fair value--
March 31, 2006, $60,482,359; September 30, 2005, $67,123,458) 60,484,994 66,827,615
Loans receivable--net of allowance for loan losses (March 31, 2006, $557,956;
September 30, 2005, $557,956) 194,399,145 175,090,988
Accrued interest receivable:
Loans receivable 1,067,117 925,618
Mortgage-backed securities 262,452 290,650
Investment securities 1,658,504 1,583,442
Real estate owned -- 360,284
Federal Home Loan Bank stock--at cost 1,681,900 1,811,500
Office properties and equipment--net 1,676,036 1,746,599
Prepaid expenses and other assets 6,795,322 2,658,636
Deferred income taxes, net 114,853 57,628
------------- -------------
TOTAL ASSETS $ 450,676,388 $ 446,591,963
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing $ 4,141,797 $ 3,440,681
Interest-bearing 338,895,025 333,027,159
------------- -------------
Total deposits 343,036,822 336,467,840
Advances from Federal Home Loan Bank 13,803,701 13,823,411
Accrued interest payable 1,098,073 1,924,883
Advances from borrowers for taxes and insurance 1,185,941 1,113,835
Accounts payable and accrued expenses 885,895 1,954,890
Accrued dividend payable 475,154 481,806
------------- -------------
Total liabilities 360,485,586 355,766,665
------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 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 - 12,362,650 at March 31, 2006 and 12,497,450 at September 30, 2005 125,638 125,638
Additional paid-in capital 54,759,747 54,733,760
Unearned ESOP shares (4,238,056) (4,349,611)
Treasury stock, at cost: 201,100 shares at March 31, 2006
and 66,300 shares at September 30, 2005 (2,452,347) (654,415)
Retained earnings 41,678,925 40,594,661
Accumulated other comprehensive income 316,895 375,265
------------- -------------
Total stockholders' equity 90,190,802 90,825,298
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 450,676,388 $ 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 SIX MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
INTEREST INCOME:
Interest and fees on loans $ 3,075,025 $ 2,351,962 $ 5,955,692 $ 4,641,240
Interest on mortgage-backed securities 806,461 971,950 1,651,779 2,004,751
Interest and dividends on investments 2,039,839 1,799,735 4,100,097 3,471,350
------------ ------------ ------------ ------------
Total interest income 5,921,325 5,123,647 11,707,568 10,117,341
------------ ------------ ------------ ------------
INTEREST EXPENSE:
Interest on deposits 2,562,959 2,099,725 4,988,302 4,139,194
Interest on borrowings 190,850 191,086 385,940 386,411
------------ ------------ ------------ ------------
Total interest expense 2,753,809 2,290,811 5,374,242 4,525,605
------------ ------------ ------------ ------------
NET INTEREST INCOME 3,167,516 2,832,836 6,333,326 5,591,736
PROVISION FOR LOAN LOSSES -- -- -- --
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,167,516 2,832,836 6,333,326 5,591,736
------------ ------------ ------------ ------------
NON-INTEREST INCOME:
Fees and other service charges 132,670 117,018 277,915 248,950
Gain on sale of real estate owned 99,553 -- 99,553 --
Other 67,071 20,213 92,566 52,568
------------ ------------ ------------ ------------
Total non-interest income 299,294 137,231 470,034 301,518
------------ ------------ ------------ ------------
NON-INTEREST EXPENSES:
Salaries and employee benefits 1,125,529 971,940 2,217,463 1,984,612
Data processing 114,433 123,198 241,227 248,147
Office occupancy 78,903 74,931 149,370 146,486
Depreciation 59,359 64,445 121,036 132,822
Payroll taxes 80,457 69,242 143,192 128,253
Director compensation 70,025 57,625 139,175 106,249
Professional services 150,688 42,500 226,819 84,998
Litigation (recovery) expense -- (49,206) -- 125,000
Other 325,762 246,536 594,800 507,807
------------ ------------ ------------ ------------
Total non-interest expenses 2,005,156 1,601,211 3,833,082 3,464,374
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 1,461,654 1,368,856 2,970,278 2,428,880
------------ ------------ ------------ ------------
INCOME TAXES:
Current 439,590 431,759 954,851 718,479
Deferred expense (benefit) 67,280 42,990 (25,798) 119,068
------------ ------------ ------------ ------------
Total 506,870 474,749 929,053 837,547
------------ ------------ ------------ ------------
NET INCOME $ 954,784 $ 894,107 $ 2,041,225 $ 1,591,333
============ ============ ============ ============
BASIC EARNINGS PER SHARE (1) $ 0.08 N/A $ 0.17 N/A
DILUTED EARNINGS PER SHARE (1) $ 0.08 N/A $ 0.17 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 for the 2005 periods are not considered meaningful and
are 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
--------------------------------------------------------------------------------
ADDITIONAL UNEARNED
COMMON PAID-IN ESOP TREASURY RETAINED
STOCK CAPITAL SHARES STOCK EARNINGS
------------ ------------ ------------ ------------ ------------
BALANCE, OCTOBER 1, 2005 $ 125,638 $ 54,733,760 $ (4,349,611) $ (654,415) $ 40,594,661
Comprehensive income:
Net income 2,041,225
Net unrealized holding loss on
available for sale securities
arising during the period, net
of income tax benefit of $31,430
Comprehensive income
Cash dividend ($.08 per share) (956,961)
Treasury stock purchased (1,797,932)
ESOP shares committed to
be released 25,987 111,555
------------ ------------
BALANCE, March 31, 2006 $ 125,638 $ 54,759,747 $ (4,238,056) $ (2,452,347) $ 41,678,925
============ ============ ============ ============ ============
(table continued)
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
INCOME EQUITY INCOME
------------- ------------- ---------------
BALANCE, OCTOBER 1, 2005 $ 375,265 $ 90,825,298
Comprehensive income:
Net income 2,041,225 2,041,225
Net unrealized holding loss on
available for sale securities
arising during the period, net
of income tax benefit of $31,430 (58,370) (58,370) (58,370)
---------
Comprehensive income $ 1,982,855
============
Cash dividend ($.08 per share) (956,961)
Treasury stock purchased (1,797,932)
ESOP shares committed to
be released 137,542
------------
BALANCE, March 31, 2006 $ 316,895 $ 90,190,802
============ ============
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 1,591,333
Net unrealized holding loss on
available for sale securities
arising during the period, net
of income tax benefit of $87,394 (162,303)
Comprehensive income
Capitalization of mutual holding (100,000)
company
Issuance of common stock 125,638 54,724,693
Purchase of ESOP shares (4,461,166)
BALANCE, March 31, 2005 $ 125,638 $ 54,724,693 $ (4,461,166) $ -- $ 39,758,031 $ 669,536
============ ============ ============ ======= ============ ============
See notes to unaudited consolidated financial statements.
(table continued)
TOTAL
STOCKHOLDERS' COMPREHENSIVE
EQUITY INCOME
-------------- -----------------
BALANCE, OCTOBER 1, 2004 $ 39,098,537
Comprehensive income:
Net income 1,591,333 1,591,333
Net unrealized holding loss on
available for sale securities
arising during the period, net
of income tax benefit of $87,394 (162,303) (162,303)
------------
Comprehensive income $ 1,429,030
============
Capitalization of mutual holding (100,000)
company
Issuance of common stock 54,850,331
Purchase of ESOP shares (4,461,166)
BALANCE, March 31, 2005 $ 90,816,732
============
4
PRUDENTIAL BANCORP, INC. OF PENNSYLVANIA AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31,
----------------------------
2006 2005
------------ ------------
OPERATING ACTIVITIES:
Net income $ 2,041,225 $ 1,591,333
Adjustments to reconcile net income to net cash used in
operating activities:
Provision for loan losses -- --
Depreciation 121,036 132,822
Net accretion of premiums/discounts (23,303) (42,957)
Net accretion of deferred loan fees and costs (156,089) (173,387)
Amotization of ESOP 137,542 --
Gain on sale of real estate owned (99,553) --
Deferred income tax (benefit) expense (25,798) 119,068
Changes in assets and liabilities which (used) provided cash:
Accounts payable and accrued expenses (1,075,646) (692,352)
Accrued interest payable (826,810) (1,057,598)
Prepaid expenses and other assets (4,136,686) 425,438
Accrued interest receivable (188,360) (30,353)
------------ ------------
Net cash (used in) provided by operating activities (4,232,442) 272,014
------------ ------------
INVESTING ACTIVITIES:
Purchase of investment securities held to maturity (6,226,562) (22,449,750)
Loans originated or acquired (37,892,819) (36,267,944)
Principal collected on loans 18,740,751 23,876,376
Principal payments received on mortgage-backed securities
held-to-maturity 6,357,654 9,118,803
Proceeds from calls of investment securities held to maturity 1,000,000 23,268,182
Proceeds from calls/sales of investment securities available for sale -- 1,000,000
Purchase of Federal Home Loan Bank stock -- (18,300)
Proceeds from redemption of Federal Home Loan Bank stock 129,600 427,800
Proceeds from the sale of real estate owned 459,837 125,000
Purchases of equipment (50,473) (54,939)
------------ ------------
Net cash used in investing activities (17,482,012) (974,772)
------------ ------------
FINANCING ACTIVITIES:
Net decrease in demand deposits, NOW accounts,
and savings accounts (3,793,274) (3,558,795)
Net increase (decrease) in certificates of deposit 10,362,256 (9,294,855)
Repayment of advances from Federal Home Loan Bank (19,710) (19,241)
Increase in advances from borrowers for taxes and insurance 72,106 70,263
Proceeds from stock issuance, net of conversion costs -- 54,850,331
Capitalization of mutual holding company -- (100,000)
Cash dividend paid (956,961) --
Purchase of treasury stock (1,797,932) --
------------ ------------
Net cash provided by financing activities 3,866,485 41,947,703
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (17,847,969) 41,244,945
CASH AND CASH EQUIVALENTS--Beginning of year 26,815,017 10,060,761
------------ ------------
CASH AND CASH EQUIVALENTS--End of year $ 8,967,048 $ 51,305,706
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid on deposits and advances from Federal
Home Loan Bank $ 6,201,051 $ 5,583,202
============ ============
Income taxes paid $ 1,061,000 $ 616,780
============ ============
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 55.9% (6,910,062 shares) of the Company's outstanding common
stock as of March 31, 2006 and must always own at least a majority of the
voting stock of the Company. In addition to the shares of the Company,
Prudential Mutual Holding Company was capitalized with $100,000 in cash
from the Bank in connection with the completion of the reorganization. The
consolidated financial statements of the Company include the accounts of
the Company and the Bank. All significant intercompany balances and
transactions have been eliminated.
Prior to the reorganization described above, the Board of Directors
approved a plan of charter conversion in May 2004 by which the Bank would
convert its charter from a Pennsylvania-chartered mutual savings and loan
association to a Pennsylvania-chartered mutual savings bank. The
conversion to a Pennsylvania-chartered mutual savings bank was completed
on August 20, 2004. As a result of the charter conversion, the Bank's
primary federal banking regulator changed from the Office of Thrift
Supervision to the Federal Deposit Insurance Corporation. The Pennsylvania
Department of Banking remains as the Bank's state banking regulator.
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 six month periods ended
March 31, 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.
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 March 15, 2006, the Company's Board of Directors
declared a quarterly cash dividend of $.04 on the common stock of the
Company payable on April 28, 2006 to the shareholders of record at the
close of business on April 13, 2006, which resulted in a payable of
$475,154 at March 31, 2006. A portion of
6
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. Shares of the Company's
common stock purchased by the ESOP are held in a suspense account until
released for allocation to participants. Shares are allocated to each
eligible participant based on the ratio of each such participant's
compensation, as defined in the ESOP, to the total compensation of all
eligible plan participants. As the unearned shares are released from the
suspense account, the Company recognizes compensation expense equal to the
fair value of the ESOP shares during the periods in which they become
committed to be released. To the extent that the fair value of the ESOP
shares released differs from the cost of such shares, the difference is
charged or credited to equity as additional paid-in capital. As of March
31, 2006, the Company had allocated a total of 16,965 shares from the
suspense account to participants and committed to release an additional
5,655 shares. For the six months ended March 31, 2006, the Company
recognized $137,542 in compensation expense related to the plan.
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 will commence upon completion of its first
repurchase program covering 277,000 shares. The average cost per share of
the 201,000 shares which had been repurchased as of March 31, 2006 was
$12.20 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 six months ended March 31, 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 $1,982,855 and $1,429,030 for the six months ended March 31, 2006
and 2005.
RECENT ACCOUNTING PRONOUNCEMENTS - In December 2004, the FASB issued 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 SEC issued 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
March 31, 2006, other than the ESOP which is a tax-qualified plan and is
not subject to the Statement.
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.
7
In March 2006, the FASB issued SFAS No. 156 Accounting for Servicing of
Financial Assets an amendment of FASB Statement No. 140 ("SFAS 140" and
"SFAS 156"). SFAS 140 establishes, among other things, the accounting for
all separately recognized servicing assets and servicing liabilities. SFAS
156 amends SFAS 140 to require that all separately recognized servicing
assets and servicing liabilities be initially measured at fair value, if
practicable. This Statement permits, but does not require, the subsequent
measurement of separately recognized servicing assets and servicing
liabilities at fair value. Under this Statement, an entity can elect
subsequent fair value measurement to account for its separately recognized
servicing assets and servicing liabilities. Adoption of this Statement 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
156 for the fiscal year beginning October 1, 2006 and currently has not
determined if it will adopt SFAS 156 using the fair value election.
RECLASSIFICATIONS- Certain reclassifications have been made to the
September 30, 2005 consolidated financial statements to conform to the
March 31, 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 March 31, 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 2005 periods are not considered meaningful and are not shown.
The calculated basic and diluted earnings per share are as follows:
FOR THE THREE MONTHS ENDED
MARCH 31, 2006
--------------------------
BASIC DILUTED
----------- -----------
Net income $ 954,784 $ 954,784
Weighted average shares outstanding used in
basic earnings per share computation 12,029,487 12,029,487
Effect of CSEs -- --
----------- -----------
Adjusted weighted average shares used in
diluted earnings per share computation 12,029,487 12,029,487
----------- -----------
Earnings per share - basic and diluted $ 0.08 $ 0.08
=========== ===========
FOR THE SIX MONTHS ENDED
MARCH 31, 2006
-------------------------
BASIC DILUTED
----------- -----------
Net income $ 2,041,225 $ 2,041,225
Weighted average shares outstanding used in
basic earnings per share computation 12,044,108 12,044,108
Effect of CSEs -- --
----------- -----------
Adjusted weighted average shares used in
diluted earnings per share computation 12,044,108 12,044,108
----------- -----------
Earnings per share - basic and diluted $ 0.17 $ 0.17
=========== ===========
9
3. INVESTMENT SECURITIES
The amortized cost and fair value of securities, with gross unrealized
gains and losses, are as follows:
MARCH 31, 2006
------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
Securities Held to Maturity:
Debt securities - U.S. Treasury securities
and securities of U.S. Government agencies $132,189,829 $ -- $ (3,927,403) $128,262,426
Debt securities - Municipal bonds 2,884,463 1,134 (69,130) 2,816,467
------------ ------------ ------------ ------------
Total securities held to maturity $135,074,292 $ 1,134 $ (3,996,533) $131,078,893
============ ============ ============ ============
Securities Available for Sale:
Debt securities - U.S. Treasury securities
and securities of U.S. Government agencies $ 2,998,748 $ -- $ (104,998) $ 2,893,750
FNMA stock 84 6,084 -- 6,168
Mutual fund 34,982,453 -- (1,000,364) 33,982,089
FHLMC preferred stock 25,909 1,586,809 -- 1,612,718
------------ ------------ ------------ ------------
Total securities available for sale $ 38,007,194 $ 1,592,893 $ (1,105,362) $ 38,494,725
============ ============ ============ ============
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 March 31,
2006:
LESS THAN 12 MONTHS MORE THAN 12 MONTHS
------------------------- ------------------------
GROSS ESTIMATED GROSS ESTIMATED
UNREALIZED FAIR UNREALIZED FAIR
LOSSES VALUE LOSSES VALUE
----------- ----------- ----------- -----------
Securities held to maturity:
Mortgage-backed securities $ 389,726 $21,738,393 $ 95,314 $ 2,095,413
U.S. Treasury and U.S. Government agencies 1,517,265 67,749,541 2,410,138 60,512,885
Municipal bonds 12,037 462,964 57,093 1,107,370
----------- ----------- ----------- -----------
Total securities held to maturity 1,919,028 89,950,898 2,562,545 63,715,668
----------- ----------- ----------- -----------
Securities available for sale:
U.S. Treasury and U.S. Government agencies 83,748 1,915,000 21,250 978,750
Mutual fund -- -- 1,000,364 33,982,089
----------- ----------- ----------- -----------
Total securities available for sale 83,748 1,915,000 1,021,614 34,960,839
----------- ----------- ----------- -----------
Total $ 2,002,776 $91,865,898 $ 3,584,159 $98,676,507
=========== =========== =========== ===========
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 March 31, 2006, securities in a gross unrealized loss position for twelve
months or longer consist of 72 securities having an aggregate depreciation of
3.5% from the Company's amortized cost basis. Securities in a gross unrealized
loss position for less than twelve months consist of 92 securities having an
aggregate depreciation of 2.1% from the Company's amortized cost basis.
Management believes that the estimated fair value of the securities disclosed
above is primarily dependent upon the 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.
MARCH 31, 2006
--------------------------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
-------------------------- --------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------ ------------ ------------ ------------
Due within one year $ 12,000,000 $ 11,936,250 $ -- $ --
Due after one through five years 33,797,386 33,139,302 -- --
Due after five through ten years 43,348,957 42,165,928 1,000,000 978,750
Due after ten years 45,927,949 43,837,413 1,998,748 1,915,000
------------ ------------ ------------ ------------
Total $135,074,292 $131,078,893 $ 2,998,748 $ 2,893,750
============ ============ ============ ============
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:
MARCH 31, 2006
------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ----------- ----------- -----------
GNMA pass-through certificates $56,262,906 $ 476,413 $ (457,279) $56,282,040
FNMA pass-through certificates 1,765,997 436 (8,860) 1,757,573
FHLMC pass-through certificates 2,456,091 5,556 (18,901) 2,442,746
----------- ----------- ----------- -----------
Total $60,484,994 $ 482,405 $ (485,040) $60,482,359
=========== =========== =========== ===========
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 March 31, 2006.
13
5. LOANS RECEIVABLE
Loans receivable consist of the following:
MARCH 31, SEPTEMBER 30,
2006 2005
------------- -------------
One-to-four family residential $ 141,955,038 $ 135,393,637
Multi-family residential 3,133,395 2,541,328
Commercial real estate 10,136,488 9,874,562
Construction and land development 74,394,972 52,093,242
Commercial business 166,504 188,429
Consumer 1,252,220 1,346,470
------------- -------------
Total loans 231,038,617 201,437,668
Undisbursed portion of loans-in-process (36,100,100) (25,823,681)
Deferred loan fees 18,584 34,957
Allowance for loan losses (557,956) (557,956)
------------- -------------
Net $ 194,399,145 $ 175,090,988
============= =============
The following schedule summarizes the changes in the allowance for loan
losses:
SIX MONTHS ENDED
MARCH 31,
---------------------
2006 2005
-------- --------
Balance, beginning of period $557,956 $557,956
Provision for loan losses -- --
Charge-offs -- --
Recoveries -- --
-------- --------
Balance, end of period $557,956 $557,956
======== ========
Nonperforming loans (which consist of nonaccrual loans and loans in excess
of 90 days delinquent and still accruing interest) at March 31, 2006 and
September 30, 2005 amounted to approximately $297,000 and $239,000,
respectively.
14
6. DEPOSITS
Deposits consist of the following major classifications:
MARCH 31, SEPTEMBER 30,
2006 2005
--------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT
------------ ------ ------------ ------
Money market deposit accounts $ 66,096,893 19.3 % $ 59,906,583 17.8%
NOW accounts 37,397,574 10.9 44,535,148 13.2
Passbook, club and statement savings 84,863,101 24.7 87,709,111 26.1
Certificates maturing in six months or less 45,902,428 13.4 44,709,277 13.3
Certificates maturing over six months or more 108,776,826 31.7 99,607,721 29.6
------------ ------ ------------ ------
Total $343,036,822 100.0 % $336,467,840 100.0%
============ ====== ============ ======
At March 31, 2006 and September 30, 2005, the weighted average cost of
funds was 3.0% and 2.7%, respectively.
15
7. INCOME TAXES
Items that gave rise to significant portions of deferred income taxes are
as follows:
MARCH 31, SEPTEMBER 30,
2006 2005
-------- ------------
Deferred tax assets:
Deposit premium $338,526 $362,998
Allowance for loan losses 227,490 255,030
Other 39,639 41,092
-------- --------
Total 605,655 659,120
-------- --------
Deferred tax liabilities:
Unrealized gain on available for sale securities 170,636 202,066
Property 304,465 363,009
Mortgage servicing rights 10,756 11,978
Deferred loan fees 4,945 10,466
Employee stock ownership plan -- 13,973
-------- --------
Total 490,802 601,492
-------- --------
Net deferred tax asset $114,853 $ 57,628
======== ========
8. COMMITMENTS AND CONTINGENT LIABILITIES
At March 31, 2006, the Company had $18,024,620 in outstanding commitments
to originate fixed and variable rate loans with market interest rates
ranging from 5.50% to 8.50%. 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
$6,624,800 and $5,966,399 at March 31, 2006 and September 30, 2005 and
letters of credit outstanding of $110,000 at both March 31, 2006 and
September 30, 2005.
In fiscal 2003, a trial court issued a decision against the Bank (along
with other defendants) 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 insurance
carrier. The Bank has authorized the Bank's insurance carrier to recover
these amounts from the other defendants in the case. No amounts had been
recovered as of March 31, 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 March 31, 2006, 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. 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 subsidiary of the Bank. PSB Delaware, Inc. is a Delaware
holding company and its principal business is to hold certain investments of the
Bank. During March 2006, all mortgaged backed securities owned by the Company
were transferred to PSB Delaware, Inc. The activity of PSB Delaware, Inc. is
included as part of the consolidation 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 Pennsylvania
Department of Banking and the FDIC, as an integral
17
part of their examination processes, periodically review our allowance for loan
losses. The Pennsylvania Department of Banking and the FDIC may require the
recognition of adjustments to the allowance for loan losses based on their
judgment of information available to them at the time of their examinations. To
the extent that actual outcomes differ from management's estimates, additional
provisions to the allowance for loan losses may be required that would adversely
impact earnings in future periods.
INCOME TAXES. We make estimates and judgments to calculate some of our tax
liabilities and determine the recoverability of some of our deferred tax assets,
which arise from temporary differences between the tax and financial statement
recognition of revenues and expenses. We also estimate a reserve for deferred
tax assets if, based on the available evidence, it is more likely than not that
some portion or all of the recorded deferred tax assets will not be realized in
future periods. These estimates and judgments are inherently subjective. In the
past, our estimates and judgments to calculate our deferred tax accounts have
not required significant revision to our initial estimates.
In evaluating our ability to recover deferred tax assets, we consider all
available positive and negative evidence, including our past operating results,
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 MARCH 31, 2006 AND SEPTEMBER 30, 2005
The Company's total assets increased by $4.1 million or 0.9% to $450.7 million
at March 31, 2006 from September 30, 2005. The increase was primarily due to an
increase in net loans receivable, partially offset by decreases in cash and cash
equivalents. Our net loan portfolio experienced a $19.3 million or 11.0%
increase to $194.4 million as we continued our emphasis on growing the 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 $17.8 million to $9.0 million at March 31, 2006
reflected the systematic investment of funds received in the subscription
offering in loans and other higher yielding investments. In addition, a portion
of the decrease in cash and cash equivalents reflected the purchase of $5.0
million of bank owned life insurance ("BOLI"). The BOLI provides
18
an attractive tax-exempt return to the Company and is being used by the Company
to fund various employee benefit plans. The BOLI is included in other assets at
its cash surrender value.
At March 31, 2006, total deposits increased $6.6 million or 2.0% to $343.0
million from $336.5 million as of September 30, 2005. The majority of the
increase was due to a $10.4 million increase in certificates of deposits. This
increase resulted primarily from a more aggressive deposit pricing strategy and
increased customer demand for attractive short-term investments.
Stockholders' equity decreased by $634,000 to $90.2 million at March 31, 2006 as
compared to $90.8 million at September 30, 2005 primarily due to the repurchase
of shares of common stock at a total cost of $1.8 million and the payment of
$957,000 in dividends, offset in part by $2.0 million in net income for the six
months ended March 31, 2006.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31,
2006 AND 2005
NET INCOME. Net income for the quarter ended March 31, 2006 was $955,000, an
increase of $61,000, or 6.8%, as compared to net income of $894,000 for the same
period in 2005. The increase was primarily due to a $335,000 increase in net
interest income and a $162,000 increase in non-interest income offset in part by
a $404,000 increase in non-interest expense.
Net income for the six months ended March 31, 2006 was $2.0 million, an increase
of $450,000, or 28.3%, as compared to net income of $1.6 million for the same
period in 2005. The increase was primarily due to a $742,000 increase in net
interest income offset in part by a $369,000 increase in non-interest expenses.
NET INTEREST INCOME. Net interest income increased $335,000 or 11.8% to $3.2
million for the three months ended March 31, 2006 as compared to $2.8 million
for the same period in 2005. The increase was primarily due to a $798,000 or
15.6% increase in interest income partially offset by a $463,000 or 20.2%
increase in interest expense. The increase in interest income resulted from an
increase of $14.5 million or 3.5% in the average balance of interest-earning
assets for the three months ended March 31, 2006, as compared to the same period
in 2005. The weighted average yield earned on such assets increased by 58 basis
points to 5.49% in the quarter ended March 31, 2006 from the comparable period
in 2005. The increase in interest expense primarily resulted from a 55 basis
point increase to 3.14% in the weighted average rate of interest paid on
interest-bearing liabilities offset in part by a $2.9 million, or 0.8% decrease
in the average balance of interest-bearing liabilities for the three months
ended March 31, 2006 as compared to the same period in 2005. The increase in the
weighted average cost of interest-bearing liabilities reflected the effect of
the prevailing market rates of interest.
For the six months ended March 31, 2006, net interest income increased $742,000
or 13.3% to $6.3 million as compared to $5.6 million for the same period in
2005. The increase was primarily due to a $1.6 million or 15.7% increase in
interest income partially offset by an $849,000 or 18.8% increase in interest
expense. The increase in interest income resulted from an increase of $26.8
million or 6.6% in the average balance of interest-earning assets for the six
months ended March 31, 2006, as compared to the same period in 2005. The
weighted average yield earned on such assets increased by 43 basis points to
5.41% in the six month period ended March 31, 2006 from the comparable period in
2005. The increase in interest expense primarily resulted from a 56 basis point
increase to 3.08% in the weighted average rate of interest paid on
interest-bearing liabilities offset in part by a $9.0 million, or 2.5% decrease
in the average balance of interest-bearing liabilities for the six months ended
March 31, 2006 as compared to the same period in 2005.
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
19
balances are based on monthly balances. Management does not believe that the
monthly averages differ significantly from what the daily averages would be.
Three Months Ended March 31,
------------------------------------------------------------------
2006 2005
Yield/Rate ------------------------------------------------------------------
At March 31, Average Average Average Average
2006 Balance Interest Yield/Rate Balance Interest Yield/Rate
------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest-earning assets:
Investment securities 4.54% $175,420 $ 1,988 4.53% $151,757 $ 1,615 4.26%
Mortgage-backed securities 5.30 62,311 806 5.17 74,493 972 5.22
Loans receivable(1) 6.33 189,107 3,075 6.50 156,330 2,352 6.02
Other interest-earning assets 4.63 4,816 52 4.32 34,535 185 2.14
--------------------- -------------------
Total interest-earning assets 5.46 431,654 5,921 5.49 417,115 5,124 4.91
-------- ------ -------- -------
Cash and non-interest-bearing balances 4,738 4,989
Other non-interest-earning assets 11,199 6,764
-------- --------
Total assets $447,591 $428,868
======== ========
Interest-bearing liabilities:
Savings accounts 2.98 $ 83,224 626 3.01 $ 93,628 515 2.20
Money market deposit and NOW accounts 2.97 100,531 745 2.96 101,295 500 1.97
Certificates of deposit 3.07 152,036 1,189 3.13 143,822 1,082 3.01
-------------------- -------------------
Total deposits 3.02 335,791 2,560 3.05 338,745 2,097 2.48
Advances from Federal Home Loan Bank 5.53 13,807 191 5.53 13,846 191 5.52
Advances from borrowers for taxes and
insurance 1.01 1,690 3 0.71 1,634 3 0.73
------------------- -------------------
Total interest-bearing liabilities 3.11 351,288 2,754 3.14 354,225 2,291 2.59
-------- ------ -------- -------
Non-interest-bearing liabilities:
Non-interest-bearing demand accounts 3,678 31,778
Other liabilities 1,861 1,770
-------- --------
Total liabilities 356,827 387,773
Stockholders' equity 90,764 41,096
-------- --------
Total liabilities and stockholders' equity $447,591 $ 428,869
======== ========
Net interest-earning assets $ 80,366 $ 62,890
======== ========
Net interest income; interest rate spread 2.35% $ 3,167 2.35% $ 2,833 2.33%
======= ========= ====== ======== =====
Net interest margin(2) 2.93% 2.72%
====== =====
Average interest-earning assets to average
interest-bearing liabilities 122.88% 117.75%
-------- --------
----------
(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
Six Months Ended March 31,
------------------------------------------------------------------
2006 2005
Yield/Rate ------------------------------------------------------------------
At March 31, Average Average Average Average
2006 Balance Interest Yield/Rate Balance Interest Yield/Rate
------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest-earning assets:
Investment securities 4.43% $173,443 $ 3,884 4.48% $152,026 $ 3,260 4.29%
Mortgage-backed securities 5.43 63,878 1,652 5.17 76,829 2,005 5.22
Loans receivable(1) 6.13 184,504 5,955 6.46 156,501 4,641 5.93
Other interest-earning assets 4.63 10,966 216 3.94 20,599 211 2.05
-------------------- -------------------
Total interest-earning assets 5.40 432,791 11,707 5.41 405,955 10,117 4.98
-------- ------ -------- -------
Cash and non-interest-bearing balances 4,620 5,511
Other non-interest-earning assets 19,300 6,799
-------- --------
Total assets $446,711 $418,265
======== ========
Interest-bearing liabilities:
Savings accounts 2.86 $ 84,014 1,198 2.85 $ 93,814 930 1.98
Money market deposit and NOW accounts 2.95 101,614 1,479 2.91 103,147 1,015 1.97
Certificates of deposit 2.98 148,489 2,306 3.11 146,226 2,189 2.99
-------------------- -------------------
Total deposits 2.94 334,117 4,983 2.98 343,187 4,134 2.41
Advances from Federal Home Loan Bank 5.59 13,812 386 5.59 13,851 386 5.57
Advances from borrowers for taxes and
insurance 0.84 1,544 5 0.65 1,484 6 0.81
------------------- -------------------
Total interest-bearing liabilities 3.04 349,473 5,374 3.08 358,522 4,526 2.52
------- ------ -------- -------
Non-interest-bearing liabilities:
Non-interest-bearing demand accounts 2,981 17,031
Other liabilities 3,006 2,414
-------- --------
Total liabilities 355,460 377,967
Stockholders' equity 91,251 40,297
-------- --------
Total liabilities and stockholders' equity $446,711 $ 418,264
======== ========
Net interest-earning assets $ 83,318 $ 47,433
======== ========
Net interest income; interest rate spread 2.36% $ 6,333 2.33% $ 5,591 2.46%
======= ========= ====== ======== =====
Net interest margin(2) 2.93% 2.75%
====== =====
Average interest-earning assets to average
interest-bearing liabilities 123.84% 113.23%
-------- --------
----------
(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. For the three months and six months ended March 31, 2006 and
2005, we made no provision for loan losses.
Our allowance for loan losses totaled $558,000 at both March 31, 2006 and
September 30, 2005. At March 31, 2006, the Company's non-performing assets
totaled $297,000, or .07% of total assets and consisted solely of non-
21
performing residential mortgage loans. There were no REO properties as of March
31, 2006. The allowance for loan losses totaled $558,000 or 0.3% of total loans
and 187.9% of non-performing loans.
Management continues to review its loan portfolio to determine the extent, if
any, to which further additional loss provisions may be deemed necessary. There
can be no assurance that the allowance for losses will be adequate to cover
losses which may in fact be realized in the future and that additional
provisions for losses will not be required.
NON-INTEREST INCOME. Non-interest income increased $162,000 and $169,000 for the
three and six months ended March 31, 2006, respectively, as compared to the same
periods in 2005. The increases were primarily due to a pre-tax gain on the sale
of a real estate owned property of $100,000 and income from BOLI of $51,000.
NON-INTEREST EXPENSES. Non-interest expense increased $404,000 or 25.2% during
the three months ended March 31, 2006 compared to the same period in 2005 and
increased $369,000 or 10.6% for the six months ended March 31, 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 $177,000 resulting primarily
from an increase in retirement plan expenses and normal merit pay rate increases
as well as an $108,000 increase in professional services expense reflecting the
increased costs associated with being a public company that were not applicable
in the 2005 period. For the six months ended March 31, 2006, the increase
reflected increased compensation and benefit expense of $281,000 due primarily
to an increase in retirement plan expenses and normal merit pay rate increases,
an increase in professional services of $142,000 reflecting the increased costs
associated with being a public company that were not applicable in 2005,
partially offset by a decrease in litigation expenses from $125,000 in the 2005
period which were not incurred in the 2006 period.
INCOME TAX EXPENSE. Income tax expense for the quarter and six months ended
March 31, 2006 amounted to $507,000 and $929,000, respectively, compared to
$475,000 and $838,000, respectively, for the quarter and six months ended March
31, 2005. Our effective income tax rate remained stable at 34.7% for the
quarters ended March 31, 2006 and 2005. For the six month period ended March 31,
2006, the effective tax rate decreased to 31.3% from 34.4% from the comparable
period in 2005. This decrease in the effective tax rate was primarily
attributable to tax benefits the Company realized as a result of the adjustment
of a valuation allowance during the quarter ended December 31, 2005 that had
previously been established for accrued liabilities related to prior period tax
accruals.
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 March 31, 2006, our cash and cash equivalents amounted to $9.0 million. In
addition, our available for sale investment securities amounted to an aggregate
of $38.5 million at March 31, 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 March 31,
2006, the Company had $18.0 million in outstanding commitments to originate
fixed and variable rate loans, not including loans in process. The Company also
had commitments under unused lines of credit of $6.6 million and letters of
credit outstanding of $110,000 at March 31, 2006. Certificates of deposit at
March 31, 2006 maturing in one year or less totaled $87.3 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
22
borrowings consist solely of advances from the Federal Home Loan Bank of
Pittsburgh, of which we are a member. Under terms of the collateral agreement
with the Federal Home Loan Bank, we pledge residential mortgage loans and
mortgage-backed securities as well as our stock in the Federal Home Loan Bank as
collateral for such advances. However, use of FHLB advances has been relatively
limited and the amount outstanding has remained relatively constant during the
past several years. At March 31, 2006 we had $13.8 million in outstanding FHLB
advances and we had the ability to obtain up to an additional $191.8 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 as of March 31, 2006 and the Bank's capital ratios as of 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
------------ ---------------- ----------------
March 31, 2006:
Tier 1 capital (to average assets)
The Company 20.09% 4.0 % N/A
The Bank 14.95% 4.0 % 5.0 %
Tier 1 capital (to risk weighted assets)
The Company 43.82% 4.0 % N/A
The Bank 32.62% 4.0 % 6.0 %
Total capital (to risk weighted assets)
The Company 44.23% 8.0 % N/A
The Bank 33.03% 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 %
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.
23
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. Likewise, our unwillingness to originate
long-term, fixed-rate residential mortgage loans at low rates has resulted in
borrowers in many cases refinancing loans elsewhere, requiring us to reinvest
the resulting proceeds from the loan payoffs at low current market rates of
interest. Thus, both of these strategies have increased our interest rate risk.
GAP ANALYSIS. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a Company's interest rate sensitivity "gap." An
asset and liability is said to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
same time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to affect adversely
net interest income while a positive gap would tend to result in an increase in
net interest income. Conversely, during a period of falling interest rates, a
negative gap would tend to result in an increase in net interest income while a
positive gap would tend to affect adversely net interest income.
The following table sets forth the amounts of our interest-earning assets and
interest-bearing liabilities outstanding at March 31, 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
24
contractual maturity of the asset or liability. The table sets forth an
approximation of the projected repricing of assets and liabilities at March 31,
2006, on the basis of contractual maturities, anticipated prepayments, and
scheduled rate adjustments within a three-month period and subsequent selected
time intervals. The loan amounts in the table reflect principal balances
expected to be redeployed and/or repriced as a result of contractual
amortization and anticipated prepayments of adjustable-rate loans and fixed-rate
loans, and as a result of contractual rate adjustments on adjustable-rate loans.
Annual prepayment rates for adjustable-rate and fixed-rate single-family and
multi-family residential and commercial mortgage loans are assumed to range from
13.08 % to 31.10%. The annual prepayment rate for mortgage-backed securities is
assumed to range from 7.02% 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) $ 21,580 $ 22,191 $ 18,271 $ 18,716 $ 92,323 $ 173,081
Mortgage-backed securities 1,993 4,901 6,683 10,726 36,182 60,485
Loans receivable(3) 55,849 28,524 43,011 26,169 41,404 194,957
Other interest earning assets 4,994 -- -- -- -- 4,994
--------------------------------------------------------------------------------
Total interest-earning assets $ 84,416 $ 55,616 $ 67,965 $ 55,611 $ 169,909 $ 433,517
================================================================================
Interest-bearing liabilities:
Savings accounts $ 373 $ 262 $ 50,727 $ 16,909 $ 16,909 $ 85,180
Money market deposit and NOW accounts -- 33,048 52,812 6,588 6,588 99,036
Certificates of deposits 21,469 65,874 54,509 12,827 -- 154,679
Advances from Federal Home Loan Bank -- -- -- 13,000 804 13,804
Advances from borrowers for taxes and insurance -- -- -- -- 1,186 1,186
--------------------------------------------------------------------------------
Total interest-bearing liabilities $ 21,842 $ 99,184 $ 158,048 $ 49,324 $ 25,487 $ 353,885
================================================================================
Interest-earning assets
less interest-bearing liabilities $ 62,574 $ (43,568) $ (90,083) $ 6,287 $ 144,422 $ 79,632
================================================================================
Cumulative interest-rate sensitivity gap (4) $ 62,574 $ 19,006 $ (71,077) $ (64,790) $ 79,632
===================================================================
Cumulative interest-rate gap as a
percentage of total assets at March 31, 2006 13.88% 4.22% (15.77)% (14.38)% 17.67%
==================================================================
Cumulative interest-earning assets
as a percentage of cumulative interest-
bearing liabilities at March 31, 2006 386.48% 115.70% 74.53% 80.27% 122.50%
==================================================================
(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.
25
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate loans, have
features which restrict changes in interest rates both on a short-term basis and
over the life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their adjustable-rate loans may decrease in the event of an interest
rate increase.
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 March 31, 2006 and
reflects the changes to NPV as a result of immediate and sustained changes in
interest rates as indicated.
Change in NPV as % of Portfolio
Interest Rates Net Portfolio Value Value of Assets
---------------------------------------------------------------------------------
In Basis Points
(Rate Shock) Amount $ Change % Change NPV Ratio Change
-------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
300 $ 68,129 $ (32,126) (32.04)% 17.20% (5.39)%
200 78,217 (22,038) (21.98)% 19.02% (3.57)%
100 89,033 (11,222) (11.19)% 20.84% (1.75)%
Static 100,255 - - 22.59% -
(100) 106,288 6,033 6.02% 23.34% 0.75 %
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.
26
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.
27
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)
------ --------- -------------- -------- -----------
January 1 - January 31, 2006 -- $ -- -- 210,700
February 1 - February 28, 2006 37,200 13.11 37,200 173,500
March 1 - March 31, 2006 97,600 13.43 97,600 75,900
------- -------
Total 134,800 $13.33 134,800 75,900
======= ======= ======= =======
----------
(1) On May 11, 2005, the Company announced a 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) Not applicable.
(b) Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On February 3, 2006, the Company held its first annual meeting of
shareholders to obtain approval for two proxy proposals submitted on
behalf of the Company's Board of Directors. Shareholders of record as of
December 16, 2005, received proxy materials and were considered eligible
to vote on these proposals. The following is a brief summary of each
proposal and the result of the vote.
28
(b) - (c)
1. The following directors were elected by the requisite plurality of the
votes cast to serve on the Company's Board of Directors:
FOR WITHHELD
--- --------
NOMINEES FOR ONE-YEAR TERMS EXPIRING IN 2007:
Jerome R. Balka, Esq. 8,033,561 3,331,885
A. J. Fanelli 8,212,201 3,153,245
NOMINEES FOR TWO-YEAR TERMS EXPIRING IN 2008:
Francis V. Mulcahy 8,213,201 3,152,245
Joseph W. Packer, Jr. 8,027,349 3,338,097
NOMINEES FOR THREE-YEAR TERMS EXPIRING IN 2009:
John P. Judge 8,045,732 3,319,714
Thomas A. Vento 8,037,301 3,328,145
FOR AGAINST ABSTAIN
--- ------- -------
2. To ratify the appointment of Deloitte & Touche LLP as independent
registered public accounting firm for the year ended September 30, 2006 11,125,893 118,035 121,518
(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
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRUDENTIAL BANCORP, INC. OF PENNSYLVANIA
DATE: MAY 15, 2006 BY: /S/ THOMAS A. VENTO
----------------------------------
THOMAS A. VENTO
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DATE: MAY 15, 2006 BY: /S/ JOSEPH R. CORRATO
---------------------------------
JOSEPH R. CORRATO
EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
30